SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of March, 2021
PRUDENTIAL PUBLIC LIMITED COMPANY
(Translation of registrant's name into English)
1 Angel Court, London,
England, EC2R 7AG
(Address
of principal executive offices)
Indicate
by check mark whether the registrant files or will file annual
reports
under
cover Form 20-F or Form 40-F.
Form
20-F X
Form 40-F
Indicate
by check mark whether the registrant by furnishing the
information
contained
in this Form is also thereby furnishing the information to
the
Commission
pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes
No X
If
"Yes" is marked, indicate below the file number assigned to the
registrant
in connection with Rule 12g3-2(b): 82-
NEWS RELEASE
03
March 2021
PRUDENTIAL PLC FULL YEAR 2020 RESULTS
DOUBLE-DIGIT INCREASE IN ASIA ADJUSTED OPERATING PROFIT AND
RECOVERY IN SALES IN H2 2020 CONFIRMATION OF PLANNED DEMERGER
TIMETABLE FOR JACKSON
Performance highlights on a constant (and actual) exchange rate
basis
●
Asia adjusted
operating profit2 up 13 per cent (12
per cent) to $3.7 billion
●
Asia embedded value
up 13 per cent3 to $44.2
billion
●
Asia 2020 full year
APE sales4
down (28) per cent5 to $3.7 billion,
with H2 APE sales4 20 per
cent10 up
on H1 2020
●
Pulse downloads
around 20 million as of February 20216, with $211 million
of sales referrals7 in 2020
●
Demerger of Jackson
expected to complete in the second quarter of 2021 with bank
finance now committed
●
Jackson local
statutory RBC ratio8 347 per cent at 31
December 2020 in line with guidance
●
Central costs
reduction of $180 million achieved with effect from 1 January
20219
●
Second interim
ordinary dividend of 10.73 cents per share, making 16.10 cents per
share for the full year
●
Considering raising
equity of $2.5-3 billion through global offering to institutions
and Hong Kong retail investors, after the demerger
Mike
Wells, Prudential plc’s Group Chief Executive, said:
“Facing challenging conditions, our people, working with our
valued partners, have performed extraordinary feats during 2020,
meeting the essential needs of our customers and communities,
innovating with new services, and delivering on our long-term
strategic priorities. With Covid-19 continuing to have a major
impact on many of our markets, I would like to pay tribute to all
my colleagues for their dedication.
“These
efforts are reflected in our operational performance in Asia. Our
agents and other distribution partners are employing virtual tools
with ever-increasing confidence. APE sales4 in the second half
of 2020 were 20 per cent10 higher than in the
first half of the year. Overall, Asia APE sales4 fell by (28) per
cent10
compared with 2019, largely as a result of a significant reduction
in sales in Hong Kong, where the border with Mainland China was
closed for much of 2020. Excluding Hong Kong, Asia APE
sales4
were down just (6) per cent10 in 2020. New
business profit11 was down for the
year, reflecting sales interruption especially in the first half
and in the higher-margin market of Hong Kong. During these
uncertain times, the Asia results are a great achievement by our
people and evidence of the high value that customers place on our
services.
“Our
digital transformation continues at pace, with downloads of Pulse,
our health and wealth super-app, now around 20 million6, up from just over 1
million in early 2020. Pulse not only meets important social needs
by making good healthcare more accessible, but has helped generate
APE sales4,7 of $211 million in
2020, substantially through referrals to agents.
“The
high quality of our in-force business, combined with the continued
loyalty of our existing customers, have supported a double-digit
rise in adjusted operating profit2 in Asia, up 13 per
cent10 to
$3.7 billion. Operating free surplus generation12 is up 8 per
cent10 in
Asia to $1.9 billion.
“Jackson,
our US business, delivered a 13 per cent increase in variable
annuity sales during 2020, which helped it maintain its leading
position in the US retail market13. This was more than
offset by lower institutional sales and lower sales of fixed and
fixed index annuity sales, as anticipated, following recent pricing
actions. Overall, Jackson APE sales4 fell by (13) per
cent to $1,923 million in 2020. US adjusted operating
profit1,2
was down (9) per cent compared with the prior year.
“We
are making good progress on the proposed separation of Jackson from
the Group. Committed term loan facilities are in place to ensure
Jackson has certainty that its targeted level of debt will be in
place at the time of the demerger, and we continue to expect to
complete the demerger in the second quarter of 2021, subject to
shareholder and regulatory approvals. We expect Jackson, under the
new management team led by Laura Prieskorn, to pursue a focused
strategy which prioritises optimisation and stability of capital
resources while protecting franchise value.
“The
proposed demerger will complete Prudential’s structural shift
from a diversified global group to a growth business focusing
exclusively on the unmet health, financial protection and savings
needs of people in Asia and Africa. In order to enhance financial
flexibility and de-lever the balance sheet, Prudential is
considering raising new equity of around $2.5-3 billion following
the completion of the Jackson demerger. Our preferred route is a
fully marketed global offering to institutional investors
concurrent with a public offering in Hong Kong to retail investors.
As an Asia focused company, the Group believes there are clear
benefits from increasing both its Asian shareholder base and the
liquidity of its shares in Hong Kong. The allocation of any
offering will take into account a number of criteria including the
interests of existing shareholders.
“We
have a resilient capital position, with a Group LCSM
surplus14
of $11.0 billion, equivalent to a cover ratio of 328 per
cent.
“While
Covid-19 will continue to create social disruption and market
volatility during 2021, the past year has proven our ability to
operate successfully in the pandemic environment, and in various
markets where social distancing rules are starting to be relaxed we
are seeing a recovery in activity. Over the longer term, the rising
prosperity of people in Asia and Africa, the scale of the unmet
need for the services we provide, our leadership positions in our
chosen markets and our ability to innovate at scale all give us
confidence that we can continue to outperform.”
Summary financials
|
2020 $m
|
2019 $m
|
Change on
AER basis
|
Change on
CER basis
|
Life new business profit from continuing
operations11
|
2,802
|
4,405
|
(36)%
|
(37)%
|
Operating free surplus generated from continuing
operations12
|
2,886
|
2,861
|
1%
|
1%
|
Adjusted operating profit from continuing
operations1,2
|
5,507
|
5,310
|
4%
|
4%
|
IFRS profit after tax from continuing operations1,15
|
2,185
|
1,953
|
12%
|
12%
|
|
|
|
|
|
|
31 December 2020
|
31 December 2019
|
|
Total
|
Per share
|
Total
|
Per share
|
EEV
shareholders’ funds
|
$54.0bn
|
2,070¢
|
$54.7bn
|
2,103¢
|
IFRS
shareholders’ funds
|
$20.9bn
|
800¢
|
$19.5bn
|
749¢
|
LCSM shareholder surplus over Group minimum capital
requirement14
|
$11.0bn
|
n/a
|
$9.5bn
|
n/a
|
Notes
1
Attributed to the
shareholders of the Group before deducting the amount attributable
to the non-controlling interests. This presentation is applied
consistently throughout the document.
2
In this press
release ‘adjusted operating profit’ refers to adjusted
IFRS operating profit based on longer-term investment returns from
continuing operations. This alternative performance measure is
reconciled to IFRS profit for the year in note B1.1 of the IFRS
financial statements.
3
On an actual
exchange rate basis.
4
APE sales is a
measure of new business activity that comprises the aggregate of
annualised regular premiums and one-tenth of single premiums on new
business written during the year for all insurance products,
including premiums for contracts designated as investment contracts
under IFRS 4. It is not representative of premium income recorded
in the IFRS financial statements. See note II of the Additional
unaudited financial information for further
explanation.
5
On both constant
and actual exchange rate bases.
6
As of 22 February
2021.
7
APE sales
substantially from full-premium products sold through referrals to
agents and a small amount of revenue from 37 new digital
products.
8
Representing the
RBC ratio of Jackson National Life that reflects the capital and
capital requirements of Jackson National Life and its subsidiaries,
including Jackson National Life NY.
9
Approximately half
of the corporate expenditure is incurred in sterling and our
assumptions forecast an exchange rate of £1=$1.2599. As
compared with head office expenditure of $(490) million in 2018 and
before a planned $10 million increase in Africa costs as previously
disclosed.
10
Year-on-year
percentage increases are stated on a constant exchange rate basis
unless otherwise stated.
11
New business
profit, on a post-tax basis, on business sold in the year,
calculated in accordance with EEV Principles.
12
Operating free
surplus generated from insurance and asset management operations.
For insurance operations, operating free surplus generated
represents amounts maturing from the in-force business during the
year less investment in new business and excludes non-operating
items. For asset management businesses, it equates to post-tax
operating profit for the year. Further information is set out in
‘movement in Group free surplus’ of the EEV basis
results.
13
LIMRA: through the
third quarter of 2020, Jackson accounted for 16.5% of new sales in
the U.S. retail variable annuity market and ranked number 1 in
variable annuity sales.
14
Shareholder surplus
over Group minimum capital requirement and estimated before
allowing for second interim ordinary dividend. Shareholder business
excludes the available capital and minimum requirement of
participating business in Hong Kong, Singapore and Malaysia.
Further information on the basis of calculation of the LCSM measure
is contained in note I(i) of the Additional unaudited financial
information.
15
IFRS profit after
tax from continuing operations reflects the combined effects of
operating results determined on the basis of longer-term investment
returns, together with short-term investment variances which for
2020 were driven by the negative effects in the US and Asia, and
gains arising on the reinsurance of fixed and fixed index annuity
business in the US and other corporate transactions.
Contact:
Media
|
|
Investors/analysts
|
|
Jonathan
Oliver
|
+44 (0)20 3977 9500
|
Patrick
Bowes
|
+44 (0)20 3977 9702
|
Tom
Willetts
|
+44 (0)20 3977 9760
|
William
Elderkin
|
+44 (0)20 3977 9215
|
Notes to editors:
a.
The results in this
announcement are prepared on two bases: International Financial
Reporting Standards (IFRS) and European Embedded Value (EEV). The
results prepared under IFRS form the basis of the Group’s
statutory financial statements. The supplementary EEV basis results
have been prepared in accordance with the amended European Embedded
Value Principles issued by the European Insurance CFO Forum in
2016. The Group’s EEV basis results are stated on a post-tax
basis and include the post-tax IFRS basis results of the
Group’s asset management and other operations. The IFRS and
EEV results are presented in US dollars and the basis of
translation is discussed in note A1 of the IFRS financial
statements. Period-on-period percentage increases are stated on a
constant exchange rate basis unless otherwise stated. Constant
exchange rates are calculated by translating prior period results
using the current period foreign exchange rate ie current period
average rates for the income statement and current period closing
rates for the balance sheet.
b.
EEV and adjusted
IFRS operating profit based on longer-term investment returns are
stated after excluding the effect of short-term fluctuations in
investment returns against long-term assumptions, which for IFRS in
2020 were driven by the negative effects in the US and Asia, and
gains arising on the reinsurance of fixed and fixed index annuity
business in the US and other corporate transactions. Furthermore,
for EEV basis results, operating profit based on longer-term
investment returns excludes the effect of changes in economic
assumptions and the mark-to-market value movement on core
borrowings. Separately on the IFRS basis, adjusted operating profit
also excludes amortisation of accounting adjustments arising
principally on the acquisition of REALIC completed in 2012. The
amounts shown are for continuing operations only (being Asia, US
and central operations including Africa but excluding M&G plc)
unless otherwise stated.
c.
Total number of
Prudential plc shares in issue as at 31 December 2020 was
2,609,489,702.
d.
We expect to
announce our 2020 Full Year Results to the London Stock Exchange
at 8.30am (UK time) on Wednesday, 3
March 2021.
A
pre-recorded presentation for analysts and investors will be
available on-demand from 8.30am (UK time) using the following link:
https://www.investis-live.com/prudential/6025193f49aa2a0e00f067f3/thsd
A copy of the script used in the recorded video will also be
available from 8.30am (UK time) on 3 March 2021 on Prudential plc's
website.
A
Q&A call for analysts and investors will be held on the same
day at 11.30am (UK time).
Registration
to a "listen in" only and online question facility
To register to listen into the
conference call and submit questions online, please do so via the
following link: https://www.investis-live.com/prudential/6005aa669a138810004417eb/omna
The call will be available to replay
afterwards using the same
link.
Dial-in
details
A dial-in facility will be available to listen
to the call and ask questions: please allow 15 minutes ahead of the
start time to join the call (lines open half an hour before the
call is due to start, ie from 11.00am (UK time)).
Dial-in: +44 (0) 20
3936 2999 (UK and international) / 0800 640 6441 (Freephone UK),
Participant access code: 085909. Once
participants have entered this code their name and company details
will be taken.
Transcript
Following the call a transcript will be
published on the results and business updates centre page of
Prudential plc's website on 5 March 2021.
Playback
facility
Please use the following for a playback facility: +44
(0) 20 3936 3001 (UK and international), replay code 901333. This will be
available from approximately 3.00pm (UK time) on 3 March 2021 until
11.59pm (UK time) on 17 March 2021.
e.
2020
Second interim ordinary dividend
|
Ex-dividend
date
|
25 March 2021 (UK, Hong Kong and Singapore)
|
|
Record
date
|
26
March 2021
|
|
Payment
of dividend
|
14 May
2021 (UK, Hong Kong and
ADR holders)
On or
about 21 May 2021 (Singapore)
|
Prudential plc is
an Asia-led portfolio of businesses focused on structural growth
markets. The business helps people get the most out of life through
life and health insurance, and retirement and asset management
solutions. Prudential plc has more than 20 million customers and is
listed on stock exchanges in London, Hong Kong, Singapore and New
York. Prudential plc is not affiliated in any manner with
Prudential Financial, Inc. a company whose principal place of
business is in the United States of America, nor with The
Prudential Assurance Company Limited, a subsidiary of M&G plc,
a company incorporated in the United Kingdom.
g.
Discontinued
operations
Throughout this
results announcement ‘discontinued operations’ refers
to the demerged UK and Europe operations (referred to as M&G
plc). All amounts presented refer to continuing operations unless
otherwise stated, which reflect the Group following the demerger of
M&G plc in the fourth quarter of 2019, and do not give effect
to the proposed demerger of Jackson.
h.
Regulatory
disclosures
Pursuant to
Practice Note 15 (“PN15”) to the Rules Governing the
Listing of Securities on The Stock Exchange of Hong Kong Limited
(the “Hong Kong Listing Rules”), the Hong Kong Stock
Exchange has confirmed that Prudential may proceed with the
proposed demerger of Jackson.
Jackson
is progressing the registration process with the U.S. Securities
and Exchange Commission (“SEC”) in connection with the
proposed demerger. The proposed demerger is subject, among other
things, to a registration statement under the Securities Exchange
of 1934 being declared effective by the SEC.
In
accordance with the requirements of paragraph 3(f) of PN15,
Prudential proposes to give due regard to the interests of its
shareholders by providing qualifying shareholders with an assured
entitlement to shares in Jackson by way of a distribution in specie
of shares in Jackson (or cash alternative under certain
circumstances) in proportion to their respective shareholdings in
Prudential, if the proposed demerger proceeds. Details of the terms
of the distribution in specie have not yet been finalised, and will
be announced by Prudential in due course. As the demerger will be
implemented by way of a distribution in specie of shares in Jackson
by Prudential, the demerger will not constitute a transaction for
Prudential under Chapter 14 of the Hong Kong Listing
Rules.
i.
Forward-Looking Statements
This
announcement may contain 'forward-looking statements' with respect
to certain of Prudential's plans and its goals and expectations
relating to its and Jackson’s future financial condition,
performance, results, strategy and objectives. Statements that are
not historical facts, including statements about Prudential's
beliefs and expectations and including, without limitation,
statements containing the words 'may', 'will', 'should',
'continue', 'aims', 'estimates', 'projects', 'believes', 'intends',
'expects', 'plans', 'seeks' and 'anticipates', and words of similar
meaning, are forward-looking statements. These statements are based
on plans, estimates and projections as at the time they are made,
and therefore undue reliance should not be placed on them. By their
nature, all forward-looking statements involve risk and
uncertainty.
A number of important factors could cause
Prudential's and Jackson’s actual future financial condition
or performance or other indicated results of the entity referred to
in any forward-looking statement to differ materially from those
indicated in such forward-looking statement. Such factors include,
but are not limited to, the ability to complete the proposed
demerger of Jackson Financial Inc. on the anticipated timeframe or
at all; the ability of the management of Jackson Financial Inc. and
its group to deliver on its business plan post-separation; the
impact of the current Covid-19 pandemic, including adverse
financial market and liquidity impacts, responses and actions taken
by regulators and supervisors, the impact to sales, claims and
assumptions and increased product lapses, disruption to
Prudential’s operations (and those of its suppliers and
partners), risks associated with new sales processes and
information security risks; future market conditions, including
fluctuations in interest rates and exchange rates, the potential
for a sustained low-interest rate environment, and the impact of
economic uncertainty, asset valuation impacts from the transition
to a lower carbon economy, derivative instruments not effectively
hedging exposures arising from product guarantees, inflation and
deflation and the performance of financial markets generally;
global political uncertainties, including the potential for
increased friction in cross-border trade and the exercise of
executive powers to restrict trade, financial transactions, capital
movements and/or investment; the policies and actions of regulatory
authorities, including, in particular, the policies and actions of
the Hong Kong Insurance Authority, as Prudential's Group-wide
supervisor, as well as new government initiatives generally; given
its designation as an Internationally Active Insurance Group
(“IAIG”), the impact on Prudential of systemic risk and
other group supervision policy standards adopted by the
International Association of Insurance Supervisors; the impact of
competition and fast-paced technological change; the effect on
Prudential's business and results from, in particular, mortality
and morbidity trends, lapse rates and policy renewal rates; the
physical, social and financial impacts of climate change and global
health crises on Prudential's business and operations; the timing,
impact and other uncertainties of future acquisitions or
combinations within relevant industries; the impact of internal
transformation projects and other strategic actions failing to meet
their objectives; the effectiveness of reinsurance for
Prudential’s businesses; the risk that Prudential's
operational resilience (or that of its suppliers and partners) may
prove to be inadequate, including in relation to operational
disruption due to external events; disruption to the availability,
confidentiality or integrity of Prudential's information
technology, digital systems and data (or those of its suppliers and
partners); any ongoing impact on Prudential of the demerger of
M&G plc and, if and when completed, the demerger of Jackson
Financial Inc.; the impact of changes in capital, solvency
standards, accounting standards or relevant regulatory frameworks,
and tax and other legislation and regulations in the jurisdictions
in which Prudential and its affiliates operate; the impact of legal
and regulatory actions, investigations and disputes; and the impact
of not adequately responding to environmental, social and
governance issues. These and other important factors may, for
example, result in changes to assumptions used for determining
results of operations or re-estimations of reserves for future
policy benefits. Further discussion of these and other important
factors that could cause Prudential's actual future financial
condition or performance or other indicated results of the entity
referred to in any forward-looking statements to differ, possibly
materially, from those anticipated in Prudential's forward-looking
statements can be found under the 'Risk Factors' heading of this
document.
Any
forward-looking statements contained in this announcement speak
only as of the date on which they are made. Prudential expressly
disclaims any obligation to update any of the forward-looking
statements contained in this announcement or any other
forward-looking statements it may make, whether as a result of
future events, new information or otherwise except as required
pursuant to the UK Prospectus Rules, the UK Listing Rules, the UK
Disclosure and Transparency Rules, the Hong Kong Listing Rules, the
SGX-ST listing rules or other applicable laws and
regulations.
This announcement does not constitute or form part of any offer or
invitation to purchase, acquire, subscribe for, sell, dispose of or
issue, or any solicitation of any offer to purchase, acquire,
subscribe for, sell or dispose of, any securities in any
jurisdiction nor shall it (or any part of it) or the fact of its
distribution, form the basis of, or be relied on in connection
with, any contract therefor.
Group Chief Executive’s report
Like
all businesses, we faced new and unexpected challenges throughout
2020, but I am pleased to say that, thanks to the dedication of our
people, we made considerable progress on all fronts. We are well
placed to weather the continuing effects of Covid-19 and to deliver
for our customers and shareholders over the longer term. Our wide
range of innovative products, diverse and flexible approach to
distribution, and relentless focus on operating efficiency enabled
us to continue to operate profitably, and at the same time continue
to invest heavily in organic and inorganic growth
initiatives.
In 2020
we focused on three areas of activity. First, we have been meeting
the urgent needs of our customers, colleagues and communities in
light of the pandemic. Second, we advanced the pace and the extent
of our plans in delivering more digitally enabled, scalable
operations, and equipping us with the tools necessary for continued
success in the future. This had the effect of enabling us to
execute effectively during lockdown restrictions. Third, we
accelerated the structural repositioning of the Group, in
particular enlarging our footprint in the Asian markets with the
most attractive structural opportunities, and working at pace
towards the proposed separation of our US business,
Jackson.
Supporting stakeholders through the pandemic
We have
been working hard to support all our stakeholders throughout the
year. For our customers, for our colleagues and distributors, and
for the communities in which we work, we have introduced a range of
innovative measures to both deal with the impact of the virus and
provide the means for them to emerge in a stronger position once
the effect of the virus has subsided.
For our
customers, we have put in place measures to increase coverage
during this difficult time and to mitigate financial stress
resulting from the virus. In most of our markets we introduced free
limited-time Covid-19 cover, and we made improvements to our
offerings throughout the year, including providing cash relief upon
diagnosis and hospitalisation, and paying out on
death.
We have
enabled our colleagues around the world to work remotely and have
undertaken a number of new initiatives to find out about and
respond to their concerns, in particular managing the risk of
mental and physical health challenges of staff and their families.
During the course of the year, we have ensured that our people
working from home have had the necessary equipment and support to
do their work safely and comfortably. With disruption to working
patterns continuing into 2021, we are taking further measures to
help colleagues manage the longer-term psychological strains of
remote working by providing as much flexibility as possible, and
offering sessions and support for psychological and physical
wellbeing.
We also
took a number of key steps throughout the year to support our
distributors through the challenges presented by Covid-19. To
support our agents, we worked with regulators in 2020 to virtualise
the sales process, and 28 per cent of agency new cases since April
2020, where we focused our efforts initially, together with 27 per
cent of bancassurance new cases since July 2020, have been made
virtually. This compares with very low amounts in prior years. Our
Mainland China joint venture, CITIC-Prudential, went a step further
by creating a virtual reality ‘meeting room’ where
clients can purchase our products.
In the
communities in which we work, we launched a number of initiatives
to provide support through the challenges of Covid-19 and beyond.
In May we launched the Prudential Covid-19 Relief Fund to provide
financial support for communities and for the volunteering efforts
of our people in Asia, the US and Africa. The fund is being
distributed among our markets around the world to support
charitable and community projects tackling the immediate impact of
the pandemic and its social and economic consequences.
Delivering on long-term strategic goals
We have
had two key strategic objectives in 2020. The first has been to
deliver the proposed separation of our US business, Jackson. The
second has been to enable our shareholders to benefit to the
maximum extent from the health, financial protection and savings
opportunities in our chosen markets in Asia and Africa, while
ensuring that we deliver more digitally enabled, scalable
operations in those regions to position us well for future
success.
In the
US we are now able to provide clarity on the path and timing of
Jackson’s proposed separation. In January 2021 the Group
announced an update on Jackson’s capital position and that it
had decided to pursue the separation of Jackson from the Group
through a demerger, whereby shares in Jackson would be distributed
to Prudential shareholders. Subject to shareholder and regulatory
approvals, the planned demerger is expected to complete in the
second quarter of 2021, and would lead to a significantly earlier
separation of Jackson from the Group than would have been possible
through a minority IPO and future sell-downs, which from market
precedent may have lasted until 2023. This accelerated process will
complete Prudential’s structural shift from a diversified
global group to a growth business focusing exclusively on the unmet
health, financial protection and savings needs of people in Asia
and Africa.
In
order to accelerate de-levering during 2021 through the redemption
of existing high coupon debt, Prudential is considering raising new
equity of around $2.5-3 billion. Such a transaction, if executed,
would maintain and enhance the Group’s financial flexibility
in light of the breadth of the opportunities to invest in growth
and aim to increase the Group’s investor base in Asia.
Prudential believes that there are clear benefits to the Group, as
an Asian focused company, of increasing its institutional ownership
in Asia and enhancing the liquidity of its ordinary shares in Hong
Kong. As a result, its preference is to raise new equity through a
fully marketed global offering to institutional investors
concurrent with a public offering in Hong Kong to retail investors,
to be undertaken after the Jackson demerger, subject to market
conditions. The Group has held discussions with shareholders and
the allocation of any offering will take into account a number of
criteria including the interests of existing shareholders and the
strategic benefits of enhancing its shareholder base and liquidity
in Hong Kong. The Group believes that there is potential for
substantial value creation for all shareholders through the
transformation of Prudential into a business purely focussed on
profitable growth in Asia and Africa.
Prudential
is planning to retain a 19.9 per cent non-controlling interest in
Jackson1
at the point of demerger, which will be reported within our IFRS
balance sheet as a financial investment at fair value. Subject to
market conditions, we intend to monetise a portion of this
investment to support investment in Asia within 12 months of the
planned demerger, such that the Group would own less than 10 per
cent at the end of such period.
At the
point of proposed separation and subject to market conditions,
Jackson expects to have an RBC ratio2 in excess of 450 per
cent and Total Financial Leverage3 in the range of 25
to 30 per cent. Jackson expects to achieve this level of RBC at the
point of separation by contributing proceeds of debt and any hybrid
capital raising to its regulated insurance subsidiaries. As a
result, we do not expect that Prudential will receive a
pre-separation dividend from Jackson.
Following
the planned demerger, Jackson intends to pursue a focused strategy
that prioritises optimisation and stability of capital resources
while protecting franchise value. Jackson’s financial goals
as a standalone company will be designed to maintain a resilient
balance sheet in order to provide shareholders with stable capital
returns and profitable growth over the long-term.
In
Asia, our focus is on strengthening our footprint in our key
strategic markets, building our distribution and product range, and
accelerating the digitalisation of our platform. Our businesses in
Asia are aligned with supportive structural trends in the region,
in particular rising prosperity and ageing populations, which are
leading to significant and growing protection and savings
gaps.
We have
built top-three positions in nine Asian life insurance markets, and
we have significant upside potential in the region’s two
largest markets, China and India. In Mainland China, our branch
network with our local partner CITIC now covers 77 per cent of the
country’s 1.4 billion people4, and we see a broad
range of opportunities to participate more deeply in that market.
In India the businesses continue to develop, with our life business
recording a 17 per cent rise in health and protection APE sales and
our asset management business increasing funds under
management5 by 6 per cent to
$26.9 billion20. At 31 December
2020, our investment in ICICI Prudential Life Insurance was valued
at $2.2 billion, in excess of the amount at which it is recorded in
our IFRS and EEV financial statements.
Across
our Asian markets, our comprehensive distribution network allows
consumers to access our services how, where and when they choose.
Our network of around 600,000 agents6 is growing ever more
skilled and productive. Agent recruits7 in Asia (excluding
India) rose 4 per cent in the year, and the number of agents
qualifying for elite MDRT status doubled to more than 13,200. Our
agent management has moved online across all markets, enhancing the
effectiveness of agent communication and operation, and expanding
sales capacity, with the number of cases per active
agent7
increasing by 8 per cent in 2020 from the prior year.
We have
access to around 20,000 bank branches and are working closely with
our partner banks to develop their online offerings. In 2020, we
entered into a major strategic partnership with TMB Bank in
Thailand and also began new relationships with banks in Vietnam,
Laos, Cambodia and Ghana. We are also developing new distribution
channels through our digital partnerships, including OVO,
Indonesia’s leading mobile payments platform, and The1,
Thailand’s largest loyalty platform.
The
services we offer are equally broad. We meet the needs of everyone
from affluent families looking for sophisticated financial advice
to people considering saving and financial protection for the first
time. Across Asia we have seen a heightened need for the health and
protection products that we provide, due to the Covid-19 pandemic.
In a survey, 58 per cent of consumers in our Asian markets stated
that they were interested in products with value-added services,
with 46 per cent of customers searching for new insurance
products8.
This has been converted into an increase in the proportions of APE
sales represented by health and protection products in seven of our
Asian markets.
We have
East Asia’s number-one Islamic life insurance business, which
saw a 49 per cent growth in new policies in 2020, contributing to a
14 per cent growth in APE sales for these products in Malaysia and
Indonesia combined. Malaysia Takaful is the leader in its market,
with a 32 per cent share of the market in 2020, as is our sharia
business in Indonesia, which has the largest Muslim population of
any country9, with a 35 per cent
share of the sharia-compliant market. Our Business at Pulse
(formerly PruWorks) proposition, which serves small and
medium-sized enterprises, continues to develop, driving APE sales
from group business up 17 per cent in 2020.
Our
Asia asset manager, Eastspring, manages $247.8 billion in assets
across 11 markets in Asia, and is a top-10 asset manager in seven
of those markets. Eastspring has a broad product set and an
unrivalled ability to serve the needs both of Asian savers and
global investors seeking access to Asian opportunities, and we
continue to diversify the product set.
Our
investment in Africa gives us exposure to a growing, under-served
continent whose population is expected to double to more than 2
billion people by 2050.
The
pace of our innovation continues to accelerate, and that is
translating into improved operational performance. In 2020, we
launched or revamped 175 products10 across our markets,
contributing 20 per cent of APE sales. Of these, more than 115 were
traditional and health and protection products, including Anxin,
our digital health and protection solution for the China market,
with 165,000 policies sold in 2020, around 50 per cent of them to
new customers. In Indonesia several new launches of simplified
standalone protection products saw their contribution rise to 37
per cent of APE, up from 8 per cent in 2019, which drove an overall
increase in total new cases sold in 2020 of 12 per
cent.
We have
significant investment appetite in Asia and Africa that is based on
the absolute size and demographic characteristics of each economy
and our ability to build competitive advantage, leveraging our
scale and expertise. While we will continue to build on our leading
positions in Hong Kong and ASEAN, we see the greatest opportunities
in the largest economies of China, India, Indonesia and Thailand.
We expect this strategy to deliver profitable and sustainable
compounding growth and high risk-adjusted returns for shareholders.
Accordingly, our dividend policy announced in August reflects a
rebalancing of capital allocation from cash dividends to
reinvestment of capital into the Asia business.
Following
the proposed separation of Jackson, our focus on Asia and Africa
will support long-term delivery of future shareholder returns
through value appreciation, with a focus on achieving sustained
double-digit growth in embedded value per share. This will in turn
be supported by the growth rates of new business profit, which are
expected to substantially exceed GDP growth rates in the markets in
which the post-demerger Prudential Group operates.
Pulse: building our digital capabilities
Our
culture of innovation is exemplified by Pulse, our new digital
platform, which is enhancing our digital capability across Asia and
Africa.
The
first iteration of the Pulse mobile app was launched in Malaysia in
August 2019, with features focused on helping our customers –
and the wider population – prevent and postpone ill-health.
These initial services included an artificial intelligence-driven
medical symptom checker, telemedicine and dengue fever alerts.
Since then, Pulse has been launched in 11 languages across 11 Asian
and four African markets. 58 per cent of Asian consumers desire
access to healthcare value-added services8, such as virtual GP,
and new features have continued to be added to Pulse on a weekly
basis to meet this demand. Covid-19 has stimulated interest in the
health features of Pulse, as both consumers and policymakers
embrace the flexibility and accessibility offered by digital health
solutions in a period when travel and face-to-face contact has been
restricted. By February 2021, Pulse had been downloaded around 20
million times11. Sales referrals
from Pulse to our agents in 2020, together with a small amount of
revenue from bite-sized products sold directly on Pulse, translated
into $211 million of APE sales12.
In
2021, as we continue to help customers become healthier, we intend
to broaden our services to give greater support to people’s
wealth needs.
Financial performance
Our
financial performance during 2020 provides tangible evidence of how
we are successfully executing our strategy.
At a
Group level, overall adjusted IFRS operating profit based on
longer-term investment returns13 (adjusted operating
profit) for 2020 from our continuing operations was $5,507 million,
4 per cent higher than the prior year on a constant exchange rate
basis, reflecting the continued growth of our Asia businesses,
offset by lower US profits. Central expenses declined by 8 per
cent, reflecting lower interest and head office costs. IFRS profit
after tax from continuing operations13 was $2,185 million
in 2020 (2019: $1,953 million on an actual exchange rate
basis).
In
Asia, in a challenging environment, our diversified, high-quality,
recurring-premium business model enabled us to continue to grow
value and scale, with our total Asia embedded value reaching $44.2
billion, an increase of 13 per cent compared with 2019, and more
than doubling over the last five years. Adjusted operating profit
was 13 per cent higher than 2019 on a constant exchange rate basis,
driven by the resilience of our in-force life business and the
rebound of the level of funds managed by our asset manager
Eastspring in the second half of 2020.
The
quality of our historic book of insurance business contributed to
resilient in-force growth, with a 6 per cent increase in renewal
premiums14
to $20.1 billion. The high level of renewal premiums is the result
of the high level of regular-premium business we sell (representing
90 per cent of APE sales in 2020), the high mix of health and
protection business, which formed 65 per cent of new business
profit in the year, and a 90 per cent customer retention
rate15.
This contributed to life insurance adjusted operating profit in
Asia growing by 14 per cent (on a constant exchange rate basis).
The performance was broad-based, led by Hong Kong, up 20 per cent,
with a further eight markets delivering double-digit
growth.
Our
Asia asset management business, Eastspring, saw total assets under
management reach $247.8 billion, up 3 per cent from the end of 2019
and 13 per cent higher than 30 June 2020, on an actual exchange
rate basis, with external net outflows moderating in the second
half of year alongside improving equity markets. Eastspring’s
funds under management also benefited from net inflows from
internal Asia life funds of $8.5 billion during 2020, representing
a continuing source of reliable funds flows to the Eastspring
business and a structural strength of our business model. Overall,
this helped the adjusted operating profit increase by 2 per cent
compared with the prior year. Continued cost discipline helped
maintain the cost/income ratio14 at 52 per
cent.
Despite
the continuing impact of the Covid-19 pandemic across our markets,
we delivered a relatively resilient performance in respect of new
business profit and APE sales. Outside Hong Kong, new business
profit17
was (4) per cent lower, in line with a (6) per cent reduction in
APE sales18. In Hong Kong, new
business profit was down (62) per cent, with APE sales (63) per
cent lower, largely as a result of the impact of Covid-19-related
restrictions on cross-border sales. Overall, this led to a (28) per
cent fall in Asia APE sales as compared with 2019. China, our
third-largest market by APE sales, was a particular highlight, with
bancassurance APE sales up by 34 per cent compared with 2019.
Agency APE sales rebounded by 15 per cent in the second quarter as
restrictions were lifted, and overall APE sales in the second half
increased by 4 per cent compared with the same period in the prior
year. New business profit in China increased 3 per cent to $269
million and new business profit margins strengthened. This was led
by the agency force focus on protection products, which accounted
for 53 per cent of sales from this channel and as a result agency
channel margins16 climbed to 85 per
cent (2019: 74 per cent).
The
nature and timing of Covid-19-related disruption varied
considerably across our markets. The ability of our franchise to
grow as restrictions were lifted is evident from the sequential
increase in APE sales in nine markets including Hong Kong, with the
third-quarter total Asia APE sales above the second by 33 per cent,
and the fourth quarter above the third by 18 per cent.
We
continue to build our operations in Africa, with APE sales reaching
$112 million, representing growth of 51 per cent. Our African
businesses are progressing well with the adoption of our new
digital sales management system, which has driven positive
operating trends.
Jackson
maintained its leading position in the US variable annuity
market19,
with new variable annuity APE sales up 13 per cent to $1,662
million, reflecting customer demand for Jackson’s products in
this market and the breadth and expertise of its distribution
force.
Jackson’s
adjusted operating profit was $2,796 million (2019: $3,070
million), reflecting DAC adjustment effects and the expected
reduction in spread-related earnings following the reinsurance
contract with Athene in June 2020 and lower asset yields, partially
offset by higher fee income from increased average account
balances. Overall Jackson incurred a $(247) million post-tax loss
(2019: loss of $(380) million), where the economic nature of our
hedging programme, and the related accounting mismatches, alongside
the exceptional equity volatility seen over the year, resulted in
the recognition of losses on equity derivatives taken out as part
of Jackson’s hedging programme.
Outlook
Throughout
the Covid-19 crisis that dominated 2020, we demonstrated our
ability to act at pace, our adaptability and the resilience of our
underlying business. We will continue to apply these strengths as
we move forward. With each cycle of lockdown and reopening, we have
adopted varied responses depending on the local conditions, we have
improved our agility as we have responded, and the strength of our
business has remained apparent. We expect that vaccination
programmes will be launched in a number of our markets in 2021,
triggering a gradual return to more normal economic patterns.
However, the pace of these programmes and their effect is likely to
vary substantially and gives a degree of uncertainty over
performance of the business in the short-term.
Our
most significant market by new business profit and embedded value
is Hong Kong. Sales to Mainland Chinese individuals in Hong Kong
have been severely curtailed by the closure of the border with
mainland China. There is at present unlikely to be a lifting of the
border restrictions until the third quarter of 2021 at the
earliest, but this depends on a number of factors. However, we
believe there will continue to be demand from Mainland Chinese
customers for the Hong Kong product suite once the border reopening
occurs and we have been building on our existing product and
digitalisation capabilities to continue to serve both these and
domestic customers in the future. Since the second quarter of 2020
we have seen sequential quarterly increases in sales in Asia, but
our continued success across all our markets will be dependent in
part on government reaction to changes in the number and type of
Covid-19 cases and the vaccine roll-out.
Nevertheless,
we are confident that the demand for our products will continue to
grow in line with the structural growth in our chosen markets, and
that our expanding and increasingly digitalised distribution
platforms will meet that demand.
That
confidence in the future is underpinned by the clarity of our
strategy for delivering long-term profitable growth. The Group aims
to deliver outperformance by building leadership positions in the
markets with the greatest scale, investing in people and
innovating, and nurturing relationships with our key
stakeholders.
If we
execute successfully, the outcome of our strategy will be growth in
new business profit that is expected to outpace the economic growth
of the markets where we operate. We are confident that our clear
and focused strategy, coupled with our proven execution ability,
leaves us well placed to continue to deliver value for our
shareholders and all our stakeholders over the long term, with a
focus on achieving sustained double-digit growth in embedded value
per share.
Notes
1
Prudential
is planning to retain a 19.9 per cent voting interest and a 19.7
per cent economic interest.
2
Representing the
RBC ratio of Jackson National Life that reflects the capital and
capital requirements of Jackson National Life and its subsidiaries,
including Jackson National Life NY.
3
Calculated on a US
GAAP basis as the ratio of total debt (including senior debt,
hybrid debt and preferred securities) to total debt and
shareholders’ equity (excluding Accumulated Other
Comprehensive Income).
4
2019
data for population. Sources from National Bureau of Statistics and
CBIRC.
5
Full
year 2020 total funds under management, including external funds
under management, money market funds, funds managed on behalf of
M&G plc and internal funds under management, reported based on
the country where the funds are managed.
8
Source:
Swiss Re COVID-19 Consumer Survey, April 2020.
9
Source:
Indonesia Ministry of Religion Data Centre.
10
Including
37 bite-sized digital products.
11
As
of 22 February 2021.
12
APE
sales substantially from full-premium products sold through
referrals to agents and a small amount of revenue from 37 new
digital products.
13
Attributed
to the shareholders of the Group before deducting the amount
attributable to the non-controlling interests. This presentation is
applied consistently throughout the document.
14
See note II of the
Additional unaudited financial information for definition and
reconciliation to IFRS balances.
15
Excluding
India, Laos and Myanmar.
16
The
value of new business on and EEV basis expressed as a percentage of
APE sales. See note 1 of the EEV basis results.
17
New
business profit, on a post-tax basis, on business sold in the year,
calculated in accordance with EEV principles.
18
APE sales is a
measure of new business activity that comprises the aggregate of
annualised regular premiums and one-tenth of single premiums on new
business written during the year for all insurance products,
including premiums for contracts designated as investment contracts
under IFRS 4. It is not representative of premium income recorded
in the IFRS financial statements. See note II of the Additional
unaudited financial information for further
explanation.
19
LIMRA: through the
third quarter of 2020, Jackson accounted for 16.5% of new sales in
the U.S. retail variable annuity market and ranked number 1 in
variable annuity sales.
20
Representing
Prudential’s 49 per cent interest.
Group strategy and operations
Prudential’s
differentiated product and geographic portfolio is well positioned
to meet the protection and savings needs of the growing populations
in Asia and Africa, where insurance penetration is currently low
and demand for savings solutions is rapidly developing. In the
United States, Jackson remains a leading provider of variable
annuities to retail investors. Following the proposed demerger of
Jackson, Prudential intends to take full advantage of the long-term
structural opportunities in Asia and Africa. It seeks to operate
with discipline in allocating capital for long-term returns, and to
deliver profitable and increasingly diversified
growth.
Group overview
Our
purpose is to help people get the most out of life. We make
healthcare affordable and accessible and promote financial
inclusion across our markets. We protect people’s wealth and
help them grow their assets, and we empower our customers to save
for their goals. This purpose is served through implementing our
business strategy, set out in this section and our environmental,
social and governance (ESG) strategy set out in our ESG
report.
With
this purpose in mind, our intention is to take full advantage of
the long-term structural opportunities in Asia and Africa and to
pursue a path for a fully independent Jackson. In January 2021, the
Board announced that it had decided to pursue the separation of
Jackson from the Group in the first half of 2021 through a
demerger, whereby shares in Jackson would be distributed to
Prudential shareholders. The result of this separation will be two
separately listed companies with distinct investment propositions,
which the Group’s Board believes will lead to improved
strategic outcomes for both businesses.
The
Prudential Group will focus exclusively on its high-growth Asia and
Africa businesses. We will also accelerate our development of
digitally enabled products and services to help prevent, postpone
and protect our customers from threats to their health and
wellbeing, as well as supporting them to achieve their savings
goals.
Jackson
will continue to help Americans grow and protect their retirement
savings and income to enable them to pursue financial freedom for
life through its differentiated products, well-known brand and
industry-leading distribution network.
Further
information on the Prudential Group’s and Jackson’s
respective businesses are set out below. The result of the proposed
separation of Jackson will be two separately listed companies with
distinct investment propositions, which the Group’s Board
believes will lead to improved strategic outcomes for both
businesses.
Asia and Africa
We have
a pan-Asian footprint, with our largest life and protection
operations in Hong Kong, Singapore, Indonesia and Malaysia as well
as our joint venture in China. We also operate in Thailand,
Vietnam, Taiwan, the Philippines, Cambodia, Laos and Myanmar and
have a successful partnership in India. Within this footprint,
Prudential has top three positions1 in 9 out of 13 life
markets and extensive distribution networks, across digital, agency
and bancassurance channels. We focus on delivering profitable
regular premium health and protection insurance products and
fee-based earnings.
In
asset management, Eastspring manages $247.8 billion across 11
markets in Asia and provides focused investment solutions to
third-party retail and institutional clients as well as to our
internally sourced life funds. Eastspring is a top 10 asset manager
in 7 of the 11 markets in which it operates, and is the largest
pan-Asian retail asset manager excluding Japan2.
Since
2014 we have also built a rapidly growing multi-product,
multi-distribution business in Africa, with operations now in eight
countries across the continent, and have over one million
customers. Starting in 2021 the regional office for Africa will be
based in Nairobi, making East Africa our hub for the continued
success of operating on the continent.
Our
offering in Asia and Africa is evolving to respond to growing
customer awareness and demand for products that address health and
wellness, as well as providing life insurance cover. Pulse by
Prudential, our health and wellness platform provides a compelling
offering to address these needs, building on our existing
distribution channels and trusted brand. Further information on
Pulse by Prudential, and our markets, customers, products and
distribution within the region is set out below.
Asia
has grown significantly over the last 10 years, for example over
the decade from 2010 to 2020, embedded value in Asia grew on
average by 14 per cent3 per annum and at 31
December 2020 was $44.2 billion. Since 2013, Prudential has
committed almost $10 billion of capital to support growth in Asia,
including around $5 billion of inorganic investments to grow our
distribution reach and to build digital capability. Around
one-third of the total investment has been made since January 2019.
Investments in 2020 included establishing a 15-year strategic
bancassurance partnership with TMB, which significantly strengthens
our distribution capability in Thailand’s fast-growing life
insurance sector and strongly complements our top-five
position2
in the country’s mutual fund market. In other markets we have
also established a new bancassurance partnership with SeABank, a
fast-growing bank in Vietnam with approximately 1.2 million
customers and almost 170 branches, as well as signing new
agreements with Banque Franco-Lao (BFL) BRED Group in Laos, and in
early 2021 with Phnom Penh Commercial Bank Plc (PPCBank) in
Cambodia.
We have
significant investment appetite in Asia in the future that is based
on the absolute size and demographic characteristics of each
economy and our ability to build competitive advantage leveraging
our scale and expertise. While we will continue to build on our
leading positions in Hong Kong and members of the Association of
Southeast Asia Nations (‘ASEAN’), we see the greatest
opportunities in the largest economies of China, India, Indonesia
and Thailand. This investment is expected to deliver profitable and
sustainable compounding growth and will support long-term delivery
of future shareholder returns through value appreciation, with a
focus on achieving sustained double-digit growth in embedded value
per share.
Markets
The
life insurance industry in Asia and Africa remains in the early
stages of development, as characterised by the low penetration
rates across the region for insurance. In particular, most of our
Asia markets are approaching the level of per capita annual income
when demand increases sharply. Around 50 per cent of the global
population lacks access to essential health services13, and across the
Asia region specifically, there are significant health funding and
wellness gaps; 80 per cent of Asians do not have insurance
cover14
and spend some $400 billion on healthcare as an out-of-pocket
expense15.
Similarly, in Africa, while mobile phone access has increased
tremendously over the last 20 years, less than 50 per cent of
Africans have access to modern health facilities16, and 80 per cent
have to rely on public health facilities, which are often
understocked, understaffed, and difficult to reach due to the
physical and financial burdens of transportation17.
Our
largest market in respect of APE sales is Hong Kong, which
accounted for 21 per cent of our overall Asia APE sales in 2020,
followed by Singapore, contributing 17 per cent and China which
accounted for 16 per cent. The rest of our new business is
diversified across 10 markets. Our adjusted operating profit is
well balanced, with the largest contributions from Hong Kong,
Singapore and Indonesia.
With
regards to strategy, we see the most significant opportunities for
growth potential in life insurance and asset management in the four
largest economies in our footprint, namely China, India, Indonesia
and Thailand. Our joint venture operations in China and India
together with our businesses in Indonesia and Thailand, provide us
with scaled access, where we can build leadership positions with
competitive advantage and economies of scale. We also intend to
continue building on our leading positions within Hong Kong and
ASEAN.
In
China, our China life business is a 50/50 joint venture with CITIC,
a leading Chinese state owned conglomerate. Our China JV business
performed well in 2020 after the Covid-19 disruption in the first
quarter, increasing new business profit by 3 per cent. Building on
our existing nationwide coverage of 20 branches and 99 cities (an
increase of five since 2019), we expect our China JV business will
continue to grow at pace by expanding and deepening our presence
from our current geographical footprint, and by leveraging our
multi-distribution platform. We operate our asset management
business in China through CITIC-Prudential Fund Management Company
Limited, a JV with CITIC with assets under management of $9.6
billion19,
as well as our wholly owned private fund manager operationalised in
2019 within Eastspring, which now has sourced and sub-advised
assets under management of $743 million. Our Chinese life insurance
joint venture has also established its own asset management company
in 2020, Prudential-CITIC Asset Management Co, which further
strengthens our capabilities in savings and retirement
products.
In
India, our business consists of our 22.1 per cent holding of the
Indian Stock Exchange listed life insurance business, ICICI
Prudential Life Insurance (with our investment valued at $2.2
billion as at 31 December 2020) and 49 per cent of the asset
manager, ICICI Prudential Asset Management, which has total funds
under management7 of $26.9
billion19.
Our India life business continues to pivot to health and
protection, with a 17 per cent increase in health and protection
APE sales, which now represent 24 per cent of total APE sales (up 9
percentage points on 2019). We will continue to capture the
significant potential in the Indian life market, with an aspiration
to double 2019 new business profit in three to four years, by
continuing to grow the business, improving retention and enhancing
productivity.
In
Indonesia, we continue to strengthen our market leadership,
including in the sharia market where we increased APE sales by 6
per cent and new business profit by 27 per cent in 2020, and propel
growth by broadening our product offerings, as well as digitalising
our business model. We added 60 products during 2020, doubled MDRT
qualifiers to over 2,100, and launched digital products through
both Pulse and our OVO partnership. We have seen positive momentum
in the last quarter of 2020, being the highest sales quarter of
2020, and believe our business transformation will continue to
drive growth in the future.
In
Thailand our new distribution partnership with TMB will help us
achieve top-three leadership in the bancassurance channel, and we
will further accelerate growth by developing a holistic
omni-channel business model. Coupled with the completion of the
acquisition of TMBAM and TFund which gives us a top-five ranking in
the mutual fund market, this will give us a high-quality platform
to deliver best-in-class health and wealth solutions to serve the
growing retirement and investment needs of both the rising middle
class and the growing high net worth segments.
In our
other large businesses, we also see ample opportunities to continue
to grow at pace. In Hong Kong, we believe based on our own and
third party surveys there is latent demand from Mainland Chinese
customers for our Hong Kong product suite and that the eventual
normalisation of visitor arrivals as the border reopening occurs
will allow for the return of this important source of new business.
For example, 61 per cent of Mainland Chinese visitor
preference20 is to receive
critical illness medical treatment in Hong Kong. In the meantime,
we continue to build our already strong and substantial Hong Kong
domestic business through multi-channel expansion and increased
digitalisation of our service offering. We also continue to broaden
our product offerings, such as our mid-tier medical reimbursement
product, the PRUHealth VHIS VIP Plan, to fulfil the protection
needs of our customers. We will also broaden access to Mainland
China consumers through Greater Bay Area initiatives and remain a
destination of choice through our market-leading products and
service propositions.
In
Singapore, we see significant opportunities in expanding the
servicing of the high net-worth and small and medium enterprise
(SME) markets, alongside supporting a fast ageing population to
address under-covered retirement and health needs. In Malaysia, we
have leading market positions in both the conventional and Takaful
markets. In particular, in the underprovided Takaful segment where
we see substantial opportunity for growth, we increased our APE
sales by 26 per cent and our new business profit by 29 per cent in
2020.
In our
other high-potential growth markets of Vietnam, the Philippines,
Cambodia, Laos and Myanmar, we see the opportunity for rapid growth
through the roll-out of our efficient and scalable business model,
multi-channel distribution networks and the provision of market
leading digital products and services through Pulse. These markets
currently have very low levels of life insurance penetration, for
example with life insurance penetration5 of just 1.4 per cent
in Vietnam and 1.2 per cent in the Philippines. However, with
rising GDP per capita at or reaching a threshold of $10,000 to
$20,000, and supported by our proven and market leading positions,
we are confident of delivering new life insurance sales growth well
in excess of GDP growth in these markets.
We see
substantial opportunities to accelerate our asset management
business, Eastspring, building on its leading market position as
Asia’s largest retail asset manager (excluding
Japan)2
and structural advantages of reliable and predictable inflows from
our life businesses. The completion of the TMBAM and TFund
acquisitions in Thailand and successful development of its China
business, mentioned above, have strengthened its strategic
portfolio.
Since
2014 we have also built a rapidly growing multi-product business in
Africa, with operations now in eight countries across the
continent. Despite the Covid-19 pandemic, APE sales at Prudential
Africa have grown by 51 per cent21 to $112 million
during 2020, with the number of active agents significantly ahead
of the same period last year. In Ghana, we have renewed our
exclusive agreement with Fidelity Bank for an additional 10 years,
building on a successful partnership over the past five years. We
also announced a new partnership with Vodafone Ghana to provide an
innovative microinsurance product to their 9 million plus
subscribers. Meanwhile, our team in Nigeria has launched a new
partnership with the largest mobile operator in the country, MTN,
in an effort to reach its subscriber base of over 70 million people
and provide protection to the millions of uninsured
Nigerians.
Products and brands
We
offer a wide range of insurance products that are tailored to local
market requirements and fast-changing individual needs. We focus on
health and protection and savings products with 65 per cent of new
business profit contributed by health and protection solutions and
the rest by savings products that include participating, linked and
other traditional products.
The
diversity and resilience of our business is supported by the
continued innovations and enhancements we make to our product
range, which include broadening coverage for new risks and adding
innovative features. In 2020, we introduced or revamped 175 new
products22
contributing 20 per cent of APE sales, including simplified lower
case-sized protection offerings.
The
Covid-19 pandemic has reinforced customer interest in health and
protection products, with 58 per cent of consumers across our Asian
markets desiring access to healthcare value-added services, such as
access to a virtual GP23. This has been
converted into an increase in the proportions of APE represented by
health and protection products in 7 of our Asian markets, led by
India (up 9 percentage points to 24 per cent of APE sales),
Singapore (up 5 percentage points to 25 per cent of APE sales),
Thailand (up 9 percentage points to 25 per cent of APE sales) and
Vietnam (up 3 percentage points to 17 per cent of APE sales), in
turn resulting in increased margins for our Asia markets excluding
Hong Kong. Of the 175 new or revamped products noted above, more
than 115 were traditional and health and protection
products.
Our
Hong Kong business offers domestic Hong Kong residents and mainland
visitors sophisticated critical illness, medical benefits and life
insurance protection business. 91 per cent of all Hong Kong
consumers23 indicated they
would retain life insurance even if their financial position is
disadvantaged by Covid-19 re-enforcing the resilience of this
market. The investment proposition provides access to international
equities and bonds. In particular, our main with-profits product
offering uses a with-profits structure, which pools the investments
of policyholders and allocates returns based on long-term
investment performance (similar to that historically used in the
UK), and leads to attractive margins. The business has a high level
of renewals that is substantially higher than the premiums from new
business. Singapore offers a similar type of product mix and also
uses a UK-style with-profits structure.
In
China, Anxin, our digital health and protection solution generated
165,000 policies in 2020, with around 50 per cent to new customers.
In Hong Kong, we launched in the second half of 2020 PRUHealth VHIS
VIP Plan, a tax-efficient medical insurance targeting the mid-tier
segment, which has contributed 10 per cent of new business profit
for the domestic segment in the fourth quarter of
2020.
In
Indonesia, we retain leadership in the sharia-compliant market,
with 35 per cent share, accounting for 37 per cent of agency sales
in Indonesia. Our PRUCinta product, the first traditional sharia
product with specific cash value, accounts for 14 per cent of
Indonesia agency sales. More widely, we have launched 60 products
in Indonesia in 2020, including lower ticket standalone protection
products which collectively accounted for 37 per cent of the APE
mix (2019: 8 per cent) and 52 per cent of new case count mix (2019:
11 per cent).
Alongside
offering products that meet customer needs, we invest in our brands
to build trust, drive awareness and attract and retain
customers.
Distribution and customer engagement
We believe in a multi-channel and integrated distribution strategy
for our business which can adapt and respond flexibly depending on
local market conditions. Our distribution network is one of the
strongest and most diversified in the Asia region, across agency,
bancassurance and non-traditional partnerships, including digital.
In recent years, we have also established non-traditional
partnerships to broaden our customer reach, particularly the
digitally-savvy millennial segment. In total, we have more than 300
life insurance and asset management distribution partnerships in
Asia. Alongside these distribution channels we also have Pulse by
Prudential (discussed further below).
Agency
We have around 600,000 licensed tied agents24
across our life insurance markets, and
the productivity of active agents increased 8 per
cent25,26
in the year, based on number of cases,
which are becoming smaller in size as we, and our customers, focus
increasingly on standalone protection products. Our agency channel
is a core component of our success, comprising 74 per cent of our
new business profit given the high proportion of high margin
protection products sold.
Our continued support for the agency channel positions us well for
sustainable growth. Our agent management has moved online across
all markets, enhancing effectiveness of agent communication and
operation, and expanding sales capacity with agent
recruits26
of 143,000 in the year. We deployed
virtual sales tools across all markets for almost all products, and
28 per cent of agency new cases since April 2020, together with 27
per cent of bancassurance new cases since July 2020 have been made
virtually. Despite the gradual relaxation of Covid-19 containment
measures in several markets, virtual selling tools have now become
mainstream with distributors, and virtual sales in the fourth
quarter represented 23 per cent of both agency and bancassurance
sales.
We place great emphasis on agent professionalism and promote career
progression by providing tailored training programmes that share
experience and best practice across different markets. In addition,
to further assist our agents during the sales process and enhance
productivity we continually upgrade the tools at their disposal.
During 2020, the number of agents qualifying for the Million Dollar
Round Table (MDRT) doubled in the year to more than
13,200.
In Africa the number of active agents in 2020 significantly
increased from the prior year. The increase in active agents is a
direct result of implementing our Rookie Development Programme in
each market, which helps with agent professionalism and customer
focus, as well as transitioning new agents from the classroom to
the field, and making those agents active within the first month of
their recruitment. In most markets, as a response to
Covid-19-related restrictions, we rapidly innovated to create an
end-to-end virtual sales submission process, with a virtual
recruitment and onboarding process for distributors as well as
delivering training digitally. Moreover, 2020 marked the first time
each market has had at least one agent qualify for the MDRT
increasing the number of qualifiers to 38 from 15 in the prior
year.
Bancassurance
We also have a leading bancassurance franchise that provides access
to around 20,000 bank outlets through our strategic partnerships
with multi-national banks and prominent domestic
banks.
Our bancassurance partnerships made an important contribution to
our business last year. Our new partnership with TMB in Thailand,
which commenced on 1 January 2021, will give us access to an
expanded network of 685 branches. In preparation we have trained
more than 5,500 bank sellers and nearly doubled the number of sales
support staff to 240. We have launched a refreshed set of
propositions encompassing the high net-worth, retail, commercial
and SME segments and rolled out a new e-POS system.
Outside of Hong Kong, our bancassurance channel APE sales remained
stable despite Covid-19 related disruption. We were particularly
pleased to see the positive momentum in our bancassurance channel
in Indonesia, which saw APE sales up 15 per cent21.
We continue to look for opportunities to expand our presence in
this market. There were also particularly strong performances in
our China JV (APE sales up 34 per cent21),
Thailand (APE sales up 21 per cent21)
and Vietnam (APE sales up 35 per cent21),
demonstrating our channel strength in these
markets.
We have
also developed strategies to reach the digitally-savvy millennial
segment through UOB Mighty, UOB’s digital bank, and new
partners such as Central in Thailand. Prudential Laos has also
recently partnered with Star Fintech to launch payment services via
its U-money platform. We anticipate that these partnerships will
significantly enhance our reach to millennial consumers in the
country through the joint development of digital propositions that
encompass health, wellness and wealth products. The experience will
also help us in designing and managing distribution strategies in
our existing markets as well as in targeting new points of
entry.
Pulse by Prudential
In 2020, we have been able to accelerate our digital development
and associated customer-centric digital ecosystem.
The Covid-19 pandemic has accelerated growing awareness and demand
for health and wellness solutions. For example, 46 per cent of
Asian consumers searched for new insurance
policies23.
Our digital capabilities allow us to make healthcare more
accessible and affordable in the countries where we
operate.
Prudential meets this growing demand for health and wellness
through its super-app Pulse by Prudential. Pulse is a free digital
mobile application that offers holistic management, artificial
intelligence (AI)-powered self-help tools, and information to serve
users 24/7 and promotes health and wellbeing through a range of
value-added services. These include telemedicine, health and
wellness content and communities, health challenges and rewards,
chronic disease management, as well as a self-diagnosis and
self-help tools. Pulse has been launched27
in 11 different languages across 11
markets in Asia (Malaysia, Indonesia, Singapore, Hong Kong, the
Philippines, Thailand, Vietnam, Cambodia, Laos, Taiwan, and
Myanmar) and most recently four markets in Africa (Kenya, Nigeria,
Cameroon and Zambia), with varying levels of
development.
Pulse has been downloaded around 20 million
times27
since its initial launch in 2019 in
Malaysia. Through this single super-app, Pulse is being developed
to offer an integrated health, wealth, and SME ecosystem. It has
integrated 32 local and regional partners27,
including most recently, a signed partnership with Central Group, a
leading retailer in Thailand, that will enable Pulse to access
Central Group’s existing digital engagement with customers to
offer insurance and health solutions to them. We have also signed a
partnership with HR Easily, an HR services digital platform which
we make available to our SME customers through ‘Business at
Pulse’. We are seeing continued increase in the usage
of AI assessment and triage, lifestyle
management and wellness, and telemedicine consultation services,
with over 1.5 million users27
accessing at least one of the services
in Asia, since launch.
Pulse also enables us to reach a younger customer
demographic, with the majority of Pulse users in the 18 to 35 age
group compared with the average age of an existing Prudential
customer profile of around 40, and is broadening our potential
customer base, with 70 per cent of Pulse consumers new to
Prudential.
37 digital bite-sized products were made available in Pulse in
2020. Some examples of bite-sized products launched by Prudential
within Pulse include products related to common critical illnesses
in Asia (cancer, stroke, heart attack), tropical disease protection
(dengue, malaria, measles), and daily care (food poisoning, minor
burns, broken bones, and accident income support).
With greater customer touchpoints, we are also able to generate
Pulse-led data-driven leads for agents. We saw over 2.2
million leads generated for agents in 2020 which together with a
small amount of revenue from policies sold directly through Pulse,
generated APE sales of $211 million28 in
2020.
Recently, we introduced a subscription plan to help Pulse users eat
healthier and promote a more active lifestyle, and even save for
the future. These paid subscription plans, priced at a low cost of
between $1-$3 per month, are currently available to users in Hong
Kong, Indonesia, Malaysia, Thailand, Vietnam and the Philippines,
with plans to expand on the offerings and launch in additional
markets in 2021. The paid subscription plans have received 164,000
active subscribers during 2020.
We have undertaken steps to meet our objective for Pulse to provide
a platform for end-to-end service, with the same app used by
customers and distributors. Agents have the ability to sell
Prudential products virtually within the Pulse platform in the
Philippines, Malaysia and Indonesia. Meanwhile, e-claims are
available in Indonesia, Malaysia, Cambodia, Myanmar and the
Philippines. We believe the integration with the life value chain
across sales, claims and payments will allow Pulse to enhance value
to new and existing users and drive efficiencies in the
business.
Customer service and loyalty
We
believe that excellent customer service has been key to our strong
reputation and leading pan-Asia franchise. Customer loyalty has
remained high during the Covid-19 pandemic, with a retention ratio
consistently in excess of 90 per cent. The satisfaction and trust
our customers have in our business also translates into a high
proportion of repeat sales, which comprised 47 per cent of APE
sales in 2020. The result of these dynamics is a portfolio of over
25 million in-force policies, with each policyholder holding 1.6
policies on average.
We are
focused on unlocking new customer segments through a broader
proposition set. During 2020, we added a further 1.3 million new
life customers from traditional channels. Our overall life customer
numbers increased to 16 million, of which about 30 per cent are our
health insurance customers.
We
continue to identify and target new customer groups and segments
outside our traditional focus in the Mass and Affluent space in
order to accelerate our future growth. Within the Emerging segment,
Pulse leads the customer acquisition as described above. Within the
High Net Worth segment, we first expanded into this segment in 2018
with Opus in Singapore, providing a differentiated experience for
our customers, including a dedicated service team, wealth planners
and external experts covering trust and legal matters. Within the
Group segment, we also developed tailored offerings for small and
medium-sized enterprise (SME), a segment that remains under-served
and offers significant growth potential. This strategy is advanced
through our all-inclusive platform, Business at Pulse platform,
which provides digitally-enabled insurance and HR solutions for
business owners and their employees, supporting a 17 per cent
increase in APE sales from group business in 2020. We have extended
our Business at Pulse platform from Singapore and Indonesia to Hong
Kong, the Philippines and Thailand, and will launch next in
Malaysia.
Integrated asset management
Eastspring is a leading Asia-based asset manager, with operations
across 11 markets in Asia, plus offices in Europe and North
America. With $247.8 billion of assets under management and over
300 investment professionals, it is the largest pan-Asian retail
asset manager excluding Japan2
and is a top-10 asset manager in 7 of
the 11 markets in which it operates.
Eastspring has a broad product set, as well as significant
distribution capabilities and industry-leading operational
efficiency. Eastspring provides focused investment solutions,
across equity, bonds and multi-asset products, to our internally
sourced life insurance funds and third-party retail and
institutional clients. Distribution channels include wholesale,
intermediary and direct online formats, which are tailored as
required, depending on the geography involved. This means that
Eastspring can continue to grow and develop through both market
cycles and changes to individual investment styles.
Operational efficiency has led to industry-leading margins, with
investment in technology, for example the implementation of
BlackRock’s Aladdin system, to deliver common platforms, and
world-class risk management and governance
capabilities.
In
terms of strategy, we see substantial growth opportunities to
accelerate Eastspring, building on its leading market position as
Asia’s largest retail asset manager2 (excluding Japan)
and structural advantages of reliable and predictable inflows from
our life business. In particular, we see China, India and Thailand
as our most material market opportunities. Eastspring is well
positioned to broaden its investment capabilities to serve the
global needs of Asia-based clients, while offering global investors
access to its expertise in investing in Asian markets. For example,
in October 2020, Eastspring announced a strategic partnership with
Atlantic Zagros Financial Partners to expand its offshore
distribution capabilities to the Americas. To support this ambition
Eastspring’s strategic objectives include developing its
distribution, product range and investment advisory capability,
while continuing to enhance support for the asset management needs
of Prudential’s life insurance business.
To
support these objectives, Eastspring has organised its operations
into three pillars that will drive the expansion of its
capabilities and growth in the future:
●
Alpha engine
– representing centralised investment capability with an
emphasis on driving asset class return on investment after
adjusting for market-related volatility. This pillar will focus on
diversifying Eastspring’s investment capabilities and
styles.
●
Advisory solutions
– standalone advisory service for institutional clients;
focusing on solutions & products for that market, including the
growing need to support clients’ Environmental, Social and
Governance (ESG) requirements. This pillar will also focus on
reinforcing the quality of service provided to the Group’s
life operations and supporting the Group’s ESG
strategy.
●
Complementary
partner solutions – this
pillar will focus on complementary investment capabilities sourced
from partners, in order to enhance strategies available to
investors.
In
developing its capabilities, Eastspring will further integrate its
offerings with those of Prudential’s life business, to enable
the Group to seamlessly offer services across the full spectrum of
Life, Health and Wealth products. Eastspring will leverage
Prudential’s established distribution channels.
We
believe these developments will further enhance Eastspring’s
position as a leading asset manager in Asia.
Summary
There is a growing awareness and demand for wellness and insurance
products across Asia, re-enforced by the global pandemic. We
continue to invest in our chosen markets, building on our leading
position in Hong Kong and ASEAN, and meeting the growing needs of
customers in the largest economies of China, India, Indonesia and
Thailand. This customer need is addressed by our wide range of
insurance products, tailored to local markets, and extensive and
diversified distribution network. We continue to amplify these
existing capabilities through extending our China footprint,
broadening our product offerings and enhancing our digital
presence. Our innovative and customer-centric digital ecosystem
increasingly complements our existing distribution channels and
provides access to address the needs of new and fast growing
customer segments. Our overall customer offering is supported by
our integrated asset manager Eastspring, which has a clear strategy
to expand its capabilities to deliver growth.
We believe these enhanced capabilities, alongside the resilience of
our high quality and well diversified platform, mean our Asia
business is well positioned to capture the structural opportunities
open to us and therefore deliver profitable and sustainable
compounding growth and high risk-adjusted returns for
shareholders.
US operations
Jackson helps Americans grow and protect their retirement savings
and income to enable them to pursue financial freedom for
life. Following the planned demerger, Jackson intends to
pursue a focused strategy which prioritises optimisation and
stability of capital resources while protecting franchise
value.
Maintaining a resilient balance sheet is critical to Jackson
meeting its objectives of fulfilling its obligations to
policyholders, providing stable capital returns to shareholders,
supporting the development of the business and enabling profitable
growth over the long-term.
In line with Jackson’s disciplined approach to pricing and
risk management, pricing actions taken in the first half of 2020 in
response to changing market conditions and to preserve statutory
capital, resulted in an expected and material reduction in new
fixed annuity and fixed index annuities sales.
Jackson has identified three main areas for business
development.
First, Jackson intends to maintain and enhance its comprehensive
suite of retirement products that it believes are sought after by
retail investors and Jackson’s distribution
partners.
Second, it plans to optimise the sales mix across its broad product
portfolio by leveraging the strength of its industry-leading
distribution network and entering into new distribution
agreements.
Third, Jackson seeks to develop the overall market demand for
retail annuities by partnering with wealth management solution
providers that historically have not considered annuities as a
solution to provide retirement savings and income
protection.
These strategies are discussed further below.
Markets
Jackson believes that the US retirement savings and income
solutions market presents a compelling growth opportunity and will
support its development in the future. The primary drivers of the
industry’s trends are believed to be the
following:
●
The target demographic is
expected to continue to grow.
Over the next decade, the proportion of the US population aged 55
or older is expected to grow at a rate double that of the total US
population, resulting in approximately 112 million individuals who
will be aged 55 or older by the year 203029.
●
The need for new sources of
retirement income is expected to grow. Over the last few decades, there has been a
pronounced shift from retirement income funded primarily by pension
plans to retirement income funded primarily by individual savings.
Of all private sector workers in the United States, only 15 per
cent had access to a defined benefit pension plan in 2020 (down
from 20 per cent in 2010), and 52 per cent only had access to a
defined contribution retirement plan in 202030.
This trend has increased the burden on individuals to save for
their retirement and to use those savings to generate income during
retirement.
●
Annuities are underutilised in
the world’s largest retirement savings
market. The United States is
the world’s largest retirement savings market estimated to
consist of approximately $51 trillion in professionally managed
retail and institutional assets as of 31 December
201931.
However, only approximately $2.4 trillion of professionally managed
assets were invested in annuities as of 31 December 2019. A key
driver of this underutilisation is the historical lack of
integration of annuities into wealth management platforms and
financial planning tools available to retail investors. Jackson has
been working actively with its distribution partners and financial
technology firms to integrate annuities into the wealth management
planning tools advisers use to select investments and build
portfolios for their clients.
Products
Jackson offers a diverse suite of annuities to retail investors in
the United States. The success of its variable annuity offerings
reflects the differentiated features Jackson offers as compared
with its competitors, in particular the wider range of investment
options and greater freedom to invest across multiple investment
options. Through the third quarter of 2020, Jackson accounted for
16.5 per cent of new sales in the US retail variable annuity
market32
and ranked number 1 in variable
annuity sales. Jackson also offers fixed index annuities and fixed
annuities and expects to offer a registered index-linked annuity in
2021. This diverse offering allows Jackson to meet the different
needs of retail investors based on their risk tolerance and desired
growth objectives, and to deliver customised, differentiated
solutions to its distribution partners. Jackson’s annuities
offer investors the opportunity to grow their savings consistent
with their objectives, ranging from full market participation with
Jackson’s variable annuities, to a guaranteed fixed return
with Jackson’s fixed annuities. Some of Jackson’s
annuities offer optional guarantee benefits for a fee, such as full
or partial protection of principal, minimum payments for life and
minimum payments to beneficiaries upon death. All annuities also
provide investors with tax deferral benefits consistent with their
purpose of providing financial security at, and through,
retirement.
Distribution network
Jackson sells its products through an industry-leading distribution
network that includes independent broker-dealers, wirehouses,
regional broker-dealers, banks, and independent registered
investment advisers, third-party platforms and insurance agents.
Jackson’s strong presence in multiple distribution channels
has been essential to positioning it as a leading provider of
retirement savings and income solutions. Each of these channels is
supported by Jackson’s sizeable wholesaler field force, which
is among the most productive in the annuity industry. According to
the Market Metrics Q3 2020 Sales, Staffing, and Productivity
Report, Jackson’s variable annuity sales per wholesaler are
more than 10 per cent higher than its nearest
competitor.
Operating platform
Jackson’s operating platform is scalable and efficient.
Jackson administers approximately 75 per cent of its in-force
policies on its in-house policy administration platform.
Jackson’s in-house policy administration platform gives it
flexibility to administer multiple product types through a single
platform. To date, Jackson has converted over 3.5 million life and
annuity policies to its in-house policy administration platform,
eliminating the burdens, costs and inefficiencies that would be
involved in maintaining multiple legacy administration systems. The
remainder of Jackson’s business is administered through
scalable third-party arrangements. Jackson believes that its
operating platform provides it with a competitive advantage by
allowing it to grow efficiently and provide superior customer
service. In 2020, Jackson received the 2019 Contact Center of the
Year award from Service Quality Management and the number 1 overall
operational ranking for 2019 from its broker-dealer partners,
according to the Operations Managers’
Roundtable.
Risk management
Product design and pricing are key aspects of Jackson’s risk
management approach. Jackson operates a sophisticated hedging
program which seeks to balance three objectives: managing the
economic impact of adverse market conditions, protecting statutory
capital and providing stable distributable earnings throughout
market cycles.
Jackson also uses third-party reinsurance to mitigate a portion of
the risks that it faces, principally in certain of its in-force
annuity and life insurance products with regard to longevity and
mortality risks and its annuities with regard to the vast majority
of its guaranteed minimum income optional benefit (GMIB)
features.
Notes
1
Based on full year
2020 (calendar year 2020 for India), or the latest information
available. Sources include formal (eg competitors’ results
release, local regulators and insurance association) and informal
(industry exchange) market share data. Ranking based on new
business (APE sales, weighted full year premium or full year
premium depending on availability of data) or total weighted
revenue premiums. Full year data is not yet available for Cambodia,
or Laos, full year 2019 data has been used instead. For Hong Kong
and the Philippines, ranking based on new business for the first
nine months of 2020.
2
Source:
Asia asset management – Fund manager surveys. Based on assets
sourced in Asia, excluding Japan, Australia and New Zealand. Ranked
according to participating firms only.
3
Increase
stated on an actual exchange rate basis.
4
United Nations,
Department of Economic and Social Affairs, Population Division,
World Population Prospects 2019 Revision (2020
estimates).
5
Source: Swiss Re
Institute; Sigma Explorer: World insurance, 2019 – life
insurance penetration (premiums as a percentage of
GDP).
6
Source: Swiss Re
Institute: The health protection gap in Asia, October 2018. Average
gap per household is calculated as ‘total health protection
gap divided by estimated number of households hospitalised under
the mentioned gap range’. In this report, the
definition/scope of ‘Asia’ is the 12 markets surveyed:
China, Hong Kong, India, Indonesia, Japan, Malaysia, the
Philippines, Singapore, South Korea, Taiwan, Thailand and
Vietnam.
7
Full year 2020
total funds under management, including external funds under
management, money market funds, funds managed on behalf of M&G
plc and internal funds under management, reported based on the
country where the funds are managed.
8
Total joint
venture/foreign players only.
11
Includes Takaful,
excludes Group business.
12
Includes
onshore only.
13
Source:
World Bank and WHO: Half the world lacks access to essential health
services, 100 million still pushed into extreme poverty because of
health expenses, December 2017.
14
Prudential
estimate based on number of in-force policies over total
population.
15
Source:
World Health Organisation: Global Health Observatory data
repository (2013). Out of pocket as % of total health expenditure.
Asia calculated as average out-of-pocket.
16
Source:
The World Bank 2017.
17
Source:
The Borgen Project: Digital health apps in Africa aim to
revolutionize medical care, September 2020.
18
Attributed
to the shareholders of the Group before deducting the amount
attributable to the non-controlling interests. This presentation is
applied consistently throughout the document.
19
Representing
Prudential’s 49 per cent interest.
20
Based
on 4Q20 MCH Sentiment Tracker conducted through online survey by
Nielsen online panel on behalf of Prudential Hong Kong. Survey
results are based on sample size of 451.
21
Increase
stated on a constant exchange rate basis.
22
Including
37 bite-sized products.
23
Source:
Swiss Re COVID-19 Consumer Survey, April 2020.
25
Cases
per active agent.
27
As
of 22 February 2021.
28
Substantially
from full-premium products sold through referrals to agents and a
small amount of revenue from 37 new digital products.
29
Source:
Census Bureau’s Current Population Survey, March
2017.
30
Source:
Bureau of Labor Statistics.
31
Source:
Estimated by Cerulli & Associates.
Group Chief Financial Officer and Chief Operating Officer’s
report on the 2020 financial performance
The Group has delivered positive operating results while supporting
our colleagues, distributors, customers and communities during the
disruption caused by Covid-19. Alongside, we have accelerated
preparations for the proposed separation of Jackson and continue to
develop our capabilities and presence in our chosen Asia and Africa
markets, which will position the Group well for success in the
future.
While Covid-19 restrictions led to new APE sales in Asia being (28)
per cent1
lower than the prior year, we have
seen positive momentum in the second half of the year, with H2 2020
sales up 20 per cent1
compared with the first half.
Excluding Hong Kong, where restrictions between Mainland China and
Hong Kong have been in place for much of 2020, new APE sales were
down (6) per cent1,
with new business profit falling by only (4) per
cent1
as new business profit margins saw a
small improvement over the prior year. Our businesses in Asia
delivered a 13 per cent1
increase in adjusted IFRS operating
profit based on longer-term investment returns (adjusted
operating profit2),
reflecting the benefits of our well positioned and broad-based
portfolio, which has long focused on high quality, recurring
premium business. Operating free surplus generation was 8 per
cent1
higher, following the on-going growth
of the in-force business and lower levels of new business which
were offset by the impact of lower interest
rates.
Lower asset returns and the effect of lower interest rates on the
economic assumptions underpinning DAC amortisation contributed to
US long-term business adjusted operating profit2
being (8) per cent lower than the
prior year. The RBC ratio of Jackson National
Life24,
Jackson’s principal operating subsidiary, was 347 per cent,
with operating capital generation in line with expectations
following the Athene reinsurance transaction. As announced on 28
January, the RBC ratio is after an 80 percentage point reduction
following revisions to Jackson’s hedge modelling for US
regulatory purposes.
2020 saw high levels of macro volatility. In the US, the S&P
500 index fell (4) per cent over the first half before recovering
by 20 per cent in the second, resulting in a 16 per cent increase
over the year. In Asia, equity indices were similarly volatile,
with the MSCI Asia ex Japan Index (6) per cent down in the first
half and up 30 per cent in the second. Government bond yields were
lower over the year, notably with the US 10-year government bond
yield ending the year at 0.9 per cent (31 December 2019: 1.9 per
cent). 2020 also saw significant volatility in credit spreads, for
example spreads on US dollar denominated A-rated corporate bonds
rose by 39 basis points in the first half and fell by (41) basis
points in the second half.
Covid-19
The Group Chief Executive’s report has set out how the Group
has risen to the operational challenges presented by Covid-19. In
terms of financial performance, the containment measures taken by
governments across the globe have impacted sales levels and
consequentially new business profitability in 2020, albeit many
business units saw sales improve in the second half of the year as
restrictions were removed. These impacts are discussed in more
detail later in this report. Future sales level will depend on how
governments respond to changing Covid-19 case levels and the
success of vaccination and containment programmes in the markets in
which we operate. Travel between Hong Kong and Mainland China
remains severely restricted, with consequential effects on Mainland
China visitor numbers and the level of APE sales in Hong Kong from
this segment. The impact that Covid-19 has had on the
macro-economic environment, with lower interest rates and volatile
equity markets, has negatively impacted profitability in the year
as discussed below. The sensitivity of our IFRS, EEV and capital
metrics to further market movements are set out in the financial
statements later in this document.
In Asia, where we focus on health and protection business, we
continue to see low levels of Covid-19 claims, which were less than
1 per cent of total Asia claims paid in the year of $7.2 billion.
We also provided our customers in 2020 with premium grace periods
in line with local regulations. Our annual review of non-economic
assumptions underpinning insurance liabilities did not identify the
need for any significant strengthening as a result of the effects
of Covid-19 and overall Asia operating experience remains positive.
There have been no impairments to goodwill or intangible assets at
31 December 2020 and we will continue to review for triggers for
impairment in line with our normal accounting procedures. Our
investments are largely at fair value in the balance sheet and no
significant changes to our valuation procedures have been applied.
Losses on sales of impaired bonds by Jackson increased to $(148)
million in the year (2019: loss of $(28) million) and bond
write-downs increased to $(32) million (2019: $(15) million)
reflecting volatility in credit spreads.
Finally, our liquidity position remains healthy with $1.5 billion
of holding company cash and $0.5 billion of commercial paper in
issue at 31 December 2020 alongside $2.6 billion of undrawn
committed facilities. We have not breached any of the requirements
of our core structural borrowings nor modified any of their
terms.
Adjusted operating profit before tax from continuing
operations
For
full year 2020, Prudential’s adjusted operating
profit2,7
from continuing operations was $5,507 million (4 per cent higher
than 2019 on a constant and an actual exchange rate basis).
Throughout this document the reference to continuing operations
refers to results of the full Group in 2020 and the results of the
Group in 2019 excluding the contribution from the discontinued UK
life and asset management operations.
The
increase in adjusted operating profit reflects the combination of a
13 per cent1 increase in adjusted
operating profit2 from our Asia life
and asset management operations, offset by a (9) per cent decrease
in adjusted operating profit2 from our US business
(including asset management), and lower central
expenses.
Central
expenses15
were 8 per cent3 lower than the prior
year reflecting a reduction in interest expense on core borrowings
following the transfer of debt to M&G plc in 2019, partly
offset by increased restructuring costs of $(208) million (2019:
$(110) million3). Restructuring
costs reflect the Group’s substantial and ongoing IFRS 17
project and costs associated with actions to reduce central costs
post the demerger of M&G plc. During 2020 our head office
activities incurred costs of $(417) million (2019: $(460)
million3).
The Group continues to take action to right-size its head office
costs alongside the evolving footprint of the business. The Group
has delivered $180 million of cost savings effective from 1 January
20215 as
previously targeted as a result of the M&G demerger6. In addition, as a
result of the separation of Jackson from the Group, head office
costs are targeted to reduce further by around $70 million from the
start of 2023. We will continue to review the timing of the full
realisation of these further savings following the completion of
the US demerger.
Non-operating items from continuing operations25
Non-operating
items in 2020 consist of short-term fluctuations in investment
returns on shareholder-backed business of negative $(4,841) million
(2019: $(3,203) million3), the net benefit
from various corporate transactions of $1,521 million (2019: loss
of $(142) million3), which are
discussed further below, and the amortisation of acquisition
accounting adjustments of negative $(39) million (2019: $(43)
million3)
arising mainly from the REALIC business acquired by Jackson in
2012.
Negative
short-term fluctuations include negative $(607) million for Asia
(2019: positive $657 million3) and negative
$(4,262) million in the US (2019: $(3,757) million).
Falling
interest rates in certain parts of Asia led to lower discount rates
on certain policyholder liabilities under the local reserving basis
applied, which were not fully offset by unrealised bond and equity
gains in the year leading to negative fluctuations
overall.
Within
the US, falling interest rates, with yields on US treasuries
falling by almost 1 percentage point over the year, and steeply
rising equity markets following substantial falls in the first
quarter of the year have led to $(4,262) million of negative
short-term investment fluctuations in the US business. Further
information is set out in the US section of this
report.
After
allowing for non-operating items, the total IFRS profit after tax
from continuing operations was $2,185 million (2019: $1,944
million1).
IFRS effective tax rates
In
2020, the effective tax rate on adjusted operating profit based on
longer-term investment returns from continuing operations was 15
per cent. This was unchanged from 2019.
The
effective tax rate on total IFRS profit in 2020 was negative (2)
per cent. This was unchanged from 2019 and reflects the tax credit
on US derivative losses exceeding the tax charge on profits from
Asia operations.
Total tax contribution from continuing operations
The
Group continues to make significant tax contributions in the
jurisdictions in which it operates, with $2,114 million remitted to
tax authorities in 2020. This was similar to the equivalent amount
of $2,168 million3 remitted in
2019.
Tax strategy
The
Group publishes its tax strategy annually which, in addition to
complying with the mandatory UK (Finance Act 2016) requirements,
also includes a number of additional disclosures, including a
country-by-country disclosure of revenues, profits, average
employee numbers and taxes for all jurisdictions where more than $5
million tax was paid. This disclosure is included as a way of
demonstrating that our tax footprint (ie where we pay taxes) is
consistent with our business footprint. An updated version of the
tax strategy, including 2020 data, will be available on the
Group’s website before 31 May 2021.
Corporate transactions
Jackson reinsurance of fixed and fixed index annuity business in
June 2020
Jackson
reinsured substantially all of its in-force portfolio of US fixed
and fixed index annuities with Athene (circa $27.6 billion of
liabilities). The transaction excluded liabilities relating to
Jackson’s legacy life and institutional business, the REALIC
portfolio and group pay-out annuity business reinsured from John
Hancock as well as investments in the general account by the
variable annuity policyholders. The transaction improved the
year-end capital position of Jackson by increasing the Jackson RBC
ratio by 67 percentage points and the Group’s LCSM cover
ratio by 24 percentage points. The reinsurance agreement was
effective on 1 June 2020 and resulted in an IFRS pre-tax gain
recorded through the profit and loss account of $804 million, after
transaction costs and post-closing adjustments. After allowing for
tax and the reduction in unrealised gains recorded directly in
other comprehensive income, the impact of the reinsurance
transaction on IFRS shareholders’ equity is a reduction of
$(1.2) billion. This transaction reduced the Group’s EEV by
$(457) million, which largely reflects the loss of future profits
recorded in the value of in-force business as a result of the
reinsurance and the loss of unrealised gains on assets passed to
Athene, partly offset by the reinsurance commission received after
deducting tax.
Equity investment into Jackson by Athene
In July
2020, Athene Life Re Ltd invested $500 million in
Prudential’s US business in return for an 11.1 per cent
economic interest for
which the voting interest is 9.9 per cent. This has no impact on
the income statement but resulted in a decline in IFRS
shareholders’ equity of $(514) million at the date of the
transaction.
Other transactions
Other
transactions in 2020 contributed $717 million to profit and
principally include the reinsurance commission from a quota share
reinsurance transaction undertaken by Hong Kong as part of the
Group’s on-going asset/liability management. Future surpluses
(or losses) arising from the business being reinsured will be
shared with the reinsurer in accordance with the terms of the
treaty. Under EEV we recorded a loss of $91 million representing
the frictional costs of the arrangement. This treaty helps mitigate
the effect of the accounting mismatch under the existing regulatory
framework in Hong Kong and is part of our management of the
transition to the new RBC regime.
In the
first half of the year, the Thailand business entered into a
strategic bancassurance partnership with TMB Bank Public Company
Limited with an initial period of 15 years which both expanded and
extended the existing partnership with Thanachart Bank. The new
arrangement commenced on 1 January 2021 and the fee paid for
expanding and extending the existing arrangement was $0.8
billion.
In
January 2021, the Group announced its intention to complete the
demerger of Jackson in the first half of 2021. The total costs
associated with this activity are estimated to be around $110
million to $120 million, of which around half is expected to be
borne by Prudential plc and the remainder by Jackson. These largely
relate to advisory and other professional fees and a small amount
relates to the separation of Jackson’s systems and processes
from those of the remaining Prudential Group.
Of
these total costs, $38 million has been incurred in 2020 ($20
million by Prudential plc and $18 million by Jackson) and has been
included in non-operating profit as part of corporate transactions.
The remainder of the costs are expected to be incurred in the first
half of 2021.
IFRS profit
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
2020 $m
|
2019 $m
|
Change %
|
|
2019 $m
|
Change %
|
Adjusted operating profit based on longer-term investment returns
before tax from continuing operations
|
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
Long-term business
|
3,384
|
2,993
|
13
|
|
2,978
|
14
|
Asset management
|
283
|
283
|
-
|
|
278
|
2
|
Total Asia
|
3,667
|
3,276
|
12
|
|
3,256
|
13
|
|
|
|
|
|
|
|
US
|
|
|
|
|
|
|
Long-term business
|
2,787
|
3,038
|
(8)
|
|
3,038
|
(8)
|
Asset management
|
9
|
32
|
(72)
|
|
32
|
(72)
|
Total US
|
2,796
|
3,070
|
(9)
|
|
3,070
|
(9)
|
|
|
|
|
|
|
|
Total segment profit from continuing operations
|
6,463
|
6,346
|
2
|
|
6,326
|
2
|
|
|
|
|
|
|
|
Other income and expenditure
|
(748)
|
(926)
|
19
|
|
(931)
|
20
|
Total adjusted operating profit before tax and restructuring
costs
|
5,715
|
5,420
|
5
|
|
5,395
|
6
|
Restructuring and IFRS 17 implementation costs
|
(208)
|
(110)
|
(89)
|
|
(110)
|
(89)
|
Total adjusted operating profit before tax
|
5,507
|
5,310
|
4
|
|
5,285
|
4
|
Non-operating items:
|
|
|
|
|
|
|
Short-term
fluctuations in investment returns on shareholder-backed
business
|
(4,841)
|
(3,203)
|
(51)
|
|
(3,191)
|
(52)
|
Amortisation
of acquisition accounting adjustments
|
(39)
|
(43)
|
9
|
|
(43)
|
9
|
Gain
on disposal of businesses and corporate transactions
|
1,521
|
(142)
|
n/a
|
|
(143)
|
n/a
|
Profit from continuing operations before tax attributable to
shareholders
|
2,148
|
1,922
|
12
|
|
1,908
|
13
|
Tax credit attributable to shareholders' returns
|
37
|
31
|
n/a
|
|
36
|
n/a
|
Profit from continuing operations for the year
|
2,185
|
1,953
|
12
|
|
1,944
|
12
|
Loss from discontinued operations for the year, net of related
tax
|
-
|
(1,161)
|
100
|
|
(1,165)
|
100
|
Profit for the year
|
2,185
|
792
|
176
|
|
779
|
180
|
|
|
|
|
|
|
|
IFRS earnings per share
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
2020 cents
|
2019 cents
|
Change %
|
|
2019 cents
|
Change %
|
Basic earnings per share based on adjusted operating profit after
tax from continuing operations
|
175.5
|
175.0
|
-
|
|
174.6
|
1
|
|
|
|
|
|
|
|
Basic earnings per share based on:
|
|
|
|
|
|
|
Total
profit after tax from continuing operations
|
81.6
|
75.1
|
9
|
|
75.1
|
9
|
Total
loss after tax from discontinued operations
|
-
|
(44.8)
|
n/a
|
|
(45.1)
|
n/a
|
IFRS shareholders' equity
|
|
|
|
2020 $m
|
2019 $m
|
Adjusted operating profit after tax attributable to
shareholders
|
4,559
|
4,528
|
|
|
|
Profit after tax for the year attributable to
shareholders
|
2,118
|
783
|
Exchange movements, net of related tax
|
239
|
2,943
|
Unrealised gains and losses on US fixed income securities
classified as available-for-sale (before the impact of
Jackson’s reinsurance with Athene)
|
2,095
|
2,679
|
Impact of Jackson’s reinsurance of fixed and fixed index
annuities to Athene
|
(1,795)
|
-
|
Sale of 11.1 per cent stake in Jackson to Athene
|
(514)
|
-
|
Demerger dividend in specie of M&G plc
|
-
|
(7,379)
|
Other external dividends
|
(814)
|
(1,634)
|
Other
|
72
|
117
|
Net increase (decrease) in shareholders’ equity
|
1,401
|
(2,491)
|
Shareholders’ equity at beginning of the year
|
19,477
|
21,968
|
Shareholders’ equity at end of the year
|
20,878
|
19,477
|
Shareholders' value per
share8
|
800¢
|
749¢
|
Group IFRS shareholders’ equity in the 12 months to 31
December 2020 increased by 7 per cent3
to $20.9 billion (31 December 2019:
$19.5 billion3),
largely reflecting profit after tax for the year and foreign
exchange movements, partly offset by dividends paid in the year of
$(0.8) billion and the impact of the sale of 11.1 per cent of the
Group’s economic interest in Jackson to
Athene.
Group capital position
Prudential
plc is applying the local capital summation method (LCSM) that has
been agreed with the Hong Kong Insurance Authority (IA) to
determine Group regulatory capital requirements until the
Group-wide Supervision (GWS) Framework is effective for Prudential
upon designation. The primary legislation was enacted in July 2020
and will come into operation on 29 March 2021. The relevant
subsidiary legislation, including the Insurance (Group Capital)
Rules, was tabled before the Legislative Council on 6 January 2021
and will also come into operation on 29 March 2021. This
legislation will be further supported by guidance material from the
Hong Kong IA. The GWS Framework is expected to be effective for
Prudential upon designation by the Hong Kong IA in the second
quarter of 2021, subject to transitional arrangements.
The GWS
methodology is largely consistent with that applied under LCSM with
the exception of the treatment of debt instruments.
Prudential’s initial analysis indicates that all debt
instruments (senior and subordinated) issued by Prudential will
meet the transitional conditions set by the Hong Kong IA and will
be included as eligible Group capital resources. If this were the
case the 31 December 2020 shareholder LCSM ratio10 (over GMCR) would
increase by 35 percentage points to 363 per cent. This is subject
to final approval by the Hong Kong IA.
The
estimated shareholder LCSM cover ratio10 at 31 December 2020
was 328 per cent (31 December 2019: 309 per cent). Excluding US
operations, the cover ratio falls marginally to 323 per cent,
before including the proposed retained 19.9 per cent
non-controlling interest in Jackson.
Overall,
LCSM shareholder surplus over group minimum capital requirements
increased by $1.5 billion since 31 December 2019 to $11.0 billion
at the end of December 2020. LCSM in-force operating capital
generation in the year was $2.2 billion, which supported $(0.2)
billion of investment in new business.
Overall
non-operating items (excluding corporate transactions) reduced
surplus by $(0.2) billion, with the negative effect of market
movements in the year being offset by a $2.2 billion benefit from
the introduction of the new Singapore risk-based capital framework
(RBC2) effective 31 March 2020. Also included within non-operating
items is a $(0.4) billion fall in surplus from changes made to
Jackson VM-21 hedging model, further details of which are set out
in the US section in the discussion of RBC changes.
The
corporate transactions previously discussed were positive overall
and contributed $0.5 billion to surplus and the payment of the 2019
second interim and 2020 first interim dividends reduced the surplus
by $(0.8) billion.
The
Group’s LCSM position is resilient to external macro
movements as demonstrated by the sensitivity disclosure contained
in note I(i) of the Additional unaudited financial information,
alongside further information on the basis of calculation of the
LCSM measure.
|
31 Dec 2020
|
31 Dec 2019
|
Estimated Group LCSM capital
position10
|
Total
|
Shareholder*
|
Total
|
Shareholder*
|
Available capital ($ billion)
|
37.9
|
15.8
|
33.1
|
14.0
|
Group minimum capital requirement (GMCR) ($ billion)
|
11.5
|
4.8
|
9.5
|
4.5
|
LCSM surplus (over GMCR) ($ billion)
|
26.4
|
11.0
|
23.6
|
9.5
|
LCSM ratio (over GMCR) (%)
|
329%
|
328%
|
348%
|
309%
|
*The shareholder LCSM amounts exclude the available capital and
minimum capital requirements of the participating business in Hong
Kong, Singapore and Malaysia.
|
Financing and liquidity
Net core structural borrowings of shareholder financed
businesses
|
|
31 Dec 2020 $m
|
|
31 Dec 2019 $m
|
|
IFRS
basis
|
Mark-to-market value
|
EEV
basis
|
|
IFRS
basis
|
Mark-to-market value
|
EEV
basis
|
Total borrowings of shareholder-financed businesses
|
6,633
|
885
|
7,518
|
|
5,594
|
633
|
6,227
|
Less: holding company cash and short-term investments
|
(1,463)
|
-
|
(1,463)
|
|
(2,207)
|
-
|
(2,207)
|
Net core structural borrowings of shareholder-financed
businesses
|
5,170
|
885
|
6,055
|
|
3,387
|
633
|
4,020
|
Net gearing ratio*
|
20%
|
|
|
|
15%
|
|
|
*
Net core structural
borrowings as proportion of IFRS shareholders’ equity plus
net debt, as set out in note II(ii) of the Additional unaudited
financial information.
The total borrowings of the shareholder-financed businesses
increased by $1.0 billion, from $5.6 billion to $6.6 billion in
2020. This reflected the issuance of $1,000 million 3.125 per cent
notes in April 2020 raised for general corporate purposes including
to support the growth of the business. The Group had central cash
resources of $1.5 billion at 31 December 2020 (31 December 2019:
$2.2 billion), resulting in net core structural borrowings of the
shareholder-financed businesses of $5.2 billion at end of December
2020 (31 December 2019: $3.4 billion). Prudential plc seeks to
maintain its financial strength rating which derives, in part, from
the high level of financial flexibility to issue debt and equity
instruments which is intended to be maintained and enhanced in the
future.
At the
31 December 2020, the Group’s net gearing ratio as defined in
the table above was 20 per cent. We estimate that this will rise to
circa 28 per cent post the separation of Jackson (based on the
balance sheet at 31 December 2020, assuming no pre-separation
dividend and before allowing for the 19.9 per cent retained stake
in Jackson). On a Moody’s basis, which is the basis
management intend to use going forward to manage leverage and which
differs to the above by taking into account gross debt, including
commercial paper, and also allows for a proportion of the surplus
within the Group’s with-profits funds, the equivalent ratio
is 33 per cent, before allowing for the 19.9 per cent retained
stake in Jackson. Following the demerger, as a pure-play Asia and
Africa business, Prudential will target a Moody’s
debt-leverage ratio of around 20 to 25 per cent4 over the medium
term. Prudential may operate outside this range temporarily to take
advantage of growth opportunities with attractive risk-adjusted
returns as they arise, while still preserving its strong credit
ratings.
As
discussed in the Chief Executive’s report, Prudential is
considering raising new equity of around $2.5-3 billion. Such a
transaction, if executed, would maintain and enhance the
Group’s financial flexibility in light of the breadth of the
opportunities to invest in growth and aim to increase the
Group’s investor base in Asia.
Other sources of liquidity
In
addition to its net core structural borrowings of
shareholder-financed businesses set out above, the Group has access
to funding via the medium-term note programme, the US shelf
programme (the platform for issuance of SEC-registered bonds in the
US market), a commercial paper programme and committed revolving
credit facilities. All of these are available for general corporate
purposes.
Prudential
plc has maintained a consistent presence as an issuer in the
commercial paper market for the past decade and had $501 million in
issue at the end of 2020 (31 December 2019: $520
million).
As at
31 December 2020, the Group had a total of $2.6 billion of undrawn
committed facilities, expiring in 2025. Apart from small drawdowns
to test the process, these facilities have never been drawn,
and there were no amounts outstanding at 31 December
2020.
In
addition to the Group’s traditional sources of liquidity and
financing, Jackson also has access to funding via the Federal Home
Loan Bank of Indianapolis with advances secured against collateral
posted by Jackson. Given the wide range of Jackson’s product
set and breadth of its customer base including retail, corporate
and institutional clients, further sources of liquidity also
include premiums and deposits.
Group free surplus generation from continuing
operations9
Free
surplus generation is the financial metric we use to measure the
internal cash generation of our business operations and is based
(with adjustments) on the capital regimes that apply locally in the
various jurisdictions in which the Group operates. For life
insurance operations, it represents amounts emerging from the
in-force business during the year, net of amounts reinvested in
writing new business. For asset management and other non-insurance
operations (including the Group’s central operations and
Africa operations) it is taken to be IFRS basis shareholders’
equity, net of goodwill attributable to shareholders, with central
Group debt shown on a market value basis and subordinated debt
recorded as free surplus to the extent that it is classified as
available capital under the Group’s capital
regime.
Analysis of movement in Group free
surplus9
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
2020 $m
|
2019 $m
|
Change %
|
|
2019 $m
|
Change %
|
Asia - operating free surplus generated before restructuring
costs
|
1,895
|
1,772
|
7
|
|
1,762
|
8
|
Central costs and eliminations (net of tax):
|
|
|
|
|
|
|
Net
interest paid on core structural borrowings
|
(328)
|
(451)
|
27
|
|
(453)
|
28
|
Corporate
expenditure
|
(419)
|
(403)
|
(4)
|
|
(406)
|
(3)
|
Other
items and eliminations
|
(111)
|
(69)
|
(61)
|
|
(69)
|
(61)
|
Net operating free surplus generated before restructuring costs and
US
|
1,037
|
849
|
22
|
|
834
|
24
|
Restructuring and IFRS 17 implementation costs (net of
tax)
|
(147)
|
(87)
|
(69)
|
|
(87)
|
(69)
|
US – operating free surplus generated net of restructuring
costs
|
1,073
|
1,120
|
(4)
|
|
1,120
|
(4)
|
Net Group operating free surplus generated for continuing
operations*
|
1,963
|
1,882
|
4
|
|
1,867
|
5
|
Redemption of subordinated debt for continuing
operations
|
-
|
(529)
|
|
|
|
|
External dividends
|
(814)
|
(1,634)
|
|
|
|
|
Non-operating and other movements
|
(1,200)
|
654
|
|
|
|
|
Net impact of Athene equity investment in Jackson
|
63
|
-
|
|
|
|
|
Foreign exchange movements
|
136
|
190
|
|
|
|
|
Increase in Group free surplus from continuing
operations*
|
148
|
563
|
|
|
|
|
Change in amounts attributable to non-controlling
interests
|
209
|
(9)
|
|
|
|
|
Free surplus at 1 Jan from continuing operations
|
9,736
|
9,182
|
|
|
|
|
Free surplus at 31 Dec from continuing operations
|
10,093
|
9,736
|
|
|
|
|
Comprising:
|
|
|
|
|
|
|
Free surplus of life insurance and asset management
operations
|
7,679
|
5,997
|
|
|
|
|
Central operations (including Africa)
|
2,414
|
3,739
|
|
|
|
|
*
Before amounts
attributable to non-controlling interests.
The
total net Group operating free surplus generation, after including
operating free surplus generated by the US business and deducting
restructuring costs was $1,963 million (2019: $1,882
million3).
This comprises $2,886 million (2019: $2,861 million3) operating free
surplus generation from the life and asset management business (net
of attributable restructuring costs) offset by centrally incurred
costs and eliminations of $(923) million (2019: $(979)
million3).
Asia
operating free surplus generation9,12 from insurance
and asset management business increased by 8 per cent1 to $1,895 million
reflecting recent business growth, higher asset management earnings
and lower levels of new business investment as Covid-19 containment
measures introduced by the authorities across the region lowered
sales in the year.
US
operating free surplus generation (after deducting restructuring
costs) fell (4) per cent compared with 2019, which included a $355
million benefit following the integration of the John Hancock
business acquired in 2018.
Cash remittances
Holding company
cash flow13
|
|
|
|
|
Actual exchange rate
|
|
2020* $m
|
2019* $m
|
Change %
|
From continuing operations
|
|
|
|
Asia
|
716
|
950
|
(25)
|
Jackson
|
-
|
509
|
(100)
|
Other operations
|
55
|
6
|
817
|
Total net cash remitted from continuing operations
|
771
|
1,465
|
(47)
|
From discontinued operations
|
|
|
|
M&G plc
|
-
|
684
|
(100)
|
Net cash remitted by business units
|
771
|
2,149
|
(64)
|
Central outflows
|
(435)
|
(522)
|
|
Dividends paid
|
(814)
|
(1,634)
|
|
Other movements
|
(264)
|
(1,999)
|
|
Total holding company cash flow
|
(742)
|
(2,006)
|
|
Cash and short-term investments at the beginning of the
year
|
2,207
|
4,121
|
|
Foreign exchange and other movements
|
(2)
|
92
|
|
Cash and short-term investments at the end of the year
|
1,463
|
2,207
|
|
*The
holding company cash flow describes the movement in the cash and
short-term investments of the centrally managed Group holding
companies.
Remittances
from our Asia business were $716 million (2019: $950
million3).
In order to support the planned separation process, there were no
remittances from Jackson during the period. $55 million remittances
from other operations reflects intragroup interest income which is
not expected to recur.
Cash
remittances were used to meet central costs of $(435) million and
to pay dividends of $(814) million. Central costs include net
interest paid of $(294) million and a net tax benefit, which is not
expected to recur going forward, of $94 million.
Other
movements of $(264) million includes the proceeds of the issuance
of $1 billion of senior debt in April 2020 offset by central
contributions to the funding of Asia strategic growth initiatives,
principally payments for bancassurance distribution agreements,
including TMB and UOB. Further information is contained in note
I(iii) of the Additional unaudited financial
information.
Cash
and short-term investments totalled $1.5 billion at the end of
December 2020 (31 December 2019: $2.2 billion3).
The
Group will seek to manage its financial condition such that it has
sufficient resources available to provide a buffer to support the
retained businesses in stress scenarios and to provide liquidity to
service central outflows.
Dividend policy
Reflecting
the Group’s capital allocation priorities, dividends will be
determined primarily based on Asia’s operating capital
generation after allowing for the capital strain of writing new
business and recurring central costs, with a portion of capital
generation retained for reinvestment in the business. Dividends are
expected to grow broadly in line with the growth in Asia operating
free surplus generation net of right-sized central costs, and will
be set taking into account financial prospects, investment
opportunities and market conditions.
The
Board has approved a 2020 second interim ordinary dividend of 10.73
cents per share. Combined with the first interim ordinary dividend
of 5.37 cents per share the Group’s total 2020 dividend is
16.10 cents per share.
Starting
from the 2021 first interim dividend, the Board intends to apply a
formulaic approach to first interim dividends, which will be
calculated as one-third of the previous year’s full-year
ordinary dividend.
Asia
Operational and financial highlights
Prudential’s
Asia businesses delivered a resilient financial performance in
2020. While Covid-19 related containment measures impacted our new
sales and associated new business profit levels, we also delivered
a step-change in our digital capabilities. While the nature and
severity of Covid-19 restrictions varied significantly across our
markets, our enhanced digital and physical capabilities combined
with our diversified and high quality platform supported a strong
sequential quarterly recovery in sales in the third and fourth
quarters of the year from a low in the second quarter, illustrating
the strength of our franchise.
The
resilience and quality of our business is also evident in customer
retention levels of 90 per cent (2019: 90 per cent), which combined
with our recurring premium, health and protection focused business
model, with renewal premiums8 increasing 6 per
cent1 to
$20.1 billion, supported an overall 13 per cent1 increase in adjusted
life insurance operating profit2 and an 8 per
cent1
increase in operating free surplus generation9,12.
These
qualities enabled us to continue to grow scale and value, even in
more challenging operating conditions, with our overall Asia
embedded value increasing to $44.2 billion at 31 December 2020 (31
December 2019: $39.2 billion3).
|
Actual exchange rate
|
|
Constant exchange rate
|
|
2020 $m
|
2019 $m
|
Change %
|
|
2019 $m
|
Change %
|
New business profit
|
2,201
|
3,522
|
(38)
|
|
3,533
|
(38)
|
Adjusted operating profit*
|
3,667
|
3,276
|
12
|
|
3,256
|
13
|
EEV operating profit*
|
4,387
|
6,138
|
(29)
|
|
6,150
|
(29)
|
Operating free surplus generation*
|
1,895
|
1,772
|
7
|
|
1,762
|
8
|
*Before
restructuring costs
New business performance
Life EEV new business profit and APE new business sales (APE
sales)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
2020 $m
|
2019 $m
|
Change %
|
|
2019 $m
|
Change %
|
|
APE sales
|
New business profit
|
APE sales
|
New business profit
|
APE sales
|
New business profit
|
|
APE sales
|
New business profit
|
APE sales
|
New business profit
|
Hong Kong
|
758
|
787
|
2,016
|
2,042
|
(62)
|
(61)
|
|
2,037
|
2,063
|
(63)
|
(62)
|
China JV
|
582
|
269
|
590
|
262
|
(1)
|
3
|
|
590
|
262
|
(1)
|
3
|
Indonesia
|
267
|
155
|
390
|
227
|
(32)
|
(32)
|
|
379
|
220
|
(30)
|
(30)
|
Malaysia
|
346
|
209
|
355
|
210
|
(3)
|
-
|
|
349
|
207
|
(1)
|
1
|
Singapore
|
610
|
341
|
660
|
387
|
(8)
|
(12)
|
|
653
|
383
|
(7)
|
(11)
|
Other life insurance markets
|
1,133
|
440
|
1,150
|
394
|
(1)
|
12
|
|
1,160
|
398
|
(2)
|
11
|
Total Asia
|
3,696
|
2,201
|
5,161
|
3,522
|
(28)
|
(38)
|
|
5,168
|
3,533
|
(28)
|
(38)
|
Total Asia excluding Hong Kong
|
2,938
|
1,414
|
3,145
|
1,480
|
(7)
|
(4)
|
|
3,131
|
1,470
|
(6)
|
(4)
|
Total new business margin
|
|
60%
|
|
68%
|
|
|
|
|
68%
|
|
|
Life insurance new business APE sales decreased by (28) per
cent1
to $3,696 million and related new
business profit decreased by (38) per cent1.
Outside Hong Kong, overall new business APE sales were (6)
per cent1
lower and new business profit
decreased by (4) per cent1.
The impact of Covid-19 related disruption varied materially in
terms of severity and duration across the region. Restrictions
eased in many markets as the year progressed. In Mainland China
internal travel and business activity resumed from the end of March
and restrictions in Hong Kong eased from the end of August, though
the border between Mainland China and Hong Kong remains closed. In
Indonesia, after an initial relaxation of lockdown measures in
June, a further four-week period of lockdown was imposed between
mid-September and mid-October and the country re-entered lockdown
again in early 2021. Significant containment restrictions remain in
place in Malaysia, Vietnam, the Philippines and Thailand, with
reduced restrictions in place in Hong Kong domestic, Taiwan,
Singapore and India.
Over 2020, we continued to benefit from the resilience our diverse
platform provides. Our diverse geographic portfolio saw four
markets increase APE sales compared with the prior year, including
Thailand up 16 per cent1,
Taiwan up 11 per cent1
and Vietnam up 9 per
cent1.
This is also evident from a new business profit perspective, with
seven markets reporting growth, led by China JV up 3 per
cent1
among our larger markets and Thailand
and Vietnam, up 38 per cent1
and 18 per cent1
respectively, in other
markets.
Outside of Hong Kong, sales from our bancassurance channel were
stable with last year, underpinned by growth in China JV (APE
bancassurance sales up 34 per cent1),
Thailand (up 21 per cent1),
Indonesia (up 15 per cent1)
and Vietnam (up 35 per cent1).
We also saw increased agency momentum in the second half of the
year.
There has been a significant acceleration of our digital
capabilities over 2020, with virtual sales accounting for 27 per
cent of bank sales from July to December and 28 per cent of all
agency sales from April to December. This compares with very low
amounts in prior years. Our agency channel was supported by over
2.2 million of ‘online to offline’ leads generated by
our Pulse health and wealth super-app, which, together with direct
sales in Pulse, generated $211 million of APE
sales23
in the year.
The quality and diversity of our platform contributed to a strong
sequential recovery in APE sales as Covid-19 related restrictions
were lifted, with discrete third quarter production of $925
million1
sequentially 33 per
cent1
higher than the second quarter and
fourth quarter sales 18 per cent1
above the third quarter and 10 per
cent1
higher than the first quarter of 2020,
prior to Covid-19 restrictions being applied in many of the markets
in which we operate.
The fourth quarter of 2020 was the highest APE sales quarter of the
year for overall Asia and for 9 markets. As we pivoted to
standalone protection products of lower case size to meet rising
consumer demand, total new policies increased by 1 per cent and new
protection policies grew by 10 per cent in the fourth quarter
compared with the same period in the prior year.
The development of new business profit mainly reflects the impact
of change in geographic mix, particularly sharply lower APE sales
in Hong Kong where the reduction in new business profit was broadly
in line with APE sales. Outside Hong Kong, new business profit was
only (4) per cent1 lower compared with a (6) per
cent1
reduction in APE sales, with improved
new business margins partly driven by new health and protection
product launches which saw seven markets increasing their health
and protection mix. Health and protection products continue to be a
significant proportion of sales, contributing 27 per cent of APE
sales in 2020 (2019: 27 per cent).
Overall, Hong Kong APE sales were (63) per cent1 below the prior year. This was principally a
result of a very sharp reduction in APE sales to Mainland China
customers, reflecting the impact of the border closure early in the
year and consequent reduction in Mainland Chinese visitors and
associated APE sales to these customers. While domestic Hong Kong
APE sales were also impacted by Covid-19 related restrictions, new
business production improved markedly over the course of the year,
with APE sales in Q3 rising 20 per cent over Q2 and Q4 rising 60
per cent over Q3. The strong sequential sales growth was supported
by product innovation and ongoing development of our broader
digital capabilities. In particular, our increased focus on
standalone protection products, with lower case sizes, to meet
rising consumer demand saw domestic new sales policy count reach 98
per cent of prior year levels in the fourth quarter. Overall Hong
Kong new business profit was (62) per cent1 lower, broadly in line with the reduction in APE
sales.
Our China JV delivered an encouraging performance despite Covid-19
related disruption, increasing new business profit by 3 per
cent1. This was supported by the agency force focus on
protection products, which accounted for 53 per cent of sales from
this channel and as a result agency channel margins climbed to 85
per cent (2019: 74 per cent). We benefited materially from our
diversified distribution model, particularly the strength in
bancassurance which saw strong and accelerating growth of 34 per
cent in APE sales throughout the year. Overall APE sales were
only (1) per cent1 lower compared with the prior year and
second half APE sales 4 per cent1 higher than the prior
year.
The sales environment in Indonesia remained challenging following a
deterioration of Covid-19 infections through the summer,
culminating in the re-introduction of the highest-level movement
restrictions in September, which remain in place today in parts of
Indonesia. Despite the challenging environment, we achieved strong
performance in the sharia segment with APE sales growing 6 per cent
and new business profit 27 per cent. Meanwhile, the fourth quarter
saw the highest overall sales of 2020 (19 per cent higher than APE
sales in the first quarter) and was driven by 60 new products
launched in 2020, including lower ticket standalone protection
products. While this product strategy saw new sales case count rise
by 12 per cent at FY20, overall APE sales volumes were (30)
per cent1
below the prior year driving a similar
reduction in new business profit.
In Malaysia, APE sales were (1) per cent1 below the prior year, with a decline
in the first half sales largely offset by a recovery in the second
half of 14 per cent (compared with the second half of the prior
year), despite the reintroduction of partial Covid-19 related
restrictions in October, driven by strong agency production across
our traditional and takaful markets. The Takaful business grew APE
sales by 26 per cent compared with 2019, with new business profit
increasing by 29 per cent. Overall new business profit increased by
1 per cent1, reflecting our
increased focus on standalone smaller case size protection
products.
In
Singapore, APE sales fell by (7) per cent1 reflecting Covid-19 restrictions with
declines in the first half of the year partly offset by an increase
in the second half of 5 per cent1 when compared with the second half of
the prior year. Strong agency momentum following the relaxation of
Covid-19 restrictions saw APE sales in the second half of the year
being 63 per cent higher than the level in the first half. New
business profit reduced by (11) per cent1, as lower interest
rates resulted in a lower margin. Singapore continues to develop products and
digital capabilities with the launch in December of 3 bite-sized
digital products on Pulse (PRUSafe Dengue, PRUSafe BreastCancer,
PRUSafe ProstateCancer) and the onboarding of the PRUCancer360
product on UOB’s Mighty banking app.
We have
made good initial progress with our recent investment in
distribution in Thailand, where our APE sales were up 16 per cent1, reflecting strong
growth of 21 per cent in bancassurance channel. New business profit
grew by a stronger 38 per cent, supported by the product mix shift
to health and protection which accounted for 25 per cent of APE
sales (2019: 16 per cent). Our distribution capability will be
further strengthened by our partnership with TMB which commenced on
1 January 2021 and our digital partnership with The1,
Thailand’s largest loyalty platform.
EEV basis results
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
2020 $m
|
2019 $m
|
Change %
|
|
2019 $m
|
Change %
|
New business profit
|
2,201
|
3,522
|
(38)
|
|
3,533
|
(38)
|
Profit from in-force business
|
1,933
|
2,366
|
(18)
|
|
2,371
|
(18)
|
Operating profit from long-term business
|
4,134
|
5,888
|
(30)
|
|
5,904
|
(30)
|
Asset management
|
253
|
250
|
1
|
|
246
|
3
|
Operating profit from long-term business and asset management
before restructuring costs
|
4,387
|
6,138
|
(29)
|
|
6,150
|
(29)
|
Restructuring and IFRS 17 implementation costs
|
(88)
|
(31)
|
(184)
|
|
(31)
|
(184)
|
Non-operating profit
|
822
|
1,962
|
(58)
|
|
1,968
|
(58)
|
Profit for the year
|
5,121
|
8,069
|
(37)
|
|
8,087
|
(37)
|
|
|
|
|
|
|
|
Other movements
|
(115)
|
(842)
|
|
|
|
|
Net increase in embedded value
|
5,006
|
7,227
|
|
|
|
|
Embedded value at 1 Jan
|
39,235
|
32,008
|
|
|
|
|
Embedded value at 31 Dec
|
44,241
|
39,235
|
|
|
|
|
% New business profit/average embedded value
|
5%
|
10%
|
|
|
|
|
% Operating profit/average embedded value
|
10%
|
17%
|
|
|
|
|
Asia EEV operating profit decreased compared with the prior year to
$4,387 million (2019: $6,150 million1),
driven by lower new business profit and a lower profit from
in-force business.
The profit from in-force business reflects the expected return and
effects of operating assumption changes and operating experience
variances, which in combination, were (18) per
cent1
below the prior year. The expected
return was (9) per cent1
below the prior year reflecting the
impact of lower interest rates in reducing the risk discount rate
under our active basis European Embedded Value methodology.
Reflecting the high quality of our in-force business and prudent
assumption setting, operating assumption changes and operating
experience variances are again positive, driven by product
repricing effects as well as positive claims variances across our
businesses, among other factors.
Asset management segment operating profit after tax was up 3 per
cent1
on the prior year at $253 million
(2019: $246 million1),
which is discussed in more detail below.
The non-operating profit of $822 million (2019: $1,968
million1)
largely comprises increases in asset values following the fall in
interest rates and higher equity markets, partially offset by the
impact of lower interest rates on expectations of future asset
returns.
Overall, Asia segment embedded value increased by 13 per
cent3
to $44.2 billion in the 12 months to
31 December 2020 (31 December 2019: $39.2
billion3).
Of this, $42.8 billion (31 December 2019: $37.8
billion3)
relates to the value of the long-term business and includes our
share of our India associate valued using embedded value principles
which is lower than its market capitalisation. The remainder
represents Asia asset management and goodwill attributable to
shareholders which are carried at IFRS net asset value within the
Group’s EEV. At 31 December 2020, 47 per cent (31
December 2019: 48 per cent3) of total Asia
long-term embedded value excluding goodwill is attributable to Hong
Kong.
Total embedded value for Asia long-term business operations,
excluding goodwill
|
|
31 Dec 2020 $m
|
31 Dec 2019 $m
|
Free surplus
|
5,295
|
3,624
|
Required capital
|
3,445
|
3,182
|
Net worth
|
8,740
|
6,806
|
Value of in-force business before deduction of cost of capital and
time value of options and guarantees
|
36,729
|
32,396
|
Cost of capital
|
(749)
|
(866)
|
Time value of options and guarantees*
|
(1,912)
|
(493)
|
Net value of in-force business
|
34,068
|
31,037
|
Embedded value
|
42,808
|
37,843
|
Asia analysis of movement in free
surplus9
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
2020 $m
|
2019 $m
|
Change %
|
|
2019 $m
|
Change %
|
Existing business – transfer to net worth
|
1,878
|
1,914
|
(2)
|
|
1,901
|
(1)
|
Expected return on existing business
|
101
|
80
|
26
|
|
79
|
28
|
Changes in operating assumptions and experience
variances
|
222
|
147
|
51
|
|
151
|
47
|
Operating free surplus generated from in-force life business before
restructuring costs
|
2,201
|
2,141
|
3
|
|
2,131
|
3
|
Asset management
|
253
|
250
|
1
|
|
246
|
3
|
Operating free surplus generated from in-force life business and
asset management before restructuring costs
|
2,454
|
2,391
|
3
|
|
2,377
|
3
|
Investment in new business
|
(559)
|
(619)
|
10
|
|
(615)
|
9
|
Operating free surplus generated before restructuring
costs
|
1,895
|
1,772
|
7
|
|
1,762
|
8
|
Restructuring and IFRS 17 implementation costs
|
(82)
|
(31)
|
(165)
|
|
(31)
|
(165)
|
Operating free surplus generated
|
1,813
|
1,741
|
4
|
|
1,731
|
5
|
Non-operating profit
|
444
|
1,195
|
|
|
|
|
Net cash flows paid to parent company
|
(716)
|
(950)
|
|
|
|
|
Foreign exchange movements on foreign operations, timing
differences and other items
|
169
|
(357)
|
|
|
|
|
Total movement in free surplus
|
1,710
|
1,629
|
|
|
|
|
Free surplus at 1 Jan
|
4,220
|
2,591
|
|
|
|
|
Free surplus at 31 Dec
|
5,930
|
4,220
|
|
|
|
|
|
|
|
|
|
|
|
Representing:
|
|
|
|
|
|
|
Long-term business
|
5,295
|
3,624
|
|
|
|
|
Asset management
|
635
|
596
|
|
|
|
|
Free surplus at 31 Dec
|
5,930
|
4,220
|
|
|
|
|
In-force
operating free surplus generation9,12 was $2,201
million, up 3 per cent1 compared with the
prior year. Excluding the effect of operating assumption changes
and experience variances, in-force free surplus generation was in
line with the prior year1 with the growth of
the in-force portfolio being dampened by the effect of lower
interest rates compared with the prior year. Operating assumption
changes and experience variances were positive, again illustrating
the high quality nature of the in-force business.
Investment
in new business was $(559) million, 9 per cent1 below that in 2019.
This reflects lower APE sales volumes, offset by business mix
effects and lower interest rates.
Overall
higher in-force generation and lower investment in new business led
to operating free surplus generated9 before restructuring
costs increasing by 8 per cent1 to $1,895
million.
The
non-operating profit of $444 million includes the benefit of the
reinsurance transaction undertaken by Hong Kong as part of the
Group’s on-going asset/liability management as discussed
earlier under corporate transactions. 2019 non-operating profits
included $278 million3 of gains from the
reduction in the Group’s stake in ICICI Prudential Life
Insurance Company and the disposal of Prudential Vietnam Finance
Company.
Local statutory capital
We
maintained a strong balance sheet with a shareholder LCSM surplus
over the regulatory minimum capital requirement of $8.2 billion and
coverage ratio of 338 per cent at 31 December 2020 (31 December
2019: $4.7 billion and 253 per cent). If our with-profits funds in
Hong Kong, Singapore and Malaysia are added the surplus increases
to $23.6 billion (31 December 2019: $18.8 billion). We seek to
safeguard our business from market volatility through our strong
focus on protection products and our prudent asset and liability
management strategy.
IFRS profit
Overall
Asia adjusted operating profit2 increased by 13 per
cent1 to
$3,667 million, driven by a 14 per cent1 increase in life
insurance adjusted operating profit2, alongside a 2 per
cent1
increase at Eastspring.
This
growth reflects the benefits of our focus on high quality recurring
premium business, which accounts for 90 per cent of our new
business, and diversified portfolio of scale businesses, with over
88 per cent of our total life income14 (excluding other
income described below) driven by insurance margin and fee income
(2019: 86 per cent1), again supporting
profit progression across market cycles.
Our
Asia life insurance adjusted operating profit2 growth is
broad-based and at scale. Overall, nine insurance markets reported
double-digit growth1, with three
insurance markets delivering growth of 20 per cent1 or more. At a market
level, highlights include Hong Kong up 20 per cent1 to $891 million,
Singapore up 18 per cent1 to $574 million,
Malaysia up 14 per cent1 to $309 million,
China up 15 per cent1 to $251 million and
Thailand up 24 per cent1 to $210 million.
Adjusted operating profit2 in Indonesia was
$519 million, marginally lower than the prior year.
Profit margin analysis of Asia
long-term insurance and asset management
operations17
|
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
2020
|
2019
|
|
2019
|
|
|
Margin
|
|
Margin
|
|
|
Margin
|
|
$m
|
bps
|
$m
|
bps
|
|
$m
|
bps
|
Spread income
|
296
|
74
|
321
|
108
|
|
319
|
106
|
Fee income11
|
282
|
101
|
286
|
104
|
|
283
|
104
|
With-profits
|
117
|
16
|
107
|
18
|
|
107
|
18
|
Insurance margin
|
2,648
|
|
2,244
|
|
|
2,234
|
|
Other income
|
3,148
|
|
3,229
|
|
|
3,225
|
|
Total life income
|
6,491
|
|
6,187
|
|
|
6,168
|
|
Expenses:
|
|
|
|
|
|
|
|
Acquisition
costs
|
(1,904)
|
(52)%
|
(2,156)
|
(42)%
|
|
(2,156)
|
(42)%
|
Administration
expenses
|
(1,539)
|
(227)
|
(1,437)
|
(252)
|
|
(1,430)
|
(249)
|
DAC
adjustments
|
382
|
|
430
|
|
|
426
|
|
Share of related tax charges from joint ventures and
associates
|
(46)
|
|
(31)
|
|
|
(30)
|
|
Long-term insurance business pre-tax adjusted operating
profit
|
3,384
|
|
2,993
|
|
|
2,978
|
|
Eastspring
|
283
|
|
283
|
|
|
278
|
|
Adjusted operating profit from long-term business and asset
management before restructuring costs
|
3,667
|
|
3,276
|
|
|
3,256
|
|
Tax charge
|
(495)
|
|
(436)
|
|
|
(432)
|
|
Adjusted operating profit after tax for the year before
restructuring costs
|
3,172
|
|
2,840
|
|
|
2,824
|
|
Non-operating profit after tax
|
210
|
|
885
|
|
|
899
|
|
Profit for the year after tax before restructuring
costs
|
3,382
|
|
3,725
|
|
|
3,723
|
|
Our
adjusted operating profit2 continues to be
based on high-quality drivers. The overall 14 per cent1 growth in Asia life
insurance adjusted operating profit2 to $3,384 million
(2019: $2,978 million1) was driven
principally by 19 per cent1 growth in insurance
margin-related revenues and reflects our ongoing focus on recurring
premium health and protection products and the associated continued
growth of our in-force business.
Fee
income was in line with the prior year, while spread income
decreased by (7) per cent1 driven by lower
interest rates in the year.
With-profits
earnings relate principally to the shareholders’ share in
bonuses declared to policyholders. As these bonuses are typically
weighted to the end of a contract, under IFRS, with-profits
earnings consequently emerge only gradually over time. The 9 per
cent1
growth in with-profits earnings reflects the ongoing growth in
these portfolios.
Other
income primarily represents amounts deducted from premiums to cover
acquisition costs and administration expenses. As such, the (2) per
cent1
decrease from 2019 largely reflects lower new business volumes,
whereas new business acquisition expense fell 12 per
cent1 to
$(1,904) million. The ratio of shareholder acquisition costs to
shareholder-related APE sales (excluding with-profits-related
sales) increased to 68 per cent (2019: 66 per cent on an actual
exchange rate basis), reflecting changes to product and
geographical mix. Administration expenses, including renewal
commissions, increased by 8 per cent1 reflecting in-force
business growth.
Asset management
|
Actual exchange rate
|
|
2020 $m
|
2019 $m
|
Change %
|
Total external net flows*
|
(9,972)
|
8,340
|
n/a
|
|
|
|
|
External funds under management* ($bn)
|
93.9
|
98.0
|
(4)
|
Funds managed on behalf of M&G plc ($bn)
|
15.7
|
26.7
|
(41)
|
Internal funds under management ($bn)
|
138.2
|
116.4
|
19
|
Total funds under management ($bn)
|
247.8
|
241.1
|
3
|
|
|
|
|
Analysis of adjusted operating profit
|
|
|
|
Retail operating income
|
390
|
392
|
(1)
|
Institutional operating income
|
256
|
244
|
5
|
Operating income before performance-related fees
|
646
|
636
|
2
|
Performance-related fees
|
7
|
12
|
(42)
|
Operating income (net of commission)
|
653
|
648
|
1
|
Operating expense
|
(336)
|
(329)
|
(2)
|
Group's share of tax on joint ventures' adjusted operating
profit
|
(34)
|
(36)
|
6
|
Adjusted operating profit
|
283
|
283
|
-
|
Adjusted operating profit after tax
|
253
|
250
|
1
|
|
|
|
|
Average funds managed by Eastspring
|
$227.1bn
|
$214.0bn
|
6
|
Fee margin based on operating income
|
28bps
|
30bps
|
-2bps
|
Cost/income ratio8
|
52%
|
52%
|
-
|
*
Excluding $15.7
billion of funds managed on behalf of M&G plc.
Eastspring’s
total funds under management were $247.8 billion at 31 December (31
December 2019: $241.1 billion3), reflecting
favourable internal net inflows and higher equity markets, partly
offset by external net outflows. Compared with 2019,
Eastspring’s average funds under management increased by 6
per cent3
(7 per cent16 on a constant
exchange rate basis). Funds under management were 13 per
cent3
higher than at the end of June ($219.7 billion3) as equity markets
recovered and asset flows began to recover from the volatility in
the first half.
Eastspring
continues to benefit from strong, positive net flows from internal
insurance funds, recording $8.5 billion (2019: $9.7 billion).
Overall third-party flows related to external funds under
management were negative $(10.0) billion, reflecting the adverse
impact of higher market volatility, as a result of Covid-19, on
retail funds, most notably in a number of retail bond funds in
Thailand in the first half of 2020. Highlights included strong
flows into our China A Fund, and Global Innovation Fund in respect
of our equity products, and Income Plus and Active Bond Fund Plus
on the fixed income side. As market volatility subsided over the
second half of the year, third-party net flows22 improved
materially, with the fourth quarter seeing net inflows of $0.5
billion. In addition, as anticipated, there were net outflows from
funds managed on behalf of M&G plc of $(10.0) billion in 2020,
with further outflows of around $(6) billion expected in the first
half of 2021.
Eastspring’s
adjusted operating profit2 of $283 million was
up 2 per cent compared with the prior year on a constant exchange
rate basis (level on an actual exchange rate basis). Operating
income (net of commission) increased by 1 per cent3 with the benefit of
higher average funds under management being partly offset by
adverse client and asset mix effects that reduced the fee margin
based on operating income to 28 basis points (2019: 30 basis
points3).
Cost discipline remains robust, with operating costs in line with
the prior year, with the resulting cost/income ratio8 the same at 52 per
cent.
Return on segment equity
The
benefit of our focus on profitable health and protection,
with-profit and asset management businesses is evident in the
attractive 26 per cent (2019: 30 per cent) operating return
delivered on average segment equity8 over
2020.
United States
Operational and financial highlights
All of
the results below reflect Jackson Financial Inc. (which we refer to
as Jackson), the entity that is proposed to be demerged, except for
the discussion on local statutory capital which covers Jackson
Financial Inc.’s subsidiary, Jackson National Life, only.
Post its separation from the Group, Jackson will no longer publish
EEV results and the discussion below therefore focuses on IFRS and
capital measures. All amounts have been prepared on the basis of
the Prudential Group’s accounting policies and methodologies
and are consistent with the Group’s reporting in 2019. This
will differ from the financial information that Jackson will report
as part of the demerger process, which will be prepared under US
GAAP and will include certain non-GAAP financial measures which
Jackson management believes will be more relevant to manage the
business as a standalone entity.
At 31
December 2020, Jackson National Life’s RBC ratio was 347 per
cent (31 December 2019: 366 per cent). At the point of proposed
separation, Jackson expects to have an RBC ratio24 in excess of 450
per cent and total financial leverage21 in the range of 25
to 30 per cent, subject to market conditions. Jackson expects to
achieve this level of RBC at the point of separation by
contributing proceeds of its debt and hybrid capital raising to its
regulated insurance subsidiaries.
|
2020 $m
|
2019 $m
|
Change %
|
APE new business sales (APE sales)
|
1,923
|
2,223
|
(13)
|
Adjusted operating profit*
|
2,796
|
3,070
|
(9)
|
RBC ratio (%)
|
347
|
366
|
(19) ppts
|
*Before
restructuring costs
New business
APE sales
|
|
|
|
|
2020 $m
|
2019 $m
|
Change %
|
Variable annuities
|
1,662
|
1,470
|
13
|
Fixed annuities
|
33
|
119
|
(72)
|
Fixed index annuities
|
100
|
382
|
(74)
|
Total retail annuity APE sales
|
1,795
|
1,971
|
(9)
|
Total institutional product APE sales
|
128
|
252
|
(49)
|
Total APE sales
|
1,923
|
2,223
|
(13)
|
Despite challenging market conditions, Jackson delivered a 13 per
cent increase in variable annuity sales, reflecting the strength
and depth of its leading distribution franchise and value-added
customer proposition. Jackson believes that the investment freedom
and optional guaranteed benefits Jackson offers its customers
support its strong brand recognition with distributors and
advisers18.
Jackson has maintained its leading position in the US retail
variable annuity market19.
This market position reflects the attractiveness of its product,
breadth of distribution across multiple channels, and the
productivity of Jackson’s wholesaler field force, which is
among the most productive in the industry, with sales per agent
over 10 per cent higher than the nearest
competitor20.
In line with Jackson’s disciplined approach to pricing and
risk management, pricing actions taken in the first half of 2020 in
response to changing market conditions and to preserve statutory
capital, resulted in an expected and material reduction in new
fixed annuity and fixed index annuities sales, evident particularly
from the beginning of the second quarter. This, combined with lower
institutional sales, resulted in an overall (13) per cent reduction
in APE sales.
IFRS profit
Adjusted operating profit
US
segment adjusted operating profit2,7 was $2,796 million
in 2020, down (9) per cent from the prior year. This reduction
largely reflects the impact of DAC adjustment effects in the
current and prior year, alongside the expected reduction in spread
related earnings following the reinsurance contract with Athene in
June 2020. Offsetting these falls, fee income was $3,386 million, 3
per cent higher than the prior year as result of higher average
account balances.
A
further breakdown of the drivers of IFRS profitability is set out
below.
Profit margin analysis of US long-term
insurance and asset management operations17
|
|
|
|
2020
|
2019
|
|
|
Margin
|
|
Margin
|
|
$m
|
bps
|
$m
|
bps
|
Spread income
|
521
|
112
|
642
|
112
|
Fee income
|
3,386
|
178
|
3,292
|
182
|
Insurance margin
|
1,298
|
|
1,317
|
|
Other income
|
-
|
|
26
|
|
Total life income
|
5,205
|
|
5,277
|
|
Expenses:
|
|
|
|
|
Acquisition
costs
|
(991)
|
(52)%
|
(1,074)
|
(48)%
|
Administration
expenses
|
(1,744)
|
(71)
|
(1,675)
|
(68)
|
DAC
adjustments
|
317
|
|
510
|
|
Long-term insurance business pre-tax adjusted operating
profit
|
2,787
|
|
3,038
|
|
Asset management
|
9
|
|
32
|
|
Adjusted operating profit from long-term business and asset
management before restructuring costs
|
2,796
|
|
3,070
|
|
Tax charge
|
(313)
|
|
(437)
|
|
Adjusted operating profit after tax for the year before
restructuring costs
|
2,483
|
|
2,633
|
|
Non-operating loss after tax
|
(2,730)
|
|
(3,013)
|
|
Loss for the year after tax before restructuring costs
|
(247)
|
|
(380)
|
|
Spread
income declined (19) per cent in 2020, primarily as a result of the
Athene reinsurance transaction, as well as lower asset yields,
partially offset by lower interest credited reflecting lower
average crediting rates compared with 2019. The margin of 112 basis
points benefited from prior year swap transactions. Excluding that
benefit, the spread margin would have been 88 basis points (2019:
101 basis points).
Insurance
margin represents profits from insurance risks, including variable
annuity guarantees and profits from the legacy life businesses and
was marginally lower than that earned in 2019.
Acquisition
costs have fallen by 8 per cent following lower sales in the year.
Administration expenses increased by 4 per cent to $(1,744) million
in 2020 as a result of higher asset-based commissions, as average
separate account balances increased, and the non-recurrence of
commission income (treated as a negative expense) earned under the
John Hancock reinsurance arrangement in 2019. Excluding the
asset-based commission, the administration expense ratio would be
34 basis points (2019: 33 basis points).
DAC
adjustments, being the cost deferred on sales in the period net of
amortisation of amounts deferred previously, have fallen by $(193)
million to $317 million. This follows lower deferrals from lower
sales and higher amortisation of prior period DAC. DAC amortisation
increased as the impact of changes to the longer-term economic
assumptions underpinning the amortisation calculation, following an
expectation of lower interest rates in the future, more than offset
the benefits of increases in DAC deceleration in the period as a
result of higher equity markets at the end of 2020 as compared with
the start of the year.
Non-operating items
The
non-operating result was negative $(3,510) million pre-tax (2019:
$(3,795) million) and contributed to a net loss after tax of $(247)
million (2019: $(380) million). The non-operating result over 2020
includes a loss of $(4,296) million from short-term investment
fluctuations and amortisation of previous acquisition accounting
adjustments offset by a $786 million pre-tax gain as a result of
the Athene reinsurance transaction.
In the
US, Jackson provides certain guarantees on its annuity products,
the value of which would typically rise when equity markets fall
and long-term interest rates decline. Jackson charges fees for
these guarantees which are in turn used to purchase downside
protection, in particular options and futures to mitigate the
effect of equity market falls.
Jackson
designs its hedge programme to protect the economics of the
business from large movements in investment markets and does not
seek to hedge on an accounting basis. It therefore accepts a degree
of variability in the accounting results.
The
$(4,296) million discussed above principally arises from the steep
rise in equity markets following the low at the end of the first
quarter of 2020 that led to equity derivative losses taken out as
part of Jackson’s hedging programme being in excess of the
corresponding reduction in guarantee liabilities and the effect of
lower interest rates on the value of its guarantees. Hedge costs
were also elevated due to the high levels of volatility observed in
the period.
Local statutory capital – Jackson National Life
(Jackson)
|
2020
|
|
2019
|
|
Total
Adjusted
Capital
(TAC) $m
|
Required
capital at
'Company
Action
Level'
(CAL) $m
|
Surplus $m
|
Ratio %
|
|
Surplus $m
|
Ratio %
|
1 Jan
|
5,221
|
1,426
|
3,795
|
366
|
|
4,315
|
458
|
Capital generation from new business written
|
191
|
153
|
38
|
(23)
|
|
(144)
|
(75)
|
Operating capital generation from business in force
|
798
|
(177)
|
975
|
100
|
|
1,531
|
141
|
Operating capital generation
|
989
|
(24)
|
1,013
|
77
|
|
1,387
|
66
|
Other non-operating movements
|
(1,832)
|
115
|
(1,947)
|
(108)
|
|
(1,524)
|
(104)
|
US reinsurance transaction
|
524
|
(251)
|
775
|
67
|
|
-
|
-
|
Investment by Athene
|
500
|
-
|
500
|
25
|
|
-
|
-
|
Adoption of NAIC reforms
|
-
|
-
|
-
|
-
|
|
142
|
(17)
|
Hedge modelling revision
|
(139)
|
251
|
(390)
|
(80)
|
|
-
|
-
|
Dividends paid
|
-
|
-
|
-
|
-
|
|
(525)
|
(37)
|
31 Dec
|
5,263
|
1,517
|
3,746
|
347
|
|
3,795
|
366
|
The
movement in surplus over the course of 2020 was driven
by;
Operating capital
generation from the in-force business was $975 million, in line
with our expectations post the Athene transaction. This is lower
than 2019 which benefited from a $355 million release of
incremental reserves following the integration of the John Hancock
business acquired in 2018. The impact of new business improved by
$182 million, largely as a result of expected fall in fixed annuity
and fixed index annuity sales following repricing actions in the
first half of 2020.
Non-operating items
reduced surplus by $(1,947) million driven primarily by the impact
of market movements where falling interest rates, rising equity
markets and elevated volatility have combined to result in
derivative losses, net of reserve changes, and an increase in
required capital. This included a reduction of $(193) million in
deferred tax assets being admitted into statutory surplus and an
increase in surplus of $140 million from changes in respect of
formal recognition by the regulator of guaranteed asset management
revenue.
Surplus benefited
from a $500 million investment by Athene and a further $775 million
as a result of the reinsurance of the in-force fixed annuity and
fixed index annuity portfolio in June.
At 31 December
2019, Jackson early adopted the provisions of the National
Association of Insurance Commissioners Valuation Manual Minimum
Standards No. VM-21 (VM-21). As announced on 28 January 2021,
Jackson determined that a simplifying modelling assumption was not
consistent with its intent in the adoption of VM-21 and the revised
modelling adopted for calculating reserves and capital reduced
surplus by $(390) million through a reduction in TAC and an
increase in CAL.
Group reporting segments after proposed separation of
Jackson
In
presenting its results for 2020, the Group continues to report its
business using the following segments:
Asia (including
insurance and asset management business); and
US (including
Jackson and US asset management business).
Other
operations are classified as unallocated to a segment, which
includes the Group’s head office functions in London and Hong
Kong and Africa insurance operations.
In
preparation for the planned separation of Jackson, from 2021 the
Group has revised its internal management information to focus on
the following revised segments, which will be used for external
reporting from half year 2021.
Growth markets and
other (including Africa)
The
Group’s head office functions will continue to be unallocated
to a segment. The US has been classified as discontinued following
the Board’s decision to proceed with a demerger in the second
quarter of 2021.
A
summary of the Group’s key performance indicators by these
segments going forward are as set out below.
|
Actual exchange rate
|
|
APE sales
|
New business profit
|
Adjusted operating profit**
|
EEV for long-term business
|
|
2020 $m
|
2019 $m
|
2020 $m
|
2019 $m
|
2020 $m
|
2019 $m
|
2020 $m
|
2019 $m
|
China JV
|
582
|
590
|
269
|
262
|
251
|
219
|
2,798
|
2,180
|
Hong Kong
|
758
|
2,016
|
787
|
2,042
|
891
|
734
|
20,156
|
18,255
|
Indonesia
|
267
|
390
|
155
|
227
|
519
|
540
|
2,630
|
2,737
|
Malaysia
|
346
|
355
|
209
|
210
|
309
|
276
|
4,142
|
3,535
|
Singapore
|
610
|
660
|
341
|
387
|
574
|
493
|
8,160
|
7,337
|
Growth markets and other***
|
1,245*
|
1,232*
|
440
|
394
|
835*
|
737*
|
4,975*
|
3,858*
|
Eastspring
|
n/a
|
n/a
|
n/a
|
n/a
|
283
|
283
|
n/a
|
n/a
|
Total
|
3,808*
|
5,243*
|
2,201
|
3,522
|
3,662*
|
3,282*
|
42,861*
|
37,902*
|
*
Includes
amounts relating to Africa.
**
Further analysis of Adjusted operating profit for
Asia is set out in note I(v) in the Additional unaudited
financial information.
***
Adjusted operating
profit includes other of $119 million (2019: $125 million) and
primarily comprises of taxes for joint ventures and associates and
other non-recurring items.
Notes
1
On a constant
exchange rate basis.
2
Adjusted IFRS
operating profit based on longer-term investment returns is
management’s primary measure of profitability and provides an
underlying operating result based on longer-term investment returns
and excludes non-operating items. Further information on its
definition and reconciliation to profit for the year is set out in
note B1.1 of the IFRS financial statements.
3
On an actual
exchange rate basis.
4
Calculated on a
Moody’s total leverage basis.
5
Approximately half
of the corporate expenditure is incurred in sterling and our
assumptions forecast an exchange rate of
£1=$1.2599.
6
As compared with
head office expenditure of $(490) million in 2018 and before a
planned $10 million increase in Africa costs as previously
disclosed.
7
Attributed to the
shareholders of the Group before deducting the amount attributable
to the non-controlling interests. This presentation is applied
consistently throughout the document.
8
See note II of the
Additional unaudited financial information for definition and
reconciliation to IFRS balances.
9
For insurance
operations, operating free surplus generated represents amounts
maturing from the in-force business during the year less investment
in new business and excludes non-operating items. For asset
management businesses, it equates to post-tax operating profit for
the year. Further information is set out in ‘movement in
Group free surplus’ of the EEV basis results.
10
Surplus over Group
minimum capital requirement and estimated before allowing for
second interim ordinary dividend. Shareholder business excludes the
available capital and minimum requirement of participating business
in Hong Kong, Singapore and Malaysia. Further information on the
basis of calculation of the LCSM measure is contained in note I(i)
of the Additional unaudited financial information.
11
In 2020, given the
significant market volatility in certain months during the year,
average liabilities used to derive the margin for fee income in
Asia have been calculated using quarter-end balances throughout the
year as opposed to opening and closing balances only to provide a
more meaningful analysis. The 2019 margin have been amended for
consistency albeit impacts are minimal.
12
Operating free
surplus generated before restructuring costs.
13
Net cash amounts
remitted by business units are included in the holding company cash
flow, which is disclosed in detail in note I(iii) of the Additional
unaudited financial information. This comprises dividends and other
transfers from business units that are reflective of emerging
earnings and capital generation.
14
Total insurance
margin ($2,648 million) and fee income ($282 million) of $2,930
million divided by total life income excluding other income of
$3,343 million (Comprised of total life income of $6,491 million
less other income of $3,148 million).
15
Central expenses
comprises other income and expenditure of $(748) million (2019:
$(926) million on an actual exchange rate basis) and restructuring
and IFRS 17 implementation costs of $(208) million (2019: $(110)
million on an actual exchange rate basis).
16
On a constant
exchange rates basis Eastspring average funds under management over
the year to 31 December 2019 were $211.5 billion (actual exchange
rate basis: $214.0 billion). Average funds under management over
the year to 31 December 2020 were $227.1 billion.
17
For discussion on
the basis of preparation of the sources of earnings in the table
see note I(iv) of the Additional unaudited financial
information.
18
Cogent Annuity
Brandscape+37 Net Promoter Score (‘NPS’) for Jackson
variable annuities, compared to an industry average NPS of
0.
19
LIMRA: through the
third quarter of 2020, Jackson accounted for 16.5% of new sales in
the U.S. retail variable annuity market and ranked number 1 in
variable annuity sales.
20
Market Metrics Q3
2020 Sales, Staffing, and Productivity Report: Jackson’s
variable annuity sales per wholesaler are more than 10% higher than
its nearest competitor.
21
Calculated on a US
GAAP basis as the ratio of total debt (including senior debt,
hybrid debt and preferred securities) to total debt and
shareholders’ equity (excluding Accumulated Other
Comprehensive Income).
22
Excluding money
market funds and funds managed on behalf of M&G
plc.
23
APE sales
substantially from full-premium products sold through referrals to
agents and a small amount of revenue from 37 new digital
products.
24
Representing the
RBC ratio of Jackson National Life that reflects the capital and
capital requirements of Jackson National Life and its subsidiaries,
including Jackson National Life NY.
25
The term
’Non-operating items’ is used in this report to refer
to items excluded from adjusted IFRS operating profit based on
longer-term investment returns from continuing operations,
including short term investment fluctuations in investment returns
on shareholder-backed business, corporate transactions and
amortisation of acquisition accounting adjustments. For the
avoidance of doubt this analysis is not intended to align with
‘results of operating activities’ as discussed in IAS 1
Presentation of Financial Statements.
Group Chief Risk and Compliance Officer’s report on the risks
facing our business and how these are managed
Enabling decisions to be taken with confidence
Our
Group Risk Framework and risk appetite have allowed us to control
our risk exposure throughout 2020. Our governance, processes and
controls enable us to deal with uncertainty effectively, which is
critical to the achievement of our strategy of capturing long-term
structural opportunities and helping our customers achieve their
long-term financial goals.
This
section explains the main risks inherent in our business and how we
manage those risks, with the aim of ensuring an appropriate risk
profile is maintained. Although Jackson is preparing to be a fully
independent business, until the proposed demerger is effected
Jackson’s risks (as with those of the Group’s other
businesses) will continue to be managed within the Group Risk
Framework and this report reflects this position.
The Group
2020
was a truly eventful year. The Covid-19 pandemic swept across the
world and has resulted in significant humanitarian suffering and
material and prolonged disruption to social and economic activity.
The business had to consider and navigate the risks arising from
the Covid-19 on multiple fronts. These included capital and
liquidity risks arising from abrupt market dislocation as well as
risks associated with the disruption to the Group’s
operations across Asia, Africa, the US and UK. Concurrently, the
business has maintained uninterrupted delivery of services for its
policyholders, and has been committed to doing the right thing for
both its customers and employees throughout the crisis. The Risk,
Compliance and Security function has successfully transitioned
into, and maintained, new ways of working across multiple time
zones to provide strong stewardship and enhanced monitoring of
these risks during the most acute phases of the pandemic’s
impact.
Through
these extraordinary circumstances, the function has also provided
risk opinions, guidance and assurance on critical activity,
including Athene’s reinsurance of $27.6 billion of
Jackson’s fixed and fixed index annuity portfolio and $500
million equity investment into Prudential’s US business, the
proposed demerger of Jackson from the Group and the revision to its
hedge modelling for US statutory standards for calculating reserves
and capital. At the same time, the function retained its focus on
managing the risks of the ongoing business, performing its defined
role in providing risk management support and oversight, as well as
objective challenge to ensure the Group remained within its risk
appetite.
The
Group continues to engage constructively with the Hong Kong
Insurance Authority (IA) as its Group-wide supervisor and is
transitioning to a new supervisory framework. The Group’s
mature and well-embedded risk framework will enable decisions to be
taken with confidence as the business seeks to capture the
opportunities in the growth markets in which it is now focused
while continuing to operate prudently with discipline.
The world economy
At the
start of 2020 the prospects for global growth appeared to be
improving. This positive momentum was abruptly reversed by the
Covid-19 pandemic, leading to the shutdown of much of the
world’s economy and a sharp recession. In response to this
unprecedented shock, governments and central banks deployed massive
fiscal and monetary stimulus measures to mitigate the impact on the
labour force and restore confidence in financial markets. Driven
largely by the strong macro policy response, global economies have
started to recover although this remains far from complete. In
Asia, China has been leading the economic rehabilitation,
benefitting other Asian economies to an extent, although the
regional recovery to date has been highly uneven. The economic
environment in Asia is expected to remain challenging given the
limited headroom for additional conventional monetary easing,
increasing inflation risks from weaker foreign exchange rates,
supply chain disruptions, and increasing fiscal pressures. Viewed
more broadly, the pandemic has increased the debt burden of many
economies and may result in sovereign debt sustainability issues,
increasing the dependence on low interest rates by
governments.
Financial markets
2020
began with risk assets performing well until concerns over the
economic impact of the Covid-19 outbreak dented investor
confidence, eventually leading to a global sell-off that unfolded
at extraordinary speed. The S&P 500 index plunged by 35 per
cent from an all-time high on 19 February 2020 to its low point on
23 March 2020. Interest rates in major markets declined
significantly, falling to historical lows as investors fretted over
the risks to the economic outlook. Credit spreads widened
significantly, in line with the plunge in equity markets. The
stress on financial markets was broadly eased by the central banks
maintaining accommodative monetary policies and implementing
various support programmes. Since their trough in March 2020,
financial markets have rallied strongly, initially driven by broad
reductions in infection rates in some countries, optimism with
respect to the restart of the global economy, and, in the US, a
small group of large-cap stocks that has buoyed the cap-weighted
index. Risk assets in particular continued to rally strongly in the
second half of 2020.
Risk
asset valuations appear elevated and display some disconnect with
economic fundamentals, and may therefore be subject to the risk of
a correction given the renewed lockdowns implemented across the
world towards the end of 2020 and into 2021, the logistical
challenges to the roll out of Covid-19 vaccination programmes
(which may more prolonged than initially anticipated) and the
development of new strains of the coronavirus. On interest rates,
the consensus outlook is of an environment in which they will
remain low-for-longer. The US Federal Reserve’s forward
guidance has constrained expectations of higher short term yields
in the foreseeable future, while economic fundamentals and globally
accommodative conditions are likely to keep downward pressure on
long term yields. For credit assets, risks of a further round of
widespread pressure on corporate liquidity - as experienced during
2020 - remain, given the stretched credit fundamentals of corporate
borrowers, although the magnitude of the pre-funding and
liquidity-raising that has been accomplished in 2020 is expected to
mitigate this to an extent.
(Geo)political landscape
During
the first half of 2020, the civil unrest increasingly seen in many
places across the world were partially curtailed by the Covid-19
restrictions put in place by governments. The second half of the
year, saw an increase in popular protests against long-standing
social issues and inequalities and were in some cases triggered by
national elections in the US, Africa and Asia. An observable trend
in recent protest movements, aided by social media, is the speed
and frequency at which they can gather momentum and their evolving
forms of leadership. The stability of governments is likely to be
tested in different ways and potentially on a more frequent basis
as a result, as will the resilience of businesses. As a global
organisation, the Group has well-established local and global plans
to mitigate the business risks from disruption. These have operated
well when deployed across the Group during the Covid-19 crisis and
also locally during the outbreaks of unrest seen during 2020 and
continued into 2021 in markets where the Group operates.
Operational resilience will continue to be critically evaluated and
enhanced as the longer-term lessons, from the pandemic response in
particular, become clearer. Governmental responses to the pandemic
have involved a necessary balancing of the impacts to
people’s health and lives, their individual rights and
liberties, and economic growth. These considerations, and the
dynamics between and within them, have become increasingly
politicised and another source of polarisation and popular
discontent which, in some places, have also provided impetus to
protest movements.
Many
governments continue to face the challenge of reconciling the
inter-connectedness of the global economy with pressure to
prioritise national self-interests. The experience of the pandemic
may provide a further impetus to the regionalisation or
fragmentation of global trade, investment and standards, and risks
undermining efforts in international cooperation and coordination.
Into 2021, accessibility to Covid-19 vaccine supplies, which may
become a prolonged challenge, has the potential to contribute to an
increase in geopolitical tensions. A key source of geopolitical
risk during 2020 was the US-China relationship and its wider impact
on international relations, and this looks likely to continue
during President Biden’s term in office. Hong Kong’s
perceived level of autonomy will remain influential in geopolitical
tensions, with potential global trade and economic consequences.
Responses by the US, UK and other governments to the enactment and
application of the national security law in Hong Kong and other
constitutional or legislative changes in the territory, which
continue to develop, may impact Hong Kong’s economy. Being a
key market for the Group which also hosts regional and head office
functions, this could potentially impact Prudential’s sales,
operations and product distribution. For internationally active
groups which operate across impacted jurisdictions such as
Prudential, these government responses and measures add to the
complexity of legal and regulatory compliance. Compliance with
Prudential’s legal or regulatory obligations in one
jurisdiction may conflict with the law or policy objectives of
another jurisdiction, or may be seen as supporting the law or
policy objectives of that jurisdiction over another, creating
additional legal, regulatory compliance and reputational risks for
the Group.
Regulations
Prudential
operates in highly regulated markets, and the nature and focus of
regulation and laws remain fluid. A number of national and
international regulatory developments are in progress, with a
continuing focus on solvency and capital standards, conduct of
business, systemic risk regulation, corporate governance and senior
management accountability, and macroprudential policy. Some of
these changes will have a significant impact on the way that the
Group operates, conducts business and manages its risks. With
geopolitical tensions elevated, the complexity of sanctions
compliance is increasing and continues to represent a challenge for
international businesses. These regulatory developments will
continue to be monitored at a national and global level and form
part of Prudential’s engagement with government policy teams
and regulators. The immediate regulatory and supervisory responses
to Covid-19 have been broad and have included increased scrutiny of
the operational resilience, liquidity and capital strength
(including the impact of making dividend payments) of financial
services companies as well as changes that have helped the Group to
continue to support its customers through non-face-to-face contact.
The financial burden in addressing the pandemic is likely to
influence changes in governmental fiscal policies, laws or
regulations aimed at increasing financial stability, and this may
include measures on businesses or specific industries to contribute
to, lessen or otherwise support, the financial cost to governments
of treating patients and meeting the logistical challenges of
providing vaccines. It is possible that requirements are imposed on
private insurance companies and healthcare providers to cover costs
associated with the treatment and prevention of Covid-19 beyond
contractual or policy terms.
Against
this evolving regulatory backdrop, constructive engagement
continues with Prudential’s Group-wide supervisor, the Hong
Kong IA, on the Group-wide Supervision (GWS) Framework. The GWS
Framework is expected to be effective for Prudential upon
designation by the Hong Kong IA in the second quarter of 2021,
subject to transitional arrangements. The primary legislation was
enacted in July 2020 and will come into operation on 29 March 2021.
The framework adopts a principle-based and outcome-focused
approach, and allows the Hong Kong IA to exercise direct regulatory
powers over the holding companies of multinational insurance
groups, reinforcing Hong Kong’s position as a preferred base
for large insurance groups in Asia Pacific and a global insurance
hub. During 2020, the Hong Kong IA engaged with the Group and other
relevant stakeholders in the development of the GWS framework,
which will be anchored on the requirements for three pillars:
capital, risk and governance, and disclosure.
Societal developments
The
experience of the pandemic has underlined the ability of evolving
demographic, geographical and environmental factors to change the
nature, likelihood and impact of extreme events. These factors can
also drive public health trends such as increasing obesity, with
consequential potential impacts to Prudential’s underwriting
assumptions and product design. While insights can be gleaned from
the current pandemic, the unique set of variables associated with
extreme events means that their impact on the functioning of
society, and the disruption to business operations, staff,
customers and sales, cannot be predicted or fully mitigated. The
Group has been actively managing the impact of the crisis as it has
developed over 2020 and into 2021, including assisting affected
policyholders and staff in meeting their resulting
needs.
In
support of increased ease of access and social inclusion, and to
meet evolving customer needs, the Group is increasing its use of
digital services, technologies and distribution methods for the
products and services that it offers. The Covid-19 pandemic has
accelerated these developments, with the Group’s businesses
having implemented virtual face-to-face sales of select ranges of
products in many of its markets, and adoption of Prudential’s
Pulse application has continued to increase. The digital health
platform is now available in 15 markets in 11 languages, with total
downloads having reached 20 million as of February 2021. Changes to
the Group’s use of technology and distribution models have
broad implications, touching on Prudential’s conduct of
business, increasing the risks of technology and data being
compromised or misused and potentially leading to new and
unforeseen regulatory issues.
A
strong sense of purpose for an enterprise is a driver of long-term
profitability, and this is making companies evaluate their place
in, and contribution to, society. The ‘why and how’ a
business acts has become arguably at least as important as what it
produces or the services that it provides. Understanding and
managing the environmental, social and governance (ESG) impact and
requirements of its business is fundamental to Prudential’s
brand, reputation and ultimately its long-term success. Ensuring
high levels of transparency and responsiveness to stakeholders is a
key aspect of this. Recent events have highlighted the structural
inequalities in our societies and are prompting organisations to
question where they stand on these important issues.
Prudential’s ESG Strategic Framework is designed to deliver
on its purpose of ‘helping people get the most out of
life’. It includes a focus on inclusivity: inclusivity of
access to quality healthcare, protection and savings for our
customers; inclusivity of the working environment for our people;
and inclusivity in the Group’s support of the transition to
low-carbon in the economies, markets and communities in which it
operates.
2.
Key internal, regulatory, economic and (geo)political events over
the past 12 months
Q1 2020
|
Q2 2020
|
Q3 2020
|
Q4 2020
|
In
January 2020, the virus responsible for what initially appeared to
be viral pneumonia is identified as a novel coronavirus. The
resulting disease is subsequently named Covid-19, and over 2020 the
coronavirus begins its spread across the globe. Across its markets
the Group rolls out initiatives to support customers and
staff.
In
January, Prudential Vietnam announces an exclusive bancassurance
partnership with Southeast Asia Commercial Joint Stock Bank
(SeABank), a fast-growing bank in Vietnam with around 1.2 million
customers and almost 170 branches, for a 20-year term.
On 20
March, the Hong Kong IA published the Insurance (Amendment) (No. 2)
Bill as part of its submission to the Hong Kong LegCo, a key step
towards GWS implementation.
In
Singapore, a revised risk-based capital framework (RBC2) for
insurers comes into force as at 31 March 2020.
The
California Consumer Protection Act (CCPA) comes into force on 1
January 2020, creating data privacy rights to California consumers.
Jackson ensures compliance with the Act in December
2019.
The
National Association of Insurance Commissioners (NAIC) implements
changes to the US statutory reserve and capital framework for
variable annuities, effective from 1 January 2020. Jackson chooses
to early adopt the changes as at 31 December 2019 for US statutory
reporting.
The
Covid-19 pandemic shuts down much of the world’s economy and
triggers a sharp recession. Equity markets sell off at an
extraordinary speed, volatility spikes, credit spreads widen
sharply and interest rates in major markets decrease to new
historical lows. Central banks maintain accommodative monetary
policies and implement various asset purchase and support
programmes to restore confidence in financial markets. Governments
deploy massive fiscal stimulus to mitigate the economic fallout and
the unprecedented shock on the labour force.
|
On 18
June 2020 the Group announces the reinsurance of $27.6 billion of
Jackson’s fixed and fixed index annuity portfolio by Athene,
and a $500 million equity investment into Prudential’s US
business in return for an 11.1 per cent economic
interest.
Shriti
Vadera joins the Board as a Non-executive Director and member of
the Nomination & Governance Committee on 1 May 2020, and
succeeds Paul Manduca as Chair of the Board and of the Nomination
& Governance Committee on 1 January 2021.
IAIS
releases the requirements for a Covid-19 tailored Data Collection
exercise for 2020. The original Data Collection exercise, released
in March for the purpose of monitoring the build-up of systemic
risk for insurers, is paused for 2020. In April 2020, the IAIS also
releases the requirements for the 2020 ICS and Aggregation Method
Data Collection exercises.
The
Network for Greening the Financial System publishes its Guide for
Supervisors in May 2020 which outlines recommendations for
integrating climate-related and environmental risks into prudential
supervision.
Markets
rally sharply during Q2 on the back of asset purchases, direct
intervention by the US Federal Reserve in credit markets, stimulus
programmes, the gradual rebound in economic activity enabled by the
progressive easing of lockdown measures and a broad reduction in
virus infection rates.
A broad
easing of Covid-19 restrictions begins to take place across many
countries in the latter half of Q2 and into Q3, including in some
countries with high infection rates, with many countries taking
steps to mitigate a second wave of infections. Other countries,
such as the US and those in Central and South America and South
Asia continue to see high daily case numbers.
|
In
August, and building on its earlier announcement in May, the Group
announces its intention to fully separate Jackson from the Group.
This is followed by a further announcement in January 2021
confirming that the separation will be facilitated by way of
demerger, which is proposed to complete in Q2 2021.
The
Insurance (Amendment) (No. 2) Ordinance, being the enabling primary
legislation providing for the GWS Framework was enacted on 24 July
2020 and will come into operation on 29 March 2021. The relevant
subsidiary legislation, including the Insurance (Group Capital)
Rules, was tabled before the Legislative Council on 6 January 2021
and will also come into operation on 29 March 2021. The GWS
Framework is expected to be effective for Prudential upon
designation by the Hong Kong IA in the second quarter of 2021,
subject to transitional arrangements.
The US
Federal Reserve adopts a new flexible average inflation targeting
strategy and introduces new forward guidance on interest rates that
delays future increases until the economy reaches maximum
employment and inflation rises to 2 per cent and is on track to
moderately exceed this level for some time.
US GDP
increases by $1.6 trillion over Q3, partially offsetting the
decrease of $2.0 trillion in Q2, as consumer spending rebounds
strongly. Meanwhile, China’s GDP growth improves from 3.2 per
cent year-on-year in Q2 to 4.9 per cent in Q3. Growth in all major
investment activities return to positive levels, with real growth
rising from -1.1 per cent y-o-y in August to 2.4 per cent in
September.
Volatility
in the financial markets remain elevated. Equity markets briefly
fall in September, accompanied by a sell-off in US treasuries,
although this is short-lived and avoids a collapse of similar
levels as seen in March. As credit market conditions stabilise,
central banks, including the US Federal Reserve and European
Central Bank (ECB), lower the pace of their asset
purchases.
A new
national security law for Hong Kong is implemented on 30 June 2020.
The US response includes enactment of the Hong Kong Autonomy Act
which introduces potential sanctions on financial institutions
doing significant business with Chinese officials materially
contributing to the alleged erosion of Hong Kong’s autonomy.
Over Q3 and Q4 the US introduces sanctions on a range of
individuals and entities in connection to a number of
issues.
On 31
July 2020, Carrie Lam postpones the September LegCo elections for
one year, citing coronavirus concerns.
|
Covid-19
cases surge in Q4 across the US and Europe. Towards the end of
2020, major European economies start to reintroduce restrictions on
movement and business to various degrees. Amid this increase in
infection rates, vaccine approvals and roll-outs begin to take
place in the UK and other countries.
Against
the backdrop of the US election and positive Covid-19 vaccine news,
equity markets continue to rally in November and volatility reaches
new post-March lows. Central banks of major economies keep interest
rate levels on hold. In Europe, the Pandemic Emergency Purchase
Programme resolves to continue bond purchases until June 2021. In
the US, a second stimulus package worth $900 billion passed in
December.
The US
elections take place amid a surge in coronavirus case numbers
across the country. After legal challenges from President Trump are
denied by the courts and the storming of the US Capitol buildings
by protestors, Joe Biden is inaugurated as the 46th US president on
20 January 2021, taking control of both houses of
Congress.
On 15
November, at the annual Association of Southeast Asian Nations
(ASEAN) Leaders Summit, 15 countries formally sign the Regional
Comprehensive Economic Partnership (RCEP) trade deal, making it the
world’s largest trading bloc. Signatories aim to work through
ratification of the deal in 2021. The RCEP comprises all ten ASEAN
economies, plus China, Japan, South Korea, Australia and New
Zealand.
Moves
to ban an opposition party in 2019 trigger anti-establishment
protests in Thailand in early 2020. Protest activity peaks in
mid-October and spikes again mid-November, with protest leaders
threatening to resume demonstrations with increased intensity in
early 2021.
In the
run-up to the Uganda presidential elections on 14 January 2021,
violence breaks out in Kampala with dozens killed in the first few
weeks of electoral campaigning.
In
early October, Nigeria is rocked by the outbreak of nationwide
demonstrations against police brutality that leaves a reported 56
people dead.
On 23
October, the China’s Central Bank, the People’s Bank of
China, publishes a draft banking law recognising, and providing a
regulatory framework for, its planned central bank digital
currency, the digital yuan.
On 11
November 2020, China’s National People’s Congress
Standing Committee determines that Hong Kong LegCo members can be
disqualified on various grounds including endangering national
security, with four members being immediately disqualified. In
protest, the remaining 15 member pro-democracy bloc resign en
masse.
On 30
December 2020, the EU and China reach an agreement in principle on
the Comprehensive Agreement on Investment, which covers market
access. Both sides commit to finalising detailed negotiations on
the investment protections covered by the Agreement, which will
require ratification, within two years.
|
3.
Managing the risks in implementing our strategy
This
section provides an overview of the Group’s strategy, the
significant risks arising from the delivery of this strategy and
current risk management focus. The risks outlined below, which are
not exhaustive, are discussed in more detail in section
5.
Our strategy
|
Significant risks arising from the delivery of the
strategy
|
Risk management focus
|
|
|
|
Group-wide
Our strategy is to capture the long-term structural opportunities
for our markets and geographies, while operating with discipline
and seeking to enhance our capabilities through innovation to
deliver high-quality resilient outcomes for our
customers.
|
● Transformation
risks around key change programmes, including those related to the
Group’s digital strategy
|
● Continuing
development of the transformation risk framework, including risk
appetite, and focus on, and ensuring consistency in, transformation
risk management across the Group’s business
units.
● Provision
of independent risk assurance, challenge and advice on first line
programme risk identification and assessments.
● Focus
on the financial and non-financial stability of Jackson as a
standalone business.
|
● Group-wide
regulatory risks
|
● Ongoing
compliance with in-force regulations and management of new
regulatory developments.
● Engagement
with national governments, regulators and industry groups on
macroprudential and systemic risk-related regulatory initiatives,
international capital standards, and other initiatives with
Group-wide impacts.
● Implementation
of the Group-wide Supervision Framework, which is expected to be
effective for Prudential upon designation by the Hong Kong IA in
the second quarter of 2021, subject to transitional
arrangements.
|
● Information
security and data privacy risks
|
● Operationalisation
of the Group-wide governance model and strategy for cyber security
management focusing on automation, business enablement, efficiency,
and continuous improvement.
● Continued
focus on compliance with applicable privacy laws across the Group
and the appropriate and ethical use of customer data.
|
● Business
disruption and third-party risks
|
● Continued
application of the Group’s global business continuity
management framework, with an enhanced focus on operational
resilience as it relates to business disruption tolerance levels
and customer impacts. Embedding of insights from the Covid-19
pandemic.
● Applying
the distinct oversight and risk management required over the
Group’s third parties, including its strategic partnerships
for product distribution, non-traditional services and processing
activities.
|
● Conduct
risk
|
● Implementing
and embedding the Group-wide customer conduct risk management
framework and policy, with particular focus on sales practices and
the Group’s digital ecosystem.
● Enhancement
of conduct risk oversight using data analytics.
|
● Model
and data risks
|
● Focus
on requirements for data and AI and complex tooling ethics
principles and framework.
● Ongoing
risk assessment of tools used.
|
● People
and culture
|
● Focus
on Group Culture as a key mechanism to support sound risk
management behaviours, practices and awareness.
● Embedding
responses and insights from Group-wide employee engagement surveys
through enhancements to the Group Risk Framework.
|
● ESG
– commitments and disclosure
|
● Assessing
the potential financial impacts from climate-related transition
risk in the asset book and integration of climate risk into the
Group Risk Framework.
● Supporting
the Group ESG Committee in its responsibility to deliver the
Group’s ESG Strategic Framework and develop its
disclosures.
|
Our strategy
|
Significant risks arising from the delivery of the
strategy
|
Risk management focus
|
|
|
|
Asia
Serving the protection and investment needs of the growing middle
class in Asia.
|
● Financial
risks
|
● Maintaining,
and enhancing where necessary, risk limits and implementing
business initiatives to manage financial risks, including asset
allocation, bonus revisions, product repricing and reinsurance
where required.
|
● Persistency
risk
|
● Implementation
of business initiatives to manage persistency risk, including
additional payment methods, enhancing customer experience,
revisions to product design and incentive structures. Ongoing
experience monitoring.
|
● Morbidity
risk
|
● Implementation
of business initiatives to manage morbidity risk, including product
repricing where required. Ongoing experience
monitoring.
|
|
|
|
Africa
Providing savings, health and protection solutions to customers in
Africa.
|
As its presence in Africa expands and grows in materiality, the
Group will continue to increase its focus on Prudential
Africa’s most significant risks. A number of significant
Group-wide risks detailed above are considered material in the
region, and these include:
● Financial
crime and security risks, where the focus is on implementation of
Group policies and standards;
● Transformation
risks, where the focus is on overseeing and managing parallel
initiatives while developing local capabilities to meet the demands
of a fast-paced transformation agenda; and
● Regulatory
risks, where the focus is on active monitoring of the local
regulatory landscape and adoption of Group processes in order to
meet international regulatory standards.
|
|
|
|
United States
Providing asset accumulation and retirement income products to US
retirees.
|
● Financial
risks
|
● Maintaining,
and enhancing where necessary, risk limits, hedging strategies
(including mitigating measures against basis risk), modelling tools
and risk oversight appropriate to Jackson’s product mix with
a view to demerger from the Prudential Group.
|
● Policyholder
behaviour risk
|
● Continued
monitoring of policyholder behaviour experience and review of
assumptions.
|
Prudential
has in place a system of governance that promotes and embeds a
clear ownership of risk, processes that link risk management to
business objectives and a proactive Board and senior management
providing oversight of risks. Mechanisms and methodologies to
review, discuss and communicate risks are in place together with
risk policies and standards to enable risks to the Group to be
identified, measured and assessed, managed and controlled,
monitored and reported.
Material
risks are retained selectively when it is considered that there is
value in doing so, and where it is consistent with the
Group’s risk appetite and philosophy towards risk-taking. The
Group Risk Framework, which is owned by the Board, details
Prudential’s risk governance, risk management processes and
risk appetite. The Group’s risk governance arrangements are
based on the ‘three lines of defence’ model, comprising
risk taking and management, risk control and oversight, and
independent assurance. The aggregate Group exposure to its key risk
drivers is monitored and managed by the Risk, Compliance and
Security function, which is responsible for reviewing, assessing,
providing oversight and reporting on the Group’s risk
exposure and solvency position from the Group economic, regulatory
and ratings perspectives.
During
2020, the Group has continued to review and update its policies and
processes for alignment with the requirements of its Group-wide
supervisor. The Group has also focused on development of its
Group-wide customer conduct risk framework and policy; its AI
ethics principles; and enhancements to its operational
resilience.
The
following section provides more detail on our risk governance, risk
culture and risk management process.
i.
Risk governance and culture
Prudential’s
risk governance comprises the Board organisational structures,
reporting relationships, delegation of authority, roles and
responsibilities, and risk policies that have been established to
make decisions and control activities on risk-related
matters.
The
risk governance structure is led by the Group Risk Committee,
supported by independent non-executive directors on risk committees
of the Group’s main subsidiaries. The Group Risk Committee
reviews and approves changes made to the Group Risk Framework and
to relevant policies. It also reviews and approves new risk
policies and recommends to the Board any material policies which
require Board approval. A number of core risk policies and
standards support the Framework to enable risks to the Group to be
identified, measured and assessed, managed and controlled,
monitored and reported.
The
risk governance arrangements for the Group’s major businesses
were delayered and strengthened in 2020 with the implementation of
direct lines of communication, reporting and oversight of the risk
committees of these businesses by the Committee. To support the
enactment of these arrangements, the terms of reference for the
major business risk committees were aligned and approved locally,
and include a standing invitation for the Group Chief Risk and
Compliance Officer (CRCO) and the requirement for risk escalations
to the Committee.
Culture
is a strategic priority of the Board, which recognises its
importance in the way that the Group does business. A Group-wide
culture framework is currently being implemented to unify the Group
towards its shared purpose of helping people get the most out of
life. Components of the framework include principles and values
that define how the Group expects business to be conducted in order
to achieve its strategic objectives, inform expectations of
leadership and guide ESG activities. The culture framework
components are intended to be supportive of sound risk management
practices by requiring a focus on longer term goals and
sustainability, the avoidance of excessive risk taking and
highlighting acceptable and unacceptable behaviours. The framework
is supported through inclusion of risk considerations in
performance management for key individuals; the building of
appropriate skills and capabilities in risk management; and by
ensuring that employees understand and care about their role in
managing risk through open discussions. The Group Risk Committee
has a key role in providing advice to the Remuneration Committee on
risk management considerations to be applied in respect of
executive remuneration.
Prudential’s
Group Code of Business Conduct and Group Governance Manual include
a series of guiding principles that govern the day-to-day conduct
of all its people and any organisations acting on its behalf. This
is supported by specific risk-related policies which require that
the Group act in a responsible manner. These include, but are not
limited to, policies related to financial crime covering anti-money
laundering and sanctions and anti-bribery and corruption. The
Group’s third-party supply policy requires that human rights
and modern slavery considerations are embedded across all of its
supplier and supply chain arrangements. Embedded procedures to
allow individuals to speak out safely and anonymously against
unethical behaviour and conduct are also in place.
ESG is
overseen by the Board, which is responsible for determining
strategy and prioritisation of key focus areas. In order to provide
greater senior executive involvement and holistic oversight of ESG
matters material to the Group, in 2020, a Group ESG Committee was
established. The Committee, chaired by the Group Chief Financial
Officer and Chief Operating Officer in his role as ESG sponsor, was
supported by senior functional leaders and representatives from the
Group’s business units, including the chief investment
officers of the Group’s asset managers. The Group ESG
Committee reported to the Board in 2020 through the Group
Nomination & Governance Committee, comprising the Group’s
Chair, the Senior Independent Director, and the chairs of the
Audit, Remuneration and Risk committees and was regularly attended
by the Group Chief Executive. The policies and procedures to
support how the Group operates in relation to certain ESG topics
are included in the Group Governance Manual, which establishes
standards for managing ESG issues across the Group and sets out the
policies and procedures to support how Prudential operates. Further
details on the Group’s ESG governance arrangements, including
the establishment in early 2021 of a Board Responsibility &
Sustainability Working Group, are included in the ESG
Report.
ii.
The risk management cycle
Risk identification
In
accordance with provision 28 of the UK Corporate Governance Code, a
process is in place to support Group-wide identification of the
company’s emerging and principal risks and this combines both
top-down and bottom-up views of risks at the level of the Group and
its business units. The Board performs a robust assessment and
analysis of these principal and emerging risks facing the company
through the risk identification process, the Group Own Risk and
Solvency Assessment (ORSA) report and the risk assessments
undertaken as part of the business planning review, including how
they are managed and mitigated, which supports
decision-making.
The
ORSA is the ongoing process of identifying, measuring and
assessing, managing and controlling, monitoring and reporting the
risks to which the business is exposed. It includes an assessment
of capital adequacy to ensure that the Group’s solvency needs
are met at all times. Stress and scenario testing, which includes
reverse stress testing requiring the Group to ascertain the point
of business model failure, is another tool that helps to identify
the key risks and scenarios that may have a material impact on the
Group. The risk profile is a key output from the risk
identification and risk measurement processes and is used as a
basis for setting Group-wide limits, management information,
assessment of solvency needs, and determining appropriate stress
and scenario testing. The Group’s annual set of principal
risks is given enhanced management and reporting
focus.
Risk measurement and assessment
All
identified risks are assessed based on an appropriate methodology
for that risk. All quantifiable risks, which are material and
mitigated by holding capital, are modelled in the Group’s
internal model, which is used to determine economic capital
requirements and is subject to independent validation and processes
and controls around model changes and limitations.
Risk management and control
The
Group’s control procedures and systems focus on aligning the
levels of risk-taking with the Group’s strategy and can only
provide reasonable, and not absolute, assurance against material
misstatement or loss. Risk management and control requirements are
set out in the Group’s risk policies and define the
Group’s risk appetite in respect of material risks and the
framework under which the Group’s exposure to those risks is
limited. The processes to enable Group senior management to effect
the measurement and management of the Group material risk profile
in a consistent and coherent way, which include the flows of
management information required, are also set out in the
Group’s risk policies. The methods and risk management tools
that the Group employs to mitigate each of its major categories of
risks are detailed in section 5 below.
Risk monitoring and reporting
The
identification of the Group’s principal risks informs the
management information received by the Group Risk Committee and the
Board. Risk reporting of key exposures against appetite is also
included, as well as ongoing developments in the Group’s
principal and emerging risks.
iii.
Risk appetite, limits and triggers
The
Group recognises that interests of its customers and shareholders,
and a managed acceptance of risk in pursuit of its strategy, lies
at the heart of its business, and that effective risk management
capabilities represent a key source of competitive advantage.
Qualitative and quantitative expressions of risk appetite are
defined and operationalised through risk limits, triggers and
indicators. The Risk, Compliance and Security function reviews the
scope and operation of these measures at least annually. The Board
approves changes to the Group’s aggregate risk appetite and
the Group Risk Committee has delegated authority to approve changes
to the system of limits, triggers and indicators.
Group
risk appetite is defined and monitored in aggregate by the setting
of objectives for its liquidity, capital requirements and
non-financial risk exposure, covering risks to shareholders,
including those from participating and third-party business. Group
limits operate within these expressions of risk appetite to
constrain material risks, while triggers and indicators provide
additional defined points for escalation. The Group Risk Committee is responsible for
reviewing the risks inherent in the Group’s business plan and
for providing the Board with input on the risk/reward trade-offs
implicit therein. This review is supported by the Risk and
Compliance function, which uses submissions from local business
units to calculate the Group’s aggregated position relative
to Group risk appetite and limits.
●
Capital requirements.
Limits on capital requirements aim to ensure that the Group
maintains sufficient capital in excess of internal economic capital
requirements in business-as-usual and stressed conditions, achieves
its desired target rating to meet its business objectives, and
supervisory intervention is avoided. The two measures currently in
use at the Group level are the regulatory local capital summation
method (LCSM) capital requirements (both minimum and prescribed
levels) and internal economic capital requirements
(‘ECap’), which under the GWS Framework will be
determined by the Group Internal Economic Capital Assessment
(‘GIECA’). In addition, capital requirements are
monitored on local statutory bases.
●
Liquidity. The objective
of the Group’s liquidity risk appetite is to ensure that
sufficient cash resources are available to meet financial
obligations as they fall due in business-as-usual and stressed
scenarios. This is measured using a liquidity coverage ratio (LCR)
which considers the sources of liquidity against liquidity
requirements under stress scenarios.
Non-financial risks. The Group is
exposed to non-financial risks, including environmental, social and
governance risks, as an outcome of its chosen business activities
and strategy. It aims to manage these risks effectively to maintain
its operational resilience and its commitments to customers and
other external stakeholders, and to avoid material adverse impact
on its reputation.
5.
The Group’s principal risks
Broadly,
the risks assumed across the Group can be categorised as those
relating to its financial situation; its business and industry;
regulatory and legal compliance; and those relating to ESG.
Principal risks, whether materialising within the Group or at third
parties on which the Group relies, may have a financial impact and
could also impact the performance of products or services provided
to customers and distributors and the ability to fulfil commitments
to customers, giving rise to potential risks to its brand and
reputation. These risks, which are not exhaustive, are detailed
below. The materiality of these risks, whether material at the
level of the Group or its business units, is also indicated. The
Group’s disclosures covering risk factors are aligned to the
same categories and can be found at the end of this
document.
In
reading the sections below, it is useful to understand that there
are some risks that Prudential’s policyholders assume by
virtue of the nature of their products, and some risks that the
Group and its shareholders assume. Examples of the latter include
those risks arising from assets held directly by and for the Group
or the risk that policyholder funds are exhausted. This report is
focused mainly on risks to the shareholder but will include those
which arise indirectly through policyholder exposures.
Covid-19 risks and responses
The
Group has responded in a number of ways to the risks arising from
the coronavirus pandemic; some responses were part of existing risk
management processes and procedures, while others have been
initiated specifically in response to the pandemic, in particular
during the acute phases experienced in Q1 and Q2.
The
Group Critical Incident Procedure (GCIP) defines specific
governance to be invoked in the event of a critical incident, such
as a significant market, liquidity or credit-related event. This
includes, where necessary, the convening of a Critical Incident
Group (CIG) to oversee, coordinate, and where appropriate, direct
any activity during a critical incident. In response to the
economic and financial market shocks triggered by the Covid-19
pandemic the Group CRCO invoked the GCIP and convened a series of
CIG meetings to provide high-cadence monitoring and management of
potential threats to the capital or liquidity position of the
Group. Local Incident Management teams were also activated to
monitor and manage the tailored response required to support the
operations, customers and employees of the Group’s
businesses.
These
risks arising from Covid-19, and the Group’s responses to
them, are summarised below, with further information provided,
where relevant, within the descriptions of the Group’s
principal risks.
Risk areas
|
Responses
|
● Staff safety and
well-being
|
Proactive
move to working from home arrangements across jurisdictions, with
Local Incident Management teams monitoring country specific
developments, undertaking risk assessments and providing regular
staff communications and support.
|
● Customer outcomes
are not met, increasing conduct risk
|
Initiatives
and campaigns rolled out across markets, including customer cash
benefits, goodwill payments, and extended grace periods for premium
payments.
|
● Disruption to the
operations of the Group, and its key partners
|
Application
of the Group and local business continuity plans. Local Incident
Management teams activated to monitor, manage and lead a tailored
response to ensure continuity of service to existing
customers.
|
● Financial market
and liquidity impacts, including to Group and business unit
solvency
|
Invocation
of the GCIP and convening of a CIG to monitor and manage threats to
the Group’s solvency or liquidity position.
|
● Heightened risk of
phishing and social engineering tactics
|
Group-wide
phishing and targeted awareness campaigns. Heightened threat
monitoring and review of cyber hygiene controls. Active management
of connections to the Group network.
|
● Sales
impacts
|
Roll-out
of virtual face-to-face sales processes in most of the
Group’s markets with appropriate regulatory engagement,
digital product offerings, oversight of incremental conduct and
operational risks and ongoing monitoring of the commercial impact
to existing sales channels.
|
● Insurance risks, in
particular increased lapses and surrenders resulting from the
broader economic effects as well as increased and/or delayed
morbidity impacts
|
Close
monitoring by the Group’s businesses and targeted management
actions where necessary. Covid-19-related claims have not been
material to date, but are being closely monitored.
|
Risks to the Group’s financial situation (including those
from the external macroeconomic and geopolitical
environment)
The global economic and geopolitical environment may impact on the
Group directly by affecting trends in financial markets and asset
values, as well as driving short-term volatility.
Risks in this category include the market risks to our investments
and the credit quality of our investment portfolio as well as
liquidity risk.
|
Global economic and geopolitical conditions
Changes
in global economic conditions can impact Prudential directly; for
example, by leading to reduced investment returns and fund
performance and liquidity, and increasing the cost of promises
(guarantees) that have been made to the Group's customers. Changes
in economic conditions, such as the abrupt and uncertain
longer-term impacts resulting from the Covid-19 crisis, can also
have an indirect impact on the Group; for example, leading to a
decrease in the propensity for people to save and buy
Prudential’s products, as well as changing prevailing
political attitudes towards regulation.
The
geopolitical environment can also impact the Group in a wide range
of ways, both directly and indirectly. Financial markets and
economic sentiment have been highly susceptible to geopolitical
developments in recent years, with implications for the
Group’s financial situation. We have seen in recent times
that geopolitical tensions can result in the imposition of
protectionist or restrictive regulatory and trading requirements by
governments and regimes. The Covid-19 pandemic has further prompted
governments to rethink the current globalised nature of supply
chains, while accessibility to vaccine supplies has the potential
to contribute to an increase in geopolitical tensions. These
factors may have geopolitical and trading implications, the full
extent of which may not be clear for a while. Various governments
have effected, or may effect, the postponement of elections and
other constitutional or legislative processes in response to the
pandemic, and the longer-term impact from this increase in
constitutional and political uncertainty remains to be seen. The
pandemic has had a negative impact on all economies, with increased
fiscal burdens, higher levels of borrowing and reduced revenues.
These pressures will impact on the business operating environments,
for example, through changes to taxation, and are likely to
contribute to political pressures for governments.
Responses
by the US, UK and other governments to the enactment and
application of the national security law in Hong Kong and other
constitutional or legislative changes in the territory, which
continue to develop, may impact Hong Kong’s economy. Being a
key market for the Group which also hosts regional and head office
functions, this could potentially impact Prudential’s sales,
operations and product distribution. For internationally active
groups which operate across impacted jurisdictions such as
Prudential, these government measures and responses add to the
complexity of legal and regulatory compliance. Compliance with
Prudential’s legal or regulatory obligations in one
jurisdiction may conflict with the law or policy objectives of
another jurisdiction, or may be seen as supporting the law or
policy objectives of that jurisdiction over another, creating
additional legal, regulatory compliance and reputational risks for
the Group. All these factors can increase the operational, business
disruption, regulatory and financial market risks to the Group and
can directly impact its sales and distribution networks.
Developments in Hong Kong and the continuing impacts of the
pandemic are being closely monitored by the Group and plans have
been enacted to manage the disruption to the business, its
employees and its customers within existing business resilience
processes. Further information on the Group’s business
disruption risks are included below.
Macroeconomic
and geopolitical risks are considered material at the level of the
Group.
Market risks to our investments
This is
the potential for reduced value of Prudential’s investments
resulting from the volatility of asset prices, driven by
fluctuations in equity prices, interest rates, foreign exchange
rates and property prices. Interest rates in the Group’s key
markets decreased to historically low levels in Q1 2020, with the
stance of central banks making it likely they will remain extremely
low for a while. A persistently low interest rate environment poses
challenges to both the capital position of life insurers as well as
to new business profitability and this is a scenario that the Group
is planning for.
The
Group has appetite for market risk where it arises from
profit-generating insurance activities to the extent that it
remains part of a balanced portfolio of sources of income for
shareholders and is compatible with a robust solvency
position.
The
Group’s market risks are managed and mitigated by the
following:
-
The Group market
risk policy;
-
The Group Asset
Liability Committee – a first-line risk management advisory
committee to the Group Chief Executive Officer which supports the
identification, assessment and management of key financial risks
significant to the achievement of the Group’s business
objectives;
-
Risk appetite
statements, limits and triggers;
-
Asset and liability
management programmes which include management actions such as
asset allocation, bonus revisions, repricing and the use of
reinsurance where appropriate;
-
Hedging
derivatives, including equity options and futures, interest rate
swaps and swaptions and currency forwards;
-
The monitoring and
oversight of market risks through the regular reporting of
management information; and
-
Regular deep dive
assessments.
As
noted above, in response to the economic and financial market
shocks triggered by the Covid-19 pandemic, the Group CRCO invoked
the GCIP and convened a series of CIG meetings to provide
high-cadence monitoring and management of any potential threats to
the capital or liquidity position of the Group.
●
Equity and property investment risk. In
Asia, the shareholder exposure to equity price movements results
from unit-linked products, where fee income is linked to the market
value of the funds under management. Further exposure arises from
with-profits businesses where bonuses declared are based broadly on
historical and current rates of return from the Asia
business’s investment portfolios, which include
equities.
In
Jackson, investment risk arises from the assets backing customer
policies. Equity risk is driven by the variable annuity business,
where the assets are invested in both equities and bonds and the
main risk to the shareholder comes from providing the guaranteed
benefits offered. The exposure to this is primarily controlled by
using a derivative hedging programme, as well as through the use of
reinsurance to pass on the risk to third-party
reinsurers.
Basis
risk is the inherent risk associated with imperfect hedging and is
caused by variables or characteristics that drive differences
between the value of an underlying position and the hedge
instruments used to offset changes in its value. Within
Jackson’s variable annuity business, basis risk can arise
from differences between the performance of the Separate Account
funds in which policyholders choose to invest and that of the
instruments used to replicate these funds for hedging and liability
modelling purposes, which are primarily linked to the S&P 500
index. This risk exposure is proportionate to the magnitude of
liability risk/hedge position which fluctuates with equity and
interest rate levels. While the market sell-off in Q1 2020
increased this liability risk/hedge exposure, the subsequent rally
in equity markets over 2020 has had a corresponding opposite and
positive impact. Jackson continues to actively evaluate the costs
and benefits of ways to further mitigate basis risk.
●
Interest rate risk. This is driven by
the valuation of Prudential’s assets (particularly the bonds
that it invests in) and liabilities, which are dependent on market
interest rates and expose the Group to the risk of those moving in
a way that is detrimental. Some products that Prudential offers are
sensitive to movements in interest rates. As part of the ongoing
management of this risk, a number of mitigating actions to the
in-force business have been taken, as well as repricing and
restructuring new business offerings in response to recent
relatively low interest rates. Nevertheless, some sensitivity to
interest rate movements is still retained. The impact of lower
interest rates may also manifest through reduced solvency levels in
some of the Group’s businesses, impairing their ability to
make remittances, as well as reduced new business
profitability.
The
Group’s appetite for interest rate risk is limited to where
assets and liabilities can be tightly matched and where liquid
assets or derivatives exist to cover interest rate
exposures.
In
Asia, our exposure to interest rate risk arises from the guarantees
of some non-unit-linked products with a savings component,
including the Hong Kong with-profits and non-profit business. This
exposure exists because of the potential for an asset and liability
mismatch, where long-dated liabilities and guarantees are backed by
short-dated assets, which cannot be eliminated but is monitored and
managed through local risk and asset liability management
committees against risk appetite aligned with the Group’s
limit framework.
Interest rate risk
results from the cost of guarantees in the variable annuity and
fixed index annuity business, which may increase when interest
rates fall. The level of sales of variable annuity products with
guaranteed living benefits is actively monitored, and the risk
limits we have in place help to ensure we are comfortable with the
level of interest rate and market risks incurred as a result.
Derivatives are also used to provide some protection. Jackson is
also affected by interest rate movements to its fixed annuity book
where the assets are primarily invested in bonds and shareholder
exposure comes from the mismatch between these assets and the
guaranteed rates that are offered to policyholders. As at 1 June
2020, this risk has been substantially transferred as part of the
reinsurance transaction with Athene, leaving only a limited
exposure from residual policies including those from the blocks
acquired externally (ie from the REALIC and John Hancock
businesses).
●
Foreign exchange risk. The geographical
diversity of Prudential’s businesses means that it has some
exposure to the risk of foreign exchange rate fluctuations. Some
entities within the Group that write policies, invest in assets or
enter into other transactions in local currencies or currencies not
linked to the US dollar. Although this limits the effect of
exchange rate movements on local operating results, it can lead to
fluctuations in the Group financial statements when results are
reported in US dollars. This risk is accepted within our appetite
for foreign exchange risk.
In
cases where a non-US dollar denominated surplus arises in an
operation which is to be used to support Group capital, or where a
significant cash payment is due from a subsidiary to the Group,
this currency exposure may be hedged where it is believed to be
economically favourable to do so. Further, the Group generally does
not have appetite for significant direct shareholder exposure to
foreign exchange risks in currencies outside the countries in which
it operates, but it does have some appetite for this on fee income
and on equity investments within the with-profits fund. Where
foreign exchange risk arises outside appetite, currency swaps and
other derivatives are used to manage the exposure.
Liquidity risk
Prudential’s
liquidity risk arises from the need to have sufficient liquid
assets to meet policyholder and third-party payments as they fall
due, and the Group considers this under both normal and stressed
conditions. It includes the risk arising from funds composed of
illiquid assets and results from a mismatch between the liquidity
profile of assets and liabilities. Liquidity risk may impact on
market conditions and valuation of assets in a more uncertain way
than for other risks like interest rate or credit risk. It may
arise, for example, where external capital is unavailable at
sustainable cost, increased liquid assets are required to be held
as collateral under derivative transactions or where redemption
requests are made against Prudential’s external funds.
Liquidity risk is considered material at the level of the
Group.
Prudential
has no appetite for any business to have insufficient resources to
cover its outgoing cash flows, or for the Group as a whole to not
meet cash flow requirements from its debt obligations under any
plausible scenario.
The
Group has significant internal sources of liquidity, which are
sufficient to meet all of our expected cash requirements for at
least 12 months from the date the financial statements are
approved, without having to resort to external sources of funding.
The Group has a total of $2.6 billion of undrawn committed
facilities that can be made use of, expiring in 2025. Access to
further liquidity is available through the debt capital markets and
an extensive commercial paper programme is in place, and Prudential
has maintained a consistent presence as an issuer in the market for
the past decade.
A
number of risk management tools are used to manage and mitigate
this liquidity risk, including the following:
-
The Group’s
liquidity risk policy;
-
Risk appetite
statements, limits and triggers;
-
Regular assessment
by the Group and business units of LCRs which are calculated under
both base case and stressed scenarios and are reported to
committees and the Board;
-
The Group’s
Liquidity Risk Management Plan, which includes details of the Group
Liquidity Risk Framework as well as gap analysis of liquidity risks
and the adequacy of available liquidity resources under normal and
stressed conditions;
-
Regular stress
testing;
-
Our contingency
plans and identified sources of liquidity;
-
The Group’s
ability to access the money and debt capital markets;
-
Regular deep dive
assessments; and
-
The Group’s
access to external committed credit facilities.
Credit risk
Credit
risk is the potential for a reduction in the value of investments
which results from the perceived level of risk of an investment
issuer being unable to meet its obligations (defaulting).
Counterparty risk is a type of credit risk and relates to the risk
of the counterparty to any contract we enter into being unable to
meet their obligations causing the Group to suffer a
loss.
Prudential
invests in bonds that provide a regular, fixed amount of interest
income (fixed income assets) in order to match the payments needed
to policyholders. It also enters into reinsurance and derivative
contracts with third parties to mitigate various types of risk, as
well as holding cash deposits at certain banks. As a result, it is
exposed to credit risk and counterparty risk across its business.
The assets backing the Jackson general account portfolio and the
Asia shareholder business means credit risk is considered a
material risk for the Group’s business units.
The
Group has some appetite to take credit risk to the extent that it
remains part of a balanced portfolio of sources of income for
shareholders and is compatible with a robust solvency
position.
A
number of risk management tools are used to manage and mitigate
this credit risk, including the following:
-
A credit risk
policy and dealing and controls policy;
-
Risk appetite
statements and portfolio-level limits that have been defined on
issuers, and counterparties;
-
Collateral
arrangements for derivative, secured lending reverse repurchase and
reinsurance transactions which aim to provide a high level of
credit protection;
-
The Group Credit
Risk Committee’s oversight of credit and counterparty credit
risk and sector and/or name-specific reviews;
-
Regular
assessments; and
-
Close monitoring or
restrictions on investments that may be of concern.
The
total debt securities4 at 31 December 2020
were $125.8 billion (31 December 2019: $134.6 billion). Credit risk
arises from the debt portfolio in the Asia business comprising the
shareholder, with-profit and unit-linked funds, the value of which
was $89.6 billion at 31 December 2020. The majority (69 per cent)
of the portfolio is in unit-linked and with-profits funds. The
remaining 31 per cent of the debt portfolio is held to back the
shareholder business.
In the
general account of the Group’s US business, $36.0 billion of
debt securities are held to support shareholder liabilities. The
shareholder-backed debt portfolio of the Group’s other
operations was $0.2 billion as at 31 December 2020. Further details
of the composition and quality of our debt portfolio, and exposure
to loans, can be found in the IFRS financial
statements.
●
Group sovereign debt. Prudential invests
in bonds issued by national governments. This sovereign debt
holding represented 28 per cent or $18.0 billion1 of the shareholder
debt portfolio of the Group as at 31 December 2020 (31 December
2019: 22 per cent or $18.8 billion of the shareholder debt
portfolio). The particular risks associated with holding sovereign
debt are detailed further in our disclosures on risk
factors.
The
exposures held by the shareholder-backed business and with-profits
funds in sovereign debt securities at 31 December 2020 are given in
note C1 of the Group’s IFRS financial
statements.
●
Corporate debt portfolio. In the Asia
shareholder business, corporate debt exposures totalled $13.9
billion of which $12.4 billion or 89 per cent were investment grade
rated. In the US general account, corporate debt exposures amounted
to $26.6 billion following the Athene transaction, and the
portfolio remains of high credit quality with 97 per
cent5
remaining investment grade rated.
●
Bank debt exposure and counterparty credit
risk. Prudential’s exposure to banks is a key part of
its core investment business, as well as being important for the
hedging and other activities undertaken to manage its various
financial risks. Given the importance of its relationship with its
banks, exposure to the sector is considered a material risk for the
Group. The exposure to derivative counterparty and reinsurance
counterparty credit risk, which includes the recently announced
reinsurance agreement with Athene Life Re, is managed using an
array of risk management tools, including a comprehensive system of
limits. Where appropriate, Prudential reduces its exposure, buys
credit protection or uses additional collateral arrangements to
manage its levels of counterparty credit risk.
At 31
December 2020:
-
92 per cent of the
Group’s shareholder portfolio (excluding all government and
government-related debt) is investment grade rated2. In particular, 52
per cent of the portfolio is rated2 A- and above (or
equivalent); and
-
The Group’s
shareholder portfolio is well diversified: no individual
sector3
makes up more than 15 per cent of the total portfolio (excluding
the financial and sovereign sectors). The exposures held by the
shareholder-backed business and with-profits funds in bank debt
securities at 31 December 2020 are given in note C1 of the
Group’s IFRS financial statements.
Risks from the nature of our business and our industry
These include the Group’s non-financial risks (including
operational and financial crime risk), transformation risks from
significant change activity and the insurance risks assumed by the
Group in providing its products.
|
Transformation risk
Prudential
has a number of significant change programmes under way to deliver
the Group’s strategy for growth, improve customer
experiences, strengthen its operational resilience and control
environment, and meet regulatory and industry requirements. If the
Group does not deliver these programmes to defined timelines, scope
and cost, this may negatively impact on its operational capability;
control environment; reputation; and ability to deliver its
strategy and maintain market competitiveness.
Transformation
risk remains a material risk for Prudential. The Group’s
transformation and change programmes inherently give rise to design
and execution risks, and may introduce new, or increase existing,
business risks and dependencies. Implementing further strategic
transformation initiatives may amplify these risks. In order to
manage these risks, the Group’s Transformation Risk Framework
aims to ensure that, for both transformation and strategic
initiatives, strong programme governance is in place with embedded
risk expertise to achieve ongoing and nimble risk oversight, and
regular risk monitoring and reporting to risk committees is
delivered.
Prudential’s
current portfolio of transformation and significant change
programmes include the proposed demerger of Jackson from the Group;
the expansion of the Group’s digital capabilities and use of
technology, platforms and analytics; and improvement of business
efficiencies through operating model changes (covering data,
systems and people). Programmes related to regulatory/industry
change such as the transition to the Hong Kong IA’s GWS
Framework, changes required to effect the discontinuation of
inter-bank offered rates (IBORs) in their current form and the
implementation of IFRS 17 are also ongoing. See below for further
detail on these regulatory changes. The Group is cognisant that the
speed of technological change in the business could outpace its
ability to anticipate all the unintended consequences that may
arise. While the adoption of innovative technologies such as
artificial intelligence has opened up new product opportunities and
channels, it also exposes the Prudential to potential information
security, operational, ethical and conduct risks which, if not
managed effectively, could result in customer detriment and
reputational damage. The Transformation Risk Framework therefore
operates alongside the Group’s existing risk policies and
frameworks in these areas to ensure appropriate controls and
governance are in place to mitigate these risks.
Non-financial risks
In the
course of doing business, the Group is exposed to non-financial
risks. A combination of the complexity of the Group, its activities
and the extent of transformation in progress creates a challenging
operating environment. The Group’s main non-financial risks
are detailed below. These risks are considered to be material at
the level of the Group.
●
Operational risk. Prudential defines
operational risk as the risk of loss (or unintended gain or profit)
arising from inadequate or failed internal processes, personnel or
systems, or from external events. This may arise from employee
error, model error, system failures, fraud or other events which
disrupt business processes or has a detrimental impact to
customers. Activities across the scope of our business, including
operational activity, regulatory compliance, and those supporting
ESG activities more broadly can expose us to operational risks. A
large volume of complex transactions is processed by the Group
across a number of diverse products and are subject to a high
number of varying legal, regulatory and tax regimes. Prudential has
no appetite for material losses (direct or indirect) suffered as a
result of failing to develop, implement or monitor appropriate
controls to manage operational risks.
The
Group’s outsourcing and third-party relationships require
distinct oversight and risk management processes. A number of
important third-party relationships exist which provide the
distribution and processing of Prudential’s products, both as
market counterparties and as outsourcing partners, including new IT
and technology partners. In Asia, the Group continues to expand its
strategic partnerships and renew bancassurance arrangements, and in
Africa Prudential is continuing its expansion through acquisitions.
These third-party arrangements support Prudential in providing a
high level and cost-effective service to our customers, but they
also make us reliant on the operational resilience and performance
of our outsourcing partners.
The
Group’s requirements for the management of material
outsourcing arrangements, which are in accordance with relevant
applicable regulations, are included through its well-established
Group-wide third-party supply policy. Third-party management is
also included and embedded in the Group-wide framework and risk
management for operational risk (see below).
The
performance of the Group’s core business activities places
reliance on the IT infrastructure, provided by our external IT and
technology partners, that supports day-to-day transaction
processing and administration. This IT environment must also be
secure, and an increasing cyber risk threat needs to be addressed
as the Group’s digital footprint increases and the
sophistication of cyber threats continue to evolve – see
separate information security risk sub-section below. Exposure to
operational and other external events could impact operational
resilience by significantly disrupting systems, operations and
services to customers, which may result in financial loss, customer
impacts and reputational damage. Operational challenges also exist
in keeping pace with regulatory changes. This requires implementing
processes to ensure we are, and remain, compliant on an ongoing
basis, including regular monitoring and reporting.
Group-wide framework and risk management for operational
risk
The
risks detailed above form key elements of the Group’s
operational risk profile. A Group-wide operational risk framework
is in place to identify, measure and assess, manage and control,
monitor and report effectively on all material operational risks
across the business. The key components of the framework
are:
-
Application of a
risk and control self-assessment (RCSA) process, where operational
risk exposures are identified and assessed as part of a periodical
cycle. The RCSA process considers a range of internal and external
factors, including an assessment of the control environment, to
determine the business’s most significant risk exposures on a
prospective basis;
-
An internal
incident management process, which identifies, quantifies and
monitors remediation conducted through root cause analysis and
application of action plans for risk events that have occurred
across the business;
-
A scenario analysis
process for the quantification of extreme, yet plausible
manifestations of key operational risks across the business on a
forward-looking basis. This is carried out at least annually and
supports external and internal capital requirements as well as
informing risk oversight activity across the business;
and
-
An operational risk
appetite framework that articulates the level of operational risk
exposure the business is willing to tolerate, covering all
operational risk categories, and sets out escalation processes for
breaches of appetite.
Outputs
from these processes and activities performed by individual
business units are monitored by the Risk function, which provides
an aggregated view of the risk profile across the business to the
Group Risk Committee and Board.
These
core framework components are embedded across the Group via the
Group Operational Risk Policy and Standards documents, which set
out the key principles and minimum standards for the management of
operational risk across the Group. The Group Operational Risk
Policy, standards and operational risk appetite framework sit
alongside other risk policies and standards that individually
engage with key operational risks, including outsourcing and
third-party supply, business continuity, financial crime,
technology and data, operations processes and extent of
transformation. These policies and standards include subject matter
expert-led processes that are designed to identify, assess, manage
and control operational risks, including:
-
A transformation
risk framework that assesses, manages and reports on the end-to-end
transformation life cycle, project prioritisation and the risks,
interdependencies and possible conflicts arising from a large
portfolio of transformation activities;
-
Internal and
external review of cyber security capability and
defences;
-
Regular updating
and testing of elements of disaster-recovery plans and the Critical
Incident Procedure process;
-
Group and business
unit-level compliance oversight and testing in respect of adherence
with in-force regulations;
-
Regulatory change
teams in place to assist the business in proactively adapting and
complying with regulatory developments;
-
On financial crime
risks (see below), screening and transaction monitoring systems are
in place and a programme of compliance control monitoring reviews
is undertaken, as well as regular risk assessments;
-
A framework is in
place for emerging risk identification and analysis in order to
capture, monitor and allow us to prepare for operational risks that
may crystallise beyond the short-term horizon;
-
Corporate insurance
programmes to limit the financial impact of operational risks;
and
-
Reviews of key
operational risks and challenges within Group and business unit
business plans.
These
activities are fundamental in maintaining an effective system of
internal control, and as such outputs from these also inform core
RCSA, incident management and scenario analysis processes and
reporting on operational risk. Furthermore, they also ensure that
operational risk considerations are embedded in key business
decision-making, including material business approvals and in
setting and challenging the Group’s strategy.
●
Business disruption risk. Events in 2020
have shown how material business disruption risk is to effective
business operations and delivery of business services to
policyholders, and the potential impact to our customers and the
market more broadly. The Group continuously seeks to develop
greater business resilience through planning, preparation, testing
and adaption. Business continuity management (BCM) is one of a
number of activities undertaken by the Group Security function that
helps the Group to protect its key stakeholders and its systems,
and business resilience is at the core of the Group’s
embedded BCM programme. The BCM programme and framework are
appropriately linked to all business activities, and includes
business impact analyses, risk assessments, incident management
plans, disaster recovery plans, and the exercising and execution of
these plans. Based on industry standards, the BCM programme is
designed to provide business continuity that matches the
Group’s evolving business needs and is appropriate to the
size, complexity and nature of the Group’s operations.
Prudential is also taking a broader, multi-functional approach to
building greater business resilience, working with our external
third-party providers and our service delivery teams to improve our
ability to withstand, absorb and recover from disruption to our
business services, while minimising the impact on our customers.
The Group continuously reviews and develops its contingency plans
and its ability to respond effectively when disruptive incidents
occur, such as those resulting from the Covid-19 pandemic and,
prior to this, the Hong Kong protests in 2019. Business disruption
risks are closely monitored by the Group Security function, with
key operational effectiveness metrics and updates on specific
activities being reported to the Group Risk Committee and discussed
by cross-functional working groups.
●
Information security risk and data
privacy. Information security and data privacy risks remain
significant considerations for Prudential. This includes the risk
of malicious attack on its systems, network disruption and risks
relating to data security, integrity, privacy and misuse. The cyber
security threat and criminal capability in this area continues to
evolve globally in sophistication and potential significance with
an increased level of understanding of complex financial
transactions which increases the risks to the financial services
industry. The systemic risk of sophisticated but untargeted attacks
remains elevated, particularly during times of heightened
geopolitical tensions and during the current disruption caused by
the Covid-19 pandemic. The scale of the Group’s IT
infrastructure and network (and the services required to monitor
and manage it), stakeholder expectations and high-profile cyber
security and data misuse incidents across industries mean that
these risks are considered material at the level of the
Group.
Prudential and the
insurance industry are making increasing use of emerging
technological tools and digital services, or forming partnerships
with third parties that provide these capabilities. While this
provides new opportunities, opening up markets, improving insights
and increasing scalability, it also comes with additional risks
which are managed within the Group’s existing governance and
risk management processes, including additional operational risks
and increased risks around data security and misuse. Automated
digital distribution channels increase the criticality of system
and process resilience in order to deliver uninterrupted service to
customers.
Developments in
data protection requirements, such as the California Consumer
Protection Act which came into force on 1 January 2020, continue to
evolve worldwide. This increases financial and reputational
implications for Prudential in the event of a breach of its (or
third-party suppliers’) IT systems. As well as protecting
data, stakeholders expect companies and organisations to use
personal information transparently and appropriately. New and
currently unforeseeable regulatory issues may also arise from the
increased use of emerging technology, data and digital services.
This includes the international transfer of data which, as a global
organisation, increases regulatory risks for Prudential. Given
this, both information security and data privacy are key risks for
the Group. As well as having preventative risk management in place,
it is fundamental that the Group has robust critical recovery
systems in place in the event of a successful attack on its
infrastructure, a breach of its information security or a failure
of its systems in order to retain its customer relationships and
trusted reputation.
During
2020, work to operationalise the revised organisational structure
and governance model for cyber security management has continued.
This change has resulted in a centralised Group-wide Information
Security and Privacy function, leveraging skills, tools and
resources across the business under a ‘centre of
excellence’ model. This global function is led by the Group
Chief Information Security Officer and falls within the scope of
the responsibilities of the Group Chief Digital Officer, working
closely with the Group Risk and Compliance Function and Group CRCO
to ensure appropriate second line oversight. Cyber risk management
is also conducted locally within business units with input from
business information security officers and with oversight from
local risk committees. The Prudential plc Board is briefed at least
twice annually on cyber security by the Group CISO and executive
training is provided to ensure that members understand the latest
regulatory expectations and the threats facing the Group and that
they have the means to enable appropriate oversight in this
area.
An
updated Group-wide information security policy has been introduced
that aligns to over 20 international standards such as ISO 27001/2,
MAS, and NIST Cyber Security Framework to ensure full coverage and
adoption of best practices. Local policies are also aligned to
relevant local regulation or law. Our Group-wide privacy policy was
developed in collaboration with industry experts to support a
pragmatic approach to the evolving regulatory environment globally
and ensure compliance with all applicable laws and regulations.
This approach ensures that all our stakeholders have confidence in
our approach to information security and risk
management.
These
developments have allowed the Group to progress on its cyber
security strategy, which for 2020 has four key
objectives:
-
Automation of key
processes to provide near real-time information on cyber security
risks, allowing for increased response times scalability of
defences to threat vectors across all security disciplines. This
also enables improved, and more rapid,
decision-making;
-
Using technology
for the rapid enablement of the Group’s businesses, which
supports the Group Digital Transformation strategy while meeting
the security requirements and expectations;
-
Optimisations for
efficiency in cyber security and data privacy management. This
includes the delivery of centralised services across the Group in
areas such as vulnerability management; and
-
Continuous
identification and implementation of improvements to the people,
processes or technology deployed on cyber security and privacy
management.
●
Model, user developed application (UDA) and
robotics process automation (RPA) risk. There is a risk of
adverse consequences arising from erroneous or misinterpreted tools
used in core business activities, decision making and reporting.
The Group utilises various tools to perform a range of operational
functions including the calculation of regulatory or internal
capital requirements, the valuation of assets and liabilities,
determining hedging requirements, and in acquiring new business
using artificial intelligence and digital applications. Many of
these tools are an integral part of the information and
decision-making framework of Prudential and errors or limitations
in these tools, or inappropriate usage, may lead to regulatory
breaches, inappropriate decision-making, financial loss, or
reputational damage.
The
Group has no appetite for model, UDA and RPA risk arising as a
result of failing to develop, implement and monitor appropriate
risk mitigation measures.
Prudential’s
model, UDA and RPA risk is managed and mitigated using the
following:
-
The Group’s
Model, UDA and RPA Risk Policy and relevant
Guidelines;
-
Annual risk
assessment of all tools used for core business activities, decision
making and reporting;
-
Maintenance of
appropriate documentation for tools used;
-
Implementation of
controls to ensure tools are accurate and appropriately
used;
-
Tools are subject
to rigorous and independent model validation; and
-
Regular reporting
to the Risk-function to support the measurement and management of
the risk.
●
Financial crime risk. As with all
financial services firms, Prudential is exposed to risks relating
to money laundering (the risk that the products or services of the
Group are used by customers or other third parties to transfer or
conceal the proceeds of crime); fraud (the risk that fraudulent
claims or transactions, or procurement of services, are made
against or through the business); sanctions compliance (the risk
that the Group undertakes business with individuals and entities on
the lists of the main sanctions regimes); and bribery and
corruption (the risk that employees or associated persons seek to
influence the behaviour of others to obtain an unfair advantage or
receive benefits from others for the same purpose).
Prudential operates
in some high-risk countries where, for example, the acceptance of
cash premiums from customers may be common practice, large-scale
agency networks may be in operation where sales are incentivised by
commission and fees, where there is a higher concentration of
exposure to politically-exposed persons, or which otherwise have
higher geopolitical risk exposure.
The
Group-wide policies we have in place on anti-money laundering,
fraud, sanctions and anti-bribery and corruption reflect the
values, behaviours and standards that are expected across the
business. Screening and transaction monitoring systems are in place
and a series of improvements and upgrades are being implemented,
while a programme of compliance control monitoring reviews is being
undertaken. Risk assessments are performed annually at higher risk
locations. Due diligence reviews and assessments against
Prudential’s financial crime policies are performed as part
of the Group’s business acquisition process. The Group
continues to undertake strategic activity to monitor and evaluate
the evolving fraud risk landscape, mitigate the likelihood of fraud
occurring and increase the rate of detection.
The
Group has in place a mature confidential reporting system through
which staff and other stakeholders can report concerns relating to
potential misconduct. The process and results of this are overseen
by the Group Audit Committee.
Insurance risks
Insurance
risk makes up a significant proportion of Prudential’s
overall risk exposure. The profitability of its businesses depends
on a mix of factors, including levels of, and trends in, mortality
(policyholders dying), morbidity (policyholders becoming ill) and
policyholder behaviour (variability in how customers interact with
their policies, including utilisation of withdrawals, take-up of
options and guarantees and persistency, ie lapsing of policies),
and increases in the costs of claims, including the level of
medical expenses increases over and above price inflation (claim
inflation).
The
principal drivers of the Group’s insurance risk vary across
its business units. Across Asia, where a significant volume of
health and protection business is written, the most significant
insurance risks are persistency risk, morbidity risk and medical
inflation risk. In Jackson, policyholder behaviour risk is
particularly material, especially in the take up of options and
guarantees on variable annuity business which impacts profitability
and is influenced by market performance and the value of policy
guarantees.
The
Group has appetite for retaining insurance risks in the areas where
it believes it has expertise and operational controls to manage the
risk and where it judges it to be more value-creating to do so
rather than transferring the risk, and only to the extent that
these risks remains part of a balanced portfolio of sources of
income for shareholders and is compatible with a robust solvency
position.
The
impact of Covid-19 to economic activity and employment levels
across the Group’s markets has the potential to elevate the
incidence of claims, lapses, or surrenders of policies, and some
policyholders may choose to defer or stop paying insurance premiums
or reduce deposits into retirement plans. In particular extended
restrictions on movement could affect product persistency in the
Group’s Asia business. The pandemic may also result in
elevated claims and policy lapses or surrenders in a less direct
way, and with some delay in time before being felt by the Group,
due to factors such as policyholders deferring medical treatment
during the pandemic, or policyholders lapsing or surrendering their
policies on the expiry of grace periods for premium payments
provided by the Group’s businesses. While these impacts to
the business have not been material to date, they are being closely
monitored by the Group’s businesses with targeted management
actions being implemented where necessary, which includes
additional Incurred But Not Reported (IBNR) claims reserves in some
markets where deferrals in non-acute medical treatments due to
movement restrictions have been observed.
The
Group’s persistency assumptions reflect similarly a
combination of recent past experience for each relevant line of
business and expert judgement, especially where a lack of relevant
and credible experience data exists. Any expected change in future
persistency is also reflected in the assumptions. Persistency risk
is managed by appropriate training and sales processes (including
active customer engagement and service quality) and managed locally
post-sale through regular experience monitoring and the
identification of common characteristics of business with high
lapse rates. Where appropriate, allowance is made for the
relationship (either assumed or observed historically) between
persistency and investment returns and any additional risk is
accounted for. Modelling this dynamic policyholder behaviour is
particularly important when assessing the likely take-up rate of
options embedded within certain products. The effect of persistency
on the Group’s financial results can vary but depends mostly
on product design and market conditions.
In
Asia, Prudential writes significant volumes of health and
protection business and so a key assumption is the rate of medical
inflation, which is often in excess of general price inflation.
There is a risk that the expenses of medical treatment increase
more than expected, so the medical claim cost passed on to
Prudential is higher than anticipated. Medical expense inflation
risk is best mitigated by retaining the right to reprice our
products each year and by having suitable overall claims limits
within our policies, either limits per type of claim or in total
across a policy, annually and/or over the policy lifetime.
Prudential’s morbidity risk is mitigated by appropriate
underwriting when policies are issued and claims are received. Our
morbidity assumptions reflect our recent experience and expectation
of future trends for each relevant line of business.
Prudential’s
insurance risks are managed and mitigated using the
following:
-
The Group’s
insurance, product and underwriting risk policies;
-
The risk appetite
statements, limits and triggers;
-
Using persistency,
morbidity and longevity assumptions that reflect recent experience
and expectation of future trends, and industry data and expert
judgement where appropriate;
-
Using reinsurance
to mitigate mortality and morbidity risks;
-
Ensuring
appropriate medical underwriting when policies are issued and
appropriate claims management practices when claims are received in
order to mitigate morbidity risk;
-
Maintaining the
quality of sales processes, training and using initiatives to
increase customer retention in order to mitigate persistency
risk;
-
Using product
repricing and other claims management initiatives in order to
mitigate medical expense inflation risk; and
-
Regular deep dive
assessments.
Conduct risk
Prudential’s
conduct of business, especially the design and distribution of its
products, is crucial in ensuring that the Group’s commitment
to meeting customers’ needs and expectations are met. The
Group’s conduct risk framework, owned by the Group Chief
Executive, was further developed in 2020 and reflects
management’s focus on customer outcomes.
Factors
that may increase conduct risks can be found throughout the product
life cycle, from the complexity of the Group’s products, to
its diverse distribution channels, including virtual face-to-face
sales and sales via online digital platforms. In alignment with the
Group’s purpose of helping people get the most out of life,
Prudential strives towards making health and protection coverage
affordable and accessible to all. Through the Pulse by Prudential
app, there is increased focused on making insurance more inclusive
to underserved segments of society, through bite-size low cost
digital products and services. Through this transition, Prudential
must continue to ensure the quality of its ongoing servicing of all
its customers. Prudential mitigates conduct risk with robust
controls, which are identified and assessed through the
Group’s conduct risk assessment framework, regularly tested
within its monitoring programmes, and overseen within reporting to
its Boards and Committees.
Management
of Prudential’s conduct risk is key to the Group’s
strategy. Prudential’s conduct risks are managed and
mitigated using the following:
The Group’s
code of business conduct and conduct standards, product and
underwriting risk policies and other related policies;
Ensuring the
quality of sales and marketing material via robust review and sign
off procedures;
Ensuring sales
practices meet commitments to customers and regulators via the use
of well-designed monitoring programmes relevant to the type of
business (insurance or asset management), distribution channel
(agency, bancassurance, or digital) and ecosystem;
Ensuring sales
processes are designed to meet commitments to customers and
regulators and that they are operating effectively via robust
assurance programmes both pre and post implementation;
Maintaining the
quality of sales processes and training, and using other
initiatives such as special requirements for vulnerable customers,
to improve customer outcomes;
Proper claims
management and complaint handling practices;
Regular deep dive
assessments on, and monitoring of, conduct risks; and
Conduct Risk
Assessments.
Risks related to regulatory and legal compliance
These include risks associated with prospective regulatory and
legal changes and compliance with existing regulations and laws
– including their retrospective application – with
which the Group must comply with in the conduct of its
business.
|
Prudential
operates under the ever-evolving requirements set out by diverse
regulatory, legal and tax regimes which may impact
Prudential’s business or the way in which it is conducted.
This covers a broad range of risks including changes in government
policy and legislation, capital control measures, and new
regulations at either national or international level. In addition
to the risks arising from regulatory change, the breadth of local
and Group-wide regulatory arrangements presents the risk that
regulatory requirements are not fully met, resulting in specific
regulator interventions or actions including retrospective
interpretation of standards by regulators which may result in
regulatory censure or significant additional costs to the business.
Furthermore, as the industry’s use of emerging technological
tools and digital services increases, this is likely to lead to new
and unforeseen regulatory issues and the Group is monitoring the
regulatory developments and standards emerging around the
governance and ethical use of technology and data.
In
certain jurisdictions in which Prudential operates there are also a
number of ongoing policy initiatives and regulatory developments
that are having, and will continue to have, an impact on the way
Prudential is supervised. Decisions taken by regulators, including
those related to solvency requirements, corporate or governance
structures, capital allocation, financial reporting and risk
management may have an impact on our business.
The
focus of some governments toward more protectionist or restrictive
economic and trade policies could impact on the degree and nature
of regulatory changes and Prudential’s competitive position
in some geographic markets. This could take effect, for example,
through increased friction in cross-border trade, capital controls
or measures favouring local enterprises such as changes to the
maximum level of non-domestic ownership by foreign companies. These
developments continue to be monitored by the Group at a national
and global level and these considerations form part of the
Group’s ongoing engagement with government policy teams and
regulators.
Further
information on specific areas of regulatory and supervisory
requirements and changes are included below.
●
Group-wide supervision. From 21 October
2019, Prudential’s Group-wide supervisor changed to the Hong
Kong IA. As a result, the Group currently applies the local capital
summation method (LCSM) to determine Group regulatory capital
requirements (both minimum and prescribed levels). The primary
legislation was enacted in July 2020 and will come into operation
on 29 March 2021. The relevant subsidiary legislation, including
the Insurance (Group Capital) Rules, was tabled before the
Legislative Council on 6 January 2021 and will also come into
operation on 29 March 2021. This will be supported by further
guidance material to be released by the Hong Kong IA. Prior to the
GWS Framework becoming effective for the Group, which is expected
in the second quarter of 2021 upon designation by the Hong Kong IA,
Prudential remains subject to the Regulatory Letter signed with the
Hong Kong IA. The letter outlines the interim supervision
arrangements from October 2019 when it became the group-wide
supervisor of the Group.
●
Global regulatory developments and systemic
risk regulation. Efforts to curb systemic risk and promote
financial stability are also under way. At the international level,
the Financial Stability Board (FSB) continues to develop
recommendations for the asset management and insurance sectors,
including ongoing assessment of systemic risk measures. The
International Association of Insurance Supervisors (IAIS) has
continued its focus on the following key developments.
In
November 2019 the IAIS adopted the Common Framework (ComFrame)
which establishes supervisory standards and guidance focusing on
the effective group-wide supervision of Internationally Active
Insurance Groups (IAIGs). Prudential was included in the first
register of IAIGs released by the IAIS on 1 July 2020 and was
designated an IAIG by the Hong Kong IA following an assessment
against the established criteria in ComFrame.
The
IAIS has also been developing the ICS (Insurance Capital Standard)
as part of ComFrame. The implementation of ICS will be conducted in
two phases: a five-year monitoring phase followed by an
implementation phase. The Aggregation Method is one of the
alternatives being considered to the default approach undertaken
for the ICS during the monitoring period and the related proposals
are being led by the National Association of Insurance
Commissioners (NAIC). Alongside the current ICS developments, the
NAIC is also developing its Group Capital Calculation (GCC) for the
supervision of insurance groups in the US. The GCC is intended to
be a risk-based capital (RBC) aggregation methodology. In
developing the GCC, the NAIC will also consider Group capital
developments by the US Federal Reserve Board, which will inform the
US regulatory association in its construction of a US group capital
calculation.
In
November 2019 the FSB endorsed a new Holistic Framework (HF),
intended for the assessment and mitigation of systemic risk in the
insurance sector, for implementation by the IAIS in 2020 and has
suspended G-SII designations until completion of a review to be
undertaken in 2022. Many of the previous G-SII measures have
already been adopted into the Insurance Core Principles (ICPs) and
ComFrame. As an IAIG, Prudential is expected to be subject to these
measures. The HF also includes a monitoring element for the
identification of a build-up of systemic risk and to enable
supervisors to take action where appropriate. As a result of the
Covid-19 pandemic, this monitoring requirement was replaced with a
Covid-19-focused exercise for 2020, with annual monitoring expected
to recommence in 2021. In November 2020 the IAIS launched a public
consultation on phase 1 of a proposed liquidity metric to be used
as an ancillary indicator in the monitoring of the build-up of
systemic risk. This followed a more general consultation on
liquidity metrics earlier in 2020. Consultations on a phase 2
liquidity metric, as well as on macroeconomic elements of the HF,
are expected to follow. The FSB published its 2020 Resolution
Report in November 2020, highlighting intra-group connectedness and
funding in resolution as key areas of attention for its work on
resolution planning. Resolution regimes will continue to be a near
term focus in the FSB’s financial stability work, potentially
being a key tool in informing decisions around the reformed G-SII
designation in 2022.
In the
US, various initiatives are under way to introduce fiduciary
obligations for distributors of investment products, which may
reshape the distribution of retirement products. Jackson has
introduced fee-based variable annuity products in response to the
potential introduction of such rules, and we anticipate that the
business’s strong relationships with distributors, history of
product innovation and efficient operations should further mitigate
any impacts.
In
Asia, regulatory regimes are developing at different speeds, driven
by a combination of global factors and local considerations. New
local capital rules and requirements could be introduced in these
and other regulatory regimes that challenge legal or ownership
structures, or current sales practices, or could be applied to
sales made prior to their introduction retrospectively, which have
a negative impact on Prudential’s business and reported
results.
●
IFRS 17. In May 2017, the International
Accounting Standards Board (IASB) published its replacement
standard on insurance accounting IFRS 17, ‘Insurance
Contracts’. Some targeted amendments to this standard,
including to the effective date, were issued in June 2020. IFRS 17,
‘Insurance Contracts’, as amended, will introduce
fundamental changes to the IFRS-based reporting of insurance
entities that prepare accounts according to IFRS from 2023. IFRS 17
is expected to, among other things, include altering the timing of
IFRS profit recognition, and the implementation of the standard is
likely to require changes to the Group’s IT, actuarial and
finance systems. The Group is reviewing the complex requirements of
this standard and considering its potential impact.
●
Inter-bank offered rate reforms. In July
2014, the Financial Stability Board (FSB) announced widespread
reforms to address the integrity and reliability of IBORs. The
discontinuation of IBORs in their current form and their
replacement with alternative risk-free reference rates such as the
Sterling Overnight Index Average (SONIA) benchmark in the UK and
the Secured Overnight Financing Rate (SOFR) in the US could, among
other things, impact the Group through an adverse effect on the
value of Prudential’s assets and liabilities which are linked
to, or which reference IBORs, a reduction in market liquidity
during any period of transition and increased legal and conduct
risks to the Group arising from changes required to documentation
and its related obligations to its stakeholders.
Risk
management and mitigation of regulatory risk at Prudential includes
the following:
-
Risk assessment of
the Business Plan which includes consideration of current
strategies;
-
Close monitoring
and assessment of our business environment and strategic
risks;
-
The consideration
of risk themes in strategic decisions;
-
Ongoing engagement
with national regulators, government policy teams and international
standard setters; and
-
Compliance
oversight to ensure adherence with in-force regulations and
management of new regulatory developments.
The Group’s ESG-related risks
These include environmental risks associated with climate change
(including physical and transition risks), social risks arising
from diverse stakeholder commitments and expectations and
governance-related risks.
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The
purpose of a business and the way in which it operates in achieving
its objectives, including in relation to ESG-related matters, are
an increasingly material consideration for key stakeholders in
achieving their own objectives and aims. ESG-related risks may
directly or indirectly impact Prudential’s business and the
achievement of its strategy and consequently those of its key
stakeholders, which range from customers, institutional investors,
employees and suppliers, to policymakers, regulators, industry
organisations and local communities, all of whom have expectations,
concerns and aims which may differ. Material risks associated with
key ESG themes may adversely impact the reputation and brand of the
Group, its ability to attract and retain customers and staff, its
ability to deliver on its long-term strategy and therefore the
results of its operations and long-term financial
success.
The
Prudential ESG Strategic Framework, developed in 2020, focuses on
giving people greater access to good health and financial security,
responsible stewardship in managing the human impact of climate
change and building human and social capital with its broad range
of stakeholders. Prudential seeks to ESG-related risks to its
strategy and their negative implications to stakeholder through a
transparent and consistent implementation of this strategy in its
key markets and across operational, underwriting and investment
activities. The strategy is enabled by strong internal governance,
sound business practices and a responsible investment approach,
both as an asset owner and asset manager.
Prudential’s
strategic ESG focus on stewarding the human impacts of climate
change recognises that environmental concerns, notably those
associated with climate change, may pose significant risks to
Prudential, its customers and other stakeholders.
Prudential’s investment horizons are long term and it is
therefore exposed to the potential long-term impact of climate
change risks, which include the financial and non-financial impact
of transition, physical and litigation risks. A failure to
understand, manage and provide greater transparency of its exposure
to these climate-related risks may have increasing adverse
implications for Prudential and its stakeholders.
The
global transition to a lower carbon economy may have an adverse
impact on investment valuations as the financial assets of
carbon-intensive companies re-price, and this could result in some
asset sectors facing significantly higher costs and a reduction in
demand for their products and services. The speed of this
transition, and the extent to which it is orderly and managed, will
be influenced by factors such as public policy, technology and
changes in market or investor sentiment. This climate-related
transition risk may adversely impact the valuation of investments
held by the Group, and the potential broader economic impact may
affect customer demand for the Group’s products.
Prudential’s stakeholders increasingly expect and/or rely on
the Group to support an orderly transition based on an
understanding of relevant country and company-level plans and which
takes into consideration the impact on the economies, businesses
and customers in the markets in which it operates and invests.
Understanding and appropriately reacting to transition risk
requires sufficient and reliable data on carbon exposure and
transition plans for the assets in which the Group
invests. The direct
physical impacts of climate change, driven by both specific
short-term climate-related events such as natural disasters and
longer-term changes to climate and the natural environment, will
increasingly influence the longevity, mortality and morbidity risk
assessments for the Group’s life insurance product
underwriting and offerings and their associated claims profiles.
Climate-driven events in countries in which Prudential or its key
third parties operate could impact the Group’s operational
resilience and its customers. More information about the activities
the Group is undertaking to increase its understanding and risk
management of these climate-related risks can be found in the
Prudential plc ESG Report 2020.
Social
risks that could impact Prudential may arise from a failure to
consider the rights, diversity, well-being, and interests of people
and communities in which the Group or its third parties operate.
These risks are increased as Prudential operates in multiple
jurisdictions with distinct local cultures and considerations. As
an employer, the Group aims to attract, retain and develop
highly-skilled staff, which relies on having in place responsible
working practices and recognising the benefits of diversity and
promoting a culture of inclusion. The Group’s reputation
extends to its supply chains, which may be exposed to factors such
as poor labour standards and abuses of human rights by third
parties. Emerging population risks associated with public health
trends (such as an increase in obesity) and demographic changes
(such as population urbanisation and ageing) may affect customer
lifestyles and therefore may impact claims against the
Group’s insurance product offerings. As a provider of
insurance and investment services the Group is committed to playing
a greater role in preventing and postponing illness in order to
protect its customers as well as making health and financial
security accessible through an increased focused on digital
innovation, technologies and distribution methods for a broadening
range of products and services. As a result, Prudential has access
to customer personal data, including data related to personal
health, and an increasing ability to analyse and interpret this
data through the use of complex tools, machine learning and
artificial intelligence technologies. The Group therefore actively
manages the regulatory, ethical and reputational risks associated
with actual or perceived customer data misuse or security breaches.
These risks are explained above. The increasing digitalisation of
products, services and processes may also result in new and
unforeseen regulatory requirements and stakeholder expectations
which Prudential monitors for, as well as ensuring support for its
customers through this transformation.
Maintaining high
standards of corporate governance is crucial for the Group and its
customers, staff and employees, reducing the risk of poor
decision-making and a lack of oversight of its key risks. Poor
governance may arise where key governance committees have
insufficient independence, a lack of diversity, skills or
experience in their members, or unclear (or insufficient) oversight
responsibilities and mandates. Inadequate oversight over
remuneration increases the risk of poor senior management
behaviours. Prudential operates across multiple jurisdictions and
has a group and subsidiary governance structure which may add
further complexity to these considerations. Participation in joint
ventures or partnerships where Prudential does not have direct
overall control and the use of third party suppliers increases the
potential for reputational risks arising from poor
governance.
Risk
management and mitigation of ESG risks at Prudential include the
following:
The Group’s
ESG Strategic Framework focused on strategic differentiators and
enablers;
The Group Code of
Business Conduct and Group Governance Manual including ESG linked
policies;
ESG risk
identification including through emerging risk
processes;
Deep dives into ESG
themes including climate-related risks; and
Integrating ESG
considerations into investment processes
Further
information on the Group’s ESG governance is included in
section 4 above, and further detail on the Group’s ESG
Strategic Framework and the management of material risks associated
with ESG themes are included in the ESG Report 2020.
Notes
1
Excluding
assets held to cover linked liabilities and those of the
consolidated investment funds.
2
Based
on middle rating from Standard & Poor’s, Moody’s
and Fitch. If unavailable, NAIC and other external ratings and then
internal ratings have been used.
3
Source
of segmentation: Bloomberg Sector, Bloomberg Group and Merrill
Lynch. Anything that cannot be identified from the three sources
noted is classified as other.
4
From
half year 2020, to align more closely with the internal risk
management analysis, the Group altered the compilation of its
credit ratings analysis to use the middle of the Standard &
Poor’s, Moody’s and Fitch ratings, where available.
Where ratings are not available from these rating agencies, NAIC
ratings (for the US), local external rating agencies’ ratings
and lastly internal ratings have been used. Securities with none of
the ratings listed above are classified as unrated and included
under the ‘below BBB- and unrated’ category. The total
securities (excluding sovereign debt) that were unrated at 31
December 2020 were $780 million (31 December 2019: $648 million).
Previously, Standard & Poor’s ratings were used where
available and if not, Moody’s and then Fitch were used as
alternatives.
5
Excluding assets in consolidated funds financed
largely by external third-party (non-recourse) borrowings, for
which the Group’s exposure is limited to the investment held
by Jackson. Including these assets, the US corporate debt
portfolio is 93 per cent investment grade.
Corporate governance
The
Company has dual primary listings in London (premium listing) and
Hong Kong (Main board listing) and has therefore adopted a
governance structure based on the UK and Hong Kong Corporate
Governance Codes (the UK and HK Codes).
The
Board confirms that, for the year under review, the Company has
complied with the principles and provisions of the UK
Code.
The
Company has also complied with the provisions of the HK Code other
than as follows: Provision B.1.2(d) of the HK Code requires
companies, on a comply or explain basis, to have a remuneration
committee which makes recommendations to a main board on the
remuneration of non-executive directors. This provision is not
compatible with principle Q of the UK Code which states that no
director should be involved in deciding their own remuneration
outcome, and provision 34 of the UK Code which recommends that the
board determines the remuneration of non-executive directors.
Prudential has chosen to adopt a practice in line with the
recommendations of the UK Code.
Following
the introduction by the UK government of measures to limit the
spread of Covid-19 by prohibiting non-essential travel and public
gatherings of more than two people, and following the issuance of
the Company’s 2020 Annual General Meeting (AGM) Notice, the
Company provided an update to shareholders in late April 2020 on
its revised arrangements for the 2020 AGM. In light of those
restrictions and to protect the health of Prudential’s
shareholders and employees, the Board decided, with regret, that
shareholders, external advisers (including the auditor) and
Directors (other than the Chairman) would not be able to attend the
AGM in person (and thus provisions A.6.7 and E1.2 of the HK Code
could not be complied with).
The
Board also confirms that the financial results contained in this
document have been reviewed by the Group Audit
Committee.
Board changes
Today
we are announcing that Kai Nargolwala, a Non-executive Director,
will retire from the Board (including the Risk and Remuneration
Committees) at the conclusion of the Annual General Meeting on 13
May 2021.
The
Company confirms that there is no further information required to
be disclosed pursuant to Rule 13.51(2) of the Rules Governing the
Listing of Securities on the Stock Exchange of Hong Kong Limited in
respect of Kai Nargolwala retiring from the Board.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: 03 March 2021
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PRUDENTIAL
PUBLIC LIMITED COMPANY
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By:
Mark FitzPatrick
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Mark
FitzPatrick
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Group
Chief Financial Officer and Chief Operating Officer
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