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-
RISK FACTORS
A number of risk factors affect Prudential's operating results and
financial condition and, accordingly, the trading price of its
shares. The risk factors mentioned below should not be regarded as
a complete and comprehensive statement of all potential risks and
uncertainties. The information given is as of the date of this
document, and any forward-looking statements are made subject to
the reservations specified under 'Forward-looking
statements'.
Prudential's approaches to managing risks are explained
in the section of this document headed 'Group Chief Risk and
Compliance Officer's Report on the risks facing our business and
how these are managed'.
Risks relating to Prudential's financial situation
Prudential's businesses are inherently subject to market
fluctuations and general economic conditions
Uncertainty, fluctuations or negative trends in international
economic and investment climates could have a material adverse
effect on Prudential's business and profitability. Prudential
operates in a macroeconomic and global financial market environment
that presents significant uncertainties and potential challenges.
For example, interest rates in the US and some Asian countries in
which Prudential operates remain low relative to historical levels,
and the transition to a lower carbon economy may impact on
long-term asset valuations.
Global financial markets are subject to uncertainty and volatility
created by a variety of factors. These factors include
monetary policy in China, the US and other jurisdictions
together with their impact on the valuation of all asset
classes and effect on interest rates and inflation
expectations, concerns over sovereign debt, a general slowing in
world growth. Other factors include the increased level of
geopolitical risk and policy-related uncertainty (including the
broader market impacts resulting from the trade negotiations
between the US and China), and socio-political, climate-driven,
pandemic events and other outbreaks such as the recent coronavirus.
The extent of financial market and economic impact of these factors
may be influenced by the actions, including the effectiveness of
mitigating measures, of governments, policymakers and the
public.
The adverse effects of such factors could be felt principally
through the following items:
● Lower interest rates and reduced investment
returns arising on the Group's portfolios including impairment of
debt securities and loans, which could reduce Prudential's capital
and impair its ability to write significant volumes of new
business, increase the potential adverse impact of product
guarantees included in Jackson's variable annuities and non
unit-linked investment products in Asia, and/or have a negative
impact on its assets under management and
profit.
● A reduction in the financial strength and
flexibility of corporate entities which may result in a
deterioration of the credit rating profile and valuation of the
Group's invested credit portfolio, as well as higher credit
defaults and wider credit and liquidity spreads resulting in
realised and unrealised credit losses.
● Failure of counterparties who have transactions
with Prudential (e.g. banks and reinsurers) to meet commitments
that could give rise to a negative impact on Prudential's financial
position and on the accessibility or recoverability of amounts due
or, for derivative transactions, adequate collateral not being in
place.
● Estimates of the value of financial instruments
becoming more difficult because in certain illiquid or closed
markets, determining the value at which financial instruments can
be realised is highly subjective. Processes to ascertain such
values require substantial elements of judgement, assumptions and
estimates (which may change over time).
● Increased illiquidity, which also adds to
uncertainty over the accessibility of financial resources and may
reduce capital resources as valuations decline. This could occur
where external capital is unavailable at sustainable cost,
increased liquid assets are required to be held as collateral under
derivative transactions or redemption restrictions are placed on
Prudential's investments in illiquid funds. In addition,
significant redemption requests could also be made on Prudential's
issued funds and while this may not have a direct impact on the
Group's liquidity, it could result in reputational damage to
Prudential. The potential impact of increased illiquidity is more
uncertain than for other risks such as interest rate or credit
risk.
In general, upheavals in the financial markets may affect general
levels of economic activity, employment and customer behaviour. As
a result, insurers may experience an elevated incidence of claims,
lapses, or surrenders of policies, and some policyholders may
choose to defer or stop paying insurance premiums. The demand for
insurance products may also be adversely affected. In addition,
there may be a higher incidence of counterparty failures. If
sustained, this environment is likely to have a negative impact on
the insurance sector over time and may consequently have a negative
impact on Prudential's business and its balance sheet and
profitability. For example, this could occur if the recoverable
value of intangible assets for bancassurance agreements and
deferred acquisition costs are reduced. New challenges related to
market fluctuations and general economic conditions may continue to
emerge.
For some non-unit-linked investment products, in particular those
written in some of the Group's Asia operations, it may not be
possible to hold assets which will provide cash flows to match
those relating to policyholder liabilities. This is particularly
true in those countries where bond markets are not developed and in
certain markets where regulated premium and claim values are set
with reference to the interest rate environment prevailing at the
time of policy issue. This results in a mismatch due to the
duration and uncertainty of the liability cash flows and the lack
of sufficient assets of a suitable duration. While this residual
asset/liability mismatch risk can be managed, it cannot be
eliminated. Where interest rates in these markets remain lower than
those used to calculate premium and claim values over a sustained
period, this could have a material adverse effect on Prudential's
reported profit and the solvency of its business units. In
addition, part of the profit from the Group's Asia operations is
related to bonuses for policyholders declared on with-profits
products, which are impacted by the difference between actual
investment returns of the with-profits fund (which are broadly
based on historical and current rates of return on equity, real
estate and fixed income securities) and minimum guarantee rates
offered to policyholders. This profit could be lower in particular
in a sustained low interest rate environment.
Jackson writes a significant amount of variable annuities that
offer capital or income protection guarantees. The value of these
guarantees is affected by market factors (such as interest rates,
equity values, bond spreads and realised volatility) and
policyholder behaviour. Jackson uses a derivative hedging programme
to reduce its exposure to market risks arising on these guarantees.
There could be market circumstances where the derivatives that
Jackson enters into to hedge its market risks may not cover its
exposures under the guarantees. The cost of the guarantees that
remain unhedged will also affect Prudential's results.
In addition, Jackson hedges the guarantees on its variable annuity
book on an economic basis (with consideration of the local
regulatory position) and, thus, accepts variability in its
accounting results in the short term in order to achieve the
appropriate result on these bases. In particular, for Prudential's
Group IFRS reporting, the measurement of the Jackson variable
annuity guarantees is typically less sensitive to market movements
than for the corresponding hedging derivatives, which are held at
market value. However, depending on the level of hedging conducted
regarding a particular risk type, certain market movements can
drive volatility in the economic or local regulatory results that
may be less significant under IFRS reporting.
Also, Jackson has a significant spread based business
with a significant proportion of its assets invested in
fixed-income securities and its results are therefore affected by
fluctuations in prevailing interest rates. In particular, fixed
annuities and stable value products written by Jackson expose
Prudential to the risk that changes in interest rates, which are
not fully reflected in the interest rates credited to customers,
will reduce spread. The spread is the difference between the rate
of return Jackson is able to earn on the assets backing the
policyholders' liabilities and the amounts that are credited to
policyholders in the form of benefit increases, subject to minimum
crediting rates. Declines in spread from these products or other
spread businesses that Jackson conducts, and increases in surrender
levels arising from interest rate rises, could have a material
impact on its businesses or results of operations.
As a holding company, Prudential is dependent upon its subsidiaries
to cover operating expenses and dividend payments
The Group's insurance and investment management operations are
generally conducted through direct and indirect subsidiaries, which
are subject to the risks discussed elsewhere in this 'Risk Factors'
section.
As a holding company, Prudential's principal sources of funds are
remittances from subsidiaries, shareholder-backed funds, the
shareholder transfer from long-term funds and any amounts that may
be raised through the issuance of equity, debt and commercial
paper.
Certain of Prudential's subsidiaries are subject to applicable
insurance, foreign exchange and tax laws, rules and
regulations (including in relation to distributable
profits) that can limit their ability to make remittances. In
some circumstances, including changes to general market conditions,
this could limit Prudential's ability to pay dividends to
shareholders or to make available funds held in certain
subsidiaries to cover operating expenses of other members of the
Group.
(Geo)political risks and political uncertainty may adversely impact
economic conditions, increase market volatility, cause operational
disruption to the Group and impact its strategic plans, which could
have adverse effects on Prudential's business and its
profitability
The Group is exposed to (geo)political risks and political
uncertainty in the markets in which it operates. Recent shifts in
the focus of some national governments toward more protectionist or
restrictive economic and trade policies, and international trade
disputes, could impact on the macroeconomic outlook and the
environment for global financial markets. This could take effect,
for example, through increased friction in cross-border trade, such
as implementation of trade tariffs or the withdrawal from existing
trading blocs or agreements, and the exercise of executive powers
to restrict overseas trade and/or financial transactions. The
degree and nature of regulatory changes and Prudential's
competitive position in some geographic markets may also be
impacted, for example, through measures favouring local
enterprises, such as changes to the maximum level of non-domestic
ownership by foreign companies.
(Geo)political risks and political uncertainty may also adversely
impact the Group's operations and its operational resilience.
Increased (geo)political tensions may increase cross-border cyber
activity and therefore increase cyber security risks.
(Geo)political tensions may also lead to civil unrest and/or acts
of civil disobedience. This includes the unrest in Hong Kong, where
mass anti-government demonstrations have given rise to increased
disruption throughout the region. Such events could impact
operational resilience by disrupting Prudential's systems,
operations, new business sales and renewals, distribution channels
and services to customers, which may result in a reduction in
contributions from business units to the central cash balances and
profit of the Group, decreased profitability, financial loss,
adverse customer impacts and reputational
damage.
Prudential is subject to the risk of potential sovereign debt
credit deterioration owing to the amounts of sovereign debt
obligations held in its investment portfolio
Investing in sovereign debt creates exposure to the direct or
indirect consequences of political, social or economic changes
(including changes in governments, heads of state or monarchs) in
the countries in which the issuers of such debt are located
and to the creditworthiness of the sovereign. Investment
in sovereign debt obligations involves risks not present in debt
obligations of corporate issuers. In addition, the issuer of the
debt or the governmental authorities that control the repayment of
the debt may be unable or unwilling to repay principal or pay
interest when due in accordance with the terms of such debt, and
Prudential may have limited recourse to compel payment in the event
of a default. A sovereign debtor's willingness or ability to repay
principal and to pay interest in a timely manner may be affected
by, among other factors, its cash flow situation, its relations
with its central bank, the extent of its foreign currency reserves,
the availability of sufficient foreign exchange on the date a
payment is due, the relative size of the debt service burden to the
economy as a whole, the sovereign debtor's policy toward local and
international lenders, and the political constraints to which the
sovereign debtor may be subject.
Moreover, governments may use a variety of techniques, such as
intervention by their central banks or imposition of regulatory
controls or taxes, to devalue their currencies' exchange rates, or
may adopt monetary and other policies (including to manage their
debt burdens) that have a similar effect, all of which could
adversely impact the value of an investment in sovereign debt even
in the absence of a technical default. Periods of economic
uncertainty may affect the volatility of market prices of sovereign
debt to a greater extent than the volatility inherent in debt
obligations of other types of issuers.
In addition, if a sovereign default or other such events described
above were to occur as has happened on occasion in the past,
other financial institutions may also suffer losses or experience
solvency or other concerns, which may result in Prudential facing
additional risks relating to investments in such financial
institutions that are held in the Group's investment portfolio.
There is also risk that public perceptions about the stability and
creditworthiness of financial institutions and the financial sector
generally might be adversely affected, as might counterparty
relationships between financial institutions. If a sovereign were
to default on its obligations, or adopt policies that
devalued or otherwise altered the currencies in which its
obligations were denominated this could have a material adverse
effect on Prudential's financial condition and results of
operations.
Downgrades in Prudential's financial strength and credit ratings
could significantly impact its competitive position and damage its
relationships with creditors or trading counterparties
Prudential's financial strength and credit ratings, which are used
by the market to measure its ability to meet policyholder
obligations, are an important factor affecting public confidence in
Prudential's products, and as a result its competitiveness.
Downgrades in Prudential's ratings as a result of, for example,
decreased profitability, increased costs, increased indebtedness or
other concerns could have an adverse effect on its ability to
market products, retain current policyholders, and on the Group's
financial flexibility. In addition, the interest rates at which
Prudential is able to borrow funds are affected by its credit
ratings, which are in place to measure the Group's ability to meet
its contractual obligations.
Prudential plc's long-term senior debt is rated as A2 by Moody's, A
by Standard & Poor's and A- by Fitch.
Prudential plc's short-term debt is rated as P-1 by Moody's, A-1 by
Standard & Poor's and F1 by Fitch.
Jackson's financial strength is rated AA- by Standard & Poor's
and Fitch, A1 by Moody's and A+ by A.M. Best.
Prudential Assurance Co. Singapore (Pte) Ltd's financial strength
is rated AA- by Standard & Poor's.
All ratings above are on a stable outlook and are stated as at the
date of this document.
In addition, changes in methodologies and criteria used by rating
agencies could result in downgrades that do not reflect changes in
the general economic conditions or Prudential's financial
condition.
Prudential is subject to the risk of exchange rate fluctuations
owing to the geographical diversity of its businesses
Due to the geographical diversity of Prudential's businesses,
Prudential is subject to the risk of exchange rate fluctuations.
Prudential's operations generally write policies and invest in
assets denominated in local currencies. Although this practice
limits the effect of exchange rate fluctuations on local operating
results, it can lead to fluctuations in Prudential's
consolidated financial statements upon the translation of results
into the Group's presentation currency. This exposure is not
currently separately managed. The Group now presents its
consolidated financial statements in US dollars, which is the
currency in which a large proportion of the Group's earnings and
assets and liabilities are denominated or linked to (such as the
Hong Kong dollar, that is pegged to the US dollar). There remains
some entities that are not denominated in or linked to the US
dollar and transactions which are conducted in non-US dollar
currencies. Prudential is subject to the risk of exchange rate
fluctuations from the translation of the results of these entities
and transactions and the risks from the maintenance of the Hong
Kong dollar peg to the US dollar.
Risks relating to Prudential's business activities and
industry
The implementation of large scale transformation, including complex
strategic initiatives, gives rise to significant execution risks,
may affect Prudential's operational capacity, and may adversely
impact the Group if these initiatives fail to meet their
objectives
As part of the implementation of its business strategies and to
maintain market competitiveness, Prudential undertakes large scale
transformation across the Group. Many of these change initiatives,
which currently focus on digitalisation, outsourcing initiatives
and industry and regulatory-driven change, are complex,
interconnected and/or of large scale. There may be adverse
financial and non-financial (including operational, regulatory,
conduct and reputational) implications for the Group if these
initiatives are subject to implementation delays, or fail, in whole
or in part, to meet their objectives. Additionally, these
initiatives inherently give rise to design and execution risks, and
may increase existing business risks, such as placing additional
strain on the operational capacity, or weakening the control
environment, of the Group.
Implementing further initiatives related to significant regulatory
changes, such as IFRS 17, and the transition to a legislative
framework in Hong Kong for the group-wide supervision of insurance
groups (GWS Framework), may amplify these risks. Risks related to
the GWS Framework are explained in the 'Regulatory
risks' risk
factor.
Adverse experience in the operational risks inherent in
Prudential's business, and those of its material outsourcing
partners, could disrupt its business functions and have a negative
impact on its results of operations
Operational risks are present in all of Prudential's businesses,
including the risk of direct or indirect loss resulting from
inadequate or failed internal and external processes, systems or
human error, fraud, the effects of natural or man-made catastrophic
events (such as natural disasters, pandemics, cyber-attacks, acts
of terrorism, civil unrest and other catastrophes) or from other
external events. These risks may also adversely impact Prudential
through its partners which provide bancassurance, outsourcing,
external technology, data hosting and other
services.
Exposure to such events could impact Prudential's operational
resilience and ability to perform necessary business functions by
disrupting its systems, operations, new business sales and
renewals, distribution channels and services to customers, or
result in the loss of confidential or proprietary data. Such
events, as well as any weaknesses in administration systems (such
as those relating to policyholder records) or actuarial reserving
processes, may also result in increased expenses, as well as legal
and regulatory sanctions, decreased profitability, financial loss,
customer conduct risk impacts and damage Prudential's reputation
and relationship with its customers and business
partners.
The recent social unrest and coronavirus outbreak, and measures to
contain it, have slowed economic and social activity in Hong Kong
and mainland China, and in the case of the coronavirus is having a
broader global economic impact. While these conditions persist, the
level of sales activity in affected markets are expected to be
adversely impacted through a reduction in travel and agency and
bancassurance activity. Extended travel restrictions in particular
may also adversely impact product persistency in the Group's Hong
Kong business. Disruption to Prudential's operations may also
result where Prudential's employees, or those of its service
partners, are affected by travel restrictions; office closures and
other measures impacting on working practices, such as the
imposition of remote working arrangements; quarantine requirements
under local laws and/or other psychosocial
impacts.
Prudential's business is dependent on processing a large number of
transactions for numerous and diverse products. It also employs a
large number of complex and interconnected information
technology (IT) and finance systems and models, and user
developed applications in its processes. The long-term nature of
much of the Group's business also means that accurate records have
to be maintained securely for significant time periods. Further,
Prudential operates in an extensive and evolving legal and
regulatory environment (including in relation to tax) which adds to
the complexity of the governance and operation of its business
processes and controls.
The performance of the Group's core business activities and the
uninterrupted availability of services to customers rely
significantly on, and require significant investment in, IT
infrastructure and security, system development, data governance
and management, compliance and other operational systems,
personnel, controls and processes. During times of significant
change, the resilience and operational effectiveness of these
systems and processes at Prudential and/or its third party
providers may be adversely impacted. In particular Prudential
and its business partners are making increasing use of emerging
technological tools and digital services, or forming strategic
partnerships with third parties to provide these capabilities.
Automated distribution channels to customers increase the
criticality of providing uninterrupted services. A failure to
implement appropriate governance and management of the incremental
operational risks from emerging technologies may adversely impact
on Prudential's reputation and brand, the results of its
operations, its ability to attract and retain customers, its
ability to deliver on its long-term strategy and therefore its
competitiveness and long-term financial success.
Although Prudential's IT, compliance and other operational systems,
models and processes incorporate governance and controls designed
to manage and mitigate the operational and model risks associated
with its activities, there can be no assurance as to the resilience
of these systems and processes to disruption or that governance and
controls will always be effective. Due to human error, among other
reasons, operational and model risk incidents do occur from
time to time and no system or process can entirely prevent
them, although Prudential has not, to date, identified any such
incidents that have had a material impact. Prudential's legacy and
other IT systems, data and processes, as with operational
systems and processes generally, may also be susceptible to failure
or security/data breaches.
In addition, Prudential relies on the performance and operations of
a number of bancassurance, outsourcing (including
external technology and data hosting), and service
partners. These include back office support functions, such as
those relating to IT infrastructure, development and support, and
customer facing operations and services, such as product
distribution and services (including through digital channels) and
investment operations. This creates reliance upon the resilient
operational performance of these partners, and failure to
adequately oversee the partner, or the failure of a partner (or of
its IT and operational systems and processes) could result in
significant disruption to business operations and customers and may
have adverse financial, reputational or conduct risk
implications.
Attempts to access or disrupt Prudential's IT systems, and loss or
misuse of personal data, could result in loss of trust from
Prudential's customers and employees, reputational damage and
financial loss
Prudential and its business partners are increasingly exposed to
the risk that individuals or groups may attempt to disrupt the
availability, confidentiality and integrity of its IT systems,
which could result in disruption to key operations, make it
difficult to recover critical services, damage assets and
compromise the integrity and security of data (both corporate and
customer). This could result in loss of trust from Prudential's
customers and employees, reputational damage and direct or indirect
financial loss. The cyber-security threat continues to evolve
globally in sophistication and potential significance. Prudential's
increasing profile in its current markets and those in which it is
entering, growing customer interest in interacting with their
insurance providers and asset managers through the internet and
social media, improved brand awareness and the 2016 designation of
Prudential as a Global Systematically Important Insurer (G-SII)
could also increase the likelihood of Prudential being considered a
target by cyber criminals. Further, there have been changes to the
threat landscape and the risk from untargeted but sophisticated and
automated attacks has increased.
There is an increasing requirement and expectation on Prudential
and its business partners, to not only hold customer, shareholder
and employee data securely, but use it in a transparent and
appropriate way. The risk of not securely handling or misusing data
may be increased by the use of emerging technological tools which
could increase the volume of data that Prudential collects and
processes. Developments in data protection worldwide (such as
the implementation of EU General Data Protection Regulation that
came into force in 2018 and the California Consumer Protection Act
that came into force on 1 January 2020) may also increase the
financial and reputational implications for Prudential following a
significant breach of its (or its third-party suppliers') IT
systems. New and currently unforeseeable regulatory issues may
also arise from the increased use of emerging technology, data and
digital services. Although Prudential has experienced or has
been affected by cyber and data breaches, to date, it has not
identified a failure or breach, or an incident of data misuse in
relation to its legacy and other IT systems and processes which has
had a material impact. However, Prudential has been, and likely
will continue to be, subject to potential damage from computer
viruses, unauthorised access and cyber-security attacks such as
'denial of service' attacks (which, for example, can cause
temporary disruption to websites and IT networks), phishing and
disruptive software campaigns.
Prudential is continually enhancing its IT environment to remain
secure against emerging threats, together with increasing its
ability to detect system compromise and recover should such an
incident occur. However, there can be no assurance that such events
will not take place which may have material adverse consequential
effects on Prudential's business and financial
position.
Prudential operates in a number of markets through joint ventures
and other arrangements with third parties, involving certain risks
that Prudential does not face with respect to its consolidated
subsidiaries
Prudential operates, and in certain markets is required by local
regulation to operate, through joint ventures and other similar
arrangements. For such Group operations, management control is
exercised in conjunction with other participants. The level of
control exercisable by the Group depends on the terms of the
contractual agreements, in particular, those terms providing for
the allocation of control among, and continued cooperation between,
the participants. In addition, the level of control exercisable by
the Group could be subject to changes in the maximum level of
non-domestic ownership imposed on foreign companies in certain
jurisdictions. Prudential may face financial, reputational and
other exposure (including regulatory censure) in the event that any
of its partners fails or is unable to meet its
obligations under the arrangements, encounters financial
difficulty, or fails to comply with local or international
regulation and standards such as those pertaining to the prevention
of financial crime. In addition, a significant proportion of the
Group's product distribution is carried out through arrangements
with third parties not controlled by Prudential such as
bancassurance and agency arrangements and is therefore dependent
upon continuation of these relationships. A temporary or permanent
disruption to these distribution arrangements, such as through
significant deterioration in the reputation, financial position or
other circumstances of the third party or material failure in
controls (such as those pertaining to the third-party system
failure or the prevention of financial crime) could adversely
affect Prudential's results of operations.
Adverse experience relative to the assumptions used in pricing
products and reporting business results could significantly affect
Prudential's results of operations
In common with other life insurers, the profitability of the
Group's businesses depends on a mix of factors including mortality
and morbidity levels and trends, policy surrenders and take-up
rates on guarantee features of products, investment performance and
impairments, unit cost of administration and new business
acquisition expenses. The Group's businesses are subject to
inflation risk. In particular, the Group's medical insurance
businesses in Asia are also exposed to medical inflation
risk.
Prudential needs to make assumptions about a number of factors in
determining the pricing of its products, for setting reserves, and
for reporting its capital levels and the results of its long-term
business operations. Assumptions about future expected levels
of mortality are of relevance to the Guaranteed Minimum Withdrawal
Benefit (GMWB) of Jackson's variable annuity business.
A further factor is the assumption that Prudential makes about
future expected levels of the rates of early termination of
products by its customers (known as persistency). This is relevant
to a number of lines of business in the Group, especially for
Jackson's portfolio of variable annuities and, in Asia markets, the
health and protection products in Hong Kong, Singapore, Indonesia
and Malaysia. Prudential's persistency assumptions reflect a
combination of recent past experience for each relevant line of
business and expert judgement, especially where a lack of relevant
and credible experience data exists. Any expected change in future
persistency is also reflected in the assumption. If actual levels
of future persistency are significantly different than assumed, the
Group's results of operations could be adversely affected.
Furthermore, Jackson's variable annuity products are sensitive to
other types of policyholder behaviour, such as the take-up of its
GMWB product features.
In addition, Prudential's business may be adversely affected by
epidemics, pandemics and other effects that give rise to a large
number of deaths or additional sickness claims, as well as
increases to the cost of medical claims. Pandemics,
significant influenza and other epidemics and outbreaks such as the
recent coronavirus have occurred a number of times historically but
the likelihood, timing, or the severity of future events cannot be
predicted. The effectiveness of external parties, including
governmental and non-governmental organisations, in combating the
spread and severity of any epidemics could have a material impact
on the Group's loss experience.
Prudential's businesses are conducted in highly competitive
environments with developing demographic trends and continued
profitability depends upon management's ability to respond to these
pressures and trends
The markets for financial services in the US and Asia are highly
competitive, with several factors affecting Prudential's ability to
sell its products and continued profitability, including price and
yields offered, financial strength and ratings, range of product
lines and product quality, brand strength and name recognition,
investment management performance and fund management trends,
historical bonus levels, the ability to respond to developing
demographic trends, customer appetite for certain savings products
and technological advances. In some of its markets, Prudential
faces competitors that are larger, have greater financial resources
or a greater market share, offer a broader range of products or
have higher bonus rates. Further, heightened competition for
talented and skilled employees and agents with local experience,
particularly in Asia, may limit Prudential's potential to grow its
business as quickly as planned. Technological advances may
result in increased competition to the Group (including from
outside the insurance industry) and a failure to be able to attract
sufficient numbers of skilled staff.
In Asia, the Group's principal competitors include global life
insurers together with regional insurers and multinational asset
managers. In most markets, there are also local companies that have
a material market presence. Jackson's competitors in the US include
major stock and mutual insurance companies, mutual fund
organisations, banks and other financial services
companies.
Prudential believes that competition will intensify across all
regions in response to consumer demand, digital and other
technological advances, the need for economies of scale and the
consequential impact of consolidation, regulatory actions and other
factors. Prudential's ability to generate an appropriate return
depends significantly upon its capacity to anticipate and respond
appropriately to these competitive pressures.
Prudential is exposed to ongoing risks as a result of the demerger
of M&G plc
On 21 October 2019, Prudential completed the demerger of M&G
plc and, in connection with the demerger, Prudential entered into a
demerger agreement with M&G plc. Among other provisions, the
demerger agreement contains a customary indemnity under which
Prudential has agreed to indemnify M&G plc against liabilities
incurred by the M&G group that relate to the business of the
Group. Although it is not anticipated that Prudential will be
required to pay any substantial amount pursuant to such indemnity
obligations, if any amount payable thereunder is substantial this
could have a material adverse effect on Prudential's financial
condition and/or results of operations.
Legal and regulatory risk
Prudential conducts its businesses subject to regulation and
associated regulatory risks, including a change to the basis in the
regulatory supervision of the Group, the effects of changes in the
laws, regulations, policies and interpretations and any accounting
standards in the markets in which it operates
Changes in government policy and legislation (including in relation
to tax), capital control measures on companies and individuals,
regulation or regulatory interpretation applying to companies in
the financial services and insurance industries in any of the
markets in which Prudential operates (including those related to
the conduct of business by Prudential or its third party
distributors), or decisions taken by regulators in connection with
their supervision of members of the Group, which in some
circumstances may be applied retrospectively, may adversely affect
Prudential. The impact from any regulatory changes may affect
Prudential, for example changes may be required to its product
range, distribution channels, handling and usage of
data, competitiveness, profitability, capital requirements,
risk management approaches, corporate or governance structure and,
consequently, reported results and financing requirements. Also,
regulators in jurisdictions in which Prudential operates may impose
requirements affecting the allocation of capital and liquidity
between different business units in the Group, whether on a
geographic, legal entity, product line or other basis. Regulators
may also change the level of capital required to be held by
individual businesses, the regulation of selling practices,
solvency requirements and could introduce changes that impact
products sold or that may be sold. Furthermore, as a result of
interventions by governments in light of financial and global
economic conditions, there may continue to be changes in government
regulation and supervision of the financial services industry,
including the possibility of higher capital requirements,
restrictions on certain types of transactions and enhancement of
supervisory powers.
With effect from 21 October 2019, the group-wide supervisor of
Prudential plc changed to the Hong Kong Insurance Authority
(HKIA). Prior to the introduction of the proposed GWS
Framework, the Group is being supervised on an interim basis in
line with principles agreed with the HKIA. Until the GWS Framework
is finalised the Group cannot be certain of the nature and extent
of differences between the interim principles agreed with the HKIA
and the specific regulatory requirements of the GWS Framework. With
the agreement of the HKIA, Prudential is applying the Local
Capital Summation Method (LCSM) to determine Group regulatory
capital requirements. Any differences between these interim
supervisory requirements and those that will be adopted under the
GWS Framework may lead to changes to the way in which capital
requirements are calculated and to the eligibility of the capital
instruments issued by Prudential to satisfy such capital
requirements. The Group's existing processes and resources may also
need to change to comply with the final GWS Framework legislation
or any other requirements of the HKIA. The need to adapt to any
such changes or to respond to any such requirements may lead to
increased costs or otherwise impact the business, financial
condition, results, profitability and/or prospects of the
Group.
While the HKIA has agreed that the subordinated debt instruments
Prudential has in issue can be included as part of the Group's
capital resources for the purposes of satisfying the capital
requirements imposed under the LCSM under the interim principles
agreed with the HKIA, the grandfathering provisions under the GWS
Framework remain subject to the Hong Kong legislative process. If
Prudential is ultimately not able to include the subordinated debt
instruments it holds as part of the Group's capital resources for
the purposes of satisfying the capital requirements imposed under
the GWS Framework it may need to raise additional capital, which
may in turn lead to increased costs for the Group.
Currently there are also a number of other global regulatory
developments which could impact Prudential's businesses in its many
jurisdictions. These include the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) and its
subsequent amendments in the US which provided for a
comprehensive overhaul of the financial services industry within
the US including reforms to financial services entities, products
and markets, the work of the Financial Stability
Board (FSB) in the area of systemic risk including the
reassessment of the designation of Global Systemically Important
Insurers (G-SIIs), and the Insurance Capital
Standard (ICS) being developed by the International
Association of Insurance Supervisors (IAIS). In addition,
regulators in a number of jurisdictions in which the Group operates
are further developing their local capital regimes. Across Asia
this includes China, Hong Kong, Singapore, Thailand and
India. There remains a high degree of uncertainty over the
potential impact of such changes on the Group.
In November 2019 the FSB has endorsed a new Holistic Framework
(HF), intended for the assessment and mitigation of systemic risk
in the insurance sector, for implementation by the IAIS in 2020 and
has suspended G-SII designations until completion of a review to be
undertaken in 2022. Many of the previous G-SII measures have
already been adopted into the Insurance Core Principles (ICPs) and
ComFrame - the common framework for the supervision of
Internationally Active Insurance Groups (IAIGs). Prudential is
expected to satisfy the criteria to be an IAIG and would therefore
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. The IAIS continues to develop 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.
In July 2014, the 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.
Various jurisdictions in which Prudential operates have created
investor compensation schemes that require mandatory contributions
from market participants in some instances in the event of a
failure of a market participant. As a major participant in the
majority of its chosen markets, circumstances could arise in which
Prudential, along with other companies, may be required to make
such contributions.
The Group's accounts are prepared in accordance with current IFRS
applicable to the insurance industry. The International Accounting
Standards Board (IASB) introduced a framework that it
described as Phase I which, under its standard IFRS 4 permitted
insurers to continue to use the statutory basis of accounting for
insurance assets and liabilities that existed in their
jurisdictions prior to January 2005. In May 2017, the IASB
published its replacement standard on insurance accounting (IFRS
17, 'Insurance Contracts'), which will have the effect of
introducing fundamental changes to the statutory 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. The EU will apply its usual process for assessing whether
the standard meets the necessary criteria for endorsement. The
Group is reviewing the complex requirements of this standard and
considering its potential impact. The effect of changes required to
the Group's accounting policies as a result of implementing the new
standard is currently uncertain, but these changes can be expected
to, amongst other things, alter the timing of IFRS profit
recognition. Given the implementation of this standard is likely to
require significant enhancements to IT, actuarial and finance
systems of the Group, it will also have an impact on the Group's
expenses.
Any changes or modification of IFRS accounting policies may require
a change in the way in which future results will be determined
and/or a retrospective adjustment of reported results to ensure
consistency.
The resolution of several issues affecting the financial services
industry could have a negative impact on Prudential's reported
results or on its relations with current and potential
customers
Prudential is, and in the future may continue to be, subject to
legal and regulatory actions in the ordinary course of its business
on matters relevant to the delivery of customer outcomes. Such
actions relate, and could in the future relate, to the application
of current regulations or the failure to implement new
regulations (including those relating to the conduct of business),
regulatory reviews of broader industry practices and products sold
(including in relation to lines of business already closed) in the
past under acceptable industry or market practices at the time and
changes to the tax regime affecting products. Regulators may
also focus on the approach that product providers use to select
third-party distributors and to monitor the appropriateness of
sales made by them. In some cases, product providers can be held
responsible for the deficiencies of third-party
distributors.
In the US, there has been significant attention on the different
regulatory standards applied to investment advice delivered to
retail customers by different sectors of the industry. As a result
of reports relating to perceptions of industry abuses, there have
been numerous regulatory inquiries and proposals for legislative
and regulatory reforms. This includes focus on the suitability of
sales of certain products, alternative investments and the widening
of the circumstances under which a person or entity providing
investment advice with respect to certain employee benefit and
pension plans would be considered a fiduciary subjecting the person
or entity to certain regulatory requirements. There is a risk that
new regulations introduced may have a material adverse effect on
the sales of the products by Prudential and increase Prudential's
exposure to legal risks.
Litigation, disputes and regulatory investigations may adversely
affect Prudential's profitability and financial
condition
Prudential is, and may in the future be, subject to legal actions,
disputes and regulatory investigations in various contexts,
including in the ordinary course of its insurance, investment
management and other business operations. These legal actions,
disputes and investigations may relate to aspects of Prudential's
businesses and operations that are specific to Prudential, or that
are common to companies that operate in Prudential's markets. Legal
actions and disputes may arise under contracts, regulations
(including tax) or from a course of conduct taken by Prudential,
and may be class actions. Although Prudential believes that it has
adequately provided in all material respects for the costs of
litigation and regulatory matters, no assurance can be provided
that such provisions are sufficient. Given the large or
indeterminate amounts of damages sometimes sought, other sanctions
that might be imposed and the inherent unpredictability of
litigation and disputes, it is possible that an adverse outcome
could have an adverse effect on Prudential's reputation, results of
operations or cash flows.
Changes in tax legislation may result in adverse tax
consequences
Tax rules, including those relating to the insurance industry, and
their interpretation may change, possibly with retrospective
effect, in any of the jurisdictions in which Prudential operates.
Significant tax disputes with tax authorities, and any change in
the tax status of any member of the Group or in taxation
legislation or its scope or interpretation could affect
Prudential's financial condition and results of
operations.
Prudential's Articles of Association contain an exclusive
jurisdiction provision
Under Prudential's Articles of Association, certain legal
proceedings may only be brought in the courts of England and Wales.
This applies to legal proceedings by a shareholder (in its capacity
as such) against Prudential and/or its directors and/or its
professional service providers. It also applies to legal
proceedings between Prudential and its directors and/or Prudential
and Prudential's professional service providers that arise in
connection with legal proceedings between the shareholder and such
professional service providers. This provision could make it
difficult for US and other non-UK shareholders to enforce their
shareholder rights.
Environmental, social and governance risks
The failure to understand and respond effectively to the risks
associated with environmental, social or governance (ESG) factors
could adversely affect Prudential's achievement of its long-term
strategy
The business environment in which Prudential operates is
continually changing. A failure to manage those material
risks associated with the ESG themes detailed below may
adversely impact on the reputation and brand of the Group, the
results of its operations, its ability to attract and retain
customers and staff, its ability to deliver on its long-term
strategy and therefore its long-term financial success.
Ensuring high levels of transparency and responsiveness to
stakeholders is a key aspect of this. ESG-related issues may also
directly or indirectly impact key stakeholders, ranging from
customers to institutional investors, employees, suppliers and
regulators, all of whom have expectations in this area, which may
differ.
The environmental risks associated with climate change is one ESG
area that poses significant risks to Prudential and its customers.
These risks include transition risks and physical risks. The global
transition to a lower carbon economy could have an adverse impact
on investment valuations as the financial assets of
carbon-intensive companies re-price and could result in some asset
sectors facing significantly higher costs and a disorderly
adjustment to their asset values. The speed of this transition will
be influenced by factors such as public policy, technology and
changes in market or investor sentiment. This may adversely impact
the valuation of investments held by the Group. The potential
broader economic impact from this may adversely affect customer
demand for the Group's products. The physical impacts of
climate change, driven by both specific short-term climate-related
events such as natural disasters and longer-term changes
to the natural environment, will increasingly influence
the longevity, mortality and morbidity risk assessments of the
Group's underwriting product offerings. Climate-driven changes
in countries in which Prudential, or its key third
parties, operate could impact on its operational
resilience and could change its claims profile. There is an
increasing expectation from stakeholders for Prudential to
understand, manage and provide increased transparency of its
exposure to climate-related risks. Given that Prudential's
investment horizons are long term, it is potentially more exposed
to the long-term impact of climate change risks. Additionally,
Prudential's stakeholders increasingly expect an approach
to responsible investment that demonstrates
how ESG considerations are effectively integrated
into investment and engagement decisions, and
fiduciary and stewardship duties.
Social risks that could impact Prudential may arise from a failure
to consider the rights, diversity, well-being, and interests of
people and communities in which the Group, or its third parties,
operates. These risks are increased as Prudential operates in
multiple jurisdictions with distinct local cultures and
considerations. Emerging population risks associated with
public health trends (such as an increase in obesity) and
demographic changes (such as population urbanisation and ageing)
may affect customer lifestyles and therefore may impact claims
against the Group's insurance product offerings. As a provider of
insurance and investment services, Prudential has access to
extensive amounts of customer personal data, including data related
to personal health, and is therefore exposed to the regulatory and
reputational risks associated with customer data misuse or security
breaches. These risks are explained in the 'Information security and loss
or misuse of data' risk
factor. The potential for reputational risks extends to the Group's
supply chains, which may be adversely impacted by factors such as
poor labour standards and abuses of human rights by third parties.
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. Poor governance may arise where key governance committees
have insufficient independence, a lack of diversity, skills or
experience in their members, or unclear (or insufficient) oversight
responsibilities and mandates. Inadequate oversight over
remuneration increases the risk of poor senior management
behaviours. Prudential operates across multiple jurisdictions and
has a group and subsidiary governance structure which may add
further complexity to these considerations. Participation in joint
ventures or partnerships where Prudential does not have direct
overall control increases the potential for reputational risks
arising from poor governance.
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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Group
Chief Financial Officer and Chief Operating Officer
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