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 May, 2019

PRUDENTIAL PUBLIC LIMITED COMPANY

(Translation of registrant’s name into English)

1 ANGEL COURT,

LONDON, EC2R 7AG, ENGLAND

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports

under cover Form 20-F or Form 40-F.

Form 20-F X         Form 40-F

Indicate by check mark whether the registrant is submitting the Form6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐

Indicate by check mark whether the registrant is submitting the Form6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ☐

 

Prudential plc

Solvency and Financial Condition Report

31 December 2018

Table of Contents

 

Summary			1
A.   Business and Performance			4
A.1       Business			4
A.2       Underwriting Performance			9
A.3       Investment Performance			13
A.4       Performance of other activities			14
A.5       Any other information			15
B.   System of Governance			22
B.1       General information on the system of governance			22
B.2       Fit and proper requirements			27
B.3       Risk management system including the own risk and solvency assessment (ORSA)			29
B.4       Internal control system			34
B.5       Internal audit function			36
B.6       Actuarial function			37
B.7       Outsourcing			38
B.8       Any other information			39
C.   Risk Profile			40
C.1       Underwriting risk			41
C.2       Market risk			42
C.3       Credit risk			43
C.4       Liquidity risk			44
C.5       Operational risk			45
C.6       Other material risks			47
C.7       Any other information			51
D.   Valuation for Solvency Purposes			54
D.1       Assets			54
D.2       Technical provisions			58
D.3       Other liabilities			64
D.4       Alternative methods for valuation			67
D.5       Any other information			67
E.  Capital Management			68
E.1       Own funds			68
E.2       Solvency Capital Requirement (SCR) and Minimum Capital Requirement (MCR)			72
E.3       Use of the duration-based equity risk sub-module in the calculation of the SCR			74
E.4       Differences between the standard formula and any internal model used			74
E.5       Non-compliance with the MCR and non-compliance with the SCR			76
E.6       Any other information			76
Statement of Directors’ Responsibilities			77
Independent Auditor’s Report			78
Quantitative Reporting Templates (QRTs)			82
S.02.01.02   Balance sheet			82
S.05.01.02   Premiums, claims and expenses by line of business			84
S.05.02.01   Premiums, claims and expenses by country			87
S.22.01.22   Impact of long-term guarantees and transitional measures			89
S.23.01.22   Own funds			90
S.25.02.22   Solvency Capital Requirement			93
S.32.01.22   Undertakings in the scope of the group			95

 

 

Summary

    

 

Summary

Prudential is an international financial services group serving over 26 million customers and with £657 billion of assets under management (as at 31 December 2018). Prudential plc is incorporated in England and Wales and its ordinary shares are listed on the stock exchanges in London, Hong Kong and Singapore, and its American Depository Receipts (ADRs) are listed on the New York Stock Exchange. Prudential plc is the parent company of the Prudential group (the ‘Prudential Group’, ‘Prudential’ or the ‘Group’). Prudential is not affiliated in any manner with Prudential Financial, Inc. or its subsidiary, The Prudential Insurance Company of America, whose principal place of business is in the US.

Business and Performance

Prudential meets the long-term savings and protection needs of a growing middle-class and ageing population. The Group focuses on markets where the need for its products is strong and growing and the Group uses its capabilities, footprint and scale to meet that need. In 2018, the Group announced its intention to demerge its UK and Europe business, M&GPrudential, from Prudential plc, which will result in two separately listed companies, with different investment characteristics and opportunities. Prudential has always been clear about the importance of creating optionality in its corporate structure, and decided to exercise one of those options in the interest of both the businesses and all of our stakeholders.

Further details on the demerger are set out in Section A.1.3, ‘Significant business or other events that have material impact on the group’.

Prudential helps people de-risk their lives and deal with their biggest financial concerns. The Group’s strategy is to capture the long-term structural opportunities within its markets, operating with discipline and enhancing capabilities through innovation to deliver high-quality resilient outcomes for its customers. Prudential aims to do this by:

 

—

Serving the protection and investment needs of the growing middle class in Asia;

—

Providing asset accumulation and retirement income products to US retirees;

—

Offering products to new customers in Africa, one of the fastest-growing regions in the world; and

—

Meeting the savings and retirement needs of an ageing UK and continental European population.

The Group’s financial performance in 2018 reflects its focus on high quality execution of its strategy, and is again led by its business in Asia. As in previous years, comment on performance is in local currency terms (expressed on a constant exchange rate basis) to show the underlying business trends in periods of currency movement.

Group adjusted IFRS operating profit based on longer-term investment returns¹ (‘operating profit’) was 6 per cent higher at £4,827 million (up 3 per cent on an actual exchange rate basis). Operating profit from our Asia life insurance and asset management businesses grew by 14 per cent, reflecting continued broad-based business momentum across the region and high-quality sales, with over 85 per cent of operating income from our preferred sources of insurance income, fee income and with-profits. In the US, Jackson’s total operating profit was 11 per cent lower, with higher fee income outweighed by an increase in market-related deferred acquisition costs (DAC) amortisation expense and the anticipated reduction in spread earnings. In the UK and Europe, M&GPrudential’s total operating profit was 19 per cent higher than the prior year, which principally reflects the benefit from updated longevity assumptions and an 11 per cent increase in the shareholder transfer from the with-profits business, which includes a 30 per cent increase from PruFund.

The Group’s capital generation is underpinned by our large and growing in-force business portfolio, and focus on profitable business with fast payback of capital invested. Overall, cash remittances to the Group from business units were £1,732 million (2017: £1,788 million). The Group’s overall performance supported a 5 per cent increase in the 2018 full year ordinary dividend to 49.35 pence per share.

The Group remains robustly capitalised, with a 2018 year-end shareholder Solvency II cover ratio of 232 per cent. Over the period, IFRS shareholders’ funds increased by 7 per cent to £17.2 billion, reflecting profit after tax of £3,013 million (2017: £2,390 million on an actual exchange rate basis) and other movements that included dividend payments to shareholders of £1,244 million and favourable foreign exchange movements of £348 million.

The performance of the Prudential Group for the year ended 31 December 2018 set out in Section A is described using the Group’s results as presented in the Group IFRS financial statements.

 

1	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. Please refer to section A.2 for further details.

 

Solvency and Financial Condition Report 2018   Prudential plc    1

Summary

    

 

System of Governance

The Group has established a governance framework for the business which is designed to promote appropriate behaviours across the Group. The governance framework includes the key mechanisms through which the Group sets strategy, plans its objectives, monitors performance, considers risk management, holds business units to account for delivering on business plans and arranges governance.

The Group Governance Manual (the Manual) sets out the policies and procedures under which the Group operates, taking into account statutory, regulatory and other relevant matters. Business units manage and report compliance with the Group-wide mandatory requirements and standards set out in the Manual through annual attestations, including compliance with the Group’s risk management framework.

Following the announcement in 2017 of the combination of our asset manager, M&G, and Prudential UK and Europe to form M&GPrudential, early in 2018 the Board announced the intention to demerge M&GPrudential from the remainder of the Prudential Group. During the year the Board has therefore been focused on the execution of that decision.

In preparation for this major transaction, the Board looked at its ways of working at the end of 2017 through its annual effectiveness review. The feedback from that review was used to ensure that the right environment for critical decision-making continued to be in place, and this has proved very helpful and effective groundwork as the Board was asked to consider a number of demerger-related items through the year.

In relation to the governance of both the Prudential and the M&GPrudential Groups, work has been undertaken to help ensure a smooth transition and ensure that both Groups have boards properly composed to meet their future strategic needs. Most importantly this has included establishing a separate M&GPrudential board and the appointment of the first independent non-executive director, Mike Evans, as chairman of that board. Since 31 December 2018, Prudential has announced the appointment of four further non-executive directors to the M&GPrudential board.

Until the demerger is completed, the Prudential Regulation Authority (PRA) will continue to be the Group-wide supervisor of Prudential. The PRA will be the Group-wide supervisor of M&GPrudential following the demerger. After the demerger, Prudential’s individual insurance and asset management businesses will continue to be supervised at a local entity level and local statutory capital requirements will continue to apply. The Supervisory College, made up of the authorities overseeing the principal regulated activities in jurisdictions where the future Prudential Group will operate, has made a collective decision that Hong Kong’s Insurance Authority (IA) should become the new Group-wide supervisor for Prudential plc.

Further information on Prudential’s system of governance including information on the composition of its Board, key functions, risk management and internal control system is provided in Section B.

Risk Profile

Prudential’s Group Risk Framework and risk appetite have allowed it to control its risk exposure successfully throughout the year. The governance, processes and controls enable the Group to deal with uncertainty effectively, which is critical to the achievement of its strategy of helping its customers achieve their long-term financial goals.

The merger activity ongoing at M&GPrudential and its planned separation from the rest of the Group (as set out above) requires significant and complex changes and these have been progressing apace throughout 2018. The Group Risk function is embedded within key work streams and a clear view exists of the objectives, risks and dependencies involved in order to execute this change agenda. A mature and well-embedded risk framework is in place and, during this period of transition, the Group Risk function has a defined role in providing oversight, support and risk management, as well as providing objective challenge to ensure the Group remains within its risk appetite. During 2018 these activities have been in the form of risk opinions, guidance and assurance on critical transformation and demerger activity, as well as assessments of the financial risks to the execution of the demerger under various stress scenarios. A key objective is that post demerger there are two strong, standalone risk functions in M&GPrudential and Prudential plc, with operational separation planning for the risk functions remaining on track.

The risks inherent in our business are influenced by the current global environment. The key factors and developments in 2018 are set out below.

Focus in western economies continues to shift from the goods and services which businesses deliver to customers towards the way in which such business is conducted and how this impacts on the wider society. Stakeholder and regulatory expectations of the Group’s environmental, social and governance (ESG) activities are also increasing. In undertaking its business, the Group actively considers the ESG implications of its activities.

The beginning of 2018 saw strong and broad economic growth following the significant US tax reforms enacted toward the end of 2017. As the year progressed the global economic backdrop evolved and a divergence in growth between the US and the rest of the world was observed. Financial markets faced a number of headwinds in 2018 and asset valuations suffered broadly amid the re-emergence of market volatility. Global markets, and emerging markets in particular, faced broad pressure throughout the year.

 

Solvency and Financial Condition Report 2018   Prudential plc    2

Summary

    

 

Events in the past year continue to indicate that the world is in a period of global geopolitical transition and increasing uncertainty. Across the Group’s key geographies we have increasingly seen national protectionism in trade and economic policies. The UK’s exit from the EU and the nature of the future relationship remains a key political uncertainty. As a global organisation, we develop plans to mitigate business risks arising from this shift and engage with national bodies where we can in order to ensure our policyholders are not adversely impacted. It is clear, however, that the full long-term impacts of these changes remain to be seen.

Prudential operates in highly regulated markets across the globe, and the nature and focus of regulation and laws remains fluid. A number of national and international regulatory developments are in progress, with a continuing focus on solvency and capital standards, conduct of business, systemic risks and macro-prudential policy. Such developments will continue to be monitored at a national and global level and form part of Prudential’s engagement with government policy teams and regulators. The Group announced in August 2018 that the Hong Kong Insurance Authority would be the Group-wide supervisor after the demerger of M&GPrudential, and constructive engagement on the future Group-wide regulatory framework, led by the Group Chief Risk Officer, will continue in 2019.

Further information on the main risks inherent in Prudential’s business (underwriting risk, market risk, credit risk, liquidity risk, operational risk and other material risks) and how Prudential manages its risks and maintains an appropriate risk profile is provided in Section C.

Valuation for Solvency Purposes

For the purposes of Solvency II reporting, Prudential applies the Solvency II valuation rules to value the majority of the assets and liabilities of the Group. As a general principle, technical provisions under Solvency II are valued at the amount for which they could theoretically be transferred immediately to a third party in an arm’s length transaction. The technical provisions consist of the best estimate liability and a risk margin plus a transitional deduction, which was recalculated at 31 December 2018.

The assets and other liabilities are valued under Solvency II at the amount for which they could be exchanged between knowledgeable and willing parties in an arm’s length transaction. The assets and other liabilities are valued separately using methods that are consistent with this principle in accordance with the valuation approaches set out in the Solvency directives.

In accordance with the Solvency II framework, and as agreed with the PRA, the US insurance companies (Brooke Life Insurance Company, Jackson National Life Insurance Company, Jackson National Life Insurance Company of New York and Squire Reassurance Company II) are aggregated into the Group’s Solvency II results using the ‘Deduction and Aggregation’ methodology on an ‘equivalent’ basis. The Group’s Solvency II results therefore incorporate US insurance companies as follows:

 

—

Own funds: represent Jackson’s local US Risk Based available capital less 100 per cent of the US Risk Based Capital requirement (Company Action Level);

—

Solvency Capital Requirement: represents 150 per cent of Jackson’s local US Risk Based Capital requirement (Company Action Level); and

—

No diversification benefits are taken into account between Jackson and the rest of the Group.

The own funds and capital for asset managers and non-regulated entities carrying out financial activities are included using sectoral rules and notional sectoral rules, respectively.

Further information on the valuation of assets, technical provisions and other liabilities of the Group for solvency purposes is provided in Section D, including a discussion of the differences between Solvency II and IFRS valuation bases.

Capital Management

The Group has been granted approval by the PRA to calculate its Solvency Capital Requirement (SCR) for all companies in the Group, except the US insurance entities discussed above, based on its internal model. The Group solvency capital requirement has been met during 2018.

The Group’s shareholder Solvency II position was published in the Group’s 2018 Annual Report. A reconciliation from the amounts shown in the Annual Report to the Solvency II position included in the quantitative reporting templates (QRTs) attached to this document, which incorporates the Group’s ring-fenced funds, is provided in Section E.1.2.

At 31 December 2018, the Group’s consolidated own funds as shown in the QRTs (including those of the Group’s ring-fenced funds) were £35,762 million (of which 81 per cent were classified as Tier 1) to cover an SCR of £18,598 million, leading to a surplus of £17,164 million. As at 31 December 2018, the minimum Group SCR was £8,445 million.

Additional information on the components of the Group’s own funds and solvency capital requirement is also provided in Section E.

 

Solvency and Financial Condition Report 2018   Prudential plc    3

A.	Business and Performance

    

 

A.	Business and Performance

(Unaudited)

 

A.1

Business

A.1.1 Overview

Name and legal form

Prudential plc is a public limited company incorporated on 1 November 1978 and registered in England and Wales. Its ordinary shares are listed on the stock exchanges in London, Hong Kong and Singapore, and its American Depository Receipts (ADRs) are listed on the New York Stock Exchange. Prudential plc is the parent company of the Prudential group (the ‘Prudential Group’, ‘Prudential’ or the ‘Group’).

During 2018, Prudential’s registered office was Laurence Pountney Hill, London EC4R 0HH. The Company’s registered office changed to 1 Angel Court, London, EC2R 7AG on 12 April 2019.

Supervisory authority

The Group is supervised by the Prudential Regulation Authority (PRA). The contact details are:

Prudential Regulation Authority

Bank of England

Threadneedle Street

London

EC2R 8AH

United Kingdom

The Group announced in August 2018 that the Hong Kong IA would be the Group-wide supervisor after the demerger of M&GPrudential, and constructive engagement on the future Group-wide regulatory framework, led by the Group Chief Risk Officer, will continue in 2019.

External auditor

The Group is audited by KPMG LLP. The contact details are:

KPMG LLP

15 Canada Square

London

E14 5GL

United Kingdom

Holders of qualifying holdings

As at 31 December 2018, there were no holders of qualifying holdings in Prudential plc (being a holder of 10 per cent or more of the capital or voting rights).

The following notifications as at 31 December 2018 have been disclosed under the Financial Conduct Authority’s (FCA’s) Disclosure Guidance and Transparency Rules in respect of notifiable interests exceeding 3 per cent in the voting rights of the issued share capital.

 

As at 31 December 2018		% of total voting rights
Capital Group Companies, Inc.			9.87%
BlackRock, Inc			5.08%
Norges Bank			3.99%

A.1.2 Group structure

Material subsidiaries

Prudential plc is the ultimate parent holding company of the Group. The table below lists Prudential’s material subsidiaries as at 31 December 2018:

 

Name of entity		Main activity		Jurisdiction of incorporation
The Prudential Assurance Company Limited*		Insurance		England and Wales
M&G Group Limited*		Asset management		England and Wales
Jackson National Life Insurance Company*		Insurance		Michigan, US
Prudential Corporation Asia Limited		Insurance		Hong Kong

*	Owned by another subsidiary undertaking of the Company.

The material subsidiaries listed above are all wholly owned group companies both as to equity and voting rights.

 

Solvency and Financial Condition Report 2018   Prudential plc    4

A.	Business and Performance

    

 

Prudential has appointed independent non-executive directors to the boards of its four Material Subsidiary entities within the Group. Each Material Subsidiary has a board of directors led by an independent chair and an audit committee and risk committee, composed entirely of independent non-executives. The focus of these boards is on oversight of the relevant material subsidiary, rather than the day-to-day management.

Dialogue between the Group Chair, Group Risk Committee Chair and Group Audit Committee Chair and their counterparts in the Material Subsidiaries provides an effective information flow. Over the course of 2018 and early 2019, the Board of M&GPrudential has been developed by its independent Chairman, Mr Mike Evans. Mr Evans and the Group Chair have maintained dialogue throughout. Since 31 December 2018, Prudential has announced the appointment of four further non-executive directors to the M&GPrudential board.

Information on the scope of the Group

A complete list of the Group’s related undertakings is provided in the attached template S.32.01.22 ‘Undertakings in the scope of the group’. As required, this includes subsidiaries, joint ventures and associates and participations (being holdings in excess of 20 per cent where the Group exercises no significant influence or control).

The scope of the Group for Solvency II purposes is the same in all material respects as for the Group IFRS financial statements.

Simplified group structure

The Prudential Group is structured around three main business units: Prudential Corporation Asia, the North American Business Unit and M&GPrudential in UK and Europe. In addition, in recent years, the Group has expanded into Africa. These business units derive revenue from both long-term insurance and asset management activities. These are supported by central functions which are responsible for Prudential strategy, cash and capital management, leadership development and succession, reputation management and other core group functions.

In 2018, the Group announced its intention to demerge its UK and Europe businesses from Prudential plc, to form two separately listed companies.

The following chart shows, in a simplified form, the legal structure of the Prudential Group as at 31 December 2018.

 

 

*	In 2018, the Group announced its intention to demerge its UK and Europe businesses, M&GPrudential, from Prudential plc, which will result in two separately-listed companies. See Section A.1.3, ‘Significant business or other events that have material impact on the group’, for further details.

†	The Group completed the transfer of the legal ownership of its Hong Kong insurance subsidiaries from The Prudential Assurance Company Limited to Prudential Corporation Asia Limited in December 2018.

 

Solvency and Financial Condition Report 2018   Prudential plc    5

A.	Business and Performance

    

 

Governance and organisational structure of the Group

The following chart shows, in a simplified form, the governance and organisational structure of the Prudential Group as at 31 December 2018.

 

 

This report reflects the governance and risk framework currently in place and in operation over 2018.

A.1.3 Business and performance

Material lines of business and material geographical areas

Prudential meets the long-term savings and protection needs of a growing middle-class and ageing population. The Group focuses on markets where the need for its products is strong and growing and the Group uses its capabilities, footprint and scale to meet that need. In 2018, the Group announced its intention to demerge its UK and Europe business, M&GPrudential, from Prudential plc, which will result in two separately listed companies, with different investment characteristics and opportunities. Prudential has always been clear about the importance of creating optionality in our corporate structure, and decided to exercise one of those options in the interest of both the businesses and all of our stakeholders.

Asia

Prudential Corporation Asia’s (PCA’s) core business is health and protection, either attached to a life policy or on a standalone basis, other life insurance (including participating business) and mutual funds. It also provides selected personal lines property and casualty insurance, group insurance and institutional fund management.

PCA offers its customers a broad range of health, protection and savings solutions that are tailored to local market requirements and individual needs. For example, in Hong Kong, PCA launched a new critical illness product with extended protection for cancer, heart attacks and strokes, and three common causes of death. Similarly, PCA enhanced its protection product for mothers and unborn children in Malaysia, PRUmy child, by expanding the range of pregnancy complications included and extending the coverage period for congenital illnesses. PCA is also actively developing products to meet the upcoming needs of Asia’s ageing populations and were amongst the first group of insurers to be granted approval to offer a tax-deferred pension product in China.

PCA develops products with specialist characteristics that broaden its offering and appeal. It has been proponents of products that comply with the requirements of Islamic law for many years. Sales of Syariah products in Indonesia grew by 17 per cent in 2018 to over £50 million. This positions PCA as market leaders in Indonesia’s Syariah market, in addition to Malaysia’s Takaful market, with market shares of approximately 30 per cent in both cases. PCA has also launched PRUvital cover in Singapore, a first-in-the-market protection plan for customers with four types of common pre-existing chronic medical condition that previously could act as barriers in obtaining insurance coverage.

 

Solvency and Financial Condition Report 2018   Prudential plc    6

A.	Business and Performance

    

 

Eastspring Investments, Prudential’s asset management business in Asia, manages investments for Prudential’s Asia and UK life companies and also has a broad base of third-party retail and institutional clients. Eastspring has a number of advantages and is well placed for the anticipated growth in Asia’s retail mutual fund market. It has one of the largest footprints in Asia, being operational in 11 major markets and distribution offices in US and Europe. It has a well-diversified customer base, comprising Prudential’s internal life funds, and a number of institutional clients, including sovereign wealth funds and retail customers. Assets managed are well diversified between fixed income and equities and also include infrastructure funds.

Africa

Prudential entered Africa in 2014, to offer products to new customers in one of the fastest-growing regions in the world. Prudential aims to provide products that help its customers to live longer and healthier lives, and save to improve future choices for them and their families. 

US

Through its distribution partners, Jackson provides products that offer Americans the retirement strategies they need, including variable, fixed, and fixed index annuities. Each of these products offer a unique range of features tailored to meet the individual needs of the retiree:

 

—

Variable annuity: A Jackson variable annuity, with investment freedom, represents an attractive option for retirees, providing both access to equity market appreciation and guaranteed lifetime income as an add on benefit.

—

Fixed index annuity: A Jackson fixed index annuity is a guaranteed product with limited market exposure but no direct equity ownership. It is designed to build wealth through a combination of a base crediting rate that is generally lower than a traditional fixed annuity crediting rate, but with the potential for additional upside, based upon the performance of the linked index.

—

Fixed annuity: A Jackson fixed annuity is a guaranteed product designed to build wealth without market exposure, through a crediting rate that is likely to be superior to interest rates offered from banks or money market funds.

—

Group pay-out annuity: consist of a closed block of defined benefit annuity plans assumed from John Hancock Life Insurance Company (John Hancock USA) in 2018 through a reinsurance agreement. The contracts provide annuity payments that meet the requirements of the specific pension plan being covered.

These products also offer tax deferral, allowing interest and earnings to grow tax-free until withdrawals are made.

In March 2018, Jackson launched MarketProtector and MarketProtector Advisory, two new fixed annuities with index-linked interest. These products provide consumers with the sought-after combination of tax-deferred investment growth, protection from market risk and the flexibility to adapt to changing needs in retirement. Both products offer an add-on living benefit that allows customers to safeguard their financial futures with income for life.

In 2018, Jackson took a lead role in bringing together 24 of America’s financial services organisations to launch the Alliance for Lifetime Income (Alliance). The Alliance was launched to educate Americans on the risk of outliving their income, so they can enjoy their years in retirement. The Alliance’s nationwide, multi-year, integrated educational campaign is designed to raise awareness and motivate consumers and financial advisers to discuss the need for protected lifetime income in retirement, which can be achieved with the use of annuity products such as those provided by Jackson.

The US operations also include PPM Holdings, Inc. (PPM), Prudential’s US internal and institutional investment management operation. As at 31 December 2018, Prudential’s US operations had more than 4 million policies and contracts in force and PPM managed approximately £92.2 billion of assets.

UK and Europe

M&GPrudential is the UK and Europe savings and investments business of Prudential plc. It was formed in 2017 through the merger of Prudential’s UK and Europe insurance operations with M&G Investments, Prudential’s international asset manager.

In March 2018, the Board of Prudential plc announced its intention to demerge M&GPrudential. The Prudential Board believes the demerger will further strengthen two already strong businesses. For M&GPrudential, the demerger will enable its leadership team to focus solely on what is important to its customers, giving M&GPrudential direct control over its own capital and enable it to pursue growth opportunities without competing for resources with other Prudential plc businesses. M&GPrudential is expected to have a premium listing on the London Stock Exchange.

 

Solvency and Financial Condition Report 2018   Prudential plc    7

A.	Business and Performance

    

 

M&GPrudential’s long-term products in the UK consist of life insurance, pension products and pensions annuities. M&GPrudential also distributes life insurance products, primarily investment bonds, in other European countries and has a business in Poland which primarily sells with-profits savings and protection products.

Following the decision taken in 2016 to curtail retail sales of annuity business, during 2017, M&GPrudential introduced an annuity service which gives retiring customers access to a panel of annuity providers rather than access to a M&GPrudential’s annuity. This has been rolled out to approximately 50 per cent of the pension books.

M&GPrudential offers customers a range of investment funds to meet different risk and reward objectives. M&GPrudential’s main onshore bond product wrapper is the Prudential Investment Plan (PIP). Through this plan, based on a single premium with no fixed term, customers have the option to invest in the with-profits fund through PruFund or in a range of unit-linked investment funds. M&GPrudential’s offshore bond products are the Prudential International Investment Bond and the Prudential International Investment Portfolio offering clients access to a wide range of quoted UK investments.

M&GPrudential provides both corporate, individual pension and income drawdown products. Pension products are tax advantaged long-term savings products that comply with rules established by the HM Revenue & Customs (HMRC) and are designed to supplement state provided pensions. These products provide policyholders with a number of options at retirement. From age 55 onwards, policyholders may elect to use part or all of their maturity benefits to purchase a pension annuity, they may choose to draw-down funds without purchasing an annuity, they may delay taking any benefits, take cash or take a combination of these options. They are also permitted to take a portion as a tax-free lump sum.

Significant business or other events that have material impact on the Group

As discussed above, in March 2018, the Group announced its intention to demerge M&GPrudential from the Group, in order to create two separately listed companies with distinct investment characteristics and opportunities. After the demerger, shareholders will have shares in Prudential plc, which will be even better positioned to capture the structural opportunities ahead of the Group, and M&GPrudential, with greater freedom to deploy its capital where and how it likes to meet the changing needs of customers.

The Group is making good progress towards the demerger. On the structural side, the holding company for M&GPrudential has been established, and the first stages at the High Court of England and Wales for the transfer of part of the M&GPrudential annuity book to Rothesay have been completed. On the operational side, the Group is moving forward with separating the functions of the two businesses and building new ones to prepare M&GPrudential for its post-demerger future. The Group also raised £1.6 billion of subordinated debt, with substitution clauses to be activated on demerger, supporting the capital rebalancing of the two businesses, and it continues to work with its regulators.

In addition the Group undertook the following corporate transactions in the year:

Transfer of subsidiaries and reinsurance of £12.0 billion UK annuity portfolio

In preparation for the demerger of M&GPrudential from Prudential plc, the Group transferred legal ownership of The Prudential Assurance Company Limited (PAC) and M&G Group Limited to the new holding company for M&GPrudential, and completed the transfer of the legal ownership of its Hong Kong insurance subsidiaries from PAC to Prudential Corporation Asia Limited in December 2018.

In March 2018, M&GPrudential reinsured £12.0 billion (as at 31 December 2017) of its shareholder-backed annuity portfolio to Rothesay Life. Under the terms of the agreement, this is expected to be followed by a Part VII transfer of most of the portfolio by 30 June 2019. The reinsurance agreement became effective on 14 March 2018 and resulted in an IFRS basis pre-tax loss of £508 million.

The above transactions increased the Group’s shareholder Solvency II capital position by £0.4 billion.

Entrance into Thailand mutual fund market

In July 2018, Eastspring reached an agreement to acquire initially 65 per cent of TMB Asset Management Co., Ltd. (TMBAM), a leading asset management company in Thailand, from the TMB Bank Public Company Limited (TMB). Thailand is the largest fund management market within the Association of Southeast Asian Nations (ASEAN) with total assets under management of £115 billion at 31 December 2018. Eastspring has an option to increase its ownership to 100 per cent in the future. As part of this acquisition, Eastspring has also entered into a distribution agreement with TMB to provide best-in-class investment solutions to their customers. The acquisition of TMBAM, with £9 billion of assets under management as at 31 December 2018, reinforces Prudential’s commitment to the Thai market.

 

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Acquisition of John Hancock’s group pay-out annuity business

In November 2018, Jackson announced an agreement with John Hancock Life Insurance Company to reinsure 100 per cent of John Hancock’s group pay-out annuity business, effective from 1 October 2018.

In total, the transaction involves Jackson indemnity reinsuring approximately US$5.5 billion of reserves, representing an increase in Jackson’s general account liabilities of approximately 10 per cent. John Hancock will continue to be responsible for the administration of the business.

Renewal and expansion of regional strategic bancassurance alliance with UOB

In January 2019, Prudential and UOB renewed their regional bancassurance alliance until 2034, extending the scope to include a fifth market, Vietnam, alongside our existing footprint across Singapore, Malaysia, Thailand and Indonesia.

Under the terms of the renewal, Prudential’s life insurance products will be distributed through UOB’s extensive network of more than 400 branches in five markets, providing access to over four million UOB customers. In addition, Prudential will use its digital capabilities to deliver protection-focused propositions to aid UOB’s digital bank expansion and customer acquisition aspirations. An initial fee of £662 million will be paid under the agreement which will be funded through internal resources. This amount will be paid in three instalments. £230 million was paid in February 2019 with £331 million to be paid in January 2020 and £101 million to be paid in January 2021.

Acquisition of majority stake in Group Beneficial

In March 2019, Prudential plc announced it is acquiring a majority stake in Group Beneficial (Beneficial), one of the leading life insurers in Cameroon, Côte d’Ivoire and Togo. Beneficial provides savings and protection products to over 300,000 customers through 41 branches and more than 2,000 agents. The acquisition will significantly add to Prudential’s growing scale in Africa, and is subject to various conditions and regulatory approvals.

 

A.2	Underwriting Performance

All discussions of the Group’s underwriting, investment and other activities in this section and the subsequent Sections A.3, A.4 and A.5 are based on the Group’s IFRS basis results.

Adjusted IFRS operating profit based on longer-term investment returns (operating profit) is management’s primary measure of profitability and provides an underlying operating result based on longer-term investment returns and excludes non-operating items.

This measurement basis distinguishes operating profit from other constituents of the total profit as follows:

 

—

Short-term fluctuations in investment returns on shareholder-backed business, which include the impact of short-term market effects on the carrying value of Jackson’s guarantee liabilities and related derivatives as explained below;

—

Amortisation of acquisition accounting adjustments arising on the purchase of business, which comprises principally the charge for the adjustments arising on the purchase of REALIC in 2012; and

—

Gain or loss on corporate transactions, such as disposals undertaken in the year.

Given the linkage between the movement of technical provisions and the movement in the investments backing those liabilities (eg for unit-linked funds, investment returns, both positive and negative, result in a corresponding change in unit-linked technical provisions), the Group has defined operating profit, which by definition excludes short-term fluctuations in investment returns, for its insurance businesses as its underwriting performance discussed in this section. Accordingly, the core discussion of the investment performance of the Group in Section A.3 is by reference to short-term fluctuations in investment returns. The discussion of the performance of the Group’s asset management business is also provided in this section and Section A.3, together with the performance discussion of the insurance businesses. Further discussion on the contribution to operating profit by the Group’s other operations, including central operations (amounts for corporate expenditure for Group Head Office as well as Asia Regional Head Office), Africa operations and Prudential Capital, is provided in Section A.4, ‘Performance of other activities’.

An analysis of premiums, claims and expenses is given in Section A.5.

 

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A.2.1 Group operating profit analysed by geographical region

 

				Actual Exchange Rates (AER)												Constant Exchange Rates (CER)*
		Section		2018 £m				2017 £m				Change %				2017 £m				Change %
Operating profit before tax
Asia
Long-term business		A2.2			1,982				1,799				10%				1,727				15%
Asset management					182				176				3%				171				6%
Total					2,164				1,975				10%				1,898				14%
US
Long-term business		A2.2			1,911				2,214				(14)%				2,137				(11)%
Asset management					8				10				(20)%				9				(11)%
Total					1,919				2,224				(14)%				2,146				(11)%
UK and Europe
Long-term business		A2.2			1,138				861				32%				861				32%
General insurance commission					19				17				12%				17				12%
Total insurance operations					1,157				878				32%				878				32%
Asset management					477				500				(5)%				500				(5)%
Total					1,634				1,378				19%				1,378				19%
Other income and expenditure		A4.1			(725)				(775)				6%				(769)				6%
Total operating profit based on longer-term investment returns before tax and restructuring costs					4,992				4,802				4%				4,653				7%
Restructuring costs		A4.1			(165)				(103)				(60)%				(103)				(60)%
Total operating profit					4,827				4,699				3%				4,550				6%
Non-operating items:
Short-term fluctuations in investment returns on shareholder-backed business:
Insurance operations		A3.1			(563)				(1,589)				65%				(1,540)				63%
Other operations		A4.1			5				26				(81)%				26				(81)%
					(558)				(1,563)				64%				(1,514)				63%
Amortisation of acquisition accounting adjustments		A4.1			(46)				(63)				27%				(61)				25%
Loss (profit) attaching to corporate transactions		A4.1			(588)				223				n/a				218				n/a
Profit before tax					3,635				3,296				10%				3,193				14%
Tax charge attributable to shareholders’ returns					(622)				(906)				31%				(876)				29%
Profit for the year					3,013				2,390				26%				2,317				30%

*

Sterling weakened over the course of 2018, compared with most of the currencies in Prudential’s major international markets. However, average exchange rates remained above those in 2017, leading to a negative effect on the translation of results from non-sterling operations. To aid comparison of underlying progress, Prudential expresses and comments on the performance trends of its Asia and US operations on a constant exchange rate basis. The 2017 CER comparative results have been translated at 2018 average exchange rates.

2018 total operating profit increased by 6 per cent (3 per cent on an actual exchange rate basis) to £4,827 million.

Asia total operating profit of £2,164 million was 14 per cent higher than the previous year (10 per cent on an actual exchange rate basis). Operating profit from life insurance operations increased 15 per cent to £1,982 million (10 per cent on an actual exchange rate basis), reflecting the continued growth of our in-force book of recurring premium business, with renewal insurance premiums² reaching £12,856 million (2017: £11,087 million). Insurance margin was up 15 per cent, driven by our continued focus on health and protection business, now contributing to 70 per cent of Asia life insurance revenues (2017: 68 per cent). At a market level, growth was led by Hong Kong up 33 per cent, Singapore 22 per cent and China 20 per cent respectively. Eastspring’s operating profit increased by 6 per cent (up 3 per cent on an actual exchange rate basis) to £182 million reflecting 4 per cent revenue growth which, combined with positive operating leverage, resulted in an improvement in the cost-income ratio³ to 55 per cent (2017: 56 per cent on an actual exchange rate basis).

US total operating profit at £1,919 million decreased by 11 per cent (14 per cent on an actual exchange rate basis). Higher fee income was more than offset by higher market-related DAC amortisation and lower spread-based income. Although equity markets declined in the fourth quarter, average separate account balances were above the prior year, given positive net inflows which supported higher levels of fee income. The higher market-related DAC amortisation arises mainly from £194 million acceleration of amortisation compared with £83 million favourable deceleration in 2017 (on a constant exchange rate basis), leading to an adverse year-on-year movement of £277 million. Excluding the acceleration and deceleration in 2018 and 2017, operating profit in 2018 would have been 2 per cent higher than 2017 on a constant exchange rate basis.

 

2	Asia renewal insurance premium is calculated as IFRS gross earned premiums less new business premiums and adjusted for the contribution from joint ventures.

3	Margin represents operating income before performance related fees as a proportion of the related funds under management.

 

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The variability in DAC from year-to-year is dependent on separate account return and its interaction with the mean reversion formula applied by Jackson when determining the amortisation charge for the year. In the current year the dominant factor driving this calculation has been the equity market falls in 2018 (whereas 2017 saw equity market rises). Spread-based income decreased 20 per cent (22 per cent on an actual exchange rate basis), as anticipated, reflecting the impact of lower yields on our fixed annuity portfolio and a reduced contribution from asset duration swaps. While Jackson expects these effects to continue to compress spread margins, the continued upwards movements in US reinvestment yields may help to reduce the speed of the decline.

UK and Europe total operating profit was 19 per cent higher at £1,634 million. Life insurance operating profit increased by 32 per cent to £1,138 million (2017: £861 million). Within this total, the contribution from our core² with-profits and in-force annuity business was £519 million (2017: £597 million), including an increased transfer to shareholders from the with-profits funds of £320 million (2017: £288 million) and within this, a 30 per cent increase in the contribution from PruFund business of £55 million. Earnings from our core annuities business were lower, reflecting the reinsurance of £12 billion of annuity liabilities to Rothesay Life in March 2018. The balance of the life insurance result reflects the contribution from other elements which are not expected to recur at the same level. This includes the favourable impact of longevity assumption changes, contributing £441 million (2017: £204 million) relating to changes to annuitant mortality assumptions reflecting recent mortality trends, which have shown a slowdown in life expectancy improvements in recent periods, and the adoption of the Continuous Mortality Investigation (CMI) 2016 model (2017: adoption of 2015 model). The result also includes a £166 million insurance recovery, related to the costs of reviewing internally vesting annuities sold without advice after July 2008. Profits from management actions of £58 million were broadly offset by a provision of £55 million for the cost of equalising guaranteed minimum pension benefits on products sold by the UK insurance business, following a High Court ruling in October which applied across the UK life insurance industry.

Asset management operating profit decreased 5 per cent to £477 million, largely reflecting a normalisation of performance fees to £15 million, compared with a particularly high contribution of £53 million in the prior year. Excluding the contribution of performance fees, operating profit was 3 per cent higher. This reflects both the higher average level of funds managed by M&G (up from £275.9 billion in 2017 to £276.6 billion in 2018) and a higher revenue margin3 of 40 basis points (2017: 37 basis points). Operating profit is after charges of £27 million incurred in preparing the business for the UK’s proposed exit from the European Union, including the migration of fund assets to our Luxembourg-domiciled SICAV platform. The cost-income ratio⁴ of 59 per cent remains broadly in line with the prior year (2017: 58 per cent).

 

 

4	The asset management cost/income ratio is calculated as asset management operating expenses, adjusted for commission and joint venture contribution, divided by asset management total IFRS revenue adjusted for commission, joint venture contribution, performance-related fees and non-operating items.

 

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A.2.2 Operating profit analysed by Solvency II lines of business

The following tables analyse operating profit by material Solvency II lines of business split by geographical segment:

Asia insurance operations

Operating profit		2018 £m						AER 2017 £m				CER 2017 £m						2018 vs 2017 AER				2018 vs 2017 CER						Relevant material Solvency II lines of business
Hong Kong			443						346				332						28%				33%					•  Insurance with-profit participation* •  Health insurance •  Other life insurance (including protection)
Indonesia			416						457				415						(9)%				0%					•  Unit-linked insurance combined with health and protection riders
Malaysia			194						173				178						12%				9%					•  Insurance with-profit participation* •  Unit-linked insurance combined with health and protection riders
Philippines			43						41				38						5%				13%					•  Unit-linked products combined with health and protection riders
Singapore			329						272				269						21%				22%					•  Insurance with-profit participation* •  Unit-linked products combined with health and protection riders •  Health insurance • Other life insurance
Thailand			113						107				108						6%				5%					•  Other life insurance (including health and protection) •  Unit-linked insurance
Vietnam			149						135				129						10%				16%					•  Insurance with-profit participation* •  Other life insurance
China			143						121				119						18%				20%					•  Insurance with-profit participation* •  Health insurance •  Unit-linked insurance •  Other life insurance (including protection)
Taiwan			51						43				41						19%				24%					•  Insurance with-profit participation* •  Health insurance •  Unit-linked insurance •  Other life insurance
Other (including non-recurrent items)			145						146				140						(1)%				4%
Total before share of related tax charges from joint ventures and associate and development expenses			2,026						1,841				1,769						10%				15%
Share of related tax charges from joint ventures and associate			(40)						(39)				(39)						(3)%				(3)%
Development expenses			(4)						(3)				(3)						(33)%				(33)%
Total			1,982						1,799				1,727						10%				15%

*	Insurance with-profit participation products relate to those sold from a ring-fenced fund as defined by the Solvency II legislation.

 

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US insurance operations

 

		AER														CER
Operating profit		2018 £m				2017 £m				Change %						2017 £m				Change %
Index-linked and unit-linked insurancenote (a)			1,532				1,788				(14)%						1,726				(11)%
Other life insurancenote (b)			379				426				(11)%						411				(8)%
Total			1,911				2,214				(14)%						2,137				(11)%

Notes

(a)	Index-linked and unit-linked insurance represents profits from Jackson’s variable annuity products.

(b)	Other life insurance includes profits from fixed annuity, fixed index annuity, guaranteed investment contracts, life and other business.

UK and Europe insurance operations

Operating profit		2018 £m				2017 £m				Change %
Insurance with-profit participationnote (a)			320				288				11%
Other (comprising index-linked and unit-linked insurance, other life insurance and life reinsurance)note (b)			818				573				43%
Total			1,138				861				32%

Notes

(a)	Insurance with-profit participation comprises the pre-tax shareholders’ transfer from the with-profits fund for the year.

(b)	‘Other’ substantially comprises profits arising from shareholder annuity business.

 

A.3	Investment Performance

A.3.1 Short-term fluctuations in investment returns

As explained in Section A.2.1, the Group describes its performance by reference to operating profit (see Section A.2 Underwriting Performance) and non-operating profit, the key component of which is IFRS short-term fluctuations in investment returns (as described below). Additional analysis on investment returns is provided in Section A.5.4.

Operating profit is based on longer-term investment return assumptions. The difference between actual investment returns recorded in the income statement and the assumed longer-term returns is reported within short-term fluctuations in investment returns.

In 2018, the total short-term fluctuations in investment returns on shareholder-backed business were negative £558 million (2017: negative £1,563 million on an actual exchange rate basis) and comprised negative £512 million (2017: negative £1 million on an actual exchange rate basis) for Asia, negative £100 million (2017: negative £1,568 million on an actual exchange rate basis) in the US, positive £34 million (2017: negative £14 million on an actual exchange rate basis) in the UK and Europe and positive £20 million (2017: positive £20 million on an actual exchange rate basis) in other operations.

Rising interest rates in many markets in Asia led to unrealised bond losses in the period. In the US, lower equity market levels, alongside higher interest rate levels, as expected, resulted in gains on equity hedge instruments which are designed to protect Jackson’s capital position, balanced by higher technical reserve requirements.

A.3.2 Investment management expenses

The total investment management expenses incurred by the Group’s insurance operations, including those that were paid to the Group’s asset management operations, totalled £803 million (2017: £890 million). These amounts comprise investment management expenses incurred by both the Group’s shareholder-backed business and with-profits business.

 

A.3.3

Movement in unrealised gains and losses on available-for-sale securities of Jackson recognised as other comprehensive income

The majority of the US insurance operation’s debt securities portfolio is accounted for on an available-for-sale basis. Movements in unrealised appreciation/depreciation of Jackson’s debt securities designated as available-for-sale are recorded in other comprehensive income. The amounts recognised in other comprehensive income are as follows:

 

		2018 £m				2017 £m
Net unrealised holding (losses) gains arising in the year			(1,606)				591
(Deduct net gains) add back net losses included in the income statement on disposal and impairment			(11)				26
Total			(1,617)				617

 

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A.3.4

Investments in securitisation

Certain of the securities classified as asset-backed securities in the Group IFRS financial statements meet the definition of securitisation for the purpose of the Solvency II capital requirements calculation.

Investments in securitisation are subject to specific spread stresses in the calculation of the Solvency II capital requirements in order to ensure that risks arising from securitisation positions are reflected appropriately.

For the Group’s UK and Europe insurance operations, of the £6,676 million (31 December 2017: £6,728 million) of asset-backed securities disclosed in the Group IFRS financial statements at 31 December 2018, £4,971 million (31 December 2017: £4,654 million) meet the definition of investments in securitisation.

The securitisation investment holdings of the Group’s US insurance operations are not included as these operations are included on a Deduction and Aggregation basis based on the local US Risk Based Capital approach and do not form a part of the internal model for Solvency II Pillar 1. The securitisation investment holdings of the Group’s Asia insurance operations were not material.

 

A.4	Performance of other activities

 

A.4.1

Contribution to operating profit and short-term fluctuations in investment returns from other operating income and expenditure

Other operating income and expenditure

Other operating income and expenditure for 2018 of £(890) million (2017: £(878) million) comprise the following items:

 

		2018 £m				2017 £m
Investment return and other income Interest payable on core structural borrowings Corporate expenditure			52				11
			(410)				(425)
			(367)				(361)
Other income and expenditures			(725)				(775)
Restructuring costs			(165)				(103)
Total			(890)				(878)

Other non-operating items

Short-term fluctuations in investment returns on other operations

The positive short-term fluctuations in investment returns for other operations of £5 million (2017: £26 million) include unrealised value movements on financial instruments held outside of the main life operations.

Other items

Other items include the results attaching to disposal of businesses of negative £(588) million (2017: positive £218 million) and the amortisation of acquisition accounting adjustments of negative £46 million (2017: negative £61 million) arising mainly from the REALIC business acquired by Jackson in 2012. The loss related to the disposal of businesses relates primarily to the £(508) million pre-tax loss following the reinsurance of £12 billion UK annuities to Rothesay Life in March 2018.

 

A.4.2

Leasing

The Group does not hold any individually material leasing arrangement. The Group’s operating and finance lease arrangements relate principally to properties as described further below, and are differentiated between operating and finance leases.

Operating leases

Prudential as a lessee

As at 31 December 2018, Prudential’s UK headquartered businesses occupied 115 operating leases in the United Kingdom, Europe, Asia and Africa. These properties are primarily offices with some ancillary storage facilities. Prudential’s global headquarters is located in London. Of the remainder, the most significant holdings are offices in London and Reading in England, Stirling in Scotland and Mumbai in India. Of the 115 operating leases, 100 are held leasehold and the rest 15 are short-term serviced offices.

The 2018 Group IFRS consolidated income statement includes minimum operating lease rental payments made by the Group of £139 million (2017: £123 million).

Prudential as a lessor

Investment properties principally relate to the UK with-profits fund (including its property fund subsidiaries) and are carried at fair value. The Group’s policy is to let investment properties to tenants through operating leases.

 

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The 2018 income statement includes rental income from investment properties of £927 million (2017: £876 million), including income from property funds consolidated by the Group, and direct operating expenses including repairs and maintenance arising from these properties of £56 million (2017: £82 million).

Finance leases

Prudential as a lessee

The Group’s portfolio of investment properties comprises both freehold and leasehold properties. Investment properties of £5,825 million (31 December 2017: £5,689 million) are held under finance leases. These finance leases are arrangements which grant very long leases with a large payment made upfront with minimal ground rent payable on an annual basis.

Prudential as a lessor

Prudential does not have any material finance leasing arrangements where Prudential acts as a lessor.

 

A.5	Any other information

An additional analysis of the premiums, benefits and claims, acquisition costs and other expenditure of the Group’s insurance operations by geographical region on an IFRS basis is provided below.

The following table shows Prudential’s consolidated total revenue and consolidated total charges for the years presented:

 

		Section				2018 £m				2017 £m
Gross premiums earned		A.5.1					47,224				44,005
Outward reinsurance premiums							(14,023)				(2,062)
Earned premiums, net of reinsurance							33,201				41,943
Investment return		A.5.4					(10,263)				42,189
Other income							1,993				2,258
Total revenue, net of reinsurance							24,931				86,390
Benefits and claims							(27,411)				(71,854)
Outward reinsurers’ share of benefit and claims							13,554				2,193
Movement in unallocated surplus of with-profits funds							1,289				(2,871)
Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance		A.5.2					(12,568)				(72,532)
Acquisition costs and other expenditure		A.5.3					(8,855)				(9,993)
Finance costs: interest on core structural borrowings of shareholder-financed operations							(410)				(425)
(Loss) gain on disposal of businesses and corporate transactions							(80)				223
Remeasurement of the sold Korea life business							-				5
Total charges, net of reinsurance and gain (loss) on disposal of businesses							(21,913)				(82,722)
Share of profits from joint ventures and associates, net of related tax							291				302
Profit before tax (being tax attributable to shareholders’ and policyholders’ returns)							3,309				3,970
Less tax charge attributable to policyholders’ returns							326				(674)
Profit before tax attributable to shareholders						3,635				3,296

 

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A.  Business and Performance

    

 

A.5.1 Comparison of gross premiums earned with the prior period

 

		2018 £m				2017 £m
Asia			16,469				15,688
US			17,656				15,164
UK and Europe			13,061				13,126
Unallocated to a segment (Africa)			38				27
Total			47,224				44,005

The gross premiums earned of £47,224 million under IFRS in 2018 excludes £1,446 million (2017: £2,164 million) of premiums for policies which are classified as investment contracts without discretionary participation features under IFRS 4 ‘Investment Contracts’ and recorded as deposits. These amounts are included in gross premiums earned within the Solvency II template S.05.01.02. The increase in gross premiums earned from 2017 to 2018 was primarily due to an addition of £3.7 billion from the agreement entered into by Jackson with John Hancock Life in October 2018 to assume 100 per cent of their group pay-out annuity business. The gross premiums earned of £48,670 million under Solvency II, including investment contracts, is analysed by line of business as follows:

 

		Gross premiums earned £m
		Health insurance		Insurance with-profit participation		Index- linked and unit-linked insurance		Other life insurance		Accepted life reinsurance		Non- life		Total
2018		863		21,132		16,362		10,198		24		91		48,670
2017		836		20,514		18,147		6,559		24		89		46,169

The analysis of the premiums of the Group’s insurance operations provided below is on an IFRS basis and therefore excludes premiums from investment contracts without discretionary participation features.

Gross premiums earned for insurance operations total £47,224 million in 2018, up 7 per cent from £44,005 million in 2017. The increase of £3,219 million is primarily driven by growth of £2,492 million in the US operations and £781 million in the Asia operations, marginally offset by a decline of £65 million in the UK and Europe operations.

Asia

Gross premiums earned reflect the aggregate of single and regular premiums of new business sold in the year and premiums on annual business sold in previous years.

Gross premiums for Asia have increased by £781 million or 5 per cent from £15,688 million in 2017 to £16,469 million in 2018 on an actual exchange rate basis. Excluding the impact of exchange translation, gross earned premiums in Asia have increased by 9 per cent from 2017 to 2018, from £15,168 million on a constant exchange rate in 2017 to £16,469 million in 2018.

The Group’s focus on quality is undiminished with regular premium contracts accounting for majority of sales as well as the mix of health and protection products. This favourable mix provides a high level of recurring income and an earnings profile that is significantly less correlated to investment markets.

In 2018, Hong Kong sales have increased during the year, with higher sales levels from Mainland China visitors to Hong Kong driving positive momentum over the course of the year. In China, sales grew in the fourth quarter. In Singapore, sales were higher driven by agency and bancassurance channels, pricing actions and favourable product mix shifts. Indonesia continues to experience a challenging market environment, which was compounded by the adverse impact of higher yields and hence sales were lower. Despite these headwinds, the Group is investing in business to strengthen its distribution capabilities, upgrading its systems and refreshing its product propositions to meet customer needs.

United States

Gross premiums have increased by 16 per cent from £15,164 million in 2017 to £17,656 million in 2018 on an actual exchange rate basis. Excluding the impact of exchange translation, gross premiums in the US have increased by 21 per cent from £14,638 million in 2017 to £17,656 million in 2018. In October 2018, Jackson entered into an agreement with John Hancock Life to assume the risk on 100 per cent of their group pay-out annuity business, increasing gross premiums earned by £3.7 billion. Excluding the premiums from this transaction, gross premiums decreased slightly from the prior year on a constant exchange rate basis.

United Kingdom and Europe

Gross premiums for UK and Europe life business of £13,061 million are in line with 2017. New sales continue to be driven by the popular PruFund ISA proposition. Reflecting this performance, total PruFund assets under management of £43 billion as at 31 December 2018 were 20 per cent higher than at the start of the year, driven by positive net flows of £8.5 billion.

 

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A.  Business and Performance

    

 

A.5.2 Comparison of benefits and claims (including the movement in unallocated surplus of with-profits funds) with the prior period

 

		2018 £m				2017 £m
Asia*			(8,775)				(18,269)
US			(8,790)				(31,205)
UK and Europe*			5,016				(23,047)
Unallocated to a segment (Africa)			(19)				(11)
Total			(12,568)				(72,532)

*	The Asia and UK benefits and claims exclude intra-group reinsurance transactions.

The analysis of the benefits and claims of the Group’s insurance operations provided above is on an IFRS basis and therefore excludes benefits and claims from investment contracts without discretionary participation features.

The underlying reasons for the year-on-year changes in benefits and claims and movement in unallocated surplus in each of Prudential’s regional operations are changes in the incidence of claims incurred, increases or decreases in policyholders’ liabilities, and movements in unallocated surplus of with-profits funds. Movement for each Group operation is described below.

Claims incurred and increase in policyholder liabilities totalling £(12,568) million in 2018 include £(34) million of claims handling expenses but exclude £(1,443) million of charges in respect of policies which are classified as investment contracts without discretionary participation features under IFRS 4 ‘Investment Contracts’. A reconciliation of the amounts shown in the Group IFRS financial statements to that shown in Solvency II template S.05.01.02 is shown below:

 

		2018 £m				2017 £m
Benefits and claims and movement in unallocated surplus, net of reinsurance as disclosed in the Group IFRS financial statements			(12,568)				(72,532)
Remove movement in unallocated surplus of with-profits funds			(1,289)				2,871
Remove Claims handling expenses			34				33
Add Charges for investment contracts without discretionary participation features			(1,443)				(1,950)
Benefits and claims, net of reinsurance within the Solvency II template S.05.01.02			(15,266)				(71,578)

The amount of £(15,266) million within the Solvency II template S.05.01.02, excluding claims handling expenses but including the charges for investment contracts, is analysed by line of business as follows:

 

		Claims incurred and changes in other technical provisions - net of reinsurance £m
		Health insurance				Insurance with-profit participation				Index- linked and unit-linked insurance				Other life insurance				Accepted life reinsurance				Non- life				Total
2018			(326	)			(12,311	)			(4,887	)			2,436				(135	)			(43	)			(15,266	)
2017			(487	)			(26,755	)			(37,708	)			(6,412	)			(178	)			(38	)			(71,578	)

The principal variations in the movements in policyholder liabilities and movements in unallocated surplus of with-profits funds for each regional operation are discussed below.

Asia

In 2018, the charge for benefits and claims and movement in unallocated surplus of with-profits funds totalled £(8,775) million, representing a decrease of £9,494 million compared with the charge of £(18,269) million in 2017. The amounts of the year-on-year change attributable to each of the underlying reasons are shown below:

 

		2018 £m				2017 £m
Claims incurred, net of reinsurance			(4,925)				(5,118)
(Increase) in policyholder liabilities, net of reinsurance			(4,969)				(12,049)
Movement in unallocated surplus of with-profits funds			1,119				(1,102)
Benefits and claims and movement in unallocated surplus, net of reinsurance			(8,775)				(18,269)

In general, the growth in policyholder liabilities in Asia over the years shown above reflects the combined growth of new business and the in-force books in the region.

The variations in the increases or decreases in policyholder liabilities in individual years were, however, primarily due to movement in investment returns. This was as a result of asset value movements that are reflected in the unit value of the unit-linked policies and the fluctuation of the policyholder liabilities of the Asia operations’ with-profits policies with the funds’ investment performance.

The decrease in investment return in 2018, mainly driven by unfavourable equity market performances across the region as compared with strong growth in 2017 and unrealised bond losses as a result of higher interest rates, resulted in a related decrease in the charge for benefits and claims in the year.

 

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A.  Business and Performance

    

 

United States

In 2018, the charge for benefits and claims has decreased by £22,415 million to £(8,790) million compared with £(31,205) million in 2017. The amounts of the year-on-year change attributable to each of the underlying reasons are shown below:

 

		2018 £m				2017* £m
Claims incurred, net of reinsurance			(14,667)				(11,583)
Decrease/(Increase) in policyholder liabilities, net of reinsurance			5,877				(19,622)
Benefits and claims, net of reinsurance			(8,790)				(31,205)

*	The comparative results have been re-presented from previously published for a reclassification between Claims incurred, net of reinsurance and Increase in policyholder liabilities, net of reinsurance.

The year-on-year movement in claims incurred for US operations as shown in the table above also includes the effect of translating the US dollar results into pound sterling at the average exchange rates for the year.

The charges in each year comprise amounts in respect of variable annuity and other business. The year-on-year movement is principally driven by the movement in the investment return on the assets backing the variable annuity separate account liabilities. This has decreased in 2018 compared to 2017 due to relatively less favourable US equity markets in the current year. The decrease in policyholder liabilities in 2018 as a result of equity market movements is partially offset by an increase in the liability for variable guarantees in the year and an increase from the reinsurance agreement entered into by Jackson in November 2018 to acquire a closed block of group pay-out annuity business from John Hancock Life Insurance Company. The transaction resulted in an increase to policyholder liabilities of £4.1 billion at the inception of the contract.

United Kingdom and Europe

The overall result for benefits, claims and the transfer to unallocated surplus has decreased to a credit of £5,016 million in 2018 compared with a £(23,047) million charge in 2017. The year-on-year changes attributable to each of the underlying reasons are shown below, together with a further analysis of the change in policyholder liabilities by type of business:

 

		2018 £m				2017 £m
Claims incurred, net of reinsurance			(10,903)				(11,101)
Decrease (increase) in policyholder liabilities, net of reinsurance:
SAIF			852				349
Shareholder-backed annuity business			13,938				897
Unit-linked and other non-participating business			1,388				(1,479)
With-profits (excluding SAIF)			(429)				(9,944)
			15,749				(10,177)
Movement in unallocated surplus of with-profits funds			170				(1,769)
Benefits and claims and movement in unallocated surplus, net of reinsurance			5,016				(23,047)

Claims incurred in the UK and Europe operations of £(10,903) million in 2018 are in line with £(11,101) million incurred in 2017.

As has been explained above, the principal driver for variations in amounts allocated to the policyholders is changes to investment return. In 2018, the result for benefits and claims is also significantly impacted by the reinsurance of £12.0 billion of the shareholder annuity liabilities to Rothesay Life.

In aggregate, as a result of lower market returns in 2018 compared with 2017 and the aforementioned reinsurance transaction, there has been a corresponding impact on benefits and claims and movements in unallocated surplus of with-profits funds in the year, moving from a net charge of £(23,047) million in 2017 to a net credit of £5,016 million in 2018.

SAIF is a ring-fenced fund with no new business written. Policyholder liabilities in SAIF reflect the underlying decreasing policyholder liabilities as the liabilities run off. The variations from year to year are, however, affected by the market valuation movement of the investments held by SAIF, which are wholly attributable to policyholders.

For shareholder-backed annuity business, the decrease in policyholder liabilities, net of reinsurance in the income statement of £13,041 million during 2018 is principally due to the reinsurance of the £12.0 billion annuity liabilities to Rothesay Life as referred to above and also negative net flows reflecting the run-off of the remaining annuity portfolio. In addition, the decreases/(increases) in policyholder liabilities in any given period include the effect of altered investment yield reflected in the discount rate applied in the measurement of the liabilities and other altered assumptions, including mortality where relevant, together with net flows into this line of business.

For unit-linked business, the primary driver of the variations in the movement in the policyholder liabilities is due to the movement in the market value of the unit-linked assets as reflected in the unit value of the unit-linked policies.

 

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A.  Business and Performance

    

 

A.5.3 Acquisition costs and other expenditure

 

		2018 £m				2017* £m
Asia			(3,866	)			(4,053	)
US			(2,077	)			(2,257	)
UK and Europe			(2,360	)			(3,206	)
Unallocated to a segment and intra-segment elimination			(552	)			(477	)
Total			(8,855	)			(9,993	)

*	The 2017 comparative results have been re-presented following the adoption of IFRS 15.

Total acquisition costs and other expenditure of £(8,855) million in 2018 is 11 per cent lower than the £(9,993) million incurred in 2017. In general, acquisition costs and other expenditure comprise acquisition costs incurred for insurance policies, change in deferred acquisition costs, operating expenses and movements in amounts attributable to external unit holders. Movements in amounts attributable to external unit holders of consolidated investment funds reflect the change in the overall returns in these funds in the period that is attributable to third parties.

Asia

Total acquisition costs and other expenditure for Asia in 2018 are £(3,866) million compared with £(4,053) million in 2017. The decrease of £187 million from 2017 to 2018 includes a favourable exchange translation impact of £147 million. Excluding the effect of currency volatility, total acquisition costs and other expenditure have decreased by £40 million from 2017 to 2018.

United States

Total acquisition costs and other expenditure for US in 2018 are £(2,077) million representing a decrease of £180 million compared with £(2,257) million in 2017. The decrease of £180 million includes a favourable exchange translation impact of £78 million. Excluding the currency volatility, the total acquisitions and other expenditure have decreased by £102 million from 2017 to 2018.

The decrease in acquisition costs and other expenditure for US in 2018 compared to 2017 on an actual exchange basis is primarily due to the inclusion in 2018 of a credit of £416 million of negative ceding commissions arising from the group pay-out annuity business reinsurance agreement entered into by Jackson with John Hancock Life during the year and a reduction of £542 million of charges for broker-dealer fees in 2018, compared to 2017 following the exit of the US broker-dealer business announced in 2017. These decreases are partially offset by higher amortisation charge of deferred acquisition costs in 2018, which was £856 million higher than 2017.

United Kingdom and Europe

Total acquisition costs and other expenditure for UK and Europe have decreased by 26 per cent from £(3,206) million in 2017 to £(2,360) million in 2018.

The decrease in 2018 arises primarily from the decrease in the charge for investment gains attributable to external unit-holders relating to funds managed on behalf of third parties which are consolidated but have no recourse to the Group, such charges have decreased by £920 million from a charge of £(719) million in 2017 to a credit of £201 million in 2018. In addition, the 2018 other expenditure includes a credit of £166 million for the insurance recovery related to the costs of reviewing internally vesting annuities sold without advice after July 2008, compared to a charge of £225 million in 2017 to increase the provision held for the costs of this review.

Unallocated to a segment and intra-segment elimination

Other net expenditure represents a charge of £(552) million in 2018 and a charge of £(477) million in 2017. The reflects mainly higher restructuring costs of £165 million (2017: £103 million), which include investment spend of £99 million in relation to M&GPrudential merger and transformation bringing the cumulative cost to £143 million since the project began. Other restructuring costs relate to efficiency and change programmes across the Group, for example the rationalisation of US locations in 2018.

 

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A.  Business and Performance

    

 

A.5.4 Additional analysis of investment return by geographical region

An additional analysis of the Group’s investment return of £(10,263) million as shown in the IFRS income statement by geographical region is provided below.

 

		2018 £m				2017 £m
Asia			(2,154)				8,995
US			(4,788)				18,533
UK and Europe			(3,437)				14,584
Unallocated to a segment and intra-segment elimination			116				77
Total			(10,263)				42,189
Analysed by Group IFRS financial statements asset classes:
Investment properties			1,102				1,421
Loans			853				951
Equity securities and portfolio holdings in unit trusts			(13,998)				33,691
Debt securities			1,760				7,456
Other investments (including derivatives)*			20				(1,330)
Total			(10,263)				42,189

*	Includes exchange gains and losses.

Investment return principally comprises interest income, dividends, investment appreciation/depreciation (realised and unrealised gains and losses) on investments designated as fair value through profit and loss and realised gains and losses, including impairment losses, on securities designated as available-for-sale. Movements in unrealised appreciation/depreciation of Jackson’s debt securities designated as amortised cost and available-for-sale are not reflected in investment return but are recorded in other comprehensive income.

The investment balances and percentages as quoted in the subsequent paragraphs are referenced to the 31 December 2018 Group IFRS consolidated statement of financial position.

Asia

The table below provides an analysis of investment return attributable to Asia operations for the years presented:

 

		2018 £m				2017 £m
Interest/dividend income (including foreign exchange gains and losses)			1,669				1,685
Investment (depreciation) appreciation*			(3,823)				7,310
Total			(2,154)				8,995

*	Investment appreciation/depreciation comprises net realised or unrealised gains or losses on the investments.

In Prudential’s Asia operations, debt securities account for 55 per cent and 54 per cent of the total investment portfolio as at 31 December 2018 and 2017, respectively, with equities comprising 38 per cent and 39 per cent, respectively. The remaining portion of the total investment portfolio were primarily loans and deposits with credit institutions. Investment return has decreased from a gain of £8,995 million in 2017 to a loss of £(2,154) million in 2018. This decrease primarily reflects the year-on-year adverse change in investment depreciation of £10,507 million driven by unfavourable debt and equity market performance. Rising interest rates across a number of Asia markets and in the US led to unrealised bond losses in the period, as well as unrealised loss on US treasuries held by certain business units. In addition, equity market movements were unfavourable during the year with the MSCI Asia excluding Japan index down 14 per cent and the S&P 500 index down 6 per cent. The adverse movements in the returns on equities have a more significant impact on the with-profits funds and unit-linked business in Asia.

United States

The table below provides an analysis of investment returns attributable to US operations for the years presented:

 

		2018 £m				2017 £m
Investment return of investments backing US separate account liabilities			(6,792)				19,198
Other investment return			2,004				(665)
Total			(4,788)				18,533

In the US, investment return has decreased from a gain of £18,533 million in 2017 to a loss of £(4,788) million in 2018. This £23,321 million unfavourable change arises from the decrease of £25,990 million in the investment return of investments backing variable annuity separate account liabilities from a gain of £19,198 million in 2017 to a loss of £(6,792) million in 2018, partially offset by an increase in other investment returns from a loss of £(665) million 2017 to a gain of £2,004 million in 2018. The lower separate account return is primarily driven by the fall in equity markets over the year. The S&P 500 index is 6 per cent lower than 2017. The increase of £2,669 million in other investment returns primarily arises as a result of realised gains from derivatives held to manage interest rate and equity risk exposures in 2018 compared to losses in 2017 as discussed in note B1.2 to the Group IFRS financial statements.

 

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A.  Business and Performance

    

 

United Kingdom and Europe

The table below provides an analysis of investment return attributable to the UK and Europe operations for the years presented:

 

		2018 £m				2017 £m
Interest/dividend income			5,951				6,183
Investment (depreciation) appreciation and other investment returns			(9,388)				8,401
Total			(3,437)				14,584

In Prudential’s UK and Europe operations, equities account for 29 per cent and 31 per cent of the total investment portfolio as at 31 December 2018 and 2017, respectively. Debt securities comprise 46 per cent and 46 per cent and investment properties account for 10 per cent and 8 per cent as at 31 December 2018 and 2017. The remaining 15 per cent and 15 per cent of the total investment portfolio as at 31 December 2018 and 2017, respectively, relate to loans, deposits with credit institutions, investments in partnerships in investment pools and derivative assets. Within debt securities of £86 billion as at 31 December 2018 (31 December 2017: £95 billion), 70 per cent (31 December 2017: 64 per cent) consist of corporate debt securities.

Interest and dividend income has decreased by £232 million from £6,183 million in 2017 to £5,951 million in 2018. The lower income in 2018 mainly arises from the decrease in interest income following the reinsurance of £12.0 billion of the UK shareholder-backed annuity portfolio to Rothesay Life.

The decrease in investment appreciation (depreciation) and other investment return of £17,789 million from a gain of £8,401 million in 2017 to a loss of £(9,388) million in 2018 principally reflects higher unrealised losses in debt and equity securities in 2018 compared to 2017. Increase in interest rates and credit spreads in 2018 led to losses on fixed income assets. The FTSE index was down 12 per cent in 2018 compared to an 8 per cent increase in 2017.

 

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B.  System of Governance

    

 

B.   System of Governance

(Unaudited)

B.1  General information on the system of governance

B.1.1 Board governance

The Company has dual primary listings in London (premium listing) and Hong Kong and has therefore adopted a governance structure based on the UK and Hong Kong Corporate Governance Codes (the UK and HK Codes).

The Group is headed by a Board led by the Chairman. As at 31 December 2018, the Board was made up of 16 Directors, of which a majority, excluding the Chairman, are independent Non-executive Directors (NEDs). Further details of the roles of the Chairman, Group Chief Executive, Senior Independent Director, Committee Chairs and the NEDs can be found below.

The Board is collectively responsible to shareholders for the long-term sustainable success of the business through:

 

—

Approving the Group’s long-term strategic objectives, annual budgets and business plans, as recommended by the Group Chief Executive and any material changes to them;

—

Monitoring the implementation of strategic objectives, annual budgets and business plans;

—

Establishing the Company’s purpose, values and strategy and satisfying itself that these are aligned with the Group’s culture; and

—

Assessing and monitoring culture, including alignment with policy, practices, behaviours and risk appetite.

Specific matters are reserved for decision by the Board, including:

 

—

Approving dividend policy and determination of dividends;

—

Approval of strategic projects;

—

Approval of the three-year business and financial plan;

—

Approval of the Group’s full and half-yearly results announcements and any other periodic financial reporting;

—

Responsibility for an effective system of internal control and risk management;

—

Overseeing the Group’s corporate social responsibility programmes; and

—

Ensuring effective engagement with, and encouraging participation from, key stakeholder groups.

Governance framework

The Group has established a governance framework for the business which is designed to promote appropriate behaviours across the Group.

The governance framework includes the key mechanisms through which the Group sets strategy, plans its objectives, monitors performance, considers risk management, holds business units to account for delivering on business plans and arranges governance.

The Group Governance Manual (the Manual) sets out the policies and procedures under which the Group operates, taking into account statutory, regulatory and other relevant matters.

Business units manage and report compliance with the Group-wide mandatory requirements and standards set out in the Manual through annual attestations. This includes compliance with our risk management framework.

The content of the Manual is reviewed regularly, reflecting the developing nature of both the Group and the markets in which it operates, with significant changes on key policies reported to the relevant Board Committee.

 

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B.  System of Governance

    

 

Board roles

 

Chairman – Paul Manduca
The Chairman is responsible for the leadership and governance of the Board, ensuring its smooth and effective running in discharging its responsibilities to the Group’s stakeholders and managing Board business.
Managing Board business —   Responsible for setting the Board agenda, ensuring the right issues are brought to the Board’s attention through collaboration with the Group Chief Executive and the Group General Counsel and Company Secretary —   Facilitating open, honest and constructive debate among Directors. When chairing meetings, ensuring there is sufficient time to consider all topics, all views are heard and all Board members, and in particular Non-executive Directors, have an opportunity to constructively challenge management		—   Meeting with Non-executive Directors throughout the year. In 2018, the Chairman met with Non-executive Directors without Executive Directors being present on four occasions —   Ensuring information brought to the Board is accurate, clear, timely and contains sufficient analysis appropriate to the scale and nature of the decisions to be made —   Promoting effective reporting of Board Committee business at Board meetings through regular Committee Chair updates
Membership and composition of the Board —   Leading the Nomination & Governance Committee in succession planning and the identification of potential candidates, having regard to the skills and experience the Board needs to fulfil its strategy, and making recommendations to the Board		—   Considering the development needs of the Directors so that Directors continually update their skills and knowledge required to fulfil their duties, including the provision of a comprehensive induction for new Directors —   Maintaining an effective dialogue with the Non-executive Directors to encourage engagement and maximise their contributions
Governance —   Leading the Board’s determination of appropriate corporate governance and business values, including ethos, values and culture at Board level and throughout the Group —   Working with the Group General Counsel and Company Secretary to ensure continued good governance		—   Acting as key contact for independent chairs of Material Subsidiaries —   Meeting with the independent chairs of the Group’s Material Subsidiaries on a regular basis and reporting to the Board on the outcome of those meetings
Relationship with the Group Chief Executive —   Discussing broad strategic plans with the Group Chief Executive prior to submission to the Board —   Ensuring the Board is aware of the necessary resources to achieve the strategic plan		—   Providing support and advice to the Group Chief Executive
Relations with shareholders and other stakeholders —   Representing the Board externally at business, political and community level. Presenting the Group’s views and positions as determined by the Board —   Playing a major role in the Group’s engagement with regulators		—   Balancing the interests of different categories of stakeholders, preserving an independent view and ensuring effective communication —   Engaging in a programme of meetings with key shareholders throughout the year and reporting to the Board on the issues raised at those meetings
External positions —   Approving Directors’ external appointments prior to them being accepted, taking into account the required time commitment and escalating consideration of conflicts of interests to the Nomination & Governance Committee as needed

 

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B.  System of Governance

    

 

Group Chief Executive – Mike Wells				Senior Independent Director – Philip Remnant
The Group Chief Executive leads the Executive Directors and senior executives and is responsible for the operational management of the Group on behalf of the Board on a day-to-day basis:   —   Responsible for the implementation of Board decisions —   Establishes processes to ensure operations are compliant with regulatory requirements —   Sets policies, provides day-to-day leadership and makes decisions on matters affecting the operation, performance and strategy of the Group, seeking Board approval for matters reserved to the Board —   Supported by the Group Executive Committee which he chairs and which receives reports on performance and implementation of strategy for each business unit and discusses major projects and other activities related to the attainment of strategy —   Chairs the Chief Executive’s Committee meetings which are held weekly to review matters requiring approval under the Group’s framework of delegated authorities —   Keeps in regular contact with the Chairman and briefs him on key issues —   Meets with key regulators worldwide —   Leads on day-to-day effective stakeholder engagement				The Senior Independent Director acts as an alternative conduit to the Board for shareholder concerns and leads the evaluation of the Chairman:   —   Acts as a sounding board for the Chairman, providing support in the delivery of the Chairman’s objectives —   Leads the Non-executive Directors in conducting the Chairman’s annual evaluation —   Holds meetings with Non-executive Directors without management being present, typically at least once a year to evaluate the performance of the Chairman —   Offers meetings to major shareholders to provide them with an additional communication point on request and is generally available to any shareholder to address concerns not resolved through normal channels

 

Committee chairs				Non-executive Directors
Each of the Committee Chairs is responsible for the effective operation of their respective Committees:   —   Responsible for the leadership and governance of their Committee —   Sets the agenda for Committee meetings —   Reports to the Board on the activities of each Committee meeting and the business considered, including, where appropriate, seeking Board approval for actions in accordance with the Committees’ terms of reference —   Works with the Group General Counsel and Company Secretary to ensure the continued good governance of each Committee during the year —   In addition to Committee duties, the Chairs of the Audit and Risk Committees act as key contact points for the independent chairs of the audit and risk committees of the Material Subsidiaries				All of the Non-executive Directors are deemed to be independent and together have a wide range of experience which can be applied to attain the strategic aims of the Group through:   —   Constructive and effective challenge —   Providing strategic guidance and offering specialist advice —   Scrutinising and holding to account the performance of management in meeting agreed goals and objectives —   Serving on at least one of the Board’s principal Committees —   Engaging with Executive Directors and other senior management at Board and Committee meetings as well as at site visits, training sessions and on an informal basis —   Taking part in one-to-one meetings with the Group Strategy team and participation in the annual Strategy Away Day

Material changes in the system of governance

Governance structures are kept under review to ensure they suit the needs of the business and stakeholders. In relation to the governance of both the Prudential and the M&GPrudential Groups, work has been undertaken to help ensure a smooth transition and ensure that both Groups have boards properly composed to meet their future strategic needs. As Chief Executive of M&GPrudential, Mr Foley will step down from the Board at the conclusion of the 2019 AGM as part of the demerger transition. Having taken into account the changed shape of the Prudential Group post-demerger and the reduced number of business units, the Board has taken a decision that the roles of Chief Executive Prudential Corporation Asia and Chief Executive Officer of Jackson Holdings LLC will no longer be Executive Director roles on the Board, although will continue to serve on the Group Executive Committee. As announced to the market on 28 February 2019, all of these Board changes will take effect from the conclusion of Prudential’s 2019 Annual General Meeting on 16 May 2019.

 

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B.  System of Governance

    

 

B.1.2 Board Committees and decision making

The Board has established four principal committees whose functions are summarised below:

 

BOARD

 

Nomination and Governance Committee		Remuneration Committee		Audit Committee		Risk Committee
Chair Paul Manduca		Chair Anthony Nightingale		Chair David Law		Chair Howard Davies
—   Keeps leadership needs under review in support of the Group’s strategic objectives —   Develops succession planning for the Board and senior executives based on merit against objective criteria promoting diversity in all areas —   Oversees development of a diverse pipeline in succession planning —   Monitors the Group’s diversity initiatives —   Recommends appointments to the Board, its principal Committees and appointments of non-executive chairs to the boards of Material Subsidiaries —   Oversees the governance of Material Subsidiaries and the Group’s overall governance framework		—   Ensures there is a formal and transparent process for establishing the Directors’ Remuneration Policy —   Approves individual remuneration packages of the Chairman, Executive Directors, senior executives and Material Subsidiary non-executive directors —   Approves the overall Remuneration Policy for the Group —   Reviews the design and development of share plans and approves and assesses performance targets where applicable and ensures alignment with the Group’s culture —   Reviews workforce remuneration practices and policies when setting executive remuneration		—   Responsible for the integrity of the Group’s financial reporting, including scrutinising accounting policies —   Monitors the effectiveness of internal control and risk management systems, including compliance arrangements —   Monitors the effectiveness and objectivity of internal and external auditors —   Approves the internal audit plan and recommends the appointment of the external auditor		—   Leads on and oversees the Group’s overall risk appetite, risk tolerance and strategy —   Approves the Group’s risk management framework and monitors its effectiveness —   Supports the Board and management in embedding and maintaining a supportive culture in relation to the management of risk —   Provides advice to the Remuneration Committee on risk management considerations to inform remuneration decisions
Terms of reference for the principal Committees can be accessed at www.prudential.co.uk/investors/governance-and-policies/board-committees-terms-of-reference

The Board has established a Standing Committee which can meet as required to assist with any business of the Board. It is typically used for ad hoc or urgent matters which cannot be delayed until the next scheduled Board meeting. All Directors are members of the Standing Committee and have the right to attend all meetings and receive papers. Notice of a Standing Committee meeting is sent to all Directors and if an individual is unable to attend, he/she can give comments to the Chairman or Group Company Secretary ahead of the meeting for consideration by the Standing Committee. Before taking decisions on any matter, the Standing Committee must first determine that the business it is considering is appropriate for a Committee of the Board and does not properly need to be brought before the whole Board. All Standing Committee meetings are reported in full to the next scheduled Board meeting. Over 2018, the Company held five meetings of the Standing Committee. This governance structure allows for fast decision-making where necessary, while ensuring that the full Board has oversight of all matters under consideration and all Non-executives can contribute.

In accordance with the Guidance on Systems of Governance published by EIOPA on Solvency II, Prudential has deemed its key functional areas to be Risk, Internal Audit, Compliance and Actuarial. These key functional control areas provide regular reports to the respective Board Committees.

It is the responsibility of the Audit Committee to review the adequacy of resources, qualifications and experience of internal audit and compliance and their training programmes. The Audit Committee also approves their annual work plans and monitors significant internal audit findings and key control findings from Compliance reviews. In addition, the Actuarial Function reports annually to the Audit Committee on its resources and the activities undertaken over the year.

 

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It is the responsibility of the Risk Committee to review the remit of the Risk function including adequacy of resourcing, access to information and independence from management.

Further information of the key functions, ie Risk, Compliance, Internal Audit and Actuarial is given in Sections B.3.2, B.4.2, B.5 and B.6, respectively.

B.1.3 Remuneration policy

Principles of remuneration policy

Prudential’s remuneration policy and practices ensure that the business units and the Group Head Office have an effective approach in place to reward its employees in an appropriate way which:

 

—

Aligns incentives to business objectives in order to support the delivery of Group and business unit business plans and strategies;

—

Enables the recruitment and retention of high calibre employees and incentivises them to achieve success for their business unit and the Group; and

—

Is consistent with the organisation’s risk framework and appetites.

The principles of the remuneration policy are:

 

—

Pay for Performance;

—

Tailored to the relevant market;

—

Interest in Prudential shares;

—

Business unit and Group focus;

—

Shareholder value creation;

—

Fair and transparent system for all;

—

Designed to minimise regulatory and operational risk; and

—

Safeguards to avoid conflicts of interest

Remuneration architecture

Both fixed and variable remuneration is assessed against market data and internal relativities on an annual basis and balanced so that the fixed component represents a sufficiently high proportion of the total remuneration to avoid employees being overly dependent on the variable components and to allow the Group and business units to operate a fully flexible bonus policy, including the ability to pay no variable component.

Annual bonus measures include various combinations of business unit financial and/or strategic targets, Group financial targets, functional targets and individual performance reflecting the level, nature and scope of the role and the practice in the market in which the business unit operates.

Currently awards are made at the discretion of the relevant business unit and determined based on business and individual performance and potential, and market practice. Awards made under the Prudential Long Term Incentive Plan (PLTIP) generally include Group and/or, where relevant, business unit financial metrics.

The LTIP awards of employees in Group Head Office and senior executives within the business units are made under the Prudential LTIP scheme and include a Group target.

Prudential does not operate supplementary pension or early retirement schemes. None of the current Executive Directors and Group Executive Committee members participate in the Group’s defined benefits schemes, all of which are closed to new members, but allow future accrual for existing members which include some key function holders.

The diagram below explains the structure of Executive Directors’ remuneration for 2018.

 

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B.1.4 Material transactions with Directors and shareholders

Executive officers and Directors of the Company may from time to time purchase insurance, asset management or annuity products marketed by Group companies in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with other persons.

In 2018 and 2017, other transactions with Directors were not deemed to be significant both by virtue of their size and in the context of the Directors’ financial positions. All of these transactions are on terms broadly equivalent to those that prevail in arm’s length transactions.

Apart from these transactions with Directors, no Director had interests in shares, transactions or arrangements that require disclosure, other than those given in the Directors’ remuneration report in the Group’s 2018 Annual Report.

There have been no material transactions with shareholders outside the normal course of business.

B.2 Fit and proper requirements

For the calendar year to up to 10 December 2018, the Group has ensured that the Board and Key Function Holders are fit and proper through implementation of a Group Fit and Proper Policy. Following the implementation of the Senior Managers and Certification Regime (SMCR) on 10 December 2018, the Group Fit and Proper Policy has been replaced by separate Fit and Proper Policies for Group Head Office and M&GPrudential, respectively. The two policy approaches are set out below.

 

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Group Fit and Proper Policy (up to 10 December 2018)

An annual certification process is carried out, whereby Group Head Office and business units confirm compliance with the Group Governance Manual, which includes the Fit and Proper Policy. The Policy applies to:

 

—

All persons approved as PRA Senior Insurance Management Functions;

—

All persons approved as FCA Significant Influence Functions;

—

All persons defined as Key Function Holders and notified to the regulator; and

—

All persons defined as Notified NEDs and notified to the regulator.

In addition, some of the requirements are applicable to those performing a key function. On this basis the fit and proper requirements explicitly apply to Prudential’s UK Solvency II regulated entities listed below and the Group Head Office:

 

—

The Prudential Assurance Company Limited; and

—

Prudential Pensions Limited.

Group Head Office and M&GPrudential Fit and Proper Policies (from 10 December 2018)

The implementation of the Senior Managers and Certification Regime has provided an opportunity to streamline the administration of the Fit and Proper Policy by splitting it into one policy covering Group Head Office and one policy covering M&GPrudential.

The Group Head Office Policy applies to Prudential Group Head Office (GHO) and to individuals carrying out the below roles for Group identified under Senior Managers & Certification Regime (SMCR) and the Solvency II Directive:

 

—

Persons approved by the PRA and/or the FCA as holding Senior Management Functions (SMFs) including approved NEDs;

—

Persons defined as Standard NEDs and notified to the regulator;

—

Persons defined as holding a Certification Function; and

—

Persons identified as Key Function Performers (KFPs) under the Solvency II Directive.

The M&GPrudential policy applies to:

 

—

All persons approved by the PRA and/or the FCA as holding Senior Management Functions (SMFs) including approved NEDs;

—

All persons defined as Key Function Holders and notified to the regulator;

—

All persons defined as Standard NEDs and notified to the regulator; and

—

All persons defined as holding a Certification Function.

B.2.1 Fit and proper criteria

Business units (including the Group Head Office) listed above ensure that individuals to whom this policy applies fulfil the following requirements:

 

—

Honesty, integrity and reputation, ie that they will be open and honest in their dealings and able to comply with the requirements imposed on them;

—

Competence and capability, ie that they have the necessary skills to carry on the function they are to perform; and

—

Financial soundness.

B.2.2 Processes for assessments

Processes for initial assessment of fitness and propriety

Business units within the scope of the fit and proper policy have processes for assessing the fitness and propriety of persons covered, including a number of direct questions and independent checks. These processes are described below:

 

—

During the recruitment process and before any regulatory application is made, business units conduct an assessment of the person’s fitness:

—

The person’s professional and formal qualifications;

—

Knowledge and relevant experience within the insurance sector, other financial sectors or other businesses; and

—

Where relevant, the insurance, financial, accounting, actuarial and management skills of the person.

—

During the recruitment process and before any regulatory application is made, business units conduct an assessment of the person’s propriety, including integrity, honesty, and financial soundness, based on evidence regarding their character, personal behaviour and business conduct, including any criminal, financial and supervisory checks; and

—

In relation to outsourced key functions, business units identify an individual who is responsible for assessing the fitness and propriety of the service provider.

 

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Processes for ongoing assessment of fitness and propriety

Business units gather sufficient evidence, at least annually, to assess the ongoing fitness and propriety of individuals captured by the Senior Managers and Certification Regime, including KFPs and Notified NEDs. This includes an assessment of whether the individuals are adhering to the relevant PRA/FCA Conduct Standards and Rules.

Business units’ compliance functions are notified where there is a change in the fit and proper status of any Significant Influence Functions, Senior Management Functions or Key Function Holder.

Business units notify the PRA and FCA of any change to the fit and proper status of Senior Management Functions, Significant Influence Functions or Key Function Holders, including instances of where these individuals have been replaced because they are no longer fit and proper.

Business units notify the PRA and FCA as soon as reasonably practicable when a breach has occurred in the Conduct Standards/Rules that has a material impact on the assessment of an individual’s fitness and propriety.

Business units notify Group Compliance as soon as reasonably practicable in the event of a breach of these Policy requirements.

B.3 Risk management system including the own risk and solvency assessment (ORSA)

B.3.1 Risk governance and culture, the risk management cycle, and risk appetite

Prudential has in place a system of governance that promotes and embeds a clear ownership of risk, processes that link risk management to business objectives, a proactive Board and senior management providing oversight of risks, mechanisms and methodologies to review, discuss and communicate risks, and risk policies and standards to ensure risks are identified, measured, managed, monitored and reported.

Prudential defines ‘risk’ as the uncertainty that is faced in implementing the Group’s strategies and achieving its objectives successfully, and includes all internal or external events, acts or omissions that have the potential to threaten the success and survival of the Group. Accordingly, material risks will be retained selectively when it is considered that there is value in doing so, and where it is consistent with the Group’s risk appetite and philosophy towards risk-taking.

The following section provides more detail on Prudential’s risk governance, risk culture and risk management process.

Risk governance and culture

Prudential’s risk governance comprises the Board, organisational structures, reporting relationships, delegation of authority, roles and responsibilities, and risk policies that the Group Head Office and the business units establish to make decisions and control their activities on risk-related matters. It includes individuals, Group-wide functions and committees involved in overseeing and managing risk.

The risk governance structure is led by the Group Risk Committee, supported by independent non-executives on risk committees of Material Subsidiaries. These committees monitor the development of the Group Risk Framework, which includes risk appetite, limits, and policies, as well as risk culture.

The Group Risk Committee reviews the Group Risk Framework and recommends changes to the Board to ensure that it remains effective in identifying and managing the risks faced by the Group. A number of core risk policies and standards support the Framework to ensure that risks to the Group are identified, assessed, managed and reported.

Culture is a strategic priority of the Board, who recognise its importance in the way that the Group does business. Risk culture is a subset of Prudential’s broader organisational culture, which shapes the organisation-wide values that Prudential uses to prioritise risk management behaviours and practices.

An evaluation of risk culture forms part of the Group Risk Framework and in particular seeks to identify evidence that:

 

—

Senior management in business units articulate the need for effective risk management as a way to realise long-term value and continuously support this through their actions;

—

Employees understand and care about their role in managing risk – they are aware of and discuss risk openly as part of the way they perform their role; and

—

Employees invite open discussion on the approach to the management of risk.

The Group Risk Committee also has a key role in providing advice to the Remuneration Committee on risk management considerations to be applied in respect of executive remuneration.

 

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Prudential’s Code of Conduct and Group Governance Manual include a series of guiding principles that govern the day-to-day conduct of all its people and any organisations acting on its behalf. This is supported by specific risk policies which require that the Group act in a responsible manner. This includes, but is not limited to, policies on anti-money laundering, financial crime and anti-bribery and corruption. The Group’s third-party supply policy ensures that human rights and modern slavery considerations are embedded across all of its supplier and supply chain arrangements. Embedded procedures to allow individuals to speak out safely and anonymously against unethical behaviour and conduct are also in place.

The risk management cycle

The risk management cycle comprises processes to identify; measure and assess; manage and control; and monitor and report on our risks.

 

Risk identification

Group-wide risk identification takes place throughout the year as the Group’s businesses undertake a comprehensive bottom-up process to identify, assess and document its risks. This concludes with an annual top-down identification of the Group’s key risks, which considers those risks that have the greatest potential to impact the Group’s operating results and financial condition and is used to inform risk reporting to the risk committees and the Board for the year.

Our risk identification process also includes the Group’s Own Risk and Solvency Assessment (ORSA), as required under Solvency II, and horizon-scanning performed as part of our emerging risk management process.

In accordance with provision C.2.1 of the UK Code, the Directors perform a robust assessment of the principal risks facing the Company through the Group-wide risk identification process, Group ORSA report and the risk assessments undertaken as part of the business planning review, including how they are managed and mitigated.

 

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Reverse stress testing, which requires the Group to ascertain the point of business model failure, is another tool that helps it to identify the key risks and scenarios that may have a material impact on the Group.

The risk profile is a key output from the risk identification and risk measurement processes, and is used as a basis for setting Group-wide limits, management information, assessment of solvency needs, and determining appropriate stress and scenario testing. The Group’s annual set of key risks are given enhanced management and reporting focus.

Risk measurement and assessment

All identified risks are assessed based on an appropriate methodology for that risk. All quantifiable risks, which are material and mitigated by holding capital, are modelled in the Group’s internal model, which is used to determine capital requirements under Solvency II and our own economic capital basis. Governance arrangements are in place to support the internal model, including independent validation and processes and controls around model changes and limitations.

Risk management and control

The control procedures and systems established within the Group are designed to manage the risk of failing to meet business objectives and are detailed in the Group risk policies. These focus on aligning the levels of risk-taking with the achievement of business objectives and can only provide reasonable, and not absolute assurance, against material misstatement or loss.

The management and control of risks are set out in the Group risk policies, and form part of the holistic risk management approach under the Group’s ORSA. These risk policies define:

 

—

The Group’s risk appetite in respect of material risks, and the framework under which the Group’s exposure to those risks is limited;

—

The processes to enable Group senior management to effect the measurement and management of the Group material risk profile in a consistent and coherent way; and

—

The flows of management information required to support the measurement and management of the Group’s material risks and to meet the needs of external stakeholders.

The methods and risk management tools Prudential employs to mitigate each of our major categories of risks are detailed in the further risk information section below.

Risk monitoring and reporting

The identification of the Group’s key risks informs the management information received by the Group risk committees and the Board. Risk reporting of key exposures against appetite is also included, as well as ongoing developments in other key and emerging risks.

Risk appetite, limits and triggers

The extent to which Prudential is willing to take risk in the pursuit of its business strategy and objective to create shareholder value is defined by a number of qualitative and quantitative expressions of risk appetite, operationalised through measures such as limits, triggers and indicators. The Group Risk function is responsible for reviewing the scope and operation of these risk appetite measures at least annually to determine that they remain relevant. The Board approves all changes made to the Group’s aggregate risk appetite, and has delegated authority to the Group Risk Committee to approve changes to the system of limits, triggers and indicators.

Group risk appetite is set with reference to economic and regulatory capital, liquidity and earnings volatility which is aimed at ensuring that an appropriate level of aggregate risk is taken. Appetite is also defined for the Group’s financial and non-financial risks. Further detail is included in sections 5 and 6, as well as covering risks to shareholders, including those from participating and third-party business. Group limits operate within these expressions of risk appetite to constrain material risks, while triggers and indicators provide further constraint and defined points for escalation.

Capital requirements

Limits on capital requirements aim to ensure that the Group meets its internal economic capital requirements, achieves its desired target rating to meet its business objectives, and ensures that supervisory intervention is not required. The two measures used at the Group level are Solvency II capital requirements and internal economic capital (ECap) requirements. In addition, capital requirements are monitored on local statutory bases.

The Group Risk Committee is responsible for reviewing the risks inherent in the Group’s business plan and for providing the Board with input on the risk/reward trade-offs implicit therein. This review is supported by the Group Risk function, which uses submissions from our local business units to calculate the Group’s aggregated position (allowing for diversification effects between local business units) relative to the aggregate risk limits.

 

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Liquidity

The objective of the Group’s liquidity risk appetite is to ensure that the Group is able to generate sufficient cash resources to meet financial obligations as they fall due in business-as-usual and stressed scenarios. Risk appetite with respect to liquidity risk is measured using a Liquidity Coverage Ratio (LCR) which considers the sources of liquidity against liquidity requirements under stress scenarios.

Earnings volatility

The objectives of the Group’s appetite and aggregate risk limits on earnings volatility seek to ensure that variability is consistent with the expectations of stakeholders; that the Group has adequate earnings (and cash flows) to service debt and expected dividends and to withstand unexpected shocks; and that earnings (and cash flows) are managed properly across geographies and are consistent with funding strategies. The volatility of earnings is measured and monitored on operating profit and EEV operating profit bases, although IFRS and EEV total profits are also considered.

B.3.2 Risk function

The Group’s risk governance arrangements, which support the Board, the Risk Committee and the Audit Committee, are based on the principles of the ‘three lines of defence’ model: risk taking and management, risk control and oversight, and independent assurance.

Within the three lines of defence model, the Risk function is structurally independent of the First Line and is responsible for risk control and oversight. While the First Line has responsibility for risk taking which is managed within clear parameters, the Risk function assists the Board to formulate, and then implement, the approved Risk Appetite and Limit Framework, risk management plans, risk policies, risk reporting and risk identification processes. The Risk function also reviews and assesses the risk taking activities of the First Line, where appropriate, challenging the actions being taken to manage and control risks and approving any significant changes to the controls.

Broadly, the Risk function has the following responsibilities:

 

—

Coordinating identification and assessment of key risks to establish the risk profile used as a basis for setting qualitative risk appetite statements and quantitative limits, management information received by the risk committees and the Board, assessment of solvency needs and determining appropriate stress and scenario testing;

—

Providing overall coordination and control of the effectiveness and efficiency of risk management processes and systems;

—

Supporting the Board and management in embedding and maintaining a supportive culture in relation to risk management;

—

In terms of the design and implementation of the internal model, Risk delegates operational and development aspects to the Actuarial function, particularly with respect to the risk modelling, methodology and assumptions underlying the solvency calculation. Through oversight and the internal model validation process, Risk ensures that the development of the internal model is within the framework of model governance and remains fit for purpose;

—

Reporting on material exposures against risk appetite which also includes ongoing developments in Group’s top and emerging risks;

—

Providing input and review of public and regulatory disclosures, such as the annual Solvency and Financial Condition Report (SFCR);

—

Performing and documenting ORSA, undertaking stress and scenario testing including Reverse Stress Testing and informing key areas of risk based decision making; and

—

Considering material findings from regulatory reviews and interactions with regulators which impact on risk governance or risk management processes.

In order to fulfil these responsibilities, Risk often liaises with other functions (eg Actuarial and Compliance) to provide technical expertise or advice throughout the risk management cycle.

B.3.3 Internal model

The Solvency II internal model is a key risk management tool and is used to calculate the Solvency II and ECap capital requirements.

Scope of the internal model

For calculating Group Solvency Capital Requirement (SCR), Prudential adopts a combination of the following two methods:

 

—

Method 1: the Accounting Consolidation method; and

—

Method 2: the Deduction and Aggregation method.

 

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Method 1 applies to all related undertakings of the Group (except for the US insurance undertakings discussed below). These undertakings include:

 

—

The insurance and reinsurance undertakings in the UK and Asia, for which the assets and liabilities are valued on a Solvency II basis; and

—

Asset managers and unregulated entities, valued using sectoral rules and notional sectoral rules respectively.

Method 2 applies to the US insurance undertakings including: Brooke Life Insurance Company, Jackson National Life Insurance Company, Jackson National Life Insurance Company of New York and Squire Reassurance Company II. For these entities the Solvency II surplus is valued under the US local Risk Based Capital regime, on the basis of the US provisional equivalence.

Internal model governance and controls

The Prudential plc Board is responsible for the governance and oversight of the internal model supported by the Group Risk Committee, Group Executive Risk Committee and Senior Management.

The duties of the Group Risk Committee include:

 

—

Annually reviewing the overall effectiveness of the internal model;

—

Reviewing and approving the overall methodology and key assumptions used in the internal model for determining economic and regulatory capital requirements for the Group; and

—

Reviewing the appropriateness of any proposed major change in the internal model and making recommendations to the Board as required.

The Group Executive Risk Committee has established two sub-committees to monitor the development, implementation and maintenance of the internal model:

 

—

Technical Actuarial Committee (TAC): The TAC is responsible for setting the methodology and assumptions for valuing the Group’s assets, liabilities and capital requirements under Solvency II and the Group’s internal economic capital basis; and

—

Solvency II Technical Oversight Committee (STOC): The STOC is responsible for the overall governance and oversight of the group-wide Solvency II internal model. Its key objectives are to ensure that the internal model remains compliant with regulatory requirements, operates effectively and is appropriate for use across the Group.

Equivalent committees are in place within M&GPrudential and Prudential Corporation Asia to provide appropriate oversight around the internal model at business unit level, with direct reporting and escalation in place between Group and business unit committees where required.

There is a consistent group-wide documentation framework that applies to Solvency II policies, standards and documentation and specifies group-wide standards in relation to document maintenance, documentation of expert judgement and document management and control. This ensures that the internal model is well documented to the level where a third party can understand the design and objectives of the internal model and any expert judgment applied and potentially reproduce the results.

Material changes to the internal model governance

The Model Change Policy was updated in the period. The policy formed part of the Major Model Change application in 2017, as approved by the PRA on 19 April 2018. The changes were a redesign of the process for classification of model change and a revision to the materiality threshold for the classification, in addition to a number of clarifications being made throughout the Policy. Otherwise, there have been no material changes to the internal model governance during the reporting period.

Validation process

Internal model validation (IMV) is a key aspect of the system of governance for the internal model. The Group Risk Model Oversight (GRMO) function within Group Risk provides independent assurance that the internal model remains fit for purpose. The objective of GRMO is to carry out an ongoing programme of risk-based assurance activity that independently supports both the Solvency II regulatory requirements and, where applicable, the internal governance requirements in respect of other non-regulatory internal model metrics, such as ECap. The process aims to provide assurance as to the reliability of the internal model for senior management and the Board, as well as acting as an incentive for the model’s ongoing improvement. A regular cycle of validation is currently in place, and regularly reports to STOC in respect of the methodology and calibration of the internal model. Group-wide Operating Standards (GwOS) support the Group governance policies for internal model governance, providing additional details around specific requirements that the Group Head Office and business units must meet.

 

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B.3.4 Own Risk and Solvency Assessment (ORSA)

The Own Risk and Solvency Assessment (ORSA) is the ongoing process of identifying, assessing, controlling, monitoring and reporting the risks to which the business is exposed, and of assessing the capital necessary to ensure that the Group’s solvency needs are met at all times.

The Group ORSA Report consolidates the analysis and outcomes of these processes and provides a quantitative and qualitative assessment of the Group’s risk profile and solvency needs, on a forward looking basis, incorporating the Group’s strategy and business plan. The report is prepared at least annually, and out of cycle if there is a significant change in the Group’s risk profile which requires a re-evaluation of the risks and solvency position of the Group.

ORSA related processes and the timing of the Group ORSA Report are linked to key strategic decision making processes.

The Group ORSA Report informs the Group Risk input into the Board Strategy Away Day, which sets the strategic direction and basis for the next Business Plan. The Risk Assessment of the Business Plan is then a key ORSA component and inputs into the next Group ORSA Report, and the cycle continues.

The table below sets out the key responsibilities of the ORSA stakeholders in the production of the ORSA report.

 

Stakeholder		Key responsibilities
Prudential plc Board		Approving the Group ORSA Report for submission to the PRA
Group Risk Committee		Advising the plc Board on the review of the Group ORSA report
Group Executive Risk Committee		Reviewing the ORSA report ahead of the Group Risk Committee
Group Chief Risk Officer		Ownership of the Group ORSA report

The Group’s risk management system is designed to ensure adequate protection of policyholder and other stakeholder interests. Within this risk management system, the Group holds capital with the objective of ensuring that the aggregate risk of not being able to meet liabilities as they fall due is kept to an acceptably low level. To meet this objective, the Group calculates capital requirements on a number of different bases including regulatory and internal bases, and has set out risk appetite relating to a number of these measures.

The Group’s key capital metrics are:

 

—

ECap: the internal capital measure that has specifically been developed to reflect management’s view of the economic risks to which the Group is exposed and the capital available to support these risks;

—

Group regulatory capital: Solvency II is the Group’s current regulatory capital basis, determined using the Group’s internal model, calibrated to the rules and requirements of the Solvency II directive;

—

Local solvency: local solvency requirements refer to the capital that individual Group subsidiaries are required to hold based on applicable local statutory regulations. Business unit requirements are monitored at the Group as they are key drivers of business unit remittances and injections.

The Group announced in August 2018 that the Hong Kong Insurance Authority would be the group-wide supervisor after the demerger, and the Group will be regulated under a new Group-wide Supervisory framework which is currently under development.

B.4 Internal control system

B.4.1 Overview

The Board is responsible for ensuring that an appropriate and effective system of internal control and risk management is in place across the Group. The framework of risk management and internal controls centres on clear delegated authorities to ensure Board oversight and control of important decisions. The framework is underpinned by the Group Code of Business Conduct, which sets out the ethical standards the Board requires of itself, employees, agents and others working in the Group. The framework is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss.

The Group Governance Manual (the Manual) sets out delegated authorities and establishes the requirements for subsidiaries to seek approvals from or report to Group Head Office. Group-wide standards are established through policies and other governance arrangements. These policies are also included within the Manual. Internal controls and processes, based on the provisions established in the Manual, are in place across the Group. These include controls covering the preparation of financial reporting. The operation of these controls and processes facilitates the preparation of reliable financial reporting and the preparation of local and consolidated financial statements in accordance with the applicable accounting standards, and requirements of the Sarbanes-Oxley Act. These controls include certifications by the chief executive and chief financial officer of each business unit with respect to the accuracy of information provided for use in preparation of the Group’s consolidated financial reporting, and the assurance work carried out in respect of US reporting requirements.

 

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The Board has delegated authority to the Audit Committee to review the framework and effectiveness of the Group’s systems of internal control. The Audit Committee is supported in this responsibility by the assurance work carried out by Group-wide Internal Audit and the work of the business unit audit committees, which oversee the effectiveness of controls in each respective business unit.

Formal review and effectiveness of controls

Formal review of controls

A formal evaluation of the systems of internal control and risk management is carried out at least annually. Prior to the Board reaching a conclusion on the effectiveness of the systems in place, the full report is considered by the Disclosure Committee and Audit Committee, with risk-specific disclosures within the report also reviewed by the Risk Committee. This evaluation takes place prior to the publication of the Annual Report.

As part of the evaluation, the chief executive and chief financial officer of each business unit, including Group Head Office, certify compliance with the Group’s governance policies and the risk management and internal control requirements. The Group Risk function facilitates a review of the matters identified by this certification process. This includes the assessment of any risk and control issues reported during the year, risk and control matters identified and reported by the other Group oversight functions and the findings from the reviews undertaken by Group-wide Internal Audit, which carries out risk-based audit plans across the Group. Issues arising from any external regulatory engagement are also taken into account.

For the purposes of the effectiveness review, the Group has followed the FRC Guidance on Risk Management, Internal Control and Related Financial and Business Reporting. In line with this guidance, the certification provided above does not apply to certain material joint ventures where the Group does not exercise full management control. In these cases, the Group satisfies itself that suitable governance and risk management arrangements are in place to protect the Group’s interests. However, the relevant Group company which is party to the joint venture must, in respect of any services it provides in support of the joint venture, comply with the requirements of the Group’s internal governance framework.

Effectiveness of controls

In accordance with provision C.2.3 of the UK Code and provisions C.2.1 and C.2.2 of the HK Code, the Board reviewed the effectiveness and performance of the system of risk management and internal control during 2018. This review covered all material controls, including financial, operational and compliance controls, risk management systems, budgets and the adequacy of the resources, qualifications, experience of staff of the Group’s accounting, internal audit and financial reporting functions. The review identified a number of areas for improvement, particularly in respect of the general IT control environment, and the necessary actions that have been or are being taken. The Audit Committees at Group and subsidiary level collectively monitor outstanding actions regularly and ensure sufficient resource and focus is in place to resolve them within a reasonable time frame.

The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, which has been in place throughout the period and up to the date of this report, and confirms that the system remains effective.

B.4.2 Compliance function

Overview

The roles and responsibilities of Prudential’s compliance functions are outlined in the Group Compliance Policy (within the Group Governance Manual), which requires all business units to maintain appropriate compliance arrangements. The Policy requires all business units to include the following activities within the role and responsibilities of their compliance functions:

 

—

Advising and guiding the business unit management and appropriate governance committees on compliance with all applicable laws, regulations and administrative provisions;

—

Advising and guiding the business unit management and appropriate governance committees on legal and regulatory change, including the likely impact on the business unit;

—

Coordinating business unit regulatory compliance risk identification and assessments;

—

Advising on the design of policies, procedures, systems and controls to promote compliance within the business;

—

Advising on compliance training;

—

Risk-based oversight, monitoring and review of business unit regulatory compliance arrangements; and

—

Reporting regulatory compliance matters, regulatory compliance risk and regulatory change.

 

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Under the Policy, a ‘compliance function’ may be any department which provides such ‘second line’ oversight in respect of specific regulatory compliance risks. Prudential’s compliance functions assist management in identifying, assessing and reporting on regulatory compliance risks and the development of compliance plans.

Management information and reporting

The Group Compliance Policy provides for three types of management information:

 

(i)	Regular compliance reporting: business units provide Group Compliance with the following:

—

Annual attestation of compliance with Group Compliance Policy;

—

Business unit Compliance Plan on annual basis;

—

Quarterly reporting on progress and updates to the plan; and

—

Regular reporting which includes at a minimum significant communications with regulators.

(ii)	Ad-hoc reporting of issues raised by regulators, Board Committees or Executive management; and

(iii)

Escalation of significant incidents or issues including material compliance events which could have a significant impact to the business unit or potentially impact the Group’s relationship with its lead UK regulators.

B.5 Internal audit function

How the internal audit function is implemented

The work of Group-wide Internal Audit is part of the overall Internal Control Framework of the Prudential Group in that it operates as a ‘third-line of defence’ in providing independent and objective internal control assurance.

Group-wide Internal Audit’s primary objective is to assist the Board, Group Executive Committee, Group Audit Committee and Group Risk Committee in protecting the assets, reputation and sustainability of the organisation through the assessment and reporting of the overall effectiveness of risk management, control and governance processes across the Group; and by appropriately challenging Executive Management to improve the effectiveness of those processes.

The audit department is led by the Group-wide Internal Audit Director, who is accountable to the Group Audit Committee through a functional reporting line to the Chair of the Committee and, for management purposes, to the Group Chief Executive Officer. In accordance with the Group-wide Internal Audit internal audit policy (‘the Charter’), each of the Group’s business units has an internal audit team, the heads of which report to the Group-wide Internal Audit Director. The function also has a Quality Assurance Director, whose primary role is to monitor and evaluate adherence to industry practice guidelines and Group-wide Internal Audit’s own standards and methodology. Internal audit resources, plans, budgets and its work are overseen by both the Group Audit Committee and the relevant Business Unit Audit Committee.

Group-wide Internal Audit activity is not restricted in scope in any way and is empowered by the Group Audit Committee to audit all parts of the Prudential Group and has full access to any of the organisation’s records, physical properties and personnel. All employees are required to assist Group-wide Internal Audit in fulfilling its roles and responsibilities.

The Group-wide Internal Audit Director submits an annual audit plan to the Group Audit Committee for review and approval. Individual business unit audit plans are also agreed with the relevant business unit Audit Committee. The annual audit plan is based on prioritisation of the identified ‘audit universe’ using an ‘audit needs’ risk-based methodology, incorporating input from Group and business unit stakeholders and is subject to ongoing review.

Group-wide Internal Audit adheres to the Institute of Internal Auditors requirements as set out in the Institute of Internal Auditors’ ‘Code of Ethics’ and ‘International Standards for the Professional Practice of Internal Auditing’, and the Chartered Institute of Internal Auditor’s revised guidance, ‘Effective Internal Audit in the Financial Services Sector’.

Group-wide Internal Audit adheres to the requirements for internal audit functions set out in the Solvency II Directive 2009/138/EC (Level 1 text) Article 47 and Delegated Regulation (EU) 2015/35 (Level 2 text) Article 271.

Group-wide Internal Audit adheres to the requirements of the Senior Insurance Managers Regime and the Group’s Fit and Proper Policy.

How the internal audit function maintains its independence and objectivity

Group-wide Internal Audit maintains its independence and objectivity in the discharge of its responsibilities, and appropriate reporting lines are in place to support this goal:

 

—

The audit department is led by the Group-wide Internal Audit Director, who is accountable to the Group Audit Committee through a functional reporting line to the Chair of the Committee and, for management purposes, reports to the Group Chief Executive Officer. The Group-wide Internal Audit Director also has direct access to the Chairman of the Board;

 

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B.  System of Governance

    

 

—

The Group-wide Internal Audit Director reports audit related matters to the Group Audit Committee and communicates directly with the Group Audit Committee through attendance at its meetings, as well as attending those of each business unit Audit Committee;

—

The Group-wide Internal Audit Director, in consultation with the Group Chief Executive Officer, is empowered to attend and observe all or part of Group Executive Committee meetings and any other key management decision making committees and activities, as appropriate;

—

In accordance with the Group-wide Internal Audit Charter, each of the Group’s business units has an internal audit team, the heads of which report to the Group-wide Internal Audit Director as functional head, while recognising local legislation or regulation, as appropriate. The Group-wide Internal Audit Director will consider the independence, objectivity and tenure of the Audit Directors when performing their appraisals;

—

The function also has an autonomous Quality Assurance Director, whose primary role is to monitor and evaluate adherence to industry practice guidelines and Group-wide Internal Audit’s own standards and methodology;

—

The assessment of the adequacy and effectiveness of the Risk Management, Compliance and Finance functions is within the scope of Group-wide Internal Audit and, as such, Group-wide Internal Audit is independent of these functions and is neither responsible for nor part of them;

—

Group-wide Internal Audit staff are expected to exhibit the highest level of professional objectivity in carrying out their duties; must make a balanced assessment of all relevant circumstances; remain impartial; and seek to avoid any professional or personal conflict of interest; and

—

Group-wide Internal Audit has a Conflicts of Interest register. Potential conflicts are recorded and monitored by the Group-wide Internal Audit Quality Assurance Director, including a quarterly review of reported conflicts to assess appropriate management oversight. Where deemed necessary, the Quality Assurance team reviews audits where a potential conflict has been identified to ensure conformance with Group-wide Internal Audit policy.

B.6 Actuarial function

Prudential’s Group Actuarial Function is responsible for the activities set out in Article 48 of the Solvency II Directive. Overall responsibility for these activities rests with the Group Actuarial Function Holder. These functional responsibilities are carried out locally by the UK Chief Actuary (who is the key function holder for Actuarial for The Prudential Assurance Company Limited), the Prudential Corporation Asia Regional Director Actuarial, and the Jackson Chief Actuary. The Group Technical Actuarial Committee, which is a sub-committee of the Group Executive Risk Committee, is the management governance body for reviewing the activities undertaken by the Group Actuarial Function.

An annual report on the activities undertaken by the Group Actuarial Function is provided to the Group Audit Committee. The report includes details of any deficiencies identified and recommendations as to how such deficiencies should be remedied.

The key activities undertaken by the Group Actuarial Function are summarised below.

Coordination and oversight of the calculation of technical provisions

The Group Actuarial Function applies a range of methods to gain comfort that the calculations of technical provisions are reliable and adequate on an ongoing basis, including: maintenance of Group-wide policies and standards requiring business unit attestations, Group and business unit review of methodologies and assumptions and business unit review of data and models.

An annual report on the reliability and adequacy of the calculation of Solvency II technical provisions is provided to the Group Audit Committee to support their review of the Group’s annual Quantitative Reporting Templates.

Under US equivalence for Solvency II, Jackson’s regulatory available capital and risk based capital are reflected in the Group’s consolidated Solvency II results. Within Jackson’s regulatory available capital, the statutory liabilities are valued in line with local regulatory requirements (rather than Solvency II requirements) and are signed off by the Jackson Appointed Actuary as required by US regulations. Jackson’s liabilities are therefore not part of the Group’s Solvency II technical provisions and are not within the scope of the Group Actuarial Function’s oversight activities under Article 48 of the Solvency II Directive.

Opinions on the overall underwriting policy and the adequacy of reinsurance arrangements

Annual opinions on the Group underwriting policy and the adequacy of reinsurance arrangements are provided to the Group Executive Risk Committee, with any material issues escalated to the Group Risk Committee. These opinions are based on reviews of Group policies governing underwriting, supported by business unit actuarial opinions on the appropriateness of local underwriting policies and the adequacy of reinsurance within the business units.

 

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B.  System of Governance

    

 

Contribution to the effective implementation of the risk management system

The Group Actuarial Function contributes to the development and maintenance of the Group’s Solvency II internal model, and the related risk modelling calibrations, within Group Risk’s governance framework. This work also includes development and maintenance of the Group’s multi-term economic capital model, in line with Group Risk’s requirements. Oversight of this activity is provided by the Group Executive Risk Committee and the Group Risk Committee.

Other activities

In addition to fulfilling the tasks of the Actuarial Function at Group level, the Group Actuarial Function has supported the Group Audit Committee in its responsibilities with respect to external financial reporting and has provided input into the methodologies and best estimate assumptions used for IFRS and European Embedded Value (EEV) reporting.

 

B.7	Outsourcing

B.7.1 Description of the Group outsourcing and third-party supply policy

Third-party management is embedded within Prudential’s Group Risk Framework. It forms part of the Group’s Operational Risk Categorisation and a qualitative operational risk appetite statement for third-party management is in place. Underpinning the appetite statement, Limits and Triggers exist which are monitored regularly by business units and the Group.

Additionally, the Group has requirements for the management of outsourcing and third-party supply arrangements through a Group Third-Party Supply Policy. The policy is well established within the Group Risk Framework and has objectives to:

 

—

Provide a consistent Group-wide definition of third-party supply, outsourcing and intra-group outsourcing, and provide clarification of what may be considered ‘critical’;

—

Summarise the Group’s due diligence/selection criteria for critical outsource and third-party supply arrangements, including whether the arrangement breaches any data protection regulations or other similar laws;

—

Define the minimum contractual requirements for outsourcing and third-party supply arrangements and critical outsourcing and third-party supply arrangements;

—

Describe the management and monitoring requirements for critical outsourcing and third-party supply arrangements, including the required governance structures, associated roles and responsibilities and supervisory authority notification requirements;

—

Define reporting and escalation principles at business unit and Group levels for critical outsourcing and third-party supply arrangements; and

—

Define the additional requirements where a critical third-party supply arrangement is classified as Outsourcing, including the notification requirements to the supervisory authority.

Prudential is committed to making sure the Group has a robust, well managed outsourced and third-party supplier network, with established requirements for the management of outsourcing and third party supply arrangements across the Group, including contractual requirements, the ongoing monitoring of such relationships and the reporting and escalation framework that supports the identification of critical supplier arrangements. Business units may also adopt their own supporting policies and reporting procedures at a local level.

As part of the Group’s minimum standards, all business units are expected to take into consideration local legislation, including (where relevant) the requirements of the UK Modern Slavery Act and local and international law regarding the detection and prevention of Modern Slavery. As part of the selection process for a possible critical outsource or third party supply arrangement, this would include an assessment of the risks of the provider breaching the United Nations Universal Declaration of Human Rights.

Business units have the capacity to make the purchasing decisions that are relevant for their individual needs and market. However, the overall process is informed by the Group standards.

Business units and their respective procurement teams are expected to undertake due diligence before engaging a new supplier, especially critical suppliers. As part of the selection process, all of the employees are expected to ensure that third-party supply arrangements are entered into with consideration of the content of the Group Code of Business Conduct and in compliance with the Group’s Outsourcing and Third-Party Supply Policy. Supplier relationships are also actively managed, with ongoing due diligence, review meetings and, if required, audits.

 

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B.  System of Governance

    

 

B.7.2 Group’s profile of critical or important operational functions or activities

Across the Group, the most common category of critical suppliers and outsourcing arrangements is Support Services and Administration which broadly cover activities such as, but not limited to, human resources, data management, employee healthcare services, general office and customer services. This is followed closely by Finance and Investments which is mainly comprised of investment operations, fund administration and banking facilities such as payments and custodian services. Technology and Infrastructure comprise the remaining types of arrangements.

In 2018, M&GPrudential signed a new partnership with Tata Consultancy Services (TCS), a global leader in IT, business process and digital services, to enhance service for our UK and Europe savings and retirement customers. This included the administration of over four million life and pensions contracts being moved from Capita to Diligenta, the FCA-regulated subsidiary of TCS, on 1 August 2018, with a contractual commitment of full transfer by 2022. In addition, further services primarily related to the UK and Europe’s annuities business transferred to Diligenta on 1 October 2018. Responsibility for the operation of some of the Group’s IT infrastructure transferred to TCS on 1 May 2018.

The tables below, as at 31 December 2018, which are from the perspective of our material business units, show the types of arrangements (including intra-group arrangements) taking place across the Group and the jurisdiction of service providers.

Table 1. Types of arrangements across the Group by business unit receiving the service

 

		Asia Operations		Group Head Office		UK and Europe Operations		US Operations
Finance and Investments		●		●		●		●
Infrastructure		●				●
Support Services and Administration		●		●		●		●
Technology		●		●		●		●

Table 2. Types of intra-group arrangements across the Group by business unit receiving the service

 

		Asia Operations		Group Head Office		UK and Europe Operations		US Operations
Finance and Investments		●				●		●
Infrastructure						●
Support Services and Administration		●		●		●		●
Technology		●		●

The majority of intra-group arrangements relate to Finance and Investments services, mainly comprised of fund/mandate administration where the Group utilises the capability of its internal asset managers. Infrastructure services are provided to UK businesses by Group Corporate Property. Support Services and Administration and Technology services are also provided across many of our Group entities.

Table 3. Jurisdiction of non-local service providers by type of arrangements and business unit

 

				Jurisdiction of service providers
				Asia		EU		South Africa		US
Finance and Investments		Asia Operations		●		●		●		●
Support Services and Administration				●		●				●
Technology				●
Support Services and Administration		UK and Europe     Operations		●

B.8 Any other information

Information on the Group’s assessment of the effectiveness of systems of internal control and risk management is provided in Section B.4.1 above.

 

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C.  Risk Profile

    

 

C. Risk Profile

(Unaudited)

ECap is the primary risk metric for monitoring the Group’s aggregate risk profile for risks that can be quantified and against which capital is held. It provides a framework for measuring risks on a common economic basis across the Group and is designed to reflect the long-term nature of the business and risks the Group is exposed to.

The calibration of the ECap metric, however, does not fully comply with the requirements of the Solvency II Directive and therefore is not used for Pillar 1 regulatory purposes. The Solvency II Pillar 1 SCR is a risk-based measure calculated using the Group’s internal model that reflects the specifics of the Group’s businesses and risks, and is calibrated to the rules and requirements of the Solvency II Directive. The PRA has also approved the use of a Deduction and Aggregation method as set out in Article 233 of the Solvency II Directive to incorporate the Group’s US insurance entities, which are included at 150 per cent of the US Risk Based Capital Company Action Level in the calculation of the Group SCR. The economic capital requirements and SCR provide an assessment of the risk profile of the Group and its business units.

The most material differences between Prudential’s ECap metric and the Pillar 1 SCR are set out below.

 

—

Treatment of with-profits funds: Prudential’s SCR is considered on a consolidated basis, incorporating both shareholder and policyholder funds capital requirements whereas the ECap metric is only considered from a shareholder perspective allowing for the economic interest in the policyholder funds;

—

Multi-term risk modelling: Under Solvency II Pillar 1, the SCR allows for an assessment of risk over a single-year time horizon. Prudential’s internal view is that many risks (eg longevity risk, credit risk, etc) are more appropriately considered over a longer time period and this view is reflected in the multi-term ECap calibration approach;

—

Treatment of Jackson: Capital required in respect of the Group’s US insurance entities is approved for inclusion in the SCR using the Deduction and Aggregation method with no allowance for diversification of risks with Prudential’s other business units. Under the ECap metric, the US insurance entities are assessed under Prudential’s economic capital model which allows for interaction/diversification across all business units;

—

Treatment of the risk margin: The ECap metric uses an alternative cost of capital for calculating the risk margin. Under the ECap metric, a risk margin is held only for risks which are subject to a single-year time horizon;

—

Liability discount rate: The ECap metric uses an economic ‘liquidity premium’ in addition to the discount rate for certain liabilities. This differs from the regulatory ‘matching adjustment’ and ‘volatility adjustment’ used under Solvency II; and

—

Asia surplus recognition: Compared to Solvency II Pillar 1, ECap uses a more economic definition of contract boundaries and no deductions are made to available capital due to ‘capital transferability’ tests.

While the above changes result in a different assessment of the level of risk between the ECap metric and the SCR, the material categories of risk are unchanged. The risk monitoring/mitigation actions outlined in this document are therefore considered appropriate under both bases.

The chart below shows the Group’s shareholder undiversified Solvency II SCR by risk category (including US insurance entities) to give an indication of the areas of key risk exposures:

 

 

 

The key risk exposures are discussed in the following sections.

 

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