Outside�Hong�Kong,�we�delivered�a� 17�per�cent8�increase�in�APE6�sales�and�a� 29�per�cent8�rise�in�new�business�profit7.� Within�Hong�Kong,�our�domestic�business� was�resilient�despite�the�effect�of�social� unrest,�with�APE6�sales�growing�by� 8�per�cent8.�Our�domestic�Hong�Kong� business�has�continued�to�expand�and� invest,�driven�by�new�health,�protection� and�retirement�solutions�and�supported�by� focused�sales�initiatives.�Fewer�visitors� from�mainland�China�caused�a�fall�in�total� Hong�Kong�APE6�sales�by�11�per�cent8�and� a�fall�in�new�business�profit7�of�12�per�cent8.
Interest�rates�have�declined�materially� in�2019�and�are�trending�lower�in�2020.� Equity�markets�have�been�volatile�and�have� declined�in�the�current�year�to�date�from� their�peaks�in�Q4�2019.�These�market� conditions,�as�well�as�the�coronavirus� outbreak,�create�headwinds�in�respect�of� near-term�new�business�profit�and�IFRS� fee-based�and�spread�earnings.�However,� our�performance�in�2019�demonstrates� that�the�opportunities�we�have�identified� are�clear�and�long�term�and�that�we�are� addressing�these�opportunities�well.�We� are�continuing�to�deliver�growth�based�on� the�strength�of�those�opportunities,�the� diversification�of�our�business�and�the� resilience�of�our�earnings.�I�am�confident� that,�with�our�clear�focus�on�our�structural� growth�markets�and�our�continuing� operational�improvements,�we�will� continue�to�deliver�profitable�growth� for�our�investors�and�benefits�for�our� stakeholders�over�the�medium�and� long�term.
At Eastspring, the expansion in assets under management was driven by strong underlying growth of 26 per cent in external client funds, excluding the M&G related assets that were reclassified following the demerger. Overall external client funds reached $124.7 billion and contributed to 52 per cent of the total funds under management at the end of 2019.
Second wave: Building an ecosystem-based business model In the second wave, to aid the expansion of our role from providing protection to making customers healthier, we have added an ecosystem-based business model which is manifested in our Pulse by Prudential app. Built on the latest architecture, Pulse is scalable and is based on real data and artificial intelligence (AI) technology focusing on positive outcomes for customers and our businesses. This business model also uses a wide range of partnerships and the latest trends in health and wealth technology, allowing us to fulfil our strategic imperative to add prevention and postponement to our protection business. So far we have secured 18 market-leading partners across an array of different elements. We believe this will help us to acquire users at pace and gain access to new data, whilst enabling our customers to enjoy a wide range of affordable healthcare and value-added services to help them live longer and healthier lives. Currently live in eight markets, Pulse will continuously improve as we roll out new functionalities, increase partnerships and learn from direct user feedback over time.
Jackson’s competitive strengths are even more critical as we work towards diversification and growth, within a highly competitive insurance industry. The breadth and depth of our best-in-class distribution team, our agility and success in launching well designed customer-centric products, the continued success of our risk management and hedge programmes through many economic cycles, and our significant investment in technology platforms and award-winning customer service will provide Americans with the retirement strategies they so desperately need. Jackson’s discipline helps enable us to be positioned to potentially capture additional growth during times of transition into the future.
Through sponsorships, grants, matching gifts and volunteer support, Jackson provided $6.7m to charitable causes across the country
I am pleased to report that we maintained focus on the execution of our strategy alongside the successful completion of the demerger of M&G plc and that this has continued to deliver positive financial performance in 2019.
The 2019 effective tax rate on total IFRS profit was negative (2) per cent (2018: 16 per cent). The decrease in the 2019 effective tax rate reflects increased derivative losses in the US where the effective tax rate on these items is higher (at 21 per cent) than the effective tax rate on profit from Asia operations.
Actual exchange rate Constant exchange rate 2019 cents 2018 cents Change % 2018 cents Change %
* Net core structural borrowings as proportion of IFRS shareholders’ funds plus net debt, as set out in note II of the Additional unaudited financial information.
Cash remitted to the Group from continuing operations in 2019 amounted to $1,465 million, included $950 million from Asia and $509 million from the US. In addition, $684 million of remittances were received pre-demerger from M&G plc (excluding the $3,841 million predemerger dividend used to offset the payment due to M&G plc in return for the substitution of debt).
US operating free surplus generation before the 2019 hedge modelling changes was $2,028 million (2018: $1,895 million) with the increase from in-force business, including a one-off benefit from the integration of the John Hancock business, offset by higher new business investment. As part of 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 this new model within its EEV results, resulting in a $3.2 billion reduction in Jackson’s EEV at the start of the year and a subsequent fall in operating free surplus of $(903) million from a lower expected transfer to net worth. Further information is included in the US segmental discussion and in the EEV basis results. After allowing for this effect and restructuring costs, operating free surplus generation for the Group was down 16 per cent to $2,861 million.
Economic assumption changes of $(1,201) million largely reflect the impact of lower interest rates in the period on the projected future fund growth rates for the variable annuity business. These projected lower growth rates reduce the expected growth in fund values for policyholders and hence the expected profitability for shareholders.
Non-operating (loss) profit (1,763) (1,124) Net flows paid to parent company (525) (452) Timing differences and other items 185 (144)
Over the period, statutory operating capital generation of $1.4 billion increased the RBC ratio by 66 percentage points, comprising 118 percentage points ($1.2 billion) from in-force capital generation, reduced by 75 percentage points ($(0.1) billion) for the capital strain of writing new business, and 23 percentage points ($0.3 billion) of one-off benefits related to the recent John Hancock acquisition. In line with the product diversification strategy previously outlined and Jackson’s accelerated sales growth of fixed index and new fixed annuity products, the capital strain from selling non-VA products was 64 percentage points of the total 75 percentage points of new business strain.
8 Using the relevant month-end spot rate. 9 Excluding profit for the year attributable to non-controlling interests. 10 See note II of the Additional unaudited financial information for definition and reconciliation to
IFRS balances. 11 For EEV shareholders’ value per share, see note II(x) of the Additional unaudited financial information.
The�ESG�Executive�Committee�is�focused� on�the�holistic�assessment�of�ESG�matters� material�to�the�Group,�raising�matters�for� Board�decision-making�and�overseeing� the�implementation�of�resulting�decisions,� supporting�the�sustainable�delivery�of�the� Group’s�strategy.�It�reports�to�the�Board� through�the�Group�Nomination�and� Governance�Committee�which�comprises� the�Group’s�Chairman,�the�Senior� Independent�Director,�and�the�chairs�of�the� Audit,�Remuneration�and�Risk�committees� and�is�regularly�attended�by�the�Group� Chief�Executive.
Capital requirements Limits�on�capital�requirements�aim�to� ensure�that�the�Group�maintains�sufficient� capital�such�that�in�business-as-usual�and� stressed�conditions�it�exceeds�its�internal� economic�capital�requirements,�achieves� its�desired�target�rating�to�meet�its�business� objectives,�and�supervisory�intervention� is�avoided.�The�two�measures�currently� in�use�at�the�Group�level�are�the�regulatory� local�capital�summation�method�(LCSM)� capital�requirements�(both�minimum�and� prescribed�levels)�and�internal�economic� capital�(ECap)�requirements.�In�addition,� capital�requirements�are�monitored�on� local�statutory�bases.
Operational�risk�is�the�risk�of�loss�or�unintended�gain� from�inadequate�or�failed�processes,�personnel,�systems� and�external�events,�and�can�arise�through�business� transformation,�introducing�new�products,�new�technologies,� and�entering�into�new�markets�and�geographies.� Implementing�the�business�strategy�and�processes�for� ensuring�regulatory�compliance�(including�those�relating�to� the�conduct�of�its�business)�requires�interconnected�change� initiatives�across�the�Group,�the�pace�of�which�introduces� further�complexity.�The�Group’s�outsourcing�and�third-party� relationships�introduce�their�own�distinct�risks.�Such� operational�risks,�if�they�materialise,�could�result�in�financial� loss�and/or�reputational�damage.�These�risks�are�considered� to�be�material�at�the�level�of�the�Group.�
The�Group’s�persistency�assumptions� reflect�similarly�a�combination�of�recent� past�experience�for�each�relevant�line�of� business�and�expert�judgement,�especially� where�a�lack�of�relevant�and�credible� experience�data�exists.�Any�expected� change�in�future�persistency�is�also� reflected�in�the�assumptions.�Persistency� risk�is�managed�by�appropriate�training�and� sales�processes�(including�active�customer� engagement�and�service�quality)�and� managed�locally�post-sale�through� regular�experience�monitoring�and�the� identification�of�common�characteristics� of�business�with�high�lapse�rates.�Where� appropriate,�allowance�is�made�for�the� relationship�(either�assumed�or�observed� historically)�between�persistency�and� investment�returns�and�any�additional�risk� is�accounted�for.�Modelling�this�dynamic� policyholder�behaviour�is�particularly� important�when�assessing�the�likely� take-up�rate�of�options�embedded�within� certain�products.�The�effect�of�persistency� on�the�Group’s�financial�results�can�vary� but�depends�mostly�on�the�value�of�the� product�features�and�market�conditions.
Business integrity The Group Code of Business Conduct details our required Standards of Business Conduct to be used across the Group and covers our employees and individuals or organisations acting on our behalf. The Code sets out our values around ownership, partnership and stewardship, and the personal standards we adhere to in the areas of: protection from financial crime, avoiding conflicts of interest, managing information, communicating as a Group and providing equality for our people.
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.
The ESG Executive Committee meets quarterly and is required to report to the Board at least twice each year, with additional ad hoc reporting provided as necessary. The ESG Executive Committee reports to the Board through the Group Nomination & Governance Committee, which comprises the Group’s Chairman, the Senior Independent Director, and the chairs of the Audit, Remuneration and Risk Committees, and is regularly attended by the Group Chief Executive.
Financial strength We contribute to financial stability and sustainability in all of the markets in which we operate. We fulfil our purpose by seeking to provide products and services that align with important global social needs and thereby generate sustainable value for stakeholders. Our products and services are designed and delivered with that purpose clearly in mind. Through the combination of our consistent strategy, our diversified portfolio of businesses and our disciplined execution, we have continued to create long-term value for customers, shareholders and other stakeholders.
Being a responsible business also requires organisations to ensure that they meet and strive to surpass commitments to the UN’s Declaration of Human Rights. We act with integrity to ensure that modern slavery, human trafficking, child labour or any other issue that subjugates human rights is eradicated from our supply chain.
Employee engagement We want to foster an environment in which employees feel empowered and which provides them with an opportunity to make an active contribution to the organisation and the communities we serve. We drive employee engagement through a number of initiatives, including colleague appreciation programmes, wellbeing programmes, networking opportunities with peers and senior leaders across functions and employee focus groups. In the US, Jackson’s Organisational Survey ensures that all associates have an opportunity to share their thoughts and make the organisation an even better place to work. The 2019 results show that associates are satisfied with their work and proud to be a part of Jackson. The areas of ethics and corporate responsibility were among the highest-scoring.
3 Waste and recycling – reducing the waste we generate and diverting waste from landfill through recycling and recovery During 2019, we generated 864 tonnes of waste in the UK and the US. The quality of the data being collected in Asia on waste continues to become more reliable and will be a focus area for ongoing reporting in 2020. Of the UK and US total, 63 per cent was diverted from landfill through recycling, composting or incineration. Scope 3 carbon emissions associated with our waste are calculated at 42 tCO2e, a minor contribution to our overall corporate footprint in comparison with the energy use of our buildings and air travel. We continue to work with our suppliers to seek opportunities to increase recycling rates and decrease waste generation in the first instance.
Prudential plc – greenhouse gas emissions statement We have compiled our global GHG emissions in accordance with the Companies Act 2006 (Strategic and Directors’ Reports) Regulations 2013. GHG emissions are broken down into three scopes; we have included full reporting for Scope 1 and 2 and select Scope 3 reporting as best practice. Scope 1 emissions are our direct emissions from the combustion of fuel, fugitive emissions and company owned vehicles. Scope 2 emissions cover our indirect emissions from the purchase of electricity, heating and cooling. We have reported our Scope 2 emissions using both the location and market-based methods in line with the GHG Protocol Scope 2 Guidance. Our Scope 3 footprint includes UK booked business travel for the occupied estate, global water consumption from the occupied estate and waste generated from occupied properties (UK and US). We continue to work with our business units to review the extent of our Scope 3 reporting and increase coverage where practicable. Our 2019 reporting covers the period 1 October 2018 to 30 September 2019. Please refer to our Basis of Reporting and supplementary reporting online for further detail on our methodology, reported consumption and drivers of variation.
Safe Steps Safe Steps is a ground-breaking, Asia and Africa public service programme aimed at enhancing awareness about natural disasters, road safety and first aid through the dissemination of survival tips. The programme was created and developed by the Prudence Foundation. Principal partners involved in the programme’s development and continuing to support its roll-out are National Geographic, the International Federation of Red Cross and Red Crescent Societies and the Federation Internationale de l’Automobile. The programme continues to reach an estimated 250 million people every day across Asia through partnerships with government, humanitarian and private sector organisations.
Early childhood development The Prudence Foundation has supported the First Read programme since 2013, partnering with Save the Children to invest in early childhood care and development in Cambodia and the Philippines. First Read helps parents to develop their children’s numeracy and literacy skills by providing books in the local language or dialect, and encouraging them to read, sing and count together. It also helps parents understand the importance of healthy and nutritious food for their children’s development. Since 2013, more than 330,000 children and their parents have benefited through this home-based early childhood development programme, while over one million people have benefited indirectly through shared knowledge and resources developed from First Read.
Political donations It is the Group’s policy neither to make donations to political parties nor to incur political expenditure, within the meaning of those expressions as defined in the UK Political Parties, Elections and Referendums Act 2000. The Group did not make any such donations to incur any such expenditure in 2019.
Dear shareholder Good governance encourages decisions to be made in a way that is most likely to promote the long-term sustainable success of the Company for the benefit of its members, taking into account the views and interests of the Group’s wider stakeholders. We aim to achieve this through a governance framework that supports decision-making, facilitates challenge, is continuously updated to meet the Group’s business needs, and encompasses a prudent system of internal controls and rigorous processes for identifying, managing and mitigating key risks.
Details of our risk governance and culture can be found in the Group Chief Risk and Compliance Officer’s Report on pages 51 to 71. Our Group-wide Internal Audit function considers the risk and control culture of the organisation throughout its activities, and our Group Code of Business Conduct underlies everything we do, shaping our culture and linking culture explicitly to values and behaviours.
The Board held a separate two-day strategy event in June in the US. The Board also held four workshops during the year to discuss key strategic matters, focusing on the demerger of M&G plc and strategy for the Prudential Group post-demerger, facilitating more in-depth discussion and challenge ahead of formal meetings and decisions. One of the Board meetings in
— Continuing work on Board succession with a focus on gender and geographic diversity.
— Stakeholder groups are reviewed and reported on in the ESG Report, which was approved by the Board in March 2020.
— Scrutinising and holding to account the performance of management in meeting agreed goals and objectives
Notice of a Standing Committee meeting is sent to all Directors and if an individual is unable to attend, he/she can give comments to the Chairman or Company Secretary ahead of the meeting for consideration by the Standing Committee. Before taking decisions on any matter, the Standing Committee must first determine that the business it is considering is appropriate for a Committee of the Board and does not properly need to be brought before the whole Board. All Standing Committee meetings are reported in full to the next scheduled Board meeting.
— Briefings on top risks and internal controls — Induction briefings and training as a whole give Directors an understanding of the interests of the Group’s key stakeholders
Review external positions, conflicts of interests and independence, time commitment, tenure and terms of appointment l
Why it is important to Prudential How is this considered Key outcomes
Executive Directors, Group Chief Executive and Group Executive Committee Executive succession planning helps to ensure continuous and effective leadership of the Group.
Diversity Board and Group Executive Committee Given the global reach of the Group’s operations, its business strategy and long-term focus, the Board makes every effort to ensure it is able to recruit Directors from different backgrounds, with diverse experience, perspective and skills. The diversity not only contributes to Board effectiveness but is essential for successfully delivering the strategy of an international business.
The Committee considers the pipeline for diverse talent below the Group Executive Committee level which remains strong, with 32 per cent female representation of those who report directly to the Group Executive Committee.
In line with US regulatory requirements, the Committee annually reviews the independence of the Audit Committee with reference to the requirements of the Sarbanes-Oxley legislation.
Time commitment Setting out clear expectations on time commitment means Non-executive Directors are able to ensure they devote sufficient time for the proper performance of their duties.
Prior to proposing Directors for election or re-election, the Committee considered the external appointments of Directors and reviewed existing conflict authorisations, reaffirming or updating any terms or conditions attached to authorisations where necessary.
Periodic financial reporting including: — Full and half-yearly report and accounts — Key accounting judgements and disclosures, including tax — Solvency II results and governance processes (up to the demerger)
Taxation The Committee regularly receives updates on the Group’s tax matters and provisions for certain open tax items including tax matters in litigation. The Committee was satisfied that the level of provisioning adopted by management was appropriate. See note B4 of the IFRS financial statements.
Governance Group governance framework The Group Governance Manual sets out the policies and procedures by which the Group operates within its framework of internal governance, taking into account relevant statutory and regulatory matters. It is a platform for mandating specific ways of working across the Group and each business unit attests annually to compliance with: — Mandatory requirements set out in Group-wide policies, including matters which must be reported to the Group functions; and
The Board has determined that David Law qualifies as the Audit Committee financial expert under the requirements of Form 20-F.
Committee members — Howard Davies (Chair) — Jeremy Anderson (from January 2020) — David Law — Kai Nargolwala — Alice Schroeder — Tom Watjen
Risk appetite and principal risks During 2019, the Committee reviewed the Group’s risk policies and proposed changes to the Group risk appetite statements. Aligned with these reviews, proposals to amend associated limits were also considered. The amendments were recommended and approved to reflect the changes in the Group’s risk profile and the evolving regulatory environment following the demerger.
The Committee considered the revised Group Risk Appetite Statement and associated limits that would apply after the demerger of M&G plc. These were defined in aggregate for financial and non-financial risks by the setting of objectives for its liquidity, capital requirements and non-financial risk exposure.
In April, the Committee considered the Group’s ORSA report, based on the Business Plan, prior to its approval by the Board. An additional ORSA report was considered by the Committee in October which included a forward-looking assessment of the demerged Group’s capital and liquidity position, and the outcome of a range of stress and scenario testing to inform the Committee of potential future capital solvency and liquidity levels.
The FSB has endorsed a new Holistic Framework for systemic risk management to be implemented by the IAIS in 2020 and suspended G-SII designations until a review is undertaken in 2022.
The Committee also considered the risk disclosures included in the Prudential plc shareholder Circular in advance of its publication.
Contract of significance At no time during the year did any Director hold a material interest in any contract of significance with the Company or any subsidiary undertaking.
Change of control Under the agreements governing Prudential Corporation Holdings Limited’s life insurance and fund management joint ventures with China International Trust & Investment Corporation (CITIC), if there is a change of control of the Company, CITIC may terminate the agreements and either, (i) purchase the Company’s entire interest in the joint venture or require the Company to sell its interest to a third party designated by CITIC, or (ii) require the Company to purchase all of CITIC’s interest in the joint venture. The price of such purchase or sale is to be the fair value of the shares to be transferred, as determined by the auditor of the joint venture.
A measure of the internal cash generation of our business units.
Maximum award under the Plan is 550% of salary although regular awards are below this level
Weight of 2020 PLTIP measures as follows: 50% TSR, 30% RoE and 20% sustainability scorecard
3 ‘Hong Kong IA’ refers to the Hong Kong Insurance Authority, the Company’s Group wide supervisor following the demerger.
May 2019 Approve the remuneration arrangements for those executives retiring from the Board; approve amendments to share plan rules and the remuneration terms of the Group Chief Risk and Compliance Officer’s relocation package; review the remuneration of senior executives across the Group, employees with a remuneration opportunity over £1 million per annum and employees within the scope of the Solvency II remuneration rules; note the remuneration sections of the draft Shareholder Circular and Demerger Agreement; and review the executive remuneration model and its appropriateness for the ongoing international business.
Notes 1 Michael Falcon was appointed to the Board on 7 January 2019 as Chairman and CEO, Jackson Holdings LLC. His salary was reviewed on appointment. 2 Michael Falcon, Nic Nicandrou and John Foley stepped down from the Board on 16 May 2019. 3 James Turner relocated to Hong Kong on 1 August 2019. His remuneration was reviewed in light of his relocation.
The level of performance required for threshold, plan and maximum payment against the Group’s 2019 AIP financial measures and the results achieved are set out below: 2019 AIP measure Weighting Threshold
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 153
— Ensured that key Board decisions in relation to the demerger were supported by clear and concise Risk opinions. These included consideration of external and internal financial and non-financial risks and scenarios relevant to the demerger timeline and readiness decisions, and contributed to the completion of the demerger of M&G plc on 21 October 2019; and
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 155
— Commenced execution of Prudential Corporation Asia -wide digital strategy as part of the drive for high quality earnings and management of operating leverage through removal of duplication and modernisation of operating structures; — Launched ‘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 and commenced the roll-out of this programme over the Prudential Corporation Asia businesses; — Through our Health Ecosystem, collaborated with various partners to offer users a wide range of affordable and easy-to-access value-added services such as health assessments, risk factor identification, triage, telemedicine, wellness and digital payment; — Built on our distribution channels by renewing our regional strategic bancassurance alliance with UOB, entering into an exclusive bancassurance partnership with SeABank and by acquiring a majority stake in Thanachart Fund Management Co., Ltd; — Conducted extensive business renewal of products and the expansion of distribution channels in Indonesia and Hong Kong as well as built execution plans for the fast-growing SME segment; — Continued to expand our presence in China across both the insurance and asset management sectors, establishing a new branch in Shaanxi, our twentieth province launching our first fund offerings in China; — 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-on-year; and
Notes 1 The share price used to calculate the value of the PLTIP awards with performance periods which ended on 31 December 2019 and vest in April 2020 for all Executive Directors other than Mark FitzPatrick and in August 2020 for Mark FitzPatrick, was the average share price for the three months up to 31 December 2019, being £13.85. The number of Prudential plc shares under award has been adjusted in line with the approach set out in the section on ‘Remuneration decisions taken in relation to the demerger’.
Michael Falcon and an ADR price of US$40.58 for Michael Falcon. ‡ The percentage of awards released for achieving maximum targets is 100 per cent. § Each of the four measures within the sustainability scorecard has equal weighting. They are Group Solvency II operating capital generation, Group ECap operating capital generation, diversity and conduct.
TSR Performance As at 31 December 2019, Prudential’s TSR performance ranked below the peer group median for the elapsed portions of the 2018 and 2019 performance periods.
The table below compares the Group Chief Executive’s ‘single figure’ of total remuneration to that received by three representative UK employees in 2019.
— Sustainability scorecard of strategic measures (20 per cent of award).
The Committee would consult with major shareholders before making any increase to current award levels. Award levels are disclosed in the relevant Annual report on remuneration.
For any award made under the PLTIP to vest, the Committee must be satisfied that the quality of the Company’s underlying financial performance justifies the level of reward delivered at the end of the performance period. The Committee receives data about factors such as risk management and the cost of capital to support their decision. The Committee has the discretion to alter or disapply the holding period if it believes that it is appropriate. See the ‘Policy on corporate transactions’ section for details of the Committee’s powers in the case of corporate transactions.
Progress against the share ownership guidelines is detailed in the ‘Statement of Directors’ shareholdings’ section of the Annual report on remuneration.
Base pay The salary for a new Executive Director will be set using the approach set out in the fixed pay policy table on page 174.
When an Executive Director leaves the Board they will be subject to post-Director Share ownership guidelines.
Deferred Annual Incentive Plan Awards In the event of a corporate transaction (eg takeover, material merger, winding up etc), the Committee will determine whether awards will: — Vest in part or in full; — Continue in accordance with the rules of the plan; and/or
Where awards vest/ are released the Committee will have regard to the performance of the Company, the time elapsed between the date of grant and the relevant event and any other matter that the Committee considers relevant or appropriate.
Changes from 2017 policy The proposed Directors’ remuneration policy generally reflects that approved by shareholders in May 2017. The principal differences are set out below. Additionally, minor changes have been made to provide alignment with the UK Corporate Governance Code and to generally improve clarity.
The conduct measure in the PLTIP rewards for appropriate management action in ensuring that there are no significant conduct/culture/governance issues that result in significant capital add-ons or material fines.
Cash-settled long-term incentive awards This information has been prepared in line with the reporting requirements of the Hong Kong Stock Exchange and sets out Executive Directors’ outstanding share awards and share options. For details of the cash-settled long-term incentive awards held by one Executive Director, please see our 2018 Annual report on remuneration.
B2 Acquisition costs and other expenditure 229 B2.1 Staff and employment costs 229 B2.2 Share-based payment 230 B2.3 Key management remuneration 232 B2.4 Fees payable to the auditor 233
C12.2 Local capital regulations 293 C12.3 Transferability of available capital 294
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 201
Total comprehensive income from continuing operations – – 1,855 135 2,679 4,669 11 4,680
Total other comprehensive income (loss) from continuing operations – – 21 (33) (1,446) (1,458) 1 (1,457)
Liabilities Insurance contract liabilities C4.1 380,143 410,947 443,952 Investment contract liabilities with discretionary participation features C4.1 633 85,858 84,789 Investment contract liabilities without discretionary participation features C4.1 4,902 24,481 27,589 Unallocated surplus of with-profits funds C4.1 4,750 20,180 22,931 Core structural borrowings of shareholder-financed businesses C6.1 5,594 9,761 8,496 Operational borrowings note (i) C6.2 2,645 6,289 7,450 Obligations under funding, securities lending and sale and repurchase agreements 8,901 8,901 7,660 Net asset value attributable to unit holders of consolidated investment funds 5,998 14,839 12,025 Deferred tax liabilities C8.2 5,237 5,122 6,378 Current tax liabilities C8.1 396 723 726 Accruals, deferred income and other liabilities 14,488 19,421 19,190
When�measuring�lease�liabilities�on�adoption,�the�Group�discounted�lease�payments�using�its�incremental�borrowing�rate�at�1�January� 2019.�The�weighted�average�rate�applied�is�3.4�per�cent.�The�aggregate�effect�of�the�adoption�of�the�standard�on�the�statement�of� financial�position�at�1�January�2019�is�shown�in�the�table�below: Effect of adoption of IFRS 16 at 1 January 2019
Amortisation�of�acquisition�accounting�adjustments note (v) (43) (61) (61) 30% 30% (Loss)�on�disposal�of�businesses�and�corporate�transactions D1 (142) (107) (106) (33)% (34)%
Profit (loss) before tax attributable to shareholders’ returns from continuing operations 4,193 (725) 3,468 (1,546) 1,922
B4.1 Total tax charge by nature of expense The�total�tax�charge�for�continuing�operations�in�the�income�statement�is�as�follows: Tax charge 2019� $m 2018� $m
AAA AA+ to AA- A+ to ABBB + to BBB- Below BBB-
(b) Derivatives and hedging Accounting principles for derivatives and embedded derivatives Derivative�financial�instruments�are�used�to�reduce�or�manage�investment,�interest�rate�and�currency�exposures,�to�facilitate�efficient� portfolio�management�and�for�investment�purposes.�
Comprising: – Policyholder liabilities on the consolidated statement of financial position note (c)
(c) The policyholder liabilities of the Asia insurance operations at 31 December 2018 of $91,836 million were after deducting the intra-group reinsurance liabilities ceded by the discontinued UK and Europe operations of $1,412 million to the Hong Kong with-profits business, which were recaptured in October 2019 upon demerger. Including this amount, total Asia policyholder liabilities at 31 December 2018 were $93,248 million.
Demerger of UK and Europe operations – – (51,911) (51,911) Net flows: Net flows note 5,594 247 – 5,841 Investment-related items and other movements 4,186 32,922 – 37,108 Foreign exchange translation differences 777 – – 777
Addition for closed block of group payout annuities in the US – 5,532 5,532 Transfers from general to separate account 708 (708) – Investment-related items and other movements (15,436) 2,086 (13,350)
At 31 December 2019, fixed interest rate annuities accounted for 6 per cent (31 December 2018: 7 per cent) of Jackson’s policy and contract liabilities.
The contracts provide annuity payments that meet the requirements of the specific pension plan being covered. In some cases, the contracts have pre-retirement death and/or withdrawal benefits, pre-retirement surviving spouse benefits, and/or subsidised early retirement benefits.
Present value of acquired in-force (PVIF) and other intangibles attributable to shareholders note (iii) 3,170 2,151
Subordinated and other debt not substituted to M&G plc: US$250m 6.75% Notes note (iii) 250 250 US$300m 6.5% Notes note (iii) 300 299
¤20m Medium Term Notes 2023 22 23 £400m 11.375% Notes 2039 note (iv) – 508
Total central operations 5,344 9,511 Jackson US$250m 8.15% Surplus Notes 2027 note (vii) 250 250
(ii) In 2019, Prudential plc transferred subordinated debt to M&G plc as part of the demerger. In addition to the subordinated debt held at 31 December 2018 as shown in the table above, the debt transferred included the further £300 million 3.875 per cent subordinated debt raised in July 2019
C7.2 Asia insurance operations Exposure and sensitivity of IFRS basis profit and shareholders’ equity to market and other risks The Asia operations sell with-profits and unit-linked policies, and the investment portfolio of the with-profits funds contains a proportion of equities. Shareholder exposure to market risk on these products is muted given the shareholders share this risk with the policyholders through its joint participation in with-profits funds results or through fees that vary with the size of the unit-linked funds. Nonparticipating business is largely backed by debt securities or deposits, which means that value of its assets fluctuate with interest rates. Depending on the reserving basis in the business unit, this may be offset by a consequential change in insurance liabilities as discount rates change accordingly. The Group’s exposure to market risk arising from its Asia operations is therefore at modest levels.
In summary, for Asia operations, the adjusted IFRS operating profit based on longer-term investment returns is mainly affected by the impact of market levels on unit-linked persistency and other insurance risks. At the total IFRS profit level, the Asia result is affected by short-term value movements on the asset portfolio for non-linked shareholder-backed business offset by the impact of changing interest rates on the discount rate used to determine insurance liabilities.
Interest rate risk — Related to meeting guaranteed rates of accumulation on fixed annuity and interest sensitive life products following a sustained fall in interest rates; — Related to increases in the present value of projected benefits related to guarantees issued in connection with its variable annuity contracts following a sustained fall in interest rates especially if in conjunction with a fall in equity markets; — Related to the surrender value guarantee features attached to the Company’s fixed annuity and interest sensitive life products and to policyholder withdrawals following a sharp and sustained increase in interest rates; and
The directional movements in the sensitivities reflect the hedging programme in place at 31 December 2019 and 2018 respectively. The impacts shown under a decrease in equity markets reflect the mismatch discussed in note B1.2(ii)(a), with the gains on equity derivatives exceeding the increase in IFRS liabilities given the measurement basis applied. Following the equity market gains during 2019, the equity call options held at 31 December 2019 act to limit losses on equity derivatives under equity market increases. If equity markets therefore increase the main effect is a reduction in liabilities as guarantees move further out-of-the-money. The sensitivities above reflect the actual hedging portfolio at 31 December 2019 and the nature of Jackson’s dynamic hedging programme means that the portfolio, and hence the results of these sensitivities, will change on an ongoing basis.
(ii) Sensitivity to interest rate risk Except in the circumstances of interest rate scenarios where the guarantee rates included in contract terms are higher than crediting rates that can be supported from assets held to cover liabilities, the IFRS measurement basis of fixed annuity liabilities of Jackson’s products is not generally sensitive to interest rate risk. This position derives from the nature of the products and the US GAAP basis of measurement. The GMWB features attached to variable annuity business (other than ‘for life’ components) are accounted for under US GAAP at fair-value and, therefore, will be sensitive to changes in interest rates, as discount rates and fund earned rates will be updated on an ongoing basis.
C8.1 Current tax At 31 December 2019, of the $492 million (31 December 2018: $476 million from continuing operations) current tax recoverable, the majority is expected to be recovered more than twelve months after the reporting period.
Note Analysis of movement in other provisions: 2019 $m 2018 $m
(iii) Meeting of capital management objectives The Group minimum capital requirement has been met during 2019. Prior to the demerger of the UK and Europe operations, the Group capital requirement was met in accordance with the Solvency II regime.
Discontinued UK and Europe operations’ profit before tax 2,094 862 Re-measurement of the UK and Europe operations on demerger note (2) 188 – Cumulative exchange loss recycled from other comprehensive income (2,668) –
(3) The tax (charge) credit wholly relates to the tax on the ordinary profits of the discontinued UK and Europe operations.
The definitions of a subsidiary undertaking, joint venture and associate in accordance with the Companies Act 2006 are different from the definition under IFRS. As a result, the related undertakings included within the list below may not be the same as the undertakings consolidated in the Group IFRS financial statements. The Group’s consolidation policy is described in note A3.1(b). The Group also operates through branches. At 31 December 2019, there is no significant branch outside the UK.
AMUNDI FTSE China A50 Index ETF U 38.67% 90, boulevard Pasteur, 75015 Paris - France
U 97.59% 10 Marina Boulevard, #32-01, Marina Bay Financial Centre, Singapore 018983
OS 99.93% 9/9 Sathorn Building, 20th–27th Floor, South Sathorn Road, Yannawa, Sahtorn, Bangkok 10120, Thailand
PT. Eastspring Investments Indonesia OS 99.95% Prudential Tower, 23rd Floor, Jl. Jend. Sudirman Kav.79, Jakarta 12910, Indonesia
* Prudential Assurance Malaysia Berhad is consolidated at 100 per cent in the Group’s financial statements reflecting the economic interest to the Group. † Prudential BSN Takaful Berhad is a joint venture that is accounted for using the equity method, for which the Group has an economic interest of 70 per cent for all business sold up to 23 December 2016 and of 49 per cent for new business sold subsequent to this date.
Amounts in respect of share-based payments of $(123) million (2018: $(81) million) comprise of $5 million (2018: $7 million) in respect of share-based payments reflecting the value of payments settled by the Company for employees of its subsidiary undertakings, less $(128) million (2018: $(88) million) relating to cash received from subsidiaries in respect of share awards.
Derivative financial instruments are held to manage certain macro-economic exposures. The change in fair value of the derivative financial instruments of the Company was a (loss) before tax of $(77) million (2018: gain of $27 million).
A summary of the ordinary shares in issue and the options outstanding to subscribe for the Company’s shares at 31 December 2019 is set out in note C10 of the Group financial statements.
Refer to page 118 (Audit Committee report), Refer to page 313 (accounting policy) and pages 315 to 316 (financial disclosures)
Notes (i) Intra-group dividends represent dividends that have been declared in the year. Dividends payable by the discontinued UK and Europe operations (M&G plc) to Prudential plc includes a $3,841 million pre-demerger dividend, cash dividends paid in the period of $684 million and restructuring impacts related to the demerger. Investment in operations reflects movements in share capital. The amounts included for these items in the analysis of movement in free surplus (note 11) for Asia are as per the holding company cash flow at transaction rates. The difference primarily relates to intra-group loans, foreign exchange and other non-cash items.
Representing Continuing operations 54,711 46,101 Discontinued UK and Europe operations – 17,301
EEV basis shareholders’ equity 54,711 63,402 * Including liabilities in respect of insurance products classified as investment contracts under IFRS 4.
Key assumptions The value of in-force business is determined by projecting post-tax future profits (on a local statutory basis) by product, using best estimate assumptions for operating factors such as persistency, mortality, morbidity and expenses. Explicit allowances are made for the cost of holding required capital under the applicable local statutory regimes and the time value of financial options and guarantees (TVOG). The TVOG is determined by weighting the probability of outcomes across a large number of different economic scenarios, and is less applicable to health and protection business that generally contain more limited financial options or guarantees.
Notes (i) In 2019, the $178 million gain on disposals mainly relates to profits arising from a reduction in the Group’s stake (from 26 per cent to 22 per cent) in its associate in India, ICICI
Investment in new business note (c) (619) (652) (646) 5% 4%
(b) Operating free surplus generated by US insurance and asset management operations before restructuring costs can be analysed as follows: Operating free surplus generated from in-force life business before EEV hedge modelling enhancements note (d) 2,542 2,191 16%
(i) Foreign exchange movements, timing differences and other items represent: 2019 $m
Cash flows are projected on a deterministic basis and are discounted at the appropriate risk discount rate. The modelled cash flows use the same methodology underpinning the Group’s EEV reporting and so are subject to the same assumptions and sensitivities.
Equity/property market values – 10% fall (810) (1,205) (2,015) (602) (634) (1,236)
Sensitivity analysis The estimated sensitivity of the Group shareholder LCSM capital position (based on GMCR) to significant changes in market conditions is as follows: Impact of market sensitivities
I(ii) Funds under management For Prudential’s asset management businesses, funds managed on behalf of third parties are not recorded on the statement of financial position. They are, however, a driver of profitability. Prudential therefore analyses the movement in the funds under management each period, focusing on those which are external to the Group and those primarily held by the Group’s insurance businesses. The table below analyses, by segment, the funds of the Group held in the statement of financial position and the external funds that are managed by Prudential’s asset management businesses.
Adjusted IFRS operating profit based on longer-term investment returns – asset management 283 32 315
Adjusted IFRS operating profit based on longer-term investment returns long-term business 2,646 2,552 5,198
Share of related tax charges from joint ventures and associate note (5) (51) – (51)
Margin on revenues 3,035 2,810 2,790 Expenses: Expected return on shareholder assets 194 172 172
Discounted expected generation from all in-force business for years 2020 to 2059 45,097 Discounted expected generation from all in-force business for years after 2059 3,892
Operating profit based on longer-term investment returns note (ii) 6,905 7,866 6,753 6,137 5,636
IFRS profit for the year net of tax and non-controlling interests 3,719 (380) (1,395) 1,944 528 2,472
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 387
In general, upheavals in the financial markets may affect general levels of economic activity, employment and customer behaviour. As a result, insurers may experience an elevated incidence of claims, lapses, or surrenders of policies, and some policyholders may choose to defer or stop paying insurance premiums. The demand for insurance products may also be adversely affected. In addition, there may be a higher incidence of counterparty failures. If sustained, this environment is likely to have a negative impact on the insurance sector over time and may consequently have a negative impact on Prudential’s business and its balance sheet and profitability. For example, this could occur if the recoverable value of intangible assets for bancassurance agreements and deferred acquisition costs are reduced. New challenges related to market fluctuations and general economic conditions may continue to emerge.
Prudential plc Annual Report 2019 prudentialplc.com392 regulatory issues may also arise from the increased use of emerging technology, data and digital services. Although Prudential has experienced or has been affected by cyber and data breaches, to date, it has not identified a failure or breach, or an incident of data misuse in relation to its legacy and other IT systems and processes which has had a material impact. However, Prudential has been, and likely will continue to be, subject to potential damage from computer viruses, unauthorised access and cyber-security attacks such as ‘denial of service’ attacks (which, for example, can cause temporary disruption to websites and IT networks), phishing and disruptive software campaigns.
In addition, Prudential’s business may be adversely affected by epidemics, pandemics and other effects that give rise to a large number of deaths or additional sickness claims, as well as increases to the cost of medical claims. Pandemics, significant influenza and other epidemics and outbreaks such as the recent coronavirus have occurred a number of times historically but the likelihood, timing, or the severity of future events cannot be predicted. The effectiveness of external parties, including governmental and non-governmental organisations, in combating the spread and severity of any epidemics could have a material impact on the Group’s loss experience.
Prudential’s businesses are conducted in highly competitive environments with developing demographic trends and continued profitability depends upon management’s ability to respond to these pressures and trends The markets for financial services in the US and Asia are highly competitive, with several factors affecting Prudential’s ability to sell its products and continued profitability, including price and yields offered, financial strength and ratings, range of product lines and product quality, brand strength and name recognition, investment management performance and fund management trends, historical bonus levels, the ability to respond to developing demographic trends, customer appetite for certain savings products and technological advances. In some of its markets, Prudential faces competitors that are larger, have greater financial resources or a greater market share, offer a broader range of products or have higher bonus rates. Further, heightened competition for talented and skilled employees and agents with local experience, particularly in Asia, may limit Prudential’s potential to grow its business as quickly as planned. Technological advances may result in increased competition to the Group (including from outside the insurance industry) and a failure to be able to attract sufficient numbers of skilled staff.
D Deferred acquisition costs (DAC) Acquisition costs are expenses of an insurer which are incurred in connection with the acquisition of new insurance contracts or the renewal of existing insurance policies. They include commissions and other variable sales inducements and the direct costs of issuing the policy, such as underwriting and other policy issue expenses. Typically, under IFRS, an element of acquisition costs are deferred ie not expensed in the year incurred, and instead amortised in the income statement in line with the emergence of surpluses on the related contracts.
Hong Kong Insurance Authority (Hong Kong IA or HKIA) The HKIA is an insurance regulatory body responsible for the regulation and supervision of the Hong Kong insurance industry.
A dditional inform ation prudentialplc.com Prudential plc Annual Report 2019 403