TIDMPRU
RNS Number : 9414Q
Prudential PLC
03 March 2021
NEWS RELEASE
03 March 2021
PRUDENTIAL PLC FULL YEAR 2020 RESULTS
DOUBLE-DIGIT INCREASE IN ASIA ADJUSTED OPERATING PROFIT AND
RECOVERY IN SALES IN H2 2020 CONFIRMATION OF PLANNED DEMERGER
TIMETABLE FOR JACKSON
Performance highlights on a constant (and actual) exchange rate
basis
-- Asia adjusted operating profit(2) up 13 per cent (12 per cent) to $3.7 billion
-- Asia embedded value up 13 per cent(3) to $44.2 billion
-- Asia 2020 full year APE sales(4) down (28) per cent(5) to $
3.7 billion, with H2 APE sales(4) 20 per cent(10) up on H1 2020
-- Pulse downloads around 20 million as of February 2021(6) ,
with $211 million of sales referrals(7) in 2020
-- Demerger of Jackson expected to complete in the second
quarter of 2021 with bank finance now committed
-- Jackson local statutory RBC ratio(8) 347 per cent at 31 December 2020 in line with guidance
-- Central costs reduction of $180 million achieved with effect from 1 January 2021(9)
-- Second interim ordinary dividend of 10.73 cents per share,
making 16.10 cents per share for the full year
-- Considering raising equity of $2.5-3 billion through global
offering to institutions and Hong Kong retail investors, after the
demerger
Mike Wells, Prudential plc's Group Chief Executive, said:
"Facing challenging conditions, our people, working with our valued
partners, have performed extraordinary feats during 2020, meeting
the essential needs of our customers and communities, innovating
with new services, and delivering on our long-term strategic
priorities. With Covid-19 continuing to have a major impact on many
of our markets, I would like to pay tribute to all my colleagues
for their dedication.
"These efforts are reflected in our operational performance in
Asia. Our agents and other distribution partners are employing
virtual tools with ever-increasing confidence. APE sales(4) in the
second half of 2020 were 20 per cent(10) higher than in the first
half of the year. Overall, Asia APE sales(4) fell by (28) per
cent(10) compared with 2019, largely as a result of a significant
reduction in sales in Hong Kong, where the border with Mainland
China was closed for much of 2020. Excluding Hong Kong, Asia APE
sales(4) were down just (6) per cent(10) in 2020. New business
profit(11) was down for the year, reflecting sales interruption
especially in the first half and in the higher-margin market of
Hong Kong. During these uncertain times, the Asia results are a
great achievement by our people and evidence of the high value that
customers place on our services.
"Our digital transformation continues at pace, with downloads of
Pulse, our health and wealth super-app, now around 20 million(6) ,
up from just over 1 million in early 2020. Pulse not only meets
important social needs by making good healthcare more accessible,
but has helped generate APE sales(4,7) of $211 million in 2020,
substantially through referrals to agents.
"The high quality of our in-force business, combined with the
continued loyalty of our existing customers, have supported a
double-digit rise in adjusted operating profit(2) in Asia, up 13
per cent(10) to $3.7 billion.
Operating free surplus generation(12) is up 8 per cent(10) in Asia to $1.9 billion.
"Jackson, our US business, delivered a 13 per cent increase in
variable annuity sales during 2020, which helped it maintain its
leading position in the US retail market(13) . This was more than
offset by lower institutional sales and lower sales of fixed and
fixed index annuity sales, as anticipated, following recent pricing
actions. Overall, Jackson APE sales(4) fell by (13) per cent to
$1,923 million in 2020. US adjusted operating profit(1,2) was down
(9) per cent compared with the prior year.
"We are making good progress on the proposed separation of
Jackson from the Group. Committed term loan facilities are in place
to ensure Jackson has certainty that its targeted level of debt
will be in place at the time of the demerger, and we continue to
expect to complete the demerger in the second quarter of 2021,
subject to shareholder and regulatory approvals. We expect Jackson,
under the new management team led by Laura Prieskorn, to pursue a
focused strategy which prioritises optimisation and stability of
capital resources while protecting franchise value.
"The proposed demerger will complete Prudential's structural
shift from a diversified global group to a growth business focusing
exclusively on the unmet health, financial protection and savings
needs of people in Asia and Africa. In order to enhance financial
flexibility and de-lever the balance sheet, Prudential is
considering raising new equity of around $2.5-3 billion following
the completion of the Jackson demerger. Our preferred route is a
fully marketed global offering to institutional investors
concurrent with a public offering in Hong Kong to retail investors.
As an Asia focused company, the Group believes there are clear
benefits from increasing both its Asian shareholder base and the
liquidity of its shares in Hong Kong. The allocation of any
offering will take into account a number of criteria including the
interests of existing shareholders.
"We have a resilient capital position, with a Group LCSM
surplus(14) of $11.0 billion, equivalent to a cover ratio of 328
per cent .
"While Covid-19 will continue to create social disruption and
market volatility during 2021, the past year has proven our ability
to operate successfully in the pandemic environment, and in various
markets where social distancing rules are starting to be relaxed we
are seeing a recovery in activity. Over the longer term, the rising
prosperity of people in Asia and Africa, the scale of the unmet
need for the services we provide, our leadership positions in our
chosen markets and our ability to innovate at scale all give us
confidence that we can continue to outperform."
Change on Change on
Summary financials 2020 $m 2019 $m AER basis CER basis
-------------------------------------------------------------------- --------- --------- ---------- ----------
Life new business profit from continuing operations(11) 2,802 4,405 (36)% (37)%
Operating free surplus generated from continuing operations(12) 2,886 2,861 1% 1%
Adjusted operating profit from continuing operations(1,2) 5,507 5,310 4% 4%
IFRS profit after tax from continuing operations(1,15) 2,185 1,953 12% 12%
31 December 2020 31 December 2019
Total Per share Total Per share
-------------------------------------------------------------------- --------- --------- ---------- ----------
EEV shareholders' funds $54.0bn 2,070c $54.7bn 2,103c
IFRS shareholders' funds $20.9bn 800c $19.5bn 749c
LCSM shareholder surplus over Group minimum capital requirement(14) $11.0bn n/a $9.5bn n/a
Notes
1 Attributed to the shareholders of the Group before deducting
the amount attributable to the non-controlling interests. This
presentation is applied consistently throughout the document.
2 In this press release 'adjusted operating profit' refers to
adjusted IFRS operating profit based on longer-term investment
returns from continuing operations. This alternative performance
measure is reconciled to IFRS profit for the year in note B1.1 of
the IFRS financial statements.
3 On an actual exchange rate basis.
4 APE sales is a measure of new business activity that comprises
the aggregate of annualised regular premiums and one-tenth of
single premiums on new business written during the year for all
insurance products, including premiums for contracts designated as
investment contracts under IFRS 4. It is not representative of
premium income recorded in the IFRS financial statements. See note
II of the Additional unaudited financial information for further
explanation.
5 On both constant and actual exchange rate bases.
6 As of 22 February 2021.
7 APE sales substantially from full-premium products sold
through referrals to agents and a small amount of revenue from 37
new digital products.
8 Representing the RBC ratio of Jackson National Life that
reflects the capital and capital requirements of Jackson National
Life and its subsidiaries, including Jackson National Life NY.
9 Approximately half of the corporate expenditure is incurred in
sterling and our assumptions forecast an exchange rate of
GBP1=$1.2599. As compared with head office expenditure of $(490)
million in 2018 and before a planned $10 million increase in Africa
costs as previously disclosed.
10 Year-on-year percentage increases are stated on a constant
exchange rate basis unless otherwise stated.
11 New business profit, on a post-tax basis, on business sold in
the year, calculated in accordance with EEV Principles.
12 Operating free surplus generated from insurance and asset
management operations. For insurance operations, operating free
surplus generated represents amounts maturing from the in-force
business during the year less investment in new business and
excludes non-operating items. For asset management businesses, it
equates to post-tax operating profit for the year. Further
information is set out in 'movement in Group free surplus' of the
EEV basis results.
13 LIMRA: through the third quarter of 2020, Jackson accounted
for 16.5% of new sales in the U.S. retail variable annuity market
and ranked number 1 in variable annuity sales.
14 Shareholder surplus over Group minimum capital requirement
and estimated before allowing for second interim ordinary dividend.
Shareholder business excludes the available capital and minimum
requirement of participating business in Hong Kong, Singapore and
Malaysia. Further information on the basis of calculation of the
LCSM measure is contained in note I(i) of the Additional unaudited
financial information.
15 IFRS profit after tax from continuing operations reflects the
combined effects of operating results determined on the basis of
longer-term investment returns, together with short-term investment
variances which for 2020 were driven by the negative effects in the
US and Asia, and gains arising on the reinsurance of fixed and
fixed index annuity business in the US and other corporate
transactions.
Contact:
Media Investors/analysts
Jonathan Oliver +44 (0)20 3977 9500 Patrick Bowes +44 (0)20 3977 9702
Tom Willetts +44 (0)20 3977 9760 William Elderkin +44 (0)20 3977 9215
Notes to editors:
a. The results in this announcement are prepared on two bases:
International Financial Reporting Standards (IFRS) and European
Embedded Value (EEV). The results prepared under IFRS form the
basis of the Group's statutory financial statements. The
supplementary EEV basis results have been prepared in accordance
with the amended European Embedded Value Principles issued by the
European Insurance CFO Forum in 2016. The Group's EEV basis results
are stated on a post-tax basis and include the post-tax IFRS basis
results of the Group's asset management and other operations. The
IFRS and EEV results are presented in US dollars and the basis of
translation is discussed in note A1 of the IFRS financial
statements. Period-on-period percentage increases are stated on a
constant exchange rate basis unless otherwise stated. Constant
exchange rates are calculated by translating prior period results
using the current period foreign exchange rate ie current period
average rates for the income statement and current period closing
rates for the balance sheet.
b. EEV and adjusted IFRS operating profit based on longer-term
investment returns are stated after excluding the effect of
short-term fluctuations in investment returns against long-term
assumptions, which for IFRS in 2020 were driven by the negative
effects in the US and Asia, and gains arising on the reinsurance of
fixed and fixed index annuity business in the US and other
corporate transactions. Furthermore, for EEV basis results,
operating profit based on longer-term investment returns excludes
the effect of changes in economic assumptions and the
mark-to-market value movement on core borrowings. Separately on the
IFRS basis, adjusted operating profit also excludes amortisation of
accounting adjustments arising principally on the acquisition of
REALIC completed in 2012. The amounts shown are for continuing
operations only (being Asia, US and central operations including
Africa but excluding M&G plc) unless otherwise stated.
c. Total number of Prudential plc shares in issue as at 31 December 2020 was 2,609,489,702.
d. We expect to announce our 2020 Full Year Results to the
London Stock Exchange at 8.30am (UK time) on Wednesday, 3 March
2021.
A pre-recorded presentation for analysts and investors will be
available on-demand from 8.30am (UK time) using the following link:
https://www.investis-live.com/prudential/6025193f49aa2a0e00f067f3/thsd
A copy of the script used in the recorded video will also be
available from 8.30am (UK time) on 3 March 2021 on Prudential plc's
website.
A Q&A call for analysts and investors will be held on the
same day at 11.30am (UK time).
Registration to a "listen in" only and online question
facility
To register to listen into the conference call and submit
questions online, please do so via the following link:
https://www.investis-live.com/prudential/6005aa669a138810004417eb/omna
The call will be available to replay afterwards using the same
link.
Dial-in details
A dial-in facility will be available to listen to the call and
ask questions: please allow 15 minutes ahead of the start time to
join the call (lines open half an hour before the call is due to
start, ie from 11.00am (UK time)).
Dial-in: +44 (0) 20 3936 2999 (UK and international) / 0800 640
6441 (Freephone UK), Participant access code: 085909 . Once
participants have entered this code their name and company details
will be taken.
Transcript
Following the call a transcript will be published on the results
and business updates centre page of Prudential plc's website on 5
March 2021.
Playback facility
Please use the following for a playback facility: +44 (0) 20
3936 3001 (UK and international), replay code 901333 . This will be
available from approximately 3.00pm (UK time) on 3 March 2021 until
11.59pm (UK time) on 17 March 2021.
e. 2020 Second interim ordinary dividend
Ex-dividend date 25 March 2021 (UK, Hong Kong and Singapore)
Record date 26 March 2021
Payment of dividend 14 May 2021 (UK, Hong Kong and ADR holders)
On or about 21 May 2021 (Singapore)
f. About Prudential plc
Prudential plc is an Asia-led portfolio of businesses focused on
structural growth markets. The business helps people get the most
out of life through life and health insurance, and retirement and
asset management solutions. Prudential plc has more than 20 million
customers and is listed on stock exchanges in London, Hong Kong,
Singapore and New York. Prudential plc is not affiliated in any
manner with Prudential Financial, Inc. a company whose principal
place of business is in the United States of America, nor with The
Prudential Assurance Company Limited, a subsidiary of M&G plc,
a company incorporated in the United Kingdom.
g. Discontinued operations
Throughout this results announcement 'discontinued operations'
refers to the demerged UK and Europe operations (referred to as
M&G plc). All amounts presented refer to continuing operations
unless otherwise stated, which reflect the Group following the
demerger of M&G plc in the fourth quarter of 2019, and do not
give effect to the proposed demerger of Jackson.
h. Regulatory disclosures
Pursuant to Practice Note 15 ("PN15") to the Rules Governing the
Listing of Securities on The Stock Exchange of Hong Kong Limited
(the "Hong Kong Listing Rules"), the Hong Kong Stock Exchange has
confirmed that Prudential may proceed with the proposed demerger of
Jackson.
Jackson is progressing the registration process with the U.S.
Securities and Exchange Commission ("SEC") in connection with the
proposed demerger. The proposed demerger is subject, among other
things, to a registration statement under the Securities Exchange
of 1934 being declared effective by the SEC.
In accordance with the requirements of paragraph 3(f) of PN15,
Prudential proposes to give due regard to the interests of its
shareholders by providing qualifying shareholders with an assured
entitlement to shares in Jackson by way of a distribution in specie
of shares in Jackson (or cash alternative under certain
circumstances) in proportion to their respective shareholdings in
Prudential, if the proposed demerger proceeds. Details of the terms
of the distribution in specie have not yet been finalised, and will
be announced by Prudential in due course. As the demerger will be
implemented by way of a distribution in specie of shares in Jackson
by Prudential, the demerger will not constitute a transaction for
Prudential under Chapter 14 of the Hong Kong Listing Rules.
i. Forward-Looking Statements
This announcement may contain 'forward-looking statements' with
respect to certain of Prudential's plans and its goals and
expectations relating to its and Jackson's future financial
condition, performance, results, strategy and objectives.
Statements that are not historical facts, including statements
about Prudential's beliefs and expectations and including, without
limitation, statements containing the words 'may', 'will',
'should', 'continue', 'aims', 'estimates', 'projects', 'believes',
'intends', 'expects', 'plans', 'seeks' and 'anticipates', and words
of similar meaning, are forward-looking statements. These
statements are based on plans, estimates and projections as at the
time they are made, and therefore undue reliance should not be
placed on them. By their nature, all forward-looking statements
involve risk and uncertainty.
A number of important factors could cause Prudential's and
Jackson's actual future financial condition or performance or other
indicated results of the entity referred to in any forward-looking
statement to differ materially from those indicated in such
forward-looking statement. Such factors include, but are not
limited to, the ability to complete the proposed demerger of
Jackson Financial Inc. on the anticipated timeframe or at all; the
ability of the management of Jackson Financial Inc. and its group
to deliver on its business plan post-separation; the impact of the
current Covid-19 pandemic, including adverse financial market and
liquidity impacts, responses and actions taken by regulators and
supervisors, the impact to sales, claims and assumptions and
increased product lapses, disruption to Prudential's operations
(and those of its suppliers and partners), risks associated with
new sales processes and information security risks; future market
conditions, including fluctuations in interest rates and exchange
rates, the potential for a sustained low-interest rate environment,
and the impact of economic uncertainty, asset valuation impacts
from the transition to a lower carbon economy, derivative
instruments not effectively hedging exposures arising from product
guarantees, inflation and deflation and the performance of
financial markets generally; global political uncertainties,
including the potential for increased friction in cross-border
trade and the exercise of executive powers to restrict trade,
financial transactions, capital
movements and/or investment; the policies and actions of
regulatory authorities, including, in particular, the policies and
actions of the Hong Kong Insurance Authority, as Prudential's
Group-wide supervisor, as well as new government initiatives
generally; given its designation as an Internationally Active
Insurance Group ("IAIG"), the impact on Prudential of systemic risk
and other group supervision policy standards adopted by the
International Association of Insurance Supervisors; the impact of
competition and fast-paced technological change; the effect on
Prudential's business and results from, in particular, mortality
and morbidity trends, lapse rates and policy renewal rates; the
physical, social and financial impacts of climate change and global
health crises on Prudential's business and operations; the timing,
impact and other uncertainties of future acquisitions or
combinations within relevant industries; the impact of internal
transformation projects and other strategic actions failing to meet
their objectives; the effectiveness of reinsurance for Prudential's
businesses; the risk that Prudential's operational resilience (or
that of its suppliers and partners) may prove to be inadequate,
including in relation to operational disruption due to external
events; disruption to the availability, confidentiality or
integrity of Prudential's information technology, digital systems
and data (or those of its suppliers and partners); any ongoing
impact on Prudential of the demerger of M&G plc and, if and
when completed, the demerger of Jackson Financial Inc.; the impact
of changes in capital, solvency standards, accounting standards or
relevant regulatory frameworks, and tax and other legislation and
regulations in the jurisdictions in which Prudential and its
affiliates operate; the impact of legal and regulatory actions,
investigations and disputes; and the impact of not adequately
responding to environmental, social and governance issues. These
and other important factors may, for example, result in changes to
assumptions used for determining results of operations or
re-estimations of reserves for future policy benefits. Further
discussion of these and other important factors that could cause
Prudential's actual future financial condition or performance or
other indicated results of the entity referred to in any
forward-looking statements to differ, possibly materially, from
those anticipated in Prudential's forward-looking statements can be
found under the 'Risk Factors' heading of this document .
Any forward-looking statements contained in this announcement
speak only as of the date on which they are made. Prudential
expressly disclaims any obligation to update any of the
forward-looking statements contained in this announcement or any
other forward-looking statements it may make, whether as a result
of future events, new information or otherwise except as required
pursuant to the UK Prospectus Rules, the UK Listing Rules, the UK
Disclosure and Transparency Rules, the Hong Kong Listing Rules, the
SGX-ST listing rules or other applicable laws and regulations.
j. Cautionary Statements
This announcement does not constitute or form part of any offer
or invitation to purchase, acquire, subscribe for, sell, dispose of
or issue, or any solicitation of any offer to purchase, acquire,
subscribe for, sell or dispose of, any securities in any
jurisdiction nor shall it (or any part of it) or the fact of its
distribution, form the basis of, or be relied on in connection
with, any contract therefor.
Group Chief Executive's report
Like all businesses, we faced new and unexpected challenges
throughout 2020, but I am pleased to say that, thanks to the
dedication of our people, we made considerable progress on all
fronts. We are well placed to weather the continuing effects of
Covid-19 and to deliver for our customers and shareholders over the
longer term. Our wide range of innovative products, diverse and
flexible approach to distribution, and relentless focus on
operating efficiency enabled us to continue to operate profitably,
and at the same time continue to invest heavily in organic and
inorganic growth initiatives.
In 2020 we focused on three areas of activity. First, we have
been meeting the urgent needs of our customers, colleagues and
communities in light of the pandemic. Second, we advanced the pace
and the extent of our plans in delivering more digitally enabled,
scalable operations, and equipping us with the tools necessary for
continued success in the future. This had the effect of enabling us
to execute effectively during lockdown restrictions. Third, we
accelerated the structural repositioning of the Group, in
particular enlarging our footprint in the Asian markets with the
most attractive structural opportunities, and working at pace
towards the proposed separation of our US business, Jackson.
Supporting stakeholders through the pandemic
We have been working hard to support all our stakeholders
throughout the year. For our customers, for our colleagues and
distributors, and for the communities in which we work, we have
introduced a range of innovative measures to both deal with the
impact of the virus and provide the means for them to emerge in a
stronger position once the effect of the virus has subsided.
For our customers, we have put in place measures to increase
coverage during this difficult time and to mitigate financial
stress resulting from the virus. In most of our markets we
introduced free limited-time Covid-19 cover, and we made
improvements to our offerings throughout the year, including
providing cash relief upon diagnosis and hospitalisation, and
paying out on death.
We have enabled our colleagues around the world to work remotely
and have undertaken a number of new initiatives to find out about
and respond to their concerns, in particular managing the risk of
mental and physical health challenges of staff and their families.
During the course of the year, we have ensured that our people
working from home have had the necessary equipment and support to
do their work safely and comfortably. With disruption to working
patterns continuing into 2021, we are taking further measures to
help colleagues manage the longer-term psychological strains of
remote working by providing as much flexibility as possible, and
offering sessions and support for psychological and physical
wellbeing.
We also took a number of key steps throughout the year to
support our distributors through the challenges presented by
Covid-19. To support our agents, we worked with regulators in 2020
to virtualise the sales process, and 28 per cent of agency new
cases since April 2020, where we focused our efforts initially,
together with 27 per cent of bancassurance new cases since July
2020, have been made virtually. This compares with very low amounts
in prior years. Our Mainland China joint venture, CITIC-Prudential,
went a step further by creating a virtual reality 'meeting room'
where clients can purchase our products.
In the communities in which we work, we launched a number of
initiatives to provide support through the challenges of Covid-19
and beyond. In May we launched the Prudential Covid-19 Relief Fund
to provide financial support for communities and for the
volunteering efforts of our people in Asia, the US and Africa. The
fund is being distributed among our markets around the world to
support charitable and community projects tackling the immediate
impact of the pandemic and its social and economic
consequences.
Delivering on long-term strategic goals
We have had two key strategic objectives in 2020. The first has
been to deliver the proposed separation of our US business,
Jackson. The second has been to enable our shareholders to benefit
to the maximum extent from the health, financial protection and
savings opportunities in our chosen markets in Asia and Africa,
while ensuring that we deliver more digitally enabled, scalable
operations in those regions to position us well for future
success.
In the US we are now able to provide clarity on the path and
timing of Jackson's proposed separation. In January 2021 the Group
announced an update on Jackson's capital position and that it had
decided to pursue the separation of Jackson from the Group through
a demerger, whereby shares in Jackson would be distributed to
Prudential shareholders. Subject to shareholder and regulatory
approvals, the planned demerger is expected to complete in the
second quarter of 2021, and would lead to a significantly earlier
separation of Jackson from the Group than would have been possible
through a minority IPO and future sell-downs, which from market
precedent may have lasted until 2023. This accelerated process will
complete Prudential's structural shift from a diversified global
group to a growth business focusing exclusively on the unmet
health, financial protection and savings needs of people in Asia
and Africa.
In order to accelerate de-levering during 2021 through the
redemption of existing high coupon debt, Prudential is considering
raising new equity of around $2.5-3 billion. Such a transaction, if
executed, would maintain and enhance the Group's financial
flexibility in light of the breadth of the opportunities to invest
in growth and aim to increase the Group's investor base in Asia.
Prudential believes that there are clear benefits to the Group, as
an Asian focused company, of increasing its institutional ownership
in Asia and enhancing the liquidity of its ordinary shares in Hong
Kong. As a result, its preference is to raise new equity through a
fully marketed global offering to institutional investors
concurrent with a public offering in Hong Kong to retail investors,
to be undertaken after the Jackson demerger, subject to market
conditions. The Group has held discussions with shareholders and
the allocation of any offering will take into account a number of
criteria including the interests of existing shareholders and the
strategic benefits of enhancing its shareholder base and liquidity
in Hong Kong. The Group believes that there is potential for
substantial value
creation for all shareholders through the transformation of
Prudential into a business purely focussed on profitable growth in
Asia and Africa.
Prudential is planning to retain a 19.9 per cent non-controlling
interest in Jackson(1) at the point of demerger, which will be
reported within our IFRS balance sheet as a financial investment at
fair value. Subject to market conditions, we intend to monetise a
portion of this investment to support investment in Asia within 12
months of the planned demerger, such that the Group would own less
than 10 per cent at the end of such period.
At the point of proposed separation and subject to market
conditions, Jackson expects to have an RBC ratio(2) in excess of
450 per cent and Total Financial Leverage(3) in the range of 25 to
30 per cent. Jackson expects to achieve this level of RBC at the
point of separation by contributing proceeds of debt and any hybrid
capital raising to its regulated insurance subsidiaries. As a
result, we do not expect that Prudential will receive a
pre-separation dividend from Jackson.
Following the planned demerger, Jackson intends to pursue a
focused strategy that prioritises optimisation and stability of
capital resources while protecting franchise value. Jackson's
financial goals as a standalone company will be designed to
maintain a resilient balance sheet in order to provide shareholders
with stable capital returns and profitable growth over the
long-term.
In Asia, our focus is on strengthening our footprint in our key
strategic markets, building our distribution and product range, and
accelerating the digitalisation of our platform. Our businesses in
Asia are aligned with supportive structural trends in the region,
in particular rising prosperity and ageing populations, which are
leading to significant and growing protection and savings gaps.
We have built top-three positions in nine Asian life insurance
markets, and we have significant upside potential in the region's
two largest markets, China and India. In Mainland China, our branch
network with our local partner CITIC now covers 77 per cent of the
country's 1.4 billion people(4) , and we see a broad range of
opportunities to participate more deeply in that market. In India
the businesses continue to develop, with our life business
recording a 17 per cent rise in health and protection APE sales and
our asset management business increasing funds under management(5)
by 6 per cent to $26.9 billion(20) . At 31 December 2020, our
investment in ICICI Prudential Life Insurance was valued at $2.2
billion, in excess of the amount at which it is recorded in our
IFRS and EEV financial statements.
Across our Asian markets, our comprehensive distribution network
allows consumers to access our services how, where and when they
choose. Our network of around 600,000 agents(6) is growing ever
more skilled and productive. Agent recruits(7) in Asia (excluding
India) rose 4 per cent in the year , and the number of agents
qualifying for elite MDRT status doubled to more than 13,200. Our
agent management has moved online across all markets, enhancing the
effectiveness of agent communication and operation, and expanding
sales capacity, with the number of cases per active agent(7)
increasing by 8 per cent in 2020 from the prior year.
We have access to around 20,000 bank branches and are working
closely with our partner banks to develop their online offerings.
In 2020, we entered into a major strategic partnership with TMB
Bank in Thailand and also began new relationships with banks in
Vietnam, Laos, Cambodia and Ghana. We are also developing new
distribution channels through our digital partnerships, including
OVO, Indonesia's leading mobile payments platform, and The1,
Thailand's largest loyalty platform.
The services we offer are equally broad. We meet the needs of
everyone from affluent families looking for sophisticated financial
advice to people considering saving and financial protection for
the first time. Across Asia we have seen a heightened need for the
health and protection products that we provide, due to the Covid-19
pandemic. In a survey, 58 per cent of consumers in our Asian
markets stated that they were interested in products with
value-added services, with 46 per cent of customers searching for
new insurance products(8) . This has been converted into an
increase in the proportions of APE sales represented by health and
protection products in seven of our Asian markets.
We have East Asia's number-one Islamic life insurance business,
which saw a 49 per cent growth in new policies in 2020,
contributing to a 14 per cent growth in APE sales for these
products in Malaysia and Indonesia combined. Malaysia Takaful is
the leader in its market, with a 32 per cent share of the market in
2020, as is our sharia business in Indonesia, which has the largest
Muslim population of any country(9) , with a 35 per cent share of
the sharia-compliant market. Our Business at Pulse (formerly
PruWorks) proposition, which serves small and medium-sized
enterprises, continues to develop, driving APE sales from group
business up 17 per cent in 2020.
Our Asia asset manager, Eastspring, manages $247.8 billion in
assets across 11 markets in Asia, and is a top-10 asset manager in
seven of those markets. Eastspring has a broad product set and an
unrivalled ability to serve the needs both of Asian savers and
global investors seeking access to Asian opportunities, and we
continue to diversify the product set.
Our investment in Africa gives us exposure to a growing,
under-served continent whose population is expected to double to
more than 2 billion people by 2050.
The pace of our innovation continues to accelerate, and that is
translating into improved operational performance. In 2020, we
launched or revamped 175 products(10) across our markets,
contributing 20 per cent of APE sales. Of these, more than 115 were
traditional and health and protection products, including Anxin,
our digital health and protection solution for the China market,
with 165,000 policies sold in 2020, around 50 per cent of them to
new customers. In Indonesia several new launches of simplified
standalone protection products saw their contribution rise to 37
per cent of APE, up from 8 per cent in 2019, which drove an overall
increase in total new cases sold in 2020 of 12 per cent.
We have significant investment appetite in Asia and Africa that
is based on the absolute size and demographic characteristics of
each economy and our ability to build competitive advantage,
leveraging our scale and expertise. While we will continue to build
on our leading positions in Hong Kong and ASEAN, we see the
greatest opportunities in the largest economies of China, India,
Indonesia and Thailand. We expect this strategy to deliver
profitable and sustainable compounding growth and high
risk-adjusted returns for shareholders. Accordingly, our dividend
policy announced in August reflects a rebalancing of capital
allocation from cash dividends to reinvestment of capital into the
Asia business.
Following the proposed separation of Jackson, our focus on Asia
and Africa will support long-term delivery of future shareholder
returns through value appreciation, with a focus on achieving
sustained double-digit growth in embedded value per share. This
will in turn be supported by the growth rates of new business
profit, which are expected to substantially exceed GDP growth rates
in the markets in which the post-demerger Prudential Group
operates.
Pulse: building our digital capabilities
Our culture of innovation is exemplified by Pulse, our new
digital platform, which is enhancing our digital capability across
Asia and Africa.
The first iteration of the Pulse mobile app was launched in
Malaysia in August 2019, with features focused on helping our
customers - and the wider population - prevent and postpone
ill-health. These initial services included an artificial
intelligence-driven medical symptom checker, telemedicine and
dengue fever alerts. Since then, Pulse has been launched in 11
languages across 11 Asian and four African markets. 58 per cent of
Asian consumers desire access to healthcare value-added services(8)
, such as virtual GP, and new features have continued to be added
to Pulse on a weekly basis to meet this demand. Covid-19 has
stimulated interest in the health features of Pulse, as both
consumers and policymakers embrace the flexibility and
accessibility offered by digital health solutions in a period when
travel and face-to-face contact has been restricted. By February
2021, Pulse had been downloaded around 20 million times(11) . Sales
referrals from Pulse to our agents in 2020, together with a small
amount of revenue from bite-sized products sold directly on Pulse,
translated into $211 million of APE sales(12) .
In 2021, as we continue to help customers become healthier, we
intend to broaden our services to give greater support to people's
wealth needs.
Financial performance
Our financial performance during 2020 provides tangible evidence
of how we are successfully executing our strategy.
At a Group level, overall adjusted IFRS operating profit based
on longer-term investment returns(13) (adjusted operating profit)
for 2020 from our continuing operations was $5,507 million, 4 per
cent higher than the prior year on a constant exchange rate basis,
reflecting the continued growth of our Asia businesses, offset by
lower US profits. Central expenses declined by 8 per cent,
reflecting lower interest and head office costs. IFRS profit after
tax from continuing operations(13) was $2,185 million in 2020
(2019: $1,953 million on an actual exchange rate basis).
In Asia, in a challenging environment, our diversified,
high-quality, recurring-premium business model enabled us to
continue to grow value and scale, with our total Asia embedded
value reaching $44.2 billion, an increase of 13 per cent compared
with 2019, and more than doubling over the last five years.
Adjusted operating profit was 13 per cent higher than 2019 on a
constant exchange rate basis, driven by the resilience of our
in-force life business and the rebound of the level of funds
managed by our asset manager Eastspring in the second half of
2020.
The quality of our historic book of insurance business
contributed to resilient in-force growth, with a 6 per cent
increase in renewal premiums(14) to $20.1 billion. The high level
of renewal premiums is the result of the high level of
regular-premium business we sell (representing 90 per cent of APE
sales in 2020), the high mix of health and protection business,
which formed 65 per cent of new business profit in the year, and a
90 per cent customer retention rate(15) . This contributed to life
insurance adjusted operating profit in Asia growing by 14 per cent
(on a constant exchange rate basis). The performance was
broad-based, led by Hong Kong, up 20 per cent, with a further eight
markets delivering double-digit growth.
Our Asia asset management business, Eastspring, saw total assets
under management reach $247.8 billion, up 3 per cent from the end
of 2019 and 13 per cent higher than 30 June 2020, on an actual
exchange rate basis, with external net outflows moderating in the
second half of year alongside improving equity markets.
Eastspring's funds under management also benefited from net inflows
from internal Asia life funds of $8.5 billion during 2020,
representing a continuing source of reliable funds flows to the
Eastspring business and a structural strength of our business
model. Overall, this helped the adjusted operating profit increase
by 2 per cent compared with the prior year. Continued cost
discipline helped maintain the cost/income ratio(14) at 52 per
cent.
Despite the continuing impact of the Covid-19 pandemic across
our markets, we delivered a relatively resilient performance in
respect of new business profit and APE sales. Outside Hong Kong,
new business profit(17) was (4) per cent lower, in line with a (6)
per cent reduction in APE sales(18) . In Hong Kong, new business
profit was down (62) per cent, with APE sales (63) per cent lower,
largely as a result of the impact of Covid-19-related restrictions
on cross-border sales. Overall, this led to a (28) per cent fall in
Asia APE sales as compared with 2019. China, our third-largest
market by APE sales, was a particular highlight, with bancassurance
APE sales up by 34 per cent compared with 2019. Agency APE sales
rebounded by 15 per cent in the second quarter as restrictions were
lifted, and overall APE sales in the second half increased by 4 per
cent compared with the same period in the prior year. New business
profit in China increased 3 per cent to $269 million and new
business profit margins strengthened. This was led by the agency
force focus on protection products, which accounted for 53 per cent
of sales from this channel and as a result agency channel
margins(16) climbed to 85 per cent (2019: 74 per cent).
The nature and timing of Covid-19-related disruption varied
considerably across our markets. The ability of our franchise to
grow as restrictions were lifted is evident from the sequential
increase in APE sales in nine markets including Hong Kong, with the
third-quarter total Asia APE sales above the second by 33 per cent,
and the fourth quarter above the third by 18 per cent.
We continue to build our operations in Africa, with APE sales
reaching $112 million, representing growth of 51 per cent. Our
African businesses are progressing well with the adoption of our
new digital sales management system, which has driven positive
operating trends.
Jackson maintained its leading position in the US variable
annuity market(19) , with new variable annuity APE sales up 13 per
cent to $1,662 million, reflecting customer demand for Jackson's
products in this market and the breadth and expertise of its
distribution force.
Jackson's adjusted operating profit was $2,796 million (2019:
$3,070 million), reflecting DAC adjustment effects and the expected
reduction in spread-related earnings following the reinsurance
contract with Athene in June 2020 and lower asset yields, partially
offset by higher fee income from increased average account
balances. Overall Jackson incurred a $(247) million post-tax loss
(2019: loss of $(380) million), where the economic nature of our
hedging programme, and the related accounting mismatches, alongside
the exceptional equity volatility seen over the year, resulted in
the recognition of losses on equity derivatives taken out as part
of Jackson's hedging programme.
Outlook
Throughout the Covid-19 crisis that dominated 2020, we
demonstrated our ability to act at pace, our adaptability and the
resilience of our underlying business. We will continue to apply
these strengths as we move forward. With each cycle of lockdown and
reopening, we have adopted varied responses depending on the local
conditions, we have improved our agility as we have responded, and
the strength of our business has remained apparent. We expect that
vaccination programmes will be launched in a number of our markets
in 2021, triggering a gradual return to more normal economic
patterns. However, the pace of these programmes and their effect is
likely to vary substantially and gives a degree of uncertainty over
performance of the business in the short-term.
Our most significant market by new business profit and embedded
value is Hong Kong. Sales to Mainland Chinese individuals in Hong
Kong have been severely curtailed by the closure of the border with
mainland China. There is at present unlikely to be a lifting of the
border restrictions until the third quarter of 2021 at the
earliest, but this depends on a number of factors. However, we
believe there will continue to be demand from Mainland Chinese
customers for the Hong Kong product suite once the border reopening
occurs and we have been building on our existing product and
digitalisation capabilities to continue to serve both these and
domestic customers in the future. Since the second quarter of 2020
we have seen sequential quarterly increases in sales in Asia, but
our continued success across all our markets will be dependent in
part on government reaction to changes in the number and type of
Covid-19 cases and the vaccine roll-out.
Nevertheless, we are confident that the demand for our products
will continue to grow in line with the structural growth in our
chosen markets, and that our expanding and increasingly digitalised
distribution platforms will meet that demand.
That confidence in the future is underpinned by the clarity of
our strategy for delivering long-term profitable growth. The Group
aims to deliver outperformance by building leadership positions in
the markets with the greatest scale, investing in people and
innovating, and nurturing relationships with our key
stakeholders.
If we execute successfully, the outcome of our strategy will be
growth in new business profit that is expected to outpace the
economic growth of the markets where we operate. We are confident
that our clear and focused strategy, coupled with our proven
execution ability, leaves us well placed to continue to deliver
value for our shareholders and all our stakeholders over the long
term, with a focus on achieving sustained double-digit growth in
embedded value per share.
Notes
1 Prudential is planning to retain a 19.9 per cent voting
interest and a 19.7 per cent economic interest.
2 Representing the RBC ratio of Jackson National Life that
reflects the capital and capital requirements of Jackson National
Life and its subsidiaries, including Jackson National Life NY.
3 Calculated on a US GAAP basis as the ratio of total debt
(including senior debt, hybrid debt and preferred securities) to
total debt and shareholders' equity (excluding Accumulated Other
Comprehensive Income).
4 2019 data for population. Sources from National Bureau of Statistics and CBIRC.
5 Full year 2020 total funds under management, including
external funds under management, money market funds, funds managed
on behalf of M&G plc and internal funds under management,
reported based on the country where the funds are managed.
6 Including India.
7 Excluding India.
8 Source: Swiss Re COVID-19 Consumer Survey, April 2020.
9 Source: Indonesia Ministry of Religion Data Centre.
10 Including 37 bite-sized digital products.
11 As of 22 February 2021.
12 APE sales substantially from full-premium products sold
through referrals to agents and a small amount of revenue from 37
new digital products.
13 Attributed to the shareholders of the Group before deducting
the amount attributable to the non-controlling interests. This
presentation is applied consistently throughout the document.
14 See note II of the Additional unaudited financial information
for definition and reconciliation to IFRS balances.
15 Excluding India, Laos and Myanmar.
16 The value of new business on and EEV basis expressed as a
percentage of APE sales. See note 1 of the EEV basis results.
17 New business profit, on a post-tax basis, on business sold in
the year, calculated in accordance with EEV principles.
18 APE sales is a measure of new business activity that
comprises the aggregate of annualised regular premiums and
one-tenth of single premiums on new business written during the
year for all insurance products, including premiums for contracts
designated as investment contracts under IFRS 4. It is not
representative of premium income recorded in the IFRS financial
statements. See note II of the Additional unaudited financial
information for further explanation.
19 LIMRA: through the third quarter of 2020, Jackson accounted
for 16.5% of new sales in the U.S. retail variable annuity market
and ranked number 1 in variable annuity sales.
20 Representing Prudential's 49 per cent interest.
Group strategy and operations
Prudential's differentiated product and geographic portfolio is
well positioned to meet the protection and savings needs of the
growing populations in Asia and Africa, where insurance penetration
is currently low and demand for savings solutions is rapidly
developing. In the United States, Jackson remains a leading
provider of variable annuities to retail investors. Following the
proposed demerger of Jackson, Prudential intends to take full
advantage of the long-term structural opportunities in Asia and
Africa. It seeks to operate with discipline in allocating capital
for long-term returns, and to deliver profitable and increasingly
diversified growth.
Group overview
Our purpose is to help people get the most out of life. We make
healthcare affordable and accessible and promote financial
inclusion across our markets. We protect people's wealth and help
them grow their assets, and we empower our customers to save for
their goals. This purpose is served through implementing our
business strategy, set out in this section and our environmental,
social and governance (ESG) strategy set out in our ESG report.
With this purpose in mind, our intention is to take full
advantage of the long-term structural opportunities in Asia and
Africa and to pursue a path for a fully independent Jackson. In
January 2021, the Board announced that it had decided to pursue the
separation of Jackson from the Group in the first half of 2021
through a demerger, whereby shares in Jackson would be distributed
to Prudential shareholders. The result of this separation will be
two separately listed companies with distinct investment
propositions, which the Group's Board believes will lead to
improved strategic outcomes for both businesses.
The Prudential Group will focus exclusively on its high-growth
Asia and Africa businesses. We will also accelerate our development
of digitally enabled products and services to help prevent,
postpone and protect our customers from threats to their health and
wellbeing, as well as supporting them to achieve their savings
goals.
Jackson will continue to help Americans grow and protect their
retirement savings and income to enable them to pursue financial
freedom for life through its differentiated products, well-known
brand and industry-leading distribution network.
Further information on the Prudential Group's and Jackson's
respective businesses are set out below. The result of the proposed
separation of Jackson will be two separately listed companies with
distinct investment propositions, which the Group's Board believes
will lead to improved strategic outcomes for both businesses.
Asia and Africa
We have a pan-Asian footprint, with our largest life and
protection operations in Hong Kong, Singapore, Indonesia and
Malaysia as well as our joint venture in China. We also operate in
Thailand, Vietnam, Taiwan, the Philippines, Cambodia, Laos and
Myanmar and have a successful partnership in India. Within this
footprint, Prudential has top three positions(1) in 9 out of 13
life markets and extensive distribution networks, across digital,
agency and bancassurance channels. We focus on delivering
profitable regular premium health and protection insurance products
and fee-based earnings.
In asset management, Eastspring manages $247.8 billion across 11
markets in Asia and provides focused investment solutions to
third-party retail and institutional clients as well as to our
internally sourced life funds. Eastspring is a top 10 asset manager
in 7 of the 11 markets in which it operates, and is the largest
pan-Asian retail asset manager excluding Japan(2) .
Since 2014 we have also built a rapidly growing multi-product,
multi-distribution business in Africa, with operations now in eight
countries across the continent, and have over one million
customers. Starting in 2021 the regional office for Africa will be
based in Nairobi, making East Africa our hub for the continued
success of operating on the continent.
Our offering in Asia and Africa is evolving to respond to
growing customer awareness and demand for products that address
health and wellness, as well as providing life insurance cover.
Pulse by Prudential, our health and wellness platform provides a
compelling offering to address these needs, building on our
existing distribution channels and trusted brand. Further
information on Pulse by Prudential, and our markets, customers,
products and distribution within the region is set out below.
Asia has grown significantly over the last 10 years, for example
over the decade from 2010 to 2020, embedded value in Asia grew on
average by 14 per cent(3) per annum and at 31 December 2020 was
$44.2 billion. Since 2013, Prudential has committed almost $10
billion of capital to support growth in Asia, including around $5
billion of inorganic investments to grow our distribution reach and
to build digital capability. Around one-third of the total
investment has been made since January 2019. Investments in 2020
included establishing a 15-year strategic bancassurance partnership
with TMB, which significantly strengthens our distribution
capability in Thailand's fast-growing life insurance sector and
strongly complements our top-five position(2) in the country's
mutual fund market. In other markets we have also established a new
bancassurance partnership with SeABank, a fast-growing bank in
Vietnam with approximately 1.2 million customers and almost 170
branches, as well as signing new agreements with Banque Franco-Lao
(BFL) BRED Group in Laos, and in early 2021 with Phnom Penh
Commercial Bank Plc (PPCBank) in Cambodia.
We have significant investment appetite in Asia in the future
that is based on the absolute size and demographic characteristics
of each economy and our ability to build competitive advantage
leveraging our scale and expertise. While we will continue to build
on our leading positions in Hong Kong and members of the
Association of Southeast Asia Nations ('ASEAN'), we see the
greatest opportunities in the largest economies of China, India,
Indonesia and Thailand. This investment is expected to deliver
profitable and sustainable compounding growth and will support
long-term delivery of future shareholder returns through value
appreciation, with a focus on achieving sustained double-digit
growth in embedded value per share.
Markets
The life insurance industry in Asia and Africa remains in the
early stages of development, as characterised by the low
penetration rates across the region for insurance. In particular,
most of our Asia markets are approaching the level of per capita
annual income when demand increases sharply. Around 50 per cent of
the global population lacks access to essential health services(13)
, and across the Asia region specifically, there are significant
health funding and wellness gaps; 80 per cent of Asians do not have
insurance cover(14) and spend some $400 billion on healthcare as an
out-of-pocket expense(15) . Similarly, in Africa, while mobile
phone access has increased tremendously over the last 20 years,
less than 50 per cent of Africans have access to modern health
facilities(16) , and 80 per cent have to rely on public health
facilities, which are often understocked, understaffed, and
difficult to reach due to the physical and financial burdens of
transportation(17) .
Our largest market in respect of APE sales is Hong Kong, which
accounted for 21 per cent of our overall Asia APE sales in 2020,
followed by Singapore, contributing 17 per cent and China which
accounted for 16 per cent. The rest of our new business is
diversified across 10 markets. Our adjusted operating profit is
well balanced, with the largest contributions from Hong Kong,
Singapore and Indonesia.
With regards to strategy, we see the most significant
opportunities for growth potential in life insurance and asset
management in the four largest economies in our footprint, namely
China, India, Indonesia and Thailand. Our joint venture operations
in China and India together with our businesses in Indonesia and
Thailand, provide us with scaled access, where we can build
leadership positions with competitive advantage and economies of
scale. We also intend to continue building on our leading positions
within Hong Kong and ASEAN.
In China, our China life business is a 50/50 joint venture with
CITIC, a leading Chinese state owned conglomerate. Our China JV
business performed well in 2020 after the Covid-19 disruption in
the first quarter, increasing new business profit by 3 per cent.
Building on our existing nationwide coverage of 20 branches and 99
cities (an increase of five since 2019), we expect our China JV
business will continue to grow at pace by expanding and deepening
our presence from our current geographical footprint, and by
leveraging our multi-distribution platform. We operate our asset
management business in China through CITIC-Prudential Fund
Management Company Limited, a JV with CITIC with assets under
management of $9.6 billion(19) , as well as our wholly owned
private fund manager operationalised in 2019 within Eastspring,
which now has sourced and sub-advised assets under management of
$743 million. Our Chinese life insurance joint venture has also
established its own asset management company in 2020,
Prudential-CITIC Asset Management Co, which further strengthens our
capabilities in savings and retirement products.
In India, our business consists of our 22.1 per cent holding of
the Indian Stock Exchange listed life insurance business, ICICI
Prudential Life Insurance (with our investment valued at $2.2
billion as at 31 December 2020) and 49 per cent of the asset
manager, ICICI Prudential Asset Management, which has total funds
under management(7) of $26.9 billion(19) . Our India life business
continues to pivot to health and protection, with a 17 per cent
increase in health and protection APE sales, which now represent 24
per cent of total APE sales (up 9 percentage points on 2019). We
will continue to capture the significant potential in the Indian
life market, with an aspiration to double 2019 new business profit
in three to four years, by continuing to grow the business,
improving retention and enhancing productivity.
In Indonesia, we continue to strengthen our market leadership,
including in the sharia market where we increased APE sales by 6
per cent and new business profit by 27 per cent in 2020, and propel
growth by broadening our product offerings, as well as digitalising
our business model. We added 60 products during 2020, doubled MDRT
qualifiers to over 2,100, and launched digital products through
both Pulse and our OVO partnership. We have seen positive momentum
in the last quarter of 2020, being the highest sales quarter of
2020, and believe our business transformation will continue to
drive growth in the future.
In Thailand our new distribution partnership with TMB will help
us achieve top-three leadership in the bancassurance channel, and
we will further accelerate growth by developing a holistic
omni-channel business model. Coupled with the completion of the
acquisition of TMBAM and TFund which gives us a top-five ranking in
the mutual fund market, this will give us a high-quality platform
to deliver best-in-class health and wealth solutions to serve the
growing retirement and investment needs of both the rising middle
class and the growing high net worth segments.
In our other large businesses, we also see ample opportunities
to continue to grow at pace. In Hong Kong, we believe based on our
own and third party surveys there is latent demand from Mainland
Chinese customers for our Hong Kong product suite and that the
eventual normalisation of visitor arrivals as the border reopening
occurs will allow for the return of this important source of new
business. For example, 61 per cent of Mainland Chinese visitor
preference(20) is to receive critical illness medical treatment in
Hong Kong. In the meantime, we continue to build our already strong
and substantial Hong Kong domestic business through multi-channel
expansion and increased digitalisation of our service offering. We
also continue to broaden our product offerings, such as our
mid-tier medical reimbursement product, the PRUHealth VHIS VIP
Plan, to fulfil the protection needs of our customers. We will also
broaden access to Mainland China consumers through Greater Bay Area
initiatives and remain a destination of choice through our
market-leading products and service propositions.
In Singapore, we see significant opportunities in expanding the
servicing of the high net-worth and small and medium enterprise
(SME) markets, alongside supporting a fast ageing population to
address under-covered retirement and health needs. In Malaysia, we
have leading market positions in both the conventional and Takaful
markets. In particular, in the underprovided Takaful segment where
we see substantial opportunity for growth, we increased our APE
sales by 26 per cent and our new business profit by 29 per cent in
2020.
In our other high-potential growth markets of Vietnam, the
Philippines, Cambodia, Laos and Myanmar, we see the opportunity for
rapid growth through the roll-out of our efficient and scalable
business model, multi-channel distribution networks and the
provision of market leading digital products and services through
Pulse. These markets currently have very low levels of life
insurance penetration, for example with life insurance
penetration(5) of just 1.4 per cent in Vietnam and 1.2 per cent in
the Philippines. However, with rising GDP per capita at or reaching
a threshold of $10,000 to $20,000, and supported by our proven and
market leading positions, we are confident of delivering new life
insurance sales growth well in excess of GDP growth in these
markets.
We see substantial opportunities to accelerate our asset
management business, Eastspring, building on its leading market
position as Asia's largest retail asset manager (excluding
Japan)(2) and structural advantages of reliable and predictable
inflows from our life businesses. The completion of the TMBAM and
TFund acquisitions in Thailand and successful development of its
China business, mentioned above, have strengthened its strategic
portfolio.
Since 2014 we have also built a rapidly growing multi-product
business in Africa, with operations now in eight countries across
the continent. Despite the Covid-19 pandemic, APE sales at
Prudential Africa have grown by 51 per cent(21) to $112 million
during 2020, with the number of active agents significantly ahead
of the same period last year. In Ghana, we have renewed our
exclusive agreement with Fidelity Bank for an additional 10 years,
building on a successful partnership over the past five years. We
also announced a new partnership with Vodafone Ghana to provide an
innovative microinsurance product to their 9 million plus
subscribers. Meanwhile, our team in Nigeria has launched a new
partnership with the largest mobile operator in the country, MTN,
in an effort to reach its subscriber base of over 70 million people
and provide protection to the millions of uninsured Nigerians.
Products and brands
We offer a wide range of insurance products that are tailored to
local market requirements and fast-changing individual needs. We
focus on health and protection and savings products with 65 per
cent of new business profit contributed by health and protection
solutions and the rest by savings products that include
participating, linked and other traditional products.
The diversity and resilience of our business is supported by the
continued innovations and enhancements we make to our product
range, which include broadening coverage for new risks and adding
innovative features. In 2020, we introduced or revamped 175 new
products(22) contributing 20 per cent of APE sales, including
simplified lower case-sized protection offerings.
The Covid-19 pandemic has reinforced customer interest in health
and protection products, with 58 per cent of consumers across our
Asian markets desiring access to healthcare value-added services,
such as access to a virtual GP(23) . This has been converted into
an increase in the proportions of APE represented by health and
protection products in 7 of our Asian markets, led by India (up 9
percentage points to 24 per cent of APE sales), Singapore (up 5
percentage points to 25 per cent of APE sales), Thailand (up 9
percentage points to 25 per cent of APE sales) and Vietnam (up 3
percentage points to 17 per cent of APE sales), in turn resulting
in increased margins for our Asia markets excluding Hong Kong. Of
the 175 new or revamped products noted above, more than 115 were
traditional and health and protection products.
Our Hong Kong business offers domestic Hong Kong residents and
mainland visitors sophisticated critical illness, medical benefits
and life insurance protection business. 91 per cent of all Hong
Kong consumers(23) indicated they would retain life insurance even
if their financial position is disadvantaged by Covid-19
re-enforcing the resilience of this market. The investment
proposition provides access to international equities and bonds. In
particular, our main with-profits product offering uses a
with-profits structure, which pools the investments of
policyholders and allocates returns based on long-term investment
performance (similar to that historically used in the UK), and
leads to attractive margins. The business has a high level of
renewals that is substantially higher than the premiums from new
business. Singapore offers a similar type of product mix and also
uses a UK-style with-profits structure.
In China, Anxin, our digital health and protection solution
generated 165,000 policies in 2020, with around 50 per cent to new
customers. In Hong Kong, we launched in the second half of 2020
PRUHealth VHIS VIP Plan, a tax-efficient medical insurance
targeting the mid-tier segment, which has contributed 10 per cent
of new business profit for the domestic segment in the fourth
quarter of 2020.
In Indonesia, we retain leadership in the sharia-compliant
market, with 35 per cent share, accounting for 37 per cent of
agency sales in Indonesia. Our PRUCinta product, the first
traditional sharia product with specific cash value, accounts for
14 per cent of Indonesia agency sales. More widely, we have
launched 60 products in Indonesia in 2020, including lower ticket
standalone protection products which collectively accounted for 37
per cent of the APE mix (2019: 8 per cent) and 52 per cent of new
case count mix (2019: 11 per cent).
Alongside offering products that meet customer needs, we invest
in our brands to build trust, drive awareness and attract and
retain customers.
Distribution and customer engagement
We believe in a multi-channel and integrated distribution
strategy for our business which can adapt and respond flexibly
depending on local market conditions. Our distribution network is
one of the strongest and most diversified in the Asia region,
across agency, bancassurance and non-traditional partnerships,
including digital. In recent years, we have also established
non-traditional partnerships to broaden our customer reach,
particularly the digitally-savvy millennial segment. In total, we
have more than 300 life insurance and asset management distribution
partnerships in Asia. Alongside these distribution channels we also
have Pulse by Prudential (discussed further below).
Agency
We have around 600,000 licensed tied agents(24) across our life
insurance markets, and the productivity of active agents increased
8 per cent(25,26) in the year, based on number of cases, which are
becoming smaller in size as we, and our customers, focus
increasingly on standalone protection products. Our agency channel
is a core component of our success, comprising 74 per cent of our
new business profit given the high proportion of high margin
protection products sold.
Our continued support for the agency channel positions us well
for sustainable growth. Our agent management has moved online
across all markets, enhancing effectiveness of agent communication
and operation, and expanding sales capacity with agent recruits(26)
of 143,000 in the year. We deployed virtual sales tools across all
markets for almost all products, and 28 per cent of agency new
cases since April 2020, together with 27 per cent of bancassurance
new cases since July 2020 have been made virtually. Despite the
gradual relaxation of Covid-19 containment measures in several
markets, virtual selling tools have now become mainstream with
distributors, and virtual sales in the fourth quarter represented
23 per cent of both agency and bancassurance sales.
We place great emphasis on agent professionalism and promote
career progression by providing tailored training programmes that
share experience and best practice across different markets. In
addition, to further assist our agents during the sales process and
enhance productivity we continually upgrade the tools at their
disposal. During 2020, the number of agents qualifying for the
Million Dollar Round Table (MDRT) doubled in the year to more than
13,200.
In Africa the number of active agents in 2020 significantly
increased from the prior year. The increase in active agents is a
direct result of implementing our Rookie Development Programme in
each market, which helps with agent professionalism and customer
focus, as well as transitioning new agents from the classroom to
the field, and making those agents active within the first month of
their recruitment. In most markets, as a response to
Covid-19-related restrictions, we rapidly innovated to create an
end-to-end virtual sales submission process, with a virtual
recruitment and onboarding process for distributors as well as
delivering training digitally. Moreover, 2020 marked the first time
each market has had at least one agent qualify for the MDRT
increasing the number of qualifiers to 38 from 15 in the prior year
.
Bancassurance
We also have a leading bancassurance franchise that provides
access to around 20,000 bank outlets through our strategic
partnerships with multi-national banks and prominent domestic
banks.
Our bancassurance partnerships made an important contribution to
our business last year. Our new partnership with TMB in Thailand,
which commenced on 1 January 2021, will give us access to an
expanded network of 685 branches. In preparation we have trained
more than 5,500 bank sellers and nearly doubled the number of sales
support staff to 240. We have launched a refreshed set of
propositions encompassing the high net-worth, retail, commercial
and SME segments and rolled out a new e-POS system.
Outside of Hong Kong, our bancassurance channel APE sales
remained stable despite Covid-19 related disruption. We were
particularly pleased to see the positive momentum in our
bancassurance channel in Indonesia, which saw APE sales up 15 per
cent(21) . We continue to look for opportunities to expand our
presence in this market. There were also particularly strong
performances in our China JV (APE sales up 34 per cent(21) ),
Thailand (APE sales up 21 per cent(21) ) and Vietnam (APE sales up
35 per cent(21) ), demonstrating our channel strength in these
markets.
We have also developed strategies to reach the digitally-savvy
millennial segment through UOB Mighty, UOB's digital bank, and new
partners such as Central in Thailand. Prudential Laos has also
recently partnered with Star Fintech to launch payment services via
its U-money platform. We anticipate that these partnerships will
significantly enhance our reach to millennial consumers in the
country through the joint development of digital propositions that
encompass health, wellness and wealth products. The experience will
also help us in designing and managing distribution strategies in
our existing markets as well as in targeting new points of
entry.
Pulse by Prudential
In 2020, we have been able to accelerate our digital development
and associated customer-centric digital ecosystem.
The Covid-19 pandemic has accelerated growing awareness and
demand for health and wellness solutions. For example, 46 per cent
of Asian consumers searched for new insurance policies(23) . Our
digital capabilities allow us to make healthcare more accessible
and affordable in the countries where we operate.
Prudential meets this growing demand for health and wellness
through its super-app Pulse by Prudential. Pulse is a free digital
mobile application that offers holistic management, artificial
intelligence (AI)-powered self-help tools, and information to serve
users 24/7 and promotes health and wellbeing through a range of
value-added services. These include telemedicine, health and
wellness content and communities, health challenges and rewards,
chronic disease management, as well as a self-diagnosis and
self-help tools. Pulse has been launched(27) in 11 different
languages across 11 markets in Asia (Malaysia, Indonesia,
Singapore, Hong Kong, the Philippines, Thailand, Vietnam, Cambodia,
Laos, Taiwan, and Myanmar) and most recently four markets in Africa
(Kenya, Nigeria, Cameroon and Zambia), with varying levels of
development.
Pulse has been downloaded around 20 million times(27) since its
initial launch in 2019 in Malaysia. Through this single super-app,
Pulse is being developed to offer an integrated health, wealth, and
SME ecosystem. It has integrated 32 local and regional partners(27)
, including most recently, a signed partnership with Central Group,
a leading retailer in Thailand, that will enable Pulse to access
Central Group's existing digital engagement with customers to offer
insurance and health solutions to them. We have also signed a
partnership with HR Easily, an HR services digital platform which
we make available to our SME customers through 'Business at Pulse'.
We are seeing continued increase in the usage of AI assessment and
triage, lifestyle management and wellness, and telemedicine
consultation services, with over 1.5 million users(27) accessing at
least one of the services in Asia, since launch.
Pulse also enables us to reach a younger customer demographic,
with the majority of Pulse users in the 18 to 35 age group compared
with the average age of an existing Prudential customer profile of
around 40, and is broadening our potential customer base, with 70
per cent of Pulse consumers new to Prudential.
37 digital bite-sized products were made available in Pulse in
2020. Some examples of bite-sized products launched by Prudential
within Pulse include products related to common critical illnesses
in Asia (cancer, stroke, heart attack), tropical disease protection
(dengue, malaria, measles), and daily care (food poisoning, minor
burns, broken bones, and accident income support).
With greater customer touchpoints, we are also able to generate
Pulse-led data-driven leads for agents. We saw over 2.2 million
leads generated for agents in 2020 which together with a small
amount of revenue from policies sold directly through Pulse,
generated APE sales of $211 million(28) in 2020.
Recently, we introduced a subscription plan to help Pulse users
eat healthier and promote a more active lifestyle, and even save
for the future. These paid subscription plans, priced at a low cost
of between $1-$3 per month, are currently available to users in
Hong Kong, Indonesia, Malaysia, Thailand, Vietnam and the
Philippines, with plans to expand on the offerings and launch in
additional markets in 2021. The paid subscription plans have
received 164,000 active subscribers during 2020.
We have undertaken steps to meet our objective for Pulse to
provide a platform for end-to-end service, with the same app used
by customers and distributors. Agents have the ability to sell
Prudential products virtually within the Pulse platform in the
Philippines, Malaysia and Indonesia. Meanwhile, e-claims are
available in Indonesia, Malaysia, Cambodia, Myanmar and the
Philippines. We believe the integration with the life value chain
across sales, claims and payments will allow Pulse to enhance value
to new and existing users and drive efficiencies in the
business.
Customer service and loyalty
We believe that excellent customer service has been key to our
strong reputation and leading pan-Asia franchise. Customer loyalty
has remained high during the Covid-19 pandemic, with a retention
ratio consistently in excess of 90 per cent. The satisfaction and
trust our customers have in our business also translates into a
high proportion of repeat sales, which comprised 47 per cent of APE
sales in 2020. The result of these dynamics is a portfolio of over
25 million in-force policies, with each policyholder holding 1.6
policies on average.
We are focused on unlocking new customer segments through a
broader proposition set. During 2020, we added a further 1.3
million new life customers from traditional channels. Our overall
life customer numbers increased to 16 million, of which about 30
per cent are our health insurance customers.
We continue to identify and target new customer groups and
segments outside our traditional focus in the Mass and Affluent
space in order to accelerate our future growth. Within the Emerging
segment, Pulse leads the customer acquisition as described above.
Within the High Net Worth segment, we first expanded into this
segment in 2018 with Opus in Singapore, providing a differentiated
experience for our customers, including a dedicated service team,
wealth planners and external experts covering trust and legal
matters. Within the Group segment, we also developed tailored
offerings for small and medium-sized enterprise (SME), a segment
that remains under-served and offers significant growth potential.
This strategy is advanced through our all-inclusive platform,
Business at Pulse platform, which provides digitally-enabled
insurance and HR solutions for business owners and their employees,
supporting a 17 per cent increase in APE sales from group business
in 2020. We have extended our Business at Pulse platform from
Singapore and Indonesia to Hong Kong, the Philippines and Thailand,
and will launch next in Malaysia.
Integrated asset management
Eastspring is a leading Asia-based asset manager, with
operations across 11 markets in Asia, plus offices in Europe and
North America. With $247.8 billion of assets under management and
over 300 investment professionals, it is the largest pan-Asian
retail asset manager excluding Japan(2) and is a top-10 asset
manager in 7 of the 11 markets in which it operates.
Eastspring has a broad product set, as well as significant
distribution capabilities and industry-leading operational
efficiency. Eastspring provides focused investment solutions,
across equity, bonds and multi-asset products, to our internally
sourced life insurance funds and third-party retail and
institutional clients. Distribution channels include wholesale,
intermediary and direct online formats, which are tailored as
required, depending on the geography involved. This means that
Eastspring can continue to grow and develop through both market
cycles and changes to individual investment styles. Operational
efficiency has led to industry-leading margins, with investment in
technology, for example the implementation of BlackRock's Aladdin
system, to deliver common platforms, and world-class risk
management and governance capabilities.
In terms of strategy, we see substantial growth opportunities to
accelerate Eastspring, building on its leading market position as
Asia's largest retail asset manager(2) (excluding Japan) and
structural advantages of reliable and predictable inflows from our
life business. In particular, we see China, India and Thailand as
our most material market opportunities. Eastspring is well
positioned to broaden its investment capabilities to serve the
global needs of Asia-based clients, while offering global investors
access to its expertise in investing in Asian markets. For example,
in October 2020, Eastspring announced a strategic partnership with
Atlantic Zagros Financial Partners to expand its offshore
distribution capabilities to the Americas. To support this ambition
Eastspring's strategic objectives include developing its
distribution, product range and investment advisory capability,
while continuing to enhance support for the asset management needs
of Prudential's life insurance business.
To support these objectives, Eastspring has organised its
operations into three pillars that will drive the expansion of its
capabilities and growth in the future:
-- Alpha engine - representing centralised investment capability
with an emphasis on driving asset class return on investment after
adjusting for market-related volatility. This pillar will focus on
diversifying Eastspring's investment capabilities and styles.
-- Advisory solutions - standalone advisory service for
institutional clients; focusing on solutions & products for
that market, including the growing need to support clients'
Environmental, Social and Governance (ESG) requirements. This
pillar will also focus on reinforcing the quality of service
provided to the Group's life operations and supporting the Group's
ESG strategy.
-- Complementary partner solutions - this pillar will focus on
complementary investment capabilities sourced from partners, in
order to enhance strategies available to investors .
In developing its capabilities, Eastspring will further
integrate its offerings with those of Prudential's life business,
to enable the Group to seamlessly offer services across the full
spectrum of Life, Health and Wealth products. Eastspring will
leverage Prudential's established distribution channels.
We believe these developments will further enhance Eastspring's
position as a leading asset manager in Asia.
Summary
There is a growing awareness and demand for wellness and
insurance products across Asia, re-enforced by the global pandemic.
We continue to invest in our chosen markets, building on our
leading position in Hong Kong and ASEAN, and meeting the growing
needs of customers in the largest economies of China, India,
Indonesia and Thailand. This customer need is addressed by our wide
range of insurance products, tailored to local markets, and
extensive and diversified distribution network. We continue to
amplify these existing capabilities through extending our China
footprint, broadening our product offerings and enhancing our
digital presence. Our innovative and customer-centric digital
ecosystem increasingly complements our existing distribution
channels and provides access to address the needs of new and fast
growing customer segments. Our overall customer offering is
supported by our integrated asset manager Eastspring, which has a
clear strategy to expand its capabilities to deliver growth.
We believe these enhanced capabilities, alongside the resilience
of our high quality and well diversified platform, mean our Asia
business is well positioned to capture the structural opportunities
open to us and therefore deliver profitable and sustainable
compounding growth and high risk-adjusted returns for
shareholders.
US operations
Jackson helps Americans grow and protect their retirement
savings and income to enable them to pursue financial freedom for
life. Following the planned demerger, Jackson intends to pursue a
focused strategy which prioritises optimisation and stability of
capital resources while protecting franchise value .
Maintaining a resilient balance sheet is critical to Jackson
meeting its objectives of fulfilling its obligations to
policyholders, providing stable capital returns to shareholders,
supporting the development of the business and enabling profitable
growth over the long-term.
In line with Jackson's disciplined approach to pricing and risk
management, pricing actions taken in the first half of 2020 in
response to changing market conditions and to preserve statutory
capital, resulted in an expected and material reduction in new
fixed annuity and fixed index annuities sales.
Jackson has identified three main areas for business
development.
First, Jackson intends to maintain and enhance its comprehensive
suite of retirement products that it believes are sought after by
retail investors and Jackson's distribution partners.
Second, it plans to optimise the sales mix across its broad
product portfolio by leveraging the strength of its
industry-leading distribution network and entering into new
distribution agreements.
Third, Jackson seeks to develop the overall market demand for
retail annuities by partnering with wealth management solution
providers that historically have not considered annuities as a
solution to provide retirement savings and income protection.
These strategies are discussed further below.
Markets
Jackson believes that the US retirement savings and income
solutions market presents a compelling growth opportunity and will
support its development in the future. The primary drivers of the
industry's trends are believed to be the following:
-- The target demographic is expected to continue to grow . Over
the next decade, the proportion of the US population aged 55 or
older is expected to grow at a rate double that of the total US
population, resulting in approximately 112 million individuals who
will be aged 55 or older by the year 2030(29) .
-- The need for new sources of retirement income is expected to
grow. Over the last few decades, there has been a pronounced shift
from retirement income funded primarily by pension plans to
retirement income funded primarily by individual savings. Of all
private sector workers in the United States, only 15 per cent had
access to a defined benefit pension plan in 2020 (down from 20 per
cent in 2010), and 52 per cent only had access to a defined
contribution retirement plan in 2020(30) . This trend has increased
the burden on individuals to save
for their retirement and to use those savings to generate income during retirement.
-- Annuities are underutilised in the world's largest retirement
savings market . The United States is the world's largest
retirement savings market estimated to consist of approximately $51
trillion in professionally managed retail and institutional assets
as of 31 December 2019(31) . However, only approximately $2.4
trillion of professionally managed assets were invested in
annuities as of 31 December 2019. A key driver of this
underutilisation is the historical lack of integration of annuities
into wealth management platforms and financial planning tools
available to retail investors. Jackson has been working actively
with its distribution partners and financial technology firms to
integrate annuities into the wealth management planning tools
advisers use to select investments and build portfolios for their
clients.
Products
Jackson offers a diverse suite of annuities to retail investors
in the United States. The success of its variable annuity offerings
reflects the differentiated features Jackson offers as compared
with its competitors, in particular the wider range of investment
options and greater freedom to invest across multiple investment
options. Through the third quarter of 2020, Jackson accounted for
16.5 per cent of new sales in the US retail variable annuity
market(32) and ranked number 1 in variable annuity sales. Jackson
also offers fixed index annuities and fixed annuities and expects
to offer a registered index-linked annuity in 2021. This diverse
offering allows Jackson to meet the different needs of retail
investors based on their risk tolerance and desired growth
objectives, and to deliver customised, differentiated solutions to
its distribution partners. Jackson's annuities offer investors the
opportunity to grow their savings consistent with their objectives,
ranging from full market participation with Jackson's variable
annuities, to a guaranteed fixed return with Jackson's fixed
annuities. Some of Jackson's annuities offer optional guarantee
benefits for a fee, such as full or partial protection of
principal, minimum payments for life and minimum payments to
beneficiaries upon death. All annuities also provide investors with
tax deferral benefits consistent with their purpose of providing
financial security at, and through, retirement.
Distribution network
Jackson sells its products through an industry-leading
distribution network that includes independent broker-dealers,
wirehouses, regional broker-dealers, banks, and independent
registered investment advisers, third-party platforms and insurance
agents. Jackson's strong presence in multiple distribution channels
has been essential to positioning it as a leading provider of
retirement savings and income solutions. Each of these channels is
supported by Jackson's sizeable wholesaler field force, which is
among the most productive in the annuity industry. According to the
Market Metrics Q3 2020 Sales, Staffing, and Productivity Report,
Jackson's variable annuity sales per wholesaler are more than 10
per cent higher than its nearest competitor.
Operating platform
Jackson's operating platform is scalable and efficient. Jackson
administers approximately 75 per cent of its in-force policies on
its in-house policy administration platform. Jackson's in-house
policy administration platform gives it flexibility to administer
multiple product types through a single platform. To date, Jackson
has converted over 3.5 million life and annuity policies to its
in-house policy administration platform, eliminating the burdens,
costs and inefficiencies that would be involved in maintaining
multiple legacy administration systems. The remainder of Jackson's
business is administered through scalable third-party arrangements.
Jackson believes that its operating platform provides it with a
competitive advantage by allowing it to grow efficiently and
provide superior customer service. In 2020, Jackson received the
2019 Contact Center of the Year award from Service Quality
Management and the number 1 overall operational ranking for 2019
from its broker-dealer partners, according to the Operations
Managers' Roundtable.
Risk management
Product design and pricing are key aspects of Jackson's risk
management approach. Jackson operates a sophisticated hedging
program which seeks to balance three objectives: managing the
economic impact of adverse market conditions, protecting statutory
capital and providing stable distributable earnings throughout
market cycles.
Jackson also uses third-party reinsurance to mitigate a portion
of the risks that it faces, principally in certain of its in-force
annuity and life insurance products with regard to longevity and
mortality risks and its annuities with regard to the vast majority
of its guaranteed minimum income optional benefit (GMIB)
features.
Notes
1 Based on full year 2020 (calendar year 2020 for India), or the
latest information available. Sources include formal (eg
competitors' results release, local regulators and insurance
association) and informal (industry exchange) market share data.
Ranking based on new business (APE sales, weighted full year
premium or full year premium depending on availability of data) or
total weighted revenue premiums. Full year data is not yet
available for Cambodia, or Laos, full year 2019 data has been used
instead. For Hong Kong and the Philippines, ranking based on new
business for the first nine months of 2020.
2 Source: Asia asset management - Fund manager surveys. Based on
assets sourced in Asia, excluding Japan, Australia and New Zealand.
Ranked according to participating firms only.
3 Increase stated on an actual exchange rate basis.
4 United Nations, Department of Economic and Social Affairs,
Population Division, World Population Prospects 2019 Revision (2020
estimates).
5 Source: Swiss Re Institute; Sigma Explorer: World insurance,
2019 - life insurance penetration (premiums as a percentage of
GDP).
6 Source: Swiss Re Institute: The health protection gap in Asia,
October 2018. Average gap per household is calculated as 'total
health protection gap divided by estimated number of households
hospitalised under the mentioned gap range'. In this report, the
definition/scope of 'Asia' is the 12 markets surveyed: China, Hong
Kong, India, Indonesia, Japan, Malaysia, the Philippines,
Singapore, South Korea, Taiwan, Thailand and Vietnam.
7 Full year 2020 total funds under management, including
external funds under management, money market funds, funds managed
on behalf of M&G plc and internal funds under management,
reported based on the country where the funds are managed.
8 Total joint venture/foreign players only.
9 Private players only.
10 Excludes Jiwasraya.
11 Includes Takaful, excludes Group business.
12 Includes onshore only.
13 Source: World Bank and WHO: Half the world lacks access to
essential health services, 100 million still pushed into extreme
poverty because of health expenses, December 2017.
14 Prudential estimate based on number of in-force policies over
total population.
15 Source: World Health Organisation: Global Health Observatory
data repository (2013). Out of pocket as % of total health
expenditure. Asia calculated as average out-of-pocket.
16 Source: The World Bank 2017.
17 Source: The Borgen Project: Digital health apps in Africa aim
to revolutionize medical care, September 2020.
18 Attributed to the shareholders of the Group before deducting
the amount attributable to the non-controlling interests. This
presentation is applied consistently throughout the document.
19 Representing Prudential's 49 per cent interest.
20 Based on 4Q20 MCH Sentiment Tracker conducted through online
survey by Nielsen online panel on behalf of Prudential Hong Kong.
Survey results are based on sample size of 451.
21 Increase stated on a constant exchange rate basis.
22 Including 37 bite-sized products.
23 Source: Swiss Re COVID-19 Consumer Survey, April 2020.
24 Including India.
25 Cases per active agent.
26 Excluding India.
27 As of 22 February 2021.
28 Substantially from full-premium products sold through
referrals to agents and a small amount of revenue from 37 new
digital products.
29 Source: Census Bureau's Current Population Survey, March
2017.
30 Source: Bureau of Labor Statistics.
31 Source: Estimated by Cerulli & Associates.
32 Source: LIMRA.
Group Chief Financial Officer and Chief Operating Officer's
report on the 2020 financial performance
The Group has delivered positive operating results while
supporting our colleagues, distributors, customers and communities
during the disruption caused by Covid-19. Alongside, we have
accelerated preparations for the proposed separation of Jackson and
continue to develop our capabilities and presence in our chosen
Asia and Africa markets, which will position the Group well for
success in the future.
While Covid-19 restrictions led to new APE sales in Asia being
(28) per cent(1) lower than the prior year, we have seen positive
momentum in the second half of the year, with H2 2020 sales up 20
per cent(1) compared with the first half. Excluding Hong Kong,
where restrictions between Mainland China and Hong Kong have been
in place for much of 2020, new APE sales were down (6) per cent(1)
, with new business profit falling by only (4) per cent(1) as new
business profit margins saw a small improvement over the prior
year. Our businesses in Asia delivered a 13 per cent(1) increase in
adjusted IFRS operating profit based on longer-term investment
returns (adjusted operating profit(2) ), reflecting the benefits of
our well positioned and broad-based portfolio, which has long
focused on high quality, recurring premium business. Operating free
surplus generation was 8 per cent(1) higher, following the on-going
growth of the in-force business and lower levels of new business
which were offset by the impact of lower interest rates.
Lower asset returns and the effect of lower interest rates on
the economic assumptions underpinning DAC amortisation contributed
to US long-term business adjusted operating profit(2) being (8) per
cent lower than the prior year. The RBC ratio of Jackson National
Life(24) , Jackson's principal operating subsidiary, was 347 per
cent, with operating capital generation in line with expectations
following the Athene reinsurance transaction. As announced on 28
January, the RBC ratio is after an 80 percentage point reduction
following revisions to Jackson's hedge modelling for US regulatory
purposes.
2020 saw high levels of macro volatility. In the US, the S&P
500 index fell (4) per cent over the first half before recovering
by 20 per cent in the second, resulting in a 16 per cent increase
over the year. In Asia, equity indices were similarly volatile,
with the MSCI Asia ex Japan Index (6) per cent down in the first
half and up 30 per cent in the second. Government bond yields were
lower over the year, notably with the US 10-year government bond
yield ending the year at 0.9 per cent (31 December 2019: 1.9 per
cent). 2020 also saw significant volatility in credit spreads, for
example spreads on US dollar denominated A-rated corporate bonds
rose by 39 basis points in the first half and fell by (41) basis
points in the second half.
Covid-19
The Group Chief Executive's report has set out how the Group has
risen to the operational challenges presented by Covid-19. In terms
of financial performance, the containment measures taken by
governments across the globe have impacted sales levels and
consequentially new business profitability in 2020, albeit many
business units saw sales improve in the second half of the year as
restrictions were removed. These impacts are discussed in more
detail later in this report. Future sales level will depend on how
governments respond to changing Covid-19 case levels and the
success of vaccination and containment programmes in the markets in
which we operate. Travel between Hong Kong and Mainland China
remains severely restricted, with consequential effects on Mainland
China visitor numbers and the level of APE sales in Hong Kong from
this segment. The impact that Covid-19 has had on the
macro-economic environment, with lower interest rates and volatile
equity markets, has negatively impacted profitability in the year
as discussed below. The sensitivity of our IFRS, EEV and capital
metrics to further market movements are set out in the financial
statements later in this document.
In Asia, where we focus on health and protection business, we
continue to see low levels of Covid-19 claims, which were less than
1 per cent of total Asia claims paid in the year of $7.2 billion.
We also provided our customers in 2020 with premium grace periods
in line with local regulations. Our annual review of non-economic
assumptions underpinning insurance liabilities did not identify the
need for any significant strengthening as a result of the effects
of Covid-19 and overall Asia operating experience remains positive.
There have been no impairments to goodwill or intangible assets at
31 December 2020 and we will continue to review for triggers for
impairment in line with our normal accounting procedures. Our
investments are largely at fair value in the balance sheet and no
significant changes to our valuation procedures have been applied.
Losses on sales of impaired bonds by Jackson increased to $(148)
million in the year (2019: loss of $(28) million) and bond
write-downs increased to $(32) million (2019: $(15) million)
reflecting volatility in credit spreads.
Finally, our liquidity position remains healthy with $1.5
billion of holding company cash and $0.5 billion of commercial
paper in issue at 31 December 2020 alongside $2.6 billion of
undrawn committed facilities. We have not breached any of the
requirements of our core structural borrowings nor modified any of
their terms.
Adjusted operating profit before tax from continuing
operations
For full year 2020, Prudential's adjusted operating profit(2,7)
from continuing operations was $5,507 million (4 per cent higher
than 2019 on a constant and an actual exchange rate basis).
Throughout this document the reference to continuing operations
refers to results of the full Group in 2020 and the results of the
Group in 2019 excluding the contribution from the discontinued UK
life and asset management operations.
The increase in adjusted operating profit reflects the
combination of a 13 per cent(1) increase in adjusted operating
profit(2) from our Asia life and asset management operations,
offset by a (9) per cent decrease in adjusted operating profit(2)
from our US business (including asset management), and lower
central expenses.
Central expenses(15) were 8 per cent(3) lower than the prior
year reflecting a reduction in interest expense on core borrowings
following the transfer of debt to M&G plc in 2019, partly
offset by increased restructuring costs of $(208) million (2019:
$(110) million(3) ). Restructuring costs reflect the Group's
substantial and ongoing IFRS 17 project and costs associated with
actions to reduce central costs post the demerger of M&G plc.
During 2020 our head office activities incurred costs of $(417)
million (2019: $(460) million(3) ). The Group continues to take
action to right-size its head office costs alongside the evolving
footprint of the business. The Group has delivered $180 million of
cost savings effective from 1 January 2021(5) as previously
targeted as a result of the M&G demerger(6) . In addition, as a
result of the separation of Jackson from the Group, head office
costs are targeted to reduce further by around $70 million from the
start of 2023. We will continue to review the timing of the full
realisation of these further savings following the completion of
the US demerger.
Non-operating items from continuing operations(25)
Non-operating items in 2020 consist of short-term fluctuations
in investment returns on shareholder-backed business of negative
$(4,841) million (2019: $(3,203) million(3) ), the net benefit from
various corporate transactions of $1,521 million (2019: loss of
$(142) million(3) ), which are discussed further below, and the
amortisation of acquisition accounting adjustments of negative
$(39) million (2019: $(43) million(3) ) arising mainly from the
REALIC business acquired by Jackson in 2012.
Negative short-term fluctuations include negative $(607) million
for Asia (2019: positive $657 million(3) ) and negative $(4,262)
million in the US (2019: $(3,757) million) .
Falling interest rates in certain parts of Asia led to lower
discount rates on certain policyholder liabilities under the local
reserving basis applied, which were not fully offset by unrealised
bond and equity gains in the year leading to negative fluctuations
overall.
Within the US, falling interest rates, with yields on US
treasuries falling by almost 1 percentage point over the year, and
steeply rising equity markets following substantial falls in the
first quarter of the year have led to $(4,262) million of negative
short-term investment fluctuations in the US business. Further
information is set out in the US section of this report.
After allowing for non-operating items, the total IFRS profit
after tax from continuing operations was $2,185 million (2019:
$1,944 million(1) ).
IFRS effective tax rates
In 2020, the effective tax rate on adjusted operating profit
based on longer-term investment returns from continuing operations
was 15 per cent. This was unchanged from 2019.
The effective tax rate on total IFRS profit in 2020 was negative
(2) per cent. This was unchanged from 2019 and reflects the tax
credit on US derivative losses exceeding the tax charge on profits
from Asia operations.
Total tax contribution from continuing operations
The Group continues to make significant tax contributions in the
jurisdictions in which it operates, with $2,114 million remitted to
tax authorities in 2020. This was similar to the equivalent amount
of $2,168 million(3) remitted in 2019.
Tax strategy
The Group publishes its tax strategy annually which, in addition
to complying with the mandatory UK (Finance Act 2016) requirements,
also includes a number of additional disclosures, including a
country-by-country disclosure of revenues, profits, average
employee numbers and taxes for all jurisdictions where more than $5
million tax was paid. This disclosure is included as a way of
demonstrating that our tax footprint (ie where we pay taxes) is
consistent with our business footprint. An updated version of the
tax strategy, including 2020 data, will be available on the Group's
website before 31 May 2021.
Corporate transactions
Jackson reinsurance of fixed and fixed index annuity business in
June 2020
Jackson reinsured substantially all of its in-force portfolio of
US fixed and fixed index annuities with Athene (circa $27.6 billion
of liabilities). The transaction excluded liabilities relating to
Jackson's legacy life and institutional business, the REALIC
portfolio and group pay-out annuity business reinsured from John
Hancock as well as investments in the general account by the
variable annuity policyholders. The transaction improved the
year-end capital position of Jackson by increasing the Jackson RBC
ratio by 67 percentage points and the Group's LCSM cover ratio by
24 percentage points. The reinsurance agreement was effective on 1
June 2020 and resulted in an IFRS pre-tax gain recorded through the
profit and loss account of $804 million, after transaction costs
and post-closing adjustments. After allowing for tax and the
reduction in unrealised gains recorded directly in other
comprehensive income, the impact of the reinsurance transaction on
IFRS shareholders' equity is a reduction of $(1.2) billion. This
transaction reduced the Group's EEV by $(457) million, which
largely reflects the loss of future profits recorded in the value
of in-force business as a result of the reinsurance and the loss of
unrealised gains on assets passed to Athene, partly offset by the
reinsurance commission received after deducting tax.
Equity investment into Jackson by Athene
In July 2020, Athene Life Re Ltd invested $500 million in
Prudential's US business in return for an 11.1 per cent economic
interest for which the voting interest is 9.9 per cent. This has no
impact on the income statement but resulted in a decline in IFRS
shareholders' equity of $(514) million at the date of the
transaction.
Other transactions
Other transactions in 2020 contributed $717 million to profit
and principally include the reinsurance commission from a quota
share reinsurance transaction undertaken by Hong Kong as part of
the Group's on-going asset/liability management. Future surpluses
(or losses) arising from the business being reinsured will be
shared with the reinsurer in accordance with the terms of the
treaty. Under EEV we recorded a loss of $91 million representing
the frictional costs of the arrangement. This treaty helps mitigate
the effect of the accounting mismatch under the existing regulatory
framework in Hong Kong and is part of our management of the
transition to the new RBC regime.
In the first half of the year, the Thailand business entered
into a strategic bancassurance partnership with TMB Bank Public
Company Limited with an initial period of 15 years which both
expanded and extended the existing partnership with Thanachart
Bank. The new arrangement commenced on 1 January 2021 and the fee
paid for expanding and extending the existing arrangement was $0.8
billion.
In January 2021, the Group announced its intention to complete
the demerger of Jackson in the first half of 2021. The total costs
associated with this activity are estimated to be around $110
million to $120 million, of which around half is expected to be
borne by Prudential plc and the remainder by Jackson. These largely
relate to advisory and other professional fees and a small amount
relates to the separation of Jackson's systems and processes from
those of the remaining Prudential Group.
Of these total costs, $38 million has been incurred in 2020 ($20
million by Prudential plc and $18 million by Jackson) and has been
included in non-operating profit as part of corporate transactions.
The remainder of the costs are expected to be incurred in the first
half of 2021.
IFRS profit
Actual exchange rate Constant exchange rate
------------------------------------------ ------------------------
2020 $m 2019 $m Change % 2019 $m Change %
-------------------------------------- -------------------- ---------- -------- ------------- ---------
Adjusted operating profit based on
longer-term investment returns before
tax from continuing
operations
Asia
Long-term business 3,384 2,993 13 2,978 14
Asset management 283 283 - 278 2
-------------------------------------- -------------------- ---------- -------- ------------- ---------
Total Asia 3,667 3,276 12 3,256 13
-------------------------------------- -------------------- ---------- -------- ------------- ---------
US
Long-term business 2,787 3,038 (8) 3,038 (8)
Asset management 9 32 (72) 32 (72)
-------------------------------------- -------------------- ---------- -------- ------------- ---------
Total US 2,796 3,070 (9) 3,070 (9)
-------------------------------------- -------------------- ---------- -------- ------------- ---------
Total segment profit from continuing
operations 6,463 6,346 2 6,326 2
-------------------------------------- -------------------- ---------- -------- ------------- ---------
Other income and expenditure (748) (926) 19 (931) 20
-------------------------------------- -------------------- ---------- -------- ------------- ---------
Total adjusted operating profit before
tax and restructuring costs 5,715 5,420 5 5,395 6
Restructuring and IFRS 17
implementation costs (208) (110) (89) (110) (89)
-------------------------------------- -------------------- ---------- -------- ------------- ---------
Total adjusted operating profit before
tax 5,507 5,310 4 5,285 4
-------------------------------------- -------------------- ---------- -------- ------------- ---------
Non-operating items:
Short-term fluctuations in
investment returns on
shareholder-backed business (4,841) (3,203) (51) (3,191) (52)
Amortisation of acquisition
accounting adjustments (39) (43) 9 (43) 9
Gain on disposal of businesses and
corporate transactions 1,521 (142) n/a (143) n/a
-------------------------------------- -------------------- ---------- -------- ------------- ---------
Profit from continuing operations
before tax attributable to
shareholders 2,148 1,922 12 1,908 13
-------------------------------------- -------------------- ---------- -------- ------------- ---------
Tax credit attributable to
shareholders' returns 37 31 n/a 36 n/a
-------------------------------------- -------------------- ---------- -------- ------------- ---------
Profit from continuing operations for
the year 2,185 1,953 12 1,944 12
Loss from discontinued operations for
the year, net of related tax - (1,161) 100 (1,165) 100
-------------------------------------- -------------------- ---------- -------- ------------- ---------
Profit for the year 2,185 792 176 779 180
-------------------------------------- -------------------- ---------- -------- ------------- ---------
IFRS earnings per share
Actual exchange rate Constant exchange rate
------------------------------------------ ------------------------
2020 cents 2019 cents Change % 2019 cents Change %
-------------------------------------- -------------------- ---------- -------- ------------- ---------
Basic earnings per share based on
adjusted operating profit after tax
from continuing operations 175.5 175.0 - 174.6 1
Basic earnings per share based on:
Total profit after tax from
continuing operations 81.6 75.1 9 75.1 9
Total loss after tax from
discontinued operations - (44.8) n/a (45.1) n/a
-------------------------------------- -------------------- ---------- -------- ------------- ---------
IFRS shareholders' equity
2020 $m 2019 $m
------------------------------------------------------------------------------------------- ------- -------
Adjusted operating profit after tax attributable to shareholders 4,559 4,528
------------------------------------------------------------------------------------------- ------- -------
Profit after tax for the year attributable to shareholders 2,118 783
Exchange movements, net of related tax 239 2,943
Unrealised gains and losses on US fixed income securities classified as available-for-sale
(before the impact of Jackson's reinsurance with Athene) 2,095 2,679
Impact of Jackson's reinsurance of fixed and fixed index annuities to Athene (1,795) -
Sale of 11.1 per cent stake in Jackson to Athene (514) -
Demerger dividend in specie of M&G plc - (7,379)
Other external dividends (814) (1,634)
Other 72 117
------------------------------------------------------------------------------------------- ------- -------
Net increase (decrease) in shareholders' equity 1,401 (2,491)
Shareholders' equity at beginning of the year 19,477 21,968
------------------------------------------------------------------------------------------- ------- -------
Shareholders' equity at end of the year 20,878 19,477
------------------------------------------------------------------------------------------- ------- -------
Shareholders' value per share(8) 800c 749c
------------------------------------------------------------------------------------------- ------- -------
Group IFRS shareholders' equity in the 12 months to 31 December
2020 increased by 7 per cent(3) to $20.9 billion (31 December 2019:
$19.5 billion(3) ), largely reflecting profit after tax for the
year and foreign exchange movements, partly offset by dividends
paid in the year of $(0.8) billion and the impact of the sale of
11.1 per cent of the Group's economic interest in Jackson to
Athene.
Group capital position
Prudential plc is applying the local capital summation method
(LCSM) that has been agreed with the Hong Kong Insurance Authority
(IA) to determine Group regulatory capital requirements until the
Group-wide Supervision (GWS) Framework is effective for Prudential
upon designation. The primary legislation was enacted in July 2020
and will come into operation on 29 March 2021. The relevant
subsidiary legislation, including the Insurance (Group Capital)
Rules, was tabled before the Legislative Council on 6 January 2021
and will also come into operation on 29 March 2021. This
legislation will be further supported by guidance material from the
Hong Kong IA. The GWS Framework is expected to be effective for
Prudential upon designation by the Hong Kong IA in the second
quarter of 2021, subject to transitional arrangements.
The GWS methodology is largely consistent with that applied
under LCSM with the exception of the treatment of debt instruments.
Prudential's initial analysis indicates that all debt instruments
(senior and subordinated) issued by Prudential will meet the
transitional conditions set by the Hong Kong IA and will be
included as eligible Group capital resources. If this were the case
the 31 December 2020 shareholder LCSM ratio(10) (over GMCR) would
increase by 35 percentage points to 363 per cent. This is subject
to final approval by the Hong Kong IA.
The estimated shareholder LCSM cover ratio(10) at 31 December
2020 was 328 per cent (31 December 2019: 309 per cent). Excluding
US operations, the cover ratio falls marginally to 323 per cent,
before including the proposed retained 19.9 per cent
non-controlling interest in Jackson.
Overall, LCSM shareholder surplus over group minimum capital
requirements increased by $1.5 billion since 31 December 2019 to
$11.0 billion at the end of December 2020. LCSM in-force operating
capital generation in the year was $2.2 billion, which supported
$(0.2) billion of investment in new business.
Overall non-operating items (excluding corporate transactions)
reduced surplus by $(0.2) billion, with the negative effect of
market movements in the year being offset by a $2.2 billion benefit
from the introduction of the new Singapore risk-based capital
framework (RBC2) effective 31 March 2020. Also included within
non-operating items is a $(0.4) billion fall in surplus from
changes made to Jackson VM-21 hedging model, further details of
which are set out in the US section in the discussion of RBC
changes .
The corporate transactions previously discussed were positive
overall and contributed $0.5 billion to surplus and the payment of
the 2019 second interim and 2020 first interim dividends reduced
the surplus by $(0.8) billion.
The Group's LCSM position is resilient to external macro
movements as demonstrated by the sensitivity disclosure contained
in note I(i) of the Additional unaudited financial information,
alongside further information on the basis of calculation of the
LCSM measure.
31 Dec 2020 31 Dec 2019
--------------------- -------------------
Estimated Group LCSM capital position(10) Total Shareholder* Total Shareholder*
--------------------------------------------------------- ------ ------------- ----- ------------
Available capital ($ billion) 37.9 15.8 33.1 14.0
Group minimum capital requirement (GMCR) ($ billion) 11.5 4.8 9.5 4.5
LCSM surplus (over GMCR) ($ billion) 26.4 11.0 23.6 9.5
LCSM ratio (over GMCR) (%) 329% 328% 348% 309%
--------------------------------------------------------- ------ ------------- ----- ------------
*The shareholder LCSM amounts exclude the available capital and minimum capital requirements
of the participating business in Hong Kong, Singapore and Malaysia.
Financing and liquidity
Net core structural borrowings of shareholder financed businesses
31 Dec 2020 $m 31 Dec 2019 $m
-------------------------------------- --------------------------------------
IFRS EEV IFRS EEV
basis Mark-to-market value basis basis Mark-to-market value basis
------------------------------------ ------- -------------------- ------- ------- -------------------- -------
Total borrowings of
shareholder-financed businesses 6,633 885 7,518 5,594 633 6,227
Less: holding company cash and
short-term investments (1,463) - (1,463) (2,207) - (2,207)
------------------------------------ ------- -------------------- ------- ------- -------------------- -------
Net core structural borrowings of
shareholder-financed businesses 5,170 885 6,055 3,387 633 4,020
------------------------------------ ------- -------------------- ------- ------- -------------------- -------
Net gearing ratio* 20% 15%
* Net core structural borrowings as proportion of IFRS
shareholders' equity plus net debt, as set out in note II(ii) of
the Additional unaudited financial information.
The total borrowings of the shareholder-financed businesses
increased by $1.0 billion, from $5.6 billion to $6.6 billion in
2020. This reflected the issuance of $1,000 million 3.125 per cent
notes in April 2020 raised for general corporate purposes including
to support the growth of the business. The Group had central cash
resources of $1.5 billion at 31 December 2020 (31 December 2019:
$2.2 billion ), resulting in net core structural borrowings of the
shareholder-financed businesses of $5.2 billion at end of December
2020 (31 December 2019: $3.4 billion). Prudential plc seeks to
maintain its financial strength rating which derives, in part, from
the high level of financial flexibility to issue debt and equity
instruments which is intended to be maintained and enhanced in the
future.
At the 31 December 2020, the Group's net gearing ratio as
defined in the table above was 20 per cent. We estimate that this
will rise to circa 28 per cent post the separation of Jackson
(based on the balance sheet at 31 December 2020, assuming no
pre-separation dividend and before allowing for the 19.9 per cent
retained stake in Jackson). On a Moody's basis, which is the basis
management intend to use going forward to manage leverage and which
differs to the above by taking into account gross debt, including
commercial paper, and also allows for a proportion of the surplus
within the Group's with-profits funds, the equivalent ratio is 33
per cent, before allowing for the 19.9 per cent retained stake in
Jackson. Following the demerger, as a pure-play Asia and Africa
business, Prudential will target a Moody's debt-leverage ratio of
around 20 to 25 per cent(4) over the medium term. Prudential may
operate outside this range temporarily to take advantage of growth
opportunities with attractive risk-adjusted returns as they arise,
while still preserving its strong credit ratings.
As discussed in the Chief Executive's report, Prudential is
considering raising new equity of around $2.5-3 billion. Such a
transaction, if executed, would maintain and enhance the Group's
financial flexibility in light of the breadth of the opportunities
to invest in growth and aim to increase the Group's investor base
in Asia.
Other sources of liquidity
In addition to its net core structural borrowings of
shareholder-financed businesses set out above, the Group has access
to funding via the medium-term note programme, the US shelf
programme (the platform for issuance of SEC-registered bonds in the
US market), a commercial paper programme and committed revolving
credit facilities. All of these are available for general corporate
purposes.
Prudential plc has maintained a consistent presence as an issuer
in the commercial paper market for the past decade and had $501
million in issue at the end of 2020 (31 December 2019: $520
million).
As at 31 December 2020, the Group had a total of $2.6 billion of
undrawn committed facilities, expiring in 2025. Apart from small
drawdowns to test the process, these facilities have never been
drawn, and there were no amounts outstanding at 31 December
2020.
In addition to the Group's traditional sources of liquidity and
financing, Jackson also has access to funding via the Federal Home
Loan Bank of Indianapolis with advances secured against collateral
posted by Jackson. Given the wide range of Jackson's product set
and breadth of its customer base including retail, corporate and
institutional clients, further sources of liquidity also include
premiums and deposits.
Group free surplus generation from continuing operations(9)
Free surplus generation is the financial metric we use to
measure the internal cash generation of our business operations and
is based (with adjustments) on the capital regimes that apply
locally in the various jurisdictions in which the Group operates.
For life insurance operations, it represents amounts emerging from
the in-force business during the year, net of amounts reinvested in
writing new business. For asset management and other non-insurance
operations (including the Group's central operations and Africa
operations) it is taken to be IFRS basis shareholders' equity, net
of goodwill attributable to shareholders, with central Group debt
shown on a market value basis and subordinated debt recorded as
free surplus to the extent that it is classified as available
capital under the Group's capital regime.
Analysis of movement in Group free surplus (9)
Actual exchange rate Constant exchange rate
-------------------------- ------------------------
2020 $m 2019 $m Change % 2019 $m Change %
-------------------------------------------------------------- ------- ------- -------- ----------- -----------
Asia - operating free surplus generated before restructuring
costs 1,895 1,772 7 1,762 8
Central costs and eliminations (net of tax):
Net interest paid on core structural borrowings (328) (451) 27 (453) 28
Corporate expenditure (419) (403) (4) (406) (3)
Other items and eliminations (111) (69) (61) (69) (61)
-------------------------------------------------------------- ------- ------- -------- ----------- -----------
Net operating free surplus generated before restructuring
costs and US 1,037 849 22 834 24
Restructuring and IFRS 17 implementation costs (net of tax) (147) (87) (69) (87) (69)
US - operating free surplus generated net of restructuring
costs 1,073 1,120 (4) 1,120 (4)
-------------------------------------------------------------- ------- ------- -------- ----------- -----------
Net Group operating free surplus generated for continuing
operations* 1,963 1,882 4 1,867 5
-------------------------------------------------------------- ------- ------- -------- ----------- -----------
Redemption of subordinated debt for continuing operations - (529)
External dividends (814) (1,634)
Non-operating and other movements (1,200) 654
Net impact of Athene equity investment in Jackson 63 -
Foreign exchange movements 136 190
-------------------------------------------------------------- ------- -------
Increase in Group free surplus from continuing operations* 148 563
Change in amounts attributable to non-controlling interests 209 (9)
-------------------------------------------------------------- ------- -------
Free surplus at 1 Jan from continuing operations 9,736 9,182
-------------------------------------------------------------- ------- -------
Free surplus at 31 Dec from continuing operations 10,093 9,736
-------------------------------------------------------------- ------- -------
Comprising:
Free surplus of life insurance and asset management operations 7,679 5,997
Central operations (including Africa) 2,414 3,739
-------------------------------------------------------------- ------- -------
* Before amounts attributable to non-controlling interests.
The total net Group operating free surplus generation, after
including operating free surplus generated by the US business and
deducting restructuring costs was $1,963 million (2019: $1,882
million(3) ). This comprises $2,886 million (2019: $2,861
million(3) ) operating free surplus generation from the life and
asset management business (net of attributable restructuring costs)
offset by centrally incurred costs and eliminations of $(923)
million (2019: $(979) million(3) ).
Asia operating free surplus generation(9,12) from insurance and
asset management business increased by 8 per cent(1) to $1,895
million reflecting recent business growth, higher asset management
earnings and lower levels of new business investment as Covid-19
containment measures introduced by the authorities across the
region lowered sales in the year.
US operating free surplus generation (after deducting
restructuring costs) fell (4) per cent compared with 2019, which
included a $355 million benefit following the integration of the
John Hancock business acquired in 2018.
Cash remittances
Holding company cash flow (13)
Actual exchange rate
----------------------------
2020* $m 2019* $m Change %
------------------------------------------------------------- -------- -------- --------
From continuing operations
Asia 716 950 (25)
Jackson - 509 (100)
Other operations 55 6 817
------------------------------------------------------------- -------- -------- --------
Total net cash remitted from continuing operations 771 1,465 (47)
From discontinued operations
M&G plc - 684 (100)
------------------------------------------------------------- -------- -------- --------
Net cash remitted by business units 771 2,149 (64)
------------------------------------------------------------- -------- -------- --------
Central outflows (435) (522)
Dividends paid (814) (1,634)
Other movements (264) (1,999)
------------------------------------------------------------- -------- --------
Total holding company cash flow (742) (2,006)
------------------------------------------------------------- -------- --------
Cash and short-term investments at the beginning of the year 2,207 4,121
Foreign exchange and other movements (2) 92
------------------------------------------------------------- -------- --------
Cash and short-term investments at the end of the year 1,463 2,207
------------------------------------------------------------- -------- --------
*The holding company cash flow describes the movement in the
cash and short-term investments of the centrally managed Group
holding companies.
Remittances from our Asia business were $716 million (2019: $950
million(3) ). In order to support the planned separation process,
there were no remittances from Jackson during the period. $55
million remittances from other operations reflects intragroup
interest income which is not expected to recur.
Cash remittances were used to meet central costs of $(435)
million and to pay dividends of $(814) million. Central costs
include net interest paid of $(294) million and a net tax benefit,
which is not expected to recur going forward, of $94 million.
Other movements of $(264) million includes the proceeds of the
issuance of $1 billion of senior debt in April 2020 offset by
central contributions to the funding of Asia strategic growth
initiatives, principally payments for bancassurance distribution
agreements, including TMB and UOB. Further information is contained
in note I(iii) of the Additional unaudited financial
information.
Cash and short-term investments totalled $1.5 billion at the end
of December 2020 (31 December 2019: $2.2 billion(3) ).
The Group will seek to manage its financial condition such that
it has sufficient resources available to provide a buffer to
support the retained businesses in stress scenarios and to provide
liquidity to service central outflows.
Dividend policy
Reflecting the Group's capital allocation priorities, dividends
will be determined primarily based on Asia's operating capital
generation after allowing for the capital strain of writing new
business and recurring central costs, with a portion of capital
generation retained for reinvestment in the business. Dividends are
expected to grow broadly in line with the growth in Asia operating
free surplus generation net of right-sized central costs, and will
be set taking into account financial prospects, investment
opportunities and market conditions.
The Board has approved a 2020 second interim ordinary dividend
of 10.73 cents per share. Combined with the first interim ordinary
dividend of 5.37 cents per share the Group's total 2020 dividend is
16.10 cents per share.
Starting from the 2021 first interim dividend, the Board intends
to apply a formulaic approach to first interim dividends, which
will be calculated as one-third of the previous year's full-year
ordinary dividend.
Asia
Operational and financial highlights
Prudential's Asia businesses delivered a resilient financial
performance in 2020. While Covid-19 related containment measures
impacted our new sales and associated new business profit levels,
we also delivered a step-change in our digital capabilities. While
the nature and severity of Covid-19 restrictions varied
significantly across our markets, our enhanced digital and physical
capabilities combined with our diversified and high quality
platform supported a strong sequential quarterly recovery in sales
in the third and fourth quarters of the year from a low in the
second quarter, illustrating the strength of our franchise.
The resilience and quality of our business is also evident in
customer retention levels of 90 per cent (2019: 90 per cent), which
combined with our recurring premium, health and protection focused
business model, with renewal premiums(8) increasing 6 per cent(1)
to $20.1 billion, supported an overall 13 per cent(1) increase in
adjusted life insurance operating profit(2) and an 8 per cent(1)
increase in operating free surplus generation(9,12) .
These qualities enabled us to continue to grow scale and value,
even in more challenging operating conditions, with our overall
Asia embedded value increasing to $44.2 billion at 31 December 2020
(31 December 2019: $39.2 billion(3) ).
Actual exchange rate Constant exchange rate
-------------------------- ------------------------
2020 $m 2019 $m Change % 2019 $m Change %
----------------------------------- ------- ------- -------- ----------- -----------
New business profit 2,201 3,522 (38) 3,533 (38)
Adjusted operating profit* 3,667 3,276 12 3,256 13
EEV operating profit* 4,387 6,138 (29) 6,150 (29)
Operating free surplus generation* 1,895 1,772 7 1,762 8
----------------------------------- ------- ------- -------- ----------- -----------
*Before restructuring costs
New business performance
Life EEV new business profit and APE new business sales (APE sales)
Actual exchange rate Constant exchange rate
----------------------------------------------------------- -------------------------------------------
2020 $m 2019 $m Change % 2019 $m Change %
------------------ ------------------ ------------------- ---------------------- -------------------
New New New New New
APE business APE business business business business
sales profit sales profit APE sales profit APE sales profit APE sales profit
---------- -------- -------- -------- -------- --------- -------- --------- ----------- --------- --------
Hong Kong 758 787 2,016 2,042 (62) (61) 2,037 2,063 (63) (62)
China JV 582 269 590 262 (1) 3 590 262 (1) 3
Indonesia 267 155 390 227 (32) (32) 379 220 (30) (30)
Malaysia 346 209 355 210 (3) - 349 207 (1) 1
Singapore 610 341 660 387 (8) (12) 653 383 (7) (11)
Other life
insurance
markets 1,133 440 1,150 394 (1) 12 1,160 398 (2) 11
---------- -------- -------- -------- -------- --------- -------- --------- ----------- --------- --------
Total Asia 3,696 2,201 5,161 3,522 (28) (38) 5,168 3,533 (28) (38)
---------- -------- -------- -------- -------- --------- -------- --------- ----------- --------- --------
Total Asia
excluding
Hong Kong 2,938 1,414 3,145 1,480 (7) (4) 3,131 1,470 (6) (4)
---------- -------- -------- -------- -------- --------- -------- --------- ----------- --------- --------
Total new
business
margin 60% 68% 68%
---------- -------- -------- -------- -------- --------- -------- --------- ----------- --------- --------
Life insurance new business APE sales decreased by (28) per
cent(1) to $3,696 million and related new business profit decreased
by (38) per cent(1) . Outside Hong Kong, overall new business APE
sales were (6) per cent(1) lower and new business profit decreased
by (4) per cent(1) .
The impact of Covid-19 related disruption varied materially in
terms of severity and duration across the region. Restrictions
eased in many markets as the year progressed. In Mainland China
internal travel and business activity resumed from the end of March
and restrictions in Hong Kong eased from the end of August, though
the border between Mainland China and Hong Kong remains closed. In
Indonesia, after an initial relaxation of lockdown measures in
June, a further four-week period of lockdown was imposed between
mid-September and mid-October and the country re-entered lockdown
again in early 2021. Significant containment restrictions remain in
place in Malaysia, Vietnam, the Philippines and Thailand, with
reduced restrictions in place in Hong Kong domestic, Taiwan,
Singapore and India.
Over 2020, we continued to benefit from the resilience our
diverse platform provides. Our diverse geographic portfolio saw
four markets increase APE sales compared with the prior year,
including Thailand up 16 per cent(1) , Taiwan up 11 per cent(1) and
Vietnam up 9 per cent(1) . This is also evident from a new business
profit perspective, with seven markets reporting growth, led by
China JV up 3 per cent(1) among our larger markets and Thailand and
Vietnam, up 38 per cent(1) and 18 per cent(1) respectively, in
other markets.
Outside of Hong Kong, sales from our bancassurance channel were
stable with last year, underpinned by growth in China JV (APE
bancassurance sales up 34 per cent(1) ), Thailand (up 21 per
cent(1) ), Indonesia (up 15 per cent(1) ) and Vietnam (up 35 per
cent(1) ). We also saw increased agency momentum in the second half
of the year.
There has been a significant acceleration of our digital
capabilities over 2020, with virtual sales accounting for 27 per
cent of bank sales from July to December and 28 per cent of all
agency sales from April to December. This compares with very low
amounts in prior years. Our agency channel was supported by over
2.2 million of 'online to offline' leads generated by our Pulse
health and wealth super-app, which, together with direct sales in
Pulse, generated $211 million of APE sales(23) in the year.
The quality and diversity of our platform contributed to a
strong sequential recovery in APE sales as Covid-19 related
restrictions were lifted, with discrete third quarter production of
$925 million(1) sequentially 33 per cent(1) higher than the second
quarter and fourth quarter sales 18 per cent(1) above the third
quarter and 10 per cent(1) higher than the first quarter of 2020,
prior to Covid-19 restrictions being applied in many of the markets
in which we operate.
The fourth quarter of 2020 was the highest APE sales quarter of
the year for overall Asia and for 9 markets. As we pivoted to
standalone protection products of lower case size to meet rising
consumer demand, total new policies increased by 1 per cent and new
protection policies grew by 10 per cent in the fourth quarter
compared with the same period in the prior year.
The development of new business profit mainly reflects the
impact of change in geographic mix, particularly sharply lower APE
sales in Hong Kong where the reduction in new business profit was
broadly in line with APE sales. Outside Hong Kong, new business
profit was only (4) per cent(1) lower compared with a (6) per
cent(1) reduction in APE sales, with improved new business margins
partly driven by new health and protection product launches which
saw seven markets increasing their health and protection mix.
Health and protection products continue to be a significant
proportion of sales, contributing 27 per cent of APE sales in 2020
(2019: 27 per cent).
Overall, Hong Kong APE sales were (63) per cent(1) below the
prior year. This was principally a result of a very sharp reduction
in APE sales to Mainland China customers, reflecting the impact of
the border closure early in the year and consequent reduction in
Mainland Chinese visitors and associated APE sales to these
customers. While domestic Hong Kong APE sales were also impacted by
Covid-19 related restrictions, new business production improved
markedly over the course of the year, with APE sales in Q3 rising
20 per cent over Q2 and Q4 rising 60 per cent over Q3. The strong
sequential sales growth was supported by product innovation and
ongoing development of our broader digital capabilities. In
particular, our increased focus on standalone protection products,
with lower case sizes, to meet rising consumer demand saw domestic
new sales policy count reach 98 per cent of prior year levels in
the fourth quarter. Overall Hong Kong new business profit was (62)
per cent(1) lower, broadly in line with the reduction in APE
sales.
Our China JV delivered an encouraging performance despite
Covid-19 related disruption, increasing new business profit by 3
per cent(1) . This was supported by the agency force focus on
protection products, which accounted for 53 per cent of sales from
this channel and as a result agency channel margins climbed to 85
per cent (2019: 74 per cent). We benefited materially from our
diversified distribution model, particularly the strength in
bancassurance which saw strong and accelerating growth of 34 per
cent in APE sales throughout the year. Overall APE sales were only
(1) per cent(1) lower compared with the prior year and second half
APE sales 4 per cent(1) higher than the prior year.
The sales environment in Indonesia remained challenging
following a deterioration of Covid-19 infections through the
summer, culminating in the re-introduction of the highest-level
movement restrictions in September, which remain in place today in
parts of Indonesia. Despite the challenging environment, we
achieved strong performance in the sharia segment with APE sales
growing 6 per cent and new business profit 27 per cent. Meanwhile,
the fourth quarter saw the highest overall sales of 2020 (19 per
cent higher than APE sales in the first quarter) and was driven by
60 new products launched in 2020, including lower ticket standalone
protection products. While this product strategy saw new sales case
count rise by 12 per cent at FY20, overall APE sales volumes were
(30) per cent(1) below the prior year driving a similar reduction
in new business profit.
In Malaysia, APE sales were (1) per cent(1) below the prior
year, with a decline in the first half sales largely offset by a
recovery in the second half of 14 per cent (compared with the
second half of the prior year), despite the reintroduction of
partial Covid-19 related restrictions in October, driven by strong
agency production across our traditional and takaful markets. The
Takaful business grew APE sales by 26 per cent compared with 2019,
with new business profit increasing by 29 per cent. Overall new
business profit increased by 1 per cent(1) , reflecting our
increased focus on standalone smaller case size protection
products.
In Singapore, APE sales fell by (7) per cent(1) reflecting
Covid-19 restrictions with declines in the first half of the year
partly offset by an increase in the second half of 5 per cent(1)
when compared with the second half of the prior year. Strong agency
momentum following the relaxation of Covid-19 restrictions saw APE
sales in the second half of the year being 63 per cent higher than
the level in the first half. New business profit reduced by (11)
per cent(1) , as lower interest rates resulted in a lower margin.
Singapore continues to develop products and digital capabilities
with the launch in December of 3 bite-sized digital products on
Pulse (PRUSafe Dengue, PRUSafe BreastCancer, PRUSafe
ProstateCancer) and the onboarding of the PRUCancer360 product on
UOB's Mighty banking app.
We have made good initial progress with our recent investment in
distribution in Thailand, where our APE sales were up 16 per
cent(1) , reflecting strong growth of 21 per cent in bancassurance
channel. New business profit grew by a stronger 38 per cent,
supported by the product mix shift to health and protection which
accounted for 25 per cent of APE sales (2019: 16 per cent). Our
distribution capability will be further strengthened by our
partnership with TMB which commenced on 1 January 2021 and our
digital partnership with The1, Thailand's largest loyalty
platform.
EEV basis results
Actual exchange rate Constant exchange rate
-------------------------- ------------------------
2020 $m 2019 $m Change % 2019 $m Change %
-------------------------------------------------------------- ------- ------- -------- ----------- -----------
New business profit 2,201 3,522 (38) 3,533 (38)
Profit from in-force business 1,933 2,366 (18) 2,371 (18)
-------------------------------------------------------------- ------- ------- -------- ----------- -----------
Operating profit from long-term business 4,134 5,888 (30) 5,904 (30)
Asset management 253 250 1 246 3
-------------------------------------------------------------- ------- ------- -------- ----------- -----------
Operating profit from long-term business and asset management
before restructuring costs 4,387 6,138 (29) 6,150 (29)
-------------------------------------------------------------- ------- ------- -------- ----------- -----------
Restructuring and IFRS 17 implementation costs (88) (31) (184) (31) (184)
Non-operating profit 822 1,962 (58) 1,968 (58)
-------------------------------------------------------------- ------- ------- -------- ----------- -----------
Profit for the year 5,121 8,069 (37) 8,087 (37)
-------------------------------------------------------------- ------- ------- -------- ----------- -----------
Other movements (115) (842)
-------------------------------------------------------------- ------- -------
Net increase in embedded value 5,006 7,227
-------------------------------------------------------------- ------- -------
Embedded value at 1 Jan 39,235 32,008
Embedded value at 31 Dec 44,241 39,235
-------------------------------------------------------------- ------- -------
% New business profit/average embedded value 5% 10%
-------------------------------------------------------------- ------- -------
% Operating profit/average embedded value 10% 17%
-------------------------------------------------------------- ------- -------
Asia EEV operating profit decreased compared with the prior year
to $4,387 million (2019: $6,150 million(1) ), driven by lower new
business profit and a lower profit from in-force business.
The profit from in-force business reflects the expected return
and effects of operating assumption changes and operating
experience variances, which in combination, were (18) per cent(1)
below the prior year. The expected return was (9) per cent(1) below
the prior year reflecting the impact of lower interest rates in
reducing the risk discount rate under our active basis European
Embedded Value methodology. Reflecting the high quality of our
in-force business and prudent assumption setting, operating
assumption changes and operating experience variances are again
positive, driven by product repricing effects as well as positive
claims variances across our businesses, among other factors.
Asset management segment operating profit after tax was up 3 per
cent(1) on the prior year at $253 million (2019: $246 million(1) ),
which is discussed in more detail below.
The non-operating profit of $822 million (2019: $1,968
million(1) ) largely comprises increases in asset values following
the fall in interest rates and higher equity markets, partially
offset by the impact of lower interest rates on expectations of
future asset returns.
Overall, Asia segment embedded value increased by 13 per cent(3)
to $44.2 billion in the 12 months to 31 December 2020 (31 December
2019: $39.2 billion(3) ). Of this, $42.8 billion (31 December 2019:
$37.8 billion(3) ) relates to the value of the long-term business
and includes our share of our India associate valued using embedded
value principles which is lower than its market capitalisation. The
remainder represents Asia asset management and goodwill
attributable to shareholders which are carried at IFRS net asset
value within the Group's EEV. At 31 December 2020, 47 per cent (31
December 2019: 48 per cent(3) ) of total Asia long-term embedded
value excluding goodwill is attributable to Hong Kong.
Total embedded value for Asia long-term business operations, excluding goodwill
31 Dec 2020 $m 31 Dec 2019 $m
-------------------------------------------------------------------------------------- -------------- --------------
Free surplus 5,295 3,624
Required capital 3,445 3,182
-------------------------------------------------------------------------------------- -------------- --------------
Net worth 8,740 6,806
-------------------------------------------------------------------------------------- -------------- --------------
Value of in-force business before deduction of cost of capital and time value of
options and
guarantees 36,729 32,396
Cost of capital (749) (866)
Time value of options and guarantees* (1,912) (493)
-------------------------------------------------------------------------------------- -------------- --------------
Net value of in-force business 34,068 31,037
-------------------------------------------------------------------------------------- -------------- --------------
Embedded value 42,808 37,843
-------------------------------------------------------------------------------------- -------------- --------------
Asia analysis of movement in free surplus(9)
Actual exchange rate Constant exchange rate
-------------------------- ------------------------
2020 $m 2019 $m Change % 2019 $m Change %
-------------------------------------------------------------- ------- ------- -------- ----------- -----------
Existing business - transfer to net worth 1,878 1,914 (2) 1,901 (1)
Expected return on existing business 101 80 26 79 28
Changes in operating assumptions and experience variances 222 147 51 151 47
-------------------------------------------------------------- ------- ------- -------- ----------- -----------
Operating free surplus generated from in-force life business
before restructuring costs 2,201 2,141 3 2,131 3
Asset management 253 250 1 246 3
-------------------------------------------------------------- ------- ------- -------- ----------- -----------
Operating free surplus generated from in-force life business
and asset management before restructuring
costs 2,454 2,391 3 2,377 3
Investment in new business (559) (619) 10 (615) 9
-------------------------------------------------------------- ------- ------- -------- ----------- -----------
Operating free surplus generated before restructuring costs 1,895 1,772 7 1,762 8
-------------------------------------------------------------- ------- ------- -------- ----------- -----------
Restructuring and IFRS 17 implementation costs (82) (31) (165) (31) (165)
-------------------------------------------------------------- ------- ------- -------- ----------- -----------
Operating free surplus generated 1,813 1,741 4 1,731 5
-------------------------------------------------------------- ------- ------- -------- ----------- -----------
Non-operating profit 444 1,195
Net cash flows paid to parent company (716) (950)
Foreign exchange movements on foreign operations, timing
differences and other items 169 (357)
-------------------------------------------------------------- ------- -------
Total movement in free surplus 1,710 1,629
Free surplus at 1 Jan 4,220 2,591
-------------------------------------------------------------- ------- -------
Free surplus at 31 Dec 5,930 4,220
-------------------------------------------------------------- ------- -------
Representing:
Long-term business 5,295 3,624
Asset management 635 596
-------------------------------------------------------------- ------- -------
Free surplus at 31 Dec 5,930 4,220
-------------------------------------------------------------- ------- -------
In-force operating free surplus generation(9,12) was $2,201
million, up 3 per cent(1) compared with the prior year. Excluding
the effect of operating assumption changes and experience
variances, in-force free surplus generation was in line with the
prior year(1) with the growth of the in-force portfolio being
dampened by the effect of lower interest rates compared with the
prior year. Operating assumption changes and experience variances
were positive, again illustrating the high quality nature of the
in-force business.
Investment in new business was $(559) million, 9 per cent(1)
below that in 2019. This reflects lower APE sales volumes, offset
by business mix effects and lower interest rates.
Overall higher in-force generation and lower investment in new
business led to operating free surplus generated(9) before
restructuring costs increasing by 8 per cent(1) to $1,895
million.
The non-operating profit of $444 million includes the benefit of
the reinsurance transaction undertaken by Hong Kong as part of the
Group's on-going asset/liability management as discussed earlier
under corporate transactions. 2019 non-operating profits included
$278 million(3) of gains from the reduction in the Group's stake in
ICICI Prudential Life Insurance Company and the disposal of
Prudential Vietnam Finance Company.
Local statutory capital
We maintained a strong balance sheet with a shareholder LCSM
surplus over the regulatory minimum capital requirement of $8.2
billion and coverage ratio of 338 per cent at 31 December 2020 (31
December 2019: $4.7 billion and 253 per cent). If our with-profits
funds in Hong Kong, Singapore and Malaysia are added the surplus
increases to $23.6 billion (31 December 2019: $18.8 billion). We
seek to safeguard our business from market volatility through our
strong focus on protection products and our prudent asset and
liability management strategy.
IFRS profit
Overall Asia adjusted operating profit(2) increased by 13 per
cent(1) to $3,667 million, driven by a 14 per cent(1) increase in
life insurance adjusted operating profit(2) , alongside a 2 per
cent(1) increase at Eastspring.
This growth reflects the benefits of our focus on high quality
recurring premium business, which accounts for 90 per cent of our
new business, and diversified portfolio of scale businesses, with
over 88 per cent of our total life income(14) (excluding other
income described below) driven by insurance margin and fee income
(2019: 86 per cent(1) ), again supporting profit progression across
market cycles.
Our Asia life insurance adjusted operating profit(2) growth is
broad-based and at scale. Overall, nine insurance markets reported
double-digit growth(1) , with three insurance markets delivering
growth of 20 per cent(1) or more. At a market level, highlights
include Hong Kong up 20 per cent(1) to $891 million, Singapore up
18 per cent(1) to $574 million, Malaysia up 14 per cent(1) to $309
million, China up 15 per cent(1) to $251 million and Thailand up 24
per cent(1) to $210 million. Adjusted operating profit(2) in
Indonesia was $519 million, marginally lower than the prior
year.
Profit margin analysis of Asia long-term insurance and asset management operations(17)
Actual exchange rate Constant exchange rate
-------------------------------- ------------------------
2020 2019 2019
--------------- --------------- ------------------------
Margin Margin Margin
$m bps $m bps $m bps
-------------------------------------------------------- ------- ------ ------- ------ ------------ ----------
Spread income 296 74 321 108 319 106
Fee income(11) 282 101 286 104 283 104
With-profits 117 16 107 18 107 18
Insurance margin 2,648 2,244 2,234
Other income 3,148 3,229 3,225
-------------------------------------------------------- ------- ------ ------- ------ ------------ ----------
Total life income 6,491 6,187 6,168
Expenses:
Acquisition costs (1,904) (52)% (2,156) (42)% (2,156) (42)%
Administration expenses (1,539) (227) (1,437) (252) (1,430) (249)
DAC adjustments 382 430 426
Share of related tax charges from joint ventures and
associates (46) (31) (30)
-------------------------------------------------------- ------- ------ ------- ------ ------------ ----------
Long-term insurance business pre-tax adjusted operating
profit 3,384 2,993 2,978
-------------------------------------------------------- ------- ------ ------- ------ ------------ ----------
Eastspring 283 283 278
-------------------------------------------------------- ------- ------ ------- ------ ------------ ----------
Adjusted operating profit from long-term business and
asset management before restructuring
costs 3,667 3,276 3,256
-------------------------------------------------------- ------- ------ ------- ------ ------------ ----------
Tax charge (495) (436) (432)
-------------------------------------------------------- ------- ------ ------- ------ ------------ ----------
Adjusted operating profit after tax for the year before
restructuring costs 3,172 2,840 2,824
-------------------------------------------------------- ------- ------ ------- ------ ------------ ----------
Non-operating profit after tax 210 885 899
-------------------------------------------------------- ------- ------ ------- ------ ------------ ----------
Profit for the year after tax before restructuring costs 3,382 3,725 3,723
-------------------------------------------------------- ------- ------ ------- ------ ------------ ----------
Our adjusted operating profit(2) continues to be based on
high-quality drivers. The overall 14 per cent(1) growth in Asia
life insurance adjusted operating profit(2) to $3,384 million
(2019: $2,978 million(1) ) was driven principally by 19 per cent(1)
growth in insurance margin-related revenues and reflects our
ongoing focus on recurring premium health and protection products
and the associated continued growth of our in-force business.
Fee income was in line with the prior year, while spread income
decreased by (7) per cent(1) driven by lower interest rates in the
year.
With-profits earnings relate principally to the shareholders'
share in bonuses declared to policyholders. As these bonuses are
typically weighted to the end of a contract, under IFRS,
with-profits earnings consequently emerge only gradually over time.
The 9 per cent(1) growth in with-profits earnings reflects the
ongoing growth in these portfolios.
Other income primarily represents amounts deducted from premiums
to cover acquisition costs and administration expenses. As such,
the (2) per cent(1) decrease from 2019 largely reflects lower new
business volumes, whereas new business acquisition expense fell 12
per cent(1) to $(1,904) million. The ratio of shareholder
acquisition costs to shareholder-related APE sales (excluding
with-profits-related sales) increased to 68 per cent (2019: 66 per
cent on an actual exchange rate basis), reflecting changes to
product and geographical mix. Administration expenses, including
renewal commissions, increased by 8 per cent(1) reflecting in-force
business growth.
Asset management
Actual exchange rate
----------------------------
2020 $m 2019 $m Change %
------------------------------------------------------------------ -------- -------- --------
Total external net flows* (9,972) 8,340 n/a
------------------------------------------------------------------ -------- -------- --------
External funds under management* ($bn) 93.9 98.0 (4)
Funds managed on behalf of M&G plc ($bn) 15.7 26.7 (41)
Internal funds under management ($bn) 138.2 116.4 19
------------------------------------------------------------------ -------- -------- --------
Total funds under management ($bn) 247.8 241.1 3
------------------------------------------------------------------ -------- -------- --------
Analysis of adjusted operating profit
Retail operating income 390 392 (1)
Institutional operating income 256 244 5
------------------------------------------------------------------ -------- -------- --------
Operating income before performance-related fees 646 636 2
Performance-related fees 7 12 (42)
------------------------------------------------------------------ -------- -------- --------
Operating income (net of commission) 653 648 1
Operating expense (336) (329) (2)
Group's share of tax on joint ventures' adjusted operating profit (34) (36) 6
------------------------------------------------------------------ -------- -------- --------
Adjusted operating profit 283 283 -
------------------------------------------------------------------ -------- -------- --------
Adjusted operating profit after tax 253 250 1
------------------------------------------------------------------ -------- -------- --------
Average funds managed by Eastspring $227.1bn $214.0bn 6
Fee margin based on operating income 28bps 30bps -2bps
Cost/income ratio(8) 52% 52% -
------------------------------------------------------------------ -------- -------- --------
* Excluding $15.7 billion of funds managed on behalf of M&G plc.
Eastspring's total funds under management were $247.8 billion at
31 December (31 December 2019: $241.1 billion(3) ), reflecting
favourable internal net inflows and higher equity markets, partly
offset by external net outflows. Compared with 2019, Eastspring's
average funds under management increased by 6 per cent(3) (7 per
cent(16) on a constant exchange rate basis). Funds under management
were 13 per cent(3) higher than at the end of June ($219.7
billion(3) ) as equity markets recovered and asset flows began to
recover from the volatility in the first half.
Eastspring continues to benefit from strong, positive net flows
from internal insurance funds, recording $8.5 billion (2019: $9.7
billion). Overall third-party flows related to external funds under
management were negative $(10.0) billion, reflecting the adverse
impact of higher market volatility, as a result of Covid-19, on
retail funds, most notably in a number of retail bond funds in
Thailand in the first half of 2020. Highlights included strong
flows into our China A Fund, and Global Innovation Fund in respect
of our equity products, and Income Plus and Active Bond Fund Plus
on the fixed income side. As market volatility subsided over the
second half of the year, third-party net flows(22) improved
materially, with the fourth quarter seeing net inflows of $0.5
billion. In addition, as anticipated, there were net outflows from
funds managed on behalf of M&G plc of $(10.0) billion in 2020,
with further outflows of around $(6) billion expected in the first
half of 2021.
Eastspring's adjusted operating profit(2) of $283 million was up
2 per cent compared with the prior year on a constant exchange rate
basis (level on an actual exchange rate basis). Operating income
(net of commission) increased by 1 per cent(3) with the benefit of
higher average funds under management being partly offset by
adverse client and asset mix effects that reduced the fee margin
based on operating income to 28 basis points (2019: 30 basis
points(3) ). Cost discipline remains robust, with operating costs
in line with the prior year, with the resulting cost/income
ratio(8) the same at 52 per cent.
Return on segment equity
The benefit of our focus on profitable health and protection,
with-profit and asset management businesses is evident in the
attractive 26 per cent (2019: 30 per cent) operating return
delivered on average segment equity(8) over 2020.
United States
Operational and financial highlights
All of the results below reflect Jackson Financial Inc. (which
we refer to as Jackson), the entity that is proposed to be
demerged, except for the discussion on local statutory capital
which covers Jackson Financial Inc.'s subsidiary, Jackson National
Life, only. Post its separation from the Group, Jackson will no
longer publish EEV results and the discussion below therefore
focuses on IFRS and capital measures. All amounts have been
prepared on the basis of the Prudential Group's accounting policies
and methodologies and are consistent with the Group's reporting in
2019. This will differ from the financial information that Jackson
will report as part of the demerger process, which will be prepared
under US GAAP and will include certain non-GAAP financial measures
which Jackson management believes will be more relevant to manage
the business as a standalone entity.
At 31 December 2020, Jackson National Life's RBC ratio was 347
per cent (31 December 2019: 366 per cent). At the point of proposed
separation, Jackson expects to have an RBC ratio(24) in excess of
450 per cent and total financial leverage(21) in the range of 25 to
30 per cent, subject to market conditions. Jackson expects to
achieve this level of RBC at the point of separation by
contributing proceeds of its debt and hybrid capital raising to its
regulated insurance subsidiaries.
2020 $m 2019 $m Change %
----------------------------------- ------- ------- ---------
APE new business sales (APE sales) 1,923 2,223 (13)
Adjusted operating profit* 2,796 3,070 (9)
RBC ratio (%) 347 366 (19) ppts
----------------------------------- ------- ------- ---------
*Before restructuring costs
New business
APE sales
2020 $m 2019 $m Change %
-------------------------------------- ------- ------- --------
Variable annuities 1,662 1,470 13
Fixed annuities 33 119 (72)
Fixed index annuities 100 382 (74)
-------------------------------------- ------- ------- --------
Total retail annuity APE sales 1,795 1,971 (9)
Total institutional product APE sales 128 252 (49)
-------------------------------------- ------- ------- --------
Total APE sales 1,923 2,223 (13)
-------------------------------------- ------- ------- --------
Despite challenging market conditions, Jackson delivered a 13
per cent increase in variable annuity sales, reflecting the
strength and depth of its leading distribution franchise and
value-added customer proposition. Jackson believes that the
investment freedom and optional guaranteed benefits Jackson offers
its customers support its strong brand recognition with
distributors and advisers(18) .
Jackson has maintained its leading position in the US retail
variable annuity market(19) . This market position reflects the
attractiveness of its product, breadth of distribution across
multiple channels, and the productivity of Jackson's wholesaler
field force, which is among the most productive in the industry,
with sales per agent over 10 per cent higher than the nearest
competitor(20) .
In line with Jackson's disciplined approach to pricing and risk
management, pricing actions taken in the first half of 2020 in
response to changing market conditions and to preserve statutory
capital, resulted in an expected and material reduction in new
fixed annuity and fixed index annuities sales, evident particularly
from the beginning of the second quarter. This, combined with lower
institutional sales, resulted in an overall (13) per cent reduction
in APE sales.
IFRS profit
Adjusted operating profit
US segment adjusted operating profit(2,7) was $2,796 million in
2020, down (9) per cent from the prior year. This reduction largely
reflects the impact of DAC adjustment effects in the current and
prior year, alongside the expected reduction in spread related
earnings following the reinsurance contract with Athene in June
2020. Offsetting these falls, fee income was $3,386 million, 3 per
cent higher than the prior year as result of higher average account
balances.
A further breakdown of the drivers of IFRS profitability is set
out below.
Profit margin analysis of US long-term insurance and asset management operations(17)
2020 2019
--------------- ---------------
Margin Margin
$m bps $m bps
------------------------------------------------------------------------------------ ------- ------ ------- ------
Spread income 521 112 642 112
Fee income 3,386 178 3,292 182
Insurance margin 1,298 1,317
Other income - 26
------------------------------------------------------------------------------------ ------- ------ ------- ------
Total life income 5,205 5,277
Expenses:
Acquisition costs (991) (52)% (1,074) (48)%
Administration expenses (1,744) (71) (1,675) (68)
DAC adjustments 317 510
------------------------------------------------------------------------------------ ------- ------ ------- ------
Long-term insurance business pre-tax adjusted operating profit 2,787 3,038
------------------------------------------------------------------------------------ ------- ------ ------- ------
Asset management 9 32
------------------------------------------------------------------------------------ ------- ------ ------- ------
Adjusted operating profit from long-term business and asset management before
restructuring
costs 2,796 3,070
------------------------------------------------------------------------------------ ------- ------ ------- ------
Tax charge (313) (437)
------------------------------------------------------------------------------------ ------- ------ ------- ------
Adjusted operating profit after tax for the year before restructuring costs 2,483 2,633
Non-operating loss after tax (2,730) (3,013)
------------------------------------------------------------------------------------ ------- ------ ------- ------
Loss for the year after tax before restructuring costs (247) (380)
------------------------------------------------------------------------------------ ------- ------ ------- ------
Spread income declined (19) per cent in 2020, primarily as a
result of the Athene reinsurance transaction, as well as lower
asset yields, partially offset by lower interest credited
reflecting lower average crediting rates compared with 2019. The
margin of 112 basis points benefited from prior year swap
transactions. Excluding that benefit, the spread margin would have
been 88 basis points (2019: 101 basis points).
Insurance margin represents profits from insurance risks,
including variable annuity guarantees and profits from the legacy
life businesses and was marginally lower than that earned in
2019.
Acquisition costs have fallen by 8 per cent following lower
sales in the year. Administration expenses increased by 4 per cent
to $(1,744) million in 2020 as a result of higher asset-based
commissions, as average separate account balances increased, and
the non-recurrence of commission income (treated as a negative
expense) earned under the John Hancock reinsurance arrangement in
2019. Excluding the asset-based commission, the administration
expense ratio would be 34 basis points (2019: 33 basis points).
DAC adjustments, being the cost deferred on sales in the period
net of amortisation of amounts deferred previously, have fallen by
$(193) million to $317 million. This follows lower deferrals from
lower sales and higher amortisation of prior period DAC. DAC
amortisation increased as the impact of changes to the longer-term
economic assumptions underpinning the amortisation calculation,
following an expectation of lower interest rates in the future,
more than offset the benefits of increases in DAC deceleration in
the period as a result of higher equity markets at the end of 2020
as compared with the start of the year.
Non-operating items
The non-operating result was negative $(3,510) million pre-tax
(2019: $(3,795) million) and contributed to a net loss after tax of
$(247) million (2019: $(380) million). The non-operating result
over 2020 includes a loss of $(4,296) million from short-term
investment fluctuations and amortisation of previous acquisition
accounting adjustments offset by a $786 million pre-tax gain as a
result of the Athene reinsurance transaction.
In the US, Jackson provides certain guarantees on its annuity
products, the value of which would typically rise when equity
markets fall and long-term interest rates decline. Jackson charges
fees for these guarantees which are in turn used to purchase
downside protection, in particular options and futures to mitigate
the effect of equity market falls.
Jackson designs its hedge programme to protect the economics of
the business from large movements in investment markets and does
not seek to hedge on an accounting basis. It therefore accepts a
degree of variability in the accounting results.
The $(4,296) million discussed above principally arises from the
steep rise in equity markets following the low at the end of the
first quarter of 2020 that led to equity derivative losses taken
out as part of Jackson's hedging programme being in excess of the
corresponding reduction in guarantee liabilities and the effect of
lower interest rates on the value of its guarantees. Hedge costs
were also elevated due to the high levels of volatility observed in
the period.
Local statutory capital - Jackson National Life (Jackson)
2020 2019
------------------------------------------- -------------------
Required
capital at
Total 'Company
Adjusted Action
Capital Level'
(TAC) $m (CAL) $m Surplus $m Ratio % Surplus $m Ratio %
-------------------------------------------------- --------- ----------- ---------- ------- ---------- -------
1 Jan 5,221 1,426 3,795 366 4,315 458
-------------------------------------------------- --------- ----------- ---------- ------- ---------- -------
Capital generation from new business written 191 153 38 (23) (144) (75)
Operating capital generation from business in
force 798 (177) 975 100 1,531 141
-------------------------------------------------- --------- ----------- ---------- ------- ---------- -------
Operating capital generation 989 (24) 1,013 77 1,387 66
Other non-operating movements (1,832) 115 (1,947) (108) (1,524) (104)
US reinsurance transaction 524 (251) 775 67 - -
Investment by Athene 500 - 500 25 - -
Adoption of NAIC reforms - - - - 142 (17)
Hedge modelling revision (139) 251 (390) (80) - -
Dividends paid - - - - (525) (37)
-------------------------------------------------- --------- ----------- ---------- ------- ---------- -------
31 Dec 5,263 1,517 3,746 347 3,795 366
-------------------------------------------------- --------- ----------- ---------- ------- ---------- -------
The movement in surplus over the course of 2020 was driven
by;
- Operating capital generation from the in-force business was
$975 million, in line with our expectations post the Athene
transaction. This is lower than 2019 which benefited from a $355
million release of incremental reserves following the integration
of the John Hancock business acquired in 2018. The impact of new
business improved by $182 million, largely as a result of expected
fall in fixed annuity and fixed index annuity sales following
repricing actions in the first half of 2020.
- Non-operating items reduced surplus by $(1,947) million driven
primarily by the impact of market movements where falling interest
rates, rising equity markets and elevated volatility have combined
to result in derivative losses, net of reserve changes, and an
increase in required capital. This included a reduction of $(193)
million in deferred tax assets being admitted into statutory
surplus and an increase in surplus of $140 million from changes in
respect of formal recognition by the regulator of guaranteed asset
management revenue.
- Surplus benefited from a $500 million investment by Athene and
a further $775 million as a result of the reinsurance of the
in-force fixed annuity and fixed index annuity portfolio in
June.
- At 31 December 2019, Jackson early adopted the provisions of
the National Association of Insurance Commissioners Valuation
Manual Minimum Standards No. VM-21 (VM-21). As announced on 28
January 2021, Jackson determined that a simplifying modelling
assumption was not consistent with its intent in the adoption of
VM-21 and the revised modelling adopted for calculating reserves
and capital reduced surplus by $(390) million through a reduction
in TAC and an increase in CAL.
Group reporting segments after proposed separation of
Jackson
In presenting its results for 2020, the Group continues to
report its business using the following segments:
- Asia (including insurance and asset management business); and
- US (including Jackson and US asset management business).
Other operations are classified as unallocated to a segment,
which includes the Group's head office functions in London and Hong
Kong and Africa insurance operations.
In preparation for the planned separation of Jackson, from 2021
the Group has revised its internal management information to focus
on the following revised segments, which will be used for external
reporting from half year 2021.
- China JV
- Hong Kong
- Indonesia
- Malaysia
- Singapore
- Growth markets and other (including Africa)
- Eastspring
The Group's head office functions will continue to be
unallocated to a segment. The US has been classified as
discontinued following the Board's decision to proceed with a
demerger in the second quarter of 2021.
A summary of the Group's key performance indicators by these
segments going forward are as set out below.
Actual exchange rate
----------------------------------------------------------------------------------------------------
APE sales New business profit Adjusted operating profit** EEV for long-term business
---------------- --------------------- ----------------------------- ----------------------------
2020 $m 2019 $m 2020 $m 2019 $m 2020 $m 2019 $m 2020 $m 2019 $m
---------------- ------- ------- ---------- --------- -------------- ------------- ------------- -------------
China JV 582 590 269 262 251 219 2,798 2,180
Hong Kong 758 2,016 787 2,042 891 734 20,156 18,255
Indonesia 267 390 155 227 519 540 2,630 2,737
Malaysia 346 355 209 210 309 276 4,142 3,535
Singapore 610 660 341 387 574 493 8,160 7,337
Growth markets
and other*** 1,245* 1,232* 440 394 835* 737* 4,975* 3,858*
Eastspring n/a n/a n/a n/a 283 283 n/a n/a
---------------- ------- ------- ---------- --------- -------------- ------------- ------------- -------------
Total 3,808* 5,243* 2,201 3,522 3,662* 3,282* 42,861* 37,902*
---------------- ------- ------- ---------- --------- -------------- ------------- ------------- -------------
* Includes amounts relating to Africa.
** Further analysis of Adjusted operating profit for Asia is set
out in note I(v) in the Additional unaudited financial
information.
*** Adjusted operating profit includes other of $119 million
(2019: $125 million) and primarily comprises of taxes for joint
ventures and associates and other non-recurring items.
Notes
1 On a constant exchange rate basis.
2 Adjusted IFRS operating profit based on longer-term investment
returns is management's primary measure of profitability and
provides an underlying operating result based on longer-term
investment returns and excludes non-operating items. Further
information on its definition and reconciliation to profit for the
year is set out in note B1.1 of the IFRS financial statements.
3 On an actual exchange rate basis.
4 Calculated on a Moody's total leverage basis.
5 Approximately half of the corporate expenditure is incurred in
sterling and our assumptions forecast an exchange rate of
GBP1=$1.2599.
6 As compared with head office expenditure of $(490) million in
2018 and before a planned $10 million increase in Africa costs as
previously disclosed.
7 Attributed to the shareholders of the Group before deducting
the amount attributable to the non-controlling interests. This
presentation is applied consistently throughout the document.
8 See note II of the Additional unaudited financial information
for definition and reconciliation to IFRS balances.
9 For insurance operations, operating free surplus generated
represents amounts maturing from the in-force business during the
year less investment in new business and excludes non-operating
items. For asset management businesses, it equates to post-tax
operating profit for the year. Further information is set out in
'movement in Group free surplus' of the EEV basis results.
10 Surplus over Group minimum capital requirement and estimated
before allowing for second interim ordinary dividend. Shareholder
business excludes the available capital and minimum requirement of
participating business in Hong Kong, Singapore and Malaysia.
Further information on the basis of calculation of the LCSM measure
is contained in note I(i) of the Additional unaudited financial
information.
11 In 2020, given the significant market volatility in certain
months during the year, average liabilities used to derive the
margin for fee income in Asia have been calculated using
quarter-end balances throughout the year as opposed to opening and
closing balances only to provide a more meaningful analysis. The
2019 margin have been amended for consistency albeit impacts are
minimal.
12 Operating free surplus generated before restructuring
costs.
13 Net cash amounts remitted by business units are included in
the holding company cash flow, which is disclosed in detail in note
I(iii) of the Additional unaudited financial information. This
comprises dividends and other transfers from business units that
are reflective of emerging earnings and capital generation.
14 Total insurance margin ($2,648 million) and fee income ($282
million) of $2,930 million divided by total life income excluding
other income of $3,343 million (Comprised of total life income of
$6,491 million less other income of $3,148 million).
15 Central expenses comprises other income and expenditure of
$(748) million (2019: $(926) million on an actual exchange rate
basis) and restructuring and IFRS 17 implementation costs of $(208)
million (2019: $(110) million on an actual exchange rate
basis).
16 On a constant exchange rates basis Eastspring average funds
under management over the year to 31 December 2019 were $211.5
billion (actual exchange rate basis: $214.0 billion). Average funds
under management over the year to 31 December 2020 were $227.1
billion.
17 For discussion on the basis of preparation of the sources of
earnings in the table see note I(iv) of the Additional unaudited
financial information.
18 Cogent Annuity Brandscape+37 Net Promoter Score ('NPS') for
Jackson variable annuities, compared to an industry average NPS of
0.
19 LIMRA: through the third quarter of 2020, Jackson accounted
for 16.5% of new sales in the U.S. retail variable annuity market
and ranked number 1 in variable annuity sales.
20 Market Metrics Q3 2020 Sales, Staffing, and Productivity
Report: Jackson's variable annuity sales per wholesaler are more
than 10% higher than its nearest competitor.
21 Calculated on a US GAAP basis as the ratio of total debt
(including senior debt, hybrid debt and preferred securities) to
total debt and shareholders' equity (excluding Accumulated Other
Comprehensive Income).
22 Excluding money market funds and funds managed on behalf of
M&G plc.
23 APE sales substantially from full-premium products sold
through referrals to agents and a small amount of revenue from 37
new digital products.
24 Representing t he RBC ratio of Jackson National Life that
reflects the capital and capital requirements of Jackson National
Life and its subsidiaries, including Jackson National Life NY.
25 The term 'Non-operating items' is used in this report to
refer to items excluded from adjusted IFRS operating profit based
on longer-term investment returns from continuing operations,
including short term investment fluctuations in investment returns
on shareholder-backed business, corporate transactions and
amortisation of acquisition accounting adjustments. For the
avoidance of doubt this analysis is not intended to align with
'results of operating activities' as discussed in IAS 1
Presentation of Financial Statements.
Group Chief Risk and Compliance Officer's report on the risks
facing our business and how these are managed
Enabling decisions to be taken with confidence
Our Group Risk Framework and risk appetite have allowed us to
control our risk exposure throughout 2020. Our governance,
processes and controls enable us to deal with uncertainty
effectively, which is critical to the achievement of our strategy
of capturing long-term structural opportunities and helping our
customers achieve their long-term financial goals.
This section explains the main risks inherent in our business
and how we manage those risks, with the aim of ensuring an
appropriate risk profile is maintained. Although Jackson is
preparing to be a fully independent business, until the proposed
demerger is effected Jackson's risks (as with those of the Group's
other businesses) will continue to be managed within the Group Risk
Framework and this report reflects this position.
1. Introduction
The Group
2020 was a truly eventful year. The Covid-19 pandemic swept
across the world and has resulted in significant humanitarian
suffering and material and prolonged disruption to social and
economic activity. The business had to consider and navigate the
risks arising from the Covid-19 on multiple fronts. These included
capital and liquidity risks arising from abrupt market dislocation
as well as risks associated with the disruption to the Group's
operations across Asia, Africa, the US and UK. Concurrently, the
business has maintained uninterrupted delivery of services for its
policyholders, and has been committed to doing the right thing for
both its customers and employees throughout the crisis. The Risk,
Compliance and Security function has successfully transitioned
into, and maintained, new ways of working across multiple time
zones to provide strong stewardship and enhanced monitoring of
these risks during the most acute phases of the pandemic's
impact.
Through these extraordinary circumstances, the function has also
provided risk opinions, guidance and assurance on critical
activity, including Athene's reinsurance of $27.6 billion of
Jackson's fixed and fixed index annuity portfolio and $500 million
equity investment into Prudential's US business, the proposed
demerger of Jackson from the Group and the revision to its hedge
modelling for US statutory standards for calculating reserves and
capital. At the same time, the function retained its focus on
managing the risks of the ongoing business, performing its defined
role in providing risk management support and oversight, as well as
objective challenge to ensure the Group remained within its risk
appetite.
The Group continues to engage constructively with the Hong Kong
Insurance Authority (IA) as its Group-wide supervisor and is
transitioning to a new supervisory framework. The Group's mature
and well-embedded risk framework will enable decisions to be taken
with confidence as the business seeks to capture the opportunities
in the growth markets in which it is now focused while continuing
to operate prudently with discipline.
The world economy
At the start of 2020 the prospects for global growth appeared to
be improving. This positive momentum was abruptly reversed by the
Covid-19 pandemic, leading to the shutdown of much of the world's
economy and a sharp recession. In response to this unprecedented
shock, governments and central banks deployed massive fiscal and
monetary stimulus measures to mitigate the impact on the labour
force and restore confidence in financial markets. Driven largely
by the strong macro policy response, global economies have started
to recover although this remains far from complete. In Asia, China
has been leading the economic rehabilitation, benefitting other
Asian economies to an extent, although the regional recovery to
date has been highly uneven. The economic environment in Asia is
expected to remain challenging given the limited headroom for
additional conventional monetary easing, increasing inflation risks
from weaker foreign exchange rates, supply chain disruptions, and
increasing fiscal pressures. Viewed more broadly, the pandemic has
increased the debt burden of many economies and may result in
sovereign debt sustainability issues, increasing the dependence on
low interest rates by governments.
Financial markets
2020 began with risk assets performing well until concerns over
the economic impact of the Covid-19 outbreak dented investor
confidence, eventually leading to a global sell-off that unfolded
at extraordinary speed. The S&P 500 index plunged by 35 per
cent from an all-time high on 19 February 2020 to its low point on
23 March 2020. Interest rates in major markets declined
significantly, falling to historical lows as investors fretted over
the risks to the economic outlook. Credit spreads widened
significantly, in line with the plunge in equity markets. The
stress on financial markets was broadly eased by the central banks
maintaining accommodative monetary policies and implementing
various support programmes. Since their trough in March 2020,
financial markets have rallied strongly, initially driven by broad
reductions in infection rates in some countries, optimism with
respect to the restart of the global economy, and, in the US, a
small group of large-cap stocks that has buoyed the cap-weighted
index. Risk assets in particular continued to rally strongly in the
second half of 2020.
Risk asset valuations appear elevated and display some
disconnect with economic fundamentals, and may therefore be subject
to the risk of a correction given the renewed lockdowns implemented
across the world towards the end of 2020 and into 2021, the
logistical challenges to the roll out of Covid-19 vaccination
programmes (which may more prolonged than initially anticipated)
and the development of new strains of the coronavirus. On interest
rates, the consensus outlook is of an environment in which they
will remain low-for-longer. The US Federal Reserve's forward
guidance has constrained expectations of higher short term yields
in the foreseeable future, while economic fundamentals and globally
accommodative conditions are likely to keep downward pressure on
long term yields. For credit assets, risks of a further round of
widespread pressure on corporate liquidity - as experienced during
2020 - remain, given the stretched credit fundamentals of corporate
borrowers, although the magnitude of the pre-funding and
liquidity-raising that has been accomplished in 2020 is expected to
mitigate this to an extent.
(Geo)political landscape
During the first half of 2020, the civil unrest increasingly
seen in many places across the world were partially curtailed by
the Covid-19 restrictions put in place by governments. The second
half of the year, saw an increase in popular protests against
long-standing social issues and inequalities and were in some cases
triggered by national elections in the US, Africa and Asia. An
observable trend in recent protest movements, aided by social
media, is the speed and frequency at which they can gather momentum
and their evolving forms of leadership. The stability of
governments is likely to be tested in different ways and
potentially on a more frequent basis as a result, as will the
resilience of businesses. As a global organisation, the Group has
well-established local and global plans to mitigate the business
risks from disruption. These have operated well when deployed
across the Group during the Covid-19 crisis and also locally during
the outbreaks of unrest seen during 2020 and continued into 2021 in
markets where the Group operates. Operational resilience will
continue to be critically evaluated and enhanced as the longer-term
lessons, from the pandemic response in particular, become clearer.
Governmental responses to the pandemic have involved a necessary
balancing of the impacts to people's health and lives, their
individual rights and liberties, and economic growth. These
considerations, and the dynamics between and within them, have
become increasingly politicised and another source of polarisation
and popular discontent which, in some places, have also provided
impetus to protest movements.
Many governments continue to face the challenge of reconciling
the inter-connectedness of the global economy with pressure to
prioritise national self-interests. The experience of the pandemic
may provide a further impetus to the regionalisation or
fragmentation of global trade, investment and standards, and risks
undermining efforts in international cooperation and coordination.
Into 2021, accessibility to Covid-19 vaccine supplies, which may
become a prolonged challenge, has the potential to contribute to an
increase in geopolitical tensions. A key source of geopolitical
risk during 2020 was the US-China relationship and its wider impact
on international relations, and this looks likely to continue
during President Biden's term in office. Hong Kong's perceived
level of autonomy will remain influential in geopolitical tensions,
with potential global trade and economic consequences. Responses by
the US, UK and other governments to the enactment and application
of the national security law in Hong Kong and other constitutional
or legislative changes in the territory, which continue to develop,
may impact Hong Kong's economy. Being a key market for the Group
which also hosts regional and head office functions, this could
potentially impact Prudential's sales, operations and product
distribution. For internationally active groups which operate
across impacted jurisdictions such as Prudential, these government
responses and measures add to the complexity of legal and
regulatory compliance. Compliance with Prudential's legal or
regulatory obligations in one jurisdiction may conflict with the
law or policy objectives of another jurisdiction, or may be seen as
supporting the law or policy objectives of that jurisdiction over
another, creating additional legal, regulatory compliance and
reputational risks for the Group.
Regulations
Prudential operates in highly regulated markets, and the nature
and focus of regulation and laws remain fluid. A number of national
and international regulatory developments are in progress, with a
continuing focus on solvency and capital standards, conduct of
business, systemic risk regulation, corporate governance and senior
management accountability, and macroprudential policy. Some of
these changes will have a significant impact on the way that the
Group operates, conducts business and manages its risks. With
geopolitical tensions elevated, the complexity of sanctions
compliance is increasing and continues to represent a challenge for
international businesses. These regulatory developments will
continue to be monitored at a national and global level and form
part of Prudential's engagement with government policy teams and
regulators. The immediate regulatory and supervisory responses to
Covid-19 have been broad and have included increased scrutiny of
the operational resilience, liquidity and capital strength
(including the impact of making dividend payments) of financial
services companies as well as changes that have helped the Group to
continue to support its customers through non-face-to-face contact.
The financial burden in addressing the pandemic is likely to
influence changes in governmental fiscal policies, laws or
regulations aimed at increasing financial stability, and this may
include measures on businesses or specific industries to contribute
to, lessen or otherwise support, the financial cost to governments
of treating patients and meeting the logistical challenges of
providing vaccines. It is possible that requirements are imposed on
private insurance companies and healthcare providers to cover costs
associated with the treatment and prevention of Covid-19 beyond
contractual or policy terms.
Against this evolving regulatory backdrop, constructive
engagement continues with Prudential's Group-wide supervisor, the
Hong Kong IA, on the Group-wide Supervision (GWS) Framework. The
GWS Framework is expected to be effective for Prudential upon
designation by the Hong Kong IA in the second quarter of 2021,
subject to transitional arrangements. The primary legislation was
enacted in July 2020 and will come into operation on 29 March 2021.
The framework adopts a principle-based and outcome-focused
approach, and allows the Hong Kong IA to exercise direct regulatory
powers over the holding companies of multinational insurance
groups, reinforcing Hong Kong's position as a preferred base for
large insurance groups in Asia Pacific and a global insurance hub.
During 2020, the Hong Kong IA engaged with the Group and other
relevant stakeholders in the development of the GWS framework,
which will be anchored on the requirements for three pillars:
capital, risk and governance, and disclosure.
Societal developments
The experience of the pandemic has underlined the ability of
evolving demographic, geographical and environmental factors to
change the nature, likelihood and impact of extreme events. These
factors can also drive public health trends such as increasing
obesity, with consequential potential impacts to Prudential's
underwriting assumptions and product design. While insights can be
gleaned from the current pandemic, the unique set of variables
associated with extreme events means that their impact on the
functioning of society, and the disruption to business operations,
staff, customers and sales, cannot be predicted or fully mitigated.
The Group has been actively managing the impact of the crisis as it
has developed over 2020 and into 2021, including assisting affected
policyholders and staff in meeting their resulting needs.
In support of increased ease of access and social inclusion, and
to meet evolving customer needs, the Group is increasing its use of
digital services, technologies and distribution methods for the
products and services that it offers. The Covid-19 pandemic has
accelerated these developments, with the Group's businesses having
implemented virtual face-to-face sales of select ranges of products
in many of its markets, and adoption of Prudential's Pulse
application has continued to increase. The digital health platform
is now available in 15 markets in 11 languages, with total
downloads having reached 20 million as of February 2021. Changes to
the Group's use of technology and distribution models have broad
implications, touching on Prudential's conduct of business,
increasing the risks of technology and data being compromised or
misused and potentially leading to new and unforeseen regulatory
issues.
A strong sense of purpose for an enterprise is a driver of
long-term profitability, and this is making companies evaluate
their place in, and contribution to, society. The 'why and how' a
business acts has become arguably at least as important as what it
produces or the services that it provides. Understanding and
managing the environmental, social and governance (ESG) impact and
requirements of its business is fundamental to Prudential's brand,
reputation and ultimately its long-term success. Ensuring high
levels of transparency and responsiveness to stakeholders is a key
aspect of this. Recent events have highlighted the structural
inequalities in our societies and are prompting organisations to
question where they stand on these important issues. Prudential's
ESG Strategic Framework is designed to deliver on its purpose of
'helping people get the most out of life'. It includes a focus on
inclusivity: inclusivity of access to quality healthcare,
protection and savings for our customers; inclusivity of the
working environment for our people; and inclusivity in the Group's
support of the transition to low-carbon in the economies, markets
and communities in which it operates.
2. Key internal, regulatory, economic and (geo)political events over the past 12 months
Q1 2020 Q2 2020 Q3 2020 Q4 2020
In January 2020, the virus On 18 June 2020 the Group In August, and building on Covid-19 cases surge in Q4
responsible for what announces the reinsurance its earlier announcement in across the US and Europe.
initially appeared to be of $27.6 billion of May, the Group announces Towards the end of 2020,
viral pneumonia is Jackson's fixed and its intention major European
identified as a novel fixed index annuity to fully separate Jackson economies start to
coronavirus. The resulting portfolio by Athene, and a from the Group. This is reintroduce restrictions on
disease is subsequently $500 million equity followed by a further movement and business to
named Covid-19, and investment into announcement in January various degrees. Amid
over 2020 the coronavirus Prudential's 2021 confirming that the this increase in infection
begins its spread across US business in return for separation will be rates, vaccine approvals
the globe. Across its an 11.1 per cent economic facilitated by way of and roll-outs begin to take
markets the Group interest. demerger, which is proposed place in the
rolls out initiatives to to complete in Q2 2021. UK and other countries.
support customers and Shriti Vadera joins the
staff. Board as a Non-executive The Insurance (Amendment) Against the backdrop of the
Director and member of the (No. 2) Ordinance, being US election and positive
In January, Prudential Nomination & Governance the enabling primary Covid-19 vaccine news,
Vietnam announces an Committee on 1 May 2020, legislation providing equity markets
exclusive bancassurance and succeeds Paul Manduca for the GWS Framework was continue to rally in
partnership with Southeast as Chair of the Board and enacted on 24 July 2020 and November and volatility
Asia Commercial Joint Stock of the Nomination will come into operation on reaches new post-March
Bank (SeABank), a & Governance Committee on 1 29 March lows. Central banks of
fast-growing bank in January 2021. 2021. The relevant major economies keep
Vietnam with around 1.2 subsidiary legislation, interest rate levels on
million customers and IAIS releases the including the Insurance hold. In Europe, the
almost 170 branches, for a requirements for a Covid-19 (Group Capital) Rules, Pandemic Emergency Purchase
20-year term. tailored Data Collection was tabled before the Programme resolves to
exercise for 2020. Legislative Council on 6 continue bond purchases
On 20 March, the Hong Kong The original Data January 2021 and will also until June 2021. In the US,
IA published the Insurance Collection exercise, come into operation a second stimulus
(Amendment) (No. 2) Bill as released in March for the on 29 March 2021. The GWS package worth $900 billion
part of purpose of monitoring the Framework is expected to be passed in December.
its submission to the Hong build-up of systemic risk effective for Prudential
Kong LegCo, a key step for insurers, is paused for upon designation The US elections take place
towards GWS implementation. 2020. In April 2020, the by the Hong Kong IA in the amid a surge in coronavirus
IAIS also releases second quarter of 2021, case numbers across the
In Singapore, a revised the requirements for the subject to transitional country. After
risk-based capital 2020 ICS and Aggregation arrangements. legal challenges from
framework (RBC2) for Method Data Collection President Trump are denied
insurers comes into force exercises. The US Federal Reserve by the courts and the
as at 31 March 2020. adopts a new flexible storming of the US
The Network for Greening average inflation targeting Capitol buildings by
The California Consumer the Financial System strategy and introduces protestors, Joe Biden is
Protection Act (CCPA) comes publishes its Guide for new forward guidance on inaugurated as the 46th US
into force on 1 January Supervisors in May 2020 interest rates that delays president on 20 January
2020, creating which outlines future increases until the 2021, taking control of
data privacy rights to recommendations for economy reaches both houses of Congress.
California consumers. integrating climate-related maximum employment and
Jackson ensures compliance and environmental risks inflation rises to 2 per On 15 November, at the
with the Act in December into cent and is on track to annual Association of
2019. prudential supervision. moderately exceed Southeast Asian Nations
The National Association of this level for some time. (ASEAN) Leaders Summit,
Insurance Commissioners Markets rally sharply 15 countries formally sign
(NAIC) implements changes during Q2 on the back of US GDP increases by $1.6 the Regional Comprehensive
to the US statutory asset purchases, direct trillion over Q3, partially Economic Partnership (RCEP)
reserve and capital intervention by the offsetting the decrease of trade deal,
framework for variable US Federal Reserve in $2.0 trillion making it the world's
annuities, effective from 1 credit markets, stimulus in Q2, as consumer spending largest trading bloc.
January 2020. Jackson programmes, the gradual rebounds strongly. Signatories aim to work
chooses to early adopt the rebound in economic Meanwhile, China's GDP through ratification of
changes as at 31 December activity enabled by the growth improves from the deal in 2021. The RCEP
2019 for US statutory progressive easing of 3.2 per cent year-on-year comprises all ten ASEAN
reporting. lockdown measures and a in Q2 to 4.9 per cent in economies, plus China,
broad reduction in virus Q3. Growth in all major Japan, South Korea,
The Covid-19 pandemic shuts infection rates. investment activities Australia and New Zealand.
down much of the world's return to positive levels,
economy and triggers a A broad easing of Covid-19 with real growth rising Moves to ban an opposition
sharp recession. restrictions begins to take from -1.1 per cent y-o-y in party in 2019 trigger
Equity markets sell off at place across many countries August to 2.4 anti-establishment protests
an extraordinary speed, in the per cent in September. in Thailand in
volatility spikes, credit latter half of Q2 and into early 2020. Protest
spreads widen Q3, including in some Volatility in the financial activity peaks in
sharply and interest rates countries with high markets remain elevated. mid-October and spikes
in major markets decrease infection rates, with Equity markets briefly fall again mid-November, with
to new historical lows. many countries taking steps in September, protest
Central banks to mitigate a second wave accompanied by a sell-off leaders threatening to
maintain accommodative of infections. Other in US treasuries, although resume demonstrations with
monetary policies and countries, such this is short-lived and increased intensity in
implement various asset as the US and those in avoids a collapse early 2021.
purchase and support Central and South America of similar levels as seen
programmes to restore and South Asia continue to in March. As credit market In the run-up to the Uganda
confidence in financial see high daily conditions stabilise, presidential elections on
markets. Governments deploy case numbers. central banks, 14 January 2021, violence
massive fiscal stimulus including the US Federal breaks out
to mitigate the economic Reserve and European in Kampala with dozens
fallout and the Central Bank (ECB), lower killed in the first few
unprecedented shock on the the pace of their weeks of electoral
labour force. asset purchases. campaigning.
A new national security law In early October, Nigeria
for Hong Kong is is rocked by the outbreak
implemented on 30 June of nationwide
2020. The US response demonstrations against
includes enactment of the police
Hong Kong Autonomy Act brutality that leaves a
which introduces potential reported 56 people dead.
sanctions on financial
institutions doing On 23 October, the China's
significant business with Central Bank, the People's
Chinese officials Bank of China, publishes a
materially contributing to draft banking
the alleged erosion of Hong law recognising, and
Kong's autonomy. Over Q3 providing a regulatory
and Q4 the US introduces framework for, its planned
sanctions on central bank digital
a range of individuals and currency, the digital yuan.
entities in connection to a
number of issues. On 11 November 2020,
China's National People's
On 31 July 2020, Carrie Lam Congress Standing Committee
postpones the September determines that
LegCo elections for one Hong Kong LegCo members can
year, citing coronavirus be disqualified on various
concerns. grounds including
endangering national
security, with four members
being immediately
disqualified. In protest,
the remaining 15 member
pro-democracy bloc resign
en masse.
On 30 December 2020, the EU
and China reach an
agreement in principle on
the Comprehensive
Agreement on Investment,
which covers market access.
Both sides commit to
finalising detailed
negotiations on the
investment protections
covered by the Agreement,
which will require
ratification,
within two years.
---------------------------- ---------------------------- ----------------------------
3. Managing the risks in implementing our strategy
This section provides an overview of the Group's strategy, the
significant risks arising from the delivery of this strategy and
current risk management focus. The risks outlined below, which are
not exhaustive, are discussed in more detail in section 5.
Our strategy Significant risks arising from the delivery of the Risk management focus
strategy
Group-wide
Our strategy * Transformation risks around key change programmes, * Continuing development of the transformation risk
is to capture including those related to the Group's digital framework, including risk appetite, and focus on, and
the long-term strategy ensuring consistency in, transformation risk
structural management across the Group's business units.
opportunities
for our
markets and * Provision of independent risk assurance, challenge
geographies, and advice on first line programme risk
while identification and assessments.
operating
with
discipline * Focus on the financial and non-financial stability of
and seeking Jackson as a standalone business.
to enhance
our
capabilities
through
innovation
to deliver
high-quality
resilient
outcomes for
our
customers.
--------------------------------------------------------- ------------------------------------------------------------
* Group-wide regulatory risks * Ongoing compliance with in-force regulations and
management of new regulatory developments.
* Engagement with national governments, regulators and
industry groups on macroprudential and systemic
risk-related regulatory initiatives, international
capital standards, and other initiatives with
Group-wide impacts.
* Implementation of the Group-wide Supervision
Framework, which is expected to be effective for
Prudential upon designation by the Hong Kong IA in
the second quarter of 2021, subject to transitional
arrangements.
--------------------------------------------------------- ------------------------------------------------------------
* Information security and data privacy risks * Operationalisation of the Group-wide governance model
and strategy for cyber security management focusing
on automation, business enablement, efficiency, and
continuous improvement.
* Continued focus on compliance with applicable privacy
laws across the Group and the appropriate and ethical
use of customer data.
--------------------------------------------------------- ------------------------------------------------------------
* Business disruption and third-party risks * Continued application of the Group's global business
continuity management framework, with an enhanced
focus on operational resilience as it relates to
business disruption tolerance levels and customer
impacts. Embedding of insights from the Covid-19
pandemic.
* Applying the distinct oversight and risk management
required over the Group's third parties, including
its strategic partnerships for product distribution,
non-traditional services and processing activities.
--------------------------------------------------------- ------------------------------------------------------------
* Conduct risk * Implementing and embedding the Group-wide customer
conduct risk management framework and policy, with
particular focus on sales practices and the Group's
digital ecosystem.
* Enhancement of conduct risk oversight using data
analytics.
--------------------------------------------------------- ------------------------------------------------------------
* Model and data risks * Focus on requirements for data and AI and complex
tooling ethics principles and framework.
* Ongoing risk assessment of tools used.
--------------------------------------------------------- ------------------------------------------------------------
* People and culture * Focus on Group Culture as a key mechanism to support
sound risk management behaviours, practices and
awareness.
* Embedding responses and insights from Group-wide
employee engagement surveys through enhancements to
the Group Risk Framework.
--------------------------------------------------------- ------------------------------------------------------------
* ESG - commitments and disclosure * Assessing the potential financial impacts from
climate-related transition risk in the asset book and
integration of climate risk into the Group Risk
Framework.
* Supporting the Group ESG Committee in its
responsibility to deliver the Group's ESG Strategic
Framework and develop its disclosures.
--------------------------------------------------------- ------------------------------------------------------------
Our strategy Significant risks arising from Risk management focus
the delivery of the strategy
Asia
Serving the * Financial risks * Maintaining, and enhancing where necessary, risk
protection and limits and implementing business initiatives to
investment needs of manage financial risks, including asset allocation,
the growing middle bonus revisions, product repricing and reinsurance
class in Asia. where required.
---------------------------------- ----------------------------------------------------------
* Persistency risk * Implementation of business initiatives to manage
persistency risk, including additional payment
methods, enhancing customer experience, revisions t
o
product design and incentive structures. Ongoing
experience monitoring.
---------------------------------- ----------------------------------------------------------
* Morbidity risk * Implementation of business initiatives to manage
morbidity risk, including product repricing where
required. Ongoing experience monitoring.
---------------------------------- ----------------------------------------------------------
Africa As its presence in Africa expands and grows in materiality, the Group will continue to
Providing savings, increase
health and protection its focus on Prudential Africa's most significant risks. A number of significant Group-wide
solutions to risks detailed above are considered material in the region, and these include:
customers in Africa. * Financial crime and security risks, where the focus
is on implementation of Group policies and standards;
* Transformation risks, where the focus is on
overseeing and managing parallel initiatives while
developing local capabilities to meet the demands of
a fast-paced transformation agenda; and
* Regulatory risks, where the focus is on active
monitoring of the local regulatory landscape and
adoption of Group processes in order to meet
international regulatory standards.
----------------------------------------------------------------------------------------------
United States
Providing asset * Financial risks * Maintaining, and enhancing where necessary, risk
accumulation and limits, hedging strategies (including mitigating
retirement income measures against basis risk), modelling tools and
products to US risk oversight appropriate to Jackson's product mix
retirees. with a view to demerger from the Prudential Group.
---------------------------------- ----------------------------------------------------------
* Policyholder behaviour risk * Continued monitoring of policyholder behaviour
experience and review of assumptions.
---------------------------------- ----------------------------------------------------------
4. Risk governance
a System of governance
Prudential has in place a system of governance that promotes and
embeds a clear ownership of risk, processes that link risk
management to business objectives and a proactive Board and senior
management providing oversight of risks. Mechanisms and
methodologies to review, discuss and communicate risks are in place
together with risk policies and standards to enable risks to the
Group to be identified, measured and assessed, managed and
controlled, monitored and reported.
Material risks are retained selectively when it is considered
that there is value in doing so, and where it is consistent with
the Group's risk appetite and philosophy towards risk-taking. The
Group Risk Framework, which is owned by the Board, details
Prudential's risk governance, risk management processes and risk
appetite. The Group's risk governance arrangements are based on the
'three lines of defence' model, comprising risk taking and
management, risk control and oversight, and independent assurance.
The aggregate Group exposure to its key risk drivers is monitored
and managed by the Risk, Compliance and Security function, which is
responsible for reviewing, assessing, providing oversight and
reporting on the Group's risk exposure and solvency position from
the Group economic, regulatory and ratings perspectives.
During 2020, the Group has continued to review and update its
policies and processes for alignment with the requirements of its
Group-wide supervisor. The Group has also focused on development of
its Group-wide customer conduct risk framework and policy; its AI
ethics principles; and enhancements to its operational
resilience.
The following section provides more detail on our risk
governance, risk culture and risk management process.
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 have been established
to make decisions and control activities on risk-related
matters.
The risk governance structure is led by the Group Risk
Committee, supported by independent non-executive directors on risk
committees of the Group's main subsidiaries. The Group Risk
Committee reviews and approves changes made to the Group Risk
Framework and to relevant policies. It also reviews and approves
new risk policies and recommends to the Board any material policies
which require Board approval. A number of core risk policies and
standards support the Framework to enable risks to the Group to be
identified, measured and assessed, managed and controlled,
monitored and reported.
The risk governance arrangements for the Group's major
businesses were delayered and strengthened in 2020 with the
implementation of direct lines of communication, reporting and
oversight of the risk committees of these businesses by the
Committee. To support the enactment of these arrangements, the
terms of reference for the major business risk committees were
aligned and approved locally, and include a standing invitation for
the Group Chief Risk and Compliance Officer (CRCO) and the
requirement for risk escalations to the Committee.
Culture is a strategic priority of the Board, which recognises
its importance in the way that the Group does business. A
Group-wide culture framework is currently being implemented to
unify the Group towards its shared purpose of helping people get
the most out of life. Components of the framework include
principles and values that define how the Group expects business to
be conducted in order to achieve its strategic objectives, inform
expectations of leadership and guide ESG activities. The culture
framework components are intended to be supportive of sound risk
management practices by requiring a focus on longer term goals and
sustainability, the avoidance of excessive risk taking and
highlighting acceptable and unacceptable behaviours. The framework
is supported through inclusion of risk considerations in
performance management for key individuals; the building of
appropriate skills and capabilities in risk management; and by
ensuring that employees understand and care about their role in
managing risk through open discussions. The Group Risk Committee
has a key role in providing advice to the Remuneration Committee on
risk management considerations to be applied in respect of
executive remuneration.
Prudential's Group Code of Business Conduct and Group Governance
Manual include a series of guiding principles that govern the
day-to-day conduct of all its people and any organisations acting
on its behalf. This is supported by specific risk-related policies
which require that the Group act in a responsible manner. These
include, but are not limited to, policies related to financial
crime covering anti-money laundering and sanctions and anti-bribery
and corruption. The Group's third-party supply policy requires that
human rights and modern slavery considerations are embedded across
all of its supplier and supply chain arrangements. Embedded
procedures to allow individuals to speak out safely and anonymously
against unethical behaviour and conduct are also in place.
ESG is overseen by the Board, which is responsible for
determining strategy and prioritisation of key focus areas. In
order to provide greater senior executive involvement and holistic
oversight of ESG matters material to the Group, in 2020, a Group
ESG Committee was established. The Committee, chaired by the Group
Chief Financial Officer and Chief Operating Officer in his role as
ESG sponsor, was supported by senior functional leaders and
representatives from the Group's business units, including the
chief investment officers of the Group's asset managers. The Group
ESG Committee reported to the Board in 2020 through the Group
Nomination & Governance Committee, comprising the Group's
Chair, the Senior Independent Director, and the chairs of the
Audit, Remuneration and Risk committees and was regularly attended
by the Group Chief Executive. The policies and procedures to
support how the Group operates in relation to certain ESG topics
are included in the Group Governance Manual, which establishes
standards for managing ESG issues across the Group and sets out the
policies and procedures to support how Prudential operates. Further
details on the Group's ESG governance arrangements, including the
establishment in early 2021 of a Board Responsibility &
Sustainability Working Group, are included in the ESG Report.
ii. The risk management cycle
Risk identification
In accordance with provision 28 of the UK Corporate Governance
Code, a process is in place to support Group-wide identification of
the company's emerging and principal risks and this combines both
top-down and bottom-up views of risks at the level of the Group and
its business units. The Board performs a robust assessment and
analysis of these principal and emerging risks facing the company
through the risk identification process, the Group Own Risk and
Solvency Assessment (ORSA) report and the risk assessments
undertaken as part of the business planning review, including how
they are managed and mitigated, which supports decision-making.
The ORSA is the ongoing process of identifying, measuring and
assessing, managing and controlling, monitoring and reporting the
risks to which the business is exposed. It includes an assessment
of capital adequacy to ensure that the Group's solvency needs are
met at all times. Stress and scenario testing, which includes
reverse stress testing requiring the Group to ascertain the point
of business model failure, is another tool that helps to identify
the key risks and scenarios that may have a material impact on the
Group. The risk profile is a key output from the risk
identification and risk measurement processes and is used as a
basis for setting Group-wide limits, management information,
assessment of solvency needs, and determining appropriate stress
and scenario testing. The Group's annual set of principal risks is
given enhanced management and reporting focus.
Risk measurement and assessment
All identified risks are assessed based on an appropriate
methodology for that risk. All quantifiable risks, which are
material and mitigated by holding capital, are modelled in the
Group's internal model, which is used to determine economic capital
requirements and is subject to independent validation and processes
and controls around model changes and limitations.
Risk management and control
The Group's control procedures and systems focus on aligning the
levels of risk-taking with the Group's strategy and can only
provide reasonable, and not absolute, assurance against material
misstatement or loss. Risk management and control requirements are
set out in the Group's risk policies and define the Group's risk
appetite in respect of material risks and the framework under which
the Group's exposure to those risks is limited. The processes to
enable Group senior management to effect the measurement and
management of the Group material risk profile in a consistent and
coherent way, which include the flows of management information
required, are also set out in the Group's risk policies. The
methods and risk management tools that the Group employs to
mitigate each of its major categories of risks are detailed in
section 5 below.
Risk monitoring and reporting
The identification of the Group's principal risks informs the
management information received by the Group Risk Committee and the
Board. Risk reporting of key exposures against appetite is also
included, as well as ongoing developments in the Group's principal
and emerging risks.
iii. Risk appetite, limits and triggers
The Group recognises that interests of its customers and
shareholders, and a managed acceptance of risk in pursuit of its
strategy, lies at the heart of its business, and that effective
risk management capabilities represent a key source of competitive
advantage. Qualitative and quantitative expressions of risk
appetite are defined and operationalised through risk limits,
triggers and indicators. The Risk, Compliance and Security function
reviews the scope and operation of these measures at least
annually. The Board approves changes to the Group's aggregate risk
appetite and the Group Risk Committee has delegated authority to
approve changes to the system of limits, triggers and
indicators.
Group risk appetite is defined and monitored in aggregate by the
setting of objectives for its liquidity, capital requirements and
non-financial risk exposure, covering risks to shareholders,
including those from participating and third - party business.
Group limits operate within these expressions of risk appetite to
constrain material risks, while triggers and indicators provide
additional defined points for escalation. The Group Risk Committee
is responsible for reviewing the risks inherent in the Group's
business plan and for providing the Board with input on the
risk/reward trade-offs implicit therein. This review is supported
by the Risk and Compliance function, which uses submissions from
local business units to calculate the Group's aggregated position
relative to Group risk appetite and limits.
-- Capital requirements. Limits on capital requirements aim to
ensure that the Group maintains sufficient capital in excess of
internal economic capital requirements in business-as-usual and
stressed conditions, achieves its desired target rating to meet its
business objectives, and supervisory intervention is avoided. The
two measures currently in use at the Group level are the regulatory
local capital summation method (LCSM) capital requirements (both
minimum and prescribed levels) and internal economic capital
requirements ('ECap'), which under the GWS Framework will be
determined by the Group Internal Economic Capital Assessment
('GIECA'). In addition, capital requirements are monitored on local
statutory bases.
-- Liquidity. The objective of the Group's liquidity risk
appetite is to ensure that sufficient cash resources are available
to meet financial obligations as they fall due in business-as-usual
and stressed scenarios. This is measured using a liquidity coverage
ratio (LCR) which considers the sources of liquidity against
liquidity requirements under stress scenarios.
Non-financial risks. The Group is exposed to non-financial
risks, including environmental, social and governance risks, as an
outcome of its chosen business activities and strategy. It aims to
manage these risks effectively to maintain its operational
resilience and its commitments to customers and other external
stakeholders, and to avoid material adverse impact on its
reputation.
5. The Group's principal risks
Broadly, the risks assumed across the Group can be categorised
as those relating to its financial situation; its business and
industry; regulatory and legal compliance; and those relating to
ESG. Principal risks, whether materialising within the Group or at
third parties on which the Group relies, may have a financial
impact and could also impact the performance of products or
services provided to customers and distributors and the ability to
fulfil commitments to customers, giving rise to potential risks to
its brand and reputation. These risks, which are not exhaustive,
are detailed below. The materiality of these risks, whether
material at the level of the Group or its business units, is also
indicated. The Group's disclosures covering risk factors are
aligned to the same categories and can be found at the end of this
document.
In reading the sections below, it is useful to understand that
there are some risks that Prudential's policyholders assume by
virtue of the nature of their products, and some risks that the
Group and its shareholders assume. Examples of the latter include
those risks arising from assets held directly by and for the Group
or the risk that policyholder funds are exhausted. This report is
focused mainly on risks to the shareholder but will include those
which arise indirectly through policyholder exposures.
Covid-19 risks and responses
The Group has responded in a number of ways to the risks arising
from the coronavirus pandemic; some responses were part of existing
risk management processes and procedures, while others have been
initiated specifically in response to the pandemic, in particular
during the acute phases experienced in Q1 and Q2.
The Group Critical Incident Procedure (GCIP) defines specific
governance to be invoked in the event of a critical incident, such
as a significant market, liquidity or credit-related event. This
includes, where necessary, the convening of a Critical Incident
Group (CIG) to oversee, coordinate, and where appropriate, direct
any activity during a critical incident. In response to the
economic and financial market shocks triggered by the Covid-19
pandemic the Group CRCO invoked the GCIP and convened a series of
CIG meetings to provide high-cadence monitoring and management of
potential threats to the capital or liquidity position of the
Group. Local Incident Management teams were also activated to
monitor and manage the tailored response required to support the
operations, customers and employees of the Group's businesses.
These risks arising from Covid-19, and the Group's responses to
them, are summarised below, with further information provided,
where relevant, within the descriptions of the Group's principal
risks.
Risk areas Responses
Proactive move to working from home arrangements across
* Staff safety and well-being jurisdictions, with Local Incident
Management teams monitoring country specific
developments, undertaking risk assessments and
providing regular staff communications and support.
--------------------------------------------------------
Initiatives and campaigns rolled out across markets,
* Customer outcomes are not met, increasing conduct including customer cash benefits, goodwill
risk payments, and extended grace periods for premium
payments.
--------------------------------------------------------
Application of the Group and local business continuity
* Disruption to the operations of the Group, and its plans. Local Incident Management teams
key partners activated to monitor, manage and lead a tailored
response to ensure continuity of service
to existing customers.
--------------------------------------------------------
Invocation of the GCIP and convening of a CIG to
* Financial market and liquidity impacts, including to monitor and manage threats to the Group's
Group and business unit solvency solvency or liquidity position.
--------------------------------------------------------
Group-wide phishing and targeted awareness campaigns.
* Heightened risk of phishing and social engineering Heightened threat monitoring and review
tactics of cyber hygiene controls. Active management of
connections to the Group network.
--------------------------------------------------------
Roll-out of virtual face-to-face sales processes in
* Sales impacts most of the Group's markets with appropriate
regulatory engagement, digital product offerings,
oversight of incremental conduct and operational
risks and ongoing monitoring of the commercial impact
to existing sales channels.
--------------------------------------------------------
Close monitoring by the Group's businesses and targeted
* Insurance risks, in particular increased lapses and management actions where necessary.
surrenders resulting from the broader economic Covid-19-related claims have not been material to date,
effects as well as increased and/or delayed morbidity but are being closely monitored.
impacts
--------------------------------------------------------
Risks to the Group's financial situation (including those from the external macroeconomic
and geopolitical environment)
The global economic and geopolitical environment may impact on the Group directly by affecting
trends in financial markets and asset values, as well as driving short-term volatility.
Risks in this category include the market risks to our investments and the credit quality
of our investment portfolio as well as liquidity risk.
Global economic and geopolitical conditions
Changes in global economic conditions can impact Prudential
directly; for example, by leading to reduced investment returns and
fund performance and liquidity, and increasing the cost of promises
(guarantees) that have been made to the Group's customers. Changes
in economic conditions, such as the abrupt and uncertain
longer-term impacts resulting from the Covid-19 crisis, can also
have an indirect impact on the Group; for example, leading to a
decrease in the propensity for people to save and buy Prudential's
products, as well as changing prevailing political attitudes
towards regulation.
The geopolitical environment can also impact the Group in a wide
range of ways, both directly and indirectly. Financial markets and
economic sentiment have been highly susceptible to geopolitical
developments in recent years, with implications for the Group's
financial situation. We have seen in recent times that geopolitical
tensions can result in the imposition of protectionist or
restrictive regulatory and trading requirements by governments and
regimes. The Covid-19 pandemic has further prompted governments to
rethink the current globalised nature of supply chains, while a
ccessibility to vaccine supplies has the potential to contribute to
an increase in geopolitical tensions. These factors may have
geopolitical and trading implications, the full extent of which may
not be clear for a while. Various governments have effected, or may
effect, the postponement of elections and other constitutional or
legislative processes in response to the pandemic, and the
longer-term impact from this increase in constitutional and
political uncertainty remains to be seen. The pandemic has had a
negative impact on all economies, with increased fiscal burdens,
higher levels of borrowing and reduced revenues. These pressures
will impact on the business operating environments, for example,
through changes to taxation, and are likely to contribute to
political pressures for governments.
Responses by the US, UK and other governments to the enactment
and application of the national security law in Hong Kong and other
constitutional or legislative changes in the territory, which
continue to develop, may impact Hong Kong's economy. Being a key
market for the Group which also hosts regional and head office
functions, this could potentially impact Prudential's sales,
operations and product distribution. For internationally active
groups which operate across impacted jurisdictions such as
Prudential, these government measures and responses add to the
complexity of legal and regulatory compliance. Compliance with
Prudential's legal or regulatory obligations in one jurisdiction
may conflict with the law or policy objectives of another
jurisdiction, or may be seen as supporting the law or policy
objectives of that jurisdiction over another, creating additional
legal, regulatory compliance and reputational risks for the Group.
All these factors can increase the operational, business
disruption, regulatory and financial market risks to the Group and
can directly impact its sales and distribution networks.
Developments in Hong Kong and the continuing impacts of the
pandemic are being closely monitored by the Group and plans have
been enacted to manage the disruption to the business, its
employees and its customers within existing business resilience
processes. Further information on the Group's business disruption
risks are included below.
Macroeconomic and geopolitical risks are considered material at
the level of the Group.
Market risks to our investments
This is the potential for reduced value of Prudential's
investments resulting from the volatility of asset prices, driven
by fluctuations in equity prices, interest rates, foreign exchange
rates and property prices. Interest rates in the Group's key
markets decreased to historically low levels in Q1 2020, with the
stance of central banks making it likely they will remain extremely
low for a while. A persistently low interest rate environment poses
challenges to both the capital position of life insurers as well as
to new business profitability and this is a scenario that the Group
is planning for.
The Group has appetite for market risk where it arises from
profit-generating insurance activities to the extent that it
remains part of a balanced portfolio of sources of income for
shareholders and is compatible with a robust solvency position.
The Group's market risks are managed and mitigated by the
following:
- The Group market risk policy;
- The Group Asset Liability Committee - a first-line risk
management advisory committee to the Group Chief Executive Officer
which supports the identification, assessment and management of key
financial risks significant to the achievement of the Group's
business objectives;
- Risk appetite statements, limits and triggers;
- Asset and liability management programmes which include
management actions such as asset allocation, bonus revisions,
repricing and the use of reinsurance where appropriate;
- Hedging derivatives, including equity options and futures,
interest rate swaps and swaptions and currency forwards;
- The monitoring and oversight of market risks through the
regular reporting of management information; and
- Regular deep dive assessments.
As noted above, in response to the economic and financial market
shocks triggered by the Covid-19 pandemic, the Group CRCO invoked
the GCIP and convened a series of CIG meetings to provide
high-cadence monitoring and management of any potential threats to
the capital or liquidity position of the Group.
-- Equity and property investment risk. In Asia, the shareholder
exposure to equity price movements results from unit-linked
products, where fee income is linked to the market value of the
funds under management. Further exposure arises from with-profits
businesses where bonuses declared are based broadly on historical
and current rates of return from the Asia business's investment
portfolios, which include equities.
In Jackson, investment risk arises from the assets backing
customer policies. Equity risk is driven by the variable annuity
business, where the assets are invested in both equities and bonds
and the main risk to the shareholder comes from providing the
guaranteed benefits offered. The exposure to this is primarily
controlled by using a derivative hedging programme, as well as
through the use of reinsurance to pass on the risk to third-party
reinsurers.
Basis risk is the inherent risk associated with imperfect
hedging and is caused by variables or characteristics that drive
differences between the value of an underlying position and the
hedge instruments used to offset changes in its value. Within
Jackson's variable annuity business, basis risk can arise from
differences between the performance of the Separate Account funds
in which policyholders choose to invest and that of the instruments
used to replicate these funds for hedging and liability modelling
purposes, which are primarily linked to the S&P 500 index. This
risk exposure is proportionate to the magnitude of liability
risk/hedge position which fluctuates with equity and interest rate
levels. While the market sell-off in Q1 2020 increased this
liability risk/hedge exposure, the subsequent rally in equity
markets over 2020 has had a corresponding opposite and positive
impact. Jackson continues to actively evaluate the costs and
benefits of ways to further mitigate basis risk.
-- Interest rate risk. This is driven by the valuation of
Prudential's assets (particularly the bonds that it invests in) and
liabilities, which are dependent on market interest rates and
expose the Group to the risk of those moving in a way that is
detrimental. Some products that Prudential offers are sensitive to
movements in interest rates. As part of the ongoing management of
this risk, a number of mitigating actions to the in-force business
have been taken, as well as repricing and restructuring new
business offerings in response to recent relatively low interest
rates. Nevertheless, some sensitivity to interest rate movements is
still retained. The impact of lower interest rates may also
manifest through reduced solvency levels in some of the Group's
businesses, impairing their ability to make remittances, as well as
reduced new business profitability.
The Group's appetite for interest rate risk is limited to where
assets and liabilities can be tightly matched and where liquid
assets or derivatives exist to cover interest rate exposures.
In Asia, our exposure to interest rate risk arises from the
guarantees of some non-unit-linked products with a savings
component, including the Hong Kong with-profits and non-profit
business. This exposure exists because of the potential for an
asset and liability mismatch, where long-dated liabilities and
guarantees are backed by short-dated assets, which cannot be
eliminated but is monitored and managed through local risk and
asset liability management committees against risk appetite aligned
with the Group's limit framework.
Interest rate risk results from the cost of guarantees in the
variable annuity and fixed index annuity business, which may
increase when interest rates fall. The level of sales of variable
annuity products with guaranteed living benefits is actively
monitored, and the risk limits we have in place help to ensure we
are comfortable with the level of interest rate and market risks
incurred as a result. Derivatives are also used to provide some
protection. Jackson is also affected by interest rate movements to
its fixed annuity book where the assets are primarily invested in
bonds and shareholder exposure comes from the mismatch between
these assets and the guaranteed rates that are offered to
policyholders. As at 1 June 2020, this risk has been substantially
transferred as part of the reinsurance transaction with Athene,
leaving only a limited exposure from residual policies including
those from the blocks acquired externally (ie from the REALIC and
John Hancock businesses).
-- Foreign exchange risk. The geographical diversity of
Prudential's businesses means that it has some exposure to the risk
of foreign exchange rate fluctuations. Some entities within the
Group that write policies, invest in assets or enter into other
transactions in local currencies or currencies not linked to the US
dollar. Although this limits the effect of exchange rate movements
on local operating results, it can lead to fluctuations in the
Group financial statements when results are reported in US dollars.
This risk is accepted within our appetite for foreign exchange
risk.
In cases where a non-US dollar denominated surplus arises in an
operation which is to be used to support Group capital, or where a
significant cash payment is due from a subsidiary to the Group,
this currency exposure may be hedged where it is believed to be
economically favourable to do so. Further, the Group generally does
not have appetite for significant direct shareholder exposure to
foreign exchange risks in currencies outside the countries in which
it operates, but it does have some appetite for this on fee income
and on equity investments within the with-profits fund. Where
foreign exchange risk arises outside appetite, currency swaps and
other derivatives are used to manage the exposure.
Liquidity risk
Prudential's liquidity risk arises from the need to have
sufficient liquid assets to meet policyholder and third-party
payments as they fall due, and the Group considers this under both
normal and stressed conditions. It includes the risk arising from
funds composed of illiquid assets and results from a mismatch
between the liquidity profile of assets and liabilities. Liquidity
risk may impact on market conditions and valuation of assets in a
more uncertain way than for other risks like interest rate or
credit risk. It may arise, for example, where external capital is
unavailable at sustainable cost, increased liquid assets are
required to be held as collateral under derivative transactions or
where redemption requests are made against Prudential's external
funds. Liquidity risk is considered material at the level of the
Group.
Prudential has no appetite for any business to have insufficient
resources to cover its outgoing cash flows, or for the Group as a
whole to not meet cash flow requirements from its debt obligations
under any plausible scenario.
The Group has significant internal sources of liquidity, which
are sufficient to meet all of our expected cash requirements for at
least 12 months from the date the financial statements are
approved, without having to resort to external sources of funding.
The Group has a total of $2.6 billion of undrawn committed
facilities that can be made use of, expiring in 2025. Access to
further liquidity is available through the debt capital markets and
an extensive commercial paper programme is in place, and Prudential
has maintained a consistent presence as an issuer in the market for
the past decade.
A number of risk management tools are used to manage and
mitigate this liquidity risk, including the following:
- The Group's liquidity risk policy;
- Risk appetite statements, limits and triggers;
- Regular assessment by the Group and business units of LCRs
which are calculated under both base case and stressed scenarios
and are reported to committees and the Board;
- The Group's Liquidity Risk Management Plan, which includes
details of the Group Liquidity Risk Framework as well as gap
analysis of liquidity risks and the adequacy of available liquidity
resources under normal and stressed conditions;
- Regular stress testing;
- Our contingency plans and identified sources of liquidity;
- The Group's ability to access the money and debt capital markets;
- Regular deep dive assessments; and
- The Group's access to external committed credit facilities.
Credit risk
Credit risk is the potential for a reduction in the value of
investments which results from the perceived level of risk of an
investment issuer being unable to meet its obligations
(defaulting). Counterparty risk is a type of credit risk and
relates to the risk of the counterparty to any contract we enter
into being unable to meet their obligations causing the Group to
suffer a loss.
Prudential invests in bonds that provide a regular, fixed amount
of interest income (fixed income assets) in order to match the
payments needed to policyholders. It also enters into reinsurance
and derivative contracts with third parties to mitigate various
types of risk, as well as holding cash deposits at certain banks.
As a result, it is exposed to credit risk and counterparty risk
across its business. The assets backing the Jackson general account
portfolio and the Asia shareholder business means credit risk is
considered a material risk for the Group's business units.
The Group has some appetite to take credit risk to the extent
that it remains part of a balanced portfolio of sources of income
for shareholders and is compatible with a robust solvency
position.
A number of risk management tools are used to manage and
mitigate this credit risk, including the following:
- A credit risk policy and dealing and controls policy;
- Risk appetite statements and portfolio-level limits that have been defined on issuers, and counterparties;
- Collateral arrangements for derivative, secured lending
reverse repurchase and reinsurance transactions which aim to
provide a high level of credit protection;
- The Group Credit Risk Committee's oversight of credit and
counterparty credit risk and sector and/or name-specific
reviews;
- Regular assessments; and
- Close monitoring or restrictions on investments that may be of concern.
The total debt securities(4) at 31 December 2020 were $125.8
billion (31 December 2019: $134.6 billion). Credit risk arises from
the debt portfolio in the Asia business comprising the shareholder,
with-profit and unit-linked funds, the value of which was $89.6
billion at 31 December 2020. The majority (69 per cent) of the
portfolio is in unit-linked and with-profits funds. The remaining
31 per cent of the debt portfolio is held to back the shareholder
business.
In the general account of the Group's US business, $36.0 billion
of debt securities are held to support shareholder liabilities. The
shareholder-backed debt portfolio of the Group's other operations
was $0.2 billion as at 31 December 2020. Further details of the
composition and quality of our debt portfolio, and exposure to
loans, can be found in the IFRS financial statements.
-- Group sovereign debt. Prudential invests in bonds issued by
national governments. This sovereign debt holding represented 28
per cent or $18.0 billion(1) of the shareholder debt portfolio of
the Group as at 31 December 2020 (31 December 2019: 22 per cent or
$18.8 billion of the shareholder debt portfolio). The particular
risks associated with holding sovereign debt are detailed further
in our disclosures on risk factors.
The exposures held by the shareholder-backed business and
with-profits funds in sovereign debt securities at 31 December 2020
are given in note C1 of the Group's IFRS financial statements.
-- Corporate debt portfolio. In the Asia shareholder business,
corporate debt exposures totalled $13.9 billion of which $12.4
billion or 89 per cent were investment grade rated. In the US
general account, corporate debt exposures amounted to $26.6 billion
following the Athene transaction, and the portfolio remains of high
credit quality with 97 per cent(5) remaining investment grade
rated.
-- Bank debt exposure and counterparty credit risk. Prudential's
exposure to banks is a key part of its core investment business, as
well as being important for the hedging and other activities
undertaken to manage its various financial risks. Given the
importance of its relationship with its banks, exposure to the
sector is considered a material risk for the Group. The exposure to
derivative counterparty and reinsurance counterparty credit risk,
which includes the recently announced reinsurance agreement with
Athene Life Re, is managed using an array of risk management tools,
including a comprehensive system of limits. Where appropriate,
Prudential reduces its exposure, buys credit protection or uses
additional collateral arrangements to manage its levels of
counterparty credit risk.
At 31 December 2020:
- 92 per cent of the Group's shareholder portfolio (excluding
all government and government-related debt) is investment grade
rated(2) . In particular, 52 per cent of the portfolio is rated(2)
A- and above (or equivalent); and
- The Group's shareholder portfolio is well diversified: no
individual sector(3) makes up more than 15 per cent of the total
portfolio (excluding the financial and sovereign sectors). The
exposures held by the shareholder-backed business and with-profits
funds in bank debt securities at 31 December 2020 are given in note
C1 of the Group's IFRS financial statements.
Risks from the nature of our business and our industry
These include the Group's non-financial risks (including operational and financial crime risk),
transformation risks from significant change activity and the insurance risks assumed by the
Group in providing its products.
Transformation risk
Prudential has a number of significant change programmes under
way to deliver the Group's strategy for growth, improve customer
experiences, strengthen its operational resilience and control
environment, and meet regulatory and industry requirements. If the
Group does not deliver these programmes to defined timelines, scope
and cost, this may negatively impact on its operational capability;
control environment; reputation; and ability to deliver its
strategy and maintain market competitiveness.
Transformation risk remains a material risk for Prudential. The
Group's transformation and change programmes inherently give rise
to design and execution risks, and may introduce new, or increase
existing, business risks and dependencies. Implementing further
strategic transformation initiatives may amplify these risks. In
order to manage these risks, the Group's Transformation Risk
Framework aims to ensure that, for both transformation and
strategic initiatives, strong programme governance is in place with
embedded risk expertise to achieve ongoing and nimble risk
oversight, and regular risk monitoring and reporting to risk
committees is delivered.
Prudential's current portfolio of transformation and significant
change programmes include the proposed demerger of Jackson from the
Group ; the expansion of the Group's digital capabilities and use
of technology, platforms and analytics; and improvement of business
efficiencies through operating model changes (covering data,
systems and people). Programmes related to regulatory/industry
change such as the transition to the Hong Kong IA's GWS Framework,
changes required to effect the discontinuation of inter-bank
offered rates (IBORs) in their current form and the implementation
of IFRS 17 are also ongoing. See below for further detail on these
regulatory changes. The Group is cognisant that the speed of
technological change in the business could outpace its ability to
anticipate all the unintended consequences that may arise. While
the adoption of innovative technologies such as artificial
intelligence has opened up new product opportunities and channels,
it also exposes the Prudential to potential information security,
operational, ethical and conduct risks which, if not managed
effectively, could result in customer detriment and reputational
damage. The Transformation Risk Framework therefore operates
alongside the Group's existing risk policies and frameworks in
these areas to ensure appropriate controls and governance are in
place to mitigate these risks.
Non-financial risks
In the course of doing business, the Group is exposed to
non-financial risks. A combination of the complexity of the Group,
its activities and the extent of transformation in progress creates
a challenging operating environment. The Group's main non-financial
risks are detailed below. These risks are considered to be material
at the level of the Group.
-- Operational risk. Prudential defines operational risk as the
risk of loss (or unintended gain or profit) arising from inadequate
or failed internal processes, personnel or systems, or from
external events. This may arise from employee error, model error,
system failures, fraud or other events which disrupt business
processes or has a detrimental impact to customers. Activities
across the scope of our business, including operational activity,
regulatory compliance, and those supporting ESG activities more
broadly can expose us to operational risks. A large volume of
complex transactions is processed by the Group across a number of
diverse products and are subject to a high number of varying legal,
regulatory and tax regimes. Prudential has no appetite for material
losses (direct or indirect) suffered as a result of failing to
develop, implement or monitor appropriate controls to manage
operational risks.
The Group's outsourcing and third-party relationships require
distinct oversight and risk management processes. A number of
important third-party relationships exist which provide the
distribution and processing of Prudential's products, both as
market counterparties and as outsourcing partners, including new IT
and technology partners. In Asia, the Group continues to expand its
strategic partnerships and renew bancassurance arrangements, and in
Africa Prudential is continuing its expansion through acquisitions.
These third-party arrangements support Prudential in providing a
high level and cost-effective service to our customers, but they
also make us reliant on the operational resilience and performance
of our outsourcing partners.
The Group's requirements for the management of material
outsourcing arrangements, which are in accordance with relevant
applicable regulations, are included through its well-established
Group-wide third-party supply policy. Third-party management is
also included and embedded in the Group-wide framework and risk
management for operational risk (see below).
The performance of the Group's core business activities places
reliance on the IT infrastructure, provided by our external IT and
technology partners, that supports day-to-day transaction
processing and administration. This IT environment must also be
secure, and an increasing cyber risk threat needs to be addressed
as the Group's digital footprint increases and the sophistication
of cyber threats continue to evolve - see separate information
security risk sub-section below. Exposure to operational and other
external events could impact operational resilience by
significantly disrupting systems, operations and services to
customers, which may result in financial loss, customer impacts and
reputational damage. Operational challenges also exist in keeping
pace with regulatory changes. This requires implementing processes
to ensure we are, and remain, compliant on an ongoing basis,
including regular monitoring and reporting.
Group-wide framework and risk management for operational
risk
The risks detailed above form key elements of the Group's
operational risk profile. A Group-wide operational risk framework
is in place to identify, measure and assess, manage and control,
monitor and report effectively on all material operational risks
across the business. The key components of the framework are:
- Application of a risk and control self-assessment (RCSA)
process, where operational risk exposures are identified and
assessed as part of a periodical cycle. The RCSA process considers
a range of internal and external factors, including an assessment
of the control environment, to determine the business's most
significant risk exposures on a prospective basis;
- An internal incident management process, which identifies,
quantifies and monitors remediation conducted through root cause
analysis and application of action plans for risk events that have
occurred across the business;
- A scenario analysis process for the quantification of extreme,
yet plausible manifestations of key operational risks across the
business on a forward-looking basis. This is carried out at least
annually and supports external and internal capital requirements as
well as informing risk oversight activity across the business;
and
- An operational risk appetite framework that articulates the
level of operational risk exposure the business is willing to
tolerate, covering all operational risk categories, and sets out
escalation processes for breaches of appetite.
Outputs from these processes and activities performed by
individual business units are monitored by the Risk function, which
provides an aggregated view of the risk profile across the business
to the Group Risk Committee and Board.
These core framework components are embedded across the Group
via the Group Operational Risk Policy and Standards documents,
which set out the key principles and minimum standards for the
management of operational risk across the Group. The Group
Operational Risk Policy, standards and operational risk appetite
framework sit alongside other risk policies and standards that
individually engage with key operational risks, including
outsourcing and third-party supply, business continuity, financial
crime, technology and data, operations processes and extent of
transformation. These policies and standards include subject matter
expert-led processes that are designed to identify, assess, manage
and control operational risks, including:
- A transformation risk framework that assesses, manages and
reports on the end-to-end transformation life cycle, project
prioritisation and the risks, interdependencies and possible
conflicts arising from a large portfolio of transformation
activities;
- Internal and external review of cyber security capability and defences;
- Regular updating and testing of elements of disaster-recovery
plans and the Critical Incident Procedure process;
- Group and business unit-level compliance oversight and testing
in respect of adherence with in-force regulations;
- Regulatory change teams in place to assist the business in
proactively adapting and complying with regulatory
developments;
- On financial crime risks (see below), screening and
transaction monitoring systems are in place and a programme of
compliance control monitoring reviews is undertaken, as well as
regular risk assessments;
- A framework is in place for emerging risk identification and
analysis in order to capture, monitor and allow us to prepare for
operational risks that may crystallise beyond the short-term
horizon;
- Corporate insurance programmes to limit the financial impact of operational risks; and
- Reviews of key operational risks and challenges within Group
and business unit business plans.
These activities are fundamental in maintaining an effective
system of internal control, and as such outputs from these also
inform core RCSA, incident management and scenario analysis
processes and reporting on operational risk. Furthermore, they also
ensure that operational risk considerations are embedded in key
business decision-making, including material business approvals and
in setting and challenging the Group's strategy.
-- Business disruption risk. Events in 2020 have shown how
material business disruption risk is to effective business
operations and delivery of business services to policyholders, and
the potential impact to our customers and the market more broadly.
The Group continuously seeks to develop greater business resilience
through planning, preparation, testing and adaption. Business
continuity management (BCM) is one of a number of activities
undertaken by the Group Security function that helps the Group to
protect its key stakeholders and its systems, and business
resilience is at the core of the Group's embedded BCM programme.
The BCM programme and framework are appropriately linked to all
business activities, and includes business impact analyses, risk
assessments, incident management plans, disaster recovery plans,
and the exercising and execution of these plans. Based on industry
standards, the BCM programme is designed to provide business
continuity that matches the Group's evolving business needs and is
appropriate to the size, complexity and nature of the Group's
operations. Prudential is also taking a broader, multi-functional
approach to building greater business resilience, working with our
external third-party providers and our service delivery teams to
improve our ability to withstand, absorb and recover from
disruption to our business services, while minimising the impact on
our customers. The Group continuously reviews and develops its
contingency plans and its ability to respond effectively when
disruptive incidents occur, such as those resulting from the
Covid-19 pandemic and, prior to this, the Hong Kong protests in
2019. Business disruption risks are closely monitored by the Group
Security function, with key operational effectiveness metrics and
updates on specific activities being reported to the Group Risk
Committee and discussed by cross-functional working groups.
-- Information security risk and data privacy. Information
security and data privacy risks remain significant considerations
for Prudential. This includes the risk of malicious attack on its
systems, network disruption and risks relating to data security,
integrity, privacy and misuse. The cyber security threat and
criminal capability in this area continues to evolve globally in
sophistication and potential significance with an increased level
of understanding of complex financial transactions which increases
the risks to the financial services industry. The systemic risk of
sophisticated but untargeted attacks remains elevated, particularly
during times of heightened geopolitical tensions and during the
current disruption caused by the Covid-19 pandemic. The scale of
the Group's IT infrastructure and network (and the services
required to monitor and manage it), stakeholder expectations and
high-profile cyber security and data misuse incidents across
industries mean that these risks are considered material at the
level of the Group.
Prudential and the insurance industry are making increasing use
of emerging technological tools and digital services, or forming
partnerships with third parties that provide these capabilities.
While this provides new opportunities, opening up markets,
improving insights and increasing scalability, it also comes with
additional risks which are managed within the Group's existing
governance and risk management processes, including additional
operational risks and increased risks around data security and
misuse. Automated digital distribution channels increase the
criticality of system and process resilience in order to deliver
uninterrupted service to customers.
Developments in data protection requirements, such as the
California Consumer Protection Act which came into force on 1
January 2020, continue to evolve worldwide. This increases
financial and reputational implications for Prudential in the event
of a breach of its (or third-party suppliers') IT systems. As well
as protecting data, stakeholders expect companies and organisations
to use personal information transparently and appropriately. New
and currently unforeseeable regulatory issues may also arise from
the increased use of emerging technology, data and digital
services. This includes the international transfer of data which,
as a global organisation, increases regulatory risks for
Prudential. Given this, both information security and data privacy
are key risks for the Group. As well as having preventative risk
management in place, it is fundamental that the Group has robust
critical recovery systems in place in the event of a successful
attack on its infrastructure, a breach of its information security
or a failure of its systems in order to retain its customer
relationships and trusted reputation.
During 2020, work to operationalise the revised organisational
structure and governance model for cyber security management has
continued. This change has resulted in a centralised Group-wide
Information Security and Privacy function, leveraging skills, tools
and resources across the business under a 'centre of excellence'
model. This global function is led by the Group Chief Information
Security Officer and falls within the scope of the responsibilities
of the Group Chief Digital Officer, working closely with the Group
Risk and Compliance Function and Group CRCO to ensure appropriate
second line oversight. Cyber risk management is also conducted
locally within business units with input from business information
security officers and with oversight from local risk committees.
The Prudential plc Board is briefed at least twice annually on
cyber security by the Group CISO and executive training is provided
to ensure that members understand the latest regulatory
expectations and the threats facing the Group and that they have
the means to enable appropriate oversight in this area.
An updated Group-wide information security policy has been
introduced that aligns to over 20 international standards such as
ISO 27001/2, MAS, and NIST Cyber Security Framework to ensure full
coverage and adoption of best practices. Local policies are also
aligned to relevant local regulation or law. Our Group-wide privacy
policy was developed in collaboration with industry experts to
support a pragmatic approach to the evolving regulatory environment
globally and ensure compliance with all applicable laws and
regulations. This approach ensures that all our stakeholders have
confidence in our approach to information security and risk
management.
These developments have allowed the Group to progress on its
cyber security strategy, which for 2020 has four key
objectives:
- Automation of key processes to provide near real-time
information on cyber security risks, allowing for increased
response times scalability of defences to threat vectors across all
security disciplines. This also enables improved, and more rapid,
decision-making;
- Using technology for the rapid enablement of the Group's
businesses, which supports the Group Digital Transformation
strategy while meeting the security requirements and
expectations;
- Optimisations for efficiency in cyber security and data
privacy management. This includes the delivery of centralised
services across the Group in areas such as vulnerability
management; and
- Continuous identification and implementation of improvements
to the people, processes or technology deployed on cyber security
and privacy management.
-- Model, user developed application (UDA) and robotics process
automation (RPA) risk. There is a risk of adverse consequences
arising from erroneous or misinterpreted tools used in core
business activities, decision making and reporting. The Group
utilises various tools to perform a range of operational functions
including the calculation of regulatory or internal capital
requirements, the valuation of assets and liabilities, determining
hedging requirements, and in acquiring new business using
artificial intelligence and digital applications. Many of these
tools are an integral part of the information and decision-making
framework of Prudential and errors or limitations in these tools,
or inappropriate usage, may lead to regulatory breaches,
inappropriate decision-making, financial loss, or reputational
damage.
The Group has no appetite for model, UDA and RPA risk arising as
a result of failing to develop, implement and monitor appropriate
risk mitigation measures.
Prudential's model, UDA and RPA risk is managed and mitigated
using the following:
- The Group's Model, UDA and RPA Risk Policy and relevant Guidelines;
- Annual risk assessment of all tools used for core business
activities, decision making and reporting;
- Maintenance of appropriate documentation for tools used;
- Implementation of controls to ensure tools are accurate and appropriately used;
- Tools are subject to rigorous and independent model validation; and
- Regular reporting to the Risk-function to support the
measurement and management of the risk.
-- Financial crime risk. As with all financial services firms,
Prudential is exposed to risks relating to money laundering (the
risk that the products or services of the Group are used by
customers or other third parties to transfer or conceal the
proceeds of crime); fraud (the risk that fraudulent claims or
transactions, or procurement of services, are made against or
through the business); sanctions compliance (the risk that the
Group undertakes business with individuals and entities on the
lists of the main sanctions regimes); and bribery and corruption
(the risk that employees or associated persons seek to influence
the behaviour of others to obtain an unfair advantage or receive
benefits from others for the same purpose).
Prudential operates in some high-risk countries where, for
example, the acceptance of cash premiums from customers may be
common practice, large-scale agency networks may be in operation
where sales are incentivised by commission and fees, where there is
a higher concentration of exposure to politically-exposed persons,
or which otherwise have higher geopolitical risk exposure.
The Group-wide policies we have in place on anti-money
laundering, fraud, sanctions and anti-bribery and corruption
reflect the values, behaviours and standards that are expected
across the business. Screening and transaction monitoring systems
are in place and a series of improvements and upgrades are being
implemented, while a programme of compliance control monitoring
reviews is being undertaken. Risk assessments are performed
annually at higher risk locations. Due diligence reviews and
assessments against Prudential's financial crime policies are
performed as part of the Group's business acquisition process. The
Group continues to undertake strategic activity to monitor and
evaluate the evolving fraud risk landscape, mitigate the likelihood
of fraud occurring and increase the rate of detection.
The Group has in place a mature confidential reporting system
through which staff and other stakeholders can report concerns
relating to potential misconduct. The process and results of this
are overseen by the Group Audit Committee.
Insurance risks
Insurance risk makes up a significant proportion of Prudential's
overall risk exposure. The profitability of its businesses depends
on a mix of factors, including levels of, and trends in, mortality
(policyholders dying), morbidity (policyholders becoming ill) and
policyholder behaviour (variability in how customers interact with
their policies, including utilisation of withdrawals, take-up of
options and guarantees and persistency, ie lapsing of policies),
and increases in the costs of claims, including the level of
medical expenses increases over and above price inflation (claim
inflation).
The principal drivers of the Group's insurance risk vary across
its business units. Across Asia, where a significant volume of
health and protection business is written, the most significant
insurance risks are persistency risk, morbidity risk and medical
inflation risk. In Jackson, policyholder behaviour risk is
particularly material, especially in the take up of options and
guarantees on variable annuity business which impacts profitability
and is influenced by market performance and the value of policy
guarantees.
The Group has appetite for retaining insurance risks in the
areas where it believes it has expertise and operational controls
to manage the risk and where it judges it to be more value-creating
to do so rather than transferring the risk, and only to the extent
that these risks remains part of a balanced portfolio of sources of
income for shareholders and is compatible with a robust solvency
position.
The impact of Covid-19 to economic activity and employment
levels across the Group's markets has the potential to elevate the
incidence of claims, lapses, or surrenders of policies, and some
policyholders may choose to defer or stop paying insurance premiums
or reduce deposits into retirement plans. In particular extended
restrictions on movement could affect product persistency in the
Group's Asia business. The pandemic may also result in elevated
claims and policy lapses or surrenders in a less direct way, and
with some delay in time before being felt by the Group, due to
factors such as policyholders deferring medical treatment during
the pandemic, or policyholders lapsing or surrendering their
policies on the expiry of grace periods for premium payments
provided by the Group's businesses. While these impacts to the
business have not been material to date, they are being closely
monitored by the Group's businesses with targeted management
actions being implemented where necessary, which includes
additional Incurred But Not Reported (IBNR) claims reserves in some
markets where deferrals in non-acute medical treatments due to
movement restrictions have been observed.
The Group's persistency assumptions reflect similarly a
combination of recent past experience for each relevant line of
business and expert judgement, especially where a lack of relevant
and credible experience data exists. Any expected change in future
persistency is also reflected in the assumptions. Persistency risk
is managed by appropriate training and sales processes (including
active customer engagement and service quality) and managed locally
post-sale through regular experience monitoring and the
identification of common characteristics of business with high
lapse rates. Where appropriate, allowance is made for the
relationship (either assumed or observed historically) between
persistency and investment returns and any additional risk is
accounted for. Modelling this dynamic policyholder behaviour is
particularly important when assessing the likely take-up rate of
options embedded within certain products. The effect of persistency
on the Group's financial results can vary but depends mostly on
product design and market conditions.
In Asia, Prudential writes significant volumes of health and
protection business and so a key assumption is the rate of medical
inflation, which is often in excess of general price inflation.
There is a risk that the expenses of medical treatment increase
more than expected, so the medical claim cost passed on to
Prudential is higher than anticipated. Medical expense inflation
risk is best mitigated by retaining the right to reprice our
products each year and by having suitable overall claims limits
within our policies, either limits per type of claim or in total
across a policy, annually and/or over the policy lifetime.
Prudential's morbidity risk is mitigated by appropriate
underwriting when policies are issued and claims are received. Our
morbidity assumptions reflect our recent experience and expectation
of future trends for each relevant line of business.
Prudential's insurance risks are managed and mitigated using the
following:
- The Group's insurance, product and underwriting risk policies;
- The risk appetite statements, limits and triggers;
- Using persistency, morbidity and longevity assumptions that
reflect recent experience and expectation of future trends, and
industry data and expert judgement where appropriate;
- Using reinsurance to mitigate mortality and morbidity risks;
- Ensuring appropriate medical underwriting when policies are
issued and appropriate claims management practices when claims are
received in order to mitigate morbidity risk;
- Maintaining the quality of sales processes, training and using
initiatives to increase customer retention in order to mitigate
persistency risk;
- Using product repricing and other claims management
initiatives in order to mitigate medical expense inflation risk;
and
- Regular deep dive assessments.
Conduct risk
Prudential's conduct of business, especially the design and
distribution of its products, is crucial in ensuring that the
Group's commitment to meeting customers' needs and expectations are
met. The Group's conduct risk framework, owned by the Group Chief
Executive, was further developed in 2020 and reflects management's
focus on customer outcomes.
Factors that may increase conduct risks can be found throughout
the product life cycle, from the complexity of the Group's
products, to its diverse distribution channels, including virtual
face-to-face sales and sales via online digital platforms. In
alignment with the Group's purpose of helping people get the most
out of life, Prudential strives towards making health and
protection coverage affordable and accessible to all. Through the
Pulse by Prudential app, there is increased focused on making
insurance more inclusive to underserved segments of society,
through bite-size low cost digital products and services. Through
this transition, Prudential must continue to ensure the quality of
its ongoing servicing of all its customers. Prudential mitigates
conduct risk with robust controls, which are identified and
assessed through the Group's conduct risk assessment framework,
regularly tested within its monitoring programmes, and overseen
within reporting to its Boards and Committees.
Management of Prudential's conduct risk is key to the Group's
strategy. Prudential's conduct risks are managed and mitigated
using the following:
- The Group's code of business conduct and conduct standards,
product and underwriting risk policies and other related
policies;
- Ensuring the quality of sales and marketing material via
robust review and sign off procedures;
- Ensuring sales practices meet commitments to customers and
regulators via the use of well-designed monitoring programmes
relevant to the type of business (insurance or asset management),
distribution channel (agency, bancassurance, or digital) and
ecosystem;
- Ensuring sales processes are designed to meet commitments to
customers and regulators and that they are operating effectively
via robust assurance programmes both pre and post
implementation;
- Maintaining the quality of sales processes and training, and
using other initiatives such as special requirements for vulnerable
customers, to improve customer outcomes;
- Proper claims management and complaint handling practices;
- Regular deep dive assessments on, and monitoring of, conduct risks; and
- Conduct Risk Assessments.
Risks related to regulatory and legal compliance
These include risks associated with prospective regulatory and legal changes and compliance
with existing regulations and laws - including their retrospective application - with which
the Group must comply with in the conduct of its business.
Prudential operates under the ever-evolving requirements set out
by diverse regulatory, legal and tax regimes which may impact
Prudential's business or the way in which it is conducted. This
covers a broad range of risks including changes in government
policy and legislation, capital control measures, and new
regulations at either national or international level. In addition
to the risks arising from regulatory change, the breadth of local
and Group-wide regulatory arrangements presents the risk that
regulatory requirements are not fully met, resulting in specific
regulator interventions or actions including retrospective
interpretation of standards by regulators which may result in
regulatory censure or significant additional costs to the business.
Furthermore, as the industry's use of emerging technological tools
and digital services increases, this is likely to lead to new and
unforeseen regulatory issues and the Group is monitoring the
regulatory developments and standards emerging around the
governance and ethical use of technology and data.
In certain jurisdictions in which Prudential operates there are
also a number of ongoing policy initiatives and regulatory
developments that are having, and will continue to have, an impact
on the way Prudential is supervised. Decisions taken by regulators,
including those related to solvency requirements, corporate or
governance structures, capital allocation, financial reporting and
risk management may have an impact on our business.
The focus of some governments toward more protectionist or
restrictive economic and trade policies could impact on the degree
and nature of regulatory changes and Prudential's competitive
position in some geographic markets. This could take effect, for
example, through increased friction in cross-border trade, capital
controls or measures favouring local enterprises such as changes to
the maximum level of non-domestic ownership by foreign companies.
These developments continue to be monitored by the Group at a
national and global level and these considerations form part of the
Group's ongoing engagement with government policy teams and
regulators.
Further information on specific areas of regulatory and
supervisory requirements and changes are included below.
-- Group-wide supervision. From 21 October 2019, Prudential's
Group-wide supervisor changed to the Hong Kong IA. As a result, the
Group currently applies the local capital summation method (LCSM)
to determine Group regulatory capital requirements (both minimum
and prescribed levels). The primary legislation was enacted in July
2020 and will come into operation on 29 March 2021. The relevant
subsidiary legislation, including the Insurance (Group Capital)
Rules, was tabled before the Legislative Council on 6 January 2021
and will also come into operation on 29 March 2021. This will be
supported by further guidance material to be released by the Hong
Kong IA. Prior to the GWS Framework becoming effective for the
Group, which is expected in the second quarter of 2021 upon
designation by the Hong Kong IA, Prudential remains subject to the
Regulatory Letter signed with the Hong Kong IA. The letter outlines
the interim supervision arrangements from October 2019 when it
became the group-wide supervisor of the Group.
-- Global regulatory developments and systemic risk regulation.
Efforts to curb systemic risk and promote financial stability are
also under way. At the international level, the Financial Stability
Board (FSB) continues to develop recommendations for the asset
management and insurance sectors, including ongoing assessment of
systemic risk measures. The International Association of Insurance
Supervisors (IAIS) has continued its focus on the following key
developments.
In November 2019 the IAIS adopted the Common Framework
(ComFrame) which establishes supervisory standards and guidance
focusing on the effective group-wide supervision of Internationally
Active Insurance Groups (IAIGs). Prudential was included in the
first register of IAIGs released by the IAIS on 1 July 2020 and was
designated an IAIG by the Hong Kong IA following an assessment
against the established criteria in ComFrame.
The IAIS has also been developing the ICS (Insurance Capital
Standard) as part of ComFrame. The implementation of ICS will be
conducted in two phases: a five-year monitoring phase followed by
an implementation phase. The Aggregation Method is one of the
alternatives being considered to the default approach undertaken
for the ICS during the monitoring period and the related proposals
are being led by the National Association of Insurance
Commissioners (NAIC). Alongside the current ICS developments, the
NAIC is also developing its Group Capital Calculation (GCC) for the
supervision of insurance groups in the US. The GCC is intended to
be a risk-based capital (RBC) aggregation methodology. In
developing the GCC, the NAIC will also consider Group capital
developments by the US Federal Reserve Board, which will inform the
US regulatory association in its construction of a US group capital
calculation.
In November 2019 the FSB endorsed a new Holistic Framework (HF),
intended for the assessment and mitigation of systemic risk in the
insurance sector, for implementation by the IAIS in 2020 and has
suspended G-SII designations until completion of a review to be
undertaken in 2022. Many of the previous G-SII measures have
already been adopted into the Insurance Core Principles (ICPs) and
ComFrame. As an IAIG, Prudential is expected to be subject to these
measures. The HF also includes a monitoring element for the
identification of a build-up of systemic risk and to enable
supervisors to take action where appropriate. As a result of the
Covid-19 pandemic, this monitoring requirement was replaced with a
Covid-19-focused exercise for 2020, with annual monitoring expected
to recommence in 2021. In November 2020 the IAIS launched a public
consultation on phase 1 of a proposed liquidity metric to be used
as an ancillary indicator in the monitoring of the build-up of
systemic risk. This followed a more general consultation on
liquidity metrics earlier in 2020. Consultations on a phase 2
liquidity metric, as well as on macroeconomic elements of the HF,
are expected to follow. The FSB published its 2020 Resolution
Report in November 2020, highlighting intra-group connectedness and
funding in resolution as key areas of attention for its work on
resolution planning. Resolution regimes will continue to be a near
term focus in the FSB's financial stability work, potentially being
a key tool in informing decisions around the reformed G-SII
designation in 2022.
In the US, various initiatives are under way to introduce
fiduciary obligations for distributors of investment products,
which may reshape the distribution of retirement products. Jackson
has introduced fee-based variable annuity products in response to
the potential introduction of such rules, and we anticipate that
the business's strong relationships with distributors, history of
product innovation and efficient operations should further mitigate
any impacts.
In Asia, regulatory regimes are developing at different speeds,
driven by a combination of global factors and local considerations.
New local capital rules and requirements could be introduced in
these and other regulatory regimes that challenge legal or
ownership structures, or current sales practices, or could be
applied to sales made prior to their introduction retrospectively,
which have a negative impact on Prudential's business and reported
results.
-- IFRS 17. In May 2017, the International Accounting Standards
Board (IASB) published its replacement standard on insurance
accounting IFRS 17, 'Insurance Contracts'. Some targeted amendments
to this standard, including to the effective date, were issued in
June 2020. IFRS 17, 'Insurance Contracts', as amended, will
introduce fundamental changes to the IFRS-based reporting of
insurance entities that prepare accounts according to IFRS from
2023. IFRS 17 is expected to, among other things, include altering
the timing of IFRS profit recognition, and the implementation of
the standard is likely to require changes to the Group's IT,
actuarial and finance systems. The Group is reviewing the complex
requirements of this standard and considering its potential
impact.
-- Inter-bank offered rate reforms. In July 2014, the Financial
Stability Board (FSB) announced widespread reforms to address the
integrity and reliability of IBORs. The discontinuation of IBORs in
their current form and their replacement with alternative risk-free
reference rates such as the Sterling Overnight Index Average
(SONIA) benchmark in the UK and the Secured Overnight Financing
Rate (SOFR) in the US could, among other things, impact the Group
through an adverse effect on the value of Prudential's assets and
liabilities which are linked to, or which reference IBORs, a
reduction in market liquidity during any period of transition and
increased legal and conduct risks to the Group arising from changes
required to documentation and its related obligations to its
stakeholders.
Risk management and mitigation of regulatory risk at Prudential
includes the following:
- Risk assessment of the Business Plan which includes consideration of current strategies;
- Close monitoring and assessment of our business environment and strategic risks;
- The consideration of risk themes in strategic decisions;
- Ongoing engagement with national regulators, government policy
teams and international standard setters; and
- Compliance oversight to ensure adherence with in-force
regulations and management of new regulatory developments.
The Group's ESG-related risks
These include environmental risks associated with climate change (including physical and transition
risks), social risks arising from diverse stakeholder commitments and expectations and governance-related
risks.
The purpose of a business and the way in which it operates in
achieving its objectives, including in relation to ESG-related
matters, are an increasingly material consideration for key
stakeholders in achieving their own objectives and aims.
ESG-related risks may directly or indirectly impact Prudential's
business and the achievement of its strategy and consequently those
of its key stakeholders, which range from customers, institutional
investors, employees and suppliers, to policymakers, regulators,
industry organisations and local communities, all of whom have
expectations, concerns and aims which may differ. Material risks
associated with key ESG themes may adversely impact the reputation
and brand of the Group, its ability to attract and retain customers
and staff, its ability to deliver on its long-term strategy and
therefore the results of its operations and long-term financial
success.
The Prudential ESG Strategic Framework, developed in 2020,
focuses on giving people greater access to good health and
financial security, responsible stewardship in managing the human
impact of climate change and building human and social capital with
its broad range of stakeholders. Prudential seeks to ESG-related
risks to its strategy and their negative implications to
stakeholder through a transparent and consistent implementation of
this strategy in its key markets and across operational,
underwriting and investment activities. The strategy is enabled by
strong internal governance, sound business practices and a
responsible investment approach, both as an asset owner and asset
manager.
(a) Environmental risks
Prudential's strategic ESG focus on stewarding the human impacts
of climate change recognises that environmental concerns, notably
those associated with climate change, may pose significant risks to
Prudential, its customers and other stakeholders. Prudential's
investment horizons are long term and it is therefore exposed to
the potential long-term impact of climate change risks, which
include the financial and non-financial impact of transition,
physical and litigation risks. A failure to understand, manage and
provide greater transparency of its exposure to these
climate-related risks may have increasing adverse implications for
Prudential and its stakeholders.
The global transition to a lower carbon economy may have an
adverse impact on investment valuations as the financial assets of
carbon-intensive companies re-price, and this could result in some
asset sectors facing significantly higher costs and a reduction in
demand for their products and services. The speed of this
transition, and the extent to which it is orderly and managed, will
be influenced by factors such as public policy, technology and
changes in market or investor sentiment. This climate-related
transition risk may adversely impact the valuation of investments
held by the Group, and the potential broader economic impact may
affect customer demand for the Group's products. Prudential's
stakeholders increasingly expect and/or rely on the Group to
support an orderly transition based on an understanding of relevant
country and company-level plans and which takes into consideration
the impact on the economies, businesses and customers in the
markets in which it operates and invests. Understanding and
appropriately reacting to transition risk requires sufficient and
reliable data on carbon exposure and transition plans for the
assets in which the Group invests. The direct physical impacts of
climate change, driven by both specific short-term climate-related
events such as natural disasters and longer-term changes to climate
and the natural environment, will increasingly influence the
longevity, mortality and morbidity risk assessments for the Group's
life insurance product underwriting and offerings and their
associated claims profiles. Climate-driven events in countries in
which Prudential or its key third parties operate could impact the
Group's operational resilience and its customers. More information
about the activities the Group is undertaking to increase its
understanding and risk management of these climate-related risks
can be found in the Prudential plc ESG Report 2020.
(b) Social risks
Social risks that could impact Prudential may arise from a
failure to consider the rights, diversity, well-being, and
interests of people and communities in which the Group or its third
parties operate. These risks are increased as Prudential operates
in multiple jurisdictions with distinct local cultures and
considerations. As an employer, the Group aims to attract, retain
and develop highly-skilled staff, which relies on having in place
responsible working practices and recognising the benefits of
diversity and promoting a culture of inclusion. The Group's
reputation extends to its supply chains, which may be exposed to
factors such as poor labour standards and abuses of human rights by
third parties. Emerging population risks associated with public
health trends (such as an increase in obesity) and demographic
changes (such as population urbanisation and ageing) may affect
customer lifestyles and therefore may impact claims against the
Group's insurance product offerings. As a provider of insurance and
investment services the Group is committed to playing a greater
role in preventing and postponing illness in order to protect its
customers as well as making health and financial security
accessible through an increased focused on digital innovation,
technologies and distribution methods for a broadening range of
products and services. As a result, Prudential has access to
customer personal data, including data related to personal health,
and an increasing ability to analyse and interpret this data
through the use of complex tools, machine learning and artificial
intelligence technologies. The Group therefore actively manages the
regulatory, ethical and reputational risks associated with actual
or perceived customer data misuse or security breaches. These risks
are explained above. The increasing digitalisation of products,
services and processes may also result in new and unforeseen
regulatory requirements and stakeholder expectations which
Prudential monitors for, as well as ensuring support for its
customers through this transformation.
(c) Governance risks
Maintaining high standards of corporate governance is crucial
for the Group and its customers, staff and employees, reducing the
risk of poor decision-making and a lack of oversight of its key
risks. Poor governance may arise where key governance committees
have insufficient independence, a lack of diversity, skills or
experience in their members, or unclear (or insufficient) oversight
responsibilities and mandates. Inadequate oversight over
remuneration increases the risk of poor senior management
behaviours. Prudential operates across multiple jurisdictions and
has a group and subsidiary governance structure which may add
further complexity to these considerations. Participation in joint
ventures or partnerships where Prudential does not have direct
overall control and the use of third party suppliers increases the
potential for reputational risks arising from poor governance.
Risk management and mitigation of ESG risks at Prudential
include the following:
- The Group's ESG Strategic Framework focused on strategic differentiators and enablers;
- The Group Code of Business Conduct and Group Governance Manual
including ESG linked policies;
- ESG risk identification including through emerging risk processes;
- Deep dives into ESG themes including climate-related risks; and
- Integrating ESG considerations into investment processes
Further information on the Group's ESG governance is included in
section 4 above, and further detail on the Group's ESG Strategic
Framework and the management of material risks associated with ESG
themes are included in the ESG Report 2020.
Notes
1 Excluding assets held to cover linked liabilities and those of
the consolidated investment funds.
2 Based on middle rating from Standard & Poor's, Moody's and
Fitch. If unavailable, NAIC and other external ratings and then
internal ratings have been used.
3 Source of segmentation: Bloomberg Sector, Bloomberg Group and
Merrill Lynch. Anything that cannot be identified from the three
sources noted is classified as other.
4 From half year 2020, to align more closely with the internal
risk management analysis, the Group altered the compilation of its
credit ratings analysis to use the middle of the Standard &
Poor's, Moody's and Fitch ratings, where available. Where ratings
are not available from these rating agencies, NAIC ratings (for the
US), local external rating agencies' ratings and lastly internal
ratings have been used. Securities with none of the ratings listed
above are classified as unrated and included under the 'below BBB-
and unrated' category. The total securities (excluding sovereign
debt) that were unrated at 31 December 2020 were $780 million (31
December 2019: $648 million). Previously, Standard & Poor's
ratings were used where available and if not, Moody's and then
Fitch were used as alternatives.
5 Excluding assets in consolidated funds financed largely by
external third-party (non-recourse) borrowings, for which the
Group's exposure is limited to the investment held by Jackson.
Including these assets, the US corporate debt portfolio is 93 per
cent investment grade.
Corporate governance
The Company has dual primary listings in London (premium
listing) and Hong Kong (Main board listing) and has therefore
adopted a governance structure based on the UK and Hong Kong
Corporate Governance Codes (the UK and HK Codes).
The Board confirms that, for the year under review, the Company
has complied with the principles and provisions of the UK Code.
The Company has also complied with the provisions of the HK Code
other than as follows: Provision B.1.2(d) of the HK Code requires
companies, on a comply or explain basis, to have a remuneration
committee which makes recommendations to a main board on the
remuneration of non-executive directors. This provision is not
compatible with principle Q of the UK Code which states that no
director should be involved in deciding their own remuneration
outcome, and provision 34 of the UK Code which recommends that the
board determines the remuneration of non-executive directors.
Prudential has chosen to adopt a practice in line with the
recommendations of the UK Code.
Following the introduction by the UK government of measures to
limit the spread of Covid-19 by prohibiting non-essential travel
and public gatherings of more than two people, and following the
issuance of the Company's 2020 Annual General Meeting (AGM) Notice,
the Company provided an update to shareholders in late April 2020
on its revised arrangements for the 2020 AGM. In light of those
restrictions and to protect the health of Prudential's shareholders
and employees, the Board decided, with regret, that shareholders,
external advisers (including the auditor) and Directors (other than
the Chairman) would not be able to attend the AGM in person (and
thus provisions A.6.7 and E1.2 of the HK Code could not be complied
with).
The Board also confirms that the financial results contained in
this document have been reviewed by the Group Audit Committee.
Board changes
Today we are announcing that Kai Nargolwala, a Non-executive
Director, will retire from the Board (including the Risk and
Remuneration Committees) at the conclusion of the Annual General
Meeting on 13 May 2021.
The Company confirms that there is no further information
required to be disclosed pursuant to Rule 13.51(2) of the Rules
Governing the Listing of Securities on the Stock Exchange of Hong
Kong Limited in respect of Kai Nargolwala retiring from the
Board.
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END
FR DKBBNNBKBQNK
(END) Dow Jones Newswires
March 03, 2021 03:30 ET (08:30 GMT)
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