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, 2020
PRUDENTIAL PUBLIC LIMITED COMPANY
(Translation of registrant's name into English)
1 Angel Court, London,
England, EC2R 7AG
(Address
of principal executive offices)
Indicate
by check mark whether the registrant files or will file annual
reports
under
cover Form 20-F or Form 40-F.
Form
20-F X
Form 40-F
Indicate
by check mark whether the registrant by furnishing the
information
contained
in this Form is also thereby furnishing the information to
the
Commission
pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes
No X
If
"Yes" is marked, indicate below the file number assigned to the
registrant
in connection with Rule 12g3-2(b): 82-
NEWS RELEASE
11 March 2020
PRUDENTIAL PLC FULL YEAR 2019 RESULTS
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PRUDENTIAL DELIVERS RESILIENT BROAD-BASED GROWTH IN
ASIA
Performance highlights on a constant (and actual) exchange rate
basis
●
Group adjusted operating
profit1 from
continuing operations of $5,310 million, up 20 per
cent2 (20
per cent3)
●
Asia adjusted operating
profit1 up
14 per cent2 (up
13 per cent3);
Asia embedded value up 23 per cent3 to
$39.2 billion
●
Double-digit growth2 in
new business profit4 in
eight markets in Asia
●
Preparations commenced for a minority
IPO of Jackson
●
LCSM shareholder
surplus5 estimated
at $9.5 billion, equivalent to cover ratio of 309 per
cent
●
Second interim ordinary dividend of
25.97 cents per share
Mike Wells, Prudential plc's Group Chief Executive, said: "We have
delivered another positive performance during 2019, despite
significant macroeconomic and geopolitical volatility. Our clear
strategy and strong execution have enabled us both to deliver
profitable growth and to position ourselves for further growth into
the future.
"In Asia, we are focused on growth opportunities. We are building
the long-term value of our fast-growing franchise by deepening our
strong relationships with existing customers and by acquiring new
customer relationships. We are continuing to strengthen our agency
and bank channels in Asia, and harnessing the opportunities of
digital technology, including Pulse by Prudential, our new
end-to-end digital health app. We see continuing opportunities for
selective inorganic investment.
"Outside Hong Kong, we delivered a 17 per cent2 increase
in APE6 sales
and a 29 per cent2 rise
in new business profit4.
This includes China where APE6 sales
were up by 53 per cent2.
Fewer visitors from mainland China caused a fall in total Hong Kong
APE6 sales
by 11 per cent2 and
a fall in new business profit4 of
12 per cent2.
Adjusted operating profit from Asia insurance operations was $2,993
million, growing by 14 per cent2 with
Hong Kong up by 24 per cent2 to
$734 million demonstrating the resilience of our business. Our Asia
asset manager, Eastspring, performed well, with net external
inflows of $8.9 billion7 (2018:
net outflows $(2.1) billion7)
contributing to average assets under management up 15 per
cent3 and
adjusted operating profit of $283 million, up 18 per
cent2.
"In the US, the world's largest retirement savings market and the
continuing transition of millions of Americans into retirement
creates a substantial opportunity for Jackson's products. US
APE6 sales
increased by 8 per cent driven by fixed income and fixed index
annuities, in line with our diversification strategy. New business
profit4 declined
by 28 per cent, reflecting lower interest rates and changes in
product mix. US adjusted operating profit1 increased
by 20 per cent to $3,070 million, reflecting the impact of lower
market-related amortisation of deferred acquisition costs. Higher
equity markets also led to US separate account assets increasing by
19 per cent3 to
$195.1 billion. Our US business continued its long term track
record of delivering cash to the Group, remitting a dividend of
$525 million8 during
the year.
"As previously stated, in order to diversify at pace, Jackson will
need access to additional investment, which we believe would best
be provided by third parties. We are today announcing that the
Board has determined that the preferred route to achieve this is a
minority Initial Public Offering (IPO) of Jackson. We have already
taken a number of management actions to support this path. We will
now begin detailed engagement with our key stakeholders, with a
view to ensuring that Jackson will have the capital strength as a
separately listed business to support its continued success as a
broad provider of retirement solutions for America's aging
population.
"We continue to monitor closely the development of the coronavirus
outbreak and are focused on the health and well-being of our
customers and staff. The outbreak has slowed economic activity and
dampened our sales momentum in Hong Kong and China. Given these
conditions, lower levels of new sales activity in affected markets
are to be expected with a consequential effect on new business
profit. Our in-force business is proving robust. The broad
geographic spread of our business across the region and the
strength of our recurring premium business model lends considerable
resilience to our earnings.
"I am confident that, with our clear focus on our structural growth
markets and our continuing operational improvements, we will
continue to deliver profitable growth for our investors and
benefits for our stakeholders over the medium and long
term."
Summary financials
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2019 $m
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2018 $m
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Change on
AER basis
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Change on
CER basis
|
|
|
|
|
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Adjusted operating profit from continuing
operations1
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5,310
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4,409
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20%
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20%
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|
|
|
|
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Operating free surplus generated from continuing operations before
US
EEV modelling enhancements9,10
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3,764
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3,410
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10%
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10%
|
|
|
|
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Life new business profit from continuing
operations4
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4,405
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4,707
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(6)%
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(6)%
|
|
|
|
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IFRS profit after tax from continuing operations11
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1,953
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2,881
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(32)%
|
(33)%
|
|
|
|
|
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Net cash remittances from business units from continuing
operations8,12
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1,465
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1,417
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3%
|
-
|
|
|
|
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LCSM shareholder surplus over Group minimum capital
requirement5
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$9.5bn
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$9.7bn
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(2)%
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-
|
|
|
|
|
|
|
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31 December 2019
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Total
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Per share
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|
|
|
|
|
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IFRS shareholders' funds13
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$19.5bn
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749¢
|
|
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EEV shareholders' funds13
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$54.7bn
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2,103¢
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Notes
1
In this press release 'adjusted operating profit' refers to
adjusted IFRS operating profit based on longer-term investment
returns from continuing operations. This alternative performance
measure is reconciled to IFRS profit for the year in note B1.1 of
the IFRS financial statements.
2
Year-on-year percentage increases are stated on a constant exchange
rate basis unless otherwise stated.
3
Growth rate on an actual exchange rate basis.
4
New business profit, on a post-tax basis, on business sold in the
year, calculated in accordance with EEV Principles.
5
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. 2018
surplus excludes M&G plc and includes $3.7 billion of
subordinated debt issued by Prudential plc that was transferred to
M&G plc on 18 October 2019. Further information on the basis of
calculation of the LCSM measure is contained in note I(i) of the
Additional unaudited financial information.
6
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.
7
Excludes Money Market Funds.
8
During 2019, the Group's holding company cash flow was managed in
sterling and significant remittances were hedged and recorded on
that basis. Amounts received were therefore distorted by the
onwards translation into US dollars. The dividend paid by Jackson
in the US in US dollars in 2019 was $525 million (2018: $450
million). The amount recorded as received in the holding company
cash flow was $509 million (2018: $452 million).
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
note 11 of the EEV basis results.
10
During 2019, as part of the implementation of the NAIC's changes to
the US statutory reserve and capital framework enhancements were
made to the model used to allow for hedging within US statutory
reporting which have been incorporated into the EEV model. This
resulted in a fall in operating free surplus of $(903) million from
a lower expected transfer to net worth. After allowing for this,
operating free surplus generated is $2,861 million, down 16 per
cent on both a constant and actual exchange rate
basis.
11
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 2019 were driven by non-operating losses in
Jackson, corporate transactions, amortisation of acquisition
accounting adjustments and the total tax charge for the
year.
12
Net cash remitted by business units are included in the holding
company cash flow, which is disclosed in detail in note I(iii) of
the Additional unaudited financial information. This comprises
dividends and other transfers from business units that are
reflective of emerging earnings and capital
generation.
13
IFRS and EEV Shareholders' funds at 31 December 2019 are not
directly comparable to group shareholders' funds reported at 31
December 2018, as the prior year balance included shareholders'
funds of M&G plc which, following demerger, are not part of the
Group at 31 December 2019. The reported 31 December 2018 IFRS
shareholders' funds per share were 847¢ and EEV shareholders'
funds per share were $2,445¢.
Contact:
Media
|
|
Investors/Analysts
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Jonathan Oliver
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+44 (0)20 3977 9500
|
Patrick Bowes
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+44 (0)20 3977 9702
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Tom Willetts
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+44 (0)20 3977 9760
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William Elderkin
|
+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, reflecting the change in the Group's presentational
currency, and comparative amounts are restated accordingly. The
basis of translation is discussed in note A1 of the IFRS financial
statements. Period-on-period percentage increases are stated on a
constant exchange rate basis unless otherwise stated. Constant
exchange rates are calculated by translating prior period results
using the current period foreign exchange rate ie current period
average rates for the income statement and current period closing
rates for the balance sheet.
b. EEV
and adjusted IFRS operating profit based on longer-term investment
returns are stated after excluding the effect of short-term
fluctuations in investment returns against long-term assumptions,
which for IFRS in 2019 were driven by the negative effects in the
US, and gains/losses arising on the disposal of businesses and
other corporate transactions including costs associated with the
demerger of M&G plc. 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 2019 was
2,601,159,949.
d. A
presentation for analysts and investors will be held today at
11.30am (UK time) / 7.30pm (Hong Kong time) in the Conference
Centre of Nomura, 1 Angel Lane, London EC4R 3AB. The presentation
will be webcast live and available to replay afterwards using the
following link https://www.investis-live.com/prudential/5e26d0d852202e0d004a4961/wsse
Alternatively,
a dial-in facility will be available to listen to the presentation:
please allow time ahead of the presentation to join the call (lines
open half an hour before the presentation is due to start, ie from
11.00am (UK time) / 7.00pm (Hong Kong time).
Dial-in:
020 3936 2999 (UK Local Call) / +44 20 3936 2999 (International) /
0800 640 6441 (Freephone UK), Participant access code: 776388. Once
participants have entered this code their name and company details
will be taken.
Playback:
+44 (0) 20 3936 3001 (UK and international excluding US) / + 1 845
709 8569 (US only) (Replay code: 542585). This will be available
from approximately 3.00pm (UK time) / 11.00pm (Hong Kong time) on
11 March 2020 until 11.59pm (UK time) on 25 March 2020 / 7.59am
(Hong Kong time) on 26 March 2020.
e. 2019 Second Interim Ordinary Dividend
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Ex-dividend date
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26 March 2020 (UK, Hong Kong and Singapore)
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Record date
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27
March 2020
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Payment of dividend
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15 May 2020 (UK, Hong Kong and ADR holders)
On or about 22 May 2020 (Singapore)
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f. About Prudential
plc
Prudential
plc is an Asia-led portfolio of businesses focused on structural
growth markets. The business helps individuals to de-risk their
lives and deal with their biggest financial concerns through life
and health insurance, and retirement and asset management
solutions. Prudential plc has 20 million customers and is listed on
stock exchanges in London, Hong Kong, Singapore and New York.
Prudential plc is not affiliated in any manner with Prudential
Financial, Inc. a company whose principal place of business is in
the United States of America, nor with the Prudential Assurance
Company, a subsidiary of M&G plc, a company incorporated in the
United Kingdom.
g. Discontinued Operations
Throughout
this results announcement 'discontinued operations' refers to the
recently demerged UK and Europe operations (referred to as M&G
plc). All amounts presented refer to continuing operations unless
otherwise stated.
h. Forward-Looking Statements
This
document may contain 'forward-looking statements' with respect to
certain of Prudential's plans and its goals and expectations
relating to its future financial condition, performance, results,
strategy and objectives. Statements that are not historical facts,
including statements about Prudential's beliefs and expectations
and including, without limitation, statements containing the words
'may', 'will', 'should', 'continue', 'aims', 'estimates',
'projects', 'believes', 'intends', 'expects', 'plans', 'seeks' and
'anticipates', and words of similar meaning, are forward-looking
statements. These statements are based on plans, estimates and
projections as at the time they are made, and therefore undue
reliance should not be placed on them. By their nature, all
forward-looking statements involve risk and
uncertainty.
A
number of important factors could cause Prudential's actual future
financial condition or performance or other indicated results to
differ materially from those indicated in any forward-looking
statement. Such factors include, but are not limited to, future
market conditions, including fluctuations in interest rates and
exchange rates, the continuance of a sustained low-interest rate
environment, and the impact of economic uncertainty, asset
valuation impacts from the transition to a lower carbon economy,
inflation and deflation and the performance of financial markets
generally; global political uncertainties; the policies and actions
of regulatory authorities, including, in particular, the policies
and actions of the Hong Kong Insurance Authority, as Prudential's
new Group-wide supervisor, as well as new government initiatives
generally; the impact of continuing application of Global
Systemically Important Insurer or 'G-SII' policy measures on
Prudential; the impact on Prudential of systemic risk policy
measures adopted by the International Association of Insurance
Supervisors; the impact of competition and fast-paced technological
change; the effect on Prudential's business and results from, in
particular, mortality and morbidity trends, lapse rates and policy
renewal rates; the physical impacts of climate change and global
health crises on Prudential's business and operations; the timing,
impact and other uncertainties of future acquisitions or
combinations within relevant industries; the impact of internal
transformation projects and other strategic actions failing to meet
their objectives; the 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 IT, digital systems and data (or those of
its suppliers and partners); any ongoing impact on Prudential of
the demerger of M&G plc; the impact of changes in capital,
solvency standards, accounting standards or relevant regulatory
frameworks, and tax and other legislation and regulations in the
jurisdictions in which Prudential and its affiliates operate; the
impact of legal and regulatory actions, investigations and
disputes; and the impact of not adequately responding to
environmental, social and governance issues. These and other
important factors may, for example, result in changes to
assumptions used for determining results of operations or
re-estimations of reserves for future policy benefits. Further
discussion of these and other important factors that could cause
Prudential's actual future financial condition or performance or
other indicated results to differ, possibly materially, from those
anticipated in Prudential's forward-looking statements can be found
under the 'Risk Factors' heading of this document.
Any
forward-looking statements contained in this document speak only as
of the date on which they are made. Prudential expressly disclaims
any obligation to update any of the forward-looking statements
contained in this document or any other forward-looking statements
it may make, whether as a result of future events, new information
or otherwise except as required pursuant to the UK Prospectus
Rules, the UK Listing Rules, the UK Disclosure and Transparency
Rules, the Hong Kong Listing Rules, the SGX-ST listing rules or
other applicable laws and regulations.
Group Chief Executive's report
We have delivered a positive operating performance during 2019, led
by continued growth in our Asian business. Our clear strategy and
focused execution, combined with improvements in our operations,
have enabled us both to deliver profitable growth and to position
ourselves for continued growth into the future.
We exist to take the financial risk out of the biggest events in
the lives of our customers, enabling them to face the future with
confidence. In addition to fulfilling our traditional role of
providing life and health protection, savings opportunities to meet
family goals and retirement income, we aspire to lead in new areas
aligned with this purpose. During 2019, collectively our continuing
businesses agreed to pay over $29 billion to our customers in
claims and savings pay-outs. Our products help consumers postpone
and prevent ill-health through digital innovation, increase access
to finance, and provide solutions for an ageing world. At the same
time, we are investing our customers' savings in the real economy,
helping to drive sustainable growth.
Our business is built around long-term structural opportunities. In
our fast-growing markets in Asia there is a strong and growing need
for health and protection, for savings opportunities and for ways
to invest, and there is a significant gap for products that meet
those needs. By meeting important financial needs, we expect to
build long-term relationships with our customers. This translates
into recurring income streams and low lapse rates, which in turn
produce high-quality earnings.
We are well positioned to meet structural opportunities. We are
diversified by geography, with operations in 15 markets in the
region, through our products offering health and protection,
savings and asset management, and in our mix of channels, providing
our products through our large agency force and our network of
partnerships with banks across the region. We are also innovating
at pace and scale to digitalise the customer journey end-to-end,
and delivering new value-added solutions, such as Pulse by
Prudential, our new digital health app.
In the US, where the continuing transition of millions of Americans
into retirement creates a substantial opportunity for Jackson's
products, we have delivered organic diversification and Jackson has
paid a dividend of $525 million1.
During 2019, we successfully completed the demerger of M&G plc
from the Group, enabling us to focus on structural growth markets.
We are working collaboratively with our new Group-wide regulator,
the Hong Kong Insurance Authority, and our other supervisors across
our markets.
The US is the world's largest retirement market with trillions of
dollars expected to move from savings into retirement income
products over the next decade. As a top-two annuity provider,
Jackson is a leader in meeting the needs of Americans who aspire to
a secure retirement with a guaranteed income.
Jackson's ambition is to play the fullest role possible through a
strategy of diversifying both its product range and distribution
network. Over time, this is expected to lead to a more balanced mix
of policyholder liabilities and enhance statutory capital and cash
generation.
As we stated at our half-year results, in order to diversify at
pace, Jackson will need access to additional investment which we
believe would best be provided by third parties. Since then, we
have undertaken significant work with our advisers to assess
options for introducing third party finance into Jackson. The Board
has determined that the preferred route to achieve this is to seek
a listing of Jackson in the US in due course, subject to market
conditions.
Accordingly, we are today announcing that preparations have
commenced for a minority initial public offering (IPO) of Jackson
and have already taken a number of management actions to support
this path. We will now commence detailed engagement with key
stakeholders, with a view to ensuring that Jackson will have the
capital strength as a separately listed business to support its
continued success as a broad provider of retirement solutions for
America's aging population. We will provide an update at our HY20
results scheduled for 11 August 2020.
Macroeconomic environment
The core demand for our long-term savings and protection products
has remained strong despite uncertain conditions in the
macroeconomic environment. A combination of low interest rates,
trade disputes and volatile international politics has created
difficult conditions across many sectors. The US government 10-year
bond yield fell to 1.9 per cent at the end of 2019 (2018: 2.7 per
cent). Equity markets finished 2019 higher than the start of the
year, especially in the US, where the S&P500 index was up 28.9
per cent, and valuations in the credit markets were also elevated
well above historic norms. We continue to manage our business
conservatively for the long term, with a cautious allocation of
shareholder funds and extensive hedge programmes in Jackson. These
hedge programmes manage the economic risk, with consideration of
the local regulatory position, of the guarantees contained within
the products sold to customers.
Financial performance
The adjusted IFRS operating profit based on longer-term investment
returns (adjusted operating profit2)
for 2019 from our continuing operations increased by 20 per cent on
both a constant and actual exchange rate basis, reflecting the
continued growth and resilience of our Asian businesses and the
beneficial impact of strong 2019 capital returns on deferred
acquisition cost amortisation in the US. The IFRS profit after tax
from continuing operations was $1,953 million in 2019 (2018: $2,881
million on an actual exchange rate basis). This is after a $(380)
million post-tax loss in Jackson, where accounting volatility
continues to be expected given the economic nature of our hedging
programme and the related accounting mismatches that
exist.
Alongside our financial performance we have made significant
investments, funded regionally and centrally. During 2019, this
included the renewal of our regional strategic bancassurance
alliance with United Overseas Bank Limited for an initial fee of
$853 million, ($301 million of which was paid in 2019), entering
into an exclusive bancassurance partnership with SeABank, our
acquisition of 50.1 per cent of Thanachart Fund Management Co., Ltd
for $142 million3 and
a total investment of $619 million of free surplus in writing
profitable new business in Asia, along with an investment of $539
million in free surplus in US new business.
Asia
Our Asian operations continued to drive our performance. The
fast-growing markets of Asia offer long-term structural
opportunities for us, with the region's growing population having a
clear and increasing need for the products we deliver. Insurance
penetration in Asia is only 2.7 per cent of GDP, compared with 7.5
per cent in the UK4,
while mutual fund penetration is just 12 per cent in Asia, compared
with 96 per cent in the US5.
We have demonstrated the strength of our portfolio of businesses in
the region by delivering double-digit growth in
APE6 sales
in six markets and in new business profit7 in
eight, reinforcing the value of our diverse portfolio and
demonstrating the breadth of earnings streams and new business
spread in Asia.
Outside Hong Kong, we delivered a 17 per cent8 increase
in APE6 sales
and a 29 per cent8 rise
in new business profit7.
Within Hong Kong, our domestic business was resilient despite the
effect of social unrest, with APE6 sales
growing by 8 per cent8.
Our domestic Hong Kong business has continued to expand and invest,
driven by new health, protection and retirement solutions and
supported by focused sales initiatives. Fewer visitors from
mainland China caused a fall in total Hong Kong
APE6 sales
by 11 per cent8 and
a fall in new business profit7 of
12 per cent8.
We have continued to accelerate our joint venture business in
China, where APE6 sales
over the year were 53 per cent8 higher,
driving new business profit7 growth
of 38 per cent8.
We recently established a new branch in Shaanxi, our 20th in the
country, and added seven cities and 14 sales and servicing offices.
We are developing rapidly in a number of our other markets in the
region, including Vietnam and the Philippines, where
APE6 sales
grew by 12 per cent8 and
34 per cent8 respectively
and we are making good progress in Indonesia, where our sales grew
by 23 per cent8 in
the year including 41 per cent8 in
the second half. Overall our Asia life businesses delivered 4 per
cent8 growth
in overall APE6 sales
and a 2 per cent8 growth
in overall new business profit7.
The benefits of our long held focus on writing high quality,
recurring premium business, contributing to resilient and
broad-based in-force growth are evident in the 12 per
cent8 increase
in renewal insurance premium9 and
14 per cent8 increase
in adjusted operating profit2,
with double-digit growth8 in
eight insurance markets including 24 per cent adjusted operating
profit growth in Hong Kong and 20 per cent8 growth
in mainland China.
At the same time, our Asian asset manager, Eastspring, has
continued to grow well. Average assets under management were up by
15 per cent (on an actual exchange rate basis), while earnings were
up by 18 per cent8 and
net external inflows totalled $8.9 billion10.
Eastspring is continuing to expand its footprint in the region, and
in December acquired a controlling stake in one of Thailand's
leading asset managers, Thanachart Fund Management Co., Ltd, with
the option to acquire the remaining equity in this business in due
course.
We have broad and efficient channels in Asia, through both our
agency force and our bank partners. During 2019, we continued to
strengthen our network of bank partnerships, renewing and expanding
our successful strategic alliance with United Overseas Bank in five
markets across the region and signing two new partnership
agreements in Vietnam.
We are continuing to deliver digital innovation to support our
successful agency and bank channels. We are diversifying into new
areas, including employee benefits insurance for both large and
small employers in the region, and at the same time we are building
new value-added services such as Pulse by Prudential, our new
end-to-end digital health app.
Africa
We are continuing to make good progress in our newer markets in
Africa. In 2019 we enhanced our growing scale in the region by
acquiring a majority stake in a leading life insurer operating in
Cameroon, Côte d'Ivoire and Togo, which have a combined
population of more than 65 million. We now operate in eight markets
in Africa with a total population of almost 400 million. In 2019,
the Africa business delivered a 76 per cent8 increase
in APE6 sales
to $82 million (2018: $47 million).
US
In the US, our product innovation and distribution leave us well
positioned to provide an ageing population with financial
strategies for stable retirements. The US is the world's largest
retirement savings market11,
with approximately four million Americans reaching retirement age
every year12.
This transition continues to trigger the unprecedented shift of
trillions of dollars from savings accumulation to retirement income
generation13.
We provide products that offer Americans the retirement strategies
they need, including variable, fixed and fixed index annuities. Our
diversified product approach has enabled us to deliver
APE6 sales
up 8 per cent, with increases in both fixed index and fixed annuity
products. New business profit7 declined
by 28 per cent, reflecting lower interest rates and changes in
product mix.
In the US, we have one of the leading distribution
teams14.
We are agile and successful in launching well designed,
customer-centric products, have successful risk management and
hedge programmes, are investing in technology platforms and have
award-winning customer service. We are continuing to work towards
further diversification and growth, within a highly competitive
industry.
Our US business has taken important steps in the delivery of its
diversification strategy, announced with our half year results in
August 2019, and has maintained a cautious approach to managing
risk through its dynamic hedging programme. The financial results
of the US business reflect the execution of this strategy. While
adjusted operating profit2 increased
by 20 per cent to $3,070 million, the effects of strong US equity
market performance and lower interest rates in the period led to a
post-tax IFRS loss in the US of $(380) million. We continue to
accept a degree of volatility in our IFRS results since our hedging
programme is based on managing the economic risks in the business
and protecting statutory solvency in the circumstances of large
market movements. Further detail is provided in the Group Chief
Financial Officer and Chief Operating Officer's
report.
Outlook
We continue to monitor closely the development of the coronavirus
outbreak. Our priority is the health and wellbeing for our
customers and staff during this challenging time.
While the coronavirus outbreak has slowed down economic activity in
the year to date and dampened our sales momentum in Hong Kong and
China, we remain confident in the medium to long-term prospects of
these economies and their respective insurance sectors. Our broad
geographic spread across the region and the strength of our
recurring premium business model lends considerable resilience to
our earnings.
Given the impact of the coronavirus outbreak on travel and activity
in the markets in which we operate, lower levels of new sales
activity in those affected markets are to be expected. Our book of
existing business is proving resilient and we are taking measures
to manage the effect of lower activity while maintaining our
investment in products, distribution and technology. Existing
customers in both Hong Kong and mainland China continue to
contribute to their policies, with premiums being paid through a
broad range of remote payment facilities.
The longer-term structural drivers of growth in our Asia markets
remain unchanged and compelling. The resilient and high quality
nature of the IFRS operating earnings growth of our Asia business
remains supported by the compounding nature of a highly enduring
regular-premium income base and focus on health and protection
products. These drivers, combined with the diversity of the Asia
platform and quality of its execution, are expected to outweigh the
effects of any one period's new sales.
In the US, we have commenced preparations for a minority IPO of
Jackson as our preferred route to introduce third party finance
into Jackson. As previously announced, from 2020 Jackson's
remittances are expected to be more evenly spread over the calendar
year than in prior periods.
The Group's strategy remains focused on structural growth
opportunities. The Group will prioritise the considerable
attractive investment opportunities available when considering the
deployment of capital and applying its progressive dividend
policy.
Interest rates have declined materially in 2019 and are trending
lower in 2020. Equity markets have been volatile and have declined
in the current year to date from their peaks in Q4 2019. These
market conditions, as well as the coronavirus outbreak, create
headwinds in respect of near-term new business profit and IFRS
fee-based and spread earnings. However, our performance in 2019
demonstrates that the opportunities we have identified are clear
and long term and that we are addressing these opportunities well.
We are continuing to deliver growth based on the strength of those
opportunities, the diversification of our business and the
resilience of our earnings. I am confident that, with our clear
focus on our structural growth markets and our continuing
operational improvements, we will continue to deliver profitable
growth for our investors and benefits for our stakeholders over the
medium and long term.
Notes
1
During 2019, the Group's holding company cash flow was managed in
sterling and significant remittances were hedged and recorded on
that basis. Amounts received were therefore distorted by the
onwards translation into US dollars. The dividend paid by Jackson
in the US in US dollars in 2019 was $525 million (2018: $450
million). The amount recorded as received in the holding company
cash flow was $509 million (2018: $452 million).
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
Cash payments made over 2019 and 2020.
4
Source: Swiss Re Sigma 2017. Insurance penetration calculated as
premiums on per cent of GDP. Asia penetration calculated on a
weighted population basis.
5
Source: Investment Company Institute, industry association and
Lipper.
6
APE sales is a measure of new business activity that comprises the
aggregate of annualised regular premiums and one-tenth of single
premiums on new business written down during the 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.
7
New business profit on a post-tax basis, on business sold in the
period, calculated in accordance with EEV principles.
8
Year-on-year percentage increases are stated on a constant exchange
rate basis unless otherwise stated. As in previous years, we
comment on our performance in local currency terms (expressed on a
constant exchange rate basis) to show the underlying business
trends in periods of currency movement.
9
See note II of the Additional unaudited financial information for
definition and reconciliation to IFRS balances.
10
Excludes Money Market Funds.
11
Source: Willis Towers Watson Global Pension Asset Study
2019.
12
Annual Estimates of the Resident Population by Single Year of Age
and Sex for the United States: 1 April 2010 to 1 July 2018. Source:
US Census Bureau, Population Division.
13
2016 Federal Reserve Board's Triennial Survey of Consumer
Finances.
14
Source: Independent research and Market Metrics, a Strategic
Insight Business: U.S. Advisor Metrics 2019, as of 30 September
2019.
Our businesses
Asia
Continued progress towards our strategic priorities.
2019
performance highlights
● Continued strong performance in key earnings and
value metrics: adjusted operating profit up 14 per
cent1 and
European Embedded Value up 23 per cent2 to
$39,235 million
● We expanded our presence in China with a new
branch in Shaanxi, the addition of seven cities and a strong start
to our wholly owned private fund manager
● We renewed our successful regional strategic
bancassurance alliance with United Overseas Bank Limited (UOB) to
2034 and expanded its coverage
● We secured one of a few 100 per cent licences in
Myanmar, our 13th life market in Asia
● Eastspring total funds under management grew to
$241 billion, up 25 per cent2
● We developed over 160 products in 2019,
contributing 16 per cent of life new business
profit
● Our digital health SuperApp, branded Pulse by
Prudential, is live in eight markets and over one million people
have downloaded the app.
Our business
Our business model is underpinned by the breadth and quality of our
operations in the life insurance and asset management sectors. We
have an outstanding reputation with customers and regulators alike
and we operate in markets with compelling structural drivers that
support sustained future growth. We have a top-three position in
nine insurance markets in the region and have built an Asian asset
management business with one of the largest regional market
footprints. This diversity, combined with our continued focus on
customer outcomes and profitability, has provided protection from
cyclical headwinds.
We have made significant investments during 2019 to strengthen
further and grow our Asia business. We renewed our successful
regional bancassurance partnership with UOB until the end of 2034
and expanded its coverage to include Vietnam as well as UOB's
digital bank, TMRW. We extended our life insurance footprint to
Myanmar, our 13th life market, and acquired a controlling stake in
Thanachart Fund which makes us the fourth largest mutual fund
manager in the attractive Thailand market with a 12 per cent market
share. To date, over one million people have downloaded the 'Pulse
by Prudential' app since its launch. Our focus on growing our
presence in China saw our reach expand to a further seven cities,
bringing our footprint to 94 cities, while our wholly owned private
fund manager established in Shanghai in December 2018 has secured
over one billion Yuan in its first year of operation.
We are able to translate these hallmarks of our business into
financial success, with diversified growth in 2019 maintaining our
strong track record of high-quality performance. We achieved a 14
per cent1 increase
in adjusted operating profit, with eight markets growing at a
double-digit rate. This is supported by a 12 per
cent1 expansion
in renewal premiums3,
which reflects the long-term nature of our insurance business, and
a 25 per cent2 increase
in funds under management at Eastspring helped by strong
third-party net inflows of $8.9 billion4.
We also delivered 29 per cent1 growth
in new business profit outside Hong Kong, with eight markets
expanding at a double-digit rate, which underpinned a 23 per
cent2 increase
in European Embedded Value to $39,235 million.
Market opportunities
We seek to enhance the health and wealth of consumers in Asia by
providing life insurance and asset management solutions to address
their protection and savings needs at all ages. The industry
remains in the early stages of development, as characterised by the
low penetration rates across the region for both insurance and
asset management, and low levels of financial inclusion. In
particular, most of our markets are approaching the level of per
capita annual income when demand increases sharply. As a
consequence, Asia is predicted to contribute about two-thirds of
the global life insurance growth in the next 10
years5 and
achieve a share of 42 per cent of the global insurance market by
2029 compared with just 32 per cent currently6.
The Asia Pacific asset and wealth management industry is also
expected to add about $13 trillion of assets under management
between 2020 and 20257.
There are many structural drivers supporting the significant growth
potential in Asia. The health protection gap, estimated at $1.8
trillion8,
is already substantial as consumers in Asia are under-insured and
social safety nets remain limited. Meanwhile, medium-term economic
growth prospects are superior to those of developed markets in the
west, with continued income growth and rising wealth levels
expected to raise the awareness of, and demand for, protection and
wealth management solutions. Similarly, demographic trends are also
favourable, as youthful emerging markets with growing working-age
populations remain a core source of demand for traditional
protection and savings products, and more mature markets with
ageing populations create demand for retirement and wealth
management solutions.
While these secular trends offer attractive prospects, we remain
vigilant and focused in our execution. We have carefully managed
our businesses through a range of unforeseen external events during
2019, including heightened capital market volatility arising from
trade tensions between the US and China, a slowdown in the growth
of the Chinese economy, suppressed yields on US dollar and other
Asian currency fixed-income instruments, and social unrest in Hong
Kong that led to a notable decline in mainland China visitor
arrivals.
We have also embraced the opportunities brought about by government
initiatives. Our widening product offerings and new partnerships
support many Asian regulators' vision to provide greater financial
inclusion and promote the health and wellbeing of the people. For
example, in Hong Kong we have seen strong demand for our annuity
and medical reimbursement products that are eligible for tax
incentives that were newly introduced by the government. We also
successfully refreshed products of our Malaysia conventional
business to comply with the new regulations on minimum allocation
rate. In addition, our expertise in economic capital reporting,
protection-focused business mix and conservative balance sheet
position us well for the migration to risk-based solvency
frameworks across the region.
Strategic priorities
We run our business with a focus on customers, quality growth and
profitability. We favour health and protection products due to
their resilience to market cycles and healthy margins.
Collectively, such products produced 67 per cent of our new
business profit in 2019 and contributed to our high mix of regular
premiums, which comprised 93 per cent of our APE sales in 2019 and
99 per cent of our life weighted premium income9.
This results in 86 per cent10 of
our life IFRS operating income (excluding other income) arising
from insurance margin and fee income, which in turn supports stable
profit progression across market cycles and strong returns on
equity.
This performance also reflects the disciplined execution of our
four strategic priorities, which align with the evolving sources of
demand across the region and help position our business for
continued growth.
First, we seek to enhance the core of our existing business and
made excellent progress in this regard in 2019. Significantly, our
sales in Indonesia grew 23 per cent1 in
the full year and this growth accelerated to 41 per
cent1 in
the second half from 4 per cent1 in
the first half, following a substantial reform of our agency
channel and new product launches. We made successful business mix
improvements in the Philippines by shifting towards higher-margin
health and protection products, which resulted in a 5 percentage
point increase in APE sales mix11 for
these products and supported the more than doubling of new business
profit. On the distribution side, we have extended our exclusive
partnership with UOB until the end of 2034 with an expanded scope
to include Vietnam and UOB's digital bank, TMRW, and have
established an exclusive 20-year partnership with SeAbank who have
1.2 million retail customers and almost 170 branches in
Vietnam.
Secondly, we aim to create 'best-in-class' health capabilities.
This is being delivered by enhancing customer access to healthcare
products and services. Through our digital health SuperApp branded
Pulse by Prudential, which is live in 8 markets, we collaborate
with various digital partners and use artificial intelligence
technology to offer users a wide range of affordable and
easy-to-access consumer services such as health assessments, risk
factor identification, triage, telemedicine, wellness and digital
payment. Meanwhile, we have launched new protection products to
meet the evolving needs of our customers, including two certified
VHIS plans in Hong Kong and PRUCritical Benefit 88, our first
standalone critical illness product in Indonesia. In 2019, we
increased our new business profit from health and protection
products by 23 per cent in Asia ex-Hong Kong, as we expanded our
APE sales of such products in seven markets with notable success in
India, where such sales saw 50 per cent underlying
growth12.
Thirdly, we plan to accelerate growth in Eastspring by expanding
its product and distribution capabilities. We have continued to
develop new solutions, including our first fund offerings in China
and Thailand as well as fixed maturity plans in Taiwan, Singapore,
Malaysia and India. We maintained our strong investment performance
with 60 per cent of retail and institutional funds outperforming
over the past year, collectively helping to attract strong net
flows from third parties. This in turn raised our funds under
management by 25 per cent2 to
$241.1 billion. Further streamlining of our front and middle-office
operations was delivered in 2019, following the completion of
Blackrock's Aladdin system implementation across 10 markets.
Meanwhile, our disciplined focus on costs has led to further
improvement in the cost-income ratio, which fell three percentage
points to 52 per cent in 2019, and contributed to the 18 per cent
growth in adjusted operating profit for the year to $283 million.
Following our acquisition of majority stakes in Thanachart Fund and
TMB Asset Management, Eastspring is now Thailand's fourth largest
mutual fund manager, with a market share of 12 per
cent13 and
combined assets under management of $22 billion4.
Finally, we continue to expand our presence in China across both
the insurance and asset management sectors. We recently established
a new branch in Shaanxi, our 20th in the country, and have added
seven cities and 14 sales services offices in 2019, extending our
reach to 94 cities and 229 sales offices. Our current presence
gives us access to 77 per cent of China's
population14 and
83 per cent of the insurance market15.
Coupled with our continued strong focus on execution, our
geographic expansion has helped us achieve strong NBP growth of 38
per cent, with strong double-digit growth across both the agency
and bancassurance channels. Our life joint venture also recently
received regulatory approval to establish its own asset management
company, which will further strengthen our capabilities in savings
and retirement products. Furthermore, our wholly owned private fund
manager established in Shanghai in December 2018 has secured over
one billion Yuan in its first year of
operation.
Customers
We believe that excellent customer service has been key to our
strong reputation and leading pan-Asia franchise. During 2019, we
added a further 1.4 million new life customers16,
bringing the total to over 15 million life customers, of which
about one-third are our health customers. Customer loyalty is high,
as reflected by our strong retention ratio which has consistently
remained 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 45 per cent of APE
sales in 2019. The result of these dynamics is a portfolio of close
to 25 million in-force policies, with each policyholder holding 1.6
policies on average.
At Eastspring, the expansion in assets under management was driven
by strong underlying growth of 26 per cent in external client
funds, excluding the M&G related assets that were reclassified
following the demerger. Overall external client funds reached
$124.7 billion and contributed to 52 per cent of the total funds
under management at the end of 2019.
Our customer centric health ecosystem, which empowers consumers to
take control of their personal health and wellbeing in an
affordable way anytime and anywhere, has made a promising start.
The number of individuals who have downloaded the Pulse by
Prudential app has exceeded one million since launch in August
2019. Pulse will help us acquire and retain users at pace as we
enhance its reach by expanding the scope of service and onboard new
partners.
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. We first expanded into the
high net worth segment in 2018 with Opus in Singapore, which
provided a differentiated experience for our customers, including a
dedicated service team, wealth planners and external experts
covering trust and legal matters. APE sales in this segment
delivered impressive growth of 46 per cent in 2019 to $76 million.
Similarly, we also developed tailored offerings for SMEs, a segment
that remains under-served and offers significant growth potential.
This strategy is advanced through our all-inclusive platform,
PRUworks, which provides a digitally-enabled HR solution for
business owners and their employees, providing access to employee
benefits and lifestyle programmes. In 2019, we achieved 22 per cent
growth in our employee benefits APE in Singapore17 and
leveraged this experience to extend our coverage to Indonesia. We
have also developed strategies to reach the digitally-savvy
millennial segment through TMRW, UOB's digital bank, and new
partners such as OVO in Indonesia.
Products
We offer a wide range of insurance products that are tailored to
local market requirements and fast-changing individual needs, with
67 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
enhancements we make to our product range, which include broadening
coverage for new risks and adding innovative features. Indeed, last
year 16 per cent of new business profit and 55 per cent of external
net inflows4 arose
from the 166 products and 109 funds that were developed in
2019.
In Hong Kong, our new and innovative product offerings have
contributed to the resilience of the domestic segment, which
achieved 8 per cent APE sales growth in the full year. This growth
accelerated to 12 per cent in the second half from 5 per cent in
the first half despite the economic slowdown and social unrest. Our
new qualified deferred annuity product was well received by
customers in both the agency and bancassurance channels, and with
sales of $162 million accounted for 11 per cent of our Hong Kong
APE sales since its launch on 1 April 2019. PruActive retirement
marked our entry into the annuity market in Singapore, contributing
6 per cent to our Singapore APE sales since its launch in August.
We also launched PRUHealth Cancer ReCover in Hong Kong, a
first-in-market cancer protection plan tailored for cancer
survivors and which also offers holistic homecare services to
support in-home recovery.
The improvement of our Indonesia business, whose new business
profit rose strongly by 39 per cent1 in
2019, was also helped by the broadening of our product offering.
Following the success of our upgraded unit-linked product, PRUlink
Generasi Baru, that was launched in late 2018, we offered a number
of new and refreshed products in 2019. To raise the productivity of
our trainee agents we launched PRUCritical Benefit 88, our first
standalone critical illness product, which accounted for around 10
per cent of the case count in this agent segment. Similarly, we
refreshed our medical product, PRUprime Healthcare Plus, offering
customers a simpler and faster process to upgrade health
protection, and this was our best-selling product in Indonesia last
year. We also plan to introduce new offerings to our critical
illness and Shariah products, which we expect will help sustain the
growth momentum in 2020.
NBP by Product
|
2019
|
|
H&P
|
67%
|
|
Par
|
21%
|
|
Non-par
|
5%
|
|
Linked
|
7%
|
|
Distribution
We believe in a multi-channel 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. We have over 600,000 licensed tied
agents across our life insurance markets, and this proprietary
distribution channel is the core component of our success,
comprising 83 per cent of our new business profit. We also have a
leading bancassurance franchise that provides access to over 18,000
bank outlets through our strategic partnerships with multi-national
banks and prominent domestic banks, which grew new business profit
by 12 per cent in 2019. In recent years, we have also established
non-traditional partnerships to broaden our reach further, with
partners added in 2019 including Viettel, the largest
telecommunications service provider in Vietnam. In total, we have
more than 300 life insurance and asset management distribution
partnerships in Asia.
Our focus on the agency channel positions us well for sustainable
growth, as customers continue to have a strong preference for
face-to-face advice from a trusted financial adviser, especially
regarding complex protection and wealth solutions. We have created
a culture whereby agents aspire to attain membership of the Million
Dollar Round Table (MDRT), an industry-recognised indicator of
quality. 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. We currently boast a number one position in
agency APE sales in Hong Kong and have increased MDRT qualifiers by
35 per cent in our markets outside Hong Kong, reflecting our focus
on agent recruitment, training and productivity across different
markets. For example, in Indonesia, our segmented agency strategy
is delivering positive early results and played a key role in
driving APE sales growth in 2019, with the Elite segment growing
APE sales by 57 per cent to account for 25 per cent of total agency
APE sales for the year.
Our partnerships also made exceptional progress last year. The
bancassurance channel achieved APE sales growth of 14 per
cent1,
with particularly strong performances in China JV and Vietnam and
24 per cent growth from UOB following the renewal of the strategic
partnership at the beginning of the year. Meanwhile, we also
extended our collaboration with new partners to widen our access to
new customer segments, underlined by our new strategic partnership
with OVO, the largest digital payment platform in Indonesia with
access to 115 million devices. We anticipate that this partnership
will significantly enhance our reach to digitally-savvy 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 or recent points of entry.
NBP by channel
|
2019
|
|
Agency
|
83%
|
|
Bancassurance
|
15%
|
|
Others
|
2%
|
|
Digital
In the face of rapidly evolving customer needs and technological
disruption, we actively embrace change and the latest technology.
Our digital strategy is being executed in two waves. The first
focuses on increasing automation and improving digital capabilities
in our current business model for better customer experience
leading to better business results. The second adds a new business
model based on a customer centric digital ecosystem which is
manifested in our SuperApp branded Pulse by
Prudential.
First wave: Enhancing our current business model
In the first wave we are continually increasing the automation of
our operations so as to improve both business efficiency and
customer experience. For example, 83 per cent of all new business
was submitted through e-point-of-sale technology in 2019,
representing an increase of 11 percentage points year-on-year, with
the enhancement particularly pronounced in our bancassurance
partners in Thailand, Taiwan and Malaysia. Our smart underwriting
tool, which is now used in 64 per cent of all new sales, offers
dynamic underwriting that streamlines the application process and
communicates instant underwriting decisions to customers. We
provide our rapidly growing digital-savvy customer-base with
efficient and secure digital payment solutions, for example,
through our recent partnership with Boost, a leading lifestyle
e-wallet in Malaysia. We have established a strategic relationship
with the global technology services company Tech Mahindra to
leverage their scale and expertise in Cloud and Mobile to ensure
faster deliveries across all markets.
At Eastspring, in addition to embedding Blackrock's Aladdin system,
we have also made other digital advancements, with our Malaysian
entity winning the 'Fintech Innovation in Asset Management' award
in Asia Asset Management's '2020 Best-of-the-Best awards'. This
reflected the continued enhancements to our online platform,
myEastspring, which enables our clients to access, monitor and
transact online and includes tools for our agents to help clients
predict their future savings needs. We also launched a new digital
facility that empowers members of the Employees Provident Fund to
take control of their investments and make transactions at nearly
zero cost.
Second wave: Building an ecosystem-based business
model
In the second wave, to aid the expansion of our role from providing
protection to making customers healthier, we have added an
ecosystem-based business model which is manifested in our Pulse by
Prudential app. Built on the latest architecture, Pulse is scalable
and is based on real data and artificial intelligence (AI)
technology focusing on positive outcomes for customers and our
businesses. This business model also uses a wide range of
partnerships and the latest trends in health and wealth technology,
allowing us to fulfil our strategic imperative to add prevention
and postponement to our protection business. So far we have secured
18 market-leading partners across an array of different elements.
We believe this will help us to acquire users at pace and gain
access to new data, whilst enabling our customers to enjoy a wide
range of affordable healthcare and value-added services to help
them live longer and healthier lives. Currently live in eight
markets, Pulse will continuously improve as we roll out new
functionalities, increase partnerships and learn from direct user
feedback over time.
The component of Pulse designed for the fast-growing small and
medium enterprise (SME) segment in Asia is known as PruWorks.
Following its launch in Singapore and Indonesia, we are now
enhancing this further with a fully integrated, new administration
system as well as direct connectivity to enhance customer
experience for SMEs and their employees.
Highlights of key ecosystem partners
|
|
Ecosystem partners
|
Markets (to be) covered
|
Ecosystem elements
|
|
Babylon
|
Regional
|
Health assessment, triage, AI symptom checker
|
|
DOC
|
Malaysia
|
Online consultations, telemedicine
|
|
Halodoc
|
Indonesia
|
Telemedicine
|
|
Mydoc
|
Regional
|
Telemedicine
|
|
TICTRAC
|
Regional
|
Wellness, engagement and rewards
|
|
Prenetics
|
Hong Kong
|
DNA testing
|
|
OVO
|
Indonesia
|
e-payment; alternative distribution channel
|
|
Boost
|
Malaysia
|
e-payment
|
|
LIME
|
Malaysia
|
Dengue alert
|
|
HaelthTech
|
Regional
|
SME cloud computing
|
|
Freedompop
|
Regional
|
Data analytics and lead generation
|
|
TMRW
|
Regional
|
UOB's digital bank
|
|
MyanCare
|
Myanmar
|
Digital healthcare
|
|
Flexible Pass
|
Myanmar
|
Wellness, engagement and rewards
|
|
AIS
|
Thailand
|
Digital service provider, Group business
|
|
Viettel
|
Vietnam
|
Telecommunication and e-payment
|
|
Central Group
|
Thailand
|
Customers and behavioural data, distribution
|
|
Chiiwii
|
Thailand
|
Telemedicine
|
|
Corporate responsibilities
We have a large number of staff and agents across our life and
asset management businesses across Asia, and an explicit inclusive
approach to hiring and monitoring diversity. Progressively, we seek
to ensure that mobility is not just seen as part of the opportunity
provided to improve our individuals' skills but is also a source of
key competitive advantage as we take learnings from one operation
and apply them in another. The change in the method of managing
agents in Indonesia using techniques developed in Vietnam is a
prime example of this.
We have long-standing and strong relationships with the regulators
in the markets we operate in. This is built on a culture of
compliance with the rules and our promotion of financial services
in the context of public policy. To drive the insurance penetration
rates in protection and savings products which are desired by
governments and regulators in the region, we support the process of
deepening capital markets, building robust regulatory and legal
frameworks and enhancing financial literacy in the markets in which
we operate, which in turn supports economic growth and stability.
We see our investment appetite and risk management approach as
contributing to the development and stability of the capital
markets for the markets in which we operate. We actively engage
with fellow market counterparties and governments to foster greater
depth, transparency and liquidity of markets.
The responsible and sustainable management of our tax affairs also
helps us to maintain constructive relations with our stakeholders
and play a positive role in the economy. We take a long-term
perspective and balance our responsibility to support our business
strategy with our responsibility to the communities in which we
operate, which need sustainable tax revenues. We understand the
importance of paying the right amount of tax on time. We manage our
tax affairs transparently and seek to build constructive
relationships with tax authorities in all the countries in which we
operate.
COVID-19 update
We continue to monitor closely the development of the coronavirus
outbreak. Our priority is the health and wellbeing of our customers
and staff during this challenging time. In China and Hong Kong, we
were one of the first insurance companies to launch extra free
protection and coverage against this disease. Similarly, in another
eight Asian markets we are offering additional free hospital cash
benefits and other lump sum benefits to customers diagnosed with
this disease, alongside a series of measures and services to
support affected customers in a timely manner, such as dedicated
hotlines and simplified claims procedures. For our staff, we have
put in place flexible work arrangements, for example on work hours
and work location, as well as enhanced hygienic tools in the
office.
While the coronavirus outbreak has slowed down economic activities
in the year-to-date and dampened our sales momentum in Hong Kong
and China, we remain confident in the medium to long-term prospects
of these economies and their respective insurance sectors. Our
broad geographic spread across the region and the strength of our
recurring premium business model lends considerable resilience to
our earnings. We will continue to collaborate actively with the
relevant governments and uphold our corporate and social
responsibilities. This is exemplified by the recent donation of
RMB15 million to support efforts in fighting against the disease by
our joint ventures in China18.
We will also continue to stand by our customers steadfastly and
make them healthier with our 'best-in-class' health and protection
capabilities.
Business outlook
Asia's growth fundamentals and demographic trends remain robust and
we expect will continue to support strong growth for the insurance
and asset management industries in Asia.
We are well placed to capture these structural prospects given our
market-leading positions, focused strategic priorities,
high-quality execution and expanding digital
capabilities.
We have built a track record of consistent and resilient expansion
across cycles over the past decades, and we are confident in
continuing to replicate our past success and to make our customers
in Asia healthier and wealthier in the years to come.
Notes
1
Increase stated on a constant exchange rate basis.
2
Increase stated on an actual exchange rate basis.
3
See note II of the Additional unaudited financial information for
definition and reconciliation to IFRS balances.
4 Excludes
Money Market Fund.
5
Source: Allianz Global Insurance Market at a crossroads, May 2019.
Global life insurance premium derived from total insurance
premium.
6
Market penetration: Swiss Re (Sigma) - based on insurance premiums
as a percentage of GDP in 2018 (estimated).
7
Source: PWC Asset & Wealth Management 2025
report.
8
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'. Report excludes
Cambodia and Laos.
9
Weighted premium income comprises gross earned premiums at 100 per
cent of renewal premiums, 100 per cent of first-year premiums and
10 per cent of single premiums.
10
Total insurance margin ($2,244 million) and fee income ($286
million) of $2,530 million divided by total life income excluding
other income of $2,958 million (Comprised of total life income of
$6,187 million less other income of $3,229 million). For discussion
on the basis of preparation of the sources of earnings see note
I(iv) of the Additional unaudited financial
information.
11
APE sales mix refers to the proportion of total market APE sales
accounted for by each product type.
12
Assuming no change in our shareholding.
13
Mutual fund market shares; mutual fund assets under management as
at 31 December 2019.
14
Source: National Bureau of Statistics of China.
15
By life and health GWP in 2019.
16
Excluding India.
17
Excluding broker channel.
18 RMB10
million by CPL and RMB5 million by Citic Pru FMC.
United States
Providing America's ageing population with financial strategies for
their retirement through product innovation and developing
market-leading distribution capabilities.
2019 performance highlights
●
Launches of Jackson's
RateProtector, a single premium, multi-year guarantee fixed
annuity, as well as MarketProtector and MarketProtector Advisory
fixed index annuity products, contributing to an 8 per cent
increase in new business sales
●
Continued growth of
advisory sales, with new business sales up 30 per cent as
distribution models continue to evolve
●
Expanded advisory
distribution footprint with Morgan Stanley, DPL Financial Partners,
TD Ameritrade and RetireOne
●
Awarded 'Contact Center
World Class CX Certification' and 'Highest Customer Service for the
Financial Industry' awards by The Service Quality Measurement
Group, Inc
●
Actively engaged with
FinTech partners including Envestnet, MoneyGuidePro and
eMoney
●
Adjusted operating
profit up 20 per cent to $3,070 million and new business profit
down 28 per cent to $883 million
The US is the world's largest retirement savings market with
approximately four million Americans reaching retirement age every
year. This transition continues to trigger the unprecedented shift
of trillions of dollars from savings accumulation to retirement
income generation.
However, these Americans face challenges in planning for life after
work. For those nearing the end of their working careers, a
financially secure retirement is at risk, due to insufficient
accumulation of savings and the current combination of low yields
and market volatility. Employer-based pensions are being withdrawn,
and state and government plans are underfunded as the impact of
increased administrative costs and lower interest rates continue to
reduce the affordability of the post-war pensions model. Social
security was never intended to be a primary retirement solution and
today its long-term funding status is in question. Additionally,
the life expectancy of an average retiree has significantly
increased, lengthening the number of years for which retirement
funding is needed.
To overcome these challenges, Americans need and demand retirement
strategies that offer them the opportunity to grow and protect the
value of their existing assets, as well as the ability to provide
guaranteed income that will last throughout their extended
lifetimes. Achieving this will reduce the gap many retirees face
between income needed during retirement and the income they can
generate from their retirement assets and social security. Reducing
this gap is a public benefit as it helps reduce strain on
supplemental government programmes for those in need.
Jackson believes that a retirement plan integrated with an income
guarantee annuity will mitigate much of the risk of retirees
running out of money during retirement. In response to this demand
and the ongoing shift to fee-based solutions, Jackson has
positioned itself with product innovation and distribution
strategies to provide a wide spectrum of choice when selecting the
retirement product that best fits customer needs. This will allow
Jackson to enhance further our market-leading variable annuity
position in the brokerage market, diversify in the fixed annuity
and fixed index annuity space and grow in the advisory retirement
solutions market. Jackson has demonstrated its ability to diversify
during the year, growing the proportion of APE sales accounted for
by fixed annuity, fixed index annuity and wholesale business to 34
per cent, from 19 per cent in the prior year.
Customers and products
Through its distribution partners, Jackson provides products that
offer Americans the retirement strategies they need, including
variable, fixed and fixed index annuities. Each of these products
offer a unique range of features tailored to meet the individual
needs of the retiree as discussed below:
Variable
annuity A Jackson variable
annuity, with investment freedom, represents an attractive option
for retirees and soon-to-be-retirees, providing both access to
equity market appreciation and guaranteed lifetime income as an
add-on benefit.
Fixed index
annuity A Jackson fixed
index annuity is a guaranteed product with limited market exposure
but no direct equity ownership. It is designed to build wealth
through a combination of a base crediting rate that is generally
lower than a traditional fixed annuity crediting rate, but with the
potential for additional upside, based upon the performance of the
linked index. Jackson also provides access to guaranteed lifetime
income as an add-on benefit.
Fixed
annuity A Jackson fixed
annuity is a guaranteed product designed to build wealth without
market exposure, through a crediting rate that is likely to be
superior to interest rates offered from banks or money market
funds.
These products also offer tax deferral, allowing interest and
earnings to grow tax-free until withdrawals are made.
Jackson has a proven track record in this market with its
market-leading flagship product, Perspective II1.
Jackson's success has been built on its quick-to-market product
innovation, as demonstrated by the development and launch of Elite
Access, our investment-only variable annuity. Further demonstrating
Jackson's flexibility and manufacturing capabilities, and in
response to the trend in financial services toward fee-based
solutions, Jackson has launched Perspective Advisory II, Elite
Access Advisory II and the innovative MarketProtector Advisory, the
industry's first fully-liquid advisory fixed index annuity, to
serve advisers and distributors with a preference for advisory
products.
In June 2019, Jackson launched RateProtector, a single premium,
multi-year guarantee fixed annuity. RateProtector offers consumers
the opportunity to protect and grow their assets through guaranteed
interest rates that will not fluctuate during a select period,
combined with the ability to defer taxes on any earnings until
money is withdrawn.
Market reception for these products has been positive and these
have contributed to the delivery of the organic diversification of
Jackson sales in 2019, with new business APE sales up 8 per cent to
$2,223 million (2018: $2,059 million). The planned transition to a
more balanced portfolio has resulted in higher investment in new
business in 2019 which over time is expected to enhance statutory
capital and cash generation.
Jackson operates within a well-defined risk framework and takes
into account the expected cost of hedging when pricing its
products. It aggregates financial risks across the company, obtains
a unified view of its risk positions, and actively manages net
risks through a hedging programme which aims to manage economic
risk. Some accounting volatility is expected in periods of large
market movements as was seen in 2019, given the economic focus
described above, and this has impacted IFRS profitability in the
year, as further discussed in the Group Chief Financial Officer and
Chief Operating Officer's report. However, the benefits of
Jackson's hedging programme have been demonstrated in times of
equity market decline, for example during the fourth quarter of
2018 and during the recent market turbulence. At the end of 2019
Jackson's surplus of available capital over required capital was
$3,795 million after adopting the NAIC's changes to its framework
for variable annuities. This equates to a ratio of 366 per cent
(2018: 458 per cent using the previous NAIC framework). Jackson
continues to monitor closely the recent changes in markets and take
the appropriate actions through its dynamic hedging strategy. If
these conditions persist management could take additional actions
to assist in mitigating the impact.
Distribution
Jackson distributes products in all 50 states of the US and in the
District of Columbia. Operations in the state of New York are
conducted through a New York subsidiary. Jackson markets its retail
products primarily through advice-based distribution channels,
including independent agents, independent broker-dealer firms,
regional broker-dealers, wirehouses and banks. For variable annuity
sales, Jackson is the leader in the independent broker-dealer, bank
and wirehouse channels2 and
third in regional firms2.
Jackson's distribution strength also sets us apart from our
competitors. Our highly productive wholesaling force is the
largest3 in
the annuity industry and is instrumental in supporting the
independent advisers who help the growing pool of American retirees
develop effective retirement strategies. Our wholesalers provide
extensive training to thousands of advisers about the range of
products and the investment strategies that are available to
support their clients. Based on the latest available data, Jackson
is the second most productive variable annuity wholesale
distribution force in the US3.
In 2019, Jackson invested significant time and resources with
fintech partners to help illustrate the benefits a lifetime income
solution can provide within a comprehensive wealth management plan.
This gives the financial adviser the necessary tools to customise
according to the unique needs and goals of the client.
Additionally, investment freedom within VA investment options
allows the adviser to build a diversified portfolio that is
customised to meet their clients' individual priorities and
preferences, rather than locking them into restrictive allocation
models. Some of the fintech platforms where Jackson is actively
engaged include eMoney, MoneyGuidePro and Envestnet.
In 2019, Jackson announced distribution agreements with DPL
Financial Partners (DPL), TD Ameritrade and RetireOne to provide
our protected lifetime income solutions to independent registered
investment advisers (RIAs). The collaboration expands Jackson's
distribution footprint and provides Jackson with access to new
opportunities in the independent RIA channel. In addition to these
new relationships, Jackson's distribution partnership announced in
late 2018 with State Farm is targeted to roll out in the first
quarter of 2020. These new partnerships show Jackson's
determination and progress on channel diversification.
Regulatory landscape
The regulatory outlook for the industry has improved since the
passing of the Securities and Exchange Commission's (SEC) Best
Interest Regulation in June 2019. This replaced proposed
legislation known as the DOL Fiduciary Duty Rule. The SEC's
finalised rule creates a best interest standard of conduct for
broker-dealers and is designed to be 'product agnostic', meaning
that it is not intended to give preference to or target any
specific product. Instead, the rule enhances the diligence required
when advising customers about suitable, albeit more complex,
products such as variable annuities. The rule became effective 60
days after being published in the Federal Register (12 July 2019)
and includes a transition period until 30 June
2020.
Despite lower interest rates, the life insurance industry saw
increased total annuity sales as of the third quarter of 2019,
primarily due to a clearer regulatory environment and more
aggressive product feature changes (ie withdrawal percentages)
implemented by competitors. Higher industry sales of fixed
annuities were offset slightly by lower variable annuity
sales.
Regardless of the outcome of the SEC best interest standard, the
regulatory disruption caused by the now rescinded DOL Rules has
challenged the industry to review the ways in which investment
advice is provided to American investors. Manufacturers will need
to have the ability to provide product and system adaptations in
order to support the success of various distribution partners in
their delivery of the retirement strategies that investors need.
Because of its strong distribution, leadership in the annuities
market, best-in-class service and an efficient operation, we
believe that Jackson is well positioned to take advantage of this
opportunity.
In December 2019, the Setting Every Community Up for Retirement
Enhancement Act (SECURE Act) was passed into law, bringing positive
changes to the US retirement system. A significant change includes
the portability of lifetime income products, permitting
participants to preserve their lifetime income investments and
avoid surrender charges and fees. Another provision of the Act
clarifies the existing Employee Retirement Income Security Act safe
harbour and removes ambiguity about the applicable fiduciary
standard that currently acts as a roadblock to offering lifetime
income benefit options under a defined contribution plan. Under
this provision, for purposes of fulfilling their fiduciary duty to
select an annuity provider, defined contribution plan fiduciaries
may rely on representations from insurers regarding their status
under state insurance laws. The enactment of these provisions, and
the SECURE Act as a whole, are important steps in facilitating
Americans' ability to achieve financial freedom for
life.
We believe that Jackson is well positioned to manage the impact of
these regulatory changes and welcome the outcomes of the revised
regulations.
At 31 December 2019, Jackson early adopted the new US regulatory
regime enacted by the National Association of Insurance
Commissioners in respect of variable annuities. The effect of this
change is further discussed in the Group Chief Financial Officer
and Chief Operating Officer's report on the 2019 financial
performance.
Corporate responsibility
As a provider of savings and protection products, stewardship is
core to what we do. We recognise that to help our customers look to
the future with confidence, we need to take a long-term view on a
wide range of issues that affect our business and the communities
in which we operate. To do this, we maintain a proactive dialogue
with our stakeholders - customers, investors, employees,
communities, regulators and governments - to ensure that we are
managing these issues sustainably and delivering long-term
value.
Jackson seeks to provide the best retirement solutions that we can,
while striving to communicate information about those products in a
fair and transparent way. In the US, Jackson continues to be a
leader in shifting perspectives and simplifying the language around
financial products. In 2018, Jackson led the creation of a
groundbreaking, industry-wide coalition seeking to help mitigate
America's looming retirement crises, the Alliance for Lifetime
Income. The Alliance is a tremendous leap forward in Jackson's
ongoing commitment to educating Americans about the importance of
lifetime income in retirement planning.
At Jackson, we take an inclusive approach to responsible
investment, seeking to integrate environmental, social and
governance (ESG) considerations into our investment processes and
stewardship activities through active ownership practices and
engagement with investee companies. We also maintain the ability to
exclude entities from our internal investment mandates, where their
practices, policies or procedures conflict with our values, or
where we see a need to explicitly recognise international
consensus.
As a long-term investor, Jackson considers both financial and
non-financial factors in our investment processes, decision-making
and ownership practices that may have a meaningful impact on our
customers' long-term investment outcomes. Similarly, as active
asset owners of the capital we invest on behalf of our customers,
we believe that due consideration of the various factors that can
impact investment returns is part of our fiduciary duty to our
customers.
Jackson also takes pride in helping the communities in which we
operate, providing significant employment, tax revenues, charitable
programmes and contributions, as well as the investment of general
account assets, all of which provide valuable public services and
build infrastructure for the benefit of the wider community and
economy.
Investment for growth
We believe that a significant opportunity exists to reach even more
American retirees and serve their needs with annuity products going
forward. This is because there are trillions of dollars of
adviser-distributed assets across distribution platforms that have
not historically been a focus for the business, such as the
dual-registered investment adviser channel, which we can seek to
access. The industry will need to remain flexible and
cost-effective in making changes to product systems and processes.
We continue to seek to understand and make the necessary
adjustments to support the needs and demands of American retirees
into the future.
Jackson is making significant investments in new technologies,
which allows us to provide better service that will give our
customers what they want, when they want it. These new technologies
will also provide higher quality data so that our executives and
staff across the business can make better informed decisions with
regard to risk, and with how and where to invest.
Jackson's competitive strengths are even more critical as we work
towards diversification and growth, within a highly competitive
insurance industry. The breadth and depth of our best-in-class
distribution team, our agility and success in launching well
designed customer-centric products, the continued success of our
risk management and hedge programmes through many economic cycles,
and our significant investment in technology platforms and
award-winning customer service will provide Americans with the
retirement strategies they so desperately need. Jackson's
discipline helps enable us to be positioned to potentially capture
additional growth during times of transition into the
future.
Notes
1 ©2020
Morningstar, Inc. All Rights Reserved. The information contained
herein: (1) is proprietary to Morningstar and/or its content
providers; (2) is not warranted to be accurate, complete, or
timely. Neither Morningstar nor its content providers are
responsible for any damages or losses arising from any use of this
information. Past performance is no guarantee of future results.
Morningstar www.AnnuityIntel.com Total
Sales by Contract 3Q YTD 2019. Jackson's Perspective II for base
states ranks #1 out of 927 VA contracts with reported sales to
Morningstar's quarterly sales survey as of 3Q YTD
2019.
2 ©2020
Morningstar, Inc. All Rights Reserved. The information contained
herein: (1) is proprietary to Morningstar and/or its content
providers; (2) is not warranted to be accurate, complete, or
timely. Neither Morningstar nor its content providers are
responsible for any damages or losses arising from any use of this
information. Past performance is no guarantee of future results.
Morningstar www.AnnuityIntel.com Total
sales by company and channel 3Q YTD 2019. Jackson ranks #1 out of
25 companies in the Independent NASD channel, #1 out of 19
companies in the Bank channel, #1 out of 15 companies in the
Wirehouse channel, and #3 out of 19 companies in the Regional Firms
channel.
3 Independent
research and Market Metrics, a Strategic Insight Business: U.S.
Advisor Metrics 2019, as of 30 September 2019.
Group Chief Financial Officer and Chief Operating Officer's report
on the 2019 financial performance
I am pleased to report that we maintained focus on the execution of
our strategy alongside the successful completion of the demerger of
M&G plc and that this has continued to deliver positive
financial performance in 2019.
Growth has once again been led by our businesses in Asia, which
reflects the benefits of our well positioned and broad-based
portfolio, which has long focused on high quality, recurring
premium business. In 2019, this saw our life businesses outside
Hong Kong deliver overall new business profit growth of 29 per
cent1,
and within this 10 markets increasing new business profit. While
Hong Kong has seen a more challenging sales environment, the
resilience of its business model is demonstrated by its 24 per
cent1 growth
in adjusted operating profit, which contributed to the 14 per
cent1 increase
in adjusted operating profit delivered by our overall Asia
business.
Our US business took its first steps in the execution of its
diversification strategy, broadened its presence across the US
annuity market, delivered increased remittances to the Group and
early adopted the new National Association of Insurance
Commissioners (NAIC) variable annuity framework. Jackson has
successfully demonstrated its ability both to develop and
distribute new products in order to diversify its product range.
Over time, this will contribute to a more balanced mix of
policyholder liabilities which will enhance statutory capital and
cash generation. During 2019, this transition has resulted in a
higher investment in new business than has been seen in recent
periods, with resulting impacts on capital generation and new
business profit margins.
During 2019 our head office activities incurred costs of $(460)
million (2018: $(490) million2).
The demerger of M&G plc provides us with the opportunity to
optimise the operating model of our Group functions across our head
office. We are well advanced in developing and executing plans that
will deliver total savings of circa $180 million3,
targeting a revised run-rate from 1 January 20214.
We have already completed the first phase of this work which will
deliver annual savings5 of
$55 million.
Over 2019, global equity markets rallied strongly. In the US
markets the S&P 500 index increased by 29 per cent over 2019,
but government bond yields were generally lower over the period,
with the US 10 year government bond yield ending the year at 1.9
per cent (2018: 2.7 per cent).
The impact of these market effects are most prevalent in the US's
results. Jackson's hedging programme is focused on managing the
economic risks in the business and protecting statutory solvency in
the circumstance of large market movements. The hedging programme
does not aim to hedge IFRS accounting results and this can lead to
volatility in the IFRS results in periods of significant market
movements, as was seen in 2019. In particular, while higher equity
markets are expected to deliver ultimately increased profitability
to Jackson through higher future fee income, this benefit is not
fully recognised in the IFRS results in the short term. This
contrasts with the impact on the derivatives within the hedging
programme, designed to provide protection when markets fall, where
rises in equity markets lead to short term losses in the IFRS
results. These losses have been exacerbated by falling interest
rates in 2019, which have led to an increase in the IFRS
liabilities for the guarantees attaching to variable annuities
given lower discount rates and lower assumed future separate
account growth, impacting directly on the income statement.
Collectively, these factors led to an IFRS loss after tax of $(380)
million for the US over 2019. The interest rate falls have also led
to gains on bonds, which are recognised outside the income
statement, and US's IFRS segment shareholders' equity increased
from $7,163 million at the end of 2018 to $8,929 million at the end
of 2019. EEV has fewer mismatches (for example future fee income is
fully recognised), but fluctuations in interest rates also impact
Jackson's EEV results, since EEV discount rates and future
expectations of separate account returns are based on current risk
free rates. While our IFRS and EEV results in 2019 may therefore
show a degree of volatility, we believe that the Jackson business
is positioned to enhance its capital and cash generation over time
as it continues to focus on the US retirement market
opportunity.
We have presented the results of the UK and Europe operations
(referred to as M&G plc) as discontinued operations and have
adopted the US dollar as our presentational currency which better
reflects the economic footprint of our business going forward.
Prior year comparatives have been restated, as required under IFRS.
However comparative balance sheet amounts are not restated for
discontinued operations. As in previous years, growth rates
referred to are on a constant exchange rate basis unless otherwise
stated.
Adjusted operating profit before tax from continuing
operations
Prudential's adjusted IFRS operating profit based on longer-term
investment returns (adjusted operating profit) from continuing
operations increased in 2019 to $5,310 million (20 per cent higher
on a constant and actual exchange rate basis). This increase was
driven by higher earnings from our Asia life insurance and asset
management operations, and by lower market-related DAC amortisation
charges compared with the prior year in the US, as a result of the
strong equity market returns achieved in 2019. Other income and
expenditure generated a net cost of $(926) million (2018: $(967)
million2).
Of this, $(179) million related to interest costs in respect of
debt instruments transferred to M&G plc on 18 October 2019
prior to completion of the demerger. Excluding these amounts,
interest costs for the continuing Group would have been $(337)
million, lower than 2018 following the redemption of debt in the
first half of 2019.
IFRS basis non-operating items from continuing
operations
Non-operating items in 2019 consist of short-term fluctuations in
investment returns on shareholder-backed business of negative
$(3,203) million (2018: negative $(791) million on an
actual exchange rate basis), the net loss arising from corporate
transactions undertaken in the year of negative $(142) million
(2018: negative $(107) million on an actual exchange rate
basis), and the amortisation of acquisition accounting adjustments
of negative $(43) million (2018: negative $(61) million on an
actual exchange rate basis) arising mainly from the REALIC business
acquired by Jackson in 2012.
The $(142) million cost of corporate transactions reflects gains
from disposals offset by the $(407) million incurred in the year in
connection with the demerger of M&G plc from Prudential plc, in
line with our previous guidance. Further information is set out in
note D1.1 to the financial statements.
Negative short-term fluctuations comprised positive
$657 million (2018: negative $(684) million on an
actual exchange rate basis) for Asia, negative $(3,757) million
(2018: negative $(134) million) in the US and negative
$(103) million (2018: positive $27 million on an actual
exchange rate basis) in other operations.
Falling interest rates in certain parts of Asia led to unrealised
bond gains in the year which are accounted for within non-operating
profit. In the US, rising equity markets and falling interest rates
have resulted in negative effects primarily reflecting net losses
on hedge instruments used to manage the market exposure of
Jackson's products and by changes in the IFRS value for these
features. Further discussion of Jackson's non-operating items is
contained in the US section of this report.
After allowing for non-operating items, the total profit after tax
from continuing items was $1,953 million (2018: $2,881
million2).
In addition to the effects seen above, falling interest rates
resulted in unrealised gains of $2.7 billion being recognised
outside the income statement as part of other comprehensive income,
partially mitigating the adverse effect of market movements on the
Group's IFRS shareholders' funds.
IFRS loss after tax from discontinued operations
In the period prior to demerger, $1,319 million IFRS profit after
tax was recognised from the discontinued M&G plc business. On
distribution to shareholders as a dividend in specie the net assets
of the business were remeasured to the market value of M&G plc
on listing, resulting in a gain of $188 million recognised within
the loss from discontinued operations for the year. As a result of
representing the historical results of M&G plc in US dollars
(as opposed to sterling), a loss of $(2,668) million was recognised
at the date of demerger representing cumulative foreign exchange
differences held in the currency translation reserve. This arose
from the fall in the sterling/US dollar exchange rate over the
period since the currency translation reserve was established in
2004. This was matched by an equal and opposite gain in other
comprehensive income resulting in no overall impact on
shareholders' funds. Reflecting the above, the total loss from
discontinued operations after tax was $(1,161) million. The
rest of this report focuses solely on the continuing operations of
the Group.
IFRS effective tax rates
In 2019, 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 2018.
The 2019 effective tax rate on total IFRS profit was negative (2)
per cent (2018: 16 per cent). The decrease in the 2019 effective
tax rate reflects increased derivative losses in the US where the
effective tax rate on these items is higher (at 21 per cent) than
the effective tax rate on profit 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 $2,168 million remitted to
tax authorities in 2019. This increased from the equivalent amount
of $1,829 million2 remitted
in 2018, primarily due to the timing of when various tax payments
became due.
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
breakdown of revenues, profits 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 2019 data, will be available
on the Group's website before 31 May 2020.
IFRS profit
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
2019 $m
|
2018 $m
|
Change %
|
|
2018 $m
|
Change %
|
Adjusted operating profit based on longer-term
investment returns before tax from
continuing operations
|
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
Long-term business
|
2,993
|
2,646
|
13
|
|
2,633
|
14
|
Asset management
|
283
|
242
|
17
|
|
239
|
18
|
Total Asia
|
3,276
|
2,888
|
13
|
|
2,872
|
14
|
|
|
|
|
|
|
|
|
|
US
|
|
|
|
|
|
|
Long-term business
|
3,038
|
2,552
|
19
|
|
2,552
|
19
|
Asset management
|
32
|
11
|
191
|
|
11
|
191
|
Total US
|
3,070
|
2,563
|
20
|
|
2,563
|
20
|
|
|
|
|
|
|
|
|
|
Total segment profit from continuing operations
|
6,346
|
5,451
|
16
|
|
5,435
|
17
|
|
|
|
|
|
|
|
|
|
Other income and expenditure
|
(926)
|
(967)
|
4
|
|
(933)
|
1
|
Total adjusted operating profit based on longer-term investment
returns before tax and restructuring costs
|
5,420
|
4,484
|
21
|
|
4,502
|
20
|
Restructuring costs
|
(110)
|
(75)
|
(47)
|
|
(73)
|
(51)
|
Total adjusted operating profit based on longer-term
investment returns before tax from continuing
operations
|
5,310
|
4,409
|
20
|
|
4,429
|
20
|
Non-operating items:
|
|
|
|
|
|
|
Short-term fluctuations in investment returns
on shareholder-backed business
|
|
(3,203)
|
(791)
|
(305)
|
|
(796)
|
(302)
|
Amortisation
of acquisition accounting adjustments
|
|
(43)
|
(61)
|
30
|
|
(61)
|
30
|
Gain (loss) on disposal of businesses and
corporate transactions
|
|
(142)
|
(107)
|
(33)
|
|
(106)
|
(34)
|
Profit from continuing operations before tax
attributable to shareholders
|
1,922
|
3,450
|
(44)
|
|
3,466
|
(45)
|
Tax credit (charge) attributable to shareholders'
returns
|
31
|
(569)
|
105
|
|
(570)
|
105
|
Profit from continuing operations for the year
|
1,953
|
2,881
|
(32)
|
|
2,896
|
(33)
|
Profit for the year from discontinued operations
|
1,319
|
1,142
|
15
|
|
1,092
|
21
|
Remeasurement of discontinued operations on demerger
|
188
|
-
|
n/a
|
|
-
|
n/a
|
Cumulative exchange loss recycled through other
comprehensive income
|
(2,668)
|
-
|
n/a
|
|
-
|
n/a
|
(Loss) profit from discontinued operations for the
year,
net of related tax
|
(1,161)
|
1,142
|
(202)
|
|
1,092
|
(206)
|
Profit for the year
|
792
|
4,023
|
(80)
|
|
3,988
|
(80)
|
|
|
|
|
|
|
|
IFRS earnings per share
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
2019 cents
|
2018 cents
|
Change %
|
|
2018 cents
|
Change %
|
Basic earnings per share based on adjusted operating profit after
tax from continuing operations
|
175.0
|
145.2
|
21
|
|
146.0
|
20
|
|
|
|
|
|
|
|
Basic earnings per share based on:
|
|
|
|
|
|
|
Total
profit after tax from continuing operations
|
75.1
|
111.7
|
(33)
|
|
112.5
|
(33)
|
Total
(loss) profit after tax from discontinued operations
|
(44.8)
|
44.3
|
(201)
|
|
42.4
|
(206)
|
Group capital position
Following the demerger of M&G plc from Prudential plc, the Hong
Kong Insurance Authority (IA) is now the Group-wide supervisor for
the Prudential Group. Ultimately, the Group will become subject to
the Group-wide Supervision (GWS) Framework which is currently under
development by the Hong Kong IA for the industry and is expected to
be finalised in the second half of 2020. Until it comes into
force, Prudential is applying the local capital summation method
(LCSM) that has been agreed with the Hong Kong IA to determine
Group regulatory capital requirements.
At 31 December 2019, the Group's LCSM surplus over the Group
minimum capital requirement (GMCR) was estimated at $9.5 billion on
a shareholder basis6,
equivalent to a solvency ratio of 309 per cent, and compares with a
like-for-like position at 31 December 2018 of $9.7 billion and
ratio of 356 per cent.
The high quality and recurring nature of the Group's operating
capital generation and disciplined approach to managing balance
sheet risk is evident from the $2.5 billion of in-force capital
generation in the period, which supported $0.6 billion of
investment in new business (on an LCSM basis), inorganic investment
in Asia along with external dividends. The movement in LCSM surplus
also includes demerger and other capital related items. More
information is set out in note I(i) of the Additional unaudited
financial information. The Group's LCSM position is resilient to
external macro movements as demonstrated by the sensitivity
disclosure contained in note I(i) of the Additional unaudited
financial information, alongside further information on the basis
of calculation of the LCSM measure.
The Group is no longer subject to Solvency II capital requirements
nor regulated by the Bank of England.
|
31 December 2019
|
31 December 2018†
|
Estimated Group LCSM capital
position6
|
Total
|
Shareholder*
|
Total
|
Shareholder*
|
Available capital ($ billion)
|
33.1
|
14.0
|
27.0
|
13.5
|
Group minimum capital requirement (GMCR) ($ billion)
|
9.5
|
4.5
|
7.6
|
3.8
|
LCSM surplus (over GMCR) ($ billion)
|
23.6
|
9.5
|
19.4
|
9.7
|
LCSM ratio (over GMCR) (%)
|
348%
|
309%
|
355%
|
356%
|
*The shareholder LCSM amounts exclude the available capital and
minimum capital requirements of the participating business in Hong
Kong, Singapore and Malaysia.
|
† Excludes M&G plc and includes $3.7 billion of
subordinated debt issued by Prudential plc that was transferred to
M&G plc on 18 October 2019.
|
Financing and liquidity
Net core structural borrowings of
shareholder financial businesses7
|
|
31 December 2019 $m
|
|
31 December 2018 $m
|
|
IFRS
basis
|
Mark-to-market value
|
EEV
basis
|
|
IFRS
basis
|
Mark-to-market value
|
EEV
basis
|
Subordinated debt substituted to M&G plc in 2019
|
-
|
-
|
-
|
|
3,718
|
82
|
3,800
|
Other core structural borrowings
|
5,594
|
633
|
6,227
|
|
6,043
|
151
|
6,194
|
Total borrowings of shareholder-financed businesses
|
5,594
|
633
|
6,227
|
|
9,761
|
233
|
9,994
|
Less: holding company cash and short-term investments
|
(2,207)
|
-
|
(2,207)
|
|
(4,121)
|
-
|
(4,121)
|
Net core structural borrowings of shareholder-financed
businesses
|
3,387
|
633
|
4,020
|
|
5,640
|
233
|
5,873
|
Gearing ratio*
|
15%
|
|
|
|
20%
|
|
|
* Net core structural borrowings as
proportion of IFRS shareholders' funds plus net debt, as set out in
note II of the Additional unaudited financial
information.
The total borrowings of the shareholder-financed businesses
decreased by $(4.2) billion, from $9.8 billion to $5.6 billion in
2019. This reflected the substitution of $4,161 million Tier 2
subordinated notes to M&G plc as part of the demerger
(including £300 million 3.875 per cent Tier 2 subordinated
notes issued in July 2019), and the redemption of £400 million
11.375 per cent Tier 2 subordinated notes in May 2019. The Group
had central cash resources of $2.2 billion at 31 December 2019 (31
December 2018: $4.1 billion), resulting in net core structural
borrowings of the shareholder-financed businesses of $3.4 billion
at end 2019 (2018: $5.6 billion).
In addition to its net core structural borrowings of
shareholder-financed businesses set out above, the Group has access
to funding via the medium-term note programme, the US shelf
programme (the platform for issuance of SEC registered bonds in the
US market), a commercial paper programme and committed revolving
credit facilities. All of these are available for general corporate
purposes.
Prudential plc has maintained a consistent presence as an issuer in
the commercial paper market for the past decade and had $520
million in issue at the year end (2018: $601 million).
As at 31 December 2019, the Group had a total of £2.0 billion
of undrawn committed facilities, expiring in 2024. Apart from
small drawdowns to test the process, these facilities have
never been drawn, and there were no amounts outstanding at 31
December 2019.
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.
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.
Cash remittances
|
|
|
|
Holding company
cash flow7
|
|
Actual exchange rate
|
|
2019* $m
|
2018* $m
|
Change %
|
From continuing operations
|
|
|
|
Asia
|
950
|
916
|
4
|
US
|
509
|
452
|
13
|
Other UK (including Prudential Capital)
|
6
|
49
|
(88)
|
Total net cash remitted from continuing operations
|
1,465
|
1,417
|
3
|
From discontinued operations
|
|
|
|
M&G plc
|
684
|
842
|
(19)
|
Net cash remitted by business units
|
2,149
|
2,259
|
(5)
|
Central outflows
|
(522)
|
(572)
|
|
Dividends paid
|
(1,634)
|
(1,662)
|
|
Other movements
|
(1,999)
|
1,153
|
|
Total holding company cash flow
|
(2,006)
|
1,178
|
|
Cash and short-term investments at beginning of year
|
4,121
|
3,063
|
|
Foreign exchange movements
|
92
|
(120)
|
|
Cash and short-term investments at end of year
|
2,207
|
4,121
|
|
*The holding company cash flow describes the movement in the cash
and short-term investments of the centrally managed group holding
companies.
Cash remitted to the Group from continuing operations in 2019
amounted to $1,465 million, included $950 million from Asia and
$509 million from the US. In addition, $684 million of remittances
were received pre-demerger from M&G plc (excluding the
$3,841 million pre-demerger dividend used to offset the payment due
to M&G plc in return for the substitution of
debt).
During 2019, the Group's holding company cash flow was managed in
sterling and significant remittances were hedged and recorded on
that basis. Growth rates are therefore distorted by the onwards
translation into US dollars for presentation purposes. If local
currency remittances in Asia had been translated directly into US
dollars8,
then the growth rate in Asia remittances year-on-year would have
been 8 per cent (compared with 4 per cent shown in the table
above). The dividend paid by the US in 2019 was $525 million (2018:
$450 million). From 1 January 2020, holding company cash flow will
be managed in US dollars and no such distortions will
occur.
Cash remittances were used to meet central costs of $(522) million,
pay dividends of $(1,634) million and meet other expenditure of
$(1,999) million. Corporate expenditure includes net interest paid
of $(527) million of which $(231) million relates to that expended
on debt substituted to M&G plc. Corporate expenditure is net of
receipts of $265 million in 2019 from tax received. The level of
tax receipts is expected to decline sharply in 2020, and then is
not expected to recur going forward given the demerger of UK
operations and the level of UK income which can be used to offset
central UK expenditure.
Other expenditure of $(1,999) million relates to amounts paid in
connection with the demerger and other corporate transactions in
the year, including the redemption of subordinated debt in the
first half of 2019. Further information is contained in note I(iii)
of the Additional unaudited financial information.
As highlighted in my report for the first half of 2019, holding
company cash was expected to reduce in the second half of 2019.
Cash and short-term investments totalled $2.2 billion at the
end of the year (2018: $4.1 billion on an actual exchange rate
basis), commensurate with the reduced size of the Group
post-demerger. 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.
Shareholders' funds
|
|
|
|
|
|
|
IFRS
|
|
EEV
|
|
2019 $m
|
2018 $m
|
|
2019 $m
|
2018 $m
|
Adjusted operating profit after tax and non-controlling interests
from continuing operations9
|
4,528
|
3,739
|
|
6,896
|
7,862
|
|
|
|
|
|
|
Profit after tax for the
year9
|
783
|
4,019
|
|
(645)
|
6,122
|
Exchange movements, net of related tax
|
2,943
|
(714)
|
|
666
|
(1,574)
|
Unrealised gains and losses on US fixed income securities
classified as available-for-sale
|
2,679
|
(1,446)
|
|
-
|
-
|
Demerger dividend in specie of M&G plc
|
(7,379)
|
-
|
|
(7,379)
|
-
|
Other dividends
|
(1,634)
|
(1,662)
|
|
(1,634)
|
(1,662)
|
Mark-to-market value movements on Jackson assets backing surplus
and required capital
|
-
|
-
|
|
206
|
(127)
|
Other
|
117
|
9
|
|
95
|
176
|
Net increase (decrease) in shareholders' funds
|
(2,491)
|
206
|
|
(8,691)
|
2,935
|
Shareholders' funds at beginning of the year
|
21,968
|
21,762
|
|
63,402
|
60,467
|
Shareholders' funds at end of the year
|
19,477
|
21,968
|
|
54,711
|
63,402
|
Shareholders' value per
share10,11
|
749¢
|
847¢
|
|
2,103¢
|
2,445¢
|
Group IFRS shareholders' funds in the 12 months to 31 December 2019
decreased by 11 per cent to $19.5 billion (31 December 2018:
$22.0 billion on an actual exchange rate basis)
principally as a result of the demerger of M&G plc which
reduced shareholders' funds by $(7.4) billion. Excluding this
effect, shareholders' funds increased by $4.9 billion primarily as
a result of profit after tax from continuing businesses of $1.9
billion, profit generated by M&G plc up to the date of demerger
of $1.3 billion and unrealised gains on fixed income securities of
Jackson of $2.7 billion following a decrease in US long-term
interest rates. These amounts were offset by dividends paid in the
year of $(1.6) billion.
The total return from continuing operations (including other
comprehensive income) on Group's closing shareholders' funds for
the year was 27 per cent12,
after excluding items arising from the demerger of $528 million
(being costs of undertaking the demerger and interest). The
demerger alters the size of the Group's shareholders' equity and
the nature of its operations, rendering a comparison with the prior
year return on shareholders' funds value
unrepresentative.
The Group's EEV basis shareholders' funds at 31 December 2019 was
$54.7 billion. This compares with $46.1 billion at 31 December
2018 if the $17.3 billion in respect of the UK & Europe
operations is excluded. The growth over the year is primarily
driven by EEV profit from continuing operations of $4.2 billion,
total inter-group dividends from M&G plc in the period before
demerger of $5.5 billion less external dividends of $(1.6) billion.
On a per share basis, the Group's embedded value at 31 December
2019 equated to 2,103 cents. More information on the Group's
EEV results are included in the segmental detail that
follows.
Free surplus generation from
continuing operations13
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 businesses, it equates
to post-tax adjusted operating profit for the year.
Operating free surplus generated from continuing operations before
the adjustments to reflect hedge modelling changes and
restructuring costs increased to $3.8 billion (2018: $3.5
billion1).
This was after $(1,158) million of investment in new business
(2018: $(946) million1).
Asia operating free surplus generation14 increased
by 13 per cent to $1,772 million in line with business growth,
higher asset management earnings and stable levels of new business
investment.
US operating free surplus generation before the 2019 hedge
modelling changes was $2,028 million (2018: $1,895 million) with
the increase from in-force business, including a one-off benefit
from the integration of the John Hancock business, offset by higher
new business investment. As part of the implementation of the
NAIC's changes to the US statutory reserve and capital framework
enhancements were made to the model used to allow for hedging
within US statutory reporting. As a consequence, the Group has
chosen to utilise this new model within its EEV results, resulting
in a $3.2 billion reduction in Jackson's EEV at the start of the
year and a subsequent fall in operating free surplus of $(903)
million from a lower expected transfer to net worth. Further
information is included in the US segmental discussion and in the
EEV basis results. After allowing for this effect and restructuring
costs, operating free surplus generation for the Group was down 16
per cent to $2,861 million.
Analysis of movement in free surplus
for insurance and asset management operations13
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
2019 $m
|
2018 $m
|
Change %
|
|
2018 $m
|
Change %
|
Operating free surplus generated before restructuring costs and US
EEV hedge modelling enhancements
|
3,800
|
3,458
|
10
|
|
3,462
|
10
|
Restructuring costs
|
(36)
|
(48)
|
25
|
|
(47)
|
23
|
Operating free surplus generated before US EEV hedge modelling
enhancements
|
3,764
|
3,410
|
10
|
|
3,415
|
10
|
Impact of 2019 US EEV hedge modelling enhancements
|
(903)
|
-
|
n/a
|
|
-
|
n/a
|
Operating free surplus generated
|
2,861
|
3,410
|
(16)
|
|
3,415
|
(16)
|
Non-operating (loss) profit
|
(568)
|
(1,649)
|
|
|
|
|
Net cash flows paid to parent company
|
(1,475)
|
(1,368)
|
|
|
|
|
Foreign exchange movements on foreign operations,
timing differences and other items
|
(172)
|
(991)
|
|
|
|
|
Total movement in free surplus from continuing
operations
|
646
|
(598)
|
|
|
|
|
Free surplus at 1 January from continuing operations
|
5,351
|
5,949
|
|
|
|
|
Free surplus at 31 December from continuing operations
|
5,997
|
5,351
|
|
|
|
|
|
|
|
|
|
|
|
Analysis of operating free surplus generated from in-force
life
business and asset management before restructuring
costs
and US EEV hedge modelling enhancements:
|
|
|
|
|
|
|
Asia
|
1,772
|
1,563
|
13
|
|
1,567
|
13
|
US
|
2,028
|
1,895
|
7
|
|
1,895
|
7
|
Total
|
3,800
|
3,458
|
10
|
|
3,462
|
10
|
Dividend
The Board has approved a 2019 second interim ordinary dividend of
25.97 cents per share, equivalent to the 19.60 pence per share
previously indicated in the demerger Circular.
The Board considers dividends to be an important component of total
shareholder return and adopted a progressive dividend policy for
the Group following the demerger. The level of dividend growth will
be determined after taking into account the Group's capital
generation capacity, financial prospects and investment
opportunities, as well as market conditions. The Group's 2020
dividend under the new progressive dividend policy will be
determined from a 2019 US dollar base of $958
million15 (36.84
cents per share), equivalent to the circa £750 million
previously disclosed in the Circular. This policy is expected to
result, over the medium term, in future central outflows ie
dividends, debt interest costs and other central expenses
(including central payments for bancassurance distribution
agreements and restructuring costs) net of tax recoverables, being
covered by remittances from business units.
The Board intends to maintain the Group's existing formulaic
approach to first interim dividends, which are calculated as
one-third of the previous year's full-year dividend.
Asia
Operational and financial highlights
Our 2019 Asia financial results reflect the benefits of our diverse
and well-positioned portfolio across the Asia region, the
resilience of the longer-term growth drivers in these markets, our
long-held prioritisation of high quality, recurring premium life
insurance business and focused execution on our key strategic
priorities.
This is reflected in diversified growth, with 10 markets expanding
new business profit and our Asia ex-Hong Kong businesses growing
new business profit by 29 per cent. Our earnings continue to be
supported by high quality drivers with a 14 per cent increase in
insurance margin, underpinned by our protection propositions for
customers, alongside 18 per cent growth in asset management
earnings, helped by a 15 per cent increase in average funds under
management. This led to a 14 per cent increase in overall Asia
adjusted operating profit with eight insurance markets delivering
double-digit growth. These drivers are also reflected in the
EEV operating profit of $6,138 million (2018: $6,052
million1),
driving a 23 per cent increase in embedded value to $39.2 billion.
At the same time, a 13 per cent increase in operating free surplus
generation14 supported
a higher cash remittance of $950 million for the
year.
|
Actual exchange rate
|
|
Constant exchange rate
|
|
2019 $m
|
2018 $m
|
Change %
|
|
2018 $m
|
Change %
|
New business profit
|
3,522
|
3,477
|
1
|
|
3,460
|
2
|
Adjusted operating profit*
|
3,276
|
2,888
|
13
|
|
2,872
|
14
|
EEV operating profit*
|
6,138
|
6,070
|
1
|
|
6,052
|
1
|
Operating free surplus generation*
|
1,772
|
1,563
|
13
|
|
1,567
|
13
|
*Before restructuring costs
New business performance
Life EEV new business profit and APE new business sales (APE
sales)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
2019 $m
|
2018 $m
|
Change %
|
|
2018 $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
|
2,016
|
2,042
|
2,266
|
2,309
|
(11)
|
(12)
|
|
2,268
|
2,310
|
(11)
|
(12)
|
China JV
|
590
|
262
|
403
|
199
|
46
|
32
|
|
386
|
190
|
53
|
38
|
Indonesia
|
390
|
227
|
315
|
163
|
24
|
39
|
|
316
|
163
|
23
|
39
|
Other life insurance markets
|
2,165
|
991
|
2,015
|
806
|
7
|
23
|
|
1,989
|
797
|
9
|
24
|
Total Asia
|
5,161
|
3,522
|
4,999
|
3,477
|
3
|
1
|
|
4,959
|
3,460
|
4
|
2
|
Total Asia excluding Hong Kong
|
3,145
|
1,480
|
2,733
|
1,168
|
15
|
27
|
|
2,691
|
1,150
|
17
|
29
|
Total new business margin
|
|
68%
|
|
70%
|
|
|
|
|
70%
|
|
|
Life insurance new business APE sales increased by 4 per cent to $5,161 million
and related new business profit increased by 2 per cent with eight
markets achieving double-digit growth in new business
profit.
Lower levels of APE sales and new business profit in Hong Kong
(down 11 and 12 per cent respectively) were more than offset by
higher overall APE sales and new business profit in markets outside
Hong Kong (up 17 and 29 per cent respectively). Our Asia ex-Hong
Kong businesses accelerated strongly, as new APE sales growth
steadily increased throughout the year, with 11 per cent growth in
the first quarter rising to 26 per cent growth in the fourth
quarter.
We continue to favour health and protection products due to their
resilience to market cycles and superior margins. Collectively,
such products achieved new business profit growth of more than 20
per cent outside Hong Kong and produced 67 per cent of our overall
Asia new business profit in 2019. This also contributed to our high
mix of regular premiums, which comprised 93 per cent of our APE
sales in 2019.
Our partnerships also made encouraging progress last year. The
bancassurance channel achieved APE sales growth of 14 per cent,
with particularly strong performances in our China joint venture
and Vietnam and 24 per cent growth from UOB following the renewal
of the strategic partnership at the beginning of the
year.
In Hong
Kong, our domestic business was
resilient with new product launches and focused management actions
leading to an 8 per cent increase in local APE sales. This was
supported by strong take-up of our new qualified deferred annuity
product which accounted for 11 per cent of our Hong Kong APE sales
since its launch on 1 April 2019 as well as our VHIS plans, both of
which are eligible for tax incentives that were newly introduced by
the government. Our Hong Kong life insurance business serves the
health and savings needs of both domestic as well as visiting
mainland Chinese consumers. The social unrest drove a decline in
mainland Chinese visitors in the second half of 2019 inhibiting
sales to this segment which led to a 41 per cent reduction in
related APE sales compared with the second half of 2018, and to a
21 per cent reduction in APE sales over the year as a whole.
Overall Hong Kong APE sales and new business profit were 11 and 12
per cent lower respectively.
In our China JV, APE sales were 53 per cent higher at $590
million. This growth reflects a strong performance by both our
agency and bancassurance channels with the latter reflecting the
success of our strategy to drive increased branch activation.
Higher volumes helped deliver an increase in new business profit by
38 per cent.
In Indonesia, the benefits of a recent restructuring of our
agency channel and successful new product launches supported a 23
per cent increase in APE sales and this growth accelerated to 41
per cent in the second half from 4 per cent in the first half. The
39 per cent increase in new business profit reflected the benefit
of increased volumes, as well as operational improvements from new
product launches in the year.
The broad-based performance of our other life insurance markets led
to a 9 per cent increase in related new sales, with particularly
strong growth in the Philippines (34 per cent higher), while shifting towards
higher-margin health and protection products. The 24 per cent
increase in new business profit contribution from our other life
markets is driven by higher new sales volumes, favourable
assumption changes and modelling enhancements.
EEV basis results
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
2019 $m
|
2018 $m
|
Change %
|
|
2018 $m
|
Change %
|
New business profit
|
3,522
|
3,477
|
1
|
|
3,460
|
2
|
Business in force
|
2,366
|
2,381
|
(1)
|
|
2,383
|
(1)
|
Operating profit from long-term business
|
5,888
|
5,858
|
1
|
|
5,843
|
1
|
Asset management
|
250
|
212
|
18
|
|
209
|
20
|
Operating profit from long-term business and asset management
before restructuring costs
|
6,138
|
6,070
|
1
|
|
6,052
|
1
|
Restructuring costs
|
(31)
|
(25)
|
(24)
|
|
(24)
|
(29)
|
Non-operating profit (loss)
|
1,962
|
(1,235)
|
259
|
|
(1,232)
|
259
|
Profit for the year
|
8,069
|
4,810
|
68
|
|
4,796
|
68
|
|
|
|
|
|
|
|
Other movements
|
(842)
|
(1,681)
|
|
|
|
|
Net increase (decrease) in embedded value
|
7,227
|
3,129
|
|
|
|
|
Embedded value at 1 January
|
32,008
|
28,879
|
|
|
|
|
Embedded value at 31 December
|
39,235
|
32,008
|
|
|
|
|
% New business profit / closing embedded value
|
9%
|
11%
|
|
|
|
|
% Operating profit / closing embedded value
|
16%
|
19%
|
|
|
|
|
Asia EEV operating profit increased marginally compared with the
prior period to $6,138 million (2018: $6,052
million1),
driven by the 2 per cent increase in life new business profit,
balanced by a 1 per cent reduction in the contribution from
in-force life business.
The development of the in-force life result of $2,366 million
(2018: $2,383 million1)
reflects a 4 per cent reduction in the expected return, partly
offset by higher, favourable operating assumption changes and
experience development. Under our active EEV assumption framework,
the lower expected return is a function of lower period end
interest rates leading to lower period end risk discount rates.
These lower risk discount rates are applied to the opening embedded
value in this analysis, and result in a lower expected return
compared with the prior period, only partly offset by a higher
starting embedded value position. Operating assumption and
experience developments were positive at $824 million (2018: $769
million1)
and are driven by favourable persistency and mortality/morbidity
effects among other factors, and again reflect the high quality of
our in-force life business.
The asset management segment operating profit after tax increased
by 20 per cent to $250 million (2018: $209
million1),
which is discussed in more detail below.
Non-operating profit was $1,962 million (2018: $(1,232)
million1),
mainly reflecting higher than assumed equity and fixed income
returns in the period, partly offset by the effect of lower period
end interest rates leading to a reduction in future assumed
investment returns, among other factors.
Overall Asia segment embedded value increased by 23 per cent to
$39.2 billion (2018: $32.0 billion). Of this, $37.8 billion (2018:
$31.0 billion) relates to the value of the long-term business. The
remainder represents Asia asset management and goodwill which are
carried at IFRS net asset value under the EEV
framework.
Asia analysis of movement in free
surplus13
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
2019 $m
|
2018 $m
|
Change %
|
|
2018 $m
|
Change %
|
Operating free surplus generated from in-force life
business
and asset management before restructuring costs
|
2,391
|
2,215
|
8
|
|
2,213
|
8
|
Investment in new business
|
(619)
|
(652)
|
5
|
|
(646)
|
4
|
Operating free surplus generated before restructuring
costs
|
1,772
|
1,563
|
13
|
|
1,567
|
13
|
Restructuring costs
|
(31)
|
(25)
|
(24)
|
|
(24)
|
(29)
|
Operating free surplus generated
|
1,741
|
1,538
|
13
|
|
1,543
|
13
|
Non-operating (loss) profit
|
1,195
|
(525)
|
|
|
|
|
Net cash flows paid to parent company
|
(950)
|
(916)
|
|
|
|
|
Foreign exchange movements on foreign operations, timing
differences and other items
|
(357)
|
(847)
|
|
|
|
|
Total movement in free surplus
|
1,629
|
(750)
|
|
|
|
|
Free surplus at 1 January
|
2,591
|
3,341
|
|
|
|
|
Free surplus at 31 December
|
4,220
|
2,591
|
|
|
|
|
Overall Asia operating free surplus generated14,
after investment in new business, was $1,772 million, an increase
of 13 per cent compared with the prior period, driven by higher
in-force generation and a lower level of investment in new
business. The 8 per cent increase in the in-force return reflects
growth in the in-force life portfolio, favourable operating
experience effects and strong growth in asset management earnings,
which more than offsets less favourable economic effects. The level
of investment in new business reduced by 4 per cent, despite higher
new sales, and reflects the net impact of assumption changes and
various country and business mix effects. In turn, this growth in
operating free surplus generation supported an increased net cash
remittance of $950 million for the year (2018: $916 million).
Non-operating profit of $1,195 million mainly relates to the net
effect of bond and equity gains across most Asia
markets.
Local statutory capital
We maintained a resilient balance sheet with a robust shareholder
LCSM surplus of $4.7 billion and coverage ratio of 253 per cent at
31 December 2019 (31 December 2018: $3.6 billion and 244 per cent)
supported by our expertise in risk management and a conservative
approach to credit risk. We seek to safeguard our business from
market volatility through our strong focus on protection products
and our prudent asset and liability management strategy, which
continues to be well-matched by both currency and duration. This is
demonstrated by the relatively low sensitivity of our new business
profit and our embedded value to a wide range of capital market
fluctuations.
IFRS earnings
Overall, Asia adjusted operating profit increased by 14 per cent to
$3,276 million, with life insurance earnings up 14 per cent and
asset management earnings up 18 per cent. Our Asia life
insurance earnings growth is broad-based and at scale, reflecting
the benefits of our focus on high quality recurring premium
business and well diversified business portfolio. 86 per
cent16 of
our total life income (excluding other income described below)
arises from insurance margin and fee income, again supporting
stable profit progression across market cycles.
Overall, eight insurance markets reported double-digit growth, with
five delivering growth of 20 per cent or more. Six markets
delivered annual adjusted operating profit of above $200 million
and three in the region of $500 million or higher. At a market
level, highlights include Hong Kong (up 24 per cent) driven by the
high quality of its in-force growth, China JV (up 20 per cent),
Vietnam (up 20 per cent) and the Philippines (up 26 per cent).
Adjusted operating profit in Indonesia of $540 million remains at a
high level, but was 3 per cent below the prior period.
Profit margin analysis of Asia
long-term insurance and asset management
operations17
|
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
2019
|
2018
|
|
2018
|
|
|
Margin
|
|
Margin
|
|
|
Margin
|
|
$m
|
bps
|
$m
|
bps
|
|
$m
|
bps
|
Spread income
|
321
|
108
|
310
|
125
|
|
305
|
124
|
Fee income
|
286
|
105
|
280
|
106
|
|
277
|
106
|
With-profits
|
107
|
18
|
95
|
20
|
|
94
|
20
|
Insurance margin
|
2,244
|
|
1,978
|
|
|
1,966
|
|
Other income
|
3,229
|
|
2,982
|
|
|
2,962
|
|
Total life income
|
6,187
|
|
5,645
|
|
|
5,604
|
|
Expenses:
|
|
|
|
|
|
|
|
Acquisition
costs
|
(2,156)
|
(42)%
|
(2,007)
|
(40)%
|
|
(1,991)
|
(40)%
|
Administration
expenses
|
(1,437)
|
(252)
|
(1,374)
|
(269)
|
|
(1,359)
|
(268)
|
DAC
adjustments
|
430
|
|
435
|
|
|
430
|
|
Share of related tax charges from joint ventures and
associates
|
(31)
|
|
(53)
|
|
|
(51)
|
|
Long-term insurance business pre-tax adjusted operating
profit
|
2,993
|
|
2,646
|
|
|
2,633
|
|
Eastspring
|
283
|
|
242
|
|
|
239
|
|
Adjusted operating profit from long-term business and asset
management before restructuring costs
|
3,276
|
|
2,888
|
|
|
2,872
|
|
Tax charge
|
(436)
|
|
(411)
|
|
|
(408)
|
|
Adjusted operating profit after tax for the year before
restructuring costs
|
2,840
|
|
2,477
|
|
|
2,464
|
|
Non-operating profit after tax
|
885
|
|
(662)
|
|
|
(665)
|
|
Profit for the year after tax before restructuring
costs
|
3,725
|
|
1,815
|
|
|
1,799
|
|
Our earnings continue to be based on high-quality drivers. The
overall 14 per cent growth in Asia life insurance adjusted
operating profit to $2,993 million (2018: $2,633
million1)
was driven principally by 14 per cent growth in insurance margin
related revenues and reflects our ongoing focus on recurring
premium health and protection products and the associated continued
growth of our in-force business. Renewal
premiums10,
reflecting the long-term nature of our insurance business, grew 12
per cent.
Fee income increased by three per cent, broadly in line with the
increase in average unit-linked liabilities, while spread income
rose by five per cent given changes in product and geographical mix
and lower interest rates in the period.
With-profits earnings relate principally to the shareholders' share
in bonuses declared to policyholders. As these bonuses are
typically weighted to the end of a contract, under IFRS,
with-profit earnings consequently emerge only gradually over time.
The 14 per cent 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 9
per cent increase in margin on revenues largely reflects ongoing
business growth and the associated continued growth in overall
premiums received. Acquisition costs borne by shareholders
increased by 8 per cent in relation to a 4 per cent increase in
overall APE sales. The ratio of shareholder acquisition costs to
shareholder related APE sales (excluding with-profits related
sales) reduced to 66 per cent (2018: 69 per cent on an actual
exchange rate) as a result of changes in product mix.
Administration expenses, including renewal commissions, increased
by 6 per cent reflecting ongoing business growth.
Asset Management
|
Actual exchange rate
|
|
2019 $m
|
2018 $m
|
Change %
|
Total external net flows
|
8,909
|
(2,118)
|
n/a
|
|
|
|
|
External funds under management ($bn)
|
124.7
|
77.8
|
60
|
Internal funds under management ($bn)
|
116.4
|
114.9
|
1
|
Total funds under management ($bn)
|
241.1
|
192.7
|
25
|
|
|
|
|
Analysis of adjusted operating profit
|
|
|
|
Retail operating income
|
392
|
336
|
17
|
Institutional operating income
|
244
|
230
|
6
|
Operating income before performance related fees
|
636
|
566
|
12
|
Performance-related fees
|
12
|
23
|
(48)
|
Operating income (net of commission)
|
648
|
589
|
10
|
Operating expense
|
(329)
|
(311)
|
(6)
|
Group's share of tax on joint ventures' adjusted operating
profit
|
(36)
|
(36)
|
-
|
Adjusted operating profit
|
283
|
242
|
17
|
Adjusted operating profit post-tax
|
250
|
212
|
18
|
|
|
|
|
Average funds managed by Eastspring
|
$214.0bn
|
$186.3bn
|
15
|
Margin based on operating income
|
30bps
|
30bps
|
-
|
Cost/income ratio10
|
52%
|
55%
|
(3)ppts
|
Eastspring delivered a strong performance in 2019 reflecting
positive operating momentum and the benefit of recent acquisitions.
Overall funds under management of $241.1 billion and adjusted
operating profit of $283 million, are at record
levels.
The increase in external funds under management to $124.7 billion
(2018: $77.8 billion) reflected $8.9 billion18 (2018: $(2.1)
billion18) in positive third-party net flows, favourable market
performance and $7.5 billion from the TFUND acquisition in December
2019. In addition, following the demerger of M&G plc, $26.7
billion of M&G related assets have been reclassified to
external from internal funds under management.
Third party net inflows were positive in both retail and
institutional products and across both equity and fixed income
funds, reflecting the benefit of new products and mandates. Overall
funds under management were also supported by continued positive
internal net flows resulting in total funds under management of
$241.1 billion at year end (2018: $192.7 billion on an actual
exchange rate basis).
An increase in average funds managed by Eastspring of 15 per cent2
resulted in adjusted operating profit rising by 18 per cent (up 17
per cent on an actual exchange rate basis) to $283 million and
growth in operating income of 10 per cent2. Disciplined cost
management has led to an improvement in its cost-income ratio10 to
52 per cent (2018: 55 per cent on an actual exchange rate basis),
with operating expenses increasing at a slower rate of 8 per cent
(6 per cent on an actual exchange rate basis).
Return on segment equity
Asia return on closing IFRS shareholders' funds
|
|
|
|
|
2019
|
2018
|
Operating return on closing shareholders' funds (%)
|
26
|
30
|
Total comprehensive return on closing shareholders' funds
(%)
|
36
|
20
|
The benefit of our focus on profitable and capital efficient health
and protection, with-profit and asset management businesses is
evident in the attractive 26 per cent (2018: 30 per cent) return
delivered on closing segment equity over 2019.
United States
Operational and financial highlights
The financial performance of the US business in the period reflects
the impact of the execution of the first steps of its
strategic diversification together with the varying financial
effects of strong US equity market performance and lower interest
rates in the period. We have decided to adopt early as at 31
December 2019 the new National Association of Insurance
Commissioners (NAIC) capital rules related to variable annuities
and have made consequential updates to our EEV basis results. All
of the results below reflect the whole US segment, except for the
discussion on local statutory capital which covers Jackson National
Life only.
|
2019 $m
|
2018 $m
|
Change %
|
New business profit
|
883
|
1,230
|
(28)
|
Adjusted operating profit*
|
3,070
|
2,563
|
20
|
EEV operating profit*
|
1,782
|
2,828
|
(37)
|
Jackson RBC ratio (%)
|
366
|
458
|
(92) ppts
|
*Before restructuring costs
New business performance
Life EEV new business profit and APE new business sales (APE
sales)
|
|
|
|
|
|
2019 $m
|
2018 $m
|
Change %
|
Variable annuities
|
1,270
|
1,443
|
(12)
|
Elite Access (variable annuity)
|
200
|
225
|
(11)
|
Fixed annuities
|
119
|
46
|
159
|
Fixed index annuities
|
382
|
33
|
1,058
|
Wholesale
|
252
|
312
|
(19)
|
Total APE sales
|
2,223
|
2,059
|
8
|
% APE variable annuities
|
66
|
81
|
(15)
|
% APE other products
|
34
|
19
|
15
|
Total new business profit
|
883
|
1,230
|
(28)
|
New business margin
|
40%
|
60%
|
|
Overall new US APE sales increased to $2,223 million (2018: $2,059
million), with the proportion of general account products (fixed
annuities, fixed index annuities and wholesale business) at 34 per
cent (2018: 19 per cent) of new sales reflecting our intention to
diversify our product mix over time to balance the overall risk
profile of Jackson better. This was supported by new product
launches and additional distribution initiatives. New business
profit was lower at $883 million (2018: $1,230 million). Of this
$(347) million reduction, $(155) million is a result of lower
interest rates and other changes in economic assumptions compared
with the prior period. The remainder reflects the change in product
mix and other assumption change impacts.
Movement in policyholder liabilities
|
|
2019 $m
|
2018 $m
|
|
Separate account liabilities
|
General account and other liabilities
|
Separate account liabilities
|
General account and other liabilities
|
At 1 January
|
163,301
|
73,079
|
176,578
|
67,905
|
Premiums
|
12,776
|
8,200
|
14,646
|
3,967
|
Surrenders
|
(12,767)
|
(4,575)
|
(11,746)
|
(4,465)
|
Maturities/deaths
|
(1,564)
|
(1,823)
|
(1,449)
|
(1,238)
|
Net flows
|
(1,555)
|
1,802
|
1,451
|
(1,736)
|
Addition for closed block of group pay-out annuities in the
US
|
-
|
-
|
-
|
5,532
|
Transfers from general to separate account
|
951
|
(951)
|
708
|
(708)
|
Investment-related items and other movements
|
32,373
|
549
|
(15,436)
|
2,086
|
At 31 December
|
195,070
|
74,479
|
163,301
|
73,079
|
Overall US net flows were $0.2 billion over the year (2018: $(0.3)
billion). Separate account net flows were negative at $(1.6)
billion (2018: positive $1.5 billion), reflecting lower new sales
of variable annuities in the period and expected higher levels of
surrenders as the in-force book develops. Investment related
movements reflect favourable investment performance driven by
strong capital market returns. General account net flows were $1.8
billion (2018: $(1.7) billion), driven by higher new sales in the
period. Total year-end policyholder liabilities were $269.5 billion
(2018: $236.4 billion), with separate account liabilities at $195.1
billion and general account and other liabilities at $74.5
billion.
IFRS earnings
Profit margin analysis of US long-term
insurance and asset management operations17
|
|
|
|
2019
|
2018
|
|
|
Margin
|
|
Margin
|
|
$m
|
bps
|
$m
|
bps
|
Spread income
|
642
|
112
|
778
|
155
|
Fee income
|
3,292
|
182
|
3,265
|
183
|
Insurance margin
|
1,317
|
|
1,267
|
|
Other income
|
26
|
|
14
|
|
Total life income
|
5,277
|
|
5,324
|
|
Expenses:
|
|
|
|
|
Acquisition
costs
|
(1,074)
|
(48)%
|
(1,013)
|
(49)%
|
Administration
expenses
|
(1,675)
|
(68)
|
(1,607)
|
(69)
|
DAC
adjustments
|
510
|
|
(152)
|
|
Long-term insurance business pre-tax adjusted operating
profit
|
3,038
|
|
2,552
|
|
Asset management
|
32
|
|
11
|
|
Adjusted operating profit from long-term business and asset
management before restructuring costs
|
3,070
|
|
2,563
|
|
Tax charge
|
(437)
|
|
(402)
|
|
Adjusted operating profit after tax for the year before
restructuring costs
|
2,633
|
|
2,161
|
|
Non-operating profit after tax
|
(3,013)
|
|
(179)
|
|
(Loss) profit for the year after tax before restructuring
costs
|
(380)
|
|
1,982
|
|
Adjusted operating profit
US long-term adjusted operating profit was $3,038 million (2018:
$2,552 million), and reflects the benefit of favourable
market-related DAC adjustments in the period compared with
unfavourable DAC adjustments in the prior period.
Fee income was marginally higher compared with the prior period,
with the benefit of a 2 per cent increase in average separate
account balances largely offset by a modest decline in the average
fee margin17.
Spread income declined to $642 million (2018: $778 million)
reflecting the combination of lower core spread income and lower
income derived from swaps held for duration management purposes.
The development of the core spread income was driven by the effect
of lower invested asset yields and the full consolidation of the
assets acquired with the John Hancock transaction towards the end
of 2018, resulting in a reduction in the spread margin to 112 basis
points (2018: 155 basis points).
Insurance margin primarily represents income from variable annuity
guarantees and profits from legacy life businesses. This increased
by 4 per cent to $1,317 million (2018: $1,267 million) mainly as a
result of higher income from variable annuity
guarantees.
Acquisition costs increased by 6 per cent, broadly in line with the
8 per cent increase in new APE sales. Administrative expenses
increased from $(1,607) million in 2018 to $(1,675) million in
2019, primarily as a result of higher asset-based commissions.
Excluding these asset-based commissions, the resulting
administration expense ratio would be 33 basis points (2018: 34
basis points).
DAC adjustments, being the cost deferred on sales in the period net
of amortisation of amounts deferred previously, of $510 million
(2018: $(152) million) were favourable compared with the prior
period, in part due to higher sales in the period. Over 2019,
strong capital market returns resulted in a separate account
investment performance materially in excess of that assumed within
the DAC mean reversion formula which led to a favourable DAC
deceleration effect of $280 million (2018: unfavourable DAC
acceleration effect of $(259) million).
Non-operating items
The non-operating result was negative $(3,795) million pre-tax
(2018: negative $(241) million pre-tax) and contributed to a net
loss after tax of $(380) million (2018: net income $1,982
million).
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. Under IFRS, accounting for the
movement in the valuation of these derivatives, which are all fair
valued, is asymmetrical to the movement in guarantee liabilities,
which are not fair valued in all cases. Jackson designs its hedge
programme to protect the economics of the business from large
movements in investment markets and accepts the variability in
accounting results. Non-operating losses of $(3,795) million in the
year mainly reflect the effect of lower interest rates on guarantee
liabilities and the impact of higher equity markets on both
guarantee liabilities and associated derivatives given that the
S&P 500 index ended the year 28.9 per cent higher than at the
start of the year. While the resulting negative mark-to-market
movements on these hedging instruments are recorded in the current
year, the related increases in fee income that arise from the
higher asset values managed, will be recognised and reported in
future years.
In addition to the effects seen above, falling interest rates
resulted in gains of $2.7 billion being recognised outside the
income statement on bonds held by Jackson's general account. In
total, Jackson's segment shareholders' funds increased to $8,929
million (2018: $7,163 million).
EEV basis results
|
|
|
2019 $m
|
2018 $m
|
Change %
|
New business profit
|
883
|
1,230
|
(28)
|
Business in force
|
874
|
1,594
|
(45)
|
Operating profit from long-term business
|
1,757
|
2,824
|
(38)
|
Asset management
|
25
|
4
|
525
|
Operating profit from long-term business and asset management
before restructuring costs
|
1,782
|
2,828
|
(37)
|
Restructuring costs
|
(5)
|
(23)
|
78
|
Non-operating loss
|
(3,802)
|
(1,695)
|
(124)
|
Profit for the year
|
(2,025)
|
1,110
|
(282)
|
|
|
|
|
Other movements (including dividends)
|
(342)
|
(654)
|
|
Net increase (decrease) in embedded value
|
(2,367)
|
456
|
|
Embedded value at 1 January
|
18,709
|
18,253
|
|
Embedded value at 31 December
|
16,342
|
18,709
|
|
% New business profit / closing embedded value
|
5%
|
7%
|
|
% Operating profit / closing embedded value
|
11%
|
15%
|
|
EEV operating profit from the long-term business reduced to $1,757
million (2018: $2,824 million) reflecting lower new business profit
in the period and a reduction in the level of expected return on
business in force.
During 2019, following the implementation of the NAIC's changes to
the US statutory reserve and capital framework, enhancements were
made to the model used to allow for hedging within US
statutory reporting. As a consequence, the Group has chosen to
utilise the model for its EEV reporting to update its allowance for
the long-term cost of hedging, resulting in a $(3,233) million
reduction in Jackson's EEV at the start of the year.
The reduction in expected return from business in force reflects
lower period end interest rates which reduce the expected unwind,
and a lower starting balance of EEV shareholders' funds compared
with the prior period. This is a function of weak equity markets in
the fourth quarter of 2018, and the adoption of a new hedge model
as discussed above.
The EEV non-operating loss of $(3,802) million mainly includes
negative $(3,233) million from the adoption of the new hedging
model (as discussed above), and negative $(1,201) million from
economic effects, offset by positive $876 million from favourable
investment movements.
The investment return variances are driven by the benefit of strong
capital market performance in the period leading to separate
account returns materially in excess of those assumed, more than
offsetting hedging losses on instruments held for risk management
purposes.
Economic assumption changes of $(1,201) million largely reflect the
impact of lower interest rates in the period on the projected
future fund growth rates for the variable annuity business. These
projected lower growth rates reduce the expected growth in fund
values for policyholders and hence the expected profitability for
shareholders.
Overall segment embedded value ended the year at $16.3 billion
(2018: $18.7 billion).
US analysis of movement in free
surplus13
|
|
|
|
2019 $m
|
2018 $m
|
Change %
|
Operating free surplus generated from in-force life business and
asset management before restructuring costs and EEV hedge modelling
enhancements
|
2,567
|
2,195
|
17
|
Investment in new business
|
(539)
|
(300)
|
(80)
|
Operating free surplus generated before restructuring costs and EEV
hedge modelling enhancements
|
2,028
|
1,895
|
7
|
Restructuring costs
|
(5)
|
(23)
|
78
|
Operating free surplus generated before EEV hedge modelling
enhancements
|
2,023
|
1,872
|
8
|
Impact of 2019 EEV hedge modelling enhancements
|
(903)
|
-
|
-
|
Operating free surplus generated
|
1,120
|
1,872
|
(40)
|
Non-operating (loss) profit
|
(1,763)
|
(1,124)
|
|
Net flows paid to parent company
|
(525)
|
(452)
|
|
Timing differences and other items
|
185
|
(144)
|
|
Total movement in free surplus
|
(983)
|
152
|
|
Free surplus at 1 January
|
2,760
|
2,608
|
|
Free surplus at 31 December
|
1,777
|
2,760
|
|
The US in-force business generated $2,567 million (2018:
$2,195 million) prior to allowing for the change to the allowance
for hedging costs discussed above. This included a $355 million
benefit following the integration of the John Hancock business
acquired in 2018. Offsetting this increase was a higher investment
in new business (up 80 per cent to $(539) million). The
increase in investment in new business to $(539) million
(2018: $(300) million) is a function of a higher weight of general
account new sales in the period.
Operating free surplus generated14 after
allowing for the impact of changes to hedge modelling was $1,120
million.
Non-operating assumptions and variances related to free
surplus development were $(1,763) million (2018: $(1,124)
million) and reflect higher losses on hedge instruments compared
with those assumed under the new basis. Circa $395 million of these
hedge losses were incurred in managing the risk profile of the
business as Jackson transitioned from the previous US statutory and
reserving framework to the new framework following updates made by
the NAIC which is further discussed below.
Local statutory capital - Jackson National Life
(Jackson)
Jackson applies the US statutory reserve and capital framework
required by the NAIC and adopted the NAIC's changes to this
framework for variable annuities with effect from 31 December
2019. This new capital methodology incorporates a unified
approach to reserving and required capital determination. In
addition, with effect from 1 October 2019, Jackson chose not to
renew its long-standing permitted practice to exclude unrealised
gains on certain derivative instruments taken out to protect
Jackson against declines in long-term interest rates.
After adopting this new regime, the surplus of available capital
over required capital (set at 100 per cent of the Company Action
Level) was $3,795 million. This equated to a risk-based capital
ratio of 366 per cent (2018: 458 per cent using the previous NAIC
framework). An analysis of the estimated movement in Jackson's
risk-based capital position over 2019 is set out below. Jackson
continues to remain within its existing risk appetite and expects
the new capital regime to result in a more stable RBC ratio than
under the previous regime, in low interest rate
scenarios.
|
Total available capital
|
Required capital
|
Surplus
|
Ratio
|
|
$m
|
$m
|
$m
|
%
|
1 January 2019
|
5,519
|
1,204
|
4,315
|
458
|
Capital generation from new business written during
2019
|
119
|
263
|
(144)
|
(75)
|
Operating capital generation from business in force at 1 January
2019*
|
1,406
|
(125)
|
1,531
|
141
|
Operating capital generation
|
1,525
|
138
|
1,387
|
66
|
Adoption of NAIC reforms (see above)
|
279
|
137
|
142
|
(17)
|
Other non-operating movements, including market effects and removal
of the permitted practice
|
(1,577)
|
(53)
|
(1,524)
|
(104)
|
Dividends paid
|
(525)
|
-
|
(525)
|
(37)
|
31 December 2019
|
5,221
|
1,426
|
3,795
|
366
|
*Includes operating experience variances and the impact of John
Hancock
Over the period, statutory operating capital generation of $1.4
billion increased the RBC ratio by 66 percentage points, comprising
118 percentage points ($1.2 billion) from in-force capital
generation, reduced by 75 percentage points ($(0.1) billion) for
the capital strain of writing new business, and 23 percentage
points ($0.3 billion) of one-off benefits related to the recent
John Hancock acquisition. In line with the product diversification
strategy previously outlined and Jackson's accelerated sales growth
of fixed index and new fixed annuity products, the capital strain
from selling non-VA products was 64 percentage points of the total
75 percentage points of new business strain.
Non-operating and other capital movements reduced the RBC ratio by
121 percentage points ($(1.4) billion) due to:
● adoption of the new capital regime at 31 December
2019, resulting in a one-off reduction in the RBC ratio of 17
percentage points;
● one-off hedge losses in respect of managing
through the changeover to the new regime representing a 28
percentage point fall in the RBC ratio;
● an increase in deferred tax assets not admitted as
statutory capital, which reduced the RBC ratio by 26 percentage
points, bringing the total non-admitted DTA to $0.9 billion at 31
December 2019. $0.5 billion of this non-admitted DTA balance
relates to hedge losses incurred in 2019 which are required to be
spread over three years for tax purposes and so is
expected to be carried forward to be deducted from Jackson's
taxable income in the next two years; and
● other non-operating items that reduced the RBC
ratio by 50 percentage points, primarily representing variable
annuity net hedge losses in the period given asymmetries between
the statutory accounting basis and the economics hedged by
Jackson.
During 2019 Jackson remitted $(525) million to Prudential,
representing around half of Jackson's operating capital generation
in the period (excluding John Hancock effects), which reduced the
RBC ratio by 37 percentage points. As previously announced, from
2020 Jackson's remittances are expected to be more evenly spread
over the calendar year than in prior periods.
In respect of the previously noted ongoing NAIC review of the C-1
bond factors in the required capital calculation, the expected
implementation has been delayed to 2021 or thereafter. After
adoption of the new capital regime, the estimated reduction in RBC
ratio under the current proposal is circa 10 to 20
points.
Return on segment equity
US return on closing IFRS shareholders' funds.
|
|
|
|
|
2019
|
2018
|
Operating return on closing shareholders' funds (%)
|
29
|
30
|
Total comprehensive return on closing shareholders' funds
(%)
|
26
|
7
|
The US operating return on segment equity was 29 per cent (2018: 30
per cent). The total comprehensive return on segment equity,
including non-operating and other comprehensive income movements,
described above, was 26 per cent (2018: 7 per cent).
Notes
1
On a constant exchange rate basis.
2 On
an actual exchange rate basis.
3
As compared with 2018 and before a planned $10 million increase in
Africa costs as business grows.
4
Approximately half of the corporate expenditure is incurred in
sterling and our assumptions forecast an exchange rate of
£1=$1.2599.
5
From 1 January 2021.
6 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.
7
Net cash remitted by business units are included in the holding
company cash flow, which is disclosed in detail in note I(iii) of
the Additional unaudited financial information. This comprises
dividends and other transfers from business units that are
reflective of emerging earnings and capital
generation.
8 Using
the relevant month-end spot rate.
9 Excluding
profit for the year attributable to non-controlling
interests.
10 See
note II of the Additional unaudited financial information for
definition and reconciliation to IFRS balances.
11 For
EEV shareholders' value per share, see note II(x) of the Additional
unaudited financial information.
12
See note I(iii) of the Additional unaudited financial information
for the basis of calculation.
13 For
insurance operations, operating free surplus generated represents
amounts maturing from the in-force business during the period less
investment in new business and excludes non-operating items. For
asset management businesses, it equates to post-tax operating
profit for the period. Restructuring costs are presented separately
from the operating business unit amount. Further information is set
out in note 11 of the EEV basis results.
14 Operating
free surplus generated before restructuring costs.
15
The pro forma dividend for 2019 of the $958 million represents the
first interim ordinary dividend paid of $528 million (£428
million based on spot exchange rate at the payment date) plus the
second interim ordinary dividend of $675 million (£510 million
based on spot rate at 31 December 2019) less the contribution of
remittances from the discontinued M&G plc business to the
second interim ordinary dividend of $245 million (£185 million
based on spot exchange rates at 31 December 2019).
16
Total insurance margin ($2,244 million) and fee income ($286
million) of $2,530 million divided by total life income excluding
other income of $2,958 million (Comprised of total life income of
$6,187 million less other income of $3,229 million).
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
Excludes Money Market Funds.
Group Chief Risk and Compliance Officer's report on the risks
facing our business and how these are managed
Our Group Risk Framework and risk appetite have allowed us to
control our risk exposure successfully throughout the year. Our
governance, processes and controls enable us to deal with
uncertainty effectively, which is critical to the achievement of
our strategy of helping our customers achieve their long-term
financial goals.
This section explains the main risks inherent in our business and
how we manage those risks, with the aim of ensuring an appropriate
risk profile is maintained.
1. Introduction
Group structure
On 21 October 2019, just 18 months after announcing its intention
to do so, the Group completed the demerger of M&G plc, marking
the successful and controlled delivery of a complex and historic
change to the business, in which the Risk function played a central
role. An unsettled macroeconomic and geopolitical environment added
to the challenges in completing a strategic initiative of this
magnitude and to the key objective of delivering two distinct and
strongly capitalised groups. Strong stewardship was provided by the
Risk function through risk opinions, guidance and assurance on
critical activity, as well as assessments and ongoing monitoring of
external risks. 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 welcomes the Hong Kong Insurance Authority (IA) as its
new Group-wide supervisor and is transitioning to a new supervisory
framework. A mature and well-embedded risk framework will enable
the repositioned business to capture the opportunities in the
growth markets in which it is now focused while operating with
discipline.
The world economy
Economic growth worldwide slowed in 2019 driven by a contraction in
global manufacturing, in particular in the Eurozone, UK and some
Asian economies. Various factors contributed to this slowdown,
including geopolitical tensions (in particular those around trade),
steps taken in China to deleverage its financial system, and
tightened financial conditions in the US during the first half of
the year. Faced with the prospect of slowing economic growth and
continued subdued inflation, the major central banks across North
America, Europe and Asia implemented significant changes in
monetary policy, deploying both conventional and non-conventional
accommodation. The US Federal Reserve cut its benchmark federal
funds rate by 75 basis points over 2019, while the ECB delivered a
10 basis point interest rate cut and announced a resumption of its
quantitative easing programme in September. At the start of 2020,
the prospects for global growth initially appeared to have improved
with the signing of the 'Phase One' initial trade agreement by the
US and China in January and signs that macroeconomic data was
stabilising throughout the Eurozone and parts of Asia. Since then
however, it is becoming increasingly evident that the coronavirus
outbreak has impacted economic activity in Hong Kong and China with
spill over to the rest of the global economy. This has prompted the
world's major central banks to commit to measures to manage the
potential economic effects and in early March 2020 the US Federal
Reserve cut its benchmark federal funds rate by 50 basis points.
This demonstrates the fragility of any improvement in the growth
outlook, with geopolitical risks representing another source of
potential disruption, including a resurfacing in trade tensions, a
resumption of the protests in Hong Kong and, looking forward,
political uncertainty that may arise from the US presidential
election towards the end of 2020.
Financial markets
After a volatile 2018, which was marked by sharp falls in equity
markets in the final quarter, 2019 saw a significant rebound with
all major risk assets, particularly global equities, providing
strong returns over the course of the year. Government bonds also
saw good returns as yields declined significantly, with the US
10-year government bond yield falling by circa 80 basis points over
the year. Corporate bonds performed similarly well, with credit
spreads tightening and mirroring the strong equity returns
observed. The year was largely characterised by relatively
defensive investor sentiment and a preference for higher credit
quality within asset classes. This positive performance was
facilitated by the accommodative environment driven by the shift in
monetary policy by major central banks, but came amid a
deterioration in macroeconomic indicators, an increase in perceived
US recession risk and the trade negotiations between the US and
China which ebbed and flowed, all of which negatively impacted
global risk sentiment. Political headlines and the monetary policy
shift by central banks were the primary drivers of currency market
movements during 2019, with the US-China trade negotiations and
developments surrounding the UK's departure from the EU impacting
the US dollar (in particular the USD-RMB rate) and UK pound
respectively. Funding markets came under significant pressure in
September when a sudden spike in repo rates was observed, prompting
the US Federal Reserve to intervene and inject significant funding
through a combination of permanent and temporary open market
operations. Global financial markets remain highly susceptible to
reversals in risk sentiment, as demonstrated in Q1 2020 with the
coronavirus outbreak, which has increased market downside risks
significantly.
(Geo)political landscape
The geopolitical landscape over 2019 continued to reflect a world
in an unsettled state of transition. Some nations continue to face
the challenge of reconciling the inter-connectedness of the global
economy with heightened nationalistic sentiment. This has played
out in international trade disputes, notably between the US and
China during 2019. Increasing polarisation has become a driver of
geopolitical risk, both between nations and within them.
Populations appear to be increasingly active in voicing and acting
collectively on their discontent. 2019 has been described as 'the
year of the street protestor' with mass demonstrations having taken
place across the world, including in Spain, France, Hong Kong,
India and the Middle East over the course of the year and
continuing into 2020. A weakening of civil order and domestic
disruption are potential consequences, and this is testing the
resilience of businesses and governments. As a global organisation,
the Group has developed plans to mitigate business risks arising
against this backdrop and engages with national bodies where it can
in order to ensure its policyholders, employees and other key
stakeholders are not adversely impacted.
Regulations
Prudential operates in highly regulated markets, and the nature and
focus of regulation and laws remains fluid. A number of national
and international regulatory developments are in progress, with a
continuing focus on solvency and capital standards, conduct of
business, systemic risks and macroprudential policy. Some of these
changes will have a significant impact on the way that the Group
operates, conducts business and manages its risks. These regulatory
developments will continue to be monitored at a national and global
level and form part of Prudential's engagement with government
policy teams and regulators. In addition to the evolving regulatory
landscape, and following the completion of the demerger in October,
Prudential's Group-wide supervisor changed, with the Hong Kong IA
assuming the role in October 2019. Constructive engagement
continues on the Group-wide Supervision Framework (GWS) that will
apply to the Group, which is expected to be finalised in
2020.
Societal developments
Increasingly, a strong sense of purpose for an enterprise is being
seen as 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.
Similarly, understanding and managing the environmental, social and
governance (ESG) implications of the Group's business is
fundamental to Prudential's brand, reputation and ultimately
long-term success. Ensuring high levels of transparency and
responsiveness to stakeholders is a key aspect of this. Key social
issues with implications for the Group include risks arising from
demographic changes as well as those arising from privacy and data
security requirements and expectations.
Recent changes in demographic, geographical and environmental
factors have driven public health trends, such as obesity, and
changed the nature, likelihood and impact of extreme events such as
pandemics, with a consequential impact on Prudential's underwriting
assumptions and product design. Given the unique set of variables
associated with extreme events, past experience is not an
indication of the likely impact or ability to deal with future
occurrences. The coronavirus outbreak demonstrates the
unpredictable nature of such events and the impact on the
functioning of society, with consequential disruption to business
operations, staff, customers and sales. The Group is actively
managing this impact including assisting affected policyholders and
staff in meeting their needs.
In support of increased 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. This amplifies the risks to Prudential
associated with regulations and expectations in relation to privacy
and data security. These 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.
2. Key internal,
regulatory, economic and (geo)political events over the past 12
months
Q1 2019
|
Q2 2019
|
Q3 2019
|
Q4 2019 and Q1 2020
|
On 25 March, the Hong Kong IA and Prudential plc sign the
Regulatory Letter specifying the supervisory framework immediately
following the demerger of M&G plc. The
Group has since agreed with the supervisor to apply the local
capital summation method (LCSM) to determine Group regulatory
capital requirements. The Hong Kong IA's Group-wide Supervision
Framework is expected to be finalised in H2
2020.
In Indonesia, the Otoritas Jasa Keuangan (OJK) approves
'grandfathering' of Prudential's existing 94.6 per cent
shareholding in PT. Prudential Life Assurance, our Indonesian
subsidiary, with future capital injections not permitted to
increase the percentage of foreign ownership.
In March, the Group announces further expansion in West Africa via
the acquisition of a majority stake in Group Beneficial, a leading
life insurer operating in Cameroon, Côte d'Ivoire and Togo.
The acquisition completes in Q3.
Over Q1, signs continue of a moderation in US growth and a sharper
slowdown in the rest of the world, with Europe's growth
expectations dropping progressively throughout the quarter. China
reports its lowest quarterly GDP growth rate in 30 years of 6.2 per
cent. Central bank rhetoric starts to turn dovish, and this is one
of the factors driving the S&P 500 to its best quarter since Q2
2009 (rising by 13.6 per cent), along with returning positive risk
sentiment. Meanwhile, yields fall sharply in response to the
softening economic outlook and dovish turn by central
banks.
On 29 March, EIOPA releases a discussion paper on systemic risk and
macroprudential policy in insurance, setting out its thinking on
how this area should be addressed in the 2020 Solvency II review.
The paper suggests a range of potential macroprudential tools and
measures.
In February, in a summit in Hanoi, the US and North Korea fail to
reach an agreement on nuclear disarmament and a lifting of US-led
international sanctions. Donald Trump becomes the first sitting US
president to enter North Korea in June as the two countries agree
to resume talks, although these stall in Q4.
|
Prudential's Pulse app launches in April in Malaysia, providing
affordable digital health and wellness services to consumers. In
June, Prudential announces a strategic partnership with OVO to
offer customers wellness, health and wealth products and services
in Indonesia.
The Hong Kong IA issues its Guidelines on Enterprise Risk
Management in July, setting out objectives and requirements on ERM
and the Own Risk Solvency Assessment under Pillar 2 of its proposed
RBC regime for solo entities.
In April, the PRA issues Supervisory Statement (SS 3/19) on
'enhancing banks and insurers' approaches to managing the financial
risks from climate change' which outlines the regulatory
expectations for financial services firms to assess impacts from
climate change.
Suspension of the Woodford Equity Income Fund in June raises
questions over the ability of the fund management industry to meet
redemption requests, in particular for those funds heavily invested
in illiquid assets.
Several key elections are held across Asia in the first and second
quarters. Legislative elections take place in Thailand in March,
with the outcome marking the country's return to civilian rule; in
April the incumbent President Widodo wins the presidential election
in Indonesia; and in May the legislative elections in India see a
victory for Prime Minister Narendra Modi. The election results
align broadly to consensus polls.
From June onwards and continuing over 2019, large-scale
demonstrations take place in Hong Kong, sparked by an extradition
bill proposed by the Hong Kong government.
Geopolitical tensions rise in the Middle East as Iran announces a
step-up in its production of enriched uranium. This follows the US'
withdrawal from the 2015 nuclear deal and its subsequent imposition
of economic sanctions. Tensions ultimately spike at the start of
2020 when the US assassinates Iranian military leader Qassam
Soleimani.
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Central bank monetary policy becomes increasingly accommodative,
contributing to a reversal in the weakness in risk assets. In
August, following a record high in July, the S&P 500 corrects
amid recession fears and trade tensions. The index continues to
struggle in September but rebounds strongly over Q4.
Government bond yields decline significantly, with the 10-year US
Treasury yield falling by circa 50 basis points to 1.5 per cent
over August (representing a circa 120 basis points drop over the
year), its lowest rate since 2017. In Japan and Europe, the volume
of negative-yielding debt surges significantly.
Following the launch of ICS field-testing for 2019 in April, the
Group submits its results to the IAIS on 31 July 2019. This is the
last field-testing exercise prior to the finalisation of the ICS
2.0 specifications and the start of a five-year monitoring period
in 2020.
In September, US President Donald Trump and Chinese President Xi
Jinping agree to resume trade talks following earlier breakdowns in
negations in May and August. Talks continue positively into Q4
culminating in the signing of a 'Phase One' trade deal between the
two countries in January 2020.
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On 21 October 2019, M&G plc's shares begin trading on the
London Stock Exchange, marking the successful completion of its
demerger from the Prudential Group. The Hong Kong IA formally
assumes its role as Group-wide supervisor for Prudential
plc.
Eastspring successfully completes the acquisition of 50.1 per cent
of Thanachart Fund, which manages $7.5 billion of mutual funds in
Thailand, for circa $142 million, with an option to increase its
ownership to 100 per cent in future. The acquisition makes
Eastspring the fourth-largest asset manager in
Thailand.
The broader economic cycle continues to deteriorate. US domestic
data begins to show economic weakness in November. Despite this,
equity markets reach new all-time highs over the quarter, supported
by continued application of accommodative monetary policy by
central banks.
In September, the ECB delivers a package of easing measures,
including a renewal of quantitative easing. Following this, the US
Federal Reserve lowers its benchmark federal funds target rate for
the third time in four months in October. Central banks in China
and other emerging markets turn more dovish amid continued weakness
in economic data.
The 26th Annual
Conference of the IAIS takes place in Abu Dhabi on 14 and 15
November, and it is agreed that the ICS project will move from
Field Testing into the Monitoring Period phase and ICS v2.0 is
released. The Holistic Framework (HF) for systemic risk is endorsed
by the FSB at the conference for implementation by the IAIS in
2020. The FSB also confirms that G-SII designations will be
suspended until its review in 2022, although a number of the
previous G-SII requirements are included either into the Insurance
Core Principles or the ComFrame.
Following the East Asia Summit in Bangkok in November, 15 of the 16
negotiating participants agree to sign up to the Regional
Comprehensive Economic Partnership (RCEP), most likely in Q1 2020,
with India deciding not to participate.
Hong Kong enters technical recession in Q3, with its economy
shrinking by 2.9 per cent overall over 2019, as the protests, which
peak in violence during November, impact the territory's economy.
On 27 November, the US president signs the Hong Kong Human Rights
and Democracy Act into law, requiring annual reviews of Hong Kong's
special trade status under US law, as well as sanctions against any
official deemed responsible for human rights abuses or for
undermining the city's autonomy.
The National Association of Insurance Commissioners (NAIC)
implements changes to the US statutory reserve and capital
framework for variable annuities, effective from 1 January 2020.
Jackson chooses to early adopt the changes at 31 December 2019 for
US statutory reporting.
In December, cases of what appear to be viral pneumonia are
reported in Wuhan, China. In January 2020, the virus is identified
as a novel coronavirus (the resulting disease has since been named
COVID-19) and over Q1 2020 thousands of cases are reported with the
virus proceeding to spread to countries across Asia and the world.
Prudential Corporation Asia rolls out Asia-wide initiatives and a
campaign to support customers and staff.
Following its launch, downloads of Pulse by Prudential exceed one
million in February 2020. The digital health platform is now one of
the most popular health and wellness apps offered by an insurer in
the region.
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3. Managing the risks in
implementing our strategy
This section provides an overview of the Group's strategy, the
significant risks arising from the delivery of this strategy and
current risk management focus. The risks outlined below, which are
not exhaustive, are discussed in more detail in sections 5 and
6.
Our strategy
|
Significant risks arising from the delivery of the
strategy
|
Risk management focus
|
|
|
|
Group-wide
Our strategy is to capture the long-term structural opportunities
for our markets and geographies, while operating with discipline
and seeking to enhance our capabilities through innovation to
deliver high-quality resilient outcomes for our
customers.
|
●
Transformation risks
around key change programmes, including those related to the
Group's digital strategy
|
● Continuing the focus on, and ensuring consistency
in transformation risk management across the Group's business
units.
● Provision of independent risk assurance, challenge
and advice on first line programme risk identification and
assessments.
|
●
Group-wide
regulatory risks
|
● Engagement with national governments, regulators
and industry groups on macroprudential and systemic risk-related
regulatory initiatives, international capital standards, and other
initiatives with Group-wide impacts.
● Engagement with the Hong Kong IA on, and
implementation of, the Group-wide Supervision Framework, which is
expected to be finalised in H2 2020.
|
●
Information security and
data privacy risks
|
● Continuing the implementation of the Group-wide
organisational structure and governance model for cyber security
management.
● Focus on compliance with applicable privacy laws
across the Group and the appropriate use of customer
data.
|
●
Business disruption and
third-party risks
|
● Continued application of the Group's global
business continuity management, with an enhanced focus on
operational resilience as it relates to customer
outcomes.
● Applying the distinct oversight and risk
management required over the Group's third parties, including its
strategic partnerships for product distribution, non-traditional
services and processing activities.
|
●
Conduct
risk
|
● Continuing the enhancement of the Group-wide
customer conduct risk management framework building on the Group's
existing customer commitments policy.
|
|
|
|
Asia
Serving the protection and investment needs of the growing middle
class in Asia.
|
●
Financial
risks
|
● Maintaining, and enhancing where necessary, risk
limits and implementing business initiatives to manage financial
risks, including asset allocation, bonus revisions, product
repricing and reinsurance where required.
|
●
Persistency
risk
|
● Implementation of business initiatives to manage
persistency risk, including additional payment methods, enhancing
customer experience, revisions to product design and incentive
structures. Ongoing experience monitoring.
|
●
Morbidity
risk
|
● Implementation of business initiatives to manage
morbidity risk, including product repricing where required. Ongoing
experience monitoring.
|
United States
Providing asset accumulation and retirement income products to US
retirees.
|
●
Financial
risks
|
● Maintaining, and enhancing where necessary, risk
limits, hedging strategies, modelling tools and risk oversight
appropriate to Jackson's product mix.
|
●
Policyholder
behaviour risk
|
● Continued monitoring of policyholder behaviour
experience and review of assumptions.
|
Africa
Offering products to new customers in Africa, one of the
fastest-growing regions in the world.
|
●
The Group
continues to increase its focus on Prudential Africa's most
significant risks, being those related to physical and information
security and financial crime, as its presence there expands and
grows in materiality.
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4. Risk
governance
a System of governance
Appropriately managed risks allow Prudential to take business
opportunities and enable the growth of its business. Effective risk
management is therefore fundamental in the execution of the Group's
business strategy. Prudential's approach to risk management must be
both well embedded and rigorous, closely aligned to the Group's key
stakeholders and operate across the entire group. As the economic
and political environment in which we operate changes, it should
also be sufficiently broad and dynamic to respond to these
changes.
Prudential has in place a system of governance that promotes and
embeds a clear ownership of risk, processes that link risk
management to business objectives and a proactive Board and senior
management providing oversight of risks. Mechanisms and
methodologies to review, discuss and communicate risks are in place
together with risk policies and standards to ensure risks are
identified, measured, managed, monitored and reported.
How 'risk' is defined
Prudential defines 'risk' as the uncertainty that is faced in
implementing the Group's strategies and achieving its objectives
successfully, and includes all internal or external events, acts or
omissions that have the potential to threaten the success and
survival of the Group. Accordingly, material risks will be retained
selectively when it is considered that there is value in doing so,
and where it is consistent with the Group's risk appetite and
philosophy towards risk-taking.
How risk is managed
Risk management is embedded across the Group through the Group Risk
Framework, which is owned by the Board and details Prudential's
risk governance, risk management processes and risk appetite. The
Group's risk governance arrangements are based on the concept of
the 'three lines of defence' model, comprising risk taking and
management, risk control and oversight, and independent assurance
and has been developed to monitor the risks to our business. The
aggregate Group exposure to its key risk drivers is monitored and
managed by the Group Risk function which is responsible for
reviewing, assessing, providing oversight and reporting on the
Group's risk exposure and solvency position from the Group
economic, regulatory and ratings perspectives.
In 2019, the Group reviewed and updated its policies and processes
for alignment with the requirements of its new Group-wide
supervisor. The frameworks relating to oversight of transformation
risk and model risk were further embedded and the Group focused
on development of a Group-wide customer conduct risk
framework, building on its existing customer commitments
policy.
The following section provides more detail on our risk governance,
risk culture and risk management process.
b Group Risk Framework
i. Risk governance and
culture
Prudential's
risk governance comprises the Board organisational structures,
reporting relationships, delegation of authority, roles and
responsibilities, and risk policies that the Group Head Office and
the business units establish to make decisions and control their
activities on risk-related matters. It includes individuals,
Group-wide functions and committees involved in overseeing and
managing risk.
The
risk governance structure is led by the Group Risk Committee,
supported by independent non-executive directors on risk committees
of the Group's main subsidiaries. These committees monitor the
development of the Group Risk Framework, which includes risk
appetite, limits, and policies, as well as risk
culture.
The
Group Risk Committee reviews the Group Risk Framework and
recommends to the Board any changes required to ensure that it
remains effective in identifying and managing the risks faced by
the Group. A number of core risk policies and standards support the
Framework to ensure that risks to the Group are identified,
assessed, managed and reported. In addition, a set of policies
owned by other Group functions support the effective implementation
of the Group Risk Framework.
Culture
is a strategic priority of the Board, which recognises its
importance in the way that the Group does business. Risk culture is
a subset of Prudential's broader organisational culture, which
shapes the organisation-wide values that we use to prioritise risk
management behaviours and practices.
Risk
culture forms part of the Group Risk Framework and the Group works
to promote a responsible risk culture in the following
ways:
● Senior management in business units promote a
responsible culture of risk management by emphasising the
importance of balancing risk with profitability and growth in
decision-making. This balance is included in the performance
evaluation of key individuals, including both senior management and
those directly responsible for risk management;
● The Group works to build skills and capabilities
in risk management, which are needed by both senior management and
risk management specialists, while attempting to allocate scarce
resources appropriately; and
● Employees understand and care about their role in
managing risk - they are aware of and discuss risk openly
as part of the way they perform their role.
The
Group Risk Committee also has a key role in providing advice to the
Remuneration Committee on risk management considerations to be
applied in respect of executive remuneration.
Prudential's
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, financial crime and anti-bribery and corruption. The
Group's third-party supply policy ensures that human rights and
modern slavery considerations are embedded across all of its
supplier and supply chain arrangements. Embedded procedures to
allow individuals to speak out safely and anonymously against
unethical behaviour and conduct are also in place.
The
ESG Executive Committee is focused on the holistic assessment of
ESG matters material to the Group, raising matters for Board
decision-making and overseeing the implementation of resulting
decisions, supporting the sustainable delivery of the Group's
strategy. It reports to the Board through the Group Nomination and
Governance Committee which comprises the Group's Chairman, the
Senior Independent Director, and the chairs of the Audit,
Remuneration and Risk committees and is regularly attended by the
Group Chief Executive.
ii. The risk management
cycle
The
risk management cycle comprises processes to identify, measure and
assess, manage and control, and monitor and report on our
risks.
Risk identification
Group-wide
risk identification takes place throughout the year as the Group's
businesses undertake a comprehensive bottom-up process to identify,
assess and document its risks. This concludes with an annual
top-down identification of the Group's principal risks, which
considers those risks that have the greatest potential to impact
the Group's operating results and financial condition and is used
to inform risk reporting to the risk committees and the Board for
the year.
Our
risk identification process also includes the Group's Own Risk and
Solvency Assessment (ORSA) and horizon-scanning performed as part
of our emerging risk management process. In addition to risk
identification, the ORSA is also the ongoing process of assessing,
controlling, monitoring and reporting the risks to which the
business is exposed. It includes an assessment of capital adequacy
to ensure that the Group's solvency needs are met at all times as
well as quantitative and qualitative assessments of the Group's
risk profile and solvency needs on a forward-looking basis,
incorporating the Group's strategy and business plan. The Group's
regular ORSA report was produced in H1 2019, with an additional
ORSA report produced in October 2019 in anticipation of the
completion of the demerger of M&G plc which included a
forward-looking assessment of the post demerger Group's capital and
liquidity position under a range of stresses and
scenarios.
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 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.
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 us to identify the key risks
and scenarios that may have a material impact on the
Group.
The
risk profile is a key output from the risk identification and risk
measurement processes and is used as a basis for setting Group-wide
limits, management information, assessment of solvency needs, and
determining appropriate stress and scenario testing. The Group's
annual set of 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.
Governance arrangements are in place to support the internal model,
including independent validation and processes and controls around
model changes and limitations.
Risk management and control
The
control procedures and systems established within the Group are
designed to manage the risk of failing to meet business objectives.
These focus on aligning the levels of risk-taking with the Group's
strategy and can only provide reasonable, and not absolute,
assurance against material misstatement or loss.
Risk
management and control requirements are set out in the Group risk
policies, and form part of the holistic risk management approach
under the Group's ORSA process. These risk policies
define:
●
The Group's risk
appetite in respect of material risks, and the framework under
which the Group's exposure to those risks is
limited;
●
The processes to enable
Group senior management to effect the measurement and management of
the Group material risk profile in a consistent and coherent way;
and
●
The flows of management
information required to support the measurement and management of
the Group's material risks.
The
methods and risk management tools that the Group employs to
mitigate each of its major categories of risks are detailed in the
further risk information section below.
Risk monitoring and reporting
The
identification of the Group's key risks informs the management
information received by the Group risk committees and the Board.
Risk reporting of key exposures against appetite is also included,
as well as ongoing developments in 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 lies at the heart of its business,
and that effective risk management capabilities represent a key
source of competitive advantage. The extent to which Prudential is
willing to take risk in the pursuit of its business strategy and
objective to create shareholder value is defined by a number of
qualitative and quantitative expressions of risk appetite,
operationalised through measures such as limits, triggers and
indicators. The Group Risk function is responsible for reviewing
the scope and operation of these risk appetite measures at least
annually to determine that they remain relevant. The Board approves
all changes made to the Group's aggregate risk appetite and has
delegated authority to the Group Risk Committee to approve changes
to the system of limits, triggers and indicators.
Group
risk appetite is defined and monitored in aggregate for financial
and non-financial risks by the setting of objectives for its
liquidity, capital requirements and non-financial risk exposure.
Further detail is included in sections 5 and 6, as well as covering
risks to shareholders, including those from participating and
third-party business. Group limits operate within these expressions
of risk appetite to constrain material risks, while triggers and
indicators provide further constraint and defined points for
escalation.
Capital requirements
Limits
on capital requirements aim to ensure that the Group maintains
sufficient capital such that in business-as-usual and stressed
conditions it exceeds its internal economic capital requirements,
achieves its desired target rating to meet its business objectives,
and supervisory intervention is avoided. The two measures currently
in use at the Group level are the regulatory local capital
summation method (LCSM) capital requirements (both minimum and
prescribed levels) and internal economic capital (ECap)
requirements. In addition, capital requirements are monitored on
local statutory bases.
The Group Risk Committee is responsible for
reviewing the risks inherent in the Group's business plan and for
providing the Board with input on the risk/reward trade-offs
implicit therein. This review is supported by the Group Risk
function, which uses submissions from local business units to
calculate the Group's aggregated position relative to the aggregate
risk limits.
Liquidity
The
objective of the Group's liquidity risk appetite is to ensure that
the Group is able to generate sufficient cash resources to meet
financial obligations as they fall due in business-as-usual and
stressed scenarios. Risk appetite with respect to liquidity risk is
measured using a liquidity coverage ratio (LCR) which considers the
sources of liquidity against liquidity requirements under stress
scenarios.
Non-financial risks
The
Group is exposed to non-financial 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 to avoid material adverse impact on
its reputation.
5. Summary
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 its ability
to fulfil commitments to customers, giving rise to potential risks
to its brand and reputation. These risks, which are not exhaustive,
are summarised below. The materiality of these risks, whether
material at the level of the Group or its business units, is also
indicated. Further information on some of these risks and the risk
management and mitigation in place are included in section 6. The
Group's disclosures covering risk factors are aligned to the same
categories and can be found at the end of this
document.
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 driving short-term volatility.
Risks in this category include the market risks to our investments,
the credit quality of our investment portfolio as well as liquidity
risk.
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● Global economic
conditions
Changes
in global economic conditions can impact Prudential directly; for
example, by leading to reduced investment returns and fund
performance and liquidity, and increasing the cost of promises
(guarantees) that have been made to our customers. Changes in
economic conditions can also have an indirect impact on the Group;
for example, leading to a decrease in the propensity for people to
save and buy Prudential's products, as well as changing prevailing
political attitudes towards regulation. This is a risk which is
considered material at the level of the Group.
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● Geopolitical
risk
The
geopolitical environment can directly impact on the Group in a wide
range of ways. Financial markets and economic sentiment have been
highly susceptible to geopolitical developments in recent years,
with implications for the Group's financial situation. Geopolitical
tensions can result in mass civil protests and/or disobedience as
well as the imposition of restrictive regulatory and trading
requirements by governments and regimes; increasing operational,
business disruption and regulatory risks, and potentially impacting
sales directly. Developments in the Hong Kong protests and the
recent COVID-19 outbreak across Asia are being closely monitored by
the Group and plans have been enacted to ensure that any potential
impact to the business, our employees and customers are managed
within our existing business resilience processes.
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● 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.
In
the Asia business, the main market risks arise from the value of
fees from its fee-earning products as well as from the guarantees
of some non-linked products. In the US, Jackson's fixed and
variable annuity books are exposed to a variety of market risks due
to the assets backing these policies.
Interest
rates remain low relative to historical levels and a persistently
low interest rate environment poses challenges to both the capital
position of life insurers as well as to new business
profitability.
|
|
● Liquidity
risk
This
is the risk of not having sufficient liquid assets to meet
obligations as they fall due, and the Group looks at this under
both normal and stressed conditions. This is a risk which is
considered material at the level of the Group.
● Credit risk
The
Group's asset portfolio gives rise to invested credit risk, being
the potential for a reduction in the value of Prudential's
investments driven by the lowering of credit quality and likelihood
of defaults. 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 is also exposed to counterparty default risk through
activities such as reinsurance and derivative hedging as well as
the operational management of cash.
|
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
This
is the risk arising from the design and execution of a material and
complex change initiative, or a combination of
initiatives.
A
number of significant change programmes are currently in progress
that effect both the Group's strategic vision, enable its future
compliance with impending regulatory changes and to maintain the
Group's market competitiveness. The breadth of these activities,
and their consequences, including the reputational impact, to the
Group should they fail to meet their objectives, mean that this
risk remains material at the level of the Group.
|
● 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.
Operational
risk is the risk of loss or unintended gain from inadequate or
failed processes, personnel, systems and external events, and can
arise through business transformation, introducing new products,
new technologies, and entering into new markets and geographies.
Implementing the business strategy and processes for ensuring
regulatory compliance (including those relating to the conduct of
its business) requires interconnected change initiatives across the
Group, the pace of which introduces further complexity. The Group's
outsourcing and third-party relationships introduce their own
distinct risks. Such operational risks, if they materialise, could
result in financial loss and/or reputational damage. These risks
are considered to be material at the level of the
Group.
Business
disruption risks may impact on Prudential's ability to meet its key
objectives, ensure continuity of services to customers, and protect
its brand and reputation. The Group's business resilience is a core
part of a well-embedded business continuity management programme,
which contributes to the wider operational resilience of the
Group.
Information
security and data privacy risks are significant considerations for
Prudential and the cyber security threat continues to evolve
globally in sophistication and potential significance. This
includes the risk of malicious attack on its systems, network
disruption and risks relating to data security, integrity, privacy
and misuse. 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.
As
with all financial services firms, the nature of the Group's
business and its operations means that it is exposed to financial
crime risks such as those relating to money laundering, fraud,
sanctions compliance and bribery and corruption.
|
● Insurance
risks
The
nature of the products offered by Prudential exposes it to
insurance risks, which form a significant part of the overall Group
risk profile.
The insurance risks that the business is exposed
to by virtue of its products include persistency
risk (customers lapsing
their policies at different levels than expected, and a type of
policyholder behaviour risk); mortality
risk (higher number of
policyholders with life protection dying than
expected); morbidity
risk (more policyholders
with health protection becoming ill than expected)
and longevity
risk (policyholders living
longer than expected). The medical insurance business in Asia is
also exposed to medical inflation
risk (the increasing cost
of medical treatments being higher than
expected).
The
pricing of Prudential's products requires it to make a number of
assumptions, and deviations from these may impact its reported
profitability and capital position. Across its business units, some
insurance risks are more material than others.
Persistency
and morbidity risks are among the most material insurance risks for
the Asia business given the focus on health and protection products
in the region.
The
Jackson business is most exposed to policyholder behaviour risk,
including persistency, which impacts the profitability of the
variable annuity business and is influenced by market performance
and the value of policy guarantees.
● Conduct
risk
Prudential's
conduct of business, especially the design and distribution of its
products is crucial in ensuring that the Group's commitment to
meeting customers' needs and expectations are met. The Group's
conduct risk framework is owned by the first line which reflects
management focus on achieving good customer outcomes.
|
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. The increasing shift towards
macroprudential regulation and the number of regulatory changes
underway across Asia and US (in particular focusing on capital
requirements and consumer protection) are key areas of focus.
Regulatory reforms can have a material impact on Prudential's
businesses. From 21 October 2019, Prudential's Group-wide
supervisor changed to the Hong Kong IA. As a result, the Group is
now applying the local capital summation method (LCSM) to
determine Group regulatory capital requirements (both minimum and
prescribed levels). The Hong Kong IA's Group-wide Supervision (GWS)
Framework is expected to be finalised in the second half of
2020.
As
the industry's use of emerging technological tools and digital
services increases, this is likely to lead to new and unforeseen
regulatory issues. The Group is monitoring the regulatory
developments and standards emerging around the governance and
ethical use of technology and data.
|
|
The Group's ESG-related risks
These include environmental risks associated with climate change
(including physical and transition risks), social risks that arise
from the diverse people and communities that the Group interacts
with and governance-related risks.
|
As
a Group, responding effectively to those material risks with ESG
implications is crucial in maintaining Prudential's brand and
reputation, and in turn its financial performance and delivery of
its long-term strategy.
These include the environmental
risks associated with
climate change and the impact of this on the business, such as the
physical impacts on the Group's operational resilience,
underwriting assumptions and claims profile, as well as the impact
to long-term asset valuations resulting from the transition to a
low carbon economy. Social risks affecting Prudential may arise from public
health and demographic changes (such as increasing obesity and
urbanisation), which may impact on product claims profiles. Social
risks may also arise from a failure to consider the rights,
diversity, well-being, and interests of people and communities in
which the Group, or its third-parties, operates. This includes the
responsibilities the Group assumes as a responsible
employer. Governance
risks may arise from a
failure to maintain high standards of corporate governance
(including committee independence and diversity) senior management
behaviours and oversight of key risks.
Policies
and procedures to support how the Group operates in relation to
certain ESG issues are included in the Group Governance Manual.
Further information on how Prudential addresses material risks
associated with ESG themes are included in the ESG
Summary.
|
6. Further risk
information
In reading the sections below, it is useful to understand that
there are some risks that Prudential's policyholders assume by
virtue of the nature of their products, and some risks that the
Company and its shareholders assume. Examples of the latter include
those risks arising from assets held directly by and for the
Company or the risk that policyholder funds are exhausted. This
report is focused mainly on risks to the shareholder but will
include those which arise indirectly through our policyholder
exposures.
6.1 Risks to the Group's financial situation, including
those from the external macroeconomic and geopolitical
environment
a. Market risk
The main drivers of market risk in the Group are:
● Investment risk, which arises on our holdings of
equity and property investments, the prices of which can change
depending on market conditions. The main investment risk exposure
arises from the portion of the profits from the Hong Kong
with-profits funds which the shareholders are entitled to receive;
the value of the future fees from the fee-earning products in the
Asia business; and from the asset returns backing Jackson's
variable annuities business;
● Interest rate risk, which is driven by the
valuation of Prudential's assets (particularly the bonds that it
invests in) and liabilities, which are dependent on market interest
rates and exposes it to the risk of those moving in a way that is
detrimental. The Group's interest rate risk is driven by Jackson's
fixed annuity business, the cost of guarantees in its fixed index
and variable annuity business, and the guarantees of some
non-unit-linked investment savings products in Asia. The impact of
lower interest rates also manifests through reduced solvency levels
in some of the Asian businesses as well as reduced new business
profitability; and
● Foreign exchange risk, through translation of its
profits and assets and liabilities denominated in various
currencies, given the geographical diversity of the
business.
The Group has appetite for market risk where it arises from
profit-generating insurance activities to the extent that it
remains part of a balanced portfolio of sources of income for
shareholders and is compatible with a robust solvency
position.
The Group's market risks are managed and mitigated by the
following:
●
The Group market risk
policy;
●
The Group Asset Liability Committee -
a first-line risk management advisory committee to the Group Chief
Executive Officer which supports the identification, assessment and
management of key financial risks significant to the achievement of
the Group's business objectives;
●
Risk appetite statements, limits and
triggers;
●
Our asset and liability management
programmes 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.
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.
While accepting the equity exposure that arises on future fees, the
Group has limited appetite for exposures to equity price movements
to remain unhedged or for volatility within policyholder guarantees
after taking into account any natural offsets and buffers within
the business.
Interest rate risk
Some products that Prudential offers are sensitive to movements in
interest rates. As part of the Group's ongoing management of this
risk, a number of mitigating actions to the in-force business have
been taken, as well as repricing and restructuring new business
offerings in response to recent relatively low interest rates.
Nevertheless, some sensitivity to interest rate movements is still
retained.
The Group's appetite for interest rate risk is limited to where
assets and liabilities can be tightly matched and where liquid
assets or derivatives exist to cover interest rate
exposures.
In Asia, our exposure to interest rate risk arises from the
guarantees of some non-unit-linked investment savings products,
including the Hong Kong with-profits and non-profit business. This
exposure exists because of the potential for an asset and liability
mismatch, where long-dated liabilities and guarantees are backed by
short-dated assets, which cannot be eliminated but is monitored and
managed through local risk and asset liability management
committees against risk appetite aligned with the Group's limit
framework.
Jackson is affected by interest rate movements to its fixed annuity
book where the assets are primarily invested in bonds and
shareholder exposure comes from the mismatch between these assets
and the guaranteed rates that are offered to policyholders.
Interest rate risk results from the cost of guarantees in the
variable annuity and fixed index annuity business, which may
increase when interest rates fall. The level of sales of variable
annuity products with guaranteed living benefits is actively
monitored, and the risk limits we have in place help to ensure we
are comfortable with the level of interest rate and market risks
incurred as a result. Derivatives are also used to provide some
protection.
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
favourable economically to do so. Further, the Group generally does
not have appetite for significant direct shareholder exposure to
foreign exchange risks in currencies outside the countries in which
it operates, but it does have some appetite for this on fee income
and on non-sterling investments within the with-profits fund. Where
foreign exchange risk arises outside appetite, currency swaps and
other derivatives are used to manage the exposure.
b. Credit risk
Prudential invests in bonds that provide a regular, fixed amount of
interest income (fixed income assets) in order to match the
payments needed to policyholders. It also enters into reinsurance
and derivative contracts with third parties to mitigate various
types of risk, as well as holding cash deposits at certain banks.
As a result, it is exposed to credit risk and counterparty risk
across its business.
Credit risk is the potential for reduction in the value of
investments which results from the perceived level of risk of an
investment issuer being unable to meet its obligations
(defaulting). Counterparty risk is a type of credit risk and
relates to the risk of the counterparty to any contract we enter
into being unable to meet their obligations causing us to suffer
loss.
The Group has some appetite to take credit risk where it arises
from profit-generating insurance activities, to the extent that it
remains part of a balanced portfolio of sources of income for
shareholders and is compatible with a robust solvency
position.
A number of risk management tools are used to manage and mitigate
this credit risk, including the following:
●
A credit risk policy and
dealing and controls policy;
●
Risk appetite statements
and limits that have been defined on issuers, and
counterparties;
●
Collateral arrangements
for derivative, secured lending reverse repurchase and reinsurance
transactions;
●
The Group Credit Risk
Committee's oversight of credit and counterparty credit risk and
sector and/or name-specific reviews;
●
Regular assessments;
and
●
Close monitoring or
restrictions on investments that may be of
concern.
Debt and loan portfolio
Credit risk also arises from the debt portfolio in the Asia
business comprising the shareholder, with-profit and unit-linked
funds, the value of which was $74.7 billion at 31 December 2019.
The majority (67 per cent) of the portfolio is in unit-linked and
with-profits funds and so exposure of the shareholder to this
component is minimal. The remaining 33 per cent of the debt
portfolio is held to back the shareholder business.
In the general account of the Group's US business, $58.5 billion of
debt securities are held to support shareholder liabilities
including those from our fixed annuities, fixed index annuities and
life insurance products.
The shareholder-backed debt portfolio of the Group's other
operations was $1.3 billion as at 31 December 2019.
Further details of the composition and quality of our debt
portfolio, and exposure to loans, can be found in the IFRS
financial statements.
Group sovereign debt
Prudential also invests in bonds issued by national governments.
This sovereign debt holdings represented 21 per cent or $18.0
billion1 of
the shareholder debt portfolio of the Group as at 31 December 2019
(31 December 2018: 20 per cent or $14.8 billion of the shareholder
debt portfolio attributable to continuing operations). One per cent
of this was rated AAA and 83 per cent was considered investment
grade (31 December 2018: 84 per cent of the sovereign debt holdings
attributable to continuing operations was considered investment
grade).
The particular risks associated with holding sovereign debt are
detailed further in our disclosures on risk factors.
The exposures held by the shareholder-backed business and
with-profits funds in sovereign debt securities at 31 December 2019
are given in note C3.2(d) of the Group's IFRS financial
statements.
Bank debt exposure and counterparty credit risk
Prudential's exposure to banks is a key part of its core investment
business, as well as being important for the hedging and other
activities undertaken to manage its various financial risks. Given
the importance of its relationship with its banks, exposure to the
sector is considered a material risk for the Group.
The exposures held by the shareholder-backed business and
with-profits funds in bank debt securities at 31 December 2019 are
given in note C3.2(d) of the Group's IFRS financial statements
for continuing operations.
The exposure to derivative counterparty and reinsurance
counterparty credit risk is managed using an array of risk
management tools, including a comprehensive system of limits. Where
appropriate, Prudential reduces its exposure, buys credit
protection or uses additional collateral arrangements to manage its
levels of counterparty credit risk.
At 31 December 2019:
●
92 per cent of the Group's
shareholder portfolio is investment grade rated2.
In particular, 61 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).
c. Liquidity risk
Prudential's liquidity risk arises from the need to have sufficient
liquid assets to meet policyholder and third-party payments as they
fall due. This incorporates the risk arising from funds composed of
illiquid assets and results from a mismatch between the liquidity
profile of assets and liabilities. Liquidity risk may impact on
market conditions and valuation of assets in a more uncertain way
than for other risks like interest rate or credit risk. It may
arise, for example, where external capital is unavailable at
sustainable cost, increased liquid assets are required to be held
as collateral under derivative transactions or where redemption
requests are made against Prudential external funds.
Prudential has no appetite for liquidity risk, ie for any business
to have insufficient resources to cover its outgoing cash flows, or
for the Group as a whole to not meet cash flow requirements from
its debt obligations under any plausible scenario.
The Group has significant internal sources of liquidity, which are
sufficient to meet all of our expected cash requirements for at
least 12 months from the date the financial statements are
approved, without having to resort to external sources of funding.
The Group has a total of £2.0 billion of undrawn committed
facilities that can be made use of, expiring in 2024. 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.
6.2 Risks arising from the nature of the Group's
business and industry
a. Transformation risk
A
number of significant change programmes are currently running in
order to implement the Group's strategic vision, comply with
impending regulatory changes and to maintain market
competitiveness. Many of these programmes are interconnected with
complex dependencies and/or of large scale, and may have financial
and non-financial implications if they fail to meet their
objectives. Additionally, these programmes inherently give rise to
design and execution risks, and may introduce new, or increase
existing, business risks. These include an increased strain on the
operational capacity, newly-implemented controls being ineffective
or general weakening of the control environment of the Group.
Implementing further strategic initiatives may amplify these risks.
Furthermore, these programmes require ongoing oversight,
coordinated independent assurance and regular monitoring and
consolidated reporting, as part of the Group's Transformation Risk
Framework, to mitigate the risks to the business.
The
Group's current significant change programmes relate to an
expansion of its use of technology, platforms and analytics,
improving the efficiency of certain business functions and
processes (data, systems, people) and the establishment of new
third-party arrangements. The Group's transformation portfolio also
includes programmes related to regulatory change, including but not
limited to, the transition to the Hong Kong IA's GWS framework, the
discontinuation of IBORs and the implementation of IFRS 17 - see
section 6.3 below for further information.
b. Non-financial risks
In the
course of doing business, the Group is exposed to non-financial
risks arising from its operations, the business environment and its
strategy. The main risks across these areas are detailed
below.
Operational 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 includes employee error, model error, system failures, fraud
or some other event which disrupts business processes or has a
detrimental impact to customers. Processes are established for
activities across the scope of our business, including operational
activity, regulatory compliance, and those supporting ESG
activities more broadly, any of which can expose us to operational
risks. A large volume of complex transactions 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, and new IT and
technology partners are being engaged. 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
in embedded in the Group-wide framework and risk management for
operational risk (see below). Third-party management forms part of
the Group's operational risk categorisations and a defined
qualitative risk appetite statement, limits and triggers are in
place.
The performance of the Group's core business activities places
reliance on the IT infrastructure, provided by our external IT and
technology partners, that supports day-to-day transaction
processing and administration. The IT environment must also be
secure, and an increasing cyber risk threat needs to be addressed
as the Group's digital footprint increases and the sophistication
of cyber threats continue to evolve - see separate information
security risk sub-section below. 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. See section 6.3 below for further detail on the
Group's regulatory and legal risks.
Business disruption risk
Prudential recognises that business disruption is a key risk to
effective business operations and delivery of business services,
and has the potential to impact our customers and the market more
broadly. The Group therefore 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 Hong Kong protests and the recent COVID-19
outbreak.
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 risk remains an area of heightened focus after
a number of recent high-profile attacks and data losses across
industries. Criminal capability in this area is maturing and
industrialising, with an increased level of understanding of
complex financial transactions which increases the risks to the
financial services industry. The threat landscape is continuously
evolving, and the systemic risk of sophisticated but untargeted
attacks is rising, particularly during times of heightened
geopolitical tensions.
Developments in data protection requirements, such as GDPR that
came into force in May 2018 and the California Consumer Protection
Act which came into force on 1 January 2020, continue to evolve
worldwide. This increases financial and reputational implications
for Prudential in the event of a breach of its (or
third-party suppliers') IT systems. As well as protecting data,
stakeholders expect companies and organisations to use personal
information transparently and appropriately. Given this, both
information security and data privacy are key risks for the Group.
As well as having preventative risk management in place, it is
fundamental that the Group has robust critical recovery systems in
place in the event of a successful attack on its infrastructure, a
breach of its information security or a failure of its systems in
order to retain its customer relationships and trusted
reputation.
During 2019, the revised organisational structure and governance
model for cyber security management was implemented. 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 organisational change has increased the
Group's efficiency and agility in responding to cyber security
related incidents and has facilitated increased collaboration
between business units leveraging their respective strengths in
delivering the Group-wide information security
programme.
The strategic objectives of the programme include achieving
consistency in the execution of security disciplines across the
Group, improving visibility across Prudential's businesses and
deployment of automation to detect and address threats. It also
includes achieving security by design by aligning subject matter
expertise to the Group's digital and business initiatives to embed
security controls across platforms and ecosystems. Implementation
of the operating model and progress against these strategic
objectives have continued over the year.
The Board receives periodic updates on information security risk
management throughout the year. Group functions work with the
business units to address risks locally within the national and
regional context of each business following the strategic direction
of the Group-wide information security function.
Financial crime risk
As with all financial services firms, Prudential is exposed to
risks relating to money laundering (the risk that the products or
services of the Group are used by customers or other third parties
to transfer or conceal the proceeds of crime); fraud (the risk that
fraudulent claims or transactions, or procurement of services, are
made against or through the business); sanctions compliance (the
risk that the Group undertakes business with individuals and
entities on the lists of the main sanctions regimes); and bribery
and corruption (the risk that employees or associated persons seek
to influence the behaviour of others to obtain an unfair advantage
or receive benefits from others for the same purpose).
Prudential operates in some high-risk countries where, for example,
the acceptance of cash premiums from customers may be common
practice, large-scale agency networks may be in operation where
sales are incentivised by commission and fees or where there is a
higher concentration of exposure to politically-exposed
persons.
The Group-wide policies we have in place on anti-money laundering,
fraud, sanctions and anti-bribery and corruption reflect the
values, behaviours and standards that are expected across the
business. Across Asia, screening and transaction monitoring systems
are in place and a series of improvements and upgrades are being
implemented, while a programme of compliance control monitoring
reviews is being undertaken. Risk assessments are performed
annually at higher risk locations. Due diligence reviews and
assessments against Prudential's financial crime policies are
performed as part of the Group's business acquisition process. The
Group continues to undertake strategic activity to monitor and
evaluate the evolving fraud risk landscape, mitigate the likelihood
of fraud occurring and increase the rate of detection.
The Group has in place a mature confidential reporting system
through which staff and other stakeholders can report concerns
relating to potential misconduct. The process and results of this
are overseen by the Group Audit Committee.
Group-wide framework and risk management for operational
risk
The risks detailed above form key elements of the Group's
operational risk profile. In order to identify, assess, manage,
control and report effectively on all operational risks across the
business, a Group-wide operational risk framework is in place. The
key components of the framework are:
●
Application of a risk and control
assessment (RCA) process, where operational risk exposures are
identified and assessed as part of a periodical cycle. The RCA
process considers a range of internal and external factors,
including an assessment of the control environment, to determine
the business's most significant risk exposures on a prospective
basis;
●
An internal incident management
process, which identifies, quantifies and monitors remediation
conducted through root cause analysis and application of action
plans for risk events that have occurred across the
business;
●
A scenario analysis process for the
quantification of extreme, yet plausible manifestations of key
operational risks across the business on a forward-looking basis.
This is carried out at least annually and supports external and
internal capital requirements as well as informing risk oversight
activity across the business; and
●
An operational risk appetite framework
that articulates the level of operational risk exposure the
business is willing to tolerate, covering all operational risk
categories, and sets out escalation processes for breaches of
appetite.
Outputs from these processes and activities performed by individual
business units are monitored by the Group Risk function, which
provides an aggregated view of the risk profile across the
business to the Group Risk Committee and Board.
These core framework components are embedded across the Group via
the Group Operational Risk Policy and Standards documents, which
set out the key principles and minimum standards for the management
of operational risk across the Group.
The Group Operational Risk Policy, standards and operational risk
appetite framework sit alongside other risk policies and standards
that individually engage with key operational risks, including
outsourcing and third-party supply, business continuity, financial
crime, technology and data, operations processes and extent of
transformation.
These policies and standards include subject matter expert-led
processes that are designed to identify, assess, manage and control
operational risks, including:
●
A
transformation risk framework that assesses, manages and reports on
the end-to-end transformation life cycle, project prioritisation
and the risks, interdependencies and possible conflicts arising
from a large portfolio of transformation
activities;
●
Internal and external
review of cyber security capability and
defences;
●
Regular updating and
testing of elements of disaster-recovery plans and the Critical
Incident Procedure process;
●
Group and business
unit-level compliance oversight and testing in respect of adherence
with in-force regulations;
●
Regulatory change teams
in place to assist the business in proactively adapting and
complying with regulatory developments;
●
On financial crime
risks, screening and transaction monitoring systems are in place
and a programme of compliance control monitoring reviews is
undertaken, as well as regular risk
assessments;
●
A framework is in place
for emerging risk identification and analysis in order to capture,
monitor and allow us to prepare for operational risks that may
crystallise beyond the short-term horizon;
●
Corporate insurance
programmes to limit the financial impact of operational risks;
and
●
Reviews of key
operational risks and challenges within Group and business unit
business plans.
These activities are fundamental in maintaining an effective system
of internal control, and as such outputs from these also inform
core RCA, incident management and scenario analysis processes and
reporting on operational risk. Furthermore, they also ensure that
operational risk considerations are embedded in key business
decision-making, including material business approvals and in
setting and challenging the Group's strategy.
c. 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 Group has appetite for retaining insurance risks in order to
create shareholder value in the areas where it believes it has
expertise and controls to manage the risk and can support such risk
with its capital and solvency position.
The principal drivers of the Group's insurance risk vary across its
business units. Across Asia, where a significant volume of health
and protection business is written, the most significant insurance
risks are morbidity risk, persistency risk, and medical inflation
risk. In Jackson, policyholder behaviour risk is particularly
material, especially in the take up of options and guarantees on
variable annuity business.
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 claim limits
within our policies, either limits per type of claim or in total
across a policy. Prudential's morbidity risk is mitigated by
appropriate underwriting when policies are issued and claims are
received. Our morbidity assumptions reflect our recent experience
and expectation of future trends for each relevant line of
business.
The Group's persistency assumptions reflect similarly a combination
of recent past experience for each relevant line of business and
expert judgement, especially where a lack of relevant and credible
experience data exists. Any expected change in future persistency
is also reflected in the 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 the
value of the product features and market conditions.
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.
6.3 Risks related to regulatory and legal
compliance
Regulatory risks 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.
On 21 October 2019, the Hong Kong IA became Prudential's Group-wide
supervisor, and the Group continues to engage with the supervisor
on the Group-wide Supervision (GWS) Framework, which is expected to
be finalised in the second half of 2020.
The focus of some governments toward more protectionist or
restrictive economic and trade policies could impact on the degree
and nature of regulatory changes and Prudential's competitive
position in some geographic markets. This could take effect, for
example, through increased friction in cross-border trade, capital
controls or measures favouring local enterprises such as changes to
the maximum level of non-domestic ownership by foreign companies.
These developments continue to be monitored by the Group at a
national and global level and these considerations form part of the
Group's ongoing engagement with government policy teams and
regulators.
Efforts to curb systemic risk and promote financial stability are
also 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 two key
developments.
The IAIS is developing the ICS as part of ComFrame. The
implementation of ICS will be conducted in two phases - a five-year
monitoring phase followed by an implementation phase. ComFrame will
more generally establish a set of common principles and standards
designed to assist supervisors in addressing risks that arise from
insurance groups with operations in multiple jurisdictions. The
ComFrame proposals, including ICS, could result in enhanced capital
and regulatory measures for IAIGs, for which Prudential is likely
to satisfy the criteria. The Aggregation Method is one of the
approaches being considered as part of the ICS and the related
proposals are being led by the National Association of Insurance
Commissioners (NAIC). Alongside the current ICS developments, the
NAIC is also developing its Group Capital Calculation (GCC) for the
supervision of insurance groups in the US. The GCC is intended to
be a risk-based capital (RBC) aggregation methodology. In
developing the GCC, the NAIC will also consider Group capital
developments by the US Federal Reserve Board, which will inform the
US regulatory association in its construction of a US group capital
calculation.
The FSB has endorsed a new holistic framework (HF) for systemic
risk for implementation by the IAIS in 2020 and suspended G-SII
designations until a review to be undertaken in 2022. Many of the
previous G-SII measures have already been adopted into the
insurance core principles (ICPs) and ComFrame - the common
framework for the supervision of internationally active insurance
groups (IAIGs). Prudential is likely to satisfy the criteria of an
IAIG and therefore continue 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. The IAIS has already consulted on an application
paper on the liquidity risk elements introduced into the ICPs and
ComFrame with a further consultation focused on macroeconomic
elements expected to follow in 2021.
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.
In May 2017, the International Accounting Standards Board (IASB)
published IFRS 17 which will introduce fundamental changes to the
IFRS-based reporting of insurance entities that prepare accounts
according to IFRS from 2021. In June 2019, the IASB published an
exposure draft proposing a number of targeted amendments to this
new standard including the deferral of the effective date by one
year from 2021 to 2022. As a result of comments on this
exposure draft, the IASB plans to redeliberate on a number of areas
of IFRS 17, with an amended standard expected to be issued in
mid-2020. IFRS 17 is expected to, among other things, include
altering the timing of IFRS profit recognition, and the
implementation of the standard is likely to require changes to the
Group's IT, actuarial and finance systems. The Group is reviewing
the complex requirements of this standard and considering its
potential impact.
In the US, various initiatives are under way to introduce fiduciary
obligations for distributors of investment products, which may
reshape the distribution of retirement products. Jackson has
introduced fee-based variable annuity products in response to the
potential introduction of such rules, and we anticipate that the
business's strong relationships with distributors, history of
product innovation and efficient operations should further mitigate
any impacts.
In Asia, regulatory regimes are developing at different speeds,
driven by a combination of global factors and local considerations.
New local capital rules and requirements could be introduced in
these and other regulatory regimes that challenge legal or
ownership structures, or current sales practices, or could be
applied to sales made prior to their introduction retrospectively,
which could have a negative impact on Prudential's business or
reported results.
In July 2014, the Financial Stability Board (FSB) announced
widespread reforms to address the integrity and reliability of
inter-bank offer rates (IBORs). The discontinuation of IBORs in
their current form and their replacement with alternative risk-free
reference rates such as the Sterling Overnight Index Average
benchmark (SONIA) in the UK and the Secured Overnight Financing
Rate (SOFR) in the US could, among other things, impact the Group
through an adverse effect on the value of Prudential's assets and
liabilities which are linked to, or which reference IBORs, a
reduction in market liquidity during any period of transition and
increased legal and conduct risks to the Group arising from changes
required to documentation and its related obligations to its
stakeholders.
Risk management and mitigation of regulatory risk at Prudential
includes the following:
●
Risk assessment
of the Business Plan which includes consideration of current
strategies;
●
Close monitoring
and assessment of our business environment and strategic
risks;
●
The consideration
of risk themes in strategic decisions; and
●
Ongoing
engagement with national regulators, government policy teams and
international standard setters.
6.4 Environmental, social and governance
risks
The
business environment in which Prudential operates is continually
changing and responding effectively to those material risks
associated with ESG themes is crucial in maintaining Prudential's
brand and reputation, its ability to attract and retain customers
and staff, and in turn its financial performance and its long-term
strategy. The Group maintains active engagement with its key
stakeholders as it responds to ESG-related matters, including
investors, customers, employees, governments, policymakers and
regulators in its key markets, as well as with international
institutions - all of whom have expectations in this area which may
differ.
Policies and procedures to support how the Group operates in
relation to certain ESG topics are included in the Group Governance
Manual. Prudential manages key ESG issues though a
multi-disciplinary approach with functional ownership for ESG
topics. The ESG Executive Committee coordinates these activities
and seeks, as one of its aims, to ensure a consistent approach in
managing ESG considerations in its business activities, including
investment activities. It is supported by senior functional leaders
and representatives from the Group's business units, including the
chief investment officers of the Group's asset
managers.
The
environmental risks associated with climate change is one ESG area
that poses significant risks to Prudential and its customers. The
global transition to a lower carbon economy could potentially see
the financial assets of carbon-intensive companies re-price as a
result of facing significantly higher costs or decreasing demand
for their products and services. The speed of this transition,
including the extent to which it is orderly and managed, will be
influenced by factors such as public policy, technology and changes
in market or investor sentiment. This 'transition risk' may
adversely impact the valuation of investments held by the Group.
The Group expects the physical impacts of climate change, driven by
both specific short-term climate-related events such as natural
disasters and longer-term changes in the natural environment, to
increasingly influence the longevity, mortality and morbidity risk
assessments of the Group's product offerings. Climate-driven change
in countries in which Prudential, or its key third parties, operate
could impact on its operational resilience and could change its
claims profile. More information about the activities the Group is
undertaking to increase its understanding and risk management of
these climate-related risks can be found in the climate section of
the ESG Summary.
Social risks that could impact Prudential include the emerging
population risks associated with public health trends (such as an
increase in obesity) and demographic changes (such as population
urbanisation) which may impact customer lifestyles and therefore
may impact claims against the Group's insurance product offerings.
As a life and health insurer, we are committed to playing a greater
role in preventing and postponing illness in order to protect our
customers. Further information about how we are investing in
artificial intelligence technology to enable access to an
affordable and quality healthcare digital offering can be found
within the Pulse case study included in the ESG Summary. Other
social risks may arise from a failure to consider the rights,
diversity, well-being, and interests of people and communities in
which the Group, or its third parties, operates. These risks are
increased as Prudential operates in multiple jurisdictions with
distinct local cultures and considerations. As an employer, the
Group is also exposed to the risk of being unable to attract,
retain and develop highly-skilled staff, which can be increased
where Prudential does not have responsible working
practices.
A failure to maintain high standards of corporate governance may
adversely impact the Group and its customers, staff and employees,
through poor decision-making and a lack of oversight of its key
risks, particularly in joint ventures or partnerships where
Prudential does not have direct overall control. Poor governance
may arise where key governance committees have insufficient
independence, a lack of diversity, skills or experience in their
members, or unclear (or insufficient) oversight responsibilities
and mandates. Inadequate oversight over remuneration increases the
risk of poor senior management behaviours. Prudential operates
across multiple jurisdictions and has a group and subsidiary
governance structure which may add further complexity to these
considerations.
Further information on how Prudential addresses material risks
associated with ESG themes are included in the ESG
Summary.
Notes
1
Excluding assets held to cover linked liabilities and those of the
consolidated unit trusts and similar funds.
2
Based on hierarchy of Standard & Poor's, Moody's and Fitch,
where available and if unavailable, NAIC and other external ratings
have been used.
3 Source
of segmentation: Bloomberg Sector, Bloomberg Group and Merrill
Lynch. Anything that cannot be identified from the three sources
noted is classified as other. Excludes debt securities from other
operations.
Corporate governance
The Directors confirm that the Company has complied with all the
provisions of the Corporate Governance Code issued by the Hong Kong
Stock Exchange Limited (HK Code) throughout the accounting period,
except that the Company does not comply with provision B.1.2(d) of
the HK Code which requires companies, on a comply or explain basis,
to have a remuneration committee which makes recommendations to a
main board on the remuneration of non-executive directors. This
provision is not compatible with supporting provision D.2.3 of the
UK Corporate Governance Code which recommends the board determines
the remuneration of non-executive directors. Prudential has chosen
to adopt a practice in line with the recommendations of the UK
Corporate Governance Code.
The Directors also confirm that the financial results contained in
this document have been reviewed by the Group Audit
Committee.
Risk Committee changes
Today we are announcing that Howard Davies, a Non-executive
Director and Chairman of the Risk Committee, will retire from the
Board at the conclusion of the Annual General Meeting on 14 May
2020.
We are also pleased to announce that Jeremy Anderson, a
Non-executive Director since 1 January 2020, will succeed Howard
Davies as Chairman of the Risk Committee and as a member of the
Nomination & Governance Committee, also at the conclusion of
the Annual General Meeting on 14 May 2020.
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 Howard Davies 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: 11 March 2020
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PRUDENTIAL
PUBLIC LIMITED COMPANY
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By: /s/ Mark FitzPatrick
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Mark
FitzPatrick
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Chief
Financial Officer
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