TIDMMNG

RNS Number : 6452I

M&G PLC

03 April 2020

M&G plc NEWS RELEASE

3 April 2020

M&G plc

Annual Report and Accounts 2019

Following the release by M&G plc (the "Company") on 10 March 2020 of the Company's 2019 Full Year Results Announcement for the year ended 31 December 2019, the Company announces that it has today issued the 2019 Annual Report and Accounts ("Annual Financial Report").

The document is available to view on the Company's website and, in accordance with Listing Rule 9.6.1, a copy has been submitted to the National Storage Mechanism and will shortly be available for inspection at http://www.morningstar.co.uk/uk/NSM

Printed copies of the Annual Financial Report are expected to be mailed to shareholders on 15 April 2020, together with the Company's 2020 Notice of Annual General Meeting, in line with shareholder communication preferences.

Enquiries:

Alan Porter, Group General Counsel and Company Secretary - +44 (0)203 977 4064

Helen Archbold, Head of Group Secretariat - +44 (0)203 977 0057

Jonathan Miller, Head of External Communications - +44 (0)203 977 0165

Sophie Redburn, External Communications Manager - +44 (0)203 977 6300

Information required under the Disclosure & Transparency Rules ("DTR")

The following information is extracted from the M&G plc Annual Report 2019 (page references are to pages in the Annual Report) and should be read in conjunction with M&G plc's Full Year Results announcement issued on 10 March 2020. Together they constitute the material required by DTR 6.3.5(1) to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the M&G plc Annual Report 2019 in full.

Principal risks and uncertainties

 
Principal risk                    Management and mitigation           Outlook 
Business environment, environmental and market forces 
Changing customer                 We conduct an annual                We believe competition 
 preferences and                   strategic planning process,         will intensify in response 
 economic, political               which is subject to oversight       to consumer demand, 
 and environmental                 by the Risk and Resilience          technological advances, 
 conditions could                  function and the Board,             the need for economies 
 adversely impact                  and results in an approved          of scale, regulatory 
 our ability to deliver            strategy. The process               actions and new market 
 our strategy and                  considers the potential             entrants. 
 have implications                 impact of the wider business        We have launched a number 
 for the profitability             environment and, throughout         of new products, including 
 of our business                   the year, we monitor                the PruFolio range of 
 model.                            and report on the delivery          funds, to broaden our 
 The markets in which              of the plan.                        offering to customers, 
 we operate are highly             We continue to diversify            and work is ongoing 
 competitive while                 our savings and investments         to develop new propositions 
 customer needs and                business to respond to              and expand into international 
 expectations are                  developing customer needs           markets. 
 changing rapidly.                 in terms of products,               Given that our investment 
 At the same time,                 distribution and servicing,         horizons are long term, 
 economic factors                  and a significant digital           we are potentially more 
 (including GDP growth             transformation programme            exposed to the long-term 
 and savings rates)                is being undertaken to              implications of climate 
 may impact the demand             deliver a more diversified          change risks. In the 
 for our products                  distribution strategy.              shorter term, our stakeholders 
 and our ability                   Prior to and since the              increasingly require 
 to generate an appropriate        UK's decision to leave              responsible investment 
 return. In addition,              the EU, we have run a               principles to be adopted 
 the risk of a hard                Brexit programme to identify        to demonstrate that 
 Brexit at the end                 and mitigate the risks              ESG considerations (including 
 of the Brexit transition          to our business, and                climate change) are 
 period persists,                  ensure that we can continue         effectively integrated 
 potentially acting                to serve our customers              into investment decisions, 
 as a drag on growth.              and access markets. This            fiduciary and stewardship 
 Our key savings                   has included preparations           duties and corporate 
 proposition, PruFund,             for a hard Brexit and               values. 
 accounts for a high               the expansion of our                We continue to focus 
 proportion of our                 presence in Luxembourg.             on minimising the impact 
 total sales, and                  We are building our capability      of Brexit on the service 
 we are also heavily               to understand the implications      we provide to our customers. 
 reliant on the intermediated      of climate change and               We are working with 
 channel for savings               climate-related financial           regulators and industry 
 solutions sales.                  risks and opportunities.            bodies to prepare for 
 This heightens our                                                    the end of the transition 
 exposure to changing                                                  period. 
 economic conditions 
 and customer preferences. 
 Increased geopolitical 
 and environmental 
 risks and policy 
 uncertainty may 
 also impact our 
 products, investments 
 and operating model. 
 Our success depends 
 upon our capacity 
 to anticipate and 
 respond appropriately 
 to such external 
 influences. 
 Investment performance and risk 
The investment objectives         Our fund managers are               Fund liquidity will 
 and risk profiles                 accountable for the performance     be a key theme in the 
 of our funds and                  of the funds they manage            near term, with the 
 segregated mandates               and the management of               Financial Conduct Authority 
 are agreed with                   the risks to the funds.             considering changes 
 our customers. A                  An independent Investment           to rules in how funds 
 failure to deliver                Risk and Performance                invest in unquoted and 
 against these objectives          team monitors and oversees          hard-to-trade assets. 
 (including sustained              fund performance, liquidity         Ensuring our customers 
 underperformance                  and risks, reporting                understand the risks 
 of funds), maintain               to the Chief Risk and               to which they are exposed, 
 risk profiles that                Resilience Officer.                 including liquidity 
 are consistent with               Such activities feed                risk, and delivering 
 our customers' expectations,      into established oversight          strong fund performance 
 or ensure that fund               and escalation forums               will be key to our success. 
 liquidity profiles                to identify, measure 
 are appropriate                   and oversee investment 
 for expected redemptions          performance, investment 
 may all lead to                   risk and fund liquidity 
 poor customer outcomes            risks. 
 and result in fund 
 outflows. If these 
 risks materialise 
 for our larger funds 
 or a range of funds, 
 our profitability, 
 reputation and plans 
 for growth may be 
 impacted. 
Financial risks 
Credit 
M&G plc is exposed                Our Credit Risk Framework           Our credit risk exposure 
 to the risk that                  sets standards for the              is expected to reduce 
 a party to a financial            assessment, measurement             over time as our annuity 
 instrument, banking               and management of credit            business runs off. However, 
 transaction or reinsurance        risk, which are monitored           we do not expect the 
 contract causes                   by a dedicated, independent         nature of our exposure 
 a financial loss                  team. We set and regularly          to credit risk, nor 
 to us by failing                  review limits for individual        our framework and processes 
 to discharge an                   counterparties, issuers             for managing and measuring 
 obligation. In the                and ratings, and monitor            the risk will materially 
 case of invested                  exposures against these             change in the short 
 assets, this relates              limits. Our policy is               term. 
 to the risk of an                 to undertake transactions 
 issuer being unable               with counterparties and 
 to meet their obligations,        invest in instruments 
 whilst for trading                of high quality. Collateral 
 or banking activities             arrangements are in place 
 this relates to                   for derivative, secured 
 the risk that the                 lending, reverse repurchase 
 counterparty to                   and reinsurance transactions. 
 any contract the 
 business enters 
 into is unable to 
 meet their obligations. 
 Our solvency is 
 also exposed to 
 changes in the value 
 of invested credit 
 assets arising from 
 credit spread widening 
 and/or credit rating 
 downgrades. 
Market 
M&G plc's profitability           Market risk appetite                Our market risk exposure 
 and solvency are                  is set and monitored                is expected to increase, 
 sensitive to market               to limit our exposure               as the increase expected 
 fluctuations. Significant         to key market risks,                from the growth of the 
 changes in the level              and we have prescribed              PruFund business outweighs 
 or volatility of                  limits on the seed capital          the reduction in market 
 prices in equity,                 provided for new funds.             risk that occurs from 
 property or bond                  Where appropriate, and              the run-off of the Heritage 
 markets could have                subject to risk limits              book. However, the risks 
 material adverse                  and procedures, we use              are well understood, 
 effects on our revenues           derivatives for risk                and closely managed 
 and returns from                  reduction, for example,             and monitored. As such, 
 our savings and                   to hedge equities, interest         we do not expect our 
 investment management             rates and currency risks,           market risk exposure, 
 businesses, and                   and we carry out regular            net of risk reduction 
 exchange rate movements           reviews of hedging and              activity, to be materially 
 could impact fee                  investment strategies,              impacted in the short 
 and investment income             including asset-liability           term. 
 denominated in foreign            matching, informed by 
 currencies. Furthermore,          stress testing. 
 material falls in 
 interest rates may 
 increase the amount 
 that we need to 
 set aside in order 
 to be able to meet 
 our future obligations. 
Corporate liquidity 
Even as a profitable,             Risk appetite is set                We expect the nature 
 financially resilient             such that we maintain               of our exposure to liquidity 
 business, we must                 adequate liquid resources           risk, and our approach 
 carefully manage                  and our liquidity position          to managing the risk, 
 the risk that we                  is regularly monitored              will remain materially 
 have insufficient                 and stressed. Detailed              unchanged in the short 
 cash resources to                 liquidity contingency               term. 
 meet our obligations              funding plans are in 
 to policyholders                  place to manage a liquidity 
 and creditors as                  crisis. 
 they fall due. This               Liquidity, cash and collateral 
 includes ensuring                 is managed for the Group 
 each part of our                  by Prudential Capital, 
 business and M&G                  which holds liquid, high 
 plc as a whole has                grade assets and has 
 sufficient resources              access to external funding. 
 to cover outgoing 
 cash flows, under 
 a range of extreme 
 scenarios. 
Longevity 
We make assumptions               We conduct annual reviews           The pace of longevity 
 regarding the life                of longevity assumptions,           improvements among the 
 expectancy (longevity)            supported by detailed               annuitant population 
 of our customers                  assessments of actual               has slowed in recent 
 when determining                  mortality experience,               years. Additionally, 
 the amount that                   and have a team of specialists      our existing business 
 should be set aside               undertaking longevity               will continue to run 
 to pay future benefits            research.                           off, reducing our longevity 
 and expenses. Unexpected          Regular stress and scenario         exposure over the longer 
 changes in the life               testing is performed                term. However, the pace 
 expectancy of our                 to understand the size              of run-off is relatively 
 customers could                   of the longevity risk               slow and therefore we 
 have a material                   exposure.                           expect no material change 
 adverse impact on                 We have undertaken longevity        in our exposure in the 
 both profitability                risk transfer transactions,         short term. 
 and solvency. This                where attractive financial 
 risk mainly arises                terms are available from 
 from our large annuity            suitable market participants. 
 book and, although 
 we no longer write 
 new annuity business 
 in the open market, 
 the size of the 
 back-book remains 
 significant. 
Operational 
A material failure                We have put in place an             Attempts by external 
 in the processes                  Operational Risk Framework          parties to disrupt our 
 and controls supporting           in order to identify,               operations and inappropriately 
 our activities,                   assess, manage and report           access and obtain customer 
 that of our third-party           on the operational risks            data and funds will remain 
 suppliers or of                   and associated controls             an ongoing threat. 
 our technology could              across the business, including      At the same time, regulatory 
 result in poor customer           IT, data and outsourcing            scrutiny of, and reputational 
 outcomes, reputational            arrangements.                       damage from issues arising 
 damage, increased                 We have established a               from the processing of 
 costs and regulatory              programme of activity               customer data, and the 
 censure. We have                  to ensure that the Group            security and resilience 
 a high dependency                 remains resilient as a              of our technology and 
 on technology, and                result of material operational      processes, will remain 
 the loss or sustained             incidents or business               high. 
 unavailability of                 disruption.                         Like many of our peers, 
 key hardware or                   We continue to maintain,            our increasing dependency 
 software, inadequate              test and upgrade our IT             on third parties for 
 information security              environment, processes              critical activities such 
 arrangements and                  and controls to maintain            as customer engagement, 
 ineffective use                   IT performance and resilience       investment management, 
 of digital solutions              and prevent, detect and             fund administration and 
 could impact our                  recover from security               technology will increase 
 ability to operate                incidents, including cyber          the importance of managing 
 effectively. Additionally,        attacks.                            third-party risks, including 
 serious failings                  We have undertaken a programme      having contingency planning 
 in the delivery                   of work to standardise              in case of outage or 
 and/or persistent                 and enhance our oversight           failure. 
 underperformance                  and risk management of              Our operational resilience 
 of third-party supplier           third parties across the            programme has been designed 
 arrangements could                Group, including our approach       to respond to material 
 impact the delivery               to selection, contracting           business disruption issues 
 of services to our                and on-boarding, management         including those from 
 customers.                        and monitoring, and termination     third-party suppliers, 
                                   and exiting.                        IT incidents or other 
                                                                       causes (eg pandemic). 
Change 
We have a number                  Strong project governance           Our exposure to change 
 of significant transformation     is in place for all aspects         risk will remain material 
 programmes underway               of the transformation               through 2020 and beyond. 
 to deliver our strategy           programme (including                A significant volume 
 for growth, improve               oversight), with reporting          of activity and benefits 
 customer experiences              and escalation of risks             are due to be delivered 
 and outcomes, strengthen          to management and the               in the year, whilst 
 our resilience and                Board.                              further transformation 
 control environment               We employ a suite of                delivery is planned 
 and support scalable              metrics to monitor and              for subsequent years, 
 growth. A failure                 report on the delivery,             in addition to those 
 to deliver these                  costs and benefits of               change programmes that 
 programmes within                 our transformation programmes.      are always required 
 timelines, scope                  We conduct regular deep-dive        to meet ongoing business 
 and cost may impact               assessments of transformation       and regulatory developments. 
 our business model                programmes, individually 
 and ability to deliver            and collectively. 
 our strategy. 
People 
The success of our                Our HR Framework includes           Competition for top 
 operations is highly              policies for Diversity              talent is expected to 
 dependent on the                  and Inclusion, Employee             remain intense. We continue 
 ability to attract,               Relations, Talent and               to increase our investment 
 retain and develop                Resourcing, Remuneration,           in leadership and manager 
 highly qualified                  and Performance and Learning.       development in order 
 professional people               The framework is designed           to be successful and 
 with the right mix                to align staff objectives           drive the right culture, 
 of skills and behaviours          and remuneration to our             behaviour and norms 
 to support our business           business strategy and               in today's fast-changing 
 strategy and culture.             culture.                            world. 
 As a large and newly              Our management and Board            Our growth strategy 
 listed public company,            receive regular reporting           (including international 
 and as we continue                on people issues and                expansion), significant 
 to implement our                  developments, for example,          change agenda and a 
 change programme,                 the succession plans                challenging cost environment 
 our people risk                   for critical talent,                mean that people risk 
 and associated reputational       the management of industrial        is expected to remain 
 impact is heightened              relations, pay, culture             elevated, requiring 
 in a number of areas              and diversity.                      close management and 
 including our pay                 We conduct regular surveys          monitoring. 
 practices, staff                  to better understand 
 workloads and morale,             colleagues' views on 
 the conduct of individuals        our business and culture, 
 or groups of individuals          the findings of which 
 and industrial relations          drive actions to improve 
 (our own and that                 the experience of our 
 of key third-party                staff. The Risk and Resilience 
 providers).                       team has begun monitoring 
                                   and reporting a series 
                                   of indicators of behavioural 
                                   risk. 
Regulatory compliance 
We operate in highly              Our dedicated Compliance            Significant progress 
 regulated markets                 function co-ordinates               has been made in addressing 
 and interact with                 regulatory activities,              historic regulatory 
 a number of regulators            including interactions              issues, including those 
 across the globe,                 with our regulators,                identified through the 
 in an environment                 recognising the obligation          Legacy Review and the 
 where the nature                  of our regulated subsidiaries       Thematic Review of Annuity 
 and focus of regulation           to meet their distinct              Sales Practices. However, 
 and laws remain                   regulatory requirements             the legacy book will 
 fluid. There are                  and to take decisions               remain an area of considerable 
 currently a large                 independently in the                management and regulatory 
 number of national                interests of their customers.       focus. 
 and international                 The function provides               Furthermore, as we continue 
 regulatory initiatives            guidance to, and oversight          to expand our international 
 in progress, with                 of, the business in relation        presence, our engagement 
 a continuing focus                to regulatory compliance            and compliance with 
 on solvency and                   and conflicts                       regulatory regimes beyond 
 capital standards,                of interest, and carries            the United Kingdom will 
 conduct of business               out routine monitoring              become more material. 
 and systemic risks.               and deep-dive activities 
 The consequences                  to assess compliance 
 of non-compliance                 with regulations and 
 can be wide-ranging               legislation. 
 and include customer              National and global regulatory 
 detriment, reputational           developments are monitored 
 damage, fines and                 and form part of our 
 restrictions on                   engagement with government 
 operations or products.           policy teams and regulators, 
                                   which includes updates 
                                   on our responses to the 
                                   changes. 
       Reputational 
Our reputation is                 We view reputational                We could face an increasing 
 the sum of our stakeholders'      risk not as a secondary             range and severity of 
 perceptions, which                risk that arises from               reputational events 
 are shaped by the                 the crystallisation of              as the business and 
 nature of their expectations      primary risk events (eg             its social media presence 
 and our ability to                a process failure), but             evolve. A number of 
 meet them. Consequently,          instead as a standalone             factors mean that such 
 there is a risk that              risk in its own right               pressures will increase, 
 through our activities,           that can also arise from            including the greater 
 behaviours or communications      people's behaviours and             focus of customers, 
 we fail to meet stakeholder       an inability to communicate         regulators and investors 
 expectations in ways              effectively.                        on ESG issues and social 
 which adversely impact            We have developed a bespoke         media providing the 
 trust and reputation.             Reputational Risk Management        means for opinions to 
 Failure to effectively            Framework and established           be stated and shared 
 manage reputational               a dedicated Reputational            instantaneously. 
 risk could therefore              Risk team, reporting 
 have an adverse impact            directly to the Chief 
 on our revenues and               Risk and Resilience Officer. 
 cost base, which 
 could also result 
 in regulatory intervention 
 or action. 
 

A Risk management and sensitivity analysis is also set out in Note 34 of the Consolidated Financial Statements.

Statement of Directors' Responsibilities

Statement of Directors' responsibilities in respect of the Annual Report and the financial statements

The Directors are responsible for preparing the Annual Report and the Group and Parent Company financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable law and have elected to prepare the Parent Company financial statements in accordance with UK accounting standards, including FRS 101 Reduced Disclosure Framework.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company financial statements, the Directors are required to:

- select suitable accounting policies and then apply them consistently.

- make judgements and estimates that are reasonable, relevant, reliable and prudent.

- for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU;

- for the Parent Company financial statements, state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the Parent Company financial statements.

- assess the Group and Parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern.

- use the going concern basis of accounting unless they either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility statement of the Directors in respect of the annual financial report

We confirm that to the best of our knowledge:

- The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole.

- The Strategic Report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

We consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable, and provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy.

Clare Bousfield

Chief Financial Officer

9 March 2020

37 Related party transactions

The Group and its related parties comprise members of the M&G plc Group, as well as the Group's joint ventures and associates, and any entity controlled by those parties.

37.1 Transactions with Prudential plc

The following transactions were carried out with members of the Prudential plc group who were considered related parties until demerger on 21 October 2019:

 
               For the year 
                   ended 
                31 December 
            ================= 
                 2019    2018 
                 GBPm    GBPm 
==========  =========  ====== 
 Revenue           16    13 
 Expenses          63    68 
==========  =========  ==== 
 
 
                                             As at 
                                       31 December 
                                    ============== 
                                              2018 
                                              GBPm 
==================================  ============== 
 Amounts due from related parties          1,207 
 Amounts due to related parties            3,291 
==================================  ============ 
 

Details of related party capital support arrangements are included in Note 35

37.2 Transactions with the Group's joint ventures and associates

The Group received dividends of GBP192m for the year ended 31 December 2019 (2018: GBP9m) and made additional capital injections of GBP4m in the year ended 31 December 2019 (2018: GBP181m) from/to joint ventures or associates accounted for using the equity method.

In addition, the Group had balances due from joint ventures or associates accounted for using the equity method of GBP132m as at

31 December 2019 (2018: GBP163m) and balances due to joint ventures or associates accounted for using the equity method of GBPnil as at

31 December 2019 (2018: GBP29m).

Furthermore, in the normal course of business a number of investments into/divestments from investment vehicles managed by the Group were made. This includes investment vehicles which are classified as investments in associates and joint ventures measured at FVTPL.

The Group entities paid amounts for the issue of shares or units and received amounts for the cancellation of shares or units. These transactions are not considered to be material to the Group.

37.3 Compensation of key management personnel

Key management personnel for the year ended 31 December 2018 included Directors of the Company and their compensation was based on their role within the Group prior to the establishment of the Company. For the year ended 31 December 2019 the members of the Executive Committee, which was formed in 2019, are deemed to have power to influence the direction, planning and control the activities of the Group, and hence are also considered to be key management personnel.

Key management personnel of the Company may from time to time purchase insurance, asset management or annuity products marketed by the Group companies in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with other persons.

Other transactions with key management personnel are not deemed to be significant either by virtue of their size or in the context of the key management personnel's respective financial positions. All of these transactions are on terms broadly equivalent to those that prevail in arm's length transactions.

The summary of compensation of key management personnel is as follows:

 
                                       For the year 
                                           ended 
                                        31 December 
                                    ================= 
                                        2019     2018 
                                        GBPm     GBPm 
==================================  ========  ======= 
 Salaries and short-term benefits       11.1      5.1 
 Post-employment benefits                0.6      0.4 
 Share-based payments                    5.9      1.5 
==================================  ========  ======= 
 Total                                  17.6    7.0 
==================================  ========  ===== 
 

Information concerning individual Directors' emoluments, interests and transactions are provided in the single figure tables in the Remuneration Report on pages 88 and 98

LEI: 254900TWUJUQ44TQJY84

Classification: 1.1 Annual Financial Report

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

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