TIDMPRU
RNS Number : 9471I
Prudential PLC
14 August 2019
NEWS RELEASE
14 August 2019
PRUDENTIAL PLC HALF YEAR 2019 RESULTS
PRUDENTIAL CONTINUES TO DELIVER ASIA-LED GROWTH AND PREPARES FOR
DEMERGER IN Q4 2019
Performance highlights on a constant (and actual) exchange rate
basis
-- Group operating profit(1) from continuing operations
(excluding M&GPrudential) of GBP2,024 million, up 14 per
cent(2) (21 per cent)
-- Asia operating profit(1) up 14 per cent(2) (up 18 per cent);
new business profit(3) up 10 per cent(2) (up 15 per cent);
operating free surplus generation(4) up 13 per cent(2) (up 16 per
cent)
-- US operating profit(1) up 14 per cent(2) (up 21 per cent);
RBC capital ratio in excess of 400 per cent
-- 2019 first interim ordinary dividend increased by 5 per cent
to 16.45 pence per share in line with our existing dividend
policy
-- Group Solvency II surplus(5,6) estimated at GBP16.7 billion,
equivalent to a cover ratio of 222 per cent
-- Demerger expected to be completed in fourth quarter of 2019,
as a result of which M&GPrudential has been classified as
discontinued operations.
Mike Wells, Group Chief Executive, said: "We have delivered a
positive performance in the first half of 2019. The Group's
operating profit(1) from continuing operations increased by 14 per
cent(2) . Our focus on key areas of operational improvement and
continued investment has enabled us to drive growth and position
ourselves to continue to grow profitably. At the same time, we
expect to complete the demerger of M&GPrudential in the fourth
quarter of 2019, and preparations are complete for Prudential plc's
move to Group-wide supervision by the Hong Kong Insurance
Authority. We believe that the demerger will enable both businesses
to maximise their potential performance. Both will have experienced
management teams better able to focus on their strategic priorities
and distinct investment prospects, as well as improved allocation
of resources and greater flexibility in execution.
"The Group's performance has again been driven by our Asian
business, where we have delivered double-digit growth across our
key metrics of operating profit(1) , up 14 per cent(2) , new
business profit(3) and APE sales(12) , both up 10 per cent(2) , and
operating free surplus generation(4) , up 13 per cent(2) . Total
assets under management at our Asian asset manager, Eastspring,
grew 12 per cent(7) to GBP169.5 billion, with positive external net
flows of GBP3.1 billion(8) (2018: net outflows of GBP0.9 billion on
an actual exchange rate basis). Our multi-channel strategy across
life insurance and asset management ensures that we provide
high-quality products delivering distinctive value-added services
to our broad customer base. We are benefiting from growing demand
for health, protection and savings across the region and we are
constantly improving our access to this demand by innovating in new
value-added services, distribution and digitalisation of the
customer journey. We recently passed another key milestone through
the first launch of our new holistic health management app, Pulse
by Prudential, in Malaysia, which will be followed by a wider
roll-out across the region.
"In the US, Jackson's operating profit(1) increased by 14 per
cent(2) , largely due to lower amortisation of deferred acquisition
costs resulting from the strong equity market performance in the
period. With greater clarity in key consumer regulations emerging,
we intend to accelerate our process of diversifying our business,
while retaining our longstanding discipline in terms of risk
management. We have a leading position in the retirement income
industry, with strong long-term economics, and our operating
platform has industry-leading cost advantages and is highly digital
and scalable. We are in the process of driving a more diversified
product mix and developing relationships with new distributors. We
are actively exploring options to accelerate this
diversification.
"M&GPrudential is approaching life as a fully independent
business, and its Board and management are in place. The business
is well positioned to capture the opportunities created by shifting
demographics and the search for yield, through its differentiated,
high-value savings and investment solutions. While operating
profit(1) was lower at GBP687 million (2018: GBP736 million),
PruFund net inflows of GBP3.5 billion contributed to 6 per cent
growth in total assets under management(9) to GBP341.1 billion.
"Our focus on structural growth opportunities in terms of
geographies, products and distribution platforms and our diligent
approach to execution mean that we are well placed to continue to
deliver important benefits for our customers and profitable growth
for our shareholders."
Half year Half year Change on Change on
Summary financials 2019 GBPm 2018 GBPm AER basis CER basis
--------------------------------------------------------------------- ---------- ----------- ---------- ----------
Operating profit from continuing operations(1) 2,024 1,669 21% 14%
Operating profit from discontinued operations(1) 687 736 (7)% (7)%
Operating free surplus generated from continuing operations(4) 1,502 1,173 28% 22%
Life new business profit from continuing operations(3) 1,643 1,588 3% (2)%
Life new business profit from discontinued operations(3) 152 179 (15)% (15)%
IFRS profit after tax (total continuing and discontinued
operations)(10) 1,540 1,356 14% 7%
Net cash remittances from business units
(both continuing and discontinued operations)(11) 1,212 1,111 9% -
30 June 31 December Change on
2019 2018 AER basis
--------------------------------------------------------------------- ---------- ----------- ----------
IFRS shareholders' funds per share 757p 665p 14%
EEV shareholders' funds per share 2,055p 1,920p 7%
Group Solvency II cover ratio(5,6) 222% 232% (10)pp
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 period in note B1.1 of the IFRS financial statements.
Continuing operations relate to Asia, US and central operations
(including Africa). It excludes M&GPrudential which met the
criteria to be classified as held for distribution at 30 June 2019
and hence is shown as discontinued. M&GPrudential operating
profit is stated after restructuring costs.
2 Period-on-period percentage increases are stated on a constant
exchange rate basis unless otherwise stated.
3 New business profit, on a post-tax basis, on business sold in
the period, calculated in accordance with EEV Principles.
4 For insurance operations, operating free surplus generated
represents amounts maturing from the in-force business during the
period less investment in new business and excludes non-operating
items. For asset management businesses, it equates to post-tax
operating profit for the period. Restructuring costs are presented
separately from the underlying business unit amount. The amount is
for continuing operations only (ie M&GPrudential is excluded).
Further information is set out in note 9 of the EEV basis
results.
5 The Group shareholder capital position covers continuing and
discontinued operations and excludes the contribution to own funds
and the Solvency Capital Requirement from ring-fenced with-profits
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.
6 Estimated before allowing for first interim ordinary dividend
(31 December 2018: second interim ordinary dividend).
7 Growth from 31 December 2018.
8 Excluding money market funds.
9 Represents M&GPrudential asset management external funds
under management and internal funds included on the
M&GPrudential long-term insurance business balance sheet.
10 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, which in
half year 2019 were driven by those arising in the US, results
attaching to disposal of businesses and corporate transactions,
amortisation of acquisition accounting adjustments and the total
tax charge for the period.
11 Net cash remitted by business units are included in the
Holding company cash flow, which is disclosed in detail in note
I(iii) of the Additional financial information. This comprises
dividends and other transfers from business units that are
reflective of emerging earnings and capital generation.
12 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 II of the Additional financial information for
further explanation.
Contact:
Media Investors/Analysts
Jonathan Oliver +44 (0)20 3977 3500 Patrick Bowes +44 (0)20 3977 9702
Tom Willetts +44 (0)20 3977 9760 Richard Gradidge +44 (0)20 3977 4014
Addy Frederick +44 (0)20 3977 9399 William Elderkin +44 (0)20 3977 9215
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 issued by the
European Insurance CFO Forum in 2016. 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.
Period-on-period percentage increases are stated on a constant
exchange rate basis unless otherwise stated. Constant exchange
rates are calculated by translating prior period 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. EEV and adjusted IFRS operating profit based on longer-term
investment returns are stated after excluding the effect of
short-term fluctuations in investment returns against long-term
assumptions, which for IFRS in half year 2019 were driven by those
arising in the US, and gains/losses arising on the disposal of
businesses and other corporate transactions including costs
associated with the demerger of M&GPrudential. 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. The amounts shown are for continuing
operations only (being Asia, US and central operations including
Africa but excluding M&GPrudential) unless otherwise
stated.
c. Total number of Prudential plc shares in issue as at 30 June 2019 was 2,599,796,199.
d. A presentation for analysts and investors will be held today
at 11.30am (UK time) / 6.30pm (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/5d2f0850379ece0b00d7f019/lwin
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) / 6.00pm (Hong Kong
time).
Dial-in: 020 3936 2999 (UK Local Call) / +44 20 3936 2999
(International) / 0800 640 6441 (Freephone UK), Participant access
code: 301853. 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: 830013). This will
be available from approximately 3.00pm (UK time) / 10.00pm (Hong
Kong time) on 14 August 2019 until 11.59pm (UK time) on 28 August
2019 / 6.59am (Hong Kong time) on 29 August 2019.
e. 2019 First Interim Dividend
Ex-dividend date 22 August 2019 (UK, Hong Kong and Singapore)
Record date 23 August 2019
Payment of dividend 26 September 2019 (UK and Hong Kong)
On or about 03 October 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, with GBP717 billion of assets under management (as at 30
June 2019). 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. UK and Europe
Throughout this results announcement we use M&GPrudential to
refer to the Group's discontinued UK and Europe operations.
M&GPrudential has announced that it will change its name in
preparation for listing to M&G plc, providing a single
corporate identity while retaining its two customer-facing brands
of Prudential and M&G Investments.
h. 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, operating environment, 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, including without limitation those
referring to the demerger and the expected timing of the demerger,
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 continuance of 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 actual or anticipated
political, legal and economic ramifications of the UK's withdrawal
from the European Union; the impact of continuing application of
Global Systemically Important Insurer (or 'G-SII') policy measures
on Prudential; 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 the Prudential 2019 Half Year Financial Report.
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.
Group Chief Executive's report
I am pleased with our performance during the first half of the
year. By focusing on key areas of sustained operational improvement
and continued investment we have both delivered growth over the
half year and positioned ourselves to deliver further growth,
despite an uncertain geopolitical and macroeconomic outlook.
We have passed a number of important milestones on our way to
demerging M&GPrudential from the Group, which will result in
two separately listed companies. We believe that the demerger will
enable both businesses to maximise their potential performance.
Both will have experienced management teams better able to focus on
their strategic priorities and distinct investment prospects, as
well as improved allocation of resources and greater flexibility in
execution. We expect to complete the demerger in the fourth quarter
of 2019. We are also preparing the Prudential plc Group for life
beyond the demerger, and intend to enhance our effectiveness,
efficiency and alignment with stakeholders. Throughout the process
of preparing for demerger, I am pleased to report that all of our
businesses and people have worked hard on delivering value and
service for our customers and this, in turn, has contributed to our
performance.
In Asia, we are continuing to grow at pace, while benefiting
from high-quality recurring income. We continue to invest in Asia.
Over the 18 month period since the start of 2018 this has included
the acquisition, in 2018, of our initial 65 per cent interest in
TMB Asset Management Co., Ltd. in Thailand for GBP197 million(1) ,
the renewal of our regional strategic bancassurance alliance with
UOB for an initial fee of GBP662 million(9) (GBP230 million(9) of
which was paid in the first half of 2019) and a total investment
over this period of GBP738 million(1) of free surplus in new
business. In the US, we are diversifying the product mix and
building new distributor relationships.
Across the Group, we are well placed to continue fulfilling our
purpose of helping people plan for the future with confidence by
removing the uncertainty from life's big financial events. In Asia,
we are focused on serving the health, protection and savings needs
of the region's rapidly growing and increasingly affluent
population, and we have intensified our drive to strengthen and
deepen our operational capabilities through innovative product
design, broadened distribution, including via non-traditional
partners, and differentiated value-added services for our
customers. In the US, we are continuing to target the growing asset
pool in the world's largest retirement market, while
M&GPrudential is addressing the compelling retirement and
savings opportunity in the UK and internationally.
Operating environment
This positive performance has been achieved against the
background of a geopolitical and macroeconomic environment that
remains uncertain. During the first half of 2019, major equity
markets performed strongly, notably with the S&P 500 index up
17 per cent and the MSCI Asia excluding Japan index up 9 per cent,
while in the second half to date they have been more volatile.
Economic growth moderated but was still respectable in the US
and China, with GDP(2) up 1.3 per cent and 3.0 per cent in the
period, respectively, while Europe was subdued and the UK was
affected by continued Brexit uncertainty. Longer-term yields fell
in the US, the UK and in Asia markets and credit conditions
remained benign.
Sterling weakened moderately compared with most of the
currencies in our major international markets over the first half
of 2019, and has weakened further in the second half. To aid
comparison of underlying progress, we continue to express and
comment on the performance trends of our international businesses
on a constant exchange rate basis.
Financial performance
Our adjusted IFRS operating profit based on longer-term
investment returns(3) (operating profit) from continuing operations
- that is, excluding M&GPrudential - was 14 per cent(4) higher
at GBP2,024 million (21 per cent higher on an actual exchange rate
basis). APE sales(5) from continuing operations were up 5 per
cent(4) (10 per cent on an actual exchange rate basis), while new
business profit(6) from continuing operations was 2 per cent(4)
lower at GBP1,643 million (3 per cent higher on an actual exchange
rate basis), with Asia up 10 per cent(4) . EEV basis operating
profit(6) from continuing operations increased 1 per cent(4) (7 per
cent on an actual exchange rate basis) to GBP2,641 million.
Operating free surplus generation(7) from continuing operations,
our preferred measure of cash generation, from our life and asset
management businesses increased by 22 per cent(4) to GBP1,502
million (28 per cent on an actual exchange rate basis), including a
GBP274 million benefit following the integration of the recently
acquired US John Hancock business, and after financing GBP516
million (2018: GBP461 million) of new business investment.
Our performance was led by our Asia business, which delivered
double-digit growth in operating profit (up 14 per cent(4) ), new
business profit (up 10 per cent(4) ) and operating free surplus
generation (up 13 per cent(4) ). In the US, Jackson's operating
profit increased by 14 per cent(4) , while new business profit
decreased by 30 per cent(4) , reflecting the adverse effect of
lower US interest rates and lower sales of variable annuities
during the period. Despite challenging external macroeconomic and
political conditions, M&GPrudential's total funds under
management(8) grew by 6 per cent in the six months to 30 June 2019
to GBP341.1 billion (31 December 2018: GBP321.2 billion),
reflecting favourable investment markets.
Over the period, IFRS shareholders' funds increased by 14 per
cent to GBP19.7 billion (31 December 2018: GBP17.2 billion),
reflecting profit after tax of GBP1,540 million (2018: GBP1,356
million on an actual exchange rate basis). Other movements in
shareholders' funds include positive net unrealised valuation
movements on US investments classified as available-for-sale of
GBP1,726 million, offset by dividend payments to shareholders of
GBP870 million. EEV shareholders' funds increased by 7 per cent to
GBP53.4 billion (31 December 2018: GBP49.8 billion), equivalent to
2,055 pence per share(6) .
Our Group Solvency II surplus(10,11) is estimated at GBP16.7
billion, equivalent to a cover ratio of 222 per cent (31 December
2018: GBP17.2 billion; 232 per cent).
We have increased our first interim ordinary dividend by 5 per
cent to 16.45 pence per share, in line with our existing dividend
policy.
Asia
Our broad portfolio of life insurance and asset management
businesses, high-quality products with distinctive value-added
services and multi-channel strategy ensured that we continue to
benefit from growing demand for the health, protection and savings
solutions we provide. Our APE sales(5) in Asia reached GBP1,978
million in the first half, up 10 per cent(4) (up 14 per cent on an
actual exchange rate basis), leading to growth in new business
profit of 10 per cent(4) to GBP1,295 million (up 15 per cent on an
actual exchange rate basis).
Our multi-platform distribution in the region, with strong
agency forces and bank partnerships, and growing digital channels,
is continuing to drive our performance. We have continued to grow
on a broad base in the region, with APE sales(5) growth in 11
markets in the first half. APE sales(5) in Hong Kong increased by 5
per cent(4) to GBP830 million, in Singapore by 8 per cent(4) to
GBP231 million and in Malaysia by 3 per cent(4) to GBP122 million.
In Hong Kong, 63 per cent of our sales came from visitors from
Mainland China.
We are also seeing a stabilisation in sales in Indonesia
following the refresh of our product line and action in agency
force productivity, with a strong performance in the second quarter
leading to overall sales growth of 4 per cent(4) . We have formed a
strategic partnership with PT Visionet International (OVO), a
leading digital payments, rewards and financial services platform
in Indonesia, which we expect will enhance our reach in one of
Asia's largest insurance markets, with a population that is
increasingly embracing digital tools.
Our sales through our joint venture, CITIC-Prudential, are up 45
per cent(4) in the half year to GBP270 million, and we have
received approval to open our 20(th) branch in Mainland China, in
Shaanxi province. Through our joint venture, we now have a
comprehensive network of 231 sales offices in 89 cities, with
access to regions accounting for 80 per cent of Mainland China's
GDP.
Our Asian asset manager, Eastspring, has grown operating profit
by 12 per cent, supported by disciplined expense management and the
acquisition of TMB Asset Management in the second half of 2018. Its
assets under management grew to GBP169.5 billion, with positive
external net flows in the first half of 2019 of GBP3.1 billion,
excluding money market funds (2018: net outflows of GBP0.9 billion
on an actual exchange rate basis), driven by strong retail bond
flows in Thailand and equity flows in Korean pensions.
We are continuing to develop our distribution reach in Asia,
including through the renewal of our successful regional strategic
bancassurance alliance with United Overseas Bank Limited, through
which APE sales(5) increased by 27 per cent(4) in the first half.
To ensure that we provide our solutions as widely as possible
across the region, we have also been actively tailoring our
propositions to suit digital sales channels. In the first half of
2019 we have activated our partnership with O bank, our digital
bank partner in Taiwan, and will look to build on this success
through UOB's new digital bank, TMRW.
We are continuing to build partnerships in Asia in a number of
areas. We are committed to improving access to healthcare, and have
launched Pulse by Prudential, a digital health app that is the
first of its kind to offer holistic health management to consumers.
The health technology and services company Tictrac has become one
of our partners in Pulse, joining Babylon Health as part of our
health ecosystem. Earlier this month, we also announced
partnerships with Halodoc, Indonesia's homegrown healthcare
start-up, to help deliver digital solutions that will meet a
critical need for affordable and accessible healthcare, and with
MyDoc, which offers consumers access to health services on their
mobile phones. Following its launch in Singapore in 2018, we
expanded PRUworks, our digital ecosystem designed to help small and
medium-sized enterprises (SMEs) grow their businesses, to
Indonesia. We have also entered into an agreement with specialist
technology provider H lthTech, whose cloud-computing technology
will be integrated into PRUworks and will facilitate the platform
in offering one-stop access to insurance products, employee
benefits and business services to small and medium-sized
enterprises across Asia. At the same time, we are making good
progress with our tailored offering for high net worth clients in
Singapore, Opus by Prudential, which is designed to address the
unfulfilled wealth protection needs of this fast-growing sector.
All of these initiatives enable us to offer improved services to
more customers.
US
Our approach in this market has been to proceed with discipline.
Consumer regulation in the US, while now starting to become
clearer, has been uncertain for some time, and has resulted in an
industry-wide slowdown in variable annuity sales. APE sales(5) in
the US were down 4 per cent(4) at GBP831 million. Importantly,
consistent with our intent to diversify our US product mix,
fixed-index annuity APE sales(5) , at GBP93 million, rose as a
share of APE sales(5) from 2 per cent for the first six months of
2018 to 11 per cent in 2019. In addition, we successfully
integrated last year's John Hancock paid-up annuities bolt-on
transaction, which increased diversification and contributed
materially to the US statutory capital generation in the
period.
Jackson has a strong record of product innovation, exceptional
distribution relationships, trust and credibility. During the
period we added to our products in the fixed-annuity space, which
we expect to contribute to sales later in the year. We have a
leading position in the annuities industry, with strong long-term
economics, and our operating platform has industry-leading cost
advantages and is highly digital and scalable. We are in the
process of driving a more diversified product mix and developing
relationships with new distributors. We are actively exploring
options to support the acceleration of this diversification, for
example through reinsurance and third-party financing.
Africa
We have also continued to expand our presence in Africa, one of
the world's most dynamic and promising regions. In July, we
completed our acquisition of a 51 per cent stake in the leading
life insurer, Group Beneficial, operating in West and Central
Africa, enabling us to enter Cameroon, Côte d'Ivoire and Togo.
Combined with our launch over the last five years of businesses in
Ghana, Kenya, Uganda, Zambia and Nigeria, this latest step means we
now operate in markets in Africa with a total population of almost
400 million. In the first half of 2019, before this acquisition,
our APE sales(5) in the region rose by 73 per cent(4) to GBP30
million.
Demerger of M&GPrudential (reported as discontinued
operations)
We expect to complete the demerger of M&GPrudential as
planned. Preparations are complete for the Hong Kong Insurance
Authority to be the Group-wide supervisor of the Prudential plc
Group, and M&GPrudential's Board is in place. We expect to
complete the demerger in the fourth quarter of 2019, subject to
shareholder approval. At the same time, M&GPrudential is
strongly focused on its internal merger and transformation
programme and preparing for entry to the market as a separately
listed independent company. It has also announced that it will
change its name in preparation for listing to M&G plc,
providing a single corporate identity while retaining its two
customer-facing brands of Prudential and M&G Investments.
M&GPrudential is an asset manager and asset owner, operating
in attractive, growing markets underpinned by long-term favourable
trends, in particular ageing populations and the shift of
responsibility for retirement to the private sector. Total funds
under management(8) grew by 6 per cent in the period to GBP341.1
billion, including PruFund positive net flows of GBP3.5 billion,
leading to total PruFund assets under management of GBP49.6 billion
as at 30 June 2019. M&G's external assets under management were
up 4 per cent in the first half of 2019 to GBP153.0 billion, with
market impacts more than offsetting net outflows in the period. The
slowdown in industry-defined benefit pension transfers, compared
with the elevated volumes in the prior year, contributed to
reductions in APE sales(5) of 8 per cent and new business profit of
15 per cent in the period. M&GPrudential's savings and asset
management operations are well positioned in with-profits savings,
retail asset management and institutional asset management, while
its annuity and other insurance operations have a large customer
base with long-duration products.
Outlook
We believe our performance for the first half of the year and
our continuing operational improvements leave us well positioned as
we move forward. We are innovating and investing to grow the range
of products and solutions we can offer our clients.
The long-term underlying demographic and economic trends in Asia
remain positive and strong, notwithstanding short-term macro
volatility, and we expect our broad portfolio to continue to
expand. We are carefully monitoring developments in Hong Kong. The
strategic focus of the Asia business on recurring premium health
and protection businesses, reflected in IFRS earnings through
growth in insurance margin, is expected to continue.
In the US, we have recently entered a period of greater
regulatory clarity than has been the case in recent years, and
expect a process of normalisation in the sales environment for our
products. At the same time, we are seeing significant shifts across
the market towards fixed and fixed-index annuities. We will
continue to follow an active portfolio approach to our business and
focus on execution and operational delivery. US IFRS earnings are
expected to remain sensitive at an operating level to the impact of
equity markets on separate account balances, which drive fee
revenues, and on the acceleration and deceleration of deferred
acquisition costs (DAC) amortisation.
Interest rates have declined in 2019, and if this trend
continues it could influence the level of income from our
interest-bearing instruments. Equity market and interest movements
will also impact shareholders' returns through hedging positions
held for risk management purposes, the valuations of bonds held and
changes to associated liability valuations, for which there is a
degree of accounting mismatch with the assets held to support
them.
The strength of our opportunities and our diversification in
terms of geographies, products and distribution platforms leave us
well positioned to deal with the protectionist developments and
political uncertainties currently affecting the global economy and
driving volatility in markets.
We expect to complete the demerger of M&GPrudential in the
fourth quarter of 2019. We have refined our strategy as Prudential
plc to be Asia-led, focused on structural growth markets, aiming
for our US business to deliver enhanced cash returns through the
accelerated diversification of its book and we are actively
exploring options to achieve this. I am confident that, while
managing risks conservatively, we will continue to deliver
important benefits for our customers and profitable growth for our
shareholders.
Notes
1 On an actual exchange rate basis.
2 Source: OECD Quarterly National Accounts, Quarterly Growth
Rates of real GDP, change on previous quarter, combined for Q1 and
Q2 2019.
3 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.
4 Period-on-period percentage increases are stated on a constant
exchange rate basis unless otherwise stated.
5 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
II of the Additional financial information for further
explanation.
6 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 the Additional EEV financial information
for further explanation.
7 For insurance operations, operating free surplus generated
represents amounts maturing from the in-force business during the
period less investment in new business and excludes non-operating
items. For asset management businesses, it equates to post-tax
operating profit for the period. Restructuring costs are presented
separately from the underlying business unit amount. Amount is for
continuing operations only (ie M&GPrudential is excluded).
Further information is set out in note 9 of the EEV basis
results.
8 Represents M&GPrudential asset management external funds
under management and internal funds included on the
M&GPrudential long-term insurance business balance sheet.
9 Translated using a Singapore dollar: Sterling foreign exchange rate of 1.7360.
10 The Group shareholder capital position covers continuing and
discontinued operations and excludes the contribution to own funds
and the Solvency Capital Requirement from ring-fenced with-profits
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.
11 Estimated before allowing for first interim ordinary dividend
(31 December 2018: second interim ordinary dividend).
Chief Financial Officer's report on the 2019 first half
financial performance
I am pleased to report that Prudential's financial performance
in the first half of 2019 reflects our continued focus on driving
growth across our Asian markets, products and distribution
channels, and the early results of our strategic initiatives to
diversify our US business mix.
In preparation for the intended demerger of M&GPrudential
from Prudential plc, the results presented within my report are
identified as being derived from continuing or discontinued
operations. Continuing operations comprise our Asia, US, Africa and
central operations. Discontinued operations comprise UK and Europe
operations, and are also referred to as M&GPrudential within
this report. Results for the comparative period have been restated
accordingly. Under IFRS, comparative balance sheet amounts are not
re-presented for discontinued operations.
IFRS profit
Actual exchange rate Constant exchange rate
------------------------------------------- ------------------------
Half year Half year Half year
2019 GBPm 2018 GBPm Change % 2018 GBPm Change %
--------------------------------- -------------------- ----------- -------- ------------- ---------
Adjusted IFRS operating profit
based on longer-term
investment returns before tax
(operating profit) from
continuing operations
Asia
Long-term business 1,095 927 18 963 14
Asset management 103 89 16 92 12
--------------------------------- -------------------- ----------- -------- ------------- ---------
Total 1,198 1,016 18 1,055 14
--------------------------------- -------------------- ----------- -------- ------------- ---------
US
Long-term business 1,203 1,001 20 1,064 13
Asset management 12 1 n/a 1 n/a
--------------------------------- -------------------- ----------- -------- ------------- ---------
Total 1,215 1,002 21 1,065 14
--------------------------------- -------------------- ----------- -------- ------------- ---------
Total segment profit from
continuing operations 2,413 2,018 20 2,120 14
--------------------------------- -------------------- ----------- -------- ------------- ---------
Other income and expenditure (366) (329) (11) (331) (11)
--------------------------------- -------------------- ----------- -------- ------------- ---------
Total operating profit based on
longer-term investment returns
before tax and restructuring
costs 2,047 1,689 21 1,789 14
Restructuring costs (23) (20) (15) (20) (15)
--------------------------------- -------------------- ----------- -------- ------------- ---------
Total operating profit based on
longer-term
investment returns before tax
from continuing operations 2,024 1,669 21 1,769 14
--------------------------------- -------------------- ----------- -------- ------------- ---------
Non-operating items:
Short-term fluctuations in
investment returns
on shareholder-backed business (1,124) 9 n/a 8 n/a
Amortisation of acquisition
accounting adjustments (17) (22) 23 (23) 26
Gain (loss) on disposal of
businesses and
corporate transactions 13 (57) n/a (60) n/a
-------------------------------- -------------------- ----------- -------- ------------- ---------
Profit from continuing operations
before tax
attributable to shareholders'
returns 896 1,599 (44) 1,694 (47)
--------------------------------- -------------------- ----------- -------- ------------- ---------
Tax charge attributable to
shareholders' returns (1) (326) 100 (343) 100
--------------------------------- -------------------- ----------- -------- ------------- ---------
Profit for the period from
continuing operations 895 1,273 (30) 1,351 (34)
--------------------------------- -------------------- ----------- -------- ------------- ---------
Profit for the period from
discontinued operations,
net of related tax 645 83 n/a 83 n/a
--------------------------------- -------------------- ----------- -------- ------------- ---------
Profit for the period 1,540 1,356 14 1,434 7
--------------------------------- -------------------- ----------- -------- ------------- ---------
IFRS earnings per share
Actual exchange rate Constant exchange rate
------------------------------------------- ------------------------
Half year Half year Half year
2019 pence 2018 pence Change % 2018 pence Change %
--------------------------------- -------------------- ----------- -------- ------------- ---------
Basic earnings per share based on
operating profit after tax
From continuing operations 65.3 53.7 22 57.0 15
--------------------------------- -------------------- ----------- -------- ------------- ---------
Basic earnings per share based on
total profit after tax
-------------------- ----------- -------------
From continuing operations 34.4 49.5 (31) 52.6 (35)
From discontinued operations 25.0 3.2 681 3.2 681
-------------------- ----------- -------------
59.4 52.7 13 55.8 6
--------------------------------- -------------------- ----------- -------- ------------- ---------
Operating profit from continuing operations in the first half of
2019 increased by 14 per cent (21 per cent on an actual exchange
rate basis) to GBP2,024 million. Profit after tax for the period
from continuing operations was GBP895 million, a decrease of 34 per
cent (30 per cent on an actual exchange rate basis), reflecting
negative short-term fluctuations. Higher equity market levels
resulted in equity hedge losses, which were only partly offset by
movements in associated liabilities, as the full benefit of higher
equity markets was limited by lower long-term interest rates and
accounting mismatch effects.
The profits attributable to M&GPrudential have been
classified as discontinued operations, although operating profit
from continuing operations still includes the total other income
and expenditure that relates to the existing, pre-demerger Group
structure, as well as the profits from our Asia and US businesses.
For example, debt costs are expected to be rebalanced between
continuing operations and discontinued operations from the point of
demerger, but are currently incurred in full in continuing
operations. Total segment profit from continuing operations, which
excludes other income and expenditure, increased by 14 per cent (20
per cent on an actual exchange rate basis).
Segmental commentary
Asia total operating profit of GBP1,198 million was 14 per cent
higher than the previous year (18 per cent on an actual exchange
rate basis). Operating profit from life insurance operations
increased by 14 per cent to GBP1,095 million (18 per cent on an
actual exchange rate basis), reflecting the continued growth of our
in-force book of recurring premium business, with renewal insurance
premiums(1) up 12 per cent reaching GBP7,093 million (17 per cent
on an actual exchange rate basis). Insurance margin was up 14 per
cent, driven by our continued focus on health and protection
business, now contributing to 71 per cent of Asia life insurance
revenues(2) (2018: 70 per cent).
The development of our Asia businesses' operating profit is
broad-based and at increasing scale. Eight of our 12 life markets
reported growth of 10 per cent or above. Operating profit growth
was led by Hong Kong (up 29 per cent to GBP260 million), China JV
(up 28 per cent on a post-tax basis), Vietnam (up 24 per cent), the
Philippines (up 24 per cent), Singapore (up 18 per cent) and
Malaysia (up 10 per cent). Indonesia remains a significant
contributor to Asia's operating profit (GBP200 million), but was 6
per cent lower compared with the prior period, reflecting the
impact of sales declines in the recent past.
Eastspring's operating profit increased by 12 per cent (up 16
per cent on an actual exchange rate basis) to GBP103 million. This
was a result of revenue growth of 5 per cent, driven by the
acquisition of TMB Asset Management in the second half of 2018 and
higher funds under management, with costs increasing at a slower
rate of 2 per cent. Disciplined cost management has led to an
improvement in its cost-income ratio(1) to 51 per cent (2018: 54
per cent on an actual exchange rate basis).
Eastspring's external assets under management, excluding money
market funds, increased by 14 per cent in the six months to 30 June
2019 (on an actual exchange rate basis) to GBP56.5 billion in the
period, reflecting positive net flows and favourable market
movements. Higher internal assets under management, driven by
inflows into the life business, lifted Eastspring's total assets
under management(3) by 12 per cent to GBP169.5 billion (31 December
2018: GBP151.3 billion an actual exchange rate basis).
US total operating profit at GBP1,215 million increased by 14
per cent (21 per cent on an actual exchange rate basis). Broadly
stable fee income was supported by favourable deferred acquisition
costs (DAC) deceleration compared with unfavourable DAC
acceleration in the prior period.
Fee income development reflects an essentially stable average
separate account balance compared with the prior period. The
evolution of separate account balances in the first half of the
year reflects strongly positive investment performance offset by
marginally negative net flows. Weak market performance in the
latter part of 2018 reduced the level of account balance at the
start of the period compared with the prior period.
Spread income was 27 per cent lower reflecting the combination
of lower core spread income and lower swap income. The reduction in
core spread reflects the effect of lower invested asset yields. The
decline in swap income is a result of the unfavourable impact of
higher short-term interest rates over much of the period. The
associated decline in margin to 106 basis points from 162 basis
points at half year 2018 in relation to average spread-related
general account assets also reflects the full consolidation of the
assets acquired with the John Hancock transaction in November 2018
in the current period. Assuming business mix and market interest
rates remain stable at 30 June 2019 levels, the overall spread
margin is expected to remain in the region of 100 basis points.
The favourable development of GBP148 million in DAC deceleration
(2018: GBP45 million unfavourable acceleration on a constant
exchange rate basis) is a function of significant outperformance of
the separate account return in the period compared with that
assumed within the mean reversion formula.
Analysis of long-term insurance business pre-tax adjusted IFRS operating profit based on longer-term
investment returns by driver from
continuing operations
Actual exchange rate Constant exchange rate
------------------------------------ ------------------------
Half year 2019 Half year 2018 Half year 2018
----------------- ----------------- ------------------------
Operating Operating Operating
profit Margin profit Margin profit Margin
GBPm bps GBPm bps GBPm bps
---------------------------------------------------- --------- ------ --------- ------ -------------- --------
Spread income 349 107 407 150 429 150
Fee income 1,349 171 1,293 172 1,370 173
With-profits 41 19 30 18 31 17
Insurance margin 1,401 1,186 1,241
Other income 1,207 1,074 1,115
---------------------------------------------------- --------- ------ --------- ------ -------------- --------
Total life income from continuing operations 4,347 3,990 4,186
Expenses including DAC adjustments* (2,049) (2,062) (2,159)
---------------------------------------------------- --------- ------ --------- ------ -------------- --------
Long-term insurance business pre-tax adjusted IFRS
operating profit based on longer-term investment
returns from continuing operations 2,298 1,928 2,027
---------------------------------------------------- --------- ------ --------- ------ -------------- --------
* Expenses including DAC adjustments includes share of related
tax charges from joint ventures and associate, see note I(iv) of
the Additional financial information.
Insurance margin increased by 13 per cent (up 18 per cent on an
actual exchange rate basis) supported by growth in health and
protection in our Asia business, while fee income decreased by 2
per cent (up 4 per cent on an actual exchange rate basis) largely
reflecting the development in average US separate account balances
and associated fee margins. Spread income decreased by 19 per cent
(down 14 per cent on an actual exchange rate basis) as a result of
a lower contribution from the US business. Administration expenses
increased to GBP1,184 million (2018: GBP1,143 million on a constant
exchange rate basis) as the Asian business continues to expand,
alongside higher asset-based commissions within the US business,
which are treated as an administrative expense in this
analysis.
Other income and expenditure and restructuring costs from
continuing operations
Other income and expenditure consists of interest payable on
core structural borrowings, corporate expenditure and other income.
These items, together with restructuring costs of GBP23 million,
increased 11 per cent to a net charge of GBP389 million (2018:
GBP351 million). Total interest costs in the period were GBP226
million. This included GBP85 million for subordinated debt that is
capable of being transferred to M&GPrudential. The annualised
interest cost of core structural borrowings held at 30 June 2019
which cannot be substituted to M&GPrudential is estimated at
GBP234 million(4) .
Total Group head office and regional head office costs were
GBP164 million for the six months to 30 June 2019. We are assessing
the efficiency and effectiveness of our Group-wide functions to
ensure that they better reflect the future needs of the business.
Updates on this process and an overview of expected benefits and
costs to be incurred will be given in due course. Implementation
and preparation for IFRS 17 continues with activity likely to
increase in the second half of 2019 onward.
IFRS basis non-operating items from continuing operations
Non-operating items consist of short-term fluctuations in
investment returns on shareholder-backed business of negative
GBP1,124 million (2018: positive GBP8 million), the results
attaching to corporate transactions of positive GBP13 million
(2018: negative GBP60 million), and the amortisation of acquisition
accounting adjustments of negative GBP17 million (2018: negative
GBP23 million) arising mainly from the REALIC business acquired by
Jackson in 2012.
In the first half of 2019, the total short-term fluctuations in
investment returns on shareholder-backed business were negative
GBP1,124 million (2018: positive GBP9 million on an actual exchange
rate basis). This comprised positive GBP420 million (2018: negative
GBP326 million on an actual exchange rate basis) for Asia, negative
GBP1,521 million (2018: positive GBP244 million on an actual
exchange rate basis) in the US and negative GBP23 million (2018:
positive GBP91 million on an actual exchange rate basis) in other
operations.
Falling interest rates in many parts of Asia led to unrealised
bond gains in the period, with varying liability accounting
treatment in each market leading to differing liability revaluation
effects. In the US, higher equity market levels resulted in equity
hedge losses, which were only partly offset by a reduction in
policyholder liabilities, as the full benefit of the uplift in
equity markets was limited by lower long-term interest rates and
accounting mismatch effects. During the period, Jackson incurred
net derivative losses of GBP2,033 million on equity and interest
rate hedge instruments used to manage the market exposure of
Jackson's products. These were offset partly by GBP227 million of
accounting movements in variable and fixed index annuity
liabilities and GBP284 million of guarantee fee assessments, net of
claims, earned in the period(5) .
Outside of the income statement, as part of other comprehensive
income, interest rate falls have given rise to a gain of GBP1.7
billion on US available-for-sale debt securities. These gains more
than offset the non-operating losses in the US, leading to an
increase in shareholders' equity of the US business since the end
of 2018.
The GBP13 million benefit of corporate transactions reflects
gains from disposals in the period offset by the GBP(196) million
incurred in the period in connection with the preparation for the
proposed demerger of M&GPrudential from Prudential plc. Further
information is set out in note D1.1 to the financial
statements.
The total costs of the demerger transaction, consisting of fees
paid to debt holders to facilitate rebalancing of debt between the
two entities, costs associated with the separation of the two
businesses and adviser fees, is expected to be circa GBP330 million
to GBP355 million. GBP227 million has been incurred to 30 June 2019
(including GBP31 million incurred in 2018). Subject to the
completion of the transactions on the expected timetable and the
absence of unforeseen circumstances and excluding the expected
costs in respect of improvements to the efficiency and
effectiveness of our Group-wide functions referred to above, the
remaining costs of circa GBP100 million to GBP125 million are
expected to be incurred in the second half of 2019.
IFRS profit for the period from discontinued operations
IFRS profit from discontinued operations
Actual exchange rate
--------------------------------
Half year Half year
2019 GBPm 2018 GBPm Change %
-------------------------------------------------------------------------------- ---------- ---------- --------
Operating profit based on longer-term investment returns before tax
Long-term business 496 487 2
General insurance commission 2 19 (89)
Asset management 239 272 (12)
Head office costs (21) - n/a
-------------------------------------------------------------------------------- ---------- ---------- --------
Operating profit based on longer-term investment returns before restructuring
costs 716 778 (8)
Restructuring costs (29) (42) 31
-------------------------------------------------------------------------------- ---------- ---------- --------
Total operating profit based on longer-term investment returns before tax 687 736 (7)
-------------------------------------------------------------------------------- ---------- ---------- --------
Non-operating profit (loss) 130 (635) n/a
-------------------------------------------------------------------------------- ---------- ---------- --------
Profit before tax attributable to shareholders 817 101 n/a
-------------------------------------------------------------------------------- ---------- ---------- --------
Tax charge attributable to shareholders' returns (172) (18) n/a
-------------------------------------------------------------------------------- ---------- ---------- --------
Profit for the period 645 83 n/a
-------------------------------------------------------------------------------- ---------- ---------- --------
M&GPrudential operating profit, before restructuring costs,
was 8 per cent lower at GBP716 million. Life insurance operating
profit increased by 2 per cent to GBP496 million (2018: GBP487
million). Within this total, the contribution from our core(6)
with-profits and in-force annuity business was GBP345 million
(2018: GBP255 million), including higher annuity income (mainly
driven by higher asset related gains) and an increased transfer to
shareholders from the with-profits funds of GBP161 million (2018:
GBP157 million). These transfers included a 20 per cent increase in
the contribution from the PruFund business of GBP30 million (2018:
GBP25 million).
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 GBP127 million benefit (2018:
GBPnil) of updates to annuitant mortality assumptions, which
reflect a recent slowdown in life expectancy improvements, and the
adoption of the Continuous Mortality Investigation (CMI) 2017
model, albeit with an uplift to the calibration such that
additional liabilities are held to cover potential differences in
experience between the PAC policyholder portfolio and the England
and Wales population.
The non-core result in the prior period included a one-off
GBP166 million insurance recovery, related to the costs of
reviewing internally vesting annuities sold without advice after
July 2008.
The reduction in general insurance commissions reflects the
planned termination of a distribution agreement and replacement
with a brand sharing arrangement.
Asset management operating profit decreased 12 per cent to
GBP239 million as a result of lower revenues following net fund
outflows during the second half of 2018 and 2019 which reduced the
average level of funds managed by M&G Investments to GBP263.8
billion (2018: GBP285.3 billion). The cost-income ratio of 57 per
cent (2018: 54 per cent) was also affected by the lower revenues.
Costs were flat in absolute terms.
Overall assets under management were GBP341.1 billion at 30 June
2019, up from GBP321.2 billion at 31 December 2018. External funds
under management were up 4 per cent from 31 December 2018 to
GBP153.0 billion at 30 June 2019, as a result of positive market
developments. These positive effects were offset partially by
institutional net outflows of GBP0.3 billion and wholesale and
direct net outflows of GBP4.3 billion over the period. Overall,
investor risk aversion remains high amid political uncertainties
including Brexit. Internal assets under management increased
moderately over the period to GBP188.1 billion at 30 June 2019 (31
December 2018: GBP174.3 billion). Net flows to PruFund remain
positive at GBP3.5 billion, although below the prior period level
due to the lower level of defined benefit pension transfers seen
across the market generally.
M&GPrudential remains on track to deliver the announced
annual shareholder cost savings of circa GBP145 million by 2022 for
a shareholder investment of circa GBP250 million. Restructuring
costs of GBP29 million (2018: GBP42 million) include investment
spend of GBP26 million in relation to its merger and transformation
programme and bring the cumulative cost to GBP169 million, on an
IFRS basis, since the project began.
Profit after tax for the period was GBP645 million (2018: GBP83
million), a result of a substantial positive swing in non-operating
profit. Non-operating profit over the first half of 2019 was GBP130
million, reflecting favourable revaluation effects on fixed income
assets supporting the capital of the shareholder-backed annuity
business. This compares with a loss of GBP635 million in the prior
period, which included a loss of GBP513 million arising from the
reinsurance of a portfolio of annuity contracts with Rothesay Life,
and negative revaluation movements on shareholder assets.
IFRS effective tax rates
In the first half of 2019, the effective tax rate on IFRS
operating profit based on longer-term investment returns from
continuing operations was 16 per cent (2018: 17 per cent). This
reflects a lower effective tax rate in Asia as a result of
investment returns in the first half of 2019 which are not taxable.
The effective tax rate on the total IFRS profit from continuing
operations was less than 1 per cent in the first half of 2019
(2018: 20 per cent). The lower rate is mainly due to non-operating
taxable losses arising in the US.
The effective tax rate on IFRS operating profit based on
longer-term investment returns from discontinued operations was 21
per cent (2018: 19 per cent). The effective tax rate on the total
IFRS profit from discontinued operations was 21 per cent in the
first half of 2019 (2018: 18 per cent).
New business performance
Life EEV new business profit and APE new business sales (APE sales) from continuing operations
Actual exchange rate Constant exchange rate
---------------------------------------------------------- -------------------------------------------
Half year Half year Half year
2019 GBPm 2018 GBPm Change % 2018 GBPm Change %
------------------ ------------------ ------------------ ---------------------- -------------------
New New New New New
APE business APE business APE business business business
sales profit sales profit sales profit APE sales profit APE sales profit
----------- -------- -------- -------- -------- -------- -------- --------- ----------- --------- --------
Asia 1,978 1,295 1,736 1,122 14 15 1,806 1,178 10 10
US 831 348 816 466 2 (25) 868 495 (4) (30)
----------- -------- -------- -------- -------- -------- -------- --------- ----------- --------- --------
Total
continuing
operations 2,809 1,643 2,552 1,588 10 3 2,674 1,673 5 (2)
----------- -------- -------- -------- -------- -------- -------- --------- ----------- --------- --------
Life insurance new business APE sales from continuing operations
increased by 5 per cent (10 per cent on an actual exchange rate
basis) to GBP2,809 million, and life insurance new business profit
from continuing operations was down 2 per cent (up 3 per cent on an
actual exchange rate basis) to GBP1,643 million, driven in part by
lower interest rates. Excluding the effect of lower interest rates
and other economic factors, new business profit would have been 4
per cent higher than the prior period.
In Asia, new business profit was 10 per cent higher at GBP1,295
million (15 per cent on an actual exchange rate basis), in line
with the increase in APE sales. The increase in new business profit
of GBP117 million, on a constant exchange rate basis, reflects the
GBP138 million positive movement attributable to sales volume
together with the combined positive effect of business and product
mix and other items, offset partly by the negative GBP21 million
effect of changes in interest rates and other economic assumptions.
Regular premium contracts, which provide a high level of recurring
income, continue to account for 93 per cent of APE sales, and the
proportion of new sales represented by health and protection
products, that has an earnings profile that is significantly less
correlated to investment markets, remains high at 27 per cent
(2018: 28 per cent).
APE sales were up 10 per cent in the period, and 13 per cent
higher excluding Hong Kong, which had exceptional growth in the
second quarter of 2018 following the launch of two new insurance
products. 11 life markets reported positive APE growth in the
period, led by 45 per cent growth in China JV, which reflects
higher levels of bancassurance sales. In Indonesia, while market
conditions remain challenging, APE sales improved in the second
quarter supported by enhanced product initiatives, contributing to
growth of 4 per cent in the first half of the year.
New business profit growth was broad-based, with 10 markets
achieving positive growth. In Hong Kong, new business profit was 6
per cent higher at GBP826 million, led by a strong agency
performance. In China JV, new business profits increased by 29 per
cent to GBP98 million as a result of higher sales. In Singapore,
new business profit was 13 per cent higher, reflecting increased
regular premium and retail protection sales volumes. In Indonesia,
new business profit increased by 8 per cent to GBP66 million,
reflecting higher APE sales, product mix and favourable interest
rate movements. Other markets also delivered strong expansion in
the first half of 2019, with total Asia new business profit up 10
per cent.
In the US, new business profit decreased by 30 per cent to
GBP348 million (down 25 per cent on an actual exchange rate basis).
This decline in new business profit reflects a 4 per cent reduction
in overall APE sales, the unfavourable impact of GBP75 million from
changes in interest rates and other economic assumptions, and a
more diverse retail product mix with materially higher fixed index
annuity sales alongside lower sales of higher margin variable
annuity products.
Life EEV new business profit and APE new business sales (APE sales) from discontinued operations
Actual exchange rate
----------------------------------------------------------------------------------------------
Half year 2019 GBPm Half year 2018 GBPm Change %
------------------------------ ------------------------------ ------------------------------
APE sales New business profit APE sales New business profit APE sales New business profit
---------------------- --------- ------------------- --------- ------------------- --------- -------------------
Discontinued
operations 705 152 770 179 (8) (15)
---------------------- --------- ------------------- --------- ------------------- --------- -------------------
In M&GPrudential, new business profit decreased to GBP152
million, down 15 per cent as a result of an 8 per cent reduction in
APE sales and a slightly lower APE margin. The decline in APE sales
reflects reduced individual pension production particularly related
to lower levels of defined benefit transfers compared with
particularly high volumes in the prior period. The reduction in new
business margin reflects the impact of GBP7 million from lower
interest rates in the period combined with the effect of changes in
product mix.
Post-tax profit - EEV
Actual exchange rate Constant exchange rate
-------------------------------- ------------------------
Half year Half year Half year
2019 GBPm 2018 GBPm Change % 2018 GBPm Change %
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Post-tax operating profit based on longer-term
investment returns from continuing operations
Asia
Long-term business 2,127 1,753 21 1,834 16
Asset management 91 77 18 79 15
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Total 2,218 1,830 21 1,913 16
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
US
Long-term business 793 1,005 (21) 1,068 (26)
Asset management 11 (2) 650 (2) 650
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Total 804 1,003 (20) 1,066 (25)
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Other income and expenditure (361) (340) (6) (341) (6)
Restructuring costs (20) (18) (11) (18) (11)
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Post-tax operating profit based on longer-term
investment returns from continuing operations 2,641 2,475 7 2,620 1
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Non-operating items:
Short-term fluctuations in investment returns 2,229 (965) n/a (1,021) n/a
Effect of changes in economic assumptions (1,371) 610 n/a 656 n/a
Mark-to-market value movements on core structural
borrowings (492) 579 n/a 580 n/a
Loss attaching to corporate transactions (24) (48) n/a (50) n/a
--------------------------------------------------- ---------- ---------- -------- ------------- ---------
Post-tax profit for the period from continuing
operations 2,983 2,651 13 2,785 7
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Post-tax profit for the period from discontinued
operations 1,281 317 304 317 304
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Post-tax profit for the period 4,264 2,968 44 3,102 37
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
EEV earnings per share
Actual exchange rate Constant exchange rate
---------------------------------- ------------------------
Half year Half year Half year
2019 pence 2018 pence Change % 2018 pence Change %
------------------------------------------------------ ----------- ----------- -------- ------------- ---------
Basic earnings per share based on post-tax operating
profit
From continuing operations 102.1 96.2 6 101.8 -
------------------------------------------------------ ----------- ----------- -------- ------------- ---------
Basic earnings per share based on post-tax total
profit
----------- ----------- -------------
From continuing operations 115.3 103.0 12 108.2 7
From discontinued operations 49.6 12.3 303 12.3 303
----------- ----------- -------------
164.9 115.3 43 120.5 37
------------------------------------------------------ ----------- ----------- -------- ------------- ---------
EEV operating profit from continuing operations
On an EEV basis, Group post-tax operating profit based on
longer-term investment returns from continuing operations increased
1 per cent (7 per cent on an actual exchange rate basis) to
GBP2,641 million in the first half of 2019.
EEV operating profit includes new business profit from the
Group's life business, which decreased by 2 per cent (up 3 per cent
on an actual exchange rate basis) to GBP1,643 million. It also
includes in-force life business profit of GBP1,277 million, which
was 4 per cent higher than prior year (up 9 per cent on an actual
exchange rate basis).
In Asia, EEV life operating profit was up 16 per cent to
GBP2,127 million, driven by 10 per cent growth in new business
profit and in-force profit growth of 27 per cent, which reflects a
growing in-force base and includes the beneficial effect of
assumption changes and ongoing positive experience variances.
Jackson's EEV life operating profit was down 26 per cent to
GBP793 million. This reflects a 30 per cent decrease in new
business profit to GBP348 million and lower expected returns from
the in-force business in part due to a lower discount rate applied,
following the decline in interest rates in the period.
EEV non-operating items from continuing operations
Positive short-term fluctuations of GBP2,229 million primarily
reflect higher 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. These
positive effects have been offset partly by losses 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 GBP1,371 million adverse
effect from economic assumption changes in the period, principally
reflecting the impact of lower interest rates on the projected
future fund growth rates for the variable annuity business in the
US and for participating businesses in Hong Kong and Singapore.
These projected lower growth rates reduce the expected growth in
fund values for policyholders and hence the expected profitability
for shareholders.
EEV post-tax profit for the period from discontinued
operations
Post-tax profit from discontinued operations of GBP1,281 million
(2018: GBP317 million) increased over the prior year primarily
driven by higher than expected returns on equities and investments
held by the UK with-profits fund and unrealised gains on the bonds
backing the shareholder annuity business, following falls in
interest rates in the period.
Free surplus generation from continuing operations(7)
Actual exchange rate Constant exchange rate
-------------------------------- ------------------------
Half year Half year Half year
2019 GBPm 2018 GBPm Change % 2018 GBPm Change %
-------------------------------------------------------- ---------- ---------- -------- ------------- ---------
Asia 935 850 10 876 7
US 1,097 773 42 822 33
-------------------------------------------------------- ---------- ---------- -------- ------------- ---------
Operating free surplus generated from in-force life
business
and asset management before restructuring costs 2,032 1,623 25 1,698 20
Restructuring costs (14) (10) (40) (10) (40)
-------------------------------------------------------- ---------- ---------- -------- ------------- ---------
Operating free surplus generated from in-force life
business
and asset management 2,018 1,613 25 1,688 20
Investment in new business (516) (440) (17) (461) (12)
-------------------------------------------------------- ---------- ---------- -------- ------------- ---------
Operating free surplus generated 1,502 1,173 28 1,227 22
-------------------------------------------------------- ---------- ---------- -------- ------------- ---------
Non-operating profit (loss) 268 (656)
Net cash flows to parent company (851) (733)
Exchange movements on foreign operations,
timing differences and other items 109 (347)
-------------------------------------------------------- ---------- ----------
Total movement in free surplus from continuing
operations 1,028 (563)
Free surplus at 1 January from continuing operations 4,201 4,398
-------------------------------------------------------- ---------- ----------
Free surplus at 30 June from continuing operations 5,229 3,835
-------------------------------------------------------- ---------- ----------
Free surplus generation is the financial metric we use to
measure the internal cash generation of our business operations and
is based (with adjustments) on the capital regimes that apply
locally in the various jurisdictions in which our life businesses
operate. For life insurance operations, it represents amounts
emerging from the in-force business during the period, net of
amounts reinvested in writing new business. For asset management
businesses, it equates to post-tax operating profit for the
period.
In the first half of 2019, operating free surplus generation
from our continuing life insurance and asset management business,
before investment in new business, increased by 20 per cent to
GBP2,018 million (increased by 25 per cent on an actual exchange
rate basis). In Asia, growth in the in-force life portfolio,
combined with post-tax asset management profit from Eastspring,
contributed to free surplus generation of GBP935 million, up 7 per
cent. After allowing for investment in new business, Asia free
surplus generation was GBP685 million, up 13 per cent. In the US,
in-force free surplus generation increased by 33 per cent
reflecting a GBP274 million benefit following the integration of
the recently acquired John Hancock business. After allowing for
investment in new business, US free surplus generation was GBP831
million, up 32 per cent.
Although new business profit decreased by 2 per cent, the amount
of free surplus invested in writing new life business in the period
was higher at GBP516 million (2018: GBP461 million). This reflects
increased new business investment in the US as a result of a more
diversified new business mix, notably driven by substantial growth
in fixed index annuities, which represented 11 per cent of total US
APE sales in the period, up from 2 per cent in the first six months
of 2018.
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 continuing life and asset
management operations was GBP5.2 billion at 30 June 2019.
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.
Cash remitted by the business units to the Group(8)
Actual exchange rate
----------------------
Half year Half year
2019 GBPm 2018 GBPm
---------------------------------------------------- ---------- ----------
From continuing operations
Asia 451 391
US 400 342
Other UK (including Prudential Capital) 5 37
From discontinued operations
M&GPrudential 356 341
---------------------------------------------------- ---------- ----------
Net cash remitted by business units 1,212 1,111
---------------------------------------------------- ---------- ----------
Holding company cash at 30 June 2,365 2,210
---------------------------------------------------- ---------- ----------
Cash remitted to the Group by business units in the first half
of 2019 amounted to GBP1,212 million. Higher remittances of GBP451
million from Asia include the GBP191 million of proceeds from the
reduction in the Group's shareholding in ICICI Prudential. US
remittances increased to GBP400 million from GBP342 million in the
prior period with the full remittance from Jackson received in the
first half of the year. Going forwards, a more balanced cash
remittance profile, between the first half and second half of the
year, is under consideration. The remittance from M&GPrudential
of GBP356 million was 4 per cent higher than the equivalent
remittance in the first half of 2018.
Cash remitted to the Group in the first half of 2019 was used to
meet central costs of GBP222 million (2018: GBP219 million) and pay
the 2018 second interim dividend of GBP870 million. Corporate
activities and other cash flows were negative GBP999 million (2018:
negative GBP106 million), driven by net debt redemption of GBP400
million within the period, cash costs paid in respect of the
demerger of GBP166 million and other transactions including
payments for bancassurance distribution agreements. This led to
holding company cash decreasing from GBP3,236 million to GBP2,365
million over the first half of 2019.
Reflecting the rebalancing of holding company cash stock
pre-demerger, potential Asian investment opportunities and demerger
related costs, holding company cash is anticipated to reduce in the
second half of 2019 from the level at 30 June 2019.
Post-demerger, a lower level of holding company cash will be
held centrally, commensurate with the reduced size of the Group
post-demerger and ensuring sufficient resources are available to
provide a buffer to support the retained businesses in stress
scenarios and to provide liquidity to service debt, other central
expenses and dividends.
Capital position, financing and liquidity
Capital position
Analysis of movement in Group shareholder Solvency II surplus(9)
2019 GBPbn 2018 GBPbn
---------- --------------------
Half year Half year Full year
----------------------------------------------------------------- ---------- --------- ---------
Solvency II surplus at 1 January 17.2 13.3 13.3
Operating experience 2.1 1.8 4.2
Non-operating experience (including market movements) (1.5) - (1.2)
M&GPrudential transactions - 0.1 0.4
Other capital movements:
Net subordinated debt (redemption)/issuance (0.4) - 1.2
Foreign currency translation impacts - 0.1 0.5
Dividends paid (0.9) (0.8) (1.2)
Model changes 0.2 (0.1) -
------------------------------------------------------------------ ---------- --------- ---------
Estimated Solvency II surplus at end of period 16.7 14.4 17.2
------------------------------------------------------------------ ---------- --------- ---------
The Group Shareholder Solvency II position shown relates to the
Group's pre-demerger structure, and includes the discontinued
M&GPrudential business.
The Group's shareholders' Solvency II capital surplus(10,11) was
estimated at GBP16.7 billion at 30 June 2019 (equivalent to a
solvency ratio of 222 per cent), compared with GBP17.2 billion (232
per cent) at 31 December 2018. Operating experience of GBP2.1
billion (31 December 2018: GBP4.2 billion) which included GBP0.3
billion related to the recently acquired John Hancock business, was
more than offset by non-operating experience of GBP1.5 billion,
including the effect of distribution deals of GBP0.6 billion,
dividends to shareholders in the period of GBP0.9 billion and net
debt redemption of GBP0.4 billion.
Local Capital Summation Method
Following the proposed demerger of M&GPrudential from
Prudential plc, the Hong Kong Insurance Authority (IA) will assume
the role of the Group-wide supervisor for the retained Group
(excluding M&GPrudential). The retained Group will no longer be
subject to Solvency II capital requirements. Ultimately, Prudential
plc will become subject to the Group Wide Supervision (GWS)
framework which is currently under development by the Hong Kong IA
for the industry and is not expected to come into force until the
second half of 2020 (subject to the legislative process) at the
earliest.
Until Hong Kong's GWS framework comes into force, Prudential
will apply the Local Capital Summation Method (LCSM) that has been
agreed with the Hong Kong IA to determine Group regulatory capital
requirements (both minimum and prescribed levels). The summation of
local statutory capital requirements across the retained Group will
be used to determine Group regulatory capital requirements, with no
allowance for diversification between business operations. The
Group available capital will be determined by the summation of
available capital across local solvency regimes for regulated
entities and IFRS net assets (with adjustments) for non-regulated
entities. The Hong Kong IA has yet to make any final decisions
regarding the GWS framework for the industry and it continues to
consider and consult on the proposed legislation and related
guidelines. The amounts below should not therefore be interpreted
as representing the results or requirements under the industry-wide
GWS framework and are not intended to provide a forecast of the
eventual position. For further information see note I(i)(b) of the
Additional financial information.
The Prudential Group shareholder LCSM surplus of available
capital over the Group minimum capital requirement at 30 June 2019,
excluding M&GPrudential, was GBP7.4 billion before allowing for
the payment of the first interim ordinary dividend, as shown in the
table below. The table also shows the adjustments needed to that
position to estimate the pro forma shareholder LCSM capital
position assuming the proposed demerger of M&GPrudential from
Prudential plc had completed as at 30 June 2019.
30 June 2019 GBPbn
-----------------------------------
Estimated Prudential Group shareholder LCSM capital position As reported Adjustments Pro forma
------------------------------------------------------------- ----------- ----------- ---------
Available Capital(12) 10.6 +0.3 10.9
Minimum Required Capital 3.2 - 3.2
LCSM surplus 7.4 +0.3 7.7
LCSM ratio (%) 332% +8% 340%
------------------------------------------------------------- ----------- ----------- ---------
The adjustments as shown in the table above, which result in an
increase in surplus of GBP0.3 billion, represent the estimated
impact on the retained Prudential Group shareholder LCSM capital
position of the proposed demerger. The adjustments are based on
current indicative estimates and are subject to change, which
include:
- A reduction of GBP2.9 billion for the expected impact of the
transfer of subordinated debt to M&GPrudential by substituting
M&GPrudential in the place of Prudential as issuer of such
debt. The GBP2.9 billion represents debt capable of being
substituted that was held at 30 June 2019. A further GBP0.3 billion
was raised in July bringing the total of subordinated debt expected
to be transferred to GBP3.2 billion;
- An increase for the expected proceeds of GBP3.0 billion from a
pre-demerger dividend to be paid by M&GPrudential to Prudential
plc shortly before demerger, together with planned dividends of
GBP0.3 billion expected to be paid earlier. All dividends are
subject to the customary legal and governance considerations
required before approval by the M&GPrudential Board; and
- A reduction of GBP0.1 billion for expected directly
attributable transaction costs associated with the proposed
demerger that have yet to be incurred at 30 June 2019. Total
demerger costs are discussed above in IFRS basis non-operating
items from continuing operations.
No account has been taken of any trading and other changes in
financial position of the Prudential Group after 30 June 2019, thus
the pro forma shareholder LCSM capital position does not reflect
the actual shareholder LCSM capital position of the retained
Prudential Group following the completion of the proposed
demerger.
Local statutory capital
All of our subsidiaries continue to hold appropriate capital
levels on a local regulatory basis.
In the US, total adjusted capital was GBP3.9 billion(13) at 30
June 2019 (US$4.9 billion), a GBP0.5 billion(13) (US$0.6 billion)
reduction over the period, mainly reflecting GBP0.6 billion(13)
(US$0.8 billion) of operating capital generation, offset by the
payment of an increased GBP400 million(13) (US$525 million)
remittance to the Group alongside GBP0.8 billion(13) (US$1.0
billion) of hedging losses net of reserve movements. Jackson's
risk-based capital (RBC) ratio was estimated at above 400 per cent
at 30 June 2019, which under the local regulator's 'permitted
practice', excludes gains attributable to the valuation of interest
rate swaps (if these were included the RBC ratio would be
approximately 45 percentage points higher). Operating capital
generation includes a favourable reserve release of GBP0.3
billion(13) (US$0.4 billion) net of tax resulting from the block of
business acquired from John Hancock in 2018.
The M&GPrudential Group has requested approval from the
Prudential Regulatory Authority (PRA) to amend the group internal
model to apply at the level of the M&GPrudential Group, rather
than at the level of the existing Prudential Group. The decision is
pending and is expected to be provided shortly before the planned
demerger, such that the Prudential Group internal model remains in
place until the demerger with M&GPrudential's model commencing
from this point. The results set out below should not be
interpreted as representing the Pillar I output from an approved
Solvency II internal model for M&GPrudential and are subject to
change. Based on the assumptions that underpin the current approved
Group internal model, the estimated shareholder Solvency II surplus
for the M&GPrudential Group at 30 June 2019 was GBP3.9 billion.
The estimated pro forma position, assuming that the proposed
demerger of M&GPrudential from Prudential plc had been
completed as at 30 June 2019 based on the operating environment and
economic conditions as at that date, was GBP3.9 billion(19)
(equivalent to a cover ratio(14) of 169 per cent). Further
information can be found in note I(i)(a) of the Additional
financial information section.
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 97 per cent
of our M&GPrudential portfolio and 96 per cent of our US
portfolio are investment grade(15) . 10 per cent of the US
portfolio is in US treasuries (31 December 2018: 10 per cent).
During the first half of 2019, default losses were minimal and
reported impairments in the US portfolio were GBP1 million (2018:
GBP2 million).
Financing and liquidity
Shareholders' net
core structural
borrowings
30 June 2019 GBPm 30 June 2018 GBPm 31 December 2018 GBPm
-------------------------------- -------------------------------- --------------------------------
IFRS Mark-to-market EEV IFRS Mark-to-market EEV IFRS Mark-to-market EEV
basis value basis basis value basis basis value basis
--------------------- ------- -------------- ------- ------- -------------- ------- ------- -------------- -------
Subordinated debt
that is capable of
being substituted to
M&GPrudential (as at
30 June 2019) 3,089 209 3,298 1,287 80 1,367 2,919 64 2,983
Other core structural
borrowings 4,352 402 4,754 5,080 71 5,151 4,745 119 4,864
--------------------- ------- -------------- ------- ------- -------------- ------- ------- -------------- -------
Total borrowings of
shareholder-financed
businesses 7,441 611 8,052 6,367 151 6,518 7,664 183 7,847
Less: Holding company
cash and
short-term
investments (2,365) - (2,365) (2,210) - (2,210) (3,236) - (3,236)
--------------------- ------- -------------- ------- ------- -------------- ------- ------- -------------- -------
Net core structural
borrowings of
shareholder-financed
businesses 5,076 611 5,687 4,157 151 4,308 4,428 183 4,611
--------------------- ------- -------------- ------- ------- -------------- ------- ------- -------------- -------
Gearing ratio* 21% 21% 20%
* Net core structural borrowings as proportion of IFRS
shareholders' funds plus net debt, as set out in note II of the
Additional financial information.
The Group had central cash resources of GBP2.4 billion at 30
June 2019 (31 December 2018: GBP3.2 billion). Total core structural
borrowings decreased by GBP0.2 billion, from GBP7.6 billion to
GBP7.4 billion in the first half of 2019, following the redemption
of GBP400 million 11.375 per cent tier 2 Subordinated Notes in May
2019, offset partly by a GBP169 million increase in the IFRS debt
value as a result of the agreement in the first half of 2019 of
holders of two tranches of bonds to permit substitution of
M&GPrudential as the issuer of these bonds in place of
Prudential plc at demerger (see note C.6.1(vi) of the IFRS
financial statements for further information).
Prior to the proposed demerger, the Group expects to rebalance
its debt capital across Prudential plc and M&GPrudential. This
will include the ultimate holding company of M&GPrudential
becoming an issuer of debt following substitution from Prudential
plc. Based on the operating environment and economic conditions as
at 30 June 2019, the total debt expected to be transferred valued
at original proceeds less unamortised transaction costs is GBP3.2
billion, compared with the circa GBP3.5 billion as previously
indicated. Of the GBP3.2 billion, GBP2.9 billion was held by
Prudential plc at 30 June 2019 (IFRS value of GBP3.1 billion), with
a further GBP0.3 billion raised in July 2019. Following the
substitution Prudential plc is expected to have core structural
borrowings valued under IFRS at GBP4.4 billion at 30 June 2019. As
set out in the 'local statutory capital' section above, the
shareholder Solvency II ratio of M&GPrudential at 30 June 2019,
assuming the demerger had taken place at this date and hence the
debt described above had been substituted, was 169 per cent. This
is based on assumptions at 30 June 2019 and does not allow for any
further trading or change in environment and economic conditions,
material changes in which may lead to a different outcome.
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 30 June 2019, we
had issued commercial paper under this programme totalling US$828
million, to finance non-core borrowings.
As at 31 December 2018, the Group had a total of GBP2.6 billion
of undrawn committed facilities, expiring in 2023. In preparation
for the demerger of M&GPrudential from Prudential plc, since
the year end, these facilities have been replaced with two separate
committed facilities totalling GBP3.5 billion expiring in 2024. Of
this amount, GBP2.0 billion of committed facilities are held by
Prudential plc and GBP1.5 billion of facilities are held by
M&GPrudential. Up to the point of demerger, Prudential plc has
access to the whole amount through an internal committed facility.
No amounts have been drawn under these facilities and there were no
amounts outstanding at 30 June 2019. Access to further liquidity is
available through the debt capital markets and a commercial paper
programme in place, and Prudential plc has maintained a consistent
presence as an issuer in the market for the past decade. 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.
In addition to the Group's traditional sources of liquidity and
financing, Jackson also has access to funding via the Federal Home
Loan Bank of Indianapolis secured by collateral posted by Jackson.
Given the wide range of Jackson's product set and breadth of its
customer base including retail, corporate and institutional,
further sources of liquidity also include premiums and
deposits.
Shareholders' funds
IFRS EEV
------------------------------- -------------------------------
2019 GBPm 2018 GBPm 2019 GBPm 2018 GBPm
--------- -------------------- --------- --------------------
Half year Half year Full year Half year Half year Full year
---------------------------------------------- --------- --------- --------- --------- --------- ---------
Profit after tax for the period(16) 1,535 1,355 3,010 4,259 2,967 4,585
Exchange movements, net of related tax 98 69 348 225 523 1,706
Unrealised gains and losses on US fixed income
securities classified as
available-for-sale(17) 1,726 (908) (1,083) - - -
Dividends (870) (840) (1,244) (870) (840) (1,244)
Mark-to-market value movements on Jackson
assets backing surplus and required capital - - - 137 (32) (95)
Other (66) 119 131 (117) 127 132
---------------------------------------------- --------- --------- --------- --------- --------- ---------
Net increase (decrease) in shareholders' funds 2,423 (205) 1,162 3,634 2,745 5,084
Shareholders' funds at beginning of the period 17,249 16,087 16,087 49,782 44,698 44,698
---------------------------------------------- --------- --------- --------- --------- --------- ---------
Shareholders' funds at end of the period 19,672 15,882 17,249 53,416 47,443 49,782
---------------------------------------------- --------- --------- --------- --------- --------- ---------
Shareholders' value per share(1,18) 757p 613p 665p 2,055p 1,830p 1,920p
---------------------------------------------- --------- --------- --------- --------- --------- ---------
Group IFRS shareholders' funds in the six months to 30 June 2019
increased by 14 per cent to GBP19.7 billion (31 December 2018:
GBP17.2 billion on an actual exchange rate basis), driven by the
strength of the operating result, offset by dividend payments of
GBP870 million. During the period, UK sterling has weakened
relative to the US dollar and various Asian currencies, which
generated a positive exchange rate movement on the net assets in
the period. In addition, the decrease in US long-term interest
rates between the start and the end of the reporting period
produced unrealised gains on fixed income securities held by
Jackson accounted for through other comprehensive income.
If the demerger had occurred at 30 June 2019, shareholders'
equity would have been reduced by GBP5.1 billion to GBP14.6
billion(19) . For further information see note I(vii) of the
Additional financial information.
The Group's EEV basis shareholders' funds also increased by 7
per cent to GBP53.4 billion (31 December 2018: GBP49.8 billion on
an actual exchange rate basis). On a per share basis, the Group's
embedded value at 30 June 2019 equated to 2,055 pence(18) , up from
1,920 pence(18) at 31 December 2018.
Financial implications of corporate transactions
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 GBP662
million(20) will be paid under the agreement which will be funded
through internal resources. This amount will be paid in three
instalments. GBP230 million(20) was paid in February 2019 with
GBP331 million(20) to be paid in January 2020 and GBP101
million(20) to be paid in January 2021.
Partnership with OVO in Indonesia
In June 2019, Prudential announced a strategic partnership with
PT Visionet International (OVO), a leading digital payments,
rewards and financial services platform in Indonesia. Prudential
and OVO will develop jointly new and comprehensive digital
propositions for customers encompassing wellness, health and wealth
products and services. Prudential and OVO customers will have the
convenience of transacting online with electronic underwriting,
e-payments, e-claims and access to Prudential's wide hospital
network, complementing the face-to-face service from Prudential's
financial consultants in 160 cities. We believe the partnership
enhances Prudential's reach in one of Asia's largest insurance
markets with a digitally-savvy population.
Acquisition of majority stake in Group Beneficial
In July 2019, Prudential plc completed its acquisition of a 51
per cent 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
enhances Prudential's growing scale in Africa.
Partial disposal of India life insurance associate
In March 2019, the Group reduced its shareholding in ICICI
Prudential Life Insurance Company, an Indian associate, from 25.8
per cent to 22.1 per cent. The proceeds from the sale of shares
were GBP191 million resulting in a gain of GBP150 million before
tax. ICICI Prudential Life Insurance Company remains an associate
of the Group.
Disposal of Vietnam consumer finance business
In June 2019, the Group completed the sale of Prudential Vietnam
Finance Company Limited, its Vietnam consumer finance subsidiary
for proceeds of GBP119 million, resulting in a profit on disposal
of GBP55 million before tax.
Acquisition of majority stake in Thanachart Fund Management
In August 2019, the Group announced that it had entered into a
binding memorandum of understanding with Thanachart Bank to acquire
a controlling stake in Thanachart Fund Management Co., Ltd. (TFUND)
and expects to enter into definitive agreements by the end of the
year. TFUND is the 9(th) largest mutual fund manager in Thailand,
with total assets under management of over GBP5 billion as at 31
December 2018. The proposed acquisition will be subject to local
regulatory approvals.
Notes
1 See note II of the Additional financial information for
definition and reconciliation to IFRS balances.
2 Asia insurance revenues include spread income, fee income,
with-profits, insurance margin and expected return on shareholder
assets.
3 Includes money market funds.
4 Annualised interest cost is calculated based on core
structural borrowings held at 30 June 2019, using exchange rates at
30 June 2019, and therefore excludes interest costs relating to
bonds redeemed in the period.
5 All figures for net derivative losses and related movements
are net of deferred acquisition costs.
6 Core refers to the underlying profit of the M&GPrudential
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(vi) of the
Additional financial information.
7 For insurance operations, operating free surplus generated
represents amounts maturing from the in-force business during the
period less investment in new business and excludes non-operating
items. For asset management businesses, it equates to post-tax
operating profit for the period. Restructuring costs are presented
separately from the underlying business unit amount. Further
information is set out in note 9 of the EEV basis results.
8 Net cash remitted by business units are included in the
Holding company cash flow, which is disclosed in detail in note
I(iii) of the Additional financial information. This comprises
dividends and other transfers from business units that are
reflective of emerging earnings and capital generation.
9 The methodology and assumptions used in calculating the
Solvency II capital results are set out in note I(i) of the
Additional financial information.
10 The Group shareholder capital position covers continuing and
discontinued operations and excludes the contribution to own funds
and the Solvency Capital Requirement from ring-fenced with-profits
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 as at 31 December 2018 reflected the approved
regulatory position.
11 Estimated before allowing for first interim ordinary dividend
(31 December 2018: second interim ordinary dividend).
12 Includes GBP2.9 billion of subordinated debt that is expected
to be transferred to M&GPrudential pre-demerger and hence has
not been 'grandfathered' with the Hong Kong IA.
13 Movements in the period have been translated at the average
exchange rates for the period ended 30 June 2019, apart from
remittances to the Group which reflect the exchange rate applied to
the transaction. The closing balance has been translated at the
closing spot rates as at 30 June 2019.
14 The M&GPrudential shareholder Solvency II ratio is
measured as the ratio of Solvency II own funds to the Solvency
Capital Requirement. It excludes the contribution to own funds and
the Solvency Capital Requirement from ring-fenced with-profits
funds and staff pension schemes in surplus and includes
management's calculation of UK transitional measures reflecting
operating and market conditions at each valuation date.
15 Based on hierarchy of Standard & Poor's, Moody's and
Fitch, where available and if unavailable, NAIC and internal
ratings have been used.
16 Excluding profit for the year attributable to non-controlling
interests.
17 Net of related charges to deferred acquisition costs and
tax.
18 For EEV shareholders' value per share, see note C of the
Additional EEV financial information.
19 No account has been taken of any trading and other changes in
financial position of the Prudential Group after 30 June 2019, thus
the pro forma financial position does not reflect the actual
financial position of the retained Prudential Group following the
completion of the proposed demerger.
20 Translated using a Singapore dollar: Sterling foreign
exchange rate of 1.7360.
The following tables are a summary of key financial disclosures
in the Chief Financial Officer's report and the IFRS and EEV basis
results
Financial highlights
Life APE new business sales (APE sales)(1)
Actual exchange rate Constant exchange rate
-------------------------------- ------------------------
Half year Half year Half year
2019 GBPm 2018 GBPm Change % 2018 GBPm Change %
------------------------------------------- ---------- ---------- -------- ------------- ---------
Asia 1,978 1,736 14 1,806 10
US 831 816 2 868 (4)
------------------------------------------- ---------- ---------- -------- ------------- ---------
Total continuing operations 2,809 2,552 10 2,674 5
Discontinued operations 705 770 (8) 770 (8)
------------------------------------------- ---------- ---------- -------- ------------- ---------
Total Group 3,514 3,322 6 3,444 2
------------------------------------------- ---------- ---------- -------- ------------- ---------
Life EEV new business profit and investment in new business from continuing
operations
Actual exchange rate Constant exchange rate
------------------------------------------------------------ -------------------------------------------
Half year 2019 Half year 2018
GBPm GBPm Change % Half year 2018 GBPm Change %
------------------ ------------------ -------------------- --------------------- --------------------
Free Free
surplus surplus Free Free Free
invested invested surplus surplus surplus
New in New in New investment New investment New investment
business new business new business in new business in new business in new
profit business profit business profit business profit business profit business
----------- -------- -------- -------- -------- -------- ---------- --------- ---------- -------- ----------
Asia 1,295 250 1,122 260 15 (4) 1,178 269 10 (7)
US 348 266 466 180 (25) 48 495 192 (30) 39
----------- -------- -------- -------- -------- -------- ---------- --------- ---------- -------- ----------
Total
continuing
operations 1,643 516 1,588 440 3 17 1,673 461 (2) 12
----------- -------- -------- -------- -------- -------- ---------- --------- ---------- -------- ----------
IFRS profit
Actual exchange rate Constant exchange rate
-------------------------------- ------------------------
Half year Half year Half year
2019 GBPm 2018 GBPm Change % 2018 GBPm Change %
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Operating profit based on longer-term
investment returns before tax from continuing
operations(2)
Asia
Long-term business 1,095 927 18 963 14
Asset management 103 89 16 92 12
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Total 1,198 1,016 18 1,055 14
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
US
Long-term business 1,203 1,001 20 1,064 13
Asset management 12 1 n/a 1 n/a
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Total 1,215 1,002 21 1,065 14
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Total segment profit from continuing operations 2,413 2,018 20 2,120 14
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Other income and expenditure (366) (329) (11) (331) (11)
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Total operating profit based on longer-term
investment returns before tax and restructuring
costs 2,047 1,689 21 1,789 14
Restructuring costs(3) (23) (20) (15) (20) (15)
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Total operating profit based on longer-term
investment returns before tax from continuing
operations 2,024 1,669 21 1,769 14
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Non-operating items:
Short-term fluctuations in investment returns
on shareholder-backed business (1,124) 9 n/a 8 n/a
Amortisation of acquisition accounting adjustments (17) (22) 23 (23) 26
Gain (loss) on disposal of businesses
and corporate transactions 13 (57) n/a (60) n/a
--------------------------------------------------- ---------- ---------- -------- ------------- ---------
Profit from continuing operations before tax
attributable to shareholders' returns 896 1,599 (44) 1,694 (47)
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Tax charge attributable to shareholders' returns (1) (326) 100 (343) 100
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Profit for the period from continuing operations 895 1,273 (30) 1,351 (34)
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Profit for the period from discontinued operations,
net of related tax 645 83 n/a 83 n/a
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Profit for the period 1,540 1,356 14 1,434 7
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
IFRS profit from discontinued operations
Actual exchange rate
--------------------------------
Half year Half year
2019 GBPm 2018 GBPm Change %
------------------------------------------------------------------------------------ ---------- ---------- --------
Operating profit based on longer-term investment returns before tax(2)
Long-term business 496 487 2
General insurance commission 2 19 (89)
Asset management 239 272 (12)
Head office costs (21) - n/a
------------------------------------------------------------------------------------ ---------- ---------- --------
Operating profit based on longer-term investment returns before restructuring costs 716 778 (8)
Restructuring costs(3) (29) (42) 31
------------------------------------------------------------------------------------ ---------- ---------- --------
Total operating profit based on longer-term investment returns before tax 687 736 (7)
------------------------------------------------------------------------------------ ---------- ---------- --------
Non-operating profit (loss) 130 (635) n/a
------------------------------------------------------------------------------------ ---------- ---------- --------
Profit before tax attributable to shareholders' returns 817 101 n/a
------------------------------------------------------------------------------------ ---------- ---------- --------
Tax charge attributable to shareholders' returns (172) (18) n/a
------------------------------------------------------------------------------------ ---------- ---------- --------
Profit for the period 645 83 n/a
------------------------------------------------------------------------------------ ---------- ---------- --------
Post-tax profit - EEV(4)
Actual exchange rate Constant exchange rate
-------------------------------- ------------------------
Half year Half year Half year
2019 GBPm 2018 GBPm Change % 2018 GBPm Change %
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Post-tax operating profit based on longer-term
investment returns from continuing operations
Asia
Long-term business 2,127 1,753 21 1,834 16
Asset management 91 77 18 79 15
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Total 2,218 1,830 21 1,913 16
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
US
Long-term business 793 1,005 (21) 1,068 (26)
Asset management 11 (2) 650 (2) 650
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Total 804 1,003 (20) 1,066 (25)
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Other income and expenditure (361) (340) (6) (341) (6)
Restructuring costs(3) (20) (18) (11) (18) (11)
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Post-tax operating profit based on longer-term
investment returns from continuing operations 2,641 2,475 7 2,620 1
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Non-operating items:
Short-term fluctuations in investment returns 2,229 (965) n/a (1,021) n/a
Effect of changes in economic assumptions (1,371) 610 n/a 656 n/a
Mark-to-market value movements on core structural
borrowings (492) 579 n/a 580 n/a
Loss attaching to corporate transactions (24) (48) n/a (50) n/a
--------------------------------------------------- ---------- ---------- -------- ------------- ---------
Post-tax profit for the period from continuing
operations 2,983 2,651 13 2,785 7
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Post-tax profit for the period from discontinued
operations 1,281 317 304 317 304
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Post-tax profit for the period 4,264 2,968 44 3,102 37
---------------------------------------------------- ---------- ---------- -------- ------------- ---------
Operating free surplus generated from continuing operations(5)
Actual exchange rate Constant exchange rate
---------------------------------------- ----------------------------
Half year Half year Half year
2019 GBPm 2018 GBPm Change % 2018 GBPm Change %
------------ ------------ ------------ -------------- ------------
Long- Long- Long- Long- Long-
term Total term Total term Total term Total term Total
---------------------------------------- ----- ----- ----- ----- ----- ----- ------ ------ ----- -----
Asia 594 685 513 590 16 16 528 607 13 13
US 820 831 595 593 38 40 632 630 30 32
---------------------------------------- ----- ----- ----- ----- ----- ----- ------ ------ ----- -----
Total continuing operations before
restructuring costs 1,414 1,516 1,108 1,183 28 28 1,160 1,237 22 23
Restructuring costs(3) (1) (14) - (10) n/a (40) - (10) n/a (40)
---------------------------------------- ----- ----- ----- ----- ----- ----- ------ ------ ----- -----
Total continuing operations 1,413 1,502 1,108 1,173 28 28 1,160 1,227 22 22
---------------------------------------- ----- ----- ----- ----- ----- ----- ------ ------ ----- -----
Basic earnings per share - based on operating profit after tax
Actual exchange rate Constant exchange rate
---------------------------------- ------------------------
Half year Half year Half year
2019 pence 2018 pence Change % 2018 pence Change %
------------------------------ ----------- ----------- -------- ------------- ---------
IFRS:
From continuing operations 65.3 53.7 22 57.0 15
------------------------------ ----------- ----------- -------- ------------- ---------
EEV:
From continuing operations 102.1 96.2 6 101.8 -
------------------------------ ----------- ----------- -------- ------------- ---------
Cash remitted by the business units to the Group(6)
Half year Half year
2019 GBPm 2018 GBPm Change %
---------------------------------------------------- ---------- ---------- --------
From continuing operations
Asia 451 391 15
US 400 342 17
Other UK (including Prudential Capital) 5 37 (86)
From discontinued operations
M&GPrudential 356 341 4
---------------------------------------------------- ---------- ---------- --------
Total Group 1,212 1,111 9
---------------------------------------------------- ---------- ---------- --------
Cash and capital - both continuing and discontinued operations
Half year Half year
2019 2018 Change %
---------------------------------------------------------------------------------- ----------- ----------- --------
First interim dividend per share relating to the reporting period 16.45p 15.67p 5
Holding company cash and short-term investments GBP2,365m GBP2,210m 7
Group Solvency II capital surplus(7,8) GBP16.7bn GBP14.4bn 16
Group Solvency II capital ratio(7,8) 222% 209% +13pp
---------------------------------------------------------------------------------- ----------- ----------- --------
Group shareholders' funds (including goodwill attributable to shareholders) - both continuing
and discontinued operations
Half year Half year
2019 GBPbn 2018 GBPbn Change %
---------------------------------------------------------------------------------- ----------- ----------- --------
IFRS 19.7 15.9 24
EEV 53.4 47.4 13
---------------------------------------------------------------------------------- ----------- ----------- --------
Half year Half year
2019 % 2018 %
---------------------------------------------------------------------------------- ----------- -----------
Total return on IFRS shareholders' funds(9) 18 17
Total return on embedded value(10) 17 13
---------------------------------------------------------------------------------- ----------- -----------
Half year Half year
2019 pence 2018 pence Change %
---------------------------------------------------------------------------------- ----------- ----------- --------
EEV shareholders' funds per share (including goodwill attributable to
shareholders)(10) 2,055 1,830 12
EEV shareholders' funds per share (excluding goodwill attributable to
shareholders)(10) 1,991 1,774 12
---------------------------------------------------------------------------------- ----------- ----------- --------
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
II of the Additional 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 II of the Additional financial information for definition and
reconciliation to IFRS balances.
5 For insurance operations, operating free surplus generated
represents amounts maturing from the in-force business during the
period less investment in new business and excludes non-operating
items. For asset management businesses, it equates to post-tax
operating profit for the period. Restructuring costs are presented
separately from the underlying business unit amount. Further
information is set out in note 9 of the EEV basis results.
6 Cash remitted to the Group forms part of the net cash flows of
the holding company. A full holding company cash flow is set out in
note I(iii) of the Additional financial information. This differs
from the IFRS Condensed 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 covers continuing and
discontinued operations and excludes the contribution to own funds
and the Solvency Capital Requirement from ring-fenced with-profits
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.
8 Estimated before allowing for first interim ordinary dividend.
9 See note II of the Additional financial information for
definition and reconciliation of IFRS balances.
10 Further information is set out in the Additional EEV
financial information.
Group Chief Risk and Compliance Officer's report on 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. Although M&GPrudential
is considered a discontinued operation and is approaching life as a
fully independent business with its board and management in place,
until the demerger is effected M&GPrudential's risks (as with
those of the Group's other business units) are managed within the
Group Risk Framework and this report reflects this position.
1. Introduction
Group structure
The activity ongoing at M&GPrudential to combine its asset
management and UK and Europe insurance businesses, and
M&GPrudential's proposed demerger from the rest of the Group
(announced in March 2018), requires significant and complex
changes. These have continued to progress apace in 2019. The Risk
function has been embedded within key work streams and with a
number of important milestones in the demerger activity now
completed, a clear view exists of the remaining activities and
associated risks and dependencies in order to execute these
changes.
A mature and well-embedded risk framework is in place and,
during this period of transition, the Group Risk function has
performed a defined role in providing oversight, support and risk
management, as well as objective challenge to ensure the Group
remains within its risk appetite. During 2019, these activities
have been in the form of risk opinions, guidance and assurance on
critical transformation and demerger activity for the Group and at
M&GPrudential, as well as assessments and ongoing monitoring of
the financial and execution risks to the demerger from external
events. These include the potential market disruption from the UK's
exit from the EU and the current situation in Hong Kong.
A key objective is that post-demerger there are two strong,
standalone risk functions in M&GPrudential and Prudential plc
that are more closely aligned to their respective key stakeholders.
Planning and delivery of operational separation for the risk
functions remain on track. Throughout this process, the Risk
function has kept its focus on managing the risks of the growing
business, in an environment which remains uncertain from a
geopolitical and macroeconomic perspective.
Societal developments
Investor focus in developed 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. Developments in the business
environments in which the Group operates are continually monitored
to ensure that the environmental, social and governance (ESG)
issues that are important to the Group's brand, reputation and
long-term strategy are understood and managed, and this includes
stakeholder and regulatory expectations. Technological developments
continue and there is a growing expectation from consumers that the
services they receive, and the manner in which it is delivered,
keeps pace. Regulatory developments such as the EU General Data
Protection Regulation (GDPR), and similar regulations in the US and
Asia, 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 regulations in data protection have been incorporated
into the principles against which the business requirements are
defined.
The world economy
Economic growth worldwide has been slowing since the beginning
of the year, with global manufacturing contracting in May and June,
led by the Eurozone, UK and some Asian economies, although the US
continued to see some expansion. Services and consumption data have
remained fairly robust over the first half and this has provided
support to the extent of economic growth seen. Various factors have
exerted downward pressure on global GDP growth over the year to
date, including political tensions (in particular those related to
trade policies), efforts in China to deleverage and tightened
financial conditions in the US. Faced with the prospect of a
slowdown in the global economy, continued subdued inflation and the
potential impacts from trade tensions, the major central banks
across North America, Europe and Asia have signalled a change in
position towards further easing in monetary policy. Although the
continuation of accommodative monetary conditions is expected to
provide support for the global economy, the outlook over the rest
of 2019 is likely to remain highly uncertain.
Financial markets
Financial markets suffered broadly as 2018 came to an end,
driven by the substantial weakening of growth in world trade and
the tightening in monetary policy being effected by central banks
at that time. In the first half of 2019, most assets responded
positively to the US Federal Reserve's then-indications of a
potential move back towards accommodative monetary policy, which
ultimately manifested in a 0.25 per cent cut in the US central
bank's benchmark interest rate in early August. Bond valuations
have also rallied on the back of the significant fall in interest
rates over the first quarter. The announcement in early July 2019
of a resumption in trade talks between the US and China has
contributed further to the increase in risk asset values. Headwinds
to a continuation of positive financial market performance remain
in place, in particular given that market turbulence and reduced
liquidity tend to exacerbate increases in volatility. Markets
remain highly susceptible to any abrupt change in risk sentiment
and in particular to the signals of central banks in respect of the
direction of travel in monetary policy.
(Geo)political landscape
Events in 2019 continue to show that the world is experiencing a
period of global geopolitical transition and increasing
uncertainty. Popular discontent has been one of the driving factors
of political change, 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) do not appear as certain as they once
were. It is clear that the full long-term impacts of these global
changes remain to be seen. Across the Group's key geographies we
continue to see national protectionism in trade and economic
policies. The UK's exit from the EU and the nature of the future
relationship persists as a key uncertainty. Rising tensions in the
Gulf region and China's relationship with both the US and Hong Kong
remain sources of geopolitical uncertainty. As a global
organisation, the Group develops plans to mitigate business risks
arising against this backdrop and engages with national bodies
where it can in order to ensure its policyholders, employees and
other key stakeholders are not adversely impacted.
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
macroprudential 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. Prudential announced in August 2018 that the Hong Kong
Insurance Authority would be the Group-wide supervisor following
the demerger of M&GPrudential, and constructive engagement
continued in 2019 on the future Group-wide regulatory framework
that will apply to the Group immediately after the demerger and the
framework that will apply in the longer term. Similarly,
M&GPrudential has been engaging closely with the PRA and FCA on
the application of the existing regulatory framework in the UK to
the demerged business.
2. Key internal, regulatory, economic and (geo)political events over the past 12 months
Q3 2018 Q4 2018 Q1 2019 Q2 2019
In August, the Group The IAIS launches a On 25 March, the Hong Kong Prudential's Pulse app
announces that the Hong consultation for the IA and Prudential plc sign launches in April in
Kong Insurance Authority Holistic Framework (HF) in the Regulatory Letter Malaysia, providing
will become the Group-wide November, which aims to specifying the affordable digital health
supervisor for Prudential assess and mitigate supervisory framework and wellness services to
plc after the demerger of systemic risk in the immediately following the consumers. In June,
M&GPrudential, and insurance sector and is demerger of M&GPrudential. Prudential announces a
constructive engagement intended to replace the The Group has since strategic partnership
on the future regulatory current agreed with the supervisor with OVO to offer customers
relationship begins. Global Systemically to apply the Local Capital wellness, health and wealth
Important Insurer (G-SII) Summation Method (LCSM) to products and services in
In July, the International measures, with the aim of determine Indonesia.
Association of Insurance adoption in November Group regulatory capital
Supervisors (IAIS) releases 2019. requirements and related Several key elections are
consultation governance requirements held across Asia in the
documents for both the In November, the until the Hong Kong first and second quarters.
Common Framework for the International Accounting IA's Group-wide Supervision Legislative elections
Supervision of Insurers Standards Board (IASB) Framework is finalised. take place in Thailand in
(ComFrame) and Insurance tentatively delays the March, with the outcome
Capital Standard (ICS) effective Over Q1 signs continue of a marking the country's
v2.0. date of IFRS 17 by one year moderation in US growth and return to civilian
The Group submits ICS field to periods beginning on or a sharper slowdown in the rule; in April the
results to the PRA in after 1 January 2022. The rest of incumbent President Widodo
August 2018. introduction the world, with Europe's wins the presidential
of further amendments to growth expectations election in Indonesia;
In September, PRA and FCA this new standard will be dropping progressively and in May the legislative
request from major banks considered. throughout the quarter. elections in India see a
and insurers, details of Central bank rhetoric turns victory for Prime Minister
preparations and The reduction in global dovish, and this is one of Narendra Modi.
actions being undertaken to accommodative monetary the factors driving the S&P The election results align
manage transition from policy continues, with the 500 to broadly to consensus polls.
London Inter-Bank Offered European Central its best quarter since Q2
Rate (LIBOR) Bank (ECB) confirming that 2009 (rising by 13.6 per Over Q2 and into Q3,
to alternative interest net asset purchases would cent), along with returning large-scale demonstrations
rate benchmarks. cease at the end of 2018, positive risk have taken place in Hong
and the US sentiment. Meanwhile, Kong, sparked by
Emerging market equities Federal Reserve raises yields fall sharply in an extradition bill
decline rapidly in August rates for the fourth time response to the softening proposed by the Hong Kong
as tightening financial in 2018 in December. economic outlook and government.
conditions impact dovish turn by central
economies with external China reports a large banks. In Q2, China reports The Hong Kong Insurance
funding vulnerabilities. manufacturing decline in its lowest quarterly GDP Authority issues its
December, prompting growth rate in Guidelines on Enterprise
The US imposes tariffs on concerns of a global growth 30 years of 6.2 per cent. Risk Management in July,
Chinese exports worth US$50 slowdown. Additional setting out objectives and
billion in July, prompting stimulus measures from the In Indonesia, the Otoritas requirements on ERM and the
Beijing to People's Bank of China are Jasa Keuangan (OJK) Own Risk Solvency
respond in kind. Despite a enacted. approves 'grandfathering' Assessment under
temporary truce agreed at of Prudential's existing Pillar 2 of its proposed
the G20 summit on 1 Fears of tightening 94.6 per cent shareholding RBC regime for solo
December, trade tensions financial conditions and a in P.T. Prudential Life entities.
between the two nations global economic slowdown Assurance, our Indonesian
remains high. trigger a sharp sell-off subsidiary, although At the G20 summit in June,
in US equity markets, which any future capital will be the US and China agree to
The Bank of England raises had remained resilient subject to the 80 per cent resume trade talks, which
rates for the second time through the first three foreign ownership limit. eases tensions
since the 2008 financial quarters of 2018, which had contributed to
crisis to 0.75 while global equities fall In March, the Group downward pressure on global
per cent in August, while further. The S&P 500 ends announces further expansion economic growth. The
highlighting significant 2018 with an annual decline in West Africa via the month-long truce
Brexit-driven uncertainties of circa acquisition of a majority ends abruptly in Q3 when
to the economy. 6 per cent. In early 2019 stake in Group Beneficial, the US announces in August
risk sentiment improves, a leading life insurer tariffs on US$300 billion
contributing to a broad operating in Cameroon, of Chinese imports
rally in equity Côte d'Ivoire (effective September). In
markets. and Togo. The acquisition response to the subsequent
completes in Q3. devaluation of the RMB, the
In November, Jackson US Treasury
announces the acquisition In February, in a summit in designates China a currency
of the group payout annuity Hanoi, the US and North manipulator as tensions
business of John Korea fail to reach an re-escalate.
Hancock Life Insurance agreement on nuclear
Company, a closed book of disarmament and a lifting Geopolitical tensions rise
circa 200,000 in-force of US-led international in the Middle East as Iran
certificates representing sanctions. However, in June announces a step-up in its
IFRS reserves of the two countries production
approximately US$5.5 agree to resume talks as of enriched uranium. This
billion. Donald Trump becomes the follows the US' withdrawal
first sitting US president from the 2015 nuclear deal
PPM America (PPMA) becomes to enter North and its subsequent
the fourth Prudential Group Korea. imposition of economic
signatory to the UN sanctions. The risk of
Principles for On 29 March, EIOPA releases further escalation remains
Responsible Investment in a discussion paper on high.
October 2018. systemic risk and
macroprudential policy In April, the PRA issues
Democrats win control of in insurance, setting out Supervisory Statement (SS
the House of its thinking on how this 3/19) on 'enhancing banks
Representatives in the area should be addressed in and insurers'
November US midterm the 2020 Solvency approaches to managing the
elections, II review. The paper financial risks from
while the Republicans suggests a range of climate change' which
retain control of the potential macroprudential outlines the regulatory
Senate. As bipartisan tools and measures. expectations for financial
disputes increase, the US services firms to assess
government partially shuts The UK Parliament fails to impacts from climate
down between late December pass the negotiated change.
2018 and January 2019. Withdrawal Agreement by
the-then Article 50 In June, the PRA and FCA
In December, the UK notice period deadline of hold a conference to set
Parliament rejects the 29 March, resulting in an out their reaction to
negotiated agreement on the agreed extension until 31 firms' plans on how
UK's withdrawal from October 2019. to transition away from
the EU. Uncertainty on the Prime Minster Theresa May London Inter-Bank Offered
nature of the UK's exit resigns from office in May Rate (LIBOR) to alternative
from the EU persists as the with Boris Johnson selected interest rate
UK government by the Conservative benchmarks.
seeks to renegotiate the Party as her successor.
agreement in early 2019. Following the end of Q2,
the Group submits the
results of ICS
field-testing for 2019
(launched
in April 2019) to the IAIS
on 31 July 2019. This will
be the last field-testing
prior to the
finalisation of the ICS 2.0
specifications and the
start of a five-year
monitoring period
next year. This follows the
IAIS global seminar which
took place in June.
---------------------------- ---------------------------- ----------------------------
3. Managing the risks in implementing our strategy
This section provides an overview of the Group's strategy, the
significant risks arising from the delivery of this strategy and
current risk management focus. The risks outlined below, which are
not exhaustive, are discussed in more detail in sections 5 and
6.
Our strategy Significant risks arising from the delivery of the Risk management focus
strategy
Group-wide
We aim to * Transformation risks around key change programmes * Managing the inter-connected execution risks from
generate this transformation activity under the Group's
attractive transformation risk framework, as well as providing
returns other risk management support and review.
enabling us
to provide
financial * Ensuring both M&GPrudential and Prudential plc will
security to have in place two strong standalone risk functions
our customers after demerger.
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
.
------------------------------------------------------------------- ------------------------------------------------------------
* Group-wide regulatory risks * Engagement with regulators and industry groups on
macroprudential 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.
Engagement with the PRA and FCA on the application of
the current UK regulatory framework to M&GPrudential.
------------------------------------------------------------------- ------------------------------------------------------------
* Information security and data privacy risks * Continuing the implementation of the Group-wide
organisational structure and governance model for
cyber security management.
* Ensuring full compliance with applicable privacy laws
across the Group.
------------------------------------------------------------------- ------------------------------------------------------------
* Business disruption and third-party risks * Continuing application of the Group-wide business
continuity framework and programme.
* Applying the distinct oversight and risk management
required over the Group's third parties, including
outsourcing partners and its strategic partnerships.
------------------------------------------------------------------- ------------------------------------------------------------
* Conduct risk * Continuing the development and implementation of the
Group-wide conduct framework which builds on the
Group's Customer Commitments Policy.
------------------------------------------------------------------- ------------------------------------------------------------
Asia
Serving the * Persistency risk * Implementation of business initiatives to manage
protection persistency risk, including revisions to product
and design and incentive structures. Ongoing experience
investment monitoring.
needs of the
growing
middle class
in Asia.
------------------------------------------------------------------- ------------------------------------------------------------
* Morbidity risk * Implementation of business initiatives to manage
morbidity risk, including product repricing where
required. Ongoing experience monitoring.
------------------------------------------------------------------- ------------------------------------------------------------
* Regulatory risk (including foreign ownership and * Proactive engagement with national governments and
conduct) regulators.
------------------------------------------------------------------- ------------------------------------------------------------
United States
Providing * Financial risks * Maintaining, and enhancing where necessary,
asset appropriate risk limits, hedging strategies and Group
accumulation oversight that are in place.
and
retirement
income
products to
US baby
boomers.
------------------------------------------------------------------- ------------------------------------------------------------
* Policyholder behaviour risk * Continued monitoring of policyholder behaviour
experience and review of assumptions.
------------------------------------------------------------------- ------------------------------------------------------------
Africa
* The Group continues to increase its risk management
focus on Prudential Africa as its presence there
expands and grows in materiality.
---------------------------------------------------------------------------------------------------------------------------------
M&GPrudential
Meeting the * M&GPrudential merger and transformation risk * Managing the merger and transformation risks to the
savings and delivery of strategic, financial and operational
retirement objectives.
needs of an
ageing UK and
continental
European
population.
------------------------------------------------------------------- ------------------------------------------------------------
* Continued oversight and experience analysis.
* Longevity risk
------------------------------------------------------------------- ------------------------------------------------------------
* 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.
------------------------------------------------------------------- ------------------------------------------------------------
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, now and after demerger. Prudential's approach to
risk management must be both well embedded and rigorous, closely
aligned with the Group's key stakeholders and its business units
and Group-wide. As the economic and political environment in which
we operate changes, it should also be sufficiently broad and
dynamic to respond to these changes.
Prudential has in place a system of governance that promotes and
embeds a clear ownership of risk, processes that link risk
management to business objectives and a proactive Board and senior
management providing oversight of risks. Mechanisms and
methodologies to review, discuss and communicate risks are in place
together with risk policies and standards to ensure risks are
identified, measured, managed, monitored and reported.
How 'risk' is 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 is owned by the Board and details
Prudential's risk governance, risk management processes and risk
appetite. The Framework is based on the concept of the 'three lines
of defence', comprising risk taking and management, risk control
and oversight, and independent assurance and has been developed to
monitor the risks to our business. The aggregate Group exposure to
its key risk drivers is monitored and managed by the Group Risk
function which is responsible for reviewing, assessing, providing
oversight and reporting on the Group's risk exposure and solvency
position from the Group economic, regulatory and ratings
perspectives.
In 2019, the Group continued to update its policies and
processes around oversight of model risks. Prudential manages key
ESG issues though a multi-disciplinary approach with 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-executive directors 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. These include, but are not limited to,
policies covering anti-money laundering, financial crime and
anti-bribery and corruption. The Group's third-party supply policy
ensures that human rights and modern slavery considerations are
embedded across all of its supplier and supply chain arrangements.
Embedded procedures to allow individuals to speak out safely and
anonymously against unethical behaviour and conduct are also in
place.
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 28 of the UK Corporate Governance
Code, the Board performs a robust assessment of the principal and
emerging 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. An emerging risk process has been
developed to support the identification, analysis, and
decision-making with respect to such risks and combines both
top-down and bottom-up views of risks at the level of the Group and
its business units.
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 Group's strategy 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.
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 across the Group. 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
currently in use 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 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, which are not exhaustive,
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 reduced investment returns and
fund performance and liquidity, 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 following its
decision to leave the EU, and in the US and China. Uncertainty in
these regions, combined with the continued threat of further
conflict in the Middle East and unpredictability in East Asia, Hong
Kong and the Korean peninsula underline that geopolitical risks
have potentially wide-ranging impacts; for example, through
increased regulatory, operational and business resilience risks,
and changes to the economic environment. Developments in Hong Kong
are being closely monitored by the Group to ensure that any
potential impact to the business, our employees and customers are
managed within our existing business resilience processes.
Regulatory risk
Prudential operates under the ever-evolving requirements set out
by diverse regulatory, legal and tax regimes. The increasing shift
towards macroprudential regulation and the number of regulatory
changes underway 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. Prudential has agreed to apply the Local Capital
Summation Method (LCSM) to determine Group regulatory capital
requirements, together with related governance requirements,
immediately following the demerger of M&GPrudential. The Group
is proactively engaging with the supervisor-elect on the
supervisory framework that will apply to the Group in the longer
term. This is intended to be the Hong Kong IA's Group-wide
Supervision (GWS) Framework which is currently under development
and is not expected to be enacted until the second half of
2020.
Technological change
The emergence of advanced technologies is continuing to provide
an impetus for companies to rethink their existing operating models
and how they interact with their customers. These developments are
already influencing changes to the competitor and regulatory
landscape. Technological change is considered from both an external
and internal view. The external view considers the risks that
emerge from the rise of new technologies (including the risk that
the Group does not identify these) and how this may impact on the
insurance industry and Prudential's competitiveness within it. 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. Policies and procedures to support how the Group operates
in relation to certain ESG issues are included in the Group
Governance Manual.
Risks from our investments Risks from our products Risks from our business operations
-------------------------------------- -------------------------------------- --------------------------------------
Market risk Insurance risks Transformation risk
Is the potential for reduced value The nature of the products offered A number of significant change
of Prudential's investments by Prudential exposes it to programmes are currently running to
resulting from the volatility insurance risks, which form effect both the Group's
of asset prices, driven by a significant part of the overall strategy and to comply with emerging
fluctuations in equity prices, Group risk profile. regulatory changes. The breadth of
interest rates, foreign exchange these activities,
rates and property prices. The insurance risks that the and the consequences, including the
business is exposed to by virtue of reputational impact, to the Group
In the Asia business, the main its products include longevity should they fail to
market risks arise from the value of risk (policyholders living longer meet their objectives, mean that
fees from its fee-earning than expected); mortality risk these risks are material at the
products. In the US, Jackson's fixed (higher number of policyholders level of the Group.
and variable annuity books are with life protection dying than
exposed to a variety of expected); morbidity risk (more Operational risks
market risks due to the assets policyholders with health A combination of the complexity of
backing these policies. protection becoming ill than the Group, its activities and the
expected) and persistency risk extent of transformation
M&GPrudential's asset management (customers lapsing their policies in progress creates a challenging
business invests in a broad range of at different levels than expected, operating environment.
asset classes and its and a type of policyholder behaviour
income is subject to the price risk). The medical Operational risk is the risk of loss
volatility of global financial and insurance business in Asia is also or unintended gain from inadequate
currency markets. The UK exposed to medical inflation risk or failed processes,
business's market risk exposure (the increasing cost personnel, systems and external
predominantly arises from the of medical treatments being higher events, and can arise through
valuation of the shareholders' than expected). business transformation; introducing
proportion of the with-profits new products; new technologies; and
fund's future profits, which depends The pricing of Prudential's products entering into new markets and
on equity, property and requires it to make a number of geographies. Implementing
bond values. assumptions, and deviations the business strategy and processes
from these may impact its reported for ensuring regulatory compliance
Credit risk profitability and capital position. (including those relating
The Group's asset portfolio gives Across its business to the conduct of its business)
rise to invested credit risk, being units, some insurance risks are more requires interconnected change
the potential for a material than others. initiatives across the Group,
reduction in the value of the pace of which introduces further
Prudential's investments driven by Persistency and morbidity risks are complexity. The Group's outsourcing
the lowering of credit quality among the most material insurance and third-party relationships
and likelihood of defaults. The risks for the Asia business introduce their own distinct risks.
assets backing the annuity business given the focus on health and Such operational risks, if they
in the UK, Jackson's general protection products in the region. materialise, could result
account portfolio and the Asia in financial loss and/or
shareholder business means credit The Jackson business is most exposed reputational damage. Operational
risk is considered a material to policyholder behaviour risk, risk is considered to be material
risk for all business units. including persistency, at the level of the Group.
which impacts the profitability of
The Group is also exposed to the variable annuity business and is Business disruption risks may impact
counterparty default risk through influenced by market on Prudential's ability to meet its
activities such as reinsurance performance and the value of policy key objectives and
and derivative hedging as well as guarantees. protect its brand and reputation.
the operational management of cash. The Group's business resilience is a
For M&GPrudential the most material core part of a well-embedded
Liquidity risk insurance risk is longevity risk, business continuity management
Is the risk of not having sufficient arising from its legacy programme.
liquid assets to meet obligations as annuity business.
they fall due, and Information security and data
we look at this under both normal Conduct risk privacy risks are significant
and stressed conditions. This is a Prudential's conduct of business, considerations for Prudential
risk which is considered especially the design and and the cyber security threat
material at the level of the Group. distribution of its products is continues to evolve globally in
crucial in ensuring that the Group's sophistication and potential
commitment to meeting customers' significance. This includes the
needs and expectations continually evolving risk of
are met. The Group's conduct risk malicious attack on its systems,
framework is owned by the first line network disruption and risks
which drives a more relating to data security,
forward-looking approach and means integrity, privacy and misuse. The
that achieving good customer scale of the Group's IT
outcomes is at the centre infrastructure and network (and
of our business activity. resources required to monitor and
manage it), stakeholder expectations
and high-profile cyber security and
data misuse incidents
across industries mean that these
risks are considered material at the
level of the Group.
As with all financial services
firms, the nature of the Group's
business and its operations
means that it is exposed to risks
relating to money laundering, fraud,
sanctions compliance
and bribery and corruption.
-------------------------------------- -------------------------------------- --------------------------------------
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 proposed demerger of
M&GPrudential from the rest of the Group, the Hong Kong
Insurance Authority will become Prudential's Group-wide supervisor.
Constructive engagement with the supervisor-elect began in 2018 and
has continued into 2019. In particular, Prudential continues to
engage with the supervisor on the proposed framework for Group-wide
supervision that will apply to the Group following the demerger. In
the longer term this is intended to be the Hong Kong IA's
Group-wide Supervision (GWS) Framework which is currently under
development and is not expected to be enacted until the second half
of 2020. Until the GWS is finalised, Prudential has agreed to apply
the Local Capital Summation Method (LCSM) to determine Group
regulatory capital requirements immediately following the demerger
of M&GPrudential, together with related governance
requirements.
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 ongoing
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's 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,
potentially serving as an alternative approach to the current G-SII
model. A further consultation was launched by the IAIS on 14 June
2019 with proposals for revisions to the Insurance Core Principles
(ICPs) in relation to the HF. The IAIS intends to implement the HF
in 2020 proposing 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 supervisory monitoring to
identify potential vulnerabilities and more supervisory powers of
intervention for mitigating systemic risk.
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.
The Aggregation Method is one of the approaches being considered as
part of the ICS and is being led by the National Association of
Insurance Commissioners (NAIC). Alongside the current ICS
developments, the NAIC is also developing its Group Capital
Calculation (GCC) for the supervision of insurance groups in the
US. The GCC is intended to be a risk-based capital (RBC)
aggregation methodology. In developing the GCC, the NAIC will
liaise as necessary with ComFrame on international capital
developments and will also consider Group capital developments by
the US Federal Reserve Board, both of which may help inform the US
regulatory association in its construction of a US Group capital
calculation.
In certain jurisdictions in which Prudential operates there are
also a number of ongoing policy initiatives and regulatory
developments that are having, and will continue to have, an impact
on the way Prudential is supervised, including the US Dodd-Frank
Wall Street Reform and Consumer Protection Act, ongoing FCA reviews
and continuing engagement with the PRA. Decisions taken by
regulators, including those related to solvency requirements,
corporate or governance structures, capital allocation, financial
reporting and risk management may have an impact on our
business.
In 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 June 2019, the IASB published an
exposure draft proposing a number of targeted amendments to this
new standard including the deferral of the effective date by one
year from 2021 to 2022. The comment deadline for the exposure draft
is 25 September 2019. 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 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.
The NAIC is targeting a January 2020 effective date for the
revised Variable Annuity Framework, which was designed with the aim
of reducing the non-economic volatility in the variable annuity
statutory balance sheet. Jackson continues to make progress in
preparing models for implementation. The NAIC also has an ongoing
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 Asia, regulatory regimes are developing at different speeds,
driven by a combination of global factors and local considerations.
New local capital rules and requirements could be introduced in
these and other regulatory regimes that challenge legal or
ownership structures, or current sales practices, or could be
applied to sales made prior to their introduction retrospectively,
which could have a negative impact on Prudential's business or
reported results.
In the UK, there has, in recent years, been regulatory focus 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 and new product
propositions may also have customer risk implications which are
monitored.
In 2017, the UK submitted the formal notification of its
intention to withdraw from the EU pursuant to Article 50 of the
Treaty on the European Union, as amended. If no formal withdrawal
agreement is reached between the UK and the EU, then it is
currently expected that the UK's membership of the EU will
automatically terminate on 31 October 2019 unless a further
extension is agreed between the UK and EU. 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.
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 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.
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, its ability to attract and retain customers
and staff, and in turn its financial performance and its long-term
strategy. The Group maintains active engagement with its key
stakeholders, 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.
Policies and procedures to support how the Group operates in
relation to certain ESG issues are included in the Group Governance
Manual. Prudential manages key ESG issues though a
multi-disciplinary approach with functional ownership for ESG
topics. The ESG Executive Committee coordinates these activities
and seeks, as one of its aims, to ensure a consistent approach in
managing ESG considerations in its business activities, including
investment activities. It is supported by senior functional leaders
and representatives from the Group's business units, including the
chief investment officers of the Group's asset managers.
Climate change is a key ESG theme for the Group and the finance
services industry. Recognising the increasing number of regulatory,
supervisory and investor-driven sustainable finance and
climate-related financial risk initiatives, the Group continues to
participate in investor-driven initiatives and collaborative
industry forums to assess and consider the risks from climate
change to our business. The Group's ESG Executive Committee is
focused on the holistic assessment of ESG considerations material
to the Group. It raises matters for Board decision-making and
oversees the implementation of decisions, supporting the
sustainable delivery of the Group's strategy. The management of
climate-related risks and opportunities is a Group strategic
priority, and one of the ESG Executive Committee's principal
responsibilities is to oversee the implementation of the
recommendations of the Financial Stability Board's Task Force on
Climate-related Financial Disclosures.
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 (including the impact of interest rate movements
on the future value of shareholder profits in the UK with-profits
fund); 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:
-- The Group market risk policy;
-- The Group Asset Liability Committee - a first line risk
management advisory committee to the Group Chief Executive Officer
which supports the identification, assessment and management of key
financial risks significant to the achievement of the Group's
business objectives;
-- Risk appetite statements, limits and triggers;
-- Our asset and liability management programmes;
-- 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 Asia, the shareholder exposure to equity price movements
results from unit-linked products, where fee income is linked to
the market value of the funds under management. Further exposure
arises from with-profits businesses where bonuses declared are
based broadly on historical and current rates of return from the
Asia business's investment portfolios, which include equities.
In Jackson, investment risk arises from the assets backing
customer policies. Equity risk is driven by the variable annuity
business, where the assets are invested in both equities and bonds
and the main risk to the shareholder comes from providing the
guaranteed benefits offered. The exposure to this is primarily
controlled by using a derivative hedging programme, as well as
through the use of reinsurance to pass on the risk to third-party
reinsurers.
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 GBP11.1 billion as at 30
June 2019, helps to protect against market fluctuations and is
protected partially against falls in equity markets through an
active hedging programme within the fund.
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 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 we
are comfortable with the level of interest rate and market risks
incurred as a result. Derivatives are also used to provide some
protection.
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.
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 of 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
Credit risk also arises from the debt portfolio in the Asia
business comprising the shareholder, with-profit and unit-linked
funds, the value of which was GBP52.6 billion at 30 June 2019. 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 Group's US business GBP45.3
billion of fixed income assets are held to support shareholder
liabilities including those from our fixed annuities, fixed index
annuities and life insurance products.
Prudential's discontinued M&GPrudential operation is exposed
to credit risk on fixed income assets in the shareholder-backed
portfolio. As at 30 June 2019, this portfolio contained fixed
income assets worth GBP21.7 billion. Credit risk arising from a
further GBP63.5 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.
The shareholder-owned debt and loan portfolio of the Group's
other operations was GBP1.9 billion as at 30 June 2019.
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 holdings of continuing operations represented
19 per cent or GBP12.1 billion of the shareholder debt portfolio
attributable to continuing operations as at 30 June 2019 (31
December 2018: 20 per cent or GBP11.7 billion). 1 per cent of this
was rated AAA and 90 per cent was considered investment grade (31
December 2018: 84 per cent investment grade).
Sovereign debt holdings of discontinued operations represented
13 per cent or GBP2.7 billion of the shareholder debt portfolio
attributable to discontinued operations as at 30 June 2019 (31
December 2018: 13 per cent or GBP2.7 billion). 9 per cent of this
was rated AAA and 100 per cent was considered investment grade (31
December 2018: 100 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 30 June 2019 are
given in note C3.2(f) of the Group's IFRS financial statements for
continuing operations and note D2.2(d) of the Group's IFRS
financial statements for discontinued operations.
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 30 June 2019 are
given in note C3.2(f) of the Group's IFRS financial statements for
continuing operations and note D2.2(d) of the Group's IFRS
financial statements for discontinued operations.
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 30 June 2019:
-- For continuing operations, 93 per cent of the shareholder
portfolio is investment grade rated(1) . In particular, 59 per cent
of the portfolio is rated(1) A- and above (or equivalent);
-- For discontinued operations, 97 per cent of the shareholder
portfolio is investment grade rated(1) . In particular, 86 per cent
of the portfolio is rated(1) A- and above (or equivalent); and
-- The Group's shareholder portfolio is well diversified: no
individual sector(2) 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 GBP3.5 billion of undrawn committed
facilities, of which GBP2.0 billion will remain with Prudential plc
following the demerger of M&GPrudential, 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 by the Group and business units of LCRs
which are calculated under both base case and stressed scenarios
and are reported to committees and the Board;
-- The Group's Liquidity Risk Management Plan, which includes
details of the Group Liquidity Risk Framework as well as gap
analysis of liquidity risks and the adequacy of available liquidity
resources under normal and stressed conditions;
-- Regular stress testing;
-- Our contingency plans and identified sources of liquidity;
-- The Group's ability to access the money and debt capital markets;
-- Regular deep dive assessments; and
-- 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. 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. At M&GPrudential, this
is predominantly longevity risk.
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 our policies, either limits per type of claim or in total
across a policy. Prudential's morbidity risk is mitigated by
appropriate underwriting when policies are issued and claims are
received. Our morbidity assumptions reflect our recent experience
and expectation of future trends for each relevant line of
business.
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 (including
active customer engagement and service quality) and managed locally
post-sale through regular experience monitoring and the
identification of common characteristics of business with high
lapse rates. Where appropriate, allowance is made for the
relationship (either assumed or observed historically) between
persistency and investment returns and any additional risk is
accounted for. Modelling this dynamic policyholder behaviour is
particularly important when assessing the likely take-up rate of
options embedded within certain products. The effect of persistency
on the Group's financial results can vary but depends mostly on the
value of the product features and market conditions.
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 GBP12 billion in UK annuity liabilities to Rothesay
Life. 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 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. Transformation risk
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. Many of these are interconnected
and/or of large scale, and may have financial and non-financial
implications if such initiatives fail to meet their objectives.
Additionally, these initiatives inherently give rise to design and
execution risks, and may increase existing business risks, such as
placing additional strain on the operational capacity, or weakening
the control environment, of the Group. Implementing further
strategic initiatives may amplify these risks. Furthermore, these
programmes require ongoing oversight, coordinated independent
assurance and regular monitoring and consolidated reporting, as
part of the Group Transformation Risk Framework, to mitigate the
risks to the business.
The Group's current significant change initiatives include the
merger of M&G Investments and Prudential UK and Europe, and the
demerger of M&GPrudential. Significant execution risks arise
from these initiatives, including in relation to the separation and
establishment of standalone governance under relevant regulatory
regimes, business functions and processes (data, systems, people)
and third party arrangements. The Group's transformation portfolio
also includes, but is not limited to, the discontinuation of LIBOR
and the implementation of IFRS 17 - see section 6.1a. above for
further information.
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.
b. 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 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 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. Exposure to
operational events could impact operational resilience by
significantly disrupting systems, operations and services to
customers, which may result in financial loss, customer impacts and
reputational damage.
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.
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 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.
Financial crime risk
As with all financial services firms, Prudential is exposed to
risks relating to money laundering (the risk that the products or
services of the Group are used by customers or other third parties
to transfer or conceal the proceeds of crime); fraud (the risk of
fraudulent claims or transactions, or procurement of services, are
made against or through the business); sanctions compliance (the
risk that the Group undertakes business with individuals and
entities on the lists of the main sanctions regimes); and bribery
and corruption (the risk that employees or associated persons seek
to influence the behaviour of others to obtain an unfair advantage
or receive benefits from others for the same purpose).
Prudential operates in some high-risk countries where, for
example, the acceptance of cash premiums from customers may be
common practice, large-scale agency networks may be in operation
where sales are incentivised by commission and fees or with a
higher concentration of exposure to politically exposed
persons.
The Group-wide policies we have in place on anti-money
laundering, fraud, sanctions and anti-bribery and corruption
reflect the values, behaviours and standards that are expected
across the business. Across Asia, screening and transaction
monitoring systems are in place and a series of improvements and
upgrades are being implemented, while a programme of compliance
control monitoring reviews is being undertaken. Risk assessments
are regularly undertaken at higher risk locations. The Group has in
place a mature confidential reporting system through which staff
and other stakeholders can report concerns relating to potential
misconduct. The process and results of this are overseen by the
Group Audit Committee.
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.
Developments in data protection worldwide (such as GDPR that
came into force in May 2018) have increased the financial and
reputational implications for Prudential in the event of a breach
of its (or third-party suppliers') IT systems. As well as data
protection, stakeholder expectations are now 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 having preventative
risk management in place, it is fundamental that the Group has
robust critical recovery systems in place in the event of a
successful attack on its infrastructure, a breach of its
information security or a failure of its systems in order 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
leverage 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.
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,
financial crime, 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:
-- A transformation risk framework that assesses, manages and
reports on the end-to-end transformation life cycle, 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;
-- On financial crime risks, screening and transaction
monitoring systems are in place and a programme of compliance
control monitoring reviews is undertaken, as well as regular risk
assessments;
-- A framework is in place for emerging risk identification and
analysis in order to capture, monitor and allow us to prepare for
operational risks that may crystallise beyond the short-term
horizon;
-- 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.
Notes
1 Based on hierarchy of Standard & Poor's, Moody's and
Fitch, where available and if unavailable, NAIC and 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 Directors confirm that the Company has complied with all the
provisions of the Corporate Governance Code issued by the Hong Kong
Stock Exchange Limited (HK Code) throughout the accounting period,
except that the Company does not comply with provision B.1.2(d) of
the HK Code which requires companies, on a comply or explain basis,
to have a remuneration committee which makes recommendations to a
main board on the remuneration of non-executive directors. This
provision is not compatible with supporting provision D.2.3 of the
UK Corporate Governance Code which recommends the board determines
the remuneration of non-executive directors. Prudential has chosen
to adopt a practice in line with the recommendations of the UK
Corporate Governance Code.
The Directors also confirm that the financial results contained
in this document have been reviewed by the Group Audit
Committee.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR UOURRKVAWAUR
(END) Dow Jones Newswires
August 14, 2019 04:30 ET (08:30 GMT)
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