Blueprint
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of March, 2019
PRUDENTIAL PUBLIC LIMITED COMPANY
(Translation of registrant's name into English)
LAURENCE POUNTNEY HILL,
LONDON, EC4R 0HH, ENGLAND
(Address
of principal executive offices)
Indicate
by check mark whether the registrant files or will file annual
reports
under
cover Form 20-F or Form 40-F.
Form
20-F X
Form 40-F
Indicate
by check mark whether the registrant by furnishing the
information
contained
in this Form is also thereby furnishing the information to
the
Commission
pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes
No X
If
"Yes" is marked, indicate below the file number assigned to the
registrant
in connection with Rule 12g3-2(b): 82-
13 March 2019
PRUDENTIAL PLC FULL YEAR 2018 RESULTS
PRUDENTIAL DELIVERS CONTINUED GROWTH IN PROFIT AND
DIVIDEND
Performance highlights on a constant (and actual) exchange rate
basis
● Group operating profit1 of
£4,827 million, up 6 per cent2 (up 3 per
cent3)
● Asia EEV new business profit4 of
£2,604 million, up 14 per cent2,
operating profit1 of
£2,164 million, up 14 per cent2 and
underlying free surplus generation5 of
£1,171 million, up 14 per cent2
● US fee income up 8 per cent2 following
a 10 per cent2 increase
in average separate account balances6
● M&GPrudential operating
profit1 up
19 per cent, including the effect of updated longevity
assumptions
● Full year 2018 ordinary dividend increased by 5
per cent to 49.35 pence per share
● Group Solvency II surplus7,8 estimated
at £17.2 billion, equivalent to a cover ratio of 232 per
cent
● Continued progress in preparations for the
demerger of M&GPrudential from Prudential
plc
Mike Wells, Group Chief Executive, said: 'In 2018, our financial
performance, again led by our Asia operations, is testament to the
scale of our opportunity set, the depth of our capabilities and our
unrelenting focus on executing our strategy at pace. At the same
time we have made good progress in our preparations for the
demerger of M&GPrudential from Prudential plc.
'In Asia we have again delivered double-digit growth across our key
metrics of new business profit4 (up
14 per cent2),
operating profit1 (up
14 per cent2)
and underlying free surplus generation5 (up
14 per cent2).
This performance is both broad-based, with 10 markets achieving
double-digit growth2 in
new business profit4,
and high-quality, with health and protection new business profit
growing by 15 per cent2.
Our Asia asset manager, Eastspring, has increased operating profit
(up 6 per
cent2)
amidst a challenging external environment reflecting the structural
benefit from life business net flows. Our broad-based portfolio of
life insurance and asset management businesses, high-quality
products with distinctive value-added services and multi-channel
strategy ensure that we continue to benefit from the growing
customer demand in Asia for the health, protection and savings
solutions that we provide.
'In the US, our life business, Jackson, remains focused on
providing financial security to increasing numbers of individuals
approaching or in retirement, broadening its product range and
extending its distribution network. US operating profit decreased
by 11 per cent, with higher fee income being more than offset by
higher market-related amortisation of acquisition costs and lower
spread-based income. Jackson's risk-based capital ratio, which
increased from 409 per cent to 458 per cent by year-end, highlights
the effectiveness of its risk management and hedging performance in
the equity market decline experienced during the fourth
quarter.
'M&GPrudential continues to make progress implementing its
merger and transformation programme while consolidating its
position as one of the leading businesses in the UK & European
savings and investment markets. M&GPrudential's total operating
profit increased 19 per cent, principally reflecting the benefit
from updated longevity assumptions and an 11 per cent increase in
the shareholder transfer from the with-profits business, which
includes a 30 per cent increase from PruFund.
'The intended demerger of M&GPrudential from Prudential plc
will further enhance the strategic focus of both businesses. I am
confident that, given the extent of our opportunities and our
proven ability to execute and innovate, we are well positioned to
continue to grow profitably.'
|
Summary financials
|
2018 £m
|
2017 £m
|
Change on
AER basis
|
Change on
CER basis
|
|
|
|
|
|
|
|
Operating profit1
|
4,827
|
4,699
|
3%
|
6%
|
|
Underlying free surplus generated5
|
4,047
|
3,640
|
11%
|
14%
|
|
Life new business profit4
|
3,877
|
3,616
|
7%
|
11%
|
|
IFRS profit after tax9
|
3,013
|
2,390
|
26%
|
30%
|
|
Net cash remittances from business units10
|
1,732
|
1,788
|
(3)%
|
-
|
|
|
|
|
|
|
|
|
2018 £bn
|
2017 £bn
|
Change on
AER basis
|
|
|
|
|
|
|
|
|
IFRS
shareholders' funds
|
17.2
|
16.1
|
7%
|
|
|
EEV
shareholders' funds
|
49.8
|
44.7
|
11%
|
|
|
Group
Solvency II capital surplus7,8
|
17.2
|
13.3
|
29%
|
|
Notes
1
In this press release 'operating profit' refers to adjusted IFRS
operating profit based on longer-term investment returns. This
alternative performance measure is reconciled to IFRS profit for
the year in note B1.1 of the IFRS financial
statements.
2 Year-on-year
percentage increases are stated on a constant exchange rate basis
unless otherwise stated.
3
Growth rate on an actual exchange rate basis.
4
New business profit on business sold in the year, calculated in
accordance with EEV principles.
5 For
insurance operations, underlying free surplus generated represents
amounts maturing from the in-force business during the period less
investment in new business and excludes non-operating items. For
asset management businesses, it equates to post-tax operating
profit for the period. Restructuring costs are presented separately
from the underlying business unit amount. Further information is
set out in note 10 of the EEV basis results.
6
Average US separate account balances for the year to 31 December
2018, compared to average balances for the year to 31 December 2017
on a constant exchange rate basis.
7 The
Group shareholder capital position excludes the contribution to Own
Funds and the Solvency Capital Requirement from ring fenced
with-profit funds and staff pension schemes in surplus. 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.
8
Estimated before allowing for second interim ordinary
dividend.
9
IFRS profit after tax reflects the combined effects of operating
results determined on the basis of longer-term investment returns,
together with short-term investment variances, results attaching to
disposal of businesses and corporate transactions, amortisation of
acquisition accounting adjustments and the total tax charge for the
year.
10
Net cash remitted by business units are included in the Holding
company cash flow, which is disclosed in detail in note II(a) of
the Additional unaudited IFRS financial information. This comprises
dividends and other transfers from business units that are
reflective of emerging earnings and capital
generation.
Contact:
|
Media
|
|
Investors/Analysts
|
|
|
Jonathan
Oliver
|
+44
(0)20 7548 3537
|
Chantal
Waight
|
+44
(0)20 7548 3039
|
|
Tom
Willetts
|
+44
(0)20 7548 2776
|
Richard
Gradidge
|
+44
(0)20 7548 3860
|
|
|
|
William
Elderkin
|
+44
(0)20 3480 5590
|
Notes to Editors:
a. The
results in this announcement are prepared on two bases:
International Financial Reporting Standards (IFRS) and European
Embedded Value (EEV). The results prepared under IFRS form the
basis of the Group's statutory financial statements. The
supplementary EEV basis results have been prepared in accordance
with the amended European Embedded Value Principles dated April
2016 prepared by the European Insurance CFO Forum. The Group's EEV
basis results are stated on a post-tax basis and include the
post-tax IFRS basis results of the Group's asset management and
other operations. Year-on-year percentage increases are stated on a
constant exchange rate basis unless otherwise stated. Constant
exchange rates are calculated b translating prior year results
using the current period foreign exchange rate ie current period
average rates for the income statement and current period closing
rates for the balance sheet.
b. Adjusted
IFRS operating profit based on longer-term investment returns is
determined on the basis of including longer-term investment
returns. EEV and adjusted IFRS operating profit based on
longer-term investment returns is stated after excluding the effect
of short-term fluctuations in investment returns against long-term
assumptions and gains/losses arising on the disposal of businesses
and other corporate transactions including the reinsurance of UK
annuity contracts to Rothesay Life in March 2018. Furthermore, for
EEV basis results, operating profit based on longer-term investment
returns excludes the effect of changes in economic assumptions and
the mark to market value movement on core borrowings. Separately on
the IFRS basis, operating profit also excludes amortisation of
accounting adjustments arising principally on the acquisition of
REALIC completed in 2012.
c. Total
number of Prudential plc shares in issue as at 31 December 2018 was
2,593,044,409.
d. A
presentation for analysts and investors will be held today at
11.30am (UK time) / 7.30pm (Hong Kong time) in the conference suite
at Nomura, 1 Angel Lane, London EC4R 3AB. The presentation will be
webcast live and available to replay afterwards using the following
link https://www.investis-live.com/prudential/5c73c9a8cad1ac0c00430540/2018-full-year-results
To register
attendance in person please send an email
to investor.relations@prudential.co.uk
Alternatively,
a dial-in facility will be available to listen to the presentation:
please allow time ahead of the presentation to join the call (lines
open half an hour before the presentation is due to start, ie from
11.00am (UK time) / 7.00pm (Hong Kong time).
Dial-in:
020 3936 2999 (UK Local Call) / +44 20 3936 2999 (International) /
0800 640 6441 (Freephone UK), Participant access code: 082125. Once
participants have entered this code their name and company details
will be taken.
Playback:
+44 (0) 20 3936 3001 (UK and international excluding US) / + 1 845
709 8569 (US only) (Replay code: 275563). This will be available
from approximately 3.00pm (UK time) / 11.00pm (Hong Kong time) on
13 March 2019 until 11.59pm (UK time) on 27 March 2019 / 7.59am
(Hong Kong time) on 28 March 2019.
e. 2018 Second interim ordinary
dividend
|
|
Ex-dividend
date
|
28 March 2019 (UK, Ireland, Hong Kong and Singapore)
|
|
|
Record
date
|
29
March 2019
|
|
|
Payment
of dividend
|
17 May
2019 (UK, Ireland and Hong Kong)
On or
about 24 May 2019 (Singapore and ADR holders)
|
f. About Prudential plc
Prudential
plc and its affiliated companies constitute one of the world's
leading financial services groups, serving 26 million customers and
it has £657 billion of assets under management (as at 31
December 2018). Prudential plc is incorporated in England and Wales
and is listed on the stock exchanges in London, Hong Kong,
Singapore and New York. Prudential plc is not affiliated in any
manner with Prudential Financial, Inc., a company whose principal
place of business is in the United States of America.
g. Forward-Looking Statements
This document may contain 'forward-looking
statements' with respect to certain of Prudential's plans and its
goals and expectations relating to its future financial condition,
performance, results, strategy and objectives. Statements that are
not historical facts, including statements about Prudential's
beliefs and expectations and including, without limitation,
statements containing the words 'may', 'will', 'should',
'continue', 'aims', 'estimates', 'projects', 'believes', 'intends',
'expects', 'plans', 'seeks' and 'anticipates', and words of similar
meaning, are 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.
Any
forward-looking statements contained in this document speak only as
of the date on which they are made. Prudential expressly disclaims
any obligation to update any of the forward-looking statements
contained in this document or any other forward-looking statements
it may make, whether as a result of future events, new information
or otherwise except as required pursuant to the UK Prospectus
Rules, the UK Listing Rules, the UK Disclosure and Transparency
Rules, the Hong Kong Listing Rules, the SGX-ST listing rules or
other applicable laws and regulations.
Summary 2018 financial performance
Financial highlights
|
Life APE new business sales (APE
sales)1
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
2018 £m
|
2017 £m
|
Change %
|
|
2017 £m
|
Change %
|
|
Asia
|
3,744
|
3,805
|
(2)
|
|
3,671
|
2
|
|
US
|
1,542
|
1,662
|
(7)
|
|
1,605
|
(4)
|
|
UK and Europe
|
1,516
|
1,491
|
2
|
|
1,491
|
2
|
|
Total Group
|
6,802
|
6,958
|
(2)
|
|
6,767
|
1
|
|
Life EEV new business profit and investment in new
business
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
2018 £m
|
|
2017 £m
|
|
Change %
|
|
2017 £m
|
|
Change %
|
|
|
New
Business
Profit
|
|
Free
surplus
invested
in new
business
|
|
New
Business
Profit
|
|
Free
surplus
invested
in new
business
|
|
New
Business
Profit
|
|
Free
surplus
invested
in new
business
|
|
New
Business
Profit
|
|
Free
surplus
invested
in new
business
|
|
New
Business
Profit
|
|
Free
surplus
invested
in new
business
|
|
Asia
|
2,604
|
|
488
|
|
2,368
|
|
484
|
|
10
|
|
1
|
|
2,282
|
|
466
|
|
14
|
|
5
|
|
US
|
921
|
|
225
|
|
906
|
|
254
|
|
2
|
|
(11)
|
|
874
|
|
245
|
|
5
|
|
(8)
|
|
UK and Europe
|
352
|
|
102
|
|
342
|
|
175
|
|
3
|
|
(42)
|
|
342
|
|
175
|
|
3
|
|
(42)
|
|
Total Group
|
3,877
|
|
815
|
|
3,616
|
|
913
|
|
7
|
|
(11)
|
|
3,498
|
|
886
|
|
11
|
|
(8)
|
|
IFRS profit2
|
|
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
|
|
2018 £m
|
2017 £m
|
Change %
|
|
2017 £m
|
Change %
|
|
Operating profit before tax based on longer-term investment
returns
|
|
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
|
Long-term business
|
1,982
|
1,799
|
10
|
|
1,727
|
15
|
|
Asset management
|
182
|
176
|
3
|
|
171
|
6
|
|
Total
|
2,164
|
1,975
|
10
|
|
1,898
|
14
|
|
|
|
|
|
|
|
|
|
|
|
US
|
|
|
|
|
|
|
|
Long-term business
|
1,911
|
2,214
|
(14)
|
|
2,137
|
(11)
|
|
Asset management
|
8
|
10
|
(20)
|
|
9
|
(11)
|
|
Total
|
1,919
|
2,224
|
(14)
|
|
2,146
|
(11)
|
|
|
|
|
|
|
|
|
|
|
|
UK and Europe
|
|
|
|
|
|
|
|
Long-term business
|
1,138
|
861
|
32
|
|
861
|
32
|
|
General insurance commission
|
19
|
17
|
12
|
|
17
|
12
|
|
Total insurance operations
|
1,157
|
878
|
32
|
|
878
|
32
|
|
Asset management
|
477
|
500
|
(5)
|
|
500
|
(5)
|
|
Total
|
1,634
|
1,378
|
19
|
|
1,378
|
19
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expenditure
|
(725)
|
(775)
|
6
|
|
(769)
|
6
|
|
Total operating profit based on longer-term investment returns
before tax and restructuring costs
|
4,992
|
4,802
|
4
|
|
4,653
|
7
|
|
Restructuring costs3
|
(165)
|
(103)
|
(60)
|
|
(103)
|
(60)
|
|
Total operating profit based on longer-term investment returns
before tax
|
4,827
|
4,699
|
3
|
|
4,550
|
6
|
|
Non-operating items:
|
|
|
|
|
|
|
|
|
Short-term fluctuations in investment returns on
shareholder-backed business
|
(558)
|
(1,563)
|
64
|
|
(1,514)
|
63
|
|
|
Amortisation of acquisition accounting adjustments
|
(46)
|
(63)
|
27
|
|
(61)
|
25
|
|
|
(Loss) gain on disposal of businesses and corporate
transactions
|
(588)
|
223
|
n/a
|
|
218
|
n/a
|
|
Profit before tax
|
3,635
|
3,296
|
10
|
|
3,193
|
14
|
|
Tax charge attributable to shareholders' returns
|
(622)
|
(906)
|
31
|
|
(876)
|
29
|
|
Profit for the year
|
3,013
|
2,390
|
26
|
|
2,317
|
30
|
|
Post-tax profit -
EEV4
|
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
|
2018 £m
|
2017 £m
|
Change %
|
|
2017 £m
|
Change %
|
|
Post-tax operating profit based on longer-term
investment returns
|
|
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
|
Long-term business
|
4,387
|
3,705
|
18
|
|
3,562
|
23
|
|
Asset management
|
159
|
155
|
3
|
|
150
|
6
|
|
Total
|
4,546
|
3,860
|
18
|
|
3,712
|
22
|
|
|
|
|
|
|
|
|
|
|
US
|
|
|
|
|
|
|
|
Long-term business
|
2,115
|
2,143
|
(1)
|
|
2,069
|
2
|
|
Asset management
|
3
|
7
|
(57)
|
|
7
|
(57)
|
|
Total
|
2,118
|
2,150
|
(1)
|
|
2,076
|
2
|
|
|
|
|
|
|
|
|
|
|
UK and Europe
|
|
|
|
|
|
|
|
Long-term business
|
1,374
|
1,015
|
35
|
|
1,015
|
35
|
|
General insurance commission
|
15
|
13
|
15
|
|
13
|
15
|
|
Total insurance operations
|
1,389
|
1,028
|
35
|
|
1,028
|
35
|
|
Asset management
|
392
|
403
|
(3)
|
|
403
|
(3)
|
|
Total
|
1,781
|
1,431
|
24
|
|
1,431
|
24
|
|
|
|
|
|
|
|
|
|
|
Other income and expenditure
|
(726)
|
(746)
|
3
|
|
(740)
|
2
|
|
Post-tax operating profit based on longer-term investment
returns
before restructuring costs
|
7,719
|
6,695
|
15
|
|
6,479
|
19
|
|
Restructuring costs3
|
(156)
|
(97)
|
(61)
|
|
(97)
|
(61)
|
|
Post-tax operating profit based on longer-term
investment returns
|
7,563
|
6,598
|
15
|
|
6,382
|
19
|
|
Non-operating items:
|
|
|
|
|
|
|
|
|
Short-term fluctuations in investment returns
|
(3,219)
|
2,111
|
n/a
|
|
2,057
|
n/a
|
|
|
Effect of changes in economic assumptions
|
146
|
(102)
|
n/a
|
|
(91)
|
n/a
|
|
|
Mark to market value on core structural borrowings
|
549
|
(326)
|
n/a
|
|
(326)
|
n/a
|
|
|
Impact of US tax reform
|
-
|
390
|
n/a
|
|
376
|
n/a
|
|
|
(Loss) gain on disposal of businesses and corporate
transactions
|
(451)
|
80
|
n/a
|
|
77
|
n/a
|
|
Post-tax profit for the year
|
4,588
|
8,751
|
(48)
|
|
8,475
|
(46)
|
|
Basic earnings per share - based on operating profit after
tax
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
2018 pence
|
2017 pence
|
Change %
|
|
2017 pence
|
Change %
|
|
IFRS
|
156.6
|
145.2
|
8
|
|
140.4
|
12
|
|
EEV
|
293.6
|
257.0
|
14
|
|
248.6
|
18
|
|
Underlying free
surplus generated 5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
|
2018 £m
|
|
2017 £m
|
|
Change %
|
|
2017 £m
|
Change %
|
|
|
|
Long-
term
|
Total
|
|
Long-
term
|
Total
|
|
Long-
term
|
Total
|
|
Long-
term
|
Total
|
Long-
term
|
Total
|
|
Asia
|
1,012
|
1,171
|
|
923
|
1,078
|
|
10
|
9
|
|
877
|
1,027
|
15
|
14
|
|
US
|
1,416
|
1,419
|
|
1,321
|
1,328
|
|
7
|
7
|
|
1,275
|
1,282
|
11
|
11
|
|
UK and Europe
|
1,175
|
1,582
|
|
895
|
1,311
|
|
31
|
21
|
|
895
|
1,311
|
31
|
21
|
|
Total Group before restructuring costs
|
3,603
|
4,172
|
|
3,139
|
3,717
|
|
15
|
12
|
|
3,047
|
3,620
|
18
|
15
|
|
Restructuring costs2
|
(68)
|
(125)
|
|
(38)
|
(77)
|
|
(79)
|
(62)
|
|
(38)
|
(77)
|
(79)
|
(62)
|
|
Total Group
|
3,535
|
4,047
|
|
3,101
|
3,640
|
|
14
|
11
|
|
3,009
|
3,543
|
17
|
14
|
|
Cash remitted by
the business units to the Group6
|
|
|
2018 £m
|
2017 £m
|
Change %
|
|
Asia
|
699
|
645
|
8
|
|
US
|
342
|
475
|
(28)
|
|
UK and Europe
|
654
|
643
|
2
|
|
Other UK (including Prudential Capital)
|
37
|
25
|
48
|
|
Total Group
|
1,732
|
1,788
|
(3)
|
|
Cash and capital
|
|
|
|
|
|
2018
|
2017
|
Change %
|
|
Dividend per share relating to the reporting year
|
49.35p
|
47.0p
|
5
|
|
Holding company cash and short-term investments
|
£3,236m
|
£2,264m
|
43
|
|
Group Solvency II capital surplus7,8
|
£17.2bn
|
£13.3bn
|
29
|
|
Group Solvency II capital ratio7,8
|
232%
|
202%
|
+30pp
|
|
|
|
|
|
|
Group shareholders' funds (including goodwill attributable to
shareholders)
|
|
|
2018 £bn
|
2017 £bn
|
Change %
|
|
IFRS
|
17.2
|
16.1
|
7
|
|
EEV
|
49.8
|
44.7
|
11
|
|
|
|
|
|
|
|
2018 %
|
2017 %
|
|
|
Return on IFRS shareholders' funds9
|
25
|
25
|
|
|
Return on embedded value9
|
17
|
17
|
|
|
|
|
|
|
|
|
2018
|
2017
|
Change %
|
|
EEV shareholders' funds per share (including goodwill attributable
to shareholders)9
|
1,920p
|
1,728p
|
11
|
|
EEV shareholders' funds per share (excluding goodwill attributable
to shareholders)9
|
1,856p
|
1,671p
|
11
|
Notes
1
APE sales is a measure of new business activity that comprises the
aggregate of annualised regular premiums and one-tenth of single
premiums on new business written during the period for all
insurance products, including premiums for contracts designated as
investment contracts under IFRS 4. It is not representative of
premium income recorded in the IFRS financial statements. See note
III of the Additional unaudited IFRS financial information for
further explanation.
2
Adjusted IFRS operating profit based on longer-term investment
returns is management's primary measure of profitability and
provides an underlying operating result based on longer-term
investment returns and excludes non-operating items. Further
information on its definition and reconciliation to profit for the
period is set out in note B1 of the IFRS financial
statements.
3
Restructuring costs include business transformation and integration
costs.
4
The EEV basis results have been prepared in accordance with EEV
principles discussed in note 1 of the EEV basis results. See note
III of the Additional unaudited IFRS financial information for
definition and reconciliation to IFRS balances.
5
For insurance operations, underlying free surplus generated
represents amounts maturing from the in-force business during the
period less investment in new business and excludes non-operating
items. For asset management businesses, it equates to post-tax
operating profit for the period. Restructuring costs are presented
separately from the underlying business unit amount. Further
information is set out in note 10 of the EEV basis
results.
6
Cash remitted to the Group form part of the net cash flows of the
holding company. A full holding company cash flow is set out in
note II(a) of the Additional unaudited IFRS financial information.
This differs from the IFRS Consolidated Statement of Cash Flows
which includes all cash flows relating to both policyholders' and
shareholders' funds. The holding company cash flow is therefore a
more meaningful indicator of the Group's central
liquidity.
7 The
Group shareholder capital position excludes the contribution to Own
Funds and the Solvency Capital Requirement from ring fenced
with-profit funds and staff pension schemes in surplus. 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.
8
Estimated before allowing for second interim ordinary
dividend.
9
See note III of the Additional unaudited IFRS financial information
for definition and reconciliation of IFRS balances.
Group Chief Executive's report
I am pleased to report that we have delivered another year of
positive financial performance across the Group. Through the
combination of our consistent strategy, our diversified portfolio
of businesses and our disciplined execution, we have continued to
produce high-quality earnings and deliver consistent returns for
our investors and good outcomes for all our
stakeholders.
Our purpose is to help people de-risk their lives and deal with
their biggest financial concerns. Whether they are starting a
family, saving for a child's education or planning for old age, we
provide them with the freedom to face the future with confidence
through our long-term savings and protection products, retirement
income solutions and asset management capabilities. At the same
time, we invest our customers' savings in the real economy, helping
to drive the cycle of growth and build stronger
communities.
We serve this purpose through our clear, consistent strategy, which
is focused on long-term structural trends and gives us unrivalled
access to the world's largest and fastest-growing markets. In Asia,
our distinguished brand, extensive footprint and broad product and
distribution reach across 14 markets leaves us well positioned to
serve the health, protection and savings needs of the rapidly
growing and increasingly affluent population. We are also a leading
provider of retirement products in the US, where the number of
people aged 65 and older is expected to grow from 55 million in
2020 to 72 million by 20301,
and we are continuing to enhance our product set and distribution
reach to capture the opportunity in this market. In the UK and
Europe, where ageing populations provide growing demand for managed
savings solutions, M&GPrudential is transforming itself to meet
those needs in new ways. In Africa we are building a presence in
one of the world's most under-penetrated insurance markets, with
operations in five markets.
We are continuing to develop our product offering and improve our
capabilities in order to meet the needs of customers in all these
markets. Across our businesses, we are listening to our customers
and creating new and better products in response to their changing
needs. At the same time, we are constantly upgrading our
capabilities, including, by investing in digital technology that
enables us to meet our customers' needs more quickly and
efficiently.
In March 2018, we announced our intention to demerge
M&GPrudential from the Group, in order to create two separately
listed companies with distinct investment characteristics and
opportunities. After the demerger, our shareholders will have
shares in Prudential plc, which will be even better positioned to
capture the structural opportunities ahead of us, and
M&GPrudential, with greater freedom to deploy its capital where
and how it likes to meet the changing needs of
customers.
We are making good progress towards the demerger. On the structural
side, we have established the holding company for
M&GPrudential, and we have completed the first stage of
approval from the High Court of England and Wales for the transfer
of part of the M&GPrudential annuity book to Rothesay. On the
operational side, we are moving forward with separating the
functions of the two businesses and building new ones to prepare
M&GPrudential for its post-demerger future. We have also raised
£1.6 billion of subordinated debt, with substitution clauses
to be activated on demerger, supporting the capital rebalancing of
the two businesses, and we continue to work with our
regulators.
Our financial performance
Our financial performance in 2018 reflects our focus on high
quality execution of our strategy, and is again led by our business
in Asia.
As in previous years, we comment on our performance in local
currency terms (expressed on a constant exchange rate basis) to
show the underlying business trends in periods of currency
movement.
New business profit2 increased
by 11 per cent3 to
£3,877 million (up 7 per cent on an actual exchange rate
basis), driven by the favourable impact of our strategic focus of
increasing health and protection sales in Asia, the benefit of
higher US interest rates and a resilient performance in the UK and
Europe.
Group adjusted IFRS operating profit based on longer-term
investment returns4 ('operating
profit') was 6 per cent3 higher
at £4,827 million (up 3 per cent on an actual exchange rate
basis). Operating profit from our Asia life insurance and asset
management businesses grew by 14 per cent3,
reflecting continued broad-based business momentum across the
region and high-quality sales, with over 85 per cent of operating
income from our preferred sources of insurance income, fee income
and with-profits. In the US, Jackson's total operating profit was
11 per cent3 lower,
with higher fee income outweighed by an increase in market-related
deferred acquisition costs (DAC) amortisation expense and the
anticipated reduction in spread earnings. In the UK and Europe,
M&GPrudential's total operating profit was 19 per cent higher
than the prior year, which principally reflects the benefit from
updated longevity assumptions and an 11 per cent5 increase
in the shareholder transfer from the with-profits business, which
includes a 30 per cent5 increase
from PruFund.
The Group's capital generation is underpinned by our large and
growing in-force business portfolio, and focus on profitable
business with fast payback of capital invested. Overall, underlying
free surplus generation6 increased
by 14 per cent3 to
£4,047 million and cash remittances to the Group from business
units were £1,732 million (2017: £1,788 million). The
Group's overall performance supported a 5 per cent increase in the
2018 full year ordinary dividend to 49.35 pence per
share.
The Group remains robustly capitalised, with a 2018 year-end
shareholder Solvency II cover ratio7,8 of
232 per cent. Over the period, IFRS shareholders' funds increased
by 7 per cent to £17.2 billion, reflecting profit after tax of
£3,013 million (2017: £2,390 million on an actual
exchange rate basis) and other movements that included dividend
payments to shareholders of £1,244 million and favourable
foreign exchange movements of £348 million. EEV shareholders'
funds increased by 11 per cent to £49.8 billion, equivalent to
1,920 pence per share2,9.
In Asia, we have maintained our focus on value, whilst continuing
to develop our capabilities and reach, which build scale and
enhance quality. Our strategic emphasis on increasing sales from
health and protection business has contributed to a 14 per
cent3 increase
in new business profit in Asia, and also reflected a 2 per
cent3 growth
in APE sales. Our growth in new business profit was broad-based,
with 10 markets delivering double-digit percentage
increases3.
Our asset management business, Eastspring Investments, has
continued to grow, with operating profit up 6 per
cent3 to
£182 million.
In the US, Jackson remains focused on providing financial security
to increasing numbers of individuals approaching or in retirement,
broadening its product range and extending its distribution
network, including new relationships announced with State Farm,
Envestnet and DPL Financial Partners. In 2018, higher charges for
deferred acquisition costs amortisation, largely as a result of
equity market movements in the year, contributed to
Jackson's operating profit being 11 per cent lower. US new
business profit increased by 5 per cent, as favourable movements in
interest rates and spread assumptions balanced a reduction in APE
sales. Jackson's hedging programmes performed as expected in the
period of equity market weakness experienced towards the end of
2018, contributing to an increased risk-based capital ratio at
year-end of 458 per cent (2017: 409 per cent).
In the UK and Europe, both our life and asset management businesses
performed well in 2018, with operating profit 19 per cent higher
driven by a number of items that are not expected to recur at the
same level including the effect from updated longevity assumptions.
Our core PruFund proposition continues to perform well, with net
inflows of £8.5 billion and the PruFund contribution to
shareholder operating profit increasing 30 per cent to £55
million. New business profit increased by 3 per cent, broadly in
line with the increase in APE sales. M&GPrudential asset
management saw net outflows of £9.9 billion from external
clients, including the expected redemption of a single £6.5
billion low-margin institutional mandate. Overall M&GPrudential
assets under management10 were
£321 billion (2017: £351 billion), reflecting net
outflows at M&GPrudential asset management and the impact of
the £12 billion annuity reinsurance agreement announced in
March 2018.
Our financial Key Performance Indicators (KPIs) continue to reflect
the outcome of the Group's strategy. Our Asia life businesses are
driven by growth in our recurring premium base and focus on health
and protection business. Elsewhere we are benefiting from our
prioritisation of fee-generating products across our Asia asset
management, US variable annuity and UK and European savings and
investment activities.
A clear and proven strategy
Our clear, proven strategy is key to our long-term positive
performance, and is focused on strong and growing opportunities in
Asia, the US, the UK and Europe and our nascent markets in
Africa.
In Asia, a large and increasingly wealthy population with low
levels of insurance and asset management coverage is creating a
huge and fast-growing market for our health, protection and savings
products. Asia is driving global growth, with average annual GDP
growth in our Asia life markets of 10.4 per cent in the decade to
201711,
compared with just 1.9 per cent for the rest of the
world11.
Furthermore, despite potential headwinds, between 2017 and 2023
Asia is expected to deliver 39 per cent of the world's GDP
growth11.
This is creating a rapidly growing middle class in the Asia region,
which is expected to double by 2030 to reach 3.5 billion
people12.
At the same time, insurance penetration in Asia is just 2.7 per
cent of GDP13,
compared with 7.2 per cent in the UK13,
leaving the region vastly under-insured with an estimated mortality
protection gap of US$40 trillion14 and
a health and protection gap of US$1.8 trillion15.
Similarly, mutual fund penetration in Asia is only 12 per
cent16,
compared with 96 per cent in the US16,
whilst 65 per cent of wealth in Asia is held in
cash17.
With private financial wealth in the region growing by US$5
trillion per year17,
there is considerable latent demand for our savings solutions.
These structural drivers of growth are expected to persist for many
years to come and create a historic opportunity for
us.
We are also developing our businesses in our newer markets in
Africa, which is one of the world's most underserved life markets,
and where the population is forecast to grow by a billion by
20451.
We are now operating in five countries in Africa - Ghana, Kenya,
Nigeria, Uganda and Zambia - which will increase further with the
announced acquisition of a majority stake in Group Beneficial, and
we are excited about the growing opportunities in this dynamic
region.
We have a strong and growing opportunity in the US. About 40
million Americans are expected to reach retirement age over the
next decade alone. At the same time, 72 per cent of American
workers do not have access to a defined benefit retirement
plan18.
A study conducted by the Insured Retirement Institute and Jackson
showed that 80 per cent of Americans think that social security
will not provide enough income for retirement19,
and the same percentage are willing to pay more for guaranteed
lifetime income19.
This aligns with our retirement income products, which are designed
to help customers avoid running out of money and provide them with
a reliable cushion against volatile markets.
In the UK and Europe, notwithstanding the uncertainty related to
the UK's intended exit from the European Union, a combination of
global trends and competitive advantages is creating a powerful
opportunity for M&GPrudential. Those approaching retirement
have been looking for new ways to ensure a comfortable future, and
since pensions freedoms were introduced in the UK in 2015 that
demand has been increasing. At the same time, the total value of
household cash deposits in the EU is estimated at €10
trillion20,
indicating the scale of the opportunity for asset management in the
region. Private assets under management are expected nearly to
double between 2017 and 202321.
M&GPrudential, which already has established international
distribution, a clear focus on customer solutions and a
broad-ranging investment capability, is transforming itself to meet
this opportunity.
New and better ways to serve customers
We are continuing to improve the way we serve our customers in
every part of the world in which we operate. We constantly update
our products and our capabilities to ensure that we are fulfilling
our purpose and maximising the effect of our strategy.
In Asia, we are continuing to develop and expand our products,
distribution capabilities and footprint and to meet the evolving
needs of our customers. During 2018, we broadened our product suite
to include tailored propositions for the high-net-worth and
corporate segments and developed new products for customers with
specific needs, such as pre-existing medical conditions. Our
distribution capabilities were enhanced by new digital technology
and provide a seamless and differentiated customer experience from
point of sale through to making a claim. At Eastspring, we also
continued to roll out BlackRock's Aladdin system across our markets
to improve efficiency. We broadened our reach through new
partnerships with leading banks in several markets, including
Thailand and the Philippines. Meanwhile, Eastspring consolidated
its position as the leading retail asset manager in Asia (excluding
Japan) by establishing an on-the-ground presence in China and
Thailand. Early in 2019, we also renewed our successful regional
strategic alliance with United Overseas Bank (UOB), one of our most
successful distribution relationships in South-east Asia, until
2034 and added Vietnam and UOB's digital bank to an existing
partnership presence in Singapore, Malaysia, Thailand and
Indonesia.
We are also expanding our footprint in our Africa markets. In
August 2018, we extended our long-term partnership with Standard
Chartered Bank, which has been a huge success in Asia, to Ghana,
and in November we signed a long-term exclusive partnership with
Zambia National Commercial Bank Plc (Zanaco), Zambia's largest
bank, to enable our market-leading products to be offered to more
than a million new customers across the country.
In the US, we have a long and durable track record of delivering
financial success for our consumers. We are offering new products
for fee-based advisers and have launched new versions of our
fee-based variable annuities. We are changing the narrative around
retirement and lifetime income, demonstrating the value proposition
of our products to regulators, investors, policyholders and
influential industry figures. In September, we announced our
collaboration with the Envestnet Insurance Exchange, to offer our
products on its platform. In October, we announced a key
distribution partnership with State Farm, further strengthening our
market-leading distribution footprint. Early in 2019, we partnered
with DPL Financial Partners to provide our protected lifetime
solutions to independent registered investment advisers (RIA),
providing access to new opportunities in the independent RIA
channel.
In the UK and Europe, as M&GPrudential prepares for the
demerger, we have been continuing to transform what we do for our
customers and how we do it. Our PruFund offering continues to
impress customers with its combination of clarity, capital growth
and lower volatility. We are investing to transform the experience
of our fast-growing digital platform, launched in 2016, to ensure
it offers a comprehensive range of solutions for customers. In our
investment management business, we continue to develop our private
asset capacity and now have £59 billion of private assets
under management, making us one of the largest private credit
investors in the world, and we are looking to expand our
differentiated capabilities across geographies and asset classes.
In 2018, M&GPrudential also signed a new partnership with Tata
Consultancy Services (TCS), a global leader in IT, business process
and digital services, to enhance service for our UK and Europe
savings and retirement customers.
Throughout our businesses, we are continuing to develop our digital
capabilities. In Asia, such initiatives are enabling us to provide
valuable and innovative services to our customers. In August, we
announced our exclusive partnership agreement with the UK-based
healthcare technology and services company Babylon Health. Through
the deployment of cutting-edge artificial intelligence technology,
this partnership will offer customers, in up to 12 of our markets
in Asia, access to a comprehensive set of digital health tools,
complementing Prudential Corporation Asia's existing suite of
world-class protection products and strengthening our digital
future. Similarly, at Eastspring, our robo-advice platform in
Taiwan, in partnership with Alkanza, helps our clients meet their
savings goals. We recognise that technology continually evolves and
we embrace the possibilities that lie ahead. Our sponsorship of
Singapore's FinTech Festival, which in 2018 had more than 400
exhibitors from 35 countries, showcasing the very latest in digital
innovation, is testament to this and presents all kinds of
partnership possibilities. Indeed, our Singapore business has since
partnered with three of the propositions showcased at the
event.
Our leadership
In July 2018, we announced that Anne Richards was resigning as
Chief Executive of M&G and from the Group's Board. I would like
to thank Anne for her contribution to the Group's continued
success. In October 2018, we announced that Barry Stowe had decided
to retire as Chairman and Chief Executive Officer of Jackson and as
an Executive Director of the Group. Barry made an exceptional
contribution over his 12 years at the Group, first at our Asia
business, which under his leadership grew to become the
market-leading operation it is today, and in the US since 2015.
Barry has been succeeded at Jackson by Michael Falcon. Formerly CEO
of Asia Pacific for JP Morgan Asset Management, Michael has deep
expertise and an impressive track record in the industry and is
well placed to lead the next phase of our development in North
America. We continue to invest in the right people at all levels
across the Group.
Delivering value into the future
Our clear strategy, discipline and improving capabilities have
enabled us to deliver a broad-based financial performance in 2018,
based on a close focus on our core purpose of helping people to
de-risk their lives and deal with their biggest financial concerns.
In Asia we continue to see a strong runway for the insurance and
asset management industries, and our presence, scale and
distribution reach position us well to participate strongly in this
growth. In the US, we continue to provide Americans with the
retirement strategies they need, and we are confident that this
will enable us to capture additional growth into the future. In the
UK and Europe, we will continue to improve service levels and
launch new offerings, and we are making good progress towards the
intended demerger of M&GPrudential from the Group, which will
result in two distinct businesses that are able to focus more
clearly on the opportunities open to us. We have an established
track record of delivering important benefits to our customers and
profitable growth to our shareholders. I am confident that, post
demerger as independent companies, both Prudential plc and
M&GPrudential will be positioned to continue to do well in the
future.
Notes
1
United Nations, Department of Economic and Social Affairs,
Population Division (2017). World Population Prospects: The 2017
Revision. American population reaching retirement age over the next
decade is based on 2019 population, aged 55 to 64.
2
Embedded value reporting provides investors with a measure of the
future profit streams of the Group. The EEV basis results have been
prepared in accordance with EEV principles discussed in note 1 of
EEV basis results. See note III of the Additional unaudited IFRS
financial information for definition and reconciliation to IFRS
balances.
3
Year-on-year percentage increases are stated on a constant exchange
rate basis unless otherwise stated.
4
Adjusted IFRS operating profit based on longer-term investment
returns is management's primary measure of profitability and
provides an underlying operating result based on longer-term
investment returns and excludes non-operating items. Further
information on its definition and reconciliation to profit for the
period is set out in note B1 of the IFRS financial
statements.
5 Growth
rate on an actual exchange rate basis.
6
For insurance operations, underlying free surplus generated
represents amounts maturing from the in-force business during the
period less investment in new business and excludes non-operating
items. For asset management businesses it equates to post-tax
operating profit for the period. Restructuring costs are presented
separately from the underlying business unit amount. Further
information is set out in note 10 of the EEV basis
results.
7 The
Group shareholder capital position excludes the contribution to Own
Funds and the Solvency Capital Requirement from ring fenced
with-profit funds and staff pension schemes in surplus. 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.
8
Estimated before allowing for second interim ordinary
dividend.
9
See note III of the Additional unaudited IFRS financial information
for definition and reconciliation to IFRS balances.
10
Represents M&GPrudential asset management external funds under
management and internal funds included on the M&GPrudential
long-term insurance business balance sheet.
11
IMF. 2017 GDP at January 2019 current prices. Asia represents
Prudential Corporation Asia's life business footprint.
12
Brookings Institution. Global Economy & Development Working
Paper 100. February 2017. 'Asia' represents Asia
Pacific.
13 Insurance penetration -
Swiss Re Sigma No 3/2018. Insurance penetration calculated as
premiums as a percentage of GDP. Asia penetration calculated on a
weighted population basis.
14
Swiss Re Mortality Protection Gap Asia Pacific 2018. Represents
Prudential Corporation Asia's life business footprint, and use per
capita income of working population as the base unit to calculate
the size of the gap.
15
Swiss Re Asia's health protection gap: insights for building
greater resilience. October 2018. Represents China, India, Japan,
Korea, Indonesia, Malaysia, Taiwan, Vietnam, the Philippines,
Singapore, Hong Kong and Thailand.
16
Investment Company Institute, industry associations and
Lipper.
17
BCG Global Wealth 2017. Navigating the New Client
Landscape.
18
U.S. Bureau of Labor Statistics, National Compensation. Survey:
Employee Benefits in the United States, March 2017. Workers defined
as those employed in private industry and state and local
government.
19
The Language of Retirement 2017 - study conducted on behalf of the
Insured Retirement Institute and Jackson.
20
Eurostat: Household deposit data.
21
Preqin Future of Alternatives Report, October 2018.
Chief Financial Officer's report on the 2018 financial
performance
I am pleased to report that Prudential's financial performance in
2018 reflects our strategic focus on driving growth in
high-quality, recurring health and protection and fee business
across our geographies, products and distribution
channels.
I am encouraged that our financial performance has been
accomplished at the same time as the Group has made good progress
in the complex preparations for the intended demerger of
M&GPrudential from Prudential plc, which we announced in March
2018. We have achieved a number of important milestones, including
the reinsurance of £12 billion of UK annuity policies to
Rothesay Life, the transfer of the Hong Kong insurance subsidiaries
to Prudential Corporation Asia, the issuance of £1.6 billion
of substitutable debt as part of the necessary rebalancing of
capital across the two businesses, the establishment of a new
holding company for M&GPrudential and the transfer of UK
operating subsidiaries to that company.
Our financial performance was led by our Asia business which
delivered double digit growth in new business profit (up 14 per
cent1),
adjusted IFRS operating profit based on longer-term investment
returns ('operating profit') (up 14 per cent1)
and underlying free surplus generation2 (up
14 per cent1).
This performance is both broad-based, with 10 markets achieving
double-digit growth1 in
new business profit, and high-quality, with health and protection
new business profit growing by 15 per cent1.
Our Asia asset manager, Eastspring, has grown operating profit by 6
per cent amidst a challenging external environment. Our broad-based
portfolio of life insurance and asset management businesses,
high-quality products with distinctive value-added services and
multi-channel strategy ensure that we continue to benefit from the
growing customer demand in Asia for health, protection and savings
solutions that we provide.
In the US, we saw growth in fee income driven by higher average
account balances offset by an increase in market-related deferred
acquisition costs (DAC) amortisation and an expected reduction in
spread-based revenues, leading to a fall in operating profit of 11
per cent. Jackson's hedge programme performed as expected as equity
markets weakened towards the end of 2018 and contributed to an
increased risk-based capital ratio of 458 per cent, up from 409 per
cent at year-end 2017.
M&GPrudential delivered operating profit of £1,634
million, up 19 per cent (2017: £1,378 million). This included
£519 million (2017: £597 million) from our
core3 with-profits
and annuity business, with the with-profits contribution up 11 per
cent to £320 million, offset by lower annuities earnings
following the reinsurance of £12 billion4 of
liabilities in March 2018. Other operating profits included the
benefit of updated longevity assumptions and an insurance recovery
on the costs of reviewing internally vesting annuity sales.
M&GPrudential remains on track to deliver the announced annual
shareholder cost savings of circa £145 million by 2022 for a
shareholder investment of circa £250
million.
Sterling weakened over the course of 2018, compared with most of
the currencies in our major international markets. However, average
exchange rates remained above those in 2017, leading to a negative
effect on the translation of the results from non-sterling
operations. To aid comparison of underlying progress, we continue
to express and comment on the performance trends in our Asia and US
operations on a constant exchange rate basis.
The performance of many equity markets was subdued in 2018, and was
characterised by higher levels of volatility. The S&P 500
closed the year 6 per cent lower than 2017, the FTSE 100 index was
down 12 per cent and the MSCI Asia excluding Japan index down 16
per cent. However, average balances, which have the most material
impact on our fee-based earnings during the year, were mostly
higher, reflecting the concentration of equity market weakness in
the fourth quarter. Long-term yields increased favourably in
the US and our larger Asia markets, but were only slightly higher
in the UK.
The key financial highlights in 2018 were as follows:
● New business
profit was 11 per cent
higher at £3,877 million (7 per cent on an actual exchange
rate basis), while APE saleswere up 1 per cent (down 2 per cent on an actual
exchange rate basis). In Asia, new business profit increased 14 per
cent with improved new business margins primarily reflecting
product mix. Jackson's new business profit increased by 5 per cent,
primarily reflecting the favourable effect of higher US interest
rates. UK and Europe life new business profit grew by 3 per cent,
driven by a 2 per cent increase in APE sales, supported by
continued demand for products offering access to our PruFund
investment proposition.
● Asset management net
outflows of £11.5
billion reflected external net outflows of £9.9 billion (2017:
net inflows of £17.3 billion) within M&GPrudential asset
management, the majority of which related to the expected
redemption of a single, low-margin £6.5 billion institutional
mandate, with the remainder reflecting the challenging market
environment for equity and fixed income business. Eastspring saw
external net outflows, excluding money market funds, of £1.6
billion (2017: net inflows of £3.1 billion on an actual
exchange rate basis), also as a result of market
conditions.
● Operating
profit was 6 per cent
higher at £4,827 million (3 per cent higher on an actual
exchange rate basis). Continued business momentum helped grow
Asia's operating profit by 14 per cent to £2,164 million and
M&GPrudential operating profit was 19 per cent higher,
reflecting a number of beneficial impacts, which are not expected
to recur at the same level. In the US, operating profit decreased
by 11 per cent, as a result of higher market-related DAC
amortisation charges.
● Total IFRS post-tax
profit was up 30 per cent
at £3,013 million (26 per cent on an actual exchange rate
basis) after a £508 million pre-tax loss following the
reinsurance of £12 billion4 of
UK annuities to Rothesay Life. This increase was driven by Jackson,
whose IFRS profit after tax in 2018 was £1,484 million, up
from £245 million (£254 million on an actual exchange
rate basis) reflecting higher interest rates and gains from
Jackson's hedging instruments as equity markets fell towards the
end of 2018. Group IFRS shareholders'
equity was 7 per cent
higher at £17.2 billion.
● EEV basis operating
profit, including embedded
value in-force profit, increased 19 per cent (15 per cent on an
actual exchange rate basis) to £7,563 million. EEV basis
shareholders' equity was up 11 per cent at £49.8
billion.
● Underlying free surplus
generation2,
our preferred measure of cash generation, from our life and asset
management businesses, increased by 14 per cent to £4,047
million (11 per cent on an actual exchange rate basis), after
financing new business growth. This was driven by in-force growth
of 10 per cent combined with a lower level of investment in new UK
and Europe business as a result of management actions to optimise
capital absorption.
● Group shareholders' Solvency II
capital surplus5 was
estimated at £17.2 billion at 31 December 2018, equivalent to
a cover ratio of 232 per cent6 (31
December 2017: £13.3 billion, 202 per cent). The improvement
in the period reflects the continuing strength of the Group's
operating capital generation and a net £1.2 billion increase
in qualifying debt.
● Full year ordinary
dividend increased by 5
per cent to 49.35 pence per share, reflecting our 2018 performance
and our confidence in the future prospects of our
businesses.
|
IFRS profit
|
|
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
|
|
2018 £m
|
2017 £m
|
Change %
|
|
2017 £m
|
Change %
|
|
Operating profit before tax based on longer-term investment
returns
|
|
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
|
Long-term business
|
1,982
|
1,799
|
10
|
|
1,727
|
15
|
|
Asset management
|
182
|
176
|
3
|
|
171
|
6
|
|
Total
|
2,164
|
1,975
|
10
|
|
1,898
|
14
|
|
|
|
|
|
|
|
|
|
|
|
US
|
|
|
|
|
|
|
|
Long-term business
|
1,911
|
2,214
|
(14)
|
|
2,137
|
(11)
|
|
Asset management
|
8
|
10
|
(20)
|
|
9
|
(11)
|
|
Total
|
1,919
|
2,224
|
(14)
|
|
2,146
|
(11)
|
|
|
|
|
|
|
|
|
|
|
|
UK and Europe
|
|
|
|
|
|
|
|
Long-term business
|
1,138
|
861
|
32
|
|
861
|
32
|
|
General insurance commission
|
19
|
17
|
12
|
|
17
|
12
|
|
Total insurance operations
|
1,157
|
878
|
32
|
|
878
|
32
|
|
Asset management
|
477
|
500
|
(5)
|
|
500
|
(5)
|
|
Total
|
1,634
|
1,378
|
19
|
|
1,378
|
19
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expenditure
|
(725)
|
(775)
|
6
|
|
(769)
|
6
|
|
Total operating profit based on longer-term investment returns
before tax and restructuring costs
|
4,992
|
4,802
|
4
|
|
4,653
|
7
|
|
Restructuring costs
|
(165)
|
(103)
|
(60)
|
|
(103)
|
(60)
|
|
Total operating profit based on longer-term investment returns
before tax
|
4,827
|
4,699
|
3
|
|
4,550
|
6
|
|
Non-operating items:
|
|
|
|
|
|
|
|
|
Short-term fluctuations in investment returns on
shareholder-backed business
|
(558)
|
(1,563)
|
64
|
|
(1,514)
|
63
|
|
|
Amortisation of acquisition accounting adjustments
|
(46)
|
(63)
|
27
|
|
(61)
|
25
|
|
|
(Loss) gain on disposal of businesses and corporate
transactions
|
(588)
|
223
|
n/a
|
|
218
|
n/a
|
|
Profit before tax
|
3,635
|
3,296
|
10
|
|
3,193
|
14
|
|
Tax charge attributable to shareholders' returns
|
(622)
|
(906)
|
31
|
|
(876)
|
29
|
|
Profit for the year
|
3,013
|
2,390
|
26
|
|
2,317
|
30
|
|
IFRS earnings per share
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
2018 pence
|
2017 pence
|
Change %
|
|
2017 pence
|
Change %
|
|
Basic earnings per share based on operating profit after
tax
|
156.6
|
145.2
|
8
|
|
140.4
|
12
|
|
Basic earnings per share based on total profit after
tax
|
116.9
|
93.1
|
26
|
|
90.0
|
30
|
Adjusted IFRS operating profit based on longer-term investment
returns (operating profit)
2018 total operating profit increased by 6 per cent (3 per cent on
an actual exchange rate basis) to £4,827 million.
Asia total operating profit of £2,164 million was
14 per cent higher than the previous year (10 per cent on an actual
exchange rate basis). Operating profit from life
insurance operations increased 15 per cent to £1,982 million
(10 per cent on an actual exchange rate basis), reflecting the
continued growth of our in-force book of recurring premium
business, with renewal insurance premiums7 reaching
£12,856 million (2017: £11,087 million). Insurance margin
was up 15 per cent, driven by our continued focus on health and
protection business, now contributing to 70 per cent of Asia life
insurance revenues8 (2017:
68 per cent). At a market level, growth was led by Hong Kong up 33
per cent, Singapore 22 per cent and China 20 per cent respectively.
Eastspring's operating profit increased by 6 per cent (up 3 per
cent on an actual exchange rate basis) to £182 million
reflecting 4 per cent revenue growth which, combined with positive
operating leverage, resulted in an improvement in the cost-income
ratio7 to
55 per cent (2017: 56 per cent on an actual exchange rate
basis).
US total operating profit at £1,919 million decreased by 11 per
cent (14 per cent on an actual exchange rate basis). Higher fee
income was more than offset by higher market-related DAC
amortisation and lower spread-based income. Although equity markets
declined in the fourth quarter, average separate account balances
were above the prior year, given positive net inflows which
supported higher levels of fee income. The higher market-related
DAC amortisation arises mainly from £194 million acceleration
of amortisation compared with £83 million favourable
deceleration in 2017 (on a constant exchange rate basis), leading
to an adverse year-on-year movement of £277 million. Excluding
the acceleration and deceleration in 2018 and 2017, operating
profit in 2018 would have been 2 per cent higher than 2017 on a
constant exchange rate basis. The variability in DAC from
year-on-year is dependent on separate account return and its
interaction with the mean reversion formula applied by Jackson when
determining the amortisation charge for the year. In the current
year the dominant factors driving this calculation have been the
equity market falls in 2018 (whereas 2017 saw equity market rises).
Spread-based income decreased 20 per cent (22 per cent on an actual
exchange rate basis), as anticipated, reflecting the impact of
lower yields on our fixed annuity portfolio and a reduced
contribution from asset duration swaps. While we expect these
effects to continue to compress spread margins, the continued
upwards movements in US reinvestment yields may help to reduce the
speed of the decline.
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.
Asset management operating profit decreased 5 per cent to £477
million, largely reflecting a normalisation of performance fees to
£15 million, compared with a particularly high contribution of
£53 million in the prior year. Excluding the contribution of
performance fees, operating profit was 3 per cent higher. This
reflects both the higher average level of funds managed by M&G
(up from £275.9 billion in 2017 to £276.6 billion in
2018) and a higher revenue margin9 of
40 basis points (2017: 37 basis points). Operating profit is after
charges of £27 million incurred in preparing the business for
the UK's proposed exit from the European Union, including the
migration of fund assets to our Luxembourg-domiciled SICAV
platform. The cost-income ratio7 of
59 per cent remains broadly in line with the prior year (2017: 58
per cent).
Life insurance profit drivers
We track the progress that we make in growing our life insurance
business by reference to the scale of our obligations to our
customers, which are referred to in the financial statements as
policyholder liabilities. Each period these increase as we write
new business and collect regular premiums from existing customers
and decrease as we pay claims and policies mature. These
policyholder liabilities contribute, for example, to our ability to
earn fees on the unit-linked element and indicates the scale of the
insurance element, another key source of profitability for the
Group.
|
Shareholder-backed
policyholder liabilities and net liability flows10
|
|
|
2018 £m
|
|
2017 £m
|
|
|
Actual exchange rate
|
|
Actual exchange rate
|
|
|
At 1 January
|
Net liability
flows11
|
Market and
other
movements
|
At 31 December
|
|
At 1 January
|
Net liability
flows11
|
Market and
other
movements
|
At 31 December
|
|
Asia
|
37,402
|
3,251
|
(56)
|
40,597
|
|
32,851
|
2,301
|
2,250
|
37,402
|
|
US
|
180,724
|
(213)
|
5,089
|
185,600
|
|
177,626
|
3,137
|
(39)
|
180,724
|
|
UK and Europe
|
56,367
|
(2,774)
|
(12,833)
|
40,760
|
|
56,158
|
(2,721)
|
2,930
|
56,367
|
|
Total Group
|
274,493
|
264
|
(7,800)
|
266,957
|
|
266,635
|
2,717
|
5,141
|
274,493
|
Focusing on business supported by shareholder capital, which
generates the majority of the life profit, in 2018 net flows into
our businesses were overall positive at £0.3 billion driven by
our Asian operations. In the US, net outflows were £0.2
billion with positive separate account net inflows of £1.1
billion being more than offset by general account net outflows of
£1.3 billion, as a result of higher surrenders as the
portfolio develops. In the UK and Europe, the net outflows
principally reflect the run-off of the in-force annuity portfolio
following our effective withdrawal from selling new annuity
business. Market and other movements have reduced shareholder-back
liabilities by £7.8 billion. This includes the removal of
£10.9 billion4 of
UK annuity liabilities, representing the portion of the £12
billion4reinsured
liabilities that will be subject to a Part VII transfer to Rothesay
Life, following their reclassification as held for sale, offset by
additions of £4.1 billion in Jackson as a result of the
agreement in November 2018 to reinsure a portfolio of business from
John Hancock. The remaining £1.0 billion primarily reflects
the effects of negative investment markets offset by currency
effects as sterling weakened over the period. In total, business
flows and market movements have decreased shareholder-backed
policyholder liabilities from £274.5 billion to
£267.0 billion.
|
Policyholder
liabilities and net liability flows in with-profits
business10,12
|
|
|
2018 £m
|
|
2017 £m
|
|
|
Actual exchange rate
|
|
Actual exchange rate
|
|
|
At 1 January
|
Net liability
flows11
|
Market and
other
movements
|
At 31 December
|
|
At 1 January
|
Net liability
flows11
|
Market and
other
movements
|
At 31 December
|
|
Asia
|
36,437
|
5,165
|
564
|
42,166
|
|
29,933
|
4,574
|
1,930
|
36,437
|
|
UK and Europe
|
124,699
|
3,209
|
(3,779)
|
124,129
|
|
113,146
|
3,457
|
8,096
|
124,699
|
|
Total Group
|
161,136
|
8,374
|
(3,215)
|
166,295
|
|
143,079
|
8,031
|
10,026
|
161,136
|
Policyholder liabilities in our with-profits business have
increased by 3 per cent to £166.3 billion reflecting the
popularity of our participating funds in Asia and PruFund in the
UK, as consumers seek protection from some of the short-term ups
and downs of direct stock market investments by using an
established smoothing process. Across our Asia and UK and Europe
operations, net liability flows increased to £8.4 billion. As
returns from these funds are smoothed and shared with customers,
the emergence of shareholder profit is more gradual. This business,
nevertheless, remains an important source of future shareholder
value.
|
Analysis of long-term insurance business pre-tax adjusted IFRS
operating profit based on longer-term investment returns by
driver
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
2018
|
|
2017
|
|
2017
|
|
|
Operating
profit
£m
|
Average
liability
£m
|
Margin
bps
|
|
Operating
profit
£m
|
Average
liability
£m
|
Margin
bps
|
|
Operating
profit
£m
|
Average
liability
£m
|
Margin
bps
|
|
Spread income
|
899
|
85,850
|
105
|
|
1,122
|
88,908
|
126
|
|
1,090
|
87,553
|
124
|
|
Fee income
|
2,711
|
175,443
|
155
|
|
2,609
|
166,839
|
156
|
|
2,518
|
162,267
|
155
|
|
With-profits
|
391
|
147,318
|
27
|
|
347
|
136,474
|
25
|
|
345
|
136,496
|
25
|
|
Insurance margin
|
2,480
|
|
|
|
2,302
|
|
|
|
2,223
|
|
|
|
Margin on revenues
|
2,254
|
|
|
|
2,287
|
|
|
|
2,210
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs*
|
(2,319)
|
6,802
|
(34)%
|
|
(2,443)
|
6,958
|
(35)%
|
|
(2,364)
|
6,767
|
(35)%
|
|
|
Administration expenses
|
(2,413)
|
265,597
|
(91)
|
|
(2,305)
|
261,114
|
(88)
|
|
(2,231)
|
255,313
|
(87)
|
|
|
DAC adjustments
|
216
|
|
|
|
505
|
|
|
|
490
|
|
|
|
Expected return on shareholder assets
|
242
|
|
|
|
234
|
|
|
|
228
|
|
|
|
|
4,461
|
|
|
|
4,658
|
|
|
|
4,509
|
|
|
|
Other items**
|
570
|
|
|
|
216
|
|
|
|
216
|
|
|
|
Long-term business adjusted IFRS operating profit based on
longer-term investment returns
|
5,031
|
|
|
|
4,874
|
|
|
|
4,725
|
|
|
* The
ratio of acquisition costs is calculated as a percentage of APE
sales including with-profits sales. The acquisition costs include
only those relating to shareholders backed
business.
** Other
items includes share of related tax charges from joint ventures and
associate and other items considered non-core to the UK and Europe
business, see note I(a) of the Additional unaudited IFRS financial
information.
We continue to maintain our preference for high-quality sources of
income such as insurance margin from life and health and protection
business, and fee income. We favour insurance margin because it is
relatively insensitive to the equity and interest rate cycle and
prefer fee income to spread income because it is more
capital-efficient. In line with this approach, on a constant
exchange rate basis, insurance margin has increased by 12 per cent
(up 8 per cent on an actual exchange rate basis) and fee income by
8 per cent (up 4 per cent on an actual exchange rate basis), while
as anticipated, spread income decreased by 18 per cent (down 20 per
cent on an actual exchange rate basis). Administration expenses
increased to £2,413 million (2017: £2,231 million) as the
business continues to expand in Asia, alongside higher asset-based
commissions within the US business, which are treated as an
administrative expense in this analysis.
Asset management profit drivers
Movements in asset management operating profit are also influenced
primarily by changes in the scale of these businesses, as measured
by funds managed on behalf of external institutional and retail
customers and our internal life insurance operations.
|
Asset management
external funds under management13,14
|
|
|
|
2018 £m
|
|
2017 £m
|
|
|
|
Actual exchange rate
|
|
Actual exchange rate
|
|
|
|
At 1 January
|
Net flows
|
Market and other movements
|
At 31 December
|
|
At 1 January
|
Net flows
|
Market and other movements
|
At 31 December
|
|
UK and Europe
|
163,855
|
(9,915)
|
(6,994)
|
146,946
|
|
136,763
|
17,337
|
9,755
|
163,855
|
|
Asia15
|
46,568
|
(1,586)
|
4,473
|
49,455
|
|
38,042
|
3,141
|
5,385
|
46,568
|
|
Total asset management
|
210,423
|
(11,501)
|
(2,521)
|
196,401
|
|
174,805
|
20,478
|
15,140
|
210,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset management
(including MMF)
|
219,740
|
(10,001)
|
(1,736)
|
208,003
|
|
182,519
|
21,973
|
15,248
|
219,740
|
M&GPrudential's external asset management net outflows were
£9.9 billion (2017: net inflows of £17.3 billion) driven
by the expected redemption of a single £6.5 billion low-margin
institutional mandate, and net outflows from wholesale and direct
clients from bond and equity classes in volatile financial markets.
This was partially offset by inflows into multi-asset wholesale
offerings and other institutional business products, including
public debt and illiquid credit strategies. Internal life insurance
assets under management were £174.3 billion (2017: £186.8
billion) benefiting from PruFund net flows of £8.5 billion,
offset by the effect of the £12 billion4 annuities
reinsurance and lower equity market levels. As a result, total
M&GPrudential assets under management16 reduced
to £321.2 billion (2017: £350.7
billion).
Eastspring’s external assets under management, excluding
money market funds, increased by 6 per cent (on an actual exchange
rate basis) to £49.5 billion, reflecting the acquisition of
TMB Asset Management, which added £9 billion, offset by client
outflows and adverse market movements. Higher internal assets under
management, driven by inflows into the life business and money
market funds, lifted Eastspring’s total assets under
management to £151.3 billion.
Other income and expenditure and restructuring costs
Other income and expenditure consists of interest payable on core
structural borrowings, corporate expenditure and other income.
These items, together with restructuring costs, increased 2 per
cent to a net charge of £890 million (2017: £872
million). This reflects higher restructuring costs of £165
million (2017: £103 million), partly offset by a lower
interest expense. Restructuring costs include investment spend of
£99 million in relation to M&GPrudential merger and
transformation bringing the cumulative cost to £143 million,
on an IFRS basis, since the project began. Other restructuring
costs relate to efficiency and change programmes across the Group,
for example the rationalisation of US locations in
2018.
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.
Short-term fluctuations in investment returns on shareholder-backed
business are discussed further below.
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 2018, the total short-term fluctuations in investment returns on
shareholder-backed business were negative £558 million (2017:
negative £1,563 million on an actual exchange rate basis) and
comprised negative £512 million (2017: negative £1
million on an actual exchange rate basis) for Asia, negative
£100 million (2017: negative £1,568 million on an actual
exchange rate basis) in the US, positive £34 million (2017:
negative £14 million on an actual exchange rate basis) in the
UK and Europe and positive £20 million (2017: positive
£20 million on an actual exchange rate basis) in other
operations.
Rising interest rates in many territories in Asia led to unrealised
bond losses in the period. In the US, lower equity market levels,
alongside higher interest rate levels, as expected, resulted in
gains on equity hedge instruments which are designed to protect
Jackson's capital position, balanced by higher technical reserve
requirements.
IFRS basis effective tax rates
In 2018, the effective tax rate on operating profit was 16 per cent
(2017: 21 per cent), reflecting the reduction in the US federal tax
rate from 35 per cent in 2017 to 21 per cent in 2018.
The 2018 effective tax rate on the total IFRS profit was 17 per
cent (2017: 14 per cent after excluding the one-off impact of the
re-measurement of US deferred tax balances, following the enactment
in December 2017 of tax reform in the US). The increase in the 2018
effective tax rate reflects non-tax deductible investment losses in
Asia operations.
The main driver of the Group's effective tax rate is the relative
mix of the profits between jurisdictions with higher tax rates
(such as Indonesia and Malaysia), jurisdictions with lower tax
rates (such as Hong Kong and Singapore), and jurisdictions with
rates in between (such as the UK and the US).
Total tax contribution
The Group continues to make significant tax contributions in the
jurisdictions in which it operates, with £2,839 million
remitted to tax authorities in 2018. This was similar to the
equivalent amount of £2,903 million remitted in
2017.
Tax strategy
In May 2018, the Group published its updated tax strategy which, in
addition to complying with the mandatory UK (Finance Act 2016)
requirements, also included a number of additional disclosures,
including a breakdown of revenues, profits and taxes for all
jurisdictions where more than £5 million tax was paid. This
disclosure was included as a way of demonstrating that our tax
footprint (ie where we pay taxes) is consistent with our business
footprint. An updated version of the tax strategy, including 2018
data, will be available on the Group's website before 31 May
2019.
New business performance
|
Life EEV new business profit and APE new business sales (APE
sales)
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
2018 £m
|
2017 £m
|
Change %
|
|
2017 £m
|
Change %
|
|
|
APE sales
|
New business profit
|
APE sales
|
New business profit
|
APE sales
|
New business profit
|
|
APE sales
|
New business profit
|
APE sales
|
New business profit
|
|
Asia
|
3,744
|
2,604
|
3,805
|
2,368
|
(2)
|
10
|
|
3,671
|
2,282
|
2
|
14
|
|
US
|
1,542
|
921
|
1,662
|
906
|
(7)
|
2
|
|
1,605
|
874
|
(4)
|
5
|
|
UK and Europe
|
1,516
|
352
|
1,491
|
342
|
2
|
3
|
|
1,491
|
342
|
2
|
3
|
|
Total Group
|
6,802
|
3,877
|
6,958
|
3,616
|
(2)
|
7
|
|
6,767
|
3,498
|
1
|
11
|
Life insurance new business profit was up 11 per cent (7 per cent on an actual
exchange rate basis) to £3,877 million,
and life
insurance new business APE
sales increased by 1 per
cent (decreased by 2 per cent on an actual exchange rate basis) to
£6,802 million, including an increase of 4 per cent during the
second half of 2018 compared with the second half of 2017, led by 8
per cent growth in Asia.
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.
The performance remains broad-based, with 10 markets delivering
double-digit percentage growth in new business profit. In Hong
Kong, new business profit increased by 17 per cent, driven largely
by our ongoing focus on increasing health and protection sales,
particularly those with more comprehensive coverage. Hong Kong APE
sales increased by 3 per cent overall, with higher sales levels
from Mainland China visitors to Hong Kong driving positive momentum
over the course of the year, culminating in APE sales growth of 18
per cent in the discrete fourth quarter. In China, new business
profit increased by 14 per cent, reflecting positive product mix
effects, and APE sales growth of 27 per cent in the fourth quarter.
In Singapore, new business profit increased by 15 per cent on
higher APE sales (up 5 per cent), driven by our agency and
bancassurance channels, pricing actions and favourable product mix
shifts. Growth in new business profit in Thailand (up 75 per cent),
Vietnam (up 29 per cent) and Malaysia (up 13 per cent) reflects our
value focus and favourable shifts in product mix. Our Indonesia
business continues to experience challenging conditions which,
compounded by the adverse impact of higher yields, drove new
business profit lower by 23 per cent. Despite these headwinds, we
are investing in the business to strengthen our distribution
capabilities, upgrading our systems and refreshing our product
propositions to meet customer needs.
In the US, new business profit increased by 5 per cent to
£921 million (up 2 per cent on an actual exchange rate basis)
as a 4 per cent reduction in new APE sales was more than balanced
by the favourable effect of higher interest rates and spread
assumption changes compared with the prior
period.
In our UK and Europe life
business, new business profit
increased to £352 million, up 3 per cent supported by 2 per
cent growth in APE sales. New sales continue to be driven by the
popular PruFund proposition with APE sales up 3 per cent.
Reflecting this performance, total PruFund assets under management
of £43 billion as at 31 December 2018 were 20 per cent higher
than at the start of the year, driven by positive net flows of
£8.5 billion.
|
Free surplus
generation2
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
|
2018 £m
|
2017 £m
|
Change %
|
|
2017 £m
|
Change %
|
|
Free surplus generation
|
|
|
|
|
|
|
|
Asia
|
1,659
|
1,562
|
6
|
|
1,493
|
11
|
|
US
|
1,644
|
1,582
|
4
|
|
1,527
|
8
|
|
UK and Europe
|
1,684
|
1,486
|
13
|
|
1,486
|
13
|
|
Underlying free surplus generated from in-force life
business and asset management before restructuring
costs
|
4,987
|
4,630
|
8
|
|
4,506
|
11
|
|
Restructuring costs
|
(125)
|
(77)
|
(62)
|
|
(77)
|
(62)
|
|
Underlying free surplus generated from in-force life
business and asset management
|
4,862
|
4,553
|
7
|
|
4,429
|
10
|
|
Investment in new business
|
(815)
|
(913)
|
11
|
|
(886)
|
8
|
|
Underlying free surplus generated
|
4,047
|
3,640
|
11
|
|
3,543
|
14
|
|
Market related movements, timing differences
and other non-operating movements
|
(1,282)
|
(1,012)
|
|
|
|
|
|
Profit attaching to corporate transactions
|
283
|
172
|
|
|
|
|
|
Net cash remitted by business units
|
(1,732)
|
(1,788)
|
|
|
|
|
|
Total movement in free surplus
|
1,316
|
1,012
|
|
|
|
|
|
Free surplus at end of year
|
8,894
|
7,578
|
|
|
|
|
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.
We drive free surplus generation by targeting markets and products
that have low capital strain, high-return and fast payback profiles
and by delivering both good service and value to improve customer
retention. Our ability to generate both growth and cash is a
distinctive feature of Prudential.
In 2018, underlying free surplus generation from our life insurance
and asset management business, before investment in new business,
increased by 10 per cent to £4,862 million (increased by 7 per
cent on an actual exchange rate basis), reflecting increased
contributions from all our businesses. In Asia, growth in the
in-force life portfolio, combined with post-tax asset management
profit from Eastspring, contributed to free surplus generation of
£1,659 million, up 11 per cent. In the US, in-force free
surplus generation increased by 8 per cent reflecting higher
in-force values. In the UK and Europe, in-force free surplus
generation increased by 13 per cent to £1,684 million,
including the positive impact of longevity assumption changes and
the £138 million post-tax insurance recovery for the costs of
the UK review of past non-advised annuity sales practices and
related potential redress. In 2017 free surplus was reduced by an
increase in the related provision of £187 million to cover
such costs.
Although new business profit increased by 11 per cent, the amount
of free surplus invested in writing new life business in the period
was lower at £815 million (2017: £886 million) primarily
reflecting lower sales in the US and measures taken to optimise
capital absorption in the UK and Europe.
After funding cash remittances from the business units to the
Group, recognition of the profit attaching to the disposal of
businesses, and other movements, which includes market movements,
the closing value of free surplus in our life and asset management
operations was £8.9 billion at 31 December 2018.
We continue to manage cash flows across the Group with a view to
achieving a balance between ensuring sufficient remittances are
made to service central requirements (including paying the external
dividend) and maximising value to shareholders through retention
and reinvestment of capital in business opportunities.
|
Business unit
remittance17
|
|
|
|
|
|
Actual exchange rate
|
|
|
|
2018 £m
|
2017 £m
|
|
Net cash remitted by business units:
|
|
|
|
|
Asia
|
699
|
645
|
|
|
US
|
342
|
475
|
|
|
UK and Europe
|
654
|
643
|
|
|
Other UK (including Prudential Capital)
|
37
|
25
|
|
Net cash remitted by business units
|
1,732
|
1,788
|
|
Holding company cash at 31 December
|
3,236
|
2,264
|
Cash remitted to the Group by business units in 2018 amounted
to £1,732 million, driven by higher remittances from Asia,
demonstrating the quality and scale of its growth. Jackson made
remittances of £342 million, although lower than the prior
period. The remittance from M&GPrudential of £654
million was 2 per cent higher than the combined remittance in 2017,
with an increase in the with-profits transfer from £215
million in 2017 to £233 million in 2018.
Cash remitted to the Group in 2018 was used to meet central costs
of £430 million (2017: £470 million) and pay the 2017
second interim and 2018 first interim dividends. As well as
these movements were corporate activities and other cash flows of
positive £914 million (2017: negative £521 million),
primarily driven by net debt issuance of £1.2 billion within
the year. This led to holding company cash increasing from
£2,264 million to £3,236 million over 2018.
|
Post-tax profit - EEV
|
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
|
2018 £m
|
2017 £m
|
Change %
|
|
2017 £m
|
Change %
|
|
Post-tax operating profit based on longer-term
investment returns
|
|
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
|
Long-term business
|
4,387
|
3,705
|
18
|
|
3,562
|
23
|
|
Asset management
|
159
|
155
|
3
|
|
150
|
6
|
|
Total
|
4,546
|
3,860
|
18
|
|
3,712
|
22
|
|
|
|
|
|
|
|
|
|
|
US
|
|
|
|
|
|
|
|
Long-term business
|
2,115
|
2,143
|
(1)
|
|
2,069
|
2
|
|
Asset management
|
3
|
7
|
(57)
|
|
7
|
(57)
|
|
Total
|
2,118
|
2,150
|
(1)
|
|
2,076
|
2
|
|
|
|
|
|
|
|
|
|
|
UK and Europe
|
|
|
|
|
|
|
|
Long-term business
|
1,374
|
1,015
|
35
|
|
1,015
|
35
|
|
General insurance commission
|
15
|
13
|
15
|
|
13
|
15
|
|
Total insurance operations
|
1,389
|
1,028
|
35
|
|
1,028
|
35
|
|
Asset management
|
392
|
403
|
(3)
|
|
403
|
(3)
|
|
Total
|
1,781
|
1,431
|
24
|
|
1,431
|
24
|
|
|
|
|
|
|
|
|
|
|
Other income and expenditure
|
(726)
|
(746)
|
3
|
|
(740)
|
2
|
|
Post-tax operating profit based on longer-term investment
returns
before restructuring costs
|
7,719
|
6,695
|
15
|
|
6,479
|
19
|
|
Restructuring costs
|
(156)
|
(97)
|
(61)
|
|
(97)
|
(61)
|
|
Post-tax operating profit based on longer-term
investment returns
|
7,563
|
6,598
|
15
|
|
6,382
|
19
|
|
Non-operating items:
|
|
|
|
|
|
|
|
|
Short-term fluctuations in investment returns
|
(3,219)
|
2,111
|
n/a
|
|
2,057
|
n/a
|
|
|
Effect of changes in economic assumptions
|
146
|
(102)
|
n/a
|
|
(91)
|
n/a
|
|
|
Mark to market value on core structural borrowings
|
549
|
(326)
|
n/a
|
|
(326)
|
n/a
|
|
|
Impact of US tax reform
|
-
|
390
|
n/a
|
|
376
|
n/a
|
|
|
(Loss) gain on disposal of businesses and corporate
transactions
|
(451)
|
80
|
n/a
|
|
77
|
n/a
|
|
Post-tax profit for the year
|
4,588
|
8,751
|
(48)
|
|
8,475
|
(46)
|
|
Earnings per share - EEV
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
2018 pence
|
2017 pence
|
Change %
|
|
2017 pence
|
Change %
|
|
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)
|
EEV operating profit
On an EEV basis, Group post-tax operating profit based on
longer-term investment return increased by 19 per cent (up 15 per
cent on an actual exchange rate basis) to £7,563 million in
2018.
EEV operating profit includes new business profit from the Group's
life business, which increased by 11 per cent (up 7 per cent on an
actual exchange rate basis) to £3,877 million. It also
includes in-force life business profit of £3,999 million,
which was 27 per cent higher than prior year (up 23 per cent on an
actual exchange rate basis), primarily reflecting the growth in our
in-force business and higher interest rates. This is most evident
in the profit from the unwind of the in-force business, which was
22 per cent higher at £2,573 million. Experience and
assumption changes were positive at £1,426 million (2017:
£1,044 million), reflecting the continuing performance of our
in-force policies.
In Asia, EEV life operating profit was up 23 per cent to
£4,387 million, driven by 14 per cent growth in new business
profit and 39 per cent growth in in-force profit, reflecting the
growth of the in-force business and positive assumption changes and
experience variances, as a result of the high quality of the
existing portfolio.
Jackson's EEV life
operating profit was up 2 per cent to £2,115 million. This
reflects a 5 per cent increase in new business profit to £921
million and higher expected returns from the in-force business due
to prior period growth and higher interest rates, partially offset
by a reduced level of favourable assumption changes and experience
variances.
In the UK and
Europe, EEV life operating
profit increased by 35 per cent to £1,374 million (2017:
£1,015 million). This was as a result of a 3 per cent increase
in new business profit, and higher in-force profit which included a
£330 million benefit from revisions to longevity assumptions
and a £138 million insurance recovery related to the costs of
reviewing past annuity sales after 1 July 2008, for which a
provision of £187 million had been charged in the prior
period.
EEV non-operating items
Negative short-term fluctuations of £3,219 million primarily
reflect lower than expected returns on equities and other
investments held by the Group's US separate accounts and by the
with-profits and unit-linked funds businesses in Asia and the UK.
These negative effects have been partly offset by gains on equity
derivatives held by the US business to manage market exposures
arising from the guarantees provided on its annuity
products.
Offsetting short-term fluctuations is a £146 million benefit
from economic assumption changes, principally reflecting the impact
of higher interest rates on the projected future fund growth rates
for certain businesses written in Hong Kong and Singapore and the
variable annuity business in the US. These projected higher growth
rates increase fund values for policyholders and hence
profitability for shareholders.
The loss attaching to corporate transactions of £451 million
primarily relates to the reinsurance of the shareholder annuity
portfolio to Rothesay Life. A more detailed explanation of this and
other corporate transactions occurring in the period are set out in
note 17 of the EEV financial statements.
Capital position, financing and liquidity
Capital position
|
Analysis of
movement in Group shareholder Solvency II
surplus18
|
|
|
|
|
|
2018 £bn
|
2017 £bn
|
|
Solvency II surplus at 1 January
|
13.3
|
12.5
|
|
Operating experience
|
4.2
|
3.6
|
|
Non-operating experience (including market movements)
|
(1.2)
|
(0.6)
|
|
M&GPrudential transactions (see below)
|
0.4
|
-
|
|
Other capital movements:
|
|
|
|
|
Net subordinated debt issuance (redemption)
|
1.2
|
(0.2)
|
|
|
Foreign currency translation impacts
|
0.5
|
(0.7)
|
|
|
Dividends paid
|
(1.2)
|
(1.2)
|
|
Model changes
|
-
|
(0.1)
|
|
Estimated Solvency II surplus at 31 December
|
17.2
|
13.3
|
The high quality and recurring nature of our operating capital
generation and our disciplined approach to managing balance sheet
risk has resulted in an increase in the Group's shareholders'
Solvency II capital surplus5 which
is estimated at £17.2 billion at 31 December 2018 (equivalent
to a solvency ratio of 232 per cent6),
compared with £13.3 billion (202 per cent) at 31 December
2017. The increase in surplus was driven by operating capital
formation of £4.2 billion and a £1.2 billion net increase
in subordinated debt, offset by dividends to shareholders of
£1.2 billion.
Local statutory capital
All of our subsidiaries continue to hold appropriate capital levels
on a local regulatory basis. In the UK and Europe, at 31 December
2018 The Prudential Assurance Company Limited and its subsidiaries
had an estimated Solvency II shareholder surplus19 of
£3.7 billion (equivalent to a cover ratio of 172 per cent),
reflecting the impact from the reinsurance of £12 billion of
annuity liabilities and the transfer of the Group's Hong Kong
insurance subsidiaries. The UK with-profits
surplus20 is
estimated at £5.5 billion (equivalent to a cover ratio of 231
per cent). In the US, operational capital formation and the strong
performance of our hedging programme as equity markets weakened
during the fourth quarter of 2018 more than offset remittances to
Group and a 35 percentage point ratio impact from the incorporation
of tax reform into the statutory capital requirement, resulting in
a risk-based capital ratio of 458 per cent (2017: 409 per
cent).
Debt portfolio
The Group continues to maintain a high-quality defensively
positioned debt portfolio. Shareholders' exposure to credit is
concentrated in the UK and Europe annuity portfolio and the US
general account, mainly attributable to Jackson's fixed annuity
portfolio. The credit exposure is well diversified and 98 per cent
of our UK and Europe portfolio and 96 per cent of our US portfolio
are investment grade21. During
2018, default losses were minimal and reported impairments across
the UK and US portfolios were £4 million (2017: £2
million).
Financing and liquidity
|
Shareholders' net core structural borrowings and
ratings
|
|
|
|
|
|
|
|
|
|
2018 £m
|
|
2017 £m
|
|
|
IFRS
basis
|
Mark to
market
value
|
EEV
basis
|
|
IFRS
basis
|
Mark to
market
value
|
EEV
basis
|
|
Total borrowings of shareholder-financed businesses
|
7,664
|
183
|
7,847
|
|
6,280
|
743
|
7,023
|
|
Less: Holding company cash and short-term investments
|
(3,236)
|
-
|
(3,236)
|
|
(2,264)
|
-
|
(2,264)
|
|
Net core structural borrowings of shareholder-financed
businesses
|
4,428
|
183
|
4,611
|
|
4,016
|
743
|
4,759
|
|
Gearing ratio*
|
20%
|
|
|
|
20%
|
|
|
* Net core structural borrowings as proportion of IFRS
shareholders' funds plus net debt, as set out in note III of the
Additional unaudited IFRS financial information.
The Group had central cash resources of £3.2 billion at 31
December 2018 (31 December 2017: £2.3 billion). Total core
structural borrowings increased by £1.4 billion, from
£6.3 billion to £7.7 billion, mainly as a result of the
capital rebalancing process related to the intended demerger of
M&GPrudential. This involved the redemption of US$550 million
(equivalent to £432 million at 31 December 2018) 7.75 per cent
tier 1 perpetual subordinated debt in December 2018 being more than
offset by the issue of US$500 million (£374 million at 31
December 2018) 6.5 per cent tier 2 substitutable subordinated
notes, £500 million 6.25 per cent tier 2 substitutable
subordinated notes and £750 million 5.625 per cent tier 2
substitutable subordinated notes in October 2018.
In addition to its net core structural borrowings of
shareholder-financed businesses set out above, the Group also has
access to funding via the money markets and has in place an
unlimited global commercial paper programme. As at 31 December
2018, we had issued commercial paper under
this programme totalling US$599 million, to finance
non-core borrowings.
Prudential's holding company currently has access to £2.6
billion of syndicated and bilateral committed revolving credit
facilities provided by 19 major international banks, expiring in
2023. Apart from small drawdowns to test the process, these
facilities have never been drawn, and there were no amounts
outstanding at 31 December 2018. The medium-term note programme,
the US shelf programme (platform for issuance of SEC registered
public bonds in the US market), the commercial paper programme and
the committed revolving credit facilities are all available for
general corporate purposes and to support the liquidity needs of
Prudential's holding company, and are intended to maintain a
flexible funding capacity.
|
Shareholders' funds
|
|
|
|
|
|
|
|
IFRS
|
|
EEV
|
|
|
2018 £m
|
2017 £m
|
|
2018 £m
|
2017 £m
|
|
Profit after tax for the
year22
|
3,010
|
2,389
|
|
4,585
|
8,750
|
|
Exchange movements, net of related tax
|
348
|
(409)
|
|
1,706
|
(2,045)
|
|
Cumulative exchange gain of Korea life business
recycled to profit and loss account
|
-
|
(61)
|
|
-
|
-
|
|
Unrealised gains and losses on Jackson fixed income
securities classified as available for sale23
|
(1,083)
|
486
|
|
-
|
-
|
|
Dividends
|
(1,244)
|
(1,159)
|
|
(1,244)
|
(1,159)
|
|
Mark to market value movements on Jackson
assets backing surplus and required capital
|
-
|
-
|
|
(95)
|
40
|
|
Other
|
131
|
175
|
|
132
|
144
|
|
Net increase in shareholders' funds
|
1,162
|
1,421
|
|
5,084
|
5,730
|
|
Shareholders' funds at 1 January
|
16,087
|
14,666
|
|
44,698
|
38,968
|
|
Shareholders' funds at 31 December
|
17,249
|
16,087
|
|
49,782
|
44,698
|
|
Shareholders' value per
share 7
|
665p
|
622p
|
|
1,920p
|
1,728p
|
|
Return on shareholders'
funds7
|
25%
|
25%
|
|
17%
|
17%
|
Group IFRS shareholders' funds at 31 December 2018 increased by 7
per cent to £17.2 billion (31 December 2017: £16.1
billion on an actual exchange rate basis), driven by the strength
of the operating result, offset by dividend payments of £1,244
million. During the period, UK sterling has weakened relative to
the US dollar and various Asian currencies. With approximately 51
per cent of the Group's IFRS net assets (74 per cent of the
Group's EEV net assets) denominated in non-sterling
currencies, this generated a positive exchange rate movement on the
net assets in the period. In addition, the increase in US long-term
interest rates between the start and the end of the reporting
period produced unrealised losses on fixed income securities held
by Jackson accounted through other comprehensive
income.
The Group's EEV basis shareholders' funds also increased by 11 per
cent to £49.8 billion (31 December 2017: £44.7 billion on
an actual exchange rate basis), On a per share basis the Group's
embedded value at 31 December 2018 equated to 1,920 pence, up from
1,728 pence at 31 December 2017.
Corporate transactions
Intention to demerge the Group's UK and Europe businesses and
reinsurance of £12.0 billion4 UK
annuity portfolio
The Group is making good progress on its previously announced
intention to demerge its UK and Europe businesses from Prudential
plc, resulting in two separately listed companies. The Group has
transferred legal ownership of The Prudential Assurance Company
Limited (PAC) and M&G Group Limited to the new holding company
for M&GPrudential, and completed the transfer of the legal
ownership of its Hong Kong insurance subsidiaries from PAC to
Prudential Corporation Asia Limited in December 2018.
In March 2018, M&GPrudential reinsured £12.0 billion (as
at 31 December 2017) of its shareholder-backed annuity portfolio to
Rothesay Life. Under the terms of the agreement, this is expected
to be followed by a Part VII transfer of most of the portfolio by
30 June 2019. The reinsurance agreement became effective on 14
March 2018 and resulted in an IFRS basis pre-tax loss of £508
million.
The above transactions reduced the Group's EEV by £376 million
which primarily reflects the loss of profits on the portion of the
annuity liabilities reinsured and increased the Group's shareholder
Solvency II capital position by £0.4 billion.
Prior to the demerger, the Group expects to rebalance its debt
capital across Prudential and M&GPrudential. This will include
the ultimate holding company of M&GPrudential becoming an
issuer of new debt, including debt substituted from Prudential, and
Prudential redeeming some of its existing debt. Following these
actions, the overall absolute quantum of debt across Prudential and
M&GPrudential is currently expected to increase, by an amount
which is not considered to be material in the context of the
Group's total outstanding debt as at 30 June 2018, before any
substitutable debt had been issued, of £7.6 billion
(comprising the Group's core structural borrowings of £6.4
billion and shareholder borrowings from short-term fixed income
securities programme of £1.2 billion). At the time of the
demerger, Prudential expects M&GPrudential to be holding around
£3.5 billion of subordinated debt. This expectation is subject
to the M&GPrudential capital risk appetite being approved by
the Board of the ultimate holding company of M&GPrudential,
once fully constituted to include independent non-executive
directors, and reflects the current operating environment and
economic conditions, material changes in which may lead to a
different outcome.
Entrance into Thailand mutual fund market
In July 2018, Eastspring reached an agreement to acquire initially
65 per cent of TMB Asset Management Co., Ltd. (TMBAM), a leading
asset management company in Thailand, from the TMB Bank Public
Company Limited (TMB). Thailand is the largest fund management
market within the Association of Southeast Asian Nations (ASEAN)
with total assets under management of £115 billion at 31
December 201824.
Eastspring has an option to increase its ownership to 100 per cent
in the future. As part of this acquisition, Eastspring has also
entered into a distribution agreement with TMB to provide
best-in-class investment solutions to their customers. The
acquisition of TMBAM, with £9 billion of assets under
management as at 31 December 2018, reinforces Prudential's
commitment to the Thai market.
Acquisition of John Hancock's group payout annuity
business
In November 2018, Jackson announced an agreement with John Hancock
Life Insurance Company to reinsure 100 per cent of John Hancock's
group payout annuity business, effective from 1 October
2018.
In total, the transaction involves Jackson indemnity reinsuring
approximately US$5.5 billion of reserves, representing an increase
in Jackson's general account liabilities of approximately 10 per
cent. John Hancock will continue to be responsible for the
administration of the business.
Renewal and expansion of regional strategic bancassurance alliance
with UOB
In January 2019, Prudential and UOB renewed their regional
bancassurance alliance until 2034, extending the scope to include a
fifth market, Vietnam, alongside our existing footprint across
Singapore, Malaysia, Thailand and Indonesia.
Under the terms of the renewal, Prudential's life insurance
products will be distributed through UOB's extensive network of
more than 400 branches in five markets, providing access to over
four million UOB customers. In addition, Prudential will use its
digital capabilities to deliver protection-focused propositions to
aid UOB's digital bank expansion and customer acquisition
aspirations. An initial fee of £662 million will be paid under
the agreement which will be funded through internal resources. This
amount will be paid in three instalments. £230 million was
paid in February 2019 with £331 million to be paid in January
2020 and £101 million to be paid in January 2021.
Acquisition of majority stake in Group Beneficial
Prudential plc is acquiring a majority stake in Group
Beneficial (Beneficial),
one of the leading life insurers in Cameroon, Côte d'Ivoire
and Togo. Beneficial provides savings and protection products
to over 300,000 customers through 41 branches and more than 2,000
agents. The acquisition will significantly add to Prudential's
growing scale in Africa, and is subject to various conditions and
regulatory approvals.
Dividend
The Board has decided to increase the full-year ordinary dividend
by 5 per cent to 49.35 pence per share, reflecting our 2018
financial performance and our confidence in the future prospects of
the Group. In line with this, the Directors have approved a second
interim ordinary dividend of 33.68 pence per share (2017: 32.5
pence per share).
The Group's dividend policy remains unchanged. The Board will
maintain focus on delivering a growing ordinary dividend. In line
with this policy, Prudential aims to grow the ordinary dividend by
5 per cent per annum. The potential for additional distributions
will continue to be determined after taking into account the
Group's financial flexibility across a broad range of financial
metrics and an assessment of opportunities to generate attractive
returns by investing in specific areas of the
business25.
Notes
1
Increase stated on a constant exchange rate basis.
2 For
insurance operations, underlying free surplus generated represents
amounts maturing from the in-force business during the period less
investment in new business and excludes non-operating items. For
asset management businesses, it equates to post-tax operating
profit for the period. Restructuring costs are presented separately
from the underlying business unit amount. Further information is
set out in note 10 of the EEV basis results.
3 Core refers
to the underlying profit of the UK and Europe insurance business,
excluding the effect of, for example, management actions to improve
solvency and material assumption changes. Details of these are set
out in note I(d) of the Additional unaudited IFRS financial
information.
4
Relates to IFRS shareholder annuity liabilities, valued as at 31
December 2017.
5 The
Group shareholder capital position excludes the contribution to Own
Funds and the Solvency Capital Requirement from ring fenced
with-profit funds and staff pension schemes in surplus. 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.
6 Estimated
before allowing for second interim ordinary
dividend.
7
See note III of the Additional unaudited IFRS financial information
for definition and reconciliation to IFRS balances.
8
Asia insurance revenues include spread income, fee income,
with-profits, insurance margin and expected return on shareholder
assets.
9
Margin represents operating income before performance-related fees
as a proportion of the related funds under management, for further
information see note I(c) of the additional unaudited IFRS
financial information.
10
Includes Group's proportionate share of the liabilities and
associated flows of the insurance joint ventures and associates in
Asia.
11
Defined as movements in policyholder liabilities arising from
premiums (net of charges), surrenders/withdrawals, maturities and
deaths.
12
Includes unallocated surplus of with-profits business.
13
Includes Group's proportionate share in PPM South Africa and the
Asia asset management joint ventures.
14 For
our asset management business, the level of funds managed on behalf
of third parties, which are not therefore recorded on the balance
sheet, is a driver of profitability. We therefore analyse the
movement in the funds under management each period, focusing
between those which are external to the Group and those held by the
insurance business and included on the Group balance sheet. This is
analysed in note II(b) of the Additional unaudited IFRS financial
information.
15
Net inflows exclude Asia Money Market Fund (MMF) inflows of
£1,500 million (2017: £1,495 million). External funds
under management exclude Asia MMF balances of £11,602 million
(2017: £9,317 million).
16 Represents
M&GPrudential asset management external funds under management
and internal funds included on the M&GPrudential long-term
insurance business balance sheet.
17
Net cash remitted by business units are included in the Holding
company cash flow, which is disclosed in detail in note II(a) of
the Additional unaudited IFRS financial information. This comprises
dividends and other transfers from business units that are
reflective of emerging earnings and capital
generation.
18
The methodology and assumptions used in calculating the Solvency II
capital results are set out in note II(c) of the Additional
unaudited IFRS financial information.
19 The
UK shareholder capital position excludes the contribution to Own
Funds and the Solvency Capital Requirement from ring-fenced
with-profit funds and staff pension schemes in surplus. 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.
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.
21
Based on hierarchy of Standard and Poor's, Moody's and Fitch, where
available and if unavailable, internal ratings have been
used.
22
Excluding profit for the year attributable to non-controlling
interests.
23
Net of related charges to deferred acquisition costs and
tax.
24
©Copyright 2018 Strategic Insight, an Asset International
Company and when referenced or sourced Morningstar Inc., Standard
& Poor's Inc., and Lipper Inc. All rights reserved. The
information, data, analyses and opinions contained herein (a)
include confidential and proprietary information of the
aforementioned companies, (b) may not be copied or redistributed
for any purpose, (c) are provided solely for information purposes,
and (d) are not warranted or represented to be correct, complete,
accurate, or timely.
25
Refer to note 11 on the parent company financial statements for
further detail on the distributable profits of Prudential
plc.
Group Chief Risk Officer's report of the risks facing our business
and how these are managed
Our Group Risk Framework and risk appetite have allowed us to
control our risk exposure successfully throughout the year. Our
governance, processes and controls enable us to deal with
uncertainty effectively, which is critical to the achievement of
our strategy of helping our customers achieve their long-term
financial goals.
This section explains the main risks inherent in our business and
how we manage those risks, with the aim of ensuring an appropriate
risk profile is maintained.
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.
The merger activity ongoing at M&GPrudential and its planned
separation from the rest of the Group requires significant and
complex changes and these have been progressing apace throughout
2018. The Group Risk function is embedded within key work streams
and a clear view exists of the objectives, risks and dependencies
involved in order to execute this change agenda. A mature and
well-embedded risk framework is in place and, during this period of
transition, the Group Risk function has a defined role in providing
oversight, support and risk management, as well as providing
objective challenge to ensure the Group remains within its risk
appetite. During 2018 these activities have been in the form of
risk opinions, guidance and assurance on critical transformation
and demerger activity, as well as assessments of the financial
risks to the execution of the demerger under various stress
scenarios. A key objective is that post demerger there are two
strong, standalone risk functions in M&GPrudential and
Prudential plc, with operational separation planning for the risk
functions remaining on track.
Societal developments
Focus in western economies continues to shift from the goods and
services which businesses deliver to customers towards the way in
which such business is conducted and how this impacts on the wider
society. Stakeholder and regulatory expectations of the Group's
environmental, social and governance (ESG) activities are also
increasing. In undertaking its business, the Group actively
considers the ESG implications of its activities. Recent regulatory
developments such as the EU General Data Protection Regulation
(GDPR) have underlined that personal data must be held securely and
its use must be transparent to the data owner. Risks around the
security and use of personal data are actively managed by the
Group, and the recent regulatory changes in data protection in the
US and Europe have been incorporated into the principles against
which the business requirements are defined.
The world economy
The beginning of 2018 saw strong and broad economic growth
following the significant US tax reforms enacted toward the end of
2017. As the year progressed the global economic backdrop evolved
and a divergence in growth between the US and the rest of the world
was observed. Rising US policy rates, tightening financial
conditions and increasing trade tensions raised concerns and
impacted emerging markets in particular. In the fourth quarter,
fears of a more pronounced global economic slowdown also impacted
the US as reductions in monetary stimulus continued, contributing
to a sharp shift in risk sentiment. At the start of 2019, the
outlook for the global economy remains uncertain and while growth
remains positive, it has become more fragile and risks are weighted
towards the downside. Political tensions in Europe, including
uncertainty surrounding the nature of the UK's exit from the EU and
its future trading relationship, geopolitical developments and the
potential increase of international trade tensions between the US
and China pose risks to global growth and the economic
environment.
Financial markets
Financial markets faced a number of headwinds in 2018 and asset
valuations suffered broadly amid the re-emergence of market
volatility. Global markets, and emerging markets in particular,
faced broad pressure throughout the year. US markets, however,
proved resilient until the fourth quarter when fears of an economic
slowdown triggered a sharp sell-off in equities. In parallel,
credit spreads also widened as the position of the credit cycle
became a key concern for market participants. Across the world,
interest rates movements were mixed over the year, although there
has been a notable broad flattening of the yield curve in the US,
impacted by changes in growth and inflation data, risk sentiment
and increased concerns of a possible recession. Financial markets
remain particularly vulnerable to further abrupt changes in
sentiment, and in particular if the risks to the global economy
noted above were to materialise.
Political landscape
Events in the past year continue to indicate that the world is in a
period of global geopolitical transition and increasing
uncertainty. Popular discontent remains one of the driving factors
of political change, and the liberal norms and the role of
multilateral rules-based institutions that underpin global order,
such as the United Nations (UN), the North Atlantic Treaty
Organisation (NATO) and the World Trade Organisation (WTO), appear
to be evolving. Across the Group's key geographies we have
increasingly seen national protectionism in trade and economic
policies. The UK's exit from the EU and the nature of the future
relationship remains a key political uncertainty. As a global
organisation, we develop plans to mitigate business risks arising
from this shift and engage with national bodies where we can in
order to ensure our policyholders are not adversely impacted. It is
clear, however, that the full long-term impacts of these changes
remain to be seen.
Regulations
Prudential operates in highly regulated markets across the globe,
and the nature and focus of regulation and laws remains fluid. A
number of national and international regulatory developments are in
progress, with a continuing focus on solvency and capital
standards, conduct of business, systemic risks and macro-prudential
policy. Such developments will continue to be monitored at a
national and global level and form part of Prudential's engagement
with government policy teams and regulators. The Group announced in
August 2018 that the Hong Kong Insurance Authority would be the
Group-wide supervisor after the demerger of M&GPrudential, and
constructive engagement on the future Group-wide regulatory
framework, led by the Group Chief Risk Officer, will continue in
2019.
2. Key internal,
regulatory, economic and (geo)political events over the past 12
months
|
Q1 2018
|
Q2 2018
|
Q3 2018
|
Q4 2018
|
|
In
March 2018 the intention to demerge M&GPrudential from the rest
of the Group is announced. £12 billion of annuity liabilities
in UK and Europe business are reinsured to Rothesay Life Plc. A
Part VII transfer of most of the portfolio is expected to be
completed by 30 June 2019.
Eastspring
becomes the third Prudential signatory, after M&G and PPM South
Africa (PPMSA), to the UN Principles for Responsible Investment in
February 2018.
President
Xi Jinping enters a second term in office in China after election
by the National People's Congress in March 2018.
A
coalition government is formed in Italy between the centre right
League and anti-establishment Five Star Movement, after general
elections in March 2018.
The US
administration proposes initial trade tariff measures (with
additional proposals announced over H1 2018), raising trade
tensions with its key G7 partners and China.
US
equity markets decline rapidly, triggering a global sell-off, with
the Dow Jones Industrial Average falling by circa 3,000 points in
just two weeks. US markets rebound over the second and third
quarters.
|
The
General Data Protection Regulation (GDPR) goes live in the EU on 25
May 2018, increasing the rights of individuals over the use of
their personal information by companies.
The US
Department of Labor's (DoL's) fiduciary rule is effectively ended
after a decision in the US courts in March 2018. The deadline for
the DoL to appeal lapses in June. Other proposals, such as the US
Securities and Exchanges Commission's best interest standard,
remain in progress.
US
President Trump and North Korean Chairman Kim Jong Un meet in
Singapore on 12 June 2018 for a historic summit, where
denuclearisation of the Korean peninsula is discussed.
The
opposition Pakatan Harapan coalition win power in Malaysia
following general elections held in May 2018.
The
22nd round of talks on the Regional Comprehensive Economic
Partnership (RCEP) are held in Singapore between 28 April and 8 May
2018, the goal being to create the world's largest economic bloc.
Negotiations continue into 2019.
The
Indonesia President approves regulations on 'grandfathering'
foreign ownership of insurance companies.
|
In
August the Group announces that the Hong Kong Insurance Authority
will become the Group-wide supervisor for Prudential plc after the
demerger of M&GPrudential, and constructive engagement on the
future regulatory relationship begins.
In July
the International Association of Insurance Supervisors (IAIS)
releases consultation documents for both the Common Framework for
the Supervision of Insurers (ComFrame) and Insurance Capital
Standard (ICS) v2.0.
The
Group submits ICS field results to the PRA in August
2018.
In
September, the Prudential Regulation Authority (PRA) and Financial
Conduct Authority (FCA) request from major banks and insurers,
details of preparations and actions being undertaken to manage
transition from London Inter-Bank Offered Rate (LIBOR) to
alternative interest rate benchmarks.
The
Bank of England raises rates for the second time since the 2008
financial crisis to 0.75 per cent in August, while highlighting
significant Brexit-driven uncertainties to the
economy.
The US
imposes tariffs on Chinese exports worth US$50 billion in July,
prompting Beijing to respond in kind. Despite a temporary
truce agreed at the G20 summit on 1 December, trade tensions
between the two nations remains high.
Emerging
market equities decline rapidly in August as tightening financial
conditions impact economies with external funding
vulnerabilities.
|
In
November, Jackson announces the acquisition of the group payout
annuity business of John Hancock Life Insurance Company, a closed
book of circa 200,000 in-force certificates representing IFRS
reserves of approximately US$5.5bn.
PPM
America (PPMA) becomes the fourth Prudential signatory to the UN
Principles for Responsible Investment in October 2018.
The
IAIS launches a consultation for the Holistic Framework (HF) in
November, which aims to asses and mitigate systemic risk in the
insurance sector and is intended to replace the current Global
Systemically Important Insurer (G-SII) measures, with the aim of
adoption in November 2019.
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.
Democrats
win control of the House of Representatives in the November US
midterm elections, while the Republicans retain control of the
Senate. As bipartisan disputes increase, the US government
partially shuts down between late December 2018 and January
2019.
In
December, the UK Parliament rejects the negotiated agreement on the
UK's withdrawal from the EU. Uncertainty on the nature of the UK's
exit from the EU persists as the UK government seeks to renegotiate
the agreement in early 2019.
The
reduction in global accommodative monetary policy continues, with
the European Central Bank (ECB) confirming that net asset purchases
would cease at the end of 2018, and the US Federal reserve raises
rates for the fourth time in 2018 in December.
China
reports a large manufacturing decline in December, prompting
concerns of a global growth slowdown. Additional stimulus measures
from the People's Bank of China are enacted.
Fears
of tightening financial conditions and a global economic slowdown
trigger a sharp sell-off in US equity markets, which had remained
resilient through the first three quarters of 2018, while global
equities fall further. The S&P500 ends 2018 with an annual
decline of circa 6 per cent. In early 2019 risk sentiment
improves, contributing to a broad rally in equity
markets.
|
3. Managing the risks in
implementing our strategy
This section provides an overview of the Group's strategy, the
significant risks arising from the delivery of this strategy and
the risk management focus for the following 12 months. The risks
outlined below, which are not exhaustive, are discussed in more
detail in sections 5 and 6.
|
Our strategy
|
Significant risks arising from the delivery of the
strategy
|
Risk management focus for the next 12 months
|
|
|
|
|
|
Asia
Serving the protection and investment needs of the growing middle
class in Asia
|
● Persistency risk
|
● Implementation of business initiatives to manage
persistency risk, including review of distribution channels and
incentive structures. Ongoing experience
monitoring.
|
|
● Morbidity risk
|
● Implementation of business initiatives to manage
morbidity risk, including product repricing where required. Ongoing
experience monitoring.
|
|
● Regulatory risk, including foreign
ownership
|
● Proactive engagement with national governments and
regulators.
|
|
United States
Providing asset accumulation and retirement income products to US
baby boomers;
|
● Financial risks
|
● Maintaining, and enhancing where necessary,
appropriate risk limits, hedging strategies and Group oversight
that are in place.
|
|
● Policyholder behaviour risk
|
● Continued monitoring of policyholder behaviour
experience and review of assumptions.
|
|
Africa
|
● The Group will continue to increase its risk
management focus on Prudential Africa as the business there grows
in materiality.
|
|
|
|
|
UK and Europe
Meeting the savings and retirement needs of an ageing UK and
continental European population
|
● M&GPrudential merger and transformation
risk
|
● Managing the merger and transformation risks to
the delivery of strategic, financial and operational
objectives.
|
|
● Longevity risk
|
● Continued oversight and experience
analysis.
|
|
● Customer risk
|
● Ongoing monitoring of embedded customer outcome
indicators.
● Managing the customer risk implications from:
merger and transformation activity; new product propositions and
new regulatory requirements.
|
|
|
|
Group-wide
We aim to generate attractive returns enabling us to provide
financial security to our customers and deliver sustainable growth
for our shareholders. Following rigorous review, we believe that
this long-term strategy is best served through the demerger of
M&GPrudential.
|
● Transformation risks around key change
programmes
|
● Managing the inter-connected execution risks from
this transformation activity under the Group's transformation risk
framework, as well as providing other risk management support and
review.
● Ensuring both M&GPrudential and Prudential plc
will have in place two strong standalone risk functions after
demerger.
|
|
● Group-wide regulatory risks
|
● Engagement with regulators and industry groups on
macro-prudential and systemic risk-related regulatory initiatives,
international capital standards, and other initiatives with
Group-wide impacts.
● Engagement with the Hong Kong Insurance Authority
on the Group-wide supervisory framework that will apply to the
Group after the demerger of M&GPrudential.
|
|
● Information security and data privacy
risks
|
● Continuing the implementation of the Group's
information security risk management strategy and defence
plan.
● Ensuring full compliance with applicable privacy
laws across the Group.
|
4. Risk
governance
a. System of governance
Appropriately managed risks allow Prudential to take business
opportunities and enable the growth of its business. Effective risk
management is therefore fundamental in the execution of the Group's
business strategy. Prudential's approach to risk management must be
both well embedded and rigorous, and, as the economic and political
environment in which we operate changes, it should also be
sufficiently broad and dynamic to respond to these
changes.
Prudential has in place a system of governance that promotes and
embeds a clear ownership of risk, processes that link risk
management to business objectives, a proactive Board and senior
management providing oversight of risks, mechanisms and
methodologies to review, discuss and communicate risks, and risk
policies and standards to ensure risks are identified, measured,
managed, monitored and reported.
How 'risk' is defined
Prudential defines 'risk' as the uncertainty that is faced in
implementing the Group's strategies and achieving its
objectives successfully, and includes all internal or external
events, acts or omissions that have the potential to threaten the
success and survival of the Group. Accordingly, material risks will
be retained selectively when it is considered that there is value
in doing so, and where it is consistent with the Group's risk
appetite and philosophy towards risk-taking.
How risk is managed
Risk management is embedded across the Group through the Group Risk
Framework, which details Prudential's risk governance, risk
management processes and risk appetite. The Framework has been
developed to monitor the risks to our business and is owned by the
Board. The aggregate Group exposure to its key risk drivers is
monitored and managed by the Group Risk function which is
responsible for reviewing, assessing, providing oversight and
reporting on the Group's risk exposure and solvency position from
the Group economic, regulatory and ratings
perspectives.
In 2018 the Group continued to update its policies and processes
around new product approvals, management of critical third-party
arrangements and oversight of model risks. A transformation risk
framework is being applied directly to manage programme delivery
risks. Prudential manages key ESG issues though a
multi-disciplinary approach with first line functional ownership
for ESG topics.
The following section provides more detail on our risk governance,
risk culture and risk management process.
b. Group Risk Framework
i. Risk governance and
culture
Prudential's
risk governance comprises the Board, organisational structures,
reporting relationships, delegation of authority, roles and
responsibilities, and risk policies that the Group Head Office and
the business units establish to make decisions and control their
activities on risk-related matters. It includes individuals,
Group-wide functions and committees involved in overseeing and
managing risk.
The
risk governance structure is led by the Group Risk Committee,
supported by independent non-executives on risk committees of
Material Subsidiaries. These committees monitor the development of
the Group Risk Framework, which includes risk appetite, limits, and
policies, as well as risk culture.
The
Group Risk Committee reviews the Group Risk Framework and
recommends changes to the Board to ensure that it remains effective
in identifying and managing the risks faced by the Group. A number
of core risk policies and standards support the Framework to ensure
that risks to the Group are identified, assessed, managed and
reported.
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.
An
evaluation of risk culture forms part of the Group Risk Framework
and in particular seeks to identify evidence that:
● Senior management in business units articulate the
need for effective risk management as a way to realise long-term
value and continuously support this through their
actions;
● Employees understand and care about their role in
managing risk - they are aware of and discuss risk openly
as part of the way they perform their role; and
● Employees invite open discussion on the approach
to the management of risk.
The
Group Risk Committee also has a key role in providing advice to the
Remuneration Committee on risk management considerations to be
applied in respect of executive remuneration.
Prudential's
Code of Conduct and Group Governance Manual include a series of
guiding principles that govern the day-to-day conduct of all its
people and any organisations acting on its behalf. This is
supported by specific risk policies which require that the Group
act in a responsible manner. This includes, but is not limited to,
policies on anti-money laundering, financial crime and anti-bribery
and corruption. The Group's third-party supply policy ensures that
human rights and modern slavery considerations are embedded across
all of its supplier and supply chain arrangements. Embedded
procedures to allow individuals to speak out safely and anonymously
against unethical behaviour and conduct are also in
place.
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.
Risk identification
Group-wide
risk identification takes place throughout the year as the Group's
businesses undertake a comprehensive bottom-up process to identify,
assess and document its risks. This concludes with an annual
top-down identification of the Group's key risks,which considers
those risks that have the greatest potential to impact the Group's
operating results and financial condition and is used to inform
risk reporting to the risk committees and the Board for the
year.
Our
risk identification process also includes the Group's Own Risk and
Solvency Assessment (ORSA), as required under Solvency II, and
horizon-scanning performed as part of our emerging risk management
process.
In
accordance with provision C.2.1 of the UK Code, the Directors
perform a robust assessment of the principal risks facing the
Company through the Group-wide risk identification process, Group
ORSA report and the risk assessments undertaken as part of the
business planning review, including how they are managed and
mitigated.
Reverse
stress testing, which requires the Group to ascertain the point of
business model failure, is another tool that helps us to identify
the key risks and scenarios that may have a material impact on the
Group.
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.
Risk measurement and assessment
All
identified risks are assessed based on an appropriate methodology
for that risk. All quantifiable risks, which are material and
mitigated by holding capital, are modelled in the Group's internal
model, which is used to determine capital requirements under
Solvency II and our own economic capital basis. Governance
arrangements are in place to support the internal model, including
independent validation and processes and controls around model
changes and limitations.
Risk management and control
The
control procedures and systems established within the Group are
designed to manage the risk of failing to meet business objectives
and are detailed in the Group risk policies. These focus on
aligning the levels of risk-taking with the achievement of business
objectives and can only provide reasonable, and not absolute
assurance, against material misstatement or loss.
The
management and control of risks are set out in the Group risk
policies, and form part of the holistic risk management approach
under the Group's ORSA. These risk policies define:
● The Group's risk appetite in respect of material
risks, and the framework under which the Group's exposure to those
risks is limited;
● The processes to enable Group senior management to
effect the measurement and management of the Group material risk
profile in a consistent and coherent way; and
● The flows of management information required to
support the measurement and management of the Group's material
risks and to meet the needs of external
stakeholders.
The
methods and risk management tools we employ to mitigate each of our
major categories of risks are detailed in the further risk
information section below.
Risk monitoring and reporting
The
identification of the Group's key risks informs the management
information received by the Group risk committees and the Board.
Risk reporting of key exposures against appetite is also included,
as well as ongoing developments in other key and emerging
risks.
iii. Risk appetite, limits and
triggers
The
extent to which Prudential is willing to take risk in the pursuit
of its business strategy and objective to create shareholder value
is defined by a number of qualitative and quantitative expressions
of risk appetite, operationalised through measures such as limits,
triggers and indicators. The Group Risk function is responsible for
reviewing the scope and operation of these risk appetite measures
at least annually to determine that they remain relevant. The Board
approves all changes made to the Group's aggregate risk appetite,
and has delegated authority to the Group Risk Committee to approve
changes to the system of limits, triggers and
indicators.
Group
risk appetite is set with reference to economic and regulatory
capital, liquidity and earnings volatility which is aimed at
ensuring that an appropriate level of aggregate risk is taken.
Appetite is also defined for the Group's financial and
non-financial risks. Further detail is included in sections 5 and
6, as well as covering risks to shareholders, including those from
participating and third-party business. Group limits operate within
these expressions of risk appetite to constrain material risks,
while triggers and indicators provide further constraint and
defined points for escalation.
Capital requirements:
Limits
on capital requirements aim to ensure that the Group meets its
internal economic capital requirements, achieves its desired target
rating to meet its business objectives, and ensures that
supervisory intervention is not required. The two measures used at
the Group level are Solvency II capital requirements and internal
economic capital (ECap) requirements. In addition, capital
requirements are monitored on local statutory bases.
The
Group Risk Committee is responsible for reviewing the risks
inherent in the Group's business plan and for providing the Board
with input on the risk/reward trade-offs implicit therein. This
review is supported by the Group Risk function, which uses
submissions from our local business units to calculate the Group's
aggregated position (allowing for diversification effects between
local business units) relative to the aggregate risk
limits.
Liquidity:
The
objective of the Group's liquidity risk appetite is to ensure that
the Group is able to generate sufficient cash resources to meet
financial obligations as they fall due in business-as-usual and
stressed scenarios. Risk appetite with respect to liquidity risk is
measured using a Liquidity Coverage Ratio (LCR) which considers the
sources of liquidity against liquidity requirements under stress
scenarios.
Earnings volatility:
The
objectives of the Group's appetite and aggregate risk limits on
earnings volatility seek to ensure that variability is consistent
with the expectations of stakeholders; that the Group has adequate
earnings (and cash flows) to service debt and expected dividends
and to withstand unexpected shocks; and that earnings (and cash
flows) are managed properly across geographies and are consistent
with funding strategies. The volatility of earnings is measured and
monitored on operating profit and EEV operating profit bases,
although IFRS and EEV total profits are also
considered.
5. Summary
risks
Broadly, the risks assumed across the Group can be
categorised as those which arise as a result of our business
operations, our investments and those arising from the nature of
our products. Prudential is also exposed to those broad risks which
apply because of the global environment in which it operates. These
risks, where they materialise, may have a financial impact on the
Group, and could also impact on the performance of its products or
the services it provides to our customers and distributors, which
gives rise to potential risks to its brand and reputation and have
conduct risk implications. These risks are summarised below. The
materiality of these risks, whether material at the level of the
Group or its business units, is also indicated. The Group's
disclosures covering risk factors can be found at the end of this
document.
'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.
Geopolitical risk
The geopolitical environment may have direct or indirect impacts on
the Group, and has seen varying levels of volatility in recent
years as seen by political developments in the UK, the US and the
Eurozone. Uncertainty in these regions, combined with continuing
conflict in the Middle East and elevated tensions in East Asia and
the Korean peninsula underline that geopolitical risks have
potentially global and wide-ranging impacts; for example, through
increased regulatory and operational risks, and changes to the
economic environment.
Regulatory risk
Prudential operates under the ever-evolving requirements set out by
diverse regulatory, legal and tax regimes. The increasing shift
towards macro-prudential regulation and the number of regulatory
changes under way across Asia (in particular focusing on consumer
protection) are key areas of focus, while both Jackson and
M&GPrudential operate in highly regulated markets. Regulatory
reforms can have a material impact on Prudential's
businesses. The proposed demerger of M&GPrudential will
result in a change in Prudential's Group-wide supervisor to the
Hong Kong Insurance Authority. The Group is, led by the Group Chief
Risk Officer, proactively engaging with the supervisor-elect on the
supervisory framework that will apply to the Group after the
demerger.
Technological change
The emergence of advanced technologies such as artificial
intelligence and blockchain is providing an impetus for companies
to rethink their existing operating models and how they interact
with their customers. Technological change is considered from both
an external and internal view. The external view considers the rise
of new technologies and how this may impact on the insurance
industry and Prudential's competitiveness within it, while the
internal view considers the risks associated with the Group's
internal developments in meeting digital change challenges and
opportunities. Prudential is embracing the opportunities from new
technologies, and any risks which arise from them are closely
monitored.
ESG risks
As a Group, responding effectively to those material risks with ESG
implications is crucial in maintaining Prudential's brand and
reputation, and in turn its financial performance and its long-term
strategy. Further information on the Group's approach to governance
on ESG issues and the relevant Group-wide policies for managing
these are included in the Corporate responsibility
review.
|
Risks from our investments
|
Risks from our products
|
Risks from our business operations
|
|
Market risk
Is the
potential for reduced value of Prudential's investments resulting
from the volatility of asset prices, driven by fluctuations in
equity prices, interest rates, foreign exchange rates and property
prices.
In the
Asia business, the main market risks arise from the value of fees
from its fee-earning products. In the US, Jackson's fixed and
variable annuity books are exposed to a variety of market risks due
to the assets backing these policies.
The UK
business' market risk exposure arises from the valuation of the
shareholder's proportion of the with-profits fund's future profits,
which depends on equity, property and bond values.
M&GPrudential
invests in a broad range of asset classes and its income is subject
to the price volatility of global financial and currency
markets.
Credit risk
Is the
potential for reduced value of Prudential's investments driven by
the market's perceptions for potential for defaults of investment
and other counterparties.
The
Group's asset portfolio also gives rise to invested credit risk.
The assets backing the UK and Jackson annuity businesses means
credit risk is considered a material risk for these business units
in particular.
Liquidity risk
Is the
risk of not having sufficient liquid assets to meet obligations as
they fall due, and we look at this under both normal and stressed
conditions. This is a risk which is considered material at the
level of the Group.
|
Insurance risks
The
nature of the products offered by Prudential exposes it to
insurance risks, which form a significant part of the overall Group
risk profile.
The
insurance risks that the business is exposed to by virtue of its
products include longevity
risk (policyholders living longer than
expected); mortality
risk (higher number of policyholders with life
protection dying than expected); morbidity risk (more policyholders
with health protection becoming ill than expected)
and persistency
risk (more customers lapsing their policies than
expected, and a type of policyholder behaviour risk). The medical
insurance business in Asia is also exposed to medical inflation risk (the
increasing cost of medical treatments being higher than
expected).
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.
Persistency
and morbidity risks are among the most material insurance risks for
the Asia business given the focus on health and protection products
in the region.
For
M&GPrudential the most material insurance risk is longevity
risk, arising from its legacy annuity business.
The
Jackson business is most exposed to policyholder behaviour risk,
including persistency, which impacts the profitability of the
variable annuity business and is influenced by market performance
and the value of policy guarantees.
Conduct risk
The
design and distribution of Prudential's products is crucial in
ensuring that the Group's commitment to meeting customers' needs
and expectations are met, and are factors which the Group considers
as part of its overall conduct of business.
|
Strategic and transformation risks
A
number of significant change programmes are currently running to
effect both the Group's strategy and to comply with emerging
regulatory changes. The breadth of these activities, and the
consequences, including the reputational impact, to the Group
should they fail to meet their objectives, mean that these risks
are material at the level of the Group.
Operational risks
A
combination of the complexity of the Group, its activities and the
extent of transformation in progress creates a challenging
operating environment.
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. Operational
risk is considered to be material at the level of the
Group.
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 well embedded business
continuity management programme.
Information
security and data privacy risks are significant considerations for
Prudential and the cyber security threat continues to evolve
globally in sophistication and potential significance. This
includes the continually evolving risk of malicious attack on its
systems, network disruption as well as risks relating to data
security, integrity, privacy and misuse. The scale of the Group's
IT infrastructure and network, stakeholder expectations and high
profile cyber security and data misuse incidents across industries
means that these risks continue to be considered material at the
level of the Group.
|
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.
6.1 'Macro' risks
a. Global regulatory and political
risks
Regulatory and political risks may impact on Prudential's
business or the way in which it is conducted. This covers a broad
range of risks including changes in government policy and
legislation, capital control measures, new regulations at either
national or international level, and specific regulator
interventions or actions. Following the announcement in August
2018 that the Hong Kong Insurance Authority would become
Prudential's Group-wide supervisor after the demerger of
M&GPrudential, constructive engagement with the
supervisor-elect began in 2018 and will continue into 2019. In
particular, Prudential continues to engage with the supervisor on
its proposed Group-wide supervision framework which will apply to
the Group after the demerger.
Recent shifts in the focus of some governments toward more
protectionist or restrictive economic and trade policies could
impact on the degree and nature of regulatory changes and
Prudential's competitive position in some geographic markets. This
could take effect, for example, through increased friction in
cross-border trade, capital controls or measures favouring local
enterprises such as changes to the maximum level of non-domestic
ownership by foreign companies. These developments continue to be
monitored by the Group at a national and global level and these
considerations form part of the Group's ongoing engagement with
government policy teams and regulators.
Efforts to curb systemic risk and promote financial stability are
also underway. At the international level, the Financial Stability
Board (FSB) continues to develop recommendations for the asset
management and insurance sectors, including on-going assessment of
systemic risk measures. The International Association of Insurance
Supervisors (IAIS) has continued its focus on the following two key
developments.
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 2022) is not part of the proposed HF. However, the HF
proposes more supervisory powers of intervention for mitigating
systemic risk, including temporary financial reinforcement measures
such as capital add-ons and suspension of dividends.
The IAIS is also developing the ICS as part of ComFrame - the
Common Framework for the supervision of Internationally Active
Insurance Groups (IAIGs). The implementation of ICS will be
conducted in two phases - a five-year monitoring phase followed by
an implementation phase. ComFrame will more generally establish a
set of common principles and standards designed to assist
supervisors in addressing risks that arise from insurance groups
with operations in multiple jurisdictions. The ComFrame proposals,
including ICS, could result in enhanced capital and regulatory
measures for IAIGs, for which Prudential satisfies the
criteria.
In certain jurisdictions in which Prudential operates there are
also a number of ongoing policy initiatives and regulatory
developments that are having, and will continue to have, an impact
on the way Prudential is supervised, including the US Dodd-Frank
Wall Street Reform and Consumer Protection Act, addressing
Financial Conduct Authority (FCA) reviews and ongoing engagement
with the Prudential Regulation Authority (PRA). Decisions taken by
regulators, including those related to solvency requirements,
corporate or governance structures, capital allocation and risk
management may have an impact on our business.
There has, in recent years, been regulatory focus in the UK on
insurance products and market practices which may have adversely
impacted customers, including the FCA's Legacy Review and Thematic
Review of Annuity Sales Practices. The management of customer risk
remains a key focus of management in the UK business. Merger and
transformation activity at M&GPrudential, new product
propositions and new regulatory requirements may also have customer
risk implications which are monitored.
In May 2017, the International Accounting Standards Board (IASB)
published IFRS 17 which will introduce fundamental changes to the
IFRS-based reporting of insurance entities that prepare accounts
according to IFRS from 2021. In November 2018, the IASB
tentatively agreed to delay the effective date of IFRS 17 by one
year to periods beginning on or after 1 January 2022 and is
considering introducing further amendments to this new standard.
IFRS 17 is expected to, among other things, include altering the
timing of IFRS profit recognition, and the implementation of the
standard is likely to require changes to the Group's IT, actuarial
and finance systems. The Group is reviewing the complex
requirements of this standard and considering its potential
impact.
In March 2018, the UK and EU agreed the terms of a transition
agreement for the UK's exit from the bloc, which will last from the
termination of the UK's membership of the EU (at 11.00pm GMT 29
March 2019) until 31 December 2020 (although a legally binding text
is yet to be agreed). The outcome of negotiations on the final
terms of the UK's relationship with the EU remains highly
uncertain. In particular, depending on the nature of the UK's
exit from the EU, the following effects may be seen. The UK and EU
may experience a downturn in economic activity, which is expected
to be more pronounced for the UK, particularly in the event of a
disorderly exit by the UK from the EU. Market volatility and
illiquidity may increase in the period leading up to, and
following, the UK's withdrawal, and property values (including the
liquidity of property funds, where redemption restrictions may be
applied) and interest rates may be impacted. In particular,
downgrades in sovereign and corporate debt ratings may occur. In a
severe scenario where the UK's sovereign rating is downgraded by
more than one notch, this may also impact on the credit ratings of
UK companies, including M&GPrudential's UK business. The legal
and regulatory regime in which the Group (and, in particular,
M&GPrudential) operates, may also be affected (including, the
future applicability of the Solvency II regime in the UK), the
extent of which remains uncertain. There is also a risk of
operational disruption to the business, in particular to
M&GPrudential.
The Group's diversification by geography, currency, product and
distribution should reduce some of the potential impact of the UK's
exit. M&GPrudential, due to the geographical location of both
its businesses and its customers, has the most potential to be
affected. As a result of the uncertainty on the nature of the
arrangements that will be put in place between the UK and the EU,
M&GPrudential has completed the implementation of a range of
plans including transfers of business to EU jurisdictions, balance
sheet and with-profits fund hedging protection and operational
measures (including customer communications) that are designed to
mitigate the potential adverse impacts to the Group's UK business.
In addition, the business has sought to ensure, through various
risk mitigation actions, that it is appropriately prepared for the
potential operational and financial impacts of a no-deal
withdrawal.
In the US, various initiatives are underway to introduce fiduciary
obligations for distributors of investment products, which may
reshape the distribution of retirement products. Jackson has
introduced fee-based variable annuity products in response to the
potential introduction of such rules, and we anticipate that the
business's strong relationships with distributors, history of
product innovation and efficient operations should further mitigate
any impacts.
In late 2018, the US NAIC concluded an industry consultation with
the aim of reducing the non-economic volatility in the variable
annuity statutory balance sheet and enhancing risk management. The
NAIC is targeting a January 2020 effective date for the new
framework, which will have an impact on Jackson's business. Jackson
continues to assess and test the changes. The NAIC also has an
on-going review of the C-1 bond factors in the required capital
calculation, on which further information is expected to be
provided in due course. The Group's preparations to manage the
impact of these reforms will continue.
In the EU, the European Commission began a review in late 2016 of
some aspects of the Solvency II legislative package, which is
expected to continue until 2021 and includes a review of the Long
Term Guarantee measures.
On 27 July 2017, the UK FCA announced that it will no longer
persuade, or use its powers to compel, panel banks to submit rates
for the calculation of LIBOR after 2021. The discontinuation of
LIBOR in its current form and its replacement with the Sterling
Overnight Index Average benchmark (SONIA) in the UK (and other
alternative benchmark rates in other countries) could, among other
things, impact the Group through an adverse effect on the value of
Prudential's assets and liabilities which are linked to, or which
reference LIBOR, a reduction in market liquidity during any period
of transition and increased legal and conduct risks to the Group
arising from changes required to documentation and its related
obligations to its stakeholders.
In Asia, regulatory regimes are developing at different speeds,
driven by a combination of global factors and local considerations.
New local capital rules and requirements could be introduced in
these and other regulatory regimes that challenge legal or
ownership structures, current sales practices, or could be applied
to sales made prior to their introduction retrospectively, which
could have a negative impact on Prudential's business or reported
results.
Risk management and mitigation of regulatory and political risk at
Prudential includes the following:
● Risk assessment of the Business Plan which
includes consideration of current strategies;
● Close monitoring and assessment of our business
environment and strategic risks;
● The consideration of risk themes in strategic
decisions; and
● Ongoing engagement with national regulators,
government policy teams and international standard
setters.
b. ESG risks including climate
change
The business environment in which Prudential operates is
continually changing, and responding effectively to those material
risks with ESG implications is crucial in maintaining Prudential's
brand and reputation, and in turn its financial performance and its
long-term strategy. The Group maintains active engagement with its
key stakeholders, including investors, customers, employees,
governments, policymakers and regulators in its key markets, as
well as with international institutions - all of whom have
expectations, which the Group must balance, as it responds to
ESG-related matters.
Climate change is a key ESG theme which continues to move up the
agenda of many regulators, governments, non-governmental
organisations and investors. An overview of the various regulatory,
supervisory and investor-driven initiatives related to climate
change currently in progress; how the Group manages climate change
risks and opportunities; and the Group's participation in industry
initiatives in this area is outlined in the Corporate
responsibility review. There has been increased regulatory and
supervisory focus on sustainable finance and responsible
investment. The Group recognises this and the ESG Executive
Committee seeks, as one of its aims, to ensure a consistent
approach in managing ESG considerations in its business activities,
including investment activities.
The Group's operational risk framework explicitly incorporates ESG
as a component of its social and environmental responsibility,
brand management and external communications. This is further
strengthened by factoring considerations for reputational impacts
when the materiality of operational risks are assessed. Policies
and procedures to support how the Group operates in relation to
certain ESG issues are covered in the Group Governance Manual.
Prudential manages key ESG issues though a multi-disciplinary
approach with first line functional ownership for ESG topics.
Further information on the Group's approach to governance on ESG
issues and the relevant Group-wide policies for managing these are
included in the Corporate responsibility review.
6.2 Risks from our investments
a. Market risk
The main drivers of market risk in the Group are:
● Investment risk, which arises on our holdings of
equity and property investments, the prices of which can change
depending on market conditions;
● Interest rate risk, which is driven by the
valuation of Prudential's assets (particularly the bonds that it
invests in) and liabilities, which are dependent on market interest
rates and exposes it to the risk of those moving in a way that is
detrimental; and
● Foreign exchange risk, through translation of its
profits and assets and liabilities denominated in various
currencies, given the geographical diversity of the
business.
The main investment risk exposure arises from the portion of the
profits from the UK and Hong Kong with-profits funds which the
shareholders are entitled to receive; the value of the future fees
from the fee-earning products in the Asia business; and from the
asset returns backing Jackson's variable annuities business.
Further detail is provided below.
The Group's interest rate risk is driven by the need to match the
duration of its assets and liabilities in the UK and Europe
insurance business and the fixed annuity business in Jackson.
Interest rate risk also arises from the guarantees of some non
unit-linked investment products in Asia; and the cost of guarantees
in Jackson's fixed index and variable annuity business. Further
detail is provided below.
The Group has appetite for market risk where it arises from
profit-generating insurance activities to the extent that it
remains part of a balanced portfolio of sources of income for
shareholders and is compatible with a robust solvency
position.
The Group's market risks are managed and mitigated by the
following:
● Our market risk policy;
● Risk appetite statements, limits and
triggers;
● Our asset and liability management
programmes;
● Hedging derivatives, including equity options and
futures, interest rate swaps and swaptions and currency
forwards;
● The monitoring and oversight of market risks
through the regular reporting of management information;
and
● Regular deep dive assessments.
Equity and property investment risk
In the UK and Europe business, the main investment risk arises from
the assets held in the with-profits funds through the shareholders'
proportion of the funds' declared bonuses and policyholder net
investment gains (future transfers). This investment risk is driven
mainly by equities in the funds and some hedging to protect against
a reduction in the value of these future transfers is performed
outside the funds.The UK with-profits funds' Solvency II own funds,
estimated at £9.7 billion as at 31 December 2018, helps
to protect against market fluctuations and is protected
partially against falls in equity markets through an active hedging
programme within the fund.
In Asia, the shareholder exposure to equity price movements results
from unit-linked products, where fee income is linked to the market
value of the funds under management. Further exposure arises from
with-profits businesses where bonuses declared are based broadly on
historical and current rates of return from the Asia business'
investment portfolios, which include equities.
In Jackson, investment risk arises from the assets backing customer
policies. Equity risk is driven by the variable annuity business,
where the assets are invested in both equities and bonds and the
main risk to the shareholder comes from providing the guaranteed
benefits offered. The exposure to this is primarily controlled by
using a derivative hedging programme, as well as through the use of
reinsurance to pass on the risk to third-party
reinsurers.
While accepting the equity exposure that arises on future fees, the
Group has limited appetite for exposures to equity price movements
to remain unhedged or for volatility within policyholder guarantees
after taking into account any natural offsets and buffers within
the business.
Interest rate risk
Some products that Prudential offer are sensitive to movements in
interest rates. As part of the Group's ongoing management of this
risk, a number of mitigating actions to the in-force business have
been taken, as well as repricing and restructuring new business
offerings in response to recent relatively low interest rates.
Nevertheless, some sensitivity to interest rate movements is still
retained.
The Group's appetite for interest rate risk is limited to where
assets and liabilities can be tightly matched and where liquid
assets or derivatives exist to cover interest rate
exposures.
In the UK and Europe insurance business, interest rate risk arises
from the need to match the cash flows of its annuity obligations
with those from its investments. The risk is managed by matching
asset and liability durations as well as continually assessing the
need for use of any derivatives. Under Solvency II rules, interest
rate risk also results from the requirement to include a balance
sheet risk margin. The with-profits business is also exposed to
interest rate risk through some product guarantees. Such risk is
largely borne by the with-profits fund itself although shareholder
support may be required in extreme circumstances where the fund has
insufficient resources to support the risk.
In Asia, our exposure to interest rate risk arises from the
guarantees of some non-unit-linked investment products, including
the Hong Kong with-profits business. This exposure exists because
of the potential for asset and liability mismatch which, although
it is small and managed appropriately, cannot be
eliminated.
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.
Foreign exchange risk
The geographical diversity of Prudential's businesses means that it
has some exposure to the risk of foreign exchange rate
fluctuations. The operations in the US and Asia, which represent a
large proportion of operating profit and shareholders' funds,
generally write policies and invest in assets in local currencies.
Although this limits the effect of exchange rate movements on local
operating results, it can lead to fluctuations in the Group
financial statements when results are reported in UK sterling. This
risk is accepted within our appetite for foreign exchange
risk.
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.
b. Credit risk
Prudential invests in bonds that provide a regular, fixed amount of
interest income (fixed income assets) in order to match the
payments needed to policyholders. It also enters into reinsurance
and derivative contracts with third parties to mitigate various
types of risk, as well as holding cash deposits at certain banks.
As a result, it is exposed to credit risk and counterparty risk
across its business.
Credit risk is the potential for reduction in the value of
investments which results from the perceived level of risk of an
investment issuer being unable to meet its obligations
(defaulting). Counterparty risk is a type of credit risk and
relates to the risk that the counterparty to any contract we enter
into being unable to meet their obligations causing us to suffer
loss.
The Group has some appetite to take credit risk where it arises
from profit-generating insurance activities, to the extent that it
remains part of a balanced portfolio of sources of income for
shareholders and is compatible with a robust solvency
position.
A number of risk management tools are used to manage and mitigate
this credit risk, including the following:
● A credit risk policy and dealing and controls
policy;
● Risk appetite statements and limits that have been
defined on issuers, and counterparties;
● Collateral arrangements for derivative, secured
lending reverse repurchase and reinsurance
transactions;
● The Group Credit Risk Committee's oversight of
credit and counterparty credit risk and sector and/or name-specific
reviews;
● Regular assessments; and
● Close monitoring or restrictions on investments
that may be of concern.
Debt and loan portfolio
Prudential's UK and Europe business is exposed to credit risk on
fixed income assets in the shareholder-backed portfolio. At 31
December 2018, this portfolio contained fixed income assets worth
£21.6 billion. M&GPrudential's debt portfolio reduced by
£12.1 billion following the transfer of fixed income assets to
Rothesay Life as part of the reinsurance agreement announced in
March 2018. Credit risk arising from a further £64.3 billion
of fixed income assets is borne largely by the with-profits fund,
to which the shareholder is not exposed directly although under
extreme circumstances shareholder support may be required if the
fund is unable to meet payments as they fall due.
Credit risk also arises from the debt portfolio in the Asia
business, the value of which was £45.8 billion at 31 December
2018. The majority (68 per cent) of the portfolio is in unit-linked
and with-profits funds and so exposure of the shareholder to this
component is minimal. The remaining 32 per cent of the debt
portfolio is held to back the shareholder business.
In the general account of the Jackson business £41.6 billion
of fixed income assets are held to support shareholder liabilities
including those from our fixed annuities, fixed index annuities and
life insurance products. Jackson's general account portfolio
increased by circa £4 billion due to the John Hancock
acquisition.
The shareholder-owned debt and loan portfolio of the Group's other
operations was £2.0 billion as at 31 December
2018.
Further details of the composition and quality of our debt
portfolio, and exposure to loans, can be found in the IFRS
financial statements.
Group sovereign debt
Prudential also invests in bonds issued by national governments.
This sovereign debt represented 18 per cent or £14.4 billion
of the shareholder debt portfolio as at 31 December 2018 (31
December 2017: 19 per cent or £16.5 billion). 3 per cent of
this was rated AAA and 87 per cent was considered investment grade
(31 December 2017: 90 per cent investment grade).
The particular risks associated with holding sovereign debt are
detailed further in our disclosures on risk factors.
The exposures held by the shareholder-backed business and
with-profits funds in sovereign debt securities at 31 December 2018
are given in note C3.2(f) of the Group's IFRS financial
statements.
Bank debt exposure and counterparty credit risk
Prudential's exposure to banks is a key part of its core investment
business, as well as being important for the hedging and other
activities undertaken to manage its various financial risks. Given
the importance of its relationship with its banks, exposure to the
sector is considered a material risk for the Group.
The exposures held by the shareholder-backed business and
with-profits funds in bank debt securities at 31 December 2018 are
given in note C3.2(f) of the Group's IFRS financial
statements.
The exposure to derivative counterparty and reinsurance
counterparty credit risk is managed using an array of risk
management tools, including a comprehensive system of
limits. Where appropriate, Prudential reduces its
exposure, buys credit protection or uses additional collateral
arrangements to manage its levels of counterparty credit
risk.
At 31 December 2018, shareholder exposures by
rating1 and
sector2 are
shown below:
● 95 per cent of the shareholder
portfolio is investment grade rated. In particular, 66 per cent of
the portfolio is rated A- and above (or equivalent);
and
● 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).
c. Liquidity risk
Prudential's liquidity risk arises from the need to have sufficient
liquid assets to meet policyholder and third-party payments as they
fall due. This incorporates the risk arising from funds composed of
illiquid assets and results from a mismatch between the liquidity
profile of assets and liabilities. Liquidity risk may impact on
market conditions and valuation of assets in a more uncertain way
than for other risks like interest rate or credit risk. It may
arise, for example, where external capital is unavailable at
sustainable cost, increased liquid assets are required to be held
as collateral under derivative transactions or where redemption
requests are made against Prudential external funds.
Prudential has no appetite for liquidity risk, ie for any business
to have insufficient resources to cover its outgoing cash flows, or
for the Group as a whole to not meet cash flow requirements from
its debt obligations under any plausible scenario.
The Group has significant internal sources of liquidity, which are
sufficient to meet all of our expected cash requirements for at
least 12 months from the date the financial statements are
approved, without having to resort to external sources of funding.
The Group has a total of £2.6 billion of undrawn committed
facilities that can be made use of, expiring in 2023. Access to
further liquidity is available through the debt capital markets and
an extensive commercial paper programme in place, and Prudential
has maintained a consistent presence as an issuer in the market for
the past decade.
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;
● Regular stress testing;
● Our contingency plans and identified sources of
liquidity;
● The Group's ability to access the money and debt
capital markets;
● Regular deep dive assessments;
and
● The Group's access to external committed credit
facilities.
6.3 Risks from our products
a. Insurance risk
Insurance risk makes up a significant proportion of Prudential's
overall risk exposure. The profitability of its businesses depends
on a mix of factors, including levels of, and trends in, mortality
(policyholders dying), morbidity (policyholders becoming ill) and
policyholder behaviour (variability in how customers interact with
their policies, including utilisation of withdrawals, take-up of
options and guarantees and persistency, ie lapsing of policies),
and increases in the costs of claims, including the level of
medical expenses increases over and above price inflation (claim
inflation).
The Group has appetite for retaining insurance risks in order to
create shareholder value in the areas where it believes it has
expertise and controls to manage the risk and can support such risk
with its capital and solvency position.
The principal drivers of the Group's insurance risk vary across its
business units. At M&GPrudential, this is predominantly
longevity risk. Across Asia, where a significant volume of health
protection business is written, the most significant insurance
risks are morbidity risk, persistency risk, and medical inflation
risk. In Jackson, policyholder behaviour risk is particularly
material, especially in the take up of options and guarantees on
variable annuity business.
The Group manages longevity risk in various ways. Longevity
reinsurance is a key tool in managing this risk. In March 2018, the
Group's longevity risk exposure was significantly reduced by
reinsuring £12 billion in UK annuity liabilities to Rothesay
Life, pursuant to a Part VII transfer of the majority of these
liabilities expected to be completed by 30 June 2019. Although
Prudential has withdrawn from selling new UK annuity business,
given its significant annuity portfolio the assumptions it makes
about future rates of improvement in mortality rates remain key to
the measurement of its insurance liabilities and to its assessment
of any reinsurance transactions. Prudential continues to conduct
research into longevity risk using both experience from its annuity
portfolio and industry data. Although the general consensus in
recent years is that people are living longer, the rate of increase
has slowed in recent years, and there is considerable volatility in
year-on-year longevity experience, which is why it needs expert
judgement in setting its longevity basis.
Prudential's morbidity risk is mitigated by appropriate
underwriting when policies are issued and claims are received. Our
morbidity assumptions reflect our recent experience and expectation
of future trends for each relevant line of business.
In Asia, Prudential writes significant volumes of health protection
business, and so a key assumption is the rate of medical inflation,
which is often in excess of general price inflation. There is a
risk that the expenses of medical treatment increase more than
expected, so the medical claim cost passed on to Prudential is
higher than anticipated. Medical expense inflation risk is best
mitigated by retaining the right to reprice our products each year
and by having suitable overall claim limits within its policies,
either limits per type of claim or in total across a
policy.
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 assumption. Persistency risk is managed by
appropriate training and sales processes 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.
Prudential's insurance risks are managed and mitigated using the
following:
● The Group's insurance and underwriting risk
policies;
● The risk appetite statements, limits and
triggers;
● Using longevity, morbidity and persistency
assumptions that reflect recent experience and expectation of
future trends, and industry data and expert judgement where
appropriate;
● Using reinsurance to mitigate longevity and
morbidity risks;
● Ensuring appropriate medical underwriting when
policies are issued and appropriate claims management practices
when claims are received in order to mitigate morbidity
risk;
● Maintaining the quality of sales processes and
using initiatives to increase customer retention in order to
mitigate persistency risk;
● Using product repricing and other claims
management initiatives in order to mitigate medical expense
inflation risk; and
● Regular deep dive assessments.
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.
Other significant change initiatives are occurring across the Group
that increase the likelihood and potential impact of risks
associated with:
● Complex dependencies between multiple programmes
spanning different businesses;
● The organisational ability to absorb change being
exceeded while maintaining a stable and robust control environment
;
● Unrealised business objectives/benefits;
and
● Failures in programme and/or project design,
execution or transition into business as usual.
b. Non-financial risks
In the course of doing business, the Group is exposed to
non-financial risks arising from its operations, the business
environment and its strategy. The main risks across these
areas are detailed below.
Operational risks
Prudential defines operational risk as the risk of loss (or
unintended gain or profit) arising from inadequate or failed
internal processes, personnel or systems, or from external events.
This includes employee error, model error, system failures, fraud
or some other event which disrupts business processes or has a
detrimental impact to customers. Processes are established for
activities across the scope of our business, including operational
activity, regulatory compliance, and those supporting
environmental, social and governance (ESG) activities more broadly,
any of which can expose us to operational risks. A large volume of
complex transactions are processed by the Group across a number of
diverse products, and are subject to a high number of varying
legal, regulatory and tax regimes. Prudential has no appetite for
material losses (direct or indirect) suffered as a result of
failing to develop, implement or monitor appropriate controls to
manage operational risks.
The Group's outsourcing and third-party relationships require
distinct oversight and risk management processes. A number of
important third-party relationships exist which provide the
distribution and processing of Prudential's products, both as
market counterparties and as outsourcing partners.
M&GPrudential outsources several operations, including a
significant part of its back office, customer-facing functions and
a number of IT functions. In Asia, the Group continues to expand
its strategic partnerships and renew bancassurance arrangements.
These third-party arrangements support Prudential in providing a
high level and cost-effective service to our customers, but they
also make us reliant on the operational performance of our
outsourcing partners.
The Group's requirements for the management of material outsourcing
arrangements, which are in accordance with relevant applicable
regulations, are included through its well-established Group-wide
third-party supply policy. Third-party management is also included
in embedded in the Group-wide framework and risk management for
operational risk (see further, below). Third-party management forms
part of the Group's Operational Risk categorisations and a defined
qualitative risk appetite statement, limits and triggers are in
place.
The performance of the Group's core business activities places
reliance on the IT infrastructure that supports day-to-day
transaction processing and administration. The IT environment must
also be secure and an increasing cyber risk threat needs to be
addressed as the Group's digital footprint increases and the
sophistication of cyber threats continue to evolve - see separate
information security risk sub-section below. The risk that
Prudential's IT infrastructure does not meet these requirements is
a key area of focus for the Group, particularly the risk that
legacy infrastructure supporting core activities/processes affects
business continuity or impacts on business growth.
Operational challenges also exist in keeping pace with regulatory
changes This requires implementing processes to ensure we are, and
remain, compliant on an ongoing basis, including regular monitoring
and reporting. The high rate of global regulatory change, in an
already complex regulatory landscape, increases the risk of
non-compliance due to a failure to identify, interpret correctly,
implement and/or monitor regulatory compliance. The change in
Group-wide supervisor, and the supervisory framework, to which
Prudential plc will be subject to after the demerger of
M&GPrudential, means that additional processes, or changes to
existing ones, may be required to ensure ongoing compliance. See
the 'Global regulatory and political risk' section above.
Legislative developments over recent years, together with enhanced
regulatory oversight and increased capability to issue sanctions,
have resulted in a complex regulatory environment that may lead to
breaches of varying magnitude if the Group's business-as-usual
operations are not compliant. As well as prudential regulation, the
Group focuses on conduct regulation, including those related to
sales practice and anti-money laundering, bribery and corruption.
There is a particular focus on regulations related to the latter in
newer/emerging markets.
Group-wide framework and risk management for operational
risk
The risks detailed above form key elements of the Group's
operational risk profile. In order to identify, assess, manage,
control and report effectively on all operational risks across the
business, a Group-wide operational risk framework is in place. The
key components of the framework are:
● Application of a risk and control assessment (RCA)
process, where operational risk exposures are identified and
assessed as part of a periodical cycle. The RCA process considers a
range of internal and external factors, including an assessment of
the control environment, to determine the business's most
significant risk exposures on a prospective
basis;
● An internal incident management process, which
identifies, quantifies and monitors remediation conducted through
root cause analysis and application of action plans for risk events
that have occurred across the business;
● A scenario analysis process for the quantification
of extreme, yet plausible manifestations of key operational risks
across the business on a forward-looking basis. This is carried out
at least annually and supports external and internal capital
requirements as well as informing risk oversight activity across
the business; and
● An operational risk appetite framework that
articulates the level of operational risk exposure the business is
willing to tolerate, covering all operational risk categories, and
sets out escalation processes for breaches of
appetite.
Outputs from these processes and activities performed by individual
business units are monitored by the Group Risk function, which
provides an aggregated view of the risk profile across the
business to the Group Risk Committee and Board.
These core framework components are embedded across the Group via
the Group Operational Risk Policy and Standards documents, which
set out the key principles and minimum standards for the management
of operational risk across the Group.
The Group Operational Risk Policy, standards and operational risk
appetite framework sit alongside other risk policies and standards
that individually engage with key operational risks, including
outsourcing and third-party supply, business continuity, technology
and data, operations processes and extent of
transformation.
These policies and standards include subject matter expert-led
processes that are designed to identify, assess, manage and control
operational risks, including the application of:
● A transformation risk framework that assesses,
manages and reports on the end-to-end transformation lifecycle,
project prioritisation and the risks, interdependencies and
possible conflicts arising from a large portfolio of transformation
activities;
● Internal and external review of cyber security
capability and defences;
● Regular updating and testing of elements of
disaster-recovery plans and the Critical Incident Procedure
process;
● Group and business unit-level compliance oversight
and testing in respect of adherence with in-force
regulations;
● Regulatory change teams in place to assist the
business in proactively adapting and complying with regulatory
developments;
● A framework in place for emerging risk
identification and analysis in order to capture, monitor and allow
us to prepare for operational risks that may crystallise beyond the
short-term horizon;
● Corporate insurance programmes to limit the
financial impact of operational risks; and
● Reviews of key operational risks and challenges
within Group and business unit business plans.
These activities are fundamental in maintaining an effective system
of internal control, and as such outputs from these also inform
core RCA, incident management and scenario analysis processes and
reporting on operational risk. Furthermore, they also ensure that
operational risk considerations are embedded in key business
decision-making, including material business approvals and in
setting and challenging the Group's strategy.
Business resilience
Business resilience is at the core of the Group's well embedded
Business Continuity Management (BCM) programme, with BCM being one
of a number of activities undertaken by the Group Security function
that protect our key stakeholders.
Prudential operates a BCM programme and framework that is linked
with its business activities, which considers key areas including
business impact analyses, risk assessments, incident management
plans, disaster recovery plans, and the exercising and execution of
these plans. The programme is designed to achieve a business
continuity capability that meets evolving business needs and is
appropriate to the size, complexity and nature of the Group's
operations, with ongoing proactive maintenance and improvements to
resilience against the disruption of the Group's ability to meet
its key objectives and protect its brand and reputation. The BCM
programme is supported by Group-wide governance policies and
procedures and is based on industry standards that meet legal and
regulatory obligations.
Business disruption risks are monitored by the Group Security
function, with reporting of key operational effectiveness metrics
and updates on specific activities being reported to the Group Risk
Committee where required and discussed by cross-functional working
groups.
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.
Recent developments in data protection worldwide (such as GDPR
that came into force in May 2018) increases the financial and
reputational implications for Prudential of a breach of
its (or third-party suppliers') IT systems. As well as data
protection, increasingly stakeholder expectations are that
companies and organisations use personal information transparently
and appropriately. Given this, both information security and
data privacy are key risks for the Group. As well as preventative
risk management, it is fundamental that robust critical recovery
systems are in place in the event of a successful attack on the
Group's infrastructure, breach of information security or failure
of its systems to retain its customer relationships and trusted
reputation.
In 2018, the organisational structure and governance model for
cyber security management was revised with the appointment of a
Group Chief Information Security Officer, and a repositioning of
the function to allow increased focus on execution. This
organisational change will increase the Group's efficiency and
agility in responding to cyber security-related incidents, and will
facilitate increased collaboration between business units and
leverages their respective strengths in delivering the Group-wide
Information Security Programme.
The objectives of the programme include achieving consistency in
the execution of security disciplines across the Group and
improving visibility across the Group's businesses; deployment of
automation to detect and address threats; and achieving security by
design by aligning subject matter expertise to the Group's digital
and business initiatives to embed security controls across
platforms and ecosystems.
The Board receives periodic updates on information security risk
management throughout the year. Group functions work with the
business units to address risks locally within the national and
regional context of each business following the strategic direction
of the Group-wide information security function.
Notes
1
Based on hierarchy of Standard and Poor's, Moody's and Fitch, where
available and if unavailable, other rating agencies or internal
ratings have been used.
2
Source of segmentation: Bloomberg Sector, Bloomberg Group and
Merrill Lynch. Anything that cannot be identified from the three
sources noted is classified as other. Excludes debt securities from
other operations.
Corporate governance
The Board confirms that it has complied with all the principles and
provisions set out in the Hong Kong Code on Corporate Governance
Practices (the HK Code) throughout the accounting period with the
following exception. With respect to Code Provision B.1.2(d) of the
HK Code, the responsibilities of the Remuneration
Committee do not include making recommendations to the
Board on the remuneration of non-executive directors. In
line with the principles of the UK Code, fees for Non-executive
Directors are determined by the Board.
The directors also confirm that the financial results contained in
this document have been reviewed by the Group Audit
Committee.
The company confirms that it has adopted a code of conduct
regarding securities transactions by directors on terms no less
exacting than required by the Hong Kong Listing Rules and that the
directors of the Company have complied with this code of conduct
throughout the year.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: 13
March 2019
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PRUDENTIAL
PUBLIC LIMITED COMPANY
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By: /s/ Mark
FitzPatrick
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Mark
FitzPatrick
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Chief
Financial Officer
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