SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of August, 2020
PRUDENTIAL PUBLIC LIMITED COMPANY
(Translation of registrant's name into English)
1 Angel Court, London,
England, EC2R 7AG
(Address
of principal executive offices)
Indicate
by check mark whether the registrant files or will file annual
reports
under
cover Form 20-F or Form 40-F.
Form
20-F X
Form 40-F
Indicate
by check mark whether the registrant by furnishing the
information
contained
in this Form is also thereby furnishing the information to
the
Commission
pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes
No X
If
"Yes" is marked, indicate below the file number assigned to the
registrant
in connection with Rule 12g3-2(b): 82-
This announcement contains inside information
NEWS RELEASE
11 August 2020
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PRUDENTIAL PLC HALF YEAR 2020 RESULTS
PRUDENTIAL ANNOUNCES RESILIENT ASIA OPERATING PROFIT AND INTENTION
TO FULLY SEPARATE JACKSON
Strategic updates and performance highlights on a constant (and
actual) exchange rate basis
●
Prudential plc intends
to fully separate Jackson from the Group, commencing with minority
IPO planned for first half of 2021 and full divestment over
time
●
Post-separation
Prudential Group to focus on high growth Asia and Africa markets
with a view to sustained double-digit growth in embedded value
per share
●
New dividend policy
aligned with revised Group strategy to focus on value creation
through growth
●
Asia half year adjusted
operating profit1 up
14 per cent2,
with double-digit adjusted operating profit1 growth2 in
nine Asia markets
●
Jackson local statutory
RBC ratio expected to be above 425 per cent after Athene equity
investment9
●
Group regulatory capital
surplus8 strong
at $12.4 billion, with an LCSM ratio of 334 per cent (31 December
2019: 309 per cent)
Mike Wells, Prudential plc's Group Chief Executive, said: "We have
delivered a resilient performance in the first half, despite a
challenging new business sales environment, which is likely to
persist for the rest of the year, and further falls in interest
rates. Our diverse, high-quality platform in Asia and our focus on
writing profitable value-adding business led to a 14 per
cent2 increase
in Asia adjusted operating profit1.
Our performance is again broad-based, with nine markets reporting
double-digit adjusted operating profit1 growth2.
In the US adjusted operating profit1 was
(19) per cent lower due to market-related effects on the level of
DAC amortisation but, while sales were lower, we have maintained
our leadership position in the annuities
market.
"The Board of Prudential plc has decided to pursue the full
separation and divestment of Jackson to enable the Group to focus
exclusively on its high-growth Asia and Africa businesses. This
would result in two separately listed companies with distinct
investment propositions, which we believe would lead to improved
strategic outcomes for both businesses. The Group would have
primary listings in both London and Hong Kong and secondary
listings in Singapore and the US. Jackson is expected to be solely
listed in the US.
"The separation and divestment of Jackson would transform
Prudential into a Group purely targeting the structural
opportunities of Asia and Africa. Our differentiated product and
geographic portfolio is well positioned to meet the health,
protection and savings needs in these regions, where insurance
penetration is low and demand for savings solutions is rapidly
developing. The post-separation Group would focus on growth,
with a view to achieving sustained double-digit growth in
embedded value per share. This would be supported by growth rates
of new business profit, which are expected to substantially exceed
GDP growth in the markets in which the Group operates.
"The Group expects to commence separation by way of a minority IPO,
targeting the first half of 2021, followed by future sell-downs
over time, subject to market conditions, with the proceeds used to
increase financial flexibility for further investment in our Asia
and Africa business. If market conditions are not supportive of an
IPO, the Group's current intention is that separation would be
facilitated through a demerger of the Group's stake in Jackson to
our existing shareholders. Any required shareholder approval for
the separation will be sought in advance of its
execution.
"Jackson intends to seek a strong credit rating and capitalisation
and is expected to target an RBC ratio in the circa 425-475 per
cent range at the point of the proposed listing. This range would
be subject to market conditions and will be kept under review.
Proceeds from anticipated new Jackson debt issuance would enable
repayment of a portion of the Group's debt during 2021 and 2022,
and support Prudential's intention to maintain its strong credit
rating following the separation. Proceeds from further sell-downs
in Jackson following the IPO would provide further resources to the
Group for investment in Asia and Africa.
"To support the separation process, other than any pre-separation
returns of capital including from Jackson's debt issuance as
indicated above, Prudential plc does not currently expect Jackson
to remit any regular dividends in 2020 or 2021 prior to an IPO.
Prudential will adopt a new dividend policy that is aligned to the
Asia and Africa growth strategy and to the intended separation of
Jackson. The new policy will apply with immediate effect. This new
policy reflects a rebalancing of capital allocation from cash
dividends to reinvestment in Asia, which is expected to deliver
profitable and sustainable compounding growth. For the 2020 first
interim dividend, the Board has approved a dividend of 5.37 cents
per share10,
representing one third of the current expectation for the 2020
full-year dividend under the Group's new dividend policy. Dividends
are expected to grow broadly in line with the growth in Asia
operating free surplus generation net of right-sized central costs,
and will be set taking into account financial prospects, market
conditions and investment opportunities.
"We believe we are well positioned both to weather the
disruption caused by the Covid-19 pandemic as we continue to
support our customers and communities in the recovery to come, and
emerge stronger and with a more focused strategy."
Summary financials - continuing operations
(ie excluding demerged M&G plc business in HY19)
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Half year 2020 $m
|
Half year 2019 $m
|
Change on
AER basis
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Change on
CER basis
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Adjusted operating profit1
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2,541
|
2,619
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(3)%
|
(2)%
|
Operating free surplus generated before the effects of US EEV
modelling enhancements made in the second half of
20193,4
|
1,979
|
1,943
|
2%
|
3%
|
Life new business profit5
|
1,160
|
2,125
|
(45)%
|
(45)%
|
IFRS profit after tax6
|
534
|
1,158
|
(54)%
|
(54)%
|
Net cash remittances from business units7
|
432
|
1,093
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(60)%
|
-
|
|
30 June 2020
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31 December 2019
|
|
Total
|
Per share
|
Total
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Per share
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LCSM shareholder surplus over Group minimum capital
requirement8
|
$12.4bn
|
n/a
|
$9.5bn
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n/a
|
IFRS shareholders' funds
|
$19.1bn
|
732¢
|
$19.5bn
|
749¢
|
EEV shareholders' funds
|
$48.9bn
|
1,876¢
|
$54.7bn
|
2,103¢
|
Notes
1
In this press release 'adjusted operating profit' refers to
adjusted IFRS operating profit based on longer-term investment
returns from continuing operations. This alternative performance
measure is reconciled to IFRS profit for the period in note B1.1 of
the IFRS financial statements.
2
Period-on-period percentage increases are stated on a constant
exchange rate basis unless otherwise stated.
3
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
adjusted operating profit for the period. Further information is
set out in note 11 of the EEV basis results.
4
During the second half of 2019, as part of the implementation of
the NAIC's changes to the US statutory reserve and capital
framework, enhancements were made to the model used to allow for
hedging within US statutory reporting, which were subsequently
incorporated into the EEV model. HY20 has been prepared on the same
basis as FY19. Accordingly, operating free surplus in HY20 is
$(535) million lower than it would have been if the previous EEV
modelling approach applied at HY19 had been used. After allowing
for this, operating free surplus generated in the first half of
2020 is $1,444 million, down (25) per cent on a constant exchange
rate basis and (26) per cent on an actual exchange rate
basis.
5
New business profit, on a post-tax basis, on business sold in the
period, calculated in accordance with EEV Principles.
6
IFRS profit after tax from continuing operations reflects the
combined effects of operating results determined on the basis of
longer-term investment returns, together with short-term investment
variances which for HY20 were driven by the impact of lower
interest rates and equity markets on the Group's obligations to
policyholders, together with amortisation of acquisition accounting
adjustments, the impacts of the corporate transactions and
tax.
7
Net cash amounts remitted by business units are included in the
holding company cash flow, which is disclosed in detail in note
I(iii) of the Additional unaudited financial information. This
comprises dividends and other transfers from business units that
are reflective of emerging earnings and capital
generation.
8
Surplus over Group minimum capital requirement and estimated before
allowing for first interim ordinary dividend. Shareholder business
excludes the available capital and minimum requirement of
participating business in Hong Kong, Singapore and Malaysia.
Further information on the basis of calculation of the LCSM measure
is contained in note I(i) of the Additional unaudited financial
information.
9
Based on the RBC capital position as at 30 June 2020 and assuming
the Athene investment transaction completed at that
date.
10
Under the Group's previous dividend policy, the first interim
dividend would have been 12.28 cents per share.
Contact:
Media
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Investors/Analysts
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Jonathan Oliver
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+44 (0)20 3977 9500
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Patrick Bowes
|
+44 (0)20 3977 9702
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Tom Willetts
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+44 (0)20 3977 9760
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William Elderkin
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+44 (0)20 3977 9215
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Person responsible
The person responsible for arranging the release of this
announcement on behalf of Prudential plc is Tom Clarkson, Company
Secretary.
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. The
IFRS and EEV results are presented in US dollars, reflecting the
change in the Group's presentational currency made in the second
half of 2019, and comparative amounts are restated accordingly. The
basis of translation is discussed in note A1 of the IFRS financial
statements. 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 2020 were driven by the impact of lower
interest rates and equity markets on the Group's obligations to
policyholders. They also exclude the effect of corporate
transactions undertaken in the period, which in 2020 was the gain
(loss) arising upon reinsurance of substantially all of Jackson's
fixed and fixed indexed annuity portfolio to Athene. 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, adjusted operating profit
also excludes amortisation of accounting adjustments arising
principally on the acquisition of REALIC that completed in 2012.
All amounts shown are for continuing operations (Asia, US and
Africa), with HY19 excluding the results of the demerged M&G
plc business.
c. Total
number of Prudential plc shares in issue as at 30 June 2020 was
2,608,860,447.
d. A
pre-recorded presentation for analysts and investors will be
available on-demand from 9.30am (UK time) using the following
link: https://www.investis-live.com/prudential/5f0d7eb427577e1000c23420/ebgd A
copy of the script used in the recorded video, a pdf of the
Presentation and this RNS will also be available from 9.30am (UK
time) on 11 August 2020 on the Prudential plc's
website.
A
Q&A call for analysts and investors will be held on the same
day at 11.30am (UK time).
Registration to a "listen in" only and online question
facility
To register to listen into the
conference call and submit questions online, please do so via the
following link: https://www.investis-live.com/prudential/5f10213027577e1000f6b945/prad The
call will be available to replay afterwards using the same
link.
Dial-in details
A
dial-in facility will be available to listen to the call and ask
questions: please allow 15 minutes ahead of the start time to join
the call (lines open half an hour before the call is due to start,
ie from 11.00am (UK time)).
Dial-in: +44 (0)20 3936 2999 (UK and
international) / 0800 640 6441 (Freephone UK), Participant access
code 717140. Once participants have entered this code their
name and company details will be taken.
Transcript
Following
the call a transcript will be published on the results centre page
of Prudential plc's website on 14 August 2020.
Playback facility
Please use the following for a playback
facility: +44 (0)20 3936 3001 (UK and international
excluding US) / + 1 845 709 8569 (US only), replay
code 943386. This will be available from approximately 3.00pm
(UK time) on 11 August 2020 until 11.59pm (UK time) on 25 August
2020.
e. 2020 First Interim Ordinary
Dividend
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Ex-dividend date
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20 August 2020 (UK, Hong Kong and Singapore)
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Record date
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21
August 2020
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Payment of dividend
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28 September 2020 (UK, Hong Kong and ADR holders)
On or about 05 October 2020 (Singapore)
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f. About Prudential plc
Prudential
plc is an Asia-led portfolio of businesses focused on structural
growth markets. The business helps people get the most out of life
through life and health insurance, and retirement and asset
management solutions. Prudential plc has 20 million customers and
is listed on 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, nor with The
Prudential Assurance Company Limited, a subsidiary of M&G plc,
a company incorporated in the United Kingdom.
g. Discontinued Operations
Throughout
this results announcement 'discontinued operations' refers to the
recently demerged UK and Europe operations (referred to as M&G
plc). All amounts presented refer to continuing operations unless
otherwise stated.
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,
strategy and objectives. Statements that are not historical facts,
including statements about Prudential's beliefs and expectations
and including, without limitation, statements containing the words
'may', 'will', 'should', 'continue', 'aims', 'estimates',
'projects', 'believes', 'intends', 'expects', 'plans', 'seeks' and
'anticipates', and words of similar meaning, are forward-looking
statements. These statements are based on plans, estimates and
projections as at the time they are made, and therefore undue
reliance should not be placed on them. By their nature, all
forward-looking statements involve risk and
uncertainty.
A
number of important factors could cause Prudential's actual future
financial condition or performance or other indicated results of
the entity referred to in any forward-looking statement to differ
materially from those indicated in such forward-looking statement.
Such factors include, but are not limited to, the impact of the
current Covid-19 pandemic, including adverse financial market and
liquidity impacts, responses and actions taken by regulators and
supervisors, the impact to sales, claims and assumptions and
increased product lapses, disruption to Prudential's operations
(and those of its suppliers and partners), risks associated with
new sales processes and information security risks. future market
conditions, including fluctuations in interest rates and exchange
rates, the potential for a sustained low-interest rate environment,
and the impact of economic uncertainty, asset valuation impacts
from the transition to a lower carbon economy, derivative
instruments not effectively hedging exposures arising from product
guarantees, inflation and deflation and the performance of
financial markets generally. global political uncertainties,
including the potential for increased friction in cross-border
trade and the exercise of executive powers to restrict trade,
financial transactions, capital movements and/or investment. the
policies and actions of regulatory authorities, including, in
particular, the policies and actions of the Hong Kong Insurance
Authority, as Prudential's Group-wide supervisor, as well as new
government initiatives generally. given its designation as an
Internationally Active Insurance Group ("IAIG"), the impact on
Prudential of systemic risk and other group supervision policy
standards adopted by the International Association of Insurance
Supervisors. the impact of competition and fast-paced technological
change. the effect on Prudential's business and results from, in
particular, mortality and morbidity trends, lapse rates and policy
renewal rates. the physical impacts of climate change and global
health crises on Prudential's business and operations. the timing,
impact and other uncertainties of future acquisitions or
combinations within relevant industries. the impact of internal
transformation projects and other strategic actions failing to meet
their objectives. the ability to complete a potential minority
initial public offering of Jackson, or one of its related
companies, or other strategic options in relation to Jackson, or
one of its related companies. the effectiveness of reinsurance for
Prudential's businesses; the risk that Prudential's operational
resilience (or that of its suppliers and partners) may prove to be
inadequate, including in relation to operational disruption due to
external events. disruption to the availability, confidentiality or
integrity of Prudential's information technology, digital systems
and data (or those of its suppliers and partners). any ongoing
impact on Prudential of the demerger of M&G plc. 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. the impact of legal and regulatory actions,
investigations and disputes. and the impact of not adequately
responding to environmental, social and governance issues. 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 of the entity referred to in any
forward-looking statements to differ, possibly materially, from
those anticipated in Prudential's forward-looking statements can be
found under the 'Risk Factors' heading of this
document.
Any
forward-looking statements contained in this document speak only as
of the date on which they are made. Prudential expressly disclaims
any obligation to update any of the forward-looking statements
contained in this document or any other forward-looking statements
it may make, whether as a result of future events, new information
or otherwise except as required pursuant to the UK Prospectus
Rules, the UK Listing Rules, the UK Disclosure and Transparency
Rules, the Hong Kong Listing Rules, the SGX-ST listing rules or
other applicable laws and regulations.
Group Chief Executive's report
During the first half of 2020, our focus has been on supporting our
customers, distributors, colleagues and communities through the
challenges created by Covid-19. At the same time, we are continuing
to invest for the future and deliver on our strategic objectives,
including with our announcement today that we intend to pursue the
full separation and divestment of Jackson to enable the Group to
focus exclusively on our high-growth Asia and Africa
businesses.
Since the Covid-19 pandemic began, we have leveraged our ability to
act at pace to help our customers and the communities in which we
operate. Both as an organisation and as individuals, we have shown
how we are able to learn from the changing conditions around us and
quickly generate new ways to support all of our
stakeholders.
The Group's purpose is to help people get the most out of life. We
do this by making healthcare accessible and affordable, helping
people accumulate wealth through growing their assets, and
empowering our customers to save for their goals. In all our
businesses, we see strong alignment with the benefits to the wider
society of financial inclusion through the increased provision of
health and protection and long-term savings. By helping to build
better lives and stronger communities and to maintain the
self-reinforcing growth cycle, we seek to create long-term value
for both our customers and our shareholders.
We continue to respond to our customers' needs for flexible and
targeted products, alongside our more traditional comprehensive
savings and protection solutions. During the first half we
introduced in all markets free, limited-time, Covid-19 cover for
new or existing customers or Pulse users and we continue to make
improvements to our offerings. We have expanded the number of
products we are able to market through virtual platforms thereby
increasing our resilience. In total, 90 per cent of our products in
Asia, based on APE sales1,
can now be sold without face-to-face contact. In the second
quarter, some 150,000 policies have been sold by our agents across
Asia throughout virtual platforms, equivalent to 38 per cent of
policies written by this channel.
Our agents, partners, bank staff and the other professionals who
distribute our services form an important part of the wider
Prudential family, and help to identify products that best fit
customer needs. To that end, we have been finding new ways to help
them to work effectively while staying safe. We have continued to
hire agents across our markets, and we have launched a virtual
sales process with some of our key partner banks in Asia. Jackson
wholesalers are continuing to adapt to the virtual sales
environment and have conducted more than 20,000 virtual meetings
since March. We also successfully launched our new distribution
relationship with State Farm, adding more than 5,700 agents
offering Jackson annuity products.
Throughout this crisis, the health and well-being of our
approximately 19,000 colleagues has been a top priority. As at the
end of July, 56 per cent of our Asia workforce were working away
from the office. In Africa that figure is around 40 per cent. In
the United States and at our London office, close to 100 per cent
of our colleagues were working remotely. A recent survey of our
colleagues19 found
that 90 per cent felt confident in the company's rapid response to
the pandemic. Our agile workplace technology has proven well suited
to remote working and our people have adapted well to this new
environment. We are taking a cautious approach to reopening our
offices, adapting them to local social distancing
requirements.
Our people have been working tirelessly to support our communities
in a variety of ways, both large and small. In particular, we have
disbursed more than $1.8 million from the $2.5 million Covid-19
fund we announced in May. New initiatives include support for
continued education and learning for vulnerable communities,
ongoing provision of PPE and needed medical equipment to hospitals
and clinics in Asia and, in our African markets, public health
awareness campaigns, food relief for deprived communities and
support for education. We have also taken steps to help our smaller
suppliers deal with the particular pressures they are under at the
current time.
Our teams are innovating with an eye to the world beyond Covid-19.
Pulse by Prudential, our Asia digital health app, is now available
in 11 markets and has been downloaded more than 8.1 million
times21 since
its launch a year ago. New tools are being added weekly, focusing
on promoting healthy lifestyles and in turn reducing major
non-communicable diseases, such as heart disease and
diabetes.
Meanwhile, we have continued to execute successfully throughout the
half year on our key strategic objectives. In March, we announced a
significant bancassurance deal with TMB in Thailand, which together
with Thanachart Bank gives us access to a customer base of more
than nine million people. Last month, Prudential Ghana and Fidelity
Bank announced a 10-year extension to their exclusive bancassurance
agreement. In June we announced major reinsurance and investment
transactions with Athene in the US and we have today announced that
we intend to pursue the full separation and divestment of
Jackson.
Intended separation of US operations
The Board of Prudential plc has decided to pursue the full
separation and divestment of Jackson to enable the Group to focus
exclusively on its high-growth Asia and Africa
businesses.
The separation would result in two separately listed companies with
distinct investment propositions, which the Board believes would
result in improved strategic outcomes for both businesses. The
separation would improve alignment of management and employees to
their businesses, customers and shareholders. The Group would
maintain its dual primary listings in both London and Hong Kong and
secondary listings in Singapore and the US. Jackson would be
expected to be solely listed in the US.
The Group intends to commence separation by way of a minority IPO
followed by future sell-downs over time, with the proceeds used to
increase financial flexibility for further investment in our Asia
and Africa business. Any required shareholder approvals for the
separation will be sought in advance of its execution.
Preparations for the IPO, targeting the first half of 2021,
continue to progress well. If market conditions are not supportive
of an IPO, the Group's current intention is that separation would
be facilitated through a demerger of the Group's stake in Jackson
to our existing shareholders.
Focus on growth opportunities in Asia and Africa
Prudential's differentiated product and geographic portfolio is
well positioned to meet the protection and savings needs of the
growing populations in Asia and Africa, where insurance penetration
is currently low and demand for savings solutions is rapidly
developing.
We have a pan-Asian footprint, with our largest life and protection
operations18 in
Hong Kong, Singapore, Indonesia and Malaysia. We also operate in
Thailand, Vietnam, Taiwan, the Philippines, Cambodia, Laos and
Myanmar and have successful partnerships in China and India. Within
this footprint, Prudential has top three
positions2 in
nine out of 13 life markets, with significant with-profits funds in
three markets providing a distinct product offering. We have a
focus on capital-efficient health and protection insurance products
and fee-based earnings. In asset management, Eastspring manages
$220 billion across 11 markets in Asia and provides focused
investment solutions to third-party retail and institutional
clients as well as to our internally sourced life
funds.
Over the decade from 2009 to 2019, embedded value in Asia grew on
average by 15 per cent3,5 per
annum and at 31 December 2019 was $39.2 billion3.
On average over the same period, total assets under
management22 grew
by 14 per cent3,5 per
annum from $69.7 billion3 to
$266.6 billion3,
APE sales4 grew
by 12 per cent3,5 per
annum, new business profit6 and
adjusted operating profit7 grew
by 16 per cent3,5 per
annum and Asia operating free surplus generation8 grew
by 19 per cent3,5 per
annum.
Our joint venture operations in China and India provide us with
scaled access to two of the largest economies in the region in
which we see significant growth potential in both insurance and
savings. In Indonesia, we continue to strengthen our market
leadership and propel growth by broadening our product offerings,
enhancing our agent quality, as well as digitalising our business
model. In Thailand our new distribution agreements will enable us
to leapfrog and play a major role in serving the growing retirement
and investment needs of a rising middle class. As the four largest
economies in our footprint, these markets offer us the most
significant opportunities for growth going forward.
In Hong Kong, we will continue to build our already strong and
substantial business through agent expansion and increased
digitalisation of our service offering, including in the Greater
Bay Area as policy guidance emerges. In Singapore, we see
significant opportunities in expanding the servicing of the wealth
and small and medium enterprise markets, alongside supporting a
fast-ageing population to address uncovered retirement and health
needs. In Malaysia, we have leading market positions in both the
conventional and takaful markets, with the underprovided sharia
market presenting substantial opportunity for growth. In our other
high-potential markets of Vietnam, the Philippines, Cambodia, Laos
and Myanmar, we see the opportunity for rapid growth through the
roll-out of our efficient and scalable business model. In Africa,
where we have a growing presence in some of the world's most
under-penetrated markets, we continue to focus on technology and
distribution to build a scalable business.
We have been able to substantially accelerate our digital
development and customer-centric digital ecosystem, materially
amplifying our physical franchise. Pulse by Prudential, our new
digital health app, is now live in 11 markets, and the number of
downloads has increased to more than 8.1 million at the beginning
of August21 from
1.3 million when we announced our full-year results in March this
year. Pulse is broadening our customer base, gathering new data and
converting this into new sales. Seventy per cent of Pulse users are
new to Prudential, representing an internet-savvy and materially
younger demographic than our in-force customer base. This is a rich
source of new relationships and leads, which support our future
growth. We are at the start of the monetisation journey from this
digitally-led customer engagement, with 1.5 million free
introductory covers provided and around 200,000 policies from our
full range of products sold direct or through online-to-offline
agency referrals. We intend to scale these monetisation activities
at pace, which are complementary to our existing
routes-to-market.
Eastspring has a broad product set, as well as significant
distribution capabilities and a strong long-term track record.
Product areas cover equity, bonds and multi-asset products, which
underpin the savings offered to life business customers and are
distributed to third-party institutions and retail clients.
Distribution channels include wholesale, intermediary and direct
online formats, which are tailored as required, depending on the
geography involved. This means that Eastspring can continue to grow
and develop through both market cycles and changes to individual
investment styles. Operational efficiency at Eastspring has led to
industry-leading margins20 and
investment in technology to deliver common platforms, and
world-class risk management and governance capabilities. We expect
Eastspring to further expand its product capabilities, tailoring
them to the fast-developing needs of the Group's life business, as
well as third-party clients.
Since 2014 we have also built a rapidly growing multi-product
business in Africa, with operations now in eight countries across
the continent. Further information on how we have been investing
and developing this business is set out further below within the
Africa performance section.
We intend to take full advantage of the long-term structural
opportunities in our chosen markets and geographies, while both
operating with discipline and continuing to innovate, to deliver
profitable and increasingly diversified growth.
Our trusted brands and digitally enabled multi-channel distribution
enable us to meet the growing needs of our customers for long-term
savings and financial security, and to design differentiated and
tailored consumer products, which integrate investment and
protection solutions. This offering is delivered through efficient
and agile infrastructure, which in turn allows us to innovate and
deploy products rapidly as consumer demands evolve.
We have significant investment appetite that is based on the
absolute size and demographic characteristics of each economy and
on our ability to build competitive advantage leveraging our scale
and expertise. While we will continue to build on our leading
positions in Hong Kong and ASEAN, we see the greatest growth
opportunities in the largest economies of China, India, Indonesia
and Thailand.
Our Asia-focused strategy will support long-term delivery of future
shareholder returns through value appreciation, with a focus on
achieving sustained double-digit growth in embedded value per
share. This will in turn be supported by growth rates of new
business profit, which is expected to substantially exceed GDP
growth in the markets in which the Group operates.
Financial impacts of intended separation
Jackson intends to seek a strong credit rating and capitalisation
and is expected to raise debt and target an RBC ratio in the circa
425-475 per cent range at the point of proposed listing. Jackson's
holding company would currently be expected to target financial
leverage in the circa 20-25 per cent range. These ranges are
subject to market conditions and will be kept under
review.
The target RBC ratio would include the proceeds of any primary
equity issued by Jackson at or before the IPO and the target
financial leverage would be expected to be raised at Jackson's
holding company in advance of any IPO. Proceeds from the
anticipated increase in Jackson's debt would enable repayment of a
portion of the Group's existing debt during 2021 and 2022, and
support Prudential's intention to maintain its strong credit rating
after any separation of Jackson. Proceeds from further sell-downs
in Jackson following the IPO would provide further resources to
fund the Group's continued investment in Asia and Africa growth
opportunities.
To support the intended separation process, other than any
pre-separation returns of capital including from Jackson's debt
issuance, Prudential plc does not currently expect Jackson to remit
any regular dividends in 2020 or 2021 prior to the IPO. Prudential
will adopt a new dividend policy that is aligned to the Asia and
Africa growth strategy and to the intended separation of Jackson.
The new policy will apply with immediate effect.
The Group will continue to right-size its head-office costs with
the evolving footprint of the business. The Group is aiming to
deliver a further annual cost reduction of around $70 million by
2023 on top of the $180 million cost savings from 2021 previously
announced as a result of the M&G demerger27.
This reduction would take into account the intended smaller size of
the Group, while still retaining the quality of reporting, risk
management and governance required by our regulators and
stakeholders. We would continue to maintain a cost-effective
presence in London to support our most liquid primary listing and
our capital markets relationships as well as to access the depth
and quality of financial service talent based
there.
Capital allocation and dividend policy
Since 2013, Prudential has committed over $9 billion of capital to
support growth in Asia, including around $5 billion of inorganic
investments to grow our distribution reach and to build digital
capability. Around one-third of this investment has been made since
January 2019. Asia has grown significantly over the last 10 years
and the Group continues to have substantial opportunities for value
creation from further investment in Asia. This investment is
expected to deliver profitable and sustainable compounding growth
and high risk-adjusted returns for shareholders. Accordingly, the
new dividend policy reflects a rebalancing of capital allocation
from cash dividends to reinvestment of capital into the Asia
business and will apply with immediate effect.
Reflecting the Group's capital allocation priorities, dividends
will be determined primarily based on Asia's operating capital
generation after allowing for the capital strain of writing new
business and recurring central costs, with a portion of capital
generation retained for reinvestment in the business. Dividends are
expected to grow broadly in line with the growth in Asia operating
free surplus generation net of right-sized central costs, and will
be set taking into account financial prospects, investment
opportunities and market conditions.
The total 2020 dividend will be subject to market conditions and
financial performance in 2020 remaining in line with expectations.
Based on current estimates of Asia's full-year 2020 operating
capital generation, the Group's total 2020 dividend is expected to
be around $420 million under the new policy, equivalent to around
16.10 cents per share.
For the 2020 first interim dividend, the Board has approved a
dividend of 5.37 cents per share13,
representing one third of the current expectation for the 2020
full-year dividend under the Group's new dividend policy. The
second interim dividend is expected to be approved by the
Prudential Board in the first quarter of 2021 and paid to
shareholders in May 2021, in accordance with the Group's normal
financial calendar.
Starting from the 2021 first interim dividend, the Board intends to
apply a formulaic approach to first interim dividends, which will
be calculated as one-third of the previous year's full-year
dividend.
Financial performance
In the first half of the year, the Group's adjusted IFRS operating
profit based on longer-term investment returns (adjusted operating
profit7)
from our continuing operations decreased by (2) per cent on a
constant exchange rate basis to $2,541 million (decreased by (3)
per cent on an actual exchange rate basis). This comprised a 14 per
cent increase in Asia adjusted operating profit7,
reflecting the resilience of our business underpinned by the
success of our health and protection offering, and a lower
contribution from our US business reflecting the adverse effect of
market movements, including the amortisation of DAC in the
period.
Our IFRS profit after tax from continuing operations was $534
million in the first half of 2020 (2019: $1,158 million on an
actual exchange rate basis). This principally reflects the impact
of lower interest rates, as well as lower equity market levels on
our guaranteed US liabilities, only partially offset by gains on
hedge instruments held for equity and interest rate related risk
management purposes. The Group also benefited from a $668 million
post-tax gain ($846 million pre-tax) from the reinsurance
transaction with Athene concluded in the period.
Asia performance
In Asia, we have been focused on supporting our communities,
customers and staff through the challenges created by Covid-19 this
year. We have also made significant strategic progress and achieved
a positive financial performance despite the difficult macro and
operating environment.
At the start of this report I set out some of the ways we have been
supporting our stakeholders through the Covid-19 pandemic. For
example, in Hong Kong, we have teamed up with the Chinese
University of Hong Kong and one of our health services partners,
Prenetics, to provide free Covid-19 tests to the 30,000 healthcare
workers and their families in the city. In Indonesia, we have
provided free Covid-19 rapid tests to 100,000 consumers in Jakarta
and Surabaya as well as free online doctor consultation with
Halodoc and in Malaysia, we have organised fundraising to
distribute provisions to low-income families and made donations to
Mercy Malaysia.
Covid-19-related restrictions applied from the start of the year in
Hong Kong and mainland China, and across the region during the
second quarter of 2020, resulting in APE sales4 declining
(34) per cent9 compared
with 2019. However, we believe the Covid-19 disruptions have also
acted to intensify our structural opportunities. The region's
growing population has a clear and increasing need for the
broad-based products we deliver. Insurance penetration in Asia is
only 2.7 per cent of GDP, compared with 7.5 per cent in the
UK10,
while mutual fund penetration is just 12 per cent in Asia, compared
with 96 per cent in the US11.
In China, for example, recent research12 suggests
that four out of five consumers intend to purchase more insurance
products after the Covid-19 crisis.
Second quarter APE sales4 were
down (45) per cent9 from
the same period last year, compared with a reduction of (24) per
cent9 in
the first quarter. The continued restriction of travel from
mainland China to Hong Kong led to a (64) per
cent9 fall
in APE sales4 over
the first half of the year in this market, with new business profit
declining by (67) per cent9,
additionally reflecting lower rates. In markets outside Hong Kong,
APE sales4 declined
(12) per cent9 over
the first half of the year, while new business profit proved more
resilient, down (6) per cent9.
China, which entered and exited lockdown earlier than other
markets, saw APE sales4 down
(5) per cent9 over
the first half of the year, with second quarter APE
sales4 20
per cent9 higher
than the same period last year as restrictions eased. Improved
business mix saw half year new business profit6 rise
by 4 per cent9 in
China. We consider this sales performance to be encouraging in the
context of the disruption to traditional forms of distribution. The
Covid-19 pandemic has, nevertheless, reinforced the structural
demand for protection in the region, with seven of our life markets
increasing the proportion of health and protection sales in the
first half. The sales environment improved across our markets as
restrictions were gradually eased, with all 13 of our life markets
reporting higher monthly sales4 in
June compared with levels in April and May.
The strength of our diverse, high-quality platform, and our
long-held focus on writing profitable, value-adding business are
demonstrated in the 14 per cent9 increase
in Asia adjusted operating profit7.
This continued positive earnings progression is supported by a 6
per cent growth3 in
life renewal premiums16 to
$9.7 billion, underpinned by our recurring premium business model,
high customer retention rate of 95 per cent, focus on protection
products and business model diversity.
As well as our progress with Pulse by Prudential, we have made
significant advances in virtualising our customer and agent
onboarding process through close engagement with regulators,
customers and existing distribution teams. Some 90 per cent of our
products (based on APE sales) can now be sold virtually, with 38
per cent (150,000) of policies sold by agents in the second quarter
requiring no face-to-face contact. Agent engagement and management
have moved online, supporting both 7 per cent
growth14 in
new agent recruits and 7 per cent growth15 in
our overall agency force. An increased level of automation is
evident across our business, with e-submission rates now at 88 per
cent, and auto-underwriting being performed on up to 60 per cent of
all new cases.
Eastspring saw adjusted operating profit7 rise
by 10 per cent9 in
the first half of 2020 supported by a 12 per
cent9,23 increase
in average funds under management. Cost management remains vigorous
as the cost-income ratio further improved by 1 percentage point to
50 per cent. Funds under management declined to $209 billion at 31
March 2020 (31 December 2019: $241 billion) due to third-party net
outflows and lower equity markets, but rebounded to $220 billion at
30 June 2020 as a result of positive Asia life flows ($2.9 billion
in the first half) and recovering markets. We continue to expand
our offerings despite adverse market conditions, with notable funds
launched in Taiwan and Thailand as well as institutional top-ups in
Japan and Malaysia. We also made good progress in China, where our
Wholly Foreign-owned Enterprise's total sourced and sub-advised FUM
reached RMB2.8 billion at end-June.
We have also continued to expand and strengthen our strategic
footprint in South-east Asia. In Thailand, our 15-year strategic
partnership with TMB has significantly strengthened our
distribution capabilities in the country's fast-growing life
insurance sector and strongly complemented our position in the
mutual fund market. Meanwhile, we have also partnered with BFL in
Laos, and expect to establish an exclusive partnership with Yoma
Bank in Myanmar, which has started to contribute new business. We
are investing in technology and bringing into play expertise from
our other operations in these exciting new markets.
The near-term outlook for the Asia business remains uncertain due
to the risks around renewed restrictions on movements both of
customers and distribution teams. Any such restrictions will likely
vary during the period meaning that we will need to continue to be
agile in our operational delivery. Our early move to full
virtualisation of new business and agent onboarding means that we
can continue to mitigate, in part, the impact on sales. The
near-term outlook for sales and new business profit in Hong Kong
will continue to be impacted by the closure of the border with
mainland China, which may not re-open in 2020.
Africa performance
Despite the Covid-19 pandemic, APE sales4 at
Prudential Africa have grown by 59 per cent9 to
$54 million in the first six months of the year, with the number of
active agents nearly doubling compared with the same period last
year. The increase in active agents is a direct result of
implementing a Rookie Development Programme in each market to help
transition new agents, from the classroom to the field, and making
those agents active within the first month of their recruitment. In
most markets, as a response to Covid-19-related restrictions, we
rapidly innovated to create an end-to-end virtual sales submission
process, and a virtual recruitment and onboarding process for
distributors, as well as delivering training digitally, which has
helped to support our APE growth. In Ghana, we have renewed our
exclusive agreement with Fidelity Bank for an additional 10 years,
building on a successful partnership over the past five years.
Meanwhile, our team in Nigeria has launched a new partnership with
the largest mobile operator in the country, MTN, in an effort to
reach its subscriber base of over 70 million people, and provide
protection to the millions of uninsured Nigerians. Integration of
the recently acquired Beneficial businesses continues with all
businesses performing well, supported by the ongoing transformation
of the agency businesses' operating model and relatively lighter
Covid-19 restrictions. Finally, all of our businesses have
identified organisations in their markets that will benefit from
support from our Covid-19 relief fund. Over 100,000 people in
Africa will be reached rapidly via this community
initiative.
US performance
The US is the world's largest retirement savings
market24,
with approximately 4 million Americans reaching retirement age
every year25.
This transition continues to trigger the unprecedented shift of
trillions of dollars from savings accumulation to retirement income
generation26.
Jackson believes that a retirement strategy that integrates an
income guarantee will mitigate much of the risk of retirees running
out of money during retirement. In response to this demand and the
ongoing shift to fee-based solutions, Jackson has positioned itself
with product innovation and distribution strategies to provide a
wide spectrum of choice when selecting the retirement savings and
income product that best fits customer needs. This will allow
Jackson to enhance further its market-leading variable annuity
position in the brokerage market, diversify in the fixed annuity
and fixed indexed annuity space and grow in the advisory retirement
solutions market.
Supporting this ambition is a flexible and scalable operating
platform that enables excellent service to be delivered
efficiently. In 2020, Service Quality Management awarded Jackson
the 2019 Contact Center of the Year award. Also in 2020, the
company received the number one overall operational ranking for
2019 from its broker-dealer partners, according to the Operations
Managers' Roundtable.
Jackson has supported our stakeholders during the Covid-19 pandemic
by using funding from the Covid-19 relief fund to support a charity
in each of our main office locations of Lansing, Nashville and
Chicago. The projects will address systemic economic insecurity,
which has been worsened by the virus, through financial coaching
and direct assistance.
Recent events in the US have raised awareness and heightened
discussion of issues related to racial bias, structural racism and
social justice. Following these events, Jackson's leadership have
held meetings with the Diversity & Inclusion Advisory Council
and Visions in Black Excellence (VIBE Business Resource Associate
Group), participated in a panel on 'Allyship' organised by Jackson
Pride Business Resource Associate Group and issued supportive
communications to all Jackson's associates. We have introduced
panels and training opportunities for all associates and managers
in this area, and have made significant charitable contributions to
the Lansing Chapter of the National Association for the Advancement
of Colored People, the Urban League of Middle Tennessee, and Facing
History and Ourselves in Chicago. We will build on our longstanding
existing activities and continue to engage with our associates on
these issues.
In June we announced that Jackson had agreed to fully reinsure
substantially all of its in-force fixed and fixed indexed annuity
portfolio to Athene. In addition, Athene agreed to make a $500
million anchor equity investment in the US business, in return for
an 11.1 per cent economic interest in the enlarged common equity of
the US business. This illustrated successful progress on our
third-party capital strategy, and meaningfully enhanced Jackson's
capital position, with an estimated RBC ratio above 400 per cent at
30 June 2020, reflecting the benefit of the reinsurance transaction
with Athene from 1st June and surplus generated in the period, but
before the equity investment had completed, as we continue to build
to an independent US business.
Adjusted operating profit7 fell
(19) per cent in the period, largely as a result of the impact on
DAC of market movements. Before allowing for DAC acceleration
impacts, adjusted operating profit7,
while reduced, was resilient (down by (6) per cent) despite market
disruptions. Despite APE sales4 being
(9) per cent lower, we maintained our leadership position in the
annuities market.
A recent survey17 indicated
that nearly two-thirds of financial professionals are having more
frequent annuity conversations with clients during the pandemic and
68 per cent indicated that they are more likely to discuss
annuities with clients in the future. Our conservative credit
strategy protected our capital position, and the Athene reinsurance
transaction reduces our exposure to credit risk going
forward.
Jackson expects that the current declines in interest rates will
lead to lower sales of fixed and fixed indexed annuities compared
with 2019, for the near term. US adjusted operating
profit7 is
expected to remain sensitive at an operating level to the impact of
equity markets on separate account balances, which drive fee
revenues, and on DAC accounting effects. The reinsurance
transaction with Athene, which reduced spread assets and
liabilities, will lead to lower spread-related earnings, albeit
with reduced exposure to credit risk as well. Additional portfolio
repositioning after the reinsurance transaction has resulted in an
even more conservative positioning in respect of US credit risk.
Jackson's estimated RBC position is significantly improved from the
year end and its operating capital generation is expected to remain
strong.
We will continue to operate with discipline in this business,
utilising our strong brand, our prudent product design and risk
management, our award-winning service and our single stack
operating platform, which has industry-leading cost advantages and
is highly scalable.
Outlook
The Covid-19 outbreak has disrupted the global economy and our
individual markets to varying degrees and at different periods, and
the extent to which we may be affected in the remaining part of the
year is uncertain. However, the long-term structural opportunities
for us in Asia remain clear. Our multi-channel and multi-product
approach, employing digital sales, fulfilment and premium
collection, is continuing to deliver on those opportunities. In
Asia we have operations in 15 markets, with a total of over 15
million customers, and we have outstanding product, platform and
distribution strengths. We believe we are well positioned both to
weather the disruption caused by the pandemic and to support our
customers and communities for many years to come.
We remain focused on our strategic priorities, including to enable
our investors to benefit to the fullest extent from the opportunity
presented by our business in Asia. We continue to invest and
innovate to meet important needs for Asia consumers, we operate a
highly resilient business model, and we are dedicated to our
purpose of helping people get the most out of life.
Our proposed separation and divestment of
Jackson would enable the Group to focus exclusively on
our high-growth Asia and Africa businesses, and I believe it would
result in two separately listed companies with distinct investment
propositions and improved strategic outcomes. I am confident
that we will not only continue to demonstrate our agility and
resilience through this period, but that we will emerge from it
stronger, more digitally enabled and even better able to serve our
customers.
Notes
1
Based on the APE sales mix achieved in Asia within the first half
of 2020.
2
Based on full year 2019 (fiscal year 2020 for India). Sources
include formal (eg competitors results release, local regulators
and insurance association) and informal (industry exchange) market
share data. Ranking based on new business (APE sales, weighted full
year premium or full year premium depending on availability of
data) or total weighted revenue premiums.
3
On an actual exchange rate basis.
4
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 down 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 unaudited financial information for further
explanation.
5
CAGR is compound annual growth rate.
6
New business profit, on a post-tax basis, on business sold in the
period, calculated in accordance with EEV Principles.
7
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 B1.1 of the IFRS financial
statements.
8
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
adjusted operating profit for the period. Further information is
set out in note 11 of the EEV basis results.
9
Period-on-period percentage increases are stated on a constant
exchange rate basis unless otherwise stated. As in previous years,
we comment on our performance in local currency terms (expressed on
a constant exchange rate basis) to show the underlying business
trends in periods of currency movement.
10
Source: Swiss Re Sigma 2017. Insurance penetration calculated as
premiums on per cent of GDP. Asia penetration calculated on a
weighted population basis.
11
Source: Investment Company Institute, industry association and
Lipper.
12
Source: McKinsey & Company: Fast forward China: How COVID-19 is
accelerating 5 key trends shaping the Chinese economy, May
2020
13 Under
the Group's previous dividend policy, the first interim dividend
would have been 12.28 cents per share.
14
Growth calculated as new agent recruits over half year 2020
compared with half year 2019, excluding India.
15
Growth calculated agents as at half year 2020 compared with half
year 2019, excluding India.
16
See note II of the Additional unaudited financial information for
definition and reconciliation to IFRS balances.
17
Source: Jackson® and the Insured Retirement Institute (IRI)
surveyed 200 financial professionals between April 8 and April 17,
2020.
18
Based on adjusted operating profit to 30 June 2020.
19
Survey of our London and Asia colleagues.
20
When compared against global competitors. Industry margin source:
BCG Global Asset Management Market-Sizing Database 2020; BCG Global
Asset Management Benchmarking Database 2020.
21
Downloads as at 5 August 2020.
22
Comprising internal funds, primarily held by Asia insurance
businesses, and external funds managed by Eastspring. Internal
funds include internally managed funds held in joint ventures and
associates but excludes assets attributable to external unit
holders of the consolidated collective investment schemes alongside
other adjustments.
23
On a constant exchange rates basis Eastspring average funds under
management over the half year to 30 June 2019 were $200.2 billion
(actual exchange rate basis: $206.7 billion). Average funds under
management over the period to 30 June 2020 were $224.1
billion.
24
Source: Willis Towers Watson Global Pension Asset Study
2019.
25
Annual Estimates of the Resident Population by Single Year of Age
and Sex for the United States: 1 April 2010 to 1 July 2018. Source:
US Census Bureau, Population Division.
26
Source: 2016 Federal Reserve Board's Triennial Survey of Consumer
Finances.
27 As
compared with 2018 and before a planned $10 million increase in
Africa costs as previously disclosed.
Group Chief Financial Officer and Chief Operating Officer's report
on the 2020 first half financial performance
The Group has demonstrated positive operating results while
supporting our colleagues, distributors, customers and communities
during the disruption caused by Covid-19, and continuing to invest
for the future and deliver on our strategic objectives. These 2020
half year results reflect the first full period of financial
reporting after the demerger of M&G plc in October
2019.
Our businesses in Asia delivered a 14 per cent1 increase
in adjusted IFRS operating profit based on longer-term investment
returns (adjusted operating profit2),
reflecting the benefits of our well positioned and broad-based
portfolio, which has long focused on high quality, recurring
premium business.
Our US business delivered a robust performance in particularly
challenging market conditions, with its risk management process
working as planned, while delivering operating in-force capital
generation in line with our expectations. This, alongside the
benefit from the reinsurance transaction with Athene, resulted in
an estimated 30 June RBC ratio for Jackson of above 400 per cent as
well as delivering a material reduction in credit-related exposure.
The $500 million investment by Athene into the US business
completed in July and contributed around 24 percentage points to
Jackson's coverage ratio3.
The first half of 2020 saw high levels of macro volatility. In the
US, the S&P 500 index fell (20) per cent over the first quarter
before recovering by 20 per cent in the second, resulting in a (4)
per cent decline over the first half of the year. In Asia, equity
indices were similarly volatile, with the MCSI Asia ex Japan index
18 per cent down in the first quarter and up 17 per cent in the
second. Government bond yields were lower over the period, notably
with the US 10-year government bond yield ending the period at 0.7
per cent (31 December 2019: 1.9 per cent). The first half of 2020
also saw significant volatility in credit spreads, for example
spreads on US dollar denominated A-rated corporate bonds rose by
184 per cent in the first quarter and fell by 48 per cent in the
second quarter.
In comparative results for the first six-months of 2019, which have
been re-presented in US dollars following the change in
presentational currency in our 2019 Annual Report, discontinued
operations refer to the results of M&G plc which was demerged
in October 2019. As in previous years, growth rates referred to are
on a constant exchange rate basis unless otherwise
stated.
Covid-19
The Group Chief Executive's report has set out how the Group has
risen to the operational challenges presented by Covid-19. In terms
of financial performance, the containment measures taken by
governments across the globe have impacted sales levels and new
business profitability in the first half of 2020, albeit we have
seen strong recoveries in those markets where measures have eased
such as China. These impacts are discussed later in this report.
The sales trajectory going forward will remain at risk to further
restrictions on movement for both our customers and distributors.
The impact that Covid-19 has had on markets, with lower interest
rates and equity markets, has negatively impacted profitability in
the period as discussed below. The sensitivity of our IFRS, EEV and
capital metrics to further market movements are set out in the
financial statements later in this document.
In terms of the balance sheet, experience has largely been within
our operating assumptions and no strengthening of assumptions has
been required at 30 June 2020. In Asia, where we focus on health
and protection business, we have seen very low levels of Covid-19
claims to date. We have provided our customers with premium grace
periods in line with local regulations but no significant impacts
on our financial position have arisen to date. There have been no
impairments to goodwill or intangible assets at 30 June 2020 and we
will continue to review for triggers for impairment in line with
our normal accounting procedures. Our investments are largely at
fair value in the balance sheet and no significant changes to our
valuation procedures have been applied. There has been a small
increase in losses on bonds sold by Jackson during the first half
of 2020 to $(148) million (2019: $(24) million on an actual
exchange rate basis) given the widening of credit spreads,
especially in the first quarter.
Finally, our liquidity position remains healthy with $1.9 billion
of central liquidity at 30 June 2020 alongside $2.6 billion of
undrawn committed facilities. We have not breached any of the
requirements of our core structural borrowings nor modified any of
their terms.
Adjusted operating profit before tax from continuing
operations
For the first half of 2020, Prudential's adjusted operating
profit2 from
continuing operations was $2,541 million ((2) per cent lower than
the same period in 2019 on a constant exchange rate and (3) per
cent lower on an actual exchange rate basis).
This reflects the combination of a 14 per cent1 increase
in adjusted operating profit2 from
our Asia life and asset management operations, offset by a (19) per
cent decrease in adjusted operating profit2 from
our US business, and lower central expenses. The decline in US
adjusted operating profit2 is
driven by unfavourable DAC accounting adjustments in the current
period and favourable DAC accounting adjustments in the prior
period. Before allowing for DAC acceleration in the current period
(2019: DAC deceleration), US adjusted operating
profit2 decreased
by 6 per cent.
Central expenses were 7 per cent1 lower
than the prior period reflecting a reduction in interest expense on
core borrowings following the transfer of debt to M&G plc in
2019, partly offset by increased restructuring costs of $(108)
million (2019: $(30) million4).
Restructuring costs reflect the Group's substantial and ongoing
IFRS 17 project, and costs associated with the planned reduction in
central overhead expenses. During the first half of 2020 our head
office activities incurred costs of $(205) million (2019: $(212)
million4).
We remain on track to deliver total annualised savings of circa
$180 million5 and
have currently completed actions to deliver $160 million, targeting
a revised run-rate from 1 January 20216.
IFRS basis non-operating items from continuing
operations
Non-operating items in the first half of 2020 consist of short-term
fluctuations in investment returns on shareholder-backed business
of negative $(2,706) million (2019: negative
$(1,455) million4),
$846 million of net gains arising from the US reinsurance
transaction with Athene (2019: gains on other corporate
transactions of $17 million4),
and the amortisation of acquisition accounting adjustments of
negative $(18) million (2019: negative
$(22) million4)
arising mainly from the REALIC business acquired by Jackson in
2012.
Negative short-term fluctuations comprised negative
$(448) million for Asia (2019: positive
$544 million4),
negative $(2,288) million in the US (2019: negative
$(1,968) million) and positive $30 million in other
operations (2019: negative $(31) million4).
Falling interest rates in certain parts of Asia led to lower
discount rates on certain policyholder liabilities under the local
reserving basis applied, which were not fully offset by unrealised
bond gains in the period. This together with the effect of falling
equity markets led to the overall negative short-term investment
fluctuations in Asia.
In the US, a significant portion of our liabilities are fair valued
under 'grandfathered' US GAAP (the basis of our IFRS reporting)
and, among other factors, assume that future market returns follow
the risk-free curve. The sharp decline in US interest rates,
alongside lower equity markets, in the period resulted in a
significant increase in these liabilities leading to accounting
losses. These were only partially offset by gains on equity and
interest rate derivatives held to protect the economics of the
business from large movements in investment markets and for which a
degree of variability is accepted within the accounting results.
Further discussion of Jackson's non-operating items is contained in
the US section of this report.
After allowing for non-operating items, the total profit after tax
from continuing operations was $534 million (2019: $1,158
million1).
In addition to the effects recorded directly in the reported
after-tax profit as described above, movements on the Group's IFRS
shareholders' funds also reflect the transfer of assets to Athene
as part of the reinsurance transaction, reducing cumulative
unrealised gains on debt securities by $(1.8) billion largely
mitigated by the positive effect of lower interest rates in the
period on the valuation of Jackson's debt securities. Overall IFRS
shareholders' funds were $19.1 billion (31 December 2019: $19.5
billion4).
IFRS effective tax rates
In the first half of 2020, the effective tax rate on adjusted
operating profit based on longer-term investment returns from
continuing operations was 18 per cent (2019: 16 per cent). This
expected higher rate reflects losses arising in other operations on
which no tax relief is expected to be available in future
periods.
The effective tax rate on total IFRS profit in the first half of
2020 was 19 per cent (2019: less than 1 per cent), reflecting a
reduction from 2019 in non-taxable investment-related
marked-to-market gains arising in Asia.
Corporate transactions
Extension of Thailand bancassurance partnership
On 19 March, the Group announced that its Thailand business had
entered into a strategic bancassurance partnership with TMB Bank
Public Company Limited (TMB) with an initial term of 15 years to
provide Prudential's suite of health and wealth solutions to TMB's
customer base. The new agreement significantly expands and extends
Prudential's partnership with Thanachart Bank to TMB Bank, which,
following their merger, is the sixth largest bank by deposits and
fourth largest bank by branches in Thailand.
The extended exclusive partnership agreement will commence on 1
January 2021 and until this time the current arrangement with
Thanachart Bank will continue. The fee for extending the current
arrangements was Thai Baht 24.5 billion (equivalent to US$754
million based on the exchange rate at 18 March 2020), with Thai
Baht 12.0 billion paid in April 2020 and the remainder due on 1
January 2021.
Jackson reinsurance of fixed and fixed indexed annuity
business
In June 2020, Jackson reinsured substantially all of its in-force
portfolio of US fixed and fixed indexed annuities with Athene
(circa $27.6 billion of liabilities). The transaction excluded
liabilities relating to Jackson's legacy life and institutional
business, the REALIC portfolio and group pay-out annuity business
reinsured from John Hancock as well as investments in the general
account by the variable annuity policyholders. At 30 June 2020
these remaining liabilities, net of reinsurance, totalled $34.8
billion, the vast majority of which attract spread type earnings.
The transaction improved the capital position of Jackson by
increasing the Jackson RBC ratio by 69 percentage points and the
Group's LCSM cover ratio by 25 percentage points. This is discussed
further in the 'Group capital position' section below and the
'Local statutory capital - Jackson National Life' section within
the discussion on the US financial performance.
The reinsurance agreement was effective on 1 June 2020 and resulted
in an IFRS pre-tax gain recorded through the profit and loss
account of $846 million. After allowing for tax and the reduction
in unrealised gains recorded directly in other comprehensive
income, the impact of the reinsurance transaction on IFRS
shareholders' equity is a reduction of $(1,135)
million19.
The policies reinsured to Athene contributed around $100 million to
adjusted operating profit in 2019.
This transaction reduced the Group's EEV by $(423) million, which
largely reflects the loss of future profits recorded in the value
of in-force business as a result of the reinsurance and the loss of
unrealised gains on assets passed to Athene partly offset by the
reinsurance commission received after deducting tax.
In June 2020, Prudential announced an agreement with Athene for its
subsidiary Athene Life Re Ltd to invest $500 million in
Prudential's US business in return for an 11.1 per cent economic
interest for which the voting interest is 9.9 per cent. This
transaction subsequently completed on 17 July 2020 and so will be
accounted for in the second half of 2020. If the transaction had
completed at 30 June, the effect on the Group's 30 June 2020 IFRS
shareholders' funds would be a further reduction of $(0.6)
billion3 and
EEV shareholders' equity would be further reduced by $(1.1)
billion3.
IFRS profit
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2020 $m
|
Half year
2019 $m
|
Change %
|
|
Half year
2019 $m
|
Change %
|
Adjusted operating profit based on longer-term
investment returns before tax from
continuing operations
|
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
Long-term business
|
1,590
|
1,417
|
12
|
|
1,396
|
14
|
Asset management
|
143
|
133
|
8
|
|
130
|
10
|
Total Asia
|
1,733
|
1,550
|
12
|
|
1,526
|
14
|
|
|
|
|
|
|
|
US
|
|
|
|
|
|
|
Long-term business
|
1,256
|
1,556
|
(19)
|
|
1,556
|
(19)
|
Asset management
|
10
|
16
|
(38)
|
|
16
|
(38)
|
Total US
|
1,266
|
1,572
|
(19)
|
|
1,572
|
(19)
|
|
|
|
|
|
|
|
Total segment profit from continuing operations
|
2,999
|
3,122
|
(4)
|
|
3,098
|
(3)
|
|
|
|
|
|
|
|
Other income and expenditure
|
(350)
|
(473)
|
26
|
|
(466)
|
25
|
Total adjusted operating profit before tax and restructuring
costs
|
2,649
|
2,649
|
-
|
|
2,632
|
1
|
Restructuring and IFRS 17 implementation costs
|
(108)
|
(30)
|
(260)
|
|
(28)
|
(286)
|
Total adjusted operating profit before tax
|
2,541
|
2,619
|
(3)
|
|
2,604
|
(2)
|
Non-operating items:
|
|
|
|
|
|
|
Short-term fluctuations in investment returns
on shareholder-backed business
|
(2,706)
|
(1,455)
|
(86)
|
|
(1,445)
|
(87)
|
Amortisation of acquisition accounting adjustments
|
(18)
|
(22)
|
18
|
|
(21)
|
14
|
Gain on disposal of businesses and
corporate transactions
|
846
|
17
|
n/a
|
|
20
|
n/a
|
Profit from continuing operations before tax
attributable to shareholders
|
663
|
1,159
|
(43)
|
|
1,158
|
(43)
|
Tax (charge) credit attributable to shareholders'
returns
|
(129)
|
(1)
|
n/a
|
|
1
|
n/a
|
Profit from continuing operations for the period
|
534
|
1,158
|
(54)
|
|
1,159
|
(54)
|
Profit from discontinued operations for the period,
net of related tax
|
-
|
835
|
n/a
|
|
813
|
n/a
|
Profit for the period
|
534
|
1,993
|
(73)
|
|
1,972
|
(73)
|
|
|
|
|
|
|
|
IFRS earnings per share
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2020 cents
|
Half year
2019 cents
|
Change %
|
|
Half year
2019 cents
|
Change %
|
Basic earnings per share based on adjusted operating profit after
tax from continuing operations
|
79.0
|
84.5
|
(7)
|
|
84.3
|
(6)
|
|
|
|
|
|
|
|
Basic earnings per share based on:
|
|
|
|
|
|
|
Total
profit after tax from continuing operations
|
19.7
|
44.6
|
(56)
|
|
44.8
|
(56)
|
Total
profit after tax from discontinued operations
|
-
|
32.3
|
n/a
|
|
31.5
|
n/a
|
|
|
|
|
|
|
|
|
|
Group capital position
Prudential is applying the local capital summation method (LCSM)
that has been agreed with the Hong Kong Insurance Authority (IA) to
determine Group regulatory capital requirements until the
Group-wide Supervision (GWS) Framework is effective. The timing of
finalisation and implementation of the GWS Framework remains
uncertain, although it is expected to become effective in early
2021. The Legislative Council of the Hong Kong Special
Administrative Region approved the enabling primary legislation in
July and further implementation guidance is expected in due course.
Subject to that guidance, we currently expect the GWS methodology
to be largely consistent with that applied under LCSM.
The estimated shareholder LCSM cover ratio7 at
30 June 2020 was 334 per cent (31 December 2019: 309 per cent) and
included a 25 per cent benefit from the Athene reinsurance
transaction.
Overall, LCSM surplus over group minimum capital requirements
increased by $2.9 billion since 31 December 2019 to $12.4
billion17 at
the end of June. LCSM in-force operating capital generation in the
period was $1.2 billion, which supported $(0.2) billion of
investment in new business. Non-operating items (excluding
corporate transactions) were positive overall and contributed $2.6
billion to surplus and was after an increase in required capital of
$0.8 billion, largely as a result of market movements in the
period. This positive contribution arose largely from the
derivative gains in Jackson more than offsetting the effect of
market movements on policyholder liabilities as well the
introduction of the new Singapore risk-based capital framework
(RBC2) effective 31 March 2020. Corporate transactions had a
broadly neutral impact with the inorganic investment in Asia
offsetting the benefit of the Athene reinsurance deal. The payment
of the 2019 second interim reduced the surplus by $0.7
billion.
The 30 June 2020 Jackson local statutory results reflect a $0.8
billion benefit from the reinsurance of the in-force portfolio of
Jackson's US fixed and fixed indexed annuity liabilities to Athene
Life Re Ltd effective from 1 June 2020, which similarly benefits
the Group's LCSM surplus over Group minimum capital
requirement.
The $500 million equity investment in Prudential's US business from
Athene Life Re Ltd in return for an 11.1 per cent economic interest
completed in July 2020 and so will be reflected in the second half
of 2020. The net impact of this transaction is a further $0.2
billion reduction in the Group LCSM shareholder surplus with the
cover ratio increasing by a further 6 per cent assuming this
transaction had completed as at 30 June 2020.
More information is set out in note I(i) of the Additional
unaudited financial information. The Group's LCSM position is
resilient to external macro movements as demonstrated by the
sensitivity disclosure contained in note I(i) of the Additional
unaudited financial information, alongside further information on
the basis of calculation of the LCSM measure.
|
30 June 2020
|
31 December 2019
|
Estimated Group LCSM capital
position7
|
Total
|
Shareholder*
|
Total
|
Shareholder*
|
Available capital ($ billion)
|
37.0
|
17.7
|
33.1
|
14.0
|
Group minimum capital requirement (GMCR) ($ billion)
|
11.5
|
5.3
|
9.5
|
4.5
|
LCSM surplus (over GMCR) ($ billion)
|
25.5
|
12.4
|
23.6
|
9.5
|
LCSM ratio (over GMCR) (%)
|
323%
|
334%
|
348%
|
309%
|
*The shareholder LCSM amounts exclude the available capital and
minimum capital requirements of the participating business in Hong
Kong, Singapore and Malaysia.
|
Financing and liquidity
Net core structural borrowings of shareholder-financed
businesses
|
|
30 June 2020 $m
|
|
30 June 2019 $m
|
|
31 December 2019 $m
|
|
IFRS
basis
|
Mark-to-market value
|
EEV
basis
|
|
IFRS
basis
|
Mark-to-market value
|
EEV
basis
|
|
IFRS
basis
|
Mark-to-market value
|
EEV
basis
|
Subordinated debt substituted to M&G plc in 2019
|
-
|
-
|
-
|
|
3,931
|
266
|
4,197
|
|
-
|
-
|
-
|
Other core structural borrowings
|
6,499
|
588
|
7,087
|
|
5,539
|
512
|
6,051
|
|
5,594
|
633
|
6,227
|
Total borrowings of shareholder-financed businesses
|
6,499
|
588
|
7,087
|
|
9,470
|
778
|
10,248
|
|
5,594
|
633
|
6,227
|
Less: holding company cash and short-term investments
|
(1,907)
|
-
|
(1,907)
|
|
(3,010)
|
-
|
(3,010)
|
|
(2,207)
|
-
|
(2,207)
|
Net core structural borrowings of shareholder-financed
businesses
|
4,592
|
588
|
5,180
|
|
6,460
|
778
|
7,238
|
|
3,387
|
633
|
4,020
|
Gearing ratio*
|
19%
|
|
|
|
21%
|
|
|
|
15%
|
|
|
* Net core structural borrowings as
proportion of IFRS shareholders' funds plus net debt, as set out in
note II of the Additional unaudited financial
information.
The total borrowings of the shareholder-financed businesses
increased by $0.9 billion, from $5.6 billion to $6.5 billion in the
first half of 2020. This reflected the issuance of $1,000 million
3.125 per cent notes in April 2020 raised for general corporate
purposes including to support the growth of the business. The Group
had central cash resources of $1.9 billion at 30 June 2020 (31
December 2019: $2.2 billion), resulting in net core structural
borrowings of the shareholder-financed businesses of $4.6 billion
at end of June 2020 (31 December 2019: $3.4 billion).
In addition to its net core structural borrowings of
shareholder-financed businesses set out above, the Group has access
to funding via the medium-term note programme, the US shelf
programme (the platform for issuance of SEC registered bonds in the
US market), a commercial paper programme and committed revolving
credit facilities. All of these are available for general corporate
purposes.
Prudential plc has maintained a consistent presence as an issuer in
the commercial paper market for the past decade and had $506
million in issue at the end of the first half of 2020 (31 December
2019: $520 million).
As at 30 June 2020, the Group had a total of $2.6 billion of
undrawn committed facilities, expiring in 2025. Apart from
small drawdowns to test the process, these facilities have
never been drawn, and there were no amounts outstanding at 30
June 2020.
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 with advances secured against collateral
posted by Jackson. Given the wide range of Jackson's product set
and breadth of its customer base including retail, corporate and
institutional clients, further sources of liquidity also include
premiums and deposits.
Cash remittances
|
|
|
|
Holding company
cash flow8
|
|
Actual exchange rate
|
|
Half year
2020* $m
|
Half year
2019* $m
|
Change %
|
From continuing operations
|
|
|
|
Asia excluding ICICI Prudential proceeds
|
400
|
329
|
22
|
ICICI Prudential proceeds
|
-
|
249
|
(100)
|
Total Asia
|
400
|
578
|
(31)
|
Jackson
|
-
|
509
|
(100)
|
Other operations
|
32
|
6
|
433
|
Total net cash remitted from continuing operations
|
432
|
1,093
|
(60)
|
From discontinued operations
|
|
|
|
M&G plc
|
-
|
453
|
(100)
|
Net cash remitted by business units
|
432
|
1,546
|
(72)
|
Central outflows
|
(172)
|
(288)
|
|
Dividends paid
|
(674)
|
(1,108)
|
|
Other movements
|
203
|
(1,282)
|
|
Total holding company cash flow
|
(211)
|
(1,132)
|
|
Cash and short-term investments at the beginning of the
period
|
2,207
|
4,121
|
|
Foreign exchange and other movements
|
(89)
|
21
|
|
Cash and short-term investments at the end of the
period
|
1,907
|
3,010
|
|
*The holding company cash flow describes the movement in the cash
and short-term investments of the centrally managed Group holding
companies.
Cash remitted to the Group from continuing operations in the first
half of 2020 amounted to $432 million, including $400 million from
Asia. Asia remittances in the first half of 2019 included $249
million in respect of capital proceeds from the required sale of
shares in the Group's Indian JV, ICICI Prudential. Excluding this
amount, Asia remittances were up 22 per cent compared with the same
period last year.
Cash remittances were used to meet central costs of $(172) million
and to pay dividends of $(674) million. Central costs include net
interest paid of $(147) million and a net tax benefit, which is not
expected to recur going forward, of $94 million.
Other movements of $203 million includes the proceeds of the
issuance of $1 billion of senior debt in April 2020 offset by
central contributions to the funding of Asia strategic growth
initiatives, principally payments for bancassurance distribution
agreements, including TMB and UOB. Further information is contained
in note I(iii) of the Additional unaudited financial
information.
Cash and short-term investments totalled $1.9 billion at the end of
June 2020 (30 June 2019: $3.0 billion4;
31 December 2019: $2.2 billion4).
The Group will seek to manage its financial condition such that it
has sufficient resources available to provide a buffer to support
the retained businesses in stress scenarios and to provide
liquidity to service central outflows. As discussed in the the
Group Chief Executive's report, Prudential plc does not currently
expect Jackson to remit any regular dividends in 2020 or 2021 prior
to the intended IPO.
Shareholders' funds
|
|
|
|
|
|
|
|
|
IFRS
|
|
EEV
|
|
Half year
2020 $m
|
Half year
2019 $m
|
Full year
2019 $m
|
|
Half year
2020 $m
|
Half year
2019 $m
|
Full year
2019 $m
|
Adjusted operating profit after tax and non-controlling interests
from continuing operations9
|
2,052
|
2,183
|
4,528
|
|
2,193
|
3,409
|
6,896
|
|
|
|
|
|
|
|
|
Profit (loss) after tax for the
period9
|
512
|
1,987
|
783
|
|
(4,824)
|
5,509
|
(645)
|
Exchange movements, net of related tax
|
(200)
|
47
|
2,943
|
|
(513)
|
154
|
666
|
Unrealised gains and losses on US fixed income securities
classified as available-for-sale (before the impact of Jackson's
reinsurance with Athene)
|
1,781
|
2,233
|
2,679
|
|
-
|
-
|
-
|
Impact of Jackson's reinsurance with Athene
|
(1,803)
|
-
|
-
|
|
-
|
-
|
-
|
Demerger dividend in specie of M&G plc
|
-
|
-
|
(7,379)
|
|
-
|
-
|
(7,379)
|
Other dividends
|
(674)
|
(1,108)
|
(1,634)
|
|
(674)
|
(1,108)
|
(1,634)
|
Mark-to-market value movements on Jackson assets backing surplus
and required capital
|
-
|
-
|
-
|
|
317
|
177
|
206
|
Other
|
17
|
(90)
|
117
|
|
(75)
|
(151)
|
95
|
Net (decrease) increase in shareholders' funds
|
(367)
|
3,069
|
(2,491)
|
|
(5,769)
|
4,581
|
(8,691)
|
Shareholders' funds at beginning of the period
|
19,477
|
21,968
|
21,968
|
|
54,711
|
63,402
|
63,402
|
Shareholders' funds at end of the period
|
19,110
|
25,037
|
19,477
|
|
48,942
|
67,983
|
54,711
|
Shareholders' value per
share10
|
732¢
|
963¢
|
749¢
|
|
1,876¢
|
2,615¢
|
2,103¢
|
Group IFRS shareholders' funds in the 6 months to 30 June 2020
decreased by (2) per cent4 to
$19.1 billion (31 December 2019:
$19.5 billion4),
largely reflecting profit after tax for the period being more than
offset by dividends paid in the period of $(0.7) billion and
foreign exchange movements of $(0.2) billion.
The Group's EEV basis shareholders' funds at 30 June 2020 were
$48.9 billion. This compares with
$54.7 billion4 at
31 December 2019. The reduction over the period is primarily driven
by EEV loss from continuing operations of $(4.8) billion, largely
driven by the effect of lower interest rates and equity markets,
and external dividends of $(0.7) billion. On a per share basis, the
Group's embedded value at 30 June 2020 equated to 1,876 cents.
More information on the Group's EEV results are included in the
segmental detail that follows.
Free surplus generation from
continuing operations11
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 the Group operates. 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 adjusted operating profit for the period.
Asia operating free surplus generation12 increased
by 13 per cent4 to
$988 million reflecting recent business growth, higher asset
management earnings and lower levels of new business investment as
Covid-19 containment measures introduced by the authorities across
the region lowered sales in the period.
US operating free surplus generation12 was
$1,029 million (2019: $1,075 million) before reflecting the impact
of the expected reduction from in-force business following EEV
hedge modelling enhancements made in the second half of 2019. The
2019 result benefited from a $355 million reserve benefit related
to the John Hancock portfolio which did not repeat in the current
year. Half year 2020 also saw lower new business investment
following a fall in sales volumes.
After allowing for restructuring costs, operating free surplus
generated from continuing operations, before the adjustments to
reflect US hedge modelling changes, increased by 3 per
cent1 to
$1,979 million. The
US EEV hedge modelling enhancements in full year 2019 reduced the
value of in-force business at 31 December 2019, and the subsequent
unwind of those cash flows over half year 2020 reduces the expected
transfer to net worth and hence operating free surplus generation
by $(535) million. After allowing for these costs operating free
surplus fell by (25) per cent1 to
$1,444 million.
Analysis of movement in free surplus
for insurance and asset management operations11
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2020 $m
|
Half year
2019 $m
|
Change %
|
|
Half year
2019 $m
|
Change %
|
Operating free surplus generated before restructuring costs and US
EEV hedge modelling enhancements during the second half of
2019
|
|
|
|
|
|
|
Asia
|
988
|
886
|
12
|
-
|
871
|
13
|
US
|
1,029
|
1,075
|
(4)
|
-
|
1,075
|
(4)
|
Total operating free surplus generated before restructuring costs
and US EEV hedge modelling enhancements during the second half of
2019
|
2,017
|
1,961
|
3
|
|
1,946
|
4
|
Restructuring and IFRS 17 implementation costs
|
(38)
|
(18)
|
(111)
|
|
(17)
|
(124)
|
Operating free surplus generated before US EEV hedge modelling
enhancements during the second half of 2019
|
1,979
|
1,943
|
2
|
|
1,929
|
3
|
Impact of US EEV hedge modelling enhancements during the second
half of 2019
|
(535)
|
-
|
n/a
|
|
-
|
n/a
|
Operating free surplus generated
|
1,444
|
1,943
|
(26)
|
|
1,929
|
(25)
|
Gain (loss) on reinsurance of US in-force fixed and fixed indexed
annuity portfolio
|
851
|
-
|
|
|
|
|
Other non-operating (loss) profit
|
(665)
|
347
|
|
|
|
|
Net cash flows paid to parent company
|
(400)
|
(1,103)
|
|
|
|
|
Foreign exchange movements on foreign operations,
timing differences and other items
|
467
|
118
|
|
|
|
|
Total movement in free surplus from continuing
operations
|
1,697
|
1,305
|
|
|
|
|
Free surplus at 1 January from continuing operations
|
5,997
|
5,351
|
|
|
|
|
Free surplus at 30 June from continuing operations
|
7,694
|
6,656
|
|
|
|
|
Asia
Operational and financial highlights
While the evolving impact of Covid-19 containment measures across
the region impacted new business sales volumes and associated
profitability in the first half of 2020, the strength of our
franchise was evident from the improvement in new business sales in
markets where restrictions have eased, and a positive in-force
performance which underpinned a 13 per cent
increase1 in
operating free surplus generation12 and
a 14 per cent1 increase
in adjusted operating profit2.
This level of growth, in a disrupted and volatile period, reflects
the benefit of our focus on high quality, recurring premium
business, supported by a diverse portfolio of well-positioned, at
scale, market operations supporting profit progression across
market cycles.
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2020 $m
|
Half year
2019 $m
|
Change %
|
|
Half year
2019 $m
|
Change %
|
New business profit
|
912
|
1,675
|
(46)
|
|
1,673
|
(45)
|
Adjusted operating profit2,*
|
1,733
|
1,550
|
12
|
|
1,526
|
14
|
EEV operating profit*
|
2,036
|
2,868
|
(29)
|
|
2,853
|
(29)
|
Operating free surplus generation*
|
988
|
886
|
12
|
|
871
|
13
|
*Before restructuring costs
New business performance
Life EEV new business profit and APE new business sales (APE
sales)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2020 $m
|
Half year
2019 $m
|
Change %
|
|
Half year
2019 $m
|
Change %
|
|
APE sales
|
New business profit
|
APE sales
|
New business profit
|
APE sales
|
New business profit
|
|
APE sales
|
New business profit
|
APE sales
|
New business profit
|
Hong Kong
|
388
|
353
|
1,075
|
1,070
|
(64)
|
(67)
|
|
1,086
|
1,081
|
(64)
|
(67)
|
China JV
|
319
|
127
|
350
|
126
|
(9)
|
1
|
|
337
|
122
|
(5)
|
4
|
Indonesia
|
123
|
68
|
156
|
85
|
(21)
|
(20)
|
|
152
|
82
|
(19)
|
(17)
|
Other life insurance markets
|
835
|
364
|
979
|
394
|
(15)
|
(8)
|
|
965
|
388
|
(13)
|
(6)
|
Total Asia
|
1,665
|
912
|
2,560
|
1,675
|
(35)
|
(46)
|
|
2,540
|
1,673
|
(34)
|
(45)
|
Total Asia excluding Hong Kong
|
1,277
|
559
|
1,485
|
605
|
(14)
|
(8)
|
|
1,454
|
592
|
(12)
|
(6)
|
Total new business margin
|
|
55%
|
|
65%
|
|
|
|
|
66%
|
|
|
Life insurance new business APE sales decreased by (34) per
cent1 to
$1,665 million and related new business profit decreased by (45)
per cent1.
The APE sales development reflects the widespread impact of
Covid-19-related restrictions across the region during the second
quarter of 2020, with new sales in the second quarter of 2020 down
(45) per cent1 compared
with a reduction of (24) per cent1 in
the first quarter. More recently, as restrictions have eased in a
number of countries, all 13 markets have seen improving sales
trends in June compared with those in April and
May.
We continue to benefit from our diversified distribution footprint
and broad portfolio. Overall new sales through our bank partners
were (13) per cent1 lower,
albeit three of our top six bank partners recorded double-digit
growth, despite Covid-related restrictions. Outside Hong Kong,
overall new sales through our bank partners were (6) per
cent1 lower,
while agency sales (25) per cent1 down
reflecting Covid-related disruption.
We continue to increase the weight of health and protection
products which represent 28 per cent of new sales (2019: 27 per
cent), with seven markets reporting an increase in the proportion
of health and protection sales.
Three markets saw higher APE sales in the first half of 2020, led
by Thailand, where bancassurance expansion underpinned the 45 per
cent1 APE
growth. In Vietnam, APE increased by 8 per cent1,
also driven by strong bancassurance growth, as easing of
restrictions from May helped new sales return to positive growth in
the second quarter. Similarly, in Taiwan, the return to positive
sales growth in the second quarter supported marginally higher APE
sales (up less than $1 million1)
in the first half.
In China, new sales were (5) per cent1 lower,
with first quarter sales impacted by Covid-related disruption.
However, as restrictions eased, momentum increased and the second
quarter produced APE sales 20 per cent1 higher
than the same period last year. The business recovery was
broad-based, driven by double-digit growth1 across
agency and bancassurance channels, when compared with the second
quarter last year.
Sales in Indonesia declined by (19) per cent1 as
increased sales through the bancassurance channel were offset by
lower agency-related activity, following Covid-19 mitigation
measures introduced at the end of March, but saw substantial
month-on-month pick-up in June as these measures started to ease.
In Singapore, sales fell by (21) per cent1 reflecting
Covid restrictions, but with strong sequential improvement in June
as these restrictions eased. Similarly, in Malaysia, sales were
(20) per cent1 lower
over the first half, but with improving momentum as restrictions
eased from early in May.
In Hong Kong, new sales were (64) per cent1 lower,
with sales to mainland China customers down very sharply reflecting
reduced visitor levels due to travel restrictions. These travels
restrictions resulted in minimal levels of mainland China visitors
since the end of January, with a consequential impact on associated
new sales. Easing of these travel restrictions will be dependent on
how Covid-19 cases evolve over the second half of the year and
their impact on the re-opening of the border with mainland China,
which may not take place in 2020. The domestic business was
supported by strong sales in the first quarter of our tax-efficient
Qualifying Deferred Annuity Plan (QDAP), given the tax year end at
the end of March. We saw higher domestic monthly sales in June
compared with levels in April and May as Covid-19 restrictions were
gradually eased. The move towards a virtual business model also saw
good progress, as we were one of the first insurers in Hong Kong
offering non-face-to-face sales across a wide range of
products.
Regulatory permission to conduct virtual sales of our flagship
Evergreen Growth Saver product via our bank partners and the agency
channel was received towards the end of the second
quarter.
The decline in new business profits by (45) per
cent1 mainly
reflects the impact of lower sales volumes and interest rates in
the period particularly in Hong Kong, where business disruption was
more pronounced. Excluding Hong Kong, new business profits were (6)
per cent1 lower,
driven by a (12) per cent1 reduction
in new sales, partly offset by increased proportion of protection
sales, among other factors. In China, new business profits were 4
per cent1 higher
driven by favourable shift in product mix.
EEV basis results
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2020 $m
|
Half year
2019 $m
|
Change %
|
|
Half year
2019 $m
|
Change %
|
New business profit
|
912
|
1,675
|
(46)
|
|
1,673
|
(45)
|
Business in force
|
998
|
1,076
|
(7)
|
|
1,065
|
(6)
|
Operating profit from long-term business
|
1,910
|
2,751
|
(31)
|
|
2,738
|
(30)
|
Asset management
|
126
|
117
|
8
|
|
115
|
10
|
Operating profit from long-term business and asset management
before restructuring costs
|
2,036
|
2,868
|
(29)
|
|
2,853
|
(29)
|
Restructuring and IFRS 17 implementation costs
|
(29)
|
(17)
|
(71)
|
|
(16)
|
(81)
|
Non-operating (loss) profit
|
(3,161)
|
1,116
|
(383)
|
|
1,113
|
(384)
|
(Loss) profit for the period
|
(1,154)
|
3,967
|
(129)
|
|
3,950
|
(129)
|
|
|
|
|
|
|
|
Other movements
|
(829)
|
(468)
|
|
|
|
|
Net (decrease) increase in embedded value
|
(1,983)
|
3,499
|
|
|
|
|
Embedded value at 1 January
|
39,235
|
32,008
|
|
|
|
|
Embedded value at 30 June
|
37,252
|
35,507
|
|
|
|
|
% New business profit13/average
embedded value
|
5%
|
10%
|
|
|
|
|
% Operating profit13/average
embedded value
|
11%
|
17%
|
|
|
|
|
Asia EEV operating profit decreased compared with the prior period
to $2,036 million (2019: $2,853 million1),
largely driven by a $(761) million1 fall
in life new business profit, given weaker sales volumes and the
effect of lower interest rates in the period.
Operating profit generated by the in-force life business was $998
million (2019: $1,065 million1),
marginally lower than the prior period. This reflected a $(41)
million1 reduction
in the expected return to $753 million, with the impact from lower
interest rates and other economic assumption changes of $(165)
million more than offsetting the effect of recent growth in the
business. Operating experience variances and assumption changes
were positive at $245 million (2019: $271
million1)
and are driven by favourable persistency and mortality/morbidity
effects among other factors, demonstrating the durability of the
in-force business.
Asset management segment operating profit after tax was up 10 per
cent1 on
the prior period at $126 million (2019: $115
million1),
which is discussed in more detail below.
The non-operating loss was $(3,161) million (2019: non-operating
profit of $1,113 million1),
mainly as a result of lower interest rates reducing future assumed
investment returns partly offset by higher than assumed returns on
bonds in the period.
Overall, Asia segment embedded value decreased by (5) per
cent4 to
$37.3 billion in the six months to 30 June 2020 (31 December 2019:
$39.2 billion4).
Of this, $35.9 billion (31 December 2019: $37.8
billion4)
relates to the value of the long-term business and includes our
share of our India associate valued using embedded value principles
which is lower than its market capitalisation. The remainder
represents Asia asset management and goodwill attributable to
shareholders which are carried at IFRS net asset value within the
Group's EEV. Overall Asia segment embedded value increased by 5 per
cent4 compared
with 30 June 2019.
Asia analysis of movement in free
surplus11
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2020 $m
|
Half year
2019 $m
|
Change %
|
|
Half year
2019 $m
|
Change %
|
Operating free surplus generated from in-force life business and
asset management before restructuring costs
|
1,286
|
1,209
|
6
|
|
1,190
|
8
|
Investment in new business
|
(298)
|
(323)
|
8
|
|
(319)
|
7
|
Operating free surplus generated before restructuring
costs
|
988
|
886
|
12
|
|
871
|
13
|
Restructuring and IFRS 17 implementation costs
|
(29)
|
(17)
|
(71)
|
|
(16)
|
(81)
|
Operating free surplus generated
|
959
|
869
|
10
|
|
855
|
12
|
Non-operating (loss) profit
|
(508)
|
872
|
|
|
|
|
Net cash flows paid to parent company
|
(400)
|
(578)
|
|
|
|
|
Foreign exchange movements on foreign operations, timing
differences and other items
|
26
|
(45)
|
|
|
|
|
Total movement in free surplus
|
77
|
1,118
|
|
|
|
|
Free surplus at 1 January
|
4,220
|
2,591
|
|
|
|
|
Free surplus at 30 June
|
4,297
|
3,709
|
|
|
|
|
In-force operating free surplus generation12 was
$1,286 million, up 8 per cent1 compared
with the prior period. Excluding the effect of operating assumption
changes and experience variances, in-force free surplus generation
was 2 per cent1 higher
than 2019 with the growth of the in-force portfolio being dampened
by the effect of lower interest rates compared with the prior
period. Operating assumption changes and experience variances were
positive, again illustrating the high quality nature of the
in-force business.
Investment in new business was $(298) million, 7 per
cent1 below
that in 2019. This reflects lower APE sales volumes, substantially
offset by the effect of lower interest rates.
Overall higher in-force generation and lower investment in new
business led to operating free surplus generated12 increasing
by 13 per cent1 to
$988 million.
The non-operating loss of $(508) million mainly relates to the
impact of lower interest rates in the period and their impact on
the discount rates that apply for local statutory reporting, only
partially offset by favourable valuation movements on fixed income
securities. 2019 non-operating profits included $282
million4 of
gains from the reduction in the Group's stake in ICICI Prudential
Life Insurance Company and the disposal of Prudential Vietnam
Finance Company together with equity and bond gains. Changes in
interest rates over the first half of 2019 had a more muted impact
on discount rates.
Local statutory capital
We maintained a strong balance sheet with a shareholder LCSM
surplus over the regulatory minimum capital requirement of $6.5
billion and coverage ratio of 308 per cent at 30 June 2020 (31
December 2019: $4.7 billion and 253 per cent). This increase in
surplus and ratio includes the adoption of the new RBC2 regime in
Singapore at the end of March and is after allowing for revisions
to the local Hong Kong solvency position from a change in the
calculation of the Hong Kong valuation interest rate (VIR). If our
with-profits funds in Hong Kong, Singapore and Malaysia are added
the surplus increases to $19.6 billion (31 December 2019: $18.8
billion). We seek to safeguard our business from market volatility
through our strong focus on protection products and our prudent
asset and liability management strategy.
IFRS profit
Overall Asia adjusted operating profit2 increased
by 14 per cent1 to
$1,733 million, driven by a 14 per cent1 increase
in life insurance adjusted operating profit2,
alongside a 10 per cent1 increase
at Eastspring.
This growth reflects the benefits of our focus on high quality
recurring premium business and diversified portfolio of scale
businesses, with over 87 per cent of our total life
income14 (excluding
other income described below) driven by insurance margin and fee
income (2019: 86 per cent1),
again supporting profit progression across market
cycles.
Our Asia life insurance adjusted operating
profit2 growth
is broad-based and at scale. Overall, nine insurance markets
reported double-digit growth1,
with all nine delivering growth of 15 per cent1 or
more. At a market level, highlights include Hong Kong up 21 per
cent1 to
$412 million, Singapore up 20 per cent1 to
$262 million, Malaysia up 16 per cent1 to
$158 million and China up 17 per cent1 to
$101 million. Adjusted operating profit2 in
Indonesia was $249 million, marginally lower than the prior
period.
Profit margin analysis of Asia
long-term insurance and asset management
operations15
|
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year 2020
|
Half year 2019
|
|
Half year 2019
|
|
|
Margin
|
|
Margin
|
|
|
Margin
|
|
$m
|
bps
|
$m
|
bps
|
|
$m
|
bps
|
Spread income
|
146
|
79
|
154
|
111
|
|
150
|
107
|
Fee income
|
135
|
97
|
144
|
109
|
|
140
|
106
|
With-profits
|
58
|
17
|
53
|
19
|
|
52
|
19
|
Insurance margin
|
1,287
|
|
1,103
|
|
|
1,086
|
|
Other income
|
1,440
|
|
1,544
|
|
|
1,528
|
|
Total life income
|
3,066
|
|
2,998
|
|
|
2,956
|
|
Expenses:
|
|
|
|
|
|
|
|
Acquisition
costs
|
(864)
|
(52)%
|
(1,038)
|
(41)%
|
|
(1,029)
|
(41)%
|
Administration
expenses
|
(711)
|
(219)
|
(708)
|
(261)
|
|
(695)
|
(256)
|
DAC
adjustments
|
117
|
|
170
|
|
|
169
|
|
Share of related tax charges from joint ventures and
associates
|
(18)
|
|
(5)
|
|
|
(5)
|
|
Long-term insurance business pre-tax adjusted operating
profit
|
1,590
|
|
1,417
|
|
|
1,396
|
|
Eastspring
|
143
|
|
133
|
|
|
130
|
|
Adjusted operating profit from long-term business and asset
management before restructuring costs
|
1,733
|
|
1,550
|
|
|
1,526
|
|
Tax charge
|
(260)
|
|
(217)
|
|
|
(214)
|
|
Adjusted operating profit after tax for the period before
restructuring costs
|
1,473
|
|
1,333
|
|
|
1,312
|
|
Non-operating (loss) profit after tax
|
(420)
|
|
784
|
|
|
792
|
|
Profit for the period after tax before restructuring
costs
|
1,053
|
|
2,117
|
|
|
2,104
|
|
Our adjusted operating profit2 continues
to be based on high-quality drivers. The overall 14 per
cent1 growth
in Asia life insurance adjusted operating profit2 to
$1,590 million (2019: $1,396 million1)
was driven principally by 19 per cent1 growth
in insurance margin-related revenues and reflects our ongoing focus
on recurring premium health and protection products and the
associated continued growth of our in-force business. Renewal
premiums10,
reflecting the long-term nature of our insurance business, grew 6
per cent4.
Fee income decreased by (4) per cent1,
reflecting the impact of weaker equity markets in the period, while
spread income decreased by (3) per cent1 driven
by lower interest rates in the period.
With-profits earnings relate principally to the shareholders' share
in bonuses declared to policyholders. As these bonuses are
typically weighted to the end of a contract, under IFRS,
with-profit earnings consequently emerge only gradually over time.
The 12 per cent1 growth
in with-profits earnings reflects the ongoing growth in these
portfolios.
Other income primarily represents amounts deducted from premiums to
cover acquisition costs and administration expenses. As such, the
(6) per cent1 decrease
from half year 2019 largely reflects lower new business volumes,
whereas new business acquisition expense fell (16) per
cent1 to
$(864) million. The ratio of shareholder acquisition costs to
shareholder-related APE sales (excluding with-profits-related
sales) increased to 69 per cent (2019: 66 per cent on an actual
exchange rate basis), reflecting changes to product and
geographical mix. Administration expenses, including renewal
commissions, increased by 2 per cent1 reflecting
in-force business growth.
Asset management
|
Actual exchange rate
|
|
Half year
2020 $m
|
Half year
2019 $m
|
Change %
|
Total external net
flows*,16
|
(8,362)
|
3,956
|
n/a
|
|
|
|
|
External funds under management* ($bn)
|
82.4
|
85.2
|
(3)
|
Funds managed on behalf of M&G plc ($bn)
|
15.7
|
24.9
|
(37)
|
Internal funds under management ($bn)
|
121.6
|
105.6
|
15
|
Total funds under management ($bn)
|
219.7
|
215.7
|
2
|
|
|
|
|
Analysis of adjusted operating profit
|
|
|
|
Retail operating income
|
188
|
191
|
(2)
|
Institutional operating income
|
125
|
118
|
6
|
Operating income before performance-related fees
|
313
|
309
|
1
|
Performance-related fees
|
2
|
1
|
100
|
Operating income (net of commission)
|
315
|
310
|
2
|
Operating expense
|
(157)
|
(157)
|
-
|
Group's share of tax on joint ventures' adjusted operating
profit
|
(15)
|
(20)
|
25
|
Adjusted operating profit
|
143
|
133
|
8
|
Adjusted operating profit after tax
|
126
|
117
|
8
|
|
|
|
|
Average funds managed by Eastspring
|
$224.1bn
|
$206.7bn
|
8
|
Fee margin based on operating income
|
28bps
|
30bps
|
(2)bps
|
Cost/income ratio10
|
50%
|
51%
|
(1)ppts
|
*
Excluding $15.7 billion of funds managed on behalf of M&G
plc.
Eastspring's total funds under management were $219.7 billion at 30
June (31 December 2019: $241.1 billion4),
reflecting third-party net outflows and lower equity markets in the
period. Funds under management were 5 per cent higher than at the
end of March ($209 billion) due to positive Asia life flows and
equity market recovery.
Third-party outflows16 of
$(8.4) billion reflected the impact, following the Covid-19
pandemic, of higher market volatility on retail funds, notably in a
number of retail bond funds in Thailand. In addition, there were
$(7.3) billion net outflows from funds managed on behalf of M&G
plc and further outflows are anticipated in the second half of
2020.
The strength of our combined asset management and insurance
franchise was demonstrated through internal net flows remaining
positive over the period at $2.9 billion. The structural benefit of
this source of flows is evident in the 15 per
cent4 increase
in internal funds under management from our Asia and US businesses
over the last year.
Market movements for equity funds were negative (MSCI Asia fell 5.5
per cent since 31 December 2019), but were largely mitigated by
strong market movements on bond funds.
Compared with the prior period, Eastspring's average funds under
management increased by 8 per cent4 (12
per cent20 on
a constant exchange rate basis), reflecting the benefit of strong
net inflows over the second half of 2019 and the acquisition of
TFUND in December 2019.
Eastspring's adjusted operating profit2 of
$143 million was 8 per cent above the prior period on an actual
exchange rate basis (10 per cent on a constant exchange rate
basis). Operating income (net of commission) increased by 2 per
cent4 with
the benefit of higher average funds under management being partly
offset by adverse client and asset mix effects that reduced the fee
margin based on operating income to 28 basis points (2019: 30 basis
points4).
Cost discipline remains robust, with operating costs in line with
the prior period, with the resulting cost/income
ratio10 (1)
per cent4 lower
at 50 per cent.
Return on segment equity
The benefit of our focus on profitable and capital efficient health
and protection, with-profit and asset management businesses is
evident in the attractive 26 per cent (2019: 30 per cent) operating
return delivered on average segment equity10,13 over
the first half of 2020.
United States
Operational and financial highlights
The financial performance of the US business in the first half of
2020 reflects the robust performance of Jackson's risk management
processes, including its disciplined approach to product pricing,
in a period of extreme macro volatility with lower equity markets
and risk free rates. This is evident from Jackson's estimated RBC
ratio, which is above 400 per cent at 30 June 2020 (31 December
2019: 366 per cent) and includes a 69 percentage point uplift from
the reinsurance transaction with Athene announced in June. We
estimate that the annual effect on statutory operating capital
generation from policies being reinsured to Athene will be a
reduction of circa $150 million. While not reflected in the half
year's results, Athene's previously announced equity investment
into the US business completed as expected in July 2020 and
represents an important step on Jackson's path to independence.
Assuming this transaction had completed at end-June, Jackson's
estimated RBC ratio would have been above 425 per
cent.
The reinsurance transaction has also acted to increase Jackson's
resilience to credit market stress. As at 30 June 2020, if 20 per
cent of the general account credit assets were to be
instantaneously downgraded by 1 whole letter rating, the RBC ratio
would fall by circa 12 percentage points (31 March 2020: circa 16
percentage points).
The US started to see the effects of the Covid-19 outbreak in
March, with stay-at-home orders in many states and increased market
volatility. Total APE sales (including $1.3 billion of single
premium institutional sales) were down (9) per cent from the first
half of 2019 and down (15) per cent from the second half of 2019.
In general, policyholders are remaining invested and not making
significant shifts in their allocations. Even as close to 100 per
cent of associates in the US are now working from home,
industry-leading service levels are being maintained and our
wholesaling teams are working closely with distributors to help
them serve new and existing clients through virtual
platforms.
All of the results below reflect the whole US segment, except for
the discussion on local statutory capital which covers Jackson
National Life only.
|
Half year
2020 $m
|
Half year
2019 $m
|
Change %
|
New business profit
|
248
|
450
|
(45)
|
Adjusted operating profit2,*
|
1,266
|
1,572
|
(19)
|
EEV operating profit*
|
696
|
1,040
|
(33)
|
*Before restructuring costs
New business performance
Life EEV new business profit and APE new business sales (APE
sales)
|
|
|
|
|
|
Half year
2020 $m
|
Half year
2019 $m
|
Change %
|
Variable annuities
|
643
|
628
|
2
|
Elite Access (variable annuity)
|
88
|
96
|
(8)
|
Fixed annuities
|
31
|
23
|
35
|
Fixed indexed annuities
|
89
|
120
|
(26)
|
Total retail APE sales
|
851
|
867
|
(2)
|
Wholesale
|
128
|
208
|
(38)
|
Total APE sales
|
979
|
1,075
|
(9)
|
% APE variable annuities
|
75
|
67
|
8pp
|
% APE other products
|
25
|
33
|
(8)pp
|
Total new business profit
|
248
|
450
|
(45)
|
New business margin
|
25%
|
42%
|
|
Retail APE sales were down 2 per cent from the first half of 2019
and down 23 per cent from the second half of 2019. The retail sales
decline in the first half of 2020 compared with the second half of
2019 reflected the impact of material pricing actions on fixed
annuities and fixed indexed annuities, with APE sales of these
products down 66 per cent compared with the second half of 2019.
These pricing actions were in response to the evolving interest
rate environment and our disciplined capital management. Variable
annuity APE sales were up 2 per cent from the first half of 2019
and in line with the second half of 2019, with Covid-19-related
containment measures and higher equity market volatility both
acting to dampen new sales activity.
Wholesale-related sales were 38 per cent below the prior period,
and reflect opportunistic sales during the first quarter of the
year.
New business profit was (45) per cent lower at $248 million (2019:
$450 million), compared with a fall in APE sales volumes of (9) per
cent. The lower margins achieved were largely as a result of the
fall in interest rates over the first half of 2020, causing new
business profit to fall $(119) million compared with the same
period last year, and a $(47) million adverse effect of the hedge
modelling enhancements that were effected in the second half of
2019.
Movement in policyholder liabilities
|
|
|
|
|
|
Half year 2020 $m
|
Half year 2019 $m
|
|
Separate account liabilities
|
General account and other liabilities
|
Separate account liabilities
|
General account and other liabilities
|
At 1 January
|
195,070
|
74,479
|
163,301
|
73,079
|
Premiums
|
6,544
|
2,321
|
6,032
|
3,104
|
Surrenders
|
(5,353)
|
(2,102)
|
(6,008)
|
(2,271)
|
Maturities/deaths
|
(848)
|
(945)
|
(782)
|
(962)
|
Net flows
|
343
|
(726)
|
(758)
|
(129)
|
Transfers from separate to general account
|
(1,042)
|
1,042
|
637
|
(637)
|
Investment-related items and other movements
|
(10,151)
|
6,640
|
21,737
|
49
|
At 30 June
|
184,220
|
81,435
|
184,917
|
72,362
|
Overall US net outflows in half year 2020 were $(0.4) billion
compared with outflows of $(0.9) billion in the first half of 2019.
Higher variable annuity sales in the period combined with lower
surrenders resulted in positive separate account net flows of $0.3
billion compared with net outflows of $(0.8) billion in the prior
period. Lower institutional sales in the first half of 2020 led to
increased net outflows from $(0.1) billion in half year 2019 to
$(0.7) billion in half year 2020. Falling equity markets in the
period contributed to lower period-end policyholder liabilities at
30 June 2020 of $265.7 billion as compared with $269.5 billion at
31 December 2019. The general account liabilities of $81.4 billion
at 30 June include $27.7 billion that were reinsured to Athene and
for which a corresponding reinsurance asset is held. All the flows
presented above are before the effects of that
reinsurance.
IFRS profit
Profit margin analysis of US long-term
insurance and asset management operations15
|
|
|
|
Half year 2020
|
Half year 2019
|
|
|
Margin
|
|
Margin
|
|
$m
|
bps
|
$m
|
bps
|
Spread income
|
273
|
96
|
298
|
106
|
Fee income
|
1,596
|
176
|
1,601
|
181
|
Insurance margin
|
708
|
|
711
|
|
Other income
|
26
|
|
18
|
|
Total life income
|
2,603
|
|
2,628
|
|
Expenses:
|
|
|
|
|
Acquisition
costs
|
(484)
|
(49)%
|
(494)
|
(46)%
|
Administration
expenses
|
(853)
|
(69)
|
(825)
|
(70)
|
DAC
adjustments
|
(10)
|
|
247
|
|
Long-term insurance business pre-tax adjusted operating
profit
|
1,256
|
|
1,556
|
|
Asset management
|
10
|
|
16
|
|
Adjusted operating profit from long-term business and asset
management before restructuring costs
|
1,266
|
|
1,572
|
|
Tax charge
|
(195)
|
|
(263)
|
|
Adjusted operating profit after tax for the period before
restructuring costs
|
1,071
|
|
1,309
|
|
Non-operating loss after tax
|
(1,150)
|
|
(1,581)
|
|
(Loss) profit for the period after tax before restructuring
costs
|
(79)
|
|
(272)
|
|
Adjusted operating profit
US adjusted operating profit2 was
$1,266 million over the first half of 2020 down (19) per cent from
the prior period. This mainly reflects the impact of unfavourable
DAC adjustments in the current period as compared with favourable
DAC adjustments in the prior period as discussed further below.
Before allowing for the impact of DAC acceleration in the current
period (2019: DAC deceleration), adjusted operating
profit2 decreased
by 6 per cent.
Fee income was $1,596 million
(2019: $1,601 million), marginally below the prior
period, reflecting both marginally higher average separate account
balances (given the performance of equity markets in the second
half of 2019) and a modest decline in the average fee
margin.
Spread income declined by (8) per cent
to $273 million (2019: $298 million) reflecting
lower asset yields in the period not being fully offset by falls in
crediting rates. Spread income benefited from a higher contribution
from swaps held for duration management purposes. If the income
from these swaps was excluded the core spread margin would be 80
basis points (2019: 95 basis points). Following the reinsurance
transaction effective 1 June and resulting reduction in spread
generating liabilities, spread income is expected to reduce further
in the future reflecting this and the ongoing impact of low
interest rates.
Insurance margin primarily represents income from variable annuity
guarantees and profits from legacy life businesses. This decreased
marginally to $708 million (2019: $711 million).
Acquisition costs declined 2 per cent to
$(484) million in line with the 2 per cent reduction
in retail APE sales. Administrative expenses increased
from $(825) million in half year 2019
to $(853) million in half year 2020. Excluding
asset-based commissions, the resulting administration expense ratio
would be broadly flat at 35 basis points (2019: 34 basis
points).
DAC adjustments, being the cost deferred on sales in the period net
of amortisation of amounts deferred previously, were $(10)
million (2019: $247 million), reflecting lower costs deferred from
lower sales but also higher DAC amortisation. Over the first half
of 2020, weaker capital market returns resulted in a separate
account investment performance below that assumed within the DAC
mean reversion formula. In addition, the application of DAC mean
reversion formula means that favourable returns from 2017 are no
longer applied in 2020. The combination of these led to an
unfavourable DAC acceleration effect of $(32) million.
This compares with a favourable DAC deceleration effect
of $191 million in the first half of 2019, resulting in a
significant increase in DAC amortisation in half year 2020 as
compared with the same period last year.
Non-operating items
The non-operating result was negative $(1,458) million pre-tax
(2019: negative $(1,987) million pre-tax) and contributed to a net
loss after tax of $(79) million (2019: $(272) million). The
non-operating result over the first half of 2020 includes a loss of
$(2,304) million from short-term investment fluctuations and
amortisation of previous acquisition accounting adjustments offset
by a $846 million pre-tax gain as a result of the Athene
transaction.
In the US, Jackson provides certain guarantees on its annuity
products, the value of which would typically rise when equity
markets fall and long-term interest rates decline as occurred in
the first half of 2020. Jackson charges fees for these guarantees
which are in turn used to purchase downside protection, in
particular options and futures to mitigate the effect of equity
market falls.
Jackson designs its hedge programme to protect the economics of the
business from large movements in investment markets and does not
seek to hedge the IFRS accounting basis. It therefore accepts a
degree of variability in the accounting results.
Losses from short-term investment fluctuations of negative $(2,288)
million (pre-tax) in the period mainly reflect the effect of lower
interest rates and lower equity markets on guarantee liabilities
which exceeded the gains on derivatives in the period.
In total, the US segment shareholders' funds at 30 June were $9.0
billion (31 December 2019: $8.9 billion), with the adverse effects
of the Athene transaction that are recorded directly within other
comprehensive income broadly offset by unrealised gains on bonds in
the period. At 30 June 2020, and post the Athene transaction, the
cumulative net unrealised gains held in the available-for-sale
reserve was $2.2 billion, excluding these amounts US segment equity
was $6.8 billion.
Following the Athene reinsurance transaction, Jackson's investment
portfolio, as recorded in the general account and as measured on an
IFRS basis, has been reduced in size from $76.1 billion as of 31
December 2019 to $56.0 billion as of 30 June 2020. After
repositioning the portfolio following the transfer of assets, the
mix remains conservative. The invested assets held at 30 June 2020
comprised 10 per cent in US Treasuries, 52 per cent in corporate
bonds (of which 97 per cent18 were
investment grade), 15 per cent in commercial mortgage loans with an
average loan-to-value of 55 per cent, and 23 per cent in other
assets.
EEV basis results
|
|
|
Half year
2020 $m
|
Half year
2019 $m
|
Change %
|
New business profit
|
248
|
450
|
(45)
|
Business in force
|
440
|
576
|
(24)
|
Operating profit from long-term business
|
688
|
1,026
|
(33)
|
Asset management
|
8
|
14
|
(43)
|
Operating profit from long-term business and asset management
before restructuring costs
|
696
|
1,040
|
(33)
|
Restructuring and IFRS 17 implementation costs
|
(9)
|
(1)
|
(800)
|
Non-operating (loss) profit
|
(3,927)
|
189
|
n/a
|
(Loss) profit for the period
|
(3,240)
|
1,228
|
(364)
|
|
|
|
|
Other movements
|
441
|
(364)
|
|
Net (decrease) increase in embedded value
|
(2,799)
|
864
|
|
Embedded value at 1 January
|
16,342
|
18,709
|
|
Embedded value at 30 June
|
13,543
|
19,573
|
|
% New business profit13/average
embedded value
|
3%
|
5%
|
|
% Operating profit13/average
embedded value
|
9%
|
11%
|
|
EEV operating profit from the long-term business reduced to $688
million (2019: $1,026 million) reflecting lower new business profit
in the period and a reduction in the level of expected return on
business in force.
The reduction in the level of expected return to $440 million
(2019: $576 million) reflects the combined effect of a lower
opening value for the expected return calculation, principally
driven by the impact of EEV methodology changes implemented at the
end of 2019, and a lower discount rate applied to this opening
value compared with the prior period, reflecting the decline in the
risk-free rate.
The EEV non-operating loss reflects the combined impact of
investment return variances and economic assumption changes
resulting from the effect of macro developments in the period,
notably lower equity market performance and lower interest rates,
changes in the fair value of the surplus loan notes issued by
Jackson of $(24) million, and the $(423) million loss as a result
of the Athene reinsurance transaction in June. This largely
represents the loss of future profits and unrealised investment
gains as a result of the business being reinsured partly offset by
reinsurance commission received after deducting tax.
The investment return variances in the period were negative $(380)
million (2019: $1,254 million) and are determined by the effect of
macro developments in the period, notably lower equity market
performance, and lower interest rates. Lower than assumed equity
market performance was partially offset by positive gains on
derivatives to manage these effects.
Economic assumption changes of $(3,100) million largely reflect the
impact of lower interest rates in the period including the
consequential impact on the projected future fund growth rates for
the variable annuity business. These projected lower growth rates
reduce the expected growth in fund values for policyholders and
hence the expected profitability for shareholders.
Overall segment embedded value ended the period at $13.5 billion
(31 December 2019: $16.3 billion).
US analysis of movement in free
surplus11
|
|
|
|
Half year
2020 $m
|
Half year
2019 $m
|
Change %
|
Operating free surplus generated from in-force life business and
asset management before restructuring costs and US EEV hedge
modelling enhancements during the second half of 2019
|
1,248
|
1,419
|
(12)
|
Investment in new business
|
(219)
|
(344)
|
36
|
Operating free surplus generated before restructuring costs and US
EEV hedge modelling enhancements during the second half of
2019
|
1,029
|
1,075
|
(4)
|
Restructuring and IFRS 17 implementation costs
|
(9)
|
(1)
|
(800)
|
Operating free surplus generated before US EEV hedge
modelling
enhancements during the second half of 2019
|
1,020
|
1,074
|
(5)
|
Impact of US EEV hedge modelling enhancements during the second
half of 2019
|
(535)
|
-
|
n/a
|
Operating free surplus generated
|
485
|
1,074
|
(55)
|
Gain on reinsurance of US in-force fixed and fixed indexed annuity
portfolio
|
851
|
-
|
|
Other non-operating loss
|
(157)
|
(525)
|
|
Net flows paid to parent company
|
-
|
(525)
|
|
Timing differences and other items
|
441
|
163
|
|
Total movement in free surplus
|
1,620
|
187
|
|
Free surplus at 1 January
|
1,777
|
2,760
|
|
Free surplus at 30 June
|
3,397
|
2,947
|
|
The US business generated in-force operating free surplus
(before restructuring costs and modelling enhancements during the
second half of 2019) of $1,248 million over the first half of 2020
(2019: $1,419 million). The reduction compared with the prior
period largely reflects the absence of the $355 million reserve
benefit recognised in the first half of 2019 related to the John
Hancock portfolio.
Investment in new business reduced by 36 per cent to $(219)
million (2019: $(344) million), largely reflecting the (9) per cent
fall in sales volumes in the period and lower levels of
institutional sales, which have higher capital
requirements.
After allowing for the impact of restructuring costs and EEV hedge
modelling enhancements made in the second half of 2019, US
operating free surplus generation was $485 million
(2019: $1,074 million).
The Athene transaction gave rise to a benefit to free surplus
of $851 million, primarily from reinsurance commission
received and reduced required capital. Other non-operating free
surplus loss of $(157) million (2019: $(525) million)
largely reflects the net impact of market, interest rate and credit
spread movements in the period on Jackson's hedging, statutory
liability and capital positions. Overall free surplus increased
from $1.8 billion at the start of the period to $3.4 billion at 30
June 2020.
Local statutory capital - Jackson National Life
(Jackson)
Jackson's RBC ratio at 30 June 2020 was estimated to be above 400
per cent (31 December 2019: 366 per cent) reflecting the benefit of
the reinsurance transaction with Athene from 1 June and surplus
generated in the period, but before the benefit of the Athene
investment which completed on 17 July. Surplus increased from $3.8
billion at the start of the period to $6.3 billion at 30 June
2020.
|
Surplus
|
|
$m
|
1 January 2020
|
3,795
|
Capital generation from new business written during the first half
of 2020
|
(60)
|
Operating capital generation from business in force at 1 January
2020
|
587
|
Operating capital generation
|
527
|
Other non-operating movements, including market effects and
modelling changes
|
1,130
|
US reinsurance transaction
|
809
|
Dividends paid
|
-
|
30 June 2020
|
6,261
|
In-force available capital generation was broadly in line with
expectations and added positively to the RBC ratio.
In the highly volatile market conditions seen over the first half
of the year, Jackson's risk management strategy performed as
anticipated.
In addition to the effect of net operational capital generation and
the reinsurance transaction, the increase in surplus over the
period was also driven by the impact of market and interest rate
movements. Jackson's risk management strategy performed effectively
and Total Adjusted Capital (TAC) increased over the period as a
result of positive hedge pay-offs exceeding market-related
increases in policyholder liabilities. This was partially offset by
higher required capital reflecting the combination of equity market
falls and lower interest rates increasing the cost of guarantees
disproportionately in the modelling of tail scenarios over the
first quarter of 2020, partly mitigated by the equity market
recovery over the second quarter of 2020. This increase in required
capital led to a reduction in the RBC ratio before allowing for the
reinsurance transaction with Athene.
Over the first half of 2020, capital impacts from credit related
losses, impairments, or ratings downgrades were minimal, reflecting
the conservative positioning of Jackson's investment
portfolio.
Return on segment equity
The 24 per cent (2019: 33 per cent) operating return delivered on
average segment equity10,13 over
the first half of 2020 largely reflects the impact of unfavourable
DAC adjustments in the current period on adjusted operating profit,
as compared with favourable DAC adjustments in the prior
period.
Notes
1
On a constant exchange rate basis.
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 B1.1 of the IFRS financial
statements.
3
Assuming transaction had been completed at 30 June
2020
4
On an actual exchange rate basis.
5
As compared with head office expenditure of $(490) million in 2018
and before a planned $10 million increase in Africa costs as
business grows.
6
Approximately half of the corporate expenditure is incurred in
sterling and our assumptions forecast an exchange rate of
£1=$1.2599.
7
Surplus over Group minimum capital requirement and estimated before
allowing for second interim ordinary dividend. Shareholder business
excludes the available capital and minimum requirement of
participating business in Hong Kong, Singapore and Malaysia.
Further information on the basis of calculation of the LCSM measure
is contained in note I(i) of the Additional unaudited financial
information.
8
Net cash amounts remitted by business units are included in the
holding company cash flow, which is disclosed in detail in note
I(iii) of the Additional unaudited financial information. This
comprises dividends and other transfers from business units that
are reflective of emerging earnings and capital
generation.
9
Excluding profit for the period attributable to non-controlling
interests.
10
See note II of the Additional unaudited financial information for
definition and reconciliation to IFRS balances.
11
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
adjusted operating profit for the period. Restructuring costs are
presented separately from the operating business unit amount.
Further information is set out in note 11 of the EEV basis
results.
12
Operating free surplus generated before restructuring
costs.
13
Annualised profits have been calculated by multiplying half year
profits by two. Further information can be found in note II of the
Additional unaudited financial information.
14
Total insurance margin ($1,287 million) and fee income ($135
million) of $1,422 million divided by total life income excluding
other income of $1,626 million (Comprised of total life income of
$3,066 million less other income of $1,440 million).
15
For discussion on the basis of preparation of the sources of
earnings in the table see note I(iv) of the Additional unaudited
financial information.
16
Excludes Money Market Funds.
17
The 30 June 2020 Group LCSM position includes the impact of a
change in the calculation of the valuation interest rate (VIR) used
to value long term insurance liabilities in Hong Kong. In line with
the circular issued by the Hong Kong IA in March 2020, an
application was made to update the basis of this calculation, which
was formally granted by the Hong Kong IA.
18
Excluding assets in consolidated funds financed largely by external
third-party (non-recourse) borrowings, for which the Group's
exposure is limited to the investment held by Jackson. Including
these assets, the US corporate debt portfolio is 93 per cent
investment grade.
19
The effects shown are based on the date of the Athene transaction
which was effective at 1 June 2020. This differs to the
announcement of the agreement in June which showed effects as of 31
March 2020.
20
On a constant exchange rates basis Eastspring average funds under
management over the half year to 30 June 2019 were $200.2 billion
(actual exchange rate basis: $206.7 billion). Average funds under
management over the period to 30 June 2020 were $224.1
billion.
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 throughout the first half of 2020. Our
governance, processes and controls enable us to deal with
uncertainty effectively, which is critical to the achievement of
our strategy of capturing long-term structural opportunities and
helping our customers achieve their long-term financial
goals.
This section explains the main risks inherent in our business and
how we manage those risks, with the aim of ensuring an appropriate
risk profile is maintained.
1. Introduction
The Group
2020 has already been an eventful year. Over Q1 and into Q2, the
Covid-19 pandemic impact swept across the world, resulting in
significant humanitarian suffering and material disruption to
social and economic activity. The business had to consider and
navigate the risks arising from the coronavirus on multiple fronts.
These have included the capital and liquidity risks arising from
the abrupt market dislocation as well as the risks associated with
the disruption to the Group's operations across Asia, the US and UK
and its key partners. Concurrently, the business has aimed to
maintain uninterrupted delivery of services for its policyholders,
and has been committed to doing the right thing for both its
customers and employees throughout the crisis. The Risk and
Compliance function has been able to transition successfully into
new ways of working across multiple time zones to provide strong
stewardship and enhanced monitoring of these risks during the most
acute phases of the pandemic.
Through these extraordinary circumstances, the function has also
provided risk opinions, guidance and assurance on critical
activity, including Athene's reinsurance of $27.6 billion of
Jackson's fixed and fixed indexed annuity portfolio and $500
million equity investment into Prudential's US business and the
intended separation of Jackson from the Group. At the same time,
the function retained its focus on managing the risks of the
ongoing business, performing its defined role in providing risk
management support and oversight, as well as objective challenge to
ensure the Group remained within its risk appetite.
The Group continues to engage constructively with the Hong Kong
Insurance Authority (IA) as its Group-wide supervisor and is
transitioning to a new supervisory framework. The Group's mature
and well-embedded risk framework will enable the business to
capture the opportunities in the growth markets in which it is now
focused while continuing to operate with discipline.
The world economy
At the start of the year the prospects for global growth appeared
to be improving. The 'Phase One' initial trade agreement was signed
by the US and China in January and there were signs that
macroeconomic data was stabilising throughout the Eurozone and
parts of Asia. This positive momentum, however, was abruptly
reversed by the Covid-19 pandemic, leading to the shutdown of much
of the world's economy and a sharp recession. The speed and
severity of the impact was illustrated by the jump in US
unemployment rate, from a low of 3.5 per cent in February to a high
of 14.7 per cent in April (both numbers representing extremes not
seen in the US for decades). In response to this unprecedented
shock, governments and central banks have deployed massive fiscal
and monetary stimulus measures to mitigate the impact on the labour
force and restore confidence in financial markets. Many countries
around the world are in the midst of easing lockdown measures and
in some areas growth is expected to rebound from depressed levels
in response. However, the economic landscape is evolving rapidly,
and the full extent of the longer-term impacts are currently
uncertain. A full economic recovery to pre-pandemic levels appears
unlikely to be achieved within a short time frame. Any rebound in
global growth is also expected to be fragile and extremely
susceptible to the risks of renewed increases in coronavirus
infection rates, uncertainties from the US election in November and
escalations in geopolitical tensions, in particular those between
the US and China.
Financial markets
2020 began with risk assets performing well until concerns over the
economic impact of the Covid-19 outbreak dented investor
confidence, eventually leading to a global sell-off that unfolded
at an extraordinary speed. The S&P 500 index plunged by 35 per
cent from an all-time high on 19 February to its low point on 23
March. Interest rates in major markets declined significantly,
falling to historical lows as investors fretted over the risks to
the economic outlook. Credit spreads widened significantly, in line
with the plunge in equity markets. The stress on financial markets
was broadly eased by the central banks maintaining accommodative
monetary policies and implementing various support programmes. For
the US Federal Reserve this included the purchase of Treasury
bonds, swap arrangements with foreign central banks to lessen the
international shortage of dollars and a commercial paper purchase
facility. The Fed also intervened directly in credit markets,
setting up new facilities designed to purchase corporate bonds in
the primary and secondary markets and going beyond even the
measures taken during the 2008 financial crisis. Since their trough
in late March, financial markets have rallied strongly, driven by
broad reductions in infection rates in some countries, optimism
with respect to the restart of the global economy, and, in the US,
a small group of large-cap stocks that has buoyed the cap-weighted
index. Despite this, global financial markets remain highly
susceptible to downside risks, which remain elevated, particularly
for equity markets where valuations appear disconnected from the
real economy.
(Geo)political landscape
2019 was described as the 'year of the street protestor' with mass
demonstrations on distinct issues in many countries across the
world. While the coronavirus, and the restrictions put in place by
governments, curtailed these protests and any related civil unrest
at the start of the 2020, the drivers have not changed and their
re-emergence as the world comes out of the crisis looks likely.
Meanwhile, individual incidents and events have triggered fresh
protests against long-standing social issues and inequalities. The
pandemic has offered a glimpse into the delicate balancing act
needed between a country's economy and individual rights and
liberties on the one hand and the health and lives of its people on
the other, and this is providing another source of geopolitical
risk. The goal of suppressing the spread of Covid-19 within
national borders has offered a common yardstick by which
governments are being judged. A commonality between the current
protests and movements, aided by social media, is the speed in
which they can gather momentum and their increasingly leaderless
nature. This, combined with the new focal point for popular
discontent provided by the pandemic, may in future increase both
the instability of governments and the unpredictability of their
actions. The resilience of businesses and governments is therefore
likely to continue to be tested. As a global organisation, the
Group has well-established local and global plans to mitigate the
business risks from disruption. These have operated well during the
current crisis and will continue to be critically evaluated and
enhanced as the longer-term lessons from the pandemic response
become clearer.
It is unlikely that the longer-term political and geopolitical
implications of the pandemic will become evident for some time.
With borders closing during regional Covid-19 infection peaks and
medical resources for a time scarce, geopolitical relationships
were tested between even historically cooperative neighbours.
Various governments have effected, or are considering effecting,
the postponement of elections and other constitutional or
legislative processes in response to the pandemic, and the
longer-term impact from this increase in constitutional and
political uncertainty remains to be seen. Being a global crisis,
the pandemic has also somewhat distracted from more traditional
geopolitical issues impacting on global trade. Nations continue to
face the challenge of reconciling the inter-connectedness of the
global economy with heightened nationalistic sentiment and the
pandemic may provide a further drive towards deglobalisation. A key
source of geopolitical risk in 2020 will continue to be China's
relationship with the US and its traditional allies, and in the
second half of the year Hong Kong's perceived level of autonomy
will influence geopolitical tensions, with potential global trade
and economic consequences. Responses by the US, UK and other
governments to the recently enacted national security law in Hong
Kong, the final form and full extent of which are still being
determined, may impact Hong Kong's economy. Being a key market for
the Group which also hosts regional and head office functions, this
could potentially impact Prudential's sales, operations and product
distribution. For internationally active groups which operate
across impacted jurisdictions such as Prudential, government
measures and responses may also add to the complexity of legal and
regulatory compliance. Compliance with Prudential's
legal or regulatory obligations in one jurisdiction may conflict
with the law or policy objectives of another jurisdiction, or may
be seen as supporting the law or policy objectives of that
jurisdiction over another, creating additional legal, regulatory
compliance and reputational risks for the
Group.
Regulations
Prudential operates in highly regulated markets, and the nature and
focus of regulation and laws remain 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 risk regulation and macroprudential policy. Some
of these changes will have a significant impact on the way that the
Group operates, conducts business and manages its risks. These
regulatory developments will continue to be monitored at a national
and global level and form part of Prudential's engagement with
government policy teams and regulators. The immediate regulatory
and supervisory responses to Covid-19 have been broad and have
included increased scrutiny of the operational resilience,
liquidity and capital strength (including the impact of making
dividend payments) of financial services companies as well as
changes that have helped the Group to continue to support its
customers through non-face-to-face contact. Against this evolving
regulatory backdrop, constructive engagement continues with
Prudential's Group-wide supervisor, the Hong Kong IA, on the
Group-wide Supervision Framework (GWS). The timing of finalisation
and implementation of the GWS Framework remains uncertain, although
it is expected to become effective in early 2021. The Legislative
Council of the Hong Kong Special Administrative Region approved the
enabling primary legislation in July.
Societal developments
The experience of the pandemic has underlined the ability of
evolving demographic, geographical and environmental factors to
change the nature, likelihood and impact of extreme events, and
drive public health trends such as tackling obesity, with
consequential potential impacts to Prudential's underwriting
assumptions and product design. Given the unique set of variables
associated with extreme events, whilst insights can be gleaned from
the current pandemic, the impact of extreme events on the
functioning of society and the disruption to business operations,
staff, customers and sales cannot be predicted or fully mitigated.
The Group has been actively managing the impact of the current
crisis, including assisting affected policyholders and staff in
meeting their resulting needs.
In support of increased ease of access and social inclusion, and to
meet evolving customer needs, the Group is increasing its use of
digital services, technologies and distribution methods for the
products and services that it offers. The Covid-19 pandemic has
accelerated these developments, with the Group's businesses having
implemented virtual face-to-face sales of select ranges of products
in many of its markets, and adoption of Prudential's Pulse
application has continued to increase. Changes to the Group's use
of technology and distribution models have broad implications,
touching on Prudential's conduct of business, increasing the risks
of technology and data being compromised or misused and potentially
leading to new and unforeseen regulatory issues.
A strong sense of purpose for an enterprise is a driver of
long-term profitability, and this is making companies evaluate
their place in, and contribution to, society. The 'why and how' a
business acts has become arguably at least as important as what it
produces or the services that it provides. Recent events have
highlighted the structural inequalities in our societies and are
prompting organisations to question where they stand on these
important issues. Understanding and managing the environmental,
social and governance (ESG) implications of the Group's business is
fundamental to Prudential's brand, reputation and ultimately its
long-term success. Ensuring high levels of transparency and
responsiveness to stakeholders is a key aspect of
this.
2. Key internal, regulatory, economic and
(geo)political events over the past 12 months
Q3 2019
|
Q4 2019
|
Q1 2020
|
Q2 2020
|
Central bank monetary policy becomes increasingly accommodative,
contributing to a reversal in the weakness in risk assets. In
August, following a record high in July, the S&P 500 corrects
amid recession fears and trade tensions. The index continues to
struggle in September but rebounds strongly over Q4.
Government bond yields decline significantly, with the 10-year US
Treasury yield falling by circa 50 basis points to 1.5 per cent
over August (representing a circa 120 basis points drop over the
year), its lowest rate since 2017. In Japan and Europe, the volume
of negative-yielding debt surges significantly.
The Group submits its Insurance Capital Standards (ICS)
field-testing results for 2019 to the IAIS on 31 July 2019. This is
the last field-testing exercise prior to the finalisation of the
ICS 2.0 specifications and the start of a five-year monitoring
period in 2020.
Hong Kong enters technical recession in Q3, with its economy
shrinking by 2.9 per cent overall over 2019, as protests in the
territory, which peak in violence during November, impact the
territory's economy.
|
On 21 October 2019, M&G plc's shares begin trading on the
London Stock Exchange, marking the successful completion of its
demerger from Prudential plc. The Hong Kong IA formally assumes its
role as Group-wide supervisor for Prudential plc.
Eastspring successfully completes the acquisition of 50.1 per cent
of Thanachart Fund, which manages $7.5 billion of mutual funds in
Thailand, for circa $142 million, with an option to increase its
ownership to 100 per cent in the future. The acquisition makes
Eastspring the fourth-largest asset manager in
Thailand.
The broader economic cycle continues to deteriorate. US domestic
data begins to show economic weakness in November. Despite this,
equity markets reach new all-time highs over the quarter, supported
by continued application of accommodative monetary policy by
central banks.
The US Federal Reserve lowers its benchmark federal funds target
rate for the third time in four months in October. This follows the
ECB's delivery of a package of easing measures, including a renewal
of quantitative easing, in September. Central banks in China and
other emerging markets turn more dovish amid continued weakness in
economic data.
The 26th Annual Conference of the IAIS takes place in Abu Dhabi on
14 and 15 November, and it is agreed that the ICS project will move
from Field Testing into the Monitoring Period phase and ICS v2.0 is
released. The Holistic Framework (HF) for systemic risk is endorsed
by the FSB at the conference for implementation by the IAIS in
2020. The FSB also confirms that G-SII designations will be
suspended until its review in 2022, although a number of the
previous G-SII requirements are included either into the Insurance
Core Principles or the Common Framework (ComFrame).
US-China trade talks continue positively during Q4, following
breakdowns in negotiations in May and August and a resumption in
September, culminating in the signing of a 'Phase One' trade deal
between the two countries in January 2020.
Following the East Asia Summit in Bangkok in November, 15 of the 16
negotiating participants agree to sign up to the Regional
Comprehensive Economic Partnership (RCEP), most likely in Q1 2020,
with India deciding not to participate.
On 27 November, the US president signs the Hong Kong Human Rights
and Democracy Act into law, requiring annual reviews of Hong Kong's
special trade status under US law, as well as sanctions against any
official deemed responsible for human rights abuses or for
undermining the city's autonomy.
|
The National Association of Insurance Commissioners (NAIC)
implements changes to the US statutory reserve and capital
framework for variable annuities, effective from 1 January 2020.
Jackson chooses to early adopt the changes as at 31 December 2019
for US statutory reporting.
In January 2020, the virus responsible for what initially appeared
to be viral pneumonia is identified as a novel coronavirus (the
resulting disease has since been named Covid-19) and over Q1 and Q2
the coronavirus begins its spread across the globe. Across its
markets the Group rolls out initiatives to support customers and
staff.
In January, Prudential Vietnam announces an exclusive bancassurance
partnership with Southeast Asia Commercial Joint Stock Bank
(SeABank), a fast-growing bank in Vietnam with around 1.2 million
customers and almost 170 branches, for a 20-year term.
The Covid-19 pandemic shuts down much of the world's economy and
triggers a sharp recession. Equity markets sell off at an
extraordinary speed, volatility spikes, credit spreads widen
sharply and interest rates in major markets decrease to new
historical lows. Central banks maintain accommodative monetary
policies and implement various asset purchase and support
programmes to restore confidence in financial markets. Governments
deploy massive fiscal stimulus to mitigate the economic fallout and
the unprecedented shock on the labour force.
On 20 March, the Hong Kong IA published the Insurance Ordinance
(Amendment) (No 2) Bill as part of its submission to the Hong Kong
Legislative Council, a key step towards GWS
implementation.
In Singapore, a revised risk-based capital framework (RBC2) for
insurers comes into force as at 31 March 2020.
The California Consumer Protection Act (CCPA) comes into force on 1
January 2020, creating data privacy rights to California consumers.
Jackson ensures compliance with the Act in December
2019.
|
In May, following its initial announcement in March, the Group
confirms that it continues to prepare for a Jackson minority IPO
alongside active evaluation of other options with respect to
creating an independent Jackson.
On 18 June the Group announces the reinsurance of $27.6 billion of
Jackson's fixed and fixed indexed annuity portfolio by Athene, and
a $500 million equity investment into Prudential's US business in
return for an 11.1 per cent economic interest.
Shriti Vadera joins the Board as a Non-executive Director and
member of the Nomination & Governance Committee on 1 May 2020,
and is expected to succeed Paul Manduca as Chair of the Board and
of the Nomination & Governance Committee on 1 January
2021.
Since its launch, downloads of Pulse by Prudential exceed five
million in June. The digital health platform is now one of the most
popular health and wellness apps offered by an insurer in the Asia
region.
Markets rally sharply during Q2 on the back of asset purchases,
direct intervention by the US Federal Reserve in credit markets,
stimulus programmes, the gradual rebound in economic activity
enabled by the progressive easing of lockdown measures and a broad
reduction in virus infection rates.
A broad easing of Covid-19 restrictions begins to take place across
many countries in the latter half of Q2 and into Q3, including in
some countries with high infection rates, with many countries
taking steps to mitigate a second wave of infections. Other
countries, such as the US and those in Central and South America
and South Asia continue to see high daily case
numbers.
The Insurance (Amendment) (No 2) Ordinance was enacted in Hong Kong
on 24 July 2020. Timing remains uncertain, although the GWS
Framework is expected to become effective in early 2021. The
primary legislation will be supported by subsidiary legislation and
guidance material which is subject to consultation with the
industry and to the Hong Kong legislative process.
IAIS releases the requirements for a Covid-19 tailored Data
Collection exercise for 2020. The original Data Collection
exercise, released in March for the purpose of monitoring the
build-up of systemic risk for insurers, is paused for 2020. In
April 2020, the IAIS also releases the requirements for the 2020
ICS and Aggregation Method Data Collection exercises.
US-China tensions rise during Q2 over Beijing's proposed national
security law for Hong Kong, which is eventually implemented on 30
June 2020. In response, the US House of Representatives and Senate
pass a bill imposing sanctions on banks which do business with
Chinese officials involved in cracking down on pro-democracy
protestors. The bill is signed into law by the US President on 14
July.
The Network for Greening the Financial System publishes its Guide
for Supervisors in May 2020 which outlines recommendations for
integrating climate-related and environmental risks into prudential
supervision.
|
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 section
5.
Our strategy
|
Significant risks arising from the delivery of the
strategy
|
Risk management focus
|
|
|
|
Group-wide
Our strategy is to capture the long-term structural opportunities
for our markets and geographies, while operating with discipline
and seeking to enhance our capabilities through innovation to
deliver high-quality resilient outcomes for our
customers.
|
● Transformation risks around key change programmes,
including those related to the Group's digital
strategy
|
● Continuing the focus on, and ensuring consistency
in transformation risk management across the Group's business
units.
● Provision of independent risk assurance, challenge
and advice on first line programme risk identification and
assessments.
|
●
Group-wide regulatory
risks
|
● Engagement with national governments, 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 IA on, and
implementation of, the Group-wide Supervision Framework, which is
expected to be enacted in 2020 and with implementation likely to
commence in Q1 2021.
|
●
Information security and
data privacy risks
|
● Operationalisation of the Group-wide governance
model and strategy for cyber security management focusing on
automation, business enablement, efficiency, and continuous
improvement.
● Continued focus on compliance with applicable
privacy laws across the Group and the appropriate use of customer
data.
|
●
Business disruption and
third-party risks
|
● Continued application of the Group's global
business continuity management, with an enhanced focus on
operational resilience as it relates to customer outcomes and
embedding of insights from the Covid-19
pandemic.
● Applying the distinct oversight and risk
management required over the Group's third parties, including its
strategic partnerships for product distribution, non-traditional
services and processing activities.
|
●
Conduct risk
|
● Continuing the enhancement of the Group-wide
customer conduct risk management framework building on the Group's
existing customer commitments policy.
|
●
Model and data
risks
|
● Focus on requirements for data and AI and complex
tooling ethics principles and framework.
|
●
People and culture
|
● Focusing on Group Culture as a key mechanism to
support sound risk management behaviours, practices and
awareness.
● Embedding responses and insights from Group-wide
employee engagement surveys through enhancements to the Group Risk
Framework.
|
●
ESG - commitments and
disclosure
|
● Assessing the potential financial impacts from
climate-related transition risk in the asset book and integration
of climate risk into the Group Risk Framework.
● Supporting the Group ESG Committee in its
responsibility to coordinate ESG activities and develop its
disclosures.
|
|
|
|
Asia
Serving the protection and investment needs of the growing middle
class in Asia.
|
●
Financial
risks
|
● Maintaining, and enhancing where necessary, risk
limits and implementing business initiatives to manage financial
risks, including asset allocation, bonus revisions, product
repricing and reinsurance where required.
|
●
Persistency
risk
|
● Implementation of business initiatives to manage
persistency risk, including additional payment methods, enhancing
customer experience, revisions to product design and incentive
structures. Ongoing experience monitoring.
|
●
Morbidity
risk
|
● Implementation of business initiatives to manage
morbidity risk, including product repricing where required. Ongoing
experience monitoring.
|
United States
Providing asset accumulation and retirement income products to US
retirees.
|
●
Financial
risks
|
● Maintaining, and enhancing where necessary, risk
limits, hedging strategies (including mitigating measures against
basis risk), modelling tools and risk oversight appropriate to
Jackson's product mix.
|
●
Policyholder behaviour
risk
|
● Continued monitoring of policyholder behaviour
experience and review of assumptions.
|
Africa
Offering products to new customers in Africa, one of the
fastest-growing regions in the world.
|
●
The Group continues to
increase its focus on Prudential Africa's most significant risks,
being those related to physical and information security and
financial crime, as its presence there expands and grows in
materiality.
|
4. Risk governance
a System of governance
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 enable risks to the
Group to be identified, measured and assessed, managed, monitored
and reported.
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. The
Group Risk Framework, which is owned by the Board, details
Prudential's risk governance, risk management processes and risk
appetite. The Group's risk governance arrangements are based on the
'three lines of defence' model, comprising risk taking and
management, risk control and oversight, and independent assurance.
The aggregate Group exposure to its key risk drivers is monitored
and managed by the Risk and Compliance 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.
During 2019 and 2020, the Group has reviewed and updated its
policies and processes for alignment with the requirements of its
Group-wide supervisor. The frameworks relating to oversight of
transformation risk and model risk were further embedded and the
Group has focused on development of a Group-wide customer conduct
risk framework, building on its existing customer commitments
policy.
The following section provides more detail on our risk governance,
risk culture and risk management process. Specific events may have
impacts across some or all of major risk categories. The Covid-19
pandemic is one such example, and the various risks impacting the
Group, and its responses to it, are summarised in section
5.
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 have been established to
make decisions and control activities on risk-related
matters.
The
risk governance structure is led by the Group Risk Committee,
supported by independent non-executive directors on risk committees
of the Group's main subsidiaries. The Group Risk Committee reviews
and approves changes made to the Group Risk Framework and to
relevant policies. It also reviews and approves new risk policies
and recommends to the Board any material policies which require
Board approval. A number of core risk policies and standards
support the Framework to enable risks to the Group to be
identified, measured and assessed, managed, monitored and
reported.
Culture
is a strategic priority of the Board, which recognises its
importance in the way that the Group does business. It shapes the
organisation-wide values that are used to prioritise risk
management awareness, behaviours and practices. The Group works to
promote a responsible, risk aware culture through ensuring the
right balance between risk, profitability and long-term growth in
organisational decision-making. This is supported through inclusion
of risk considerations in performance management for key
individuals; by building appropriate skills and capabilities in
risk management; and by ensuring that employees understand and care
about their role in managing risk through open discussions. The
Group Risk Committee 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
Group Code of Business Conduct and Group Governance Manual include
a series of guiding principles that govern the day-to-day conduct
of all its people and any organisations acting on its behalf. This
is supported by specific risk-related policies which require that
the Group act in a responsible manner. These include, but are not
limited to, policies related to financial crime covering anti-money
laundering and sanctions and anti-bribery and corruption. The
Group's third-party supply policy requires 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.
ESG
is owned by the Board, which is responsible for determining
strategy and prioritisation of key focus areas. In order to provide
greater senior executive involvement and holistic oversight of ESG
matters material to the Group, in 2020, a Group ESG Committee was
established. The Committee is chaired by the Group Chief Financial
and Chief Operating Officer, supported by senior functional leaders
and representatives from the Group's business units, including the
chief investment officers of the Group's asset managers. The Group
ESG Committee reports to the Board through the Group Nomination
& Governance Committee which comprises the Group's Chairman,
the Senior Independent Director, and the chairs of the Audit,
Remuneration and Risk committees and is regularly attended by the
Group Chief Executive. The policies and procedures to support how
the Group operates in relation to certain ESG topics are included
in the Group Governance Manual. Prudential manages key ESG issues
through a multi-disciplinary approach with functional ownership for
specific ESG topics.
ii. The
risk management cycle
Risk identification
In
accordance with provision 28 of the UK Corporate Governance Code, a
process is in place to support Group-wide identification of the
Company's emerging and principal risks and this combines both
top-down and bottom-up views of risks at the level of the Group and
its business units. The Board performs a robust assessment and
analysis of these principal and emerging risks facing the Company
through the risk identification process, the Group Own Risk
and Solvency Assessment (ORSA) report and the risk assessments
undertaken as part of the business planning review, including how
they are managed and mitigated, which supports
decision-making.
The
ORSA is the ongoing process of identifying, assessing, controlling,
monitoring and reporting the risks to which the business is
exposed. It includes an assessment of capital adequacy to ensure
that the Group's solvency needs are met at all times. Stress and
scenario testing, which includes reverse stress testing requiring
the Group to ascertain the point of business model failure, is
another tool that helps 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 principal risks is 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 economic capital requirements and
is subject to independent validation and processes and controls
around model changes and limitations.
Risk management and control
The
Group's control procedures and systems 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. Risk management and control requirements are
set out in the Group's risk policies and 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, which include the flows of management information
required, are also set out in the Group's risk policies. The
methods and risk management tools that the Group employs to
mitigate each of its major categories of risks are detailed in
section 5 below.
Risk monitoring and reporting
The
identification of the Group's principal risks informs the
management information received by the Group Risk Committee and the
Board. Risk reporting of key exposures against appetite is also
included, as well as ongoing developments in the Group's principal
and emerging risks.
iii. Risk appetite, limits and
triggers
The
Group recognises that interests of its customers and shareholders,
and a managed acceptance of risk in pursuit of its strategy, lies
at the heart of its business, and that effective risk management
capabilities represent a key source of competitive advantage.
Qualitative and quantitative expressions of risk appetite are
defined and operationalised through risk limits, triggers and
indicators. The Risk and Compliance function reviews the scope and
operation of these measures at least annually. The Board approves
changes to the Group's aggregate risk appetite and the Group Risk
Committee has delegated authority to approve changes to the system
of limits, triggers and indicators.
Group
risk appetite is defined and monitored in aggregate by the setting
of objectives for its liquidity, capital requirements and
non-financial risk exposure, 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
additional defined points for escalation. 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 Risk and Compliance function, which uses submissions from
local business units to calculate the Group's aggregated position
relative to Group risk appetite and limits.
● Capital
requirements. Limits on
capital requirements aim to ensure that the Group maintains
sufficient capital in excess of internal economic capital
requirements in business-as-usual and stressed conditions, achieves
its desired target rating to meet its business objectives, and
supervisory intervention is avoided. The two measures currently in
use at the Group level are the regulatory local capital
summation method (LCSM) capital requirements (both minimum and
prescribed levels) and internal economic capital (ECap/GEICA)
requirements. In addition, capital requirements are monitored on
local statutory bases.
● Liquidity. The objective of the Group's liquidity risk
appetite is to ensure that sufficient cash resources are available
to meet financial obligations as they fall due in business-as-usual
and stressed scenarios. This is measured using a liquidity coverage
ratio (LCR) which considers the sources of liquidity against
liquidity requirements under stress scenarios.
● Non-financial
risks. The Group is
exposed to non-financial risks, including environmental, social and
governance risks, as an outcome of its chosen business activities
and strategy. It aims to manage these risks effectively to maintain
its operational resilience and its commitments to customers and
other external stakeholders, and to avoid material adverse impact
on its reputation.
5. The Group's principal
risks
Broadly, the risks assumed across the Group can be categorised as
those relating to its financial situation; its business and
industry; regulatory and legal compliance; and those relating to
ESG. Principal risks, whether materialising within the Group or at
third parties on which the Group relies, may have a financial
impact and could also impact the performance of products or
services provided to customers and distributors and the ability to
fulfil commitments to customers, giving rise to potential risks to
its brand and reputation. These risks, which are not exhaustive,
are detailed 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 are
aligned to the same categories and can be found at the end of this
document.
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
Group and its shareholders assume. Examples of the latter include
those risks arising from assets held directly by and for the Group
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 policyholder exposures.
Covid-19 risks and responses
The Group has responded in a number of ways to the risks arising
from the coronavirus pandemic; some responses were part of existing
risk management processes and procedures, while others have been
initiated specifically in response to the pandemic, in particular
during the acute phases experienced in Q1 and Q2.
The Group Critical Incident Procedure (GCIP) defines specific
governance to be invoked in the event of a critical incident, such
as a significant market, liquidity or credit-related event. This
includes, where necessary, the convening of a Critical Incident
Group (CIG) to oversee, coordinate, and where appropriate, direct
any activity during a critical incident. In response to the
economic and financial market shocks triggered by the Covid-19
pandemic the Group CRCO invoked the GCIP and convened a series of
CIG meetings to provide high-cadence monitoring and management of
potential threats to the capital or liquidity position of the
Group. Local Incident Management teams were also activated to
monitor and manage the tailored response required to support the
operations, customers and employees of the Group's
businesses.
These risks arising from the Covid-19, and the Group's responses to
them, are summarised below, with further information provided,
where relevant, within the descriptions of the Group's principal
risks.
Risk areas
|
Responses
|
● Staff safety and well-being
|
Proactive move to working from home arrangements across
jurisdictions, with local incident management teams monitoring
country specific developments, undertaking risk assessments and
providing regular staff communications and support.
|
● Customer outcomes are not met, increasing conduct
risk
|
Initiatives and campaigns rolled out across markets, including
customer cash benefits, goodwill payments, and extended grace
periods for premium payments.
|
● Disruption to the operations of the Group, and its
key partners
|
Application of the Group and local business continuity plans. Local
Incident Management teams activated to monitor, manage and lead a
tailored response to ensure continuity of service to existing
customers.
|
● Financial market and liquidity impacts, including
to Group and business unit solvency
|
Invocation of the Group's Critical Incident Procedures and
convening of a Critical Incident Group to monitor and manage
threats to the Group's solvency or liquidity position.
|
● Heightened risk of phishing and social engineering
tactics
|
Group-wide phishing awareness campaigns. Heightened threat
monitoring and review of cyber hygiene controls. Active management
of connections to the Group network.
|
● Sales impacts
|
Roll-out of virtual face-to-face sales processes in most of the
Group's markets with at least limited product offerings with
appropriate regulatory engagement, oversight of incremental
operational risks and ongoing monitoring of the commercial impact
to existing sales channels.
|
● Insurance risks, in particular increased lapses
and surrenders resulting from the broader economic
effects
|
Close monitoring by the Group's businesses and targeted management
actions where necessary. Covid-19-related claims have not been
material to date, but are being closely monitored.
|
Risks to the Group's financial situation (including those from the
external macroeconomic and geopolitical environment)
The global economic and geopolitical environment may impact on the
Group directly by affecting trends in financial markets and asset
values, as well as driving short-term volatility.
Risks in this category include the market risks to our investments
and the credit quality of our investment portfolio as well as
liquidity risk.
|
Global economic and geopolitical 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 the Group's customers. Changes
in economic conditions, such as the abrupt and uncertain
longer-term impacts resulting from the Covid-19 crisis, 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.
The geopolitical environment can also impact the Group in a wide
range of ways, both directly and indirectly. Financial markets and
economic sentiment have been highly susceptible to geopolitical
developments in recent years, with implications for the Group's
financial situation. We have seen in recent times that geopolitical
tensions can result in the imposition of protectionist or
restrictive regulatory and trading requirements by governments and
regimes. The Covid-19 pandemic has further prompted governments to
rethink the current globalised nature of supply chains, and may
have geopolitical and trading implications, the full extent of
which may not be clear for a while. Various governments have
effected, or are considering effecting, the postponement of
elections and other constitutional or legislative processes in
response to the pandemic, and the longer-term impact from this
increase in constitutional and political uncertainty remains to be
seen.
Responses by the US, UK and other governments to the recently
enacted national security law in Hong Kong, the final form and full
extent of which are still being determined, may impact Hong Kong's
economy. Being a key market for the Group which also hosts regional
and head office functions, this could potentially impact
Prudential's sales, operations and product distribution. For
internationally active groups which operate across impacted
jurisdictions such as Prudential, government measures and responses
may also add to the complexity of legal and regulatory compliance.
Compliance with Prudential's legal or regulatory obligations in one
jurisdiction may conflict with the law or policy objectives of
another jurisdiction, or may be seen as supporting the law or
policy objectives of that jurisdiction over another, creating
additional legal, regulatory compliance and reputational risks for
the Group. All these factors can increase the operational, business
disruption, regulatory and financial market risks to the Group and
can directly impact its sales and distribution networks.
Developments in Hong Kong and the continuing impacts of the
pandemic are being closely monitored by the Group and plans have
been enacted to manage the disruption to the business, our
employees and customers within our existing business resilience
processes. Further information on the Group's business disruption
risks are included below.
Macroeconomic and geopolitical risks are considered material at the
level of the Group.
Market risks to our investments
This is the potential for reduced value of Prudential's investments
resulting from the volatility of asset prices, driven by
fluctuations in equity prices, interest rates, foreign exchange
rates and property prices. Interest rates in the Group's key
markets decreased to historically low levels in Q1 2020, with the
stance of central banks making it likely they will remain extremely
low for a while. A persistently low interest rate environment poses
challenges to both the capital position of life insurers as well as
to new business profitability and this is a scenario that the Group
is planning for.
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 strong 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;
-
Asset and liability management programmes which include management
actions such as asset allocation, bonus revisions, repricing and
the use of reinsurance where appropriate;
-
Hedging derivatives, including equity options and futures, interest
rate swaps and swaptions and currency forwards;
-
The monitoring and oversight of market risks through the regular
reporting of management information; and
-
Regular deep dive assessments.
As noted above, in response to the economic and financial market
shocks triggered by the Covid-19 pandemic, the Group CRCO invoked
the GCIP and convened a series of CIG meetings to provide
high-cadence monitoring and management of any potential threats to
the capital or liquidity position of the Group.
● 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.
Basis
risk is the inherent risk associated with imperfect hedging and is
caused by variables or characteristics that drive differences
between the value of an underlying position and the hedge
instruments used to offset changes in its value. Within Jackson's
variable annuity business, basis risk can arise from differences
between the performance of the Separate Account funds in which
policyholders choose to invest and that of the instruments used to
replicate these funds for hedging and liability modelling purposes,
which are primarily linked to the S&P 500 index. This risk
exposure is proportionate to the magnitude of liability risk/hedge
position which fluctuates with equity and interest rate levels.
Therefore, while the market sell-off in Q1 increased this liability
risk/hedge exposure, the rally in equity markets since March has
had a corresponding opposite and positive impact. Jackson is
actively evaluating ways to further mitigate basis risk,
particularly in light of the market volatility seen as a result of
the Covid-19 pandemic.
● Interest
rate risk. This 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 expose the Group to the risk of those moving in
a way that is detrimental. Some products that Prudential offers are
sensitive to movements in interest rates. As part of the 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 impact of lower
interest rates may also manifest through reduced solvency levels in
some of the Group's businesses, impairing their ability to make
remittances, as well as reduced new business
profitability.
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 savings products, including the
Hong Kong with-profits and non-profit business. This exposure
exists because of the potential for an asset and liability
mismatch, where long-dated liabilities and guarantees are backed by
short-dated assets, which cannot be eliminated but is monitored and
managed through local risk and asset liability management
committees against risk appetite aligned with the Group's limit
framework.
Interest
rate risk results from the cost of guarantees in the variable
annuity and fixed indexed 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.
Jackson is also 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. As at 1
June 2020, this risk has been substantially transferred as part of
the reinsurance transaction with Athene, leaving only a limited
exposure from residual policies including those from the blocks
acquired externally (ie from the REALIC and John Hancock
businesses).
● Foreign
exchange risk. The
geographical diversity of Prudential's businesses means that it has
some exposure to the risk of foreign exchange rate fluctuations.
Some entities within the Group that write policies, invest in
assets or enter into other transactions in local currencies or
currencies not linked to the US dollar. Although this limits the
effect of exchange rate movements on local operating results, it
can lead to fluctuations in the Group financial statements when
results are reported in US dollars. This risk is accepted within
our appetite for foreign exchange risk.
In
cases where a non-US dollar denominated surplus arises in an
operation which is to be used to support Group capital, or where a
significant cash payment is due from a subsidiary to the Group,
this currency exposure may be hedged where it is believed to be
economically favourable 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.
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, and the Group considers this under both normal and
stressed conditions. It includes 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's external
funds. Liquidity risk is considered material at the level of the
Group.
Prudential has no appetite for liquidity risk, ie for any business
to have insufficient resources to cover its outgoing cash flows, or
for the Group as a whole to not meet cash flow requirements from
its debt obligations under any plausible scenario.
The Group has significant internal sources of liquidity, which are
sufficient to meet all of our expected cash requirements for at
least 12 months from the date the financial statements are
approved, without having to resort to external sources of funding.
The Group has a total of $2.6 billion of undrawn committed
facilities that can be made use of, expiring in 2025. Access to
further liquidity is available through the debt capital markets and
an extensive commercial paper programme is 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.
Credit risk
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 the Group to
suffer loss.
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. The assets backing the Jackson general account
portfolio and the Asia shareholder business means credit risk is
considered a material risk for the Group's business
units.
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 strong 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.
The total debt securities4 at
30 June 2020 were $121.5 billion (30 June 2019: $126.9 billion; 31
December 2019: $134.6 billion). Credit risk arises from the debt
portfolio in the Asia business comprising the shareholder,
with-profit and unit-linked funds, the value of which was $82.1
billion at 30 June 2020. The majority (71 per cent) of the
portfolio is in unit-linked and with-profits funds. The remaining
29 per cent of the debt portfolio is held to back the shareholder
business.
In the general account of the Group's US business, $39.0 billion of
debt securities are held to support shareholder liabilities
including those from our fixed annuities, fixed indexed annuities
and life insurance products. The shareholder-backed debt portfolio
of the Group's other operations was $0.3 billion as at 30 June
2020. 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
invests in bonds issued by national governments. This sovereign
debt holding represented 27 per cent or $17.1
billion1 of
the shareholder debt portfolio of the Group as at 30 June 2020 (31
December 2019: 22 per cent or $18.8 billion of the shareholder debt
portfolio). 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 2020 are given in
note C1 of the Group's IFRS financial statements.
● Corporate
debt and loan portfolio. In the Asia shareholder business, corporate
debt exposures totalled $11.3 billion of which $10.3 billion or 92
per cent were investment grade rated. In the US general account,
corporate debt exposures amounted to $29.1 billion following the
Athene transaction, and the portfolio remains of high credit
quality with 97 per cent5 remaining
investment grade rated.
● 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 exposure to derivative counterparty and reinsurance
counterparty credit risk, which includes the recently announced
reinsurance agreement with Athene Life Re, 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 2020:
- 93 per cent
of the Group's shareholder portfolio (excluding all government and
government-related debt) is investment grade
rated2.
In particular, 53 per cent of the portfolio is
rated2 A-
and above (or equivalent); and
- The Group's
shareholder portfolio is well diversified: no individual
sector3 makes
up more than 10 per cent of the total portfolio (excluding the
financial and sovereign sectors). The exposures held by the
shareholder-backed business and with-profits funds in bank debt
securities at 30 June 2020 are given in note C1 of the Group's IFRS
financial statements.
Risks from the nature of our business and our industry
These include the Group's non-financial risks (including
operational and financial crime risk), transformation risks from
significant change activity and the insurance risks assumed by the
Group in providing its products.
|
Transformation risk
Prudential has a number of significant transformation and change
programmes under way to deliver the Group's strategy for growth,
improve customer experiences, strengthen its operational resilience
and control environment, and meet regulatory and industry
requirements. If the Group does not deliver these programmes to
defined timelines, scope and cost, this may negatively impact on
its operational capability, ability to deliver its strategy and
reputation.
In 2020, transformation risk remains a material risk for
Prudential. The Group's transformation and change programmes
inherently give rise to design and execution risks, and may
introduce new, or increase existing, business risks and
dependencies. These include, but are not limited to, an increased
strain on operational capacity, newly-implemented controls being
ineffective or a general weakening of the control environment of
the Group. Implementing further strategic transformation
initiatives may amplify these risks. In order to manage these
risks, the Group's Transformation Risk Framework aims to ensure
that, for both transformation and strategic initiatives, strong
programme governance is in place with embedded risk expertise to
achieve ongoing and nimble risk oversight, and regular risk
monitoring and reporting to risk committees is
delivered.
The Group's current portfolio of transformation and significant
change programmes include the intended separation of Jackson
from the Group; the expansion of the Group's digital capabilities
and use of technology, platforms and analytics; and improvement of
business efficiencies through operating model changes (covering
data, systems and people). Programmes related to
regulatory/industry change such as the transition to the Hong Kong
IA's GWS Framework, changes required to effect the discontinuation
of inter-bank offered rates (IBORs) in their current form and the
implementation of IFRS 17 are also ongoing. See below for further
detail on these regulatory changes.
Non-financial risks
In the course of doing business, the Group is exposed to
non-financial risks. A combination of the complexity of the Group,
its activities and the extent of transformation in progress creates
a challenging operating environment. The Group's main non-financial
risks are detailed below. These risks are considered to be material
at the level of the Group.
● Operational
risk. Prudential defines
operational risk as the risk of loss (or unintended gain or profit)
arising from inadequate or failed internal processes, personnel or
systems, or from external events. This may arise from employee
error, model error, system failures, fraud or other events which
disrupt business processes or has a detrimental impact to
customers. Activities across the scope of our business, including
operational activity, regulatory compliance, and those supporting
ESG activities more broadly can expose us to operational risks. A
large volume of complex transactions is processed by the Group
across a number of diverse products and are subject to a high
number of varying legal, regulatory and tax regimes. Prudential has
no appetite for material losses (direct or indirect) suffered as a
result of failing to develop, implement or monitor appropriate
controls to manage operational risks.
The
Group's outsourcing and third-party relationships require distinct
oversight and risk management processes. A number of important
third-party relationships exist which provide the distribution and
processing of Prudential's products, both as market counterparties
and as outsourcing partners, including new IT and technology
partners. In Asia, the Group continues to expand its strategic
partnerships and renew bancassurance arrangements and in Africa
Prudential is continuing its expansion through acquisitions. These
third-party arrangements support Prudential in providing a high
level and cost-effective service to our customers, but they also
make us reliant on the operational resilience and performance of
our outsourcing partners.
The
Group's requirements for the management of material outsourcing
arrangements, which are in accordance with relevant applicable
regulations, are included through its well-established Group-wide
third-party supply policy. Third-party management is also included
and 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 and supporting limits and
triggers are in place.
The
performance of the Group's core business activities places reliance
on the IT infrastructure, provided by our external IT and
technology partners, that supports day-to-day transaction
processing and administration. This IT environment must also be
secure, and an increasing cyber risk threat needs to be addressed
as the Group's digital footprint increases and the sophistication
of cyber threats continue to evolve - see separate information
security risk sub-section below. Exposure to operational and other
external events could impact operational resilience by
significantly disrupting systems, operations and services to
customers, which may result in financial loss, customer impacts and
reputational damage. 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.
Group-wide framework and risk management for operational
risk
The risks detailed above form key elements of the Group's
operational risk profile. A Group-wide operational risk framework
is in place to identify, assess, manage, control and report
effectively on all operational risks across the business. The key
components of the framework are:
-
Application of a risk and control self-assessment (RCSA) process,
where operational risk exposures are identified and assessed as
part of a periodical cycle. The RCSA 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 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 (see below), 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 RCSA, incident management and scenario analysis processes and
reporting on operational risk. Furthermore, they also ensure that
operational risk considerations are embedded in key business
decision-making, including material business approvals and in
setting and challenging the Group's strategy.
● Business
disruption risk. Events in
2020 have shown how material business disruption risk is to
effective business operations and delivery of business services to
policyholders, and the potential impact to our customers and the
market more broadly. The Group continuously seeks to develop
greater business resilience through planning, preparation, testing
and adaption. Business continuity management (BCM) is one of a
number of activities undertaken by the Group Security function that
helps the Group to protect its key stakeholders and its systems,
and business resilience is at the core of the Group's embedded BCM
programme. The BCM programme and framework are appropriately linked
to all business activities, and includes business impact analyses,
risk assessments, incident management plans, disaster recovery
plans, and the exercising and execution of these plans. Based on
industry standards, the BCM programme is designed to provide
business continuity that matches the Group's evolving business
needs and is appropriate to the size, complexity and nature of the
Group's operations. Prudential is also taking a broader,
multi-functional approach to building greater business resilience,
working with our external third-party providers and our service
delivery teams to improve our ability to withstand, absorb and
recover from disruption to our business services, while minimising
the impact on our customers. The Group continuously reviews and
develops its contingency plans and its ability to respond
effectively when disruptive incidents occur, such as those
resulting from the Covid-19 pandemic and, prior to this, the Hong
Kong protests.
Business
disruption risks are closely monitored by the Group Security
function, with key operational effectiveness metrics and updates on
specific activities being reported to the Group Risk Committee and
discussed by cross-functional working groups.
● Information
security risk and data privacy. Information security and data privacy risks
remain significant considerations for Prudential. This includes the
risk of malicious attack on its systems, network disruption and
risks relating to data security, integrity, privacy and misuse. The
cyber security threat and criminal capability in this area
continues to evolve globally in sophistication and potential
significance with an increased level of understanding of complex
financial transactions which increases the risks to the financial
services industry. The systemic risk of sophisticated but
untargeted attacks remains high, particularly so during times of
heightened geopolitical tensions. The scale of the Group's IT
infrastructure and network (and the services 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.
Prudential
and the insurance industry are making increasing use of emerging
technological tools and digital services, or forming partnerships
with third parties that provide these capabilities. While this
provides new opportunities, opening up markets, improving insights
and increasing scalability, it also comes with additional risks
which are managed within the Group's existing governance and risk
management processes, including additional operational risks and
increased risks around data security and misuse. Automated digital
distribution channels increase the criticality of system and
process resilience in order to deliver uninterrupted service to
customers.
Developments
in data protection requirements, such as the California Consumer
Protection Act which came into force on 1 January 2020, continue to
evolve worldwide. This increases financial and reputational
implications for Prudential in the event of a breach of its (or
third-party suppliers') IT systems. As well as protecting data,
stakeholders expect companies and organisations to 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.
During
2020, work to operationalise the revised organisational structure
and governance model for cyber security management has continued.
This change has resulted in a centralised Group-wide Information
Security and Privacy function, leveraging skills, tools and
resources across the business under a 'centre of excellence' model.
This global function is led by the Group Chief Information Security
Officer and falls within the scope of the responsibilities of the
Group Chief Digital Officer, working closely with the Group Risk
and Compliance Function and Group Chief Risk and Compliance Officer
to ensure appropriate second line oversight. Cyber risk management
is also conducted locally within business units with input from
business information security officers and with oversight from
local risk committees. The Prudential plc Board is briefed at least
twice annually on cyber security by the Group CISO and executive
training is provided to ensure that members understand the latest
regulatory expectations and the threats facing the Group and that
they have the means to enable appropriate oversight in this
area.
A
new Group-wide information security policy has been introduced that
aligns to over 20 international standards such as ISO 27001/2, MAS,
and NIST Cyber Security Framework to ensure full coverage and
adoption of best practices. Local policies are also aligned to
relevant local regulation or law. Our Group-wide privacy policy was
developed in collaboration with industry experts to support a
pragmatic approach to the evolving regulatory environment globally
and ensure compliance with all applicable laws and regulations.
This approach ensures that all our stakeholders have confidence in
our approach to information security and risk
management.
These
developments have allowed the Group to progress on its cyber
security strategy, which for 2020 has four key
objectives:
-
Automation of key processes to provide near real-time information
on cyber security risks, allowing for increased response times
scalability of defences to threat vectors across all security
disciplines. This also enables improved, and more rapid,
decision-making;
-
Using technology for the rapid enablement of the Group's
businesses, which supports the Group Digital Transformation
strategy while meeting the security requirements and
expectations;
-
Optimisations for efficiency in cyber security and data privacy
management. This includes the delivery of centralised services
across the Group in areas such as vulnerability management;
and
-
Continuous identification and implementation of improvements to the
people, processes or technology deployed on cyber security and
privacy management.
● 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 that 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 where there is 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 performed
annually at higher risk locations. Due diligence reviews and
assessments against Prudential's financial crime policies are
performed as part of the Group's business acquisition process. The
Group continues to undertake strategic activity to monitor and
evaluate the evolving fraud risk landscape, mitigate the likelihood
of fraud occurring and increase the rate of detection.
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.
Insurance risks
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 principal drivers of the Group's insurance risk vary across its
business units. Across Asia, where a significant volume of health
and protection business is written, the most significant insurance
risks are persistency risk, morbidity 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 which impacts profitability and is
influenced by market performance and the value of policy
guarantees.
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 impact of Covid-19 to economic activity and employment levels
across the Group's markets has the potential to elevate the
incidence of claims, lapses, or surrenders of policies, and some
policyholders may choose to defer or stop paying insurance premiums
or reduce deposits into retirement plans. In particular extended
travel restrictions could affect product persistency in the Group's
Asia business. While these impacts to the business have not been
material to date, they are being closely monitored by the Group's
businesses with targeted management actions being implemented where
necessary, which includes additional IBNR claims reserves in some
markets where delays in non-acute medical treatments due to
movement restrictions have been observed.
The Group's persistency assumptions reflect similarly a combination
of recent past experience for each relevant line of business and
expert judgement, especially where a lack of relevant and credible
experience data exists. Any expected change in future persistency
is also reflected in the assumptions. Persistency risk is managed
by appropriate training and sales processes (including active
customer engagement and service quality) and managed locally
post-sale through regular experience monitoring and the
identification of common characteristics of business with high
lapse rates. Where appropriate, allowance is made for the
relationship (either assumed or observed historically) between
persistency and investment returns and any additional risk is
accounted for. Modelling this dynamic policyholder behaviour is
particularly important when assessing the likely take-up rate of
options embedded within certain products. The effect of persistency
on the Group's financial results can vary but depends mostly on
product design and market conditions.
In Asia, Prudential writes significant volumes of health and
protection business and so a key assumption is the rate of medical
inflation, which is often in excess of general price inflation.
There is a risk that the expenses of medical treatment increase
more than expected, so the medical claim cost passed on to
Prudential is higher than anticipated. Medical expense inflation
risk is best mitigated by retaining the right to reprice our
products each year and by having suitable overall claims limits
within our policies, either limits per type of claim or in total
across a policy, annually and/or over the policy lifetime.
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.
Prudential's insurance risks are managed and mitigated using the
following:
-
The Group's insurance, product and underwriting risk
policies;
-
The risk appetite statements, limits and triggers;
-
Using persistency, morbidity and longevity assumptions that reflect
recent experience and expectation of future trends, and industry
data and expert judgement where appropriate;
-
Using reinsurance to mitigate mortality 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, training 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.
Conduct risk
Prudential's conduct of business, especially the design and
distribution of its products, is crucial in ensuring that the
Group's commitment to meeting customers' needs and expectations are
met. The Group's conduct risk framework is owned by the first line
which reflects management focus on achieving good customer
outcomes.
Conduct risk drivers can be found throughout the product life
cycle, from the complexity of the Group's products, to its diverse
distribution channels (including virtual face-to-face sales
processes implemented in response to Covid-19 restrictions) and the
ongoing servicing of its customers. Prudential aims to mitigate
conduct risk with robust controls, which are identified and
assessed through the Group's conduct risk assessment framework, and
regularly tested within its monitoring programmes. Conduct risk is
heightened in markets where financial sophistication among
consumers may be lower. In alignment with the Group's purpose of
helping people get the most out of life, Prudential strives towards
making health and protection coverage affordable and accessible to
all. Management of Prudential's conduct risk in its emerging
markets is therefore high on the agenda.
Prudential's conduct risks are managed and mitigated using the
following:
-
The Group's code of business conduct and customer commitments,
product and underwriting risk policies;
-
Maintaining the quality of sales processes, training and using
other initiatives to improve customer outcomes;
-
Ensuring proper sales practices via the use of welcome calls and
mystery shopping;
-
Proper claims management and complaint handling
practices;
-
Regular deep dive assessments on, and monitoring of, conduct
risks;
-
Conduct risk assessments; and
-
Consideration of customer outcomes as part of any business change,
including acquired, reinsured or divested business.
Risks related to regulatory and legal compliance
These include risks associated with prospective regulatory and
legal changes and compliance with existing regulations and laws -
including their retrospective application - with which the Group
must comply with in the conduct of its business.
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Prudential operates under the ever-evolving requirements set out by
diverse regulatory, legal and tax regimes which may impact
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, and new
regulations at either national or international level. In addition
to the risks arising from regulatory change, the breadth of local
and Group-wide regulatory arrangements presents the risk that
regulatory requirements are not fully met, resulting in specific
regulator interventions or actions including retrospective
interpretation of standards by regulators which may result in
regulatory censure or significant additional costs to the business.
Furthermore, as the industry's use of emerging technological tools
and digital services increases, this is likely to lead to new and
unforeseen regulatory issues and the Group is monitoring the
regulatory developments and standards emerging around the
governance and ethical use of technology and data.
In certain jurisdictions in which Prudential operates there are
also a number of ongoing policy initiatives and regulatory
developments that are having, and will continue to have, an impact
on the way Prudential is supervised. Decisions taken by regulators,
including those related to solvency requirements, corporate or
governance structures, capital allocation, financial reporting and
risk management may have an impact on our business.
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.
Further information on specific areas of regulatory and supervisory
requirements and changes are included below.
● Group-wide
supervision. From 21
October 2019, Prudential's Group-wide supervisor changed to the
Hong Kong IA. As a result, the Group currently applies the local
capital summation method (LCSM) to determine Group regulatory
capital requirements (both minimum and prescribed levels). The
enabling legislation for the Hong Kong IA's GWS Framework was
enacted in July 2020. The timing of finalisation and implementation
of the GWS Framework remains uncertain, although it is expected to
become effective in early 2021.
● Global
regulatory developments and systemic risk
regulation. Efforts to
curb systemic risk and promote financial stability are also under
way. 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 key
developments.
In
November 2019 the IAIS adopted the Common Framework (ComFrame)
which establishes supervisory standards and guidance focusing on
the effective group-wide supervision of Internationally Active
Insurance Groups (IAIGs). Prudential was included in the first
register of IAIGs released by the IAIS on 1 July 2020 and was
designated an IAIG by the Hong Kong IA following an assessment
against the established criteria in ComFrame.
The
IAIS has also been developing the ICS (Insurance Capital Standard)
as part of ComFrame. The implementation of ICS will be conducted in
two phases: a five-year monitoring phase followed by an
implementation phase. The Aggregation Method is one of the
alternatives being considered to the default approach undertaken
for the ICS during the monitoring period and the related proposals
are being led by the National Association of Insurance
Commissioners (NAIC). Alongside the current ICS developments, the
NAIC is also developing its Group Capital Calculation (GCC) for the
supervision of insurance groups in the US. The GCC is intended to
be a risk-based capital (RBC) aggregation methodology. In
developing the GCC, the NAIC will also consider Group capital
developments by the US Federal Reserve Board, which will inform the
US regulatory association in its construction of a US group capital
calculation.
The
FSB has endorsed a new holistic framework (HF) for systemic risk
for implementation by the IAIS in 2020 and suspended G-SII
designations until a review to be undertaken in 2022. Many of the
previous G-SII measures have already been adopted into the
insurance core principles (ICPs) and ComFrame. As an IAIG,
Prudential continues to be subject to these measures. The HF also
includes a monitoring element for the identification of a build-up
of systemic risk and to enable supervisors to take action where
appropriate. As a result of the Covid-19 pandemic, this monitoring
requirement has been replaced with a Covid-19-focused exercise for
2020. In June 2020 the IAIS published an application paper on the
liquidity risk elements introduced into the ICPs and ComFrame. A
public consultation on the development of liquidity metrics to be
used as an ancillary indicator for monitoring is planned for Q4
2020, with a further consultation focused on macroeconomic elements
expected to follow in 2021.
In
the US, various initiatives are under way to introduce fiduciary
obligations for distributors of investment products, which may
reshape the distribution of retirement products. Jackson has
introduced fee-based variable annuity products in response to the
potential introduction of such rules, and we anticipate that the
business's strong relationships with distributors, history of
product innovation and efficient operations should further mitigate
any impacts.
In
Asia, regulatory regimes are developing at different speeds, driven
by a combination of global factors and local considerations. New
local capital rules and requirements could be introduced in these
and other regulatory regimes that challenge legal or ownership
structures, or current sales practices, or could be applied to
sales made prior to their introduction retrospectively, which could
have a negative impact on Prudential's business and reported
results.
● IFRS
17. In May 2017, the
International Accounting Standards Board (IASB) published its
replacement standard on insurance accounting IFRS 17, 'Insurance
Contracts'. Some targeted amendments to this standard, including to
the effective date, were issued in June 2020. IFRS 17, 'Insurance
Contracts', as amended, will introduce fundamental changes to the
IFRS-based reporting of insurance entities that prepare accounts
according to IFRS from 2023. 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.
● Inter-bank
offered rate reforms. In
July 2014, the Financial Stability Board (FSB) announced widespread
reforms to address the integrity and reliability of IBORs. The
discontinuation of IBORs in their current form and their
replacement with alternative risk-free reference rates such as the
Sterling Overnight Index Average benchmark (SONIA) in the UK and
the Secured Overnight Financing Rate (SOFR) in the US could, among
other things, impact the Group through an adverse effect on the
value of Prudential's assets and liabilities which are linked to,
or which reference IBORs, a reduction in market liquidity during
any period of transition and increased legal and conduct risks to
the Group arising from changes required to documentation and its
related obligations to its stakeholders.
Risk management and mitigation of regulatory risk at Prudential
includes the following:
-
Risk assessment of the Business Plan which includes consideration
of current strategies;
-
Close monitoring and assessment of our business environment and
strategic risks;
-
The consideration of risk themes in strategic decisions;
and
-
Ongoing engagement with national regulators, government policy
teams and international standard setters.
The Group's ESG-related risks
These include environmental risks associated with climate change
(including physical and transition risks), social risks that arise
from the diverse people and communities that the Group interacts
with and governance-related risks.
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The business environment in which Prudential operates is
continually changing and responding effectively to those material
risks associated with ESG themes is crucial in maintaining
Prudential's brand and reputation, its ability to attract and
retain customers and staff, and in turn its financial performance
and delivery of its long-term strategy. The Group maintains active
engagement with its key stakeholders as it responds to ESG-related
matters, including investors, customers, employees, governments,
policymakers and regulators in its key markets, as well as with
industry bodies and forums - all of whom have expectations in this
area which may differ.
Further information on ESG governance is detailed in section 4
above and further detail on how the Group addresses material risks
associated with ESG themes is included in the Prudential plc ESG
Report 2019.
● Environmental
risks. The environmental
risk associated with climate change is one ESG area that poses
significant risks to Prudential and its customers. The global
transition to a lower carbon economy could potentially see the
financial assets of carbon-intensive companies re-price as a result
of facing significantly higher costs or decreasing demand for their
products and services. The speed of this transition, including the
extent to which it is orderly and managed, will be influenced by
factors such as public policy, technology and changes in market or
investor sentiment. This 'transition risk' may adversely impact the
valuation of investments held by the Group. The Group expects the
physical impacts of climate change, driven by both specific
short-term climate-related events such as natural disasters and
longer-term changes in the natural environment, to increasingly
influence the longevity, mortality and morbidity risk assessments
of the Group's product offerings. Climate-driven change in
countries in which Prudential, or its key third parties, operate
could impact on its operational resilience, underwriting
assumptions and could change its claims profile. More information
about the activities the Group is undertaking to increase its
understanding and risk management of these climate-related risks
can be found in the Prudential plc ESG Report
2019.
● Social
risks. Social risks that
could impact Prudential include the emerging population risks
associated with public health trends (such as an increase in
obesity) and demographic changes (such as population urbanisation)
which may impact customer lifestyles and therefore may impact
claims against the Group's insurance product offerings. As a life
and health insurer, we are committed to playing a greater role in
preventing and postponing illness in order to protect our
customers. Further information about how we are investing in
artificial intelligence technology to enable access to an
affordable and quality healthcare digital offering can be found
within the Pulse case study included in the ESG Report 2019. Other
social risks may arise from a failure to consider the rights,
diversity, well-being, and interests of people and communities in
which the Group, or its third parties, operates. These risks are
increased as Prudential operates in multiple jurisdictions with
distinct local cultures and considerations. The Group assumes
responsibilities as a responsible employer and is exposed to the
risk of being unable to attract, retain and develop highly-skilled
staff, which can be increased where Prudential does not have
responsible working practices.
● Governance
risks. A failure to
maintain high standards of corporate governance may adversely
impact the Group and its customers, staff and employees, through
poor decision-making and a lack of oversight of its key risks,
particularly in joint ventures or partnerships where Prudential
does not have direct overall control. Poor governance may arise
where key governance committees have insufficient independence, a
lack of diversity, skills or experience in their members, or
unclear (or insufficient) oversight responsibilities and mandates.
Inadequate oversight over remuneration increases the risk of poor
senior management behaviours. Prudential operates across multiple
jurisdictions and has a group and subsidiary governance structure
which may add further complexity to these
considerations.
Notes
1
Excluding assets held to cover linked liabilities and those of the
consolidated unit trusts and similar funds.
2
Based on hierarchy of Standard & Poor's, Moody's and Fitch,
where available and if unavailable, NAIC and other external ratings
and the internal ratings have been used.
3
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.
4
In 2020, to align more closely with the internal risk management
analysis, the Group altered the compilation of its credit ratings
analysis to use the middle of the Standard & Poor's, Moody's
and Fitch ratings, where available. Where ratings are not available
from these rating agencies, NAIC ratings (for the US), local
external rating agencies' ratings and lastly internal ratings have
been used. Securities with none of the ratings listed above are
classified as unrated and included under the 'below BBB- and
unrated' category. The total securities (excluding sovereign debt)
that were unrated at 30 June 2020 were $788 million (30 June 2019:
$794 million; 31 December 2019: $648 million). Previously, Standard
& Poor's ratings were used where available and if not, Moody's
and then Fitch were used as alternatives. Additionally, government
debt is shown separately from the rating breakdowns in order to
provide a more focused view of the credit portfolio.
5 Excluding
assets in consolidated funds financed largely by external
third-party (non-recourse) borrowings, for which the Group's
exposure is limited to the investment held by
Jackson. Including
these assets, the US corporate debt portfolio is 93 per cent
investment grade.
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 as described below.
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 the board on
the remuneration of non-executive directors. This provision is not
compatible with provision 34 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.
Following the introduction by the UK Government of measures to
limit the spread of Covid-19 by prohibiting non-essential travel
and public gatherings of more than two people, and following the
issuance of the Company's 2020 AGM Notice, the Company provided an
update to shareholders in late April 2020 on its revised
arrangements for the 2020 annual general meeting (AGM). In light of
those restrictions and to protect the health of Prudential's
shareholders and employees, the Board decided, with regret, that
shareholders, external advisors (including the auditor) and
Directors (other than the Chairman) would not be able to attend the
AGM in person (and thus provision E1.2 of the HK Code could not be
complied with). The AGM on 14 May 2020 was therefore held as a
'closed meeting' with just two shareholders to provide the
requisite quorum to enable the formal business of passing
resolutions to be conducted. In recognising the continuing
importance of the annual general meeting as an opportunity to
engage with shareholders the Board encouraged participation from
shareholders. The revised meeting arrangements included an option
for shareholders to submit questions to the Board in advance of the
meeting, the answers to which were posted on the Company's website,
and shareholders were also asked to vote their shares by proxy
ahead of the meeting. Prudential is keeping shareholders informed
through its website and released a number of updates during the
period of the Covid-19 pandemic, including a Q1 business update and
other presentations.
Notwithstanding the pandemic and related unprecedented measures and
circumstances, the Board continues to receive regular updates on
shareholder engagement activities.
The Directors also confirm that the financial results contained in
this document have been reviewed by the Group Audit
Committee.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: 11 August 2020
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PRUDENTIAL
PUBLIC LIMITED COMPANY
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By: /s/ Mark FitzPatrick
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Mark
FitzPatrick
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Group
Chief Financial Officer and Chief Operating Officer
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