SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the
month of August,
2019
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
14
August 2019
PRUDENTIAL PLC HALF YEAR 2019 RESULTS
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PRUDENTIAL CONTINUES TO DELIVER ASIA-LED GROWTH AND PREPARES FOR
DEMERGER IN Q4 2019
Performance highlights on a constant (and actual) exchange rate
basis
● Group
operating profit1 from
continuing operations (excluding M&GPrudential) of £2,024
million, up 14 per cent2 (21
per cent)
● Asia
operating profit1 up
14 per cent2 (up
18 per cent); new business profit3 up
10 per cent2 (up
15 per cent); operating free surplus generation4 up
13 per cent2 (up
16 per cent)
● US
operating profit1 up
14 per cent2 (up
21 per cent); RBC capital ratio in excess of 400 per
cent
● 2019
first interim ordinary dividend increased by 5 per cent to 16.45
pence per share in line with our existing dividend
policy
● Group
Solvency II surplus5,6 estimated
at £16.7 billion, equivalent to a cover ratio of 222 per
cent
● Demerger expected to be completed in fourth
quarter of 2019, as a result of which M&GPrudential has been
classified as discontinued operations.
Mike Wells, Group Chief Executive, said: "We have delivered a
positive performance in the first half of 2019. The Group's
operating profit1from
continuing operations increased by 14 per cent2.
Our focus on key areas of operational improvement and continued
investment has enabled us to drive growth and position ourselves to
continue to grow profitably. At the same time, we expect to
complete the demerger of M&GPrudential in the fourth quarter of
2019, and preparations are complete for Prudential plc's move to
Group-wide supervision by the Hong Kong Insurance Authority. We
believe that the demerger will enable both businesses to maximise
their potential performance. Both will have experienced management
teams better able to focus on their strategic priorities and
distinct investment prospects, as well as improved allocation of
resources and greater flexibility in execution.
"The Group's performance has again been driven by our Asian
business, where we have delivered double-digit growth across our
key metrics of operating profit1,
up 14 per cent2,
new business profit3 and
APE sales12,
both up 10 per cent2,
and operating free surplus generation4,
up 13 per cent2.
Total assets under management at our Asian asset manager,
Eastspring, grew 12 per cent7 to
£169.5 billion, with positive external net flows of £3.1
billion8 (2018:
net outflows of £0.9 billion on an actual exchange rate
basis). Our multi-channel strategy across life insurance and asset
management ensures that we provide high-quality products delivering
distinctive value-added services to our broad customer base. We are
benefiting from growing demand for health, protection and savings
across the region and we are constantly improving our access to
this demand by innovating in new value-added services, distribution
and digitalisation of the customer journey. We recently passed
another key milestone through the first launch of our new holistic
health management app, Pulse by Prudential, in Malaysia, which will
be followed by a wider roll-out across the
region.
"In the US, Jackson's operating profit1 increased
by 14 per cent2,
largely due to lower amortisation of deferred acquisition costs
resulting from the strong equity market performance in the period.
With greater clarity in key consumer regulations emerging, we
intend to accelerate our process of diversifying our business,
while retaining our longstanding discipline in terms of risk
management. We have a leading position in the retirement income
industry, with strong long-term economics, and our operating
platform has industry-leading cost advantages and is highly digital
and scalable. We are in the process of driving a more diversified
product mix and developing relationships with new distributors. We
are actively exploring options to accelerate this
diversification.
"M&GPrudential is approaching life as a fully independent
business, and its Board and management are in place. The business
is well positioned to capture the opportunities created by shifting
demographics and the search for yield, through its differentiated,
high-value savings and investment solutions. While operating
profit1 was
lower at £687 million (2018: £736 million), PruFund net
inflows of £3.5 billion contributed to 6 per cent growth in
total assets under management9 to
£341.1 billion.
"Our focus on structural growth opportunities in terms of
geographies, products and distribution platforms and our diligent
approach to execution mean that we are well placed to continue to
deliver important benefits for our customers and profitable growth
for our shareholders."
Summary financials
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Half year
2019 £m
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Half year
2018 £m
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Change on
AER basis
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Change on
CER basis
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|
|
|
|
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Operating profit from continuing operations1
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2,024
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1,669
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21%
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14%
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Operating profit from discontinued operations1
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687
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736
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(7)%
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(7)%
|
|
|
|
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Operating free surplus generated from continuing
operations4
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1,502
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1,173
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28%
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22%
|
|
|
|
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Life new business profit from continuing
operations3
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1,643
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1,588
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3%
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(2)%
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Life new business profit from discontinued
operations3
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152
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179
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(15)%
|
(15)%
|
|
|
|
|
|
IFRS profit after tax (total continuing and discontinued
operations)10
|
1,540
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1,356
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14%
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7%
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Net cash remittances from business units
(both continuing and discontinued operations)11
|
1,212
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1,111
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9%
|
-
|
|
|
|
|
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30 June
2019
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31 December
2018
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Change on
AER basis
|
|
|
|
|
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IFRS
shareholders' funds per share
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757p
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665p
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14%
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EEV
shareholders' funds per share
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2,055p
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1,920p
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7%
|
|
Group
Solvency II cover ratio5,6
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222%
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232%
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(10)pp
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Notes
1
In this press release 'operating profit' refers to adjusted IFRS
operating profit based on longer-term investment returns. This
alternative performance measure is reconciled to IFRS profit for
the period in note B1.1 of the IFRS financial statements.
Continuing operations relate to Asia, US and central operations
(including Africa). It excludes M&GPrudential which met the
criteria to be classified as held for distribution at 30 June 2019
and hence is shown as discontinued. M&GPrudential operating
profit is stated after restructuring costs.
2
Period-on-period percentage increases are stated on a constant
exchange rate basis unless otherwise stated.
3
New business profit, on a post-tax basis, on business sold in the
period, calculated in accordance with EEV Principles.
4
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 underlying business unit amount. The amount is
for continuing operations only (ie M&GPrudential is excluded).
Further information is set out in note 9 of the EEV basis
results.
5
The Group shareholder capital position covers continuing and
discontinued operations and excludes the contribution to own funds
and the Solvency Capital Requirement from ring-fenced with-profits
funds and staff pension schemes in surplus. The estimated solvency
positions include management's calculation of UK transitional
measures reflecting operating and market conditions at each
valuation date.
6
Estimated before allowing for first interim ordinary dividend (31
December 2018: second interim ordinary dividend).
7
Growth from 31 December 2018.
8
Excluding money market funds.
9
Represents M&GPrudential asset management external funds under
management and internal funds included on the M&GPrudential
long-term insurance business balance sheet.
10
IFRS profit after tax reflects the combined effects of operating
results determined on the basis of longer-term investment returns,
together with short-term investment variances, which in half year
2019 were driven by those arising in the US, results attaching to
disposal of businesses and corporate transactions, amortisation of
acquisition accounting adjustments and the total tax charge for the
period.
11
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 financial information. This comprises dividends and
other transfers from business units that are reflective of emerging
earnings and capital generation.
12
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 period for all
insurance products, including premiums for contracts designated as
investment contracts under IFRS 4. It is not representative of
premium income recorded in the IFRS financial statements. See note
II of the Additional financial information for further
explanation.
Contact:
Media
|
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Investors/Analysts
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Jonathan
Oliver
|
+44 (0)20 3977 3500
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Patrick
Bowes
|
+44 (0)20 3977 9702
|
Tom
Willetts
|
+44 (0)20 3977 9760
|
Richard
Gradidge
|
+44 (0)20 3977 4014
|
Addy
Frederick
|
+44 (0)20 3977 9399
|
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.
Period-on-period percentage increases are stated on a constant
exchange rate basis unless otherwise stated. Constant exchange
rates are calculated by translating prior period results using the
current period foreign exchange rate ie current period average
rates for the income statement and current period closing rates for
the balance sheet.
b. EEV
and adjusted IFRS operating profit based on longer-term investment
returns are stated after excluding the effect of short-term
fluctuations in investment returns against long-term assumptions,
which for IFRS in half year 2019 were driven by those arising in
the US, and gains/losses arising on the disposal of businesses and
other corporate transactions including costs associated with the
demerger of M&GPrudential. 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, 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&GPrudential) unless otherwise
stated.
c. Total
number of Prudential plc shares in issue as at 30 June 2019 was
2,599,796,199.
d. A
presentation for analysts and investors will be held today at
11.30am (UK time) / 6.30pm (Hong Kong time) in the conference suite
at 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/5d2f0850379ece0b00d7f019/lwin
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) / 6.00pm (Hong Kong time).
Dial-in:
020 3936 2999 (UK Local Call) / +44 20 3936 2999 (International) /
0800 640 6441 (Freephone UK), Participant access code: 301853. 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: 830013). This will be available
from approximately 3.00pm (UK time) / 10.00pm (Hong Kong time) on
14 August 2019 until 11.59pm (UK time) on 28 August 2019 / 6.59am
(Hong Kong time) on 29 August 2019.
e. 2019 First Interim
Dividend
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Ex-dividend
date
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22 August 2019 (UK, Hong Kong and Singapore)
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|
Record
date
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23
August 2019
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|
Payment
of dividend
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26 September
2019 (UK and Hong Kong)
On or
about 03 October 2019 (Singapore and ADR holders)
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f. About Prudential
plc
Prudential
plc and its affiliated companies constitute one of the world's
leading financial services groups, serving 26 million customers,
with £717 billion of assets under management (as at 30 June
2019). Prudential plc is incorporated in England and Wales and is
listed on the 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.
g. UK and Europe
Throughout
this results announcement we use M&GPrudential to refer to the
Group's discontinued UK and Europe operations. M&GPrudential
has announced that it will change its name in preparation for
listing to M&G plc, providing a single corporate identity while
retaining its two customer-facing brands of Prudential and M&G
Investments.
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, operating environment, 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, including without limitation those
referring to the demerger and the expected timing of the demerger,
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, the timing, costs and successful
implementation of the demerger of the M&GPrudential business;
the future trading value of the shares of Prudential plc and the
trading value and liquidity of the shares of the to-be-listed
M&GPrudential business following such
demerger; future market conditions, including
fluctuations in interest rates and exchange rates, the continuance
of a sustained low-interest rate environment, and the performance
of financial markets generally; the policies and actions of
regulatory authorities, including, for example, new government
initiatives; the actual or anticipated political, legal and
economic ramifications of the UK's withdrawal from the European
Union; the impact of continuing application of Global Systemically
Important Insurer (or 'G-SII') policy measures on Prudential; the
impact of competition, economic uncertainty, inflation and
deflation; the effect on Prudential's business and results from, in
particular, mortality and morbidity trends, lapse rates and policy
renewal rates; the timing, impact and other uncertainties of future
acquisitions or combinations within relevant industries; the impact
of internal projects and other strategic actions failing to meet
their objectives; disruption to the availability, confidentiality
or integrity of Prudential's IT systems (or those of its
suppliers); 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; and the impact of legal and
regulatory actions, investigations and disputes. 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' section in the Prudential 2019 Half Year
Financial Report.
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
I am pleased with our performance during the first half of the
year. By focusing on key areas of sustained operational improvement
and continued investment we have both delivered growth over the
half year and positioned ourselves to deliver further growth,
despite an uncertain geopolitical and macroeconomic
outlook.
We have passed a number of important milestones on our way to
demerging M&GPrudential from the Group, which will result in
two separately listed companies. We believe that the demerger will
enable both businesses to maximise their potential performance.
Both will have experienced management teams better able to focus on
their strategic priorities and distinct investment prospects, as
well as improved allocation of resources and greater flexibility in
execution. We expect to complete the demerger in the fourth quarter
of 2019. We are also preparing the Prudential plc Group for life
beyond the demerger, and intend to enhance our effectiveness,
efficiency and alignment with stakeholders. Throughout the process
of preparing for demerger, I am pleased to report that all of our
businesses and people have worked hard on delivering value and
service for our customers and this, in turn, has contributed to our
performance.
In Asia, we are continuing to grow at pace, while benefiting from
high-quality recurring income. We continue to invest in Asia.
Over the 18 month period since the start of 2018 this has included
the acquisition, in 2018, of our initial 65 per cent interest in
TMB Asset Management Co., Ltd. in Thailand for £197
million1,
the renewal of our regional strategic bancassurance alliance with
UOB for an initial fee of £662 million9 (£230
million9 of
which was paid in the first half of 2019) and a total investment
over this period of £738 million1 of
free surplus in new business. In the US, we are diversifying
the product mix and building new distributor
relationships.
Across the Group, we are well placed to continue fulfilling our
purpose of helping people plan for the future with confidence by
removing the uncertainty from life's big financial events. In Asia,
we are focused on serving the health, protection and savings needs
of the region's rapidly growing and increasingly affluent
population, and we have intensified our drive to strengthen and
deepen our operational capabilities through innovative product
design, broadened distribution, including via non-traditional
partners, and differentiated value-added services for our
customers. In the US, we are continuing to target the growing asset
pool in the world's largest retirement market, while
M&GPrudential is addressing the compelling retirement and
savings opportunity in the UK and internationally.
Operating environment
This positive performance has been achieved against the background
of a geopolitical and macroeconomic environment that remains
uncertain. During the first half of 2019, major equity markets
performed strongly, notably with the S&P 500 index up 17 per
cent and the MSCI Asia excluding Japan index up 9 per cent, while
in the second half to date they have been more
volatile.
Economic growth moderated but was still respectable in the US and
China, with GDP2 up
1.3 per cent and 3.0 per cent in the period, respectively, while
Europe was subdued and the UK was affected by continued Brexit
uncertainty. Longer-term yields fell in the US, the UK and in Asia
markets and credit conditions remained benign.
Sterling weakened moderately compared with most of the currencies
in our major international markets over the first half of 2019, and
has weakened further in the second half. To aid comparison of
underlying progress, we continue to express and comment on the
performance trends of our international businesses on a constant
exchange rate basis.
Financial performance
Our adjusted IFRS operating profit based on longer-term investment
returns3 (operating
profit) from continuing operations - that is, excluding
M&GPrudential - was 14 per cent4 higher
at £2,024 million (21 per cent higher on an actual exchange
rate basis). APE sales5from
continuing operations were up 5 per cent4 (10
per cent on an actual exchange rate basis), while new business
profit6 from
continuing operations was 2 per cent4 lower
at £1,643 million (3 per cent higher on an actual exchange
rate basis), with Asia up 10 per cent4.
EEV basis operating profit6 from
continuing operations increased 1 per cent4 (7
per cent on an actual exchange rate basis) to £2,641 million.
Operating free surplus generation7 from
continuing operations, our preferred measure of cash generation,
from our life and asset management businesses increased by 22 per
cent4 to
£1,502 million (28 per cent on an actual exchange rate basis),
including a £274 million benefit following the integration of
the recently acquired US John Hancock business, and after financing
£516 million (2018: £461 million) of new business
investment.
Our performance was led by our Asia business, which delivered
double-digit growth in operating profit (up 14 per
cent4),
new business profit (up 10 per cent4)
and operating free surplus generation (up 13 per
cent4).
In the US, Jackson's operating profit increased by 14 per
cent4,
while new business profit decreased by 30 per
cent4,
reflecting the adverse effect of lower US interest rates and lower
sales of variable annuities during the period. Despite challenging
external macroeconomic and political conditions,
M&GPrudential's total funds under management8 grew
by 6 per cent in the six months to 30 June 2019 to £341.1
billion (31 December 2018: £321.2 billion), reflecting
favourable investment markets.
Over the period, IFRS shareholders' funds increased by 14 per cent
to £19.7 billion (31 December 2018: £17.2 billion),
reflecting profit after tax of £1,540 million (2018:
£1,356 million on an actual exchange rate basis). Other
movements in shareholders' funds include positive net unrealised
valuation movements on US investments classified as
available-for-sale of £1,726 million, offset by dividend
payments to shareholders of £870 million. EEV shareholders'
funds increased by 7 per cent to £53.4 billion (31 December
2018: £49.8 billion), equivalent to 2,055 pence per
share6.
Our Group Solvency II surplus10,11 is
estimated at £16.7 billion, equivalent to a cover ratio of 222
per cent (31 December 2018: £17.2 billion; 232 per
cent).
We have increased our first interim ordinary dividend by 5 per cent
to 16.45 pence per share, in line with our existing dividend
policy.
Asia
Our broad portfolio of life insurance and asset management
businesses, high-quality products with distinctive value-added
services and multi-channel strategy ensured that we continue to
benefit from growing demand for the health, protection and savings
solutions we provide. Our APE sales5 in
Asia reached £1,978 million in the first half, up 10 per
cent4 (up
14 per cent on an actual exchange rate basis), leading to growth in
new business profit of 10 per cent4 to
£1,295 million (up 15 per cent on an actual exchange rate
basis).
Our multi-platform distribution in the region, with strong agency
forces and bank partnerships, and growing digital channels, is
continuing to drive our performance. We have continued to grow on a
broad base in the region, with APE sales5 growth
in 11 markets in the first half. APE sales5 in
Hong Kong increased by 5 per cent4 to
£830 million, in Singapore by 8 per cent4 to
£231 million and in Malaysia by 3 per cent4 to
£122 million. In Hong Kong, 63 per cent of our sales came from
visitors from Mainland China.
We are also seeing a stabilisation in sales in Indonesia following
the refresh of our product line and action in agency force
productivity, with a strong performance in the second quarter
leading to overall sales growth of 4 per cent4.
We have formed a strategic partnership with PT Visionet
International (OVO), a leading digital payments, rewards and
financial services platform in Indonesia, which we expect will
enhance our reach in one of Asia's largest insurance markets, with
a population that is increasingly embracing digital
tools.
Our sales through our joint venture, CITIC-Prudential, are up 45
per cent4 in
the half year to £270 million, and we have received approval
to open our 20th branch
in Mainland China, in Shaanxi province. Through our joint venture,
we now have a comprehensive network of 231 sales offices in 89
cities, with access to regions accounting for 80 per cent of
Mainland China's GDP.
Our Asian asset manager, Eastspring, has grown operating profit by
12 per cent, supported by disciplined expense management and the
acquisition of TMB Asset Management in the second half of 2018. Its
assets under management grew to £169.5 billion, with positive
external net flows in the first half of 2019 of £3.1 billion,
excluding money market funds (2018: net outflows of £0.9
billion on an actual exchange rate basis), driven by strong retail
bond flows in Thailand and equity flows in Korean
pensions.
We are continuing to develop our distribution reach in Asia,
including through the renewal of our successful regional strategic
bancassurance alliance with United Overseas Bank Limited, through
which APE sales5 increased
by 27 per cent4 in
the first half. To ensure that we provide our solutions as widely
as possible across the region, we have also been actively tailoring
our propositions to suit digital sales channels. In the first half
of 2019 we have activated our partnership with O bank, our digital
bank partner in Taiwan, and will look to build on this success
through UOB's new digital bank, TMRW.
We are continuing to build partnerships in Asia in a number of
areas. We are committed to improving access to healthcare, and have
launched Pulse by Prudential, a digital health app that is the
first of its kind to offer holistic health management to consumers.
The health technology and services company Tictrac has become one
of our partners in Pulse, joining Babylon Health as part of our
health ecosystem. Earlier this month, we also announced
partnerships with Halodoc, Indonesia's homegrown healthcare
start-up, to help deliver digital solutions that will meet a
critical need for affordable and accessible healthcare, and with
MyDoc, which offers consumers access to health services on their
mobile phones. Following its launch in Singapore in 2018, we
expanded PRUworks, our digital ecosystem designed to help small and
medium-sized enterprises (SMEs) grow their businesses, to
Indonesia. We have also entered into an agreement with specialist
technology provider HǣlthTech, whose cloud-computing
technology will be integrated into PRUworks and will facilitate the
platform in offering one-stop access to insurance products,
employee benefits and business services to small and medium-sized
enterprises across Asia. At the same time, we are making good
progress with our tailored offering for high net worth clients in
Singapore, Opus by Prudential, which is designed to address the
unfulfilled wealth protection needs of this fast-growing sector.
All of these initiatives enable us to offer improved services to
more customers.
US
Our approach in this market has been to proceed with discipline.
Consumer regulation in the US, while now starting to become
clearer, has been uncertain for some time, and has resulted in an
industry-wide slowdown in variable annuity sales. APE
sales5 in
the US were down 4 per cent4 at
£831 million. Importantly, consistent with our intent to
diversify our US product mix, fixed-index annuity APE
sales5,
at £93 million, rose as a share of APE
sales5 from
2 per cent for the first six months of 2018 to 11 per cent in 2019.
In addition, we successfully integrated last year's John Hancock
paid-up annuities bolt-on transaction, which increased
diversification and contributed materially to the US statutory
capital generation in the period.
Jackson has a strong record of product innovation, exceptional
distribution relationships, trust and credibility. During the
period we added to our products in the fixed-annuity space, which
we expect to contribute to sales later in the year. We have a
leading position in the annuities industry, with strong long-term
economics, and our operating platform has industry-leading cost
advantages and is highly digital and scalable. We are in the
process of driving a more diversified product mix and developing
relationships with new distributors. We are actively exploring
options to support the acceleration of this diversification, for
example through reinsurance and third-party financing.
Africa
We have also continued to expand our presence in Africa, one of the
world's most dynamic and promising regions. In July, we completed
our acquisition of a 51 per cent stake in the leading life insurer,
Group Beneficial, operating in West and Central Africa, enabling us
to enter Cameroon, Côte d'Ivoire and Togo. Combined with our
launch over the last five years of businesses in Ghana, Kenya,
Uganda, Zambia and Nigeria, this latest step means we now operate
in markets in Africa with a total population of almost 400 million.
In the first half of 2019, before this acquisition, our APE
sales5 in
the region rose by 73 per cent4 to
£30 million.
Demerger of M&GPrudential (reported as discontinued
operations)
We expect to complete the demerger of M&GPrudential as planned.
Preparations are complete for the Hong Kong Insurance Authority to
be the Group-wide supervisor of the Prudential plc Group, and
M&GPrudential's Board is in place. We expect to complete the
demerger in the fourth quarter of 2019, subject to shareholder
approval. At the same time, M&GPrudential is strongly focused
on its internal merger and transformation programme and preparing
for entry to the market as a separately listed independent company.
It has also announced that it will change its name in preparation
for listing to M&G plc, providing a single corporate identity
while retaining its two customer-facing brands of Prudential and
M&G Investments.
M&GPrudential is an asset manager and asset owner, operating in
attractive, growing markets underpinned by long-term favourable
trends, in particular ageing populations and the shift of
responsibility for retirement to the private sector. Total funds
under management8grew
by 6 per cent in the period to £341.1 billion, including
PruFund positive net flows of £3.5 billion, leading to total
PruFund assets under management of £49.6 billion as at 30 June
2019. M&G's external assets under management were up 4 per cent
in the first half of 2019 to £153.0 billion, with market
impacts more than offsetting net outflows in the period. The
slowdown in industry-defined benefit pension transfers, compared
with the elevated volumes in the prior year, contributed to
reductions in APE sales5 of
8 per cent and new business profit of 15 per cent in the period.
M&GPrudential's savings and asset management operations are
well positioned in with-profits savings, retail asset management
and institutional asset management, while its annuity and other
insurance operations have a large customer base with long-duration
products.
Outlook
We believe our performance for the first half of the year and our
continuing operational improvements leave us well positioned as we
move forward. We are innovating and investing to grow the range of
products and solutions we can offer our clients.
The long-term underlying demographic and economic trends in Asia
remain positive and strong, notwithstanding short-term macro
volatility, and we expect our broad portfolio to continue to
expand. We are carefully monitoring developments in Hong Kong. The
strategic focus of the Asia business on recurring premium health
and protection businesses, reflected in IFRS earnings through
growth in insurance margin, is expected to continue.
In the US, we have recently entered a period of greater regulatory
clarity than has been the case in recent years, and expect a
process of normalisation in the sales environment for our products.
At the same time, we are seeing significant shifts across the
market towards fixed and fixed-index annuities. We will continue to
follow an active portfolio approach to our business and focus on
execution and operational delivery. US IFRS earnings are expected
to remain sensitive at an operating level to the impact of equity
markets on separate account balances, which drive fee revenues, and
on the acceleration and deceleration of deferred acquisition costs
(DAC) amortisation.
Interest rates have declined in 2019, and if this trend continues
it could influence the level of income from our interest-bearing
instruments. Equity market and interest movements will also impact
shareholders' returns through hedging positions held for risk
management purposes, the valuations of bonds held and changes to
associated liability valuations, for which there is a degree of
accounting mismatch with the assets held to support
them.
The strength of our opportunities and our diversification in terms
of geographies, products and distribution platforms leave us well
positioned to deal with the protectionist developments and
political uncertainties currently affecting the global economy and
driving volatility in markets.
We expect to complete the demerger of M&GPrudential in the
fourth quarter of 2019. We have refined our strategy as Prudential
plc to be Asia-led, focused on structural growth markets, aiming
for our US business to deliver enhanced cash returns through the
accelerated diversification of its book and we are actively
exploring options to achieve this. I am confident that, while
managing risks conservatively, we will continue to deliver
important benefits for our customers and profitable growth for our
shareholders.
Notes
1
On an actual exchange rate basis.
2
Source: OECD Quarterly National Accounts, Quarterly Growth Rates of
real GDP, change on previous quarter, combined for Q1 and Q2
2019.
3
Adjusted IFRS operating profit based on longer-term investment
returns is management's primary measure of profitability and
provides an underlying operating result based on longer-term
investment returns and excludes non-operating items. Further
information on its definition and reconciliation to profit for the
period is set out in note B1 of the IFRS financial
statements.
4
Period-on-period percentage increases are stated on a constant
exchange rate basis unless otherwise stated.
5
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 period for all
insurance products, including premiums for contracts designated as
investment contracts under IFRS 4. It is not representative of
premium income recorded in the IFRS financial statements. See note
II of the Additional financial information for further
explanation.
6
Embedded value reporting provides investors with a measure of the
future profit streams of the Group. The EEV basis results have been
prepared in accordance with EEV principles discussed in note 1 of
EEV basis results. See the Additional EEV financial information for
further explanation.
7
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 underlying business unit amount. Amount is for
continuing operations only (ie M&GPrudential is excluded).
Further information is set out in note 9 of the EEV basis
results.
8
Represents M&GPrudential asset management external funds under
management and internal funds included on the M&GPrudential
long-term insurance business balance sheet.
9
Translated using a Singapore dollar: Sterling foreign exchange rate
of 1.7360.
10
The Group shareholder capital position covers continuing and
discontinued operations and excludes the contribution to own funds
and the Solvency Capital Requirement from ring-fenced with-profits
funds and staff pension schemes in surplus. The estimated solvency
positions include management's calculation of UK transitional
measures reflecting operating and market conditions at each
valuation date.
11
Estimated before allowing for first interim ordinary dividend (31
December 2018: second interim ordinary dividend).
Chief Financial Officer's report on the 2019 first half financial
performance
I am pleased to report that Prudential's financial performance in
the first half of 2019 reflects our continued focus on driving
growth across our Asian markets, products and distribution
channels, and the early results of our strategic initiatives to
diversify our US business mix.
In preparation for the intended demerger of M&GPrudential from
Prudential plc, the results presented within my report are
identified as being derived from continuing or discontinued
operations. Continuing operations comprise our Asia, US, Africa and
central operations. Discontinued operations comprise UK and Europe
operations, and are also referred to as M&GPrudential within
this report. Results for the comparative period have been restated
accordingly. Under IFRS, comparative balance sheet amounts are not
re-presented for discontinued operations.
IFRS profit
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2019 £m
|
Half year
2018 £m
|
Change %
|
|
Half year
2018 £m
|
Change %
|
Adjusted IFRS operating profit based on longer-term
investment returns before tax (operating profit) from
continuing operations
|
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
Long-term business
|
1,095
|
927
|
18
|
|
963
|
14
|
Asset management
|
103
|
89
|
16
|
|
92
|
12
|
Total
|
1,198
|
1,016
|
18
|
|
1,055
|
14
|
|
|
|
|
|
|
|
|
|
US
|
|
|
|
|
|
|
Long-term business
|
1,203
|
1,001
|
20
|
|
1,064
|
13
|
Asset management
|
12
|
1
|
n/a
|
|
1
|
n/a
|
Total
|
1,215
|
1,002
|
21
|
|
1,065
|
14
|
|
|
|
|
|
|
|
|
|
Total segment profit from continuing operations
|
2,413
|
2,018
|
20
|
|
2,120
|
14
|
|
|
|
|
|
|
|
|
|
Other income and expenditure
|
(366)
|
(329)
|
(11)
|
|
(331)
|
(11)
|
Total operating profit based on longer-term investment returns
before tax and restructuring costs
|
2,047
|
1,689
|
21
|
|
1,789
|
14
|
Restructuring costs
|
(23)
|
(20)
|
(15)
|
|
(20)
|
(15)
|
Total operating profit based on longer-term
investment returns before tax from continuing
operations
|
2,024
|
1,669
|
21
|
|
1,769
|
14
|
Non-operating items:
|
|
|
|
|
|
|
|
Short-term fluctuations in investment returns
on shareholder-backed business
|
(1,124)
|
9
|
n/a
|
|
8
|
n/a
|
|
Amortisation of acquisition accounting adjustments
|
(17)
|
(22)
|
23
|
|
(23)
|
26
|
|
Gain (loss) on disposal of businesses and
corporate transactions
|
13
|
(57)
|
n/a
|
|
(60)
|
n/a
|
Profit from continuing operations before tax
attributable to shareholders' returns
|
896
|
1,599
|
(44)
|
|
1,694
|
(47)
|
Tax charge attributable to shareholders' returns
|
(1)
|
(326)
|
100
|
|
(343)
|
100
|
Profit for the period from continuing operations
|
895
|
1,273
|
(30)
|
|
1,351
|
(34)
|
Profit for the period from discontinued operations,
net of related tax
|
645
|
83
|
n/a
|
|
83
|
n/a
|
Profit for the period
|
1,540
|
1,356
|
14
|
|
1,434
|
7
|
|
|
|
|
|
|
|
IFRS earnings per share
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2019 pence
|
Half year
2018 pence
|
Change %
|
|
Half year
2018 pence
|
Change %
|
Basic earnings per share based on operating profit after
tax
|
|
|
|
|
|
|
From
continuing operations
|
65.3
|
53.7
|
22
|
|
57.0
|
15
|
Basic earnings per share based on total profit after
tax
|
|
|
|
|
|
|
From
continuing operations
|
34.4
|
49.5
|
(31)
|
|
52.6
|
(35)
|
From
discontinued operations
|
25.0
|
3.2
|
681
|
|
3.2
|
681
|
|
59.4
|
52.7
|
13
|
|
55.8
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit from continuing
operations in the first
half of 2019 increased by 14 per cent (21 per cent on an actual
exchange rate basis) to £2,024 million. Profit after tax for
the period from continuing operations was £895 million, a
decrease of 34 per cent (30 per cent on an actual exchange rate
basis), reflecting negative short-term fluctuations. Higher equity
market levels resulted in equity hedge losses, which were only
partly offset by movements in associated liabilities, as the full
benefit of higher equity markets was limited by lower long-term
interest rates and accounting mismatch effects.
The profits attributable to M&GPrudential have been classified
as discontinued operations, although operating profit from
continuing operations still includes the total other income and
expenditure that relates to the existing, pre-demerger Group
structure, as well as the profits from our Asia and US businesses.
For example, debt costs are expected to be rebalanced between
continuing operations and discontinued operations from the point of
demerger, but are currently incurred in full in continuing
operations. Total segment profit from continuing operations, which
excludes other income and expenditure, increased by 14 per cent (20
per cent on an actual exchange rate basis).
Segmental commentary
Asia total operating profit of £1,198 million was
14 per cent higher than the previous year (18 per cent on an actual
exchange rate basis). Operating profit from life
insurance operations increased by 14 per cent to £1,095
million (18 per cent on an actual exchange rate basis), reflecting
the continued growth of our in-force book of recurring premium
business, with renewal insurance premiums1 up
12 per cent reaching £7,093 million (17 per cent on an actual
exchange rate basis). Insurance margin was up 14 per cent, driven
by our continued focus on health and protection business, now
contributing to 71 per cent of Asia life insurance
revenues2 (2018:
70 per cent).
The development of our Asia businesses' operating profit is
broad-based and at increasing scale. Eight of our 12 life markets
reported growth of 10 per cent or above. Operating profit growth
was led by Hong Kong (up 29 per cent to £260 million), China
JV (up 28 per cent on a post-tax basis), Vietnam (up 24 per cent),
the Philippines (up 24 per cent), Singapore (up 18 per cent) and
Malaysia (up 10 per cent). Indonesia remains a significant
contributor to Asia's operating profit (£200 million), but was
6 per cent lower compared with the prior period, reflecting the
impact of sales declines in the recent past.
Eastspring's operating profit increased by 12 per cent (up 16 per
cent on an actual exchange rate basis) to £103 million. This
was a result of revenue growth of 5 per cent, driven by the
acquisition of TMB Asset Management in the second half of 2018 and
higher funds under management, with costs increasing at a slower
rate of 2 per cent. Disciplined cost management has led to an
improvement in its cost-income ratio1 to
51 per cent (2018: 54 per cent on an actual exchange rate
basis).
Eastspring's external assets under management, excluding money
market funds, increased by 14 per cent in the six months to 30 June
2019 (on an actual exchange rate basis) to £56.5 billion in
the period, reflecting positive net flows and favourable market
movements. Higher internal assets under management, driven by
inflows into the life business, lifted Eastspring's total assets
under management3 by
12 per cent to £169.5 billion (31 December 2018: £151.3
billion an actual exchange rate basis).
US total operating profit at £1,215 million increased by 14 per
cent (21 per cent on an actual exchange rate basis). Broadly stable
fee income was supported by favourable deferred acquisition costs
(DAC) deceleration compared with unfavourable DAC acceleration in
the prior period.
Fee income development reflects an essentially stable average
separate account balance compared with the prior period. The
evolution of separate account balances in the first half of the
year reflects strongly positive investment performance offset by
marginally negative net flows. Weak market performance in the
latter part of 2018 reduced the level of account balance at the
start of the period compared with the prior period.
Spread income was 27 per cent lower reflecting the combination of
lower core spread income and lower swap income. The reduction in
core spread reflects the effect of lower invested asset yields. The
decline in swap income is a result of the unfavourable impact of
higher short-term interest rates over much of the period. The
associated decline in margin to 106 basis points from 162 basis
points at half year 2018 in relation to average spread-related
general account assets also reflects the full consolidation of the
assets acquired with the John Hancock transaction in November 2018
in the current period. Assuming business mix and market interest
rates remain stable at 30 June 2019 levels, the overall spread
margin is expected to remain in the region of 100 basis
points.
The favourable development of £148 million in DAC deceleration
(2018: £45 million unfavourable acceleration on a constant
exchange rate basis) is a function of significant outperformance of
the separate account return in the period compared with that
assumed within the mean reversion formula.
Analysis of long-term insurance business pre-tax adjusted IFRS
operating profit based on longer-term investment returns by driver
from
continuing operations
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year 2019
|
Half year 2018
|
|
Half year 2018
|
|
Operating
profit
|
Margin
|
Operating
profit
|
Margin
|
|
Operating
profit
|
Margin
|
|
£m
|
bps
|
£m
|
bps
|
|
£m
|
bps
|
Spread income
|
349
|
107
|
407
|
150
|
|
429
|
150
|
Fee income
|
1,349
|
171
|
1,293
|
172
|
|
1,370
|
173
|
With-profits
|
41
|
19
|
30
|
18
|
|
31
|
17
|
Insurance margin
|
1,401
|
|
1,186
|
|
|
1,241
|
|
Other income
|
1,207
|
|
1,074
|
|
|
1,115
|
|
Total life income from continuing operations
|
4,347
|
|
3,990
|
|
|
4,186
|
|
Expenses including DAC adjustments*
|
(2,049)
|
|
(2,062)
|
|
|
(2,159)
|
|
Long-term insurance business pre-tax adjusted IFRS operating profit
based on longer-term investment returns from continuing
operations
|
2,298
|
|
1,928
|
|
|
2,027
|
|
* Expenses
including DAC adjustments includes share of related tax charges
from joint ventures and associate, see note I(iv) of the Additional
financial information.
Insurance margin increased by 13 per cent (up 18 per cent on an
actual exchange rate basis) supported by growth in health and
protection in our Asia business, while fee income decreased by 2
per cent (up 4 per cent on an actual exchange rate basis) largely
reflecting the development in average US separate account balances
and associated fee margins. Spread income decreased by 19 per cent
(down 14 per cent on an actual exchange rate basis) as a result of
a lower contribution from the US business. Administration expenses
increased to £1,184 million (2018: £1,143 million on a
constant exchange rate basis) as the Asian business continues to
expand, alongside higher asset-based commissions within the US
business, which are treated as an administrative expense in this
analysis.
Other income and expenditure and restructuring costs from
continuing operations
Other income and expenditure consists of interest payable on core
structural borrowings, corporate expenditure and other income.
These items, together with restructuring costs of £23 million,
increased 11 per cent to a net charge of £389 million (2018:
£351 million). Total interest costs in the period were
£226 million. This included £85 million for subordinated
debt that is capable of being transferred to M&GPrudential. The
annualised interest cost of core structural borrowings held at 30
June 2019 which cannot be substituted to M&GPrudential is
estimated at £234 million4.
Total Group head office and regional head office costs were
£164 million for the six months to 30 June 2019. We are
assessing the efficiency and effectiveness of our Group-wide
functions to ensure that they better reflect the future needs of
the business. Updates on this process and an overview of expected
benefits and costs to be incurred will be given in due course.
Implementation and preparation for IFRS 17 continues with activity
likely to increase in the second half of 2019 onward.
IFRS basis non-operating items from continuing
operations
Non-operating items consist of short-term fluctuations in
investment returns on shareholder-backed business of negative
£1,124 million (2018: positive £8 million), the results
attaching to corporate transactions of positive £13 million
(2018: negative £60 million), and the amortisation of
acquisition accounting adjustments of negative £17 million
(2018: negative £23 million) arising mainly from the REALIC
business acquired by Jackson in 2012.
In the first half of 2019, the total short-term fluctuations in
investment returns on shareholder-backed business were negative
£1,124 million (2018: positive £9 million on an actual
exchange rate basis). This comprised positive £420 million
(2018: negative £326 million on an actual exchange rate basis)
for Asia, negative £1,521 million (2018: positive £244
million on an actual exchange rate basis) in the US and negative
£23 million (2018: positive £91 million on an actual
exchange rate basis) in other operations.
Falling interest rates in many parts of Asia led to unrealised bond
gains in the period, with varying liability accounting treatment in
each market leading to differing liability revaluation effects. In
the US, higher equity market levels resulted in equity hedge
losses, which were only partly offset by a reduction in
policyholder liabilities, as the full benefit of the uplift in
equity markets was limited by lower long-term interest rates and
accounting mismatch effects. During the period, Jackson incurred
net derivative losses of £2,033 million on equity and interest
rate hedge instruments used to manage the market exposure of
Jackson's products. These were offset partly by £227 million
of accounting movements in variable and fixed index annuity
liabilities and £284 million of guarantee fee assessments, net
of claims, earned in the period5.
Outside of the income statement, as part of other comprehensive
income, interest rate falls have given rise to a gain of £1.7
billion on US available-for-sale debt securities. These gains more
than offset the non-operating losses in the US, leading to an
increase in shareholders' equity of the US business since the end
of 2018.
The £13 million benefit of corporate transactions reflects
gains from disposals in the period offset by the £(196)
million incurred in the period in connection with the preparation
for the proposed demerger of M&GPrudential from Prudential plc.
Further information is set out in note D1.1 to the financial
statements.
The total costs of the demerger transaction, consisting of fees
paid to debt holders to facilitate rebalancing of debt between the
two entities, costs associated with the separation of the two
businesses and adviser fees, is expected to be circa £330
million to £355 million. £227 million has been incurred
to 30 June 2019 (including £31 million incurred in 2018).
Subject to the completion of the transactions on the expected
timetable and the absence of unforeseen circumstances and excluding
the expected costs in respect of improvements to the efficiency and
effectiveness of our Group-wide functions referred to above, the
remaining costs of circa £100 million to £125 million are
expected to be incurred in the second half of 2019.
IFRS profit for the period from discontinued
operations
IFRS profit from discontinued operations
|
|
|
|
|
Actual exchange rate
|
|
Half year
2019 £m
|
Half year
2018 £m
|
Change %
|
Operating profit based on longer-term investment returns before
tax
|
|
|
|
Long-term business
|
496
|
487
|
2
|
General insurance commission
|
2
|
19
|
(89)
|
Asset management
|
239
|
272
|
(12)
|
Head office costs
|
(21)
|
-
|
n/a
|
Operating profit based on longer-term investment returns before
restructuring costs
|
716
|
778
|
(8)
|
Restructuring costs
|
(29)
|
(42)
|
31
|
Total operating profit based on longer-term investment returns
before tax
|
687
|
736
|
(7)
|
|
|
|
|
|
|
Non-operating profit (loss)
|
130
|
(635)
|
n/a
|
Profit before tax attributable to shareholders
|
817
|
101
|
n/a
|
Tax charge attributable to shareholders' returns
|
(172)
|
(18)
|
n/a
|
Profit for the period
|
645
|
83
|
n/a
|
|
|
|
|
|
|
M&GPrudential operating profit, before restructuring costs, was 8 per cent lower
at £716 million. Life insurance operating profit
increased by 2 per cent to £496 million (2018: £487
million). Within this total, the contribution from our
core6 with-profits
and in-force annuity business was £345 million (2018:
£255 million), including higher annuity income (mainly driven
by higher asset related gains) and an increased transfer to
shareholders from the with-profits funds of £161 million
(2018: £157 million). These transfers included a 20 per cent
increase in the contribution from the PruFund business of £30
million (2018: £25 million).
The balance of the life insurance result reflects the contribution
from other elements which are not expected to recur at the same
level.This includes the £127 million benefit (2018: £nil)
of updates to annuitant mortality assumptions, which reflect a
recent slowdown in life expectancy improvements, and the adoption
of the Continuous Mortality Investigation (CMI) 2017 model, albeit
with an uplift to the calibration such that additional liabilities
are held to cover potential differences in experience between the
PAC policyholder portfolio and the England and Wales
population.
The non-core result in the prior period included a one-off
£166 million insurance recovery, related to the costs of
reviewing internally vesting annuities sold without advice after
July 2008.
The reduction in general insurance commissions reflects the planned
termination of a distribution agreement and replacement with a
brand sharing arrangement.
Asset management operating profit decreased 12 per cent to
£239 million as a result of lower revenues following net fund
outflows during the second half of 2018 and 2019 which reduced the
average level of funds managed by M&G Investments to
£263.8 billion (2018: £285.3 billion). The cost-income
ratio of 57 per cent (2018: 54 per cent) was also affected by the
lower revenues. Costs were flat in absolute terms.
Overall assets under management were £341.1 billion at 30 June
2019, up from £321.2 billion at 31 December 2018. External
funds under management were up 4 per cent from 31 December 2018 to
£153.0 billion at 30 June 2019, as a result of positive market
developments. These positive effects were offset partially by
institutional net outflows of £0.3 billion and wholesale and
direct net outflows of £4.3 billion over the period. Overall,
investor risk aversion remains high amid political uncertainties
including Brexit. Internal assets under management increased
moderately over the period to £188.1 billion at 30 June 2019
(31 December 2018: £174.3 billion). Net flows to PruFund
remain positive at £3.5 billion, although below the prior
period level due to the lower level of defined benefit pension
transfers seen across the market generally.
M&GPrudential remains on track to deliver the announced annual
shareholder cost savings of circa £145 million by 2022 for a
shareholder investment of circa £250 million. Restructuring
costs of £29 million (2018: £42 million) include
investment spend of £26 million in relation to its merger and
transformation programme and bring the cumulative cost to £169
million, on an IFRS basis, since the project began.
Profit after tax for the period was £645 million (2018:
£83 million), a result of a substantial positive swing in
non-operating profit. Non-operating profit over the first half of
2019 was £130 million, reflecting favourable revaluation
effects on fixed income assets supporting the capital of the
shareholder-backed annuity business. This compares with a loss of
£635 million in the prior period, which included a loss of
£513 million arising from the reinsurance of a portfolio of
annuity contracts with Rothesay Life, and negative revaluation
movements on shareholder assets.
IFRS effective tax rates
In the first half of 2019, the effective tax rate
on IFRS operating profit based on longer-term investment
returns from continuing operations was 16 per cent (2018: 17 per
cent). This reflects a lower effective tax rate in Asia as a result
of investment returns in the first half of 2019 which are not
taxable. The effective tax rate on the total IFRS profit from
continuing operations was less than 1 per cent in the first half of
2019 (2018: 20 per cent). The lower rate is mainly due to
non-operating taxable losses arising in the US.
The effective tax rate on IFRS operating profit based on
longer-term investment returns from discontinued operations was 21
per cent (2018: 19 per cent). The effective tax rate on the total
IFRS profit from discontinued operations was 21 per cent in the
first half of 2019 (2018: 18 per cent).
New business performance
Life EEV new business profit and APE new business sales (APE sales)
from continuing operations
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2019 £m
|
Half year
2018 £m
|
Change %
|
|
Half year
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
|
Asia
|
1,978
|
1,295
|
1,736
|
1,122
|
14
|
15
|
|
1,806
|
1,178
|
10
|
10
|
US
|
831
|
348
|
816
|
466
|
2
|
(25)
|
|
868
|
495
|
(4)
|
(30)
|
Total continuing operations
|
2,809
|
1,643
|
2,552
|
1,588
|
10
|
3
|
|
2,674
|
1,673
|
5
|
(2)
|
Life insurance new business APE sales from continuing operations increased by 5
per cent (10 per cent on an actual exchange rate basis) to
£2,809 million, and life
insurance new business
profit from continuing
operations was down 2 per cent (up 3 per cent on an actual exchange
rate basis) to £1,643 million, driven in part by lower
interest rates. Excluding the effect of lower interest rates and
other economic factors, new business profit would have been 4 per
cent higher than the prior period.
In Asia, new business profit was 10 per cent higher at
£1,295 million (15 per cent on an actual exchange rate basis),
in line with the increase in APE sales. The increase in new
business profit of £117 million, on a constant exchange rate
basis, reflects the £138 million positive movement
attributable to sales volume together with the combined positive
effect of business and product mix and other items, offset partly
by the negative £21 million effect of changes in interest
rates and other economic assumptions. Regular premium contracts,
which provide a high level of recurring income, continue to account
for 93 per cent of APE sales, and the proportion of new sales
represented by health and protection products, that has an earnings
profile that is significantly less correlated to investment
markets, remains high at 27 per cent (2018: 28 per
cent).
APE sales were up 10 per cent in the period, and 13 per cent higher
excluding Hong Kong, which had exceptional growth in the second
quarter of 2018 following the launch of two new insurance products.
11 life markets reported positive APE growth in the period, led by
45 per cent growth in China JV, which reflects higher levels of
bancassurance sales. In Indonesia, while market conditions remain
challenging, APE sales improved in the second quarter supported by
enhanced product initiatives, contributing to growth of 4 per cent
in the first half of the year.
New business profit growth was broad-based, with 10 markets
achieving positive growth. In Hong Kong, new business profit was 6
per cent higher at £826 million, led by a strong agency
performance. In China JV, new business profits increased by 29 per
cent to £98 million as a result of higher sales. In Singapore,
new business profit was 13 per cent higher, reflecting increased
regular premium and retail protection sales volumes. In Indonesia,
new business profit increased by 8 per cent to £66 million,
reflecting higher APE sales, product mix and favourable interest
rate movements. Other markets also delivered strong expansion in
the first half of 2019, with total Asia new business profit up 10
per cent.
In the US, new business profit decreased by 30 per cent to
£348 million (down 25 per cent on an actual exchange rate
basis). This decline in new business profit reflects a 4 per cent
reduction in overall APE sales, the unfavourable impact of £75
million from changes in interest rates and other economic
assumptions, and a more diverse retail product mix with materially
higher fixed index annuity sales alongside lower sales of higher
margin variable annuity products.
Life EEV new business profit and APE new business sales (APE sales)
from discontinued operations
|
|
Actual exchange rate
|
|
Half year 2019 £m
|
Half year 2018 £m
|
Change %
|
|
APE sales
|
New business profit
|
APE sales
|
New business profit
|
APE sales
|
New business profit
|
Discontinued operations
|
705
|
152
|
770
|
179
|
(8)
|
(15)
|
In M&GPrudential,
new business profit decreased to £152 million, down 15 per
cent as a result of an 8 per cent reduction in APE sales and a
slightly lower APE margin. The decline in APE sales reflects
reduced individual pension production particularly related to lower
levels of defined benefit transfers compared with particularly high
volumes in the prior period. The reduction in new business margin
reflects the impact of £7 million from lower interest rates in
the period combined with the effect of changes in product
mix.
Post-tax profit - EEV
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2019 £m
|
Half year
2018 £m
|
Change %
|
|
Half year
2018 £m
|
Change %
|
Post-tax operating profit based on longer-term
investment returns from continuing operations
|
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
Long-term business
|
2,127
|
1,753
|
21
|
|
1,834
|
16
|
Asset management
|
91
|
77
|
18
|
|
79
|
15
|
Total
|
2,218
|
1,830
|
21
|
|
1,913
|
16
|
|
|
|
|
|
|
|
|
|
US
|
|
|
|
|
|
|
Long-term business
|
793
|
1,005
|
(21)
|
|
1,068
|
(26)
|
Asset management
|
11
|
(2)
|
650
|
|
(2)
|
650
|
Total
|
804
|
1,003
|
(20)
|
|
1,066
|
(25)
|
|
|
|
|
|
|
|
|
|
Other income and expenditure
|
(361)
|
(340)
|
(6)
|
|
(341)
|
(6)
|
Restructuring costs
|
(20)
|
(18)
|
(11)
|
|
(18)
|
(11)
|
Post-tax operating profit based on longer-term
investment returns from continuing operations
|
2,641
|
2,475
|
7
|
|
2,620
|
1
|
Non-operating items:
|
|
|
|
|
|
|
|
Short-term fluctuations in investment returns
|
2,229
|
(965)
|
n/a
|
|
(1,021)
|
n/a
|
|
Effect of changes in economic assumptions
|
(1,371)
|
610
|
n/a
|
|
656
|
n/a
|
|
Mark-to-market value movements on core structural
borrowings
|
(492)
|
579
|
n/a
|
|
580
|
n/a
|
|
Loss attaching to corporate transactions
|
(24)
|
(48)
|
n/a
|
|
(50)
|
n/a
|
Post-tax profit for the period from continuing
operations
|
2,983
|
2,651
|
13
|
|
2,785
|
7
|
Post-tax profit for the period from discontinued
operations
|
1,281
|
317
|
304
|
|
317
|
304
|
Post-tax profit for the period
|
4,264
|
2,968
|
44
|
|
3,102
|
37
|
EEV earnings per share
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2019 pence
|
Half year
2018 pence
|
Change %
|
|
Half year
2018 pence
|
Change %
|
Basic earnings per share based on post-tax operating
profit
|
|
|
|
|
|
|
From
continuing operations
|
102.1
|
96.2
|
6
|
|
101.8
|
-
|
Basic earnings per share based on post-tax total
profit
|
|
|
|
|
|
|
From
continuing operations
|
115.3
|
103.0
|
12
|
|
108.2
|
7
|
From
discontinued operations
|
49.6
|
12.3
|
303
|
|
12.3
|
303
|
|
164.9
|
115.3
|
43
|
|
120.5
|
37
|
EEV operating profit from continuing operations
On an EEV basis, Group post-tax operating profit based on
longer-term investment returns from continuing
operations increased 1 per cent (7 per cent on an actual
exchange rate basis) to £2,641 million in the first half of
2019.
EEV operating profit includes new business profit from the Group's
life business, which decreased by 2 per cent (up 3 per cent on an
actual exchange rate basis) to £1,643 million. It also
includes in-force life business profit of £1,277 million,
which was 4 per cent higher than prior year (up 9 per cent on an
actual exchange rate basis).
In Asia, EEV life operating profit was up 16 per cent to
£2,127 million, driven by 10 per cent growth in new business
profit and in-force profit growth of 27 per cent, which reflects a
growing in-force base and includes the beneficial effect of
assumption changes and ongoing positive experience
variances.
Jackson's EEV life
operating profit was down 26 per cent to £793 million. This
reflects a 30 per cent decrease in new business profit to £348
million and lower expected returns from the in-force business in
part due to a lower discount rate applied, following the decline in
interest rates in the period.
EEV non-operating items from continuing operations
Positive short-term fluctuations of £2,229 million primarily
reflect higher than expected returns on equities and other
investments held by the Group's US separate accounts and by the
with-profits and unit-linked funds businesses in Asia. These
positive effects have been offset partly by losses on equity
derivatives held by the US business to manage market exposures
arising from the guarantees provided on its annuity
products.
Offsetting short-term fluctuations is a £1,371 million adverse
effect from economic assumption changes in the period, principally
reflecting the impact of lower interest rates on the projected
future fund growth rates for the variable annuity business in the
US and for participating businesses in Hong Kong and Singapore.
These projected lower growth rates reduce the expected growth in
fund values for policyholders and hence the expected profitability
for shareholders.
EEV post-tax profit for the period from discontinued
operations
Post-tax profit from discontinued operations of £1,281 million
(2018: £317 million) increased over the prior year primarily
driven by higher than expected returns on equities and investments
held by the UK with-profits fund and unrealised gains on the bonds
backing the shareholder annuity business, following falls in
interest rates in the period.
Free surplus generation from
continuing operations7
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2019 £m
|
Half year
2018 £m
|
Change %
|
|
Half year
2018 £m
|
Change %
|
Asia
|
935
|
850
|
10
|
|
876
|
7
|
US
|
1,097
|
773
|
42
|
|
822
|
33
|
Operating free surplus generated from in-force life
business
and asset management before restructuring costs
|
2,032
|
1,623
|
25
|
|
1,698
|
20
|
Restructuring costs
|
(14)
|
(10)
|
(40)
|
|
(10)
|
(40)
|
Operating free surplus generated from in-force life
business
and asset management
|
2,018
|
1,613
|
25
|
|
1,688
|
20
|
Investment in new business
|
(516)
|
(440)
|
(17)
|
|
(461)
|
(12)
|
Operating free surplus generated
|
1,502
|
1,173
|
28
|
|
1,227
|
22
|
Non-operating profit (loss)
|
268
|
(656)
|
|
|
|
|
Net cash flows to parent company
|
(851)
|
(733)
|
|
|
|
|
Exchange movements on foreign operations,
timing differences and other items
|
109
|
(347)
|
|
|
|
|
Total movement in free surplus from continuing
operations
|
1,028
|
(563)
|
|
|
|
|
Free surplus at 1 January from continuing operations
|
4,201
|
4,398
|
|
|
|
|
Free surplus at 30 June from continuing operations
|
5,229
|
3,835
|
|
|
|
|
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 our life businesses operate.
For life insurance operations, it represents amounts emerging from
the in-force business during the period, net of amounts reinvested
in writing new business. For asset management businesses, it
equates to post-tax operating profit for the period.
In the first half of 2019, operating free surplus generation from
our continuing life insurance and asset management business, before
investment in new business, increased by 20 per cent to £2,018
million (increased by 25 per cent on an actual exchange rate
basis). In Asia, growth in the in-force life portfolio, combined
with post-tax asset management profit from Eastspring, contributed
to free surplus generation of £935 million, up 7 per cent.
After allowing for investment in new business, Asia free surplus
generation was £685 million, up 13 per cent. In the US,
in-force free surplus generation increased by 33 per cent
reflecting a £274 million benefit following the integration of
the recently acquired John Hancock business. After allowing for
investment in new business, US free surplus generation was
£831 million, up 32 per cent.
Although new business profit decreased by 2 per cent, the amount of
free surplus invested in writing new life business in the period
was higher at £516 million (2018: £461 million). This
reflects increased new business investment in the US as a result of
a more diversified new business mix, notably driven by substantial
growth in fixed index annuities, which represented 11 per cent of
total US APE sales in the period, up from 2 per cent in the first
six months of 2018.
After funding cash remittances from the business units to the
Group, recognition of the profit attaching to the disposal of
businesses, and other movements, which includes market movements,
the closing value of free surplus in our continuing life and asset
management operations was £5.2 billion at 30 June
2019.
We continue to manage cash flows across the Group with a view to
achieving a balance between ensuring sufficient remittances are
made to service central requirements (including paying the external
dividend) and maximising value to shareholders through retention
and reinvestment of capital in business opportunities.
Cash remitted by
the business units to the Group8
|
|
|
|
Actual exchange rate
|
|
Half year
2019 £m
|
Half year
2018 £m
|
From continuing operations
|
|
|
Asia
|
451
|
391
|
US
|
400
|
342
|
Other UK (including Prudential Capital)
|
5
|
37
|
From discontinued operations
|
|
|
M&GPrudential
|
356
|
341
|
Net cash remitted by business units
|
1,212
|
1,111
|
Holding company cash at 30 June
|
2,365
|
2,210
|
Cash remitted to the Group by business units in the first half
of 2019 amounted to £1,212 million. Higher remittances
of £451 million from Asia include the £191 million
of proceeds from the reduction in the Group's shareholding in ICICI
Prudential. US remittances increased to £400 million from
£342 million in the prior period with the full remittance from
Jackson received in the first half of the year. Going forwards, a
more balanced cash remittance profile, between the first half and
second half of the year, is under consideration. The
remittance from M&GPrudential of £356 million was 4 per
cent higher than the equivalent remittance in the first half of
2018.
Cash remitted to the Group in the first half of 2019 was used
to meet central costs of £222 million (2018: £219
million) and pay the 2018 second interim dividend of £870
million. Corporate activities and other cash flows were negative
£999 million (2018: negative £106 million), driven by net
debt redemption of £400 million within the period, cash costs
paid in respect of the demerger of £166 million and other
transactions including payments for bancassurance distribution
agreements. This led to holding company cash decreasing from
£3,236 million to £2,365 million over the first half
of 2019.
Reflecting the rebalancing of holding company cash stock
pre-demerger, potential Asian investment opportunities and demerger
related costs, holding company cash is anticipated to reduce in the
second half of 2019 from the level at 30 June
2019.
Post-demerger, a lower level of holding company cash will be held
centrally, commensurate with the reduced size of the Group
post-demerger and ensuring sufficient resources are available to
provide a buffer to support the retained businesses in stress
scenarios and to provide liquidity to service debt, other central
expenses and dividends.
Capital position, financing and liquidity
Capital position
Analysis of movement in Group
shareholder Solvency II surplus9
|
|
|
|
|
|
|
2019 £bn
|
|
2018 £bn
|
|
|
Half year
|
|
Half year
|
Full year
|
Solvency II surplus at 1 January
|
17.2
|
|
13.3
|
13.3
|
Operating experience
|
2.1
|
|
1.8
|
4.2
|
Non-operating experience (including market movements)
|
(1.5)
|
|
-
|
(1.2)
|
M&GPrudential transactions
|
-
|
|
0.1
|
0.4
|
Other capital movements:
|
|
|
|
|
|
Net subordinated debt (redemption)/issuance
|
(0.4)
|
|
-
|
1.2
|
|
Foreign currency translation impacts
|
-
|
|
0.1
|
0.5
|
|
Dividends paid
|
(0.9)
|
|
(0.8)
|
(1.2)
|
Model changes
|
0.2
|
|
(0.1)
|
-
|
Estimated Solvency II surplus at end of period
|
16.7
|
|
14.4
|
17.2
|
The Group Shareholder Solvency II position shown relates to the
Group's pre-demerger structure, and includes the discontinued
M&GPrudential business.
The Group's shareholders' Solvency II capital
surplus10,11 was
estimated at £16.7 billion at 30 June 2019 (equivalent to a
solvency ratio of 222 per cent), compared with £17.2 billion
(232 per cent) at 31 December 2018. Operating experience of
£2.1 billion (31 December 2018: £4.2 billion) which
included £0.3 billion related to the recently acquired John
Hancock business, was more than offset by non-operating experience
of £1.5 billion, including the effect of distribution deals of
£0.6 billion, dividends to shareholders in the period of
£0.9 billion and net debt redemption of £0.4
billion.
Local Capital Summation Method
Following the proposed demerger of M&GPrudential from
Prudential plc, the Hong Kong Insurance Authority (IA) will assume
the role of the Group-wide supervisor for the retained Group
(excluding M&GPrudential). The retained Group will no longer be
subject to Solvency II capital requirements. Ultimately, Prudential
plc 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 not expected to come into force until the
second half of 2020 (subject to the legislative process) at the
earliest.
Until Hong Kong's GWS framework comes into force, Prudential will
apply the Local Capital Summation Method (LCSM) that has been
agreed with the Hong Kong IA to determine Group regulatory capital
requirements (both minimum and prescribed levels). The summation of
local statutory capital requirements across the retained Group will
be used to determine Group regulatory capital requirements, with no
allowance for diversification between business operations. The
Group available capital will be determined by the summation of
available capital across local solvency regimes for regulated
entities and IFRS net assets (with adjustments) for non-regulated
entities. The Hong Kong IA has yet to make any final decisions
regarding the GWS framework for the industry and it continues to
consider and consult on the proposed legislation and related
guidelines. The amounts below should not therefore be interpreted
as representing the results or requirements under the industry-wide
GWS framework and are not intended to provide a forecast of the
eventual position. For further information see note I(i)(b) of the
Additional financial information.
The Prudential Group shareholder LCSM surplus of available capital
over the Group minimum capital requirement at 30 June 2019,
excluding M&GPrudential, was £7.4 billion before allowing
for the payment of the first interim ordinary dividend, as shown in
the table below. The table also shows the adjustments needed to
that position to estimate the pro forma shareholder LCSM capital
position assuming the proposed demerger of M&GPrudential from
Prudential plc had completed as at 30 June 2019.
|
30 June 2019 £bn
|
Estimated Prudential Group shareholder LCSM capital
position
|
As reported
|
Adjustments
|
Pro forma
|
Available Capital12
|
10.6
|
+0.3
|
10.9
|
Minimum Required Capital
|
3.2
|
-
|
3.2
|
LCSM surplus
|
7.4
|
+0.3
|
7.7
|
LCSM ratio (%)
|
332%
|
+8%
|
340%
|
The
adjustments as shown in the table above, which result in an
increase in surplus of £0.3 billion, represent the estimated
impact on the retained Prudential Group shareholder LCSM capital
position of the proposed demerger. The adjustments are based on
current indicative estimates and are subject to change, which
include:
-
A reduction of £2.9 billion for the expected impact of the
transfer of subordinated debt to M&GPrudential by substituting
M&GPrudential in the place of Prudential as issuer of such
debt. The £2.9 billion represents debt capable of being
substituted that was held at 30 June 2019. A further £0.3
billion was raised in July bringing the total of subordinated debt
expected to be transferred to £3.2 billion;
- An
increase for the expected proceeds of £3.0 billion from a
pre-demerger dividend to be paid by M&GPrudential to Prudential
plc shortly before demerger, together with planned dividends of
£0.3 billion expected to be paid earlier. All dividends are
subject to the customary legal and governance considerations
required before approval by the M&GPrudential Board;
and
- A
reduction of £0.1 billion for expected directly attributable
transaction costs associated with the proposed demerger that have
yet to be incurred at 30 June 2019. Total demerger costs are
discussed above in IFRS basis non-operating items from continuing
operations.
No account has been taken of any trading and other changes in
financial position of the Prudential Group after 30 June 2019, thus
the pro forma shareholder LCSM capital position does not reflect
the actual shareholder LCSM capital position of the retained
Prudential Group following the completion of the proposed
demerger.
Local statutory capital
All of our subsidiaries continue to hold appropriate capital levels
on a local regulatory basis.
In the US, total adjusted capital was £3.9
billion13 at
30 June 2019 (US$4.9 billion), a £0.5
billion13 (US$0.6
billion) reduction over the period, mainly reflecting £0.6
billion13 (US$0.8
billion) of operating capital generation, offset by the payment of
an increased £400 million13(US$525
million) remittance to the Group alongside £0.8
billion13 (US$1.0
billion) of hedging losses net of reserve movements. Jackson's
risk-based capital (RBC) ratio was estimated at above 400 per cent
at 30 June 2019, which under the local regulator's 'permitted
practice', excludes gains attributable to the valuation of interest
rate swaps (if these were included the RBC ratio would be
approximately 45 percentage points higher). Operating capital
generation includes a favourable reserve release of £0.3
billion13 (US$0.4
billion) net of tax resulting from the block of business acquired
from John Hancock in 2018.
The M&GPrudential Group has requested approval from the
Prudential Regulatory Authority (PRA) to amend the group internal
model to apply at the level of the M&GPrudential Group, rather
than at the level of the existing Prudential Group. The decision is
pending and is expected to be provided shortly before the planned
demerger, such that the Prudential Group internal model remains in
place until the demerger with M&GPrudential's model commencing
from this point. The results set out below should not be
interpreted as representing the Pillar I output from an approved
Solvency II internal model for M&GPrudential and are subject to
change. Based on the assumptions that underpin the current approved
Group internal model, the estimated shareholder Solvency II surplus
for the M&GPrudential Group at 30 June 2019 was £3.9
billion. The estimated pro forma position, assuming that the
proposed demerger of M&GPrudential from Prudential plc had been
completed as at 30 June 2019 based on the operating environment and
economic conditions as at that date, was £3.9
billion19 (equivalent
to a cover ratio14 of
169 per cent). Further information can be found in note I(i)(a) of
the Additional financial information section.
Debt portfolio
The Group continues to maintain a high-quality defensively
positioned debt portfolio. Shareholders' exposure to credit is
concentrated in the UK and Europe annuity portfolio and the US
general account, mainly attributable to Jackson's fixed annuity
portfolio. The credit exposure is well diversified and 97 per cent
of our M&GPrudential portfolio and 96 per cent of our US
portfolio are investment grade15.
10 per cent of the US portfolio is in US treasuries (31 December
2018: 10 per cent). During the first half of 2019, default
losses were minimal and reported impairments in the US portfolio
were £1 million (2018: £2 million).
Financing and liquidity
Shareholders' net core structural borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
30 June 2019 £m
|
|
30 June 2018 £m
|
|
31 December 2018 £m
|
|
IFRS
basis
|
Mark-to-market value
|
EEV
basis
|
|
IFRS
basis
|
Mark-to-market value
|
EEV
basis
|
|
IFRS
basis
|
Mark-to-market value
|
EEV
basis
|
Subordinated debt that is capable of being substituted to
M&GPrudential (as at 30 June 2019)
|
3,089
|
209
|
3,298
|
|
1,287
|
80
|
1,367
|
|
2,919
|
64
|
2,983
|
Other core structural borrowings
|
4,352
|
402
|
4,754
|
|
5,080
|
71
|
5,151
|
|
4,745
|
119
|
4,864
|
Total borrowings of shareholder-financed businesses
|
7,441
|
611
|
8,052
|
|
6,367
|
151
|
6,518
|
|
7,664
|
183
|
7,847
|
Less: Holding company cash and
short-term investments
|
(2,365)
|
-
|
(2,365)
|
|
(2,210)
|
-
|
(2,210)
|
|
(3,236)
|
-
|
(3,236)
|
Net core structural borrowings of
shareholder-financed businesses
|
5,076
|
611
|
5,687
|
|
4,157
|
151
|
4,308
|
|
4,428
|
183
|
4,611
|
Gearing ratio*
|
21%
|
|
|
|
21%
|
|
|
|
20%
|
|
|
* Net core structural borrowings as
proportion of IFRS shareholders' funds plus net debt, as set out in
note II of the Additional financial information.
The Group had central cash resources of £2.4 billion at 30
June 2019 (31 December 2018: £3.2 billion). Total core
structural borrowings decreased by £0.2 billion, from
£7.6 billion to £7.4 billion in the first half of 2019,
following the redemption of £400 million 11.375 per cent tier
2 Subordinated Notes in May 2019, offset partly by a £169
million increase in the IFRS debt value as a result of the
agreement in the first half of 2019 of holders of two tranches of
bonds to permit substitution of M&GPrudential as the issuer of
these bonds in place of Prudential plc at demerger (see note
C.6.1(vi) of the IFRS financial statements for further
information).
Prior to the proposed demerger, the Group expects to rebalance its
debt capital across Prudential plc and M&GPrudential. This will
include the ultimate holding company of M&GPrudential becoming
an issuer of debt following substitution from Prudential plc. Based
on the operating environment and economic conditions as at 30 June
2019, the total debt expected to be transferred valued at original
proceeds less unamortised transaction costs is £3.2 billion,
compared with the circa £3.5 billion as previously indicated.
Of the £3.2 billion, £2.9 billion was held by Prudential
plc at 30 June 2019 (IFRS value of £3.1 billion), with a
further £0.3 billion raised in July 2019. Following the
substitution Prudential plc is expected to have core structural
borrowings valued under IFRS at £4.4 billion at 30 June 2019.
As set out in the 'local statutory capital' section above, the
shareholder Solvency II ratio of M&GPrudential at 30 June 2019,
assuming the demerger had taken place at this date and hence the
debt described above had been substituted, was 169 per cent. This
is based on assumptions at 30 June 2019 and does not allow for any
further trading or change in environment and economic conditions,
material changes in which may lead to a different
outcome.
In addition to its net core structural borrowings of
shareholder-financed businesses set out above, the Group also has
access to funding via the money markets and has in place an
unlimited global commercial paper programme. As at 30
June 2019, we had issued commercial paper under
this programme totalling US$828 million, to finance
non-core borrowings.
As at 31 December 2018, the Group had a total of £2.6 billion
of undrawn committed facilities, expiring in 2023. In preparation
for the demerger of M&GPrudential from Prudential plc, since
the year end, these facilities have been replaced with two separate
committed facilities totalling £3.5 billion expiring in 2024.
Of this amount, £2.0 billion of committed facilities are held
by Prudential plc and £1.5 billion of facilities are held by
M&GPrudential. Up to the point of demerger, Prudential plc has
access to the whole amount through an internal committed facility.
No amounts have been drawn under these facilities and there were no
amounts outstanding at 30 June 2019. Access to further liquidity is
available through the debt capital markets and a commercial paper
programme in place, and Prudential plc has maintained a consistent
presence as an issuer in the market for the past decade. The
medium-term note programme, the US shelf programme (platform for
issuance of SEC registered public bonds in the US market), the
commercial paper programme and the committed revolving credit
facilities are all available for general corporate purposes and to
support the liquidity needs of Prudential's holding company, and
are intended to maintain a flexible funding capacity.
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 secured by collateral posted by Jackson.
Given the wide range of Jackson's product set and breadth of its
customer base including retail, corporate and institutional,
further sources of liquidity also include premiums and
deposits.
Shareholders' funds
|
|
|
|
|
|
|
|
|
|
|
IFRS
|
|
EEV
|
|
2019 £m
|
2018 £m
|
|
2019 £m
|
2018 £m
|
|
Half year
|
Half year
|
|
Full year
|
|
Half year
|
Half year
|
|
Full year
|
Profit after tax for the
period16
|
1,535
|
1,355
|
|
3,010
|
|
4,259
|
2,967
|
|
4,585
|
Exchange movements, net of related tax
|
98
|
69
|
|
348
|
|
225
|
523
|
|
1,706
|
Unrealised gains and losses on US fixed income securities
classified as available-for-sale17
|
1,726
|
(908)
|
|
(1,083)
|
|
-
|
-
|
|
-
|
Dividends
|
(870)
|
(840)
|
|
(1,244)
|
|
(870)
|
(840)
|
|
(1,244)
|
Mark-to-market value movements on Jackson assets backing surplus
and required capital
|
-
|
-
|
|
-
|
|
137
|
(32)
|
|
(95)
|
Other
|
(66)
|
119
|
|
131
|
|
(117)
|
127
|
|
132
|
Net increase (decrease) in shareholders' funds
|
2,423
|
(205)
|
|
1,162
|
|
3,634
|
2,745
|
|
5,084
|
Shareholders' funds at beginning of the period
|
17,249
|
16,087
|
|
16,087
|
|
49,782
|
44,698
|
|
44,698
|
Shareholders' funds at end of the period
|
19,672
|
15,882
|
|
17,249
|
|
53,416
|
47,443
|
|
49,782
|
Shareholders' value per
share1,18
|
757p
|
613p
|
|
665p
|
|
2,055p
|
1,830p
|
|
1,920p
|
Group IFRS shareholders' funds in the six months to 30 June 2019
increased by 14 per cent to £19.7 billion (31 December 2018:
£17.2 billion on an actual exchange rate basis), driven by the
strength of the operating result, offset by dividend payments of
£870 million. During the period, UK sterling has weakened
relative to the US dollar and various Asian currencies, which
generated a positive exchange rate movement on the net assets in
the period. In addition, the decrease in US long-term interest
rates between the start and the end of the reporting period
produced unrealised gains on fixed income securities held by
Jackson accounted for through other comprehensive
income.
If the demerger had occurred at 30 June 2019, shareholders' equity
would have been reduced by £5.1 billion to £14.6
billion19.
For further information see note I(vii) of the Additional financial
information.
The Group's EEV basis shareholders' funds also increased by 7 per
cent to £53.4 billion (31 December 2018: £49.8 billion on
an actual exchange rate basis). On a per share basis, the Group's
embedded value at 30 June 2019 equated to 2,055
pence18,
up from 1,920 pence18 at
31 December 2018.
Financial implications of corporate transactions
Renewal and expansion of regional strategic bancassurance alliance
with UOB
In January 2019, Prudential and UOB renewed their regional
bancassurance alliance until 2034, extending the scope to include a
fifth market, Vietnam, alongside our existing footprint across
Singapore, Malaysia, Thailand and Indonesia. Under the terms of the
renewal, Prudential's life insurance products will be distributed
through UOB's extensive network of more than 400 branches in five
markets, providing access to over four million UOB customers. In
addition, Prudential will use its digital capabilities to deliver
protection-focused propositions to aid UOB's digital bank expansion
and customer acquisition aspirations. An initial fee of £662
million20 will
be paid under the agreement which will be funded through internal
resources. This amount will be paid in three instalments. £230
million20 was
paid in February 2019 with £331 million20 to
be paid in January 2020 and £101 million20 to
be paid in January 2021.
Partnership with OVO in Indonesia
In June 2019, Prudential announced a strategic partnership with PT
Visionet International (OVO), a leading digital payments, rewards
and financial services platform in Indonesia. Prudential and OVO
will develop jointly new and comprehensive digital propositions for
customers encompassing wellness, health and wealth products and
services. Prudential and OVO customers will have the convenience of
transacting online with electronic underwriting, e-payments,
e-claims and access to Prudential's wide hospital network,
complementing the face-to-face service from Prudential's financial
consultants in 160 cities. We believe the partnership enhances
Prudential's reach in one of Asia's largest insurance markets with
a digitally-savvy population.
Acquisition of majority stake in Group Beneficial
In July 2019, Prudential plc completed its acquisition of a 51 per
cent stake in Group Beneficial (Beneficial), one of the leading
life insurers in Cameroon, Côte d'Ivoire and Togo. Beneficial
provides savings and protection products to over 300,000 customers
through 41 branches and more than 2,000 agents. The acquisition
enhances Prudential's growing scale in Africa.
Partial disposal of India life insurance associate
In March 2019, the Group reduced its shareholding in ICICI
Prudential Life Insurance Company, an Indian associate, from 25.8
per cent to 22.1 per cent. The proceeds from the sale of shares
were £191 million resulting in a gain of £150 million
before tax. ICICI Prudential Life Insurance Company remains an
associate of the Group.
Disposal of Vietnam consumer finance business
In June 2019, the Group completed the sale of Prudential Vietnam
Finance Company Limited, its Vietnam consumer finance subsidiary
for proceeds of £119 million, resulting in a profit on
disposal of £55 million before tax.
Acquisition of majority stake in Thanachart Fund
Management
In August 2019, the Group announced that it had entered into a
binding memorandum of understanding with Thanachart Bank to acquire
a controlling stake in Thanachart Fund Management Co., Ltd. (TFUND)
and expects to enter into definitive agreements by the end of the
year. TFUND is the 9th largest
mutual fund manager in Thailand, with total assets under management
of over £5 billion as at 31 December 2018. The proposed
acquisition will be subject to local regulatory
approvals.
Notes
1
See note II of the Additional financial information for definition
and reconciliation to IFRS balances.
2
Asia insurance revenues include spread income, fee income,
with-profits, insurance margin and expected return on shareholder
assets.
3
Includes money market funds.
4
Annualised interest cost is calculated based on core structural
borrowings held at 30 June 2019, using exchange rates at 30 June
2019, and therefore excludes interest costs relating to bonds
redeemed in the period.
5
All figures for net derivative losses and related movements are net
of deferred acquisition costs.
6 Core refers
to the underlying profit of the M&GPrudential insurance
business, excluding the effect of, for example, management actions
to improve solvency and material assumption changes. Details of
these are set out in note I(vi) of the Additional financial
information.
7 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 underlying business unit amount. Further information is
set out in note 9 of the EEV basis results.
8
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 financial information. This comprises dividends and
other transfers from business units that are reflective of emerging
earnings and capital generation.
9
The methodology and assumptions used in calculating the Solvency II
capital results are set out in note I(i) of the Additional
financial information.
10 The
Group shareholder capital position covers continuing and
discontinued operations and excludes the contribution to own funds
and the Solvency Capital Requirement from ring-fenced with-profits
funds and staff pension schemes in surplus. The estimated solvency
positions include management's calculation of UK transitional
measures reflecting operating and market conditions at each
valuation date, which as at 31 December 2018 reflected the approved
regulatory position.
11
Estimated before allowing for first interim ordinary dividend (31
December 2018: second interim ordinary dividend).
12 Includes
£2.9 billion of subordinated debt that is expected to be
transferred to M&GPrudential pre-demerger and hence has not
been 'grandfathered' with the Hong Kong IA.
13
Movements in the period have been translated at the average
exchange rates for the period ended 30 June 2019, apart from
remittances to the Group which reflect the exchange rate applied to
the transaction. The closing balance has been translated at the
closing spot rates as at 30 June 2019.
14 The
M&GPrudential shareholder Solvency II ratio is measured as the
ratio of Solvency II own funds to the Solvency Capital Requirement.
It excludes the contribution to own funds and the Solvency Capital
Requirement from ring-fenced with-profits funds and staff pension
schemes in surplus and includes management's calculation of UK
transitional measures reflecting operating and market conditions at
each valuation date.
15 Based
on hierarchy of Standard & Poor's, Moody's and Fitch,
where available and if unavailable, NAIC and internal ratings have
been used.
16 Excluding
profit for the year attributable to
non-controlling interests.
17
Net of related charges to deferred acquisition costs and
tax.
18
For EEV shareholders' value per share, see note C of the Additional
EEV financial information.
19
No account has been taken of any trading and other changes in
financial position of the Prudential Group after 30 June 2019, thus
the pro forma financial position does not reflect the actual
financial position of the retained Prudential Group following the
completion of the proposed demerger.
20
Translated using a Singapore dollar: Sterling foreign exchange rate
of 1.7360.
The following tables are a summary of key financial disclosures in
the Chief Financial Officer's report and the IFRS and EEV basis
results
Financial highlights
Life APE new business sales (APE
sales)1
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2019 £m
|
Half year
2018 £m
|
Change %
|
|
Half year
2018 £m
|
Change %
|
Asia
|
1,978
|
1,736
|
14
|
|
1,806
|
10
|
US
|
831
|
816
|
2
|
|
868
|
(4)
|
Total continuing operations
|
2,809
|
2,552
|
10
|
|
2,674
|
5
|
Discontinued operations
|
705
|
770
|
(8)
|
|
770
|
(8)
|
Total Group
|
3,514
|
3,322
|
6
|
|
3,444
|
2
|
Life EEV new business profit and investment in new business from
continuing operations
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year 2019 £m
|
|
Half year 2018 £m
|
|
Change %
|
|
Half year 2018 £m
|
|
Change %
|
|
New
business
profit
|
Free
surplus
invested in
new
business
|
|
New
business
profit
|
Free
surplus
invested in
new
business
|
|
New
business
profit
|
Free
surplus
investment
in new
business
|
|
New
business
profit
|
Free
surplus
investment
in new
business
|
|
New
business
profit
|
Free
surplus
investment
in new
business
|
Asia
|
1,295
|
250
|
|
1,122
|
260
|
|
15
|
(4)
|
|
1,178
|
269
|
|
10
|
(7)
|
US
|
348
|
266
|
|
466
|
180
|
|
(25)
|
48
|
|
495
|
192
|
|
(30)
|
39
|
Total continuing operations
|
1,643
|
516
|
|
1,588
|
440
|
|
3
|
17
|
|
1,673
|
461
|
|
(2)
|
12
|
IFRS profit
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2019 £m
|
Half year
2018 £m
|
Change %
|
|
Half year
2018 £m
|
Change %
|
Operating profit based on longer-term
investment returns before tax from continuing
operations2
|
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
Long-term business
|
1,095
|
927
|
18
|
|
963
|
14
|
Asset management
|
103
|
89
|
16
|
|
92
|
12
|
Total
|
1,198
|
1,016
|
18
|
|
1,055
|
14
|
|
|
|
|
|
|
|
|
|
US
|
|
|
|
|
|
|
Long-term business
|
1,203
|
1,001
|
20
|
|
1,064
|
13
|
Asset management
|
12
|
1
|
n/a
|
|
1
|
n/a
|
Total
|
1,215
|
1,002
|
21
|
|
1,065
|
14
|
|
|
|
|
|
|
|
|
|
Total segment profit from continuing operations
|
2,413
|
2,018
|
20
|
|
2,120
|
14
|
|
|
|
|
|
|
|
|
|
Other income and expenditure
|
(366)
|
(329)
|
(11)
|
|
(331)
|
(11)
|
Total operating profit based on longer-term investment returns
before tax and restructuring costs
|
2,047
|
1,689
|
21
|
|
1,789
|
14
|
Restructuring costs3
|
(23)
|
(20)
|
(15)
|
|
(20)
|
(15)
|
Total operating profit based on longer-term
investment returns before tax from continuing
operations
|
2,024
|
1,669
|
21
|
|
1,769
|
14
|
Non-operating items:
|
|
|
|
|
|
|
|
Short-term fluctuations in investment returns
on shareholder-backed business
|
(1,124)
|
9
|
n/a
|
|
8
|
n/a
|
|
Amortisation of acquisition accounting adjustments
|
(17)
|
(22)
|
23
|
|
(23)
|
26
|
|
Gain (loss) on disposal of businesses
and corporate transactions
|
13
|
(57)
|
n/a
|
|
(60)
|
n/a
|
Profit from continuing operations before tax
attributable to shareholders' returns
|
896
|
1,599
|
(44)
|
|
1,694
|
(47)
|
Tax charge attributable to shareholders' returns
|
(1)
|
(326)
|
100
|
|
(343)
|
100
|
Profit for the period from continuing operations
|
895
|
1,273
|
(30)
|
|
1,351
|
(34)
|
Profit for the period from discontinued operations,
net of related tax
|
645
|
83
|
n/a
|
|
83
|
n/a
|
Profit for the period
|
1,540
|
1,356
|
14
|
|
1,434
|
7
|
IFRS profit from discontinued operations
|
|
|
|
|
Actual exchange rate
|
|
Half year
2019 £m
|
Half year
2018 £m
|
Change %
|
Operating profit based on longer-term
investment returns before tax2
|
|
|
|
Long-term business
|
496
|
487
|
2
|
General insurance commission
|
2
|
19
|
(89)
|
Asset management
|
239
|
272
|
(12)
|
Head office costs
|
(21)
|
-
|
n/a
|
Operating profit based on longer-term investment returns before
restructuring costs
|
716
|
778
|
(8)
|
Restructuring costs3
|
(29)
|
(42)
|
31
|
Total operating profit based on longer-term investment returns
before tax
|
687
|
736
|
(7)
|
|
|
|
|
Non-operating profit (loss)
|
130
|
(635)
|
n/a
|
Profit before tax attributable to shareholders'
returns
|
817
|
101
|
n/a
|
Tax charge attributable to shareholders' returns
|
(172)
|
(18)
|
n/a
|
Profit for the period
|
645
|
83
|
n/a
|
Post-tax profit -
EEV4
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2019 £m
|
Half year
2018 £m
|
Change %
|
|
Half year
2018 £m
|
Change %
|
Post-tax operating profit based on longer-term
investment returns from continuing operations
|
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
Long-term business
|
2,127
|
1,753
|
21
|
|
1,834
|
16
|
Asset management
|
91
|
77
|
18
|
|
79
|
15
|
Total
|
2,218
|
1,830
|
21
|
|
1,913
|
16
|
|
|
|
|
|
|
|
|
|
US
|
|
|
|
|
|
|
Long-term business
|
793
|
1,005
|
(21)
|
|
1,068
|
(26)
|
Asset management
|
11
|
(2)
|
650
|
|
(2)
|
650
|
Total
|
804
|
1,003
|
(20)
|
|
1,066
|
(25)
|
|
|
|
|
|
|
|
|
|
Other income and expenditure
|
(361)
|
(340)
|
(6)
|
|
(341)
|
(6)
|
Restructuring costs3
|
(20)
|
(18)
|
(11)
|
|
(18)
|
(11)
|
Post-tax operating profit based on longer-term
investment returns from continuing operations
|
2,641
|
2,475
|
7
|
|
2,620
|
1
|
Non-operating items:
|
|
|
|
|
|
|
|
Short-term fluctuations in investment returns
|
2,229
|
(965)
|
n/a
|
|
(1,021)
|
n/a
|
|
Effect of changes in economic assumptions
|
(1,371)
|
610
|
n/a
|
|
656
|
n/a
|
|
Mark-to-market value movements on core structural
borrowings
|
(492)
|
579
|
n/a
|
|
580
|
n/a
|
|
Loss attaching to corporate transactions
|
(24)
|
(48)
|
n/a
|
|
(50)
|
n/a
|
Post-tax profit for the period from continuing
operations
|
2,983
|
2,651
|
13
|
|
2,785
|
7
|
Post-tax profit for the period from discontinued
operations
|
1,281
|
317
|
304
|
|
317
|
304
|
Post-tax profit for the period
|
4,264
|
2,968
|
44
|
|
3,102
|
37
|
Operating free surplus generated from
continuing operations5
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2019 £m
|
|
Half year
2018 £m
|
|
Change %
|
|
Half year
2018 £m
|
Change %
|
|
Long-
term
|
Total
|
|
Long-
term
|
Total
|
|
Long-
term
|
Total
|
|
Long-
term
|
Total
|
Long-
term
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia
|
594
|
685
|
|
513
|
590
|
|
16
|
16
|
|
528
|
607
|
13
|
13
|
US
|
820
|
831
|
|
595
|
593
|
|
38
|
40
|
|
632
|
630
|
30
|
32
|
Total continuing operations before restructuring costs
|
1,414
|
1,516
|
|
1,108
|
1,183
|
|
28
|
28
|
|
1,160
|
1,237
|
22
|
23
|
Restructuring costs3
|
(1)
|
(14)
|
|
-
|
(10)
|
|
n/a
|
(40)
|
|
-
|
(10)
|
n/a
|
(40)
|
Total continuing operations
|
1,413
|
1,502
|
|
1,108
|
1,173
|
|
28
|
28
|
|
1,160
|
1,227
|
22
|
22
|
Basic earnings per share - based on operating profit after
tax
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2019 pence
|
Half year
2018 pence
|
Change %
|
|
Half year
2018 pence
|
Change %
|
IFRS:
|
|
|
|
|
|
|
From
continuing operations
|
65.3
|
53.7
|
22
|
|
57.0
|
15
|
EEV:
|
|
|
|
|
|
|
From
continuing operations
|
102.1
|
96.2
|
6
|
|
101.8
|
-
|
Cash remitted by the business units to the Group6
|
|
|
|
|
Half year
2019 £m
|
Half year
2018 £m
|
Change %
|
From continuing operations
|
|
|
|
Asia
|
451
|
391
|
15
|
US
|
400
|
342
|
17
|
Other UK (including Prudential Capital)
|
5
|
37
|
(86)
|
From discontinued operations
|
|
|
|
M&GPrudential
|
356
|
341
|
4
|
Total Group
|
1,212
|
1,111
|
9
|
Cash and capital - both continuing and discontinued
operations
|
|
|
|
|
Half year
2019
|
Half year
2018
|
Change %
|
First interim dividend per share relating to the reporting
period
|
16.45p
|
15.67p
|
5
|
Holding company cash and short-term investments
|
£2,365m
|
£2,210m
|
7
|
Group Solvency II capital surplus7,8
|
£16.7bn
|
£14.4bn
|
16
|
Group Solvency II capital ratio7,8
|
222%
|
209%
|
+13pp
|
|
|
|
|
Group shareholders' funds (including goodwill attributable to
shareholders) - both continuing and discontinued
operations
|
|
Half year
2019 £bn
|
Half year
2018 £bn
|
Change %
|
IFRS
|
19.7
|
15.9
|
24
|
EEV
|
53.4
|
47.4
|
13
|
|
|
|
|
|
Half year
2019 %
|
Half year
2018 %
|
|
Total return on IFRS shareholders' funds9
|
18
|
17
|
|
Total return on embedded value10
|
17
|
13
|
|
|
|
|
|
|
Half year
2019 pence
|
Half year
2018 pence
|
Change %
|
EEV shareholders' funds per share (including goodwill attributable
to shareholders)10
|
2,055
|
1,830
|
12
|
EEV shareholders' funds per share (excluding goodwill attributable
to shareholders)10
|
1,991
|
1,774
|
12
|
Notes
1
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 period for all
insurance products, including premiums for contracts designated as
investment contracts under IFRS 4. It is not representative of
premium income recorded in the IFRS financial statements. See note
II of the Additional financial information for further
explanation.
2
Adjusted IFRS operating profit based on longer-term investment
returns is management's primary measure of profitability and
provides an underlying operating result based on longer-term
investment returns and excludes non-operating items. Further
information on its definition and reconciliation to profit for the
period is set out in note B1 of the IFRS financial
statements.
3
Restructuring costs include business transformation and integration
costs.
4
The EEV basis results have been prepared in accordance with EEV
principles discussed in note 1 of the EEV basis results. See note
II of the Additional financial information for definition and
reconciliation to IFRS balances.
5
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 underlying business unit amount. Further
information is set out in note 9 of the EEV basis
results.
6
Cash remitted to the Group forms part of the net cash flows of the
holding company. A full holding company cash flow is set out in
note I(iii) of the Additional financial information. This differs
from the IFRS Condensed consolidated statement of cash flows which
includes all cash flows relating to both policyholders' and
shareholders' funds. The holding company cash flow is therefore a
more meaningful indicator of the Group's central
liquidity.
7 The
Group shareholder capital position covers continuing and
discontinued operations and excludes the contribution to own funds
and the Solvency Capital Requirement from ring-fenced with-profits
funds and staff pension schemes in surplus. The estimated solvency
positions include management's calculation of UK transitional
measures reflecting operating and market conditions at each
valuation date.
8
Estimated before allowing for first interim ordinary
dividend.
9 See
note II of the Additional financial information for definition and
reconciliation of IFRS balances.
10 Further
information is set out in the Additional EEV financial
information.
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. Although M&GPrudential is
considered a discontinued operation and is approaching life as a
fully independent business with its board and management in place,
until the demerger is effected M&GPrudential's risks (as with
those of the Group's other business units) are managed within the
Group Risk Framework and this report reflects this
position.
1. Introduction
Group structure
The activity ongoing at M&GPrudential to combine its asset
management and UK and Europe insurance businesses, and
M&GPrudential's proposed demerger from the rest of the Group
(announced in March 2018), requires significant and complex
changes. These have continued to progress apace in 2019. The Risk
function has been embedded within key work streams and with a
number of important milestones in the demerger activity now
completed, a clear view exists of the remaining activities and
associated risks and dependencies in order to execute these
changes.
A mature and well-embedded risk framework is in place and, during
this period of transition, the Group Risk function has performed a
defined role in providing oversight, support and risk management,
as well as objective challenge to ensure the Group remains within
its risk appetite. During 2019, these activities have been in the
form of risk opinions, guidance and assurance on critical
transformation and demerger activity for the Group and at
M&GPrudential, as well as assessments and ongoing monitoring of
the financial and execution risks to the demerger from external
events. These include the potential market disruption from the UK's
exit from the EU and the current situation in Hong
Kong.
A key objective is that post-demerger there are two strong,
standalone risk functions in M&GPrudential and Prudential plc
that are more closely aligned to their respective key stakeholders.
Planning and delivery of operational separation for the risk
functions remain on track. Throughout this process, the Risk
function has kept its focus on managing the risks of the growing
business, in an environment which remains uncertain from a
geopolitical and macroeconomic perspective.
Societal developments
Investor focus in developed economies continues to shift from the
goods and services which businesses deliver to customers towards
the way in which such business is conducted and how this impacts on
the wider society. Developments in the business environments in
which the Group operates are continually monitored to ensure that
the environmental, social and governance (ESG) issues that are
important to the Group's brand, reputation and long-term strategy
are understood and managed, and this includes stakeholder and
regulatory expectations. Technological developments continue and
there is a growing expectation from consumers that the services
they receive, and the manner in which it is delivered, keeps pace.
Regulatory developments such as the EU General Data Protection
Regulation (GDPR), and similar regulations in the US and Asia, have
underlined that personal data must be held securely and its use
must be transparent to the data owner. Risks around the security
and use of personal data are actively managed by the Group, and
regulations in data protection have been incorporated into the
principles against which the business requirements are
defined.
The world economy
Economic growth worldwide has been slowing since the beginning of
the year, with global manufacturing contracting in May and June,
led by the Eurozone, UK and some Asian economies, although the US
continued to see some expansion. Services and consumption data have
remained fairly robust over the first half and this has provided
support to the extent of economic growth seen. Various factors have
exerted downward pressure on global GDP growth over the year to
date, including political tensions (in particular those related to
trade policies), efforts in China to deleverage and tightened
financial conditions in the US. Faced with the prospect of a
slowdown in the global economy, continued subdued inflation and the
potential impacts from trade tensions, the major central banks
across North America, Europe and Asia have signalled a change in
position towards further easing in monetary policy. Although the
continuation of accommodative monetary conditions is expected to
provide support for the global economy, the outlook over the rest
of 2019 is likely to remain highly uncertain.
Financial markets
Financial markets suffered broadly as 2018 came to an end, driven
by the substantial weakening of growth in world trade and the
tightening in monetary policy being effected by central banks at
that time. In the first half of 2019, most assets responded
positively to the US Federal Reserve's then-indications of a
potential move back towards accommodative monetary policy, which
ultimately manifested in a 0.25 per cent cut in the US central
bank's benchmark interest rate in early August. Bond valuations
have also rallied on the back of the significant fall in interest
rates over the first quarter. The announcement in early July 2019
of a resumption in trade talks between the US and China has
contributed further to the increase in risk asset values. Headwinds
to a continuation of positive financial market performance remain
in place, in particular given that market turbulence and reduced
liquidity tend to exacerbate increases in volatility. Markets
remain highly susceptible to any abrupt change in risk sentiment
and in particular to the signals of central banks in respect of the
direction of travel in monetary policy.
(Geo)political landscape
Events in 2019 continue to show that the world is experiencing a
period of global geopolitical transition and increasing
uncertainty. Popular discontent has been one of the driving factors
of political change, and the role of multilateral rules-based
institutions that underpin global order, such as the United Nations
(UN), the North Atlantic Treaty Organisation (NATO) and the World
Trade Organisation (WTO) do not appear as certain as they once
were. It is clear that the full long-term impacts of these global
changes remain to be seen. Across the Group's key geographies we
continue to see national protectionism in trade and economic
policies. The UK's exit from the EU and the nature of the future
relationship persists as a key uncertainty. Rising tensions in the
Gulf region and China's relationship with both the US and Hong Kong
remain sources of geopolitical uncertainty. As a global
organisation, the Group develops 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 across the globe,
and the nature and focus of regulation and laws remains fluid. A
number of national and international regulatory developments are in
progress, with a continuing focus on solvency and capital
standards, conduct of business, systemic risks and macroprudential
policy. Such developments will continue to be monitored at a
national and global level and form part of Prudential's engagement
with government policy teams and regulators. Prudential announced
in August 2018 that the Hong Kong Insurance Authority would be the
Group-wide supervisor following the demerger of M&GPrudential,
and constructive engagement continued in 2019 on the future
Group-wide regulatory framework that will apply to the Group
immediately after the demerger and the framework that will apply in
the longer term. Similarly, M&GPrudential has been engaging
closely with the PRA and FCA on the application of the existing
regulatory framework in the UK to the demerged
business.
2. Key internal,
regulatory, economic and (geo)political events over the past 12
months
Q3 2018
|
Q4 2018
|
Q1 2019
|
Q2 2019
|
In
August, the Group announces that the Hong Kong Insurance Authority
will become the Group-wide supervisor for Prudential plc after the
demerger of M&GPrudential, and constructive engagement on the
future regulatory relationship begins.
In
July, the International Association of Insurance Supervisors (IAIS)
releases consultation documents for both the Common Framework for
the Supervision of Insurers (ComFrame) and Insurance Capital
Standard (ICS) v2.0.
The
Group submits ICS field results to the PRA in August
2018.
In
September, PRA and FCA request from major banks and insurers,
details of preparations and actions being undertaken to manage
transition from London Inter-Bank Offered Rate (LIBOR) to
alternative interest rate benchmarks.
Emerging
market equities decline rapidly in August as tightening financial
conditions impact economies with external funding
vulnerabilities.
The US
imposes tariffs on Chinese exports worth US$50 billion in July,
prompting Beijing to respond in kind. Despite a temporary truce
agreed at the G20 summit on 1 December, trade tensions between the
two nations remains high.
The
Bank of England raises rates for the second time since the 2008
financial crisis to 0.75 per cent in August, while highlighting
significant Brexit-driven uncertainties to the
economy.
|
The
IAIS launches a consultation for the Holistic Framework (HF) in
November, which aims to assess and mitigate systemic risk in the
insurance sector and is intended to replace the current Global
Systemically Important Insurer (G-SII) measures, with the aim of
adoption in November 2019.
In
November, the International Accounting Standards Board (IASB)
tentatively delays the effective date of IFRS 17 by one year to
periods beginning on or after 1 January 2022. The introduction of
further amendments to this new standard will be
considered.
The
reduction in global accommodative monetary policy continues, with
the European Central Bank (ECB) confirming that net asset purchases
would cease at the end of 2018, and the US Federal Reserve raises
rates for the fourth time in 2018 in December.
China
reports a large manufacturing decline in December, prompting
concerns of a global growth slowdown. Additional stimulus measures
from the People's Bank of China are enacted.
Fears
of tightening financial conditions and a global economic slowdown
trigger a sharp sell-off in US equity markets, which had remained
resilient through the first three quarters of 2018, while global
equities fall further. The S&P 500 ends 2018 with an annual
decline of circa 6 per cent. In early 2019 risk sentiment improves,
contributing to a broad rally in equity markets.
In
November, Jackson announces the acquisition of the group payout
annuity business of John Hancock Life Insurance Company, a closed
book of circa 200,000 in-force certificates representing IFRS
reserves of approximately US$5.5 billion.
PPM
America (PPMA) becomes the fourth Prudential Group signatory to the
UN Principles for Responsible Investment in October
2018.
Democrats
win control of the House of Representatives in the November US
midterm elections, while the Republicans retain control of the
Senate. As bipartisan disputes increase, the US government
partially shuts down between late December 2018 and January
2019.
In
December, the UK Parliament rejects the negotiated agreement on the
UK's withdrawal from the EU. Uncertainty on the nature of the UK's
exit from the EU persists as the UK government seeks to renegotiate
the agreement in early 2019.
|
On 25
March, the Hong Kong IA and Prudential plc sign the Regulatory
Letter specifying the supervisory framework immediately following
the demerger of M&GPrudential.The Group has since agreed with
the supervisor to apply the Local Capital Summation Method (LCSM)
to determine Group regulatory capital requirements and related
governance requirements until the Hong Kong IA's Group-wide
Supervision Framework is finalised.
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. Central bank
rhetoric turns 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. In Q2, China reports its lowest
quarterly GDP growth rate in 30 years of 6.2 per cent.
In
Indonesia, the Otoritas Jasa Keuangan (OJK) approves
'grandfathering' of Prudential's existing 94.6 per cent
shareholding in P.T. Prudential Life Assurance, our Indonesian
subsidiary, although any future capital will be subject to the 80
per cent foreign ownership limit.
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.
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. However, in June the two countries agree
to resume talks as Donald Trump becomes the first sitting US
president to enter North Korea.
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.
The UK
Parliament fails to pass the negotiated Withdrawal Agreement by
the-then Article 50 notice period deadline of 29 March, resulting
in an agreed extension until 31 October 2019. Prime Minster Theresa
May resigns from office in May with Boris Johnson selected by the
Conservative Party as her successor.
|
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.
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.
Over Q2
and into Q3, large-scale demonstrations have taken place in Hong
Kong, sparked by an extradition bill proposed by the Hong Kong
government.
The Hong
Kong Insurance Authority 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.
At the
G20 summit in June, the US and China agree to resume trade talks,
which eases tensions which had contributed to downward pressure on
global economic growth. The month-long truce ends abruptly in Q3
when the US announces in August tariffs on US$300 billion of
Chinese imports (effective September). In response to the
subsequent devaluation of the RMB, the US Treasury designates China
a currency manipulator as tensions re-escalate.
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. The risk of further escalation remains
high.
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.
In
June, the PRA and FCA hold a conference to set out their reaction
to firms' plans on how to transition away from London Inter-Bank
Offered Rate (LIBOR) to alternative interest rate
benchmarks.
Following
the end of Q2, the Group submits the results of ICS field-testing
for 2019 (launched in April 2019) to the IAIS on 31 July 2019. This
will be the last field-testing prior to the finalisation of the ICS
2.0 specifications and the start of a five-year monitoring period
next year. This follows the IAIS global seminar which took place in
June.
|
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
We aim to generate attractive returns enabling us to provide
financial security to our customers and deliver sustainable growth
for our shareholders. Following rigorous review, we believe that
this long-term strategy is best served through the demerger of
M&GPrudential.
|
● Transformation risks around key change
programmes
|
●
Managing the inter-connected execution
risks from this transformation activity under the Group's
transformation risk framework, as well as providing other risk
management support and review.
●
Ensuring both M&GPrudential and
Prudential plc will have in place two strong standalone risk
functions after demerger.
|
● Group-wide regulatory risks
|
●
Engagement with 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
Insurance Authority on the Group-wide supervisory framework that
will apply to the Group after the demerger of M&GPrudential.
Engagement with the PRA and FCA on the application of the current
UK regulatory framework to M&GPrudential.
|
● Information security and data privacy
risks
|
●
Continuing the implementation of the
Group-wide organisational structure and governance model for cyber
security management.
●
Ensuring full compliance with
applicable privacy laws across the Group.
|
● Business disruption and third-party
risks
|
●
Continuing application of the
Group-wide business continuity framework and
programme.
●
Applying the distinct oversight and
risk management required over the Group's third parties, including
outsourcing partners and its strategic
partnerships.
|
● Conduct risk
|
●
Continuing the development and
implementation of the Group-wide conduct framework which builds on
the Group's Customer Commitments Policy.
|
|
|
|
Asia
Serving the protection and investment needs of the growing middle
class in Asia.
|
● Persistency risk
|
●
Implementation of business initiatives
to manage persistency risk, including 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.
|
● Regulatory risk (including foreign ownership and
conduct)
|
●
Proactive engagement with national
governments and regulators.
|
United States
Providing asset accumulation and retirement income products to US
baby boomers.
|
● Financial risks
|
●
Maintaining, and enhancing where
necessary, appropriate risk limits, hedging strategies and Group
oversight that are in place.
|
● Policyholder behaviour risk
|
●
Continued monitoring of policyholder
behaviour experience and review of assumptions.
|
Africa
|
● The
Group continues to increase its risk management focus on Prudential
Africa as its presence there expands and grows in
materiality.
|
|
|
M&GPrudential
Meeting the savings and retirement needs of an ageing UK and
continental European population.
|
● M&GPrudential merger and transformation
risk
|
●
Managing the merger and transformation
risks to the delivery of strategic, financial and operational
objectives.
|
● Longevity risk
|
●
Continued oversight and experience
analysis.
|
● Customer risk
|
●
Ongoing monitoring of embedded
customer outcome indicators.
●
Managing the customer risk
implications from: merger and transformation activity; new product
propositions and new regulatory requirements.
|
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, now and after demerger. Prudential's approach to
risk management must be both well embedded and rigorous, closely
aligned with the Group's key stakeholders and its business units
and Group-wide. 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
Framework is based on the concept of the 'three lines of defence',
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 continued to update its policies and processes
around oversight of model risks. Prudential manages key ESG issues
though a multi-disciplinary approach with functional ownership for
ESG topics.
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 material subsidiaries. These committees monitor the development
of the Group Risk Framework, which includes risk appetite, limits,
and policies, as well as risk culture.
The
Group Risk Committee reviews the Group Risk Framework and
recommends changes to the Board to ensure that it remains effective
in identifying and managing the risks faced by the Group. A number
of core risk policies and standards support the Framework to ensure
that risks to the Group are identified, assessed, managed and
reported.
Culture
is a strategic priority of the Board, who recognise its importance
in the way that the Group does business. Risk culture is a subset
of Prudential's broader organisational culture, which shapes the
organisation-wide values that we use to prioritise risk management
behaviours and practices.
An
evaluation of risk culture forms part of the Group Risk Framework
and in particular seeks to identify evidence that:
● Senior management in business units articulate the
need for effective risk management as a way to realise long-term
value and continuously support this through their
actions;
● Employees understand and care about their role in
managing risk - they are aware of and discuss risk openly
as part of the way they perform their role; and
● Employees invite open discussion on the approach
to the management of risk.
The
Group Risk Committee also has a key role in providing advice to the
Remuneration Committee on risk management considerations to be
applied in respect of executive remuneration.
Prudential's
Code of Conduct and Group Governance Manual include a series of
guiding principles that govern the day-to-day conduct of all its
people and any organisations acting on its behalf. This is
supported by specific risk policies which require that the Group
act in a responsible manner. These include, but are not limited to,
policies 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.
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 key risks,which considers
those risks that have the greatest potential to impact the Group's
operating results and financial condition and is used to inform
risk reporting to the risk committees and the Board for the
year.
Our
risk identification process also includes the Group's Own Risk and
Solvency Assessment (ORSA), as required under Solvency II, and
horizon-scanning performed as part of our emerging risk management
process.
In
accordance with provision 28 of the UK Corporate Governance Code,
the Board performs a robust assessment of the principal and
emerging risks facing the Company through the Group-wide risk
identification process, Group ORSA report and the risk assessments
undertaken as part of the business planning review, including how
they are managed and mitigated. An emerging risk process has been
developed to support the identification, analysis, and
decision-making with respect to such risks and combines both
top-down and bottom-up views of risks at the level of the Group and
its business units.
Reverse
stress testing, which requires 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 key risks are given enhanced management and reporting
focus.
Risk measurement and assessment
All
identified risks are assessed based on an appropriate methodology
for that risk. All quantifiable risks, which are material and
mitigated by holding capital, are modelled in the Group's internal
model, which is used to determine capital requirements under
Solvency II and our own economic capital basis. Governance
arrangements are in place to support the internal model, including
independent validation and processes and controls around model
changes and limitations.
Risk management and control
The
control procedures and systems established within the Group are
designed to manage the risk of failing to meet business objectives
and are detailed in the Group risk policies. These focus on
aligning the levels of risk-taking with the Group's strategy and
can only provide reasonable, and not absolute, assurance against
material misstatement or loss.
The
management and control of risks are set out in the Group risk
policies, and form part of the holistic risk management approach
under the Group's ORSA. These risk policies define:
● The Group's risk appetite in respect of material
risks, and the framework under which the Group's exposure to those
risks is limited;
● The processes to enable Group senior management to
effect the measurement and management of the Group material risk
profile in a consistent and coherent way; and
● The flows of management information required to
support the measurement and management of the Group's material
risks.
The
methods and risk management tools we employ to mitigate each of our
major categories of risks are detailed in the further risk
information section below.
Risk monitoring and reporting
The
identification of the Group's key risks informs the management
information received by the Group risk committees and the Board.
Risk reporting of key exposures against appetite is also included,
as well as ongoing developments in other key and emerging
risks.
iii. Risk appetite, limits and
triggers
The
extent to which Prudential is willing to take risk in the pursuit
of its business strategy and objective to create shareholder value
is defined by a number of qualitative and quantitative expressions
of risk appetite, operationalised through measures such as limits,
triggers and indicators. The Group Risk function is responsible for
reviewing the scope and operation of these risk appetite measures
at least annually to determine that they remain relevant. The Board
approves all changes made to the Group's aggregate risk appetite
and has delegated authority to the Group Risk Committee to approve
changes to the system of limits, triggers and
indicators.
Group
risk appetite is set with reference to economic and regulatory
capital, liquidity and earnings volatility which is aimed at
ensuring that an appropriate level of aggregate risk is taken
across the Group. Appetite is also defined for the Group's
financial and non-financial risks. Further detail is included in
sections 5 and 6, as well as covering risks to shareholders,
including those from participating and third-party business. Group
limits operate within these expressions of risk appetite to
constrain material risks, while triggers and indicators provide
further constraint and defined points for escalation.
Capital requirements
Limits
on capital requirements aim to ensure that the Group meets its
internal economic capital requirements, achieves its desired target
rating to meet its business objectives, and ensures that
supervisory intervention is not required. The two measures
currently in use at the Group level are Solvency II capital
requirements and internal economic capital (ECap) requirements. In
addition, capital requirements are monitored on local statutory
bases.
The Group Risk Committee is responsible for
reviewing the risks inherent in the Group's business plan and for
providing the Board with input on the risk/reward trade-offs
implicit therein. This review is supported by the Group Risk
function, which uses submissions from local business units to
calculate the Group's aggregated position (allowing for
diversification effects between local business units) 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.
Earnings volatility
The
objectives of the Group's appetite and aggregate risk limits on
earnings volatility seek to ensure that variability is consistent
with the expectations of stakeholders; that the Group has adequate
earnings (and cash flows) to service debt and expected
dividends and to withstand unexpected shocks; and that earnings
(and cash flows) are managed properly across geographies and are
consistent with funding strategies. The volatility of earnings is
measured and monitored on operating profit and EEV operating profit
bases, although IFRS and EEV total profits are also
considered.
5. Summary
risks
Broadly, the risks assumed across the Group can be
categorised as those which arise as a result of our business
operations, our investments and those arising from the nature of
our products. Prudential is also exposed to those broad risks which
apply because of the global environment in which it operates. These
risks, where they materialise, may have a financial impact on the
Group, and could also impact on the performance of its products or
the services it provides to our customers and distributors, which
gives rise to potential risks to its brand and reputation and have
conduct risk implications. 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. The Group's disclosures covering risk factors can be
found at the end of this document.
'Macro' risks
Some of the risks that the Group is exposed to are necessarily
broad given the external influences which may impact on the
business. These risks include:
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.
Geopolitical risk
The geopolitical environment may have direct or indirect impacts on
the Group and has seen varying levels of volatility in recent years
as seen by political developments in the UK following its decision
to leave the EU, and in the US and China. Uncertainty in these
regions, combined with the continued threat of further conflict in
the Middle East and unpredictability in East Asia, Hong Kong and
the Korean peninsula underline that geopolitical risks have
potentially wide-ranging impacts; for example, through increased
regulatory, operational and business resilience risks, and changes
to the economic environment. Developments in Hong Kong are being
closely monitored by the Group to ensure that any potential impact
to the business, our employees and customers are managed within our
existing business resilience processes.
Regulatory risk
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 (in particular focusing on consumer
protection) are key areas of focus, while both Jackson and
M&GPrudential operate in highly regulated markets. Regulatory
reforms can have a material impact on Prudential's
businesses. The proposed demerger of M&GPrudential will
result in a change in Prudential's Group-wide supervisor to the
Hong Kong Insurance Authority. Prudential has agreed to apply
the Local Capital Summation Method (LCSM) to determine Group
regulatory capital requirements, together with related governance
requirements, immediately following the demerger of
M&GPrudential. The Group is proactively engaging with the
supervisor-elect on the supervisory framework that will apply to
the Group in the longer term. This is intended to be the Hong
Kong IA's Group-wide Supervision (GWS) Framework which is currently
under development and is not expected to be enacted until the
second half of 2020.
Technological change
The emergence of advanced technologies is continuing to provide an
impetus for companies to rethink their existing operating models
and how they interact with their customers. These developments are
already influencing changes to the competitor and regulatory
landscape. Technological change is considered from both an external
and internal view. The external view considers the risks that
emerge from the rise of new technologies (including the risk that
the Group does not identify these) and how this may impact on the
insurance industry and Prudential's competitiveness within it. The
internal view considers the risks associated with the Group's
internal developments in meeting digital change challenges and
opportunities. Prudential is embracing the opportunities from new
technologies, and any risks which arise from them are closely
monitored.
ESG 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 its long-term
strategy. Policies and procedures to support how the Group operates
in relation to certain ESG issues are included in the Group
Governance Manual.
Risks from our investments
|
Risks from our products
|
Risks from our business operations
|
Market risk
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. 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.
M&GPrudential's
asset management business invests in a broad range of asset classes
and its income is subject to the price volatility of global
financial and currency markets. The UK business's market risk
exposure predominantly arises from the valuation of the
shareholders' proportion of the with-profits fund's future profits,
which depends on equity, property and bond values.
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 annuity business in the UK,
Jackson's general account portfolio and the Asia shareholder
business means credit risk is considered a material risk for all
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.
Liquidity risk
Is the
risk of not having sufficient liquid assets to meet obligations as
they fall due, and we look at this under both normal and stressed
conditions. This is a risk which is considered material at the
level of the Group.
|
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 longevity
risk (policyholders living longer than
expected); mortality
risk (higher number of policyholders with life
protection dying than expected); morbidity risk (more policyholders
with health protection becoming ill than expected)
and persistency
risk (customers lapsing their policies at different
levels than expected, and a type of policyholder behaviour risk).
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.
For
M&GPrudential the most material insurance risk is longevity
risk, arising from its legacy annuity business.
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 drives a
more forward-looking approach and means that achieving good
customer outcomes is at the centre of our business
activity.
|
Transformation risk
A
number of significant change programmes are currently running to
effect both the Group's strategy and to comply with emerging
regulatory changes. The breadth of these activities, and the
consequences, including the reputational impact, to the Group
should they fail to meet their objectives, mean that these risks
are material at the level of the Group.
Operational 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. Operational
risk is considered to be material at the level of the
Group.
Business
disruption risks may impact on Prudential's ability to meet its key
objectives and protect its brand and reputation. The Group's
business resilience is a core part of a well-embedded business
continuity management programme.
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 continually evolving 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 resources 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.
As with
all financial services firms, the nature of the Group's business
and its operations means that it is exposed to risks relating to
money laundering, fraud, sanctions compliance and bribery and
corruption.
|
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 'Macro' risks
a. Global regulatory and political
risks
Regulatory and political risks may impact on 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, new regulations at either national or
international level, and specific regulator interventions or
actions. Following the proposed demerger of M&GPrudential from
the rest of the Group, the Hong Kong Insurance Authority will
become Prudential's Group-wide supervisor. Constructive engagement
with the supervisor-elect began in 2018 and has continued into
2019. In particular, Prudential continues to engage with the
supervisor on the proposed framework for Group-wide supervision
that will apply to the Group following the demerger. In the longer
term this is intended to be the Hong Kong IA's Group-wide
Supervision (GWS) Framework which is currently under development
and is not expected to be enacted until the second half of 2020.
Until the GWS is finalised, Prudential has agreed to apply the
Local Capital Summation Method (LCSM) to determine Group regulatory
capital requirements immediately following the demerger of
M&GPrudential, together with related governance
requirements.
Recent shifts in 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 underway. 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.
Prudential's designation as a G-SII was last reaffirmed on 21
November 2016. The FSB, in conjunction with the IAIS, did not
publish a new list of G-SIIs in 2017 and did not engage in G-SII
identification for 2018 following IAIS's launch of the consultation
on the Holistic Framework (HF) on 14 November 2018, which aims to
assess and mitigate systemic risk in the insurance sector,
potentially serving as an alternative approach to the current G-SII
model. A further consultation was launched by the IAIS on 14 June
2019 with proposals for revisions to the Insurance Core Principles
(ICPs) in relation to the HF. The IAIS intends to implement the HF
in 2020 proposing that G-SII identification be suspended from that
year. In the interim, the relevant Group-wide supervisors have
committed to continue applying existing enhanced G-SII supervisory
policy measures with some supervisory discretion, which includes a
requirement to submit enhanced risk management plans. In November
2022, the FSB will review the need to either discontinue or
re-establish an annual identification of G-SIIs in consultation
with the IAIS and national authorities. The Higher Loss Absorbency
(HLA) standard (a proposed additional capital measure for G-SII
designated firms, planned to apply from 2022) is not part of the
proposed HF. However, the HF proposes supervisory monitoring to
identify potential vulnerabilities and more supervisory powers of
intervention for mitigating systemic risk.
The IAIS is also developing the ICS as part of ComFrame - the
Common Framework for the supervision of Internationally Active
Insurance Groups (IAIGs). 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 satisfies the criteria.
The Aggregation Method is one of the approaches being considered as
part of the ICS and is 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
liaise as necessary with ComFrame on international capital
developments and will also consider Group capital developments by
the US Federal Reserve Board, both of which may help inform the US
regulatory association in its construction of a US Group capital
calculation.
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, including the US Dodd-Frank
Wall Street Reform and Consumer Protection Act, ongoing FCA reviews
and continuing engagement with the PRA. 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. The comment deadline for the exposure draft
is 25 September 2019. 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 underway 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.
The NAIC is targeting a January 2020 effective date for the revised
Variable Annuity Framework, which was designed with the aim of
reducing the non-economic volatility in the variable annuity
statutory balance sheet. Jackson continues to make progress in
preparing models for implementation. The NAIC also has an ongoing
review of the C-1 bond factors in the required capital calculation,
on which further information is expected to be provided in due
course. The Group's preparations to manage the impact of these
reforms will continue.
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 the UK, there has, in recent years, been regulatory focus on
insurance products and market practices which may have adversely
impacted customers, including the FCA's Legacy Review and Thematic
Review of Annuity Sales Practices. The management of customer risk
remains a key focus of management in the UK business. Merger and
transformation activity at M&GPrudential and new product
propositions may also have customer risk implications which are
monitored.
In 2017, the UK submitted the formal notification of its intention
to withdraw from the EU pursuant to Article 50 of the Treaty on the
European Union, as amended. If no formal withdrawal agreement is
reached between the UK and the EU, then it is currently expected
that the UK's membership of the EU will automatically terminate on
31 October 2019 unless a further extension is agreed between the UK
and EU. Depending on the nature of the UK's exit from the EU, the
following effects may be seen. The UK and EU may experience a
downturn in economic activity, which is expected to be more
pronounced for the UK, particularly in the event of a disorderly
exit by the UK from the EU. Market volatility and illiquidity may
increase in the period leading up to, and following, the UK's
withdrawal, and property values (including the liquidity of
property funds, where redemption restrictions may be applied) and
interest rates may be impacted. In particular, downgrades in
sovereign and corporate debt ratings may occur. In a severe
scenario, where the UK's sovereign rating is downgraded by more
than one notch, this may also impact on the credit ratings of UK
companies, including M&GPrudential's UK business. The legal and
regulatory regime in which the Group (and, in particular,
M&GPrudential) operates, may also be affected (including the
future applicability of the Solvency II regime in the UK), the
extent of which remains uncertain. There is also a risk of
operational disruption to the business, in particular to
M&GPrudential.
As a result of the uncertainty on the nature of the arrangements
that will be put in place between the UK and the EU,
M&GPrudential has completed the implementation of a range of
plans including transfers of business to EU jurisdictions, balance
sheet and with-profits fund hedging protection and operational
measures (including customer communications) that are designed to
mitigate the potential adverse impacts to the Group's UK business.
In addition, the business has sought to ensure, through various
risk mitigation actions, that it is appropriately prepared for the
potential operational and financial impacts of a no-deal
withdrawal. In the EU, the European Commission began a review in
late 2016 of some aspects of the Solvency II legislative package,
which is expected to continue until 2021 and includes a review of
the Long-Term Guarantee Measures.
On 27 July 2017, the UK FCA announced that it will no longer
persuade, or use its powers to compel, panel banks to submit rates
for the calculation of LIBOR after 2021. The discontinuation of
LIBOR in its current form and its replacement with the Sterling
Overnight Index Average benchmark (SONIA) in the UK (and other
alternative benchmark rates in other countries) 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 LIBOR, 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 and political 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.
b. ESG risks including climate
change
The
business environment in which Prudential operates is continually
changing and responding effectively to those material risks with
ESG implications 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,
including investors, customers, employees, governments,
policymakers and regulators in its key markets, as well as with
international institutions - all of whom have expectations which
the Group must balance, as it responds to ESG-related
matters.
Policies and procedures to support how the Group operates in
relation to certain ESG issues 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.
Climate
change is a key ESG theme for the Group and the finance services
industry. Recognising the increasing number of regulatory,
supervisory and investor-driven sustainable finance and
climate-related financial risk initiatives, the Group continues to
participate in investor-driven initiatives and collaborative
industry forums to assess and consider the risks from climate
change to our business. The Group's ESG Executive Committee is
focused on the holistic assessment of ESG considerations material
to the Group. It raises matters for Board decision-making and
oversees the implementation of decisions, supporting the
sustainable delivery of the Group's strategy. The management of
climate-related risks and opportunities is a Group strategic
priority, and one of the ESG Executive Committee's principal
responsibilities is to oversee the implementation of the
recommendations of the Financial Stability Board's Task Force on
Climate-related Financial Disclosures.
6.2 Risks from our investments
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;
● 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; 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 main investment risk exposure arises from the portion of the
profits from the UK and 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.
Further detail is provided below.
The Group's interest rate risk is driven by the need to match the
duration of its assets and liabilities in the UK and Europe
insurance business (including the impact of interest rate movements
on the future value of shareholder profits in the UK with-profits
fund); and the fixed annuity business in Jackson. Interest rate
risk also arises from the guarantees of some non-unit-linked
investment products in Asia; and the cost of guarantees in
Jackson's fixed index and variable annuity business. Further detail
is provided below.
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;
● 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.
In the UK and Europe business, the main investment risk arises from
the assets held in the with-profits funds through the shareholders'
proportion of the funds' declared bonuses and policyholder net
investment gains (future transfers). This investment risk is driven
mainly by equities in the funds and some hedging to protect against
a reduction in the value of these future transfers is performed
outside the funds. The UK with-profits funds' Solvency II own
funds, estimated at £11.1 billion as at 30 June 2019, helps to
protect against market fluctuations and is protected partially
against falls in equity markets through an active hedging programme
within the fund.
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 offer 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 products, including
the Hong Kong with-profits business. This exposure exists because
of the potential for asset and liability mismatch which, although
it is small and managed appropriately, cannot be
eliminated.
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.
In the UK and Europe insurance business, interest rate risk arises
from the need to match the cash flows of its annuity obligations
with those from its investments. The risk is managed by matching
asset and liability durations as well as continually assessing the
need for use of any derivatives. Under Solvency II rules, interest
rate risk also results from the requirement to include a balance
sheet risk margin. The with-profits business is also exposed to
interest rate risk through some product guarantees. Such risk is
largely borne by the with-profits fund itself although shareholder
support may be required in extreme circumstances where the fund has
insufficient resources to support the risk.
Foreign exchange risk
The geographical diversity of Prudential's businesses means that it
has some exposure to the risk of foreign exchange rate
fluctuations. The operations in the US and Asia, which represent a
large proportion of operating profit and shareholders' funds,
generally write policies and invest in assets in local currencies.
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 UK sterling. This
risk is accepted within our appetite for foreign exchange
risk.
In cases where a surplus arises in an overseas operation which is
to be used to support Group capital, or where a significant cash
payment is due from an overseas 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 £52.6 billion at 30 June 2019.
The majority (68 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 32 per cent of the debt
portfolio is held to back the shareholder business.
In the general account of the Group's US business £45.3
billion of fixed income assets are held to support shareholder
liabilities including those from our fixed annuities, fixed index
annuities and life insurance products.
Prudential's discontinued M&GPrudential operation is exposed to
credit risk on fixed income assets in the shareholder-backed
portfolio. As at 30 June 2019, this portfolio contained fixed
income assets worth £21.7 billion. Credit risk arising from a
further £63.5 billion of fixed income assets is borne largely
by the with-profits fund, to which the shareholder is not exposed
directly although under extreme circumstances shareholder support
may be required if the fund is unable to meet payments as they fall
due.
The shareholder-owned debt and loan portfolio of the Group's other
operations was £1.9 billion as at 30 June 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 of continuing operations represented
19 per cent or £12.1 billion of the shareholder debt portfolio
attributable to continuing operations as at 30 June 2019 (31
December 2018: 20 per cent or £11.7 billion). 1 per cent of
this was rated AAA and 90 per cent was considered investment grade
(31 December 2018: 84 per cent investment grade).
Sovereign debt holdings of discontinued operations represented 13
per cent or £2.7 billion of the shareholder debt portfolio
attributable to discontinued operations as at 30 June 2019 (31
December 2018: 13 per cent or £2.7 billion). 9 per cent of
this was rated AAA and 100 per cent was considered investment grade
(31 December 2018: 100 per cent 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 30 June 2019 are
given in note C3.2(f) of the Group's IFRS financial
statements for continuing operations and note D2.2(d) of the
Group's IFRS financial statements for discontinued
operations.
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 30 June 2019 are
given in note C3.2(f) of the Group's IFRS financial statements
for continuing operations and note D2.2(d) of the Group's IFRS
financial statements for discontinued 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 30 June 2019:
●
For continuing
operations, 93 per cent of the shareholder portfolio is investment
grade rated1.
In particular, 59 per cent of the portfolio is
rated1 A-
and above (or equivalent);
●
For discontinued
operations, 97 per cent of the shareholder portfolio is investment
grade rated1.
In particular, 86 per cent of the portfolio is
rated1 A-
and above (or equivalent); and
●
The Group's shareholder portfolio is
well diversified: no individual sector2 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 £3.5 billion of undrawn committed
facilities, of which £2.0 billion will remain with Prudential
plc following the demerger of M&GPrudential, that can be made
use of, expiring in 2023. Access to further liquidity is available
through the debt capital markets and an extensive commercial paper
programme 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.
6.3 Risks from our products
a. Insurance risk
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
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. At M&GPrudential, this is
predominantly longevity risk.
In Asia, Prudential writes significant volumes of health 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 assumption. 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.
The Group manages longevity risk in various ways. Longevity
reinsurance is a key tool in managing this risk. In March 2018, the
Group's longevity risk exposure was significantly reduced by
reinsuring £12 billion in UK annuity liabilities to Rothesay
Life. Although Prudential has withdrawn from selling new UK annuity
business, given its significant annuity portfolio the assumptions
it makes about future rates of improvement in mortality rates
remain key to the measurement of its insurance liabilities and to
its assessment of any reinsurance transactions. Prudential
continues to conduct research into longevity risk using both
experience from its annuity portfolio and industry data. Although
the general consensus in recent years is that people are living
longer, the rate of increase has slowed in recent years, and there
is considerable volatility in year-on-year longevity experience,
which is why it needs expert judgement in setting its longevity
basis.
Prudential's insurance risks are managed and mitigated using the
following:
● The Group's insurance and underwriting risk
policies;
● The risk appetite statements, limits and
triggers;
● Using longevity, morbidity and persistency
assumptions that reflect recent experience and expectation of
future trends, and industry data and expert judgement where
appropriate;
● Using reinsurance to mitigate longevity 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 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.
6.4 Risks from our business operations
a. Transformation risk
A
number of significant change programmes are currently running in
order to implement the Group's strategy and the need to comply with
emerging regulatory changes. Many of these are interconnected
and/or of large scale, and may have financial and non-financial
implications if such initiatives fail 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
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 Transformation Risk Framework, to mitigate the
risks to the business.
The
Group's current significant change initiatives include the merger
of M&G Investments and Prudential UK and Europe, and the
demerger of M&GPrudential. Significant execution risks arise
from these initiatives, including in relation to the separation and
establishment of standalone governance under relevant regulatory
regimes, business functions and processes (data, systems, people)
and third party arrangements. The Group's transformation portfolio
also includes, but is not limited to, the discontinuation of LIBOR
and the implementation of IFRS 17 - see section 6.1a. above for
further information.
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.
b. Operational risks
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 are 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.
M&GPrudential outsources several operations, including a
significant part of its back office, customer-facing functions and
a number of IT functions. In Asia, the Group continues to expand
its strategic partnerships and renew bancassurance arrangements.
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 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 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. The risk that
Prudential's IT infrastructure does not meet these requirements is
a key area of focus for the Group, particularly the risk that
legacy infrastructure supporting core activities/processes affects
business continuity or impacts on business growth. Exposure to
operational 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. The high rate of global regulatory change, in an
already complex regulatory landscape, increases the risk of
non-compliance due to a failure to identify, interpret correctly,
implement and/or monitor regulatory compliance. The change in
Group-wide supervisor, and the supervisory framework, to which
Prudential plc will be subject to after the demerger of
M&GPrudential, means that additional processes, or changes to
existing ones, may be required to ensure ongoing compliance. See
the Global regulatory and political risk section above. Legislative
developments over recent years, together with enhanced regulatory
oversight and increased capability to issue sanctions, have
resulted in a complex regulatory environment that may lead to
breaches of varying magnitude if the Group's business as usual
operations are not compliant. As well as prudential regulation, the
Group focuses on conduct regulation, including those related to
sales practice and anti-money laundering, bribery and corruption.
There is a particular focus on regulations related to the latter in
newer/emerging markets.
Business resilience
Business resilience is at the core of the Group's well embedded
Business Continuity Management (BCM) programme, with BCM being one
of a number of activities undertaken by the Group Security function
that protect our key stakeholders.
Prudential operates a BCM programme and framework that is linked
with its business activities, which considers key areas including
business impact analyses, risk assessments, incident management
plans, disaster recovery plans, and the exercising and execution of
these plans. The programme is designed to achieve a business
continuity capability that meets evolving business needs and is
appropriate to the size, complexity and nature of the Group's
operations, with ongoing proactive maintenance and improvements to
resilience against the disruption of the Group's ability to meet
its key objectives and protect its brand and reputation. The BCM
programme is supported by Group-wide governance policies and
procedures and is based on industry standards that meet legal and
regulatory obligations.
Business disruption risks are monitored by the Group Security
function, with key operational effectiveness metrics and updates on
specific activities being reported to the Group Risk Committee
where required and discussed by cross-functional working
groups.
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 of
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 with 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 regularly
undertaken at higher risk locations. 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.
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 worldwide (such as GDPR that came
into force in May 2018) have increased the financial and
reputational implications for Prudential in the
event of a breach of its (or third-party suppliers') IT
systems. As well as data protection, stakeholder expectations are
now that companies and organisations 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.
In 2018, the organisational structure and governance model for
cyber security management was revised with the appointment of a
Group Chief Information Security Officer, and a repositioning of
the function to allow increased focus on execution. This
organisational change will increase the Group's efficiency and
agility in responding to cyber security related incidents and will
facilitate increased collaboration between business units and
leverage their respective strengths in delivering the Group-wide
Information Security Programme.
The objectives of the programme include achieving consistency in
the execution of security disciplines across the Group and
improving visibility across the Group's businesses; deployment of
automation to detect and address threats; and 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.
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.
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.
Notes
1
Based on hierarchy of Standard & Poor's, Moody's and Fitch,
where available and if unavailable, NAIC and internal ratings have
been used.
2
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.
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: 14
August 2019
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PRUDENTIAL
PUBLIC LIMITED COMPANY
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By: /s/ Mark FitzPatrick
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Mark
FitzPatrick
Chief
Financial Officer
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