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Prudential plc
Annual Report 2018
Prudential helps people
de‑risk their lives and
deal with their biggest
financial concerns.
Our year in numbers
Summary financials
2018
2017 Change on an actual
exchange rate basis8
Change on a constant
exchange rate basis8
Adjusted IFRS operating profit based on longer-term investment returns1 £4,827m £4,699m
Underlying free surplus generated2
Life new business profit3
IFRS profit after tax4
Net cash remittances from business units5
IFRS shareholders’ funds
European Embedded Value (EEV) shareholders’ funds
Group Solvency II capital surplus6,7
Full-year ordinary dividend
2018
2017
Notes
1 This alternative performance measure is reconciled to IFRS
4
profit for the year in note B1.1 of the IFRS financial
statements.
2 For insurance operations, underlying free surplus generated
represents amounts maturing from the in-force business
during the period less investment in new business and
excludes non-operating items. For asset management
businesses, it equates to post-tax operating profit for the
period. Restructuring costs are presented separately from
the underlying business unit amount. Further information
is set out in note 10 of the EEV basis results.
3 New business profit on business sold in the year, calculated
in accordance with EEV principles.
£4,047m £3,640m
£3,877m £3,616m
£3,013m £2,390m
£1,732m £1,788m
£17.2bn
£16.1bn
£49.8bn £44.7bn
£17.2bn
£13.3bn
6%
14%
11%
30%
–
3%
11%
7%
26%
(3)%
7%
11%
29%
49.35pence +5%
47 pence
IFRS profit after tax reflects the combined effects of
operating results determined on the basis of longer-term
investment returns, together with short-term investment
variances, results attaching to disposal of businesses and
corporate transactions, amortisation of acquisition
accounting adjustments and the total tax charge for the year.
5 Net cash remitted by business units are included in the
Holding company cash flow, which is disclosed in detail in
note II(a) of the Additional unaudited financial information.
This comprises dividends and other transfers from
business units that are reflective of emerging earnings
and capital generation.
6 The Group shareholder capital position excludes the
contribution to Own Funds and the Solvency Capital
Requirement from ring fenced with-profit funds and
staff pension schemes in surplus. The estimated solvency
positions include management’s calculation of UK
transitional measures reflecting operating and market
conditions at each valuation date, which for both 2018
and 2017 reflects the approved regulatory position.
7 Estimated before allowing for second interim ordinary
dividend.
8 Further information on actual and constant exchange rate
basis is set out in note A1 of the IFRS financial statements.
Prudential plc Annual Report 2018
www.prudential.co.uk
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Contents
01
02
03
04
05
06
07
Group overview
Chairman’sstatement
GroupChiefExecutive’sreport
Strategic report
Ataglance
Ourbusinessmodel
Ourdistribution
Demergerupdate
Ourperformance
Ourbusinesses
ChiefFinancialOfficer’sreportonthe2018financialperformance
GroupChiefRiskOfficer’sreportoftherisksfacingourbusiness
andhowthesearemanaged
Corporateresponsibilityreview
Governance
Chairman’sintroduction
BoardofDirectors
Howweoperate
Riskmanagementandinternalcontrol
Committeereports
Statutoryandregulatorydisclosures
IndextoprincipalDirectors’reportdisclosures
Directors’ remuneration report
AnnualstatementfromtheChairmanoftheRemunerationCommittee
OurExecutiveDirectors’remunerationataglance
SummaryofthecurrentDirectors’remunerationpolicy
Annualreportonremuneration
Supplementaryinformation
Financial statements
European Embedded Value (EEV) basis results
Additional information
Indextotheadditionalunauditedfinancialinformation
Riskfactors
Glossary
Shareholderinformation
Howtocontactus
TheDirectors’ReportofPrudentialplc
fortheyearended31December2018
issetoutonpages2to7,88to130and
378to423,andincludesthesections
oftheAnnualReportreferred
tointhesepages.
Page
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142
166
171
341
377
378
407
416
420
423
www.prudential.co.uk
AnnualReport2018 Prudential plc 01
Chairman’s statement – Paul Manduca
Continuing to deliver long-term value
to our customers
I am pleased to introduce Prudential’s 2018 Annual Report. The Company
has performed well amid uncertain macro-economic conditions, continuing
to deliver value for our customers, shareholders and wider stakeholders.
We have also made good progress towards our planned demerger of
M&GPrudential from Prudential plc.
Ourperformancedependsonthequality
ofourproducts,whichmeetessential
needsforourcustomers.Wearestrongly
awareofourpurpose,whichistohelp
peoplede-risktheirlivesanddealwith
theirbiggestfinancialconcerns.Our
productsandservicesaredesignedand
deliveredwiththatpurposeclearlyinmind.
Thequalityofourfinancialperformance
during2018isareflectionofoursuccessin
providingvaluetoourcustomers.
Wehavebeenworkinghardonthe
proposeddemergerofM&GPrudential
fromtheGroup,whichweannouncedin
March2018.Weremainconfidentthatit
willresultinthecreationoftwobusinesses
withdistinctinvestmentprospects,each
offeringcompellingpropositionsto
customersandshareholders.Thepractical
stepsneededtodeliverthedemergerare
progressingasplanned.TheBoardis
focusedonensuringasmoothtransition
andthatbothbusinesseshavethe
necessarymanagementandboard
expertisetogivethemthebestpossible
starttolifeafterthedemerger.Thishas
includedtheappointmentofMikeEvans
asChairofM&GPrudential.
Performance and dividend
TheGroupdeliveredanotheryearof
sustainableoperatingandfinancial
performanceduring2018.Inviewofthis
performance,theBoardhasdecidedto
increasethefull-yearordinarydividendby
5percentto49.35pencepershare.Inline
withthis,theDirectorshaveapproved
asecondinterimordinarydividendof
33.68pencepershare.
Board changes
Awell-runcompanyisbuiltthroughgood
decision-makingandexecution,androbust
governanceisthefoundation.Duringa
timeofbothexternalandinternalchange,
theBoardmustbedecisiveandexerciseits
judgementinatimelymanner.
IthasbeenaprivilegetoserveontheBoard
ofPrudentialplcsinceOctober2010,and
tohaveservedasChairmansinceJuly
2012.TheBoardismindfulthatthe
CorporateGovernanceCodestatesthat
achairshouldnotremaininpostbeyond
nineyearsfromthedateoffirst
appointmenttotheBoard.However,to
helpprovideBoardstabilityduringthe
periodcoveringthedemergerof
M&GPrudential,Ihaveagreedtoremain
asChairmanuntilMay2021,subjectto
re-electioneachyear.
WehavealsolookedatourwiderBoard
compositionasweheadtowardsthe
demergerofM&GPrudential.AsChief
ExecutiveofM&GPrudential,JohnFoley
willnaturallystanddownfromtheBoard
aspartofthetransition.Havingtakeninto
accountthechangedshapeofthe
PrudentialGrouppost-demergerandthe
reducednumberofbusinessunits,the
BoardhasdecidedthattherolesofChief
ExecutiveofPrudentialCorporationAsia
andChairmanandChiefExecutiveof
JacksonHoldingswillnolongerbe
executivedirectorrolesontheBoard,
althoughtheywillremainontheGroup
ExecutiveCommittee.JohnFoley,Nic
NicandrouandMichaelFalconwillnotseek
re-electionandwillstepdownatthe2019
AnnualGeneralMeeting(AGM).My
thanksgotoallthreeofthemfortheir
serviceontheBoard.
LordTurnerhasalsoannouncedthathe
willretirefromtheBoardatthe2019AGM.
Iwouldliketotakethisopportunitytothank
himforhissignificantcontributiontothe
Boardoverthelastthreeandahalfyears,
asaNon-executiveDirectorandamember
oftheRiskandAuditCommittees.Iwould
alsoliketowelcomeFieldsWicker-Miurin,
whojoinedtheBoardin2018,andtothank
AnneRichardsandBarryStowe,whoboth
steppeddownduring2018,fortheir
valuablecontributionstotheBoardand
theGroup.
Our customers and wider
stakeholders
Regardlessofthenatureoftheexternal
environmentandthechangesweare
makingtotheGroup,wemaintainour
strongfocusondeliveringforour
customers.InAsia,wearedeveloping
innovativedigitalsolutions;intheUSwe
areprovidingnewretirementpropositions;
andintheUKwearemakingoursuccessful
PruFundproductsincreasinglyavailableto
peoplewhoarelookingforwaystoensure
theirfinancialsecurityinretirement,
includingthroughourdigitalplatform.
Wearealsotakingactivestepstoensure
thatwearepreparedfortheimpactofthe
UK’sexitfromtheEuropeanUnion.Atthe
sametime,weareusingourcustomers’
capitaltoinvestincompaniesand
infrastructurearoundtheworld,driving
economicgrowthandsupportingthe
communitiesinwhichweoperate.
TheBoardiscommittedtoensuringthat
theGroupcontinuestomakeapositive
socialandeconomicimpact.Inour
Corporateresponsibilityreview,beginning
onpage70ofthisAnnualReport,we
provideanoverviewofourapproachasa
responsiblecorporatecitizen.Moredetails
canbefoundinour2018Environmental,
socialandgovernancereport(ESG),which
willbepublishedinMay.
Our shareholders
TheBoard’sroleistorepresentthe
interestsofallshareholders.Aregular
andfrankdialoguewithourshareholders
ensuresweareresponsivetoourowners’
prioritiesandconcerns.Wehavean
ongoingprogrammeofshareholder
engagement,whichenablesustomake
betterdecisionsbasedonthewell
02 Prudential plc AnnualReport2018
www.prudential.co.uk
informedfeedbackwereceive.Ipersonally
findthesediscussionshugelyvaluableand
taketheideasandsuggestionsreceived
veryseriously.
Inaddition,policyandregulatorychange
canhaveasignificanteffectonbothour
operatingenvironmentandourcustomers.
Wearecommittedtodeveloping
constructiveandopenrelationshipswith
alloursupervisors,aswellasgovernments
andcivilsociety.Wearegratefulforthe
constructiveengagementofourregulators
duringthedemergerprocess,andthe
Boardiscommittedtocontinuingtowork
closelywiththem.
Our people
Prudentialhasalwaysbeenabusinessbuilt
onourpeople.Itisthecommitment,drive
andcreativityofourteamsinmarkets
aroundtheworldthathasenabledusto
delivertheseresultswhilemovingtowards
ourdemerger.Thecommitmentofour
peopletoourcustomersisinspiring,and
understandingtheirneedsandprioritiesis
afocalpointfortheBoard.Anenvironment
wherewecontinuallydevelopourtalent,
rewardgreatperformance,protectour
peopleandvalueourdifferencesiskey
todeliveringresultssuchasthese.
Wearealsodeterminedtomakesureour
peoplerepresentthediversecommunities
weserve.Ensuringthatourcolleagues
haveawiderangeofexperienceand
viewpointsisvitaltooursuccess,andthe
Boardhasmadediversityandinclusionone
ofourstrategicpriorities.Thereismuchto
dointhisarea,butIamencouragedbythe
progresswehavemade.
Iamalsoparticularlypleasedwiththeefforts
somanyofourpeoplemakeinregardto
communityinvolvement.Wehaveanactive
programmeofcommunityinvestmentinour
businessesaroundtheworld,withatotal
contributionofover£27million.Ourprojects
rangefromCha-Ching,thefinancial
educationplatformaimedatprimary-school
children,whichbeganinAsiaandisnow
presentonallfourcontinentsonwhichwe
operate,toPrudentialRideLondon,nowin
itsseventhyear,whichhasraisedmorethan
£66millionforcharity,plusourmanyother
activitiesaroundsocialinclusion,education
andlifeskillsanddisasterpreparedness.
Akeypartofourcommunitycontributionis
madebyourpeoplevolunteeringtheirtime
andskillsforthebenefitoftheircommunities,
andthismakesmeparticularlyproud.
Isupportthisactivitypersonallythrough
theChairman’sChallenge,ourflagship
internationalvolunteeringprogramme,
whichbringstogetherpeoplefromacrossthe
Grouptogetinvolvedintheircommunities.
In2018,morethan9,000ofourcolleagues
aroundtheworldtookpartintheChairman’s
Challenge,volunteeringover49,000hoursto
support33differentprojects.
Looking forward
Wehavedeliveredsolidresultswhile
makinggoodprogresstowardsasignificant
changethatwebelievewillsecurethe
long-termfutureforbothPrudentialplcand
M&GPrudential.TheBoardisconfident
thatshareholders,customersandallour
stakeholderswillbenefitfromthecreationof
thetwofocusedandinnovativecompanies
thatwillresult,andthatwewillcontinue
deliveringvaluewellintothefuture.
Paul Manduca
Chairman
Bringing Money Smarts to kids across the US
Since2017,theJacksonCharitableFoundation
hasbeenhelpingAmericanstudentstoform
betterfinancialhabitsfromtheyoungestages.
Cha-Ching Money Smart Kidsmusicvideos
andactivities,originallydevelopedby
PrudentialCorporationAsia,arenowused
inelementaryschoolsacrosstheUSwith
programmesledbyclassroomteachersand
communityvolunteers.
PartneringwithJuniorAchievementUSA(JA),
Cha-ChinghasbeenincorporatedintoJA’s
thirdgradeclassroomcurriculumwhichis
taughtinmorethan15,000classrooms
annuallybycommunityvolunteers,including
Jacksonassociates.TheFoundationhasalso
teamedupwithDiscoveryEducationtomake
Cha-Chingavailableatnocosttoteachers
andfamiliesthroughstreamingservicesand
www.cha-chingusa.org
‘Helpingchildrenlearnmoneymanagement
conceptswhileengagingtheminfunand
memorableactivitiespreparesthemfor
apromisingfuture,’saidJackiePrester,
BusinessandTechnologyTeacher,
MansfieldPublicSchools,Massachusetts.
‘WithCha-Ching,weareputtingstudents
onapathtofinancialfreedominadulthood,
wheremoneysmarthabitscanpositively
impacttheirfamilies,communitiesandlives.’
Betweenthesetwoefforts,Cha-Chinghas
reachedmorethan2.6millionstudentssince
2017andcontinuestogrowinpopularity,
teachingyoungpeoplehowto‘Earn,Save,
SpendandDonate!’
www.prudential.co.uk
AnnualReport2018 Prudential plc 03
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Group Chief Executive’s report – Mike Wells
Capturing the structural opportunities
ahead of us
I am pleased to report that we have delivered another year of positive financial
performance across the Group. Through the combination of our consistent
strategy, our diversified portfolio of businesses and our disciplined execution,
we have continued to produce high-quality earnings and deliver consistent
returns for our investors and good outcomes for all our stakeholders.
Ourpurposeistohelppeoplede-risktheir
livesanddealwiththeirbiggestfinancial
concerns.Whethertheyarestartinga
family,savingforachild’seducationor
planningforoldage,weprovidethem
withthefreedomtofacethefuturewith
confidencethroughourlong-termsavings
andprotectionproducts,retirement
incomesolutionsandassetmanagement
capabilities.Atthesametime,weinvest
ourcustomers’savingsintherealeconomy,
helpingtodrivethecycleofgrowthand
buildstrongercommunities.
Weservethispurposethroughourclear,
consistentstrategy,whichisfocusedon
long-termstructuraltrendsandgivesus
unrivalledaccesstotheworld’slargestand
fastest-growingmarkets.InAsia,our
distinguishedbrand,extensivefootprint
andbroadproductanddistributionreach
across14marketsleavesuswellpositioned
toservethehealth,protectionandsavings
needsoftherapidlygrowingand
increasinglyaffluentpopulation.Weare
alsoaleadingproviderofretirement
productsintheUS,wherethenumberof
peopleaged65andolderisexpectedto
growfrom55millionin2020to72million
by20301,andwearecontinuingto
enhanceourproductsetanddistribution
reachtocapturetheopportunityinthis
market.IntheUKandEurope,where
ageingpopulationsprovidegrowing
demandformanagedsavingssolutions,
M&GPrudentialistransformingitselfto
meetthoseneedsinnewways.InAfrica
wearebuildingapresenceinoneofthe
world’smostunder-penetratedinsurance
markets,withoperationsinfivemarkets.
Wearecontinuingtodevelopourproduct
offeringandimproveourcapabilitiesin
ordertomeettheneedsofcustomersinall
thesemarkets.Acrossourbusinesses,we
arelisteningtoourcustomersandcreating
newandbetterproductsinresponseto
theirchangingneeds.Atthesametime,we
areconstantlyupgradingourcapabilities,
including,byinvestingindigitaltechnology
thatenablesustomeetourcustomers’
needsmorequicklyandefficiently.
InMarch2018,weannouncedour
intentiontodemergeM&GPrudentialfrom
theGroup,inordertocreatetwoseparately
listedcompanieswithdistinctinvestment
characteristicsandopportunities.Afterthe
demerger,ourshareholderswillhave
sharesinPrudentialplc,whichwillbeeven
betterpositionedtocapturethestructural
opportunitiesaheadofus,and
M&GPrudential,withgreaterfreedomto
deployitscapitalwhereandhowitlikesto
meetthechangingneedsofcustomers.
Wearemakinggoodprogresstowardsthe
demerger.Onthestructuralside,wehave
establishedtheholdingcompanyfor
M&GPrudential,andwehavecompleted
thefirststagesattheHighCourtofEngland
andWalesforthetransferofpartofthe
M&GPrudentialannuitybooktoRothesay.
Ontheoperationalside,wearemoving
forwardwithseparatingthefunctionsof
thetwobusinessesandbuildingnewones
toprepareM&GPrudentialforitspost-
demergerfuture.Wehavealsoraised
£1.6billionofsubordinateddebt,with
substitutionclausestobeactivatedon
demerger,supportingthecapital
rebalancingofthetwobusinesses,and
wecontinuetoworkwithourregulators.
Our financial performance
Ourfinancialperformancein2018reflects
ourfocusonhighqualityexecutionofour
strategy,andisagainledbyourbusiness
inAsia.
Asinpreviousyears,wecommentonour
performanceinlocalcurrencyterms
(expressedonaconstantexchangerate
basis)toshowtheunderlyingbusiness
trendsinperiodsofcurrencymovement.
Newbusinessprofit2increasedby
11percent3to£3,877million(up7percent
onanactualexchangeratebasis),driven
bythefavourableimpactofourstrategic
focusofincreasinghealthandprotection
Operating profit* , 4
by business and currency mix
%2018
38%
Asia
other
17%
GBP
15%
%
US$
40%
US$
linked
28%
33%
29%
Asia
UnitedStates
M&GPrudential
*Segmentalearningsofkeybusinessesandexcludes
restructuringcostsandotherincomeandexpenditure.
salesinAsia,thebenefitofhigherUS
interestratesandaresilientperformance
intheUKandEurope.
GroupadjustedIFRSoperatingprofit
basedonlonger-terminvestmentreturns4
(‘operatingprofit’)was6percent3higher
at£4,827million(up3percentonanactual
exchangeratebasis).Operatingprofit
fromourAsialifeinsuranceandasset
managementbusinessesgrewby
14percent3,reflectingcontinuedbroad-
basedbusinessmomentumacrosstheregion
andhigh-qualitysales,withover85percent
ofoperatingincomefromourpreferred
sourcesofinsuranceincome,feeincome
andwith-profits.IntheUS,Jackson’stotal
operatingprofitwas11percent3lower,
withhigherfeeincomeoutweighedby
anincreaseinmarket-relateddeferred
acquisitioncosts(DAC)amortisation
expenseandtheanticipatedreductionin
spreadearnings.IntheUKandEurope,
M&GPrudential’stotaloperatingprofitwas
04 Prudential plc AnnualReport2018
www.prudential.co.uk
Innovation through partnership
In2017,PrudentialSingaporeannounced
acommitmenttotheMonetaryAuthority
ofSingaporetobeaGrandSponsorofthe
SingaporeFinTechFestivalfrom2018to2022,
demonstratingourdedicationtofostering
acultureofinnovation,collaborationand
co-creationamongfinancialinstitutions,
fintechcompaniesandregulatorsglobally.
TheSingaporeFinTechFestivalisthelargest
festivalofitskindintheworld,withthe2018
eventhostingmorethan250speakers,more
than400exhibitorsand16international
pavilions,anddrawingcloseto45,000
participantsfromalmost130countries.
planningservicethatusessophisticated
algorithmstopredictmoneyneedsacrossthe
customer’slifetime,andPrudentialSingapore’s
newPRUworksservice,whichprovides
arangeoflegal,HRandemployeebenefit
servicesforSMEsinoneconvenientapp.
Singaporeisakeyinnovationtest-bedfor
Prudentialasitharnessestechnologyto
makeinsurancesimplerandmoreaccessible.
Recognisingthatcustomersaredemanding
greaterspeed,seamlessness,convenience
andcontrolovertheirfinances,wehavebeen
investinginunderstandingcustomers’needs
moredeeplyandincreatingadistinctive
Prudentialcustomerexperienceacross
multipletouchpoints.Wearealsocreating
digitaltoolstohelpourmorethan4,900
financialconsultantsinSingaporework
moreefficientlyandserveourcustomers
evenbetter.
Prudential’sstandatthefestivalfeaturedsome
newtoolspoweredbypartnershipsbetween
Prudentialandlocalstart-ups.Initiativeson
showincludedaninstanthealthcheckthrough
anappthatdeterminesbodyfatusingpictures
takenonamobilephone,anewfinancial
19percenthigherthantheprioryear,which
principallyreflectsthebenefitfromupdated
longevityassumptionsandan11percent5
increaseintheshareholdertransferfromthe
with-profitsbusiness,whichincludes
a30percent5increasefromPruFund.
TheGroup’scapitalgenerationis
underpinnedbyourlargeandgrowing
in-forcebusinessportfolio,andfocuson
profitablebusinesswithfastpaybackof
capitalinvested.Overall,underlying
freesurplusgeneration6increasedby
14percent3to£4,047millionandcash
remittancestotheGroupfrombusiness
unitswere£1,732million(2017:
£1,788million).TheGroup’soverall
performancesupporteda5percent
increaseinthe2018fullyearordinary
dividendto49.35pencepershare.
TheGroupremainsrobustlycapitalised,
witha2018year-endshareholder
SolvencyIIcoverratio7,8of232percent.
Overtheperiod,IFRSshareholders’funds
increasedby7percentto£17.2billion,
reflectingprofitaftertaxof£3,013million
(2017:£2,390milliononanactual
exchangeratebasis)andothermovements
thatincludeddividendpaymentsto
shareholdersof£1,244millionand
favourableforeignexchangemovements
of£348million.EEVshareholders’funds
increasedby11percentto£49.8billion,
equivalentto1,920pencepershare2,9.
InAsia,wehavemaintainedourfocuson
value,whilstcontinuingtodevelopour
capabilitiesandreach,whichbuildscale
andenhancequality.Ourstrategic
emphasisonincreasingsalesfromhealth
andprotectionbusinesshascontributed
toa14percent3increaseinnewbusiness
profitinAsia,andalsoreflecteda2percent3
growthinAPEsales.Ourgrowthinnew
businessprofitwasbroad-based,with10
marketsdeliveringdouble-digitpercentage
increases3.Ourassetmanagement
business,EastspringInvestments,has
continuedtogrow,withoperatingprofit
up6percent3to£182million.
IntheUS,Jacksonremainsfocusedon
providingfinancialsecuritytoincreasing
numbersofindividualsapproachingorin
retirement,broadeningitsproductrange
andextendingitsdistributionnetwork,
includingnewrelationshipsannounced
withStateFarm,EnvestnetandDPL
FinancialPartners.In2018,highercharges
fordeferredacquisitioncostsamortisation,
largelyasaresultofequitymarket
movementsintheyear,contributedto
Jackson’soperatingprofitbeing11percent
lower.USnewbusinessprofitincreasedby
5percent,asfavourablemovementsin
interestratesandspreadassumptions
balancedareductioninAPEsales.
Jackson’shedgingprogrammesperformed
asexpectedintheperiodofequitymarket
weaknessexperiencedtowardstheend
of2018,contributingtoanincreased
risk-basedcapitalratioatyear-endof
458percent(2017:409percent).
IntheUKandEurope,bothourlifeandasset
managementbusinessesperformedwell
in2018,withoperatingprofit19percent
higherdrivenbyanumberofitemsthatare
notexpectedtorecuratthesamelevel
includingtheeffectfromupdatedlongevity
assumptions.OurcorePruFundproposition
continuestoperformwell,withnetinflows
of£8.5billionandthePruFundcontribution
toshareholderoperatingprofitincreasing
30percentto£55million.Newbusiness
profitincreasedby3percent,broadlyin
linewiththeincreaseinAPEsales.
M&GPrudentialassetmanagementsawnet
outflowsof£9.9billionfromexternalclients,
includingtheexpectedredemptionofa
single£6.5billionlowmargininstitutional
mandate.OverallM&GPrudentialassets
undermanagement10were£321billion
(2017:£351billion),reflectingnetoutflowsat
M&GPrudentialassetmanagementandthe
impactofthe£12billionannuityreinsurance
agreementannouncedinMarch2018.
OurfinancialKeyPerformanceIndicators
(KPIs)continuetoreflecttheoutcome
oftheGroup’sstrategy.OurAsialife
businessesaredrivenbygrowthinour
recurringpremiumbaseandfocuson
healthandprotectionbusiness.Elsewhere
wearebenefitingfromourprioritisationof
fee-generatingproductsacrossourAsia
assetmanagement,USvariableannuity
andUKandEuropeansavingsand
investmentactivities.
A clear and proven strategy
Ourclear,provenstrategyiskeytoour
long-termpositiveperformance,andis
focusedonstrongandgrowing
opportunitiesinAsia,theUS,theUKand
EuropeandournascentmarketsinAfrica.
InAsia,alargeandincreasinglywealthy
populationwithlowlevelsofinsurance
andassetmanagementcoverageis
creatingahugeandfast-growingmarket
forourhealth,protectionandsavings
products.Asiaisdrivingglobal
www.prudential.co.uk
AnnualReport2018 Prudential plc 05
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Group Chief Executive’s report – Mike Wells continued
growth,withaverageannualGDPgrowth
inourAsialifemarketsof10.4percentin
thedecadeto201711,comparedwithjust
1.9percentfortherestoftheworld11.
Furthermore,despitepotentialheadwinds,
between2017and2023Asiaisexpected
todeliver39percentoftheworld’sGDP
growth11.Thisiscreatingarapidlygrowing
middleclassintheAsiaregion,whichis
expectedtodoubleby2030toreach
3.5billionpeople12.Atthesametime,
insurancepenetrationinAsiaisjust
2.7percentofGDP13,comparedwith
7.2percentintheUK13,leavingtheregion
vastlyunder-insuredwithanestimated
mortalityprotectiongapofUS$40trillion14
andahealthandprotectiongapof
US$1.8trillion15.Similarly,mutualfund
penetrationinAsiaisonly12percent16,
comparedwith96percentintheUS16,
whilst65percentofwealthinAsiaisheld
incash17.Withprivatefinancialwealthin
theregiongrowingbyUS$5trillionper
year17,thereisconsiderablelatentdemand
foroursavingssolutions.Thesestructural
driversofgrowthareexpectedtopersist
formanyyearstocomeandcreatea
historicopportunityforus.
Wearealsodevelopingourbusinesses
inournewermarketsinAfrica,whichis
oneoftheworld’smostunderservedlife
markets,andwherethepopulationis
forecasttogrowbyabillionby20451.
Wearenowoperatinginfivecountriesin
Africa–Ghana,Kenya,Nigeria,Uganda
andZambia–whichwillincreasefurther
withtheannouncedacquisitionofa
majoritystakeinGroupBeneficial,
andweareexcitedaboutthegrowing
opportunitiesinthisdynamicregion.
Wehaveastrongandgrowingopportunity
intheUS.About40millionAmericansare
expectedtoreachretirementageoverthe
nextdecadealone.Atthesametime,
72percentofAmericanworkersdonot
haveaccesstoadefinedbenefitretirement
plan18.AstudyconductedbytheInsured
RetirementInstituteandJacksonshowed
that80percentofAmericansthinkthat
socialsecuritywillnotprovideenough
incomeforretirement19,andthesame
percentagearewillingtopaymorefor
guaranteedlifetimeincome19.Thisaligns
withourretirementincomeproducts,which
aredesignedtohelpcustomersavoid
runningoutofmoneyandprovidethemwith
areliablecushionagainstvolatilemarkets.
IntheUKandEurope,notwithstandingthe
uncertaintyrelatedtotheUK’sintended
exitfromtheEuropeanUnion,a
combinationofglobaltrendsand
competitiveadvantagesiscreatinga
powerfulopportunityforM&GPrudential.
Thoseapproachingretirementhavebeen
lookingfornewwaystoensurea
comfortablefuture,andsincepensions
freedomswereintroducedintheUKin
2015thatdemandhasbeenincreasing.At
thesametime,thetotalvalueofhousehold
cashdepositsintheEUisestimatedat
¤10trillion20,indicatingthescaleofthe
opportunityforassetmanagementinthe
region.Privateassetsundermanagement
areexpectednearlytodoublebetween
2017and202321.M&GPrudential,which
alreadyhasestablishedinternational
distribution,aclearfocusoncustomer
solutionsandabroad-ranginginvestment
capability,istransformingitselftomeet
thisopportunity.
New and better ways
to serve customers
Wearecontinuingtoimprovethewaywe
serveourcustomersineverypartofthe
worldinwhichweoperate.Weconstantly
updateourproductsandourcapabilities
toensurethatwearefulfillingourpurpose
andmaximisingtheeffectofourstrategy.
InAsia,wearecontinuingtodevelopand
expandourproducts,distribution
capabilitiesandfootprintandtomeetthe
evolvingneedsofourcustomers.During
2018,webroadenedourproductsuiteto
includetailoredpropositionsforthe
high-net-worthandcorporatesegments
anddevelopednewproductsforcustomers
withspecificneeds,suchaspre-existing
medicalconditions.Ourdistribution
capabilitieswereenhancedbynewdigital
technologyandprovideaseamlessand
differentiatedcustomerexperiencefrom
pointofsalethroughtomakingaclaim.
AtEastspring,wealsocontinuedtoroll
outBlackRock’sAladdinsystemacross
ourmarketstoimproveefficiency.We
broadenedourreachthroughnew
partnershipswithleadingbanksin
severalmarkets,includingThailandand
thePhilippines.Meanwhile,Eastspring
consolidateditspositionastheleading
retailassetmanagerinAsia(excluding
Japan)byestablishinganon-the-ground
presenceinChinaandThailand.Earlyin
2019,wealsorenewedoursuccessful
regionalstrategicalliancewithUnited
OverseasBank(UOB),oneofourmost
successfuldistributionrelationshipsin
South-eastAsia,until2034andadded
VietnamandUOB’sdigitalbanktoan
existingpartnershippresenceinSingapore,
Malaysia,ThailandandIndonesia.
Wearealsoexpandingourfootprintin
ourAfricamarkets.InAugust2018,we
extendedourlong-termpartnershipwith
Prudential,forthesecondyearinarow,
wontheinsurancecategoryofManagement
Today’s‘Britain’sMostAdmiredCompanies’
awardsinDecember2018.
StandardCharteredBank,whichhasbeen
ahugesuccessinAsia,toGhana,andin
Novemberwesignedalong-termexclusive
partnershipwithZambiaNational
CommercialBankPlc(Zanaco),Zambia’s
largestbank,toenableourmarket-leading
productstobeofferedtomorethan
amillionnewcustomersacrossthecountry.
IntheUS,wehavealonganddurabletrack
recordofdeliveringfinancialsuccessforour
consumers.Weareofferingnewproducts
forfee-basedadvisersandhavelaunched
newversionsofourfee-basedvariable
annuities.Wearechangingthenarrative
aroundretirementandlifetimeincome,
demonstratingthevaluepropositionof
ourproductstoregulators,investors,
policyholdersandinfluentialindustry
figures.InSeptember,weannouncedour
collaborationwiththeEnvestnetInsurance
Exchange,toofferourproductsonits
platform.InOctober,weannouncedakey
distributionpartnershipwithStateFarm,
furtherstrengtheningourmarket-leading
distributionfootprint.Earlyin2019,we
partneredwithDPLFinancialPartnersto
provideourprotectedlifetimesolutionsto
independentregisteredinvestmentadvisers
(RIA),providingaccesstonewopportunities
intheindependentRIAchannel.
IntheUKandEurope,asM&GPrudential
preparesforthedemerger,wehavebeen
continuingtotransformwhatwedoforour
customersandhowwedoit.OurPruFund
06 Prudential plc AnnualReport2018
www.prudential.co.uk
offeringcontinuestoimpresscustomers
withitscombinationofclarity,capital
growthandlowervolatility.Weare
investingtotransformtheexperienceof
ourfast-growingdigitalplatform,launched
in2016,toensureitoffersacomprehensive
rangeofsolutionsforcustomers.Inour
investmentmanagementbusiness,we
continuetodevelopourprivateasset
capacityandnowhave£59billionof
privateassetsundermanagement,making
usoneofthelargestprivatecreditinvestors
intheworld,andwearelookingtoexpand
ourdifferentiatedcapabilitiesacross
geographiesandassetclasses.In2018,
M&GPrudentialalsosignedanew
partnershipwithTataConsultancy
Services(TCS),agloballeaderinIT,
businessprocessanddigitalservices,to
enhanceserviceforourUKandEurope
savingsandretirementcustomers.
Throughoutourbusinesses,weare
continuingtodevelopourdigital
capabilities.InAsia,suchinitiativesare
enablingustoprovidevaluableand
innovativeservicestoourcustomers.
InAugust,weannouncedourexclusive
partnershipagreementwiththeUK-based
healthcaretechnologyandservices
companyBabylonHealth.Throughthe
deploymentofcutting-edgeartificial
intelligencetechnology,thispartnership
willoffercustomers,inupto12ofour
marketsinAsia,accesstoacomprehensive
setofdigitalhealthtools,complementing
PrudentialCorporationAsia’sexistingsuite
ofworld-classprotectionproductsand
strengtheningourdigitalfuture.Similarly,
atEastspring,ourrobo-adviceplatformin
Taiwan,inpartnershipwithAlkanza,helps
ourclientsmeettheirsavingsgoals.We
recognisethattechnologycontinually
Notes
1 UnitedNations,DepartmentofEconomicandSocialAffairs,
PopulationDivision(2017).WorldPopulationProspects:
The2017Revision.Americanpopulationreaching
retirementageoverthenextdecadeisbasedon2019
population,aged55to64.
2 Embeddedvaluereportingprovidesinvestorswitha
measureofthefutureprofitstreamsoftheGroup.TheEEV
basisresultshavebeenpreparedinaccordancewithEEV
principlesdiscussedinnote1ofEEVbasisresults.Seenote
IIIoftheAdditionalunauditedfinancialinformationfor
definitionandreconciliationtoIFRSbalances.
evolvesandweembracethepossibilities
thatlieahead.Oursponsorshipof
Singapore’sFinTechFestival,whichin2018
hadmorethan400exhibitorsfrom35
countries,showcasingtheverylatestin
digitalinnovation,istestamenttothisand
presentsallkindsofpartnership
possibilities.Indeed,ourSingapore
businesshassincepartneredwiththreeof
thepropositionsshowcasedattheevent.
Our leadership
InJuly2018,weannouncedthatAnne
RichardswasresigningasChiefExecutiveof
M&GandfromtheGroup’sBoard.Iwould
liketothankAnneforhercontributionto
theGroup’scontinuedsuccess.InOctober
2018,weannouncedthatBarryStowehad
decidedtoretireasChairmanandChief
ExecutiveOfficerofJacksonandasan
ExecutiveDirectoroftheGroup.Barry
madeanexceptionalcontributionoverhis
12yearsattheGroup,firstatourAsia
business,whichunderhisleadershipgrew
tobecomethemarket-leadingoperationit
istoday,andintheUSsince2015.Barry
hasbeensucceededatJacksonbyMichael
Falcon.FormerlyCEOofAsiaPacificforJP
MorganAssetManagement,Michaelhas
deepexpertiseandanimpressivetrack
recordintheindustryandiswellplacedto
leadthenextphaseofourdevelopmentin
NorthAmerica.Wecontinuetoinvestinthe
rightpeopleatalllevelsacrosstheGroup.
Delivering value into the future
Ourclearstrategy,disciplineandimproving
capabilitieshaveenabledustodeliver
abroad-basedfinancialperformancein2018,
basedonaclosefocusonourcorepurposeof
helpingpeopletode-risktheirlivesanddeal
withtheirbiggestfinancialconcerns.InAsia
wecontinuetoseeastrongrunwayforthe
insuranceandassetmanagementindustries,
andourpresence,scaleanddistribution
reachpositionuswelltoparticipatestrongly
inthisgrowth.IntheUS,wecontinueto
provideAmericanswiththeretirement
strategiestheyneed,andweareconfident
thatthiswillenableustocaptureadditional
growthintothefuture.IntheUKandEurope,
wewillcontinuetoimproveservicelevelsand
launchnewofferings,andwearemaking
goodprogresstowardstheintended
demergerofM&GPrudentialfromtheGroup,
whichwillresultintwodistinctbusinesses
thatareabletofocusmoreclearlyonthe
opportunitiesopentous.Wehavean
establishedtrackrecordofdelivering
importantbenefitstoourcustomersand
profitablegrowthtoourshareholders.
Iamconfidentthat,postdemergeras
independentcompanies,bothPrudentialplc
andM&GPrudentialwillbepositionedto
continuetodowellinthefuture.
Mike Wells
Group Chief Executive
7 TheGroupshareholdercapitalpositionexcludesthe
contributiontoOwnFundsandtheSolvencyCapital
Requirementfromringfencedwith-profitfundsandstaff
pensionschemesinsurplus.Theestimatedsolvency
positionsincludemanagement’scalculationofUK
transitionalmeasuresreflectingoperatingandmarket
conditionsateachvaluationdate,whichforboth2018
and2017reflectstheapprovedregulatoryposition.
8 Estimatedbeforeallowingforsecondinterimordinary
14SwissReMortalityProtectionGapAsiaPacific2018.
RepresentsPrudentialCorporationAsia’slifebusiness
footprint,andusepercapitaincomeofworkingpopulation
asthebaseunittocalculatethesizeofthegap.
15 SwissReAsia’shealthprotectiongap:insightsforbuilding
greaterresilience.October2018.RepresentsChina,
India,Japan,Korea,Indonesia,Malaysia,Taiwan,Vietnam,
thePhilippines,Singapore,HongKongandThailand.
16InvestmentCompanyInstitute,industryassociations
dividend.
andLipper.
9 SeenoteIIIoftheAdditionalunauditedfinancialinformation
17 BCGGlobalWealth2017.NavigatingtheNewClient
3 Year-on-yearpercentageincreasesarestatedonaconstant
fordefinitionandreconciliationtoIFRSbalances.
Landscape.
exchangeratebasisunlessotherwisestated.
4 AdjustedIFRSoperatingprofitbasedonlonger-term
investmentreturnsismanagement’sprimarymeasureof
profitabilityandprovidesanunderlyingoperatingresult
basedonlonger-terminvestmentreturnsandexcludes
non-operatingitems.Furtherinformationonitsdefinition
andreconciliationtoprofitfortheperiodissetoutinnote
B1oftheIFRSfinancialstatements.
5 Growthrateonanactualexchangeratebasis.
6 Forinsuranceoperations,underlyingfreesurplusgenerated
representsamountsmaturingfromthein-forcebusiness
duringtheperiodlessinvestmentinnewbusinessand
excludesnon-operatingitems.Forassetmanagement
businessesitequatestopost-taxoperatingprofitforthe
period.Restructuringcostsarepresentedseparatelyfrom
theunderlyingbusinessunitamount.Furtherinformation
issetoutinnote10oftheEEVbasisresults.
10RepresentsM&GPrudentialassetmanagementexternal
fundsundermanagementandinternalfundsincluded
ontheM&GPrudentiallong-terminsurancebusiness
balancesheet.
11 IMF.2017GDPatJanuary2019currentprices.
AsiarepresentsPrudentialCorporationAsia’slife
businessfootprint.
12 BrookingsInstitution.GlobalEconomy&Development
WorkingPaper100.February2017.‘Asia’represents
AsiaPacific.
13 Insurancepenetration–SwissReSigmaNo3/2018.
Insurancepenetrationcalculatedaspremiumsasa
percentageofGDP.Asiapenetrationcalculatedona
weightedpopulationbasis.
18U.S.BureauofLaborStatistics,NationalCompensation.
Survey:EmployeeBenefitsintheUnitedStates,March
2017.Workersdefinedasthoseemployedinprivate
industryandstateandlocalgovernment.
19TheLanguageofRetirement2017–studyconducted
onbehalfoftheInsuredRetirementInstituteandJackson.
20Eurostat:Householddepositdata.
21PreqinFutureofAlternativesReport,October2018.
www.prudential.co.uk
AnnualReport2018 Prudential plc 07
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 08 Prudential plc Annual Report 2018
www.prudential.co.uk
02
Strategic report
At a glance
Our business model
Our distribution
Demerger update
Our performance
Our businesses
Asia
United States
M&GPrudential
Chief Financial Officer’s report on the 2018 financial performance
Group Chief Risk Officer’s report of the risks facing our business
and how these are managed
Corporate responsibility review
Page
10
12
14
15
16
18
18
26
32
38
52
70
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Annual Report 2018 Prudential plc 09
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information At a glance
Group at a glance
We meet the long-term savings and protection needs of a growing middle-class
and ageing population. We focus on markets where the need for our products is strong
and growing and we use our capabilities, footprint and scale to meet that need.
In 2018 the Group announced its intention to demerge its UK and Europe business,
M&GPrudential, from Prudential plc, which will result in two separately listed
companies, with different investment characteristics and opportunities.
We have always been clear about the importance of creating optionality in our
corporate structure, and decided to exercise one of those options in the interests
of both the business and all of our stakeholders.
Our purpose
Prudential helps people de-risk their lives and deal with their biggest financial concerns.
Our strategy
Our strategy is to capture the long-term
structural opportunities within our
markets, operating with discipline and
enhancing capabilities through
innovation to deliver high-quality
resilient outcomes for our customers.
We aim to do this by:
— Serving the protection and investment
needs of the growing middle class in Asia;
— Providing asset accumulation and
retirement income products to US retirees;
— Offering products to new customers in
Africa, one of the fastest-growing regions
in the world; and
— Meeting the savings and retirement
needs of an ageing UK and continental
European population.
We aim to generate attractive returns
enabling us to provide financial security
to our customers and deliver sustainable
growth for our shareholders. Following
rigorous review, we believe that this
long-term strategy is best served through
the intended demerger of M&GPrudential.
The demerger will enable both businesses
to continue to deliver on our customer and
stakeholder commitments, but without
the requirement to compete for resources
and capital internally.
10 Prudential plc Annual Report 2018
www.prudential.co.uk
total funds under management
£657 billion
26 million
customers worldwide
Asia
Leading pan-regional franchise
£151bn assets under management
94% of APE sales are regular premium
£1.2bn underlying free surplus generation
United States
Premier retirement income player
US$163bn separate account assets
US$2.2bn variable annuity net inflows
£2.4bn fee income
Africa
M&GPrudential
Long-term conviction-led investment approach
£43bn total PruFund funds under management
Operating in 29 markets
£321bn total M&GPrudential funds under management1
Structural growth over the last two decades has allowed our
non-European business to reach the scale where it has the
ability to self-fund its own long-term goals through disciplined
capital allocation. Prudential plc has a diversified, but highly
complementary, portfolio of businesses with access to the
world’s largest and fastest-growing markets.
Prudential Corporation Asia has leading insurance and asset
management operations across 14 markets which serve the families
of the region’s high potential economies. We have been operating in
Asia for over 90 years and have built high-performing businesses
with multichannel distribution, a product portfolio centred on
regular savings and protection, award-winning customer service
and a widely recognised brand.
Eastspring Investments is a leading asset manager in Asia and
provides investment solutions across a broad range of asset classes.
Jackson provides retirement savings and income strategies aimed
at the large number of people approaching retirement in the
United States. Jackson’s pursuit of excellence in product
innovation and distinctive distribution capabilities has helped us
forge a solid reputation for meeting the needs of customers.
Jackson’s variable annuities offer a distinct retirement solution
designed to provide a variety of investment choices to help
customers pursue their financial goals.
We entered Africa in 2014, to offer products to new customers in
one of the fastest-growing regions in the world. We aim to provide
products that help our customers to live longer and healthier lives,
and save to improve future choices for them and their families.
The formation of M&GPrudential, the joining of two well
recognised brands with a strong track record, has created a
leading savings and investment business, ideally positioned
to target growing customer demand for financial solutions
in the UK and Europe.
With over 6 million clients across 29 markets and £321 billion1 in
assets under management, M&GPrudential’s vision is a business
built for the customer which is simple, efficient, digitally enabled,
capital-light, fast-growing and, above all, focused on delivery.
The combined business benefits from two strong complementary
brands, a world-class investment capability, international
distribution and a robust capital position.
1 Represents M&GPrudential asset management external funds under management and
internal funds included on the M&GPrudential long-term insurance balance sheet.
www.prudential.co.uk
Annual Report 2018 Prudential plc 11
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Our business model
Evolving to serve the future customer
Our trusted brands and strong distribution channels enable us
to understand the growing needs of our customers for long-term
savings and financial security, and to design innovative products
that meet those needs. By helping to build better lives and stronger
communities and to fuel the growth cycle, we create long-term
value for both our customers and our shareholders.
Capturing structural opportunity
... through enhanced capabilities
Serving
customer
needs
Asia
— Low life insurance and mutual fund penetration
— Significant health and protection gap
— Growing working age population
— Increasing consumer affluence
Our businesses page 18
United States
— Increase in retirement age population
— Large and growing retirement asset pools
— Growing demand for guaranteed income
Our businesses page 26
M&GPrudential
— Ageing population
— Large and growing retirement asset pools
— Growing demand for saving and income
Our businesses page 32
Customer service
Customers are at the heart of our strategy. We proactively listen to
both new and existing customers to understand and respond to their
changing needs. This allows us to propose financial solutions
customised for different groups, whether that is young and
middle-aged people or those in the retirement phase of life. We
are expanding our digital infrastructure to enhance our customer
experience.
Solutions
We offer solutions for customers as they face the biggest financial
challenges of their lives. We consistently develop our product
portfolio, designing it around our customers’ needs and providing
them with peace of mind, whether that be in relation to saving
for retirement or insuring against risks of illness, death or critical
life events.
Distribution
Distribution plays a key role in our ability to reach, attract and
retain customers in different parts of the world. Building out and
diversifying our distribution capabilities, including adding digital
tools, helps ensure that we fully capitalise on the opportunities
available to us in each of our markets.
Investment for growth
We focus on strategic investment in long-term opportunities and
capabilities to drive future growth and value for our stakeholders.
We invest to improve relationships with our customers and
distributors, to create innovative products, to improve our
operating platforms and to capture new opportunities and build
new relationships. We invest in digital capabilities to empower
our distributors and improve customer service.
Risk management
We generate value by selectively taking exposures to risks that are
adequately rewarded and that can be appropriately quantified and
managed. Balance sheet strength and proactive risk management
enable us to make good our promises to our customers and create
long-term value for our stakeholders.
Group Chief Risk Officer’s report of the risks facing our business
and how these are managed page 52
12 Prudential plc Annual Report 2018
www.prudential.co.uk
... creating high-quality outcomes
... for our stakeholders.
We create financial benefits for our investors and deliver
economic and social benefits for our customers, our
employees and the societies in which we operate.
Customers
Providing financial security and wealth creation.
Read more on pages 18 to 37
Investors
Growing dividends and share price performance enhance
shareholder value.
Read more on pages 16 to 86
Employees
Providing an environment with equal opportunities, career
potential and rewards, enabling us to attract and retain
high-quality individuals to deliver our strategy.
Read more on pages 78 to 80
Communities
Supporting communities where we operate, through
investment in business and infrastructure, tax revenues
and community support activities.
Read more on pages 80 to 85
Growth
£4,827m
Operating profit1 +6%2 on 2017
£3,877m
New business profit +11%2 on 2017
£7,563m
EEV operating profit +19%2 on 2017
Cash
£4,047m
Free surplus generation +14%2 on 2017
£1,732m
Remittances -3%3 on 2017
Capital
£17.2bn
Solvency II surplus +29%3 on 2017
232%
Solvency II cover ratio +30pp on 2017
The Group has a number of key performance indicators internally
to measure financial performance. Read more on page 16
Notes
1 Adjusted IFRS operating profit based on longer-term investment returns.
2 Growth rates on a constant exchange rate basis.
3 Growth rates on an actual exchange rate basis.
www.prudential.co.uk
Annual Report 2018 Prudential plc 13
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Our distribution
Our global distribution strength
We respond to the needs of our global customers through
diverse and robust distribution channels in all our markets.
Jackson
Strength and flexibility of our distribution
network gives us a distinctive advantage
Largest and most productive VA wholesale distribution
force in the US1
+700 broker-dealers’ selling agreements covering +230,000
(74%) of total US advisers2
#1 selling variable annuity contract3 in the independent
channel since 2003
4 million customers
Prudential Corporation Asia
Pan-regional multi-channel
network
+600,000 agents
Multiple established bank partnerships
Access to +14,000 bank outlets
Eastspring Investments are present in 11 Asia markets and
distribution offices in US and Europe
+15 million life customers
Prudential Africa
M&GPrudential
Establishing network with
market-leading initiatives
+4,000 agents
Diversified distribution model underpinned
by two complementary brands
£321 billion total assets under management4
6 exclusive bank partners
Operating in 29 markets around the world
Access to over 600 bank branches
+6 million customers
2 mobile telecommunications partners
+300 Prudential Financial Planning partners
+500,000 customers
Notes
1
Independent research and Market Metrics, a Strategic Insight Business: U.S. Advisor Metrics
2018, as of 30 September 2018.
2 The Cerulli Report Adviser Metrics 2018 and Jackson research.
3 ©2019 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to
Morningstar and/or its content providers; (2) is not warranted to be accurate, complete, or timely.
Neither Morningstar nor its content providers are responsible for any damages or losses arising
from any use of this information. Past performance is no guarantee of future results. Morningstar
www.AnnuityIntel.com. Total Sales by Company & by Contract 3Q YTD 2018. Jackson ranks #1
out of 725 VA contracts with reported sales in the Independent Channel in 3Q YTD 2018.
4 Represents M&GPrudential asset management external funds under management and
internal funds included on the M&GPrudential long-term insurance business balance sheet.
14 Prudential plc Annual Report 2018
www.prudential.co.uk
Demerger update
Creating two leading companies
We are aiming to create two separately listed companies with distinct
investment prospects, capital allocation priorities and customer needs.
M&GPrudential, one of the leading savings and investments businesses
in the UK and Europe, will be an independent, capital-efficient business,
headquartered and premium-listed in London.
Prudential plc will continue to combine the exciting growth potential of
our Asia, US and Africa businesses, as a leading international insurance and
asset management group. We will also remain headquartered and premium
listed in London.
Prudential plc
M&GPrudential
Prudential
Corporation
Asia
Prudential
Africa
Jackson
Prudential UK & Europe
M&G Investments
Chief Executive Officer: Mike Wells
Headquarters: London
Premium listing: London Stock Exchange
Other listings: Hong Kong (Primary), Singapore, New York
Chief Executive Officer: John Foley
Headquarters: London
Premium listing (intended): London Stock Exchange
Frequently asked questions
What is the rationale for the
demerger?
Following separation, M&GPrudential
will have more control over its business
strategy and capital allocation. This will
enable it to play a greater role in developing
the savings and retirement markets in
the UK and Europe through two of the
financial sector’s most trusted brands,
M&G and Prudential, while Prudential plc
will be able to focus on the attractive
returns and growth potential of its
market-leading businesses in Asia and
the US.
Will the businesses stay in the UK?
Both businesses will be headquartered in
the UK, and premium-listed on the London
Stock Exchange. We expect both businesses
will meet the criteria for inclusion in the FTSE
100 index.
How are we progressing?
In preparation for the demerger, we have
already completed a number of key steps,
including:
— We announced that the Hong Kong
Insurance Authority would be the
Group-wide supervisor after the
demerger of M&GPrudential;
— We raised £1.6 billion of debt in
September 2018. This debt issuance
contained a substitution clause, allowing
us to substitute M&GPrudential for
Prudential plc as the issuer;
— We established a new holding company
for M&GPrudential and completed the
transfer of the legal ownership of The
Prudential Assurance Company Limited
and M&G Group Limited to this company;
— We announced the independent Chair
of M&GPrudential in October 2018; and
— We completed the transfer of the legal
ownership of our Hong Kong insurance
subsidiaries from The Prudential
Assurance Company Limited
(M&GPrudential’s UK-regulated
insurance entity) to Prudential
Corporation Asia Limited.
When will it happen?
We are making good progress on
the workstreams to enable the legal,
operational and financial separation of
the businesses and we are committed
to delivery with best execution. We will
provide more details on timing when
it is appropriate to do so.
What will happen to your shares?
Shareholders will retain their shares in
Prudential plc and, if the demerger
completes, receive shares in a separately
listed M&GPrudential.
www.prudential.co.uk
Annual Report 2018 Prudential plc 15
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Our performance
Measuring our performance
To create sustainable economic value for our shareholders
we focus on delivering growth and cash while maintaining
appropriate capital.
Profit, cash and capital1
Prudential takes a balanced approach to performance management across IFRS, EEV
and cash. We aim to demonstrate how we generate profit under different accounting
bases, reflecting the returns we generate on capital invested, and the cash generation
of our business.
Adjusted IFRS operating profit based on longer-term investment returns2 £m
The Group’s business involves entering into
long-term contracts with customers, and
hence the Group manages its associated
assets and liabilities over a longer-term time
horizon. This enables the Group to manage
a degree of short-term market volatility.
Therefore operating profit based on
longer-term investment returns gives
a more relevant measure of the performance
of the business. Other items are excluded
from operating profit to allow more relevant
period-on-period comparisons of the trading
operations of the Group, eg the effects of
corporate transactions are excluded.
Group operating profit in 2018 is 6 per cent
higher on a constant exchange rate basis
(3 per cent on an actual exchange rate
basis), compared with 2017. Operating
profit from Asia life and asset management
operations was up 14 per cent on a constant
exchange rate basis (10 per cent on an actual
exchange rate basis), and M&GPrudential
was up 19 per cent. In the US, operating
profit was down 11 per cent on a constant
exchange rate basis (14 per cent on an
actual exchange rate basis) reflecting higher
market-related deferred acquisition
costs amortisation.
EEV new business profit3 £m
Life insurance products are, by their
nature, long term and generate profit
over a number of years. Embedded value
reporting provides investors with a measure
of the future profit streams of the Group.
EEV new business profit reflects the value
of future profit streams which are not
fully captured in the year of sale under
IFRS reporting.
EEV new business profit in 2018 increased
by 11 per cent on a constant exchange
rate basis (7 per cent on an actual exchange
rate basis) compared with 2017, driven by
increases in health and protection business
and pricing actions in Asia, higher interest
rates and spread assumption changes in
the US and M&GPrudential PruFund based
Retirement Account sales.
1 %
C A G R + 1
4,699
4,827
3,969
4,256
3,154
2014
2015
2016
2017
2018
8 %
C A G R + 1
3,616
3,877
3,088
2,492
2,021
2014
2015
2016
2017
2018
EEV operating profit3 £m
EEV operating profit is provided as an
additional measure of profitability. This
measure includes EEV new business profit,
the change in the value of the Group’s
long-term in-force business, and profit
from our asset management and other
businesses. As with IFRS, EEV operating
profit reflects the underlying results based
on longer-term investment returns.
Group EEV operating profit in 2018
increased by 19 per cent on a constant
exchange rate basis (15 per cent on an
actual exchange rate basis), compared
with 2017, driven by higher new business
profit and higher contributions from the
in-force business.
6 %
C A G R + 1
7,563
6,598
5,497
4,840
4,108
2014
2015
2016
2017
2018
16 Prudential plc Annual Report 2018
www.prudential.co.uk
Group free surplus generation4 £m
Free surplus generation is used to measure
the internal cash generation of our business
units. For insurance operations, it represents
amounts maturing from the in-force business
during the period, less investment in new
business and excludes other non-operating
items. For asset management, it equates to
post-tax operating profit for the year.
Overall, underlying free surplus generation
increased by 14 per cent on a constant
exchange rate basis (11 per cent on an
Business unit remittances5 £m
Remittances measure the cash transferred
from business units to the Group. Cash flows
across the Group reflect our aim of achieving
a balance between ensuring sufficient net
remittances from business units to cover the
dividend (after corporate costs) and the use
of cash for reinvestment in profitable
opportunities available to the Group.
actual exchange rate basis), reflecting good
performance in each of our businesses with
Asia up 14 per cent on a constant exchange
rate basis (9 per cent on an actual exchange
rate basis), the US up 11 per cent on
a constant exchange rate basis (7 per cent
on an actual exchange rate basis) and
M&GPrudential up 21 per cent, including
the positive impact of longevity assumption
changes and an insurance recovery on
annuity review costs.
2 %
C A G R + 1
3,566
3,640
4,047
3,025
2,553
2014
2015
2016
2017
2018
Total remittances to the Group decreased
by 3 per cent in 2018, compared with
2017. Remittances from Asia, increased,
demonstrating the quality and scale of its
growth. Remittances from the US were
£342 million. Remittances from
M&GPrudential increased by 2 per cent.
Group Solvency II capital surplus6,7 £bn
Prudential is subject to the risk-sensitive
solvency framework required under
European Solvency II Directives
(Solvency II) as implemented by the
Prudential Regulation Authority in the
UK. The Solvency II surplus represents the
aggregated capital (own funds) held by the
Group, less solvency capital requirements.
The high quality and recurring nature of
our operating capital generation, beneficial
effects of debt issued and disciplined
approach to managing balance sheet
risks are reflected in the solvency capital
surplus, which increased to £17.2 billion
at 31 December 2018.
1,625
1,482
1,718
1,788
1,732
2014
2015
2016
2017
2018
17.2
12.5
13.3
9.7
2015
2016
2017
2018
Notes
1 The comparative results shown above have been prepared
using an actual exchange rate (AER) basis except where
otherwise stated. Comparative results on a constant
exchange rate (CER) basis are also shown in financial tables
in the Chief Financial Officer’s report on our 2018 financial
performance. CAGR is compound annual growth rate.
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. See note III of Additional unaudited
financial information for definition and reconciliation to
IFRS balances.
3 The EEV basis results have been prepared in accordance
with EEV principles discussed in note 1 of the EEV basis
results. See note III of Additional unaudited financial
information for definition and reconciliation to
IFRS balances.
4 For insurance operations, underlying free surplus generated
represents amounts maturing from the in-force business
during the period less investment in new business and
excludes non-operating items. For asset management
businesses, it equates to post-tax operating profit for the
period. Restructuring costs are presented separately from
the underlying business unit amount. Further information
is set out in note 10 of the EEV basis results.
5 Cash remitted to the Group forms part of the net cash flows
of the holding company. A full holding company cash flow
is set out in note II (a) of the Additional unaudited IFRS
financial information. This differs from the IFRS
Consolidated Statement of Cash Flows which includes all
cash flows relating to both policyholders’ and shareholders’
funds. The holding company cash flow is therefore a more
meaningful indicator of the Group’s central liquidity.
6 The Group shareholder capital position excludes the
contribution to Own Funds and the Solvency Capital
Requirement from ring fenced with-profit funds and
staff pension schemes in surplus. The estimated solvency
positions include management’s calculation of UK
transitional measures reflecting operating and market
conditions at each valuation date, which for both 2018
and 2017 reflects the approved regulatory position.
7 Estimated before allowing for second interim ordinary
dividend.
www.prudential.co.uk
Annual Report 2018 Prudential plc 17
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Asia
2018 performance highlights
— Continued performance in key metrics: new business profit up 14 per cent1, operating
profit up 14 per cent1 and underlying free surplus generation up 14 per cent1
— Developed over 160 products in 2018 and added 1.4 million new life customers2
— Signed an exclusive partnership with Babylon Health to provide AI-powered digital health
services in up to 12 markets across Asia
— Established Eastspring’s wholly foreign-owned enterprise in Shanghai and extended our asset
management presence to Thailand, following the acquisition of TMB Asset Management
— Continued expansion in China, following entry into Hunan province and 10 new cities
— Retained Eastspring’s ‘Best Asia Fund House’ accolade in the AsianInvestor Asset
Management Awards
— In early 2019, we renewed and expanded our successful regional strategic bancassurance
alliance with UOB
18 Prudential plc Annual Report 2018
www.prudential.co.uk
Our businesses
Asia
Continued progress against our strategic priorities,
which align with the evolving and expanding sources
of demand in Asia, leaves the business well positioned
for sustained future growth.
Our business
It is 95 years since we established our first
operations in Asia. Our long heritage and
strong brand awareness form the
foundations of our business and today our
footprint spans 14 markets and encompasses
3.6 billion people. We have a top three
position in eight out of our 12 insurance
markets3 and Eastspring, our asset
management business, remains the largest
pan-regional retail asset manager in Asia,
excluding Japan. In addition, Eastspring
retained the prestigious ‘Best Asia Fund
House’ accolade in 2018, a feat that has now
been achieved in three of the past four years.
We believe our commitment to customers on
‘listening, understanding, delivering’ is a key
differentiator. To fulfil this, we adopt
a multi-channel strategy with over 600,000
agents, over 300 distribution partners and an
increasing online offering, enabling us to
serve our customers’ needs in their preferred
manner. We have a proven ability to attract,
develop and retain a talented and diverse
workforce, employing over 13,000 people
with more than 40 separate nationalities and
wide-ranging industry backgrounds. This
enables us to remain at the forefront
of product development, create innovative
services for our customers and embed digital
technology to drive efficiency.
We are also able to translate these
hallmarks of our business into financial
success, with our strong performance in
2018 building upon our existing excellent
track record. Our gross premium earned
grew4 by 9 per cent1 to £16.5 billion, and
renewal premiums5 grew by 16 per cent1.
This helped deliver a 14 per cent1 increase
in operating profit6 to £2.2 billion and
grow our total assets by 11 per cent7
to £94.2 billion. We also delivered
14 per cent1 growth in new business profit8
to £2.6 billion and the total embedded
value of the business grew 16 per cent7 to
£24.3 billion. At Eastspring, we managed
funds totalling £151 billion at the end of
2018, invested in over 1,600 funds.
Market opportunity
In Asia, we provide insurance and asset
management solutions that enable
customers of all ages to address their
health, protection and savings needs.
Demand for our products is underpinned
by low levels of existing coverage and is
further supported by economic and
demographic tailwinds that look set to
persist over the coming decades.
Today, consumers in Asia are both
under-insured and under-saved during
their working lives, which leaves them
inadequately prepared for retirement.
This is evident from the significant gap in
life insurance penetration rates compared
with developed markets. Furthermore,
the limited welfare social safety net in many
of our markets means that out-of-pocket
healthcare spend by people in Asia is three
to four times the proportion seen in the
US and UK. Collectively, these dynamics
resulted in an estimated health protection
gap of US$1.8 trillion in 2017 across the
Asia region9.
The economic growth potential of the
region is widely recognised and is
expected to translate into rising levels
of affluence, with 88 per cent of the
next billion entrants into the middle class
predicted to be based in Asia10. Entering
the middle class is typically the trigger
for individuals to protect their health and
that of their families, while also seeking
to manage and grow their wealth. Indeed,
total annual expenditure by Asia’s middle
class is forecast to reach US$37 trillion
in 203010, more than double the current
amount.
Asia’s economies are also benefiting
from a demographic dividend with
moderating fertility rates and improving
life expectancy. In youthful markets, such
as Indonesia, this is creating a surge in the
working age population and with that
a continued source of demand for our
Prudential life customer and population by age11,12
Prudential customer profile
Illustrative future profile
Population profile (Asia)
2018
2030
3.3bn
Working age
population
2.3bn
Over 65s
286m
3.7bn
Working age
population
2.5bn
Over 65s
448m
<15 16-
20
21-
25
26-
30
31-
35
36-
40
41-
45
46-
50
51-
55
56-
60
61-
65
66-
70
71-
75
76-
80
>80
<15 16-
20
21-
25
26-
30
31-
35
36-
40
41-
45
46-
50
51-
55
56-
60
61-
65
66-
70
71-
75
76-
80
>80
www.prudential.co.uk
Annual Report 2018 Prudential plc 19
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
Our businesses
Asia continued
Asia continued
Middle class in Asia as a
proportion of world middle class10
Asia middle class population
Middle class population
of the rest of the world
3,766m
2,023m
54%
3,030m
1,380m
46%
5,412m
3,492m
65%
4,617m
2,784m
60%
2015
2020
2025
2030
products. Across Asia the working age
population is forecast to grow by almost
one million people per month between
now and 2030 to 2.5 billion people11.
Meanwhile, the number of those aged over
65 is projected to almost treble by 2050 to
700 million11. This is expected to create
demand for new solutions in markets with
ageing populations, such as Hong Kong
and China, as individuals look to maintain
their standard of living during retirement.
Whilst these trends provide an attractive
backdrop, we need to remain diligent and
focused in our execution as a wide range
of external developments can affect our
business. The escalating trade-related
tensions between the US and China
contributed to increased equity market
volatility in the second half of 2018. The
landmark election result in Malaysia
heralded the first change in governing
party since independence in 1957 and
we have been actively discussing how we
support the new leadership in their desire
to provide greater insurance access to the
Malaysian population. In China, there was
a step forwards in easing foreign
investment in the insurance sector, with
caps on foreign ownership expected to
be lifted by 2021. Alongside these
developments, regulators across the region
are seeking to reward disciplined risk-
management practices by strengthening
consumer protection and migrating to
risk-based solvency frameworks.
We are steadfast in our conviction that the
structural drivers of consumer demand in
this region are of greater significance to
our business than short-term market or
regulatory driven events. We also
recognise that the insurance industry
is not immune to the pervasive impact of
technology and the way this is shaping our
customers’ expectations and behaviours
with regards to accessibility, service and
overall experience. These perspectives are
instrumental in guiding the decisions we
take to position our business for future
success.
Strategic priorities
Our business achieves high risk-adjusted
returns by maintaining a disciplined focus
on value. Two key distinguishing features
of our sales mix are the contribution from
health and protection products, which
Prudential Corporation Asia is well positioned to benefit from
long-term structural opportunities
Customer segment
Distribution channels Core products
High-net-worth
Consultants
Estate planning
Robo-investment
New
Affluent
Mass
Emerging
Group
Agency Bank partners
Unit linked
Return of premium
Multi-care multi-stage medical cover
Critical illness
Existing
New partners
Direct to consumer
Corporate
Term life
Health benefit
Micro credit
Group term
Medical
Personal accident
New
New
collectively accounted for 70 per cent of
our new business profit in 2018, and the
high proportion of regular premiums,
which comprised 94 per cent of APE sales.
We favour this mix because it provides our
shareholders with a higher and more stable
return across market cycles. Our success in
health and protection is underpinned by
our comprehensive underwriting
processes, extensive experience and
technical capabilities of our in-house
professionals. Meanwhile, the high
proportion of regular premiums ensures we
collect a steady stream of revenues across
market cycles.
This focus on value is supported by four
strategic priorities that we believe align
with the evolving sources of demand
across the region and hence will position
our business for continued future growth.
We seek to enhance the core of our existing
business by improving our customers’
experience. Significantly, we have
extended our exclusive partnership with
UOB until the end of 2034 and, due to its
success to date, agreed to expand its scope
to include Vietnam and UOB’s digital bank.
We also continued to expand and diversify
our distribution reach with nine new bank
partnerships across six of our markets
being successfully activated during 2018,
including Siam Commercial Bank in
Thailand and O-Bank, the first digital bank
in Taiwan. The success of these
partnerships is underpinned by the quality
and competitiveness of our products, the
additional value-added services we offer to
customers and the digital tools and training
we provide to sales teams.
We simplify the process of purchasing a
policy by embracing the latest technology
and embedding this within proprietary
tools used by our agents and bank
partners. For example, over 70 per cent of
all new business was submitted through
e-point-of-sale technology. Our smart
underwriting tool, which is now used in
59 per cent of all sales, provides dynamic
underwriting that streamlines the
application process, while also
communicating instant underwriting
decisions to customers.
We also use digital technology in servicing
policies, both to improve the efficiency of
our business and to enhance customer
satisfaction. In Hong Kong we developed
the ‘Hospital to Prudential’ portal to
redefine the way our customers and
medical professionals manage hospital
claims, reducing the time required to
submit a claim to just three minutes.
Meanwhile, in China we have extended
20 Prudential plc Annual Report 2018
www.prudential.co.uk
our award-winning WeChat self-service
platform to include 90 per cent of all policy
administration actions. Similarly, in
Thailand we created a new customer
services touchpoint through PruConnect,
which enables customers to quickly access
key information such as policy information,
premium certificates and nearby network
hospitals.
Secondly, we want to create ‘best-in-class’
health capabilities and attained new
business profit growth of 15 per cent from
health and protection products in 2018.
Our strategy is supported by distinctive
value-added services, such as the exclusive
multi-year partnership we signed with
Babylon, a UK-based healthcare and
technology services company. This
partnership will provide personal health
assessments and treatment information,
powered by artificial intelligence, which
will transform health provision for our
customers. This will greatly enhance our
customers’ access to healthcare,
particularly for those in remote locations,
whilst empowering them to proactively
manage their health in a flexible and
cost-efficient manner.
Thirdly, we plan to accelerate Eastspring by
expanding its existing investment offering
and enhancing its distribution capabilities.
We have continued to strengthen our
in-house investment teams, which helped
us launch 51 new products in 2018. In
September, we also entered Thailand, the
largest mutual fund market in the
Association of Southeast Asian Nations
(ASEAN)13, with the acquisition of TMB
Asset Management. Our on-the-ground
Life weighted premium income14,15
£bn CER
In-force
New business
PRUconnect
PRUconnect, one of Prudential Thailand’s
latest offerings, is aimed at extending online
customer service via LINE, a popular
instant-communication mobile application
in Thailand with more than 44 million active
users. Launched in January 2018,
PRUconnect provides policyholders with
a dedicated web portal where they can
access policy information, make premium
payments, download premium certificates
and locate nearby network hospitals, as well
as a range of other self-service options.
PRUconnect also includes a chatbot feature,
which uses artificial intelligence to simulate
natural conversations. Customers can
submit simple enquiries to the PRUchat
bot via the LINE app, and stay connected
to the company for assistance anytime
and anywhere.
team recently launched an Asia Pacific
Property Flexible Fund that obtained
inflows totalling US$91 million during the
week-long initial public offering period.
Finally, we intend to expand our presence
in China across both the insurance and
asset management sectors. We recently
established a new branch in Hunan and
received regulatory approval to undertake
preparatory work to establish a new branch
in Shaanxi, our nineteenth and twentieth
provinces, respectively, offering access to
over 100 million new people. This
geographic expansion is supported by the
diligent growth in our agency force, which
grew by 7 per cent in 2018 to 48,000
agents. We also formed a two-year
research partnership with the
Development Research Centre of the State
Council focused on the development of a
sustainable pension system, which is
testament to our aspirations in this market
and our differentiated capabilities. Another
major milestone in China was the opening
of Eastspring’s wholly foreign-owned
enterprise in Shanghai. This enables us to
manage onshore investments for high-net-
worth individuals and institutional
investors in China, complementing our
existing asset management joint venture
with CITIC. Our first private fund has a
Chinese equities mandate and is
Eastspring total funds
under management7
£bn
12.9
11.2
151
139
9.2
+1.1x
6.6
5.6
4.7
4.1
1.5
1.7
2.0
2.3
7.7
2.9
3.5
1.3
2.9
1.0
3.5
3.5
3.5
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2017
2018
www.prudential.co.uk
Annual Report 2018 Prudential plc 21
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Our businesses
Asia continued
expected to launch in April 2019, with
further investment strategies planned to
follow in due course.
Customers
Our strong reputation and success to date
have been built on a foundation of excellent
customer service. During 2018, we added
a further 1.4 million new life customers2,
bringing the total to over 15 million life
customers. Our strong retention ratio,
which remained in excess of 90 per cent,
and the consistently high proportion of
repeat sales, which last year contributed
over 40 per cent of APE sales, demonstrate
the regard and trust our customers have in
our business. These dynamics mean that
we have 24 million in-force policies in total,
with each of our policyholders holding 1.6
policies on average. In addition, our focus
on health and protection business is
reflected in a 7 per cent increase in
sum-at-risk per policy, which is a leading
measure of insurance coverage. Funds
managed by Eastspring grew by 6 per cent
to £151 billion at the end of 2018, with
10 per cent growth amongst third-party
retail clients.
We maintain this advantage by constantly
striving to improve the experience of our
customers, with whom we have over
two million interactions every month,
including over 300,000 calls. Our
customers typically need us most when
they want to submit a claim as this can
signify the death or illness of a family
member. Consequently, we strive to
provide a frictionless claims process at this
sensitive time. To facilitate this, our new Jet
claims tool, which is currently being used
in Hong Kong and Indonesia, can
automatically review, assess and pay
a claim on the same day. We now have
e-claims capability in six of our businesses
and have already attained submission rates
of almost 40 per cent. We also leverage
technology in our more regular dealings
with customers. For example, our new
Virtual Assistant in Hong Kong, which
builds upon the success of our askPRU
chatbot that was launched in Singapore in
2017 and reduced call centre volumes by
40 per cent, already has answers to many
frequently asked questions from agents
and policyholders.
At Eastspring we use digital tools to help
our retail clients set and achieve their
savings goals. Our partnership with
Alkanza has enabled us to build a robo-
advisory platform in Taiwan that can
suggest portfolio rebalancing if
performance is off track and has the
functionality to show the impact of changes
PRUworks
PRUworks is a digital ecosystem designed
to help small and medium-sized enterprises
(SMEs) grow their businesses, and attract
and retain talent. A first-of-its-kind platform
by an insurer in Singapore, PRUworks gives
business owners and their employees easy
and convenient access to insurance,
employee benefits and business solutions in
one seamless digital experience.
PRUworks is targeted specifically at SMEs,
an under-served market in need of solutions
catering to their size and budget. Wellness
solutions, a core component of PRUworks,
are offered as part of Prudential’s
collaboration with healthtech companies
and include fitness monitoring, specialist
doctor recommendations and health
screenings. Participating SMEs can also
enjoy complimentary access to the
Singapore government’s ‘SME Health+’
initiative, which includes programmes in
chronic disease management, healthy
eating, active living and mental wellbeing.
in parameters, such as retirement age
and contribution amount.
Products
We offer our customers a broad range of
health, protection and savings solutions
that are tailored to local market
requirements and individual needs.
Key to our ongoing success is our focus
on upgrading our product suite to add
innovative new features. Indeed, last year
nearly half of new business profit arose
from the 160 products that were developed
in 2018. For example, in Hong Kong we
launched a new critical illness product with
extended protection for cancer, heart
attacks and strokes, three common causes
of death, and was instrumental in
generating the 17 per cent growth in Hong
Kong’s new business profit. Similarly, we
enhanced our protection product for
mothers and unborn children in Malaysia,
PRUmy child, by expanding the range of
pregnancy complications included and
extending the coverage period for
congenital illnesses. We are also actively
developing products to meet the upcoming
needs of Asia’s ageing populations and
were amongst the first group of insurers to
be granted approval to offer a tax-deferred
pension product in China.
In addition, we develop products with
specialist characteristics that broaden our
offering and appeal. We have been
proponents of products that comply with
the requirements of Islamic law for many
years. Indeed, we offer such products by
default, and sales of our Syariah products
in Indonesia grew by 17 per cent in 2018
to over £50 million, equivalent to over
20 per cent of our APE in this market.
This positions us as market leaders in
Indonesia’s Syariah market, in addition to
Malaysia’s Takaful market, with market
shares of approximately 30 per cent in both
cases. We have also launched PRUvital
cover in Singapore, a first-in-the-market
protection plan for customers with four
types of common pre-existing chronic
medical condition that previously could act
as barriers in obtaining insurance coverage.
Historically our products were targeted at
the mass and affluent market segments.
We are purposefully developing new
products to meet the needs of other
segments. In Singapore we recently
launched Opus, a proposition specifically
tailored for high-net-worth customers.
This brings a differentiated experience for
our customers and includes a dedicated
service team, wealth planners and external
experts covering trust and legal matters.
We also launched PRUworks, our new
insurance proposition for the corporate
segment to target small and medium
enterprises. Our PRUworks platform is an
all-inclusive platform that comes with a
digitally enabled HR solution for business
owners and their employees, which
provides access to employee benefits and
services alongside additional services
such as lifestyle programmes.
22 Prudential plc Annual Report 2018
www.prudential.co.uk
A leading pan-Asia franchise
Accelerate Asia
Compounding revenues and profits
Prudential Corporation Asia is a business
with compounding revenues underpinned
by high quality recurring income that is
uncorrelated to investment markets. The
current scale and profitability has been
achieved by increasing our customer base
and penetration across the continent.
Growth is driven by our ability to meet
customer needs through the breadth of
markets we operate in, the scale and
innovation of our operations, the
capabilities of Eastspring Investments, our
pan-Asia asset manager, and our diverse
and talented workforce.
Diversification
11
1
10
9
8
£2,164m
+14%
2
7
6
5
4
3
Operating profit by region
Full year 2018 %
1 Hong Kong
2 Indonesia
3 Singapore
4 Malaysia
5 Vietnam
6 China
7 Thailand
8 Taiwan
9 Philippines
10 Eastspring
11 Others
20% +33%
20% +0%
15% +22%
9% +9%
7% +16%
7% +20%
5% +5%
2% +24%
2% +13%
8% +6%
5% +3%
Growth rate vs 2017 constant exchange rates
Cambodia
Life insurance
Market ranking3
Population
Penetration16
China17
Life insurance
Market ranking3
Population
Penetration16
Average health protection
gap per household9
Eastspring
Funds under management18
Hong Kong
Life insurance
Market ranking3
Population
Penetration16
Average health protection
gap per household9
Eastspring
Funds under management18
India19
Life insurance
Market ranking3
Population
Penetration16
Average health protection
gap per household9
Eastspring
Funds under management18
Indonesia20
Life insurance
Market ranking3
Population
Penetration16
Average health protection
gap per household9
Eastspring
Funds under management18
Japan
Eastspring
Funds under management18
Korea
Eastspring
Funds under management18
Laos
Life insurance
Market ranking3
Population
Penetration16
1st
16m
0.1%
5th
1.4bn
2.7%
US$1,724
£6.2bn
3rd
7m
14.6%
US$9,156
£3.4bn
2nd
1.4bn
2.8%
US$1,382
£17.8bn
1st
267m
1.9%
US$1,230
£4.0bn
£5.4bn
£8.1bn
Top 3
7m
0.0%
Malaysia21
Life insurance
Market ranking3
Population
Penetration16
Average health protection
gap per household9
Eastspring
Funds under management18
Philippines
Life insurance
Market ranking3
Population
Penetration16
Average health protection
gap per household9
Singapore22
Life insurance
Market ranking3
Population
Penetration16
Average health protection
gap per household9
Eastspring
Funds under management18
Taiwan
Life insurance
Market ranking3
Population
Penetration16
Average health protection
gap per household9
Eastspring
Funds under management18
Thailand
Life insurance
Market ranking3
Population
Penetration16
Average health protection
gap per household9
Eastspring
Funds under management18
Vietnam
Life insurance
Market ranking3
Population
Penetration16
Average health protection
gap per household9
Eastspring
Funds under management18
1st
32m
3.3%
US$6,864
£8.1bn
3rd
107m
1.2%
US$1,406
2nd
6m
6.6%
US$13,776
£80.1bn
13th
24m
17.9%
US$4,823
£4.9bn
9th
69m
3.6%
US$287
£9.3bn
4th
97m
1.3%
US$1,251
£2.6bn
www.prudential.co.uk
Annual Report 2018 Prudential plc 23
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
Our businesses
Asia continued
Distribution
Our diversified mix of tied agents and bank
partners creates one of the strongest
distribution networks across the region
with non-traditional partnerships further
broadening our reach. Our experience
shows customers have an overarching
preference for face-to-face advice from
a trusted financial adviser while also
increasingly demanding the flexibility to
conduct basic research and fact-finding
themselves digitally. Thus, whilst our tied
agents and in-branch bank staff remain our
primary distribution channels, customers
are now more actively engaging with us
through our online platforms.
Prudential has over 600,000 licenced tied
agents across our 12 life markets in Asia.
This proprietary distribution channel is a
core component of our success, accounting
for 84 per cent of new business profit,
having grown by 14 per cent in 2018. The
value provided by our tied agents makes it
paramount for us to continue expanding
their reach and enhancing their
capabilities. We place great emphasis
on the professionalism and productivity
of our agency force, and facilitate this by
continually providing new and upgraded
tools. This creates a culture whereby our
agents aspire to attain membership of the
‘Million Dollar Round Table’, an industry-
recognised indicator of quality. We
currently have over 7,000 such qualifiers,
which would represent annual growth in
members of approximately 20 per cent23
and reflects our focus on the recruitment,
training and productivity of our agents,
the emphasis on which varies by market.
In our younger markets we are typically
still accelerating recruitment. For example,
we added over 1,100 new agents per
month in the Philippines on average during
2018, which was more than 40 per cent
higher than in 2017, and helped expand our
agency force to around 28,000 agents. As
markets mature the emphasis starts to shift
Notes
1 Growth rate on a constant exchange rate basis.
2 Excluding India.
3 Based on full year 2018 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).
IFRS gross premiums earned for Asia segment.
Includes renewal premiums from joint ventures.
See note III of the additional unaudited financial
information for reconciliation to IFRS balances.
4
5
6 Adjusted IFRS operating profit based on longer-term
investment returns. See note B1 of the IFRS financial
statements for reconciliation to IFRS profit.
7 Growth rate on an actual exchange rate basis.
8 New business profit on business sold in the year,
calculated in accordance with EEV principles.
9 Swiss Re Institute: The health protection gap in Asia,
October 2018. Average gap per household is calculated
as ‘total health protection gap divided by the estimated
number of households hospitalised under the mentioned
gap range’. Report excludes Cambodia and Laos.
towards the other factors. We have
designed an entrepreneur development
programme to fast-track our successful
professional agents into leaders, which in
turn supports our activation of new
recruits. This programme has already been
launched in China, where the number of
active agents grew by 12 per cent in 2018.
We pioneered the strategy of partnering
with banks in Asia over 20 years ago and
now have one of the largest and most
successful bancassurance franchise in the
region. Our strategic bank partnerships
include multi-national banks, regional
banks and prominent domestic banks in
many key markets including China, India
and Taiwan. In total we have access to over
14,000 bank outlets. Collectively, these
partnerships contributed over 30 per cent
of our APE sales in 2018 and associated
new business profit grew by 19 per cent.
We have also started collaborating
with non-traditional partners, including
DirectAsia, Hiscox’s online property
and casualty business in Singapore, and
Eureka, a data management and analytics
platform based in Indonesia. These
mutually beneficial partnerships will enable
us to reach new customers and create
unique opportunities for our existing ones.
Business outlook
We continue to see a strong runway for the
insurance and asset management industries
in Asia. We recently conducted a strategic
assessment, which re-affirmed the
strengths of our business, established the
potential future size of our markets and has
informed our future investment pathway.
The review demonstrated that we are well
positioned in the traditional life insurance
segment, with a market share of
approximately 25 per cent24. We forecast
that this market has the potential to
continue growing at a double-digit rate over
the coming five years, due to the underlying
structural drivers of demand in the region.
Our presence, scale and broad product
and distribution reach position us well to
participate strongly in this expected growth.
We also anticipate strong growth in the
medical reimbursement segment in our
current markets, which we believe will
more than double in the next five years due
to increasing consumer demand. We have
estimated that our share of the value pool
in this segment is currently 9 per cent,
which gives us significant scope to expand.
This ambition is reflected in our strategic
priorities with recent investments, such as
Babylon, transforming our offering.
Our market-leading position in retail fund
management reflects our region-wide
presence and strong operating credentials.
This positions us well for the future growth
in the market that is expected from new
wealth creation and the shift we envisage
from deposits to riskier investments. We
believe these factors make double-digit
growth viable in India, where we are market
leaders, alongside other key markets such
as China and Thailand, where we have
taken action to strengthen our position.
Nic Nicandrou
Chief Executive
Prudential Corporation Asia
10 Brookings Institution. Global Economy & Development
Working Paper 100. February 2017. ‘Asia’ represents
Asia Pacific.
11 United Nations, Department of Economics and Social
Affairs, Population Division (2017). World Population
Prospects: The 2017 Revision.
12 Working age population: 15 to 64 years.
13 ©Copyright 2018 Strategic Insight, an Asset International
Company and when referenced or sourced Morningstar Inc.,
Standard & Poor’s Inc., and Lipper Inc. All rights reserved.
The information, data, analyses and opinions contained
herein (a) include confidential and proprietary information
of the aforementioned companies, (b) may not be copied
or redistributed for any purpose, (c) are provided solely
for information purposes, and (d) are not warranted or
represented to be correct, complete, accurate, or timely.
14 Weighted premium income comprises gross earned
premiums at 100 per cent of renewal premiums,
100 per cent of first year premiums and 10 per cent
of single premiums.
15 Comparatives have been stated on a constant exchange rate
basis. Historic results have been restated to exclude sales
from the Korea and Japan life businesses, which have been
disposed of. 2014 excludes intra-group reinsurance
contracts between the UK and Asia with-profits businesses.
16 Market penetration: Swiss Re (Sigma) – based on insurance
premiums as a percentage of GDP in 2017 (estimated).
17 Total joint venture / foreign players only.
18 FUM reported based on the country where the funds
are managed.
19 IFRS gross premiums earned for Asia segment.
20 Excludes Jiwasraya.
21 Includes Takaful sales and excludes Group business.
22 Includes onshore only, excluding Eldershield and DPS.
23 Based on 100 per cent conversion of qualifiers into members.
24 Proprietary research/Bain Analysis (2018) covering the
following markets: Hong Kong; Singapore; Indonesia;
Malaysia; China; and India, using sales data provided by
insurance regulators, insurance associations and industry
expert surveys in these markets.
24 Prudential plc Annual Report 2018
www.prudential.co.uk
Driving our business
Creating value and benefiting our stakeholders
Customers
In Asia, we focus our efforts on helping new and existing
customers build better futures for themselves and their
families, by helping to fill the savings and protection gap
that exists in many markets in the region.
15 million life customers
Products
We listen to our customers to help us understand
their changing needs and tailor our design of product
solutions and services.
94% of APE sales in regular premium
70% of all new business submitted through
e-point-of-sale technology
Distribution
We are well-positioned in terms of the scale and
diversity of our distribution to reach and serve
our customers’ needs. At the core of our distribution
model is face-to-face customer interaction that delivers
high-quality, needs-based advice.
Investment for growth
Building on our strong track record, we are building
for future growth by investing in new opportunities
and capabilities.
+600,000 agents
Access to over 14,000 bank outlets
Now in 87 cities in China
9 new bank partners across 6 markets
Eastspring Investments’ total funds under
management £151 billion
www.prudential.co.uk
Annual Report 2018 Prudential plc 25
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information United States
2018 performance highlights
— New distribution relationship with State Farm
— New collaboration to offer advisory annuities on the Envestnet® Insurance Exchange
— Awarded ‘Contact Center World Class CX Certification’
and ‘Highest Customer Service for the Financial Industry’ awards
by The Service Quality Measurement Group, Inc.
26 Prudential plc Annual Report 2018
www.prudential.co.uk
Our businesses
United States
Providing an ageing American population
with financial strategies for stable retirements.
The US is the world’s largest retirement
savings market with approximately
40 million Americans reaching retirement
age over the next decade. This transition
will trigger the need for an unprecedented
shift of trillions of dollars from savings
accumulation to retirement income
generation.
Customers and products
Through its distribution partners, Jackson
provides products that offer Americans the
retirement strategies they need, including
variable, fixed and fixed index annuities.
Each of these products offer a unique
range of features tailored to meet the
individual needs of the retiree:
However, these Americans face challenges
in planning for life after work. For those
nearing the end of their working careers,
a financially secure retirement is at risk, due
to insufficient accumulation of savings and
the current combination of low yields and
market volatility. Employer-based pensions
are disappearing, and government plans
are underfunded. Social security was
never intended to be a primary retirement
solution and today its long-term funding
status is in question. Additionally, the life
expectancy of an average retiree has
significantly increased, lengthening the
number of years for which retirement
funding is needed.
To overcome these challenges, Americans
need and demand retirement strategies
that offer them the opportunity to grow
and protect the value of their existing
assets, as well as the ability to provide
guaranteed income that will last
throughout their extended lifetimes.
In response to this demand and the
ongoing shift to fee-based solutions,
Jackson has positioned itself with product
innovation and distribution strategies to
further enhance our market-leading VA
position in the brokerage market and grow
in the advisory retirement solutions market.
Variable annuity A Jackson variable
annuity, with investment freedom,
represents an attractive option for retirees,
providing both access to equity market
appreciation and guaranteed lifetime
income as an add on benefit.
Fixed index annuity A Jackson fixed
index annuity is a guaranteed product with
limited market exposure but no direct
equity ownership. It is designed to build
wealth through a combination of a base
crediting rate that is generally lower than
a traditional fixed annuity crediting rate,
but with the potential for additional
upside, based upon the performance
of the linked index.
Fixed annuity A Jackson fixed annuity is
a guaranteed product designed to build
wealth without market exposure, through
a crediting rate that is likely to be superior
to interest rates offered from banks or
money market funds.
These products also offer tax deferral,
allowing interest and earnings to grow
tax-free until withdrawals are made.
Jackson has a proven track record in this
market with its market-leading flagship
product1, Perspective II. Jackson’s success
has been built on its quick-to-market
product innovation, as demonstrated by
the development and launch of Elite
Access, our investment-only variable
annuity. Further demonstrating Jackson’s
flexibility and manufacturing capabilities,
and in response to the trend in financial
services toward fee-based solutions,
Jackson has launched Perspective
Advisory II and Elite Access Advisory II
to serve advisers and distributors with
a preference for advisory products.
In March 2018, Jackson launched
MarketProtector and MarketProtector
Advisory, two new fixed annuities with
index-linked interest. These products
provide consumers with the sought-after
combination of tax-deferred investment
growth, protection from market risk and
the flexibility to adapt to changing needs in
retirement. Both products offer an add-on
living benefit that allows customers to
safeguard their financial futures with
income for life.
Also, in 2018, Jackson took a lead role in
bringing together 24 of America’s financial
services organisations to launch the
Alliance for Lifetime Income (Alliance).
The Alliance was launched to educate
Americans on the risk of outliving their
income, so they can enjoy their years in
retirement. The Alliance’s nationwide,
multi-year, integrated educational
campaign is designed to raise awareness
and motivate consumers and financial
advisers to discuss the need for protected
lifetime income in retirement, which can be
achieved with the use of annuity products
such as those provided by Jackson.
Distribution
Jackson distributes products in all 50 states
of the US and in the District of Columbia.
Operations in the state of New York are
conducted through a New York subsidiary.
Jackson markets its retail products primarily
through advice-based distribution
channels, including independent agents,
independent broker-dealer firms, regional
broker-dealers, wirehouses and banks. For
variable annuity sales, Jackson is the leader
in the independent broker-dealer, bank
and wirehouse channels2 and fourth in
regional firms2.
www.prudential.co.uk
Annual Report 2018 Prudential plc 27
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Our businesses
United States continued
Jackson’s distribution strength also sets
us apart from our competitors. Our
wholesaling force is the largest3 in
the variable annuity industry and is
instrumental in supporting the
independent advisers who help the
growing pool of American retirees develop
effective retirement strategies. Our
wholesalers provide extensive training to
thousands of advisers about the range of
products and the investment strategies
that are available to support their clients.
Based on the latest available data, Jackson
is the most productive variable annuity
wholesale distribution force in the US3.
In October 2018, Jackson announced a
new distribution relationship with State
Farm®. In the second half of 2019,
authorised State Farm agents will begin
offering a select group of Jackson’s variable
annuity and fixed index annuity products.
While Jackson currently maintains one of
the largest sales teams in the industry, this
distribution relationship will add significant
distribution access through State Farm’s
growing network of qualified producers.
In February 2019, Jackson partnered with
DPL Financial Partners (DPL) to provide
our protected lifetime income solutions to
independent registered investment
advisors (RIAs). The collaboration expands
Jackson’s distribution footprint and
provides Jackson with access to new
opportunities in the independent
RIA channel.
Regulatory landscape
The industry has continued to manage
through an ever-changing regulatory
landscape. In 2016, the US Department
of Labor (DoL) released a final version of
its Fiduciary Duty Rule (Rules), which
sought to eliminate conflicts of interest in
investment advice, in order to protect and
encourage savings and investment for
working Americans. These Rules were
rescinded in 2018. However, other
alternative proposals, such as the US
Securities and Exchange Commission’s
(SEC) best interest standard, remain
pending.
As a result of an improved regulatory
outlook, rising interest rates and more
aggressive product feature changes
(ie withdrawal percentages) implemented
by competitors, the annuity industry saw
increased sales in 2018 (albeit still well
below levels prior to the DoL Rules
proposal). Sales in the variable annuity
industry as of the third quarter of 2018 at
US$75.4 billion4 were up 4 per cent
compared with the same period last year.
Regardless of the outcome of the SEC best
interest standard, the regulatory disruption
caused by the now rescinded DoL Rules
has challenged the industry to review the
ways in which investment advice is
provided to American investors.
Manufacturers will need to have the ability
to provide product and system adaptations
in order to support the success of various
distribution partners in their delivery of
invaluable retirement strategies that
investors need. Because of its strong
distribution, leadership in the annuities
market, best-in-class service and a
low-cost efficient operation, we believe
that Jackson is well positioned to take
advantage of this opportunity.
Furthermore, in late 2018, the US National
Association of Insurance Commissioners
(NAIC) concluded an industry consultation
with the aim of reducing the non-economic
volatility in the variable annuity statutory
balance sheet and enhancing risk
management. The NAIC is targeting a
January 2020 effective date for the new
framework in order to allow adequate time
for the drafting and implementation of the
revised regulations and instructions with
a potential three-year phase-in. The NAIC
also has an ongoing review of the C-1 bond
factors in the required capital calculation,
on which further information is expected to
be provided in due course. Despite these
regulatory challenges, we believe that
Jackson is well positioned to manage the
impact of these regulatory changes.
Retirement wave
Population by age5
Under-saved
Median net worth6 (US$000)
Increased longevity
Life expectancy at 657
4.4m
4.5m
4.0m
187.3
19.4
124.2
14.3
Age 65
in 2019
Age 60
in 2019
Age 55
in 2019
45-54
55-64
1960
2016
28 Prudential plc Annual Report 2018
www.prudential.co.uk
Talking to Americans
about bridging the
retirement income gap
Last year, Jackson reintroduced the idea of
‘protected lifetime income’ into American
retirement planning conversations by
publishing ‘The Return of Lifetime Income’
in The Wall Street Journal, reaching millions
of consumers. Recognising the need for a
unified industry voice around this critical
issue, Jackson also co-founded The Alliance
for Lifetime Income, an innovative industry
coalition to raise awareness among
Americans about the financial risks and
income gaps they may face in retirement
and the importance of protected lifetime
income solutions in helping bridge those
potential gaps.
As Alliance co-chair, Jackson leads the
charge to bring together 23 peer companies,
non-profit groups and leading financial
experts to create awareness about the role
annuities can play in truly comprehensive
financial plans.
The Alliance shares its mission through
a breakthrough national educational
campaign, including online and offline media
engagement and advertising, digital and
social media communication, content
marketing, live events, virtual reality
experiences, new financial planning tools,
and much more.
Investment for growth
With trillions of dollars of adviser-
distributed assets across distribution
platforms that have not historically been
a focus, such as the dually-registered
investment adviser channel, we believe
that a significant opportunity exists to
reach even more American retirees and
serve their needs with annuity products
going forward. The industry will need to
remain flexible and cost-effective in
making changes to product systems and
processes. We continue to seek to
understand and make the necessary
adjustments to support the needs and
demands of American retirees into the
future.
In September 2018, Jackson announced
a technology integration collaboration
with Envestnet® allowing Jackson to offer
its complete product suite of advisory
annuities on the Envestnet Insurance
Exchange. The new collaboration brings
together a leading provider of annuities
in the US, with the leading provider of
intelligent systems for wealth management
and financial wellness. Jackson is working
with Envestnet to make annuities easier
to work with inside of a client’s portfolio.
Advisers will be able to create more value
for their clients by holistically considering
longevity risk, sequence of returns risk,
market risk and mortality risk within the
Envestnet wealth management platform.
The acquisition of John Hancock’s group
payout annuity business in late 2018
represents a reaffirmation of Jackson’s
growth bolt-on strategy and continuing
commitment to deploy capital at attractive
return levels. This transaction further
diversifies Jackson’s risk portfolio and
revenue sources in relation to both general
and separate account businesses.
With the ever-changing regulatory
environment described earlier, Jackson has
made and continues to consider changes to
its product offerings, entered into new
selling agreements with advisory providers,
and is working with its distributors to
support implementation of the anticipated
SEC best interest standard.
www.prudential.co.uk
Annual Report 2018 Prudential plc 29
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Our businesses
United States continued
Jackson’s competitive strengths are even
more critical during periods of disruption.
Our best-in-class distribution team, our
agility and success in launching well
designed products, the continued success
of our risk management and hedge
programmes through many economic
cycles, and our effective technology
platforms and award-winning customer
service will provide Americans with the
retirement strategies they so desperately
need. Jackson’s discipline will enable us to
be positioned to capture additional growth
during times of transition into the future.
Michael Falcon
Chairman and Chief Executive
Jackson Holdings LLC
Notes
1 ©2019 Morningstar, Inc. All Rights Reserved. The
information contained herein: (1) is proprietary to
Morningstar and/or its content providers; (2) is not
warranted to be accurate, complete, or timely. Neither
Morningstar nor its content providers are responsible for
any damages or losses arising from any use of this
information. Past performance is no guarantee of future
results. Morningstar www.AnnuityIntel.com Total Sales
by Contract 3Q YTD 2018. Jackson’s Perspective II for
base states ranks #1 out of 973 VA contracts with reported
sales to Morningstar’s quarterly sales survey as of
3Q YTD 2018.
2 ©2019 Morningstar, Inc. All Rights Reserved. The
information contained herein: (1) is proprietary to
Morningstar and/or its content providers; (2) is not
warranted to be accurate, complete, or timely. Neither
Morningstar nor its content providers are responsible for
any damages or losses arising from any use of this
information. Past performance is no guarantee of future
results. Morningstar www.AnnuityIntel.com Total sales by
company and channel 3Q YTD 2018. Jackson ranks #1 out
of 25 companies in the Independent NASD channel, #1 out
of 20 companies in the Bank channel, #1 out of 16
companies in the Wirehouse channel, and #4 out of 19
companies in the Regional Firms channel.
3
Independent research and Market Metrics, a Strategic
Insight Business. US Advisor Metrics 2018, as of
30 September 2018.
4 LIMRA/Secure Retirement Institute, US Individual Annuity
Participants Report 3Q YTD 2018.
5 US Census Bureau Population division 2014 estimate
of population.
6 2016 Federal Reserve Board’s Triennial Survey of
Consumer Finances.
7 US Department of Health and Human Services,
‘Health, United States, 2017.
8 New advisers defined as producers who have not sold
Jackson product since 2013.
30 Prudential plc Annual Report 2018
www.prudential.co.uk
Driving our business
Creating value and benefiting our stakeholders
Customers
Many retirees or soon-to-be retirees face a reality of
under-saving, having no guaranteed income source and
the prospect of living longer than any prior generation.
Jackson’s focus is to provide solutions to help address
these concerns for the millions of Americans currently
transitioning to and through retirement.
Products
Jackson’s products provide needed access to equity
market growth, protection of principal, and a way of
converting retirees’ savings into retirement income with
a degree of certainty. With a long history of disciplined
product design and prudent risk management,
Jackson has earned and continues to earn trust from
its key stakeholders.
Distribution
Jackson’s distribution teams set us apart from our
competitors. Jackson’s variable annuity wholesaling
force is the largest and most productive in the industry,
supporting thousands of advisers across multiple
channels and distribution outlets.
Investment for growth
Jackson continues to invest in technology and
innovative products to efficiently and effectively adapt
to what our customers and regulatory environment
require. Jackson has recently launched an advisory
version of our flagship product Perspective II, our
innovative Elite Access product and our fixed index
MarketProtector product to allow for penetration
into untapped distribution. Jackson also announced
a technology integration collaboration with Envestnet®
allowing Jackson to offer its complete product suite of
advisory annuities on the Envestnet Insurance Exchange.
Average of 10,000 Americans retire per day 5
Assisting 4 million customers with their
financial needs
Leading individual annuity seller in the US4
Perspective II is the #1 selling variable
annuity contract1
Largest and most productive VA wholesale
distribution force in the US3
New marketing alliance with State Farm adding
significant distribution access through its
growing network of qualified producers
Technology integration collaboration
with Envestnet®
Approximately 32% of Jackson’s 2018 advisory
variable annuity sales from new advisers8
www.prudential.co.uk
Annual Report 2018 Prudential plc 31
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information M&GPrudential
2018 performance highlights
— Total M&GPrudential operating profit up 19 per cent to £1.6 billion,
including the effect of updated longevity assumptions
— Total assets under management of £321 billion1 including a rise in PruFund assets
to £43 billion from £36 billion last year
— Major transformation programme already showing improvements in digital service
for customers
— Luxembourg SICAV fund range launched with £21 billion assets under management
as an investment in international growth and to minimise disruption of Brexit
for customers
— Demerger preparation progressing at pace with several major milestones reached
32 Prudential plc Annual Report 2018
www.prudential.co.uk
Our businesses
M&GPrudential
Building a simple and efficient savings
and investments business.
M&GPrudential is the UK and Europe
savings and investments business of
Prudential plc. It was formed in 2017
through the merger of Prudential’s UK
and Europe insurance operations with
M&G Investments, Prudential’s
international asset manager.
Our business manages total assets of
£321 billion1 and serves more than
six million customers worldwide.
M&GPrudential offers savings and
investment products for individuals who
want to build and protect their life savings.
We provide innovative asset management
and customer solutions, supported by
strategic asset allocation, an international
distribution network and two strong brands.
In March 2018, the Board of Prudential plc
announced its intention to demerge
M&GPrudential. The Prudential Board
believes the demerger will further
strengthen two already strong businesses.
For M&GPrudential, the demerger will
enable our leadership team to focus solely
on what is important to our customers, give
us direct control over our own capital and
enable us to pursue growth opportunities
without competing for resources with other
Prudential plc businesses. M&GPrudential
is expected to have a premium listing on
the London Stock Exchange.
We see a huge opportunity in the growing
savings gap across Europe. As support
from the state diminishes and employers
gradually retreat from guaranteed
retirement provisions, more and more
people need to make their own
preparations for retirement and other life
goals. At the same time, many people with
sizeable asset pools, who want to grow or
protect their value, seem to be keeping
their money in cash despite the negative
real return. Across the EU there is an
estimated ¤10 trillion2 of cash sitting,
largely idle, in bank deposits at very low
interest rates.
We believe M&GPrudential is well placed
to help our customers build and protect
their savings because of the mix of our
businesses, capabilities and people. We
combine the best of fund management
with compelling customer propositions
in a highly collaborative culture. Our
competitive advantages arise from the
strength and depth of this business mix
built over many years.
We have a full set of diversified investment
capabilities with expertise spanning a
range of fixed income, equity, multi-asset,
real estate and private asset classes. We
are one of the largest multi-asset managers
in Europe through the £131 billion
Prudential With-Profits Fund and our
range of branded M&G funds, and manage
£59 billion of private assets, including an
international real estate portfolio. We are a
UK market leader in savings solutions with
our PruFund proposition, a modern way of
with-profits investing. We also have one of
the fastest growing advised platforms3 in
the UK, reaching £13.3 billion in assets
under administration in the 24-month
period since launch. We have a growing
international distribution network with
multi-channel breadth and depth, and
two of the strongest brands in the market.
Building on these competitive advantages,
M&GPrudential’s priorities in 2019 will be:
— to continue to serve our customers well,
by improving outcomes and service
levels, and widening product choice;
— to advance our merger and
transformation programme, to
modernise the business so that we
become a simpler, lower-cost, digital
organisation; and
— to prepare M&GPrudential for
demerger and its future as an
independent company with its
own listing on the stock market.
Understanding our markets
M&GPrudential serves the world’s largest
savings and investments markets, with a
focus on UK and Europe. Across the
region, people increasingly need help to
meet their long-term financial goals as
responsibility for retirement savings passes
from state and employer to the individual.
Customers in our markets demand easy
access to savings and investment solutions,
as well as guidance and advice from trusted
providers. In addition, persistently low
rates of return on bank cash deposits are
fuelling demand for effective solutions,
whether clients are saving for retirement,
building a lump sum or protecting their
wealth from inflation.
In the institutional market, clients are
increasingly seeking bespoke solutions
from asset managers with diversified
investment capabilities and global reach.
The combination of M&GPrudential’s
expertise in private assets, which are much
in demand in this sector, and our growing
international network of offices means we
are well placed to serve these clients.
Customers
We serve a wide range of customers:
individuals saving for retirement and other
life goals; retirees who want to draw down
on their accumulated savings; professional
intermediaries who manage the savings of
their own customers; pension funds; and
other institutional clients with future,
long-term financial commitments.
What all our customers have in common
is the desire for professional help to build
and protect their savings with confidence.
Our approach is to offer a broad range
of products and services, in a variety of
formats, through multiple distribution
channels – all backed by the same in-house
investment expertise and capability.
www.prudential.co.uk
Annual Report 2018 Prudential plc 33
M&GPrudential
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Our businesses
M&GPrudential continued
Our customers fall into five broad categories:
— UK retail advised customers who are
saving for retirement or who want to
draw down on their accumulated
savings. They typically invest in our
market-leading PruFund, which offers
smoothed, long-term returns adjusted
for different risk tolerances;
— UK retail advised and direct customers
who invest for the long term through
our range of M&G-branded mutual
funds. This group includes about
160,000 customers who invest directly
with our fund management business;
— Customers of our traditional insurance
business in the UK. Numbering
six million, these customers typically
hold a Prudential annuity, which pays
an income for life, or an insurance-
wrapped savings bond;
— Wholesale clients in Europe and Asia.
These include retail banks, private
banks, wealth managers, independent
advisers and fund platforms. We
manage £38 billion on behalf of these
clients’ own customers; and
— Pension funds and other institutional
clients, who invest on behalf of their
scheme members. We have nearly 900
such relationships, including 70 per cent
of the UK’s largest pension schemes4.
PruFund investment performance7
100%
75%
50%
25%
0%
-25%
In 2019, we will continue to improve service
levels and launch new offerings. In the UK
retail market, we will broaden the choice of
tax wrappers and products on our own
adviser platform. In November, we made
M&G’s range of mutual funds available for
the first time on the Prudential adviser
platform and in January, we launched
PruFolio, a new range of passive, active and
smoothed return funds.
Our investment solutions
The core engine of our business is a
long-standing collaboration between
our fund managers and the strategic asset
allocators who oversee the investment
of the Prudential life funds. This symbiotic
relationship enables us to diversify our
investment capabilities and to innovate
by developing high-quality products for
all customers.
For customers of our traditional insurance
business, our modernisation programme
is already improving service levels.
Deployment of new digital technology
has reduced markedly the time it takes to
process a redemption from a Prudential
savings bond. Customers can now register
for our MyPru online service in minutes.
During 2018, we transferred £21 billion of
our key European fund offerings into new
Luxembourg-based SICAVs, with the
process expected to be completed as
planned in the first quarter of 2019. This
positions us well to minimise any potential
disruption for our European clients
stemming from the UK’s withdrawal from
the European Union, while also creating
a more flexible and robust platform for
international growth.
Our investment capabilities span the
traditional public markets, from cash
through fixed income and on to international
equities. We also have a large range of
private asset capabilities with £59 billion of
assets under management, covering real
estate, private debt, corporate loans and
infrastructure investments such as
broadband and solar energy.
This breadth of our investment capability
underpins many of our customer offerings.
It reinforces the reliability of the returns from
our £131 billion With-Profits Fund, which is
one of Europe’s largest multi-asset portfolios
for retail savers5. The With-Profits Fund has
produced a cumulative gross return of
129.5 per cent over 10 years6 before tax and
charges compared with a 121.4 per cent
return from the FTSE 100 Index over the
same period, not allowing for any
management fees. A key component of this
performance is PruFund. Launched over
10 years ago, PruFund is a transparent and
modern way of with-profits investing in the
UK, which has since become the fastest-
growing savings and investment proposition
across the Group.
+88%
+45%
Mutual fund investment performance, net of fees,
weighted by: assets under management8
%
Since fund manager tenure –
Dec 2018
(Average = 5.7 years)
Three years –
Dec 2018
55
19
8
18
One year –
Dec 2018
9
35
25
31
73
13
9
5
Five years –
Dec 2018
50
5
25
20
2006 2007
2008 2009 2010 2011 2012 2013 2014 2015 2016
2017
2018
PruFund Growth
ABI sector comparator
First quartile
Second quartile
Third quartile
Fourth quartile
34 Prudential plc Annual Report 2018
www.prudential.co.uk
Improving the service for our
M&GPrudential customers
When Prudential UK customers want to
withdraw their funds from a bond they expect
the speed and simplicity they’d receive from
online shopping. So the challenge was to
simplify a complex, manual process and
enable customers to get access to their
money more quickly.
over three days. And the online journey is now
much easier to use than the old one. In fact,
33 per cent of customers making a withdrawal
have already adopted it after just four months.
But even vastly improved journeys are only as
good as customers’ experience of them and,
so far, they like it and tell us it’s easy to use.
Our savings and investments business took
the approach of transforming the whole
customer journey – the customer experience
from start to finish – rather than looking at
each stage of the process individually,
as they had done previously.
As a result, they’ve made significant
improvements. The time customers have had
to wait for us to send them their funds has
been cut from more than two weeks to just
Following further cross-team collaboration,
the business has just launched a version for
independent financial advisers (IFAs) too and
the initial response has been great. One IFA
told us that being able to gain access to this
data ‘at the touch of a button is market-leading
and saves two weeks when compared to
some competitors’ manual processes.’
PruFund offers individuals different rates
of smoothed return aligned with their
tolerance for risk. In 2019, we aim to
enhance advisers’ access to PruFund by
significantly upgrading our digital services
across a range of tax wrappers. We are also
exploring with European distributors, how
we might make the benefits of PruFund
available to savers in their markets. Today,
assets under management in PruFund top
£43 billion after attracting £8.5 billion of
net inflows during 2018.
The With-Profits Fund has acted as an
incubator for other products too. Among
these are a range of investment strategies
based on private asset investments – such
as real estate, infrastructure assets and
private debt – and marketed to clients
seeking this type of exposure.
We are seeing strong demand from
pension funds for our private asset
products because they are seeking higher
yields to manage long-term liabilities.
These types of investment strategy remain
comparatively resilient to fee pressure
because they are not easy for passive
investment managers to replicate as they
involve securing real and private assets.
During 2018, we continued to expand our
range of mutual funds for retail investors.
These included the innovative M&G
Positive Impact Fund, which widens access
to impact investing for retail customers
who want to invest in companies that aim
to have a positive impact on society, and
the M&G Sustainable Allocation Fund,
a multi-asset fund incorporating
environmental, social and governance
factors. We also launched an investment
trust, M&G Credit Income Investment
Trust, which for the first time allows UK
retail investors to put their money into a
combined portfolio of public and private
debt.
Responding to the growing institutional
client demand for social and environmental
investment strategies, we also launched
the M&G Impact Financing Fund, which
was awarded Best New Entrant (Fund)
at the Sustainable and ESG Investment
Awards 2018. Total assets under
management at 31 December 2018 were
£321 billion1 (31 December 2017:
£351 billion), reflecting inflows to PruFund
products, multi-asset wholesale offerings
and other institutional business, more than
offset by the expected redemption of a
single low-margin institutional mandate
and outflows from bond and equity funds
in volatile financial markets.
Distribution
At M&GPrudential, we have two
outstanding complementary brands, both
of which share a common philosophy of
aiming to deliver excellent long-term
customer outcomes.
Currently, we choose to serve our
customers’ needs through our many
business-to-business relationships.
These relationships include thousands
of independent financial advisers, most
of the high-street banks, wealth managers,
institutional investment managers and
pension funds. Two years ago, we
established an adviser platform in the
UK to give the market better access to
PruFund. Since then, we have diversified
the range of products on the platform to
include M&G mutual funds. In 2018, it was
among the fastest growing platforms in the
UK, reaching £13.3 billion of assets under
administration.
Outside the UK, we distribute our
investment products with the support of
our financial advisers, independent asset
managers, insurers and some of the world’s
largest banks. From a standing start just
under two decades ago, we have built an
international distribution network to
distribute M&G products and support
clients in 29 markets, with offices most
recently opened in Australia and the
United States. Our new Luxembourg
investment platform, as well as readying
our business for Brexit, enables us to
distribute our mutual funds more efficiently
in Europe and beyond by offering our
investment strategies in the SICAV format
favoured by many of our clients.
www.prudential.co.uk
Annual Report 2018 Prudential plc 35
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Our businesses
M&GPrudential continued
In September, we announced the
appointment of an M&GPrudential Chair,
Mike Evans. During the first half of 2019,
Mike and I will lead the recruitment of
the board for the new listed company,
including the appointment of independent
non-executive directors including the
heads of the key committees.
John Foley
Chief Executive
M&GPrudential
Update on business transformation
and demerger
Our business modernisation programme is
well advanced and already showing service
benefits for customers. In January 2018,
we announced a new partnership with
Tata Consultancy Services to transfer,
consolidate and upgrade the customer
administration systems for our traditional
insurance business. This involved the
transfer of 2,500 people, including 650
Prudential colleagues.
Each day, we move closer to our model of
a simpler, lower-cost, digital organisation.
The impact on customer outcomes is
already evident. Examples include:
a new digital service for investment
bond customers that has reduced
cash withdrawal waiting times by almost
80 per cent; changes to our bereavements
processes, which are saving our customers
200,000 days of their time each year; and
delivery of simplified annual benefit
statements for more than one million
Prudential customers. M&GPrudential
remains on track to deliver the announced
annual shareholder cost savings of circa
£145 million by 2022 for a shareholder
investment of circa £250 million.
The build of our corporate infrastructure
is well advanced. The M&GPrudential
leadership team is in place, a new
governance model has been implemented
and we have built a set of unified corporate
support services.
Notes
1 Represents M&GPrudential asset management external
funds under management and internal funds included
on the M&GPrudential long-term insurance business
balance sheet.
2 Household deposit data, Eurostat 2017.
3 UK Advised Platform Market data, Platforum, Q3 2018.
4 Based on the UK’s Top 50 Pension Schemes by size,
S&P Money Market Directory, June 2018.
5 M&GPrudential analysis comparing our largest with-profits
fund with other European mixed asset funds with data from
Financial Express.
6 Performance data for Prudential with-profits fund excludes
hypothecated asset pools of Optimum Bonus fund and
Risk-Managed PruFunds. Returns are shown before
charges.
7 ABI Mixed Investment 20 per cent – 60 per cent Shares
(performance is net of charge). PruFund returns are also net
of charge (0.65 per cent). Growth rate calculated across the
period August 2006 to December 2018.
8 Quartile ranking based on ranking of the funds
representative share class, net of fees, within their
respective Investment Association (IA) or Morningstar
sectors. Closed funds excluded. M&G total wholesale AUM
was £69.5 billion as at 31 December 2018, representing
22 per cent of the total M&GPrudential AUM. One year
figures represent £67.8 billion AUM, three year figures
represent £67.5 billion AUM, five year figures represent
£49.6 billion AUM, fund manager tenure figures represent
£67.8 billion AUM. Performance figures in GBP, bid to bid,
net income reinvested. Average fund manager tenure
December 2017 = 5.7 years. Source: M&GPrudential,
December 2018. IA and Morningstar Inc. combined UK
and Pan-European peer groups as at end December 2018.
36 Prudential plc Annual Report 2018
www.prudential.co.uk
Driving our business
Creating value and benefiting our stakeholders
Customers
Meeting the growing and fast-evolving saving and
investment needs of customers across retail,
institutional and direct channels.
+6 million customers
£321 billion total assets under management1
across a broad range of strategies and asset classes
Products
Market-leading propositions, including PruFund and
the M&G Optimal Income Fund, available in a number
of saving and investment wrappers; and a range of
strategies to help institutional customers meet their
long-term commitments.
£43 billion PruFund assets under management
Launch of new M&G Impact Financing Fund
Distribution
Multi-channel distribution, based on strong
relationships with institutional investors, advisers and
intermediaries, and direct-to-customer franchises,
including Prudential Financial Planning.
Extensive distribution relationships across
financial advisers, high-street banks, wealth
managers, institutional investment managers
and pension funds
Investment for growth
Investing in our infrastructure to improve
customer service and business efficiency and
drive long-term growth.
New offices opened in Australia and US
Luxembourg SICAV fund platform for
international growth
Transformation programme
improving customer service levels
On track to deliver the announced
annual shareholder cost savings
of circa £145 million by 2022
www.prudential.co.uk
Annual Report 2018 Prudential plc 37
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Chief Financial Officer’s report on the 2018 financial performance
Positive financial performance demonstrating
our focus on implementing our strategy
I am pleased to report that Prudential’s financial performance in
2018 reflects our strategic focus on driving growth in high-quality,
recurring health and protection and fee business across our geographies,
products and distribution channels.
I am encouraged that our financial
performance has been accomplished at
the same time as the Group has made good
progress in the complex preparations for
the intended demerger of M&GPrudential
from Prudential plc, which we announced
in March 2018. We have achieved a
number of important milestones, including
the reinsurance of £12 billion of UK annuity
policies to Rothesay Life, the transfer of the
Hong Kong insurance subsidiaries to
Prudential Corporation Asia, the issuance
of £1.6 billion of substitutable debt as part
of the necessary rebalancing of capital
across the two businesses, the
establishment of a new holding company
for M&GPrudential and the transfer of UK
operating subsidiaries to that company.
Our financial performance was led by our
Asia business which delivered double digit
growth in new business profit (up
14 per cent1), adjusted IFRS operating profit
based on longer-term investment returns
(‘operating profit’) (up 14 per cent1) and
underlying free surplus generation2
(up 14 per cent1). This performance is both
broad-based, with 10 markets achieving
double-digit growth1 in new business profit,
and high-quality, with health and
protection new business profit growing by
15 per cent1. Our Asia asset manager,
Eastspring, has grown operating profit by
6 per cent amidst a challenging external
environment. Our broad-based portfolio
of life insurance and asset management
businesses, high-quality products with
distinctive value-added services and
multi-channel strategy ensure that we
continue to benefit from the growing
customer demand in Asia for health,
protection and savings solutions that
we provide.
In the US, we saw growth in fee income
driven by higher average account balances
offset by an increase in market-related
deferred acquisition costs (DAC)
amortisation and an expected reduction in
spread-based revenues, leading to a fall in
operating profit of 11 per cent. Jackson’s
hedge programme performed as expected
as equity markets weakened towards the
end of 2018 and contributed to an
increased risk-based capital ratio of
458 per cent, up from 409 per cent at
year-end 2017.
M&GPrudential delivered operating profit
of £1,634 million, up 19 per cent (2017:
£1,378 million). This included £519 million
(2017: £597 million) from our core3
with-profits and annuity business, with the
with-profits contribution up 11 per cent to
£320 million, offset by lower annuities
earnings following the reinsurance of
£12 billion4 of liabilities in March 2018.
Other operating profits included the
benefit of updated longevity assumptions
and an insurance recovery on the costs of
reviewing internally vesting annuity sales.
M&GPrudential remains on track to deliver
the announced annual shareholder cost
savings of circa £145 million by 2022 for
a shareholder investment of circa
£250 million.
Sterling weakened over the course of 2018,
compared with most of the currencies in
our major international markets. However,
average exchange rates remained above
those in 2017, leading to a negative effect
on the translation of the results from
non-sterling operations. To aid comparison
of underlying progress, we continue to
express and comment on the performance
trends in our Asia and US operations on
a constant exchange rate basis.
The performance of many equity markets
was subdued in 2018, and was characterised
by higher levels of volatility. The S&P 500
closed the year 6 per cent lower than 2017,
the FTSE 100 index was down 12 per cent
and the MSCI Asia excluding Japan index
down 16 per cent. However, average
balances, which have the most material
impact on our fee-based earnings during
the year, were mostly higher, reflecting the
concentration of equity market weakness
in the fourth quarter. Long-term yields
increased favourably in the US and our
larger Asia markets, but were only slightly
higher in the UK.
The key financial highlights in 2018 were
as follows:
— New business profit was 11 per cent
higher at £3,877 million (7 per cent on
an actual exchange rate basis), while
APE sales were up 1 per cent (down
2 per cent on an actual exchange rate
basis). In Asia, new business profit
increased 14 per cent with improved
new business margins primarily
reflecting product mix. Jackson’s new
business profit increased by 5 per cent,
primarily reflecting the favourable
effect of higher US interest rates. UK
and Europe life new business profit
grew by 3 per cent, driven by a
2 per cent increase in APE sales,
supported by continued demand for
products offering access to our PruFund
investment proposition.
— Asset management net outflows
of £11.5 billion reflected external net
outflows of £9.9 billion (2017: net inflows
of £17.3 billion) within M&GPrudential
asset management, the majority of
which related to the expected
redemption of a single, low margin
£6.5 billion institutional mandate, with
the remainder reflecting the challenging
market environment for equity and fixed
income business. Eastspring saw
external net outflows, excluding money
market funds, of £1.6 billion (2017: net
inflows of £3.1 billion on an actual
exchange rate basis), also as a result of
market conditions.
— Operating profit was 6 per cent higher
at £4,827 million (3 per cent higher on an
actual exchange rate basis). Continued
business momentum helped grow
Asia’s operating profit by 14 per cent to
£2,164 million and M&GPrudential
operating profit was 19 per cent higher,
reflecting a number of beneficial
impacts, which are not expected to recur
at the same level. In the US, operating
profit decreased by 11 per cent, as a
result of higher market-related DAC
amortisation charges.
— Total IFRS post-tax profit was up
30 per cent at £3,013 million
(26 per cent on an actual exchange rate
basis) after a £508 million pre-tax loss
following the reinsurance of £12 billion4
of UK annuities to Rothesay Life. This
increase was driven by Jackson, whose
IFRS profit after tax in 2018 was
£1,484 million, up from £245 million
(£254 million on an actual exchange
rate basis) reflecting higher interest
rates and gains from Jackson’s hedging
instruments as equity markets fell
towards the end of 2018. Group IFRS
shareholders’ equity was 7 per cent
higher at £17.2 billion.
38 Prudential plc Annual Report 2018
www.prudential.co.uk
— EEV basis operating profit, including
embedded value in-force profit,
increased 19 per cent (15 per cent
on an actual exchange rate basis) to
£7,563 million. EEV basis shareholders’
equity was up 11 per cent at
£49.8 billion.
— Underlying free surplus generation2,
(11 per cent on an actual exchange rate
basis), after financing new business
growth. This was driven by in-force
growth of 10 per cent combined with
a lower level of investment in new UK
and Europe business as a result of
management actions to optimise capital
absorption.
our preferred measure of cash
generation, from our life and asset
management businesses, increased by
14 per cent to £4,047 million
— Group shareholders’ Solvency II
capital surplus5 was estimated at
£17.2 billion at 31 December 2018,
equivalent to a cover ratio of
232 per cent6 (31 December 2017:
£13.3 billion, 202 per cent). The
improvement in the period reflects the
continuing strength of the Group’s
operating capital generation, and a net
£1.2 billion increase in qualifying debt.
— Full year ordinary dividend
increased by 5 per cent to 49.35 pence
per share, reflecting our 2018
performance and our confidence in the
future prospects of our businesses.
IFRS profit
Operating profit before tax based on longer-term
Actual exchange rate
Constant exchange rate
2018 £m
2017 £m
Change %
2017 £m
Change %
investment returns
Asia
Long-term business
Asset management
Total
US
Long-term business
Asset management
Total
UK and Europe
Long-term business
General insurance commission
Total insurance operations
Asset management
Total
Other income and expenditure
Total operating profit based on longer-term investment returns
before tax and restructuring costs
Restructuring costs
Total operating profit based on longer-term investment
returns before tax
Non-operating items:
Short-term fluctuations in investment returns on
shareholder-backed business
Amortisation of acquisition accounting adjustments
(Loss) gain on disposal of businesses and corporate transactions
Profit before tax
Tax charge attributable to shareholders' returns
Profit for the year
IFRS earnings per share
1,982
182
2,164
1,911
8
1,919
1,138
19
1,157
477
1,634
(725)
4,992
(165)
1,799
176
1,975
2,214
10
2,224
861
17
878
500
1,378
(775)
4,802
(103)
10
3
10
(14)
(20)
(14)
32
12
32
(5)
19
6
4
(60)
1,727
171
1,898
2,137
9
2,146
861
17
878
500
1,378
(769)
4,653
(103)
4,827
4,699
3
4,550
(558)
(46)
(588)
3,635
(622)
3,013
(1,563)
(63)
223
3,296
(906)
2,390
64
27
n/a
10
31
26
(1,514)
(61)
218
3,193
(876)
2,317
15
6
14
(11)
(11)
(11)
32
12
32
(5)
19
6
7
(60)
6
63
25
n/a
14
29
30
Basic earnings per share based on operating profit after tax
Basic earnings per share based on total profit after tax
156.6
116.9
145.2
93.1
8
26
140.4
90.0
12
30
Actual exchange rate
Constant exchange rate
2018 pence
2017 pence
Change %
2017 pence
Change %
www.prudential.co.uk
Annual Report 2018 Prudential plc 39
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Adjusted IFRS operating profit
based on longer-term investment
returns (operating profit)
2018 total operating profit increased by
6 per cent (3 per cent on an actual
exchange rate basis) to £4,827 million.
Asia total operating profit of
£2,164 million was 14 per cent higher than
the previous year (10 per cent on an actual
exchange rate basis). Operating profit from
life insurance operations increased
15 per cent to £1,982 million (10 per cent
on an actual exchange rate basis), reflecting
the continued growth of our in-force book
of recurring premium business, with
renewal insurance premiums7 reaching
£12,856 million (2017: £11,087 million).
Insurance margin was up 15 per cent,
driven by our continued focus on health
and protection business, now contributing
to 70 per cent of Asia life insurance
revenues8 (2017: 68 per cent). At a market
level, growth was led by Hong Kong up
33 per cent, Singapore 22 per cent and
China 20 per cent respectively.
Eastspring’s operating profit increased
by 6 per cent (up 3 per cent on an actual
exchange rate basis) to £182 million
reflecting 4 per cent revenue growth
which, combined with positive operating
leverage, resulted in an improvement in
the cost-income ratio7 to 55 per cent
(2017: 56 per cent on an actual exchange
rate basis).
US total operating profit at
£1,919 million decreased by 11 per cent
(14 per cent on an actual exchange rate
basis). Higher fee income was more than
offset by higher market-related DAC
amortisation and lower spread-based
income. Although equity markets declined
in the fourth quarter, average separate
account balances were above the prior
year, given positive net inflows which
supported higher levels of fee income. The
higher market-related DAC amortisation
arises mainly from £194 million acceleration
of amortisation compared with £83 million
favourable deceleration in 2017 (on a
constant exchange rate basis), leading to
an adverse year-on-year movement of
£277 million. Excluding the acceleration
and deceleration in 2018 and 2017,
operating profit in 2018 would have been
2 per cent higher than 2017 on a constant
exchange rate basis. The variability in DAC
from year-on-year is dependent on
separate account return and its interaction
with the mean reversion formula applied
by Jackson when determining the
amortisation charge for the year. In the
current year the dominant factors driving
this calculation have been the equity
market falls in 2018 (whereas 2017 saw
equity market rises). Spread-based income
decreased 20 per cent (22 per cent on an
actual exchange rate basis), as anticipated,
reflecting the impact of lower yields on our
fixed annuity portfolio and a reduced
contribution from asset duration swaps.
While we expect these effects to continue
to compress spread margins, the continued
upwards movements in US reinvestment
yields may help to reduce the speed of the
decline.
UK and Europe total operating profit
was 19 per cent higher at £1,634 million.
Life insurance operating profit increased
by 32 per cent to £1,138 million (2017:
£861 million). Within this total, the
contribution from our core3 with-profits
and in-force annuity business was
£519 million (2017: £597 million), including
an increased transfer to shareholders from
the with-profits funds of £320 million
(2017: £288 million) and within this, a
30 per cent increase in the contribution
from PruFund business of £55 million.
Earnings from our core3 annuities business
were lower, reflecting the reinsurance of
£12 billion of annuity liabilities to Rothesay
Life in March 2018. The balance of the life
insurance result reflects the contribution
from other elements which are not
expected to recur at the same level. This
includes the favourable impact of longevity
assumption changes, contributing
£441 million (2017: £204 million) relating
to changes to annuitant mortality
assumptions reflecting recent mortality
trends, which have shown a slowdown
in life expectancy improvements in
recent periods, and the adoption of the
Continuous Mortality Investigation
(CMI) 2016 model (2017: adoption of
2015 model). The result also includes a
£166 million insurance recovery, related
to the costs of reviewing internally vesting
annuities sold without advice after July
2008. Profits from management actions
of £58 million were broadly offset by a
provision of £55 million for the cost of
equalising guaranteed minimum pension
benefits on products sold by the UK
insurance business, following a High Court
ruling in October which applied across the
UK life insurance industry.
Asset management operating profit
decreased 5 per cent to £477 million,
largely reflecting a normalisation of
performance fees to £15 million, compared
with a particularly high contribution of
Operating profit by business
% vs 2017
45%
(19)%
£4,827m
+6% (+3% AER)
34%
40%
Asia £2,164m, +14% (+10% AER)
US £1,919m, -11% (-14% AER)
M&GPrudential £1,634m, +19%
Other £(890)m, -2% (-1% AER)
£53 million in the prior year. Excluding
the contribution of performance fees,
operating profit was 3 per cent higher.
This reflects both the higher average level
of funds managed by M&G (up from
£275.9 billion in 2017 to £276.6 billion in
2018) and a higher revenue margin9 of
40 basis points (2017: 37 basis points).
Operating profit is after charges of
£27 million incurred in preparing the
business for the UK’s proposed exit
from the European Union, including the
migration of fund assets to our
Luxembourg-domiciled SICAV platform.
The cost-income ratio7 of 59 per cent
remains broadly in line with the prior year
(2017: 58 per cent).
Life insurance profit drivers
We track the progress that we make in
growing our life insurance business by
reference to the scale of our obligations to
our customers, which are referred to in the
financial statements as policyholder
liabilities. Each period these increase as we
write new business and collect regular
premiums from existing customers and
decrease as we pay claims and policies
mature. These policyholder liabilities
contribute, for example, to our ability to
earn fees on the unit-linked element and
indicates the scale of the insurance
element, another key source of profitability
for the Group.
40 Prudential plc Annual Report 2018
www.prudential.co.uk
Chief Financial Officer’s report on the 2018 financial performance continued Shareholder-backed policyholder liabilities and net liability flows10
2018 £m
Actual exchange rate
2017 £m
Actual exchange rate
Asia
US
UK and Europe
Total Group
37,402
180,724
56,367
274,493
At 1
January
Net liability
flows11
Market and
other
movements
(56)
5,089
(12,833)
At 31
December
40,597
185,600
40,760
3,251
(213)
(2,774)
264
(7,800)
266,957
At 1
January
Net liability
flows11
Market and
other
movements
32,851
177,626
56,158
266,635
2,301
3,137
(2,721)
2,717
2,250
(39)
2,930
5,141
At 31
December
37,402
180,724
56,367
274,493
Focusing on business supported by
shareholder capital, which generates the
majority of the life profit, in 2018 net flows
into our businesses were overall positive at
£0.3 billion driven by our Asian operations.
In the US, net outflows were £0.2 billion
with positive separate account net inflows
of £1.1 billion being more than offset by
general account net outflows of
£1.3 billion, as a result of higher surrenders
as the portfolio develops. In the UK and
Europe, the net outflows principally reflect
the run-off of the in-force annuity portfolio
following our effective withdrawal from
selling new annuity business. Market
and other movements have reduced
shareholder-back liabilities by £7.8 billion.
This includes the removal of £10.9 billion4
of UK annuity liabilities, representing the
portion of the £12 billion4 reinsured
liabilities that will be subject to a Part VII
transfer to Rothesay Life, following their
reclassification as held for sale, offset by
additions of £4.1 billion in Jackson as a
result of the agreement in November 2018
to reinsure a portfolio of business from
John Hancock. The remaining £1.0 billion
primarily reflects the effects of negative
investment markets offset by currency
effects as sterling weakened over the
period. In total, business flows and market
movements have decreased shareholder-
backed policyholder liabilities from
£274.5 billion to £267.0 billion.
Policyholder liabilities and net liability flows in with-profits business10,12
2018 £m
Actual exchange rate
2017 £m
Actual exchange rate
Asia
UK and Europe
Total Group
At 1
January
Net liability
flows11
36,437
124,699
161,136
5,165
3,209
8,374
Market and
other
movements
564
(3,779)
(3,215)
At 31
December
42,166
124,129
166,295
At 1
January
Net liability
flows11
29,933
113,146
143,079
4,574
3,457
8,031
Market and
other
movements
1,930
8,096
10,026
At 31
December
36,437
124,699
161,136
Policyholder liabilities in our with-profits
business have increased by 3 per cent to
£166.3 billion reflecting the popularity of
our participating funds in Asia and PruFund
in the UK, as consumers seek protection
from some of the short-term ups and
downs of direct stock market investments
by using an established smoothing process.
Across our Asia and UK and Europe
operations, net liability flows increased to
£8.4 billion. As returns from these funds
are smoothed and shared with customers,
the emergence of shareholder profit is
more gradual. This business, nevertheless,
remains an important source of future
shareholder value.
www.prudential.co.uk
Annual Report 2018 Prudential plc 41
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Analysis of long-term insurance business pre-tax adjusted IFRS operating profit based on longer-term investment
returns by driver
Actual exchange rate
Constant exchange rate
2018
2017
2017
Operating
profit
£m
Average
liability
£m
Margin
bps
Operating
profit
£m
Average
liability
£m
Margin
bps
Operating
profit
£m
Average
liability
£m
899
85,850
2,711 175,443
391 147,318
105
155
27
1,122
88,908
2,609 166,839
347 136,474
126
156
25
1,090
87,553
2,518 162,267
345 136,496
2,480
2,254
2,302
2,287
2,223
2,210
Margin
bps
124
155
25
(2,319)
6,802
(2,413) 265,597
(34)%
(91)
(2,443)
6,958
(2,305) 261,114
(35)%
(88)
(2,364)
6,767
(2,231) 255,313
(35)%
(87)
216
242
4,461
570
5,031
505
234
4,658
216
4,874
490
228
4,509
216
4,725
Spread income
Fee income
With-profits
Insurance margin
Margin on revenues
Expenses:
Acquisition costs*
Administration expenses
DAC adjustments
Expected return on shareholder assets
Other items†
Long-term business adjusted IFRS
operating profit based on longer-
term investment returns
* The ratio of acquisition costs is calculated as a percentage of APE sales including with-profits sales. The acquisition costs include only those relating to shareholder-backed business.
† Other items includes share of related tax charges from joint ventures and associate and other items considered non-core to the UK and Europe business, see note I(a) of the Additional
unaudited financial information.
Analysis of long-term insurance business operating profit by driver
£m (% vs 2017)
£4,874m
1,122
2,302
£4,725m
1,090
2,223
£5,031m
899
2,480
2,609
2,518
2,711
Spread income
Insurance margin
Fee income
Other margins and expenses
Growth vs 2017 on a constant
exchange rate basis
(1,159)
(1,106)
(1,059)
2017 AER
2017 CER
2018
-18%
+12%
+8%
+4%
We continue to maintain our preference
for high-quality sources of income such as
insurance margin from life and health and
protection business, and fee income. We
favour insurance margin because it is
relatively insensitive to the equity and
interest rate cycle and prefer fee income to
spread income because it is more capital-
efficient. In line with this approach, on a
constant exchange rate basis, insurance
margin has increased by 12 per cent (up
8 per cent on an actual exchange rate basis)
and fee income by 8 per cent (up 4 per cent
on an actual exchange rate basis), while as
anticipated, spread income decreased by
18 per cent (down 20 per cent on an actual
exchange rate basis). Administration
expenses increased to £2,413 million
(2017: £2,231 million) as the business
continues to expand in Asia, alongside
higher asset-based commissions within
the US business, which are treated as an
administrative expense in this analysis.
Asset management profit drivers
Movements in asset management operating
profit are also influenced primarily by
changes in the scale of these businesses, as
measured by funds managed on behalf of
external institutional and retail customers
and our internal life insurance operations.
42 Prudential plc Annual Report 2018
www.prudential.co.uk
Chief Financial Officer’s report on the 2018 financial performance continued Asset management external net flows and external funds under management13,14
£m
Net flows £(11,501)m
Net flows £20,478m
17,337
3,141
1,495
15,248
182,519
7,714
38,042
136,763
219,740
9,317
46,568
163,855
(9,915)
(1,586)
1,500
(1,736)
208,003
11,602
49,455
146,946
1 Jan 2017
M&GPrudential
asset
management
Asia asset
management15
MMF
Market
and other
movements
31 Dec 2017
M&GPrudential
asset
management
Asia asset
management15
MMF
Market
and other
movements
31 Dec 2018
M&GPrudential’s external asset
management net outflows were £9.9 billion
(2017: net inflows of £17.3 billion) driven
by the expected redemption of a single
£6.5 billion low-margin institutional
mandate, and net outflows from wholesale
and direct clients from bond and equity
classes in volatile financial markets.
This was partially offset by inflows into
multi-asset wholesale offerings and other
institutional business products, including
public debt and illiquid credit strategies.
Internal life insurance assets under
management were £174.3 billion (2017:
£186.8 billion) benefiting from PruFund net
flows of £8.5 billion, offset by the effect of
the £12 billion4 annuities reinsurance and
lower equity market levels. As a result,
total M&GPrudential assets under
management16 reduced to £321.2 billion
(2017: £350.7 billion).
Eastspring’s external assets under
management, excluding money market
funds, increased by 6 per cent (on an
actual exchange rate basis) to £49.5 billion,
reflecting the acquisition of TMB Asset
Management, which added £9 billion,
offset by client outflows and adverse
market movements. Higher internal assets
under management, driven by inflows into
the life business and money market funds,
lifted Eastspring’s total assets under
management to £151.3 billion.
Other income and expenditure
and restructuring costs
Other income and expenditure consists
of interest payable on core structural
borrowings, corporate expenditure and
other income. These items, together with
restructuring costs, increased 2 per cent
to a net charge of £890 million (2017:
£872 million). This reflects higher
restructuring costs of £165 million (2017:
£103 million), partly offset by a lower
interest expense. Restructuring costs
include investment spend of £99 million
in relation to M&GPrudential merger and
transformation bringing the cumulative
cost to £143 million, on an IFRS basis, since
the project began. Other restructuring
costs relate to efficiency and change
programmes across the Group, for example
the rationalisation of US locations in 2018.
IFRS basis non-operating items
Non-operating items consist of short-term
fluctuations in investment returns on
shareholder-backed business of negative
£558 million (2017: negative
£1,514 million), the results attaching to
disposal of businesses of negative
£588 million (2017: positive £218 million),
and the amortisation of acquisition
accounting adjustments of negative
£46 million (2017: negative £61 million)
arising mainly from the REALIC business
acquired by Jackson in 2012. The loss
related to the disposal of businesses relates
primarily to the £508 million pre-tax loss
following the reinsurance of £12 billion4 UK
annuities to Rothesay Life in March 2018.
Short-term fluctuations in investment
returns on shareholder-backed business
are discussed further below.
IFRS basis short-term fluctuations
in investment returns on
shareholder-backed business
Operating profit is based on longer-term
investment return assumptions. The
difference between actual investment
returns recorded in the income statement
and the assumed longer-term returns is
reported within short-term fluctuations in
investment returns.
In 2018, the total short-term fluctuations in
investment returns on shareholder-backed
business were negative £558 million (2017:
negative £1,563 million on an actual
exchange rate basis) and comprised
negative £512 million (2017: negative
£1 million on an actual exchange rate basis)
for Asia, negative £100 million (2017:
negative £1,568 million on an actual
exchange rate basis) in the US, positive
£34 million (2017: negative £14 million on
an actual exchange rate basis) in the UK
and Europe and positive £20 million (2017:
positive £20 million on an actual exchange
rate basis) in other operations.
Rising interest rates in many territories in
Asia led to unrealised bond losses in the
period. In the US, lower equity market
levels, alongside higher interest rate levels,
as expected, resulted in gains on equity
hedge instruments which are designed to
protect Jackson’s capital position, balanced
by higher technical reserve requirements.
www.prudential.co.uk
Annual Report 2018 Prudential plc 43
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information IFRS basis effective tax rates
In 2018, the effective tax rate on operating
profit was 16 per cent (2017: 21 per cent),
reflecting the reduction in the US federal
tax rate from 35 per cent in 2017 to
21 per cent in 2018.
The 2018 effective tax rate on the total
IFRS profit was 17 per cent (2017:
14 per cent after excluding the one-off
impact of the re-measurement of US
deferred tax balances, following the
enactment in December 2017 of tax
reform in the US). The increase in the
2018 effective tax rate reflects non-tax
deductible investment losses in Asia
operations.
The main driver of the Group’s effective tax
rate is the relative mix of the profits between
jurisdictions with higher tax rates (such as
Indonesia and Malaysia), jurisdictions with
lower tax rates (such as Hong Kong and
Singapore), and jurisdictions with rates in
between (such as the UK and the US).
Total tax contribution
The Group continues to make significant
tax contributions in the jurisdictions in
which it operates, with £2,839 million
remitted to tax authorities in 2018. This
was similar to the equivalent amount of
£2,903 million remitted in 2017.
Tax strategy
In May 2018, the Group published its
updated tax strategy which, in addition
to complying with the mandatory UK
(Finance Act 2016) requirements,
also included a number of additional
disclosures, including a breakdown
of revenues, profits and taxes for all
jurisdictions where more than £5 million
tax was paid. This disclosure was 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 2018 data, will be available on
the Group’s website before 31 May 2019.
New business performance
Life EEV new business profit and APE new business sales (APE sales)
Actual exchange rate
Constant exchange rate
2018 £m
2017 £m
Change %
2017 £m
Change %
APE
sales
New
business
profit
APE
sales
New
business
profit
APE
sales
New
business
profit
APE
sales
New
business
profit
APE
sales
New
business
profit
3,744
1,542
1,516
6,802
2,604
921
352
3,877
3,805
1,662
1,491
6,958
2,368
906
342
3,616
(2)
(7)
2
(2)
10
2
3
7
3,671
1,605
1,491
6,767
2,282
874
342
3,498
2
(4)
2
1
14
5
3
11
Asia
US
UK and Europe
Total Group
Life insurance new business profit
was up 11 per cent (7 per cent on an actual
exchange rate basis) to £3,877 million, and
life insurance new business APE sales
increased by 1 per cent (decreased by
2 per cent on an actual exchange rate basis)
to £6,802 million, including an increase of
4 per cent during the second half of 2018
compared with the second half of 2017,
led by 8 per cent growth in Asia.
In Asia, new business profit was
14 per cent higher at £2,604 million
(10 per cent on an actual exchange rate
basis), benefiting from pricing actions and
our strategic focus on health and
protection sales. This growth was also
supported by increasing sales momentum,
with APE growth of 8 per cent during the
second half of 2018 compared with the
second half of 2017.
Our focus on quality is undiminished, with
regular premium contracts accounting for
94 per cent of APE sales as well as the mix
of health and protection products
increasing to 28 per cent of APE sales.
Overall, new business profit from health
and protection products was 15 per cent
higher and contributed 70 per cent of the
total in Asia. This favourable mix provides
a high level of recurring income and an
earnings profile that is significantly less
correlated to investment markets.
The performance remains broad-based,
with 10 markets delivering double-digit
percentage growth in new business profit.
In Hong Kong, new business profit
increased by 17 per cent, driven largely
by our ongoing focus on increasing health
and protection sales, particularly those
with more comprehensive coverage.
Hong Kong APE sales increased by
3 per cent overall, with higher sales levels
from Mainland China visitors to Hong Kong
driving positive momentum over the
course of the year, culminating in APE sales
growth of 18 per cent in the discrete fourth
quarter. In China, new business profit
increased by 14 per cent, reflecting positive
product mix effects, and APE sales growth
of 27 per cent in the fourth quarter. In
Singapore, new business profit increased
by 15 per cent on higher APE sales (up
5 per cent), driven by our agency and
bancassurance channels, pricing actions
and favourable product mix shifts. Growth
in new business profit in Thailand (up
75 per cent), Vietnam (up 29 per cent) and
Malaysia (up 13 per cent) reflects our value
focus and favourable shifts in product mix.
New business performance
£m (% vs 2017)
55%
9%
67%
22%
24% %
23%
Split of APE new business sales
£6,802m, +1% (-2% AER)
Asia £3,744m, +2% (-2% AER)
US £1,542m, -4% (-7% AER)
M&GPrudential £1,516m, +2%
Split of new business profit
£3,877m, +11% (+7% AER)
Asia £2,604m, +14% (+10% AER)
US £921m, +5% (+2% AER)
M&GPrudential £352m, +3%
44 Prudential plc Annual Report 2018
www.prudential.co.uk
Chief Financial Officer’s report on the 2018 financial performance continued
Our Indonesia business continues to
experience challenging conditions which,
compounded by the adverse impact of
higher yields, drove new business profit
lower by 23 per cent. Despite these
headwinds, we are investing in the
business to strengthen our distribution
capabilities, upgrading our systems and
refreshing our product propositions to
meet customer needs.
Free surplus generation2
In the US, new business profit increased
by 5 per cent to £921 million (up 2 per cent
on an actual exchange rate basis) as a
4 per cent reduction in new APE sales was
more than balanced by the favourable
effect of higher interest rates and spread
assumption changes compared with the
prior period.
In our UK and Europe life business, new
business profit increased to £352 million,
up 3 per cent supported by 2 per cent
growth in APE sales. New sales continue
to be driven by the popular PruFund
proposition with APE sales up 3 per cent.
Reflecting this performance, total PruFund
assets under management of £43 billion as
at 31 December 2018 were 20 per cent
higher than at the start of the year, driven
by positive net flows of £8.5 billion.
Actual exchange rate
Constant exchange rate
2018 £m
2017 £m
Change %
2017 £m
Change %
Free surplus generation
Asia
US
UK and Europe
Underlying free surplus generated from in-force life business
and asset management before restructuring costs
Restructuring costs
Underlying free surplus generated from in-force life
business and asset management
Investment in new business
Underlying free surplus generated
Market related movements, timing differences
and other non-operating movements
Profit attaching to corporate transactions
Net cash remitted by business units
Total movement in free surplus
Free surplus at end of year
6
4
13
8
(62)
7
11
11
1,493
1,527
1,486
4,506
(77)
4,429
(886)
3,543
11
8
13
11
(62)
10
8
14
1,659
1,644
1,684
4,987
(125)
4,862
(815)
4,047
(1,282)
283
(1,732)
1,316
8,894
1,562
1,582
1,486
4,630
(77)
4,553
(913)
3,640
(1,012)
172
(1,788)
1,012
7,578
Free surplus generation is the financial
metric we use to measure the internal cash
generation of our business operations and
is based on the capital regimes that apply
locally in the various jurisdictions in which
our life businesses operate. For life
insurance operations it represents amounts
maturing from the in-force business during
the year, net of amounts reinvested in
writing new business. For asset
management businesses, it equates to
post-tax operating profit for the period.
We drive free surplus generation by
targeting markets and products that have
low capital strain, high-return and fast
payback profiles and by delivering both
good service and value to improve
customer retention. Our ability to generate
both growth and cash is a distinctive
feature of Prudential.
In 2018, underlying free surplus generation
from our life insurance and asset
management business, before investment
in new business, increased by 10 per cent
to £4,862 million (increased by 7 per cent
on an actual exchange rate basis), reflecting
increased contributions from all our
businesses. In Asia, growth in the in-force
life portfolio, combined with post-tax asset
management profit from Eastspring,
contributed to free surplus generation of
£1,659 million, up 11 per cent. In the US,
in-force free surplus generation increased
by 8 per cent reflecting higher in-force
values. In the UK and Europe, in-force free
surplus generation increased by 13 per cent
to £1,684 million, including the positive
impact of longevity assumption changes,
and the £138 million post-tax insurance
recovery for the costs of the UK review of
past non-advised annuity sales practices
and related potential redress. In 2017 free
surplus was reduced by an increase in the
related provision of £187 million to cover
such costs.
Although new business profit increased
by 11 per cent, the amount of free surplus
invested in writing new life business in the
period was lower at £815 million (2017:
£886 million) primarily reflecting lower sales
in the US and measures taken to optimise
capital absorption in the UK and Europe.
After funding cash remittances from the
business units to the Group, recognition
of the profit attaching to the disposal of
businesses, and other movements, which
includes market movements, the closing
value of free surplus in our life and asset
management operations was £8.9 billion
at 31 December 2018.
We continue to manage cash flows across
the Group with a view to achieving a
balance between ensuring sufficient
remittances are made to service central
requirements (including paying the
external dividend) and maximising value
to shareholders through retention and
reinvestment of capital in business
opportunities.
www.prudential.co.uk
Annual Report 2018 Prudential plc 45
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Actual exchange rate
2018 £m
2017 £m
699
342
654
37
1,732
3,236
645
475
643
25
1,788
2,264
Business unit remittance17
Net cash remitted by business units:
Asia
US
UK and Europe
Other UK (including Prudential Capital)
Net cash remitted by business units
Holding company cash at 31 December
Movement in central cash17
£m
1,732
(1,244)
914
3,236
(430)
2,264
1 Jan 2018
Cash remitted
to Group by
business units
Dividends
paid
Central
costs
Corporate
activities/other
31 Dec 2018
2017 second interim dividend and 2018 first interim dividend
Cash remitted to the Group by business
units in 2018 amounted to £1,732 million,
driven by higher remittances from Asia,
demonstrating the quality and scale of its
growth. Jackson made remittances of
£342 million, although lower than the
prior period. The remittance from
M&GPrudential of £654 million was
2 per cent higher than the combined
remittance in 2017, with an increase in the
with-profits transfer from £215 million in
2017 to £233 million in 2018.
Cash remitted to the Group in 2018 was
used to meet central costs of £430 million
(2017: £470 million) and pay the 2017
second interim and 2018 first interim
dividends. As well as these movements
were corporate activities and other cash
flows of positive £914 million (2017:
negative £521 million), primarily driven by
net debt issuance of £1.2 billion within the
year. This led to holding company cash
increasing from £2,264 million to
£3,236 million over 2018.
46 Prudential plc Annual Report 2018
www.prudential.co.uk
Chief Financial Officer’s report on the 2018 financial performance continued Post-tax profit – EEV
Post-tax operating profit based on longer-term investment returns
Asia
Long-term business
Asset management
Total
US
Long-term business
Asset management
Total
UK and Europe
Long-term business
General insurance commission
Total insurance operations
Asset management
Total
Other income and expenditure
Post-tax operating profit based on longer-term investment returns
before restructuring costs
Restructuring costs
Post-tax operating profit based on longer-term investment returns
Non-operating items:
Short-term fluctuations in investment returns
Effect of changes in economic assumptions
Mark to market value on core structural borrowings
Impact of US tax reform
(Loss) gain on disposal of businesses and corporate transactions
Post-tax profit for the year
Earnings per share – EEV
Actual exchange rate
Constant exchange rate
2018 £m
2017 £m
Change %
2017 £m
Change %
4,387
159
4,546
2,115
3
2,118
1,374
15
1,389
392
1,781
3,705
155
3,860
2,143
7
2,150
1,015
13
1,028
403
1,431
(726)
(746)
7,719
(156)
7,563
(3,219)
146
549
–
(451)
4,588
6,695
(97)
6,598
2,111
(102)
(326)
390
80
8,751
18
3
18
(1)
(57)
(1)
35
15
35
(3)
24
3
15
(61)
15
n/a
n/a
n/a
n/a
n/a
(48)
3,562
150
3,712
2,069
7
2,076
1,015
13
1,028
403
1,431
(740)
6,479
(97)
6,382
2,057
(91)
(326)
376
77
8,475
23
6
22
2
(57)
2
35
15
35
(3)
24
2
19
(61)
19
n/a
n/a
n/a
n/a
n/a
(46)
Basic earnings per share based on post-tax operating profit
Basic earnings per share based on post-tax total profit
293.6
178.1
257.0
340.9
14
(48)
248.6
330.2
18
(46)
Actual exchange rate
Constant exchange rate
2018 pence
2017 pence
Change %
2017 pence
Change %
EEV operating profit
On an EEV basis, Group post-tax operating
profit based on longer-term investment
return increased by 19 per cent (up
15 per cent on an actual exchange rate
basis) to £7,563 million in 2018.
EEV operating profit includes new business
profit from the Group’s life business, which
increased by 11 per cent (up 7 per cent on
an actual exchange rate basis) to
£3,877 million. It also includes in-force life
business profit of £3,999 million, which
was 27 per cent higher than prior year (up
23 per cent on an actual exchange rate
basis), primarily reflecting the growth in our
in-force business and higher interest rates.
This is most evident in the profit from the
unwind of the in-force business, which
was 22 per cent higher at £2,573 million.
Experience and assumption changes were
positive at £1,426 million (2017:
£1,044 million), reflecting the continuing
performance of our in-force policies.
In Asia, EEV life operating profit was up
23 per cent to £4,387 million, driven by
14 per cent growth in new business profit
and 39 per cent growth in in-force profit,
reflecting the growth of the in-force
business and positive assumption changes
and experience variances, as a result of the
high quality of the existing portfolio.
Jackson’s EEV life operating profit was up
2 per cent to £2,115 million. This reflects a
5 per cent increase in new business profit
to £921 million and higher expected
returns from the in-force business due to
prior period growth and higher interest
rates, partially offset by a reduced level
of favourable assumption changes and
experience variances.
In the UK and Europe, EEV life operating
profit increased by 35 per cent to
£1,374 million (2017: £1,015 million). This
was as a result of a 3 per cent increase in
new business profit, and higher in-force
profit which included a £330 million benefit
from revisions to longevity assumptions
and a £138 million insurance recovery
related to the costs of reviewing past
annuity sales after 1 July 2008, for which a
provision of £187 million had been charged
in the prior period.
www.prudential.co.uk
Annual Report 2018 Prudential plc 47
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information EEV operating profit by business
% vs 2017
Capital position, financing and liquidity
Capital position
Analysis of movement in Group shareholder Solvency II surplus18
(12)%
58%
8%
£7,563m
+19% (+15% AER)
18%
28%
Asia life £4,387m, +23% (+18% AER)
US life £2,115m, +2% (-1% AER)
M&GPrudential life £1,374m, +35%
Asset management and general insurance
£569m, -1% (-2% AER)
Other £(882)m, -5% (-5% AER)
EEV non-operating items
Negative short-term fluctuations of
£3,219 million primarily reflect lower than
expected returns on equities and other
investments held by the Group’s US
separate accounts and by the with-profits
and unit-linked funds businesses in Asia
and the UK. These negative effects have
been partly offset by gains on equity
derivatives held by the US business to
manage market exposures arising
from the guarantees provided on its
annuity products.
Offsetting short-term fluctuations is a
£146 million benefit from economic
assumption changes, principally reflecting
the impact of higher interest rates on the
projected future fund growth rates for
certain businesses written in Hong Kong
and Singapore and the variable annuity
business in the US. These projected higher
growth rates increase fund values for
policyholders and hence profitability for
shareholders.
The loss attaching to corporate
transactions of £451 million primarily
relates to the reinsurance of the
shareholder annuity portfolio to Rothesay
Life. A more detailed explanation of this
and other corporate transactions occurring
in the period are set out in note 17 of the
EEV financial statements.
Solvency II surplus at 1 January
Operating experience
Non-operating experience (including market movements)
M&GPrudential transactions (see below)
Other capital movements:
Net subordinated debt issuance (redemption)
Foreign currency translation impacts
Dividends paid
Model changes
Estimated Solvency II surplus at 31 December
2018 £bn
2017 £bn
13.3
4.2
(1.2)
0.4
1.2
0.5
(1.2)
–
17.2
12.5
3.6
(0.6)
–
(0.2)
(0.7)
(1.2)
(0.1)
13.3
The high quality and recurring nature of
our operating capital generation and our
disciplined approach to managing balance
sheet risk has resulted in an increase in the
Group’s shareholders’ Solvency II capital
surplus5 which is estimated at £17.2 billion
at 31 December 2018 (equivalent to a
solvency ratio of 232 per cent6), compared
with £13.3 billion (202 per cent) at
31 December 2017. The increase in surplus
was driven by operating capital formation
of £4.2 billion and a £1.2 billion net increase
in subordinated debt, offset by dividends
to shareholders of £1.2 billion.
Local statutory capital
All of our subsidiaries continue to hold
appropriate capital levels on a local
regulatory basis. In the UK and Europe,
at 31 December 2018 The Prudential
Assurance Company Limited and its
subsidiaries had an estimated Solvency II
shareholder surplus19 of £3.7 billion
(equivalent to a cover ratio of 172 per cent),
reflecting the impact from the reinsurance
Solvency II surplus18
£bn
of £12 billion of annuity liabilities and
the transfer of the Group’s Hong Kong
insurance subsidiaries. The UK with-profits
surplus20 is estimated at £5.5 billion
(equivalent to a cover ratio of 231 per cent).
In the US, operational capital formation and
the strong performance of our hedging
programme as equity markets weakened
during the fourth quarter of 2018 more
than offset remittances to Group and
a 35 percentage point ratio impact from
the incorporation of tax reform into the
statutory capital requirement, resulting in
a risk-based capital ratio of 458 per cent
(2017: 409 per cent).
Debt portfolio
The Group continues to maintain a
high-quality defensively positioned debt
portfolio. Shareholders’ exposure to credit is
concentrated in the UK and Europe annuity
portfolio and the US general account, mainly
attributable to Jackson’s fixed annuity
portfolio. The credit exposure is well
diversified and 98 per cent of our UK and
Europe portfolio and 96 per cent of our US
portfolio are investment grade21. During
2018, default losses were minimal and
reported impairments across the UK and US
portfolios were £4 million (2017: £2 million).
17.2
13.3
202%
232%
31 Dec 2017
31 Dec 20185
Solvency II cover ratio6
48 Prudential plc Annual Report 2018
www.prudential.co.uk
Chief Financial Officer’s report on the 2018 financial performance continued Prudential’s holding company currently has
access to £2.6 billion of syndicated and
bilateral committed revolving credit
facilities provided by 19 major international
banks, expiring in 2023. Apart from small
drawdowns to test the process, these
facilities have never been drawn, and there
were no amounts outstanding at
31 December 2018. The medium-term
note programme, the US shelf programme
(platform for issuance of SEC registered
public bonds in the US market), the
commercial paper programme and the
committed revolving credit facilities are all
available for general corporate purposes
and to support the liquidity needs of
Prudential’s holding company, and are
intended to maintain a flexible funding
capacity.
Net core structural borrowings
£m (EEV basis)
4,759
743
4,016
4,611
183
4,428
20%
20%
2017
2018
IFRS basis of value of net core structural borrowings
Mark to market value
Gearing ratio*
* Net core structural borrowings as proportion of IFRS
shareholders’ funds plus net debt, as set out in note III
of the Additional unaudited financial information.
Financing and liquidity
The Group had central cash resources of
£3.2 billion at 31 December 2018
(31 December 2017: £2.3 billion). Total
core structural borrowings increased by
£1.4 billion, from £6.3 billion to £7.7 billion,
mainly as a result of the capital rebalancing
process related to the intended demerger
of M&GPrudential. This involved the
redemption of US$550 million (equivalent
to £432 million at 31 December 2018)
7.75 per cent tier 1 perpetual subordinated
debt in December 2018 being more than
offset by the issue of US$500 million
(£374 million at 31 December 2018)
6.5 per cent tier 2 substitutable
subordinated notes, £500 million
6.25 per cent tier 2 substitutable
subordinated notes and £750 million
5.625 per cent tier 2 substitutable
subordinated notes in October 2018.
In addition to its net core structural
borrowings of shareholder-financed
businesses set out above, the Group also
has access to funding via the money
markets and has in place an unlimited
global commercial paper programme. As at
31 December 2018, we had issued
commercial paper under this programme
totalling US$599 million, to finance
non-core borrowings.
Shareholders’ funds
IFRS
EEV
2018 £m
2017 £m
2018 £m
2017 £m
Profit after tax for the year22
Exchange movements, net of related tax
Cumulative exchange gain of Korea life business recycled to profit and loss account
Unrealised gains and losses on Jackson fixed income securities classified
as available for sale23
Dividends
Mark to market value movements on Jackson assets backing surplus and
3,010
348
–
2,389
(409)
(61)
4,585
1,706
–
(1,083)
(1,244)
486
(1,159)
–
(1,244)
required capital
Other
Net increase in shareholders’ funds
Shareholders’ funds at 1 January
Shareholders’ funds at 31 December
Shareholders' value per share7
Return on shareholders' funds7
–
131
1,162
16,087
17,249
665p
25%
–
175
1,421
14,666
16,087
622p
25%
(95)
132
5,084
44,698
49,782
8,750
(2,045)
–
–
(1,159)
40
144
5,730
38,968
44,698
1,920p
1,728p
17%
17%
www.prudential.co.uk
Annual Report 2018 Prudential plc 49
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information IFRS shareholders’ funds
£bn
+7%
17.2
16.1
31 Dec 2017
31 Dec 2018
EEV shareholders’ funds
£bn
+11%
49.8
44.7
1,728p
1,920p
31 Dec 2017
31 Dec 2018
EEV value per share7
Group IFRS shareholders’ funds at
31 December 2018 increased by 7 per cent
to £17.2 billion (31 December 2017:
£16.1 billion on an actual exchange rate
basis), driven by the strength of the
operating result, offset by dividend
payments of £1,244 million. During the
period, UK sterling has weakened relative
to the US dollar and various Asian
currencies. With approximately 51 per cent
of the Group’s IFRS net assets (74 per cent
of the Group’s EEV net assets)
denominated in non-sterling currencies,
this generated a positive exchange rate
movement on the net assets in the period.
In addition, the increase in US long-term
interest rates between the start and the
end of the reporting period produced
unrealised losses on fixed income securities
held by Jackson accounted through other
comprehensive income.
The Group’s EEV basis shareholders’
funds also increased by 11 per cent to
£49.8 billion (31 December 2017:
£44.7 billion on an actual exchange rate
basis), On a per share basis the Group’s
embedded value at 31 December 2018
equated to 1,920 pence, up from
1,728 pence at 31 December 2017.
Corporate transactions
Intention to demerge the Group’s
UK and Europe businesses and
reinsurance of £12.0 billion4
UK annuity portfolio
The Group is making good progress on
its previously announced intention to
demerge its UK and Europe businesses
from Prudential plc, resulting in two
separately listed companies. The Group
has transferred legal ownership of The
Prudential Assurance Company Limited
(PAC) and M&G Group Limited to the
new holding company for M&GPrudential
and completed the transfer of the legal
ownership of its Hong Kong insurance
subsidiaries from PAC to Prudential
Corporation Asia Limited in
December 2018.
In March 2018, M&GPrudential reinsured
£12.0 billion (as at 31 December 2017) of
its shareholder-backed annuity portfolio
to Rothesay Life. Under the terms of the
agreement, this is expected to be followed
by a Part VII transfer of most of the
portfolio by 30 June 2019. The reinsurance
agreement became effective on 14 March
2018 and resulted in an IFRS basis pre-tax
loss of £508 million.
The above transactions reduced the
Group’s EEV by £376 million which
primarily reflects the loss of profits on the
portion of the annuity liabilities reinsured
and increased the Group’s shareholder
Solvency II capital position by £0.4 billion.
Prior to the demerger, the Group expects
to rebalance its debt capital across
Prudential and M&GPrudential. This will
include the ultimate holding company of
M&GPrudential becoming an issuer of
new debt, including debt substituted from
Prudential, and Prudential redeeming
some of its existing debt. Following these
actions, the overall absolute quantum of
debt across Prudential and M&GPrudential
is currently expected to increase, by an
amount which is not considered to be
material in the context of the Group’s
total outstanding debt as at 30 June 2018,
before any substitutable debt had been
issued, of £7.6 billion (comprising the
Group’s core structural borrowings of
£6.4 billion and shareholder borrowings
from short-term fixed income securities
programme of £1.2 billion).
At the time of the demerger, Prudential
expects M&GPrudential to be holding
around £3.5 billion of subordinated debt.
This expectation is subject to the
M&GPrudential capital risk appetite being
approved by the Board of the ultimate
holding company of M&GPrudential, once
fully constituted to include independent
non-executive directors, and reflects the
current operating environment and
economic conditions, material changes
in which may lead to a different outcome.
Entrance into Thailand mutual
fund market
In July 2018, Eastspring reached an
agreement to acquire initially 65 per cent
of TMB Asset Management Co., Ltd.
(TMBAM), a leading asset management
company in Thailand, from the TMB Bank
Public Company Limited (TMB). Thailand
is the largest fund management market
within the Association of Southeast Asian
Nations (ASEAN) with total assets under
management of £115 billion at
31 December 201824. Eastspring has an
option to increase its ownership to
100 per cent in the future. As part of this
acquisition, Eastspring has also entered
into a distribution agreement with TMB to
provide best-in-class investment solutions
to their customers. The acquisition of
TMBAM, with £9 billion of assets under
management as at 31 December 2018,
reinforces Prudential’s commitment to
the Thai market.
Acquisition of John Hancock’s
group payout annuity business
In November 2018, Jackson announced
an agreement with John Hancock Life
Insurance Company to reinsure
100 per cent of John Hancock’s group
payout annuity business, effective from
1 October 2018.
In total, the transaction involves Jackson
indemnity reinsuring approximately
US$5.5 billion of reserves, representing
an increase in Jackson’s general account
liabilities of approximately 10 per cent.
John Hancock will continue to be
responsible for the administration
of the business.
Renewal and expansion of regional
strategic bancassurance alliance
with UOB
In January 2019, Prudential and UOB
renewed their regional bancassurance
alliance until 2034, extending the scope to
include a fifth market, Vietnam, alongside
50 Prudential plc Annual Report 2018
www.prudential.co.uk
Chief Financial Officer’s report on the 2018 financial performance continued our existing footprint across Singapore,
Malaysia, Thailand and Indonesia.
Under the terms of the renewal,
Prudential’s life insurance products will
be distributed through UOB’s extensive
network of more than 400 branches in
five markets, providing access to over
four million UOB customers. In addition,
Prudential will use its digital capabilities to
deliver protection-focused propositions to
aid UOB’s digital bank expansion and
customer acquisition aspirations. An initial
fee of £662 million will be paid under the
agreement which will be funded through
internal resources. This amount will be paid
in three instalments. £230 million was paid
in February 2019 with £331 million to be
paid in January 2020 and £101 million to
be paid in January 2021.
Acquisition of majority stake
in Group Beneficial
Prudential plc is acquiring a majority
stake in Group Beneficial (Beneficial),
one of the leading life insurers in
Cameroon, Côte d’Ivoire and Togo.
Beneficial provides savings and protection
products to over 300,000 customers
through 41 branches and more than 2,000
agents. The acquisition will significantly
add to Prudential’s growing scale in Africa,
and is subject to various conditions and
regulatory approvals.
Increase stated on a constant exchange rate basis.
Notes
1
2 For insurance operations, underlying free surplus generated
represents amounts maturing from the in-force business
during the period less investment in new business and
excludes non-operating items. For asset management
businesses, it equates to post-tax operating profit for the
period. Restructuring costs are presented separately from
the underlying business unit amount. Further information
is set out in note 10 of the EEV basis results.
3 Core refers to the underlying profit of the UK and Europe
insurance business, excluding the effect of, for example,
management actions to improve solvency and material
assumption changes. Details of these are set out in note I(d)
of the Additional unaudited financial information.
4 Relates to IFRS shareholder annuity liabilities, valued
as at 31 December 2017.
5 The Group shareholder capital position excludes the
contribution to Own Funds and the Solvency Capital
Requirement from ring fenced with-profit funds and staff
pension schemes in surplus. The estimated solvency
positions include management’s calculation of UK
transitional measures reflecting operating and market
conditions at each valuation date, which for both 2018
and 2017 reflects the approved regulatory position.
6 Estimated before allowing for second interim ordinary
dividend.
Dividend
The Board has decided to increase the
full-year ordinary dividend by 5 per cent to
49.35 pence per share, reflecting our 2018
financial performance and our confidence
in the future prospects of the Group.
In line with this, the Directors have
approved a second interim ordinary
dividend of 33.68 pence per share
(2017: 32.5 pence per share).
The Group’s dividend policy remains
unchanged. The Board will maintain focus
on delivering a growing ordinary dividend.
In line with this policy, Prudential aims to
grow the ordinary dividend by 5 per cent
per annum. The potential for additional
distributions will continue to be
determined after taking into account the
Group’s financial flexibility across a broad
range of financial metrics and an
assessment of opportunities to generate
attractive returns by investing in specific
areas of the business25.
Mark FitzPatrick
Chief Financial Officer
10 Includes Group’s proportionate share of the liabilities
and associated flows of the insurance joint ventures
and associates in Asia.
11 Defined as movements in policyholder liabilities arising
from premiums (net of charges), surrenders/withdrawals,
maturities and deaths.
12 Includes unallocated surplus of with-profits business.
13 Includes Group’s proportionate share in PPM South Africa
and the Asia asset management joint ventures.
14 For our asset management business, the level of funds
managed on behalf of third parties, which are not therefore
recorded on the balance sheet, is a driver of profitability.
We therefore analyse the movement in the funds under
management each period, focusing between those which
are external to the Group and those held by the insurance
business and included on the Group balance sheet. This is
analysed in note II(b) of the Additional unaudited financial
information.
18 The methodology and assumptions used in calculating
the Solvency II capital results are set out in note II(c)
of the Additional unaudited financial information.
19 The UK shareholder capital position excludes the
contribution to Own Funds and the Solvency Capital
Requirement from ring-fenced with-profit funds and
staff pension schemes in surplus. The estimated solvency
positions include management’s calculation of UK
transitional measures reflecting operating and market
conditions at each valuation date, which for both 2018
and 2017 reflects the approved regulatory position.
20 The estimated solvency positions include management’s
calculation of UK transitional measures reflecting operating
and market conditions at each valuation date, which for both
2018 and 2017 reflects the approved regulatory position.
21 Based on hierarchy of Standard and Poor’s, Moody’s and
Fitch, where available and if unavailable, internal ratings
have been used.
15 Net inflows exclude Asia Money Market Fund (MMF)
22 Excluding profit for the year attributable to non-controlling
inflows of £1,500 million (2017: £1,495 million). External
funds under management exclude Asia MMF balances
of £11,602 million (2017: £9,317 million).
16 Represents M&GPrudential asset management external
funds under management and internal funds included
on the M&GPrudential long-term insurance business
balance sheet.
interests.
23 Net of related charges to deferred acquisition costs and tax.
24 ©Copyright 2018 Strategic Insight, an Asset International
Company and when referenced or sourced Morningstar
Inc., Standard & Poor’s Inc., and Lipper Inc. All rights
reserved. The information, data, analyses and opinions
contained herein (a) include confidential and proprietary
information of the aforementioned companies, (b) may not
be copied or redistributed for any purpose, (c) are provided
solely for information purposes, and (d) are not warranted
or represented to be correct, complete, accurate, or timely.
25 Refer to note 11 on the parent company financial statements
for further detail on the distributable profits of Prudential plc.
7 See note III of the Additional unaudited financial information
17 Net cash remitted by business units are included in the
for definition and reconciliation to IFRS balances.
8 Asia insurance revenues include spread income, fee
income, with-profits, insurance margin and expected return
on shareholder assets.
9 Margin represents operating income before performance-
related fees as a proportion of the related funds under
management, for further information see note I(c) of the
additional unaudited financial information.
Holding company cash flow, which is disclosed in detail in
note II(a) of the Additional unaudited financial information.
This comprises dividends and other transfers from
business units that are reflective of emerging earnings
and capital generation.
www.prudential.co.uk
Annual Report 2018 Prudential plc 51
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Group Chief Risk Officer’s report of the risks facing our business and how these are managed
Enabling business growth and change
through risk management
Our Group Risk Framework and risk appetite
have allowed us to control our risk exposure
successfully throughout the year. Our
governance, processes and controls enable
us to deal with uncertainty effectively,
which is critical to the achievement of our
strategy of helping our customers achieve
their long-term financial goals.
This section explains the main risks inherent
in our business and how we manage
those risks, with the aim of ensuring an
appropriate risk profile is maintained.
1. Introduction
Group structure
In August 2017 the Group announced
its intention to combine M&G and its
UK and Europe life business to form
M&GPrudential, allowing the scale and
capabilities in these businesses to be
leveraged more effectively. In March 2018,
the intention to demerge M&GPrudential
from the rest of the Group was announced,
with the aim of focusing on meeting
customers’ rapidly evolving needs and
to deliver enhanced long-term value to
investors as two separate businesses.
The merger activity ongoing at
M&GPrudential and its planned separation
from the rest of the Group requires
significant and complex changes and these
have been progressing apace throughout
2018. The Group Risk function is
embedded within key work streams and a
clear view exists of the objectives, risks and
dependencies involved in order to execute
this change agenda. A mature and
well-embedded risk framework is in place
and, during this period of transition, the
Group Risk function has a defined role in
providing oversight, support and risk
management, as well as providing
objective challenge to ensure the Group
remains within its risk appetite. During
2018 these activities have been in the form
of risk opinions, guidance and assurance
on critical transformation and demerger
activity, as well as assessments of the
financial risks to the execution of the
demerger under various stress scenarios.
A key objective is that post demerger there
are two strong, standalone risk functions in
M&GPrudential and Prudential plc, with
operational separation planning for the
risk functions remaining on track.
Societal developments
Focus in western economies continues to
shift from the goods and services which
businesses deliver to customers towards
the way in which such business is
conducted and how this impacts on the
wider society. Stakeholder and regulatory
expectations of the Group’s environmental,
social and governance (ESG) activities are
also increasing. In undertaking its business,
the Group actively considers the ESG
implications of its activities. Recent
regulatory developments such as the EU
General Data Protection Regulation
(GDPR) have underlined that personal data
must be held securely and its use must be
transparent to the data owner. Risks
around the security and use of personal
data are actively managed by the Group,
and the recent regulatory changes in data
protection in the US and Europe have been
incorporated into the principles against
which the business requirements are
defined.
The world economy
The beginning of 2018 saw strong and
broad economic growth following the
significant US tax reforms enacted toward
the end of 2017. As the year progressed the
global economic backdrop evolved and a
divergence in growth between the US and
the rest of the world was observed. Rising
US policy rates, tightening financial
conditions and increasing trade tensions
raised concerns and impacted emerging
markets in particular. In the fourth quarter,
fears of a more pronounced global
economic slowdown also impacted the
US as reductions in monetary stimulus
continued, contributing to a sharp shift
in risk sentiment. At the start of 2019, the
outlook for the global economy remains
uncertain and while growth remains
positive, it has become more fragile and
risks are weighted towards the downside.
Political tensions in Europe, including
uncertainty surrounding the nature of the
UK’s exit from the EU and its future trading
relationship, geopolitical developments
and the potential increase of international
trade tensions between the US and China
pose risks to global growth and the
economic environment.
Financial markets
Financial markets faced a number of
headwinds in 2018 and asset valuations
suffered broadly amid the re-emergence
of market volatility. Global markets, and
emerging markets in particular, faced
broad pressure throughout the year. US
markets, however, proved resilient until the
fourth quarter when fears of an economic
slowdown triggered a sharp sell-off in
equities. In parallel, credit spreads also
widened as the position of the credit
cycle became a key concern for market
participants. Across the world, interest
rates movements were mixed over the
year, although there has been a notable
broad flattening of the yield curve in the
US, impacted by changes in growth and
inflation data, risk sentiment and increased
concerns of a possible recession. Financial
markets remain particularly vulnerable to
further abrupt changes in sentiment, and in
particular if the risks to the global economy
noted above were to materialise.
Political landscape
Events in the past year continue to indicate
that the world is in a period of global
geopolitical transition and increasing
uncertainty. Popular discontent remains
one of the driving factors of political
change, and the liberal norms and the role
of multilateral rules-based institutions that
underpin global order, such as the United
Nations (UN), the North Atlantic Treaty
Organisation (NATO) and the World
Trade Organisation (WTO), appear
to be evolving. Across the Group’s key
geographies, we have increasingly seen
national protectionism in trade and
economic policies. The UK’s exit from the
EU and the nature of the future relationship
remains a key political uncertainty. As a
global organisation, we develop plans to
mitigate business risks arising from this
shift and engage with national bodies
where we can in order to ensure our
policyholders are not adversely impacted.
It is clear, however, that the full long-term
impacts of these changes remain to be
seen.
Regulations
Prudential operates in highly regulated
markets across the globe, and the nature
and focus of regulation and laws remains
fluid. A number of national and
international regulatory developments
are in progress, with a continuing focus
on solvency and capital standards, conduct
of business, systemic risks and macro-
prudential policy. Such developments will
continue to be monitored at a national and
global level and form part of Prudential’s
engagement with government policy
teams and regulators. The Group
announced in August 2018 that the Hong
Kong Insurance Authority would be the
Group-wide supervisor after the demerger
of M&GPrudential, and constructive
engagement on the future Group-wide
regulatory framework, led by the Group
Chief Risk Officer, will continue in 2019.
52 Prudential plc Annual Report 2018
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2. Key internal, regulatory, economic and (geo)political events over the past 12 months
Q1 2018
In March 2018 the intention to
Eastspring becomes the third
demerge M&GPrudential from the rest of
the Group is announced. £12 billion of
annuity liabilities in UK and Europe
business are reinsured to Rothesay Life
Plc. A Part VII transfer of most of the
portfolio is expected to be completed by
30 June 2019.
Prudential signatory, after M&G and PPM
South Africa (PPMSA), to the UN
Principles for Responsible Investment in
February 2018.
President Xi Jinpingenters a second
term in office in China after election by
the National People’s Congress in March
2018.
A coalition government is formed in
Italy between the centre right League and
anti-establishment Five Star Movement,
after general elections in March 2018.
The US administration proposes initial
trade tariff measures (with additional
proposals announced over H1 2018),
raising trade tensions with its key G7
partners and China.
US equity markets decline rapidly,
triggering a global sell-off, with the Dow
Jones Industrial Average falling by circa
3,000 points in just two weeks. US
markets rebound over the second and
third quarters.
Q2
The General Data Protection
Regulation (GDPR) goes live in the EU on
25 May 2018, increasing the rights of
individuals over the use of their personal
information by companies.
The US Department of Labor’s (DoL’s)
fiduciary rule is effectively ended after a
decision in the US courts in March 2018.
The deadline for the DoL to appeal lapses
in June. Other proposals, such as the US
Securities and Exchanges Commission’s
best interest standard, remain in
progress.
US President Trump and North Korean
Chairman Kim Jong Un meet in Singapore
on 12 June 2018 for a historic summit,
where denuclearisation of the Korean
peninsula is discussed.
The opposition Pakatan Harapan
coalition win power in Malaysia following
general elections held in May 2018.
The 22nd round of talks on the
Regional Comprehensive Economic
Partnership (RCEP) are held in Singapore
between 28 April and 8 May 2018, the
goal being to create the world’s largest
economic bloc. Negotiations continue
into 2019.
The Indonesia President approves
regulations on ‘grandfathering’ foreign
ownership of insurance companies. Q3
In August the Group announces that
the Hong Kong Insurance Authority will
become the Group-wide supervisor for
Prudential plc after the demerger of
M&GPrudential, and constructive
engagement on the future regulatory
relationship begins.
In July the International Association of
In September, the Prudential
Insurance Supervisors (IAIS) releases
consultation documents for both the
Common Framework for the Supervision
of Insurers (ComFrame) and Insurance
Capital Standard (ICS) v2.0. The Group
submits ICS field results to the PRA in
August 2018.
Regulation Authority (PRA) and Financial
Conduct Authority (FCA) request from
major banks and insurers, details of
preparations and actions being
undertaken to manage transition from
London Inter-Bank Offered Rate (LIBOR)
to alternative interest rate benchmarks.
The Bank of England raises rates for
the second time since the 2008 financial
crisis to 0.75 per cent in August, while
highlighting significant Brexit-driven
uncertainties to the economy.
The US imposes tariffs on Chinese
exports worth US$50 billion in July,
prompting Beijing to respond in kind.
Despite a temporary truce agreed at the
G20 summit on 1 December 2017, trade
tensions between the two nations
remains high.
Emerging market equities decline
rapidly in August as tightening financial
conditions impact economies with
external funding vulnerabilities.
Q4
In November, Jackson announces the
acquisition of the group payout annuity
business of John Hancock Life Insurance
Company, a closed book of circa 200,000
in-force certificates representing IFRS
reserves of approximately US$5.5bn.
PPM America (PPMA) becomes the
fourth Prudential signatory to the UN
Principles for Responsible Investment in
October 2018.
The IAIS launches a consultation for
the Holistic Framework (HF) in
November, which aims to assess and
mitigate systemic risk in the insurance
sector and is intended to replace the
current Global Systemically Important
Insurer (G-SII) measures, with the aim of
adoption in November 2019.
The reduction in global
accommodative monetary policy
continues, with the European Central
Bank (ECB) confirming that net asset
purchases would cease at the end of
2018, and the US Federal reserve raises
rates for the fourth time in 2018
in December.
In November the International
Accounting Standards Board (IASB)
tentatively delays the effective date of
IFRS 17 by one year to periods beginning
on or after 1 January 2022. The
introduction of further amendments to
this new standard will be considered.
Democrats win control of the House of
In December, the UK Parliament
Representatives in the November US
midterm elections, while the Republicans
retain control of the Senate. As bipartisan
disputes increase, the US government
partially shuts down between late
December 2018 and January 2019.
rejects the negotiated agreement on the
UK’s withdrawal from the EU.
Uncertainty on the nature of the UK’s exit
from the EU persists as the UK
government seeks to renegotiate the
agreement in early 2019.
China reports a large manufacturing
decline in December, prompting
concerns of a global growth slowdown.
Additional stimulus measures from the
People’s Bank of China are enacted.
Fears of tightening financial conditions
and a global economic slowdown trigger
a sharp sell-off in US equity markets,
which had remained resilient through the
first three quarters of 2018, while global
equities fall further. The S&P500 ends
2018 with an annual decline of circa
6 per cent. In early 2019 risk sentiment
improves, contributing to a broad rally in
equity markets.
Key
Prudential
Regulatory
(Geo)political
Markets/economies
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Annual Report 2018 Prudential plc 53
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Group Chief Risk Officer’s report of the risks facing our business and how these are managed continued
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 the risk
management focus for the following 12 months. The risks outlined below, which are not exhaustive, are discussed in more detail in
sections 5 and 6.
Our strategy
Asia
Significant risks arising from
the delivery of the strategy
Persistency risk
Serving the protection and
investment needs of the
growing middle class in Asia
Morbidity risk
Risk management focus for the next 12 months
Implementation of business initiatives to manage persistency
risk, including review of distribution channels and incentive
structures. Ongoing experience monitoring.
Implementation of business initiatives to manage morbidity
risk, including product repricing where required. Ongoing
experience monitoring.
Regulatory risk, including
foreign ownership
Proactive engagement with national governments and
regulators.
United States
Financial risks
Maintaining, and enhancing where necessary, appropriate risk
limits, hedging strategies and Group oversight that are in place.
Providing asset accumulation
and retirement income
products to US baby boomers
Policyholder behaviour risk
Continued monitoring of policyholder behaviour experience
and review of assumptions.
Africa
The Group will continue to increase its risk management focus on Prudential Africa as the business
there grows in materiality.
UK and Europe
Meeting the savings and
retirement needs of an
ageing UK and continental
European population
Group-wide
We aim to generate attractive
returns enabling us to
provide financial security to
our customers and deliver
sustainable growth for our
shareholders. Following
rigorous review, we believe
that this long-term strategy
is best served through the
demerger of
M&GPrudential.
M&GPrudential merger and
transformation risk
Managing the merger and transformation risks to the delivery
of strategic, financial and operational objectives.
Longevity risk
Customer risk
Transformation risks around
key change programmes
Group-wide regulatory risks
Continued oversight and experience analysis.
Ongoing monitoring of embedded customer outcome indicators.
Managing the customer risk implications from: merger and
transformation activity; new product propositions and new
regulatory requirements.
Managing the inter-connected execution risks from this
transformation activity under the Group’s transformation
risk framework, as well as providing other risk management
support and review.
Ensuring both M&GPrudential and Prudential plc will have
in place two strong standalone risk functions after demerger.
Engagement with regulators and industry groups on macro-
prudential and systemic risk-related regulatory initiatives,
international capital standards, and other initiatives with
Group-wide impacts.
Engagement with the Hong Kong Insurance Authority on
the Group-wide supervisory framework that will apply to
the Group after the demerger of M&GPrudential.
Information security and
data privacy risks
Continuing the implementation of the Group’s information
security risk management strategy and defence plan.
Ensuring full compliance with applicable privacy laws
across the Group.
54 Prudential plc Annual Report 2018
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In 2018, the Group continued to update
its policies and processes around new
product approvals, management of critical
third-party arrangements and oversight
of model risks. A transformation risk
framework is being applied directly
to manage programme delivery risks.
Prudential manages key ESG issues through
a multi-disciplinary approach with first-line
functional ownership for ESG topics.
The following section provides more detail
on our risk governance, risk culture and risk
management process.
4. Risk governance
a. System of governance
Appropriately managed risks allow
Prudential to take business opportunities
and enable the growth of its business.
Effective risk management is therefore
fundamental in the execution of the
Group’s business strategy. Prudential’s
approach to risk management must be both
well embedded and rigorous, and, as the
economic and political environment in
which we operate changes, it should also
be sufficiently broad and dynamic to
respond to these changes.
Prudential has in place a system of
governance that promotes and embeds a
clear ownership of risk, processes that link
risk management to business objectives,
a proactive Board and senior management
providing oversight of risks, mechanisms
and methodologies to review, discuss and
communicate risks, and risk policies and
standards to ensure risks are identified,
measured, managed, monitored and
reported.
How ‘risk’ is defined
Prudential defines ‘risk’ as the uncertainty
that is faced in implementing the Group’s
strategies and achieving its objectives
successfully, and includes all internal or
external events, acts or omissions that have
the potential to threaten the success and
survival of the Group. Accordingly, material
risks will be retained selectively when it is
considered that there is value in doing so,
and where it is consistent with the Group’s
risk appetite and philosophy towards
risk-taking.
How risk is managed
Risk management is embedded across the
Group through the Group Risk Framework,
which details Prudential’s risk governance,
risk management processes and risk appetite.
The Framework has been developed to
monitor the risks to our business and is
owned by the Board. The aggregate Group
exposure to its key risk drivers is monitored
and managed by the Group Risk function
which is responsible for reviewing,
assessing, providing oversight and reporting
on the Group’s risk exposure and solvency
position from the Group economic,
regulatory and ratings perspectives.
Risk management
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Annual Report 2018 Prudential plc 55
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
b. Group Risk Framework
i. Risk governance and culture
Prudential’s risk governance comprises the
Board, organisational structures, reporting
relationships, delegation of authority, roles
and responsibilities, and risk policies that
the Group Head Office and the business
units establish to make decisions and
control their activities on risk-related
matters. It includes individuals, Group-
wide functions and committees involved
in overseeing and managing risk.
The risk governance structure is led by
the Group Risk Committee, supported
by independent non-executives on risk
committees of Material Subsidiaries. These
committees monitor the development of
the Group Risk Framework, which includes
risk appetite, limits, and policies, as well
as risk culture.
The Group Risk Committee reviews the
Group Risk Framework and recommends
changes to the Board to ensure that it
remains effective in identifying and
managing the risks faced by the Group.
A number of core risk policies and
standards support the Framework to ensure
that risks to the Group are identified,
assessed, managed and reported.
Culture is a strategic priority of the Board,
who recognise its importance in the way that
the Group does business. Risk culture is a
subset of Prudential’s broader organisational
culture, which shapes the organisation-wide
values that we use to prioritise risk
management behaviours and practices.
An evaluation of risk culture forms part of
the Group Risk Framework and in particular
seeks to identify evidence that:
— Senior management in business units
articulate the need for effective risk
management as a way to realise
long-term value and continuously
support this through their actions;
— Employees understand and care about
their role in managing risk – they are
aware of and discuss risk openly as part
of the way they perform their role; and
— Employees invite open discussion on the
approach to the management of risk.
The Group Risk Committee also has a key
role in providing advice to the
Remuneration Committee on risk
management considerations to be applied
in respect of executive remuneration.
Prudential’s Code of Conduct and Group
Governance Manual include a series of
guiding principles that govern the
day-to-day conduct of all its people and
any organisations acting on its behalf. This
is supported by specific risk policies which
require that the Group act in a responsible
manner. This includes, but is not limited to,
policies on anti-money laundering, financial
crime and anti-bribery and corruption. The
Group’s third-party supply policy ensures
that human rights and modern slavery
considerations are embedded across all of
its supplier and supply chain arrangements.
Embedded procedures to allow individuals
to speak out safely and anonymously
against unethical behaviour and conduct
are also in place.
ii. The risk management cycle
The risk management cycle comprises
processes to identify, measure and assess,
manage and control, and monitor and
report on our risks.
Risk identification
Group-wide risk identification takes place
throughout the year as the Group’s
businesses undertake a comprehensive
bottom-up process to identify, assess and
document its risks. This concludes with an
annual top-down identification of the
Group’s key risks, which considers those
risks that have the greatest potential to
impact the Group’s operating results and
financial condition and is used to inform
risk reporting to the risk committees and
the Board for the year.
Our risk identification process also includes
the Group’s Own Risk and Solvency
Assessment (ORSA), as required under
Solvency II, and horizon-scanning
performed as part of our emerging risk
management process.
In accordance with provision C.2.1 of the
UK Code, the Directors perform a robust
assessment of the principal risks facing the
Company through the Group-wide risk
identification process, Group ORSA report
and the risk assessments undertaken as part
of the business planning review, including
how they are managed and mitigated.
Reverse stress testing, which requires the
Group to ascertain the point of business
model failure, is another tool that helps us
to identify the key risks and scenarios that
may have a material impact on the Group.
The risk profile is a key output from the
risk identification and risk measurement
processes, and is used as a basis for
setting Group-wide limits, management
information, assessment of solvency
needs, and determining appropriate stress
and scenario testing. The Group’s annual
set of key risks are given enhanced
management and reporting focus.
Risk measurement and assessment
All identified risks are assessed based on
an appropriate methodology for that risk.
All quantifiable risks, which are material
and mitigated by holding capital, are
modelled in the Group’s internal model,
which is used to determine capital
requirements under Solvency II and our
own economic capital basis. Governance
arrangements are in place to support the
internal model, including independent
validation and processes and controls
around model changes and limitations.
Risk management and control
The control procedures and systems
established within the Group are designed
to manage the risk of failing to meet
business objectives and are detailed in
the Group risk policies. These focus on
aligning the levels of risk-taking with the
achievement of business objectives and
can only provide reasonable, and not
absolute assurance, against material
misstatement or loss.
The management and control of risks are
set out in the Group risk policies, and form
part of the holistic risk management
approach under the Group’s ORSA.
These risk policies define:
— The Group’s risk appetite in respect of
material risks, and the framework under
which the Group’s exposure to those
risks is limited;
— The processes to enable Group senior
management to effect the measurement
and management of the Group material
risk profile in a consistent and coherent
way; and
— The flows of management information
required to support the measurement
and management of the Group’s
material risks and to meet the needs
of external stakeholders.
The methods and risk management tools
we employ to mitigate each of our major
categories of risks are detailed in the
further risk information section below.
Risk monitoring and reporting
The identification of the Group’s key risks
informs the management information
received by the Group risk committees and
the Board. Risk reporting of key exposures
against appetite is also included, as well as
ongoing developments in other key and
emerging risks.
iii. Risk appetite, limits and triggers
The extent to which Prudential is willing
to take risk in the pursuit of its business
strategy and objective to create
56 Prudential plc Annual Report 2018
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Group Chief Risk Officer’s report of the risks facing our business and how these are managed continued shareholder value is defined by a number
of qualitative and quantitative expressions
of risk appetite, operationalised through
measures such as limits, triggers and
indicators. The Group Risk function is
responsible for reviewing the scope and
operation of these risk appetite measures
at least annually to determine that they
remain relevant. The Board approves all
changes made to the Group’s aggregate
risk appetite, and has delegated authority
to the Group Risk Committee to approve
changes to the system of limits, triggers
and indicators.
Group risk appetite is set with reference to
economic and regulatory capital, liquidity
and earnings volatility which is aimed at
ensuring that an appropriate level of
aggregate risk is taken. Appetite is also
defined for the Group’s financial and
non-financial risks. Further detail is
included in sections 5 and 6, as well as
covering risks to shareholders, including
those from participating and third-party
business. Group limits operate within these
expressions of risk appetite to constrain
material risks, while triggers and indicators
provide further constraint and defined
points for escalation.
Capital requirements:
Limits on capital requirements aim to ensure
that the Group meets its internal economic
capital requirements, achieves its desired
target rating to meet its business objectives,
and ensures that supervisory intervention
is not required. The two measures used at
the Group level are Solvency II capital
requirements and internal economic capital
(ECap) requirements. In addition, capital
requirements are monitored on local
statutory bases.
The Group Risk Committee is responsible
for reviewing the risks inherent in the
Group’s business plan and for providing the
Board with input on the risk/reward
trade-offs implicit therein. This review is
supported by the Group Risk function,
which uses submissions from our local
business units to calculate the Group’s
aggregated position (allowing for
diversification effects between local
business units) relative to the aggregate
risk limits.
Risk management
Risk identification
Risk identification covers Group-wide:
— Top down risk identification
— Bottom up risk identification
— Emerging risk identification.
Risk measurement and assessment
Risks are assessed in terms of materiality.
Material risks which are modelled are
included in appropriately validated
regulatory and economic capital models.
Manage and control
Risk appetite and limits allow for the
controlled growth of our business, in
line with business strategy and plan.
Processes that support the oversight
and control of risks include:
— The Own Risk and Solvency
Assessment (ORSA)
— Group approved limits and early
warning triggers
— Large risk approval process
— Global counterparty limit framework
— Financial incidents procedures.
Monitor and report
Escalation requirements in the event of a
breach are clearly defined. Risk reporting
provides regular updates to the Group’s
Board and risk committees on exposures
against Board-approved risk appetite
statements and limits. Reporting also
covers the Group’s key risks.
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Risk governance comprises the Board,
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broader organisational culture, and
shapes the organisation-wide values used
to prioritise risk management behaviours.
Capital management
Capital adequacy is monitored to ensure
that internal and regulatory capital
requirements are met, and that solvency
buffers are appropriate, over the business
planning horizon and under stress.
Business strategy
Business strategy and the business
plan provide direction on future
growth and inform the level of limits
on solvency, liquidity and earnings
and for our key risks. The Group Risk
function provide input and opinion on
key aspects of business strategy.
Stress and scenario testing
Stress and scenario testing is
performed to assess the robustness of
capital adequacy and liquidity, and the
appropriateness of risk limits. Recovery
planning assesses the effectiveness of
the Group’s recovery measures and the
appropriateness of activation points.
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Annual Report 2018 Prudential plc 57
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
Liquidity:
The objective of the Group’s liquidity risk
appetite is to ensure that the Group is able
to generate sufficient cash resources to
meet financial obligations as they fall due
in business-as-usual and stressed
scenarios. Risk appetite with respect to
liquidity risk is measured using a Liquidity
Coverage Ratio (LCR) which considers
the sources of liquidity against liquidity
requirements under stress scenarios.
Earnings volatility:
The objectives of the Group’s appetite and
aggregate risk limits on earnings volatility
seek to ensure that variability is consistent
with the expectations of stakeholders; that
the Group has adequate earnings (and
cash flows) to service debt and expected
dividends and to withstand unexpected
shocks; and that earnings (and cash flows)
are managed properly across geographies
and are consistent with funding strategies.
The volatility of earnings is measured and
monitored on operating profit and EEV
operating profit bases, although IFRS
and EEV total profits are also considered.
5. Summary risks
Broadly, the risks assumed across the
Group can be categorised as those which
arise as a result of our business operations,
our investments and those arising from the
nature of our products. Prudential is also
exposed to those broad risks which apply
because of the global environment in
which it operates. These risks, where they
materialise, may have a financial impact on
the Group, and could also impact on the
performance of its products or the services
it provides to our customers and
distributors, which gives rise to potential
risks to its brand and reputation and have
conduct risk implications. These risks are
summarised below. The materiality of
these risks, whether material at the level
of the Group or its business units, is also
indicated. The Group’s disclosures
covering risk factors can be found at the
end of this document.
‘Macro’ risks
Some of the risks that the Group is exposed to are necessarily broad given the external influences which may impact on the business.
These risks include:
Global economic conditions
Changes in global economic conditions can impact Prudential directly; for example, by leading to poor investment returns and
fund performance, and increasing the cost of promises (guarantees) that have been made to our customers. Changes in economic
conditions can also have an indirect impact on the Group; for example, leading to a decrease in the propensity for people to save
and buy Prudential’s products, as well as changing prevailing political attitudes towards regulation. This is a risk which is considered
material at the level of the Group.
Geopolitical risk
The geopolitical environment may have direct or indirect impacts on the Group, and has seen varying levels of volatility in recent
years as seen by political developments in the UK, the US and the Eurozone. Uncertainty in these regions, combined with continuing
conflict in the Middle East and elevated tensions in East Asia and the Korean peninsula underline that geopolitical risks have
potentially global and wide-ranging impacts; for example, through increased regulatory and operational risks, and changes to the
economic environment.
Regulatory risk
Prudential operates under the ever-evolving requirements set out by diverse regulatory, legal and tax regimes. The increasing
shift towards macro-prudential regulation and the number of regulatory changes under way across Asia (in particular focusing on
consumer protection) are key areas of focus, while both Jackson and M&GPrudential operate in highly regulated markets. Regulatory
reforms can have a material impact on Prudential’s businesses. The proposed demerger of M&GPrudential will result in a change in
Prudential’s Group-wide supervisor to the Hong Kong Insurance Authority. The Group is, led by the Group Chief Risk Officer,
proactively engaging with the supervisor-elect on the supervisory framework that will apply to the Group after the demerger.
Technological change
The emergence of advanced technologies such as artificial intelligence and blockchain is providing an impetus for companies to
rethink their existing operating models and how they interact with their customers. Technological change is considered from both
an external and internal view. The external view considers the rise of new technologies and how this may impact on the insurance
industry and Prudential’s competitiveness within it, while the internal view considers the risks associated with the Group’s internal
developments in meeting digital change challenges and opportunities. Prudential is embracing the opportunities from new
technologies, and any risks which arise from them are closely monitored.
ESG risks
As a Group, responding effectively to those material risks with ESG implications is crucial in maintaining Prudential’s brand and
reputation, and in turn its financial performance and its long-term strategy. Further information on the Group’s approach to
governance on ESG issues and the relevant Group-wide policies for managing these are included in the Corporate responsibility
review on pages 71 to 74.
58 Prudential plc Annual Report 2018
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Group Chief Risk Officer’s report of the risks facing our business and how these are managed continued Risks from our investments
Risks from our products
Risks from our business operations
Market risk
Is the potential for reduced value of
Prudential’s investments resulting from
the volatility of asset prices, driven by
fluctuations in equity prices, interest
rates, foreign exchange rates and
property prices.
In the Asia business, the main market
risks arise from the value of fees from
its fee-earning products. In the US,
Jackson’s fixed and variable annuity
books are exposed to a variety of
market risks due to the assets backing
these policies.
The UK business’ market risk
exposure arises from the valuation
of the shareholder’s proportion of
the with-profits fund’s future profits,
which depends on equity, property
and bond values.
M&GPrudential invests in a broad range
of asset classes and its income is subject
to the price volatility of global financial
and currency markets.
Credit risk
Is the potential for reduced value of
Prudential’s investments driven by the
market’s perceptions for potential for
defaults of investment and other
counterparties.
The Group’s asset portfolio also gives
rise to invested credit risk. The assets
backing the UK and Jackson annuity
businesses means credit risk is
considered a material risk for these
business units in particular.
Liquidity risk
Is the risk of not having sufficient liquid
assets to meet obligations as they fall
due, and we look at this under both
normal and stressed conditions. This
is a risk which is considered material
at the level of the Group.
Insurance risks
The nature of the products offered by
Prudential exposes it to insurance risks,
which form a significant part of the
overall Group risk profile.
The insurance risks that the business
is exposed to by virtue of its products
include longevity risk (policyholders
living longer than expected); mortality
risk (higher number of policyholders
with life protection dying than
expected); morbidity risk (more
policyholders with health protection
becoming ill than expected) and
persistency risk (more customers
lapsing their policies than expected,
and a type of policyholder behaviour
risk). The medical insurance business
in Asia is also exposed to medical
inflation risk (the increasing cost
of medical treatments being higher
than expected).
The pricing of Prudential’s products
requires it to make a number of
assumptions, and deviations from these
may impact its reported profitability and
capital position. Across its business
units, some insurance risks are more
material than others.
Persistency and morbidity risks are
among the most material insurance risks
for the Asia business given the focus on
health and protection products in the
region.
For M&GPrudential the most material
insurance risk is longevity risk, arising
from its legacy annuity business.
The Jackson business is most exposed
to policyholder behaviour risk, including
persistency, which impacts the
profitability of the variable annuity
business and is influenced by market
performance and the value of policy
guarantees.
Conduct risk
The design and distribution of
Prudential’s products is crucial in
ensuring that the Group’s commitment
to meeting customers’ needs and
expectations are met, and are factors
which the Group considers as part of
its overall conduct of business.
Strategic and transformation risks
A number of significant change
programmes are currently running to
effect both the Group’s strategy and to
comply with emerging regulatory changes.
The breadth of these activities, and the
consequences, including the reputational
impact, to the Group should they fail to
meet their objectives, mean that these
risks are material at the level of the Group.
Operational risks
A combination of the complexity of the
Group, its activities and the extent of
transformation in progress creates a
challenging operating environment.
Operational risk is the risk of loss or
unintended gain from inadequate or
failed processes, personnel, systems
and external events, and can arise through
business transformation; introducing new
products; new technologies; and entering
into new markets and geographies.
Implementing the business strategy and
processes for ensuring regulatory
compliance (including those relating to
the conduct of its business) requires
interconnected change initiatives across
the Group, the pace of which introduces
further complexity. The Group’s
outsourcing and third party relationships
introduce their own distinct risks. Such
operational risks, if they materialise, could
result in financial loss and/or reputational
damage. Operational risk is considered
to be material at the level of the Group.
Business disruption risks may impact on
Prudential’s ability to meet its key
objectives and protect its brand and
reputation. The Group’s business
resilience is a core part of a well-
embedded business continuity
management programme.
Information security and data privacy
risks are significant considerations for
Prudential and the cyber security threat
continues to evolve globally in
sophistication and potential significance
This includes the continually evolving risk
of malicious attack on its systems, network
disruption as well as risks relating to data
security, integrity, privacy and misuse.
The scale of the Group’s IT infrastructure
and network, stakeholder expectations
and high profile cyber security and data
misuse incidents across industries means
that these risks continue to be considered
material at the level of the Group.
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Annual Report 2018 Prudential plc 59
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
6. Further risk information
In reading the sections below, it is useful
to understand that there are some risks
that Prudential’s policyholders assume
by virtue of the nature of their products,
and some risks that the Company and its
shareholders assume. Examples of the
latter include those risks arising from assets
held directly by and for the Company or the
risk that policyholder funds are exhausted.
This report is focused mainly on risks to the
shareholder but will include those which
arise indirectly through our policyholder
exposures.
6.1 ‘Macro’ risks
a. Global regulatory and political risks
Regulatory and political risks may impact
on Prudential’s business or the way in
which it is conducted. This covers a broad
range of risks including changes in
government policy and legislation, capital
control measures, new regulations at either
national or international level, and specific
regulator interventions or actions.
Following the announcement in August
2018 that the Hong Kong Insurance
Authority would become Prudential’s
Group-wide supervisor after the demerger
of M&GPrudential, constructive
engagement with the supervisor-elect
began in 2018 and will continue into 2019.
In particular, Prudential continues to
engage with the supervisor on its proposed
Group-wide supervision framework which
will apply to the Group after the demerger.
Recent shifts in the focus of some
governments toward more protectionist
or restrictive economic and trade policies
could impact on the degree and nature
of regulatory changes and Prudential’s
competitive position in some geographic
markets. This could take effect, for
example, through increased friction in
cross-border trade, capital controls or
measures favouring local enterprises
such as changes to the maximum level
of non-domestic ownership by foreign
companies. These developments continue
to be monitored by the Group at a national
and global level and these considerations
form part of the Group’s ongoing
engagement with government policy
teams and regulators.
Efforts to curb systemic risk and promote
financial stability are also underway. At the
international level, the Financial Stability
Board (FSB) continues to develop
recommendations for the asset
management and insurance sectors,
including on-going assessment of systemic
risk measures. The International
Association of Insurance Supervisors (IAIS)
has continued its focus on the following
two key developments.
Prudential’s designation as a G-SII was last
reaffirmed on 21 November 2016. The
FSB, in conjunction with the IAIS, did not
publish a new list of G-SIIs in 2017 and did
not engage in G-SII identification for 2018
following IAIS’ launch of the consultation
on the Holistic Framework (HF) on
14 November 2018, which aims to assess
and mitigate systemic risk in the insurance
sector and is intended to replace the
current G-SII measures. The IAIS intends
to implement the HF in 2020 and it is
proposed that G-SII identification be
suspended from that year. In the interim,
the relevant group-wide supervisors have
committed to continue applying existing
enhanced G-SII supervisory policy
measures with some supervisory
discretion, which includes a requirement to
submit enhanced risk management plans.
In November 2022, the FSB will review the
need to either discontinue or re-establish
an annual identification of G-SIIs in
consultation with the IAIS and national
authorities. The Higher Loss Absorbency
(HLA) standard (a proposed additional
capital measure for G-SII designated firms,
planned to apply from 2022) is not part of
the proposed HF. However, the HF
proposes more supervisory powers of
intervention for mitigating systemic risk,
including temporary financial
reinforcement measures such as capital
add-ons and suspension of dividends.
The IAIS is also developing the ICS as part
of ComFrame – the Common Framework
for the supervision of Internationally Active
Insurance Groups (IAIGs). The
implementation of ICS will be conducted in
two phases – a five-year monitoring phase
followed by an implementation phase.
ComFrame will more generally establish
a set of common principles and standards
designed to assist supervisors in
addressing risks that arise from insurance
groups with operations in multiple
jurisdictions. The ComFrame proposals,
including ICS, could result in enhanced
capital and regulatory measures for IAIGs,
for which Prudential satisfies the criteria.
In certain jurisdictions in which Prudential
operates there are also a number of
ongoing policy initiatives and regulatory
developments that are having, and will
continue to have, an impact on the way
Prudential is supervised, including the
US Dodd-Frank Wall Street Reform and
Consumer Protection Act, addressing
Financial Conduct Authority (FCA) reviews
and ongoing engagement with the
Prudential Regulation Authority (PRA).
Decisions taken by regulators, including
those related to solvency requirements,
corporate or governance structures, capital
allocation and risk management may have
an impact on our business.
There has, in recent years, been regulatory
focus in the UK on insurance products and
market practices which may have adversely
impacted customers, including the FCA’s
Legacy Review and Thematic Review of
Annuity Sales Practices. The management
of customer risk remains a key focus
of management in the UK business.
Merger and transformation activity at
M&GPrudential, new product propositions
and new regulatory requirements may also
have customer risk implications which are
monitored.
In May 2017, the International Accounting
Standards Board (IASB) published IFRS 17
which will introduce fundamental changes
to the IFRS-based reporting of insurance
entities that prepare accounts according
to IFRS from 2021. In November 2018,
the IASB tentatively agreed to delay the
effective date of IFRS 17 by one year to
periods beginning on or after 1 January
2022 and is considering introducing further
amendments to this new standard.
IFRS 17 is expected to, among other things,
include altering the timing of IFRS profit
recognition, and the implementation of the
standard is likely to require changes to the
Group’s IT, actuarial and finance systems.
The Group is reviewing the complex
requirements of this standard and
considering its potential impact.
In March 2018, the UK and EU agreed the
terms of a transition agreement for the UK’s
exit from the bloc, which will last from the
termination of the UK’s membership of the
EU (at 11.00pm GMT 29 March 2019) until
31 December 2020 (although a legally
binding text is yet to be agreed). The
outcome of negotiations on the final terms
of the UK’s relationship with the EU
remains highly uncertain. In particular,
depending on the nature of the UK’s exit
from the EU, the following effects may be
seen. The UK and EU may experience a
downturn in economic activity, which is
expected to be more pronounced for the
UK, particularly in the event of a disorderly
exit by the UK from the EU. Market
volatility and illiquidity may increase in the
period leading up to, and following, the
UK’s withdrawal, and property values
(including the liquidity of property funds,
where redemption restrictions may be
applied) and interest rates may be
impacted. In particular, downgrades in
60 Prudential plc Annual Report 2018
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Group Chief Risk Officer’s report of the risks facing our business and how these are managed continued sovereign and corporate debt ratings may
occur. In a severe scenario where the UK’s
sovereign rating is downgraded by more
than one notch, this may also impact on the
credit ratings of UK companies, including
M&GPrudential’s UK business. The legal
and regulatory regime in which the Group
(and, in particular, M&GPrudential)
operates, may also be affected (including
the future applicability of the Solvency II
regime in the UK), the extent of which
remains uncertain. There is also a risk of
operational disruption to the business, in
particular to M&GPrudential.
The Group’s diversification by geography,
currency, product and distribution should
reduce some of the potential impact of the
UK’s exit. M&GPrudential, due to the
geographical location of both its
businesses and its customers, has the
most potential to be affected. As a result
of the uncertainty on the nature of the
arrangements that will be put in
place between the UK and the EU,
M&GPrudential has completed the
implementation of a range of plans
including transfers of business to EU
jurisdictions, balance sheet and with-
profits fund hedging protection and
operational measures (including customer
communications) that are designed to
mitigate the potential adverse impacts to
the Group’s UK business. In addition, the
business has sought to ensure, through
various risk mitigation actions, that it is
appropriately prepared for the potential
operational and financial impacts of a
no-deal withdrawal.
In the US, various initiatives are underway
to introduce fiduciary obligations for
distributors of investment products, which
may reshape the distribution of retirement
products. Jackson has introduced
fee-based variable annuity products
in response to the potential introduction
of such rules, and we anticipate that the
business’s strong relationships with
distributors, history of product innovation
and efficient operations should further
mitigate any impacts.
In late 2018, the US NAIC concluded
an industry consultation with the aim of
reducing the non-economic volatility in the
variable annuity statutory balance sheet
and enhancing risk management. The
NAIC is targeting a January 2020 effective
date for the new framework, which will
have an impact on Jackson’s business.
Jackson continues to assess and test the
changes. The NAIC also has an on-going
review of the C-1 bond factors in the
required capital calculation, on which
further information is expected to be
provided in due course. The Group’s
preparations to manage the impact of these
reforms will continue.
In the EU, the European Commission began
a review in late 2016 of some aspects of the
Solvency II legislative package, which is
expected to continue until 2021 and
includes a review of the Long Term
Guarantee measures.
On 27 July 2017, the UK FCA announced
that it will no longer persuade, or use its
powers to compel, panel banks to submit
rates for the calculation of LIBOR after
2021. The discontinuation of LIBOR in its
current form and its replacement with the
Sterling Overnight Index Average
benchmark (SONIA) in the UK (and other
alternative benchmark rates in other
countries) could, among other things,
impact the Group through an adverse
effect on the value of Prudential’s assets
and liabilities which are linked to, or which
reference LIBOR, a reduction in market
liquidity during any period of transition and
increased legal and conduct risks to the
Group arising from changes required to
documentation and its related obligations
to its stakeholders.
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,
current sales practices, or could be applied
to sales made prior to their introduction
retrospectively, which could have a
negative impact on Prudential’s business
or reported results.
Risk management and mitigation of
regulatory and political risk at Prudential
includes the following:
— Risk assessment of the Business Plan
which includes consideration of current
strategies;
— Close monitoring and assessment
of our business environment and
strategic risks;
— The consideration of risk themes
in strategic decisions; and
— Ongoing engagement with national
regulators, government policy teams
and international standard setters.
b. ESG risks including climate change
The business environment in which
Prudential operates is continually
changing, and responding effectively to
those material risks with ESG implications
is crucial in maintaining Prudential’s brand
and reputation, and in turn its financial
performance and its long-term strategy.
The Group maintains active engagement
with its key stakeholders, including
investors, customers, employees,
governments, policymakers and
regulators in its key markets, as well as
with international institutions – all of
whom have expectations, which the
Group must balance, as it responds to
ESG-related matters.
Climate change is a key ESG theme which
continues to move up the agenda of many
regulators, governments, non-
governmental organisations and investors.
An overview of the various regulatory,
supervisory and investor-driven initiatives
related to climate change currently in
progress; how the Group manages climate
change risks and opportunities; and the
Group’s participation in industry initiatives
in this area is outlined in the Corporate
responsibility review on page 74. There has
been increased regulatory and supervisory
focus on sustainable finance and
responsible investment. The Group
recognises this and the ESG Executive
Committee seeks, as one of its aims, to
ensure a consistent approach in managing
ESG considerations in its business
activities, including investment activities.
The Group’s operational risk framework
explicitly incorporates ESG as a component
of its social and environmental
responsibility, brand management and
external communications. This is further
strengthened by factoring considerations
for reputational impacts when the
materiality of operational risks are
assessed. Policies and procedures to
support how the Group operates in relation
to certain ESG issues are covered in the
Group Governance Manual. Prudential
manages key ESG issues though a
multi-disciplinary approach with first line
functional ownership for ESG topics.
Further information on the Group’s
approach to governance on ESG issues
and the relevant Group-wide policies
for managing these are included in
the Corporate responsibility review
on page 74.
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Annual Report 2018 Prudential plc 61
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 6.2 Risks from our investments
a. Market risk
The main drivers of market risk in the
Group are:
— Investment risk, which arises on
our holdings of equity and property
investments, the prices of which
can change depending on market
conditions;
— Interest rate risk, which is driven by
the valuation of Prudential’s assets
(particularly the bonds that it invests in)
and liabilities, which are dependent on
market interest rates and exposes it to
the risk of those moving in a way that is
detrimental; and
— Foreign exchange risk, through
translation of its profits and assets
and liabilities denominated in various
currencies, given the geographical
diversity of the business.
The main investment risk exposure arises
from the portion of the profits from the UK
and Hong Kong with-profits funds which
the shareholders are entitled to receive;
the value of the future fees from the
fee-earning products in the Asia business;
and from the asset returns backing
Jackson’s variable annuities business.
Further detail is provided below.
The Group’s interest rate risk is driven by
the need to match the duration of its assets
and liabilities in the UK and Europe
insurance business and the fixed annuity
business in Jackson. Interest rate risk also
arises from the guarantees of some non
unit-linked investment products in Asia;
and the cost of guarantees in Jackson’s
fixed index and variable annuity business.
Further detail is provided below.
The Group has appetite for market risk
where it arises from profit-generating
insurance activities to the extent that it
remains part of a balanced portfolio of
sources of income for shareholders and is
compatible with a robust solvency position.
The Group’s market risks are managed
and mitigated by the following:
— Our market risk policy;
— Risk appetite statements, limits and
triggers;
— Our asset and liability management
programmes;
— Hedging derivatives, including equity
options and futures, interest rate swaps
and swaptions and currency forwards;
— The monitoring and oversight of market
risks through the regular reporting of
management information; and
— Regular deep dive assessments.
Equity and property investment risk
(Audited)
In the UK and Europe business, the main
investment risk arises from the assets
held in the with-profits funds through the
shareholders’ proportion of the funds’
declared bonuses and policyholder net
investment gains (future transfers). This
investment risk is driven mainly by equities
in the funds and some hedging to protect
against a reduction in the value of these
future transfers is performed outside
the funds. The UK with-profits funds’
Solvency II own funds, estimated at
£9.7 billion as at 31 December 2018, helps
to protect against market fluctuations and
is protected partially against falls in equity
markets through an active hedging
programme within the fund.
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’ investment portfolios, which
include equities.
In Jackson, investment risk arises from the
assets backing customer policies. Equity
risk is driven by the variable annuity
business, where the assets are invested in
both equities and bonds and the main risk
to the shareholder comes from providing
the guaranteed benefits offered. The
exposure to this is primarily controlled by
using a derivative hedging programme, as
well as through the use of reinsurance to
pass on the risk to third-party reinsurers.
While accepting the equity exposure that
arises on future fees, the Group has limited
appetite for exposures to equity price
movements to remain unhedged or for
volatility within policyholder guarantees
after taking into account any natural offsets
and buffers within the business.
Interest rate risk
(Audited)
Some products that Prudential offer are
sensitive to movements in interest rates.
As part of the Group’s ongoing
management of this risk, a number of
mitigating actions to the in-force business
have been taken, as well as repricing and
restructuring new business offerings in
response to recent relatively low interest
rates. Nevertheless, some sensitivity to
interest rate movements is still retained.
The Group’s appetite for interest rate risk
is limited to where assets and liabilities
can be tightly matched and where liquid
assets or derivatives exist to cover interest
rate exposures.
In the UK and Europe insurance business,
interest rate risk arises from the need to
match the cash flows of its annuity
obligations with those from its investments.
The risk is managed by matching asset and
liability durations as well as continually
assessing the need for use of any
derivatives. Under Solvency II rules,
interest rate risk also results from the
requirement to include a balance sheet risk
margin. The with-profits business is also
exposed to interest rate risk through some
product guarantees. Such risk is largely
borne by the with-profits fund itself
although shareholder support may be
required in extreme circumstances where
the fund has insufficient resources to
support the risk.
62 Prudential plc Annual Report 2018
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Group Chief Risk Officer’s report of the risks facing our business and how these are managed continued b. Credit risk
Prudential invests in bonds that provide a
regular, fixed amount of interest income
(fixed income assets) in order to match the
payments needed to policyholders. It also
enters into reinsurance and derivative
contracts with third parties to mitigate
various types of risk, as well as holding
cash deposits at certain banks. As a result,
it is exposed to credit risk and counterparty
risk across its business.
Credit risk is the potential for reduction in
the value of investments which results from
the perceived level of risk of an investment
issuer being unable to meet its obligations
(defaulting). Counterparty risk is a type of
credit risk and relates to the risk that the
counterparty to any contract we enter into
being unable to meet their obligations
causing us to suffer loss.
The Group has some appetite to take credit
risk where it arises from profit-generating
insurance activities, to the extent that it
remains part of a balanced portfolio of
sources of income for shareholders and is
compatible with a robust solvency position.
A number of risk management tools are
used to manage and mitigate this credit
risk, including the following:
— A credit risk policy and dealing
and controls policy;
— Risk appetite statements and limits
that have been defined on issuers,
and counterparties;
— Collateral arrangements for derivative,
secured lending reverse repurchase
and reinsurance transactions;
— The Group Credit Risk Committee’s
oversight of credit and counterparty
credit risk and sector and/or name-
specific reviews;
— Regular assessments; and
— Close monitoring or restrictions on
investments that may be of concern.
Debt and loan portfolio
(Audited)
Prudential’s UK and Europe business is
exposed to credit risk on fixed income
assets in the shareholder-backed portfolio.
At 31 December 2018, this portfolio
contained fixed income assets worth
£21.6 billion. M&GPrudential’s debt
portfolio reduced by £12.1 billion following
the transfer of fixed income assets to
Rothesay Life as part of the reinsurance
agreement announced in March 2018.
Credit risk arising from a further
£64.3 billion of fixed income assets is borne
largely by the with-profits fund, to which
the shareholder is not exposed directly
although under extreme circumstances
shareholder support may be required if the
fund is unable to meet payments as they
fall due.
Credit risk also arises from the debt
portfolio in the Asia business, the value of
which was £45.8 billion at 31 December
2018. The majority (68 per cent) of the
portfolio is in unit-linked and with-profits
funds and so exposure of the shareholder
to this component is minimal. The
remaining 32 per cent of the debt portfolio
is held to back the shareholder business.
In the general account of the Jackson
business £41.6 billion of fixed income
assets are held to support shareholder
liabilities including those from our fixed
annuities, fixed index annuities and life
insurance products. Jackson’s general
account portfolio increased by circa
£4 billion due to the John Hancock
acquisition.
The shareholder-owned debt and loan
portfolio of the Group’s other operations
was £2.0 billion as at 31 December 2018.
Further details of the composition and
quality of our debt portfolio, and exposure
to loans, can be found in the IFRS financial
statements.
In Asia, our exposure to interest rate
risk arises from the guarantees of some
non-unit-linked investment products,
including the Hong Kong with-profits
business. This exposure exists because of
the potential for asset and liability mismatch
which, although it is small and managed
appropriately, cannot be eliminated.
Jackson is affected by interest rate
movements to its fixed annuity book where
the assets are primarily invested in bonds
and shareholder exposure comes from the
mismatch between these assets and the
guaranteed rates that are offered to
policyholders. Interest rate risk results
from the cost of guarantees in the variable
annuity and fixed index annuity business,
which may increase when interest rates
fall. The level of sales of variable annuity
products with guaranteed living benefits
is actively monitored, and the risk limits we
have in place help to ensure comfort with
the level of interest rate and market risks
incurred as a result. Derivatives are also
used to provide some protection.
Foreign exchange risk
(Audited)
The geographical diversity of Prudential’s
businesses means that it has some
exposure to the risk of foreign exchange
rate fluctuations. The operations in the
US and Asia, which represent a large
proportion of operating profit and
shareholders’ funds, generally write
policies and invest in assets in local
currencies. Although this limits the effect
of exchange rate movements on local
operating results, it can lead to fluctuations
in the Group financial statements when
results are reported in UK sterling. This risk
is accepted within our appetite for foreign
exchange risk.
In cases where a surplus arises in an
overseas operation which is to be used
to support Group capital, or where a
significant cash payment is due from an
overseas subsidiary to the Group, this
currency exposure may be hedged where
it is believed to be favourable economically
to do so. Further, the Group generally does
not have appetite for significant direct
shareholder exposure to foreign exchange
risks in currencies outside the countries in
which it operates, but it does have some
appetite for this on fee income and on
non-sterling investments within the
with-profits fund. Where foreign exchange
risk arises outside appetite, currency swaps
and other derivatives are used to manage
the exposure.
www.prudential.co.uk
Annual Report 2018 Prudential plc 63
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Shareholder exposure by rating1
5
1
2
Group sovereign debt
(Audited)
Prudential also invests in bonds issued by
national governments. This sovereign debt
represented 18 per cent or £14.4 billion of
the shareholder debt portfolio as at
31 December 2018 (31 December 2017:
19 per cent or £16.5 billion). 3 per cent of
this was rated AAA and 87 per cent was
considered investment grade (31 December
2017: 90 per cent investment grade).
The particular risks associated with holding
sovereign debt are detailed further in our
disclosures on risk factors.
4
3
1 AAA
2 AA
3 A
4 BBB
5 BB or below, or non-rated assets
9%
26%
31%
29%
5%
Shareholder exposure by sector2
8
7
10 11
9
1
12 – 15
6
5
4
3
1 Financial
2 Government
3 Consumer, non-cyclical
4 Utilities
5 Industrial
6 Energy
7 Communications
8 Consumer, cyclical
9 Basic materials
10 Real estate
11 Technology
12 Mortgage securities
13 Diversified
14 Asset-backed securities
15 Other
2
29.73%
20.41%
11.79%
11.79%
6.48%
4.52%
3.57%
3.56%
1.98%
1.90%
1.74%
0.67%
0.44%
0.39%
1.03%
The exposures held by the shareholder-
backed business and with-profits funds in
sovereign debt securities at 31 December
2018 are given in note C3.2(f) of the
Group’s IFRS financial statements.
Bank debt exposure and counterparty
credit risk
(Audited)
Prudential’s exposure to banks is a key part
of its core investment business, as well as
being important for the hedging and other
activities undertaken to manage its various
financial risks. Given the importance of its
relationship with its banks, exposure to
the sector is considered a material risk for
the Group.
The exposures held by the shareholder-
backed business and with-profits funds in
bank debt securities at 31 December 2018
are given in note C3.2(f) of the Group’s
IFRS financial statements.
The exposure to derivative counterparty
and reinsurance counterparty credit risk is
managed using an array of risk management
tools, including a comprehensive system
of limits. Where appropriate, Prudential
reduces its exposure, buys credit protection
or uses additional collateral arrangements to
manage its levels of counterparty credit risk.
At 31 December 2018, shareholder
exposures by rating1 and sector2 are
shown below:
— 95 per cent of the shareholder portfolio
is investment grade rated. In particular,
66 per cent of the portfolio is rated A-
and above (or equivalent); and
— The Group’s shareholder portfolio is
well diversified: no individual sector
makes up more than 15 per cent of the
total portfolio (excluding the financial
and sovereign sectors).
c. Liquidity risk
Prudential’s liquidity risk arises from the
need to have sufficient liquid assets to
meet policyholder and third-party
payments as they fall due. This
incorporates the risk arising from funds
composed of illiquid assets and results
from a mismatch between the liquidity
profile of assets and liabilities. Liquidity
risk may impact on market conditions
and valuation of assets in a more uncertain
way than for other risks like interest rate or
credit risk. It may arise, for example, where
external capital is unavailable at sustainable
cost, increased liquid assets are required
to be held as collateral under derivative
transactions or where redemption requests
are made against Prudential external funds.
Prudential has no appetite for liquidity
risk, ie for any business to have insufficient
resources to cover its outgoing cash flows,
or for the Group as a whole to not meet
cash flow requirements from its debt
obligations under any plausible scenario.
The Group has significant internal sources
of liquidity, which are sufficient to meet all
of our expected cash requirements for at
least 12 months from the date the financial
statements are approved, without having
to resort to external sources of funding.
The Group has a total of £2.6 billion of
undrawn committed facilities that can be
made use of, expiring in 2023. Access to
further liquidity is available through the
debt capital markets and an extensive
commercial paper programme in place,
and Prudential has maintained a consistent
presence as an issuer in the market for the
past decade.
A number of risk management tools are
used to manage and mitigate this liquidity
risk, including the following:
— The Group’s liquidity risk policy;
— Risk appetite statements, limits
and triggers;
— Regular assessment at 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;
64 Prudential plc Annual Report 2018
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Group Chief Risk Officer’s report of the risks facing our business and how these are managed continued — Regular stress testing;
— Our contingency plans and identified
sources of liquidity;
— The Group’s ability to access the money
and debt capital markets;
— Regular deep dive assessments; and
— The Group’s access to external
committed credit facilities.
6.3 Risks from our products
a. Insurance risk
Insurance risk makes up a significant
proportion of Prudential’s overall risk
exposure. The profitability of its
businesses depends on a mix of factors,
including levels of, and trends in,
mortality (policyholders dying),
morbidity (policyholders becoming
ill) and policyholder behaviour
(variability in how customers interact
with their policies, including utilisation
of withdrawals, take-up of options and
guarantees and persistency, ie lapsing
of policies), and increases in the costs
of claims, including the level of medical
expenses increases over and above price
inflation (claim inflation).
The Group has appetite for retaining
insurance risks in order to create
shareholder value in the areas where it
believes it has expertise and controls to
manage the risk and can support such risk
with its capital and solvency position.
The principal drivers of the Group’s
insurance risk vary across its business
units. At M&GPrudential, this is
predominantly longevity risk. Across
Asia, where a significant volume of health
protection business is written, the most
significant insurance risks are morbidity
risk, persistency risk, and medical inflation
risk. In Jackson, policyholder behaviour
risk is particularly material, especially in
the take up of options and guarantees on
variable annuity business.
The Group manages longevity risk in
various ways. Longevity reinsurance is
a key tool in managing this risk. In March
2018, the Group’s longevity risk exposure
was significantly reduced by reinsuring
£12 billion in UK annuity liabilities to
Rothesay Life, pursuant to a Part VII
transfer of the majority of these liabilities
expected to be completed by 30 June
2019. Although Prudential has withdrawn
from selling new UK annuity business,
given its significant annuity portfolio the
assumptions it makes about future rates of
improvement in mortality rates remain key
to the measurement of its insurance
liabilities and to its assessment of any
reinsurance transactions. Prudential
continues to conduct research into
longevity risk using both experience from
its annuity portfolio and industry data.
Although the general consensus in recent
years is that people are living longer, the
rate of increase has slowed in recent years,
and there is considerable volatility in
year-on-year longevity experience, which
is why it needs expert judgement in setting
its longevity basis.
Prudential’s 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.
In Asia, Prudential writes significant
volumes of health protection business, and
so a key assumption is the rate of medical
inflation, which is often in excess of general
price inflation. There is a risk that the
expenses of medical treatment increase
more than expected, so the medical claim
cost passed on to Prudential is higher than
anticipated. Medical expense inflation risk
is best mitigated by retaining the right to
reprice our products each year and by
having suitable overall claim limits within
its policies, either limits per type of claim
or in total across a policy.
The Group’s persistency assumptions
reflect similarly a combination of recent
past experience for each relevant line of
business and expert judgement, especially
where a lack of relevant and credible
experience data exists. Any expected
change in future persistency is also
reflected in the assumption. Persistency
risk is managed by appropriate training
and sales processes and managed locally
post-sale through regular experience
monitoring and the identification of
common characteristics of business
with high lapse rates. Where appropriate,
allowance is made for the relationship
(either assumed or observed historically)
between persistency and investment
returns and any additional risk is accounted
for. Modelling this dynamic policyholder
behaviour is particularly important when
assessing the likely take-up rate of options
embedded within certain products.
The effect of persistency on the Group’s
financial results can vary but depends
mostly on the value of the product
features and market conditions.
Prudential’s insurance risks are managed
and mitigated using the following:
— The Group’s insurance and
underwriting risk policies;
— The risk appetite statements, limits
and triggers;
— Using longevity, morbidity and
persistency assumptions that reflect
recent experience and expectation of
future trends, and industry data and
expert judgement where appropriate;
— Using reinsurance to mitigate longevity
and morbidity risks;
— Ensuring appropriate medical
underwriting when policies are issued
and appropriate claims management
practices when claims are received in
order to mitigate morbidity risk;
— Maintaining the quality of sales
processes and using initiatives to
increase customer retention in order
to mitigate persistency risk;
— Using product repricing and other
claims management initiatives in order
to mitigate medical expense inflation
risk; and
— Regular deep dive assessments.
6.4 Risks from our business
operations
a. Strategic and transformation risks
A number of significant change
programmes are currently running in order
to implement the Group’s strategy and the
need to comply with emerging regulatory
changes. These include, but are not limited
to, the discontinuation of LIBOR and
implementation of new international
accounting standards – see section 6.1a.
above for further information. This has
resulted in a significant portfolio of change
initiatives which increases the
transformation risks for the Group, and is
likely to further increase in the future. In
particular the demerger of M&GPrudential
from the rest of the Group has resulted in
a substantial transformation programme
which needs to be delivered alongside, and
in conjunction with other material change
programmes. The scale and the complexity
of this portfolio of transformation
programmes could impact business
operations, weaken the control
environment, impact customers, and has
the potential for reputational damage if
these programmes fail to deliver their
objectives. Implementing further strategic
initiatives may amplify these risks.
www.prudential.co.uk
Annual Report 2018 Prudential plc 65
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Other significant change initiatives are
occurring across the Group that increase
the likelihood and potential impact of risks
associated with:
— Complex dependencies between
multiple programmes spanning
different businesses;
— The organisational ability to absorb
change being exceeded while
maintaining a stable and robust
control environment ;
— Unrealised business objectives/
benefits; and
— Failures in programme and/or project
design, execution or transition into
business as usual.
b. Non-financial risks
In the course of doing business, the Group
is exposed to non-financial risks arising
from its operations, the business
environment and its strategy. The main
risks across these areas are detailed below.
Operational risks
Prudential defines operational risk as the
risk of loss (or unintended gain or profit)
arising from inadequate or failed internal
processes, personnel or systems, or from
external events. This includes employee
error, model error, system failures, fraud or
some other event which disrupts business
processes or has a detrimental impact to
customers. Processes are established for
activities across the scope of our business,
including operational activity, regulatory
compliance, and those supporting
environmental, social and governance
(ESG) activities more broadly, any of which
can expose us to operational risks. A large
volume of complex transactions are
processed by the Group across a number of
diverse products, and are subject to a high
number of varying legal, regulatory and tax
regimes. Prudential has no appetite for
material losses (direct or indirect) suffered
as a result of failing to develop, implement
or monitor appropriate controls to manage
operational risks.
The Group’s outsourcing and third-party
relationships require distinct oversight and
risk management processes. A number of
important third-party relationships exist
which provide the distribution and
processing of Prudential’s products, both
as market counterparties and as outsourcing
partners. M&GPrudential outsources
several operations, including a significant
part of its back office, customer facing
functions and a number of IT functions.
In Asia, the Group continues to expand
its strategic partnerships and renew
bancassurance arrangements. These
third-party arrangements support
Prudential in providing a high level and
cost-effective service to our customers, but
they also make us reliant on the operational
performance of our outsourcing partners.
The Group’s requirements for the
management of material outsourcing
arrangements, which are in accordance
with relevant applicable regulations, are
included through its well-established
Group-wide third-party supply policy.
Third-party management is also included
in embedded in the Group-wide
framework and risk management for
operational risk (see further, below).
Third-party management forms part of the
Group’s Operational Risk categorisations
and a defined qualitative risk appetite
statement, limits and triggers are in place.
The performance of the Group’s core
business activities places reliance on the
IT infrastructure that supports day-to-day
transaction processing and administration.
The IT environment must also be secure
and an increasing cyber risk threat needs
to be addressed as the Group’s digital
footprint increases and the sophistication
of cyber threats continue to evolve –
see separate information security risk
sub-section below. The risk that
Prudential’s IT infrastructure does not
meet these requirements is a key area of
focus for the Group, particularly the risk
that legacy infrastructure supporting core
activities/processes affects business
continuity or impacts on business growth.
Operational challenges also exist in keeping
pace with regulatory changes This requires
implementing processes to ensure we are,
and remain, compliant on an ongoing basis,
including regular monitoring and reporting.
The high rate of global regulatory change,
in an already complex regulatory landscape,
increases the risk of non-compliance due to
a failure to identify, interpret correctly,
implement and/or monitor regulatory
compliance. The change in Group-wide
supervisor, and the supervisory
framework, to which Prudential plc will
be subject to after the demerger of
M&GPrudential, means that additional
processes, or changes to existing ones, may
be required to ensure ongoing compliance.
See the ‘Global regulatory and political risk’
section above. Legislative developments
over recent years, together with enhanced
regulatory oversight and increased
capability to issue sanctions, have resulted
in a complex regulatory environment that
may lead to breaches of varying magnitude
if the Group’s business-as-usual operations
are not compliant. As well as prudential
regulation, the Group focuses on conduct
regulation, including those related to sales
practice and anti-money laundering,
bribery and corruption. There is a
particular focus on regulations related
to the latter in newer/emerging markets.
Group-wide framework and risk
management for operational risk
The risks detailed above form key elements
of the Group’s operational risk profile. In
order to identify, assess, manage, control
and report effectively on all operational
risks across the business, a Group-wide
operational risk framework is in place.
The key components of the framework are:
— Application of a risk and control
assessment (RCA) process, where
operational risk exposures are identified
and assessed as part of a periodical
cycle. The RCA process considers a
range of internal and external factors,
including an assessment of the control
environment, to determine the
business’s most significant risk
exposures on a prospective basis;
— An internal incident management
process, which identifies, quantifies
and monitors remediation conducted
through root cause analysis and
application of action plans for risk events
that have occurred across the business;
— A scenario analysis process for the
quantification of extreme, yet plausible
manifestations of key operational risks
across the business on a forward-
looking basis. This is carried out at least
annually and supports external and
internal capital requirements as well as
informing risk oversight activity across
the business; and
— An operational risk appetite framework
that articulates the level of operational
risk exposure the business is willing to
tolerate, covering all operational risk
categories, and sets out escalation
processes for breaches of appetite.
Outputs from these processes and
activities performed by individual business
units are monitored by the Group Risk
function, which provides an aggregated
view of the risk profile across the business
to the Group Risk Committee and Board.
These core framework components are
embedded across the Group via the Group
Operational Risk Policy and Standards
documents, which set out the key
principles and minimum standards for
the management of operational risk
across the Group.
66 Prudential plc Annual Report 2018
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Group Chief Risk Officer’s report of the risks facing our business and how these are managed continued the Group. As well as preventative risk
management, it is fundamental that robust
critical recovery systems are in place in the
event of a successful attack on the Group’s
infrastructure, breach of information
security or failure of its systems to retain
its customer relationships and trusted
reputation.
In 2018, the organisational structure and
governance model for cyber security
management was revised with the
appointment of a Group Chief Information
Security Officer, and a repositioning of the
function to allow increased focus on
execution. This organisational change will
increase the Group’s efficiency and agility
in responding to cyber security related
incidents, and will facilitate increased
collaboration between business units and
leverages their respective strengths in
delivering the Group-wide Information
Security Programme.
The objectives of the programme include
achieving consistency in the execution of
security disciplines across the Group and
improving visibility across the Group’s
businesses; deployment of automation to
detect and address threats; and achieving
security by design by aligning subject
matter expertise to the Group’s digital and
business initiatives to embed security
controls across platforms and ecosystems.
The Board receives periodic updates on
information security risk management
throughout the year. Group functions work
with the business units to address risks
locally within the national and regional
context of each business following the
strategic direction of the Group-wide
information security function.
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,
technology and data, operations processes
and extent of transformation.
Business resilience
Business resilience is at the core of the
Group’s well embedded Business
Continuity Management (BCM)
programme, with BCM being one of a
number of activities undertaken by the
Group Security function that protect our
key stakeholders.
These policies and standards include
subject matter expert-led processes that
are designed to identify, assess, manage
and control operational risks, including
the application of:
— A transformation risk framework that
assesses, manages and reports on the
end-to-end transformation lifecycle,
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;
— A framework in place for emerging risk
identification and analysis in order to
capture, monitor and allow us to prepare
for operational risks that may crystallise
beyond the short-term horizon;
— Corporate insurance programmes to
limit the financial impact of operational
risks; and
— Reviews of key operational risks and
challenges within Group and business
unit business plans.
These activities are fundamental in
maintaining an effective system of
internal control, and as such outputs
from these also inform core RCA,
incident management and scenario
analysis processes and reporting on
operational risk. Furthermore, they
also ensure that operational risk
considerations are embedded in key
business decision-making, including
material business approvals and in setting
and challenging the Group’s strategy.
Prudential operates a BCM programme
and framework that is linked with its
business activities, which considers key
areas including business impact analyses,
risk assessments, incident management
plans, disaster recovery plans, and the
exercising and execution of these plans.
The programme is designed to achieve a
business continuity capability that meets
evolving business needs and is appropriate
to the size, complexity and nature of the
Group’s operations, with ongoing proactive
maintenance and improvements to
resilience against the disruption of the
Group’s ability to meet its key objectives
and protect its brand and reputation. The
BCM programme is supported by Group-
wide governance policies and procedures
and is based on industry standards that
meet legal and regulatory obligations.
Business disruption risks are monitored
by the Group Security function, with key
operational effectiveness metrics and
updates on specific activities being
reported to the Group Risk Committee
where required and discussed by cross-
functional working groups.
Information security risk and
data privacy
Information security risk remains an area of
heightened focus after a number of recent
high-profile attacks and data losses across
industries. Criminal capability in this area is
maturing and industrialising, with an
increased level of understanding of
complex financial transactions which
increases the risks to the financial services
industry. The threat landscape is
continuously evolving, and the systemic
risk of sophisticated but untargeted attacks
is rising, particularly during times of
heightened geopolitical tensions.
Recent developments in data protection
worldwide (such as GDPR that came into
force in May 2018) increases the financial
and reputational implications for Prudential
of a breach of its (or third-party suppliers’)
IT systems. As well as data protection,
increasingly stakeholder expectations
are that companies and organisations use
personal information transparently and
appropriately. Given this, both information
security and data privacy are key risks for
www.prudential.co.uk
Annual Report 2018 Prudential plc 67
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Viability statement prepared in
accordance with the provision
C.2.2 of the UK code
The Group’s longer-term prospects
The Group’s strategy is based around
meeting the long-term savings and
protection needs of its customers and
hence creating value for both customers
and shareholders over a time frame that
can be many years. As described on pages
12 to 13, the Group’s business model
supports this strategy by constantly
evolving our products to meet changing
customers’ needs, building out and
diversifying distribution capabilities and
relationships to reach new customers and
investing in technology to better empower
and serve the salesforce and customers.
Examples of the actions undertaken during
2018 are set out on pages 18 to 37. These
activities are underpinned by ongoing risk
management, implemented via the Group
Risk Framework and risk appetite limits
described on pages 55 to 58. The Group’s
management of wider environmental,
social and governance issues that could
pose a risk in the future to the Group is set
out in the Corporate responsibility review
on pages 71 to 72. This collective focus
supports the sustainability of our business
over the longer term.
The Directors regularly consider strategic
matters that may affect the longer-term
prospects of the Group. In the current year
this included the impact of the proposed
demerger of M&GPrudential, announced
in March 2018. Further, the Group as a
whole and each of its life assurance
operations are subject to extensive
regulation and supervision, which are
designed primarily to reinforce the Group’s
management of its long-term solvency,
liquidity and viability to ensure that it can
continue to meet obligations to
policyholders. Further details on the
current capital strength of the Group are
provided on pages 48 to 50.
For the purposes of assessing the Group’s
viability, the Directors considered those
risks where the impact of possible adverse
external developments could be of such
speed and severity to present a shock to
the Group’s financial position. The risks
considered, from those detailed on pages
58 to 59, are: market risk, credit risk,
liquidity risk and regulatory risk. In addition
the Directors considered the operational
and financial risks arising from the UK’s
intended departure from the European
Union in a number of possible scenarios,
including those which assume no
withdrawal agreement is enacted.
To evaluate the Group’s resilience to
significant deteriorations in market and
credit conditions and other shock events,
these risks are grouped together into
severe but plausible scenarios which are
then applied to the assumptions underlying
the business plans considered. For
example, the impacts of scenarios
assuming a disorderly transition to a higher,
more normalised interest rate environment
and an international recession (causing a
fall in interest rates and in equity and
property values, together with an increase
in credit spreads and credit losses on debt
assets and higher policyholder lapse rates)
were considered in the preparation of the
most recent business plan, together with
the impact on liquidity of a scenario
assuming the closure of short-term debt
markets for three months. In addition, the
Group conducts an annual reverse stress
test which gives the Directors an
understanding of the maximum resilience
of the Group to extremely severe adverse
scenarios.
The scenarios tested showed that the
Group with or without the demerger
would be able to maintain viability, over the
three-year period under assessment, after
taking account of the actions available to
management to mitigate the impacts on
capital and liquidity in such scenarios.
Period of viability assessment
The Directors have assessed the viability
of the Group for a period longer than
the 12 months required by the going
concern statement.
The Directors performed the assessment
by reference to the three-year period to
December 2021. Three years is considered
an appropriate period as it represents the
period covered by the detailed business
plan that is prepared annually on a rolling
three-year basis. In approving the business
plan, the Directors review the Group’s
projected performance with regards to
profitability, cash generation and capital
position, together with the parent
company’s liquidity over this three-year
period. This projection involves setting
a number of economic and other
assumptions that are inherently volatile
over a much longer reporting period. Such
assumptions include foreign exchange
rates, interest rates, economic growth
rates and the impact on the business
environment arising from events such as
the exit of the United Kingdom from the
European Union or changes in regulation.
The intended demerger of M&GPrudential
from the Group, if approved by
shareholders, is expected to occur within
the period covered by the viability
statement. The Directors have therefore
considered the ability of the Group to
continue in its current form (ie the scenario
in which the demerger does not proceed)
for the three-year period ending
31 December 2021 as well as the viability
of the Group if the demerger proceeds
as planned.
Assessment of risks over the period
The Group’s business plan implements the
Group’s strategic objectives through the
business model and activities discussed on
pages 10 to 13. This year’s business
planning process considered the results of
the current Group over the planning period
as well as those of the Group post
demerger. As noted above, underpinning
the projections in the business plan are a
number of economic and other
assumptions. Assessment of the risks to
achieving the projected performance
therefore remains an integral part of the
planning process. The Group’s approach to
risk management and a summary of the key
risks facing the Group are set out on pages
52 to 69.
68 Prudential plc Annual Report 2018
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Group Chief Risk Officer’s report of the risks facing our business and how these are managed continued The impact on the business of known areas
of regulatory change whose financial
implications can be reasonably quantified
is also considered as part of the plan. As
well as known areas of regulatory change
the Group is exposed to the risk of sudden
and unexpected changes in regulatory
requirements at the Group and local level.
While unexpected changes cannot be fully
anticipated and hence modelled, the risk of
regulatory change is mitigated by capital
held by the Group and its subsidiaries in
excess of Group and local regulatory
requirements, the Group and its
subsidiaries’ ability to generate significant
capital annually through operational
delivery and the availability of
compensating actions designed to restore
key capital and solvency metrics.
Conclusion on viability
Based on this assessment, the Directors
have a reasonable expectation that
the Group will be able to continue in
operation and meet its liabilities as they
fall due over the three-year plan period
to December 2021.
James Turner
Group Chief Risk Officer
www.prudential.co.uk
Annual Report 2018 Prudential plc 69
Notes
1 Based on hierarchy of Standard & Poor’s, Moody’s and Fitch,
where available and if unavailable, other rating agencies or
internal ratings have been used.
2 Source of segmentation: Bloomberg Sector, Bloomberg
Group and Merrill Lynch. Anything that cannot be identified
from the three sources noted is classified as other. Excludes
debt securities from other operations.
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Corporate responsibility review
A long-term view
We want to create a positive legacy from all our business activities. We aim to provide value
to our customers through the products we deliver and to our shareholders through our
positive financial performance. At the same time we recognise the importance of providing
benefits to all our stakeholders, whether through our community investment programmes,
our environmental impact, our engagement and talent development with our colleagues
or our approach to responsible investment.
Non-financial information statement
As a global provider of savings and
protection products, stewardship is core
to what we do. We recognise that to help
our customers look to the future with
confidence, we need to take a long-term
view on a wide range of issues that affect our
business and the communities in which we
operate. To do this, we maintain a proactive
dialogue with our stakeholders – customers,
investors, employees, communities,
regulators and governments – to ensure
that we are managing these issues
sustainably and delivering long-term value.
Further information on our engagement
with our stakeholders will be provided in
our upcoming 2018 ESG report, which will
be published in May 2019.
This Strategic report complies with the
Non-Financial Reporting requirements
contained in sections 414CA and 414CB
of the Companies Act 2006.
The diagram below provides a guide to the
sections of this Strategic report that fulfil
these requirements:
Responsible investment
Environment
Overview, relevant risks and associated
management practices – page 71
Relevant KPIs: greenhouse gas emissions –
pages 75 to 77
Environmental
matters
Suppliers
Overview, relevant risks and
associated management practices
– page 72
People
Overview, relevant risks and
associated management practices
– page 71
Relevant KPIs: gender diversity –
page 79
Employees
Human rights
Group-wide policies
and due diligence
– pages 72 to 73
Anti-bribery
and
anti-corruption
matters
Social
matters
Business integrity
Overview, relevant risks and
associated management practices
– page 71
Business model
– pages 12 to 13
Principal risks
– pages 58 to 69
Communities
Technology
Relevant KPIs: community
investments, fundraising and
donations, employee voluntary
hours – page 85
70 Prudential plc Annual Report 2018
www.prudential.co.uk
This corporate responsibility review
provides an overview of our activities and
progress in 2018 across a range of areas in
which we have helped to provide benefits
to stakeholders throughout the markets in
which we operate. It also includes an
overview of our Environmental, social
and governance (ESG) activities.
For us, ESG means:
— What we do – the products we offer,
our customer service, our human capital
and our investment management; and
— How we do it – understanding our
customers and providing suitable
solutions that meet their needs, building
long-term profitable relationships,
investing in our people and making
responsible investments, to generate
sustainable long-term returns in line
with our risk appetite, to meet our
customers’ needs.
Our ESG approach underpins the delivery
of our strategy, generating sustainable
earnings and resilient capital growth,
enabling us to deliver on our promises to
our customers.
More detailed information on our corporate
responsibility and ESG activities is available
online at www.prudential.co.uk/
corporate-responsibility and in our 2018
ESG report, which will be published in
May 2019.
How we govern ESG
We established an ESG Executive
Committee (ESG ExCo) in 2018 to lead on
how we identify, manage and report on
material ESG risks. Our ESG sponsor,
Jonathan Oliver (Group Executive
Committee member), was nominated as
Chair and is supported by senior leaders
from Group operations, across financial
reporting, investor relations, risk,
compliance, operations, investment and
human resources. There is representation
from our business units, provided by the
Chief Investment Officers of our asset
management businesses (PPM America
(PPMA) and Eastspring), M&G’s Head of
Corporate Finance and Stewardship and
Jackson’s General Counsel. The ESG ExCo
meets quarterly and reports to the Board
at least twice each year, with additional
ad hoc reporting provided as necessary.
Our ESG ExCo is focused on the holistic
assessment of ESG matters material to the
Group, raising matters for Board decision-
making and implementing resulting
decisions, supporting the sustainable
delivery of the Group’s strategy.
Managing our material ESG issues –
summary
Responsible investment
As a life insurer, asset owner and manager,
we are long-term stewards of our customers’
assets and we recognise the importance of
ESG matters. We also recognise our
responsibility to our customers, society and
the environment to effectively integrate
associated considerations into investment
decisions and fiduciary and stewardship
duties, helping to finance a more
sustainable economy.
Environment
We recognise the risks and opportunities
posed by climate change and our impact
on the environment, and as such we strive
to play our part in reducing both our direct
and indirect impacts where possible. Our
approach includes not only understanding
our impact on the environment, through
measuring and improving the
environmental performance of our global
operations, but also developing our
understanding of the environment’s
potential impact on our business.
People
We foster a diverse and inclusive
organisation that develops and protects
our people’s interests, wellbeing and
health. Developing talent and valuing
diversity is key to how we operate and
deliver outstanding results for our
customers, shareholders and communities.
Data protection and cyber security
New technologies present new risks, from
privacy to cyber security, and we are
vigilant in working to identify these and to
manage old and new risks in ways that are
proportionate to and commensurate with
the threats our business faces. At the same
time, we are making significant investments
in technology as we continue to upgrade
our digital capabilities to provide a more
seamless customer experience.
Communities
Our business purpose, the interests of
our stakeholders and our drive to ensure
economic and social progress for the
long term are central to our community
investment strategy. This strategy has four
principal themes: social inclusion, financial
education and life skills, disaster
preparedness and employee engagement,
and we continued to be active in all these
areas during 2018.
We maintain long-term relationships with
our charity partners, providing support
through both funding and skills-based
volunteering led by our employees.
Business integrity
We embed responsible and ethical
behaviour across our organisation. From how
we conduct ourselves, shape and monitor
our culture and meet our responsibility to
prevent bribery and corruption, through
to transparency in our tax practices, our
contribution to the global economy and
our leadership role in our industry, we
are a responsible, ethical business.
Our governance framework, setting out
the principles by which we conduct our
business and ourselves, is built on our
Group Code of Business Conduct and our
Group Governance Manual. We contribute
to financial stability and sustainability in all
of the markets in which we operate. The
responsible and sustainable management
of our tax affairs helps us to maintain
constructive relations with our stakeholders
and play a positive role in the economy. We
take a long-term perspective and balance
our responsibility to support our business
strategy with our responsibility to the
communities in which we operate, which
need sustainable tax revenues.
We have a global footprint and maintain
business relationships with a range of
parties, such as agents and intermediaries,
who act on our behalf. As such, financial
crime is a key risk and we are committed to
fighting it through the maintenance and
implementation of policies and procedures
on anti-money laundering, counter-
terrorist financing, anti-bribery and
corruption and anti-fraud, and through our
commitment to industry-wide efforts. We
operate a Group-wide whistle-blowing
programme, which is able to receive
reports from a variety of channels and is
supported by an independent third party
that captures and comprehensively records
matters raised.
Customers
Our relationships with our customers are
long-term and are central to our ability to
continue creating sustainable value. We
provide fair, transparent, inclusive and
accessible products to best serve our
customers’ needs and to support them in
de-risking their lives. We are constantly
looking for new ways to innovate and
provide the highest level of service.
We take our commitment to our customers
seriously when training our personnel, who
deliver service consistent with our values.
Where customers have cause to complain
to us, we have documented procedures in
place to manage complaints received
through multiple touchpoints, in a timely,
robust and professional manner.
www.prudential.co.uk
Annual Report 2018 Prudential plc 71
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information In Asia, the health protection gap remains
large and continues to expand. In line with
our commitment to help close this gap and
protect our customers’ health, we have
continued our efforts to create best-in-
class health capabilities by offering more
comprehensive and flexible coverage and
a wider range of value-added services.
Increasing access to financial protection is
a significant socio-economic issue and we
seek to provide the right products through
appropriate means to improve access for
new and existing customers. We also strive
to communicate information about our
products in a fair and transparent way.
In the US, Jackson continues to be a leader
in shifting perspectives and simplifying
the language around financial products.
Suppliers
Managing ESG risks when sourcing goods
and services, and throughout the lifecycle
of our third-party relationships, is vital to
our position as an ethical and responsible
business. We take this position seriously
and seek to both maximise value and
minimise risk throughout our interactions
with our supply chain.
We work with a range of partners that
support our business units with our IT
network and systems, specialist
professional and advisory services,
facilities management, contractors and the
agents that form our distribution network.
Our Group Code of Business Conduct
outlines the values and standards that we
require of each of our suppliers. We act
with integrity to ensure that modern
slavery, human trafficking, child labour
or any other issue that subjugates human
rights is eradicated from our supply chain.
Our business units are responsible for
managing third-party supply arrangements
and able to adopt further policies as they
require, to meet localised operating
conditions. Business units conduct due
diligence before engaging with and
ultimately selecting a new supplier. During
this process, our employees are trained to
ensure that the contractual arrangements
reflect the requirements of those policies.
We perform regular due diligence, review
meetings and audits, where required, and
our policies and procedures are supported
by regular employee training exercises.
Our ‘Speak Out’ whistleblowing service
enables employees to raise any concerns
they may have in relation to our third-party
relationships, and our contractors and
third-party suppliers are also able to use
this service.
ESG policy framework – Group Governance Manual
The Group Governance Manual (GGM) establishes standards for managing key material ESG issues across the Group, setting out the
policies and procedures to support how we operate. The GGM is used to ensure that we comply with relevant statutory and regulatory
requirements. Our Group-wide policies relating to our identified material issues include:
Material ESG issues
Our Group-wide policies*
Business
integrity
— Code of Business Conduct Policy details our required standards to be used across the Group and covers our
employees and individuals or organisations acting on our behalf. It is governed by five standards: protection from
financial crime, avoiding conflicts of interest, managing information, communicating as a group and providing
equality for our people.
— Anti-Bribery and Corruption Policy covers our values for reputation, ethical behaviour and reliability. As an
organisation we are focused on financial practices that align to those values and we prohibit corruption or bribery
within our working practices.
— Anti-Money Laundering and Counter Terrorist Financing Policy outlines how we prohibit money laundering
or terrorist financing in our working practices, setting out how we establish parameters to prevent this taking
place across the organisation.
— Sanctions Policy details the commitment we have to comply with sanctions laws and regulations by screening,
prohibiting or restricting business activity, and following up through investigation.
— Security Policy outlines our commitment to ensuring security aligns to industry recommended practice for
managing our regulatory and legal obligations. This includes how we manage incidents under the ‘Speak Out’
programme, our whistle-blowing process.
— Tax Risk Policy includes our processes to manage tax-related risk, by identifying, measuring, controlling and
reporting on issues considered an operational, reputational or regulatory risk.
— Political Donations Policy outlines our position, that as an organisation we do not donate to political parties.
Customers
— Customer Commitments Policy covers our five key commitments to our customers and how we assess,
manage and report on these:
1 Treat customers fairly, openly and honestly;
2
Provide and promote a range of products and services that meet customer needs, are easy to understand
and that deliver real value;
3 Maintain the confidentiality of our customer information (except where the law requires disclosure);
4 Provide and promote high standards of customer service and monitor these standards rigorously; and
Ensure that our complaints processes provide an effective and fair means of arbitration between the
5
Group’s businesses and customers.
72 Prudential plc Annual Report 2018
www.prudential.co.uk
Corporate responsibility review continued Material ESG issues
Our Group-wide policies*
Environment
— Environment Policy outlines our approach to understand and manage the direct environmental impact of the
Group. This covers our measurement, monitoring, review and reporting of issues associated with our
environmental performance.
Responsible
investment
— Owing to the distinct investment risks faced by our asset management and ownership businesses, with each
investing in different markets and asset classes, each business manages ESG-related matters through the
pursuit of business-specific responsible investment policies. This is overlain by our Group-wide Responsible
Investment Framework, aligned to our Group-wide Code of Conduct and underpinned by our Group Responsible
Investment Standards.
Suppliers
— Third-Party Supply Policy – an updated Third-Party Supply Policy was approved by the Group Risk Committee
in July 2018. It covers how we manage and oversee our third-party arrangements, through due diligence/
selection criteria, contractual requirements, the ongoing monitoring of such relationships and reporting and
escalation. Additionally, our policy considers the requirements of the UK Modern Slavery Act and the principles
of the UN’s Universal Declaration of Human Rights.
Technology
— Privacy Policy governs the protection of data. The policy became operational in 2018 and complies with the
General Data Protection Regulation.
People
— Diversity and Inclusion Policy sets out how we foster an inclusive workforce and ensure all our employees are
treated fairly and feel valued, and together have the diversity in skill sets and backgrounds that enriches the
organisation. Our policy considers a range of diversity aspects of our employees, including gender, age, ethnicity,
disability, sexual orientation and background. Further information on the diversity of our Board, our policy in
respect of this, how this is implemented and the associated results in 2018 can be found in our Governance
statement on pages 109 to 114.
— Employee Relations Policy outlines the way we engage our employees and motivate them to achieve success for
the Group: promoting positive relationships with employees, representative organisations and trade unions, and
maintaining a positive reputation for the treatment of employees.
— Performance and Learning Policy sets out the importance of our people and frames how we invest in their
development to deliver against our strategy and the future success of the organisation. This includes our
Performance Management Framework.
— Remuneration Policy outlines our effective approach to appropriately rewarding our employees in a way that
aligns incentives to business objectives and enables the recruitment, retention and incentivisation of high-calibre
employees in line with our risk appetite and Group Reward Principles.
— Talent Policy demonstrates how we attract and select the best people for roles that will ensure high performance
in the short term and improve the longer-term succession and talent pipeline. It sets out our fair and effective
approach to pursuing this.
— Health and Safety Policy covers our employees, business partners, customers and others that may be affected
by our operations. This details our health and safety core principles, our commitments and the measuring and
reporting on our health and safety performance.
Communities
— Community Investment Policy covers how we are committed to working with the communities we operate in as
active and supportive members. This also outlines our strategy for investing in the community and how we make
investments and report against them.
* In addition to our Group-wide policies, our business units have underlying business-specific policy frameworks, reflecting their individual risks and operating environments.
For the purposes of this report, we focus primarily on the Group policy framework.
www.prudential.co.uk
Annual Report 2018 Prudential plc 73
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information The GGM is used as a platform for
mandating specific ways of working across
the Group. The chief executive of each
business unit attests annually to
compliance with applicable requirements
set out in the policies, including matters
that must be reported to the Group.
Specific procedures are followed for the
reporting of non-compliance. Business
units present such instances in their annual
certification, which in turn is reported to
the Group Audit Committee.
Due diligence on ESG-related policies
Our GGM forms part of the Group Risk
Framework, which details how business
units should put in place sufficient
processes that identify, evaluate and
manage risks, incorporating key ESG
issues. Due diligence is conducted by the
business units to ensure that the policies
are complied with and we require evidence
to demonstrate this.
The Group Audit Committee reviewed
the results of the year-end certificate of
compliance with GGM requirements.
While several improvements to ensure
the policies are fully embedded were
discussed, no significant areas of non-
compliance in relation to the policies
relevant to ESG issues were noted.
For further information on our Group
business standards and policies pursued in
relation to our material ESG issues, refer to
the ‘Business standards’ pages of our
website at: www.prudential.co.uk/
responsibility/standards
Further information on ESG issues
Responsible investment
As a life insurer, asset owner and manager,
we are long term stewards of our customers’
assets and we recognise the importance of
ESG matters. We also recognise our
responsibility to our customers, society and
the environment to effectively integrate
associated considerations into investment
decisions and fiduciary and stewardship
duties, helping to finance a more sustainable
economy. We believe that our investment
activities should help our customers both
today and over the long term. We take our
commitment to ESG and responsible
investment seriously, which is why our
asset management business units, M&G
Investments, PPMA, PPMSA and Eastspring
Investments, are signatories to the Principles
for Responsible Investment. Similarly, as a
life insurer we remain committed to
servicing our customers’ evolving needs,
providing product solutions that support
their financial resilience and enable them
to face the future with confidence.
Assessing the implications of evolving
expectations of the Group in financing
a sustainable and low-carbon economy
Over 2018 there have been a number of
regulatory, supervisory and investor-driven
sustainable finance and climate-related
financial risk initiatives. From a supervisory
perspective, the International Association
of Insurance Supervisors and the Prudential
Regulation Authority (PRA) have made
clear that they expect insurers to assess and
consider the risks from climate change, with
the PRA releasing a consultation on a draft
supervisory statement. We engaged with
the PRA on the topic during 2018 and
continue to focus on developing our
practices in this area, with the implications
for us as a Group being considered by our
Board. Climate risk is under similar scrutiny
from the Financial Conduct Authority,
which issued a draft discussion paper on
the topic, and the Securities and Futures
Commission in Hong Kong launched its
Strategic Framework for Green Finance.
In addition to assessing the implications
for the Group of evolving regulatory and
supervisory expectations, we continued to
monitor the changing legislative landscape,
including developments set out in the
European Commission’s (EC) Action Plan
for Financing Sustainable Growth. Our
approach to meeting these evolving
expectations of financial institutions is
twofold: to consider the need for enhancing
our ESG integration and disclosure
practices and to continue to increase our
industry participation and collaboration
towards positive change. Further detail on
the progress we have made in responsible
investing in 2018, through engagement
with investees and the assets in which we
invest with regard to financing sustainable
growth, will be provided in our forthcoming
2018 ESG report.
Strengthening our governance
of responsible investment
Following on from the establishment of our
Group Responsible Investment Advisory
Committee (GRIAC) and Group
Responsible Investment Framework
in 2017, our governance of responsible
investment activities has continued to
be strengthened during 2018 by our
businesses. Each asset management
business now has a clearly designated
responsible investment committee. The
GRIAC links these independent business
unit committees, serving as a forum for
sharing best practice innovations across
the Group. It also enables our Group-wide
Responsible Investment Standards to be
adopted in a consistent manner across our
business units, while still affording them
the flexibility to manage investments in a
way that balances the needs of their clients
and the local regulatory environments in
which they operate.
In 2018 our Group Responsible Investment
Standards, which underpin our Group
Responsible Investment Framework and
Principles, were in the road-testing phase
with our businesses, which focused on
developing internal monitoring and
reporting capabilities to support the
implementation of the Standards.
Prudential Corporation Asia, for example,
has implemented a new investment
portfolio and risk management system as
part of the ongoing enhancement of its
approach to ESG integration. This provides
its regional and local investment offices
with increased transparency of how ESG
factors are being incorporated into its
investment decisions, manager selection
and manager reporting process, in line with
its commitment to responsible investing.
Eastspring has also embraced technology
solutions in 2018, with Group Digital
working in partnership with the investment
teams to develop tools that utilise artificial
intelligence and learning to facilitate faster
and scalable ESG screening of investee
companies. During 2018, M&G signed up
to using the new MSCI Carbon Portfolio
Analytics tool, enabling portfolio managers
to monitor a portfolio’s carbon emissions,
carbon intensity and fossil fuel reserves
and to support the better management
of carbon risks.
Industry participation and
collaboration on climate change
We have long believed in the benefits that
collaboration and collective action can
bring on important issues. Active
consideration of ESG factors is integral to
our stewardship responsibilities. For this
reason, we as a Group and our businesses
remain active participants in industry
initiatives on sustainable finance on climate
change. M&G continues to participate in
the Climate Action 100+ initiative and
remains a member of the Institutional
Investors Group on Climate Change.
During 2018, Eastspring participated
in roundtables organised by its local
regulator, the Monetary Authority of
Singapore (MAS), to help raise awareness
of climate risk in the region and promote
the integration of ESG frameworks in
investment strategies. Similarly, Prudential
Singapore has engaged with its local
regulators (the Life Insurance Association
Singapore and MAS) to discuss its
approach to climate change risk as an
Asian asset owner.
74 Prudential plc Annual Report 2018
www.prudential.co.uk
Corporate responsibility review continued Prudential remains an active member of the
ClimateWise initiative, a global network of
leading insurance industry organisations,
and an investor signatory to the Carbon
Disclosure Project. In 2018, we again
participated in the Asset Owner Disclosure
Project, a survey managed by ShareAction
to assess the insurance sector’s response to
addressing climate risk, where we ranked
30th out of 80 in the Global Climate
Insurance Index (an assessment of the
80 largest insurance companies globally)
(2017: 31st). In 2018, M&G collaborated
on enhancing industry climate-related
disclosure practices and signed up to a pilot
initiative sponsored by the United Nations
Environment Programme to work on
climate-change scenario modelling for
portfolios across different asset classes.
This is a central part of the Task Force on
Climate-related Financial Disclosures
(TCFD) framework, and the key output will
be an industry climate scenario modelling
tool. Further information in relation to the
Group’s support for the Financial Stability
Board’s (FSB) TCFD is provided below in
the section on ‘Managing climate risks and
opportunities and the FSB’s TCFD’ below.
Evolving our ESG-focused investment
product offering
We continued to add to our ESG-focused
investment product offering over 2018, in
light of increasing interest and demand
from customers. M&GPrudential launched
two new retail funds in 2018, the M&G
Positive Impact Fund and the M&G
Sustainable Multi Asset Fund, both
employing a structured approach to
ESG integration and both investing in
companies that are aligned with the United
Nations Sustainable Development Goals.
The Positive Impact Fund seeks to invest in
companies that have a positive impact on
society through addressing the world’s
major social and/or environmental
challenges, while providing attractive
financial returns. Sustainability and impact
considerations are fundamental in the
stock selection process. The M&G Impact
team undertakes a ‘triple I’ approach to
identifying impactful investments,
analysing the investment case,
intentionality and impact of a company to
assess its suitability for the fund. The fund
won Best New Entrant (Fund) at the 2018
Investment Week Sustainable and ESG
Investment Awards.
Managing climate risks and
opportunities and the FSB’s TCFD
As a life insurer, asset owner, asset
manager and occupier of over 400
properties worldwide, we recognise both
the risks and opportunities posed by
climate change on our businesses, and our
Group’s impact on the environment. Our
approach includes not only understanding
our impact on the environment, through
measuring and improving the
environmental performance of our global
operations, but also developing our
understanding of the environment’s
potential impact on our business. With
respect to the impact that climate change
poses to our businesses, we are cognisant
that the risks and opportunities may
manifest in a number of different ways.
We outline further detail on the specific
climate-related risks within the Group
Chief Risk Officer’s report on page 61.
We as a Group welcomed, and are
a signatory to, the FSB’s TCFD
Recommendations, which were released
in 2017. Our governance structures, which
provide oversight in this important area,
were enhanced in 2018 through the
establishment of our ESG ExCo, which will
oversee the Group’s processes to assess
the climate related risks and opportunities
facing our businesses, which are currently
under development, and the identification
and delivery of supporting implementation
activities, with the view to enhancing our
climate-related financial risk management
practices. Over the next year the Group
will take action to enhance the Group’s
climate-related financial risk management
practices and disclosure.
Our strategy needs to be tailored to the
local US, Asian, European and African
countries in which we operate. Climate
change is a material challenge for the global
economy and, in conjunction with other
global trends, may impact each part of
the world differently. The physical risks
will be as difficult to determine as the risks
resulting from transitioning to a low-carbon
economy. Accompanying those risks are
inherent investment opportunities that
we will continue to explore, including the
emergence of infrastructure investments
as a new asset class. We are keen to
position our organisation in order to
best place us to respond to and manage
material climate risks and capitalise on
the opportunities from the economy’s
transition. Demonstrating our approach
and performance transparently to our
external stakeholders has always been
central to our vision, mission and values.
As an organisation with a long history,
we invest for the long term. Integrating
non-financial decision-making with our
current financial systems is a key part of
taking that long-term view and is a
continuing priority for the Group.
Further information on our approach to
responsible investment, including progress
made by our businesses during 2018 in
enhancing ESG integration, investing for
positive change and collaborating and
participating in industry initiatives, will be
found in our forthcoming 2018 ESG report.
Environment
Managing our direct environmental
impact
Cognisant of our direct environmental
impacts as an occupier of over 400
properties worldwide, we strive to play our
part in reducing our operational impacts
where possible. In 2016, we established a
global environmental targets framework
and roadmap to drive progress across a
range of environmental aspects and
impacts for our operational property
portfolio worldwide. This framework aligns
to our regional footprints covering Asia, the
UK and Europe and the US, reflecting the
maturity of environmental management
practices in these markets and the
autonomy given to our business units in
managing their operations.
We recognise the importance of our
own internal environmental targets and
decarbonisation goals in reducing our
direct footprint. In 2018, global energy use
across our occupied estate was 127,098
MWh (2017: 129,324 MWh), a decrease of
2 per cent. Our absolute Scope 1 and
Scope 2 (market based) Greenhouse Gas
(GHG) emissions decreased by 7 per cent
to 61,318 tCO2e (2017: 65,979 tCO2e
restated) across our occupied estate.
When normalised against net lettable floor
area, our Scope 1 and 2 emissions fell by
13 per cent to 99 kg CO2e/m2 influenced by
several factors such as decarbonisation of
the UK/European grid (cleaner electricity
generation), outsourcing our UK data
centres and a 7 per cent increase in
occupied floor area.
www.prudential.co.uk
Annual Report 2018 Prudential plc 75
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information For the Group as a whole, further detail
on our environmental performance
throughout 2018 is available online and will
be published in our 2018 ESG report early
in 2019, including performance against our
global environmental objectives.
Prudential plc – greenhouse gas
emissions statement
We have compiled our global GHG
emissions statement in accordance with
the Companies Act 2006 (Strategic and
Directors’ Reports) Regulations 2013. GHG
emissions are broken down into three
scopes; we have included full reporting for
Scope 1 and 2 and select Scope 3 reporting
as best practice.
Scope 1 emissions are our direct emissions
from the combustion of fuel, fugitive
emissions and company-owned vehicles.
Scope 2 emissions cover our indirect
emissions from the purchase of electricity,
heating and cooling. We have reported our
Scope 2 emissions using both the location
and market-based methods in line with the
GHG Protocol Scope 2 Guidance. Our
Scope 3 footprint includes UK/EU/Africa
booked business travel for the occupied
estate, global water consumption from the
occupied and investment estate (where
Prudential have operational control), waste
generated from occupied properties (UK
and US) and global investment properties
(where Prudential have operational
control). We continue to work with our
business units to review the extent of our
Scope 3 reporting and increase coverage
where practicable.
Please refer to our Basis of Reporting and
supplementary reporting online for further
detail on our methodology, reported
consumption and drivers of variation.
Prudential Group
Scope 1 and 2 GHG emissions
tCO2e
37,536
71,104
14,893
74,315
14,940
65,979
13,170
61,318
2015
2016
2017*
2018
Investment Estate
Occupied Estate
* 2017 figures restated as revised data became
available from suppliers
Prudential Group Scope 1 and 2
GHG Emissions
We achieved a ranking of B in the 2018
CDP Climate Change disclosure
benchmark, and in ClimateWise, the
insurance sector climate initiative
managed by the Cambridge Institute for
Sustainability Leadership, we improved
our score, achieving 78 per cent (2017:
72 per cent). Our performance in
ClimateWise against six core principles
is independently audited by PwC.
As a Group, we signed up to RE100 in
2018 to achieve 100 per cent renewable
electricity by 2025 across our occupied and
managed investment estates. 30 per cent
of our global electricity consumption is
procured from 100 per cent certified
renewable sources (solar PV and on-shore
wind). Our Group Scope 2 (market based)
emissions are independently assured by
Deloitte. Looking ahead, we will develop
roadmaps in 2019 for the demerged
businesses to set out strategies to achieve
this target, on a country-by-country basis.
As our business becomes increasingly
global, we recognise the importance of
understanding the impact of air travel on
our overall corporate carbon footprint.
We have collated air travel data internally
across all three regions for the first time.
We have elected to disclose Scope 3 GHG
emissions data from air travel for the UK
and Europe business unit. This amounted
to 21,622 tCO2e, representing a 50 per cent
increase over preliminary estimates (2017:
14,413 tCO2e). The scope of this data now
includes air travel from our sites in the UK,
Japan, Kenya, Poland and Zambia, which
are controlled by the UK and Europe
business unit.
Our combined reported and unreported
carbon footprint from air travel is a
significant contribution to our overall
emissions. Therefore, as part of a holistic
approach to the management of our
climate impacts, we will focus management
effort on reducing the need for travel
through the deployment of digitally
enabled office working practices and
offsetting emissions from unavoidable
flights as final mitigation. Plans will be
developed in 2019 to establish a CO2
offsetting programme for air travel
emissions.
As part of our ongoing environmental
management system (ISO 14001:2015) in
the UK, we achieved zero nonconformities
in 2018, and focused on improving
recycling rates and minimising single use
vending cups and plastics, as well as
completing the roll out of advanced energy
analytics software across our largest UK
properties following a successful trial.
In the US, Jackson completed a further
three Energy Star assessments in addition
to the two completed in 2017. The US
Environmental Protection Agency Energy
Star scheme is a certification programme
and performance benchmark identifying
the buildings nationwide that use
35 per cent less energy than typical
buildings.
In Asia we have developed Green Design,
Construction and Leasing Guidelines, as
well as a smart leasing toolkit to ensure
good environmental performance of new
sites, focusing on energy and water
efficiency.
M&G Real Estate, part of M&GPrudential,
has an approach to responsible property
investment that enables it to manage and
respond to the growing range of
environmental and social issues that can
impact property values. It continues to
decarbonise its property estate through
targeting low and no cost energy reduction
measures such as LED lighting installations,
real time monitoring of high energy users
through smart building technology and
realising energy efficiency through
refurbishment. Further details on M&G
Real Estate’s progress can be found in its
annual Responsible Property Investment
report at www.mandg.co.uk/institutions/
realestate/responsible-investing/
76 Prudential plc Annual Report 2018
www.prudential.co.uk
Corporate responsibility review continued Emissions source (tCO2e)
Scope 1
Scope 2 – Location-based
Occupied estate1
Investment properties
Occupied estate1
Investment properties
Scope 2 – Market-based (supplier and residual mix)
Occupied estate1
Investment properties1
Group1
Occupied estate
Investment estate
Group
Group
Group1
Group1
Group1
Scope 3
Scope 1 and Scope 2*
Total Scope 1 and 2*
Total Scope 1, 2 and 3*
Carbon intensity*
kg CO2e per m2 – Scope 1 and 2 only
kg CO2e per employee – Scope 1 and 2 only
kg CO2e per m2 – Scope 1, 2 and 3
* Note that when reporting Group totals, the market-based emission is used.
Data notes
Reporting period:
Baseline year:
Independent Assurance:
2018
9,191
7,711
56,554
15,281
52,127
5,459
22,545
61,318
13,170
74,488
97,032
2017
% Change
10,494
7,703
61,154
18,751
55,484
7,237
15,306
65,979
14,940
80,919
96,225
-12%
0%
-8%
-19%
-6%
-25%
+47%
-7%
-12%
-8%
+1%
2018
2017
% Change
24
3.1
32
29
3.2
34
-17%
-3%
-8%
1 October 2017 to 30 September 2018
1 October 2016 to 30 September 2017
Deloitte LLP has provided limited assurance over selected environmental
metrics in accordance with the International Auditing and Assurance
Standards Board’s (ISAE3000 (Revised)) international standard.
Consolidation (boundary) approach:
Operational Control
Consistency with financial statements:
The reporting period does not correspond with the Directors’ Report period
(01 January 2018 to 31 December 2018) as it was brought forward by three
months to improve the availability of invoice data and reduce reliance on
estimated data.
Prudential owns assets, which are held on its balance sheet in the financial
statements, over which it does not have operational control. These are
excluded from the data below. Assets not included on the balance sheet
but held under an operating lease and where we have operational control
are included.
Emission factor:
Scope 1 and 3 reporting uses the UK DEFRA 2018 GHG Conversion Factors.
Accounting methodology:
Materiality threshold:
Note
1 2017 figure restated as revised data became available from suppliers.
Scope 2 calculations use the IEA GHG 2018 Conversion Factors for location-
based reporting. Market-based reporting uses supplier emission factors for
our UK REGO-backed supply and RE-DISS factors where available.
The Greenhouse Gas Protocol Corporate Accounting and Reporting Standard
Five per cent
www.prudential.co.uk
Annual Report 2018 Prudential plc 77
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
People
An inclusive working environment, where
we continually develop our talent, reward
great performance, protect our people and
value our differences, is key in delivering
outstanding results for our customers,
shareholders and communities.
Diversity and inclusion
Organisations benefit from a number of
diverse perspectives and experiences and
we consider this is important to our success
today and in the future. Diversity and
inclusion (D&I) is one of our strategic
objectives. Tim Rolfe, Group HR Director,
is the executive sponsor across the Group,
with Nic Nicandrou, Chief Executive of
Prudential Corporation Asia, acting as the
Board member accountable for D&I work.
The Group D&I Policy ensures we provide
equal opportunities to our workforce
through fostering an environment where
our current and prospective employees are
treated with dignity and respect, ensuring
an appropriate diversity of skill sets and
backgrounds to deliver success across the
Group. Our policy supports an inclusive
culture, where all our employees are
protected against discrimination and
provided with opportunities regardless of
their age, caring responsibilities, disability
status, ethnicity, gender, religion, sexual
orientation, professional, social, educational
or cultural background, or employment
contract type. Through our policy we
govern our business units to have effective
approaches in place to comply with local
regulation, provide equality of opportunity
and encourage our suppliers to promote
equality of opportunity. Each of our
businesses, including Group Head Office
(GHO), is required to report regularly to
Group HR on its compliance with the policy.
Over time, we aspire to have a senior
management team that better represents
the experiences and backgrounds of our
customers and stakeholders. Diversity
contributes to Board effectiveness and is
essential for successfully delivering the
strategy of an international Group. Our
Board is committed to recruiting the best
available talent and appointing the most
appropriate candidate to each role. This
process ensures appropriate diversity of
experience, skill sets and professional
backgrounds. For more information on
diversity within our Board, please refer to
page 109 of the Governance section within
the Annual Report.
We have a strategic, long-term approach
to D&I and the Board monitors progress
regularly through the Group D&I Advisory
Committee, including reviewing our
benchmarked progress against industry
advances on key aspects such as the
diversity of our Leadership Team. The
majority of D&I activity is managed by the
individual business units, which focus on
the priorities that make a key difference in
their specific markets, in alignment with the
Group-wide strategy. The articulation of
our D&I strategy has been updated in 2018
to reflect the evolution of our D&I journey.
Prudential Corporation Asia continued to
develop its D&I Works Committee, made
up of representatives from across its
regional businesses. Its purpose is to drive
the D&I strategies and initiatives in the
respective countries, provide support and
share best practices. In the US, Jackson has
introduced a D&I Advisory Council to
support senior leadership by helping guide,
implement and oversee D&I strategies and
initiatives, providing updates on progress
and communicating D&I efforts and
commitment internally and externally.
Across our businesses, our commitment
to all employees regarding D&I includes
making reasonable adjustments to those
with special requirements and is supported
by initiatives such as reviews of pay,
performance management consistency,
providing training to staff, engaging with
recruitment firms and awareness
campaigns to diversify the pool of potential
candidates. In 2018, building on the
unconscious bias leadership workshops for
senior managers and executives delivered
in 2017, we aimed to reach all employees via
the Group-wide roll-out of unconscious
bias e-learning. Completion rates exceeded
90 per cent throughout and positive
feedback was received from participants.
We again sponsored Dive In, the D&I
festival for insurance and the financial
services sector, which took place in 27
countries and 53 cities in the Americas,
Asia, Africa, the Middle East and Europe.
In 2018 we published two Group-wide D&I
newsletters for all employees on the themes
of mentoring and sponsorship and cultural
inclusion. The cultural inclusion newsletter
highlighted how our African businesses
reflect the cultural diversity of the countries
in which we operate through engaging with
clients in their native languages to improve
understanding of our products, helping us
to provide a better service.
We are committed to improving the
diversity balance of our organisation. For
example, Prudential Corporation Asia
completed a review of recruitment
processes resulting in a clear commitment
to equal opportunities being incorporated
in all job adverts internally and externally
across Asia. Additionally, Prudential
Corporation Asia has committed to
increasing the focus on blind CV
assessment and gender balanced
short-lists. Our Group operations have
reported a measurable improvement in the
balance of gender, ethnicity, international
experience and sector background
experience in hires. The Group offers
tailored 1:1 maternity coaching for female
staff. This development initiative helps
mothers to prepare for maternity leave,
offers support while they are out of the
office, and aids and facilitates a successful
return to the workplace. Externally,
M&GPrudential achieved recognition from
D&I-related awards and rankings. Several
individuals were winners or shortlisted for
awards, for example the EMpower100
Ethnic Minority Executives List, the Black
Business Awards, Women in Investment
Awards and Top 50 Leading Lights,
Kindness and Leadership Awards. M&G
Investments was ranked in the top 50 of
the UK’s Social Mobility Employers Index.
In addition to the established affinity
networks – Prudential Women’s Network,
Pride (LGBT), CAN (cultural awareness)
and Mind Matters (mental health) – we
launched Enable (the Group-wide network
for employees with physical and mental
disabilities, allies, carers and champions)
and PruPride – the first LGBT and allies
network in Asia. We were part of the first
cohort of companies to sign the HM
Treasury Women in Finance Charter in
2016. In 2018, we achieved our
commitment to have 27 per cent of women
in senior management, a year ahead of the
target date of the end of 2019. We continue
to work towards the target of 30 per cent
women in senior management by the end
of 2021. See below for the gender
breakdown of our workforce for 2018.
Talent development
Development of our people is key to
our strategic objectives. Group Human
Resources focuses on senior leadership
through an annual talent review process.
We continue to develop leaders and critical
specialists for senior roles through
succession planning. We segment our
talent to identify short, medium and
long-term successors. Development of
our senior executive leaders is a bespoke
exercise that we base on their
requirements.
78 Prudential plc Annual Report 2018
www.prudential.co.uk
Corporate responsibility review continued Gender diversity: senior management
71%
75%
Male
Female
2018
2018
29%
2017
2017
25%
83%
2012
2012
17%
Gender diversity: all employees
Headcount
Total
Male
Female Undisclosed2 Unspecified3
Chairman & Independent
Non-executive Directors
Executive Directors
Group Executive Committee (GEC)
Includes Executive directors
Senior managers
Excludes the Chairman,
all directors and GEC
members
Whole company1
Full time equivalent
Includes the Chairman,
all directors, GEC members
and senior managers
10
6
11
8
6
11
2
0
0
79
56
23
–
–
–
–
–
–
–
–
23,792 11,354
12,375
33.0
30.5
Notes
1 Excludes Prudential Corporation Asia joint venture.
2
In many of our businesses, we provide our employees with the option to not disclose their gender.
For these employees, gender is recorded as ‘undisclosed’.
3 No specification or information is captured on gender for an immaterial number of our employees.
These employees are recorded as ‘unspecified’.
We offer a range of programmes that
enable our people to grow and develop.
Most programmes are managed by our
business units. In 2018, 113 senior
high-potential individuals participated
in our established and well respected
Group-wide leadership development
programmes ‘Impact’ and ‘Agility’ and
the ‘Next Generation’ emerging talent
programme. These programmes were
developed in partnership with world-
leading academic institutions and
co-delivered with business school thought
leaders. Across our businesses there are
many more examples of our continuing
commitment to talent development. For
example, in 2018 Prudential Corporation
Asia built on its strategic workforce
planning initiative to develop and upgrade
capabilities and reshape some critical roles
to ensure continued success. Prudential
Corporation Asia has implemented a senior
leadership behaviours framework, taking
a significant step towards creating a
purpose-led culture to help all employees
embrace the transformation of their
business.
Jackson offers customised onsite
programmes, as well as access to an
online university, to meet the personal
and professional development needs of
employees with all levels of experience.
Development programmes have been
aligned to known enterprise-wide skills
gaps to further develop critical capabilities
for the future.
The Group continues to provide innovative
programmes designed in partnership with
top academic institutions and industry
experts, focused on early career
development, leadership development and
opportunities, to develop a strategic and
innovation mindset through varied career
experiences and projects. In 2018 the
Enhance programme incorporated several
new themes, notably collaboration,
including virtual and a new course
‘Experiments at Work’, which encourages
expansive thinking in finding fresh
perspectives for repetitive challenges and
applying creative behaviours in everyday
situations.
M&GPrudential supports talent
development through a range of
programmes to increase personal and
organisational capability, alongside
bespoke development support for
individuals in key roles, including
leadership roles and critical specialists
such as fund managers, technologists
and actuaries.
Employee engagement
We want to foster an environment in which
employees feel empowered and that they
are making an active contribution to the
organisation and the communities we
serve. We drive employee engagement
through a number of initiatives, including
colleague appreciation programmes,
wellbeing programmes, networking
opportunities with peers and senior
leaders across functions and employee
focus groups. Each of our businesses
manages its own activities in this area,
including employee engagement surveys,
regular employee open forums with senior
management and team away days to
discuss business performance. Our
businesses, including GHO, have
processes and, where appropriate, a policy
in place for engaging with employees. For
any significant issues that are likely to
impact either positively or negatively on
our reputation as an employer – at both
business and Group level immediate
reporting to Group HR is required.
Employee engagement in the context
of the demerger
We understand that during times of change
within organisations, colleagues can require
extra support and engagement. Since we
announced in March 2018 our intention to
demerge M&GPrudential from the Group,
we have embarked on a programme of
engagement to ensure that colleagues
are fully briefed on progress towards the
demerger and the expected shape of the
organisation afterwards. This has involved
town hall meetings with senior
management, smaller question-and-answer
sessions with leadership, regular updates
from senior management on progress, line
managers playing a key role in demerger-
related communications and encouraging
colleagues to submit questions and
concerns, with a commitment to respond as
soon as practicable. The frequency of these
two-way communications is increasing
during 2019, as we move closer to the
demerger.
www.prudential.co.uk
Annual Report 2018 Prudential plc 79
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
We appreciate that managing and
supporting our people through such a
period of change is vital in ensuring that
they remain engaged with the business,
and we also recognise the value of the
culture that we have built up in the business
and are taking steps to ensure that culture
is protected during the process of the
demerger. Throughout our
communications we have been stressing
the importance of partnership, stewardship
and ownership, key elements of our
culture, and we are doing everything we
can to ensure that our colleagues are aware
that they have a stake in the future success
of the demerged businesses.
Data protection and cyber security
For all businesses, the theft of large
quantities of personal data has become
increasingly common, at significant cost to
consumers and businesses. For us, as for
many other businesses, the impact of such
events has the potential to be more severe
in the future as our business changes and
becomes increasingly digital. These types
of incidents also have the potential to
significantly impact on the continuity of our
business, our customer relationships and
our brand reputation, as well as to diminish
customers’ trust in engaging digitally with
us and all businesses. The knock-on effect
of this could be that many of the social
benefits of new technology, such as
enabling financial inclusion and greater
access to primary healthcare, may not be
realised. In this context, cyber risk remains
a prominent concern and focus area for
ourselves, regulators and businesses
globally.
Our cyber strategy was rolled out during
2018, providing increased insight into our
Group-wide information security
performance. The strategy is designed to
deliver against three objectives: to protect
the business, comply with applicable laws
and regulations, and support the growth
of the business. A number of work streams
underpin the delivery of the strategy,
covering risk prevention, the Group-wide
baseline of security controls and capability,
and promoting resilience. This supports
the business to prioritise and make
informed, risk-based decisions. These
benefits will continue to be delivered
throughout 2019, as the strategy matures
under the new Group Chief Information
Security Officer.
A key element to managing cyber risk and
strategies is to have good information,
which our executives and other
stakeholders across the business use to
make good decisions. During the course
of 2018, 18 reports on topics such as the
current performance of cyber security
capabilities across the Group and the
lessons learned from industry events have
been provided to various executive
committees including the Group Executive
Committee and the Group Risk Committee.
Using a newly developed set of Group-
wide cyber key performance indicators
(KPIs) that map to international standards
such as National Institute of Standards and
Technology (NIST), senior executives are
provided with a monthly update from
Group-wide Information Security
regarding the Group’s cyber performance
in key areas of cyber risk management. Our
Group-wide cyber KPIs track a broad range
of security domains on a monthly basis,
including infrastructure oversight, asset
management, incident response,
awareness and compliance. An annual
in-depth, evidence-based analysis of our
Group-wide cyber capabilities, aligning to
international standards was also
completed. This information is brought
together and further augmented by regular
threat update papers and a benchmarking
of ourselves against our peers across the
globe to facilitate timely decision-making
by senior business leaders across the
Group. The analysis we conduct and the
KPIs we gather are kept under constant
review to ensure that they remain aligned
to the business and that they continue to
facilitate business decision-making and
thus reduce cyber risk. Throughout the
year, Board members, including non-
executives, have received one-to-one
training on cyber threats, including privacy,
by a senior manager of the Group-wide
Information Security team.
The Group-wide cyber assurance
programme, which is based on standards
like the NIST Cyber Security Framework,
became operational in 2018. It has
provided valuable insights regarding our
capabilities and performance in the way we
manage cyber risk across the business. The
information and analysis provided by the
Group-wide Oversight and Assurance
team has been used in a number of ways to
inform our cyber security-related choices.
For example, it is used to provide senior
executives with assurance that our cyber
risk is being appropriately managed, while
business unit leaders have used the insight
to make better-informed and targeted
investment decisions.
The programme continues to evolve to
ensure that the way we manage cyber risk
remains effective and includes all three
elements of cyber risk management –
people, processes and technology.
This is vital as changes to our business,
the technologies we use and our operating
environment continue to gather pace. For
example, throughout 2018, we continually
reviewed and made adjustments where
necessary to our KPIs. This is to ensure that
they provide appropriate oversight and
cover areas of cyber risk that may have
been introduced as a consequence of new
technologies. Similarly, we continue to
identify, adjust and review the cyber
capabilities we need. The Group-wide
policies and standards for information and
cyber security, which were refreshed in 2018
to reflect the rapid advance in cyber threats,
have been introduced and will be reviewed
annually and adjusted where necessary to
reflect a changing operational environment.
The Group has an established Cyber
Threat Intelligence team that assists our
businesses with understanding the cyber
threats we face and provides guidance on
how to protect and mitigate against these
threats. We believe that knowledge sharing
across our businesses is key to a mature
intelligence function and we use a variety
of mechanisms, including a Group-wide
threat intelligence-sharing platform and
weekly telephone conferences with
representatives of business security teams,
to ensure timely visibility and dissemination
of intelligence to proactively defend the
business. In the last year, we have further
enhanced our collaboration tools and
launched a weekly threat bulletin to
provide situational awareness to a wider
audience in information security.
Looking ahead to 2019 and recognising
that the threat landscape will continue
to evolve, we will continue to evolve and
strengthen our cyber defences and
management of cyber risk. To maximise
effectiveness and efficiencies we are
looking to establish global cyber centres
of excellence. We will be exploring new
machine learning and augmented
intelligence technologies to identify if they
can be used Group-wide to enhance and/
or improve our understanding and
management of cyber risk.
Communities
We take an active approach to managing
ESG-related risks and tackling
environmental and social challenges.
Our strong contribution, harnessing the
commitment of our people, continues to
improve lives and build communities,
wherever we work.
Our community investment strategy is
closely aligned with our business purpose
80 Prudential plc Annual Report 2018
www.prudential.co.uk
Corporate responsibility review continued Cha-Ching financial
literacy programme
Prudential colleagues collaborated
with Junior Achievement Kenya to
provide financial literacy skills to children
aged seven to 11 years using Cha-Ching
education materials.
Volunteers acted as student mentors and
shared their experiences of dealing with
money, using the Cha-Ching concepts of
Earn, Save, Spend and Donate. The
programme culminated in a graduation
ceremony, which provided a platform
for pupils from different schools to come
together and test their knowledge
through a series of fun and engaging
financial literacy games and challenges.
and with our stakeholders’ concerns and
interests, focused on four principal themes:
— Social inclusion;
— Education and life skills;
— Disaster preparedness; and
— Employee engagement.
We establish long-term relationships with
our charity partners to ensure that the
projects we support are sustainable, and
we work closely with them to ensure that
our programmes continuously improve.
Education and life skills
Cha-Ching – the first global financial
education programme
Developed by Prudential to address
financial illiteracy, Cha-Ching is a global
financial responsibility and education
platform. Now in its eighth year, the
programme is aimed at primary school-age
children and has expanded from its origins
in Asia to each of the four continents where
the Group does business. In all the markets
where it has been launched it has been
very positively received, with strong
feedback from parents, teachers, children
and political stakeholders. In Asia, the
programme reaches over 34 million
households a day through a multi-
distribution platform including Cartoon
Network Asia, and through its own
standardised curriculum and school
contact programme, has reached more
than 400,000 children so far. The
curriculum developed in partnership with
Junior Achievement has continued to be
well received during 2018 and rolled out
to a further 180,000 students in Indonesia,
the Philippines, Malaysia and Thailand.
In the US, the Jackson Charitable
Foundation has brought Cha-Ching to
more than 2.7 million elementary school
students since 2017 through partnerships
with Junior Achievement USA and
Discovery Education. The Cha-Ching
videos and lessons have been integrated
into Junior Achievement’s third grade
classroom programme. Each year, schools
across the country have the chance to win
US$10,000 to increase financial education
at their school and US$1,000 to donate to
a charity of their choice through the
Cha-Ching Money Smart Kids Pledge
Challenge in the US.
In the UK, working with Young Enterprise,
we have developed an online educational
resource for primary school students in
England and Wales that has enabled the
Cha-Ching programme to be brought into
the classroom. The Quality Marked
teaching resource is linked to the Personal
Finance Education Group’s Financial
Education Framework and has guidance
for teachers on how most effectively to
integrate activities into their teaching, as
well as activities for home-learning. Since
launch in late 2016, the resource has been
downloaded 28,478 times in 1,179 schools
across the UK.
In other markets, the online educational
resource has also been utilised to support
the roll-out of the Cha-Ching programme
across our African markets as part of a
financial literacy campaign, delivered
jointly by Junior Achievement Africa and
Prudential Africa employees. Cha-Ching
was launched in Poland in 2015 and the
first 10 films were translated into Polish
and aired on several children’s television
channels. A website with materials for
children and teachers was created to
share in local schools.
First Read – investing in early
childhood development
Prudence Foundation has funded and
supported the First Read programme since
2013, partnering with Save the Children to
focus on investing in early childhood care
and development in Cambodia and the
Philippines. First Read helps parents to
develop their children’s numeracy and
literacy skills by providing books in the
local language or dialect, and encouraging
them to read, sing and count together.
It also helps parents understand the
importance of healthy and nutritious food
for children’s development. Since 2013,
more than 300,000 children aged up to six
and their parents have benefited through
this home-based early childhood
development programme, while over
700,000 people have also benefited
indirectly through shared knowledge
and resources.
A new three-year partnership formed
with the China Development Research
Foundation will comprise two programmes,
focusing on rural education and child
health; and on nutrition improvement.
Both programmes are aligned with the
strategic development focus of the Chinese
national government and will be delivered
in rural China.
www.prudential.co.uk
Annual Report 2018 Prudential plc 81
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Employee
volunteering
Jackson’s charitable efforts are focused
on strengthening families and
increasing economic opportunities in
the communities we call home. Our
employees work together for a common
cause, which helps them build stronger
bonds and valuable skills.
Jackson employees volunteer with
Chicago Youth Programmes throughout
the year, mentoring students from
under-resourced neighbourhoods,
serving as important role models and
creating a safe space for students to
grow, learn and have fun.
Jackson Charitable Foundation teams
up with Ramsey Education
In 2018, in addition to Cha-Ching, Jackson
Charitable Foundation sponsored Ramsey
Education’s Foundations in Personal
Finance curriculum in 250 high schools
across the country. The Foundation,
which has a mission to advance financial
knowledge on a national scale, has teamed
up with Ramsey Education to ensure that
more than 20,000 high school students
have access to this critical, financial
education programme that teaches
valuable skills to prepare them for a life of
financial freedom. More than three million
students have benefited from Foundations
in Personal Finance in middle schools,
high schools and universities nationwide.
Foundations in Personal Finance can
be used as a primary resource to fulfil
requirements in mathematics, economics,
family consumer science, business
mathematics and personal finance.
Educators who use this programme see
their students build confidence, security
and hope. They share stories of students
going to college debt-free, paying cash for
their first car, or even helping their parents
learn about the importance of an
emergency fund.
Secondary school scholarships across
Africa
In our markets in Africa we have committed
to provide support for academically able
but financially disadvantaged high school
students, and to help build capacity for
training in actuarial sciences at local
universities. Prudential has worked with
several charities operating in Ghana,
Kenya, Uganda and Zambia to deliver the
Prudential Scholarship Programme with
the aim of improving quality and access to
education for all, and ensuring that
everyone marginalised by society receives
education, skills and support towards
employability. The Prudential Scholarship
Programme has supported more than
7,000 academically able but financially
disadvantaged high school students to
complete their secondary education over
either four or five years of high school.
This has included financial bursaries to
cover the cost of school fees and boarding
fees where necessary, uniforms and
books, as well as a programme to upgrade
conditions to increase attendance at three
schools in Uganda.
Nashville associates further financial
education with Junior Achievement
Career Exploration Centre
Jackson and its employees donated more
than US$150,000 to sponsor the Jackson
Career Exploration Center at the brand-
new Junior Achievement Finance Park in
Middle Tennessee. The interactive
personal finance facility will reach older
students with a hands-on experiential
budgeting simulation facility where
students convene for 13 teacher-led
lessons. The hands-on experience helps
students build a foundation to make smart
financial decisions related to income,
expenses, savings and understanding
credit.
Supporting young people with
employability and financial skills
M&GPrudential is a partner member
of the KickStart Money primary financial
education programme. The programme
aims to reach 20,000 primary school
children and focuses on saving, budgeting,
careers, borrowing and consumer and
public finance.
Through three secondary school
partnerships in Paddington, Reading and
Stirling, M&GPrudential has also been
directly involved in building the knowledge
and skills of young people. These
partnerships have supported over
4,100 young people since 2013, with
370 employees giving their time and
sharing their knowledge and skills.
82 Prudential plc Annual Report 2018
www.prudential.co.uk
Corporate responsibility review continued Volunteering to support communities
in need
During 2018, Prudence Foundation formed
a partnership with Habitat for Humanity
to implement a regional volunteering
programme that supports communities
in need, complementing the volunteer
support we provide when appropriate
during disaster recovery. In April 2018,
over 70 volunteers from across the region
spent one week in Yogyakarta, Indonesia,
helping to build homes for those in need
and an early childhood development
centre. In November 2018, the Foundation
led another group of more than 80 regional
volunteers to Siem Reap in Cambodia to
build houses for families desperate for new
homes and support the refurbishment
of a primary school. During 2018 the
Foundation provided support to help
with relief and recovery efforts in Taiwan
(following the Hualien earthquake) and
Laos (following the flooding). In 2019,
we will also be supporting longer-term
recovery in Lombok and Sulawesi,
Indonesia which were both severely
affected by natural disasters in 2018.
Disaster readiness and relief
Helping to make Asia more prepared
and safer
Safe Steps is a first-of-its-kind, in terms
of reach and breadth of partnerships,
pan-Asian public service initiative to
enhance awareness through the
dissemination of educational survival tips
for natural disasters, road safety and first
aid. The programme was created and
developed by Prudence Foundation in
partnership with National Geographic and
the International Federation of Red Cross
and Red Crescent Societies. It is a
multi-platform programme including on-air
video messages and informative website
and educational collateral that can be
shared among communities. At its core,
Safe Steps utilises one-minute videos to
provide simple to understand messages on
how to be prepared and stay safe in three
areas that cause unnecessary loss of life:
natural disasters (launched 2014), road
safety (2016) and first aid (2017).
The programme continues to reach an
estimated 250 million people every day
across Asia, through partnerships with
government, humanitarian and private
sector organisations. In 2018, new
partnerships were formed in Cambodia,
Hong Kong, the Philippines, Singapore
and Vietnam. For example, Prudence
Foundation and Prudential Singapore
embarked on a new partnership with the
Singapore Red Cross Society, focusing
on a mass community first aid training
programme aimed at the younger
demographic.
Safe Schools programme
Asia Pacific is the world’s most disaster-
prone region, and the Prudence
Foundation continues to focus on disaster
preparedness, relief and recovery in our
Asia markets. Prudence Foundation works
with the humanitarian, government and
private sector to help communities better
prepare for such disasters before they
strike, as well as providing support at times
of emergency response and recovery.
During 2018, Prudence Foundation
continued to support the Safe Schools
programme, partnering with Plan
International and Save the Children in
Cambodia, Indonesia, the Philippines,
Thailand and Vietnam. The programme
focuses on capacity-building for students,
teachers and local community members
on disaster preparedness. Since 2013,
more than 85,000 students and 40,000
adults have participated.
In 2018, the Foundation formed a new
partnership with Save the Children and
the Philippines’ Department of Education
to implement a nationwide focused
programme. The three-year programme
will aim to develop a disaster risk reduction
management information system, together
with training and capacity building of
teachers and local government officials.
This innovative new approach to Safe
Schools aims to ensure that every school in
the Philippines will be able to benefit from
the Safe Schools programme, providing the
Department of Education with the
information to help allocate its resources
and expertise to support the ongoing
implementation of the global and ASEAN
Comprehensive Safe Schools framework.
Safe Steps
Safe Steps is a pan-Asian public service
initiative to enhance awareness through
the dissemination of educational
survival tips for natural disasters, road
safety and first aid. The programme was
created and developed by Prudence
Foundation in partnership with National
Geographic and the International
Federation of Red Cross and Red
Crescent Societies. Prudence
Foundation and Prudential Singapore
embarked on a new partnership with
the Singapore Red Cross Society in
2018, with a mass community first aid
training programme aimed at younger
people.
www.prudential.co.uk
Annual Report 2018 Prudential plc 83
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information PruGOals
As part of our nationwide commitment
to social inclusion in the UK, Prudential
has developed the PruGOals programme
in partnership with our four charity
partners: Teach First, Transformation
Trust, Greenhouse Sports and the Dame
Kelly Holmes Trust.
PruGOals aims to empower young
people to achieve their goals, focusing
on building confidence, raising
aspirations and increasing self-esteem.
The core programme takes the riders on
a journey of commitment, endurance,
training and fitness, and culminates in
taking on the Prudential RideLondon-
Surrey 46.
Working with purpose
In partnership with RVS we launched our
‘Bring People Together’ campaign, which
seeks to encourage and empower more
people to volunteer, particularly those
aged 50 to 65. Specifically its aim is to
inspire them to start their own activities or
clubs for older people with the backing of
RVS. From social activities and hobby
classes to running a lunch club or providing
companionship to older people in their
homes, together we want to harness
the get-up-and-go of pre-retirees by
encouraging them to put their talents
and life experience to valuable use by
becoming volunteer co-ordinators. The
programme aims to support the creation of
150 new groups and recruit 500 volunteer
co-ordinators to lead them.
Emergency fund relief
Prudential has been a Group-level
supporter of Save the Children since 2010
and is one of the Children’s Emergency
Fund’s major supporters. This allows us to
act swiftly when disasters occur in any of
our markets and provides an instant,
effective fundraising mechanism for
employees when needed. In 2018 Save
the Children’s emergency fund was used
93 times across 35 countries, and helped
to reach over 2.1 million people affected
by emergencies with life-saving support.
Social inclusion
Commitment to social inclusion in the
UK through Prudential RideLondon
Prudential RideLondon has established
itself as a major mass-participation and
charity fundraising event in the UK, and
in the past six years, has raised more than
£66 million for charity. In 2018 it raised
more than £13 million for charity to set
a European record for a cycling event,
beating the previous year’s record of
£12.75 million. There was a sharp rise in the
number of participants riding for charity –
55 per cent, up from 44 per cent in 2017.
More than 900 charities have benefited.
Prudential has sponsored the event since
inception in 2013 and our own community
engagement partnership, PruGOals,
supported 420 16 to 18-year olds from
41 schools across the UK to improve their
self-esteem, aspiration and educational
outcomes. The PruGOals programme
helps young people to achieve their goals
regardless of social or economic
background by providing aspirational
challenges, culminating in taking on the
Prudential RideLondon-Surrey 46. The
2018 post-event evaluation report from the
charity Teach First reveals that students’
‘resilience’ and ‘determination’ rose by
a third after completing the programme.
Enhancing later life
M&GPrudential’s partnership with Royal
Voluntary Service (RVS) continues with
First Time for Everything. This programme
aims to tackle loneliness and social isolation
by encouraging 2,700 older people across
the UK to stay active, engaged and
connected to their community in 2018.
Prudential has also continued to fund the
Later Life Links programme with Age UK,
providing long-term companionship,
advice and practical help to older people.
Running in six UK communities, the
programme supported over 4,900 older
people in 2018 through telephone and
face-to-face support.
84 Prudential plc Annual Report 2018
www.prudential.co.uk
Corporate responsibility review continued Charitable donations
We calculate our community investment
spend using the internationally recognised
London Benchmarking Group (LBG)
standard. This includes cash donations
to registered charitable organisations,
as well as a cash equivalent for in-kind
contributions.
In 2018, the Group spent £27.3 million
supporting community activities. The
direct cash donations to charitable
organisations amounted to £19.6 million,
of which approximately £4.4 million came
from our UK and Europe operations. The
remaining £15.2 million was contributed to
charitable organisations by Jackson and
Prudential Corporation Asia.
The cash contribution to charitable
organisations from our UK and Europe
operations is broken down as follows:
education £2,337,000; social, welfare
and environment £1,995,000 and
cultural £64,000.
The balance includes in-kind donations
as set out on the Group website at
www.prudential.co.uk/responsibility/
standards prepared in accordance with
LBG guidelines. This included 11,710
employees who dedicated 117,491 hours
of volunteer service in their communities.
Furthermore, £479,633 was donated
across the Group by our employees
through our payroll giving scheme.
Political donations
It is the Group’s policy neither to make
donations to political parties nor to incur
political expenditure, within the meaning
of those expressions as defined in the
UK Political Parties, Elections and
Referendums Act 2000. The Group did not
make any such donations or incur any such
expenditure in 2018.
Apprenticeships in the UK
Youth unemployment remains a growing
problem in the UK and M&GPrudential
continues to help to shape future job
prospects for young people.
M&GPrudential’s asset management and
insurance businesses have run successful
apprenticeship programmes for the last
seven years, gaining recognition and
awards for the success of the schemes.
Over 300 apprentices have been through
both programmes and over two-thirds of
those who completed the programme
secured ongoing employment with the
business, while others chose to work
elsewhere or moved on to higher
education. In 2018, 15 Prudential UK
apprentices joined the programmes, with
an increased emphasis on recruitment from
diverse backgrounds. All Prudential UK
apprentices are on fixed-term contracts,
with the exception of two graduate
apprentices who are on permanent
contracts. All M&G apprentices are offered
permanent positions from the outset and
UCAS points have been removed from
graduate/internship applications to try and
reach those from a low socio-economic
background who may not have excelled at
school but have done so at university.
CVs have also been removed from the
face-to-face interview stage, so that
assessors are able to assess purely on
potential, rather than being influenced by
a candidate’s background or experience.
Support for disadvantaged
communities
M&GPrudential also continues to support
disadvantaged communities near our
offices and during 2018 over 200 charities
received support either by donation or
employee volunteering. The range of areas
which received support is extensive and
includes projects that relate to education,
arts and heritage, children and youth, the
environment, medical research and social
and welfare matters. M&GPrudential
continues to support many aspects of
education and provides several on-site
educational days for students at our
London headquarters. M&GPrudential
continued its support of City Giving Week
with an on-site event which each day
showcased several charities that have
received support and highlighted the
services they provide. The Lord Mayor of
the City of London attended M&G’s event
as part of his initiative to promote the
varied charitable activities undertaken
by City businesses.
M&GPrudential continues to use its
sponsorship of the RHS Chelsea Flower
Show to support social issues through RHS
outreach programmes including Greening
Grey Britain, It’s Your Neighbourhood and
the RHS Campaign for School Gardening
across the UK.
Employee volunteering
Successful volunteering programme –
Chairman’s Challenge
Many of our employees play an active role
in their communities through volunteering,
charitable donations and fundraising. In the
UK and Europe, the US and Asia we offer
our employees the opportunity to support
charities through payroll giving.
Chairman’s Challenge is our flagship
international volunteering programme,
bringing together people from across
the Group to help in their communities.
Colleagues from across the Group give
their time and skills to support our global
charity partners, including Plan
International, Help Age International
and Junior Achievement.
The programme continues to appeal to
colleagues, with the number of volunteers
signing up increasing year-on-year. Last
year 9,054 colleagues from around the
world took part, volunteering over 49,000
hours to support 33 projects.
Each volunteering project focuses on one
or more of our CR priorities and allows us
to support both large, well established
charities and innovative, smaller-scale
activities with volunteers as well as
financial support. Prudential donates £150
to our charity partners for every employee
who registers for the programme. Charity
partners use this money to seed-fund
charitable projects for Prudential
volunteers. Each year, employees across
the Group are involved in the voting
process to decide on the most innovative
projects, which receive extra funding
towards their charitable objectives.
Volunteering across the Group
As well as volunteering efforts on behalf
of the Chairman’s Challenge, employees
around the Group volunteered on a huge
range of other charitable projects, from
providing relief following disasters to
mentoring schoolchildren, supporting the
elderly and skills-sharing. We recognise
that employee volunteering brings benefit
not only to the charities but also to the
development of our people, and we
actively encourage colleagues to
participate in our programmes.
www.prudential.co.uk
Annual Report 2018 Prudential plc 85
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Code of Business Conduct
Consideration of environmental, social
and community matters is integrated in our
Code of Business Conduct. Our code is
reviewed by the Board on an annual basis.
Refer to page 72 for more information.
Risk assessment
For more information on the risks facing
our business, see the Group Chief Risk
Officer’s report on page 52. Further
information on how we manage our
material ESG issues and associated risks
are provided in the ‘Managing our material
ESG issues’ section of the Corporate
responsibility review on page 71.
Accountability and governance
for corporate responsibility
The Board
The Board regularly reviews the Group’s
corporate responsibility performance and
scrutinises and approves the Group
corporate responsibility report and
strategy on an annual basis.
Local governance
We believe that corporate responsibility is
best managed on the ground by our people
running the businesses. In M&GPrudential
and Jackson there are governance
committees in place – with senior
management representation – that agree
strategy and spend. In Asia, the Prudence
Foundation has been established as a
unified charitable platform to align and
maximise the impact of community efforts
across the region. The Prudence
Foundation is governed by a statutory
Board of Directors, under which a Board
of Trustees operates as a decision-making
forum, directing the management of the
programmes in collaboration with our local
markets, and ensuring that we maximise
the value of our spend to local
communities. The Material Subsidiary
Boards oversee the business unit corporate
responsibility initiatives. All business units
submit comprehensive Board reports
to the Subsidiary Board and to the
Prudential plc Board annually providing
detailed information on major strategic
initiatives.
Strategic report approval by the
Board of Directors
The Strategic report set out on pages
9 to 86 is approved by the Board of
Directors.
Signed on behalf of the
Board of Directors
Mike Wells
Group Chief Executive
12 March 2019
86 Prudential plc Annual Report 2018
www.prudential.co.uk
Corporate responsibility review continued 03
Governance
Chairman’s introduction
Board of Directors
How we operate
Risk management and internal control
Committee reports
Nomination&GovernanceCommitteereport
AuditCommitteereport
RiskCommitteereport
Statutory and regulatory disclosures
Index to principal Directors’ report disclosures
Page
88
89
95
107
109
109
115
124
128
130
www.prudential.co.uk
AnnualReport2018 Prudential plc 87
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Chairman’s introduction
Robust and transparent governance
supporting the delivery of our strategy
Dear Shareholder
Goodgovernanceencouragesdecisions
tobemadeinawaythatismostlikelyto
promotethesuccessoftheCompanyforthe
benefitofitsmembers,takingintoaccount
theviewsandinterestoftheGroup’swider
stakeholders.Weaimtoachievethisthrough
agovernanceframeworkthatsupports
decision-making,iscontinuouslyupdated
tomeettheGroup’sbusinessneeds,makes
roomforchallengeandencompassesa
prudentsystemofinternalcontrolsand
processesforidentifying,managingand
mitigatingkeyrisks.
Setoutbelowaresomeofthekeystrategic
andgovernanceitemstheBoardhas
consideredover2018.
Demerger
Followingtheannouncementin2017ofthe
combinationofourassetmanager,M&G,
andPrudentialUK&Europetoform
M&GPrudential,earlyin2018theBoard
announcedtheintentiontodemerge
M&GPrudentialfromtheremainderofthe
PrudentialGroup.DuringtheyeartheBoard
hasthereforebeenfocusedontheexecution
ofthatdecision.
Inpreparationforthismajortransaction,the
Boardlookedatitswaysofworkingatthe
endof2017throughourannualeffectiveness
review.Thefeedbackfromthatreviewwas
usedtoensurethattherightenvironmentfor
criticaldecision-makingcontinuedtobein
place,andthishasprovedveryhelpfuland
effectivegroundworkastheBoardwas
askedtoconsideranumberofdemerger-
relateditemsthroughtheyear.
Inrelationtothegovernanceofboththe
PrudentialandtheM&GPrudentialGroups,
workhasbeenundertakentohelpensure
asmoothtransitionandensurethatboth
Groupshaveboardsproperlycomposedto
meettheirfuturestrategicneeds.Most
importantlythishasincludedestablishing
aseparateM&GPrudentialboardandthe
appointmentofthefirstindependent
non-executivedirector,MikeEvans,
aschairmanofthatboard.
Furtherinformationaboutthedemerger
issetoutintheStrategicreport.
Culture and values
TheBoardspenttimein2018focusingon
Prudential’sculture,recognisingthatitis
animportantcontributortotheGroup’s
successandsustainablegrowthandthe
Boardmadefurtherprogressonconsidering
howourGroup’scultureisarticulated,
communicated,rewardedandrecognised.
Inlightoftheupcomingdemerger,the
Group’sculturehastakenonextra
significanceaswenavigatethroughaperiod
ofchange.Itisoneofourobjectivestoensure
thattheGroupcontinuestobeguidedbyits
valuesandbehavioursanddemonstrates
ongoingcommitmenttoourstakeholders
andtoinnovation,performanceand
excellenceinexecution.
TheBoardapprovedchangestoitsterms
ofreferencein2018tomakeexplicit
referencetoitsroleinestablishingthe
Group’spurpose,valuesandstrategy.
Looking after our stakeholders
and wider community initiatives
AtPrudential,werecognisethatour
stakeholdersarekeytoourlong-termsuccess.
Weseektoengageproactivelywiththem,to
understandtheirviewsandtotakethese
viewsintoaccountwhenmakingdecisions.
TheBoardiscognisantoftheemphasisthat
thenewCorporateGovernanceCodeputs
onstakeholdersmorebroadlythan
shareholders.TheBoardconsideredthis
intwoseparatemeetingsduringtheyear
andisdevelopingmechanismstoensure
stakeholderviews,andinparticularthe
employeevoice,maketheirwaytoBoard
levelinaneffectiveway.
Iremainimmenselyproudofourinternational
volunteeringprogramme,theChairman’s
Challenge,whichcontinuestogrowwith
over9,000colleagueshavinggiven49,000
hourstosupportingthecommunityin2018.
Youcanreadmoreaboutourcorporate
socialresponsibilityactionsinthecorporate
responsibilityreviewonpages70to86
andinour2018ESGreportwhichwillbe
publishedonourwebsiteinMay2019.
Succession planning and Board
composition changes
IthasbeenaprivilegetoserveontheBoard
ofPrudentialplcsinceOctober2010andto
haveservedasChairmansinceJuly2012.
IandmyfellowmembersoftheNomination
&GovernanceCommitteeagreethatitis
importantthatleadershipoftheBoardis
refreshedappropriatelyandthatsuccession
planningformyroleasChairmantakesplace
inanopenandtransparentway.
OurSeniorIndependentDirector,
MrRemnant,hasthereforebeenconsulting
withmajorshareholdersonmytenure
extendingtoMay2021,subjecttore-
electioneachyear.Wearemindfulofthe
provisionsoftheCorporateGovernance
Codewhichstatethatachairshouldnot
remaininpostbeyondnineyearsfrom
thedateoffirstappointmenttotheboard,
whichinmycasewouldbeOctober2019.
However,giventheGroup’splanned
demergeroftheM&GPrudentialbusiness,
andinlightoftheshareholdersupportwe
havereceivedtheBoardhasconsidered
andconfirmedthatitbelievesittobein
shareholders’bestinterestsformeto
continuetoserveintheChairroleinorderto
overseetheBoardduringthistimeofchange
andensurethatthePrudentialGroupis
stronglyestablishedinitspost-demerger
state.Iamfullycommittedtothischallenge.
Furtherdetailsoftheagreedtimeframefor
mydepartureandplansforidentifyingand
appointingasuccessoraresetoutinareport
fromMrRemnant,aspartoftheNomination
&GovernanceCommitteereporton
page111.TheCommittee’sreportincludes
adescriptionoftheGroup’sapproachto
successionplanningmorewidely.
LordTurnerhasannouncedthathewillretire
fromtheBoardatthe2019AnnualGeneral
Meeting.Iwanttothankhimforhis
significantcontributiontotheBoardoverthe
lastthreeandahalfyears,asaNon-executive
DirectorandmemberoftheRiskCommittee.
WehavealsolookedatourBoard
compositionaspartofourprogresstowards
demerger.AsChiefExecutiveof
M&GPrudential,MrFoleywillnaturallystand
downfromtheBoardaspartofthedemerger
transition.Havingtakenintoaccountthe
changedshapeofthePrudentialGroup
post-demergerandthereducednumber
ofbusinessunits,theBoardhastakena
decisionthattherolesofChiefExecutive
PrudentialCorporationAsiaandChief
ExecutiveOfficerofJacksonHoldingsLLC
willnolongerbeExecutiveDirectorroleson
theBoard,althoughwillcontinuetoserve
ontheGroupExecutiveCommittee.As
announcedtothemarketon28February
2019alloftheseBoardchangeswilltake
effectfromtheconclusionofour2019
AnnualGeneralMeeting.Mythanksgoto
MrFoley,MrNicandrouandMrFalconfor
theirservice.
IwouldalsoliketothankMsRichardsand
MrStowe,asExecutiveDirectorshaving
steppeddownduring2018,fortheirvaluable
contributionstotheBoardandtotheGroup
duringtheyear.
Ihopethatthisreportandthereportsofmy
fellowCommitteeChairswilldemonstrateto
youtheworkwehaveundertakenoverthe
courseoftheyearaswellasthetangibleand
positiveimpactthishashadonourbusiness.
Paul Manduca
Chairman
88 Prudential plc AnnualReport2018
www.prudential.co.uk
Board of Directors
Chairman
Key to Committee membership
Chair
Audit
Chair
Audit
N&G Nomination&Governance
Rem Remuneration
Risk
Risk
Relevant skills and experience
Paulwillcontinuetodrawonhisextensive
experienceinleadershiprolesandhisknowledge
oftheGroup’scorebusinesses,international
marketsandindustrysectors,andhistechnical
knowledge,toprovideeffectiveleadership
duringaperiodofchangefortheGroup.
Paulhasheldanumberofseniorleadership
roles.Notableappointmentsincludeserving
aschairmanoftheAssociationofInvestment
Companies(1991to1993),actingasfounding
CEOofThreadneedleAssetManagement
Limited(1994to1999),globalCEOofRothschild
AssetManagement(1999to2002),directorships
ofEagleStarandAlliedDunbar,holdingthe
officesofEuropeanCEOofDeutscheAsset
Management(2002to2005),chairmanof
BridgewellGroupplcandadirectorofHenderson
SmallerCompaniesInvestmentTrustplc.
Otherpreviousappointmentsincludethe
chairmanshipofAonUKLimitedandJPM
EuropeanSmallerCompaniesInvestment
TrustPlc.FromSeptember2005untilMarch
2011,Paulwasanon-executivedirectorof
WmMorrisonSupermarketsPlc,includingas
seniorindependentdirector,auditcommittee
chairmanandremunerationcommittee
chairman.Hewasanon-executivedirectorand
auditcommitteechairmanofKazMunaiGas
Exploration&Productionuntiltheendof
September2012andchairmanofHenderson
DiversifiedIncomeLimiteduntilJuly2017.
PaulinitiallyjoinedtheBoardinOctober2010as
theSeniorIndependentDirectorandmemberof
theAuditandRemunerationCommittees,roles
hehelduntilhisappointmentasChairmanin
July2012.OnbecomingChairman,Paulwas
alsoappointedChairoftheNomination&
GovernanceCommittee,havingbeenamember
oftheCommitteesinceJanuary2011.
Other appointments
— RateSetter(RetailMoneyMarketLimited)
(chairman)
— TempletonEmergingMarketsInvestment
Trust(TEMIT)(chairman)
— SecuritiesInstitute
— TheCityUKAdvisoryCouncil(chairman)
Relevant skills and experience
Mikecontinuestodeveloptheoperational
managementoftheGrouponbehalfofthe
Board,implementingBoarddecisionsand
leadingtheExecutiveDirectorsandsenior
executivesinthemanagementofallaspects
oftheday-to-daybusinessoftheGroup.
Mikehasmorethanthreedecades’experience
ininsuranceandretirementservices,having
startedhiscareerattheUSbrokeragehouse
DeanWitter,beforegoingontobecome
amanagingdirectoratSmithBarneyShearson.
MikejoinedthePrudentialGroupin1995
andbecameChiefOperatingOfficerand
Vice-ChairmanofJacksonin2003.In2011,he
wasappointedPresidentandChiefExecutive
OfficerofJackson,andjoinedtheBoard
ofPrudential.
DuringhisleadershipofJackson,Mikewas
responsibleforthedevelopmentofJackson’s
market-leadingrangeofretirementsolutions.
HewasalsopartoftheJacksonteamsthat
purchasedandsuccessfullyintegratedasavings
instituteandtwolifecompanies.
MikejoinedtheBoardin2011andwas
appointedGroupChiefExecutiveinJune2015.
Other appointments
— InternationalAdvisoryPanelofthe
MonetaryAuthorityofSingapore
— SanDiegoUniversityAdvisoryBoard
Executive Directors
MrTurnerjoinedtheBoardasanExecutive
DirectorandGroupChiefRiskOfficerwith
effectfrom1March2018.
MsRichardssteppeddownasChiefExecutive
ofM&GandasExecutiveDirectorofthe
Companywitheffectfrom10August2018.
MrStowesteppeddownasChairmanand
ChiefExecutiveOfficerofPrudential’s
NorthAmericanBusinessUnitandasan
ExecutiveDirectoroftheCompanywith
effectfrom31December2018.Hewas
succeededbyMichaelFalconwhojoined
theBoardfrom7January2019andholds
thetitleofChiefExecutiveOfficer
ofJacksonHoldingsLLC.
MrFalconwillstepdownasanExecutive
DirectoroftheBoardattheconclusionof
the2019AnnualGeneralMeeting,aswill
MrFoleyandMrNicandrou.Thesechanges
arebeingmadeaspartofourprogress
towardsdemergerandaremorefully
describedonpage88.EachofMrFalcon,
MrFoleyandMrNicandrouwillmaintaintheir
rolesaschiefexecutivesoftheirrespective
businessunitsandmembersoftheGroup
ExecutiveCommittee.
Paul Manduca
Chairman
Appointment:October2010
Age:67
N&G
Chief Executive
Michael Wells
Group Chief Executive
Appointment:January2011
Age:58
Board changes
Non-executive Directors
MrsWicker-Miurinwasappointedasa
Non-executiveDirectorandamemberofthe
RemunerationCommitteewitheffectfrom
3September2018.
MsSchroederjoinedtheRiskCommittee
witheffectfrom1March2018.
MrWatjenjoinedtheRiskCommitteewith
effectfrom1November2018.
Asannouncedon28February,LordTurner
willstepdownfromtheBoardwitheffect
fromtheconclusionofthe2019Annual
GeneralMeeting.
www.prudential.co.uk
AnnualReport2018 Prudential plc 89
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Board of Directors continued
Executive Directors
Mark FitzPatrick CA
Chief Financial Officer
Appointment:July2017
Age: 50
James Turner FCA
Group Chief Risk Officer
Appointment:March2018
Age: 49
Relevant skills and experience
Markhasastrongbackgroundacrossfinancial
services,insuranceandinvestmentmanagement,
encompassingwidegeographicalexperience
relevanttotheGroup’skeymarkets.
MarkpreviouslyworkedatDeloittefor26years,
buildinghisindustryfocusoninsuranceand
investmentmanagementglobally.Duringthis
time,MarkwasmanagingpartnerforClients
andMarkets,amemberoftheexecutive
committeeandamemberoftheboardof
DeloitteUK.HewasavicechairmanofDeloitte
forfouryears,leadingtheCFOProgrammeand
developingtheCFOTransitionlabs.Mark
previouslyledtheInsurance&Investment
Managementauditpracticeandtheinsurance
industrypractice.
MarkjoinedtheBoardasanExecutiveDirector
andChiefFinancialOfficerinJuly2017.
Relevant skills and experience
HavingheldseniorpositionsatPrudentialfor
anumberofyears,Jameshasawide-ranging
understandingofthebusinessanddrawson
previousexperienceacrossinternalaudit,
financeandcomplianceaswellastechnical
knowledge.
JameshasledinternalauditteamsinUBSin
boththeUKandSwitzerland.Priortojoining
Prudential,Jameswasthedeputyheadof
complianceforBarclaysplc.Healsohelda
numberofseniorinternalauditrolesacrossthe
Barclaysgroup,leadingteamsthatcoveredthe
UK,theUS,WesternEurope,AfricaandAsia
retailandcommercialbankingactivities.
JamesjoinedPrudentialinNovember2010as
theDirectorofGroup-wideInternalAuditand
wasappointedDirectorofGroupFinancein
September2015,withresponsibilityfordelivery
oftheGroup’sinternalandexternalfinancial
reporting,businessplanning,performance
monitoringandcapitalandliquidityplanning.
HealsoledthedevelopmentoftheGroup’s
SolvencyIIinternalmodel.
JamesjoinedtheBoardasanExecutiveDirector
andGroupChiefRiskOfficerinMarch2018.
Other appointments
— WestBromwichBuildingSociety
(non-executivedirector)
Michael Falcon
Chief Executive Officer of Jackson
Holdings LLC
Appointment:January2019
Age: 56
Relevant skills and experience
Michaelhasextensiveexperienceinsenior
positionsacrossarangeoffinancialservices
institutionsintheUSandAsia.
MichaelholdsadegreeinFinancefromIndiana
Universityandbeganhiscareerincommercial
andinvestmentbankingatChaseManhattan
Bankin1985.Between1989and2000,
MichaelworkedatSaraLeeCorporation
(nowHanesbrands,Inc)inavarietyofsenior
financial,strategicandgeneralmanagement
roles,basedinChicago,ParisandWinston-
Salem,NorthCarolina.
Between2000and2008Michaelworkedat
MerrillLynch,servingasheadoftheretirement
groupandotherroles,includingheadofstrategy
andfinancefortheUSPrivateClientbusiness.
Michaellaterservedasaconsultantand
strategicadvisertocompaniesintheretirement,
equityawards,wealthmanagementandasset
managementindustriesuntiljoiningJ.P.Morgan
AssetManagementin2010.Michaelhasserved
asatrusteeandexecutivecommitteememberof
EBRI(theEmployeeBenefitResearchInstitute)
andwasfoundingchairmanoftheAdvisory
BoardofEBRI’sCenterforRetirementIncome
Researchbetween2011and2014.
BeforejoiningPrudential,Michaelwasbased
inHongKongaschiefexecutiveofficerofAsia
PacificforJ.P.MorganAssetManagement,
aroleheheldsince2015,andwasheadofAsia
Pacificfundsfrom2014.HejoinedJ.P.Morgan
AssetManagementinNewYorkasheadof
retirementin2010,responsibleforinvestment
managementandplanservicebusinessesinthe
definedcontribution,individualretirementand
taxablesavingsmarket.
MichaeljoinedtheBoardinJanuary2019as
anExecutiveDirector,succeedingBarryStowe,
andholdsthetitleofChiefExecutiveOfficerof
JacksonHoldingsLLC(Jackson),whichincludes
Jackson’sUSsubsidiariesandaffiliates(formerly
theNorthAmericanBusinessUnit).
90 Prudential plc AnnualReport2018
www.prudential.co.uk
John Foley
Chief Executive of M&GPrudential
Appointment:January2016
Age: 62
Nicolaos Nicandrou ACA
Chief Executive of Prudential
Corporation Asia
Appointment:October2009
Age: 53
Relevant skills and experience
Nichasafinancebackgroundandhavingbuilt
updeepknowledgeoftheGroup,movedto
thepositionofChiefExecutiveofPrudential
CorporationAsiainJuly2017.Nicisresponsible
forPrudentialCorporationAsia’slifeinsurance
andassetmanagementbusinessacross
14marketsintheregion.
NicstartedhiscareeratPricewaterhouseCoopers
(PwC).BeforejoiningPrudential,heworkedat
Aviva,whereheheldanumberofseniorfinance
roles,includingNorwichUnionLifefinance
directorandboardmember,Avivagroup
financialcontroldirector,Avivagroupfinancial
managementandreportingdirectorand
CGNUgroupfinancialreportingdirector.
NicjoinedtheBoardinOctober2009asan
ExecutiveDirectorandChiefFinancialOfficer.
Other appointments
— CITIC-PrudentialLifeInsuranceCompany
Limited(chairman)(aPrudentialplcjoint
venture)
Relevant skills and experience
Johnhaswide-rangingexperienceofdifferent
seniorrolesinfinancialservices,bothat
Prudentialandinhisearliercareer,makinghim
wellplacedtoleadM&GPrudentialanddeliver
onitslong-termstrategicaims.
Johnspentover20yearsatHillSamuel&Co,
whereheworkedineverydivisionofthebank,
culminatinginseniorrolesinrisk,capitalmarkets
andtreasuryofthecombinedTSBandHill
SamuelBank.BeforejoiningPrudential,John
spentthreeyearsasgeneralmanager,global
capitalmarketsatNationalAustraliaBank.
JohnjoinedPrudentialasDeputyGroup
Treasurerin2000andbecameManaging
DirectorofPrudentialCapitalandGroup
Treasurerin2001.Duringhiscareerat
Prudential,JohnhasheldtheofficesofChief
ExecutiveofPrudentialCapital,GroupChief
RiskOfficer,GroupInvestmentDirectorand
ChiefExecutiveofPrudentialUK&Europe.
JohnfirstjoinedtheBoardin2011asGroup
ChiefRiskOfficerandwasreappointedin
January2016,havingsteppeddownduringhis
timeasGroupInvestmentDirector.
In2017,John’srolewasexpandedfromChief
ExecutiveofPrudentialUK&EuropetoChief
ExecutiveofM&GPrudential,theGroup’s
combinedUKassetmanagementandsavings
andretirementsolutionsbusiness.In2018he
tookontheadditionalresponsibilityofactingas
ChiefExecutiveofthekeyregulatedentitiesof
M&GandPrudentialUK.
www.prudential.co.uk
AnnualReport2018 Prudential plc 91
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Non-executive Directors
The Hon. Philip Remnant CBE FCA
Senior Independent Director
Appointment:January2013
Age:64
Sir Howard Davies
Appointment:October2010
Age: 68
David Law ACA
Appointment:September2015
Age: 58
Audit
N&G
Rem
Audit
N&G
Risk
Audit
N&G
Risk
Relevant skills and experience
Philipcontributesexperienceacrossanumber
ofsectorsandinparticularlistedcompany
experienceandthefinancialservicesindustry,
includingassetmanagement,intheUK
andEurope.
PhilipwasasenioradvisoratCreditSuisseand
avicechairmanofCreditSuisseFirstBoston
(CSFB)EuropeandheadoftheUKInvestment
BankingDepartment.Hewastwiceseconded
totheroleofdirectorgeneraloftheTakeover
Panel.Philipalsoservedontheboardof
NorthernRockplcandaschairmanofthe
ShareholderExecutive.UntilJuly2018,he
alsoservedontheboardofUKFinancial
InvestmentsLimited.
PhilipjoinedtheBoardinJanuary2013as
aNon-executiveDirector,asSeniorIndependent
DirectorandasamemberofeachoftheAudit
Committee,theRemunerationCommitteeand
theNomination&GovernanceCommittee.
HealsochairedtheM&GGroupLimitedboard
fromApril2016untilOctober2018.
Other appointments
— SevernTrentplc
— CityofLondonInvestmentTrust(chairman)
— TakeoverPanel(deputychairman)
Relevant skills and experience
SirHowardhasawealthofexperienceinthe
financialservicesindustry,acrosstheCivil
Service,consultancy,assetmanagement,
regulatoryandacademia.Healsocontributes
hisdetailedknowledgeoftheGroup’skey
internationalmarketsincludingtheUK,Europe,
NorthAmericaandAsiaaswellasinternational
regulatoryexperience.
SirHowardwaspreviouslychairmanofthe
PhoenixGroupandanindependentdirector
ofMorganStanleyInc.
SirHowardjoinedtheBoardinOctober2010
asaNon-executiveDirectorandChairofthe
RiskCommittee.HejoinedtheAuditCommittee
inNovember2010andtheNomination&
GovernanceCommitteeinJuly2012.
Other appointments
— RoyalBankofScotland(chairman)
— ChinaBankingRegulatoryCommission
internationaladvisoryboard
— ChinaSecuritiesRegulatoryCommission
internationaladvisoryboard(chairman)
— Institutd’ÉtudesPolitiques(SciencesPo)
— MillenniumLLCregulatoryadvisoryboard
Relevant skills and experience
DavidhasexperienceacrosstheGroup’skey
internationalmarketsincludingtheUK,Europe,
NorthAmericaandAsia,andacrossanumber
ofindustrysectors.Hecontributesextensive
technicalknowledgeofaudit,accountingand
financialreportingessentialtohisroleas
ChairoftheAuditCommittee.
Davidwasthegloballeaderof
PricewaterhouseCoopers(PwC)insurance
practice,apartnerinPwC’sUKfirm,and
workedastheleadauditpartnerformulti-
nationalinsurancecompaniesuntilhis
retirementin2015.Davidhasalsobeen
responsibleforPwC’sinsuranceandinvestment
managementassurancepracticeinLondonand
thefirm’sScottishassurancedivision.
DavidjoinedtheBoardinSeptember2015as
aNon-executiveDirectorandmemberofthe
AuditCommittee.DavidwasappointedChair
oftheAuditCommitteeandamemberofthe
RiskCommitteeandoftheNomination&
GovernanceCommitteeinMay2017.
Other appointments (until July 2019)
— L&FHoldingsLimited(CEO)andits
subsidiaries(theprofessionalindemnity
captiveinsurancegroupthatservesthe
PwCnetworkanditsmemberfirms)
92 Prudential plc AnnualReport2018
www.prudential.co.uk
Board of Directors continued Key to Committee membership
Chair
Audit
Chair
Audit
N&G Nomination&Governance
Rem Remuneration
Risk
Risk
Kaikhushru Nargolwala FCA
Anthony Nightingale CMG SBS JP
Alice Schroeder
Appointment:January2012
Age: 68
Appointment:June2013
Age: 71
Appointment:June2013
Age: 62
Rem
Risk
N&G
Rem
Audit
Risk
Relevant skills and experience
KaihasexperienceacrosssomeoftheGroup’s
keyinternationalmarkets,particularlyHong
KongandthewiderAsianmarket.Inadditionto
hisexperiencewithlistedgroups,hecontributes
knowledgeofthefinancialservicessector.
Kaispent19yearsatBankofAmericaandwas
basedinHongKonginrolesasgroupexecutive
vicepresidentandheadoftheAsiaWholesale
BankingGroupduring1990to1995.Hespent
10yearsworkingforStandardCharteredPLC
inSingaporeasgroupexecutivedirector
responsibleforAsiaGovernanceandRisk
during1998to2007.Kaiwaschiefexecutive
officeroftheAsiaPacificRegionofCreditSuisse
AGduring2008to2010andnowservesas
directorandchairmanoftheirremuneration
committee.
Kaihasservedonanumberofotherboards,
includingSingaporeTelecommunicationsand
TateandLyleplc.
KaijoinedtheBoardinJanuary2012asa
Non-executiveDirectorandmemberofthe
RemunerationandRiskCommittees.
Other appointments
— PrudentialCorporationAsiaLimited
(Prudentialplcsubsidiary)(chairman)
— CliffordCapitalPte.Ltd(chair)
— CreditSuisseGroupAG
— Duke-NUSMedicalSchool(chairman)
— PSAInternationalPteLtd
Relevant skills and experience
Anthonyhaslongexecutiveexperienceof
listedcompaniesand,inparticular,extensive
knowledgeofAsianmarkets.
Relevant skills and experience
Alicehasexperienceacrosstheinsurance,asset
management,technologyandfinancialservices
industriesintheUS.
AnthonyspenthiscareerinAsia,wherehe
joinedtheJardineMathesonGroupin1969,
holdinganumberofseniorpositionsbefore
joiningtheboardofJardineMathesonHoldings
in1994.Hewasmanagingdirectorofthe
JardineMathesonGroupfrom2006to2012.
HispositionontheHongKong-APECtrade
policystudygroupendedin2018andhe
resignedasamemberoftheUK-ASEAN
BusinessCouncilin2019.
AnthonyjoinedtheBoardinJune2013asa
Non-executiveDirectorandmemberofthe
RemunerationCommittee.HebecameChairof
theRemunerationCommitteeandamemberof
theNomination&GovernanceCommitteein
May2015.
Other appointments
— JardineMathesonHoldings(andother
JardineMathesongroupcompanies)
— SchindlerHoldingLimited
— ShuiOnLandLimited
— VitasoyInternationalHoldingsLimited
— TheInnovationandStrategicDevelopment
CouncilinHongKong
— TheAPECVisionGroup
Alicebeganhercareerasaqualifiedaccountant
atErnst&Young.ShejoinedtheFinancial
AccountingStandardsBoardasamanagerin
1991,overseeingtheissuanceofseveral
significantinsuranceaccountingstandards.
From1993,sheledteamsofanalystsspecialising
inproperty-casualtyinsuranceasamanaging
directoratCIBSOppenheimer,PaineWebber
(nowUBS)andMorganStanley.Alicewasalso
anindependentboardmemberoftheCetera
FinancialGroupandheldtheofficeofCEO
andchairofShowferMediaLLC(formerly
WebTuner).ShewasalsoadirectorofBank
ofAmericaMerrillLynchInternationaluntil
December2018.
AlicejoinedtheBoardinJune2013asa
Non-executiveDirectorandmemberofthe
AuditCommittee.Shebecameamember
oftheRiskCommitteeinMarch2018.
Other appointments
— QuorumHealthCorporation
— NatusMedicalIncorporated
www.prudential.co.uk
AnnualReport2018 Prudential plc 93
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Key to Committee membership
Chair
Audit
Chair
Audit
N&G Nomination&Governance
Rem Remuneration
Risk
Risk
Non-executive Directors continued
Lord Turner FRS
Appointment:September2015
Age: 63
Thomas Watjen
Appointment:July2017
Age: 64
Fields Wicker-Miurin OBE
Appointment:September2018
Age: 60
Audit
Risk
Rem
Risk
Rem
Relevant skills and experience
LordTurnerhasextensiveknowledgeand
experienceoftheUKregulatoryregime.
LordTurnerbeganhiscareerwithMcKinsey&Co,
advisingcompaniesacrossarangeofindustries.
Heservedasdirector-generalofthe
ConfederationofBritishIndustry,vice-chairman
ofMerrillLynchEurope,chairmanofthe
PensionsCommissionandasanon-executive
directorofStandardCharteredBank.
LordTurnerwaschairmanoftheUK’sFinancial
ServicesAuthority,amemberofthe
internationalFinancialStabilityBoardanda
non-executivedirectoroftheBankofEngland.
LordTurnerjoinedtheBoardinSeptember2015
asaNon-executiveDirectorandmemberofthe
RiskCommittee.Hebecameamemberofthe
AuditCommitteeinMay2017.
Other appointments
— ChubbEurope(chairman)
— EnergyTransitionCommission(chairman)
— EnvisionLimited(advisoryboard)
— HouseofLordscrossbenchmember
(from2005)
— SeniorFellowoftheInstituteforNew
EconomicThinking
— LondonSchoolofEconomicsand
CassBusinessSchool(visitingprofessor)
— OakNorthBank(advisor)
Relevant skills and experience
Tomhasexperienceacrosstheinsurance,asset
managementandfinancialservicesindustriesas
wellasexperiencewithlistedcompaniesinthe
UKandtheUS.
TomstartedhiscareeratAetnaLifeand
CasualtybeforejoiningConning&Company,
aninvestmentandassetmanagementprovider,
wherehebecameapartnerintheconsulting
andprivatecapitalareas.HejoinedMorgan
Stanleyin1987,andbecameamanaging
directorinitsinsurancepractice.
In1994hewasappointedexecutivevice
presidentandchieffinancialofficerofProvident
CompaniesInc.
Hewasakeymemberoftheteamassociated
withProvident’smergerwithUnumin1999and
wasappointedpresidentandchiefexecutive
officeroftherenamedUnumGroupin2003,
arolehehelduntilMay2017.
TomjoinedtheBoardinJuly2017asa
Non-executiveDirectorandmemberofthe
RemunerationCommittee.Hebecame
amemberoftheRiskCommitteein
November2018.
Other appointments
— SunTrustBanks,Inc
Relevant skills and experience
Fieldshasextensiveinternationalboardroom
experience,combiningknowledgeofthe
Group’skeygeographicmarketswith
experienceacrosstheglobalfinancialservices
industry.
FieldsstartedhercareeratPhiladelphiaNational
Bankin1982beforejoiningStrategicPlanning
Associates(nowOliverWyman)asasenior
partnerin1989.Shebecamechieffinancial
officeranddirectorofstrategyattheLondon
StockExchangein1994,leaderoftheglobal
marketspracticeofATKearneyin1998and
managingdirectorofVestaCapitalAdvisors
in2000.ShewasappointedtoNasdaq’s
TechnologyAdvisoryCouncilin2000andwas
amemberofthepanelofexpertsadvisingthe
EuropeanParliamentonfinancialmarkets
harmonisationforfouryearsfrom2002.She
becameanon-executivedirectorandchair
oftheauditcommitteeofSavillsplcin2002
andanon-executivedirectorandchairofthe
investmentcommitteeoftheRoyalLondon
Groupin2003.
FieldsjoinedtheBoardinSeptember2018as
aNon-executiveDirectorandmemberofthe
RemunerationCommittee.
Other appointments
— BNPParibas
— SCORSE
— DepartmentforDigital,Culture,
Media&Sport
— Leaders’Quest(Partner)
94 Prudential plc AnnualReport2018
www.prudential.co.uk
Board of Directors continued How we operate
This section tells you more about the Group’s governance,
operation of the Board and Board roles.
Group governance
Corporate governance codes –
statement of compliance
TheCompanyhasdualprimarylistingsin
London(premiumlisting)andHongKong
andhasthereforeadoptedagovernance
structurebasedontheUKandHongKong
CorporateGovernanceCodes(theUKand
HKCodes).
TheBoardconfirmsthat,fortheyearunder
review,theCompanyhascompliedwithall
theprinciplesandprovisionsofthe2016
UKCode,whichwasapplicableforthe
reportingperiod.TheCompanyhas
beenapplyingthe2018UKCodefrom
1January2019.
TheCompanyhasalsocompliedwiththe
provisionoftheHKCodeotherthanas
follows:ProvisionB.1.2(d)oftheHKCode
requirescompanies,onacomplyorexplain
basis,tohavearemunerationcommittee
whichmakesrecommendationstoamain
boardontheremunerationofnon-
executivedirectors.Thisprovisionisnot
compatiblewithsupportingprovisionD.2.3
oftheUKCodewhichrecommendsthat
theboarddeterminestheremunerationof
non-executivedirectors.Prudentialhas
chosentoadoptapracticeinlinewiththe
recommendationsoftheUKCode.
TheUKCodeisavailablefrom:
www.frc.org.uk
TheHKCodeisavailablefrom:
www.hkex.com.hk
Our governance framework
TheGrouphasestablishedagovernance
frameworkforthebusinesswhichis
designedtopromoteappropriate
behavioursacrosstheGroup.
Thegovernanceframeworkincludesthe
keymechanismsthroughwhichtheGroup
setsstrategy,plansitsobjectives,monitors
performance,considersriskmanagement,
holdsbusinessunitstoaccountfor
deliveringonbusinessplansandarranges
governance.
TheGroupGovernanceManual(the
Manual)setsoutthepoliciesand
proceduresunderwhichtheGroup
operates,takingintoaccountstatutory,
regulatoryandotherrelevantmatters.
Businessunitsmanageandreport
compliancewiththeGroup-wide
mandatoryrequirementsandstandards
setoutintheManualthroughannual
attestations.Thisincludescompliancewith
ourriskmanagementframework,detailsof
whicharesetoutonpages107and108of
thisreport.
ThecontentoftheManualisreviewed
regularly,reflectingthedevelopingnature
ofboththeGroupandthemarketsinwhich
itoperates,withsignificantchangesonkey
policiesreportedtotherelevantBoard
Committee.
Material Subsidiary governance
Prudentialhasappointedindependent
non-executivedirectorstotheboardsofits
fourMaterialSubsidiaryentitieswithinthe
Group:JacksonNationalLifeInsurance
Company,M&GGroupLimited,Prudential
CorporationAsiaLimitedandThe
PrudentialAssuranceCompanyLimited.
EachMaterialSubsidiaryhasaboardof
directorsledbyanindependentchairand
anauditcommitteeandriskcommittee,
composedentirelyofindependent
non-executives.
DialoguebetweentheGroupChair,Group
RiskCommitteeChairandGroupAudit
CommitteeChairandtheircounterparts
intheMaterialSubsidiariesprovidesan
effectiveinformationflow.Overthecourse
of2018andearly2019,theBoardof
M&GPrudentialhasbeendevelopedby
itsindependentChairman,MrMikeEvans.
MrEvansandtheGroupChairhave
maintaineddialoguethroughout.
Anevaluationoftheboard,auditandrisk
committeesofeachMaterialSubsidiary
wascarriedoutinrespectof2018which
concludedthateachofthoseboardsand
committeesoperatedeffectivelyduring
theyear.Anassessmentofwhethereach
businessunitauditandriskcommittee
hasfulfilledtheirmandatesisconducted
annuallyandtheresultsreportedtothe
GroupAuditCommitteeandGroupRisk
Committee.
TheNomination&GovernanceCommittee
isresponsibleforoversightofgovernance
arrangementsfortheMaterialSubsidiaries.
ThisandotheractivitiesoftheNomination
&GovernanceCommitteeduring2018are
describedonpages109to114.
AspartoftheGroup’sfocusoncorporate
responsibility,theboardsofeachofour
MaterialSubsidiariesconsidersupdates
oncorporateresponsibilityactivitiesand
spendintheircommunitiesonanannual
basis.Thishascreatedalayerof
independentscrutinytohelpensurethose
boardsareclosetothecommunityand
charitableactivitiesoftheirbusinesses.
Regulatory environment
Untilthedemergeriscompleted,the
PrudentialRegulationAuthority(PRA)will
continuetobetheGroup-widesupervisor
ofPrudential.ThePRAwillbetheGroup-
widesupervisorofM&GPrudential
followingthedemerger.Afterthedemerger,
Prudential’sindividualinsuranceandasset
managementbusinesseswillcontinuetobe
supervisedatalocalentitylevelandlocal
statutorycapitalrequirementswillcontinue
toapply.TheSupervisoryCollege,madeup
oftheauthoritiesoverseeingtheprincipal
regulatedactivitiesinjurisdictionswhere
thefuturePrudentialGroupwilloperate,
hasmadeacollectivedecisionthatHong
Kong’sInsuranceAuthority(IA)should
becomethenewGroup-widesupervisor
forPrudentialplc.
Interactionswithourregulatorsshapeour
governanceframeworkandtheChairman
andGroupChiefExecutiveplayaleading
roleinrepresentingtheGrouptoregulators
andensuringourdialoguewiththemis
constructive.
Stakeholder engagement
TheBoardhasidentifiedtheGroup’skey
stakeholdersasincludingcustomers,
investors,employees,regulators,civil
society,themediaandsuppliers.
Duringtheyear,theBoardconsidered
workforceengagementactivitiesinlight
oftheprovisionsoftherevisedUKCode
publishedinJuly2018.In2019theGroup
willbeputtinginplaceprocedurestohelp
ensurethatworkforcepracticesand
policiesareconsistentwiththeGroup’s
valuesandsupportitslong-term
sustainablesuccessandthattheworkforce
voiceisunderstoodatBoardlevel.
Asamajorinstitutionalinvestor,theBoard
recognisestheimportanceofmaintaining
anappropriateleveloftwo-way
communicationwithshareholders.
www.prudential.co.uk
AnnualReport2018 Prudential plc 95
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information TheAnnualGeneralMeetingisan
opportunityforfurthershareholder
engagement,fortheChairmanto
explaintheCompany’sprogressand,
alongwithothermembersoftheBoard,
toansweranyquestions.AllDirectors
theninofficeattendedthe2018Annual
GeneralMeeting.
Detailsofthe2019Annual
GeneralMeetingareavailableat
www.prudential.co.uk/investors
Afullprogrammeofengagementwith
shareholders,potentialinvestorsand
analysts,intheUKandoverseas,is
conductedeachyearbytheGroupChief
ExecutiveandtheChiefFinancialOfficer,
ledbytheInvestorRelationsteam.A
conferenceforinvestorsandanalystsis
heldonaregularbasis,includingin-depth
businesspresentationsandopportunities
forattendeestomeetwithmembersof
theBoardandseniorexecutivesandan
opportunityfortheexecutiveteamto
communicateprogressandstrategy
outsideofthefinancialreportingcycle.The
mostrecenteventwasheldinNovember
2018andfeedbackwasprovidedtothe
BoardinNovemberandDecember2018.
TheGroupChiefExecutive,ChiefFinancial
OfficerandInvestorRelationsteamalso
attendmajorfinancialservicesconferences
topresentto,andmeetwith,the
Company’sshareholders.
In2018,aspartoftheinvestorrelations
programme,over370meetingswereheld
withmorethan300individualinstitutional
investorsinLondon,continentalEurope,
theUSAandAsia.
TheCompanyholdsanongoing
programmeofregularcontactwithmajor
shareholders,conductedbytheChairman,
todiscusstheirviewsontheCompany’s
governance.TheSeniorIndependent
Directoroffersmeetingstomajor
shareholdersasneededandthisyear
carriedoutaconsultationspecificallyon
theChairman’stenure.Engagementwith
institutionalinvestorsontheDirectors’
RemunerationPolicyandimplementation
isledbytheRemunerationCommittee
Chaironanannualbasis.OtherNon-
executiveDirectorsareavailabletomeet
withmajorshareholdersonrequest.
Shareholderfeedbackandkeyissuesfrom
thesemeetingsiscommunicatedtothe
Board.Detailsofwhenfeedbackwas
discussedbytheBoardin2018canbe
foundinthetableonpage97.
TheAnnualGeneralMeetingisan
opportunityforfurthershareholder
engagement,fortheChairmantoexplain
theCompany’sprogressand,alongwith
othermembersoftheBoard,toanswer
anyquestions.AllDirectorstheninoffice
attendedthe2018AnnualGeneral
Meeting.
Detailsofthe2019AnnualGeneral
Meetingareavailableat
www.prudential.co.uk/investors
Moredetailsofstakeholderengagement
withourcommunitiesandsocietiescan
befoundinourCorporateresponsibility
reviewonpages70to86andonour
websiteatwww.prudential.co.uk/
responsibility/approach.
Operation of the Board
How the Board leads the Group
TheGroupisheadedbyaBoardledby
theChairman.
TheBoardiscurrentlymadeupof16
Directors,ofwhichamajority,excluding
theChairman,areindependentNon-
executiveDirectors.Biographicaldetails
ofeachoftheDirectorscanbefound
onpages89to94andfurtherdetailsof
therolesoftheChairman,GroupChief
Executive,SeniorIndependentDirector,
CommitteeChairsandtheNon-executive
Directorscanbefoundonpages101
and102.
TheBoardiscollectivelyresponsibleto
shareholdersforthelong-termsustainable
successofthebusinessthrough:
— ApprovingtheGroup’slong-term
strategicobjectives,annualbudgets
andbusinessplans,asrecommended
bytheGroupChiefExecutiveandany
materialchangestothem;
— Monitoringtheimplementationof
strategicobjectives,annualbudgets
andbusinessplans;
— EstablishingtheCompany’spurpose,
valuesandstrategyandsatisfyingitself
thatthesearealignedwiththeGroup’s
culture;and
— Assessingandmonitoringculture,
includingalignmentwithpolicy,
practices,behavioursandriskappetite.
Specificmattersarereservedfordecision
bytheBoard,including:
— Approvingdividendpolicyand
determinationofdividends;
— Approvalofstrategicprojects;
— Approvalofthethree-yearbusiness
andfinancialplan;
— ApprovaloftheGroup’sfulland
half-yearlyresultsannouncementsand
anyotherperiodicfinancialreporting;
— Responsibilityforaneffectivesystemof
internalcontrolandriskmanagement;
— OverseeingtheGroup’scorporate
socialresponsibilityprogrammes;and
— Ensuringeffectiveengagementwith,
andencouragingparticipationfrom,
keystakeholdergroups.
96 Prudential plc AnnualReport2018
www.prudential.co.uk
How we operate continued Key areas of focus – how the Board spent its time
TheBoardheld10meetingsduring2018.Inadditiontothosemeetingssetoutinthetablebelow,theBoardheldaseparatetwo-day
strategyeventinJuneandtwoBoardworkshopsfocusedonthedemerger.
Inadditiontomeetings,theBoardreceivesamonthlyupdatereportfrommanagement.
Mar1
Apr May
Jun
Jul
Aug
Sep
Oct
Dec
Strategy and implementation
Approvalandreviewofstrategicpriorities
Strategicprioritiesmonitoring
Approvalofthree-yearoperatingplan
Strategicprojects2
GroupChiefExecutive’sreport
Report from Committee Chairs
Audit
Nomination&Governance
Remuneration
Risk
Financial reporting and dividends
ChiefFinancialOfficer’sperformancereport
Fullyear
Halfyear
GroupSolvencyIIreporting
Business unit Chief Executive updates
PrudentialCorporationAsia
Jackson
M&GPrudential
Risk, regulatory and compliance
Regulatoryandcomplianceupdates
ChiefRiskOfficer’sreport
Governmentrelations
Relationswithregulators
Governance and stakeholders
Governanceupdates
Boardevaluationandactionstracking
Successionplanning
CorporateresponsibilityreportingandESG
Diversityandinclusion
Talentreview
Non-executiveDirectors’fees
Investorupdatesincludingfeedbackoninvestormeetings
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Notes
1 TheBoardheldtwomeetingsinMarch2018.
2 StrategicprojectsconsideredduringtheyearincludedthedemergerofM&GPrudential,announcedinMarch,theacquisitionofTMBAssetManagementCo.,Ltd.inThailand,announcedinJuly,
andtherenewalofthebancassurancealliancewithUnitedOverseasBankLimited,announcedinJanuary2019,aswellasotherconfidentialmatters.
www.prudential.co.uk
AnnualReport2018 Prudential plc 97
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
Board and Committee meeting attendance throughout 2018
IndividualDirectors’attendanceatmeetingsthroughouttheyearissetoutinthetablebelow.
Chairman PaulManduca
Executive
Directors
Nomination
& Governance
Committee
3meetings
llll
Audit
Committee
9meetings
Board
10meetings
llllllllll
llllllllll
MikeWells
llllllllll
MarkFitzPatrick
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JamesTurner
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JohnFoley
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NicNicandrou
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AnneRichards1
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BarryStowe2
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PhilipRemnant
lll
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HowardDavies
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lll
DavidLaw
llllllllll
KaiNargolwala
AnthonyNightingale llllllllll
AliceSchroeder3
LordTurner
TomWatjen4
FieldsWicker-Miurin5
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Remuneration
Committee
5meetings
Risk
Committee
5meetings
Joint Audit
and Risk
Committee
1meeting
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1meeting
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Non-
executive
Directors
Notes
1 MsRichardssteppeddownfromtheBoardwitheffectfrom10August2018.
2 MrStowesteppeddownfromtheBoardwitheffectfrom31December2018.
3 MsSchroederwasappointedamemberoftheRiskCommitteewitheffectfrom1March2018.
4 MrWatjenwasappointedamemberoftheRiskCommitteewitheffectfrom1November2018.
5 MrsWicker-MiurinwasappointedamemberoftheBoardwitheffectfrom3September2018.
BoardandCommitteepapersareusuallyprovidedoneweekinadvanceofameeting.WhereaDirectorisunabletoattendameeting,
hisorherviewsarecanvassedinadvancebytheChairmanofthatmeetingwherepossible.
98 Prudential plc AnnualReport2018
www.prudential.co.uk
How we operate continued Board effectiveness
Actions during 2018 arising from the 2017 review
Attheendof2017,anexternallyfacilitatedreviewoftheBoard’seffectivenesswascarriedoutbyBoardroomReviewLimited.During
2018,theactionpointsthathadbeenidentifiedinthatreviewwereaddressedandtheBoardreceivedanupdateonprogressagainst
thoseactionsinSeptember2018andFebruary2019.
Setoutbelowarethethemes,summaryofactionsandprogressupdates:
Theme
Summary of actions
Progress
Creating the right
environment for
critical decision-
making
Spendadditionaltimeonsitevisits
ContinuetoholdNon-executiveDirector
onlysessionsonanasrequiredbasis
— TheagendaoftheApril2018BoardmeetingheldinSingapore
wasextendedtoensurethatarangeofinternalandexternal
stakeholderviewsontheGroup’sAsiabusinesswasgiven.
— DuringtheBoardvisittoWashington,DCinSeptember2018,
theJacksonHoldingsteamprovidedtheBoardwithupdates
ontheUSbusinessandwithaspecificperspectiveontheUS
government,itsregulatoryregimeandimpactontheJackson
Holdingsbusinesses.
— TheChairman’scurrentpracticeofholdingregularprivate
Non-executiveDirectormeetingshascontinuedandNon-
executiveDirectorsmayrequestadditionalmeetingsifneeded.
— Thepracticeofprivate,members-onlymeetingsisalso
establishedseparatelyfortheRiskandAuditCommitteesand
hascontinuedin2018,withadhocprivatemeetingsbeingheld
asrequired.
Highlighting
culture on the
agenda
ProvidefurtherreportstotheBoardon
culturein2018andmaturetheGroup’s
strategicobjectivetodevelopaframework
forameasurable,definableculture
— AreportonculturewaspresentedtotheBoardinOctober
2018detailingactionstakenandproposedactionsupto
demergerandbeyond.
— TheRiskCommitteecontinuestomonitorriskcultureacross
Increasing the
Board’s resilience
Continuetofocusongenderandother
diversityinallnewBoardappointments
Introduceaskillsmaptomonitorexperience
andexpertisemoreformally
theorganisation.
— TheBoardhasapprovedamendmentstoitstermsofreference
whichformalisetheBoard’sroleinestablishingtheGroup’s
purpose,valuesandstrategyandensuringthealignment
ofthesewithGroupculture.
— TheappointmentofMrsWicker-MiurinasaNon-executive
DirectorandmemberoftheRemunerationCommitteewith
effectfrom3September2018,helpedtostrengthenthe
Board’srangeofskills,technicalexpertiseandknowledge.
— ThesearchforadditionalNon-executiveDirectorsisongoing
giventheBoard’sdesiretocontinueenhancingitsdiversity,
includinggenderandgeography.
— TheNomination&GovernanceCommitteecontinuestoutilise
askillsmapforNon-executiveDirectorsuccessionplanning
toensurethatgapsinBoardexperienceorknowledgeare
identifiedandaddressed.
www.prudential.co.uk
AnnualReport2018 Prudential plc 99
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Board site visits
Singapore
InSingapore,theBoardreceiveddeep
divepresentationson:
— EastspringInvestments,
PrudentialCorporationAsia’s
assetmanagementbusiness;
— Thehealthecosystemand
partnershipsthatPrudential
CorporationAsiaisdeveloping,
includingwithhealthcare
technologyandservicescompany,
BabylonHealth;
— Digitisationandcustomeracquisition;
— ExpandingtheGroup’spresence
inChina;and
— Financialandperformanceupdates
ontheSingaporebusinessand
Asiamorewidely.
Washington, DC, USA
InWashington,theBoardfocusedon
Jackson’sinitiativesaround:
— Customerunderstandingofvariable
annuityproducts;
— Distribution;
— Regulatorymodernisationand
governmentinteractions;and
— Technologyandpeople.
2018 review and actions for 2019
TheperformanceevaluationoftheBoardanditsprincipalCommitteesfor2018was
conductedinternallyattheendof2018throughaquestionnaire.Thefindingswere
presentedtotheBoardinFebruary2019andanactionplanagreedtoaddressareas
offocusidentifiedbytheevaluation.
ThereviewconfirmedthattheBoardcontinuedtooperateeffectivelyduringtheyear
andnomajorareasrequiringimprovementwerehighlighted.
Theme
Summarised actions
Board
composition
and process
Risk, capital
and audit
ContinuingworkonBoardsuccessionwithafocusongenderand
geographicdiversity.
ReductioninBoardandCommitteepapervolume.
CyberriskfocusforBoardagendafor2019.
BoardtrainingontheHKInsuranceAuthorityregulatoryregime.
Stakeholders
Reviewofstakeholdergroups.
ReviewofworkforcevoiceanditsrepresentationatBoardlevel.
People
DevelopdiversityandinclusionreportingtotheBoard.
Ensureoverseasand‘home’BoardsgivescopeforNon-executives
tomeetcolleaguesbelowGroupExecutiveCommitteelevel.
Director evaluation
TheperformanceoftheNon-executive
DirectorsandtheGroupChiefExecutive
during2018wasevaluatedbythe
Chairmaninindividualmeetings.
PhilipRemnant,theSeniorIndependent
Director,ledtheNon-executiveDirectors
inaperformanceevaluationofthe
Chairman.
ExecutiveDirectorsaresubjecttoregular
reviewandtheGroupChiefExecutive
individuallyappraisedtheperformance
ofeachoftheExecutiveDirectorsaspart
oftheannualGroup-wideperformance
evaluationofallemployees.
Theoutcomeofeachoftheseevaluation
processesisreportedtotheNomination
&GovernanceCommitteeinFebruaryeach
yearinordertoinformtheCommittee’s
recommendationforBoardmemberstobe
putforwardforre-electionbyshareholders.
ExecutiveDirectorperformanceisalso
reviewedbytheRemunerationCommittee
aspartofitsdeliberationsonbonus
payments.
100 Prudential plc AnnualReport2018
www.prudential.co.uk
How we operate continued Directors
Board roles and governance
ThetermsofreferenceoftheChairman,GroupChiefExecutiveandSeniorIndependentDirectorwereupdatedinDecember2018to
reflectthe2018UKCodeandtheBoardalsoconsideredtheBoardEffectivenessGuidanceissuedbytheFinancialReportingCouncil
(FRC)astohowtheserolesoughttobeimplemented.
Chairman – Paul Manduca
The Chairman is responsible for the leadership and governance of the Board, ensuring its smooth and effective running
in discharging its responsibilities to the Group’s stakeholders and managing Board business.
Managing Board business
— ResponsibleforsettingtheBoardagenda,ensuringtheright
issuesarebroughttotheBoard’sattentionthrough
collaborationwiththeGroupChiefExecutiveandtheGroup
GeneralCounselandCompanySecretary
— Facilitatingopen,honestandconstructivedebateamong
Directors.Whenchairingmeetings,ensuringthereis
sufficienttimetoconsideralltopics,allviewsareheardandall
Boardmembers,andinparticularNon-executiveDirectors,
haveanopportunitytoconstructivelychallengemanagement
— MeetingwithNon-executiveDirectorsthroughouttheyear.
In2018,theChairmanmetwithNon-executiveDirectors
withoutExecutiveDirectorsbeingpresentonfouroccasions
— EnsuringinformationbroughttotheBoardisaccurate,clear,
timelyandcontainssufficientanalysisappropriatetothescale
andnatureofthedecisionstobemade
— PromotingeffectivereportingofBoardCommitteebusiness
atBoardmeetingsthroughregularCommitteeChairupdates
Governance
— LeadingtheBoard’sdeterminationofappropriatecorporate
governanceandbusinessvalues,includingethos,valuesand
cultureatBoardlevelandthroughouttheGroup
— WorkingwiththeGroupGeneralCounselandCompany
Secretarytoensurecontinuedgoodgovernance
— ActingaskeycontactforindependentchairsofMaterial
Subsidiaries
— MeetingwiththeindependentchairsoftheGroup’sMaterial
SubsidiariesonaregularbasisandreportingtotheBoardon
theoutcomeofthosemeetings
Relationship with the Group Chief Executive
— DiscussingbroadstrategicplanswiththeGroupChief
ExecutivepriortosubmissiontotheBoard
— EnsuringtheBoardisawareofthenecessaryresourcesto
achievethestrategicplan
— ProvidingsupportandadvicetotheGroupChiefExecutive
Membership and composition of the Board
— LeadingtheNomination&GovernanceCommitteein
successionplanningandtheidentificationofpotential
candidates,havingregardtotheskillsandexperiencethe
Boardneedstofulfilitsstrategy,andmaking
recommendationstotheBoard
— ConsideringthedevelopmentneedsoftheDirectorssothat
Directorscontinuallyupdatetheirskillsandknowledge
requiredtofulfiltheirduties,includingtheprovisionofa
comprehensiveinductionfornewDirectors
— MaintaininganeffectivedialoguewiththeNon-executive
Directorstoencourageengagementandmaximisetheir
contributions
Relations with shareholders and other stakeholders
— RepresentingtheBoardexternallyatbusiness,politicaland
communitylevel.PresentingtheGroup’sviewsandpositions
asdeterminedbytheBoard
— PlayingamajorroleintheGroup’sengagementwithregulators
— Balancingtheinterestsofdifferentcategoriesofstakeholders,
preservinganindependentviewandensuringeffective
communication
— Engaginginaprogrammeofmeetingswithkeyshareholders
throughouttheyearandreportingtotheBoardontheissues
raisedatthosemeetings
External positions
— ApprovingDirectors’externalappointmentspriortothem
beingaccepted,takingintoaccounttherequiredtime
commitmentandescalatingconsiderationofconflicts
ofintereststotheNomination&GovernanceCommittee
asneeded
www.prudential.co.uk
AnnualReport2018 Prudential plc 101
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information How we operate continued
Group Chief Executive – Mike Wells
Senior Independent Director – Philip Remnant
TheGroupChiefExecutiveleadstheExecutiveDirectorsand
seniorexecutivesandisresponsiblefortheoperational
managementoftheGrouponbehalfoftheBoardona
day-to-daybasis:
— ResponsiblefortheimplementationofBoarddecisions
TheSeniorIndependentDirectoractsasanalternativeconduit
totheBoardforshareholderconcernsandleadstheevaluation
oftheChairman:
— ActsasasoundingboardfortheChairman,providing
supportinthedeliveryoftheChairman’sobjectives
— Establishesprocessestoensureoperationsarecompliant
— LeadstheNon-executiveDirectorsinconductingthe
withregulatoryrequirements
Chairman’sannualevaluation
— Setspolicies,providesday-to-dayleadershipandmakes
— HoldsmeetingswithNon-executiveDirectorswithout
managementbeingpresent,typicallyatleastonceayear
toevaluatetheperformanceoftheChairman
— Offersmeetingstomajorshareholderstoprovidethem
withanadditionalcommunicationpointonrequestandis
generallyavailabletoanyshareholdertoaddressconcerns
notresolvedthroughnormalchannels
decisionsonmattersaffectingtheoperation,performance
andstrategyoftheGroup,seekingBoardapprovalfor
mattersreservedtotheBoard
— SupportedbytheGroupExecutiveCommitteewhichhe
chairsandwhichreceivesreportsonperformanceand
implementationofstrategyforeachbusinessunitand
discussesmajorprojectsandotheractivitiesrelatedtothe
attainmentofstrategy
— ChairstheChiefExecutive’sCommitteemeetingswhichare
heldweeklytoreviewmattersrequiringapprovalunderthe
Group’sframeworkofdelegatedauthorities
— KeepsinregularcontactwiththeChairmanandbriefshim
onkeyissues
— Meetswithkeyregulatorsworldwide
— Leadsonday-to-dayeffectivestakeholderengagement
Committee Chairs
Non-executive Directors
EachoftheCommitteeChairsisresponsiblefortheeffective
operationoftheirrespectiveCommittees:
— Responsiblefortheleadershipandgovernanceoftheir
Committee
— SetstheagendaforCommitteemeetings
— ReportstotheBoardontheactivitiesofeachCommittee
meetingandthebusinessconsidered,including,where
appropriate,seekingBoardapprovalforactionsin
accordancewiththeCommittees’termsofreference
— WorkswiththeGroupGeneralCounselandCompany
Secretarytoensurethecontinuedgoodgovernanceofeach
Committeeduringtheyear
InadditiontoCommitteeduties,theChairsoftheAuditandRisk
Committeesactaskeycontactpointsfortheindependentchairs
oftheauditandriskcommitteesoftheMaterialSubsidiaries
AlloftheNon-executiveDirectorsaredeemedtobe
independentandtogetherhaveawiderangeofexperience
whichcanbeappliedtoattainthestrategicaimsofthe
Groupthrough:
— Constructiveandeffectivechallenge
— Providingstrategicguidanceandofferingspecialistadvice
— Scrutinisingandholdingtoaccounttheperformanceof
managementinmeetingagreedgoalsandobjectives
— ServingonatleastoneoftheBoard’sprincipalCommittees
— EngagingwithExecutiveDirectorsandothersenior
managementatBoardandCommitteemeetingsaswell
asatsitevisits,trainingsessionsandonaninformalbasis
— Takingpartinone-to-onemeetingswiththeGroupStrategy
teamandparticipationintheannualStrategyAwayDay
102 Prudential plc AnnualReport2018
www.prudential.co.uk
TheBoardhasestablishedfourprincipalCommitteeswhosefunctionsaresummarisedbelow.
Nomination&Governance
Committee
Remuneration
Committee
Audit
Committee
Risk
Committee
Chair
Paul Manduca
— Keepsleadershipneeds
underreviewinsupport
oftheGroup’sstrategic
objectives
— Developssuccession
planningfortheBoard
andseniorexecutives
basedonmeritagainst
objectivecriteria
promotingdiversity
inallareas
— Overseesdevelopment
ofadiversepipelinein
successionplanning
— MonitorstheGroup’s
diversityinitiatives
— Recommends
appointmentstothe
Board,itsprincipal
Committeesand
appointmentsof
non-executivechairs
totheboardsofMaterial
Subsidiaries
— Overseesthegovernance
ofMaterialSubsidiaries
andtheGroup’soverall
governanceframework
SeeNomination&Governance
Committeereportonpages
109to114
Chair
Anthony Nightingale
— Ensuresthereisaformal
andtransparentprocess
forestablishingthe
Directors’Remuneration
Policy
Chair
David Law
— Responsibleforthe
integrityoftheGroup’s
financialreporting,
includingscrutinising
accountingpolicies
— Approvesindividual
— Monitorsthe
effectivenessofinternal
controlandrisk
managementsystems,
includingcompliance
arrangements
— Monitorsthe
effectivenessand
objectivityofinternaland
externalauditors
— Approvestheinternal
auditplanand
recommendsthe
appointmentofthe
externalauditor
remunerationpackages
oftheChairman,
ExecutiveDirectors,
seniorexecutivesand
MaterialSubsidiary
non-executivedirectors
— Approvestheoverall
RemunerationPolicyfor
theGroup
— Reviewsthedesignand
developmentofshare
plansandapprovesand
assessesperformance
targetswhereapplicable
andensuresalignment
withtheGroup’sculture
— Reviewsworkforce
remunerationpractices
andpolicieswhensetting
executiveremuneration
Chair
Howard Davies
— Leadsonandoversees
theGroup’soverallrisk
appetite,risktolerance
andstrategy
— ApprovestheGroup’s
riskmanagement
frameworkandmonitors
itseffectiveness
— SupportstheBoardand
managementin
embeddingand
maintainingasupportive
cultureinrelationtothe
managementofrisk
— Providesadvicetothe
Remuneration
Committeeonrisk
management
considerationstoinform
remunerationdecisions
SeeRemunerationCommittee
reportonpages132to165
SeeAuditCommitteereport
onpages115to123
SeeRiskCommitteereport
onpages124to127
Termsofreferencefortheprincipal
Committeescanbeaccessedat
www.prudential.co.uk/investors/
governance-and-policies/board-
committees-terms-of-reference
TheBoardhasestablishedaStanding
Committeewhichcanmeetasrequiredto
assistwithanybusinessoftheBoard.Itis
typicallyusedforadhocorurgentmatters
whichcannotbedelayeduntilthenext
scheduledBoardmeeting.AllDirectorsare
membersoftheStandingCommitteeand
havetherighttoattendallmeetingsand
receivepapers.
NoticeofaStandingCommitteemeeting
issenttoallDirectorsandifanindividual
isunabletoattend,he/shecangive
commentstotheChairmanorGroup
CompanySecretaryaheadofthemeeting
forconsiderationbytheStanding
Committee.Beforetakingdecisionson
anymatter,theStandingCommitteemust
firstdeterminethatthebusinessitis
consideringisappropriatefora
CommitteeoftheBoardanddoesnot
properlyneedtobebroughtbeforethe
wholeBoard.AllStandingCommittee
meetingsarereportedinfulltothenext
scheduledBoardmeeting.
Over2018,theCompanyheldfive
meetingsoftheStandingCommittee.
Thisgovernancestructureallowsforfast
decision-makingwherenecessary,while
ensuringthatthefullBoardhasoversight
ofallmattersunderconsiderationandall
Non-executivescancontribute.
www.prudential.co.uk
AnnualReport2018 Prudential plc 103
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information How we operate continued
Building Directors’ knowledge
Induction – new Directors
ThetwonewDirectorsappointedduring
2018,MrTurnerandMrsWicker-Miurin,
eachreceivedacomprehensiveinduction,
tailoredtoreflecttheirexperienceand
positionasExecutiveandNon-executive
Directorsrespectively.
PriortohisappointmentasGroupChief
RiskOfficer,MrTurnerwasalong-serving
memberofthePrudentialseniorexecutive
team,havingmostrecentlyservedas
DirectorofGroupFinance.Asaresult
ofhispriorroles,MrTurnerwasaregular
attendeeofmeetingsoftheRiskandAudit
Committeesandhasastrong
understandingofthebusinessandits
controlenvironment.Thereforehis
inductionwasspecificallytailoredtocover
thestrategicandoperationalprioritiesof
theGroupRiskfunctionandhisroleasa
memberoftheBoard,includinghis
regulatoryobligations.
AsummaryofthegeneralandspecificinductionprogrammeforMrsWicker-Miurinissetoutbelow:
General induction programme
relevant to new Non-executive Directors
Understanding our governance
Understanding our business
— MeetingswiththeChairmanandGroup
— Tailoredbriefingswitheachbusinessunitto
ChiefExecutiveseparately
— ExplanationoftheGroup’sstrategyand
businessplan
— ExplanationofPrudential’scorporate
structure,BoardandExecutiveCommittee
structure
— BriefingsonGroupgovernanceframework
andkeypolicies
— Trainingasneededontherulesand
governancerequirementsoftheLondonand
HongKongStockExchangesandonfulfilling
thestatutorydutiesofaDirector
gainacomprehensiveunderstandingofeach
oftheirbusinessmodels,productsuites,
pricingarrangementsandgovernance
structures
— TailoredmeetingswithallGroupfunctions
— Comprehensivebriefingsontheregulatory
environmentinwhichtheGroupoperates
— Briefingsontoprisksandinternalcontrols
— Inductionbriefingsandtrainingasawhole
giveDirectorsanunderstandingofthe
interestsoftheGroup’skeystakeholders
Role-specific induction programme
for Fields Wicker-Miurin
— Orientationtotheworkand
roleoftheRemuneration
Committee
— UpdatesoncurrentUK
remunerationtopics
— MeetingwiththeChair
oftheRemuneration
Committeetodiscuss
theannualcycleof
Committeework,itscurrent
focusandfocusfor2019
andbeyond
MrFalconhascommencedacomprehensiveinductionprogrammefollowinghisappointmenttotheBoardwitheffectfrom7January2019.
Continuing development of
knowledge and skills
During2018,theBoardanditsCommittees
receivedanumberoftechnicalandbusiness
updatesaspartoftheirscheduledmeetings,
providinginformationonexternal
developmentsrelevanttotheGroupandon
particularproductsoroperations.Belowis
anoverviewofhowDirectorsarekept
uptodate:
— TheBoardholdsanannualstrategy
session,whichallowsfordetailed
updatesoneachofthebusinessunits
anddeepdivesonstrategicdirection
andobjectivesfortheGroup;
— TheBoardreceivesupdatesonbrand,
diversityandinclusion,healthandsafety
mattersandcorporateresponsibility
activities,usuallyonceayear;
— TheBoardreceivesupdatesoncorporate
governance,politicalandregulatory
developments,andthedynamicsof
equityandcurrencymarketsatevery
scheduledmeeting;
— Over2018,theBoardreceivedtwo
specificupdatesontheimpactofthe
FRC’srevisedcorporategovernance
codehighlightingkeythemesandactions
fortheGroup;
— InOctober2018,theGrouprana
focusedcybersecurityupdatefor
membersoftheRiskandAudit
Committees,whichwasparticularly
aimedatdevelopingtheknowledge
oftheNon-executiveDirectors;
— InOctober2018,theBoardalsoreceived
anupdateaboutdevelopments
surroundingEnvironmental,Socialand
Governance(ESG)reporting,including
climaterelatedrisk;
— TheBoardreviewseachbusinessunitin
depthatleastonceayearandconducts
periodicsitevisitsaspartofthis.In2018,
theBoardmetinSingaporeand
Washington,DC,USA.Detailsofthe
activitiesundertakenonthesevisitsare
setoutintheboxonpage100;
— TheBoardandtheRiskCommittee
receiveregularupdatesonmarket
developmentsandkeyrisks,including
SolvencyIIandcyberrisk.TheRisk
Committeereviewstoprisksonan
annualbasisanddeepdivesintospecific
topicsinresponsetotheidentificationof
keyrisks.Thisreviewcoversthefinancial,
operationalandstrategicrisks,whilstalso
identifyingandaddressingbusiness
environmentandinsuranceriskswithin
theGroup.Theidentificationofsuch
risksinformtheriskreportingprovided
totheCommitteeandtheBoard;
— TheRiskCommitteereceivedupdates
andtrainingonmattersincludingGeneral
DataProtectionRegulation,reputational
risksandLIBORdiscontinuationover
theyear;
— TheAuditCommitteereceivedupdates
ondevelopmentsaffectingfinancial
reportingandtheworkofaudit
committeesgenerally.In2018,this
includedfinancialreporting
developments,anti-moneylaundering,
anti-briberyandcorruption,fraud
prevention,whistleblowingandcyber
risktraining;and
— TheRemunerationCommitteereceives
updatesonregulatoryandgovernance
developmentsaffectingtheGroup’s
remunerationarrangements.In2018,
theseincludedtrendswiththeinsurance
industryandpeers,trendsfromthe2018
AnnualGeneralMeetingseason,
CorporateGovernancereformincluding
remunerationandgenderpaygap
reporting.
AllDirectorshavetheopportunitytodiscuss
theirindividualdevelopmentneedsaspart
oftheannualBoardeffectivenessreview
andDirectorsareaskedtoprovidearecord
oftrainingreceivedexternallyonanannual
basis.AllDirectorshavetherighttoobtain
professionaladviceatPrudential’sexpense.
104 Prudential plc AnnualReport2018
www.prudential.co.uk
Further information on Directors
Information on a number of regulations and processes relevant to Directors, and how these are addressed by Prudential,
is given below.
Area
Prudential’s approach
Rules governing
appointment
and removal
— TheappointmentandremovalofDirectorsisgovernedbytheprovisionsintheArticlesofAssociation(the
Articles),theUKCode,theHKCode(asappendedtotheHongKongListingRules(theHKListingRules))
andtheCompaniesAct2006.
‘Senior
management’
definition
Terms of
appointment
— TheExecutiveDirectorsaretheseniormanagementpopulationforthepurposesoftheHongKongListingRules.
— Non-executiveDirectortenureisshownonpage160.
— Non-executiveDirectorsareappointedforaninitialtermofthreeyears,commencingwiththeirelectionby
shareholders.From2019,Directors’tenurecommencesfromthedateoftheirinitialappointmenttotheBoard.
— SubjecttoreviewbytheNomination&GovernanceCommitteeandre-electionbyshareholders,itwouldbe
expectedthatNon-executiveDirectorsserveasecondtermofthreeyears.Aftersixyears,Non-executive
Directorsmaybeappointedforafurtheryear,uptoamaximumofthreeyearsintotal.Reappointmentissubject
torigorousreviewaswellasre-electionbyshareholders.
— TheDirectors’remunerationreportsetsoutthetermsoftheNon-executiveDirectors’lettersofappointment
onpage141andthetermsofExecutiveDirectors’servicecontractsonpage160.
Time
commitment
— Atpresent,thetimecommitmentexpectedofaNon-executiveDirectorisapproximately32.5daysperannum.
— AllNon-executiveDirectorscurrentlyserveonatleastoneoftheBoard’sprincipalCommittees,whichrequires
anadditionalcommitmentoftimedependentontheCommitteeandrole.
— Onappointment,allNon-executiveDirectorsconfirmtheyareabletodevotesufficienttimetotheGroup’saffairs
tomeetthedemandsoftherole.
— AllNon-executiveDirectorsarerequiredtodiscussanyadditionalcommitmentswhichmightimpactthetime
whichheorsheisabletodevotetotheirrolewiththeChairmanpriortoaccepting.
Independence
— TheindependenceoftheNon-executiveDirectorsisdeterminedbyreferencetotheUKCodeandHKListing
Rulesasfollows:
– ForthepurposesoftheUKCode,throughouttheyear,allNon-executiveDirectorswereconsideredbythe
Boardtobeindependentincharacterandjudgementandtohavemetthecriteriaforindependenceassetout
intheUKCode;and
– AlltheNon-executiveDirectorswereconsideredindependentforthepurposesoftheHKListingRules,and
eachNon-executiveDirectorprovidesanannualconfirmationofhisorherindependenceasrequiredunder
theHKListingRules.
— InaccordancewithUSregulatoryrequirements,PrudentialaffirmsannuallythatallmembersoftheAudit
CommitteeareindependentwithinthemeaningoftheSarbanes-Oxleylegislation.
— PrudentialisoneoftheUK’slargestinstitutionalinvestors.TheBoarddoesnotbelievethatthiscompromisesthe
independenceofthoseNon-executiveDirectorswhoareontheboardsofcompaniesinwhichtheGrouphasa
shareholding.TheBoardalsobelievesthatsuchshareholdingsshouldnotprecludetheCompanyfromhavingthe
mostappropriateandhighestcalibreNon-executiveDirectors.
— TheBoardandNomination&GovernanceCommitteeinparticularconsideredindependenceoftheChairman
andMrDaviesbeforeproposingthemforre-election,giventhatbothwillhaveservedontheBoardfornineyears
atOctober2019.AfullexplanationofindependenceconsiderationsissetoutintheNomination&Governance
CommitteeReport.
Audit
Committee
experience
— InrelationtotheprovisionsoftheUKCodeandHKListingRules,theBoardissatisfiedthatMrLawhasrecentand
relevantfinancialexperienceandthattheCommitteeasawholehascompetencerelevanttothesectorsinwhich
thebusinessoperates.FullbiographiesoftheCommitteemembersincludingexperienceandprofessional
qualifications,aresetoutonpages92to94.
— TheBoardhasdeterminedthatMrLawqualifiesastheAuditCommitteefinancialexpertundertherequirements
ofForm20-F.
www.prudential.co.uk
AnnualReport2018 Prudential plc 105
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Area
Prudential’s approach
Indemnities
— SubjecttotheprovisionsoftheCompaniesAct2006,theCompany’sArticlespermittheDirectorsandofficersof
theCompanytobeindemnifiedinrespectofliabilitiesincurredasaresultoftheiroffice.
— Suitableinsurancecoverisinplaceinrespectoflegalactionagainstdirectorsandseniormanagersofcompanies
withintheGroup.
— Qualifyingthird-partyindemnityprovisionsarealsoavailableforthebenefitoftheDirectorsoftheCompanyand
certainothersuchpersons,includingcertaindirectorsofothercompanieswithintheGroup.
— Qualifyingpensionschemeindemnityprovisionsarealsoinplaceforthebenefitofcertainpensiontrustee
directorswithintheGroup.
— Theseindemnitieswereinforceduring2018andremainso.
Significant
contracts
— AtnotimeduringtheyeardidanyDirectorholdamaterialinterestinanycontractofsignificancewiththe
Companyoranysubsidiaryundertaking.
106 Prudential plc AnnualReport2018
www.prudential.co.uk
How we operate continued Risk management and internal control
Risk management
AkeycomponentoftheManualisthe
GroupRiskFramework,whichrequires
allbusinessunitstoestablishprocesses
foridentifying,evaluatingandmanaging
therisksfacingthebusiness.
TheBoarddeterminesthenatureand
extentoftheprincipalrisksitiswillingto
takeinachievingitsstrategicobjectives.
IthasdelegatedauthoritytotheRisk
CommitteetoassisttheBoardinproviding
leadership,directionandoversightofthe
Group’soverallriskappetite,risktolerance
andstrategy,overseeingandadvising
onthecurrentandpotentialfuturerisk
exposuresoftheGroup,reviewingand
approvingtheGroup’sriskmanagement
framework,includingchangestorisklimits
withintheoverallBoardapprovedrisk
appetite,monitoringtheeffectiveness
oftheriskmanagementframeworkand
adherencetothevariousriskpolicies.
Regularactivitiesaredetailedinthe
reportonpages124to127.
TheGroup’sriskgovernance
arrangements,whichsupporttheBoard,
theRiskCommitteeandtheAudit
Committee,arebasedontheprinciples
ofthe‘threelinesofdefence’model:
risktakingandmanagement,riskcontrol
andoversight,andindependentassurance.
First line of defence
(risk taking and management)
— Takesandmanagesriskexposures
inaccordancewiththeriskappetite,
mandateandlimitssetbytheBoard;
— Identifiesandreportstherisksthat
theGroupisexposedto,andthose
thatareemerging;
— Promptlyescalatesanylimitbreaches
oranyviolationsofriskmanagement
policies,mandatesorinstructions;
— Identifiesandpromptlyescalates
significantemergingriskissues;and
— Managesthebusinesstoensurefull
compliancewiththeGrouprisk
managementframeworkassetoutin
theManual,whichincludestheGroup
RiskFrameworkandriskpoliciesaswell
asapprovalrequirements,amongother
requirements.
Second line of defence
(risk control and oversight)
— AssiststheBoardtoformulateandthen
implementtheapprovedriskappetite
andlimitframework,riskmanagement
plans,riskpolicies,riskreportingand
riskidentificationprocesses;and
— Reviewsandassessestherisk-taking
activitiesofthefirstlineofdefence,
whereappropriatechallengingthe
actionsbeingtakentomanageand
controlrisksandapprovingany
significantchangestothecontrols
inplace.
Third line of defence
(independent assurance)
— Providesindependentassurance
onthedesign,effectivenessand
implementationoftheoverallsystem
ofinternalcontrol,includingrisk
managementandcompliance.
Formal review of controls
Aformalevaluationofthesystemsof
internalcontrolandriskmanagement
iscarriedoutatleastannually.Priorto
theBoardreachingaconclusiononthe
effectivenessofthesystemsinplace,the
fullreportisconsideredbytheDisclosure
CommitteeandAuditCommittee,with
risk-specificdisclosureswithinthereport
alsoreviewedbytheRiskCommittee.
Thisevaluationtakesplacepriortothe
publicationoftheAnnualReport.
Aspartoftheevaluation,thechief
executiveandchieffinancialofficer
ofeachbusinessunit,includingGroup
HeadOffice,certifycompliancewith
theGroup’sgovernancepoliciesand
theriskmanagementandinternalcontrol
requirements.TheGroupRiskfunction
facilitatesareviewofthemattersidentified
bythiscertificationprocess.Thisincludes
theassessmentofanyriskandcontrol
issuesreportedduringtheyear,riskand
controlmattersidentifiedandreportedby
theotherGroupoversightfunctionsand
thefindingsfromthereviewsundertaken
byGroup-wideInternalAudit,which
carriesoutrisk-basedauditplansacross
theGroup.Issuesarisingfromanyexternal
regulatoryengagementarealsotaken
intoaccount.
TheBoardisresponsibleforensuringthat
anappropriateandeffectivesystemof
internalcontrolandriskmanagementis
inplaceacrosstheGroup.Theframework
ofriskmanagementandinternalcontrols
centresoncleardelegatedauthoritiesto
ensureBoardoversightandcontrolof
importantdecisions.Theframeworkis
underpinnedbytheGroupCodeof
BusinessConduct,whichsetsoutthe
ethicalstandardstheBoardrequiresof
itself,employees,agentsandothers
workingintheGroup.Theframeworkis
designedtomanageratherthaneliminate
theriskoffailuretoachievebusiness
objectives,andcanonlyprovide
reasonableandnotabsoluteassurance
againstmaterialmisstatementorloss.
Internal control
TheGroupGovernanceManual
(theManual)setsoutdelegatedauthorities
andestablishestherequirementsfor
subsidiariestoseekapprovalsfromor
reporttoGroupHeadOffice.Group-wide
standardsareestablishedthroughpolicies
andothergovernancearrangements.
Thesepoliciesarealsoincludedwithinthe
Manual.Internalcontrolsandprocesses,
basedontheprovisionsestablishedinthe
Manual,areinplaceacrosstheGroup.
Theseincludecontrolscoveringthe
preparationoffinancialreporting.The
operationofthesecontrolsandprocesses
facilitatesthepreparationofreliable
financialreportingandthepreparationof
localandconsolidatedfinancialstatements
inaccordancewiththeapplicable
accountingstandards,andrequirements
oftheSarbanes-OxleyAct.Thesecontrols
includecertificationsbythechiefexecutive
andchieffinancialofficerofeachbusiness
unitwithrespecttotheaccuracyof
informationprovidedforuseinpreparation
oftheGroup’sconsolidatedfinancial
reporting,andtheassuranceworkcarried
outinrespectofUSreportingrequirements.
TheBoardhasdelegatedauthoritytothe
AuditCommitteetoreviewtheframework
andeffectivenessoftheGroup’ssystems
ofinternalcontrol.TheAuditCommittee
issupportedinthisresponsibilitybythe
assuranceworkcarriedoutbyGroup-wide
InternalAuditandtheworkofthebusiness
unitauditcommittees,whichoverseethe
effectivenessofcontrolsineachrespective
businessunit.DetailsofhowtheAudit
Committeeoverseestheframeworkof
controlsandtheireffectivenessonan
ongoingbasis,issetoutmorefullyinthe
reportonpages115to123.
www.prudential.co.uk
AnnualReport2018 Prudential plc 107
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Board
Board
Nomination
& Governance
Committee
Remuneration
Committee
Risk
Committee
Audit
Committee
Executives
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Chief Executive
Committee
Group
Chief Executive
Group Executive
Committee
Group Asset
and Liability
Committee
Balance Sheet &
Capital Management
Committee
Chief
Financial
Officer
Management
Group
Regulatory
Director
Group
Chief Risk
Officer
Group Executive
Risk Committee
Sub-committees
Group
Finance
Group
Compliance
Chief Security
Information
Office
Group
Security
Group
Risk
Group-wide
Internal Audit
Board-levelcommittees
Executivepersonnel
Exec/Managementcommittees
GHOfunctions
Directreportingline
Regularcommunicationandescalation
Forthepurposesoftheeffectiveness
review,theGrouphasfollowedtheFRC
GuidanceonRiskManagement,Internal
ControlandRelatedFinancialandBusiness
Reporting.Inlinewiththisguidance,
thecertificationprovidedabovedoes
notapplytocertainmaterialjointventures
wheretheGroupdoesnotexercise
fullmanagementcontrol.Inthesecases,
theGroupsatisfiesitselfthatsuitable
governanceandriskmanagement
arrangementsareinplacetoprotectthe
Group’sinterests.However,therelevant
Groupcompanywhichispartytothejoint
venturemust,inrespectofanyservices
itprovidesinsupportofthejointventure,
complywiththerequirementsofthe
Group’sinternalgovernanceframework.
Effectiveness of controls
InaccordancewithprovisionC.2.3ofthe
UKCodeandprovisionsC.2.1andC.2.2
oftheHKCode,theBoardreviewedthe
effectivenessandperformanceofthe
systemofriskmanagementandinternal
controlduring2018.Thisreviewcovered
allmaterialcontrols,includingfinancial,
operationalandcompliancecontrols,
riskmanagementsystems,budgetsandthe
adequacyoftheresources,qualifications,
experienceofstaffoftheGroup’s
accounting,internalauditandfinancial
reportingfunctions.Thereviewidentified
anumberofareasforimprovement,
particularlyinrespectofthegeneralIT
controlenvironment,andthenecessary
actionsthathavebeenorarebeingtaken.
TheAuditCommitteesatGroupand
subsidiarylevelcollectivelymonitor
outstandingactionsregularlyandensure
sufficientresourceandfocusisinplace
toresolvethemwithinareasonable
timeframe.
TheBoardconfirmsthatthereisanongoing
processforidentifying,evaluatingand
managingthesignificantrisksfacedbythe
Group,whichhasbeeninplacethroughout
theperiodanduptothedateofthisreport,
andconfirmsthatthesystemremains
effective.
108 Prudential plc AnnualReport2018
www.prudential.co.uk
Committee reports
The principal Board Committees are the Nomination & Governance,
Audit, Risk and Remuneration Committees. These Committees form
a key element of the Group governance framework, providing effective
independent oversight of the Group’s activities by the Non-executive
Directors. Each Committee Chair provides an update to the Board
on the matters covered at each Committee meeting, supported by
a short written summary.
Nomination & Governance
Committee report
Dear Shareholder
Thisreporthighlightssomeofthekeyareas
offocusconsideredbytheCommittee
during2018.
Ongoing succession planning
TheCommittee’smainroleisensuringthat
theBoardretainsanappropriatebalance
ofskillstosupportthestrategicobjectives
oftheGroupandmaintainsarigorousand
transparentapproachtotheappointment
ofDirectors.
In2018wewelcomedtwoDirectorsto
theBoard.MrTurnerwasappointedasan
ExecutiveDirectorandGroupChiefRisk
OfficerinMarch,aninternalappointment
tosucceedPennyJames.
AnewNon-executiveDirector,
MrsWicker-Miurin,wasappointedin
Septemberfollowinganextensivesearch.
FullbiographicaldetailsforbothMrTurner
andMrsWicker-Miurincanbefoundon
pages90and94.
Followingtheyearend,wealsowelcomed
MrFalcontotheBoardinJanuary2019
followingMrStowe’sretirementas
ChairmanandChiefExecutiveofour
NorthAmericanBusinessUnit.
Weviewsuccessionasongoing–
ourplanningforbothExecutiveand
Non-executiverolesincludesemergency
coveraswellaslonger-termoptions.
Demerger
Asignificantpartofoursuccessionplanning
thisyearwasfocusedondeterminingthe
bestmixofskillsfortheBoardforpost
demerger.
ThenewstructureoftheBoardwillinclude
MrWells,MrFitzPatrickandMrTurneras
ExecutiveDirectors.Wetookthedecision
thatourbusinessunitchiefexecutives
wouldstepdownfromtheirBoardroles
althoughtheywillcontinuetoattend
relevantpartsofBoardmeetings.Weare
makingthatchangetoourBoardfromthe
AnnualGeneralMeetingthisyear,and
accordinglyMrFalcon,MrNicandrouand
MrFoleywillnotstandforelectionor
re-electioninMay2019.
Sincetheannouncementofourintention
todemergeM&GPrudential,theCommittee
hashadtooverseesomeelementsof
establishingtheM&GPrudentialboard.The
Committeeinterviewedandrecommended,
withtheinputoftheM&GPrudentialchief
executive,theappointmentofMikeEvans
totheM&GPrudentialboard,anddetails
wereannouncedon1October.The
CommitteehasassistedMikeEvansinthe
searchforsuitablenon-executivestojoin
theM&GPrudentialboard.
TheCommitteealsoconsideredsuccession
planninginrespectofmyroleasChairman
oftheBoard.Aseparatepartofthissection
providesanupdatefromPhilipRemnant,
ourSeniorIndependentDirectoron
thismatter.
Diversity
Althoughimprovinggenderdiversityat
Boardlevelhasreceivedagreatdealof
theCommittee’sattention,thisremains
achallengeandonewhichtheCommittee
isfocusingon.Genderdiversityisan
importantfactorinidentifyingcandidates
forBoardlevelsuccessionandthereis
moreworktobedoneacrossbuilding
ourinternalpipeline,ensuringexternal
recruitmentisproducingadiversepool
andappointingatBoardlevel.
TheCommittee’stermsofreferencewere
updatedtoformaliseitsroleindeveloping
adiversepipelineandexpandingitsrole
inreviewingandmonitoringdiversity
initiativesacrosstheGroupasawhole.
Paul Manduca
Chair of the Nomination &
Governance Committee
Committee members
— PaulManduca(Chair)
— HowardDavies
— DavidLaw
— AnthonyNightingale
— PhilipRemnant
Regular attendees
— GroupChiefExecutive
— GroupHumanResourcesDirector
— GroupGeneralCounseland
CompanySecretary
Number of meetings in 2018:
Three.
www.prudential.co.uk
AnnualReport2018 Prudential plc 109
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Committee governance
Followingthepublicationoftherevised
UKCorporateGovernanceCodein
July2018theCommitteereviewedand
recommendedanumberofamendments
toitstermsofreferenceinordertoalign
themwiththenewCodeandevolving
governancebestpractice.
TheCommitteealsoconducteditsusual
reviewsofgovernancearrangementsofthe
Group’sMaterialSubsidiaries,including
thereviewofperformanceofeachMaterial
Subsidiaryboard,theirtermsofreference
andthereviewoftheongoingappointments
oftheindependentnon-executive
directorsandchairsofthoseboards.
AsChairoftheCommittee,Ihave
responsibilityforensuringtheCommittee
operateseffectively.Inordertoenable
theCommitteetoprovideconstructive
challengetomanagement,Iencourage
opendebateandcontributionsfromall
Committeemembers.
AspartoftheBoard’seffectivenessreview,
describedinmoredetailonpages99and
100,theCommitteewasfoundtobe
operatingeffectively.
How the Committee spent its time during 2018
Year end matters, re-election and tenure
Reviewexternalpositions,conflictsofinterestsandindependence,timecommitment,tenureandterms
ofappointment
ReviewperformanceofChairmanandNon-executiveDirectors
ReviewrelevantdisclosuresintheAnnualReportandAccounts
RecommendelectionofDirectorsbyshareholders
Succession planning, diversity and appointments
Chairman
Non-executiveDirectors
GroupChiefExecutive
ExecutiveDirectors
GroupExecutiveCommitteecomposition
Governance
MembershipreviewofprincipalBoardCommittees
Committeetermsofreference
Demergergovernancearrangements
Groupgovernanceframework
Material Subsidiary governance
Subsidiaryboardcomposition,non-executivesuccessionplanningandappointments
TermsofreferenceforMaterialSubsidiaryboards,chairsandcommittees
MaterialSubsidiarygovernancemanual
MaterialSubsidiaryboard,chairanddirectorevaluations
AppointmentofM&GPrudentialchair(notaMaterialSubsidiary)
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110 Prudential plc AnnualReport2018
www.prudential.co.uk
Report from Philip Remnant, Senior Independent Director
Philip Remnant
Senior Independent Director
Successionplanningfortheroleof
ChairmanoftheBoard,onwhichIlead,
isconsideredbytheCommitteeona
regularbasis.Wereviewthenecessary
skillsandexperiencerequiredforthe
effectiveleadershipoftheBoardofan
internationalfinancialservicesgroup.
Thisyear,wealsohadtoconsidertwo
majorchanges:therevisedUKCode
which,underthecomplyorexplain
principle,setsoutthatthetenureof
thechairmanofalistedcompany
shouldbenomorethannineyears
fromfirstappointmenttotheboard,
andourdemerger.
MrManduca’sappointmenttothe
BoardwasinOctober2010,meaning
theCodewouldprescribehisretirement
inOctober2019.
Atatimeofsubstantialchangeforthe
Group,theBoardconsidersthatitwould
bedisruptiveforMrManducatostand
downduringthedemergerprocess.
TheBoardbelievesthatshareholderswill
benefitfromacommittedandengaged
ChairmantoleadtheGroupthroughthe
transactionandtoremaininroleforsome
periodoftimethereaftertoensure
continuingstronggovernanceinthe
PrudentialGrouppost-demerger.Itis
currentlyintendedthatMrManduca
wouldstanddownasChairmaninMay
2021,subjecttoannualre-electionupto
thatdate.
Wearethereforeproposingthat
MrManducastandforelectionas
Chairmanatourforthcoming2019
AnnualGeneralMeeting.
Beforetakingthisdecision,weconsulted
withanumberofourinvestorsto
obtaintheirviewsandtakethem
intoaccountinourdecision-making.
Shareholdersrespondedpositivelyto
thespecificengagementonthistopic
andweresupportiveofMrManduca’s
extendedtenure.
Theprocessforidentifyingcandidates
tosucceedMrManducawillcommence
in2020,Iwillleadthisprocess,assisted
bytheCommittee.
Key matters considered during the year
Matter considered
How the Committee addressed the matter
Succession planning
Boardcomposition
Throughouttheyear,theCommitteekeptsuccessionplansforallExecutiveandNon-executive
Boardrolesunderreview.
SuccessionplansaresupportedbytheyearendBoardevaluationandindividualperformance
evaluationswhichhelpinformtheCommittee’srecommendations.
TheCommitteetakesaccountofthesize,structureandcompositionoftheBoardandits
Committees,includingexistingknowledge,experienceanddiversity.Indoingso,theCommittee
considerstheGroup’sstrategicneedsandanticipatesfutureneeds,skillsandexperience.
TheCommitteeisinvolvedfromthestartwhenavacancyoragapintheBoard’sskillsisidentified.
LedbytheChairman,andworkingwiththeGroupChiefExecutiveandHumanResourcesDirector,
arolespecificationisprepared.ThiswilltakeintoaccountfeedbackfromtheCommitteeandthe
Group’sDiversityandInclusionPolicy.Oncethespecificationisagreed,specialisttalentagenciesare
typicallyengagedtocreateashortlistofcandidateswhichisreviewedbytheCommitteeandother
stakeholders.InterviewswithindividualsthentakeplacewithselectedCommitteemembersand
feedbackisprovidedtoallmembers.Inthismanner,apreferredcandidateisselectedandthe
CommitteethenrecommendstheindividualtotheBoardforappointment(subjecttoregulatory
approvalwhererequired).
Contemporaneouslywiththisprocess,duediligencechecksareundertakenonthecandidateand
Prudentialliaiseswiththerelevantregulatoryauthoritiesforanyapprovalsneeded.TheCommittee
iskeptupdatedonthisprocessasnecessary.
Thisyear,theCommitteehasconsideredBoardcompositionandsuccessionplanninginthecontext
ofthedecisiontodemergeM&GPrudentialfromthePrudentialGroup,andtookthedecisionin
February2019torecommendthatthecurrentchiefexecutivesofthebusinessunitswouldstep
downattheforthcomingAnnualGeneralMeeting.TheBoardwasinunanimousagreementthat
underthepost-demergerstructure,effectiveoversightofthebusinessunitscanbemaintained
withoutthebusinessunitchiefexecutivesbeingplcBoardmembers.
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AnnualReport2018 Prudential plc 111
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Committee reports continued
Key matters considered during the year continued
Matter considered
How the Committee addressed the matter
Non-executiveDirectors
Duringtheyear,theCommitteefinalisedtheappointmentofMrsWicker-MiurinasaNon-executive
Director.TheCommitteewassupportedinthesearchforcandidatesbytheMilesPartnership.
ThenumberofNon-executiveDirectorsrequiredontheBoardisconsideredonaregularbasis,
andthisyearparticularlyinthecontextofthesmallerGrouppost-demerger.
TheCommitteeusesaregularlyrefreshedskillsmapforNon-executivesuccessionplanning.
Theskillsmapidentifiesskillsandexperiencebysector,geographyandtechnicalskills,whichare
desirablefortheBoardasawhole,takingaccounttheGroup’sstrategicdirection.
FullbiographicaldetailsofeachNon-executiveDirector,includingasummaryoftheskillsand
experienceattributabletothemwhichhavebeenidentifiedasimportanttotheGroup’slong-term
sustainablesuccess,aresetoutonpages92to94.
ExecutiveDirectorsand
seniorexecutives
TheCommitteecarriedoutitsannualreviewofthesuccessionplansinplacefortheGroupChief
Executive,otherExecutiveDirectorsandGroupExecutiveCommittee(GEC)roles.
Useofsearchconsultancies
ElectionofDirectors
TheCommitteedirectedthedevelopmentandrenewaloftheseplansthroughtheGroupHR
Director,supportedbyEgonZehnderinthecaseoftheGroupChiefExecutiveplanandbyTalent
IntelligencefortheotherExecutiveDirectorrolesandGECmembers.In2017,TalentIntelligence
preparedlong-listsandshort-listswithafocusongenderandethnicdiversityrequirements.
TheCommitteehasoversightofseniorexecutivelevelsuccessionplanningandthetalentpipeline.
TheCommitteediscussedtheseplanscloselywiththeGroupChiefExecutivetoidentifybusiness
requirementsandplanforfuturesuccessionneedsandgavefeedbackontheplanningprocess.
TheCompanyannouncedon12October2018thatMrStowewouldretireasChairmanandChief
ExecutiveoftheNorthAmericanBusinessUnitwitheffectfrom31December2018.MrStowe
wassucceededinthisrolebyMrFalcon,whojoinedtheBoardon7January2019.MrFalcon’s
appointmentwasconsideredinJune2018followingacomprehensivesearch,ledbyKornFerry,
withsupportfromSpencerStuart.TheCommitteeconsideredcandidateprofilesandskillsand
conductedinterviewsbeforeagreeingtorecommendMrFalcon’sappointmenttotheBoard.
FullbiographicaldetailsforMrFalconcanbefoundonpage90.
TheMilesPartnershipdoesnothaveanyadditionalconnectionwithPrudential.Inadditiontoacting
assearchconsultantforcertainexecutivehires,EgonZehnderalsoprovidessupportforsenior
developmentassessments.TalentIntelligencealsoprovidesadditionalsuccessionplanningsupport
totheGroupbelowGEClevel.
AspartofitsongoingworkonBoardsuccessionplanning,theCommitteeconsideredtheongoing
appointmentoftheChairman,CommitteeChairsandNon-executiveDirectors,takingintoaccount
timecommitmentandthegeneralbalanceofskills,diversity,experienceandknowledgeonthe
Boardandassessinglengthofserviceintheirroles.
Particularattentionhasbeenpaidtotherecommendationtore-electMrNargolwalaandSirHoward
DaviesattheAnnualGeneralMeetingtobeheldin2019duetotheirlengthofservice.InMrDavies’
case,electionatthe2019AnnualGeneralMeetingwilltakehimthroughtheCode-prescribednine
yearsfromdateofappointment.TheBoarddoesnotconsiderthatMrDavies’independencewillbe
impactedbyhistenureextendingforsixmonthsbeyondthenine-yearanniversary.
WhenmakingrecommendationsforDirectorstostandforelectionattheAnnualGeneralMeeting,
theCommitteeconsidersindividualDirectors’contributiontoPrudential’slong-termsuccessaswell
astheircommitmenttotheroleandotherexternalpositionsordirectorshipswhichmayimpacttheir
independenceoravailability.
HavingreviewedtheperformanceoftheNon-executiveDirectorsinofficeatthetime,andhaving
receivedfeedbackfromtheGroupChiefExecutiveontheperformanceoftheExecutiveDirectors,
theCommitteeconcludedthateachDirectorcontinuedtoperformeffectivelyandwasableto
devotesufficienttimetofulfiltheirduties.FollowingreviewoftheoutcomesoftheBoardevaluation
process,theGroupconsidersthattheNon-executiveDirectorscontinuedtoexhibitappropriate
behaviours,contributedeffectivelytodecision-makingandexercisedsoundindependent
judgementinholdingmanagementtoaccount.
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Key matters considered during the year continued
Matter considered
How the Committee addressed the matter
ElectionofDirectorscontinued
ThediversityoftheBoardincludingskillsandexperience,andthecontributionmadebyeach
DirectorissetoutintheindividualbiographiesofDirectorsonpages89to94.
Diversity
DiversityandInclusionPolicy
Boardandseniormanagement
Group-wide
TheCommitteerecommendedtotheBoardthoseDirectorsstandingforelectionattheCompany’s
AnnualGeneralMeeting.
TheGrouphasaDiversityandInclusionPolicythataimstoprovideequalopportunitiesforallwho
applyandwhoperformworkforourorganisation,includingtheExecutiveandNon-executive
Directors,irrespectiveofsex,race,age,ethnicorigin,educational,socialandculturalbackground,
maritalstatus,pregnancyandmaternity,civilpartnershipstatus,anygenderreassignment,religion
orbelief,sexualorientation,disability,orparttime/fixedtermwork.TheCommitteekeepsthisunder
reviewacrossallitsrecruitmentplanning.
GiventheglobalreachoftheGroup’soperations,itsbusinessstrategyandlong-termfocus,theBoard
makeseveryefforttoensureitisabletorecruitDirectorsfromdifferentbackgrounds,withdiverse
experience,perspectiveandskills.ThisdiversitynotonlycontributestowardsBoardeffectiveness
butisessentialforsuccessfullydeliveringthestrategyofaninternationalgroup.
TheBoardiscommittedtorecruitingthebestavailabletalentandappointingthemostsuitable
candidateforeachrole,whileatthesametimeaimingfor,appropriatediversityontheBoard.
InDecember2018theBoardapprovedchangestotheCommittee’stermsofreferencetoformalise
itsresponsibilityforoverseeingthedevelopmentofadiversepipelineforBoardandothersenior
executives.Thiswillincludeensuringthatplansarebasedonmeritagainstobjectivecriteriaand
promotediversityacrossgender,socialandethnicbackgroundandcognitiveandpersonal
strengths.
InthecaseofBoardappointments,theCommitteewillconsiderrelevantresultsoftheannualBoard
effectivenessevaluationandensuresuggestedenhancementstotheBoardareaddressed.
TheBoardconsidersthatitsdiversityofexperience,skillsetandprofessionalbackgroundhas
increasedasaresultofBoardlevelsuccessionin2018.
InDecember2018theBoardapprovedchangestotheCommittee’stermsofreferencetoinclude
responsibilityforperiodicallyreviewinganyobjectivesfortheimplementationofdiversityforthe
Groupasawholeandmonitoringtheimpactofdiversityinitiatives.
In2016theBoarddecidedtosigntheHMTreasuryWomeninFinanceCharter.In2018theGroup
achieveditscommitmenttohave27percentwomeninseniormanagementroles,ayearearlier
thanthetargetdateoftheendof2019.TheGroupcontinuestoworktowardsachievingatleast
30percentofwomeninseniormanagementbytheendof2021.
ThebusinessunitsalsoengagedinanumberoftargetedactivitiesinsupportoftheGroup’sDiversity
andInclusionPolicy,includingawarenesstrainingofunconsciousbias.
UpdatesonactivitiesrelatingtothediversityacrosstheGroupareprovidedtotheBoardperiodically.
TheGroup’sactivitiesinthisrespectaredescribedinourcorporateresponsibilityreviewonpages70
to86.
Governance
ReviewofprincipalCommittee
membership
TheCommitteeregularlyreviewsthemembershipofallprincipalCommitteesandmakes
recommendationstotheBoardasappropriate.RecommendationsonCommitteemembership
aretakenafterconsultationwiththeChairoftherelevantCommittee.
Independencecriteria
InMarch,theCommitteemadearecommendationthatMsSchroederjointheRiskCommittee,
andinOctober,thatMrWatjenjointheRiskCommittee.Theseappointmentsrefreshedexperience,
providedsuccessionoptionsandincreaseddiversityontheCommittee.
TheCommitteeconsideredtheindependenceoftheNon-executiveDirectorsagainstrelevant
requirementsasoutlinedonpage105,takingintoaccounttheamendedCodewhichrequires
nine-yeartenuretorunfromthetimeofappointmenttotheboardratherthanfirstelection
byshareholders.
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Key matters considered during the year continued
Matter considered
How the Committee addressed the matter
Conflictsofinterest
TheBoardconsideredinOctoberandDecember2018thenewCodeprovisionformalisingtheneed
forboardstoidentifyandmanageconflictsofinterest.TheBoardhasdelegatedauthoritytothe
Committeetoconsider,andauthorisewherenecessary,anyactualorpotentialconflictsofinterest.
PriortoproposingDirectorsforre-election,theCommitteeconsideredtheexternalappointments
ofallDirectorsandreviewedexistingconflictauthorisations,reaffirmingorupdatinganytermsor
conditionsattachedtoauthorisationswhererequired.
Inaddition,theCommitteeconsideredtheexternalpositionsofthoseDirectorsappointedduring
theyear,notedchangesintheexternalpositionsofexistingDirectorsandconsideredwhetherthese
gaverisetoanyconflicts.
TheBoardconsidersthattheproceduressetoutabovefordealingwithconflictsofinterest
operateeffectively.
Subsidiary governance
MaterialSubsidiaries
Duringtheyearunderreview,theCommitteecarriedoutvariousdutiesrelatedtotheMaterial
Subsidiaries:
M&GPrudential
— Successionplanningarrangementsfornon-executivedirectors;
— EvaluatingtheperformanceoftheMaterialSubsidiaryboards,chairsanddirectors;and
— ReviewingMaterialSubsidiarygovernancearrangements,includingprinciplesforattendance
atcommitteemeetings,andthetermsofreferencefortheMaterialSubsidiaryboardsandchairs.
On1October2018,theCompanyannouncedtheappointmentofMikeEvansaschairof
M&GPrudentialwithimmediateeffect.TheCommitteeconsideredandrecommendedthe
appointmentofMrEvansaschairoftheM&GPrudentialboard.
TheCommitteecontinuestobeinvolvedinsupportingMrEvansinM&GPrudentialboard
appointmentswhichareongoing.
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Demerger activities
In2018theCommitteeconsidereda
numberofkeyareasunderitsremitin
thecontextofthedemergerprocess
includingtheprogressinintegrating
thefinancefunctionsofM&Gand
PrudentialUK&Europeintoasingle
M&GPrudentialteamwithanappropriate
controlenvironmentandthecapabilities,
processesandsystemstosupportboththe
demergeractivityandthefutureambitions
oftheM&GPrudentialbusiness.
Internal audit
During2018theCommitteecontinued
toreceiveregularbriefingsfromthe
Group-wideInternalAudit(GwIA)
Director.GwIAundertookaprogrammeof
risk-basedauditscoveringmattersacross
thebusinessunitsinadditiontoassurance
workonsignificantchangeprogrammes.
Deliveryoftheinternalauditplanandthe
independentassuranceprovidedbyGwIA
representimportantcomponentsofthe
Committee’soversightoftheGroup’s
internalcontrolsprocedures.The
effectivenessofGwIAwasassessedduring
theyear,togetherwithareviewofprogress
againstsuggestedenhancements
identifiedbytheexternalreview
undertakenbyDeloittein2017.Imeet
regularlywiththeGwIADirectortodiscuss
theworkdoneandmattersarisingandthe
Committeealsoaskedthatmanagement
responsibleforrectifyingsomeofthe
issuesidentifiedtoattendtheCommittee
toensurethatappropriateactionwasbeing
taken.TheCommitteealsoapprovedthe
2019internalauditplanwhichtakes
accountofthebusinessandorganisational
changesarisingfromtheplanned
demerger.TheworkhighlightedGwIA’s
roleinsupportingthedemergerandthe
creationoftwoappropriatelysized,
resourcedandexperiencedindependent
internalauditfunctions.
Audit Committee report
Dear Shareholder
AsChairoftheAuditCommittee,
Iampleasedtopresentthisreporton
theCommittee’sactivitiesduring2018.
TheCommitteeprovidestheBoardwith
assuranceastotheintegrityoftheGroup’s
financialreportingand,togetherwith
theRiskCommittee,monitorsthe
effectivenessofthesecondandthirdlines
ofdefence,whichareanintegralpartof
ourinternalcontrolenvironment.
WithregardtotheGroup’sfinancial
reporting,theCommittee’sworkis
focusedonensuringappropriatefinancial
accountingpoliciesareadoptedand
implementedandonassessingkey
judgementsanddisclosures.The
introductionoffinancialaccounting
standardIFRS17,whichisnowanticipated
tocomeintoeffectin2022,willbea
significantchallengeandchangeandas
aconsequencetheCommitteereceived
updatesduring2018ontheGroup’s
progresstowardsitsimplementation.
External auditor
AnimportantpartoftheCommittee’s
workconsistsofoverseeingtheGroup’s
relationshipwithKPMGLLP(KPMG),
includingsafeguardingindependence,
approvingnon-auditfeesandsatisfying
itselfthatitisinthebestinterestsof
shareholderstorecommendthe
reappointmentofKPMG.Followingthe
publicationoftheFRC’sAuditQuality
InspectionreportforKPMGinJune2018,
IandtheGroupFinanceDirectormetwith
KPMG’sleadershipandtheCommittee
discussedtheactionstheirfirmistaking
toimprovequality.Wealsoreviewedthe
assessmentoftheauditofPrudentialand
introducedchangestoenhanceourauditor
effectivenessmonitoringprocess.
ItremainstheCommittee’scurrentview
that,withoutexceptionalcircumstances,
changetothecurrentauditorshouldnot
occurduringaperiodofsignificantchange
forPrudential.Itisthereforethe
Committee’sintentiontoappointanew
auditorforthe2023financialyear-end,
afterthefirstyearofimplementationofthe
newinsuranceaccountingstandard.Aplan
toidentifyKPMG’ssuccessortoensurea
smoothtransitionhasbeendeveloped.
FurtherexplanationoftheCommittee’s
approachissetoutinthisreport.
David Law
Chair of the Audit Committee
Committee members
— DavidLaw(Chair)
— HowardDavies
— PhilipRemnant
— AliceSchroeder
— LordTurner
Regular attendees
— ChairmanoftheBoard
— GroupChiefExecutive
— ChiefFinancialOfficer
— GroupChiefRiskOfficer
— DirectorofGroupFinance
— DirectorofGroupFinancial
Accounting&Reporting
— GroupRegulatoryandGovernment
RelationsDirector
— GroupGeneralCounseland
CompanySecretary
— DirectorofGroupCompliance
— DirectorofGroup-wide
InternalAudit
— ExternalAuditPartner
Number of meetings in 2018:
Nine.(Inaddition,ajointmeetingwas
heldwiththeRiskCommittee)
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AnnualReport2018 Prudential plc 115
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Compliance
TheCommitteereceivedupdateson
mattersarisingfromtheannualCompliance
Plan(thePlan)throughout2018.ThePlan
focusedonanumberofareastohelp
strengthenthecomplianceframework,
whichisintendedtoaidtheGroupin
meetingregulatoryobligations,including
monitoringcompliancewithkeyelements
ofthecomplianceframeworksuchas
conflictsofinterest,anti-moneylaundering
andanti-briberyandcorruptionpolicies.
TheCommitteealsoapprovedthe2019
CompliancePlaninthecontextofthe
proposeddemerger,andismonitoring
relevantaspectsoftheproposedtransition
ofPrudential’sleadregulatorfromthe
PrudentialRegulatoryAuthoritytothe
HongKongInsuranceAuthority(IA).
Committee governance
TheCommitteeworkscloselywiththeRisk
CommitteetomakesurebothCommittees
areupdatedandalignedonmattersof
commoninterest.Whereresponsibilities
areperceivedtooverlapbetweenthetwo
Committees,SirHowardandIagreethe
mostappropriateCommitteetoconsider
thematter.InOctober2018thetwo
Committeesheldajointsessiononcyber
security,includingupdatesonthe
Group-widecybersecuritystrategyand
informationsecurityprogramme,more
detailsofwhicharesetoutintheRisk
Committeereportonpages124and125.
How the Committee spent its time during 2018
Financial reporting and external auditor
Periodicfinancialreportingincluding:
— Fullandhalf-yearlyreportandaccounts
— Keyaccountingjudgementsanddisclosures,includingtax
— SolvencyIIresultsandgovernanceprocesses
— Associatedauditreports
Auditplanning,fees,independence,effectivenessandreappointment
Environmental,socialandgovernancereporting
Internal control framework
Internalcontrolframeworkincludingeffectiveness
Internal audit
Statusupdatesandeffectiveness
Internalauditplan
Compliance
Statusupdates
Complianceplan
Financial crime and whistleblowing
Financialcrimepreventionandwhistleblowing–regularupdates
Governance and reporting
MaterialSubsidiariesupdates
Internalgovernanceframeworkincludingeffectiveness
Businessunitauditcommitteeeffectivenessandtermsofreference
Committeetermsofreferenceandeffectiveness
Note
1 TwomeetingswereheldineachofMarchandOctober2018.
AsChairoftheCommittee,Ihave
responsibilityforensuringtheCommittee
operateseffectively.Inadvanceofeach
Committeemeeting,Ispeaktothechairsof
ourMaterialSubsidiaryauditcommittees
andreporttothefullBoardaftereach
Committeemeetingonthemainmatters
discussed.Wehavealsoheldprivate
sessionsasaCommitteetodiscuss
performanceandalsowiththeGroup’s
ResilienceDirectortodiscuss
whistleblowingcasesandtheirresolution
andhadprivatediscussionswithGwIA
andKPMG.Anannualreviewofour
effectivenesswascarriedoutaspartofthe
Boardevaluation,describedinmoredetail
onpage100.TheCommitteewasfoundto
befunctioningeffectively.
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Jul
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116 Prudential plc AnnualReport2018
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Key matters considered during the year
Matter considered
How the Committee addressed the matter
Financial reporting and tax
Overview
OneoftheCommittee’skeyresponsibilitiesistomonitortheintegrityofthefinancialstatements
andanyotherperiodicfinancialreporting.Duringthelastyear,itemsreviewedbytheCommittee
includedthe2017AnnualReportandAccounts,the2017SolvencyandFinancialConditionReport
andassociatedPillar3returnssubmittedtotheGroup’sregulator,the2017Environmental,Social
andGovernanceReport,the2017TaxStrategyReport,the2018HalfYearReportandAccounts,
andthekeyaccountingjudgementsforthe2018AnnualReport.
Inreviewingtheseandotheritems,theCommitteereceivedreportsfrommanagementand,as
appropriate,reportsfrominternalandexternalassuranceproviders,whichinsomecaseswere
providedattheexplicitrequestoftheCommittee.
WhenconsideringfinancialreportingtheCommitteeassessescompliancewithrelevantaccounting
standards,regulationsandgovernancecodes.During2018,theGroupadoptedIFRS15‘Revenue
fromcontractswithcustomers’and,asdescribedinnoteA2,thishadnomaterialeffectonthe
Group’sfinancialresults.TheCommitteealsoreviewedthepotentialimpactofaccountingstandards
thatareeffectiveinthefuture,includingIFRS16’Leases’andIFRS17‘InsuranceContracts’.The
approachtoadoptingthesestandardsisfurtherdiscussedinnoteA2.TheCommitteerequested
regularupdatesfrommanagementontheprogressagainstplansforimplementingIFRS17givenits
particularsignificance.
Thefollowingsectionssetoutthekeyassumptions,judgementsandothermattersconsidered
aspartoftheirreviewofthe2018AnnualReportandAccounts.
Keyassumptionsandjudgements TheCommitteereviewedthekeyassumptionsandjudgementsincludingthosemadeinvaluing
theGroup’sinvestments,insuranceliabilitiesanddeferredacquisitioncostsunderIFRS,together
withreportsontheoperationofinternalcontrolstoderivetheseamounts.Italsoreviewedthe
assumptionsunderpinningtheGroup’sEuropeanEmbeddedValue(EEV)metrics.
Assumption setting
ThemeasurementofinsuranceliabilitiesandEEVarebasedonestimatesoffuturecashflows,
includingthosetoandfrompolicyholders,overalongperiodoftime.Theseestimatescan,
dependingonthetypeofbusiness,behighlyjudgemental.TheCommitteeconsideredchanges
toassumptionsandotherestimatesusedtoderiveIFRSinsuranceliabilitiesandtheGroup’sEEV.
Peerbenchmarkingwasconsideredwhereavailable.Thekeyassumptionsreviewedwere:
— Persistency,mortality,morbidity(includinginrelationtomedicalinflation)andexpense
assumptionswithintheAsialifebusinesses;
— Policyholderbehaviourassumptions(includingmortality)affectingthemeasurementofJackson
guaranteedliabilities(seenoteC4.2(b)oftheIFRSfinancialstatementsandnote14totheEEV
basisresults);and
— Mortality,expenseandcreditriskassumptionsfortheUKannuitybusiness.Mortality
assumptionscontinuedtobeanareaoffocusgivenongoinganalysisofhistoricexperience,
(seenoteC4.1(d)totheIFRSfinancialstatements).
TheCommitteewassatisfiedthattheassumptionsadoptedbymanagementwereappropriate.
Furtherinformationontheeffectsofmaterialchangestoinsuranceassetsandliabilitiesisincluded
innoteB3totheIFRSfinancialstatementsandnote14oftheEEVbasisresults.
Goodwill and other intangible assets including deferred acquisition costs (DAC)
TheCommitteereceivedinformationtoenableittoreviewthemorematerialintangibleasset
balances.ThisincludedtherecoverabilityandamortisationoftheDACbalanceintheUSand
whethertherehadbeenanyindicationofimpairmentoftheGroup’sdistributionrightsassets.
TheCommitteewassatisfiedthattherewasnoimpairmentoftheGroup’sintangiblesat
31December2018.FurtherinformationiscontainedinnoteC5oftheIFRSfinancialstatements.
Investments
TheCommitteereceivedinformationonthecarryingvalueofinvestmentsintheGroup’sbalance
sheetincludingonthoseassetswhicharehardertovalueanddataontheapplicationoftheGroup’s
IndependentPriceVerificationpolicy.ThisdatashowedthatthemajorityoftheGroup’sassetswere
markedtomarketusingtwoindependentprices,reducingthelevelofjudgementappliedininvestment
valuation.FurtherinformationonthevaluationofassetsiscontainedinnoteC3oftheIFRSfinancial
statements.TheCommitteesatisfieditselfthatoverallinvestmentswerevaluedappropriately.
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Key matters considered during the year continued
Matter considered
How the Committee addressed the matter
Otherfinancialreportingmatters
andtaxreporting
Provisions
TheCommitteeregularlyreviewstheGroup’sprovisions,includingthelevelofprovisioningfor
regulatoryandlitigationmattersandprovisionsforcertainopentaxitemsincludingtaxmattersin
litigation.TheCommitteewassatisfiedthatthelevelofprovisioningadoptedbymanagementwas
appropriate.SeenoteC11oftheIFRSfinancialstatements.
Going concern and viability statements
TheCommitteeconsideredvariousanalysesfrommanagementregardingGroupandsubsidiary
capitalandliquiditypriortorecommendingtotheBoardthatitcouldconcludethatthefinancial
statementsshouldcontinuetobepreparedonthegoing-concernbasis(seepage128),andthatthe
disclosuresontheGroup’slonger-termviability(seepage68)werebothreasonableandappropriate.
TheCommitteeconsideredinformationontheriskstotheGroup’sliquidityandcapitalpositionas
wellastheimpactoftheproposeddemergerandthescenariosthatcouldariseaspartoftheUK’s
intendedwithdrawalfromtheEU.
Alternative performance measures
TheCommitteereviewedthealternativeperformancemeasurescontainedintheGroup’sStrategic
Report.ItconsideredtheconsistencywiththeprioryearandtheprominenceascomparedtoIFRS
measuresofperformance.
Fair, balanced and understandable requirement
TheCommitteecarriedoutaformalreviewofwhethertheAnnualReportandAccountswere‘fair,
balancedandunderstandable’asrequiredbytheUKCorporateGovernanceCode.Inparticular,
theyconsideredwhetherthereportgaveafullpictureoftheGroup’sperformanceintheyearwith
importantmessagesappropriatelyhighlighted,thelevelofconsistencybetweenfinancial
statementsandnarrativesectionsandwhetherperformancemeasureswereclearlyexplained.
Aftercompletionofitsdetailedreview,theCommitteewassatisfiedthat,takenasawhole,
theGroup’sAnnualReportandAccountswerefair,balancedandunderstandable.
FRC review of 2017 Annual Report and Accounts
AsanoutcomeoftheFRC’sregularoversightroleoncompanyreportingthroughitsreviewofthe
Group’s2017AnnualReportandAccounts,asmallnumberofdisclosureimprovementshavebeen
madeinthe2018financialstatementsofwhichthemostsignificantistodemonstratebetterthe
linkagebetweenmovementininsuranceandinvestmentcontractbalancesreportedintheincome
statementandthenotes(seenoteC4.1(a)(iii)).TheFRCnotesthatitsreviewwasbasedonthe
Group’s2017AnnualReportandAccountsonlyanddoesnotbenefitfromdetailedknowledge
oftheGroup’sbusinessoranunderstandingoftheunderlyingtransactions.
Parent company financial statements
TheCommitteereviewedtheparentcompanyprofitandlossaccountandbalancesheet,which
includedrecognitionofapensionsurplusasset,(seenote7oftheParentCompanyfinancial
statements).
External audit
Review of effectiveness, non-audit services and auditor reappointment
Externalauditeffectiveness
TheGroup’sexternalauditorisKPMGLLP(KPMG)andoversightoftherelationshipwiththemis
oneoftheCommittee’skeyresponsibilities.TheCommitteereviewstheeffectivenessoftheaudit
throughouttheyeartakingintoaccount:
— Thedetailedauditstrategyfortheyearandcoverageofthehighlightedrisks;
— Groupmaterialityandhowthatisappliedtotheindividualbusinessunits;
— Insightaroundthekeyaccountingjudgements,includingbenchmarking,andthewayKPMG
appliedconstructivechallengeandprofessionalscepticismindealingwithmanagement.The
CommitteeformallymetwiththeGroupLeadPartnerwithoutmanagementpresentonthree
occasionsoverthelastyear;
— Theoutcomeofmanagement’sinternalevaluationoftheauditorasdiscussedbelow;and
— OtherexternalevaluationsofKPMG,withafocusontheFRC’sAnnualQualityReview.
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Key matters considered during the year continued
Matter considered
How the Committee addressed the matter
Externalauditeffectiveness
continued
Auditorindependence
andobjectivity
Internal evaluation of KPMG
ThiswasconductedusingaquestionnairethatwascirculatedtotheCommitteemembers,Material
Subsidiaryauditcommitteemembers,theChiefFinancialOfficerandtheGroup’sseniorfinancial
leadershipforcompletion.Thesurveyasked24questionsoverfourcategories(teamperformance,
process,communicationandauditexecution)inrelationtothe2017audit.Thedegreeofchallenge
androbustnessofapproachtotheauditwerekeycomponentsoftheevaluation.
KPMGweregiventheopportunitytorespondtothefindingsinthereport.Asaresultofthereport
KPMGproposedenhancementstotheauditandteamandprogressagainstthesechangeswere
reportedtotheCommitteeinDecember.
FRC’s Annual Audit Quality Review of KPMG
DuringJune2018,theFRCpublishedtheprincipalfindingsarisingfromthe2017/18inspection
ofKPMGcarriedoutbyitsAuditQualityReviewteam.TheFRCnotedthattherehadbeena
deteriorationinqualityatKPMGanditwasplacingthefirmunderincreasedscrutiny.Theaudit
ofPrudentialplchadnotbeenreviewedbytheFRCaspartofthe2017/18inspection.
AsaresultoftheFRC’sfindingstheCommitteediscussedthefindingsandthefirm’sresponse
andquestionedKPMGonhowthoseenhancementswouldbeappliedtothePrudentialplcaudit.
ItnotedthegoodpracticeidentifiedbytheFRCinrespectoftheauditofinsuranceliabilitiesandthe
seriousnesswithwhichKPMGwereaddressingtheFRC’sfindings.Overall,itwassatisfiedthatthe
auditofPrudentialplcremainedeffective.However,inlightofthefindingsitrequestedthatKPMG
providecontinuingupdatesonprogressondeliveringtheenhancementsdiscussedandtheitems
raisedaspartoftheinternalevaluationofauditeffectiveness.Italsochallengedmanagementto
furtherenhanceitsinternalprocesstoreviewitseffectivenessofthe2018audit.
TheCommitteehasresponsibilityformonitoringauditorindependenceandobjectivityand
issupportedindoingsobytheGroup’sAuditorIndependencePolicy(thePolicy).ThePolicy
isupdatedannuallyandapprovedbytheCommittee.Itsetsoutthecircumstancesinwhich
theexternalauditormaybepermittedtoundertakenon-auditservicesandisbasedonfour
keyprincipleswhichspecifythattheauditorshouldnot:
— Audititsownfirm’swork;
— ActasmanagementoremployeesfortheGroup;
— HaveamutualorconflictinginterestwiththeGroup;or
— BeputinapositionofbeinganadvocatefortheGroup.
ThePolicyhastwopermissibleservicetypes:thosethatrequirespecificapprovalbytheCommittee
onanengagementbasisandthosethatarepre-approvedbytheCommitteewithanannual
monetarylimitcappedatnomorethan5percentoftheGroupauditfeeintheproposedyearand
cappedat£50,000individually.InaccordancewiththePolicy,theCommitteeapprovedthese
permissibleservices,classifiedaseitherauditornon-auditservices,andmonitoredtheusageofthe
annuallimitsonaquarterlybasis.Allnon-auditservicesundertakenbyKPMGwereagreedpriorto
thecommencementofworkandwereconfirmedaspermissiblefortheexternalauditortoundertake
inaccordancewiththePolicywhichcomplieswiththerulesandregulationsoftheUKFinancial
ReportingCouncilsEthicalStandard(2016),theUSSecuritiesandExchangeCommission(SEC)
andthestandardsofthePublicCompanyAccountingOversightBoard(PCAOB).
Inkeepingwithprofessionalethicalstandards,KPMGalsoconfirmedtheirindependencetothe
Committeeandsetoutthesupportingevidencefortheirconclusioninareportthatwasconsidered
bytheCommitteepriortopublicationofthefinancialresults.
Whileasyettobeformalisedasrules,theKingmanreview,theCompetitionsandMarketAuthority
reviewoftheauditmarketandtheBrydonreviewwillshapethefutureofauditandtheaudit
regulatorwithaviewtoenhancingauditqualityandindependence.TheCommitteewillcontinue
tomonitordevelopmentstoensuretheGroup’spoliciesandprocessesaroundauditeffectiveness
andindependenceevolveinlinewithmarketpractice.
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Key matters considered during the year continued
Matter considered
How the Committee addressed the matter
Feespaidtotheauditor
Reappointment
Audittender
ThefeespaidtoKPMGfortheyearended31December2018amountedto£18.3million
(2017:£17.3million)ofwhich£2.3million(2017:£2.6million)waspayableinrespectofnon-audit
services.Non-auditservicesaccountedfor13percentoftotalfeespayable(2017:15percent).
AbreakdownofthefeespaidtoKPMGcanbefoundinnoteB2.4tothefinancialstatements.
Ofthe£2.3millionofnon-auditservices,£1.1millionwasinrespectofassuranceservices.These
servicescoveredassuranceovertheGroup’sSolvencyIIexternaldisclosures,assurancereportson
internalcontrolsofcertainGroupcompaniesthataremadeavailableforthirdpartiesandcomfort
letterprocedurestosupportdebtraisingintheyear.Theremaining£1.2millionprincipallyrelatedto
workperformedaspartofplanningfortheproposeddemerger.Inallthesecases,theauditfirmwas
consideredthemostappropriatetocarryoutthework,givenitsknowledgeoftheGroupandthe
synergiesthatarisefromrunningtheseengagementsalongsideitsmainaudit.
Allnon-auditserviceswerepre-approvedbytheCommitteeandwereinlinewiththePolicy
discussedabove.
Basedontheoutcomeoftheeffectivenessevaluationandallotherconsiderations,theCommittee
concludedthattherewasnothingintheperformanceoftheauditorwhichwouldrequireachange.
TheCommitteethereforerecommendedthatKPMGbereappointedastheauditor.Aresolution
tothiseffectwillbeproposedtoshareholdersatthe2019AnnualGeneralMeeting.
TheCommitteeacknowledgestheprovisionscontainedintheUKCodeinrespectofaudit
tendering,alongwithEuropeanrulesonmandatoryauditrotationandaudittendering.In
conformancewiththeserequirements,theCompanywillberequiredtochangeauditfirmno
laterthanforthe2023financialyearend.
Theexternalauditwaslastputouttocompetitiveretenderin1999whenthepresentauditor,
KPMG,wasappointed.Since2005,theCommitteehasannuallyconsideredtheneedtoretender
theexternalauditservice.TheCommittee’sChairmanandtheGroup’sFinanceDirectorcurrently
recusethemselvesfromthesediscussions.
TheGroupisundergoingaperiodofunprecedentedchangewithboththedemergerof
M&GPrudentialfromPrudentialplcbeingconsideredandthenewinsuranceaccountingstandard
(IFRS17)requiringimplementationin2022.TheCommitteecurrentlybelievesanychangeofauditor
shouldbescheduledtolimitoperationaldisruptionduringsuchaperiodofchangegiventhe
significantvolumeofworktobedeliveredbytheGroup’sfinanceteamsinrelationtothedemerger
andpreparingtoimplementthenewinsuranceaccountingstandardin2022.TheCommittee
considereditsstrategyonaudittenderinginFebruary2019,concludingthatwiththechangein
implementationdateforIFRS17thatthepreviouslyproposedtimelineforappointinganewauditor
shouldalsobeextendedbyoneyeartothe2023yearend.Inconductingthisreview,theCommittee
concludedthatitwouldbeappropriatetocommenceacompetitivetenderforthe2023auditinthe
firsthalfof2020.ThiswouldpermitthecurrentauditorstocompletethefirstyearofIFRS17
adoptionandreducethe‘self-review’threattoanyoftheauditfirmsconductingadvisoryserviceson
implementationoffinancesystemsforthenewaccountingstandardwhoareinvitedtotenderforthe
audit.ThesuggestedtimelineshouldalsoenabletheCommitteetotakeintoaccountanyproposals
arisingfromthecurrentreviewsoftheauditingprofession.Thetimingremainssubjecttothe
Committee’snormalannualreviewofauditorperformanceandrecommendationtoshareholders.
TheCompanyhascompliedthroughoutthe2018financialyearwiththeprovisionsoftheStatutory
AuditServicesforLargeCompaniesMarketInvestigation(MandatoryUseofCompetitiveTender
ProcessesandAuditCommitteeResponsibilities)Order2014issuedbytheCompetitionand
MarketsAuthority.
Aplantoidentifysuccessorfirmstoensurethatthereissufficienttimeforanorderlytransitionand
tosafeguardindependencewasconsideredandagreedbytheCommittee.
InlinewiththeFRCEthicalStandard,therulesandregulationsoftheSECandthestandardsofthe
PCAOB,anewleadauditpartner,PhilipSmart,wasappointedinrespectofthe2017financialyear.
MrSmartisexpectedtobeinplaceforafive-yeartermuntilthecompletionofthe2021reporting
cycle.Anewleadauditpartnerwouldberequiredforthe2022auditandanappropriatetransition
plandeveloped.
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Key matters considered during the year continued
Matter considered
How the Committee addressed the matter
Second line oversight
Compliance, financial crime prevention, whistleblowing
Regularreportingfrom
theCompliancefunction
RegularupdateswereprovidedtotheCommitteebytheGroupRegulatoryandGovernmentAffairs
DirectorandtheGroupComplianceDirector.ThereportskepttheCommitteeapprisedofkey
complianceactivities,issuesandcontrols,includingprogressagainstthe2018CompliancePlan,
theoutcomeofcompliancemonitoringactivitiesacrosstheGroupandtheeffectivenessofbusiness
units’complianceactivities.
CompliancePlanandfocus
for2019
Financialcrimeprevention
Whistleblowing
Keyactivitiesidentifiedforthefirsthalfof2019include:regulatoryengagement,includingmanaging
thetransitionofourleadregulatorfromtheUK’sPrudentialRegulatoryAuthoritytotheHongKong
IA,supportingdeliveryofthedemergeractivitiesinkeyareasandprovidingongoingadvice,
guidanceandoversighttobusinessunitscoveringkeyriskssuchasconflictsofinterestandfinancial
crime.TheCommitteeintendstoreviewupdatestothe2019GroupCompliancePlanaroundthe
mid-yearpoint.
GroupCompliancewillalsocontinuetodriveforwardcapabilitieswithintheteamandwider
compliancecommunity,carryingoutactivitiestomaintainoversightofthetoprisksidentified.
TheCommitteereceivedtheMoneyLaunderingReportingOfficer’sreportwhichassessedthe
operationandeffectivenessoftheGroup’ssystemsandcontrolsinrelationtomanagingfinancial
crimerisks.
Aspartofitsresponsibilityfortheoversightoffinancialcrimeprevention,theCommitteereceived
updatesoncybersecurity(aspartofajointmeetingheldwiththeRiskCommitteeinOctober2018),
anti-briberyandcorruption,anti-moneylaunderingandsanctionsactivitiesundertakenduring
theyear.
TheGroupcontinuestooperateaGroup-widewhistleblowingprogramme(‘SpeakOut’),hosted
byanindependentthirdparty(Navex).TheSpeakOutprogrammereceivesadhocreportsfrom
awidevarietyofchannels,includingawebportal,hotline,emailandletters.Reportsarecaptured,
confidentiallyrecordedbyNavex,andflaggedforinvestigationbytheappropriateteam.Underthe
SeniorManagersCertificationRegime(SMCR),theroleoftheWhistleblowingChampioncontinues
tobecarriedoutbytheChairofthePrudentialAssuranceCompany(PAC)AuditCommittee,
anindependentnon-executivedirectorofPAC.
TheCommitteeisresponsibleforoversightoftheeffectivenessoftheGroup’swhistleblowing
arrangements.TheCommitteereceivesregularreportsonthemostseriouscasesandother
significantmattersraisedthroughtheprogrammeandtheactiontakentoaddressthem.The
CommitteeisalsobriefedonemergingSpeakOuttrendsandthemes.TheCommitteemay,and
has,requestedfurtherreviewofparticularareasofinterest.
TheCommitteereviewedtheGroup’sSpeakOutprogrammearrangementsduringtheyear,
satisfyingitselfthattheycontinuetocomplywithregulatoryandgovernancerequirements.The
Committeealsonotedtheconsistencyofapproachadoptedacrosssubsidiarycommittees.This
wasfacilitatedthroughgreatervisibilityofregionalsignificantissues(addressedbysubsidiaryaudit
committees)andtheiroutcomes.TheSpeakOutprocesshasbeenfurtherenhancedthisyearby
focusingon(post-reporting)managementactionand,whererelevant,sharingoflessonslearnt.
TheChairandCommitteespenttimeprivatelywiththeGroupResilienceDirector,toensurethat
investigationswereadequatelyresourcedandappropriatelymanaged,thattherehadbeenno
retaliationagainstanyonemakingareportandthatinvestigationswerenotimproperlyinfluenced.
TheCommitteewasalsoupdatedonarrangementsforpromotingGroup-wideawarenessofthe
SpeakOutpolicy(includingcomputer-basedtrainingtailoredforeachbusinessunit)andarefresh
ofSpeakOutcommunicationsacrosstheGroup.
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AnnualReport2018 Prudential plc 121
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Key matters considered during the year continued
Matter considered
How the Committee addressed the matter
Third line oversight
Internal audit
Regularreporting
TheCommitteereceivedregularupdatesfromGroup-wideInternalAudit(GwIA)onaudits
conductedandmanagement’sprogressinaddressingauditfindingswithinagreedtimelines.
AnydelaysinimplementingremediationactionswereescalatedtotheCommitteeandgiven
particularscrutiny.
TheindependentassuranceprovidedbyGwIAformedakeypartoftheCommittee’sdeliberations
ontheGroup’soverallcontrolenvironment.During2018,theareasreviewedincluded:change
managementandtransformation,financialcontrols,outsourcingandthird-partysupply,customer
outcomes,cyberrisk,complianceandregulatoryandsecondlineofdefence.
TheDirectorofGwIAreportsfunctionallytotheCommitteeChairandformanagementpurposes
totheGroupChiefExecutive,andalsohasdirectaccesstotheChairmanoftheBoard.Inaddition
toformalCommitteemeetings,theCommitteemeetswiththeDirectorofGwIAinprivatetodiscuss
mattersrelatingto,forexample,theeffectivenessoftheinternalauditfunction,significantaudit
findingsandtheriskandcontrolcultureoftheorganisation.
TheCommitteeChairalsomeetswithGwIA’sQualityAssuranceDirectortodiscusstheoutcome
ofthequalityreviewsofGwIA’sworkandactionsarising.
Annualplanandfocusfor2019
TheCommitteeapprovedthehalf-yearupdateofthe2018plan.Italsoconsideredandapproved
theInternalAuditPlan,resourceandbudgetfor2019.
Effectiveness
The2019InternalAuditPlanwasformulatedbasedonabottom-upriskassessmentofauditneeds
mappedagainstvariousmetricscombinedwithtop-downchallenge.Theplanwasthenmapped
againstaseriesofriskandcontrolparameters,includingthetoprisksidentifiedbytheRisk
Committee,toverifythatitisappropriatelybalancedbetweenfinancial,businesschange,regulatory
andoperationalriskdriversandprovidesappropriatecoverageofkeyriskareasandauditthemes
withinarisk-basedcycleofcoverage.Keyareasoffocusfor2019include:strategicchangeinitiatives,
customeroutcomes,cybersecurity,financialriskandfinancialcontrols,outsourcinganddigitisation.
TheCommitteeisresponsibleforapprovaloftheGwIAcharter,auditplan,resources,andfor
monitoringtheeffectivenessofthefunction.TheCommitteeassessestheeffectivenessofGwIA
throughacombinationofExternalQualityAssessment(EQA)reviews,requiredeveryfiveyears,
andanannualinternaleffectivenessreview,performedbytheGwIAQualityAssuranceDirector.
A2018InternalEffectivenessreview,performedbytheGwIAQualityAssuranceDirector,was
conductedinaccordancewiththeprofessionalpracticestandardsoftheCharteredInstituteof
InternalAuditors(CIIA)andassessedcontinuedconformancewiththeCIIAguidanceforEffective
InternalAuditintheFinancialServices(theCode).ThereviewconcludedthatGwIAcontinuedto
complywiththerequirementsofinternalauditpolicies,proceduresandpractices,andstandards
inallmaterialrespectsrelatingtoauditplanningandexecution,andcontinuedtobealignedwith
itsmandatedobjectivesandmaintainedgeneralconformancewiththeCIIACode.
During2018,GwIAalsoprogressedthoseareasthatwereidentifiedbythe2017EQAas
opportunitiesforenhancementtoexistingpractice.Inresponsetothedemergerannouncement,the
functioncommenceditspreparationsforcreatingtwoappropriatelyskilledandsized,independent
internalauditfunctions,wherepreviouslytherewasasinglefunction.
HavingconsideredthefindingsoftheinternaleffectivenessreviewperformedbytheQuality
AssuranceDirector,theCommitteeconcludedthatGwIAhadcontinuedtooperateincompliance
withtherequirementsofGwIApolicies,proceduresandpracticestandardsinallmaterialrespects
andremainedalignedtomandatedobjectivesduring2018.
122 Prudential plc AnnualReport2018
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Key matters considered during the year continued
Matter considered
How the Committee addressed the matter
Internal control
Internalcontrolandrisk
managementsystems
TheCommitteeisresponsibleforreportingandmakingrecommendationstotheBoardonthe
effectivenessofGroup-wideinternalcontrolandriskmanagementsystems.
Governance
Groupgovernanceframework
TheCommitteeconsideredtheoutcomeoftheannualreviewofthesystemsofinternalcontrol
andriskmanagementasdiscussedonpages107and108.Thereviewidentifiedanumberofareas
forimprovement,particularlyinrespectofthegeneralITcontrolenvironment,andthenecessary
actionsthathavebeenorarebeingtaken.TheAuditCommitteesatgroupandsubsidiarylevel
collectivelymonitoroutstandingactionsregularlyandensuresufficientresourceandfocusisin
placetoresolvethemwithinareasonabletimeframe.
TheBoardconfirmedthatthereisanongoingprocessforidentifying,evaluatingandmanagingthe
significantrisksfacedbytheGroup,whichhasbeeninplacethroughouttheperiodanduptothe
dateofthisreportandconfirmsthatthesystemremainseffective.
Anupdatetotheorganisationalstructureandgovernancemodelforcybersecuritymanagement,
tofurtherstrengthentheGroup’sinformationsecuritycapabilities,waspresentedatajointmeeting
oftheRiskandAuditCommitteesinOctober2018.
TheGroupGovernanceManualsetsoutthepoliciesandproceduresbywhichtheGroupoperates
withinitsframeworkofinternalgovernance,takingintoaccountrelevantstatutoryandregulatory
matters.ItisaplatformformandatingspecificwaysofworkingacrosstheGroupandeachbusiness
unitattestsannuallytocompliancewith:
— MandatoryrequirementssetoutinGroup-widepolicies,includingmatterswhichmust
bereportedtotheGroupfunctions;and
— Mattersrequiringpriorapprovalfromthosepartieswithdelegatedauthority.
TheCommitteereviewedtheresultsoftheGroupGovernanceManualannualcontentreviewand
theresultsoftheyearendcertificationofcompliancewithGroupGovernanceManualrequirements
fortheyearended31December2018.
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AnnualReport2018 Prudential plc 123
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Howard Davies
Chair of the Risk Committee
Committee members
— Howard Davies (Chair)
— David Law
— Kai Nargolwala
— Alice Schroeder (from March 2018)
— Lord Turner
— Tom Watjen (from November 2018)
Regular attendees
— Chairman of the Board
— Group Chief Executive
— Group Chief Risk Officer
— Chief Financial Officer
— Group Regulatory and Government
Relations Director
— Group General Counsel and
Company Secretary
— Director of Group-wide
Internal Audit
Dependent on the business to be
discussed at each meeting, chief risk
officers of the business units and
members of the Group Risk Leadership
Team are invited to attend each meeting
as appropriate
Number of meetings in 2018:
Five. (In addition a joint meeting was
held with the Audit Committee)
Risk Committee report
Dear Shareholder
As Chair of the Risk Committee, I am
pleased to report on the Committee’s
activities and focus during 2018.
Committee operation
The Committee assists the Board in
providing leadership, direction and
oversight of the Group’s overall risk
appetite and limits, risk strategy, and risk
culture. It also oversees and advises the
Board on current and future risk exposures
of the Group, including those which have
the potential to impact on the delivery of
the Group’s Business Plan. The Committee
reviews the Group Risk Framework and
recommends changes to it for approval by
the Board to ensure that it remains effective
in identifying and managing the risks faced
by the Group. In March 2018, the Group
announced the appointment of Mr Turner
as Group Chief Risk Officer (CRO) and
Executive Director. During the year, the
Committee welcomed Ms Schroeder and
Mr Watjen as members in March and
November respectively.
The Committee received regular reports
from the CRO, who is advised by the
Group Executive Risk Committee (GERC).
I provided feedback on the performance
of the CRO to the Group Chief Executive
Officer as part of the annual evaluation of
the Board and its members. The Committee
also received regular reports from the
Group-wide Internal Audit and Compliance
functions and updates from other areas of
the business as needed.
Transformation activity and
demerger of M&GPrudential
During 2018, a key area of consideration
for the Committee was the risk associated
with the Group’s portfolio of key strategic
change initiatives, including the merger
and transformation programmes at
M&GPrudential and the planned demerger
of M&GPrudential from the rest of the
Group. In March 2018, prior to the
announcement of the demerger, the
Committee considered the associated risks
of proceeding and weighed them against the
risks of retaining the current Group structure.
Analyses of the key financial risks to the
execution of the demerger under various
stress scenarios were considered. During the
year, the Committee considered updates,
risk opinions, guidance and assurance on
critical change and demerger activity.
Risk appetite and principal risks
During 2018 we reviewed the Group’s
risk policies and the aggregate limits
accompanying the Group risk appetite
statements, updating limits where necessary
to reflect changes in the Group’s risk profile
and the evolving regulatory and
macroeconomic environments. We also
reviewed the principal risks facing the Group
and received regular updates on these
through the course of the year and
received regular reports from the chief risk
officers of our Material Subsidiaries. A
fuller explanation of principal risks facing
the Group and the way in which the Group
manages these is set out in the CRO’s report
on pages 52 to 69. During 2018, the
Committee considered risk assessments
and opinions on key areas covering the
risks associated with the Group’s Business
Plan and executive remuneration, further
details of which are noted below.
In respect of our principal risks,
we continued to focus on those arising
from the products we offer our customers,
those inherent in our investment portfolios
and the risks that arise from the operation
of our businesses. We regularly reviewed
the strength of our capital and liquidity
positions, which included the results of
stress and scenario analyses, and the
significant ongoing changes to the
regulatory framework and environment.
In addition, we closely monitored risks
arising from the macroeconomic
environment and the pace of regulatory
developments across the globe.
In-depth reviews included consideration
of the Jackson fixed annuity business and
hedging programme. Reviews were also
performed on the Group’s credit risk
exposures, in the context of our assessment
of the global credit cycle, and into our Asia
business which included reviews of the
product lifecycle in Singapore, persistency
risk in Indonesia and fund management
and modelling in our Hong Kong and
Singapore businesses. During the year
we continued to oversee the work required
as a result of the continued applicability to
the Group of the requirements under the
Global Systemically Important Insurer
(G-SII) regime, which included the
approval of the 2018 Systemic Risk
Management Plan, Liquidity Risk
Management Plan and Recovery Plan.
Information security and privacy
Information security and data privacy also
received attention from the Committee
in 2018. During the year we reviewed
progress achieved on the implementation of
our plans on cyber defence. The Committee
received updates on implementation
activity to ensure compliance with the EU’s
General Data Protection Regulation
124 Prudential plc Annual Report 2018
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(GDPR),whichcameintoforceinMay
2018.InOctober2018ajointsessionwith
theAuditCommitteeoncybersecurity
includedanupdateontheGroup-wide
cybersecuritystrategyandinformation
securityprogrammeandwasaimedat
enhancingtheknowledgeofNon-
executiveDirectorsaswellasproviding
anupdateontheprogressoftheGroup’s
approachtocybersecurity.
Regulatory matters
TheCommitteereviewedthemethodology
andannualcalibrationoftheSolvencyII
internalmodel,andwealsooversawthe
submissionoftheGroup’sMajorModel
ChangeapplicationinDecember2018
inrespectofthemodel.TheCommittee
consideredtheGroupresultsoffield
testingoftheInsuranceCapitalStandards
(ICS)inOctober2018.
Whereresponsibilitiesareperceivedto
overlapbetweenthetwoCommittees,
MrLawandIagreethemostappropriate
Committeetoconsiderthematter.
FollowingtheannouncementinAugust
2018thattheHongKongIAwouldbecome
theGroup’sregulatorafterthedemerger
ofM&GPrudential,updatesonthe
discussionswiththeHongKongIAon
thefutureregulatoryrelationshipwere
providedaspartoftheCRO’sregular
reportingtotheCommittee.
Committee governance
WeworkcloselywiththeAuditCommittee
toensurebothCommitteesareupdated
andalignedonmattersofcommoninterest.
AsChairoftheCommittee,Ihave
responsibilityforensuringtheCommittee
operateseffectively.Inordertoenable
theCommitteetoprovideconstructive
challengetomanagement,Iencourage
opendebateandcontributionsfromall
Committeemembers.IreporttotheBoard
infullaftereachmeetingonthemain
mattersdiscussed.Anannualreviewofour
effectivenesswascarriedoutaspartofthe
Boardevaluation,describedinmoredetail
onpage100.TheCommitteewasfoundto
befunctioningeffectively.
How the Committee spent its time during 2018
Markets and Group risk updates
Groupriskupdate
MaterialSubsidiaries
Risk management
Grouptopriskidentification
Topriskdiscussions
Businessunitspecificriskmatters
RiskassessmentofBusinessPlan
Riskfunctioneffectiveness
Riskculture
Riskoversightofremuneration
Transformation
Informationsecurityandprivacy
Regulatory matters
Regulatorymatters
Risk framework
SolvencyIIinternalmodeldevelopmentandchanges
Groupriskappetitereview
Risklimitupdates
Riskpolicyframeworkrefresh
Risk-relatedcompliancepolicies
Group-wideInternalAuditupdate
Governance and reporting
Fullandhalfyearriskdisclosures
GlobalSystemicallyImportantInsurer
LiquidityRiskManagementPlan,SystemicRiskManagementPlanandRecoveryPlan
SolvencyIIreportingandgovernanceprocesses
OwnRiskandSolvencyAssessment
Year-endE-capresults
GroupRegulatoryandCompliancereport
Committeetermsofreference
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Key matters considered during the year
Matter considered
How the Committee addressed the matter
Business Plan
AspartofitsroleinoverseeingandadvisingtheBoardonfutureriskexposuresandstrategicrisks,
theCommitteereviewedGroupRisk’sassessmentoftheGroup’sBusinessPlanwhichcovereda
rangeofbothfinancialandnon-financialconsiderationsincludingthoseassociatedwiththe
demergerofM&GPrudentialfromtheGroup.
AspartoftheGroupRisk’sreviewoftheannualGroupBusinessPlan,GroupApprovedLimitswere
reviewed,updatedandapprovedbytheCommittee.
Risk appetite
TheCommitteeisresponsibleforrecommendingtheGroup’soverallriskappetiteandtolerance
totheBoard.
Risk framework
and management
Transformation activity and
demerger of M&GPrudential
TheCommitteeapprovedtheGroupRiskAppetiteStatement,whichsetsaggregaterisklimitsin
respectofcapitalrequirements,earningsvolatilityandliquidityaswellasmaintainingtheexisting
tolerancelevelsassociatedwitheachoftheselimits.
Annually,businessunitsmustassessandcertifytheircompliancewiththeGroupRiskFramework
andriskpoliciesaspartoftheannualGroupGovernanceManualcertification.Thecertification
processforriskpoliciesisfacilitatedbyGroupRiskandsubjecttooversightbytheCommittee.
In2018,theGroupRiskFrameworkandriskpoliciesweresubjecttotheirannualreview,with
changesbeingapprovedbytheCommittee.
TheCommitteeconducteditsannualreviewofRiskeffectivenessinFebruary.Italsoapprovedthe
GroupRiskMandate,whichformallysetsoutthepurposeandresponsibilitiesoftheGroupRisk
function,andhowitworkswithotherfunctionsandmaintainsoversightofbusinessunitrisk
functionsandtheireffectivenessinmanagingthekeyriskstotheGroup.
InDecember2018,theCommitteeconsideredanupdateonactivitiessupportingapositiverisk
cultureacrossPrudential,includingthedevelopmentsandimprovementsimplementedacrossthe
businessunitsovertheyear.
TheCommitteeconsideredtheresultsofanumberof‘deepdive’reviewsundertakenduring2018.
ThesefocusedonrisksembeddedwithintheexistingportfolioofproductsinourUS,AsiaandUK
businesses,aswellastherisksarisingfrom,andto,thedemerger.
InMarch2018,theGroupannouncedtheplanneddemergerofM&GPrudentialfromtherestof
theGroup,furthercontributingtotheportfolioofkeystrategicchangeactivityacrosstheGroup.
TheCommitteewasprovidedwithupdatesonthisactivitythroughouttheyear,andconsidered
theresultsofriskopinions,guidanceandassuranceonthedemerger.
Analysesofthekeyfinancialriskstotheexecutionofthedemergerundervariousstressscenarios
wereconsidered.
RiskrecommendationsandobservationswereprovidedtotheCommitteeonthekeymerger
andtransformationprogrammescurrentlyongoingatM&GPrudential.
Hong Kong Insurance
Authority (IA)
InAugust2018,itwasannouncedthattheHongKongIAwouldbecometheGroup-widesupervisor
forPrudentialplcafterthedemergerofM&GPrudential.Keyupdatesonthediscussionswiththe
HongKongIAonthefutureregulatoryrelationshipwereprovidedtotheCommitteeaspartofthe
CRO’sregularreporting.
Information security
and privacy
InJuly2018,theCommitteewasprovidedwithanupdateonthekeydeliverablesrelatingtothe
Group’scyberresilienceandthroughout2018theCommitteereceivedregularupdatesonGroup-
wideinformationsecuritymetricsprovidingaviewofsecuritypostureacrossourbusinesses.
Anupdatetotheorganisationalstructureandgovernancemodelforcybersecuritymanagement,
tofurtherstrengthentheGroup’sinformationsecuritycapability,waspresentedatajointmeeting
oftheRiskandAuditCommitteesinOctober.
InNovember2018,PrudentialparticipatedintheannualFTSE350CyberGovernanceHealthCheck
survey,insightsfromwhichinformgovernmentpolicyoncybersecurityandcontributetoguidance
andsupportprovidedtoindustryandboards.
Inthekeyareaofdataprivacy,theCommitteereceivedupdatesthroughouttheyearonprogress
onGroup-wideimplementationactivitytoensurecompliancewiththeGeneralDataProtection
Regulation.
126 Prudential plc AnnualReport2018
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Key matters considered during the year continued
Matter considered
How the Committee addressed the matter
Jackson oversight
TheCommitteereceivedregularupdatesontheJacksonbusinessthroughout2018,including
updatesonfinancialriskoversightoverthebusiness.
Group principal risks
Solvency II reporting
Global Systemically
Important Insurer (G-SII)
Stress testing
TheCommitteeapprovedupdatestokeyrisklimitsusedinitsmonitoringofthefinancialriskstothe
Jacksonbusiness,inparticularthoseoverinterestraterisk.
Additionally,theCommitteeconsideredtheresultsofin-depthreviewsperformedontheJackson
fixedannuitybusinessandhedgingprogramme.
TheCommitteeevaluatedtheGroup’sprincipalrisks,consideringrecommendationsforpromoting
additionalrisksandchangesinthescopeofexistingrisks.TheCommitteereceivedregularreporting
ontheprincipalrisksandmitigatingactionsoverthecourseoftheyearwithintheGroupCRO’s
regularreporttotheCommittee.
ThesereportsalsoprovidedtheCommitteewithregulatoryupdates;developmentsunder
SolvencyIIandtheGroup’sinternalmodel;theimplicationsofthedevelopingglobalcapital
standardsincludingtheengagementwiththeHongKongIAonthedevelopmentofanindustry
groupcapitalandriskmanagementframework;anddevelopmentsandthedeliverablesrequiredas
aresultoftheGroup’sdesignationasaGlobalSystemicallyImportantInsurer.
TheCommitteeconsideredtheOwnRiskandSolvencyAssessmentreportbasedontheoutcomes
oftheGroup’sBusinessPlanandthefullyear2017riskandsolvencypositionspriortoitsapprovalby
theBoard.ThereportwasalsoconsideredinlightoftheresultsoftheGroup’sregularstresstesting.
TheCommitteereviewedthemethodologyandannualcalibrationoftheSolvencyIIinternalmodel.
The2018MajorModelChangeapplicationwascloselyoverseenbytheCommitteethroughout
theyearandweapprovedthemodelchangesaspartofthesubmissionoftheapplicationto
theregulator.
TheFinancialStabilityBoard(FSB)confirmedinNovember2017thatthe2016GlobalSystematically
ImportantInsurerdesignationwouldcontinuetoapplytotheGroup.Asaresult,in2018the
Committeewasrequiredtoconsiderandapproveupdateddeliverablesassociatedwiththe
designation.TheseincludedtheSystemicRiskManagementPlan,RecoveryPlanandLiquidity
RiskManagementPlan.
StressandscenariotestingisakeyriskmeasurementandmanagementtoolfortheGroup.The
ReverseStressTestexercisewascarriedoutwhichconfirmedtheGroup’spositionasremaining
resilienttocertainbusinessfailurescenarios.ThereportrelatedtotheGroup’syearend2017
positionandwassubmittedtothePRA.
TheCommitteealsoconsideredtheresultsofthe2018EuropeanInsuranceandOccupational
PensionsAuthority(EIOPA)StressTests,whichweresubmittedtothePRAandEIOPA.
Remuneration
TheCommitteehasaformalroleintheprovisionofadvicetotheRemunerationCommitteeonrisk
managementconsiderationsinrespectofexecutiveremuneration.
TheCommitteeconsideredreviewsontheriskmanagementconsiderationsassociatedwithannual
incentiveplansduringtheyearandreportsonremuneration-relatedmatters.
Compliance and
audit reporting
TheCommitteereceivedregularreportingonkeycompliancerisksandmitigationactivity,and
reviewedandapprovedupdatestoanumberofregulatorycompliancerisk-relatedpoliciesincluding
thosearoundanti-briberyandcorruption,conflictsofinterestandpersonalaccountdealing.
TheCommitteealsoreceivedupdatesfromGroup-wideInternalAuditthroughouttheyear.
www.prudential.co.uk
AnnualReport2018 Prudential plc 127
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Statutory and regulatory disclosures
Powers of the Board
TheBoardmayexerciseallpowers
conferredonitbytheCompany’sArticles
andtheCompaniesAct2006.This
includesthepowersoftheCompanyto
borrowmoneyandtomortgageorcharge
anyofitsassets(subjecttothelimitations
setoutintheCompaniesAct2006and
theCompany’sArticles)andtogivea
guarantee,securityorindemnityin
respectofadebtorotherobligationof
theCompany.
Securities dealing and
inside information
Prudentialhasadoptedsecuritiesdealing
rulesrelatingtotransactionsbyDirectors
ontermsnolessexactingthanrequiredby
Appendix10totheHKListingRulesand
byrelevantUKregulations.TheDirectors
havecompliedwiththeserulesthroughout
theperiod.
TheGrouphasadoptedanInside
InformationPolicywhichincludes
guidanceandproceduresforthe
identification,disseminationandescalation
ofinsideinformationaswellasappropriate
controlsonthedisclosureofsuch
informationinlinewithregulatory
requirements.Allstaffaremadeaware
ofthepolicyandreceivecommunications
remindingthemoftheirobligationswhen
theyworkonanyconfidentialmattersin
thebusinessorarenotifiedwhenthe
Companyentersorexitsaclosedperiod.
Requirements of Listing Rule 9.8.4
InformationtobeincludedintheAnnual
ReportandaccountsunderListingRule
9.8.4maybefoundasfollows:
Listing Rule Description
9.8.4(4) Detailsoflong-term
Page
161
incentiveschemes
requiredbyListing
Rule9.4.3
9.8.4(10) ContractsofSignificance
106
involvingaDirector
Financial reporting
TheDirectorshaveadutytoreportto
shareholdersontheperformanceand
financialpositionoftheGroupandare
responsibleforpreparingthefinancial
statementsonpages172to329andthe
supplementaryinformationonpages342
to375.Itistheresponsibilityoftheauditor
toformindependentopinions,basedonits
auditofthefinancialstatementsandits
auditoftheEEVbasissupplementary
information,andtoreportitsopinionsto
theCompany’sshareholdersandtothe
Company.Itsopinionsaregivenonpages
330to340andpage376.
CompanylawrequirestheDirectorsto
preparefinancialstatementsforeach
financialyearthatgiveatrueandfairview
ofthefinancialaffairsoftheCompanyand
oftheGroup.Thecriteriaappliedinthe
preparationofthefinancialstatements
aresetoutinthestatementofDirectors’
responsibilitiesonpages329and375.
CompanylawalsorequirestheBoardto
approvetheStrategicreport.Inaddition,
theUKCoderequirestheDirectors’
statementtostatethattheyconsiderthe
AnnualReportandfinancialstatements,
takenasawholeisfair,balancedand
understandableandprovidesthe
informationnecessaryforshareholders
toassesstheCompany’spositionand
performance,businessmodelandstrategy.
TheDirectorsarefurtherrequiredto
confirmthattheStrategicreportincludes
afairreviewofthedevelopmentand
performanceofthebusiness,witha
descriptionoftheprincipalrisksand
uncertainties.Suchconfirmationis
includedinthestatementofDirectors’
responsibilitiesonpages329and375.
TheStrategicreportprovides,onpages48
to50,adescriptionoftheGroup’scapital
position,financingandliquidity.Therisks
facingtheGroup’sbusinessarediscussed
intheGroupChiefRiskOfficer’sreportof
therisksfacingourbusinessandhowthese
aremanagedonpages52to69.
TheDirectorswhoheldofficeatthedate
ofapprovalofthisDirectors’reportconfirm
that,sofarastheyareeachaware,thereis
norelevantauditinformationofwhichthe
Company’sauditorisunaware;each
Directorhastakenallthestepsthatheor
sheoughttohavetakenasaDirectorto
makehimselforherselfawareofany
relevantauditinformationandtoestablish
thattheCompany’sauditorisawareofthat
information.Thisconfirmationisgivenand
shouldbeinterpretedinaccordancewith
theprovisionsofSection418ofthe
CompaniesAct2006.
Going concern
Inaccordancewiththeguidanceissued
bytheFinancialReportingCouncilin
September2014,‘GuidanceonRisk
Management,InternalControlandRelated
FinancialandBusinessReporting’,after
makingsufficientenquiriestheDirectors
haveareasonableexpectationthatthe
CompanyandtheGrouphaveadequate
resourcestocontinuetheiroperationsfor
aperiodofatleast12monthsfromthedate
thatthefinancialstatementsareapproved.
Insupportofthisexpectation,the
Company’sbusinessactivities,together
withthefactorslikelytoaffectitsfuture
development,successfulperformanceand
positioninthecurrenteconomicclimate,
aresetoutintheStrategicreportonpages
10to86.TherisksfacingtheGroup’s
capitalandliquiditypositionsandtheir
sensitivitiesarereferredtointheStrategic
reportonpages52to69andnoteII(c)
‘SolvencyCapitalPositionat31December
2018’withinAdditionalunauditedfinancial
information.InadditiontheDirectors
consideredtheoperationalandfinancial
risksarisingfromtheUK’sintended
departurefromtheEuropeanUnionina
numberofpossiblescenarios,including
thosewhichassumenowithdrawal
agreementisenacted.TheGroup’sIFRS
financialstatementsincludethedetailsof
theGroup’sborrowingsinnoteC6onpage
269,themarketriskandliquidityanalysis
associatedwiththeGroup’sassetsand
liabilitiescanbefoundinnoteC3.4(a)on
pages236to238,policyholderliability
maturityprofilebybusinessunitsinnotes
C4.1(b),(c)and(d)onpages244,246and
248respectively,cashflowdetailsinthe
consolidatedstatementofcashflowsand
provisionsandcontingenciesinnotesC11
andD2.TheDirectorsthereforeconsiderit
appropriatetocontinuetoadoptthegoing
concernbasisofaccountinginpreparing
thefinancialstatementsfortheyearended
31December2018.
128 Prudential plc AnnualReport2018
www.prudential.co.uk
Customers
ThefivelargestcustomersoftheGroup
constitutedinaggregatelessthan
30percentofitstotalrevenuefromsales
foreachof2018and2017.
US regulation and legislation
AsaresultofitslistingontheNewYork
StockExchange,theCompanyisrequired
tocomplywiththerelevantprovisionsof
theSarbanes-OxleyAct2002astheyapply
toforeignprivateissuersandhasadopted
procedurestoensuresuchcompliance.
Inparticular,inrelationtoSection302
oftheSarbanes-OxleyAct2002which
coversdisclosurecontrolsandprocedures,
aDisclosureCommitteehasbeen
established,reportingtotheGroupChief
Executive,chairedbytheChiefFinancial
OfficerandcomprisingmembersofGroup
headofficemanagement.Theworkofthe
DisclosureCommitteesupportstheGroup
ChiefExecutiveandChiefFinancialOfficer
inmakingthecertificationsregardingthe
effectivenessoftheGroup’sdisclosure
procedures.
Change of control
Undertheagreementsgoverning
PrudentialCorporationHoldingsLimited’s
lifeinsuranceandfundmanagementjoint
ventureswithChinaInternationalTrust&
InvestmentCorporation(CITIC),ifthereis
achangeofcontroloftheCompany,CITIC
mayterminatetheagreementsandeither
(i)purchasetheCompany’sentireinterest
inthejointventureorrequiretheCompany
tosellitsinteresttoathirdpartydesignated
byCITIC,or(ii)requiretheCompanyto
purchaseallofCITIC’sinterestinthejoint
venture.Thepriceofsuchpurchaseorsale
istobethefairvalueofthesharestobe
transferred,asdeterminedbytheauditor
ofthejointventure.
www.prudential.co.uk
AnnualReport2018 Prudential plc 129
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Index to principal Directors’ report disclosures
Information required to be disclosed in the Directors’ report may be found in the following sections:
Information
Section in Annual Report
Page number(s)
Disclosure of information to auditor
Statutory and regulatory disclosures
Directors in office during the year
Board of Directors
Corporate responsibility governance
Corporate responsibility review
Employment practices
Corporate responsibility review
Greenhouse gas emissions
Corporate responsibility review
Charitable donations
Corporate responsibility review
Political donations and expenditure
Corporate responsibility review
Remuneration Committee report
Directors’ remuneration report
Directors’ interests in shares
Directors’ remuneration report
Agreements for compensation for loss of
office or employment on takeover
Directors’ remuneration report
Details of qualifying third-party
indemnity provisions
Governance report
Internal control and risk management
Governance report
Powers of Directors
Governance report
Rules governing appointment of Directors
Governance report
Significant agreements impacted by a
change of control
Future developments of the business
of the Company
Governance report
Group Chief Executive’s report
128
89 to 94
70 to 86
78 to 80
75 to 77
85
85
132 to 169
158
162 and 163
106
107 and 108
128
105
129
4 to 7
Post-balance sheet events
Note D3 of the notes on the Group financial statements
299
Rules governing changes to the
Articles of Association
Structure of share capital, including
changes during the year and restrictions on
the transfer of securities, voting rights and
significant shareholders
Business review
Changes in borrowings
Dividend details
Financial instruments
Shareholder information
420
Shareholder information and note C10 of the notes
on the Group financial statements
420, 421 and 291
Strategic report
Strategic report and note C6 of the notes on the
Group financial statements
Strategic report
10 to 86
48, 49 and 269
2 and 39
Strategic report and Additional information
52 to 69 and 407
In addition, the risk factors set out on pages 407 to 415 and the additional unaudited financial information set out on pages 378 to 406, are
incorporated by reference into the Directors’ report.
Signed on behalf of the Board of Directors
Alan F Porter
Group General Counsel and Company Secretary
12 March 2019
130 Prudential plc Annual Report 2018
www.prudential.co.uk
04
Directors’ remuneration
report
Annual statement from the Chairman of the Remuneration Committee
Our Executive Directors’ remuneration at a glance
Summary of the current Directors’ remuneration policy
Annual report on remuneration
Supplementary information
Page
132
135
137
142
166
ThisreporthasbeenpreparedtocomplywithSchedule8ofTheLargeandMedium-sizedCompaniesandGroups
(AccountsandReports)(Amendment)Regulations2013,aswellastheCompaniesAct2006andotherrelatedregulations.
Thefollowingsectionsweresubjecttoaudit:Tableof2018and2017ExecutiveDirectortotalremuneration
(the‘singlefigure’)andrelatednotes,salaryinformationtableinsectionentitledRemunerationinrespectof
performancein2018,Pensionentitlements,Long-termincentivesawardedin2018,ChairmanandNon-executive
Directorremunerationin2018,StatementofDirectors’shareholdings,Outstandingshareoptions,Recruitment
arrangementsandPaymentstopastDirectorsandpaymentsforlossofoffice.
www.prudential.co.uk
www.prudential.co.uk
AnnualReport2018 Prudential plc 131
AnnualReport2018 Prudential plc 131
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Dear shareholder,
I am pleased to present the
Remuneration Committee’s report
for the year to 31 December 2018.
isdeliveredwithintheCompany’srisk
frameworkandappetites,andthatthe
conductexpectationsofPrudential,our
regulatorsandotherstakeholdersaremet.
TheCommittee’sreportispresentedinthe
followingsections:
1
2
3
An‘ataglance’summaryoftheGroup’s
remunerationarrangementsonpages
135and136;
AsummaryofourDirectors’
remunerationpolicyonpages137
to141whichdescribeshowwepay
Directors.Thispolicywasapproved
byshareholdersatthe2017AGM;
OurAnnualreportonremunerationon
pages142to165whichdescribeshow
theCommitteeappliedtheDirectors’
remunerationpolicyin2018andthe
decisionsithasmadeinrespectof2019;
and
4
Supplementaryinformationonpages
166to169.
Bywayofpreface,Iwouldliketoshare
thecontextforthekeydecisionsthe
Committeetookduring2018,inparticular,
howwerewardedperformanceachieved
duringtheyear,theremuneration
arrangementsforthosejoiningand
steppingdownfromtheBoardandthe
decisionsrelatingtoremuneration
arrangementsin2019.
IamdelightedtowelcomeFieldsWicker-
MiurinwhojoinedtheCommitteein
September2018.
Implementing the Directors’
remuneration policy
During2018,theCommitteeoperated
allelementsofremunerationinlinewith
theDirectors’remunerationpolicy,which
receivedthesupportof90.7percent
ofshareholdersattheAGMinMay
2017.Thenewpolicysimplifiedpay
arrangementsbyreducingthenumberof
annualbonusmeasures,italsointroduced
atwo-yearholdingperiodonlong-term
incentiveawardsandincreasedshare
ownershipguidelines.
Iampleasedtonotethatanannualreview
oftheCommittee’seffectivenesswas
carriedoutin2018aspartoftheBoard
evaluation,asdescribedinmoredetail
onpage100.TheCommitteewasfound
tobefunctioningeffectively.
Rewarding 2018 performance
Prudential’sexecutiveremuneration
arrangementsrewardtheachievementof
Group,business,functionalandpersonal
targets,providedthatthisperformance
AssetoutintheStrategicreportsection
earlierinthisAnnualReport,theGroup
deliveredastrongfinancialresultwhich
hasbeenachievedinparalleltotheGroup’s
goodprogressinthepreparationsforthe
intendeddemergerofM&GPrudential.
Thetableoppositeillustratesachievement
ofKPIs.
2018operatingprofitandGroupfree
surplusgenerationexceededthestretching
targetsestablishedbytheBoard,with
operatingprofit6percenthigherand
Groupfreesurplusgeneration14percent
higherthan2017onaconstantexchange
ratebasis,despitelowerearningsfrom
annuitiesfollowingthereinsurance
transactioninMarch2018.EEVnew
businessprofitwas11percenthigherthan
prioryearonaconstantexchangerate
basisreflectingtheperformancesoutlined
inthebusinessperformancereview,which
deliveredaresultapproachingtheBoard
approvedtargets.Allofourbusinessunits
achievedtargetremittanceslevelsand,
althoughlowerthanthepriorperiod,we
achievedourobjectivetobalancenet
remittancessufficienttocoverthedividend
andcorporatecosts,withreinvestmentin
profitableopportunitieswithinthe
businessunits,andmaintainedsignificant
cashstockatthecentre.Thebusinessunit
remittancescontributedtoGroup
cashflow,whichapproachedthestretch
targetlevel.TheGroupachievedthese
resultswhilemaintainingappropriatelevels
ofcapitalandwhileoperatingwithinthe
Group’sriskframeworkandappetites.The
Committeebelievesthatthebonusesit
awardedtoExecutiveDirectorsfor2018
(between84percentand95percentof
executives’maximumAIPopportunities)
appropriatelyreflectthisperformance.
Performancein2018hascontinuedto
deliveronthemomentumachievedin
recentyears.TheGroupdeliveredtotal
operatingprofitsof£13,782millioninthe
2016,2017and2018financialyears.
Basedontotalshareholderreturn(TSR)
andthisstrongcumulativeoperating
profitperformanceovertheperiod,the
Committeedeterminedthatbetween
55.5and62.5percentofthePrudential
LongTermIncentivePlan(PLTIP)awards
madetoExecutiveDirectorsin2016
wouldvest(dependingonthebusiness
unit).Theseawardswillbereleasedto
participantsinApril2019.
TheCommitteecontinuestoensure
thatpaymentsandshareorADRaward
releasesreflecttheperformanceofthe
business,andremainsmindfulofitsscope
tousediscretionifitisnotsatisfiedthat
underlyingfinancialperformancejustifies
therewardsarithmeticallysuggestedby
theachievementoftheperformance
conditions.
Thetotal2018remunerationor‘single
figure’fortheGroupChiefExecutive,Mike
Wells,is13.2percentlowerthanhistotal
2017‘singlefigure’,notwithstandinghis
exceptionalleadershipandpersonal
performance.Thischieflyreflectsthata
lowerproportionof2016PLTIPawards
vestedthanof2015awards.
Changes to the executive team
Asyouwillbeaware,therehavebeen
changestoPrudential’steamofExecutive
Directorsduring2018.JamesTurnerwas
appointedasGroupChiefRiskOfficerin
March2018.AnneRichardssteppeddown
fromtheBoardasChiefExecutive,M&Gin
August2018.BarryStoweretiredas
ChairmanandChiefExecutiveOfficerof
ourNorthAmericanBusinessUnit(NABU)
andsteppeddownfromtheBoardon
31December2018.Hewassucceededby
MichaelFalconwhowasappointedtothe
Boardon7January2019.Theremuneration
decisionsarisingfromthesechangeswere
disclosedinstockexchangeandwebsite
announcementswhentheytookplace.
Furtherinformationcanbefoundinthe
RecruitmentarrangementsandPayments
topastDirectorssectionsofthisreport.
Implementation in 2019
TheCommitteeintendstocontinueto
operatewithinthecurrentDirectors’
remunerationpolicyduring2019.In
determiningremunerationpackagesfor
2019,theCommitteewasmindfulofthe
needforrestraintinbasesalaryincreases.
AllExecutiveDirectorsreceivedasalary
increaseof2percenteffective1January
2019.The2019salaryincreasebudgetsfor
otheremployeesacrosstheGroup’s
businessunitswerebetween2percentand
8percent.Nochangeshavebeenmadeto
executives’maximumopportunitiesunder
eithertheannualincentiveorthelong-term
incentiveplans,aswebelieveremuneration
packagesprovideanappropriatebalance
betweenperformanceovertheshortand
thelongterm.
Duringlate2018andearly2019,
Icorrespondedwithandmetthemajority
ofourmajorshareholders,aswellas
organisationsthatrepresentandadvise
shareholders.OnbehalfoftheCommittee,
132 Prudential plc AnnualReport2018
www.prudential.co.uk
Annual statement from the Chairman of the Remuneration CommitteeDirectors’ remuneration report Performance measures
Group performance (£m)3
Operating profit1
Prudential’sprimarymeasure
ofprofitabilityandakeydriver
ofshareholdervalue.
4,699
4,827
3,969
4,256
3,154
3%/6%
2017-2018 growth
(AER/CER)4
2018 bonus achievement
Above stretch
target level
CAGR5(excludingKorea):+11%
2014
2015
2016
2017
2018
EEV new business profit2
Ameasureofthefutureprofitability
ofthenewbusinesssoldduringtheyear
andindicatestheprofitablegrowthof
theGroup.
CAGR5(excludingKoreaandUKbulk
annuitynewbusinessprofits):+18%
Group free surplus generation
Ameasureoftheinternalcash
generationofourbusinessunits.
3,616
3,877
3,088
7%/11%
2,492
2,021
2014
2015
2016
2017
2018
3,566
3,640
4,047
3,025
2,553
11%/14%
CAGR5(excludingKoreaandUKbulk
annuitynewbusinessprofits):+14%
Business unit remittances3
CashflowsacrosstheGroupreflectour
aimofachievingabalancebetween
ensuringsufficientnetremittancesfrom
businessunitstocoverthedividend
(aftercorporatecosts)andtheuseof
cashforreinvestmentinprofitable
opportunities.
2014
2015
2016
2017
2018
1,625
1,482
1,718
1,788
1,732
-3%
CAGR5:+4%
2014
2015
2016
2017
2018
Operatingprofit
accountedfor35percent
ofGroupfinancialbonus
targets.
Approaching
target level
EEVnewbusinessprofit
accountedfor15percent
ofGroupfinancialbonus
targets.
Above stretch
target level
Groupfreesurplus
generationaccountedfor
30percentofGroup
financialbonustargets.
Above target,
approaching stretch
target level
Acashflowmeasure
wasusedtodetermine
20percentoftheGroup
financialbonustargets.
Notes
1
Inthisreport‘operatingprofit’referstoadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns.Aspreviouslyreportedandexcludingthecontribution
fromtheKorealifebusinessforallyears.
2 AspreviouslyreportedandexcludingthecontributionfromtheKorealifebusinessandUKbulkannuitynewbusinessprofitsforallyears.
3 Asreportedbasis.
4 Asreportedbasis/constantexchangebasis(excludingbusinessunitremittances,whicharepresentedasreported).
5 2014-2018CAGRasreported.
www.prudential.co.uk
AnnualReport2018 Prudential plc 133
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Directors’ remuneration report continued
This approach benefits from maximising
the community of interest between
Executive Directors and other shareholders
during the 2019 to 2021 period, improving
simplicity by reducing the number of
measures used in the PLTIP, and providing
a set of metrics common to all Executive
Directors by removing the different
measures and weightings previously
applied to Group executives, business unit
Chief Executives and to the Group Chief
Risk Officer.
Reduced pension benefits for newly
recruited Executive Directors
The Committee is mindful of the recent
developments with regards to the
alignment of retirement benefits across
the Group, and for externally recruited
Executive Directors appointed on or after
1 March 2019 has committed to reducing
the pension benefits from the current level
of 25 per cent of salary to 20 per cent of
salary. As part of next year’s review of the
Directors’ remuneration policy, the
Committee will consider its approach to
Executive Director pension benefits further
in the light of market developments, to
ensure they are appropriately aligned to
the retirement arrangements offered
across the wider workforce taking into
account the composition of the Group
at that time.
Early publication of the CEO
pay ratio
The Committee has decided to publish
the CEO pay ratio in the 2018 Directors’
remuneration report, one year in advance
of the disclosure becoming a requirement
under the UK Companies (Miscellaneous
Reporting) Regulations 2018. This has
been welcomed by many shareholders.
Enhanced disclosure of performance
against personal and functional
Annual Incentive Plan targets
This report includes more detail about the
process for setting personal and strategic
targets, and about levels of achievement
against the targets used for 2018 bonuses.
There is also a new section on the
functional objectives used in the
determination of the Group Chief Risk
Officer’s bonus. These disclosures can
be found in the Annual report on
remuneration.
I would like to thank them for their
engagement. During this consultation,
there was a great deal of support for the
proposals which the Committee made for
2019 and valuable discussions on other
areas for consideration.
In light of conversations with shareholders
and their advisers, and given the unusual
circumstances of the Group as it prepares
for the planned demerger of the
M&GPrudential business, the Committee
has made the following changes for 2019
which aim to enhance the transparency of
executive remuneration arrangements;
simplify the connection between
performance and reward; and reflect
changes in market practice which are
developing in the context of the new UK
Corporate Governance Code:
Reduced proportion of 2019 PLTIP
awards vesting for threshold
performance
The Committee has reduced the
proportion of 2019 PLTIP awards which
would vest for threshold performance
from 25 per cent to 20 per cent. This would
see the value available for threshold
performance decrease from 100 per cent
of salary for the Group Chief Executive to
80 per cent of salary.
Revised 2019 PLTIP award
performance measures
It is imperative that the performance
measures attached to PLTIP awards create
a clear focus within the executive team
and a straightforward connection with
the value to be delivered to shareholders,
particularly as the Group prepares for the
planned demerger. On this basis, the
Committee has decided that a different
mixture of performance conditions are
used, specifically for the awards to be
made in 2019, which will vest based
on performance over the 2019 to 2021
financial years.
The vesting of 75 per cent of the 2019
PLTIP awards will be based on the
achievement of relative TSR targets.
Performance against our balanced
scorecard targets will continue to
determine the vesting of the remaining
25 per cent of the awards as set out in the
Statement of implementation in 2019. The
measures attached to long-term incentive
awards to be made in 2020 and subsequent
years will be developed in light of the
evolving priorities of the business and we
will consult with shareholders on these in
due course.
Post cessation share ownership
policy
Our current policy is that existing
remuneration arrangements, including the
deferral under the bonus into Prudential plc
shares or ADRs for three years and a
post-performance holding period of two
years for awards of Prudential plc shares
or ADRs under the PLTIP, will normally
continue to provide alignment between the
interests of our senior executives and our
other shareholders for a period after the
end of employment. This will be reviewed
as part of the development of the new
Directors’ remuneration policy in 2019.
In conclusion
The Committee intends to seek
shareholder approval for a new Directors’
remuneration policy at the 2020 AGM.
During 2019, we will review this policy,
taking into account the demerger, the
views of our shareholders, evolving market
practice in meeting the requirements of the
new UK Corporate Governance Code,
changing accounting standards and the
broader regulatory and competitive
environment. I trust that you will find
this report a clear account of the way in
which the Committee has implemented
the Directors’ remuneration policy
during 2018.
Anthony Nightingale, CMG SBS JP
Chairman of the Remuneration
Committee
12 March 2019
134 Prudential plc Annual Report 2018
www.prudential.co.uk
Our Executive Directors’ remuneration
at a glance
Our current remuneration architecture
Salary and
benefits
Cash bonus
Deferred bonus
Prudential
Long Term
Incentive Plan
(PLTIP)
Key elements1
Fixed pay
Short-term
variable pay
Financial/functional
and personal objectives
set with reference to
business plans approved
by the Board
Long-term
variable pay
Stretching operating
profit ranges set with
reference to business
plans approved by the
Board for in-flight
awards2
TSR vesting relative to
international insurance
peers
Balanced scorecard of
capital, conduct and
diversity measures
8
1
0
2
9
1
0
2
0
2
0
2
1
2
0
2
2
2
0
2
3
2
0
2
Key features of the policy
How we implemented the policy
Broadly aligned with pay budget
for other employees
Salary increase of 2% in 2018
The maximum opportunity is
up to 200% of salary
40% of bonus is deferred into
shares for three years
Award is subject to malus and
clawback provisions
The Group Chief Executive has a maximum
bonus opportunity of 200% of salary. For
other Executive Directors the maximum is
180% of salary or less
2018 bonuses were paid based on financial
performance or functional measures as
well as personal objectives
Maximum award under the plan
is 550% of salary
Awards in 2018 were below the plan limits:
— Group Chief Executive:
Aligned with long-term business
strategy and delivery of shareholder
value
Measured over three financial years
from year of award with a two-year
post-performance holding period
Award is subject to malus and
clawback provisions
400% of salary
— CEO, NABU: 460% of salary
— CEO, M&G: 450% of salary3
— Other PLTIP awards were
250% of salary
For business unit CEOs, awards vest based
on TSR, business unit operating profit and
balanced scorecard measures
For other Executive Directors, awards vest
based on TSR, Group operating profit and
balanced scorecard measures
Share ownership
guidelines
Share ownership
guidelines
Significant share ownership guidelines for all Executive Directors as follows:
— 400% of salary for the Group Chief Executive
— 250% of salary for other Executive Directors
Notes
1 TheCEO,NABUisalsoeligibletoreceivea10percentshareoftheJacksonbonuspool.
2 PLTIPawardsgrantedin2019willbesubjecttorelativeTSRandbalancedscorecardmeasuresonly.
3 TheCEO,M&Gresignedduringtheyearandthisawardwilllapse.
www.prudential.co.uk
AnnualReport2018 Prudential plc 135
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
What performance means for Executive Directors’ pay
AtPrudential,remunerationpackagesaredesignedtoensureastrongalignmentbetweenpayandperformance.Asyoucanseefromthe
chartswithintheAnnualstatementfromtheChairmanoftheRemunerationCommittee,sustainedgrowthacrossourkeyperformance
metricshasdeliveredsubstantialvaluetoourshareholders.Thishasbeenreflectedinboththeannualbonusespaidandthereleaseof
long-termincentiveawards,assetoutintheAnnualreportonremuneration.
Inparticular,thelong-termincentivesawardedtoExecutiveDirectorsin2016hadstretchingperformanceconditionsattachedtovesting
andweredenominatedinsharesorADRs.Thevaluegeneratedforshareholdersthroughsharepricegrowthanddividendspaidoverthe
lastthreeyearsisreflectedinthevalueoftheLTIPreleases.
Thevalueoftheseperformance-relatedelementsofremunerationisaddedtothefixedpackagesprovidedtoExecutiveDirectorsto
calculatethe2018‘singlefigure’oftotalremuneration.Thetotal2018‘singlefigure’fortheGroupChiefExecutiveis13.2percentless
thanthetotal2017‘singlefigure’,despitecontinuingstrongbusinessperformanceandhisexceptionalleadershipandpersonal
performance.Thisischieflyaresultofalowerlevelofvestingofthe2016PLTIPawards.ThevaluesfortheExecutiveDirectorsduringthe
yearareoutlinedinthetablebelow:
Executive Director
Role
MarkFitzPatrick
JohnFoley
ChiefFinancialOfficer
ChiefExecutive,
Fixed pay
Performance related
2018
salary
Pension and
benefits
2018
bonus
LTIP
vesting
2018
single figure
2017
single figure1
£745,000
£275,000
£1,241,000
–
£2,261,000
£1,634,000
NicNicandrou2
AnneRichards4
BarryStowe2,5
JamesTurner7
MikeWells
M&GPrudential
ChiefExecutive,PCA3
ChiefExecutive,M&G
ChairmanandCEO,NABU6
GroupChiefRiskOfficer
GroupChiefExecutive
£781,000
£1,023,000
£249,000
£867,000
£521,000
£1,126,000
£318,000
£654,000
£164,000
£287,000
£239,000
£689,000
£1,186,000
£1,692,000
–
£4,935,000
£793,000
£2,133,000
£1,511,000
£1,433,000
–
£2,761,000
£347,000
£3,486,000
£3,796,000
£4,802,000
£413,000
£8,850,000
£1,900,000
£7,434,000
£4,597,000
£4,705,000
£3,053,000
£9,541,000
N/A
£8,560,000
Notes
1 Revised2017singlefigure,inlinewiththeregulations,reflectingtheactualvalueof2017LTIPreleasesandadditionaldividendspaidassetoutinthenotestothe2017singlefigure
tableonpage145.
2 NicNicandrouandBarryStowearepaidintheirlocalcurrencyandexchangeratefluctuationswillthereforeimpactthereportedsterlingvalue.
3 PCAisanabbreviationofPrudentialCorporationAsia.
4 AnneRichardsresignedandsteppeddownfromtheBoardasanExecutiveDirectoron10August2018.HeremploymentwiththeCompanyterminatedon30November2018.
5 BarryStoweretiredfromtheBoardon31December2018.HisemploymentwiththeCompanywillterminateon31December2019.
6 NABUisanabbreviationofNorthAmericanBusinessUnitwhichincludesJacksonNationalLifeandPPMAmerica.NABUisnowdescribedasJacksonHoldings.
7 JamesTurnerwasappointedtotheBoardon1March2018asGroupChiefRiskOfficer.TheremunerationabovewaspaidinrespectofhisserviceasanExecutiveDirector.
Aligning 2019 pay to performance
TheCommitteeawardedsalaryincreasestotheExecutiveDirectorsfor2019of2percent,whichwasatthelowerendoftherange
ofsalaryincreasebudgetsforthewiderworkforce.Nochangeshavebeenmadetoincentiveopportunitiesaswebelieveremuneration
packagesremainstronglyalignedwithperformanceoverboththeshortandthelongterm.However,asdiscussedintheAnnual
statementfromtheChairmanoftheRemunerationCommitteeintheprevioussection,theCommitteehasreducedtheproportion
ofthe2019PLTIPawardswhichwouldvestforthresholdperformance.
Remunerationpackagesfor2019aresetoutindetailintheAnnualreportonremunerationandsummarisedbelow:
Executive Director
Role
MichaelFalcon2
MarkFitzPatrick
JohnFoley
NicNicandrou
JamesTurner
MikeWells
ChairmanandCEO,JacksonHoldings
ChiefFinancialOfficer
ChiefExecutive,M&GPrudential
ChiefExecutive,PrudentialCorporationAsia
GroupChiefRiskOfficer
GroupChiefExecutive
AIP
2019
salary
Maximum
bonus
(% of salary)
Bonus
deferred
(% of bonus)
PLTIP award
(% of salary)1
US$800,000
£760,000
£797,000
HK$10,930,000
£638,000
£1,149,000
100%
175%
180%
180%
160%
200%
40%
40%
40%
40%
40%
40%
400%
250%
250%
250%
250%
400%
Notes
1 ThePLTIPawardissubjecttoathree-yearperformanceperiodandafurthertwo-yearholdingperiod.
2 MichaelFalconwasappointedtotheBoardon7January2019asChairmanandChiefExecutiveOfficer,JacksonHoldingsLLC.Inadditiontohavingamaximumbonusopportunity
of100percentofsalaryundertheAIPhewillalsobeeligibletoreceivea10percentshareoftheJacksonbonuspool.
136 Prudential plc AnnualReport2018
www.prudential.co.uk
Directors’ remuneration report continued Summary of the current Directors’
remuneration policy
TheCompany’sDirectors’remunerationpolicywasapprovedbyshareholdersatthe2017AGM.Thispolicycameintoeffectfollowing
theAGMon18May2017andisexpectedtoapplyuntilthe2020AGM,whenshareholderswillbeaskedtoapprovearevisedDirectors’
remunerationpolicy.
ThepagesthatfollowpresentasummaryofthecurrentDirectors’remunerationpolicy.Thecompletepolicycanbefoundonourwebsite
atwww.prudential.co.uk/investors/governance-and-policies
Remuneration for Executive Directors
Fixed pay
Element
Salary
Operation
TheCommitteereviewssalariesannually,consideringfactorssuchas:
— SalaryincreasesforotheremployeesacrosstheGroup;
— Theperformanceandexperienceoftheexecutive;
— Thesizeandscopeoftherole;
— Groupand/orbusinessunitfinancialperformance;
— Internalrelativities;and
— Externalfactorssuchaseconomicconditionsandmarketdata.
Marketdataisalsoreviewedsothatsalariesremaininacompetitiverange,
relativetoeachExecutiveDirector’slocalmarket.
Benefits
ExecutiveDirectorsareofferedbenefitswhichreflecttheirindividual
circumstancesandarecompetitivewithintheirlocalmarket,including:
— Healthandwellnessbenefits;
— Protectionandsecuritybenefits;
— Transportbenefits;
— Familyandeducationbenefits;
— Allemployeeshareplansandsavingsplans;
— Relocationandexpatriatebenefits;and
— Reimbursedbusinessexpenses(includinganytaxliability)incurred
whentravellingoverseasinperformanceofduties.
Provision for
an income in
retirement
CurrentExecutiveDirectorshavetheoptionto:
— Receivepaymentsintoadefinedcontributionscheme;and/or
— Takeacashsupplementinlieuofcontributions.
Jackson’sDefinedContributionRetirementPlanhasaguaranteedelement
(6percentofpensionablesalary)andadditionalcontributions(uptoa
further6percentofpensionablesalary)basedontheprofitabilityofJackson.
Opportunity
AnnualsalaryincreasesforExecutive
Directorswillnormallybeinlinewith
theincreasesforotheremployees
acrossourbusinessunits.However,
thereisnoprescribedmaximum
annualincrease.
Themaximumpaidwillbethecostto
theCompanyofprovidingbenefits.
Thecostofbenefitsmayvaryfrom
yeartoyearbuttheCommitteeis
mindfulofachievingthebestvalue
fromproviders.
ExecutiveDirectorsareentitled
toreceivepensioncontributionsor
acashsupplement(orcombination
ofthetwo)uptoatotalof25percent
ofbasesalary.
Inaddition,theChiefExecutive,
PrudentialCorporationAsiareceives
statutorycontributionsintothe
MandatoryProvidentFund.
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AnnualReport2018 Prudential plc 137
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Variable pay
Element
Operation
Annual bonus
CurrentlyallExecutiveDirectorsparticipateintheAnnualIncentivePlan(AIP).
AIPawardsforallExecutiveDirectors,otherthantheGroupChiefRisk
Officer,aresubjecttotheachievementoffinancialandpersonalobjectives.
TheGroupChiefRiskOfficer’sperformancemeasuresareentirelybasedon
acombinationoffunctionalandpersonalmeasures.
Businessunitchiefexecutiveseitherhavemeasuresoftheirbusinessunit’s
financialperformanceintheAIPortheymayparticipateinabusinessunit
specificbonusplan.Forexample,theChairmanandCEO,NABUcurrently
participatesintheJacksonSeniorManagementBonusPoolaswellasin
theAIP.
Thefinancialmeasuresusedfortheannualbonuswilltypicallyincludeprofit
andcashflowtargetsandpaymentsdependontheachievementofminimum
capitalthresholds.Jackson’sprofitabilityandotherkeyfinancialmeasures
determinethevalueoftheJacksonSeniorManagementBonusPool.
Inspecificcircumstances,theCommitteealsohasthepowertorecoverall
(orpartof)bonusesforaperiodaftertheyareawardedtoexecutives.These
clawbackpowersapplytothecashanddeferredelementsofbonusesmade
inrespectofperformancein2015andsubsequentyears.
Deferred
bonus shares
ExecutiveDirectorsarerequiredtodeferapercentage(currently
40percent)oftheirtotalannualbonusintoPrudentialsharesforthreeyears.
Thereleaseofawardsisnotsubjecttoanyfurtherperformanceconditions.
Prudential
Long Term
Incentive Plan
TheCommitteehastheauthoritytoapplyamalusadjustmenttoall,oraportion
of,anoutstandingdeferredawardinspecificcircumstances.From2015,the
Committeealsohasthepowertorecoverall,oraportionof,amountsalready
paidinspecificcircumstancesandwithinadefinedtimeframe(clawback).
CurrentlyallExecutiveDirectorsparticipateinthePrudentialLongTerm
IncentivePlan(PLTIP).ThePLTIPhasathree-yearperformanceperiod.
Theperformancemeasuresattachedtoeachawardaredependentonthe
roleoftheexecutiveandwillbedisclosedintherelevantAnnualreporton
remuneration.TheCommitteehastheauthoritytoapplyamalusadjustment
toall,oraportionof,anoutstandingawardinspecificcircumstances.
For2015andsubsequentyears,theCommitteealsohasthepowerto
recoverall,oraportionof,amountsalreadypaidinspecificcircumstances
andwithinadefinedtimeframe(clawback).
From2017,PLTIPawardsareusuallysubjecttoanadditionaltwo-year
holdingperiodfollowingtheendofthethree-yearperformanceperiod.
Opportunity
TheChiefExecutive,M&Ghasa
bonusopportunityofthelowerofsix
timessalaryor0.75percentofM&G’s
operatingprofit.ForotherExecutive
DirectorsthemaximumAIP
opportunityisupto200percentof
salary.Annualawardsaredisclosed
intherelevantAnnualreporton
remuneration.
InadditiontotheAIP,theChairman
andCEO,NABUreceivesa
10percentshareoftheJackson
SeniorManagementBonusPool.
Themaximumvestingunderthis
arrangementis100percentof
theoriginaldeferralplusaccrued
dividendshares.
Thevalueofsharesawardedunder
thePLTIP(inanygivenfinancialyear)
maynotexceed550percentofthe
executive’sannualbasicsalary.
Awardsmadeinaparticularyearare
usuallysignificantlybelowthislimit
andaredisclosedintherelevant
Annualreportonremuneration.The
Committeewouldconsultwithmajor
shareholdersbeforeincreasingaward
levelsduringthelifeofthispolicy.
ThemaximumvestingunderthePLTIP
is100percentoftheoriginalshare
awardplusaccrueddividendshares.
Share ownership guidelines
Theguidelinesforshareownershipareasfollows:
— 400percentofsalaryfortheGroupChiefExecutive;and
— 250percentofsalaryforotherExecutiveDirectors.
Executiveshavefiveyearsfromtheimplementationoftheseincreasedguidelines(orfromthedateoftheirappointment,iflater)tobuild
thislevelofownership.SharesearnedanddeferredundertheAIPareincludedincalculatingtheExecutiveDirector’sshareholdingfor
thesepurposes.Unvestedshareawardsunderlong-termincentiveplansarenotincludedbutvestedshareawardsunderlong-term
incentiveplanswhicharesubjecttothetwo-yearholdingperiodareincluded.
ProgressagainsttheshareownershipguidelinesisdetailedintheStatementofDirectors’shareholdingssectionoftheAnnualreport
onremuneration.
138 Prudential plc AnnualReport2018
www.prudential.co.uk
Directors’ remuneration report continued Malus and clawback policy
TheCommitteemayapplyclawbackand/oramalusadjustmenttovariablepayincertaincircumstancesassetoutbelow.TheCommittee
candelaythereleaseofawardspendingthecompletionofaninvestigationwhichcouldleadtotheapplicationofmalusorclawback.
Circumstances when the Committee may exercise its discretion to apply malus or clawback to an award
Malus(appliesinrespectof
anyannualbonusorlong-term
incentiveaward)
Whereabusinessdecisiontakenduringtheperformanceperiodbythebusinessunitbywhichthe
participantwasemployedhasresultedinamaterialbreachofanylaw,regulation,codeofpractice
orotherinstrumentthatappliestocompaniesorindividualswithinthebusinessunit.
Allowsunvestedsharesawarded
underdeferredbonusandLTIP
planstobeforfeitedorreduced
incertaincircumstances.
Thereisamateriallyadverserestatementoftheaccountsforanyyearduringtheperformance
periodof(i)thebusinessunitinwhichtheparticipantworkedatanytimeinthatyear;and/or
(ii)anymemberoftheGroupwhichisattributabletoincorrectinformationabouttheaffairsof
thatbusinessunit.
Clawback
Allowscashandshareawards
toberecoveredbeforeorafter
releaseincertaincircumstances.
AnymatterariseswhichtheCommitteebelievesaffectsormayaffectthereputationofthe
CompanyoranymemberoftheGroup.
Whereatanytimebeforethefifthanniversaryofthestartoftheperformanceperiod,either
(i)thereisamateriallyadverserestatementoftheCompany’spublishedaccountsinrespectofany
financialyearwhich(inwholeorpart)comprisedpartoftheperformanceperiod;or(ii)itbecomes
apparentthatamaterialbreachofalaworregulationtookplaceduringtheperformanceperiod
whichresultedinsignificantharmtotheCompanyoritsreputation,andtheCommitteeconsiders
itappropriate,takingaccountoftheextentoftheparticipants’responsibilityfortherelevant
restatementorbreach,thatclawbackbeappliedtotherelevantparticipant.
ThefullDirectors’remunerationpolicysetsouttheCommittee’spowersinrespectofExecutiveDirectorsjoiningorleavingtheBoard,
whereachangeinperformanceconditionsisappropriateorinthecaseofcorporatetransactions(suchasatakeover,mergerorrights
issue).Thepolicyalsodescribeslegacylong-termincentiveplansunderwhichsomeExecutiveDirectorscontinuetoholdawards.
SubsequenttotheapprovaloftheDirectors’remunerationpolicybyourshareholders,wehavedeterminedthatforPLTIPawards
grantedin2019andsubsequentyearstheproportionvestingforthresholdperformancewillbereducedfrom25percentto20percent
ofthemaximumopportunity,andexternallyrecruitedExecutiveDirectorsappointedonorafter1March2019willbeofferedpension
benefitsof20percentofsalary,ratherthanthecurrentlevelof25percentofsalary.
Scenarios of total remuneration
ThefollowingchartprovidesanillustrationofthefuturetotalremunerationforeachExecutiveDirectorinrespectoftheirremuneration
opportunityfor2019.Threescenariosofpotentialoutcomeareprovidedbasedonunderlyingassumptionsshowninthenotestothe
chart.InlinewithchangestoSchedule8ofTheLargeandMedium-sizedCompaniesandGroups(AccountsandReports)(Amendment)
Regulations2013whichwouldapplyfromthenextDirectors’remunerationpolicy,wehaveindicatedthemaximumremunerationthat
wouldbedeliveredtoeachExecutiveDirectorbya50percentsharepricegrowthduringtherelevantperformanceperiod.
TheCommitteeissatisfiedthatthemaximumpotentialremunerationoftheExecutiveDirectorsisappropriate.Prudential’spolicyisto
offerExecutiveDirectorsremunerationwhichreflectstheperformanceandexperienceoftheexecutive,internalrelativitiesandGroup
and/orbusinessunitfinancialperformance.Inorderforthemaximumillustratedtotalremunerationtobepayable:
— FinancialperformancemustexceedtheGroupand/orbusinessunit’sstretchingbusinessplan;
— RelativeTSRmustbeatorabovetheupperquartilerelativetothepeergroup;
— Thebalancedscorecard,alignedtotheGroup’sstrategicpriorities,mustbefullysatisfied;
— Functionalandpersonalperformanceobjectivesmustbefullymet;
— PerformancemustbeachievedwithintheGroup’sandbusinessunits’riskframeworkandappetites;and
— TheCompany’ssharepricemustgrowby50percentoverthreeyears.
www.prudential.co.uk
AnnualReport2018 Prudential plc 139
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information £000
12,000
10,000
8,000
6,000
4,000
2,000
8,996
40%
51%
6,463
23%
64%
819
100%
0
13%
9%
1,039
100%
i
i
M
n
m
u
m
i
i
M
n
m
u
m
i
M
a
x
m
u
m
I
n
l
i
n
e
w
i
t
h
e
x
p
e
c
t
a
t
i
o
n
s
5,219
55%
25%
20%
i
M
a
x
m
u
m
2,892
41%
23%
36%
I
n
l
i
n
e
w
i
t
h
e
x
p
e
c
t
a
t
i
o
n
s
5,542
54%
26%
20%
i
M
a
x
m
u
m
3,082
41%
23%
36%
I
n
l
i
n
e
w
i
t
h
e
x
p
e
c
t
a
t
i
o
n
s
4,320
55%
24%
21%
i
M
a
x
m
u
m
2,414
41%
21%
38%
I
n
l
i
n
e
w
i
t
h
e
x
p
e
c
t
a
t
i
o
n
s
907
100%
i
i
M
n
m
u
m
1,119
100%
i
i
M
n
m
u
m
7,501
52%
25%
23%
i
M
a
x
m
u
m
4,276
38%
22%
40%
I
n
l
i
n
e
w
i
t
h
e
x
p
e
c
t
a
t
i
o
n
s
1,704
100%
i
i
M
n
m
u
m
11,035
62%
21%
17%
i
M
a
x
m
u
m
5,864
49%
1,843
100%
20%
31%
i
i
M
n
m
u
m
I
n
l
i
n
e
w
i
t
h
e
x
p
e
c
t
a
t
i
o
n
s
Michael Falcon
Mark FitzPatrick
John Foley
James Turner
Nic Nicandrou
Mike Wells
Fixed
Short-termincentives
Long-termincentives
Note
Thescenariosinthechartabovehavebeencalculatedonthefollowingassumptions:
Fixedpay
Basesalaryat1January2019.
Minimum
In line with expectations
Maximum
Pensionallowanceat1January2019.
Estimatedvalueofbenefitsbasedonamountspaidin2018.
ForMichaelFalconthishasbeenbasedonthevalueofbenefits
paidtohispredecessor,BarryStowe.
NicNicandrouandMichaelFalconarepaidinHK$andUS$
respectivelyandfigureshavebeenconvertedtoGBPforthe
purposesofthischart.
Annualbonus
Nobonuspaid.
Long-termincentives
(excludesdividends)
NoPLTIPvesting.
50%ofmaximumAIP.
100%ofmaximumAIP.
Jacksonbonuspoolattheaverage
ofthelastthreeyears.
Jacksonbonuspoolathighest
ofthelastthreeyears.
Vestingof62.5%ofawardunder
PLTIP(midwaybetweenthreshold
andmaximum).
Vestingof100%ofaward
underPLTIP;plus
Sharepricegrowthof50%
overthreeyears.
140 Prudential plc AnnualReport2018
www.prudential.co.uk
Directors’ remuneration report continued
Remuneration for Non-executive Directors and the Chairman
Non-executive Directors
Fees
AllNon-executiveDirectorsreceiveabasic
feefortheirdutiesasaBoardmember.
Additionalfeesarepaidforadded
responsibilitiessuchaschairmanshipand
membershipofcommitteesoractingasthe
SeniorIndependentDirector.Feesarepaid
toNon-executiveDirectorsincash.Fees
arereviewedannuallybytheBoardwith
anychangeseffectivefrom1July.
Non-executiveDirectorsarenoteligible
toparticipateinannualbonusplansor
long-termincentiveplans.
If,inaparticularyear,thenumberof
meetingsismateriallygreaterthanusual,
theCompanymaydeterminethatthe
provisionofadditionalfeesisfairand
reasonable.
Chairman
TheChairmanreceivesanannualfee
fortheperformanceoftherole.On
appointment,thefeemaybefixedfor
aspecifiedperiodoftime.Feeswill
otherwisebereviewedannuallywith
anychangeseffectivefrom1July.
TheChairmanisnoteligibletoparticipate
inannualbonusplansorlong-term
incentiveplans.
Benefits
Share ownership guidelines
TravelandexpensesforNon-executive
Directorsareincurredinthenormalcourse
ofbusiness,forexample,inrelationto
attendanceatBoardandCommittee
meetings.Thecostsassociatedwiththese
areallmetbytheCompany.
ItisexpectedthatNon-executiveDirectors
willholdshareswithavalueequivalentto
onetimestheannualbasicfee(excluding
additionalfeesforchairmanshipand
membershipofanycommittees).
Non-executiveDirectorsareexpectedto
attainthislevelofshareownershipwithin
threeyearsoftheirappointment.
TheChairmanmaybeofferedbenefits
including:
— Healthandwellnessbenefits;
— Protectionandsecuritybenefits;
TheChairmanhasashareownership
guidelineofonetimeshisannualfeeand
isexpectedtoattainthislevelofshare
ownershipwithinfiveyearsofthedate
ofhisappointment.
— Transportbenefits;
— Reimbursementofbusinessexpenses
(andanyassociatedtaxliabilities)
incurredwhentravellingoverseas
inperformanceofduties;and
— Relocationandexpatriatebenefits
(whereappropriate).
TheChairmanisnoteligibletoreceive
apensionallowanceortoparticipateinthe
Group’semployeepensionschemes.
InsettingtheDirectors’remunerationpolicy,theCommitteeconsidersarangeoffactorsincluding:
Statement of consideration of conditions elsewhere in the Group
AcrosstheGroup,remunerationisreviewedregularlywiththeintentionthatallemployeesarepaidappropriatelyinthecontextoftheir
localmarketandgiventheirindividualskills,experienceandperformance.Eachbusinessunit’ssalaryincreasebudgetissetwith
referencetolocalmarketconditions.TheCommitteeconsiderssalaryincreasebudgetsineachbusinessunitwhendeterminingthe
salariesofExecutiveDirectors.
PrudentialdoesnotconsultwithemployeeswhensettingtheDirectors’remunerationpolicy.Prudentialisaglobalorganisationwith
employeesandagentsinmultiplebusinessunitsandgeographies.Assuch,therearepracticalchallengesassociatedwithconsultingwith
employeesdirectlyonthismatter.Asmanyemployeesarealsoshareholders,theyareabletoparticipateinbindingvotesonthe
Directors’remunerationpolicyandannualvotesontheAnnualreportonremuneration.
Statement of consideration of shareholder views
TheCommitteeandtheCompanyundertakeregularconsultationwithkeyinstitutionalinvestorsontheremunerationpolicyand
itsimplementation.ThisengagementisledbytheRemunerationCommitteeChairandisanintegralpartoftheCompany’sinvestor
relationsprogramme.TheCommitteeisgratefultoshareholdersfortheirfeedbackandtakesthisintoaccountwhendetermining
executiveremuneration.AssetoutintheAnnualstatementfromtheChairmanoftheRemunerationCommittee,feedbackfrom
shareholdersandtheiradvisersinformedanumberofchangestotheCompany’s2019remunerationarrangements.
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AnnualReport2018 Prudential plc 141
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Annual report on remuneration
TheBoardhasestablishedAudit,Remuneration,RiskandNomination&GovernanceCommitteesasprincipalstandingcommittees
oftheBoard.ThesecommitteesformakeyelementoftheGroupgovernanceframework.
The operation of the Remuneration Committee
Members
AnthonyNightingale(ChairoftheCommittee)
KaiNargolwala
PhilipRemnant
ThomasWatjen
FieldsWicker-Miurin(membersince3September2018)
IndividualDirectors’attendanceatmeetingsthroughout2018issetoutintheGovernancesection.
Role and responsibility
TheroleandresponsibilitiesoftheCommitteearesetoutinitstermsofreference,whicharereviewedbytheCommitteeandapproved
bytheBoardonanannualbasis,andwhichcanbefoundontheCompany’swebsite.TheCommittee’sroleistoassisttheBoardin
meetingitsresponsibilitiesregardingthedetermination,implementationandoperationoftheoverallremunerationpolicyfortheGroup,
includingtheremunerationoftheChairmanandExecutiveDirectors,aswellasoverseeingtheremunerationarrangementsofotherstaff
withinitspurview.
TheprincipalresponsibilitiesoftheCommitteeare:
— DeterminingandrecommendingtotheBoardforapproval,theframeworkandpolicyfortheremunerationoftheChairman,Executive
DirectorsandothermembersoftheGroupExecutiveCommittee;
— Approvingthedesignofperformance-relatedpayschemesoperatedfortheExecutiveDirectorsandothermembersoftheGroup
ExecutiveCommittee,anddeterminingthetargetsandindividualpayoutsundersuchschemes;
— ReviewingthedesignanddevelopmentofallshareplansrequiringapprovalbytheBoardand/ortheCompany’sshareholders;
— ApprovingtheshareownershipguidelinesfortheChairmanandExecutiveDirectorsandothermembersoftheGroupExecutive
Committee,andmonitoringcompliance;
— ReviewingandapprovingindividualpackagesfortheExecutiveDirectorsandothermembersoftheGroupExecutiveCommittee,
andthefeesoftheChairmanandtheNon-executiveDirectorsoftheGroup’smaterialsubsidiaries;
— ReviewingandapprovingpackagestobeofferedtonewlyrecruitedExecutiveDirectorsandothermembersoftheGroupExecutive
Committee;
— ReviewingandapprovingthestructureandquantumofanyseverancepackageforExecutiveDirectorsandothermembersofthe
GroupExecutiveCommitteetoensuretheyarefairanddonotrewardfailure;
— EnsuringtheprocessforestablishingremunerationpolicyistransparentandconsistentwiththeGroup’sriskframeworkand
appetites,encouragingstrongriskmanagementandsolvencymanagementpractices;
— ReviewingtheworkforceremunerationpracticesandrelatedpoliciesacrosstheGroupwhensettingtheremunerationpolicyfor
ExecutiveDirectors,aswellasthealignmentofincentivesandawardswithculture;
— MonitoringtheremunerationandriskmanagementimplicationsofremunerationofseniorexecutivesacrosstheGroup,other
selectedrolesandthosewithanopportunitytoearninexcessof£1millioninaparticularyear;and
— OverseeingtheimplementationoftheGroupremunerationpolicyforthoseroleswithinscopeofthespecificarrangementsreferred
toinArticle275ofSolvencyII.
142 Prudential plc AnnualReport2018
www.prudential.co.uk
In2018,theCommitteemetfivetimes.Keyactivitiesateachmeetingareshowninthetablebelow:
Meeting
Key activities
Early March 2018
Approvethe2017Directors’remunerationreportandtheGenderpaygapreport;consider2017bonusawards
forExecutiveDirectors;considervestingofthelong-termincentiveawardswithaperformanceperiodending
on31December2017;approve2018long-termincentiveawards,performancemeasuresandplan
documentation;noteanupdateonregulationaffectingremuneration;andreviewtheappointmentofthe
Committee’sindependentadviser.
Mid-March 2018
Confirm2017annualbonusesandthevestingoflong-termincentiveawardswithaperformanceperiodending
on31December2017,inlightofauditedfinancialresults.
June 2018
September 2018
December 2018
Considerperformanceforoutstandinglong-termincentiveawards,basedonthehalf-yearresults;review
theremunerationofseniorexecutivesacrosstheGroup,employeeswitharemunerationopportunityover
£1millionperannumandemployeeswithinthescopeoftheSolvencyIIremunerationrules;reviewprogress
towardsshareownershipguidelinesbytheChairman,ExecutiveDirectorsandotherGroupExecutive
Committeemembers;approvetheexpenseapprovalprocessfortheGroupChiefExecutiveandChairman;
andapprovetheChairman’sfees.
Reviewproposed2019remunerationarrangementsforExecutiveDirectorsaheadofconsultationwith
shareholders;noteanupdateonregulationaffectingremuneration;reviewthepotentialimpactofthedemerger
onremunerationarrangements;reviewgenderpaygapreportingdata;andapprovetheCommittee’sterms
ofreferenceforrecommendationtotheBoard.
ReviewlevelofparticipationintheCompany’sall-employeeshareplansanddilutionlevelsresultingfromthe
Company’sshareplans;considerthepotentialimpactofthedemergeronremunerationarrangements;approve
GroupExecutiveCommitteemembers’2019salariesandincentiveopportunities;considertheannualbonus
measuresandtargetstobeusedin2019;reviewaninitialdraftofthe2018Annualreportonremuneration;
approvetheCommittee’s2019ScheduleofBusiness;approvethefeesforindependentnon-executivedirectors
ofMaterialSubsidiaries;andnoteanupdateonregulationaffectingremuneration.
Additionally,anumberofresolutionsinwritingwereapprovedbytheCommitteebetweenthesemeetingsrelatingtotheapprovalofthe
SolvencyIIRemunerationPolicyStatementcoveringthe2017financialyear;newExecutiveDirectors’remunerationarrangementsand
separationarrangementsforthoseExecutiveDirectorswhosteppeddownfromtheBoard;joiningarrangementsforthenewChairman
andChiefExecutiveOfficer,NABU;andtheM&GPrudentialChairman’sfee.
TheChairmanandtheGroupChiefExecutiveattendmeetingsbyinvitation.TheCommitteealsohadthebenefitofadvicefrom:
— GroupChiefRiskOfficer;
— ChiefFinancialOfficer;
— GroupHumanResourcesDirector;and
— DirectorofGroupRewardandEmployeeRelations.
IndividualsareneverpresentwhentheirownremunerationisdiscussedandtheCommitteeisalwayscarefultomanagepotential
conflictsofinterestwhenreceivingviewsfromExecutiveDirectorsorseniormanagementaboutexecutiveremunerationproposals.
During2018,DeloitteLLPwastheindependentadvisertotheCommittee.DeloittewasappointedbytheCommitteein2011following
acompetitivetenderprocess.Aspartofthisprocess,theCommitteeconsideredtheservicesthatDeloitteprovidedtoPrudentialandits
competitors,aswellasotherpotentialconflictsofinterest.DeloitteisamemberoftheRemunerationConsultants’Groupandvoluntarily
operatesundertheircodeofconductwhenprovidingadviceonexecutiveremunerationintheUK.Deloitteregularlymeetswiththe
ChairoftheCommitteewithoutmanagementpresent.TheCommitteeiscomfortablethattheDeloitteengagementpartnerandteam
providingremunerationadvicetotheCommitteedonothaveconnectionswithPrudentialthatmayimpairtheirindependenceand
objectivity.ThetotalfeespaidtoDeloittefortheprovisionofindependentadvicetotheCommitteein2018were£48,400(2017:
£56,000)chargedonatimeandmaterialsbasis.During2018,DeloittegavePrudentialmanagementadviceonremuneration,aswellas
providingguidanceoncapitaloptimisation,digitalandtechnology,taxation,internalaudit,realestate,globalmobilityandotherfinancial,
riskandregulatorymatters.RemunerationadviceisprovidedbyanentirelyseparateteamwithinDeloitte.Assetoutinthetableabove,
theCommitteereviewedDeloitte’sappointmentduring2018andconsideredDeloittetobeindependent.
Inaddition,managementreceivedexternaladviceanddatafromanumberofotherproviders.Thisincludedmarketdataandlegal
counsel.Thisadvice,andtheseservices,arenotconsideredtobematerial.
Duringtheyear,theCompanyhascompliedwiththeappropriateprovisionsoftheUKCorporateGovernanceCoderegardingDirectors’
remuneration.
www.prudential.co.uk
AnnualReport2018 Prudential plc 143
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Table of 2018 Executive Director total remuneration (the ‘single figure’)
£000s
MarkFitzPatrick
JohnFoley
NicNicandrou1,6
AnneRichards2
BarryStowe3,6
JamesTurner4
MikeWells5
Total
Of which:
2018
salary
745
781
1,023
249
867
521
1,126
2018
taxable
benefits*
89
123
396
102
70
109
407
2018
total
bonus
1,241
1,186
1,692
–
4,935
793
2,133
Amount
deferred into
Prudential
shares†
Amount
paid in cash
2018
LTIP
releases‡
2018
pension
benefits§
Total 2018
remuneration
the ‘single
figure’¶
745
712
1,015
–
2,961
476
1,280
496
474
677
–
1,974
317
853
–
1,511
1,433
–
2,761
347
3,486
186
195
258
62
217
130
282
2,261
3,796
4,802
413
8,850
1,900
7,434
5,312
1,296
11,980
7,189
4,791
9,538
1,330
29,456
*Benefitsinclude(whereprovided)thecostofprovidingtheuseofacaranddriver,medicalinsurance,securityarrangementsandrelocation/expatriatebenefits.
†Thedeferredpartofthebonusissubjecttomalusandclawbackinaccordancewiththemalusandclawbackpoliciesbutnofurtherconditions.
‡Inlinewiththeregulations,theestimatedvalueofthe2018PLTIPreleaseshasbeencalculatedbasedontheaverageshare/ADRpriceoverthelastthreemonthsof2018(£15.34/US$39.41)
andincludestheaccumulateddividendsdeliveredintheformofshares/ADRs.TheactualvalueofPLTIPs,basedonthesharepriceonthedateawardsarereleased,willbeshowninthe
2019report.InlinewiththeearlyadoptionofrequirementsundertheUKCompanies(MiscellaneousReporting)Regulations2018,itisestimatedthat15.3percentofthevalueofthe
2018LTIPreleasesisattributabletosharepricegrowthoverthevestingperiodasawardsweregrantedusingashare/ADRpriceof£12.99/US$37.29in2016.TheCommitteeconcluded
thatnodiscretionwillbeappliedindeterminingtheremunerationresultingfromthe2018LTIPreleasesasaresultofsharepriceappreciation.
§2018pensionbenefitsincludecashsupplementsforpensionpurposesandcontributionsintoDCschemesasoutlinedonpage147.
¶Eachremunerationelementisroundedtothenearest£1,000andtotalsarethesumoftheseroundedfigures.Totalremunerationiscalculatedusingthemethodologyprescribedby
Schedule8ofStatutoryInstrument2013No.1981–TheLargeandMedium-sizedCompaniesandGroups(AccountsandReports)(Amendment)Regulations2013.
Notes
1 TofacilitateNicNicandrou’srelocationtoHongKong,Nic’sbenefitsinclude£267,000tocoveraccommodation.
2 AnneRichardssteppeddownfromtheBoardon10August2018.TheremunerationabovewaspaidinrespectofherserviceasanExecutiveDirector.
3 BarryStoweretiredfromtheBoardon31December2018.
4 JamesTurnerwasappointedtotheBoardon1March2018.
5 TofacilitatehisappointmentasGroupChiefExecutiveandmovetotheUKin2015,MikeWells’sbenefitsinclude£311,000tocovermortgageinterest,whichceasedeffective
30November2018.
6 BarryStoweandNicNicandrouarepaidintheirlocalcurrencyandexchangeratefluctuationswillthereforeimpactthereportedsterlingvalue.
144 Prudential plc AnnualReport2018
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Directors’ remuneration report continued
Table of 2017 Executive Director total remuneration (the ‘single figure’)
£000s
MarkFitzPatrick1
JohnFoley
PennyJames2
NicNicandrou3,8
AnneRichards4
BarryStowe5,8
MikeWells6
TonyWilkey7
Total
2017
taxable
benefits*
18
115
81
303
153
59
493
456
2017
total
bonus
1,197
1,283
–
1,414
2,400
5,354
2,072
787
Of which:
Amount
deferred into
Prudential
shares†
Amount
paid in cash
2017
LTIP
releases‡
2017
pension
benefits§
Total 2017
remuneration
the ‘single
figure’¶
718
770
–
848
1,440
3,212
1,243
472
479
513
–
566
960
2,141
829
315
–
2,243
–
1,901
–
3,028
4,616
2,819
84
191
119
218
100
220
276
123
1,634
4,597
678
4,705
3,053
9,541
8,560
4,675
1,678
14,507
8,703
5,803
14,607
1,331
37,443
2017
salary
335
765
478
869
400
880
1,103
490
5,320
*Benefitsinclude(whereprovided)thecostofprovidingtheuseofacaranddriver,medicalinsurance,securityarrangementsandrelocation/expatriatebenefits.
†Thedeferredpartofthebonusissubjecttomalusandclawbackinaccordancewiththemalusandclawbackpoliciesbutnofurtherconditions.
‡Inlinewiththeregulations,theestimatedvalueof2017LTIPreleaseshasbeenrecalculatedbasedontheactualshare/ADRpriceonthedateawardswerereleased,being£17.47/US$49.24
fortheMarchreleaseandashare/ADRpriceof£18.41/US$49.38intheJunerelease.TherestatedvalueofthoseawardsreleasedinJunealsoreflectsdividendspaidonthoseawardsin
thepreviousmonth.
§2017pensionbenefitsincludecashsupplementsforpensionpurposesandcontributionsintoDefinedContribution(DC)schemes.
¶Eachremunerationelementisroundedtothenearest£1,000andtotalsarethesumoftheseroundedfigures.Totalremunerationiscalculatedusingthemethodologyprescribedby
Schedule8ofStatutoryInstrument2013No.1981–TheLargeandMedium-sizedCompaniesandGroups(AccountsandReports)(Amendment)Regulations2013.
Notes
1 MarkFitzPatrickwasappointedtotheBoardon17July2017.
2 PennyJamessteppeddownfromtheBoardon30September2017.TheremunerationabovewaspaidinrespectofherserviceasanExecutiveDirector.
3 TofacilitateNicNicandrou’srelocationtoHongKongtotakeuphisnewroleasChiefExecutive,PrudentialCorporationAsia,Nic’sbenefitsincluderelocationsupportbeingtemporary
accommodationof£126,000andtaxandimmigrationadviceof£33,000.
4 TofacilitateherappointmentasChiefExecutive,M&G,in2016AnneRichards’sbenefitsincludetravelcostsfromAnne’shomeinEdinburghtoLondonof£15,000.
5 BarryStowe’sbonusfigureexcludesacontributionof£16,200fromaprofitsharingplanwhichhasbeenmadeintoa401(k)retirementplaninrespectofhisroleasChairman&CEO,
NABU.Thisisincludedunder2017pensionbenefits.
6 TofacilitatehisappointmentasGroupChiefExecutiveandmovetotheUKin2015,MikeWells’sbenefitsinclude£340,000tocovermortgageinterestand£37,000tocoverhomeleaveflights.
7 TonyWilkeysteppeddownfromtheBoardon17July2017.TheremunerationabovewaspaidinrespectofhisserviceasanExecutiveDirector.Hisbenefitsinclude£148,000for
housing,£24,000forhomeleaveflightsanda£235,000ExecutiveDirectorLocationAllowance.TwooftheLTIPreleasesrelatetohispreviousrole,priortohisserviceasan
ExecutiveDirector.
8 BarryStowe,TonyWilkeyand,followinghisappointmentasChiefExecutive,PrudentialCorporationAsia,NicNicandrouarepaidintheirlocalcurrencyandexchangerate
fluctuationswillthereforeimpactthereportedsterlingvalue.
www.prudential.co.uk
AnnualReport2018 Prudential plc 145
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
Remuneration in respect of performance in 2018
Base salary
ExecutiveDirectors’salarieswerereviewedin2017withchangeseffectivefrom1January2018.WhentheCommitteetookthese
decisionsitconsidered:
— Thesalaryincreasebudgetsforotheremployees,whichvaryacrossourbusinessunits,reflectinglocalmarketconditions;
— TheperformanceandexperienceofeachExecutiveDirector;
— TherelativesizeofeachExecutiveDirector’srole;and
— TheperformanceoftheGroup.
Asreportedlastyear,aftercarefulconsiderationbytheCommittee,allExecutiveDirectorsreceivedasalaryincreaseof2percent.
The2018salaryincreasebudgetsforotheremployeesacrossourbusinessunitswerebetween2.5percentand10percent.Nochanges
weremadetoExecutiveDirectors’maximumopportunitiesundereithertheannualincentiveorthelong-termincentiveplans.
Toprovidecontextforthemarketreview,informationwasalsodrawnfromthefollowingmarketreferencepoints:
Executive
MarkFitzPatrick
ChiefFinancialOfficer
Role
Benchmark(s) used to assess remuneration
JohnFoley
ChiefExecutive,M&GPrudential
NicNicandrou
ChiefExecutive,Prudential
CorporationAsia
AnneRichards
ChiefExecutive,M&G
BarryStowe
Chairman&CEO,NABU
JamesTurner1
GroupChiefRiskOfficer
MikeWells
GroupChiefExecutive
— FTSE40
— Internationalinsurancecompanies
— FTSE40
— Internationalinsurancecompanies
— WillisTowersWatsonAsianInsuranceSurvey
— McLaganUKInvestmentManagementSurvey
— Internationalinsurancecompanies
— WillisTowersWatsonUSFinancialServicesSurvey
— LOMAUSInsuranceSurvey
— FTSE40
— FTSE50insurers
— FTSE40
— Internationalinsurancecompanies
Note
1 JamesTurnerwasappointedtotheroleofGroupChiefRiskOfficerandtotheBoardon1March2018.Hissalarywasreviewedonappointment.
Asaresult,ExecutiveDirectorsreceivedthefollowingsalaryincreases:
Executive Director
MarkFitzPatrick1
JohnFoley
NicNicandrou2
AnneRichards3
BarryStowe
JamesTurner4
MikeWells
2017
salary
2018
salary
£730,000
£765,000
HK$10,500,000
£400,000
US$1,134,000
N/A
£1,103,000
£745,000
£781,000
HK$10,710,000
£408,000
US$1,157,000
£625,000
£1,126,000
Notes
1 MarkFitzPatrickwasappointedChiefFinancialOfficeron17July2017.Theannualised2017salaryabovewaspaidinrespectofhisserviceasChiefFinancialOfficer.
2 NicNicandrouwasappointedChiefExecutive,PrudentialCorporationAsiaon17July2017.Theannualised2017salaryabovewaspaidinrespectofhisserviceasChiefExecutive,
PrudentialCorporationAsia.
3 AnneRichardssteppeddownfromtheBoardon10August2018.HeremploymentwiththeCompanyendedon30November2018andher2018annualisedsalaryisillustratedabove.
4 JamesTurnerwasappointedtotheBoardon1March2018.Theannualised2018salaryabovewaspaidinrespectofhisserviceasGroupChiefRiskOfficer.
146 Prudential plc AnnualReport2018
www.prudential.co.uk
Directors’ remuneration report continued Pension entitlements
Pensionprovisionsin2018were:
Executive Director
BarryStowe
NicNicandrou
2018 pension arrangement
Pensionsupplementof25percentofsalary,
partofwhichispaidasacontributiontoan
approvedUSretirementplan.
Life assurance provision
Twotimessalary
Pensionsupplementinlieuofpensionof
25percentofsalaryandaHK$18,000
employerpaymenttotheHongKong
MandatoryProvidentFund.
Eighttimessalary
UK-basedexecutives
Pensioncontributiontodefinedcontribution
planand/orpensionsupplementinlieuof
pensionof25percentofsalary.
Uptofourtimessalaryplusadependants’
pension
JohnFoleypreviouslyparticipatedinanon-contributorydefinedbenefitschemethatwasopenatthetimehejoinedtheCompany.
Theschemeprovidedanaccrualof1/60thoffinalpensionableearningsforeachyearofpensionableservice.Johnreceivedpension
paymentsof£15,636perannumwhichincreasedto£16,061perannumfrom1April2018,inlinewiththeConsumerPricesIndex.
ThepensionwillcontinuetobesubjecttostatutoryincreasesinlinewiththeConsumerPricesIndex.
Annual bonus outcomes for 2018
Target setting
ForthefinancialAIPmetricswhichcomprise80percentofthebonusopportunityforallExecutiveDirectorsapartfromtheGroupChief
RiskOfficer,theperformancerangesaresetbytheCommitteepriorto,oratthebeginningof,theperformanceperiod.Theserangesare
basedontheannualbusinessplansapprovedbytheBoardandreflecttheambitionsoftheGroupandbusinessunits,inthecontextof
anticipatedmarketconditions.
Personalobjectivescomprise20percentofthebonusopportunityforallExecutiveDirectorsapartfromtheGroupChiefRiskOfficer,for
whomthisaccountsfor50percentofthetotalbonusopportunity.Theseobjectivesareestablishedatthestartoftheyearandreflectthe
Company’sStrategicPrioritiessetbytheBoard.
InlinewiththeremunerationrequirementsofSolvencyII,functionalobjectivesaccountfortheremaining50percentoftheGroupChief
RiskOfficer’sbonusopportunity.ThesearebasedontheGroupRiskPlanandaredevelopedwithinputfromtheChairmanoftheGroup
RiskCommittee.
AIPpaymentsaresubjecttomeetingSolvencyIIminimumcapitalthresholdswhicharealignedtotheGroupandbusinessunit
riskframeworkandappetites(asadjustedforanyGroupRiskCommitteeand/orbusinessunitriskcommitteesapproved
counter-cyclicalbuffers).
TheCommitteealsoseeksadvicefromtheGroupRiskCommitteeonriskmanagementconsiderationstobeappliedtoremuneration
architectureandperformancemeasures.Thisistoensureriskmanagementcultureandconductisappropriatelyreflectedinthedesign
andoperationofExecutiveDirectors’remuneration.
ExecutiveDirectors’2018bonusesweredeterminedbytheachievementoffourGroupmeasures,namelyoperatingprofit,freesurplus,
EEVnewbusinessprofitandcashflow,whicharealignedtotheGroup’sgrowthandcashgenerationfocus.
IncompliancewithSolvencyII,theweightingsoftheGroupChiefRiskOfficer’sAIPperformancetargetsrelatetoacombinationof
functionalandpersonalmeasuresonly.
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AnnualReport2018 Prudential plc 147
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Performance assessment
TheCommitteedeterminestheoverallvalueofthebonus,takingaccountoftheinputsdescribedaboveandanyotherfactorswhichit
considersrelevant.Thetablebelowillustratestheweightingofperformancemeasuresfor2018andthelevelofachievementunderthe
AIP.ThetotalbonusoutcomesreflectthestrongperformanceduringtheyearasdiscussedinthissectionandintheAnnualStatement
fromtheChairmanoftheRemunerationCommittee.
Weighting of measures
(% of total bonus opportunity)
Achievement against
performance measures
Group financial
measures
Business unit
financial
measures
Personal/
functional
objectives
Financial
measures
(%)
Personal/
functional
objectives
(%)
2018 AIP
outcome1
(% of total bonus
opportunity)
80%
20%
20%
20%
80%
–
80%
–
60%
60%
60%
–
–
–
20%
20%
20%
20%
20%
100%
20%
94%
82%
94%
N/A
94%
N/A
94%
99%
92%
84%
N/A
83%
95%
96%
95%
84%
92%
nil
92%
95%
95%
Executive Director
MarkFitzPatrick
JohnFoley
NicNicandrou
AnneRichards2
BarryStowe3
JamesTurner
MikeWells
Notes
1 Allbonusawardsaresubjectto40percentdeferralforthreeyearsandthedeferredbonuswillbepaidinPrudentialplcsharesorADRs.
2 AnneRichardssteppeddownfromtheBoardon10August2018.HeremploymentwiththeCompanyendedon30November2018.No2018bonuswasawarded.
3 BarryStoweretiredfromtheBoardon31December2018andremainedeligibletoreceivehis2018AIPaward.BarryStoweisalsoeligibletoreceive10percentoftheJackson
bonuspool.
Financial performance
TheCommitteereviewedperformanceagainsttheperformancerangesatitsmeetinginMarch2019.2018Groupoperatingprofitand
GroupfreesurplusgenerationexceededthestretchingtargetsestablishedbytheBoard.Allofourbusinessunitsachievedtarget
remittanceslevelsand,althoughlowerthanthepriorperiod,weachievedourobjectivetobalancenetremittancessufficienttocoverthe
dividendandcorporatecosts,withreinvestmentinprofitableopportunitieswithinthebusinessunits,andmaintainedsignificantcash
stockatthecentre.ThebusinessunitremittancescontributedtoGroupcashflow,whichapproachedthemaximumtarget.GroupEEV
newbusinessprofitwasbetweenthresholdandplan.
TheCommitteeconsideredareportfromtheGroupChiefRiskOfficerwhichhadbeenapprovedbytheGroupRiskCommittee.This
reportconfirmedthatthe2018resultswereachievedwithintheGroup’sandbusinessunits’riskframeworkandappetite.TheGroup
ChiefRiskOfficeralsoconsideredtheeffectivenessofriskmanagementandinternalcontrols,andspecificactionstakentomitigaterisks,
particularlywherethesemaybeattheexpenseofprofitsorsales.ThereportalsoconfirmedthattheGroupmetSolvencyIIminimum
capitalthresholdswhichwerealignedtotheGroupandbusinessunitriskframeworkandappetites.TheGroupChiefRiskOfficer’s
recommendationsweretakenintoaccountbytheCommitteewhendeterminingAIPoutcomesforExecutiveDirectors.
Thelevelofperformancerequiredforthreshold,planandmaximumpaymentagainsttheGroup’s2018AIPfinancialmeasuresandthe
resultsachievedaresetoutbelow.
2018 AIP measure
Groupoperatingprofit
Groupfreesurplusgenerated
Groupcashflow
GroupEEVnewbusinessprofit
Weighting
Threshold
(£m)
Plan
(£m)
Maximum
(£m)
Achievement
(£m)
35%
30%
20%
15%
3,691
3,235
(237)
3,663
3,991
3,370
10
3,897
4,290
3,572
93
4,053
4,827
4,047
58
3,877
TheCommitteehadregardtotheachievementagainsttheperformancemeasuresandtheGroupChiefRiskOfficer’sreportanddecided
nottoapplyadiscretionaryadjustmenttothearithmeticoutcomeunderthefinancialelementofthe2018bonus.TheBoardbelievesthat,
duetothecommercialsensitivityofthebusinessunittargets,disclosingfurtherdetailsofthesetargetsmaydamagethecompetitive
positionoftheGroup.
148 Prudential plc AnnualReport2018
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Directors’ remuneration report continued Personal performance
AssetoutinourDirectors’remunerationpolicy,aproportionoftheannualbonusforeachExecutiveDirectorisbasedonthe
achievementofpersonalobjectivesincluding:
— Theexecutivemeetingtheirindividualconductandcustomermeasures;
— Theexecutive’scontributiontoGroupstrategyasamemberoftheBoard;and
— Specificgoalsrelatedtothebusinessorfunctionforwhichtheyareresponsibleandprogressonmajorprojectsincludingthe
demerger.
AttheendoftheyeartheCommitteeconsideredtheperformanceofeachExecutiveDirectoragainstobjectivesestablishedatthestart
oftheyear.AtitsmeetinginMarch2019itconcludedthattherehadbeenahighlevelofperformanceagainstthese2018objectives,as
summarisedbelow.Allexecutivesmettheirindividualconductmeasuresandtherewasahighlevelofindividualcontributionmadeby
eachExecutiveDirectortotheachievementofGroupstrategyduring2018.
Business
Overview of objectives
2018 performance against objectives
GroupHeadOffice
Prudential
CorporationAsia
andAfrica
Objectivesincluded
progressingthedemergerof
theM&GPrudentialbusiness
fromPrudentialplc,developing
relationshipswithstakeholders,
enhancingexternalpublications,
continueddevelopmentof
executivebenchstrengthand
leveragingdigitalopportunities.
Objectivesincludedleveraging
digitalopportunities,
diversifyingdistribution
channels,continued
developmentofexecutive
benchstrength,developing
EastspringInvestments
andgrowingtheGroup’s
Africafootprint.
— AnnouncedthedemergerofM&GPrudentialfromPrudentialplcresulting
intwoseparately-listedcompanies,eachwithitsowndistinctinvestment
prospectsinordertofurtherstrengthentwoalreadystrongbusinessesfor
thebenefitofcustomers;
— AnnouncedthattheHongKongInsuranceAuthoritywouldbethe
Group-widesupervisorafterthedemergerofM&GPrudential;
— Raised£1.6billionofsubordinateddebt,withsubstitutionclausestobe
activatedondemerger,supportingthecapitalrebalancingacross
PrudentialplcandM&GPrudential;and
— WontheInsurancecategoryofManagementToday’s‘Britain’sMost
AdmiredCompanies’awardforthesecondconsecutiveyear.
— EnteredanewpartnershipwithAlkanzaandbuiltarobo-adviceplatform
tocreatebespokeportfoliosforourwealthmanagementclientsinTaiwan;
— LaunchedourinnovativeandexclusivepartnershipwithBabylonHealth
tobringacomprehensivesetofdigitalhealthtoolstoourcustomerswhich
ispartofourambitiontomakehealthcaremoreaccessibleandaffordable
inAsia;
— EstablishedEastpring’swhollyforeign-ownedenterpriseinShanghai
andextendedourassetmanagementpresencetoThailandfollowing
theacquisitionofTMBAssetManagement;
— EastspringInvestmentsnamedbothlargestretailassetmanagerand
largestinstitutionalassetmanagerinAsia,excludingJapan,intheAsia
AssetManagementannualrankings;
— Wontophonoursinthisyear’sAsianInvestor’sInstitutionalExcellence
Awards;and
— Extendedourlong-termpartnershipwithStandardCharteredBankin
Ghanaandsignedalong-termexclusivepartnershipwithZambia’slargest
retailbank,ZambiaNationalCommercialBankPlctoenableourproducts
tobeofferedtomorethanamillionnewcustomersacrossthecountry.
www.prudential.co.uk
AnnualReport2018 Prudential plc 149
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Business
Overview of objectives
2018 performance against objectives
NorthAmerican
BusinessUnit
Objectivesincludedleveraging
digitalopportunities,developing
ourproductrangeandfocusing
oncorebusinessareas.
— LaunchedJackson’sFinancialFreedomForLifecampaigntoencourage
Americanstosignupforanannuitythatwillprotecttheminretirement;
— CollaboratedwiththeEnvestnetInsuranceExchangetoofferourproducts
onitsplatform;
— JacksonlaunchedMarketProtectorandMarketProtectorAdvisory,two
newfixedannuitieswithindex-linkedinteresttoprovideconsumerswith
acombinationoftax-deferredinvestmentgrowth,protectionfrommarket
riskandtheflexibilitytoadapttochangingneedsinretirement;
— EnteredintoakeydistributionpartnershipwithStateFarm,further
strengtheningourmarket-leadingdistributionfootprint;and
— WontheContactCentreWorldClassCXCertificationandHighest
CustomerServicefortheFinancialIndustryawardsbyTheServiceQuality
MeasurementGroup,Inc.
— Reinsured£12billionofUKannuitypoliciesandcompletedthefirststages
attheHighCourtofEnglandandWalesforthetransferofPrudentialUK
annuitiestoRothesayLifePlc;
— EstablishedanewM&GPrudentialleadershipteam,implementedanew
governancemodelandbuiltasetofunifiedcorporatesupportservicesin
preparationfordemergerfromPrudentialplc;
— Introducedanewdigitalserviceforinvestmentbondcustomerswhichhas
reducedcashwithdrawalwaitingtimesbyalmost80percent;and
— LaunchedtheLuxembourgSICAVfundrangewith£21billionassetsunder
managementasaninvestmentininternationalgrowthandtominimise
disruptionofBrexitforcustomers.
M&GPrudential
Objectivesincludedcompleting
thesaleoftheshareholder
annuityportfoliotoRothesay
LifePlc,progressingthe
demergeroftheM&GPrudential
businessfromPrudentialplc,
continuingtobuildpositive
relationshipswithregulators,
leveragingdigitalopportunities,
developingourrangeof
productsandinvestment
offerings,andcontinued
developmentofexecutive
benchstrength.
Functional performance
TheChairoftheGroupRiskCommitteeundertakestheassessmentofperformanceagainstfunctionalobjectivesfortheGroupChief
RiskOfficer.2018achievementissummarisedbelow:
Overview of functional objectives
2018 performance against objectives
DefiningandmaintainingaGroup-wideriskpolicy,
appetiteandbusinessunitlimitsandtriggers
framework,andoversight/controllingofadherenceto
thisframework.
EnsuringtheGroupRiskFunctionmaintains
appropriateriskoversightacrosstheGroup,and
enablingtheGroupRiskCommitteeandBoardto
dischargetheirresponsibilitiesinrespectofrisk
management.
Deliveringregulatoryrequirements,includingthose
requiredunderSolvencyII,theGroup’sOwnRiskand
SolvencyAssessment,andthoserelatingtothe
Group’sdesignationasaGlobalSystemicallyImportant
Insurer.
Providingriskguidance,opinionandassuranceon
criticaltransformationactivity,includingthedemerger.
— Successfullyenhancedanappropriatelydefinedsystemofpolicies,risk
appetitesandlimits.ProvidedstrongoversightofGroup-wideadherence
inaccordancewiththerequirementsoftheGroupRiskMandate.
— ProvidedkeyinsightandanalysisonemergingissuestotheGroupRisk
CommitteeandBoardthroughouttheyear,facilitatingtheperformance
oftheirrespectiveduties.
— Strengthenedfocusonareasofstrategicrisk,significantlyenhancing
Group-widetransformationoversightdeliveringassurance,riskguidance
andopinionsoncriticaltransformationactivity.
— Deliveredanextensivesetofregulatorydeliverables,includingtheGroup’s
ORSAReport,SystemicRiskManagementPlan,LiquidityRisk
ManagementPlanandRecoveryPlan.Ensuredappropriateinternalmodel
validationperSolvencyIIrequirements.
— Positiveengagementwithregulatorybodiesthroughouttheyear,including
proactiveengagementwiththeHongKongInsuranceAuthorityasthe
regulator-electfortheinternationalGroup.
2018 Jackson bonus pool
In2018,theJacksonbonuspoolwasdeterminedbyJacksonNationalLifeInsuranceCompany’sprofitability,remittancestoGroupand
advisorysales.AcrossallthesemeasuresJacksonNationalLifeInsuranceCompanydeliveredstrongperformance,andmoredetailon
thatperformanceissetoutonpages26to31.TheCommitteealsoconsideredperformanceinanumberofkeyactivitiesandthedelivery
againstcertainnon-financialGrouprequirements.Asaresultofthisassessment,theCommitteedeterminedthatBarryStowe’sshareof
thebonuspoolwasUS$4,886,910.
150 Prudential plc AnnualReport2018
www.prudential.co.uk
Directors’ remuneration report continued Outcome of bonus assessments
OnthebasisofthestrongperformanceoftheGroupanditsbusinessunitsandtheCommittee’sconsiderationofthetotalbonusvalue
inlightofitsviewofallrelevantcircumstances,includingtheoverallcontributionoftheexecutive,behavioural,conductandrisk
managementconsiderations,theCommitteedeterminedthefollowing2018AIPawards.Fortypercentofallawardsaredeferredinto
sharesforthreeyears:
Executive Director
Role
MarkFitzPatrick
JohnFoley
NicNicandrou
ChiefFinancialOfficer
ChiefExecutive,M&GPrudential
ChiefExecutive,Prudential
AnneRichards2
BarryStowe3
JamesTurner4
MikeWells
CorporationAsia
ChiefExecutive,M&G
Chairman&CEO,NABU
GroupChiefRiskOfficer
GroupChiefExecutive
2018
salary1
£745,000
£781,000
HK$10,710,000
£249,000
US$1,157,000
£521,000
£1,126,000
Maximum
2018 AIP
(% of salary)
Actual 2018
AIP award
(% of maximum
opportunity)
2018 bonus award
(including cash and
deferred elements)
175%
180%
180%
600%
160%
160%
200%
95%
84%
92%
0%
92%
95%
95%
£1,241,000
£1,186,000
£1,692,000
£nil
£4,935,000
£793,000
£2,133,000
Notes
1 SalarypaidinrespectofservicesasanExecutiveDirector.
2 AnneRichardssteppeddownfromtheBoardon10August2018.HeremploymentwiththeCompanyendedon30November2018.Themaximumbonusopportunityshown
representsherannualopportunityasanExecutiveDirector,butnobonuswaspaid.
InadditiontotheAIP,BarryStowealsoparticipatesintheJacksonbonuspool.
3
4 JamesTurnerwasappointedtotheBoardon1March2018.TheAIPshownabovewasawardedinrespectofhisserviceasanExecutiveDirector.
Remuneration in respect of performance periods ending in 2018
Prudential Long Term Incentive Plan (PLTIP)
Target setting
Ourlong-termincentiveplanshavestretchingperformanceconditionsthatarealignedtothestrategicprioritiesoftheGroup.In2016,
allExecutiveDirectorsweregrantedawardsunderthePLTIP.IndeterminingthetargetstheCommitteehadregardtothestretching
natureofthethree-yearBusinessPlanforoperatingprofitsetbytheBoard.
Theweightingsofthesemeasuresaredetailedinthetablebelow.
Executive Director1
JohnFoley
NicNicandrou4
BarryStowe
JamesTurner5
MikeWells
Weighting of measures
Group TSR2
Operating profit (Group or business unit)3
50%
50%
50%
50%
50%
50%(businessunittarget)
50%(Grouptarget)
50%(businessunittarget)
50%(Grouptarget)
50%(Grouptarget)
Notes
1 ThistableincludescurrentExecutiveDirectorswith2016PLTIPawards.AnneRichardssteppeddownfromtheBoardon10August2018andher2016PLTIPawardlapsed.
2 GroupTSRismeasuredonarankedbasisoverthreeyearsrelativetopeers.
3 Operatingprofitismeasuredonacumulativebasisoverthreeyears.
4 NicNicandrouwasgrantedthisawardwhenhewasintheroleofChiefFinancialOfficer.TheperformancemeasuresattachedtohisPLTIPawarddidnotchangefollowinghis
appointmenttotheroleofChiefExecutive,PrudentialCorporationAsiain2017.
5 JamesTurnerwasgrantedthisawardwhenhewasinhispreviousroleofDirectorofGroupFinance.TheperformancemeasuresattachedtohisPLTIPawarddidnotchangefollowing
hisappointmenttotheroleofGroupChiefRiskOfficeron1March2018.
UndertheGroupTSRmeasureusedfor2016PLTIPawards,25percentoftheawardvestsforTSRatthemedianofthepeergroup
increasingtofullvestingforperformancewithintheupperquartile.TSRismeasuredonalocalcurrencybasissincethishasthebenefit
ofsimplicityanddirectnessofcomparison.Thepeergroupforthe2016awardsis:
Aegon
Allianz
Legal&General
OldMutual
SwissRe
Aflac
Aviva
Manulife
PrudentialFinancial
ZurichInsuranceGroup
AIA
AXA
MetLife
StandardLife
AIG
Generali
MunichRe
SunLifeFinancial
FollowingthemergerofStandardLifeandAberdeenAssetManagementduringtheperformanceperiod,theCommitteedetermined
thatStandardLifewouldberetainedinthepeergroupforthepre-mergerperiodandthecombinedentitywouldbeincludedinthepeer
groupfromthedateofthemergerforalloutstandingPLTIPawards.Inaddition,followingthedemergerofQuilterfromOldMutualand
OldMutual’sdelistingfromtheFTSEon26June2018,theCommitteedeterminedthatOldMutualberetainedasaTSRpeerwithno
adjustmenttoitsperformanceduringtheperiodpriortoitsdemergeranddelisting,andthatOldMutual’sTSRperformancefromthe
dateofitsdemergeranddelistingwouldtrackanindexofthepeers(excludingPrudentialplc)foralloutstandingPLTIPawards.
www.prudential.co.uk
AnnualReport2018 Prudential plc 151
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Performance assessment
Indecidingtheproportionoftheawardstobereleased,theCommitteeconsideredactualfinancialresultsagainsttheseperformance
targets.TheCommitteealsoreviewedunderlyingCompanyperformancetoensurevestinglevelswereappropriate,includingan
assessmentofwhetherresultswereachievedwithintheGroup’sandbusinessunits’riskframeworkandappetite.TheDirectors’
remunerationpolicycontainsfurtherdetailsofthedesignofPrudential’slong-termincentiveplans.
Prudential’sTSRperformanceduringtheperformanceperiod(1January2016to31December2018)wasrankedatmedianofthepeer
group.TheportionoftheawardsrelatedtoTSRthatthereforevestedwas25percent.
Undertheoperatingprofitmeasure,25percentofthe2016awardsvestformeetingthethresholdoperatingprofittargetsetatthe
startoftheperformanceperiod,increasingtofullvestingforperformanceatorabovethestretchlevel.Thetablebelowillustratesthe
cumulativeperformanceachievedover2016to2018comparedtotheGrouptargetssetin2016:
Group
Operatingprofit
2016-18 cumulative targets
Threshold
Plan
Maximum
2016-18
cumulative
achievement
Vesting under
the operating
profit element
£10,837m
£12,041m
£13,245m
£13,782m
100%
TheCommitteedeterminedthatthecumulativeoperatingprofittargetestablishedforthePLTIPshouldbeexpressedusingexchange
ratesconsistentwiththereporteddisclosures.Individualbusinessunitsachievedbetween86percentand100percentvestingunder
thiselement.
DetailsofbusinessunitoperatingprofittargetshavenotbeendisclosedastheCommitteeconsidersthatthesearecommerciallysensitive
anddisclosureoftargetsatsuchagranularlevelwouldputtheCompanyatadisadvantagecomparedtoitscompetitors.TheCommittee
willkeepthisdisclosurepolicyunderreviewbasedonwhether,initsview,disclosurewouldcompromisetheCompany’scompetitive
position.
PLTIP vesting
TheCommitteeconsideredareportfromtheGroupChiefRiskOfficerwhichhadbeenapprovedbytheGroupRiskCommittee.
ThisreportconfirmedthatthefinancialresultswereachievedwithintheGroup’sandbusinessunits’riskframeworkandappetite.
Onthebasisofthisreport,andtheperformanceoftheGroupanditsbusinessunitsdescribedabove,theCommitteedecidednotto
applyadiscretionaryadjustmenttothearithmeticvestingoutcomeunderthe2016PLTIPawardsanddeterminedthevestingofeach
ExecutiveDirector’sPLTIPawardsassetoutbelow.
Executive Director
JohnFoley
NicNicandrou
BarryStowe
JamesTurner
MikeWells
Maximum value
of award at
full vesting1
£2,418,213
£2,292,486
£4,417,184
£554,771
£5,576,826
Percentage of the
LTIP award vesting
Number of
shares/ADRs vesting2
Value of
shares/ADRs vesting1
62.5%
62.5%
62.5%
62.5%
62.5%
98,525
93,402
93,530
22,602
227,217
£1,511,374
£1,432,787
£2,760,648
£346,715
£3,485,509
Notes
1 ThesharepriceusedtocalculatethevalueofthePLTIPawardswithperformanceperiodswhichendedon31December2018andvestin2019wastheaverageshare/ADRpricefor
thethreemonthsupto31December2018,being£15.34/US$39.41.
2 Thenumberofshares/ADRsvestingincludesaccrueddividends.
152 Prudential plc AnnualReport2018
www.prudential.co.uk
Directors’ remuneration report continued Long-term incentives awarded in 2018
2018 share-based long-term incentive awards
AsdetailedintheDirectors’remunerationpolicy,approvedbyshareholdersatthe2017AGM,alllong-termincentiveawardsmade
toExecutiveDirectorsin2018weregrantedunderthePLTIP.Thevestingoftheseawardswilldependon:
— RelativeTSR(25percentofaward);
— Grouporbusinessunitoperatingprofit(50percentofaward);and
— Balancedscorecardofstrategicmeasures(25percentofaward).
InlinewiththeremunerationrequirementsofSolvencyII,theweightingsoftheGroupChiefRiskOfficer’sLTIPperformancetargets
weredifferenttotheotherExecutiveDirectorsandwere:
— RelativeTSR(50percentofaward);
— Groupoperatingprofit(20percentofaward);and
— Balancedscorecardofstrategicmeasures(30percentofaward).
UndertheGroupTSRmeasureusedfor2018awards,25percentoftheawardvestsforTSRatthemedianofthepeergroup,increasing
tofullvestingforperformancewithintheupperquartile.Thepeergroupforthe2018awardsisthesameasthatusedforthe2017awards
otherthanfollowingthemergerofStandardLifeandAberdeenAssetManagement,thecombinedentityofStandardLifeAberdeenhas
beenincluded.TSRismeasuredonalocalcurrencybasissincethishasthebenefitofsimplicityanddirectnessofcomparison.
Thepeergroupforthe2018awardsissetoutbelow:
Aegon
Aviva
Manulife
StandardLifeAberdeen
AIA
AXA
MetLife
SunLifeFinancial
AIG
Generali
OldMutual
ZurichInsuranceGroup
Allianz
Legal&General
PrudentialFinancial
Undertheoperatingprofitmeasureusedfor2018awards,25percentoftheawardvestsformeetingthethresholdoperatingprofit,
setatthestartoftheperformanceperiod,increasingtofullvestingforperformanceatorabovethestretchlevel.
Underthebalancedscorecard,performanceisassessedforeachofthefourmeasures,attheendofthethree-yearperformanceperiod.
Performancewillbeassessedonaslidingscaleratherthanthemeet/failapproachadoptedforthe2017scorecard.Eachofthemeasures
hasequalweightingandthe2018measuresaresetoutbelow:
Capital measure:
Cumulativethree-yearECapGroupoperatingcapitalgenerationrelativetoplan,lesscostofcapital(based
onthecapitalpositionatthestartoftheperformanceperiod).
Vesting basis:
25percentvestingforachievingPlan,increasingtofullvestingforperformanceabovestretchlevel.Theplan
figureforthismetricwillbepublishedintheAnnualReportforthefinalyearoftheperformanceperiod.
Capital measure:
Cumulativethree-yearSolvencyIIGroupoperatingcapitalgeneration(ascapturedinpublisheddisclosures)
relativetoplan.
Vesting basis:
25percentvestingforachievingPlan,increasingtofullvestingforperformanceabovestretchlevel.Theplan
figureforthismetricwillbepublishedintheAnnualReportforthefinalyearoftheperformanceperiod.
Conduct measure: Throughappropriatemanagementaction,ensuretherearenosignificantconduct/culture/governanceissues
thatresultinsignificantcapitaladd-onsormaterialfines.
Vesting basis:
25percentvestingforpartialachievementoftheGroup’sexpectations,increasingtofullvestingforachieving
theGroup’sexpectations.
Diversity measure: PercentageoftheLeadershipTeamthatisfemaleattheendof2020.Thetargetforthismetricisbasedon
progresstowardsthegoalthattheCompanysetwhenitsignedtheWomeninFinanceCharter,specificallythat
30percentofourLeadershipTeamwillbefemalebytheendof2021.Forthisportionofthe2018PLTIPawards
tovest,atleast28percentofourLeadershipTeammustbefemalebytheendof2020.
Vesting basis:
25percentvestingformeetingthethresholdofatleast27percentofourLeadershipTeambeingfemaleatthe
endof2020,increasingtofullvestingforreachingthestretchlevelofatleast29percentbeingfemaleatthatdate.
TheperformanceconditionsattachedtooutstandingPLTIPawardsmaybereviewedatthetimeofthedemerger.Shouldany
performanceconditionsberevised,thenewconditionswillbenomoreorlessstretchingthatthoseoriginallyattachedtotheawards
andthechangeswillbedisclosed.
www.prudential.co.uk
AnnualReport2018 Prudential plc 153
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information ThetablebelowshowstheawardsmadetoExecutiveDirectorsin2018undershare-basedlong-termincentiveplansandthe
performanceconditionsattachedtotheseawards:
Number
of shares
or ADRs
subject
to award*
Percentage
of awards
released
for
achieving
threshold
targets‡
Face value
of award†
Executive Director Role
MarkFitzPatrick ChiefFinancial
Officer
106,611
£1,862,494
25%
JohnFoley
ChiefExecutive,
M&GPrudential 111,763
£1,952,500
25%
NicNicandrou ChiefExecutive,
Prudential
Corporation
Asia
138,846
£2,425,640
25%
AnneRichards1 ChiefExecutive,
M&G
105,094
£1,835,992
25%
BarryStowe
Chairman&
CEO,NABU
107,649 US$5,322,167
25%
JamesTurner
GroupChiefRisk
Officer
89,439
£1,562,499
25%
MikeWells
GroupChief
Executive
257,813
£4,503,993
25%
Weighting of performance conditions
Operating profit
Group
TSR
Balanced
scorecard
Group Asia
US
UK M&G
25%
25% 50%
25%
25%
31% 19%
25%
25%
50%
25%
25%
50%
25%
25%
50%
50%
30% 20%
25%
25% 50%
End of
performance
period
31December
2020
31December
2020
31December
2020
31December
2020
31December
2020
31December
2020
31December
2020
*AwardsovershareswereawardedtoallExecutiveDirectorsotherthanBarryStowewhoseawardswereoverADRs.
†AwardsforExecutiveDirectorsarecalculatedbasedontheaveragesharepriceoverthethreedealingdayspriortothegrantdate,being£17.47forallExecutiveDirectorsotherthan
BarryStoweandanADRpriceofUS$49.44forBarryStowe.
‡Thepercentageofawardsreleasedforachievingmaximumtargetsis100percent.
Note
1 AnneRichardssteppeddownfromtheBoardon10August2018.Thisawardlapsedattheendofheremploymenton30November2018.
Update on performance against targets for awards made in 2017 and 2018 under the Prudential Long Term
Incentive Plan
TSR Performance
Asat31December2018,Prudential’sTSRperformanceduringtheperiod1January2017to31December2018wasrankedbetween
medianandupperquartileandduringtheperiod1January2018to31December2018wasrankedbelowmedian.
Group operating profit
Prudential’sGroupoperatingprofitperformancebetween1January2017and31December2018wasslightlyabovethestretchtarget
establishedfor2017PLTIPawards.TheGroup’soperatingprofitachievementbetween1January2018and31December2018was
slightlyabovethestretchtargetadoptedfor2018PLTIPawards.
Balanced scorecard of strategic measures
Between1January2017and31December2018,theGroupalsomadegoodprogresstowardsmeetingthemeasuresunderthe
sustainabilityscorecardusedforthe2017and2018PLTIPawards:
— Capital measure – Solvency II operating capital generationTheGroup’sSolvencyIIoperatingcapitalgenerationbetween
1January2017to31December2018wasabovethePlanlevelestablishedfor2017PLTIPawards.TheGroup’sSolvencyIIoperating
capitalgenerationbetween1January2018and31December2018wasabovethePlanlevelestablishedfor2018PLTIPawards.
— Capital measure – E-cap operating capital generationTheGroup’sE-capoperatingcapitalgenerationbetween1January2017
and31December2017wasbelowthePlanlevelestablishedfor2017PLTIPawards.
— Conduct measureDuring2017and2018,therewerenosignificantconduct/culture/governanceissuesthatresultedinsignificant
capitaladd-onsormaterialfines.
— Diversity measureAsat31December2018,29percentofourLeadershipTeamwasfemale.Thisrepresentedstrongprogress
towardsthetargetthatatleast27percentoftheLeadershipTeambefemalebytheendof2019forthe2017PLTIPaward,andthe
targetthat28percentoftheLeadershipTeambefemalebytheendof2020forthe2018PLTIPaward.
154 Prudential plc AnnualReport2018
www.prudential.co.uk
Directors’ remuneration report continued Pay comparisons
Performance graph and table
ThechartbelowillustratestheTSRperformanceofPrudential,theFTSE100(astheCompanyhasapremiumlistingontheLondonStock
Exchange)andthepeergroupofinternationalinsurersusedtobenchmarktheCompany’sperformanceforthepurposesofthePLTIP.
Prudential TSR vs FTSE 100 and peer group average – total return per cent over 10 years to December 2018
£800
£700
£600
£500
£400
£300
£200
£100
£605
£250
£240
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Prudential
FTSE100
Peergroupaverage
Note
ThepeergroupaveragerepresentstheaverageTSRperformanceofthepeergroupusedfor2018PLTIPawards(excludingcompaniesnotlistedatthestartoftheperiod).
TheinformationinthetablebelowshowsthetotalremunerationfortheGroupChiefExecutiveoverthesameperiod:
£000
2009
2009
2010
2011
2012
2013
2014
2015
2015
2016
2017
2018
GroupChief
Executive
Salary,pension
andbenefits
Annualbonus
payment
(As%ofmaximum)
LTIPvesting
(As%ofmaximum)
Otherpayments
GroupChief
Executive
‘singlefigure’
oftotal
remuneration3
MTucker1 TThiam TThiam TThiam TThiam TThiam TThiam TThiam2 MWells MWells MWells MWells
1,013
286
1,189
1,241
1,373
1,411
1,458
613
1,992
2,244
1,872
1,815
841
(92%)
1,575
(100%)
308
354
(90%)
–
–
–
1,570
(97%)
2,534
(100%)
–
1,570
(97%)
2,528
(100%)
–
2,000
(100%)
6,160
(100%)
–
2,056
(99.8%)
5,235
(100%)
–
2,122
(100%)
9,838
(100%)
–
704
(77.3%)
3,382
(100%)
–
1,244
(99.7%)
4,290
(100%)
–
2,151
(99.5%)
2,975
(70.8%)
–
2,072
(94%)
4,616
(95.8%)
–
2,133
(95%)
3,486
(62.5%)
–
3,737
640
5,293
5,339
9,533
8,702
13,418
4,699
7,526
7,370
8,560
7,434
Notes
1 MarkTuckerlefttheCompanyon30September2009.TidjaneThiambecameGroupChiefExecutiveon1October2009.ThefiguresshownforTidjaneThiam’sremunerationin2009
relateonlytohisserviceasGroupChiefExecutive.
2 TidjaneThiamlefttheCompanyon31May2015.MikeWellsbecameGroupChiefExecutiveon1June2015.ThefiguresshownforMikeWells’sremunerationin2015relateonlytohis
serviceasGroupChiefExecutive.
3 Furtherdetailonthe‘singlefigure’isprovidedinthe‘singlefigure’tablefortherelevantyear.
www.prudential.co.uk
AnnualReport2018 Prudential plc 155
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Percentage change in remuneration
ThetablebelowsetsouthowthechangeinremunerationfortheGroupChiefExecutivebetween2017and2018comparedtoawider
employeecomparatorgroup:
GroupChiefExecutive
AllUKemployees
Salary
2%
3%
Benefits
(17.4)%
(1.4)%
Bonus
2.9%
8.6%
TheemployeecomparatorgroupusedforthepurposeofthisanalysisisallUKemployees.ThisincludesemployeesinM&GPrudential
andGroupHeadOffice,andreflectstheaveragechangeinpayforemployeesemployedinboth2017and2018.Thesalaryincrease
includesupliftsmadethroughtheannualsalaryreview,aswellasanyadditionalchangesintheyear;forexampletoreflectpromotions
orrolechanges.TheUKworkforcehasbeenchosenasthemostappropriatecomparatorgroupasitreflectstheeconomicenvironment
wheretheGroupChiefExecutiveisemployed.
Group Chief Executive pay compared with employee pay
Tofurtherincreasetransparencyofexecutiveremunerationanditsalignmentwiththepayofotheremployees,wearepublishingour
CEOpayratiooneyearinadvanceofthedisclosurebecomingarequirementundertheUKCompanies(MiscellaneousReporting)
Regulations2018.TheemployeecomparatorgroupusedforthepurposeofthisanalysisisallUKemployees.Thisincludesemployees
inM&GPrudentialandGroupHeadOfficein2018.ThetablebelowcomparestheGroupChiefExecutive’s‘singlefigure’oftotal
remunerationtothatreceivedbythreerepresentativeUKemployeesin2018.
Year
2018
Method
OptionB
25th percentile
pay ratio
155:1
Median
pay ratio
102:1
75th percentile
pay ratio
68:1
Undertheregulationsthereisachoiceofthreemethodstodeterminethe25th,medianand75thfull-timeequivalentremunerationofour
UKemployees.TheCompanyhaschosentousethe2018hourlyrategenderpaygapinformationasthismethodusesdatathatisaligned
withotherdisclosuresmadeunderourgenderpaygapreporting(‘OptionB’inthetableabove).Theemployeesusedinthecalculations
wereselectedon11January2019,followingtheendofthefinancialyear.TheCommitteedeterminedthattheidentifiedemployeesare
reasonablyrepresentativesincethestructureoftheirremunerationarrangementsisinlinewiththatofthemajorityofUKworkforce.
Thesamemethodologyusedforcalculatingthe‘singlefigure’fortheGroupChiefExecutivehasbeenusedforcalculatingthepayand
benefitsoftheUKemployees.
Thesalaryandtotalremunerationreceivedduring2018bytheindicativeemployeesusedintheaboveanalysisaresetoutbelow:
Year
2018salary
Total2018remuneration
25th percentile
Median
75th percentile
£40,000
£48,000
£55,000
£73,000
£68,000
£109,000
TheCommitteebelievesthemedianpayratioisconsistentwiththepay,rewardandprogressionpoliciesforourUKemployees.Thebase
salaryandtotalremunerationlevelsfortheGroupChiefExecutiveandthemedianrepresentativeemployeearecompetitivelypositioned
withintherelevantmarketsandreflecttheoperationofourremunerationstructureswhichareeffectiveinappropriatelyincentivising
staff,havingregardtoourriskframework,riskappetitesandtorewardingthe‘how’aswellasthe‘what’ofperformance.
Gender pay gap
TheUKbusinessentitieshaverecentlyreportedtheir2018UKgenderpaygapdataanddetailscanbefoundontheGroup’swebsite
atwww.prudential.co.uk/responsibility.Therehasbeennarrowingofthepaygapsinsomeareasandmodestincreasesinothers.While
wehavemadeprogress,thegenderpaygapcannotberemovedovernight.Weremainfocusedandcommittedtoclosingitasquicklyas
possible.Wehaveapolicyandcarryoutprocedurestoensurethat,wheremenandwomenperformsimilarroles,theyarepaidequally.
However,thegenderpaygapsdemonstratethedemographicprofileofthebusiness(andthefinancialservicessectormorewidely):
thereisagreaterproportionofmalesinmoreseniorandfront-officerolesandagreaterproportionoffemalesinmorejunior,supportand
back-officenon-financeroles.AlltheGroup’sbusinessesarecontinuingtoworkoninitiativestoincreasetheproportionofwomenin
seniormanagementandoperatingrolesaspartoftheGroup’sstrategicfocusondiversityandinclusionasdescribedinthediversityand
inclusionstatementonourwebsite.ThisimportantpriorityisreflectedintheGroup’srewardstructurethroughthediversitymeasure
attachedtoPLTIPawardsgrantedfrom2017onwards.
Relative importance of spend on pay
Thetablebelowsetsouttheamountspayableinrespectof2017and2018onallemployeepayanddividends:
Allemployeepay(£m)1
Dividends(£m)
Note
1 AllemployeepayastakenfromnoteB2.1tothefinancialstatements.
2017
1,985
1,216
2018
1,838
1,279
Percentage
change
(7.4)%
5.2%
156 Prudential plc AnnualReport2018
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Directors’ remuneration report continued Chairman and Non-executive Director remuneration in 2018
Chairman’s fees
TheChairman’sfeewasreviewedbytheCommitteeduring2018andincreasedby2.2percentto£750,000witheffectfrom1July2018
inordertoreflectinflation.
Non-executive Directors’ fees
TheNon-executiveDirectors’feeswerereviewedbytheBoardduring2018andthemembershipfeefortheAudit,Remunerationand
RiskCommitteeswasincreasedfrom£27,500to£30,000whiletheNomination&GovernanceCommitteememberfeeincreasedfrom
£10,000to£12,500.Thisisthefirsttimethesefeeshavebeenincreasedsince2015.Nootherfeeswereincreased.
Annual fees
Basicfee
Additionalfees:
AuditCommitteeChair
AuditCommitteemember
RemunerationCommitteeChair
RemunerationCommitteemember
RiskCommitteeChair
RiskCommitteemember
NominationCommitteemember
SeniorIndependentDirector
From
1 July 2017
£
From
1 July 2018
£
97,000
97,000
75,000
27,500
60,000
27,500
75,000
27,500
10,000
50,000
75,000
30,000
60,000
30,000
75,000
30,000
12,500
50,000
Note
If,inaparticularyear,thenumberofmeetingsismateriallygreaterthanusual,theCompanymaydeterminethattheprovisionofadditionalfeesisfairandreasonable.
TheresultingfeespaidtotheChairmanandNon-executiveDirectorsare:
£000s
Chairman
PaulManduca
Non-executive Directors
HowardDavies
AnnGodbehere1
DavidLaw
KaiNargolwala2
AnthonyNightingale
PhilipRemnant3
AliceSchroeder4
LordTurner
ThomasWatjen5
FieldsWicker-Miurin6
Total
2018 fees
2017 fees
2018 taxable
benefits*
2017 taxable
benefits*
Total 2018
remuneration:
the ‘single
figure’†
Total 2017
remuneration:
the ‘single
figure’†
742
212
–
212
155
168
216
150
155
131
41
727
209
79
176
151
166
211
124
140
59
–
136
122
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
878
212
–
212
155
168
216
150
155
131
41
849
209
79
176
151
166
211
124
140
59
–
2,182
2,042
136
122
2,318
2,164
*Benefitsincludethecostofprovidingtheuseofacaranddriver,medicalinsuranceandsecurityarrangements.
†Eachremunerationelementisroundedtothenearest£1,000andtotalsarethesumoftheseroundedfigures.Totalremunerationiscalculatedusingthemethodologyprescribed
bySchedule8oftheCompaniesAct.TheChairmanandNon-executiveDirectorsarenotentitledtoparticipateinannualbonusplansorlong-termincentiveplans.
Notes
1 AnnGodbeheresteppeddownfromtheBoardon18May2017.
2 KaiNargolwalaalsoreceivedanannualfeeof£250,000inrespectofhisnon-executivechairmanshipofPrudentialCorporationAsiaLimitedwitheffectfrom1February2016.
3 PhilipRemnantsteppeddownfromhisnon-executivechairmanshipofM&GGroupLimitedwitheffectfrom1October2018.Hereceivedafeeof£187,500inrespectofhis
chairmanshipduring2018.
4 AliceSchroederbecameamemberoftheRiskCommitteeon1March2018.
5 ThomasWatjenjoinedtheBoardon11July2017andbecameamemberoftheRiskCommitteeon1November2018.
6 FieldsWicker-MiurinjoinedtheBoardandtheRemunerationCommitteeon3September2018.
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AnnualReport2018 Prudential plc 157
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Statement of Directors’ shareholdings
TheinterestsofDirectorsinordinarysharesoftheCompanyaresetoutbelow.‘Beneficialinterest’includessharesownedoutright,
sharesacquiredundertheShareIncentivePlan(SIP)anddeferredannualincentiveawards,detailedinthe‘Supplementaryinformation’
section.Itisonlythesesharesthatcounttowardstheshareownershipguidelines.
1 January 2018
(or on date of
appointment)
Total
beneficial
interest
(numberof
shares)
During 2018
31 December 2018
(or on date of retirement)
Share ownership guidelines
Number
of shares
acquired
Number
of shares
disposed
Total
beneficial
interest*
(numberof
shares)
Number
of shares
subject to
performance
conditions†
Total interest
in shares
Beneficial
interest as a
percentage of
basic salary/
basic fees§
Share
ownership
guidelines‡
(%of
salary/fee)
Chairman
PaulManduca
Executive Directors
MarkFitzPatrick
JohnFoley
NicNicandrou
AnneRichards1
BarryStowe2
JamesTurner3
MikeWells4
Non-executive Directors
HowardDavies
DavidLaw
KaiNargolwala
AnthonyNightingale
PhilipRemnant
AliceSchroeder5
LordTurner
ThomasWatjen6
FieldsWicker-Miurin7
42,500
–
–
42,500
–
42,500
81
250,116
292,309
86,361
282,346
9,701
662,623
9,278
9,066
70,000
50,000
6,916
8,500
6,552
5,500
–
28,252
161,186
142,276
56,447
285,042
23,798
304,853
–
81,468
139,500
–
193,860
12,623
155,224
236
–
–
–
–
6,000
167
4,840
1,000
–
–
–
–
–
–
–
–
–
28,333
329,834
295,085
142,808
373,528
20,876
812,252
9,514
9,066
70,000
50,000
6,916
14,500
6,719
10,340
1,000
207,971
370,280
384,039
258,461
737,088
150,495
854,084
236,304
700,114
679,124
401,269
1,110,616
171,371
1,666,336
–
–
–
–
–
–
–
–
–
9,514
9,066
70,000
50,000
6,916
14,500
6,719
10,340
1,000
100%
250%
250%
250%
N/A
250%
250%
400%
100%
100%
100%
100%
100%
100%
100%
100%
100%
94%
62%
693%
473%
N/A
708%
55%
1184%
161%
153%
1185%
846%
117%
245%
114%
175%
17%
*TherewerenochangesofDirectors’interestsinordinarysharesbetween31December2018and12March2019,withtheexceptionoftheUK-basedExecutiveDirectorsduetotheir
participationinthemonthlyShareIncentivePlan(SIP).MarkFitzPatrickacquiredafurther37sharesintheSIP,JohnFoleyacquiredafurther38sharesintheSIP,JamesTurneracquired
afurther38sharesintheSIPandMikeWellsacquiredafurther38sharesintheSIPduringthisperiod.
†Furtherinformationonshareawardssubjecttoperformanceconditionsaredetailedinthe‘share-basedlong-termincentiveawards’sectionoftheSupplementaryinformation.
‡HoldingrequirementoftheArticlesofAssociation(2,500ordinaryshares)mustbeobtainedwithinoneyearofappointmenttotheBoard.TheincreasedguidelinesforExecutive
DirectorswereintroducedwitheffectfromJanuary2013andincreasedagainin2017.ExecutiveDirectorshavefiveyearsfromthisdate(ordateofjoiningorrolechange,iflater)toreach
theenhancedguideline.TheguidelineforNon-executiveDirectorswasintroducedon1July2011.Non-executiveDirectorshavethreeyearsfromtheirdateofjoiningtoreachtheguideline.
§Basedontheaverageclosingpriceforthesixmonthsto31December2018(£16.42).
TheCompanyanditsDirectors,ChiefExecutivesandshareholdershavebeengrantedapartialexemptionfromthedisclosurerequirementsunderPartXVoftheSecuritiesandFutures
Ordinance(SFO).Asaresultofthisexemption,Directors,ChiefExecutivesandshareholdersdonothaveanobligationundertheSFOtonotifytheCompanyofshareholdinginterests,
andtheCompanyisnotrequiredtomaintainaregisterofDirectors’andChiefExecutives’interestsundersection352oftheSFO,noraregisterofinterestsofsubstantialshareholders
undersection336oftheSFO.TheCompanyis,however,requiredtofilewiththeStockExchangeofHongKongLimitedanydisclosureofinterestsnotifiedtoitintheUnitedKingdom.
Notes
1 AnneRichardssteppeddownfromtheBoardon10August2018.Totalinterestinsharesisshownasatthisdate.
2 BarryStowesteppeddownfromtheBoardon31December2018.Totalinterestinsharesisshownatthisdate.Forthe1January2018figureBarryStowe’sbeneficialinterestinshares
ismadeupof141,173ADRs(representing282,346ordinaryshares),(8,513.73oftheseADRsareheldwithinaninvestmentaccountwhichsecurespremiumfinancingforalife
assurancepolicy).Forthe31December2018figurethebeneficialinterestinsharesismadeupof186,764ADRs(representing373,528ordinaryshares).
3 JamesTurnerwasappointedtotheBoardon1March2018.Totalinterestinsharesisshownasatthisdate.
4 Forthe1January2018figureMikeWells’sbeneficialinterestinsharesismadeupof249,811ADRs(representing499,622ordinaryshares)and163,001ordinaryshares.Forthe
31December2018figurehisbeneficialinterestinsharesismadeupof297,320ADRs(representing594,640ordinaryshares)and217,612ordinaryshares.
5 Forthe1January2018figureAliceSchroeder’sbeneficialinterestinsharesismadeupof4,250ADRs(representing8,500ordinaryshares).Forthe31December2018figurethe
beneficialinterestinsharesismadeupof7,250ADRs(representing14,500ordinaryshares).
6 Forthe1January2018figureThomasWatjen’sbeneficialinterestinsharesismadeupof2,750ADRs(representing5,500ordinaryshares).Forthe31December2018figurethe
beneficialinterestinsharesismadeupof5,170ADRs(representing10,340ordinaryshares).
7 FieldsWicker-MiurinwasappointedtotheBoardon3September2018.Totalinterestinsharesisshownfromthisdate.
158 Prudential plc AnnualReport2018
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Directors’ remuneration report continued
ThebarchartbelowillustratestheExecutiveDirectors’shareholdingasapercentageofbasesalaryversustheshareownershipguideline.
%
1,200
1,000
800
600
400
1,184
693
708
473
400
200
250
250
250
250
250
0
62
Mark FitzPatrick
Shareownershipguidelineas%ofsalary
Beneficialinterestasat31December2018,as%ofsalary
John Foley
Nic Nicandrou
James Turner
Barry Stowe
Mike Wells
55
Outstanding share options
ThefollowingtablesetsouttheshareoptionsheldbytheExecutiveDirectorsintheUKSavings-RelatedShareOptionScheme(SAYE)
asattheendoftheperiod.
Date
of grant
Exercise
price
(pence)
21Sep17
21Sep16
21Sep17
23Sep14
21Sep16
21Sep16
22Sep15
1,455
1,104
1,455
1,155
1,104
1,104
1,111
MarkFitzPatrick
JohnFoley
JohnFoley
NicNicandrou
NicNicandrou
AnneRichards
MikeWells
Market
price at
31 Dec
2018
(pence)
Exercise period
Number of options
Beginning
Beginning
of period Granted Exercised Cancelled Forfeited
End
Lapsed
End of
period
1,402 01Dec22 31May23
1,402 01Dec19 31May20
1,402 01Dec20 31May21
1,402 01Dec19 31May20
1,402 01Dec21 31May22
1,402 01Dec19 31May20
1,402 01Dec18 31May19
2,061
815
618
1,311
1,358
1,630
1,620
–
–
–
–
–
–
–
–
–
–
–
–
–
1,620
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,061
815
618
1,311
1,358
1,630
–
Notes
1 NogainwasmadebyDirectorsin2018ontheexerciseofSAYEoptions.
2 Nopricewaspaidfortheawardofanyoption.
3 Thehighestandlowestclosingsharepricesduring2018were£19.81and£13.44respectively.
4 Allexercisepricesareshowntothenearestpence.
5 AnneRichardsparticipatedintheplanduringhertimeasanExecutiveDirector.Thecolumnabovemarked’Endofperiod’reflectsAnneRichards’positionasat10August2018,
thedateatwhichshesteppeddownfromtheBoard.
6 FollowingNicNicandrou’sappointmentasChiefExecutiveofPrudentialCorporationAsiaon17July2017,hewasabletocontinuesavingunderhisSAYEoptioncontractsexisting
atthatdatebutisnolongereligibletoparticipateinfutureSAYEgrants.
www.prudential.co.uk
AnnualReport2018 Prudential plc 159
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Directors’ terms of employment and external appointments
DetailsoftheservicecontractsofeachExecutiveDirectorareoutlinedinthetablebelow.TheDirectors’remunerationpolicycontains
furtherdetailsofthetermsincludedinExecutiveDirectorservicecontracts.
SubjecttotheGroupChiefExecutive’sortheChairman’sapproval,ExecutiveDirectorsareabletoacceptexternalappointments
asnon-executivedirectorsofotherorganisations.FeespayableareretainedbytheExecutiveDirectors.
Service contracts
External appointment
Date of contract
Notice period
to the Company
Notice period
from the Company
External
appointment
during 2018
Fee received in the
period the Executive
Director was a
Group Director
17May2017
8December2010
27April2009
4July2016
18October2006
1March2018
21May2015
12months
12months
12months
12months
12months
12months
12months
12months
12months
12months
12months
12months
12months
12months
–
–
–
–
–
Yes
–
–
–
–
–
–
£45,833
–
Executive Directors
MarkFitzPatrick
JohnFoley
NicNicandrou
AnneRichards
BarryStowe
JamesTurner
MikeWells
Directorsservedontheboardsofeducational,charitableandculturalorganisationswithoutreceivingafeefortheseservices.
DetailsofchangestotheBoardofDirectorsduringtheyeararesetoutintheCorporategovernancereport.
Letters of appointment of the Chairman and Non-executive Directors
DetailsofNon-executiveDirectors’individualappointmentsareoutlinedbelow.TheDirectors’remunerationpolicycontainsfurther
detailsontheirlettersofappointment.
Chairman/Non-executive Director
Chairman
PaulManduca
Non-executive Directors
PhilipRemnant
HowardDavies
DavidLaw
KaiNargolwala
AnthonyNightingale
AliceSchroeder
LordTurner
ThomasWatjen
FieldsWicker-Miurin
Appointment
by the Board
Notice period
Time on the Board
at 2019 AGM
15October2010
(ChairmanfromJuly2012)
12months
8years7months
1January2013
15October2010
15September2015
1January2012
1June2013
10June2013
15September2015
11July2017
3September2018
6years4months
6months
8years7months
6months
3years8months
6months
6months
7years4months
6months 5years11months
6months 5years11months
6months
3years8months
6months 1years10months
8months
6months
160 Prudential plc AnnualReport2018
www.prudential.co.uk
Directors’ remuneration report continued Recruitment arrangements
InmakingdecisionsabouttheremunerationarrangementsforthosejoiningtheBoard,theCommitteeworkedwithintheDirectors’
remunerationpolicyapprovedbyshareholdersandwasmindfulof:
— Theskills,knowledgeandexperiencethateachnewExecutiveDirectorbroughttotheBoard;
— Theneedtosupporttherelocationofexecutivestoenablethemtoassumetheirroles;and
— Itscommitmenttohonourlegacyarrangements.
Appointinghigh-calibreexecutivestotheBoardandtodifferentrolesontheBoardisnecessarytoensuretheCompanyiswellpositioned
todevelopandimplementitsstrategyanddeliverlong-termvalue.AstheCompanyoperatesinaninternationalmarketplacefortalent,
thebestinternalandexternalcandidatesaresometimesaskedtomovelocationtoassumetheirnewroles.Wherethishappens,the
Companywillofferrelocationsupport.Thesupportofferedwilldependonthecircumstancesofeachmovebutmayincludepayingfor
travel,shippingservices,theprovisionoftemporaryaccommodationandotherhousingbenefits.Executivesmayreceivesupportwith
thepreparationoftaxreturns,butnocurrentExecutiveDirectoristaxequalised.
James Turner
JamesTurnerwasappointedasGroupChiefRiskOfficeron1March2018.MrTurnerwasappointedonalowersalarythanhis
predecessorandhasthesameincentiveopportunities,namelyamaximumbonusopportunityof160percentofsalaryundertheAIP
andalong-termincentiveawardof250percentofsalary.MrTurner’sbonuswillbesubjectto40percentdeferralforthreeyearsand
thedeferredbonuswillbepaidinPrudentialplcshares.Hislong-termincentiveawardswillbesubjecttoatwo-yearholdingperiodat
theendofthethree-yearperformanceperiod.MrTurnerwillbesubjecttothesameshareholdingguidelinesof250percentofsalary
asallotherExecutiveDirectors.Hewillhavefiveyearsfromthedateofhisappointmenttobuildthislevelofownership.Therehasbeen
nobuy-outasMrTurnerwasinternallypromotedtothisroleandnorelocationwaspaidonhimjoiningtheBoard.MrTurner’sservice
contractcontainsanoticeprovisionunderwhicheitherpartymayterminateupon12months’notice.
Detailsoftheremunerationhereceivedduring2018inhisroleasGroupChiefRiskOfficeraresetoutinthe2018‘singlefigure’table.
Michael Falcon
MichaelFalconsucceededBarryStoweasChairmanandChiefExecutiveOfficer,JacksonHoldingsLLCandjoinedtheBoardon
7January2019.AssetoutintheStatementofimplementationin2019,MrFalconwasappointedonalowersalarythanhispredecessor
withlowerincentiveopportunities.MrFalcon’sbasicsalaryisUS$800,000perannum.For2019hewillhaveamaximumbonus
opportunityof100percentofsalaryundertheAIP.Hewillalsobeeligibletoreceivea10percentshareoftheJacksonbonuspool.
FortypercentofanybonuswillbedeferredintotheCompany’sADRsforthreeyears.Long-termincentiveawards,grantedunderthe
PLTIP,willhaveafacevalueongrantof400percentofbasesalary.Hewillbesubjecttothesameshareholdingguidelinesof250percent
ofsalaryasallotherExecutiveDirectorsandwillhavefiveyearsfromthedateofhisappointmenttobuildthislevelofownership.
Buy-out awards
InordertofacilitateMrFalcon’sappointment,theCompanyagreedtoreplacethe2018bonusandotheroutstandingawardsthat
MrFalconforfeitedonleavinghispreviousemployer,J.P.MorganAssetManagement.
2018 bonus
TheCommitteeapprovedanawardundertheAIPofUS$2,637,179inordertocompensateMrFalconforthelossofhis2018bonus.
Theamountistheaverageofthe2016and2017bonusesMrFalconreceivedfromJ.P.MorganAssetManagement.Inlinewiththe
Directors’remunerationpolicy,60percentofthiswillbedeliveredincashand40percentdeferredintoPrudentialADRswithdividend
equivalentsuntilthethirdanniversaryofthegrant’sawarddate,subjecttotherulesofthedeferredAIP.ThisbonuspaymentandAIP
awardwillbemadealongside2018bonuspaymentsanddeferredAIPawardsforotherExecutiveDirectors.
Outstanding deferred awards
ThetermsofMrFalcon’sreplacementawardsweredesignedtoreplicatethoseofhisforfeitedrestrictedstockandfundunits.Atthe
dateofthisreporttheCompanyisinaClosedPeriodandtheseawardswillnotbegranteduntilweareinanOpenPeriodfollowing
theannouncementof2018results.
AportionoftheseawardsthatwereduetovestinJanuary2019willbecompensatedbyacashpaymentofUS$1,316,551tobepaid
inMarch2019afterthedateofthisreport.Thedateofthispaymentwillbereportedinthe2019Directors’remunerationreport.
www.prudential.co.uk
AnnualReport2018 Prudential plc 161
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information TheremainingawardswillbemadeintheformofnominalcostoptionsoverPrudentialADRs,tobereleasedinaccordancewiththe
originalvestingschedule.Thetermsofthereplacementawardweredesignedtoreplicatethoseoftheforfeitedawardsandwilltherefore
notbesubjecttoperformanceconditionsandwillaccruedividendequivalents.ThisawardentitlesMrFalcontoreceiveacashamount
equaltothemarketvalueofthespecificnotionalnumberofPrudentialADRsonthedateofexercise,lessanawardpriceof10penceper
ADR.Theawardwillvestonthedatesdetailedbelow.ThenumberofPrudentialADRsoverwhichoptionswillbegrantedhasbeen
calculatedwithreferencetotheclosingstockpricesofJ.P.MorganAssetManagementandPrudentialplcon19December2018,
MrFalcon’slastdateofemploymentwithhisformeremployer.Furtherdetailswillbedisclosedinstockexchangeandwebsite
announcementswhenthegranttakesplace.
Exercise period
25Octoberto24November2019
30dayscommencingonthedateofreleaseofPrudentialplc’sresultsfor2019
30dayscommencingonthedateofreleaseofPrudentialplc’sresultsfor2020
Number of
notional ADRs
11,224
30,938
14,380
Theabovereplacementawardswillbemadeunderrule9.4.2oftheUKLAListingRules,asprovidedforbytheDirectors’remuneration
policy,astheawardcouldnotbeeffectedunderanyoftheCompany’sexistingincentiveplans.MrFalconisthesoleparticipantinthis
arrangementandnofurtherawardswillbemadetoMrFalconunderthisplan.
MrFalconhasnotbeenappointedforafixedtermbuthisservicecontractcontainsanoticeprovisionunderwhicheitherpartymay
terminateupon12months’notice.
PriortojoiningtheGroup,MrFalconwasbasedinHongKong.TheCompanywillpaytotransportMrFalcon’sbelongingsfromHong
KongtotheUSandwillthensupporthismovewithintheUSinlinewithourUSdomesticrelocationpolicy.Thesebenefitswillbe
includedinthe2019Directors’remunerationreport.
Payments to past Directors and payments for loss of office
TheCommittee’sapproachwhenexercisingitsdiscretionunderthepolicyistobemindfuloftheparticularcircumstanceofthedeparture
andthecontributiontheindividualmadetotheGroup.
Anne Richards
AnneRichardssteppeddownfromtheBoardasChiefExecutive,M&Gon10August2018andheremploymentendedwiththe
Companyon30November2018.TheCommitteeappliedtheDirectors’remunerationpolicywhendeterminingseparationtermsfor
MsRichards.
MsRichardsreceived£161,976inrespectofsalary,benefitsandpensionbetween11Augustand30November2018.Shewillnot
receiveabonusawardfor2018.AportionofMsRichards’2016and2017bonuseswasdeferredforthreeyearsintheformofshares.
ThesedeferredAIPawardswillbereleasedontheoriginaltimetableandremainsubjecttomalusandclawbackprovisions.
AllofMsRichards’outstandinglong-termincentiveawardsandbuy-outawards(grantedtoMsRichardswhenshejoinedPrudentialin
2016inrespectoftheawardssheforfeitedonleavingAberdeenAssetManagement)lapsedattheendofheremploymentandshedid
notreceivealossofofficepayment.
Barry Stowe
BarryStoweretiredasChairmanandChiefExecutiveOfficer,NABUon31December2018.HewillremainasanadvisertotheGroup
untilhisemploymentendson31December2019.MrStowe’sbasesalary,pensionbenefitsandcertainotherbenefitswillcontinuetobe
paiduntiltheendofhisemployment.
AportionofMrStowe’s2016and2017bonuseswasdeferredforthreeyearsintheformofADRs.MrStowe’sunvestedawardsovera
totalof186,764ADRsundertheAIPwillbereleasedontheoriginaltimetable.Theyremainsubjecttomalusandclawbackprovisionsand
willcontinuetoaccumulatedividendequivalentsuntiltheyarereleased.
MrStowe’soutstandingPLTIPawardswillvestinlinewiththeoriginalvestingdates,subjecttosatisfactionoftheperformanceconditions
undertheplanrules.The2017and2018PLTIPawardswillbepro-rateduptothedateonwhichMrStoweretiredfromtheBoard,while
the2016awardwillnotbepro-ratedsinceMrStoweservedontheBoardfortheentireperformanceperiod.Theseawards(totalling
253,268ADRs)willcontinuetoaccumulatedividendequivalentsuntiltheyarereleasedandbesubjecttotheoriginalmalusand
clawbackprovisions.The2017and2018PLTIPawardswillremainsubjecttoatwo-yearholdingperiodfollowingtheendoftheir
three-yearperformanceperiods.
AsdiscussedundertheAnnualbonusoutcomesfor2018,MrStowehasreceivedanannualbonusfor2018ofUS$6,588,583.
Sixtypercentofthisawardwillbepaidincashintheusualway,and40percentwillbedeferredintoPrudentialADRs(tobereleased
inthespringof2022).Thisawardwillbesubjecttomalusandclawbackprovisions.
MrStowewillnotreceiveabonusfor2019andhewillnotbemadealong-termincentiveawardin2019oranysubsequentyear.
TheCommitteeappliedtheDirectors’remunerationpolicywhendeterminingseparationarrangementsforMsRichardsandMrStowe.
162 Prudential plc AnnualReport2018
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Directors’ remuneration report continued Tony Wilkey
TonyWilkeysteppeddownfromtheBoardon17July2017andhisemploymentendedwiththeGroupon17July2018.MrWilkey
received£1,057,343inrespectofsalary,benefitsandpensionbetween1Januaryand17July2018.
Asdisclosedinthe2017Directors’remunerationreport,theCommitteeexerciseditsdiscretioninaccordancewiththeapproved
Directors’remunerationpolicyanddeterminedthatMrWilkeyshouldbeallowedtoretainhisunvestedPLTIPawardgrantedin2016.
Thisawardwillvestinaccordancewiththeoriginaltimetable,subjecttotheoriginalperformanceconditions,remainsubjecttomalus
andclawbackprovisions,andwillbepro-ratedforservice.
Assetoutinthesection‘Remunerationinrespectofperformancein2018’theperformanceconditionsattachedtoMrWilkey’s
2016PLTIPawardswerepartiallymetand55.5percentoftheseawardswillbereleasedin2019.ThedetailsofMrWilkey’sawardare
setoutbelow.
Award
PrudentialLTIP
Number of
shares vesting1
Value of
shares vesting2
69,891
£1,072,128
Notes
1 Thenumberofsharesvestingincludeaccrueddividendshares.
2 Thesharepriceusedtocalculatethevaluewastheaveragesharepriceforthethreemonthsupto31December2018,being£15.34.
Other Directors
AnumberofformerDirectorsreceiveretireemedicalbenefitsforthemselvesandtheirpartner(whereapplicable).Thisisconsistent
withotherseniormembersofstaffemployedatthesametime.Ademinimisthresholdof£10,000hasbeensetbytheCommittee;
anypaymentsorbenefitsprovidedtoapastDirectorunderthisamountwillnotbereported.
Statement of voting at general meeting
Atthe2017AnnualGeneralMeeting,shareholderswereaskedtovoteonthecurrentDirectors’remunerationpolicyandatthe
2018AnnualGeneralMeeting,shareholderswereaskedtovoteonthe2017Directors’remunerationreport.Eachoftheseresolutions
receivedasignificantvoteinfavourbyshareholdersandtheCommitteeisgratefulforthissupportandendorsementbyour
shareholders.Thevotesreceivedwere:
Resolution
ToapprovetheDirectors’remunerationpolicy
Votes
for
% of votes
cast
Votes
against
% of votes
cast
Total votes
cast
Votes
withheld
(2017AGM)
1,773,691,171
90.71
181,582,497
9.29 1,955,273,668
45,820,585
ToapprovetheDirectors’remunerationreport
(2018AGM)
1,944,563,586
94.91
104,204,573
5.09 2,048,768,159
26,571,316
Statement of implementation in 2019
Aligning 2019 pay to performance
ExecutiveDirectors’remunerationpackageswerereviewedin2018withchangeseffectivefrom1January2019.WhentheCommittee
tookthesedecisions,itconsideredthesalaryincreasesawardedtootheremployeesin2018andtheexpectedincreasesin2019.
TheexternalmarketreferencepointsusedtoprovidecontexttotheCommitteewereidenticaltothoseusedfor2018salaries.
AllExecutiveDirectorsreceivedasalaryincreaseof2percent.The2019salaryincreasebudgetsforotheremployeesacrosstheGroup’s
businessunitswerebetween2percentand8percent.
TheExecutiveDirectors’bonusopportunities,performancemeasuresandweightingswillremainthesameasin2018.
DetailsofMichaelFalcon’srecruitmentarrangementshavebeenprovidedundertheRecruitmentarrangementssection.TheCommittee
consideredhisremunerationpackagewithreferencetointernalandexternalreferencepointsanddeterminedthatitwasappropriateto
appointhimonalowersalaryandlowerincentiveopportunitiesthanhispredecessor,BarryStowe,whohadservedontheBoardover
thelast12years.HavingjoinedtheBoardon7January2019,MichaelFalconwillbeeligibletoreceiveafullyearbonusforthe2019
financialyear.Hewillreceivea2019long-termincentiveaward,grantedunderthePLTIP,withafacevalueongrantof400percent
ofbasesalary.
On28February2019,weannouncedthatJohnFoley,ChiefExecutiveofM&GPrudential,NicNicandrou,ChiefExecutiveof
PrudentialCorporationAsia,andMichaelFalcon,ChairmanandChiefExecutiveOfficer,JacksonHoldingsLLC,willstepdownas
membersofPrudential’sBoardattheendoftheAnnualGeneralMeetingon16May2019aspartofourprogresstowardsthedemerger
ofM&GPrudential.TheywillremainintheirexecutiverolesandwillcontinuetobemembersoftheGroupExecutiveCommittee.
TheremunerationoftheseexecutiveswillbemanagedinlinewiththeapprovedDirectors’remunerationpolicyandtheywillnot
receiveanylossofofficepaymentinrespectoftheirserviceasDirectors.Furtherdetailswillbedisclosedinwebsiteannouncements
andinthe2019Directors’remunerationreport.
www.prudential.co.uk
AnnualReport2018 Prudential plc 163
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 2019 share-based long-term incentive awards
TheExecutiveDirectors’long-termincentiveawardswillcontinuetobemadeunderthePLTIPandtheopportunitylevelsremainthe
sameasthe2018PLTIPawards.However,ashighlightedintheAnnualstatementfromtheChairmanoftheRemunerationCommittee
atthebeginningofthisreport,changeswillbemadetothevestingscaleandmeasuresunderPLTIPforthe2019awardsonly.Thevesting
oftheseawardswilldependon:
— RelativeTSR(75percentofaward);and
— Balancedscorecardofstrategicmeasures(25percentofaward).
SincethesemeasuresareinlinewiththeremunerationrequirementsofSolvencyII,theweightingsoftheGroupChiefRiskOfficer’s
PLTIPperformancetargetswillbethesameasthatoftheotherExecutiveDirectors.
UndertheGroupTSRmeasure,20percentoftheawardwillvestforTSRatthemedianofthepeergroup,increasingtofullvestingfor
performancewithintheupperquartile.TSRismeasuredonalocalcurrencybasissincethishasthebenefitofsimplicityanddirectness
ofcomparison.AcomprehensivereviewoftheTSRpeergrouphasbeenundertakenfor2019PLTIPawardsasanumberofyearshas
passedsincethegroupwaslastconsideredindetail.Thecompanieswereselectedbasedonorganisationalsize,productmixand
geographicalfootprint.
Thepeergroupfor2019PLTIPawardsissetoutbelow:
Aegon
GreatEastern
PingAnInsurance
AIA
LincolnNational
PrincipalFinancial
AXAEquitable
Manulife
PrudentialFinancial
ChinaTaipingInsurance
MetLife
SunLifeFinancial
TheTSRpeergroupfor2017and2018PLTIPawardsremainsunchanged.
Underthe2019balancedscorecard,performancewillbeassessedforeachofthefourmeasures,attheendofthethree-year
performanceperiod.Performancewillbeassessedonaslidingscale.Eachofthemeasureshasequalweightingandthe2019measures
aresetoutbelow:
Capital measure:
Cumulativethree-yearE-capGroupoperatingcapitalgenerationrelativetoplan,lesscostofcapital
(basedonthecapitalpositionatthestartoftheperformanceperiod).
Vesting basis:
20percentvestingforachievingPlan,increasingtofullvestingforperformanceabovestretchlevel.Theplan
figureforthismetricwillbepublishedintheAnnualReportforthefinalyearoftheperformanceperiod.
Capital measure:
Cumulativethree-yearSolvencyIIGroupoperatingcapitalgeneration(ascapturedinpublisheddisclosures)
relativetoplan.
Vesting basis:
20percentvestingforachievingPlan,increasingtofullvestingforperformanceabovestretchlevel.Theplan
figureforthismetricwillbepublishedintheAnnualReportforthefinalyearoftheperformanceperiod.
Conduct measure: Throughappropriatemanagementaction,ensuretherearenosignificantconduct/culture/governanceissues
thatresultinsignificantcapitaladd-onsormaterialfines.
Vesting basis:
20percentvestingforpartialachievementoftheGroup’sexpectations,increasingtofullvestingforachieving
theGroup’sexpectations.
Diversity measure: PercentageoftheLeadershipTeamthatisfemaleattheendof2021.Thetargetforthismetricwillbebasedon
progresstowardsthegoalthattheCompanysetwhenitsignedtheWomeninFinanceCharter,specificallythat
30percentofourLeadershipTeamwillbefemalebytheendof2021.
Vesting basis:
20percentvestsformeetingthethresholdofatleast28percentofourLeadershipTeambeingfemaleattheend
of2021,increasingtofullvestingforreachingthestretchlevelofatleast32percentbeingfemaleatthatdate.
Pension entitlements from 2019
Externally-recruitedExecutiveDirectorsappointedonorafter1March2019willbeofferedpensionbenefitsof20percentofsalary,
ratherthanthecurrentlevelof25percentofsalary.Givenevolvingpracticeinthisarea,pensionbenefitswillbeconsideredagainaspart
ofourreviewoftheDirectors’remunerationpolicy.
164 Prudential plc AnnualReport2018
www.prudential.co.uk
Directors’ remuneration report continued Demerger and review of the Directors’ remuneration policy
During2018theGroupannounceditsintentiontodemergeM&GPrudentialfromPrudentialplc,resultingintwoseparatelylisted
companies,eachwithitsowndistinctinvestmentprospects.InpreparationforthedemergerprocesstheCommitteehasestablished
asetofprinciplestounderpindecisionsonremunerationrelatingtothedemerger,including:
— Executivesshouldnotbeadvantagedordisadvantagedbythedemerger;thevalueofoutstandingawardsandtheirkeyterms
(releasedates,holdingperiods,malusandclawbackprovisions)shouldbeunaffected;
— Whereperformanceconditionsneedtoberevised,thenewconditionsshouldbenomoreorlessstretchingthatthoseoriginally
attachedtotheawards;
— WheretheCommitteehasapplieddiscretion,thiswillbedisclosedclearly;and
— ThefuturearrangementsofM&GPrudentialwillbeamatterfortheBoard,RemunerationCommitteeandshareholdersofthenew
business.However,untilthedateofthedemerger,thePrudentialplcRemunerationCommitteewillhavearesponsibilityforthe
remunerationofmembersoftheplcBoardandGroupExecutiveCommitteemembersandoversightofthoseM&GPrudential
employeescurrentlywithinitspurview.
ThePrudentialplcDirectors’remunerationpolicywillcontinuetoapplytoallmembersoftheplcBoarduntilthedateofthedemergerand
thePrudentialplcGroup-wideRemunerationPolicywillcontinuetoapplytoallGroupstaff(includingthosewithintheM&GPrudential
business)untilthedateofthedemerger.
During2019,weintendtoreviewtheDirectors’remunerationpolicy,takingintoaccountthedemerger,theviewsofourshareholders,
thenewUKCorporateGovernanceCode,forthcomingchangestoaccountingstandardsandthebroaderregulatoryandcompetitive
environment.
Chairman and Non-executive Directors
FeesfortheChairmanandNon-executiveDirectorswerereviewedin2018withchangeseffectivefrom1July2018,assetoutunder
theChairmanandNon-executiveDirectorremunerationin2018section.Thenextreviewwillbeeffective1July2019.
SignedonbehalfoftheBoardofDirectors
Anthony Nightingale, CMG SBS JP
Chair of the Remuneration Committee
12March2019
Paul Manduca
Chairman
12March2019
www.prudential.co.uk
AnnualReport2018 Prudential plc 165
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
Supplementary information
Directors’ outstanding long-term incentive awards
Share-based long-term incentive awards
Plan name
Year of
award
Conditional
share awards
outstanding at
1 Jan 2018
Conditional
awards in
2018
Market
price at
date of
award
Mark FitzPatrick PLTIP
PLTIP
John Foley
Nic Nicandrou
Barry Stowe1
James Turner
Mike Wells2
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
PLTIP
2017
2018
2015
2016
2017
2018
2015
2016
2017
2018
2015
2015
2016
2017
2018
2015
2015
2016
2017
2018
2015
2015
2016
2017
2018
(numberof
shares)
(numberof
shares)
101,360
106,611
101,360
106,611
122,808
144,340
114,177
111,763
381,325
111,763
104,117
136,836
108,357
138,846
(pence)
1,828
1,750
1,672
1,279
1,672
1,750
1,672
1,279
1,672
1,750
Dividend
equivalents on
vested shares3
(number
ofshares
released)
Rights
exercised
in 2018
Rights
lapsed
in 2018
Conditional
share awards
outstanding at
31 Dec 2018
Date of
end of
performance
period
(numberof
shares)
101,360 31Dec19
106,611 31Dec20
–
–
–
207,971
10,683 117,693 5,115
– 31Dec17
144,340 31Dec18
114,177 31Dec19
111,763 31Dec20
10,683 117,693 5,115
370,280
9,057
99,781 4,336
– 31Dec17
136,836 31Dec18
108,357 31Dec19
138,846 31Dec20
349,310
138,846
9,057
99,781 4,336
384,039
113,940
50,668
274,100
247,690
215,298
686,398
215,298
18,927
2,993
33,116
27,940
89,439
82,976
89,439
209,222
30,132
332,870
263,401
257,813
1,672
1,611.5
1,279
1,672
1,750
1,672
1,417.5
1,279
1,672
1,750
1,672
1,611.5
1,279
1,672
1,750
9,238 101,788 12,152
45,264 5,404
7,770
– 31Dec17
– 31Dec17
274,100 31Dec18
247,690 31Dec19
215,298 31Dec20
17,008 147,052 17,556
737,088
1,643
261
18,139
2,868
788
125
– 31Dec17
– 31Dec17
33,116 31Dec18
27,940 31Dec19
89,439 31Dec20
1,904
21,007
913
150,495
18,198 200,508 8,714
28,878 1,254
2,658
– 31Dec17
– 31Dec17
332,870 31Dec18
263,401 31Dec19
257,813 31Dec20
835,625
257,813
20,856 229,386 9,968
854,084
Notes
1 TheawardsforBarryStoweweremadeinADRs(1ADR=2ordinaryshares).Thefiguresinthetablearerepresentedintermsofordinaryshares.
2 Theawardin2015forMikeWellswasmadeinADRs(1ADR=2ordinaryshares).Alloftheawardsfrom2016onwardsweremadeinordinaryshares.Thefiguresinthetableare
representedintermsofordinaryshares.
3 Adividendequivalentwasaccumulatedontheseawards.
166 Prudential plc AnnualReport2018
www.prudential.co.uk
Directors’ remuneration report Other share awards
ThetablebelowsetsoutExecutiveDirectors’deferredbonusshareawards.
Conditional
share awards
outstanding
at 1 Jan 2018
(number
ofshares)
Year of
grant
Conditionally
awarded
in 2018
(number
ofshares)
Dividends
accumulated
in 20183
(number
ofshares)
Shares
released
in 2018
(number
ofshares)
Conditional
share awards
outstanding
at 31 Dec
2018
(number
ofshares)
Date of end
of restricted
period
Date of
release
Market
price at
date of
award
Market
price at
date of
vesting or
release
(pence)
(pence)
Mark FitzPatrick
Deferred2017annual
incentiveaward
2018
27,414
27,414
–
705
705
28,119 31Dec20
28,119
–
1,750
John Foley
Deferred2014annual
incentiveaward
Deferred2015annual
incentiveaward
Deferred2016annual
incentiveaward
Deferred2017annual
incentiveaward
Nic Nicandrou
Deferred2014annual
incentiveaward
Deferred2015annual
incentiveaward
Deferred2016annual
incentiveaward
Deferred2017annual
incentiveaward
Barry Stowe1
Deferred2014annual
incentiveaward
Deferred2015annual
incentiveaward
Deferred2016annual
incentiveaward
Deferred2017annual
incentiveaward
James Turner
Deferred2014group
deferredbonus
planaward
Deferred2015group
deferredbonus
planaward
Mike Wells2
Deferred2014annual
incentiveaward
Deferred2015annual
incentiveaward
Deferred2016annual
incentiveaward
Deferred2017annual
incentiveaward
2015
2016
2017
2018
2015
2016
2017
2018
2015
2016
2017
2018
44,783
67,418
31,139
143,340
29,373
29,373
30,662
40,121
30,269
101,052
29,800
114,518
138,028
282,346
30,788
30,788
111,652
111,652
44,783
– 31Dec17 03Apr18 1,672
1,747
69,154 31Dec18
31,940 31Dec19
30,128 31Dec20
1,279
1,672
1,750
44,783
131,222
30,662
– 31Dec17 03Apr18 1,672
1,747
41,153 31Dec18
31,048 31Dec19
31,580 31Dec20
1,279
1,672
1,750
30,662
103,781
29,800
– 31Dec17 03Apr18 1,672
1,747
117,452 31Dec18
141,564 31Dec19
114,512 31Dec20
373,528
29,800
1,279
1,672
1,750
1,736
801
755
3,292
1,032
779
792
2,603
2,934
3,536
2,860
9,330
2015
3,917
3,917
– 31Dec17 03Apr18 1,672
1,747
2016
2015
2016
2017
2018
5,305
9,222
123,822
109,890
52,703
286,415
135
135
3,917
5,440 31Dec18
5,440
–
1,279
123,822
– 31Dec17 03Apr18 1,672
1,747
2,830
1,357
47,443
47,443
1,221
5,408 123,822
112,720 31Dec18
54,060 31Dec19
48,664 31Dec20
215,444
1,279
1,672
1,750
Notes
1 TheawardsforBarryStoweweremadeinADRs(1ADR=2ordinaryshares).Thefiguresinthetablearerepresentedintermsofordinaryshares.
2 TheawardforMikeWellsin2015wasmadeinADRs(1ADR=2ordinaryshares).Alloftheawardsmadefrom2016onwardsweremadeinordinaryshares.Thefiguresinthetable
arerepresentedintermsofordinaryshares.
3 Adividendequivalentwasaccumulatedontheseawards.
www.prudential.co.uk
AnnualReport2018 Prudential plc 167
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information All-employee share plans
ItisimportantthatallemployeesareofferedtheopportunitytoownsharesinPrudential,connectingthembothtothesuccessofthe
Companyandtotheinterestsofothershareholders.ExecutiveDirectorsareinvitedtoparticipateintheseplansonthesamebasisas
otherstaffintheirlocation.
Save As You Earn (SAYE) schemes
UK-basedExecutiveDirectorsarenormallyeligibletoparticipateintheHMRevenueandCustoms(HMRC)approvedPrudential
Savings-RelatedShareOptionScheme.Thisschemeallowsalleligibleemployeestosavetowardstheexerciseofoptionsover
Prudentialplcshareswiththeoptionpricesetatthebeginningofthesavingsperiodatadiscountofupto20percentofthemarketprice.
Since2014participantshavebeenabletoelecttoenterintosavingscontractsofupto£500permonthforaperiodofthreeorfiveyears.
Attheendofthisterm,participantsmayexercisetheiroptionswithinsixmonthsandpurchaseshares.Ifanoptionisnotexercisedwithin
sixmonths,participantsareentitledtoarefundoftheircashsavingsplusinterestifapplicableundertherules.Sharesareissuedtosatisfy
thoseoptionswhichareexercised.Nooptionsmaybegrantedundertheschemesifthegrantwouldcausethenumberofshareswhich
havebeenissued,orwhichremainissuablepursuanttooptionsgrantedinthepreceding10yearsundertheschemeandanyotheroption
schemesoperatedbytheCompany,orwhichhavebeenissuedunderanyothershareincentiveschemeoftheCompany,toexceed
10percentoftheCompany’sordinarysharecapitalattheproposeddateofgrant.InanticipationofthedemergeroftheM&GPrudential
businesstheCompanydidnotoperatetheSAYEin2018.
DetailsofExecutiveDirectors’rightsundertheSAYEschemearesetoutinthe‘Outstandingshareoptions’table.
Share Incentive Plan (SIP)
UK-basedExecutiveDirectorsarealsoeligibletoparticipateintheCompany’sShareIncentivePlan(SIP).SinceApril2014,allUK-based
employeeshavebeenabletopurchasePrudentialplcsharesuptoavalueof£150permonthfromtheirgrosssalary(partnershipshares)
throughtheSIP.Foreveryfourpartnershipsharesbought,anadditionalmatchingshareisawardedwhichispurchasedbyPrudentialplc
ontheopenmarket.Dividendsharesaccumulatewhiletheemployeeparticipatesintheplan.Iftheemployeewithdrawsfromtheplan,
orleavestheGroup,matchingsharesmaybeforfeited.
ThetablebelowprovidesinformationaboutsharespurchasedundertheSIPtogetherwithmatchingshares(awardedona1:4basis)and
dividendshares.
MarkFitzPatrick
JohnFoley
NicNicandrou1
JamesTurner2
MikeWells
Year of
initial grant
Share
Incentive Plan
awards held
in Trust at
1 Jan 2018
(numberof
shares)
Partnership
shares
accumulated
in 2018
(numberof
shares)
Matching
shares
accumulated
in 2018
(numberof
shares)
Dividend
shares
accumulated
in 2018
(numberof
shares)
Share
Incentive Plan
awards held
in Trust at
31 Dec 2018
(numberof
shares)
2017
2014
2010
2011
2015
81
576
1,766
479
408
104
103
–
172
103
26
26
–
43
25
3
16
47
15
12
214
721
1,813
709
548
Notes
1 FollowingNicNicandrou’sappointmentasChiefExecutiveofPrudentialCorporationAsiaon17July2017,heisnolongereligibletoparticipateintheSIP.However,whilehisshares
remainintheSIPTrusthewillreceiveanydividendspayableontheseshares.
2 ThenumberofsharesforJamesTurnerreflectshisSIPholdingonhisappointmentasanExecutiveDirectoron1March2018.
Cash-settled long-term incentive awards
ThisinformationhasbeenpreparedinlinewiththereportingrequirementsoftheHongKongStockExchangeandsetsoutExecutive
Directors’outstandingshareawardsandshareoptions.Fordetailsofthecash-settledlong-termincentiveawardsheldbysome
ExecutiveDirectors,pleaseseeourAnnualreportonremuneration.
Dilution
ReleasesfromthePrudentialLongTermIncentivePlanandthePrudentialAgencyLongTermIncentivePlanaresatisfiedusingnewissue
sharesratherthanbypurchasingsharesintheopenmarket.Sharesrelatingtooptionsgrantedunderall-employeeshareplansarealso
satisfiedbynewissueshares.Thecombineddilutionfromalloutstandingsharesandoptionsat31December2018was1.11percent
ofthetotalsharecapitalatthetime.Deferredbonusawardswillcontinuetobesatisfiedbythepurchaseofsharesintheopenmarket.
168 Prudential plc AnnualReport2018
www.prudential.co.uk
Directors’ remuneration report continued Five highest paid individuals
Ofthefiveindividualswiththehighestemolumentsin2018,threewereExecutiveDirectorswhoseemolumentsaredisclosedinthis
report.Theaggregateoftheemolumentsoftheothertwoindividualsfor2018wereasfollows:
Basesalaries,allowancesandbenefitsinkind
Pensioncontributions
Performancerelatedpay
Total
Theiremolumentswerewithinthefollowingbands:
£7,200,001-£7,300,000
£16,600,001-£16,700,000
2018
£000
2,810
104
20,993
23,907
Number of five highest
paid employees 2018
1
1
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AnnualReport2018 Prudential plc 169
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
170 Prudential plc Annual Report 2018
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05
Financial
statements
Index to Group IFRS financial statements
Parent company financial statements
Notes on the parent company financial statements
Statement of Directors’ responsibilities
Independent auditor’s report to Prudential plc
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Annual Report 2018 Prudential plc 171
Index to Group IFRS financial statements
Primary statements
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated statement of changes in equity
Consolidated statement of financial position
Consolidated statement of cash flows
Page
Section
173
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178
C4
Policyholder liabilities and unallocated surplus
C4.1 Movement and duration of liabilities
C4.1(a) Group overview
C4.1(b) Asia insurance operations
C4.1(c) US insurance operations
C4.1(d) UK and Europe insurance operations
C4.2
C4.2(a) Asia
C4.2(b) US
C4.2(c) UK and Europe
Products and determining contract liabilities
Section
C5
Page
C6
Page
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C5.1
C5.2
Intangible assets
Goodwill
Deferred acquisition costs and other
intangible assets
Borrowings
Core structural borrowings of
shareholder-financed businesses
C6.2
Other borrowings
C6.3 Maturity analysis
C6.1
C7
C8
C9
C10
C11
C12
C13
C14
D
D1
D2
D3
D4
D5
D6
E
E1
C7.1
C7.2
C7.3
C7.4
C7.5
C8.1
C8.2
Risk and sensitivity analysis
Group overview
Asia insurance operations
US insurance operations
UK and Europe insurance operations
Asset management and other operations
Tax assets and liabilities
Deferred tax
Current tax
Defined benefit pension schemes
Share capital, share premium and own shares
Provisions
Capital
C12.1 Group objectives, policies and processes
C12.2
C12.3
for managing capital
Local capital regulations
Transferability of available capital
Property, plant and equipment
Investment properties
D1.1
D1.2
Other notes
Corporate transactions
Gains/(losses) on disposal of businesses
and corporate transactions
Acquisition of TMB Asset Management Co., Ltd.
in Thailand
Contingencies and related obligations
Post balance sheet events
Related party transactions
Commitments
Investments in subsidiary undertakings,
joint ventures and associates
Further accounting policies
Other significant accounting policies
Notes to the Primary statements
A
A1
A2
A3
Background and critical accounting policies
Basis of preparation and exchange rates
New accounting pronouncements in 2018
Accounting policies
Critical accounting policies, estimates
and judgements
New accounting pronouncements
not yet effective
A3.1
A3.2
B1.1
B1.2
B1.3
B1.4
B1.5
B1.6
B2.1
B2.2
B2.3
B2.4
C2.1
C2.2
C2.3
B
B1
B2
B3
B4
B5
B6
C
C1
C2
C3
B1.6(a) Asia
B1.6(b) US
B1.6(c) UK and Europe
Earnings performance
Analysis of performance by segment
Segment results – profit before tax
Short-term fluctuations in investment returns
on shareholder-backed business
Determining operating segments and
performance measure of operating segments
Segmental income statement
Other investment return
Additional analysis of performance
by segment components
Acquisition costs and other expenditure
Staff and employment costs
Share-based payment
Key management remuneration
Fees payable to the auditor
Effect of changes and other accounting matters
on insurance assets and liabilities
Tax charge
Earnings per share
Dividends
Balance sheet notes
Analysis of Group statement of financial position
by segment
Analysis of segment statement of financial position
by business type
Asia
US
UK and Europe
Assets and liabilities
Group assets and liabilities – measurement
Debt securities
Loans portfolio
Financial instruments – additional information
C3.1
C3.2
C3.3
C3.4
C3.4(a) Financial risk
C3.4(b) Derivatives and hedging
C3.4(c) Derecognition, collateral and offsetting
179
180
180
189
193
194
196
200
202
202
203
204
205
206
208
208
209
210
213
214
215
218
219
220
221
229
235
236
238
239
172 Prudential plc Annual Report 2018
www.prudential.co.uk
Consolidated income statement
Grosspremiumsearned
Outwardreinsurancepremiums note (i)
Earnedpremiums,netofreinsurance
Investmentreturn
Otherincome note (ii)
Totalrevenue,netofreinsurance
Benefitsandclaims note (i)
Outwardreinsurers’shareofbenefitandclaims note (i)
Movementinunallocatedsurplusofwith-profitsfunds
Benefitsandclaimsandmovementinunallocatedsurplusofwith-profitsfunds,
netofreinsurance
Acquisitioncostsandotherexpenditure note (ii)
Financecosts:interestoncorestructuralborrowingsofshareholder-financedbusinesses
(Loss)gainondisposalofbusinessesandcorporatetransactions
RemeasurementofthesoldKorealifebusiness
Totalcharges,netofreinsuranceand(loss)gainondisposalofbusinesses
Shareofprofitsfromjointventuresandassociates,netofrelatedtax
Profitbeforetax(being tax attributable to shareholders’ and policyholders’ returns) note (iii)
Lesstaxcredit(charge)attributabletopolicyholders’returns
Profitbeforetaxattributabletoshareholders
Totaltaxchargeattributabletopolicyholdersandshareholders
Adjustmenttoremovetax(credit)chargeattributabletopolicyholders’returns
Taxchargeattributabletoshareholders’returns
Profit for the year
Attributable to:
EquityholdersoftheCompany
Non-controllinginterests
Profit for the year
Earnings per share (in pence)
BasedonprofitattributabletotheequityholdersoftheCompany:
Basic
Diluted
Note
2018 £m
2017 £m
B1.4
B1.4
B1.4
B1.4
C4.1(a)(iii)
C4.1(a)(iii)
C4.1(a)(iii)
B1.4
B2
D1.1
B1.4
D6
B1.1
B4
B4
47,224
(14,023)
33,201
(10,263)
1,993
24,931
(27,411)
13,554
1,289
(12,568)
(8,855)
(410)
(80)
–
(21,913)
291
3,309
326
3,635
(296)
(326)
(622)
3,013
3,010
3
3,013
44,005
(2,062)
41,943
42,189
2,258
86,390
(71,854)
2,193
(2,871)
(72,532)
(9,993)
(425)
223
5
(82,722)
302
3,970
(674)
3,296
(1,580)
674
(906)
2,390
2,389
1
2,390
Note
B5
2018
2017
116.9p
116.8p
93.1p
93.0p
Notes
(i)
(ii)
(iii)
Outwardreinsurancepremiumsincludethe£(12,149)millionpaidduringtheyearinrespectofthereinsuranceoftheUKannuityportfolio.Theassociatedincreaseinreinsurance
assetsisincludedinoutwardreinsurers’shareofbenefitsandclaimsandtheconsequentialchangetopolicyholderliabilitiesisincludedinbenefitsandclaims.SeenoteD1.1
forfurtherdetails.
The2017comparativeresultshavebeenre-presentedfromthosepreviouslypublishedforthedeductionofcertainexpensesagainstrevenuefollowingtheadoptionofIFRS15.
SeenoteA2.
ThismeasureistheformalprofitbeforetaxmeasureunderIFRSbutitisnottheresultattributabletoshareholders.ThisisprincipallybecausethecorporatetaxesoftheGroup
includethoseontheincomeofconsolidatedwith-profitsandunit-linkedfundsthat,throughadjustmentstobenefits,arebornebypolicyholders.Theseamountsarerequiredto
beincludedinthetaxchargeoftheCompanyunderIAS12.Consequently,theprofitbeforealltaxesmeasureisnotrepresentativeofpre-taxprofitsattributabletoshareholders.
Profitbeforealltaxesisdeterminedafterdeductingthecostofpolicyholderbenefitsandmovementsintheliabilityforunallocatedsurplusofwith-profitsfundsafteradjusting
fortaxesbornebypolicyholders.
www.prudential.co.uk
AnnualReport2018 Prudential plc 173
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Consolidated statement
of comprehensive income
Profit for the year
Other comprehensive income (loss):
Items that may be reclassified subsequently to profit or loss
Exchangemovementsonforeignoperationsandnetinvestmenthedges:
Exchangemovementsarisingduringtheyear
CumulativeexchangegainofsoldKorealifebusinessrecycledthroughprofitorloss
Relatedtax
NetunrealisedvaluationmovementsonsecuritiesofUSinsuranceoperationsclassified
asavailable-for-sale:
Netunrealisedholding(losses)gainsarisingintheyear
(Deductnetgains)addbacknetlossesincludedintheincomestatementondisposal
andimpairment
Total
Relatedchangeinamortisationofdeferredacquisitioncosts
Relatedtax
Total
Items that will not be reclassified to profit or loss
Shareholders’shareofactuarialgainsandlossesondefinedbenefitpensionschemes:
Actuarialgainsandlossesondefinedbenefitpensionschemes
Relatedtax
DeductamountattributabletoUKwith-profitfundstransferredtounallocatedsurplusof
with-profitfunds,netofrelatedtax
Othercomprehensive(loss)incomefortheyear,netofrelatedtax
Totalcomprehensiveincomefortheyear
Attributable to:
EquityholdersoftheCompany
Non-controllinginterests
Total comprehensive income for the year
Note
2018 £m
2017 £m
3,013
2,390
A1
C3.2(c)
C5.2
C8.1
344
–
5
349
(1,606)
(11)
(1,617)
246
288
(1,083)
(734)
134
(23)
111
(38)
73
(661)
2,352
2,348
4
2,352
(404)
(61)
(5)
(470)
591
26
617
(76)
(55)
486
16
200
(33)
167
(78)
89
105
2,495
2,494
1
2,495
174 Prudential plc AnnualReport2018
www.prudential.co.uk
Consolidated statement
of changes in equity
Year ended 31 December 2018 £m
Share
capital
C10
Share
premium
C10
Note
Retained
earnings
Translation
reserve
Available-
for-sale
securities
reserves
Share-
holders’
equity
Non-
controlling
interests
Total
equity
–
3,010
–
–
3,010
3
3,013
Reserves
Profitfortheyear
Othercomprehensiveincome:
Exchangemovementsonforeign
operationsandnetinvestment
hedges,netofrelatedtax
Netunrealisedvaluationmovements,
netofrelatedchangein
amortisationofdeferred
acquisitioncostsandrelatedtax
Shareholders’shareofactuarialgains
andlossesondefinedbenefit
pensionschemes,netofrelatedtax
Totalothercomprehensiveincome(loss)
Totalcomprehensiveincomefortheyear
Dividends
Reservemovementsinrespect
ofshare-basedpayments
Changeinnon-controllinginterests
Movementsinrespectofoptionto
acquirenon-controllinginterests
Share capital and share premium
Newsharecapitalsubscribed
Treasury shares
Movementinownsharesinrespect
ofshare-basedpaymentplans
MovementinPrudentialplcshares
purchasedbyunittrustsconsolidated
underIFRS
Netincrease(decrease)inequity
Atbeginningofyear
At end of year
B6
D1.2
D1.2
C10
–
–
–
–
–
–
–
–
–
–
1
–
–
–
–
–
–
–
–
–
–
–
–
–
73
73
3,083
(1,244)
69
–
(109)
16
–
–
–
29
52
348
–
348
1
349
–
(1,083)
(1,083)
–
(1,083)
–
348
348
–
73
(1,083)
(662)
(1,083)
2,348
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,244)
69
–
(109)
17
29
52
–
1
4
–
–
7
–
–
–
–
11
7
18
73
(661)
2,352
(1,244)
69
7
(109)
17
29
52
1,173
16,094
17,267
1
129
130
16
1,948
1,880
12,326
348
840
(1,083)
844
1,162
16,087
1,964
14,206
1,188
(239) 17,249
www.prudential.co.uk
AnnualReport2018 Prudential plc 175
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Consolidated statement of changes in equity continued
Year ended 31 December 2017 £m
Share
capital
C10
Share
premium
C10
Note
Retained
earnings
Translation
reserve
Available-
for-sale
securities
reserves
Share-
holders’
equity
Non-
controlling
interests
Total
equity
–
2,389
–
–
2,389
1
2,390
(470)
–
(470)
–
(470)
Reserves
Profitfortheyear
Othercomprehensiveincome:
Exchangemovementsonforeign
operationsandnetinvestment
hedges,netofrelatedtax
Netunrealisedvaluationmovements,
netofrelatedchangein
amortisationofdeferred
acquisitioncostsandrelatedtax
Shareholders’shareofactuarialgains
andlossesondefinedbenefit
pensionschemes,netofrelatedtax
Totalothercomprehensiveincome(loss)
Totalcomprehensiveincomefortheyear
Dividends
Reservemovementsinrespectof
share-basedpayments
Changeinnon-controllinginterests
Share capital and share premium
Newsharecapitalsubscribed
B6
C10
Treasury shares
Movementinownsharesinrespect
ofshare-basedpaymentplans
MovementinPrudentialplcshares
purchasedbyunittrustsconsolidated
underIFRS
Netincrease(decrease)inequity
Atbeginningofyear
At end of year
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
21
–
–
–
–
89
89
2,478
(1,159)
89
–
–
(15)
(9)
–
–
(470)
(470)
–
–
–
–
–
–
486
486
–
486
486
–
–
–
–
–
–
89
105
2,494
(1,159)
89
–
21
(15)
(9)
–
–
–
1
–
–
5
–
–
–
6
1
7
486
89
105
2,495
(1,159)
89
5
21
(15)
(9)
1,427
14,667
16,094
–
129
129
21
1,927
1,948
1,384
10,942
12,326
(470)
1,310
840
486
358
844
1,421
14,666
16,087
176 Prudential plc AnnualReport2018
www.prudential.co.uk
Consolidated statement of financial position
Assets
Goodwill
Deferredacquisitioncostsandotherintangibleassets
Property,plantandequipment
Reinsurers’shareofinsurancecontractliabilities
Deferredtaxassets
Currenttaxrecoverable
Accruedinvestmentincome
Otherdebtors
Investmentproperties
Investmentinjointventuresandassociatesaccountedforusingtheequitymethod
Loans
Equitysecuritiesandportfolioholdingsinunittrusts note (i)
Debtsecurities note (i)
Derivativeassets
Otherinvestments note (i)
Deposits
Assetsheldforsale note (ii)
Cashandcashequivalents
Total assets
Equity
Shareholders’equity
Non-controllinginterests
Total equity
Liabilities
Insurancecontractliabilities
Investmentcontractliabilitieswithdiscretionaryparticipationfeatures
Investmentcontractliabilitieswithoutdiscretionaryparticipationfeatures
Unallocatedsurplusofwith-profitsfunds
Corestructuralborrowingsofshareholder-financedbusinesses
Operationalborrowingsattributabletoshareholder-financedbusinesses
Borrowingsattributabletowith-profitsbusinesses
Obligationsunderfunding,securitieslendingandsaleandrepurchaseagreements
Netassetvalueattributabletounitholdersofconsolidatedunittrustsandsimilarfunds
Deferredtaxliabilities
Currenttaxliabilities
Accruals,deferredincomeandotherliabilities
Provisions
Derivativeliabilities
Liabilitiesheldforsale note (ii)
Total liabilities
Total equity and liabilities
Note
C5.1
C5.2
C13
C4.1(a)(iv)
C8.1
C8.2
C1
C1
C14
C3.3
C3.2
C3.4
C1
C1
C4.1
C4.1
C4.1
C4.1
C6.1
C6.2
C6.2
C8.1
C8.2
C1
C11
C3.4
C1
31 Dec 2018
£m
31 Dec 2017
£m
1,857
11,923
1,409
11,144
2,595
618
2,749
4,088
17,925
1,733
18,010
214,733
175,356
3,494
6,512
11,796
10,578
12,125
508,645
1,482
11,011
789
9,673
2,627
613
2,676
2,963
16,497
1,416
17,042
223,391
171,374
4,801
5,622
11,236
38
10,690
493,941
17,249
18
17,267
16,087
7
16,094
322,666
67,413
19,222
15,845
7,664
998
3,940
6,989
11,651
4,022
568
15,248
1,078
3,506
10,568
491,378
508,645
328,172
62,677
20,394
16,951
6,280
1,791
3,716
5,662
8,889
4,715
537
14,185
1,123
2,755
–
477,847
493,941
Notes
(i)
(ii)
Includedwithinequitysecuritiesandportfolioholdingsinunittrusts,debtsecuritiesandotherinvestmentsare£8,278million(31December2017:£8,232million)oflentsecurities
andassetssubjecttorepurchaseagreements.
Assetsheldforsaleof£10,578millioninclude£10,568millioninrespectofthereinsuredUKannuitybusiness.Acorrespondingamountisreflectedinliabilitiesheldforsale.
SeenoteD1.1forfurtherdetails.
Theconsolidatedfinancialstatementsonpages173to319wereapprovedbytheBoardofDirectorson12March2019.Theyweresigned
onitsbehalf:
Paul Manduca
Chairman
www.prudential.co.uk
Mike Wells
Group Chief Executive
Mark FitzPatrick
Chief Financial Officer
AnnualReport2018 Prudential plc 177
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Consolidated statement of cash flows
Cash flows from operating activities
Profitbeforetax (being tax attributable to shareholders’ and policyholders’ returns) note (i)
Adjustmentstoprofitbeforetaxfornon-cashmovementsinoperatingassetsandliabilities:
Investments
Othernon-investmentandnon-cashassets
Policyholderliabilities(includingunallocatedsurplus)
Otherliabilities(includingoperationalborrowings)
Interestincomeandexpenseanddividendincomeincludedinresultbeforetax
Note
2018 £m
2017 £m
3,309
3,970
15,456
(3,503)
(17,392)
4,344
(7,861)
(49,771)
(968)
44,877
3,360
(8,994)
Operatingcashitems:
Interestreceiptsandpayments
Dividendreceipts
Taxpaid note (iv)
Othernon-cashitems
Netcashflowsfromoperatingactivities
Cash flows from investing activities
Purchasesofproperty,plantandequipment
Proceedsfromdisposalofproperty,plantandequipment
Acquisitionofbusinessesandintangibles note (v)
Saleofbusinesses note (v)
Netcashflowsfrominvestingactivities
Cash flows from financing activities
StructuralborrowingsoftheGroup:
Shareholder-financedbusinesses: note (ii)
Issueofsubordinateddebt,netofcosts
Redemptionofsubordinateddebt
Feespaidtomodifytermsandconditionsofseniordebt note (ii)
Interestpaid
With-profitsbusinesses: note (iii)
Redemptionofsubordinateddebt
Interestpaid
Equitycapital:
Issuesofordinarysharecapital
Dividendspaid
Netcashflowsfromfinancingactivities
Netincreaseincashandcashequivalents
Cashandcashequivalentsatbeginningofyear
Effectofexchangeratechangesoncashandcashequivalents
Cash and cash equivalents at end of year
C13
C6.1
C6.2
5,793
2,361
(625)
582
2,464
(289)
4
(504)
–
(789)
1,630
(434)
(33)
(376)
(100)
(4)
17
(1,244)
(544)
1,131
10,690
304
12,125
6,900
2,612
(915)
549
1,620
(134)
–
(351)
1,301
816
565
(751)
–
(369)
–
(9)
21
(1,159)
(1,702)
734
10,065
(109)
10,690
Notes
(i)
(ii)
ThismeasureistheformalprofitbeforetaxmeasureunderIFRSbutitisnottheresultattributabletoshareholders.
Structuralborrowingsofshareholder-financedbusinessesexcludeborrowingstosupportshort-termfixedincomesecuritiesprogrammes,non-recourseborrowingsofinvestment
subsidiariesofshareholder-financedbusinessesandotherborrowingsofshareholder-financedbusinesses.Cashflowsinrespectoftheseborrowingsareincludedwithincash
flowsfromoperatingactivities.Thechangesinthecarryingvalueofthestructuralborrowingsofshareholder-financedbusinessesduring2018areanalysedasfollows:
2018
2017
Cash movements £m
Non-cash movements £m
Balance at
beginning
of year
6,280
6,798
Issue
of debt
Redemption
of debt
Modification
of debt*
Foreign
exchange
movement
Other
movements
1,630
565
(434)
(751)
(33)
–
210
(341)
11
9
Balance at
end of
year
7,664
6,280
*Theamountin2018relatestofeespaidtobondholderswhoparticipatedinthevotingprocessinrespectofcertainmodificationstothetermsandconditionsoftheseniordebt.
Otherthanthesefees,themodificationdidnotresultinanadjustmenttothecarryingvalueoftheseniordebt.
(iii)
(iv)
(v)
Interestpaidonstructuralborrowingsofwith-profitsbusinessesrelatessolelytothe£100million8.5percentundatedsubordinatedguaranteedbonds,whichcontributeto
thesolvencybaseoftheScottishAmicableInsuranceFund(SAIF),aring-fencedsub-fundoftheUKwith-profitsfund.Thesebondswereredeemedinfullon30June2018.
Cashflowsinrespectofotherborrowingsofwith-profitsfunds,whichprincipallyrelatetoconsolidatedinvestmentfunds,areincludedwithincashflowsfromoperatingactivities.
Taxpaidincludes£134million(2017:£298million)paidonprofitstaxableatpolicyholderratherthanshareholderrates.
Cashflowsarisingfromthe‘acquisitionofbusinessesandintangibles’and‘saleofbusinesses’includeamountspaidfordistributionrightsandcashflowsarisingfromtheacquisitions
anddisposalsofbusinesses(includingsubsidiariesacquiredanddisposedbywith-profitsfundsforinvestmentpurposes).
178 Prudential plc AnnualReport2018
www.prudential.co.uk
A Background and critical accounting policies
A1 Basis of preparation and exchange rates
Prudentialplc(‘theCompany’)togetherwithitssubsidiaries(collectively,‘theGroup’or‘Prudential’)isaninternationalfinancialservices
group.TheGrouphasoperationsinAsia,theUS,theUKandEurope,andAfrica.Prudentialoffersawiderangeofretailfinancial
productsandservicesandassetmanagementservicesthroughouttheseoperations.Theretailfinancialproductsandservicesprimarily
includelifeinsurance,pensionsandannuitiesaswellascollectiveinvestmentschemes.On14March2018,theCompanyannouncedits
intentiontodemergeM&GPrudential,itsUKandEuropebusiness,fromPrudentialplcresultingintwoseparately-listedcompanies.
Whileitremainstheintentiontodemergethebusiness,M&GPrudentialhasnotbeendisclosedseparatelyasavailablefordistributionat
31December2018,asthebusinessdoesnotsatisfythecriteriaofbeingimmediatelyavailableforsaleunderIFRS5,‘Non-currentAssets
HeldforSaleandDiscontinuedOperations’.
Basis of preparation
ThesestatementshavebeenpreparedinaccordancewithIFRSStandardsasissuedbytheInternationalAccountingStandardsBoard
(IASB)andasendorsedbytheEuropeanUnion(EU)asrequiredbyEUlaw(IASRegulationEC1606/2032).EU-endorsedIFRSStandards
maydifferfromIFRSStandardsissuedbytheIASBif,atanypointintime,neworamendedIFRSStandardshavenotbeenendorsedby
theEU.At31December2018,therewerenounendorsedstandardseffectiveforthetwoyearsended31December2018whichimpact
theconsolidatedfinancialinformationoftheGroup.TherewerenodifferencesbetweenIFRSStandardsendorsedbytheEUandIFRS
StandardsissuedbytheIASBintermsoftheirapplicationtotheGroup.Thesestatementshavebeenpreparedonagoingconcernbasis.
TheparentcompanystatementoffinancialpositionpreparedinaccordancewiththeUKGenerallyAcceptedAccountingPractice
(includingFinancialReportingStandard101ReducedDisclosureFramework)ispresentedonpage320.
TheGroupIFRSaccountingpoliciesarethesameasthoseappliedfortheyearended31December2017withtheexceptionofthe
adoptionofthenewandamendedaccountingstandardsasdescribedinnoteA2.
Exchange rates
TheexchangeratesappliedforbalancesandtransactionsincurrencyotherthanthepresentationalcurrencyoftheGroup,pounds
sterling(GBP),were:
Local currency: £
HongKong
Indonesia
Malaysia
Singapore
China
India
Vietnam
Thailand
US
Closing
rate at
31 Dec 2018
Average rate
for
2018
Closing
rate at
31 Dec 2017
Average rate
for
2017
9.97
18,314.37
5.26
1.74
8.74
88.92
29,541.15
41.47
1.27
10.46
18,987.65
5.38
1.80
8.82
91.25
30,732.53
43.13
1.34
10.57
18,353.44
5.47
1.81
8.81
86.34
30,719.60
44.09
1.35
10.04
17,249.38
5.54
1.78
8.71
83.90
29,279.71
43.71
1.29
Certainnotestothefinancialstatementspresent2017comparativeinformationatconstantexchangerates(CER),inadditiontothe
reportingatactualexchangerates(AER)usedthroughouttheconsolidatedfinancialstatements.AERareactualhistoricalexchangerates
forthespecificaccountingperiod,beingtheaverageratesovertheperiodfortheincomestatementandtheclosingratesforthebalance
sheetatthebalancesheetdate.CERresultsarecalculatedbytranslatingpriorperiodresultsusingthecurrentperiodforeignexchange
rate,iecurrentperiodaverageratesfortheincomestatementandcurrentperiodclosingratesforthebalancesheet.
Theexchangemovementarisingduring2018recognisedinothercomprehensiveincomeis:
Asiaoperations*
USoperations
UKandEuropeoperations
Unallocatedtoasegment(otherfunds)†
2018 £m
2017 £m
222
329
–
(207)
344
(295)
(477)
3
304
(465)
*2017includedtherecyclingofthecumulativeexchangegainofthesoldKorealifebusinessof£61milliontotheincomestatement.
†Theexchangeratemovementunallocatedtoasegmentmainlyreflectsthetranslationofcurrencyborrowings,issuedbytheGroupparentcompany,thathavebeendesignatedasanet
investmenthedgeagainstthecurrencyriskoftheGroup’sinvestmentintheUSoperations.
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AnnualReport2018 Prudential plc 179
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information A2 New accounting pronouncements in 2018
IFRS 15, ‘Revenue from Contracts with Customers’
TheGrouphasadoptedIFRS15,‘RevenuefromContractswithCustomers’from1January2018.Thisstandardprovidesasingle
frameworktorecogniserevenueforcontractswithdifferentcharacteristicsandoverridestherevenuerecognitionrequirements
previouslyprovidedinotherstandards.Thecontractsexcludedfromthescopeofthisstandardinclude:
— LeasecontractswithinthescopeofIAS17,’Leases’;
— InsurancecontractswithinthescopeofIFRS4,‘InsuranceContracts’;and
— FinancialinstrumentswithinthescopeofIAS39,‘FinancialInstruments’.
ThemainimpactsofIFRS15forPrudentialaretorevenuerecognitionforassetmanagementcontractsandinvestmentcontractsthat
donotcontaindiscretionaryparticipatingfeaturesbutdoincludeinvestmentmanagementservices.
InaccordancewiththetransitionprovisionsinIFRS15,theGrouphasadoptedthestandardusingthefullretrospectivemethodforall
periodspresented.Theonlyimpactonthepriorperiodspresentedisaminorreclassificationintheconsolidatedincomestatementto
presentcertainexpenses(suchasrebatestoclientsofassetmanagementfees)asadeductionagainstrevenue.Revenuehasbeen
reducedby£234millionin2018(2017:£172million)withacorrespondingdeductioninexpenses.
IFRS 9, ‘Financial Instruments’ and amendments to IFRS 4, ‘Insurance Contracts’
TheIASBpublishedacompleteversionofIFRS9inJuly2014withtheexceptionofmacrohedgeaccountingandthestandardis
mandatorilyeffectiveforannualperiodsbeginningonorafter1January2018.
InSeptember2016,theIASBpublishedamendmentstoIFRS4,‘ApplyingIFRS9FinancialInstrumentswithIFRS4Insurance
Contracts’toaddressthetemporaryconsequencesofthedifferenteffectivedatesofIFRS9andIFRS17,‘InsuranceContracts’.
TheamendmentsincludeanoptionaltemporaryexemptionfromapplyingIFRS9andtheassociatedamendmentsuntilIFRS17comes
intoeffectin2021.Thistemporaryexemptionisavailabletocompanieswhosepredominantactivityistoissueinsurancecontractsbased
onmeetingtheeligibilitycriteriaasat31December2015assetoutintheamendments.
TheGroupmettheeligibilitycriteriafortemporaryexemptionundertheamendmentstoIFRS4fromapplyingIFRS9andhas
accordinglydeferredtheadoptionofIFRS9.SeenoteA3.2forfurtherdetailsonIFRS9,includingthedisclosuresassociatedwiththe
temporaryexemption.
InNovember2018,theIASBtentativelydecidedthattheeffectivedateofIFRS17shouldbedelayedbyoneyearfromperiodsending
onorafter1January2021to1January2022.TheIASBalsotentativelydecidedthatIFRS9couldbedelayedforinsurersbyanadditional
yeartokeeptheeffectivedateofIFRS9andIFRS17aligned.ThesechangesareyettobefinalisedandtheGroupcontinuestomonitor
developments.
Other new accounting pronouncements
Inadditiontotheabove,thefollowingnewaccountingpronouncementsarealsoeffectivefrom1January2018:
— IFRIC22,‘ForeignCurrencyTransactionsandAdvanceConsideration’;
— Classificationandmeasurementofshare-basedpaymenttransactions(amendmentstoIFRS2,‘Share-basedpayment’);
— TransfersofInvestmentProperty(amendmentstoIAS40,‘Investmentproperty’);and
— AnnualImprovementstoIFRSs2014–2016Cycle.
ThesepronouncementshavehadnoeffectontheGroup’sfinancialstatements.
A3 Accounting policies
A3.1 Critical accounting policies, estimates and judgements
Thisnotepresentsthecriticalaccountingpolicies,accountingestimatesandjudgementsappliedinpreparingtheGroup’sconsolidated
financialstatements.OthersignificantaccountingpoliciesarepresentedinnoteE1.Allaccountingpoliciesareappliedconsistentlyfor
bothyearspresentedandnormallyarenotsubjecttochangesunlessnewaccountingstandards,interpretationsoramendmentsare
introducedbytheIASB.
ThepreparationofthesefinancialstatementsrequiresPrudentialtomakeestimatesandjudgementsabouttheamountsofassets,
liabilities,revenuesandexpenses,whicharebothrecognisedandunrecognised(egcontingentliabilities)intheprimaryfinancial
statements.Prudentialevaluatesitsestimates,includingthoserelatedtolong-termbusinessprovisioningandthefairvalueofassetsas
required.BelowaresetoutthosecriticalaccountingpoliciestheapplicationofwhichrequirestheGrouptomakecriticalestimatesand
judgements.AlsosetoutarefurthercriticalaccountingpoliciesaffectingthepresentationoftheGroup’sresultsandotheritemsthat
requiretheapplicationofcriticalestimatesandjudgements.
180 Prudential plc AnnualReport2018
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A Background and critical accounting policies continued (a) Critical accounting policies with linked critical estimates and judgements
Classification of insurance and investment contracts
IFRS4requirescontractswritten
byinsurerstobeclassifiedaseither
‘insurance’contractsor‘investment’
contracts.Theclassificationofthe
contractdeterminesitsaccounting.
Impacts£433billionofreportedliabilities,
requiringclassification.
Judgementisappliedinconsidering
whetherthematerialfeaturesofa
contractgivesrisetothetransfer
ofsignificantinsurancerisk.
ContractsthattransfersignificantinsurancerisktotheGroupareclassifiedasinsurance
contracts.Thisjudgementismadeatthepointofcontractinceptionandisnotrevisited.
ForthemajorityoftheGroup’scontracts,classificationisbasedonareadilyidentifiable
scenariothatdemonstratesasignificantdifferenceincashflowsifthecoveredevent
occurs(asopposedtodoesnotoccur)reducingthelevelofjudgementinvolved.
ContractsthattransferfinancialrisktotheGroupbutnotsignificantinsuranceriskare
classifiedasinvestmentcontracts.Furthermore,somecontracts,bothinsuranceand
investment,containdiscretionaryparticipatingfeaturesrepresentingthecontractualright
toreceiveadditionalbenefitsasasupplementtoguaranteedbenefitsthat(i)arelikelyto
beasignificantportionofthetotalcontractbenefits;(ii)haveanamountortiming
contractuallyatthediscretionoftheinsurer;and(iii)arecontractuallybasedonassetor
fundperformance,asdiscussedinIFRS4.Insurancecontractsandinvestmentcontracts
withdiscretionaryparticipationfeaturesareaccountedforunderIFRS4.Investment
contractswithoutsuchdiscretionaryparticipationfeaturesareaccountedforasfinancial
instrumentsunderIAS39.
Insurance
business units
Asia
Insurance contracts and
investment contracts with
discretionary participation features
Investment contracts without
discretionary participation features
— With-profitscontracts
— Non-participatingterm
— Minoramountsforanumber
ofsmallcategoriesofbusiness
contracts
— Wholelifecontracts
— Unit-linkedpolicies
— Accidentandhealthpolicies
US
— Variableannuitycontracts
— Fixedannuitycontracts
— Fixedindexannuitycontracts
— Grouppayoutannuity
— Guaranteedinvestment
contracts(GICs)
— Minoramountsof‘annuity
certain’contracts
contracts
— Lifeinsurancecontracts
UKandEurope
— With-profitscontracts
— Bulkandindividualannuity
— Certainunit-linkedsavings
andsimilarcontracts
business
— Non-participatingterm
contracts
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AnnualReport2018 Prudential plc 181
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information A3 Accounting policies continued
A3.1 Critical accounting policies, estimates and judgements continued
Measurement of policyholder liabilities and unallocated surplus of with-profits
Themeasurementbasisofpolicyholder
liabilitiesisdependentuponthe
classificationofthecontractsunderIFRS4
describedabove.
Impacts£433billionofliabilities.
Policyholderliabilitiesareestimatedbased
onanumberofactuarialassumptions(eg
mortality,morbidity,policyholder
behaviourandexpenses).
Measurementofinsurancecontract
liabilitiesandinvestmentcontractliabilities
withdiscretionaryparticipationfeatures.
Asia insurance operations
US insurance operations (Jackson)
IFRS4permitsthecontinuedusageofpreviouslyappliedGenerallyAcceptedAccounting
Practices(GAAP)forinsurancecontractsandinvestmentcontractswithdiscretionary
participatingfeatures.
AmodifiedstatutorybasisofreportingwasadoptedbytheGrouponfirsttimeadoption
ofIFRSin2005.ThiswassetoutintheStatementofRecommendedPracticeissuedby
theAssociationofBritishInsurers(ABISORP).AnexceptionwasforUKregulated
with-profitsfundswhichweremeasuredunderFRS27,‘LifeAssurance’asdiscussedbelow.
FRS27andtheABISORPwerewithdrawnfortheaccountingperiodsbeginninginorafter
2015.Asusedintheseconsolidatedfinancialstatements,theterms‘grandfathered’FRS
27andthe‘grandfathered’ABISORPrefertotherequirementsofthesepronouncements
priortotheirwithdrawal.
Forinvestmentcontractsthatdonotcontaindiscretionaryparticipatingfeatures,IAS39
isappliedand,wherethecontractincludesaninvestmentmanagementelement,IFRS15,
‘Revenue’,applies.
Thepoliciesappliedineachbusinessunitarenotedbelow.Whenmeasuringpolicyholder
contractliabilitiesanumberofassumptionsareappliedtoestimatefutureamountsdue
toorfromthepolicyholder.Thenatureofassumptionvariesbyproductandamongthe
mostsignificantareassumedratesofpolicyholders’mortality,particularlyinrespectof
annuitiessoldintheUK,andpolicyholderbehaviour,particularlyintheUS.Additional
detailsofvaluationmethodologiesandassumptionsappliedformaterialproducttypes
arediscussedinnoteC4.2.
ThepolicyholderliabilitiesforbusinessesinAsiaaregenerallydeterminedinaccordance
withmethodsprescribedbylocalGAAPadjustedtocomply,wherenecessary,withthe
modifiedstatutorybasis.Refinementstothelocalreservingmethodologyaregenerally
treatedaschangesinestimates,dependentontheirnature.Insomeoperations,Taiwan
andIndia,USGAAPprinciplesareapplied.
Whilethebasisofvaluationofliabilitiesinthisbusinessisinaccordancewiththe
requirementsofthe‘grandfathered’ABISORP,itmaydifferfromthatdeterminedonthe
modifiedstatutorybasisfortheUKandEuropeinsuranceoperationswiththesamefeatures.
ThesensitivityofAsiainsuranceoperationstovariationsinkeyestimatesandassumptions,
includingmortalityandmorbidity,isdiscussedinnoteC7.2.
ThepolicyholderliabilitiesforJackson’sconventionalprotection-typepoliciesare
determinedunderUSGAAPprincipleswithlockedinassumptionsformortality,interest,
policylapsesandexpensesalongwithprovisionsforadversedeviations.Forother
policies,thepolicyholderliabilitiesincludethepolicyholderaccountbalance.
ForthoseinvestmentcontractsintheUSwithfixedandguaranteedterms,theGroupuses
theamortisedcostmodeltomeasuretheliability.TheUShasnoinvestmentcontracts
withdiscretionaryparticipationfeatures.
ThesensitivityofUSinsuranceoperationstovariationsinkeyestimatesandassumptions,
includingpolicyholderbehaviour,isdiscussedinnoteC7.3.
182 Prudential plc AnnualReport2018
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A Background and critical accounting policies continued Measurement of policyholder liabilities and unallocated surplus of with-profits continued
UK and Europe insurance operations
TheUKregulatedwith-profitsfunds’liabilitiesaretherealisticbasisliabilitiesin
accordancewith‘grandfathered’FRS27.Therealisticbasisrequiresthevalueofliabilities
tobecalculatedas:
— Awith-profitsbenefitsreserve;plus
— Futurepolicy-relatedliabilities;plus
— Therealisticcurrentliabilitiesofthefund.
Thewith-profitsbenefitsreserveisprimarilybasedontheretrospectivecalculationof
accumulatedassetsharesbutisadjustedtoreflectfuturepolicyholderbenefitsandother
chargesandexpenses.Assetsharesbroadlyreflectthepolicyholders’shareofthe
with-profitsfundassetsattributabletotheirpolicies.
Thefuturepolicy-relatedliabilitiesmustincludeamarketconsistentvaluationofcosts
ofguarantees,optionsandsmoothing,lessanyrelatedcharges,andthisamountis
determinedusingeitherastochasticapproach,hedgingcostsoraseriesofdeterministic
projectionswithattributedprobabilities.
Theshareholders’shareoffuturecostsofbonusesisincludedwithintheliabilitiesfor
unallocatedsurplus.Shareholders’shareofprofitisrecognisedinlinewiththedistribution
ofbonusestopolicyholders.
Forthepurposesoflocalregulations,segregatedaccountsareestablishedforlinked
businessforwhichpolicyholderbenefitsarewhollyorpartlydeterminedbyreference
tospecificinvestmentsortoaninvestment-relatedindex.
Theinterestratesusedinestablishingpolicyholderbenefitprovisionsforpension
annuitiesinthecourseofpaymentareadjustedeachreportingperiodandincludean
allowanceforcreditrisk(seenoteB3).Mortalityratesusedinestablishingpolicyholder
benefitsarebasedonpublishedmortalitytablesadjustedtoreflectactualexperience.
ThesensitivityoftheUKandEuropeinsuranceoperationstovariationsinkeyestimates
andassumptions,includingannuitantmortality,isdiscussedinnoteC7.4.
Investmentcontractswithoutdiscretionaryparticipationfeaturesaremeasuredin
accordancewithIAS39toreflectthedepositnatureofthearrangement,withpremiums
andclaimsreflectedasdepositsandwithdrawalsandtakendirectlytothestatement
offinancialpositionasmovementsinthefinancialliabilitybalance.
Incremental,directlyattributableacquisitioncostsrelatingtotheinvestmentmanagement
elementofthesecontractsarecapitalisedandamortisedinlinewiththerelatedrevenue.
Ifthecontractsinvolveup-frontcharges,thisincomeisalsodeferredandamortised
throughtheincomestatementinlinewithcontractualserviceprovisioninaccordance
withIFRS15.
Investmentcontractswithoutfixedandguaranteedtermsareclassifiedasfinancial
instrumentsanddesignatedasfairvaluethroughprofitorlossbecausetheresulting
liabilitiesaremanagedandtheirperformanceisevaluatedonafairvaluebasis.Wherethe
contractincludesasurrenderoptionitscarryingvalueissubjecttoaminimumcarrying
valueequaltoitssurrendervalue.
Otherinvestmentcontractsaremeasuredatamortisedcost.
Representstheexcessofassetsoverpolicyholderliabilitiesthataredeterminedin
accordancewiththeGroup’saccountingpoliciesandarebasedonlocalGAAPforthe
Group’swith-profitsfundsintheUK,HongKongandMalaysiathathaveyettobe
appropriatedbetweenpolicyholdersandshareholders.Theunallocatedsurplusis
recordedwhollyasaliabilitywithnoallocationtoequity.Theannualexcess(shortfall)
ofincomeoverexpenditureofthewith-profitsfunds,afterdeclarationandattribution
ofthecostofbonusestopolicyholdersandshareholders,istransferredto(from)the
unallocatedsurpluseachyearthroughacharge(credit)totheincomestatement.
Thebalanceretainedintheunallocatedsurplusrepresentscumulativeincomearising
onthewith-profitsbusinessthathasnotbeenallocatedtopolicyholdersorshareholders.
Thebalanceoftheunallocatedsurplusisdeterminedafterfullprovisionfordeferredtax
onunrealisedappreciationoninvestments.
Measurementofinvestmentcontract
liabilitieswithoutdiscretionary
participationfeatures.
Measurementofunallocatedsurplus
ofwith-profitsfunds.
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AnnualReport2018 Prudential plc 183
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information A3 Accounting policies continued
A3.1 Critical accounting policies, estimates and judgements continued
Measurement of policyholder liabilities and unallocated surplus of with-profits continued
Liabilityadequacytest.
TheGroupperformsadequacytestingonitsinsuranceliabilitiestoensurethatthe
carryingamounts(netofrelateddeferredacquisitioncosts)and,whererelevant,present
valueofacquiredin-forcebusinessissufficienttocovercurrentestimatesoffuturecash
flows.Anydeficiencyisimmediatelychargedtotheincomestatement.
Jackson’sliabilitiesforinsurancecontracts,whichincludethoseforseparateaccounts
(reflectingseparateaccountassets),policyholderaccountvaluesandguarantees
measuredasdescribedinnoteC4.2andtheassociateddeferredacquisitioncostasset
aremeasuredunderUSGAAPandliabilityadequacytestingisperformedinthiscontext.
UnderUSGAAP,mostofJackson’sproductsareaccountedforunderAccounting
StandardsCodificationTopic944,FinancialServices–InsuranceoftheFinancial
AccountingStandardsBoard(ASC944)wherebydeferredacquisitioncostsareamortised
inlinewithexpectedgrossprofits.Recoverabilityofthedeferredacquisitioncostsinthe
balancesheetistestedagainsttheprojectedvalueoffutureprofitsusingcurrentestimates
andthereforenoadditionalliabilityadequacytestisrequiredbyIFRS4.TheDAC
recoverabilitytestisperformedinlinewithUSGAAPrequirementswhichinpractice
isatagroupedlevelofthosecontractsmanagedtogether.
(b) Further critical accounting policies
Measurement and presentation of derivatives and debt securities of US insurance operations
Jacksonholdsanumberofderivative
instrumentsanddebtsecurities.
Theselectionoftheaccountingapproach
fortheseitemssignificantlyaffectsthe
volatilityofIFRSprofitbeforetax.
£(2,014)millionoftheUSincome
statementinvestmentreturnarisesfrom
suchderivativesanddebtsecurities.
Jacksonentersintoderivativeinstrumentstomitigateeconomicexposures.TheGroup
hasconsideredwhetheritisappropriatetoundertakethenecessaryoperationalchanges
toqualifyforhedgeaccountingsoastoachievematchingofvaluemovementsinhedging
instrumentsandhedgeditemsintheperformancestatements.Thekeyfactorsconsidered
inthisassessmentwerethecomplexityofassetandliabilitymatchinginJackson’sproduct
rangeandthedifficultyandcostofapplyingthemacrohedgeprovisionsunderIAS39
(whicharemoresuitedtobankingarrangements)toJackson’sderivativebook.
TheGrouphasdecidedthat,exceptforoccasionalcircumstances,applyinghedge
accountingusingIAS39toderivativeinstrumentsheldbyJacksonwouldnotimprove
therelevanceorreliabilityofthefinancialstatementstosuchanextentthatwouldjustify
thedifficultyandcostofapplyingtheseprovisions.Asaresultofthisdecision,thetotal
incomestatementresultsaremorevolatileasthemovementsinthefairvalueofJackson’s
derivativesarereflectedwithinit.Thisvolatilityisreflectedinthelevelofshort-term
fluctuationsininvestmentreturns,asshowninnotesB1.1andB1.2.
UnderIAS39,unlesscarriedatamortisedcost(subjecttoimpairmentprovisionswhere
appropriate)undertheheld-to-maturitycategory,debtsecuritiesarealsocarriedat
fairvalue.TheGrouphaschosennottoclassifyanyfinancialassetsasheld-to-maturity.
DebtsecuritiesofJacksonaredesignatedasavailable-for-salewithvaluemovements,
unlessimpaired,beingrecordedasmovementswithinothercomprehensiveincome.
Impairmentsarerecordedintheincomestatement.
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A Background and critical accounting policies continued Presentation of results before tax
ProfitbeforetaxisasignificantIFRS
incomestatementitem.TheGrouphas
chosentopresentameasureofprofit
beforetaxattributabletoshareholders
whichdistinguishesbetweentax
attributabletopolicyholdersand
unallocatedsurplusandtaxborneby
shareholders,tosupportunderstanding
oftheperformanceoftheGroup.
Profitbeforetaxattributableto
shareholdersis£3,635millionand
comparestoprofitbeforetaxof
£3,309million.
ThetotaltaxchargefortheGroupreflectstaxthat,inadditiontorelatingtoshareholders’
profits,isalsoattributabletopolicyholdersandunallocatedsurplusofwith-profitsfunds
andunit-linkedpolicies.FurtherdetailisprovidedinnoteB4.Reportedprofitbefore
thetotaltaxchargeisnotrepresentativeofpre-taxprofitsattributabletoshareholders.
Accordingly,inordertoprovideameasureofpre-taxprofitsattributabletoshareholders
theGrouphaschosentoadoptanincomestatementpresentationofthetaxchargeand
pre-taxresultsthatdistinguishesbetweenpolicyholderandshareholdercomponents.
Segmental analysis of results and earnings attributable to shareholders
TheGroupusesadjustedIFRSoperating
profitbasedonlonger-terminvestment
returnsasthesegmentalmeasureof
itsresults.
TotalsegmentaladjustedIFRSoperating
profitbasedonlonger-terminvestment
returnsis£5,717millionandisshown
innoteB1.1.
ThebasisofcalculationofadjustedIFRSoperatingprofitbasedonlonger-terminvestment
returnsisdisclosedinnoteB1.3.
Forshareholder-backedbusiness,withtheexceptionofdebtsecuritiesheldbyJackson
andassetsclassifiedasloansandreceivablesatamortisedcost,allfinancialinvestments
andinvestmentpropertyaredesignatedasassetsatfairvaluethroughprofitorloss.
Short-termfluctuationsinfairvalueaffecttheresultfortheyearandtheGroupprovides
additionalanalysisofresultsbeforeandaftertheeffectsofshort-termfluctuationsin
investmentreturns,togetherwithotheritemsthatareofashort-term,volatileorone-off
nature.Theeffectsofshort-termfluctuationsincludeasymmetricimpactswherethe
measurementbasesoftheliabilitiesandassociatedderivativesusedtomanagethe
JacksonannuitybusinessdifferasdescribedinnoteB1.2.
Short-termfluctuationsininvestmentreturnsonassetsheldbywith-profitsfundsinthe
UK,HongKong,MalaysiaandSingapore,donotaffectdirectlyreportedshareholder
results.Thisisbecause(i)theunallocatedsurplusofwith-profitsfundsisaccountedfor
asaliabilityand(ii)excessordeficitsofincomeandexpenditureofthefundsoverthe
requiredsurplusfordistributionaretransferredtoorfrompolicyholderliabilities
(includingtheunallocatedsurplus).
(c) Further critical estimates or judgements
Deferred acquisition costs for insurance contracts
TheGroupappliesjudgementin
determiningqualifyingcoststhatshould
becapitalised(iethosecostsofacquiring
newinsurancebusinessthatmeetthe
criteriaundertheGroup’saccounting
policyfordeferredacquisitioncosts).
TheGroupestimatesprojectedfuture
profits/marginstoassesswhether
adjustmentstothecarryingvalue
oramortisationprofileofdeferred
acquisitioncostassetsarenecessary.
£10.1billionofdeferredacquisitioncosts
aspernoteC5.2(b).
Exceptforacquisitioncostsofwith-profitscontractsoftheUKregulatedwith-profits
funds,whichareaccountedforunderthe‘grandfathered’FRS27,costsofacquiringnew
insurancebusinessareaccountedforinawaythatisconsistentwiththeprinciplesofthe
’grandfathered’ABISORPwithdeferralandamortisationagainstmarginsinfuture
revenuesontherelatedinsurancepolicies.Ingeneral,thisdeferralisshownbyanexplicit
carryingvalueinthebalancesheet.However,insomeAsiaoperationsthedeferralis
implicitthroughthereservingmethodology.Therecoverabilityofthedeferredacquisition
costsismeasuredandisdeemedimpairediftheprojectedmargins(whichareestimated
basedonanumberofassumptionssimilartothoseunderlyingpolicyholderliabilities)
arelessthanthecarryingvalue.Totheextentthatthefuturemarginsdifferfromthose
anticipated,thenanadjustmenttothecarryingvaluewillbenecessaryeitherthrough
animpairment(iftheprojectedmarginsarelowerthancarryingvalue)orthroughachange
intheamortisationprofile.
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A3.1 Critical accounting policies, estimates and judgements continued
Deferred acquisition costs for insurance contracts continued
Asia insurance operations
US insurance operations
UK and Europe insurance operations
ForthosebusinessunitsapplyingUSGAAPtoinsuranceassetsandliabilities,aspermitted
bythe‘grandfathered’ABISORP,principlessimilartothosesetoutintheUSinsurance
operationsparagraphbelowareappliedtothedeferralandamortisationofacquisition
costs.ForotherterritoriesinAsia,thegeneralprinciplesofthe‘grandfathered’ABISORP
areappliedwith,asdescribedabove,deferralofacquisitioncostsbeingeitherexplicit
orimplicitthroughthereservingbasis.
Themostmaterialestimatesandassumptionsappliedinthemeasurementand
amortisationofdeferredacquisitioncostbalancesrelatetotheUSinsuranceoperations.
TheGroup’sUSinsuranceoperationsapplyFASBASU2010-26on‘AccountingforCosts
AssociatedwithAcquiringorRenewingInsuranceContracts’andcapitaliseonlythose
incrementalcostsdirectlyrelatingtosuccessfullyacquiringacontract.
Fortermlifebusiness,acquisitioncostsaredeferredandamortisedinlinewithexpected
premiums.Forannuityandinterest-sensitivelifebusiness,acquisitioncostsaredeferred
andamortisedinlinewithexpectedgrossprofitsontherelevantcontracts.Forfixed
andfixedindexannuityandinterest-sensitivelifebusiness,thekeyassumptionisthe
long-termspreadbetweentheearnedrateoninvestmentsandtheratecreditedto
policyholders.Inaddition,expectedgrossprofitsdependonmortalityassumptions,
assumedunitcostsandlapses(includingtherelatedcharges),allofwhicharebased
onacombinationofJackson’sactualexperience,industrybenchmarkingandfuture
expectations.Adetailedanalysisofactualmortality,lapseandexpensesexperience
isperformedusinginternallydevelopedexperiencestudies.
ForUSvariableannuitybusiness,akeyassumptionisthelong-terminvestmentreturn
fromtheseparateaccounts.Jacksonusesameanreversionmethodologythatsetsthe
projectedlevelofreturnforeachofthenextfiveyearssuchthatthesereturnsin
combinationwiththeactualratesofreturnfortheprecedingthreeyears,includingthe
currentyear,averagetheassumedlong-termannualreturn(grossofassetmanagement
feesandotherchargestopolicyholders,butnetofexternalfundmanagementfees)over
theeightyearperiod.Projectedreturnsafterthemeanreversionperiodrevertbacktothe
long-terminvestmentreturn.Forfurtherdetailsoncurrentbalances,assumptionsand
sensitivity,refertonoteC5.2(b)andC7.3(iv).
Toensurethatthemethodologyinextrememarketmovementsproducesfutureexpected
returnsthatarerealistic,themeanreversiontechniquehasacapandfloorfeaturewhereby
theprojectedreturnsineachofthenextfiveyearscanbenomorethan15percentper
annumandnolessthan0percentperannum(bothgrossofassetmanagementfeesand
otherchargestopolicyholders,butnetofexternalfundmanagementfees)ineachyear.
Jacksonmakescertainadjustmentstothedeferredacquisitioncostswhicharerecognised
directlyinothercomprehensiveincome(‘shadowaccounting’)tomatchtherecognition
ofunrealisedgainsorlossesonavailable-for-salesecuritiescausingtheadjustments
Moreprecisely,shadowdeferredacquisitioncostsadjustmentsreflectthechangein
deferredacquisitioncoststhatwouldhaveariseniftheassetsheldinthestatementof
financialpositionhadbeensold,crystallisingunrealisedgainsorlosses,andtheproceeds
reinvestedattheyieldscurrentlyavailableinthemarket.
ForUKregulatedwith-profitsfundswhere‘grandfathered’FRS27isapplied,thesecosts
areexpensedasincurred.ThemajorityoftheUKshareholder-backedbusinessis
individualandgroupannuitybusinesswherethedeferralofacquisitioncostsisnegligible.
186 Prudential plc AnnualReport2018
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A Background and critical accounting policies continued Financial investments – Valuation
Financialinvestmentsheldatfairvalue
represent£401.3billionoftheGroup’s
totalassets.
Financialinvestmentsheldatamortised
costrepresent£13.3billionoftheGroup’s
totalassets.
TheGroupestimatesthefairvalueof
financialinvestments,thatarenotactively
traded,usingquotationsfromindependent
thirdpartiesorinternallydeveloped
pricingmodels.
TheGroupholdsthemajorityofitsfinancialinvestmentsatfairvalue(eitherthroughprofit
andlossoravailable-for-sale).Informationontheinclusionwithintheincomestatementof
gains/lossesarisingondebtsecuritiesclassifiedasavailable-for-saleisincludedinnote
E1(e)(i).Financialinvestmentsheldatamortisedcostprimarilycompriseloansand
deposits.
Determination of fair value
TheGroupusescurrentbidpricestovalueitsinvestmentshavingquotedprices.Actively
tradedinvestmentswithoutquotedpricesarevaluedusingpricesprovidedbythird
partiesasdescribedfurtherinnoteC3.1.Financialinvestmentsmeasuredatfairvalue
areclassifiedintoathree-levelhierarchyasdescribedinnoteC3.1(b).
IfthemarketforafinancialinvestmentoftheGroupisnotactive,theGroupestablishes
fairvaluebyusingquotationsfromindependentthirdparties,suchasbrokersorpricing
services,orbyusinginternallydevelopedpricingmodels.Priorityisgiventopublicly
availablepricesfromindependentsourceswhenavailable,butoverallthesourceof
pricingand/orthevaluationtechniqueischosenwiththeobjectiveofarrivingatafair
valuemeasurementwhichreflectsthepriceatwhichanorderlytransactionwouldtake
placebetweenmarketparticipantsonthemeasurementdate.Thevaluationtechniques
includetheuseofrecentarm’slengthtransactions,referencetootherinstrumentsthat
aresubstantiallythesame,discountedcashflowanalysis,option-adjustedspreadmodels
and,ifapplicable,enterprisevaluationandmayincludeanumberofassumptionsrelating
tovariablessuchascreditriskandinterestrates.Changesinassumptionsrelatingtothese
variablescouldpositivelyornegativelyimpactthereportedfairvalueofthesefinancial
investments.Detailsofthefinancialinvestmentsclassifiedas‘level3’towhichvaluation
techniquesareapplied,andthesensitivityofprofitbeforetaxtoachangeintheseitems’
valuation,arepresentedinnoteC3.1(d).
Determination of impaired value
Inestimatingthepresentvalueoffuturecashflowsfordeterminingtheimpairedvalue
ofinstrumentsheldatamortisedcost,theGrouplooksattheexpectedcashflowsofthe
assetsandapplieshistoricallossexperienceofassetswithsimilarcreditrisksthathas
beenadjustedforconditionsinthehistoricallossexperiencewhichnolongerexist,orfor
conditionsthatareexpectedtoarise.Theestimatedfuturecashflowsarediscounted
usingthefinancialasset’seffectiveinterestrateandexcludecreditlossesthathavenotyet
beenincurred.
InestimatinganyrequiredimpairmentforUSresidentialmortgage-backedandother
asset-backedsecuritiesheldasavailable-for-sale,theexpectedvalueoffuturecashflows
isdeterminedusingamodel,thekeyassumptionsofwhichincludehowmuchofthe
currentlydelinquentloanswilleventuallydefaultandassumedlossseverity.Further
detailsoftheassumptionsandestimatesappliedinassessingimpairmentofUSavailable-
for-salesecuritiesisgiveninnoteC3.2(g).
www.prudential.co.uk
AnnualReport2018 Prudential plc 187
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information A3 Accounting policies continued
A3.1 Critical accounting policies, estimates and judgements continued
Financial investments – Determining impairment in relation to financial assets
TheGroupappliesjudgementtoassess
whetherfactorssuchastheseverity
anddurationofthedeclineinfairvalue,
thefinancialconditionandtheprospects
oftheissuerindicateanimpairmentin
valueoffinancialinvestmentsclassified
as‘available-for-sale’or‘atamortisedcost’.
Ifevidenceforimpairmentexists,valuation
techniques,includingestimates,arethen
appliedindeterminingtheimpairedvalue.
TheGroupestimatestheimpairedvalue
offinancialinvestmentsbasedonits
expectationofdiscountedfuturecashflows.
Affects£54.2billionofassets.
Forfinancialinvestmentsclassifiedas‘available-for-sale’or‘atamortisedcost,’ifaloss
eventthatwillhaveadetrimentaleffectoncashflowsisidentified,animpairmentlossis
recognisedintheincomestatement.Thelossrecognisedisdeterminedasthedifference
betweenthebookcostandthefairvalueoftherelevantimpairmentassets.Theloss
comprisestheeffectoftheexpectedlossofcontractualcashflowsandanyadditional
market-pricedriventemporaryreductionsinvalues.
Available-for-sale securities
TheGroup’sreviewoffairvalueinvolvesseveralfactors,includingeconomicconditions,
creditlossexperience,otherissuer-specificdevelopmentsandfuturecashflows.These
assessmentsarebasedonthebestavailableinformationatthetime.Factorssuchas
marketliquidity,thewideningofbid/askspreadsandachangeincashflowassumptions
cancontributetofuturepricevolatility.Ifactualexperiencediffersnegativelyfromthe
assumptionsandotherconsiderationsusedintheconsolidatedfinancialstatements,
unrealisedlossescurrentlyinequitymayberecognisedintheincomestatementinfuture
periods.Additionaldetailsonthemethodologyandestimatesusedtodetermine
impairmentsoftheavailable-for-salesecuritiesofJacksonaredescribedinnoteC3.2(g).
ThemajorityoftheUSinsuranceoperation’sdebtsecuritiesportfolioisaccountedfor
onanavailable-for-salebasis.Theconsiderationofevidenceofimpairmentrequires
management’sjudgement.Inmakingthisdeterminationarangeofmarketandindustry
indicatorsareconsideredincludingtheseverityanddurationofthedeclineinfairvalue
andthefinancialconditionandprospectsoftheissuer.
ForUSresidentialmortgage-backedandotherasset-backedsecurities,allofwhichare
classifiedasavailable-for-sale,impairmentisestimatedusingamodelofexpectedfuture
cashflows.Keyassumptionsusedinthemodelincludeassumptionsabouthowmuch
ofthecurrentlydelinquentloanswilleventuallydefaultandassumedlossseverity.
Assets held at amortised cost
Whenassetsheldatamortisedcostaresubjecttoimpairmenttestingestimatedfuture
cashflowsarecomparedtothecarryingvalueoftheasset.Inestimatingfuturecashflows,
theGrouplooksattheexpectedcashflowsoftheassetsandapplieshistoricalloss
experienceofassetswithsimilarcreditrisksthathasbeenadjustedforconditionsinthe
historicallossexperiencewhichnolongerexist,orforconditionsthatareexpectedto
arise.Theestimatedfuturecashflowsarediscountedusingthefinancialasset’soriginalor
variableeffectiveinterestrateandexcludecreditlossesthathavenotyetbeenincurred.
Reversal of impairment losses
If,insubsequentperiods,animpaireddebtsecurityheldonanavailable-for-salebasis
oranimpairedloanorreceivablerecoversinvalue(inpartorinfull),andthisrecovery
canbeobjectivelyrelatedtoaneventoccurringaftertheimpairment,thenanyamount
determinedtohavebeenrecoveredisreversedthroughtheincomestatement.
188 Prudential plc AnnualReport2018
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A Background and critical accounting policies continued Intangible assets – Carrying value of distribution rights
TheGroupappliesjudgementtoassess
whetherfactorssuchasthefinancial
performanceofthedistribution
arrangement,changesinrelevant
legislationandregulatoryrequirements
indicateimpairmentofintangibleassets
representingdistributionrights.
TodeterminetheimpairedvaluetheGroup
estimatesthediscountedfutureexpected
cashflowsarisingfromdistributionrights.
Affects£1.7billionofassets.
Distributionrightsrelatetobancassurancepartnershiparrangementsforbankdistribution
ofproductsforthetermofthecontractualagreementwiththebankpartner,forwhichan
assetisrecognisedbasedonfeespaid.Distributionrightsimpairmenttestingisconducted
whenthereisanindicationofimpairment.
Toassessindicatorsofimpairment,theGroupmonitorsanumberofinternalandexternal
factors,includingindicationsthatthefinancialperformanceofthearrangementislikely
tobeworsethanoriginallyexpectedandchangesinrelevantlegislationandregulatory
requirementsthatcouldimpacttheGroup’sabilitytocontinuetosellnewbusiness
throughthebancassurancechannel,andthenappliesjudgementtoassesswhether
thesefactorsindicateimpairmenthasoccurred.
Ifanimpairmenthasoccurred,animpairmentchargeisrecognisedforthedifference
betweenthecarryingvalueandrecoverableamountoftheassetwhichisrecognisedin
theincomestatement.Therecoverableamountisthegreateroffairvaluelesscoststosell
andvalueinuse.Valueinuseiscalculatedasthepresentvalueoffutureexpectedcash
flowsfromtheassetorthecashgeneratingunittowhichitisallocated.
A3.2 New accounting pronouncements not yet effective
Thefollowingstandards,interpretationsandamendmentshavebeenissuedbutarenotyeteffectivein2018,includingthosewhichhave
notyetbeenadoptedintheEU.Thisisnotintendedtobeacompletelistasonlythosestandards,interpretationsandamendmentsthat
couldhaveamaterialimpactupontheGroup’sfinancialstatementsarediscussed.
Accounting pronouncements endorsed by the EU but not yet effective
IFRS 9, ‘Financial instruments: Classification and measurement’
InJuly2014,theIASBpublishedacompleteversionofIFRS9withtheexceptionofmacrohedgeaccounting.Thestandardbecame
mandatorilyeffectivefortheannualperiodsbeginningonorafter1January2018,withearlyapplicationpermittedandtransitional
rulesapply.
AsdiscussedinnoteA2,theGroupmettheeligibilitycriteriafortemporaryexemptionundertheAmendmentstoIFRS4from
applyingIFRS9in2018andhasaccordinglydeferredtheadoptionofIFRS9untilIFRS17,‘InsuranceContracts’isadopteduponits
mandatoryeffectivedate.TheGroupiseligibleasitsactivitiesarepredominantlytoissueinsurancecontractsbasedonthecriteriaasset
outintheamendmentstoIFRS4.ThedisclosureofthefairvalueoftheGroup’sfinancialassets,showingtheamountsforinstruments
thatmeetthe‘SolelyforPaymentofPrincipalandInterest’(SPPI)criteriaseparatelyfromallotherfinancialassets,asrequiredforentities
applyingthetemporaryexemptionisprovidedbelow.
WhenadoptedIFRS9replacestheexistingIAS39,’FinancialInstruments–RecognitionandMeasurement’,andwillaffectthe
followingthreeareas:
— The classification and the measurement of financial assets and liabilities
IFRS9redefinestheclassificationoffinancialassets.Basedonthewayinwhichtheassetsaremanagedinordertogeneratecash
flowsandtheircontractualcashflowcharacteristics(whetherthecashflowsrepresent‘solelypaymentsofprincipalandinterest’),
financialassetsareclassifiedintooneofthefollowingcategories:amortisedcost,fairvaluethroughothercomprehensiveincome
(FVOCI)andfairvaluethroughprofitorloss(FVTPL).Anoptionisalsoavailableatinitialrecognitiontoirrevocablydesignatea
financialassetasatFVTPLifdoingsoeliminatesorsignificantlyreducesaccountingmismatches.
UnderIAS39,85percentoftheGroup’sinvestmentsarevaluedatFVTPLandtheGroup’scurrentexpectationisthatasignificant
proportionwillcontinuetobedesignatedassuchunderIFRS9.
TheexistingIAS39amortisedcostmeasurementforfinancialliabilitiesislargelymaintainedunderIFRS9.Forfinancialliabilities
designatedatFVTPLIFRS9requireschangesinfairvalueduetochangesinentity’sowncreditrisktoberecognisedinother
comprehensiveincome.
— The calculation of the impairment charge relevant for financial assets held at amortised cost or FVOCI
AnewimpairmentmodelbasedonanexpectedcreditlossapproachreplacestheexistingIAS39incurredlossimpairmentmodel,
resultinginearlierrecognitionofcreditlossescomparedtoIAS39.
ThisaspectisthemostcomplexareaofIFRS9toimplementandwillinvolvesignificantjudgementsandestimationprocesses.The
Groupiscurrentlyassessingthescopeofassetstowhichtheserequirementswillapply.
— The hedge accounting requirementswhicharemorecloselyalignedwiththeriskmanagementactivitiesoftheCompany.
NosignificantchangetotheGroup’shedgeaccountingiscurrentlyanticipated,butthisremainsunderreview.
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AnnualReport2018 Prudential plc 189
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information A3 Accounting policies continued
A3.2 New accounting pronouncements not yet effective continued
TheGroupisassessingtheimpactofIFRS9andimplementingthisstandardinconjunctionwiththeIFRS17.FurtherdetailsonIFRS17
areprovidedbelow.
Theparentcompanyandanumberofnon-insuranceUKandAsiasubsidiarieswithintheGrouphaveadoptedIFRS9in2018intheir
individualorseparatefinancialstatementswherethesestatementsarepreparedinaccordancewithIFRS,includingtheUKFinancial
ReportingStandard101ReducedDisclosureFramework.Inaddition,PrudentialPensionsLimited,aUKinsurancesubsidiaryhas
adoptedIFRS9initsindividualfinancialstatementsasitdidnotmeettheeligibilitycriteriafortemporaryexemption.PrudentialPensions
Limitedwritesmostlyunit-linkedproductsthatareclassifiedasinvestmentcontractswithoutdiscretionaryparticipationfeature.
TheresultsfortheseentitiescontinuetobeaccountedforonanIAS39basisintheseconsolidatedfinancialstatements.
The2018individualfinancialstatementsoftheUKsubsidiariesthatincludeIFRS9informationrelevanttothecurrentyear,canbe
obtainedpubliclywhenfiledwiththeUKRegistrarofCompanieslaterintheyearviatheUKCompaniesHousewebsite.Thesefinancial
statementsincludethoseofPrudentialPensionsLimitedreferredtoabove,theconsolidatedandindividualfinancialstatementsofM&G
GroupLimitedanditsUKoperatingsubsidiariesandthefinancialstatementsofPrudentialCapitalplc,PrudentialCorporationHoldings
Limited,PrudentialHoldingsLimitedandM&GPrudentialLimited.FortheAsiasubsidiariesthatadoptedIFRS9intheirindividual
financialstatements,thepublicavailabilityofthesestatementsvariesaccordingtothelocallawsandregulationsofeachjurisdiction.
ThefairvalueoftheGroup’sdirectlyheldfinancialassetsat31December2018isshownbelow.Financialassetswithcontractualterms
thatgiveriseonspecifieddatestocashflowsthataresolelypaymentsofprincipalandinterest(SPPI)asdefinedbyIFRS9areshown
separately.Thisexcludesfinancialassetsthatmeetthedefinitionofheldfortradingoraremanagedandevaluatedonafairvaluebasis.
Financial assets on the Group’s statement of financial position
Accruedinvestmentincome
Otherdebtors
Loans(1)
Equitysecuritiesandportfolioholdingsinunittrusts
Debtsecurities(2)
Derivativeassets,netofderivativeliabilities
Otherinvestments
Deposits
Cashandcashequivalents
Totalfinancialassets,netofderivativeliabilities
Financial assets that pass
the SPPI test
All other financial assets,
net of derivative liabilities
Fair value at
31 Dec 2018
£m
Movement in
the fair value
during the
year
£m
Fair value at
31 Dec 2018
£m
Movement in
the fair value
during the
year
£m
2,749
4,088
11,914
–
39,522
–
–
11,796
12,125
82,194
–
–
(493)
–
(1,574)
–
–
–
–
(2,067)
–
–
6,505
214,733
135,834
(12)
6,512
–
–
363,572
–
–
(175)
(16,359)
(3,343)
(941)
466
–
–
(20,352)
Notes
Further information on the loans and debt securities that pass the SPPI test
(1)
(2)
TheloansthatpasstheSPPItestinthetableaboveareprimarilycarriedatamortisedcostunderIAS39.FurtherinformationontheseloansisasprovidedinnoteC3.3.
ThedebtsecuritiesthatpasstheSPPItestinthetableabovearewhollyheldbyJacksonandareclassifiedasavailable-for-saleunderIAS39.Thecreditratingsofthesesecurities,
analysedonthesamebasisofthosedisclosedinnoteC3.2,areasfollows:
31 Dec 2018 £m
Jackson
AAA
AA+ to AA-
A+ to A-
BBB+ to BBB-
Below BBB-
Other
Total
fair value
Debtsecuritiesthatpass
theSPPItest
652
7,252
10,214
14,315
843
6,246
39,522
190 Prudential plc AnnualReport2018
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A Background and critical accounting policies continued TheunderlyingfinancialassetsoftheGroup’sjointventuresandassociatesaccountedforusingtheequitymethodareanalysedbelow
intothosewhichmeettheSPPIconditionofIFRS9,excludinganyfinancialassetsthatmeetthedefinitionofheldfortradingorare
managedandevaluatedonafairvaluebasis,andallotherfinancialassets.Fairvalueinformationforjointventuresandassociatesisalso
setoutinthetablebelow:
Financial assets held by the Group’s joint ventures and associates
accounted for using the equity method
Accruedinvestmentincome
Otherdebtors
Loans
Equitysecuritiesandportfolioholdingsinunittrusts
Debtsecurities
Deposits
Cashandcashequivalents
Totalfinancialassets,netofderivativeliabilities
Financial assets that pass
the SPPI test
All other financial assets,
net of derivative liabilities
Fair value at
31 Dec 2018
£m
Movement in
the fair value
during the
year
£m
Fair value at
31 Dec 2018
£m
Movement in
the fair value
during the
year
£m
131
212
117
–
–
355
396
1,211
–
–
–
–
–
–
–
–
–
–
–
3,677
4,247
–
–
7,924
–
–
–
(281)
86
–
–
(195)
IFRS 16, ‘Leases’
InJanuary2016,theIASBpublishedIFRS16,‘Leases’effectiveforperiodsbeginningonorafter1January2019,withearlieradoption
permittedifIFRS15,‘RevenuefromContractswithCustomers’hasalsobeenapplied.Thenewstandardbringsmostleaseson-balance-
sheetforlesseesunderasinglemodel,eliminatingthedistinctionbetweenoperatingandfinanceleases.Forlesseeaccounting,thishas
theeffectofrequiringmostoftheexistingoperatingleasestobeaccountedforinasimilarmannerasfinanceleasesundertheexisting
IAS17,‘Leases’.Theonlyoptionalexemptionsareforshort-termleasesandleasesoflow-valueassets.Lessoraccounting,however,
remainslargelyunchangedfromIAS17.
IFRS16willapplyprimarilytooperatingleasesofmajorpropertiesoccupiedbytheGroup’sbusinesseswherePrudentialisalessee.
UnderIFRS16,theseleaseswillbebroughtontotheGroup’sstatementoffinancialpositionwitha‘rightofuse’assetbeingestablished
andacorrespondingliabilityrepresentingtheobligationtomakeleasepayments.Thecurrentrentalaccrualchargeintheincome
statementwillbereplacedwithadepreciationchargeforthe‘rightofuse’assetandaninterestexpenseontheleaseliabilityleadingtoa
morefront-loadedoperatingleasecostprofilecomparedtoIAS17.
IFRS16permitstransitiontothenewstandardthroughamodifiedretrospectiveapproachorafullretrospectiveapproach.Underthe
modifiedretrospectiveapproach,aswellasaffordinganumberofsimplifications,theGroup’scomparativeinformationisnotrestated,
buttheremaybeanadjustmenttoretainedearningsatthedateofinitialapplication(ie1January2019)dependingontheoptionusedto
measure‘right-of-useasset’.Underthemodifiedretrospectiveapproach,alesseehastheoptiontochoose,onalease-by-leasebasis,to
measurethe‘right-of-use’assetateitheritscarryingamountasifthestandardhadbeenappliedsincethecommencementofthelease
(referredtoas‘modifiedretrospectiveapproachoptionA’)oranamountequaltothediscountedremainingleasepaymentsadjustedby
anyprepaidoraccruedleasepaymentbalanceimmediatelybeforethedateofinitialapplicationofthestandard(referredtoas‘modified
retrospectiveapproachoptionB’).
FollowingthecompletionoftheIFRS16implementationproject,theGrouphasadoptedIFRS16from1January2019usingthe
modifiedretrospectiveapproachoptionB.Itisestimatedthatapplicationofthestandardwillresultinrecognitionofanadditionallease
liabilityamountingtoapproximately£0.8billionandacorresponding‘right-of-use’assettoasimilaramountasat1January2019.These
amountsremainsubjecttoongoingrefinementandverification.UnderthemodifiedretrospectiveapproachoptionBthereisno
adjustmenttotheGroup’sretainedearningsat1January2019.ForexistingfinanceleaseswheretheGroupisalessee,thecarrying
amountofthe‘right-of-use’assetandleaseliabilityat1January2019willbedeterminedbasedonthecarryingamountoftheleaseasset
andleaseliabilityimmediatelybeforethatdatemeasuredapplyingIAS17.
TheGroupwillapplythepracticalexpedienttograndfatherthedefinitionofaleaseontransition.ThismeansthatitwillapplyIFRS16
toallcontracts,whichwereidentifiedasleasesinaccordancewithIAS17andIFRIC4,‘DeterminingwhetheranArrangementcontainsa
Lease’,enteredintobefore1January2019.TheGroupalsowillapplythepracticalexpedienttouseasinglediscountratetoaportfolioof
leaseswithreasonablysimilarcharacteristics.Accordingly,forsuchportfolios,theincrementalborrowingratesusedtodiscountthe
futureleasepaymentswillbedeterminedbasedoncountryspecificrisk-freeratesadjustedwithamargin/spreadtoreflecttheGroup’s
creditstanding,leasetermandtheoutstandingleasepayments.
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AnnualReport2018 Prudential plc 191
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information A3 Accounting policies continued
A3.2 New accounting pronouncements not yet effective continued
Accounting pronouncements not yet endorsed by the EU
IFRS 17, ‘Insurance Contracts’
InMay2017,theIASBissuedIFRS17,‘InsuranceContracts’toreplacetheexistingIFRS4,‘InsuranceContracts’.Thestandard,which
issubjecttoendorsementintheEUandotherterritories,appliestoannualperiodsbeginningonorafter1January2021.InNovember
2018,theIASBtentativelydecidedtodelaytheeffectivedateofIFRS17byoneyeartoperiodsbeginningonorafter1January2022
andisconsideringfurtheramendmentstothisnewstandard.Earlyapplicationispermitted,providedtheentityalsoappliesIFRS9
onorbeforethedateitfirstappliesIFRS17.TheGroupintendstoadoptthenewstandardonitsmandatoryeffectivedate,alongside
theadoptionofIFRS9.
IFRS4permittedinsurerstocontinuetousethestatutorybasisofaccountingforinsuranceassetsandliabilitiesthatexistedintheir
jurisdictionspriortoJanuary2005.IFRS17replacesthiswithanewmeasurementmodelforallinsurancecontracts.
IFRS17requiresliabilitiesforinsurancecontractstoberecognisedasthepresentvalueoffuturecashflows,incorporatinganexplicit
riskadjustment,whichisupdatedateachreportingdatetoreflectcurrentconditions,andacontractualservicemargin(CSM)thatis
equalandoppositetoanyday-onegainarisingoninitialrecognition.Lossesarerecogniseddirectlyintotheincomestatement.For
measurementpurposes,contractsaregroupedtogetherintocontractsofsimilarrisk,profitabilityprofileandissueyear,withfurther
divisionsforcontractsthataremanagedseparately.
ProfitforinsurancecontractsunderIFRS17isrepresentedbytherecognitionoftheservicesprovidedtopolicyholdersintheperiod
(releaseoftheCSM),releasefromnon-economicrisk(releaseofriskadjustment)andinvestmentprofit.
TheCSMisreleasedasprofitoverthecoverageperiodoftheinsurancecontract,reflectingthedeliveryofservicestothe
policyholder.Forcertaincontractswithparticipatingfeatures(whereasubstantialshareofthefairvalueoftherelatedinvestmentsand
otherunderlyingitemsispaidtopolicyholders)suchastheGroup’swith-profitsproducts,theCSMreflectsthevariablefeeto
shareholders.Forthesecontracts,theCSMisadjustedtoreflectthechangesineconomicexperienceandassumptions.Forallother
contractstheCSMisonlyadjustedfornon-economicassumptions.
IFRS17introducesanewmeasureofinsurancerevenue,basedonthedeliveryofservicestopolicyholdersandexcludingany
premiumsrelatedtotheinvestmentelementsofpolicies,whichwillbesignificantlydifferentfromexistingpremiumrevenuemeasures,
currentlyreportedintheincomestatement.InordertotransitiontoIFRS17,theamountofdeferredprofit,beingtheCSMattransition
date,needstobedetermined.
IFRS17requiresthisCSMtobecalculatedasifthestandardhadappliedretrospectively.Howeverifthisisnotpracticalanentityis
requiredtochooseeitherasimplifiedretrospectiveapproachortodeterminetheCSMbyreferencetothefairvalueoftheliabilitiesatthe
transitiondate.TheapproachfordeterminingtheCSMwillhaveasignificantimpactonbothshareholders’equityandontheamountof
profitsonin-forcebusinessinfuturereportingperiods.
IFRS 17 Implementation Programme
IFRS17isexpectedtohaveasignificantimpactastherequirementsofthenewstandardarecomplexandrequiresafundamental
changetoaccountingforinsurancecontractsaswellastheapplicationofsignificantjudgementandnewestimationtechniques.
TheeffectofchangesrequiredtotheGroup’saccountingpoliciesasaresultofimplementingthesestandardsarecurrentlyuncertain,
butthesechangescanbeexpectedto,amongotherthings,alterthetimingofIFRSprofitrecognition.Giventheimplementationofthis
standardislikelytoinvolvesignificantenhancementstoIT,actuarialandfinancesystemsoftheGroup,itwillalsohaveanimpactonthe
Group’sexpenses.
TheGrouphasaGroup-wideimplementationprogrammeunderwaytoimplementIFRS17andIFRS9.Theprogrammeisresponsible
forsettingGroup-wideaccountingpoliciesanddevelopingapplicationmethodologies,establishingappropriateprocessesandcontrols,
sourcingappropriatedataandimplementingactuarialandfinancesystemchanges.
AGroup-wideSteeringCommittee,chairedbytheGroupChiefFinancialOfficerwithparticipationfromtheGroupRiskfunctionand
theGroup’sandbusinessunits’seniorfinancemanagers,providesoversightandstrategicdirectiontotheimplementationprogramme.
Anumberofsub-committeesarealsoinplacetoprovidegovernanceoverthetechnicalinterpretationandaccountingpoliciesselected,
programmemanagement,designanddeliveryoftheprogramme.
TheGroupremainsontracktostartprovidingIFRS17financialstatementsinlinewiththerequirementsforinterimreportingatits
effectivedate,whichiscurrentlyexpectedtobe2022.
Other new accounting pronouncements
Inadditiontotheabove,thefollowingnewaccountingpronouncementshavealsobeenissuedandarenotyeteffectivebuttheGroup
isnotexpectingthemtohaveasignificantimpactontheGroup’sfinancialstatements:
— IFRICInterpretation23,‘Uncertaintyoverincometaxtreatments’,issuedinJune2017andeffectivefrom1January2019.
ThisinterpretationhasbeenendorsedbytheEU;
— AmendmentstoIAS28,‘Long-termInterestsinAssociatesandJointVentures’,issuedinOctober2017andeffectivefrom
1January2019;
— AnnualImprovementstoIFRSs2015-2017cycleissuedinDecember2017andeffectivefromJanuary2019;
— AmendmentstoIAS19,‘PlanAmendment,CurtailmentorSettlement’,issuedinFebruary2018andeffectivefrom
1January2019;
— AmendmenttoIFRS3,‘BusinessCombinations’,issuedinOctober2018andeffectivefrom1January2020;and
— AmendmentstoIAS1andIAS8,‘Definitionofmaterial’,issuedinOctober2018andeffectivefrom1January2020.
192 Prudential plc AnnualReport2018
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A Background and critical accounting policies continued B Earnings performance
B1 Analysis of performance by segment
B1.1 Segment results – profit before tax
Asia:
Insuranceoperations
Assetmanagement
Total Asia
US:
Jackson(USinsuranceoperations)
Assetmanagement
Total US
UK and Europe:
UKandEuropeinsuranceoperations:
Long-termbusiness
Generalinsurancecommission note (i)
TotalUKandEuropeinsuranceoperations
UKandEuropeassetmanagement note (v)
Total UK and Europe
Total segment profit
Other income and expenditure:
Investmentreturnandotherincome
Interestpayableoncorestructural
borrowings
Corporateexpenditure note (ii)
Totalotherincomeandexpenditure
Restructuringcosts
Adjusted IFRS operating profit based
on longer-term investment returns
Short-termfluctuationsininvestmentreturns
onshareholder-backedbusiness
Amortisationofacquisitionaccounting
adjustments note (iii)
(Loss)gainondisposalofbusinesses
andcorporatetransactions
Profit before tax
Taxchargeattributabletoshareholders’returns
Profit for the year
Attributable to:
EquityholdersoftheCompany
Non-controllinginterests
2018 £m
2017 £m
2018 vs 2017 %
AER
note(iv)
CER
note(iv)
AER
note(iv)
CER
note(iv)
Note
B3(i)
B3(iii)
1,982
182
2,164
1,911
8
1,919
1,138
19
1,157
477
1,634
5,717
52
(410)
(367)
(725)
(165)
1,799
176
1,975
2,214
10
2,224
861
17
878
500
1,378
5,577
11
(425)
(361)
(775)
(103)
1,727
171
1,898
2,137
9
2,146
861
17
878
500
1,378
5,422
11
(425)
(355)
(769)
(103)
4,827
4,699
4,550
B1.2
(558)
(1,563)
(1,514)
D1.1
B4
(46)
(63)
(61)
(588)
3,635
(622)
3,013
223
3,296
(906)
2,390
218
3,193
(876)
2,317
10%
3%
10%
(14)%
(20)%
(14)%
32%
12%
32%
(5)%
19%
3%
373%
4%
(2)%
6%
(60)%
3%
64%
27%
n/a
10%
31%
26%
15%
6%
14%
(11)%
(11)%
(11)%
32%
12%
32%
(5)%
19%
5%
373%
4%
(3)%
6%
(60)%
6%
63%
25%
n/a
14%
29%
30%
3,010
3
2,389
1
2,316
1
26%
200%
30%
200%
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AnnualReport2018 Prudential plc 193
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information B1 Analysis of performance by segment continued
B1.1 Segment results – profit before tax continued
Basic earnings per share (in pence)
BasedonadjustedIFRSoperatingprofitbased
onlonger-terminvestmentreturns note (vi)
Basedonprofitfortheyear
Note
B5
B5
2018
2017
2018 vs 2017 %
AER
note(iv)
CER
note(iv)
AER
note(iv)
CER
note(iv)
156.6p
116.9p
145.2p
93.1p
140.4p
90.0p
8%
26%
12%
30%
Themajorityofthegeneralinsurancecommissionisnotexpectedtorecurinfutureyears.
CorporateexpenditureasshownaboveisprimarilyforGroupHeadOfficeandAsiaRegionalHeadOffice.
Notes
(i)
(ii)
(iii) AmortisationofacquisitionaccountingadjustmentsprincipallyrelatetotheREALICbusinessofJacksonwhichwasacquiredin2012.
(iv)
FordefinitionsofAERandCERrefertonoteA1.Thedifferencebetween‘Profitfortheyearattributabletoshareholders’intheprioryearonanAERbasisandaCERbasisis
£73million,arisingfromtheretranslationoftheprioryearresultsoftheGroup’sforeignsubsidiariesintoGBPusingtheexchangeratesappliedtotheequivalentcurrentyearresults.
(v) UKandEuropeassetmanagementadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns:
Assetmanagementfeeincome
Otherincome
Staffcosts*
Othercosts*
Underlyingprofitbeforeperformance-relatedfees
Shareofassociateresults
Performance-relatedfees
TotalUKandEuropeassetmanagementadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns
2018 £m
2017 £m
1,098
2
(384)
(270)
446
16
15
477
1,027
7
(400)
(202)
432
15
53
500
*Staffandothercostsinclude£27millionofchargesincurredpreparingforBrexit.
(vi)
Taxchargeshavebeenreflectedasoperatingandnon-operatinginthesamewayasforthepre-taxitems.FurtherdetailsontaxchargesareprovidedinnoteB4.
B1.2 Short-term fluctuations in investment returns on shareholder-backed business
Asiaoperations note (i)
USoperations note (ii)
UKandEuropeoperations note (iii)
Otheroperations note (iv)
Total
2018 £m
2017 £m
(512)
(100)
34
20
(558)
(1)
(1,568)
(14)
20
(1,563)
Notes
(i)
Asia operations
InAsia,thenegativeshort-termfluctuationsof£(512)million(2017:negative£(1)million)principallyreflectnetvaluemovementsonassetsandrelatedliabilitiesfollowingincreases
inbondyieldsandfallsinequitymarketsduringtheyear,especiallyinthosecountrieswherepolicyholderliabilitiesuseavaluationinterestratewhichdoesnotreflectall
movementsininterestratesintheperiod.
(ii) US operations
Theshort-termfluctuationsininvestmentreturnsforUSinsuranceoperationsarereportednetoftherelatedchargeforamortisationofdeferredacquisitioncostsof£(114)million
asshowninnoteC5.2(a)(2017:creditof£462million)andcompriseamountsinrespectofthefollowingitems:
2018 £m
2017 £m
Netequityhedgeresult note (a)
Otherthanequity-relatedderivatives note (b)
Debtsecurities note (c)
Equity-typeinvestments:actuallesslonger-termreturn
Otheritems
Total
(58)
(64)
(31)
38
15
(100)
(1,490)
(36)
(73)
12
19
(1,568)
Notes
(a) Netequityhedgeresult
ThenetequityhedgeresultrelatestotheaccountingeffectofmarketmovementsonboththevalueofguaranteesinJackson’svariableannuityandfixedindexannuity
productsandontherelatedderivativesusedtomanagetheexposuresinherentintheseguarantees.Theleveloffeesrecognisedinnon-operatingprofitisdeterminedby
referencetothatallowedforwithinthereservingbasis.ThevariableannuityguaranteesarevaluedinaccordancewitheitherAccountingStandardsCodification(ASC)Topic
820,FairValueMeasurementsandDisclosures(formerlyFAS157)orASCTopic944,FinancialServices–Insurance(formerlySOP03-01)dependingonthetypeofguarantee.
Bothapproachesrequireanentitytodeterminethetotalfee(‘thefeeassessment’)thatisexpectedtofundfutureprojectedbenefitpaymentsarisingusingtheassumptions
applicableforthatmethod.ThemethodunderFAS157requiresthisfeeassessmenttobefixedatthetimeofissue.Asthefeesincludedwithintheinitialfeeassessmentare
earned,theyareincludedinnon-operatingprofittomatchthecorrespondingmovementintheguaranteeliability.AstheGroupappliesUSGAAPforthemeasuredvalueofthe
productguaranteesthisitemalsoincludesasymmetricimpactswherethemeasurementbasesoftheliabilitiesandassociatedderivativesusedtomanagetheJacksonannuity
businessdifferasdescribedinnoteB1.3(c)below.
–Thevariableannuityguaranteesandfixedindexannuityembeddedoptionsbeingonlypartiallyfairvaluedunder‘grandfathered’USGAAPasdescribedinnoteB1.3(c);
–Theinterestrateexposurebeingmanagedthroughtheotherthanequity-relatedderivativeprogrammeexplainedinnote(b)below;and
–Jackson’smanagementofitseconomicexposuresforanumberofotherfactorsthataretreateddifferentlyintheaccountingframeworkssuchasfuturefeesandassumed
Thenetequityhedgeresultthereforeincludessignificantaccountingmismatchesandotherfactorsthatdonotrepresenttheeconomicresult.Theseotherfactorsinclude:
volatilitylevels.
194 Prudential plc AnnualReport2018
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B Earnings performance continued
Thenetequityhedgeresult(netofrelatedDACamortisationinaccordancewiththepolicythatDACisamortisedinlinewithemergenceofmargins)canbesummarisedasfollows:
Fairvaluemovementsonequityhedgeinstruments*
Accountingvaluemovementsonthevariableandfixedindexannuityguaranteeliabilities†
Feeassessmentsnetofclaimpayments
Total
2018 £m
2017 £m
299
(894)
537
(58)
(1,871)
(99)
480
(1,490)
*Heldtomanageequityexposuresofthevariableannuityguaranteesandfixedindexannuityoptions.
†Theaccountingvaluemovementsonthevariableandfixedindexannuityguaranteeliabilitiesreflecttheimpactofmarketmovementsandchangesineconomicandactuarial
assumptions.Actuarialassumptionsincludeconsiderationofpersistency,mortalityandtheexpectedutilisationofcertainfeaturesattachingtovariableannuitycontracts.
Assumptionsareupdatedannuallyviaacomparisontoexperienceandafterapplyingexpertjudgementforhowexperiencemaychangeinthefuture.Routineupdatesin
2018reducedprofitbeforetax(afterallowingrelatedchangedtoDACamortisation)by£143million(2017:£382million).
(b) Otherthanequity-relatedderivatives
Thefluctuationsforthisitemcomprisetheneteffectof:
–Fairvaluemovementsonfree-standing,otherthanequity-relatedderivatives;
–FairvaluemovementsontheGuaranteedMinimumIncomeBenefit(GMIB)reinsuranceassetthatarenotmatchedbymovementsintheunderlyingGMIBliability,whichis
notfairvaluedasexplainedinnoteB1.3;and
–RelatedamortisationofDAC.
Thefree-standing,otherthanequity-relatedderivativesareheldtomanageinterestrateexposuresanddurationswithinthegeneralaccountandthevariableannuity
guaranteesandfixedindexannuityembeddedoptionsdescribedinnote(a)above.Accountingmismatchesarisebecauseofdifferencesbetweenthemeasurementbasisand
presentationofthederivatives,whicharefairvaluedwithmovementsrecordedintheincomestatement,andtheexposurestheyareintendedtomanage.
(c) Short-termfluctuationsrelatedtodebtsecurities
(Charges)creditsintheyear:
Lossesonsalesofimpairedanddeterioratingbonds
Bondwrite-downs
Recoveries/reversals
Totalcreditsintheyear
RiskmarginallowancedeductedfromadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns*
Interest-relatedrealised(losses)gains:
Lossesarisingintheyear
AmortisationofgainsandlossesarisingincurrentandprioryearstoadjustedIFRSoperatingprofitbased
onlonger-terminvestmentreturns
Relatedamortisationofdeferredacquisitioncosts
Totalshort-termfluctuationsrelatedtodebtsecurities
2018 £m
2017 £m
(4)
(4)
19
11
77
88
(8)
(116)
(124)
5
(31)
(3)
(2)
10
5
86
91
(43)
(140)
(183)
19
(73)
*ThedebtsecuritiesofJacksonareheldinthegeneralaccountofthebusiness.Realisedgainsandlossesarerecordedintheincomestatementwithnormalisedreturnsincluded
inadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnswithvariationsfromyeartoyearincludedintheshort-termfluctuationscategory.Theriskmargin
reservechargeforlonger-termcredit-relatedlossesincludedinadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsofJacksonfor2018isbasedonan
averageannualriskmarginreserveof18basispoints(2017:21basispoints)onaveragebookvaluesofUS$57.1billion(2017:US$55.3billion)asshownbelow:
Moody’s rating category (or equivalent under
NAIC ratings of mortgage-backed securities)
A3orhigher
Baa1,2or3
Ba1,2or3
B1,2or3
BelowB3
Total
Relatedamortisationofdeferredacquisition
costs(seebelow)
RiskmarginreservechargetoadjustedIFRS
operatingprofitforlonger-termcredit-
relatedlosses
Average
book
value
US$m
29,982
25,814
1,042
289
11
57,138
2018
2017
Annual
expected loss
US$m
(31)
(55)
(10)
(8)
–
(104)
Average
book
value
US$m
27,277
26,626
1,046
318
23
55,290
£m
(23)
(40)
(8)
(6)
–
(77)
22
15
RMR
%
0.12
0.22
1.03
2.70
3.78
0.21
Annual
expected loss
US$m
(33)
(58)
(11)
(9)
(1)
(112)
21
£m
(25)
(45)
(8)
(7)
(1)
(86)
15
(82)
(62)
(91)
(71)
RMR
%
0.10
0.21
0.98
2.64
3.69
0.18
InadditiontotheaccountingforrealisedgainsandlossesdescribedaboveforJacksongeneralaccountdebtsecurities,includedwithinthestatementofother
ConsistentwiththebasisofmeasurementofinsuranceassetsandliabilitiesforJackson’sIFRSresults,thechargesandcreditstoadjustedIFRSoperatingprofitsbasedon
longer-terminvestmentreturnsarepartiallyoffsetbyrelatedamortisationofdeferredacquisitioncosts.
comprehensiveincomeisapre-taxchargeof£(1,371)millionfornetunrealisedlossesondebtsecuritiesclassifiedasavailable-for-salenetofrelatedamortisationofdeferred
acquisitioncosts(2017:creditof£541million).Temporarymarketvaluemovementsdonotreflectdefaultsorimpairments.Additionaldetailsofthemovementinthevalue
oftheJacksonportfolioareincludedinnoteC3.2(b).
(iii) UK and Europe operations
Thepositiveshort-termfluctuationsininvestmentreturnsfortheUKandEuropeoperationsof£34million(2017:negative£14million)mainlyarisesfromunrealisedgainsonequity
optionsheldtohedgethevalueoffutureshareholdertransfersfromthewith-profitsfundpartiallyoffsetbylossesoncorporatebondsbackingcapitaltosupporttheremaining
annuitybusiness,giventheincreaseininterestratesandcreditspreadsin2018.
(iv) Other operations
Thepositiveshort-termfluctuationsininvestmentreturnsforotheroperationsof£20million(2017:positive£20million)includeunrealisedvaluemovementsonfinancial
instrumentsheldoutsideofthemainlifeoperations.
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AnnualReport2018 Prudential plc 195
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
B1 Analysis of performance by segment continued
B1.3 Determining operating segments and performance measure of operating segments
Operating segments
TheGroup’soperatingsegmentsforfinancialreportingaredefinedandpresentedinaccordancewithIFRS8,‘OperatingSegments’,
onthebasisofthemanagementreportingstructureanditsfinancialmanagementinformation.
UndertheGroup’smanagementandreportingstructureitschiefoperatingdecisionmakeristheGroupExecutiveCommittee(GEC).
Inthemanagementstructure,responsibilityisdelegatedtotheChiefExecutiveOfficersofPrudentialCorporationAsia,theNorth
AmericanBusinessUnitandM&GPrudentialfortheday-to-daymanagementoftheirbusinessunits(withintheframeworksetoutinthe
GroupGovernanceManual).FinancialmanagementinformationusedbytheGECalignswiththesethreebusinesssegments.These
operatingsegmentsderiverevenuefrombothlong-terminsuranceandassetmanagementactivities.
Operationswhichdonotformpartofanybusinessunitarereportedas‘Unallocatedtoasegment’.TheseincludeGroupHeadOffice
andAsiaRegionalHeadOfficecosts.PrudentialCapitalandAfricaoperationsdonotformpartofanyoperatingsegmentunderthe
structure,andtheirassetsandliabilitiesandprofitorlossbeforetaxarenotmaterialtotheoverallfinancialpositionoftheGroup.
PrudentialCapitalandAfricaoperationsarethereforereportedas‘Unallocatedtoasegment’.
Performance measure
TheperformancemeasureofoperatingsegmentsutilisedbytheCompanyisadjustedIFRSoperatingprofitattributabletoshareholders
basedonlonger-terminvestmentreturns,asdescribedbelow.ThismeasurementbasisdistinguishesadjustedIFRSoperatingprofit
basedonlonger-terminvestmentreturnsfromotherconstituentsofthetotalprofitasfollows:
— Short-termfluctuationsininvestmentreturnsonshareholder-backedbusiness.Thisincludestheimpactofshort-termmarketeffects
onthecarryingvalueofJackson’sguaranteeliabilitiesandrelatedderivativesasexplainedbelow;
— Amortisationofacquisitionaccountingadjustmentsarisingonthepurchaseofbusiness.Thiscomprisesprincipallythechargefor
theadjustmentsarisingonthepurchaseofREALICin2012;and
— Gainorlossoncorporatetransactions,suchasdisposalsundertakenintheyear.
Determination of adjusted IFRS operating profit based on longer-term investment returns for investment
and liability movements:
(a) General principles
(i) UK-style with-profits business
TheadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsreflectsthestatutorytransfergrossofattributabletax.
Valuemovementsintheunderlyingassetsofthewith-profitsfundsdonotaffectdirectlythedeterminationofadjustedIFRSoperating
profitbasedonlonger-terminvestmentreturns.
(ii) Unit-linked business
Thepolicyholderunitliabilitiesaredirectlyreflectiveoftheunderlyingassetvaluemovements.Accordingly,theadjustedIFRSoperating
profitbasedonlonger-terminvestmentreturnsreflectthecurrentperiodvaluemovementsinboththeunitliabilitiesandthebackingassets.
(iii) US variable annuity and fixed index annuity business
ThisbusinesshasguaranteeliabilitieswhicharemeasuredonacombinationoffairvalueandotherUSGAAPderivedprinciples.These
liabilitiesaresubjecttoanextensivederivativeprogrammetomanageequityandinterestrateexposureswhosefairvaluemovements
passthroughtheincomestatementeachperiod.TheprinciplesfordeterminationoftheadjustedIFRSoperatingprofitbasedon
longer-terminvestmentreturnsandshort-termfluctuationsareasdiscussedinsection(c)below.
(iv) Business where policyholder liabilities are sensitive to market conditions
UnderIFRS,thedegreetowhichthecarryingvaluesofliabilitiestopolicyholdersaresensitivetocurrentmarketconditionsvaries
betweenbusinessunitsdependinguponthenatureofthe‘grandfathered’measurementbasis.Ingeneral,inthoseinstanceswherethe
liabilitiesareparticularlysensitivetoroutinechangesinmarketconditions,theaccountingbasisissuchthattheimpactofmarket
movementsontheassetsandliabilitiesisbroadlyequivalentintheincomestatement,andadjustedIFRSoperatingprofitbasedon
longer-terminvestmentreturnsisnotdistorted.Inthesecircumstances,thereisnoneedforthemovementintheliabilitytobebifurcated
betweentheelementsthatrelatetolonger-termmarketconditionsandshort-termeffects.
However,movementsinliabilitiesforsometypesofbusinessdorequirebifurcationtoensurethatatthenetlevel(ieafterallocated
investmentreturnandchargeforpolicyholderbenefits)theadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns
reflectslonger-termmarketreturns.
ExamplesofwheresuchbifurcationisnecessaryareinHongKongandforUKshareholder-backedannuitybusiness,asexplained
insectionsb(i)andd(i),respectively.ForothertypesofAsia’snon-participatingbusiness,expectedlonger-terminvestmentreturns
areusedtodeterminethemovementinpolicyholderliabilitiesfordeterminingadjustedIFRSoperatingprofitbasedonlonger-term
investmentreturns.
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B Earnings performance continued (v) Other shareholder-financed business
Forlong-terminsurancebusiness,whereassetsandliabilitiesareheldforthelongterm,theaccountingbasisforinsuranceliabilities
undercurrentIFRScanleadtoprofitsthatincludetheeffectsofshort-termfluctuationsinmarketconditions,whichmaynotbe
representativeoftrendsinunderlyingperformance.Therefore,thefollowingkeyelementsareappliedtotheresultsoftheGroup’s
shareholder-financedbusinessestodetermineadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns.
Exceptinthecaseofassetsbackingliabilitieswhicharedirectlymatched(suchasunit-linkedbusiness)orcloselycorrelatedwith
valuemovements(asdiscussedbelow)adjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsforshareholder-financed
businessisdeterminedonthebasisofexpectedlonger-terminvestmentreturns.Longer-terminvestmentreturnscompriseactual
incomereceivablefortheperiod(interest/dividendincome)andforbothdebtandequity-typesecuritieslonger-termcapitalreturns.
Debt securities and loans
Inprinciple,fordebtsecuritiesandloans,thelonger-termcapitalreturnscomprisetwoelements:
— Riskmarginreservebasedchargefortheexpectedlevelofdefaultsfortheperiod,whichisdeterminedbyreferencetothecredit
qualityoftheportfolio.Thedifferencebetweenimpairmentlossesinthereportingperiodandtheriskmarginreservechargetothe
adjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsisreflectedinshort-termfluctuationsininvestmentreturns;
and
— Theamortisationofinterest-relatedrealisedgainsandlossestoadjustedIFRSoperatingprofitbasedonlonger-terminvestment
returnstothedatewhensoldbondswouldhaveotherwisematured.
At31December2018,thelevelofunamortisedinterest-relatedrealisedgainsandlossesrelatedtopreviouslysoldbondsfortheGroup
wasanetgainof£629million(2017:£855million).
Equity-type securities
Forequity-typesecurities,thelonger-termratesofreturnareestimatesofthelong-termtrendinvestmentreturnsforincomeandcapital
havingregardtopastperformance,currenttrendsandfutureexpectations.Equity-typesecuritiesheldforshareholder-financed
businessesotherthantheUKannuitybusiness,unit-linkedandUSvariableannuityseparateaccountsareprincipallyrelevantforthe
USandAsiainsuranceoperations.Differentratesapplytodifferentcategoriesofequity-typesecurities.
Derivative value movements
Generally,derivativevaluemovementsareexcludedfromadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns.The
exceptioniswherethederivativevaluemovementsbroadlyoffsetchangesintheaccountingvalueofotherassetsandliabilitiesincluded
inadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns.Theprincipalexampleofderivativeswhosevaluemovements
areexcludedfromadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsarisesinJackson,asdiscussedbelowin
section(c).
(b) Asia insurance operations
(i) Business where policyholder liabilities are sensitive to market conditions
ForcertainAsianon-participatingbusiness,forexampleinHongKong,theeconomicfeaturesaremoreakintoassetmanagement
productswithpolicyholderliabilitiesreflectingassetsharesoverthecontractterm.Consequently,fortheseproducts,thechargefor
policyholderbenefitsintheadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsreflectstheassetsharefeaturerather
thanvolatilemovementsthatwouldotherwisebereflectedifthelocalregulatorybasis(alsoappliedforIFRSbasis)wasused.
Forcertainothertypesofnon-participatingbusinessexpectedlonger-terminvestmentreturnsareusedtodeterminethemovement
inpolicyholderliabilitiesfordeterminingadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns.
(ii) Other Asia shareholder-financed business
Debt securities
Forthisbusiness,therealisedgainsandlossesareprincipallyinterestrelated.Accordingly,allrealisedgainsandlossestodatefor
theseoperationsareamortisedovertheperiodtothedatethosesecuritieswouldotherwisehavematured,withnoexplicitriskmargin
reservecharge.
Equity-type securities
ForAsiainsuranceoperations,investmentsinequitysecuritiesheldfornon-linkedshareholder-backedbusinessamountedto
£2,146millionasat31December2018(31December2017:£1,759million).Theratesofreturnappliedin2018rangedfrom5.3percent
to17.6percent(2017:4.3percentto17.2percent)withtheratesappliedvaryingbybusinessunit.Theseratesarebroadlystablefrom
periodtoperiodbutmaybedifferentbetweencountriesreflecting,forexample,differingexpectationsofinflationineachbusinessunit.
Theassumptionsareforthereturnsexpectedtoapplyinequilibriumconditions.Theassumedratesofreturndonotreflectanycyclical
variabilityineconomicperformanceandarenotsetbyreferencetoprevailingassetvaluations.
Thelonger-terminvestmentreturnsfortheAsiainsurancejointventuresaccountedforusingtheequitymethodaredetermined
onasimilarbasisastheotherAsiainsuranceoperationsdescribedabove.
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AnnualReport2018 Prudential plc 197
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information B1 Analysis of performance by segment continued
B1.3 Determining operating segments and performance measure of operating segments continued
(c) US insurance operations
(i) Separate account business
Forsuchbusinessthepolicyholderunitliabilitiesaredirectlyreflectiveoftheassetvaluemovements.Accordingly,theadjusted
IFRSoperatingprofitbasedonlonger-terminvestmentreturnsreflectthecurrentperiodvaluemovementsinunitliabilitiesandthe
backingassets.
(ii) US variable and fixed index annuity business
ThefollowingvaluemovementsforJackson’svariableandfixedindexannuitybusinessareexcludedfromadjustedIFRSoperatingprofit
basedonlonger-terminvestmentreturns.SeenoteB1.2note(ii):
— Fairvaluemovementsforequity-basedderivatives;
— Fairvaluemovementsforguaranteedbenefitoptionsforthe‘notforlife’portionofGuaranteedMinimumWithdrawalBenefit
(GMWB)andfixedindexannuitybusiness,andGuaranteedMinimumIncomeBenefit(GMIB)reinsurance(seebelow);
— MovementsintheaccountscarryingvalueofGuaranteedMinimumDeathBenefit(GMDB),GMIBandthe‘forlife’portionofGMWB
liabilities,(seebelow)forwhich,underthe‘grandfathered’USGAAPappliedunderIFRSforJackson’sinsuranceassetsandliabilities,
themeasurementbasisgivesrisetoamutedimpactofcurrentperiodmarketmovements(ietheyarerelativelyinsensitivetotheeffect
ofcurrentperiodequitymarketandinterestratechanges);
— Aportionofthefeeassessmentsaswellasclaimpayments,inrespectofguaranteeliabilities;and
— Relatedamortisationofdeferredacquisitioncostsforeachoftheaboveitems.
Guaranteed benefit options for the ‘not for life’ portion of GMWB and equity index options for the fixed index annuity business
The‘notforlife’portionofGMWBguaranteedbenefitoptionliabilitiesismeasuredundertheUSGAAPbasisappliedforIFRSina
mannerconsistentwithIAS39underwhichtheprojectedfuturegrowthrateoftheaccountbalanceisbasedoncurrentswaprates
(ratherthanexpectedratesofreturn)withonlyaportionoftheexpectedfutureguaranteefeesincluded.Reservevaluemovementson
theseliabilitiesaresensitivetochangestolevelsofequitymarkets,impliedvolatilityandinterestrates.Theequityindexoptionforfixed
indexannuitybusinessismeasuredundertheUSGAAPbasisappliedforIFRSinamannerconsistentwithIAS39underwhichthe
projectedfuturegrowthisbasedoncurrentswaprates.
Guaranteed benefit option for variable annuity guarantee minimum income benefit
TheGMIBliability,whichissubstantiallyreinsured,subjecttoadeductibleandannualclaimlimits,isaccountedforusing‘grandfathered’
USGAAP.Thisaccountingbasissubstantiallydoesnotrecognisetheeffectsofmarketmovements.Thecorrespondingreinsuranceasset
ismeasuredunderthe‘grandfathered’USGAAPbasisappliedforIFRSinamannerconsistentwithIAS39,‘FinancialInstruments:
RecognitionandMeasurement’,andtheassetisthereforerecognisedatfairvalue.AstheGMIBiseconomicallyreinsured,themarkto
marketelementofthereinsuranceassetisincludedasacomponentofshort-termfluctuationsininvestmentreturns.
(iii) Other derivative value movements
Theprincipalexampleofnon-equitybasedderivatives(forexample,interestrateswapsandswaptions)whosevaluemovementsare
excludedfromadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns,arisesinJackson.Non-equitybasedderivatives
areprimarilyheldbyJacksonaspartofabroadly-basedhedgingprogrammeforfeaturesofJackson’sbondportfolio(forwhichvalue
movementsarebookedinthestatementofothercomprehensiveincomeratherthantheincomestatement),productliabilities(forwhich
USGAAPaccountingas‘grandfathered’underIFRS4doesnotfullyreflecttheeconomicfeaturesbeinghedged),andtheinterestrate
exposureattachingtoequity-basedproductoptions.
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B Earnings performance continued (iv) Other US shareholder-financed business
Debt securities
Thedistinctionbetweenimpairmentlossesandinterest-relatedrealisedgainsandlossesisofparticularrelevancetoJackson.Jacksonhas
usedtheratingsbyNationallyRecognisedStatisticalRatingsOrganisations(NRSRO)orratingsresultingfromtheregulatoryratingsdetail
issuedbytheNationalAssociationofInsuranceCommissioners(NAIC)todeterminetheaverageannualriskmarginreservetoapplyto
debtsecuritiesheldtobackgeneralaccountbusiness.Debtsecuritiesheldtobackseparateaccountandreinsurancefundswithheldare
notsubjecttoriskmarginreservecharge.Furtherdetailsoftheriskmarginreservecharge,aswellastheamortisationofinterest-related
realisedgainsandlosses,forJacksonareshowninnoteB1.2note(ii)(c).
Equity-type securities
Asat31December2018,theequity-typesecuritiesforUSinsurancenon-separateaccountoperationsamountedto£1,359million
(31December2017:£946million).Fortheseoperations,thelonger-termratesofreturnforincomeandcapitalappliedintheyears
indicated,whichreflectthecombinationoftheaveragerisk-freeratesovertheyearandappropriateriskpremiumsareasfollows:
Equity-typesecuritiessuchascommonandpreferredstockandportfolioholdingsinmutualfunds
Otherequity-typesecuritiessuchasinvestmentsinlimitedpartnershipsandprivateequityfunds
6.7% to 7.2% 6.1%to6.5%
8.7% to 9.2% 8.1%to8.5%
2018
2017
(d) UK and Europe insurance operations
(i) Shareholder-backed annuity business
Forthisbusiness,policyholderliabilitiesaredeterminedbyreferencetocurrentinterestrates.Thevaluemovementsoftheassets
coveringliabilitiesarecloselycorrelatedwiththerelatedchangeinliabilities.Accordingly,assetvaluemovementsarerecordedwithin
the‘adjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns’.Policyholderliabilitiesincludeamarginforcreditrisk.
Variationsbetweenactualandbestestimateexpectedimpairmentsarerecordedasacomponentofshort-termfluctuationsin
investmentreturns.
TheadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsreflectstheimpactofvaluemovementsonpolicyholder
liabilitiesforshareholder-backedannuitybusinesswithinThePrudentialAssuranceCompanyLimited(PAC)afteradjustmentstoallocate
thefollowingelementsofthemovementtothecategoryof‘short-termfluctuationsininvestmentreturns’:
— Theimpactoncreditriskprovisioningofactualupgradesanddowngradesduringtheperiod;
— Creditexperiencecomparedwithassumptions;and
— Short-termvaluemovementsonassetsbackingthecapitalofthebusiness.
Creditexperiencereflectstheimpactofdefaultsandothersimilarexperience,suchasassetexchangesarisingfromdebtrestructuring
byissuersthatincludeeffectivelyanelementofpermanentimpairmentofthesecurityheld.Positiveornegativeexperiencecompared
withassumptionsisincludedwithinshort-termfluctuationsininvestmentreturnswithoutfurtheradjustment.Theeffectsofother
changestocreditriskprovisioningareincludedintheadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns,asisthe
neteffectofchangestothevaluationrateofinterestduetoportfoliorebalancingtoalignmorecloselywithmanagementbenchmark.
(ii) Non-linked shareholder-financed business
Fordebtsecuritiesbackingnon-linkedshareholder-financedbusinessoftheUKandEuropeinsuranceoperations(otherthantheannuity
business)therealisedgainsandlossesareprincipallyinterestrelated.Accordingly,allrealisedgainsandlossestodateforthese
operationsarebeingamortisedovertheperiodtothedatethosesecuritieswouldotherwisehavematured,withnoexplicitriskmargin
reservecharge.
(e) Fund management and other non-insurance businesses
Forthesebusinesses,theparticularfeaturesapplicableforlifeassurancenotedabovedonotapplyandthereforetheadjustedIFRS
operatingprofitbasedonlonger-terminvestmentreturnsisnotdeterminedonthebasisdescribedabove.Instead,realisedgainsand
lossesaregenerallyincludedinadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnswithtemporaryunrealisedgains
andlossesbeingincludedinshort-termfluctuations.Insomeinstances,realisedgainsandlossesonderivativesandotherfinancial
instrumentsareamortisedtoadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsoveratimeperiodthatreflectsthe
underlyingeconomicsubstanceofthearrangements.
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AnnualReport2018 Prudential plc 199
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information B1 Analysis of performance by segment continued
B1.4 Segmental income statement
Grosspremiumsearned note (iv)
Outwardreinsurancepremiums note (i)
Earnedpremiums,netofreinsurance
Otherincome note (ii),(iii)
Totalexternalrevenue note (v),(vi)
Intra-grouprevenue
Interestincome note (vii)
Otherinvestmentreturnnote B1.5
Totalrevenue,netofreinsurance
Benefitsandclaimsandmovementsin
unallocatedsurplusofwith-profitsfunds,
netofreinsurance note (i),(iv)
Acquisitioncostsandotheroperating
expenditure note B2, note (iii),(iv)
Interestoncorestructuralborrowings
Lossondisposalofbusinessesandcorporate
transactionsnote D1.1
Totalcharges,netofreinsuranceandloss
ondisposalofbusinesses
Shareofprofitfromjointventuresandassociates,
netofrelatedtax
Profit(loss)beforetax(being tax attributable to
shareholders’ and policyholders’ returns) note (viii)
Tax(charge)creditattributableto
policyholders’returns
Profit(loss)beforetaxattributable
toshareholders
Analysis of profit (loss) before tax
AdjustedIFRSoperatingprofit(loss)based
onlonger-terminvestmentreturns
Short-termfluctuationsininvestmentreturns
onshareholder-backedbusiness
Amortisationofacquisitionaccounting
adjustments
Lossondisposalofbusinessesandcorporate
transactions note D1.1
2018 £m
Asia
US
UK and
Europe
Total
segment
16,469
(575)
15,894
309
16,203
42
1,086
(3,240)
14,091
17,656
(309)
17,347
50
17,397
50
2,016
(6,804)
12,659
13,061
(13,137)
(76)
1,595
1,519
3
3,039
(6,476)
(1,915)
47,186
(14,021)
33,165
1,954
35,119
95
6,141
(16,520)
24,835
Unallocated
to a segment
(other
operations)
note(ix)
38
(2)
36
39
75
(95)
51
65
96
Group
total
47,224
(14,023)
33,201
1,993
35,194
–
6,192
(16,455)
24,931
(8,736)
(8,790)
4,977
(12,549)
(19)
(12,568)
(3,866)
–
(2,077)
(15)
(2,360)
–
(8,303)
(15)
(11)
(38)
–
(49)
(552)
(395)
(31)
(8,855)
(410)
(80)
(12,613)
(10,920)
2,617
(20,916)
(997)
(21,913)
239
–
1,717
1,739
(80)
–
52
754
406
291
–
291
4,210
(901)
3,309
326
–
326
1,637
1,739
1,160
4,536
(901)
3,635
2,164
1,919
1,634
5,717
(890)
4,827
(512)
(100)
(4)
(11)
(42)
(38)
1,637
1,739
34
–
(508)
1,160
(578)
(46)
(557)
4,536
20
–
(31)
(901)
(558)
(46)
(588)
3,635
200 Prudential plc AnnualReport2018
www.prudential.co.uk
B Earnings performance continued Grosspremiumsearned
Outwardreinsurancepremiums
Earnedpremiums,netofreinsurance
Otherincome note (ii),(iii)
Totalexternalrevenue note (v),(vi)
Intra-grouprevenue
Interestincome note (vii)
Otherinvestmentreturnnote B1.5
Totalrevenue,netofreinsurance
Benefitsandclaimsandmovementsin
unallocatedsurplusofwith-profitsfunds,
netofreinsurance
Acquisitioncostsandotheroperating
expenditurenote B2, note(iii)
Interestoncorestructuralborrowings
Gainondisposalofbusinessesandcorporate
transactionsnote D1.1
Re-measurementofthesoldKorealifebusiness
Totalcharges,netofreinsuranceandgain
ondisposalofbusiness
Shareofprofitfromjointventuresandassociates,
netofrelatedtax
Profit(loss)beforetax(being tax attributable to
shareholders’ and policyholders’ returns) note (viii)
Taxchargeattributabletopolicyholders’returns
Profit(loss)beforetaxattributable
toshareholders
Analysis of profit (loss) before tax
AdjustedIFRSoperatingprofit(loss)based
onlonger-terminvestmentreturns
Short-termfluctuationsininvestmentreturns
onshareholder-backedbusiness
Amortisationofacquisitionaccounting
adjustments
Gainondisposalofbusinessesandcorporate
transactionsnote D1.1
2017 £m
Asia
US
UK and
Europe
Total
segment
15,688
(656)
15,032
307
15,339
40
932
8,063
24,374
15,164
(352)
14,812
669
15,481
64
2,085
16,448
34,078
13,126
(1,050)
12,076
1,234
13,310
5
3,413
11,171
27,899
43,978
(2,058)
41,920
2,210
44,130
109
6,430
35,682
86,351
Unallocated
to a segment
(other
operations)
note(ix)
27
(4)
23
48
71
(109)
67
10
39
Group
total
44,005
(2,062)
41,943
2,258
44,201
–
6,497
35,692
86,390
(18,291)
(31,205)
(23,025)
(72,521)
(11)
(72,532)
(4,053)
–
(2,257)
(16)
(3,206)
–
(9,516)
(16)
(477)
(409)
(9,993)
(425)
61
5
162
–
–
–
223
5
–
–
223
5
(22,278)
(33,316)
(26,231)
(81,825)
(897)
(82,722)
181
2,277
(249)
2,028
–
762
–
762
121
302
–
302
1,789
(425)
4,828
(674)
(858)
–
3,970
(674)
1,364
4,154
(858)
3,296
1,975
2,224
1,378
5,577
(878)
4,699
(1)
(7)
61
2,028
(1,568)
(14)
(1,583)
(56)
162
762
–
–
1,364
(63)
223
4,154
20
–
–
(858)
(1,563)
(63)
223
3,296
Notes
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Outwardreinsurancepremiumsof£(14,023)millionincludesthe£(12,149)millionpaidduringtheyearinrespectofthereinsuranceoftheUKannuityportfolio.Theassociated
increaseinreinsuranceassetsisincludedinoutwardreinsurers’shareofbenefitsandclaimsandtheconsequentialchangeinpolicyholderliabilitiesisincludedinbenefitsand
claims.SeenoteD1.1forfurtherdetails.
IncludedwithinotherincomeisrevenuefromtheGroup’sassetmanagementbusinessof£1,489million(2017:£1,371million).Theremainingotherincomeincludesrevenuefrom
externalcustomers.Otherincomealsoincludes£20million(2017:£7million)relatingtofinancialinstrumentsthatarenotheldatfairvaluethroughprofitorloss.The2017
comparativealsoincludedamountsforbroker-dealerfeesgeneratedbytheUSbroker-dealernetworkwhichwasdisposedofinAugust2017,amountingto£542million.
FollowingtheadoptionofIFRS15,the2017comparativeresultshavebeenre-presentedasdescribedinnoteA2.
InOctober2018,Jacksonenteredintoa100percentreinsuranceagreementwithJohnHancockLifeInsuranceCompany(JohnHancockUSA)toacquireaclosedblockofgroup
payoutannuitybusiness.Thetransactionresultedinanadditiontogrosspremiumsearnedof£3.7billionandacorrespondingincreaseinbenefitsandclaimsof£4.1billionforthe
increaseinpolicyholderliabilitiesandadecreaseinotheroperatingexpenditurefornegativecedingcommissionsof£0.4billionattheinceptionofthecontract.Therewasno
materialimpactonadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsortotalprofitasaresultofthetransaction.
InAsia,externalrevenuefromnooneindividualmarketexceeds10percentoftheGrouptotalexceptforHongKonginboth2018and2017.TotalexternalrevenueofHongKongis
£7,719million(2017:£7,269million).
Totalexternalrevenueshowninthetablesaboveisallfromexternalcustomersexceptfor£166millionwithinthe2018amountforUKandEuropeof£1,519million.The£166million
representstheinsurancerecoveriesrecognisedinrespectofcostsassociatedwiththereviewofpastannuitysalesasdescribedfurtherinnoteC11.
Interestincomeincludes£4million(2017:£3million)accruedinrespectofimpairedsecurities.
(vii)
(viii) Thismeasureistheformalprofit(loss)beforetaxmeasureunderIFRSbutisnottheresultattributabletoshareholders.
(ix) Unallocatedtoasegmentincludescentraloperations(GroupandAsiaRegionalHeadOfficesandGroupborrowings),PrudentialCapitalandAfricaoperations.Inaddition,
thiscolumnincludesintra-groupeliminations,includingtheeliminationoftheintra-groupreinsurancecontractbetweentheUKwith-profitsandAsiawith-profitsbusinesses.
(x) DuetothenatureofthebusinessoftheGroup,thereisnorelianceonanymajorcustomers.
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AnnualReport2018 Prudential plc 201
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information B1 Analysis of performance by segment continued
B1.5 Other investment return
Realisedandunrealised(losses)gainsonsecuritiesatfairvaluethroughprofitorloss
Realisedandunrealised(losses)onderivativesatfairvaluethroughprofitorloss
Realisedgains(losses)onavailable-for-salesecurities,previouslyrecognisedinother
comprehensiveincome*
Realised(losses)gainsonloans
Dividends
Otherinvestmentincome
Otherinvestmentreturn
*Includingimpairment.
2018 £m
2017 £m
(19,665)
(941)
33,121
(1,624)
11
(4)
2,362
1,782
(26)
9
2,654
1,558
(16,455)
35,692
RealisedgainsandlossesontheGroup’sinvestmentsfor2018recognisedintheincomestatementamountedtoanetgainof£8.2billion
(2017:anetgainof£5.7billion).
B1.6 Additional analysis of performance by segment components
B1.6(a) Asia
Earnedpremiums,netofreinsurance
Otherincome
Totalexternalrevenue
Intra-grouprevenue
Interestincome
Otherinvestmentreturn
Totalrevenue,netofreinsurance
Benefitsandclaimsandmovementsinunallocatedsurplus
ofwith-profitsfunds,netofreinsurance
Acquisitioncostsandotherexpenditurenote B2
(Loss)gainondisposalofbusinessesandcorporate
transactionsnote D1.1
RemeasurementofthesoldKorealifebusinessnote D1.1
Totalcharges,netofreinsuranceand(loss)gainondisposal
2018 £m
Insurance
Asset
management
Eliminations
15,894
99
15,993
–
1,083
(3,240)
13,836
(8,736)
(3,732)
(11)
–
–
210
210
158
3
–
371
–
(250)
–
–
–
–
–
(116)
–
–
(116)
–
116
–
–
2017 £m
Total
15,032
307
15,339
40
932
8,063
24,374
Total
15,894
309
16,203
42
1,086
(3,240)
14,091
(8,736)
(3,866)
(18,291)
(4,053)
(11)
–
61
5
ofbusinesses
(12,479)
(250)
116
(12,613)
(22,278)
Shareofprofitfromjointventuresandassociates,
netofrelatedtax
Profitbeforetax(beingtaxattributabletoshareholders’
andpolicyholders’returns)
Taxchargeattributabletopolicyholders’returns
Profitbeforetaxattributabletoshareholders
Analysis of profit (loss) before tax
AdjustedIFRSoperatingprofitbasedonlonger-term
investmentreturns
Short-termfluctuationsininvestmentreturnson
shareholder-backedbusiness
Amortisationofacquisitionaccountingadjustments
(Loss)gainondisposalofbusinessesandcorporate
transactionsnote D1.1
178
1,535
(80)
1,455
61
182
–
182
1,982
182
(512)
(4)
(11)
1,455
–
–
–
182
–
–
–
–
–
–
–
–
–
239
181
1,717
(80)
1,637
2,277
(249)
2,028
2,164
1,975
(512)
(4)
(11)
1,637
(1)
(7)
61
2,028
202 Prudential plc AnnualReport2018
www.prudential.co.uk
B Earnings performance continued B1.6(b) US
Earnedpremiums,netofreinsurance note (ii)
Otherincome
Totalexternalrevenue
Intra-grouprevenue
Interestincome
Otherinvestmentreturn
Totalrevenue,netofreinsurance
Benefitsandclaims note (ii)
Interestoncorestructuralborrowings
Acquisitioncostsandotheroperatingexpenditurenote B2
(Loss)gainondisposalofbusinessesandcorporate
transactionsnote D1.1
Totalcharges,netofreinsuranceandgainondisposal
ofbusinesses
Profitbeforetax
Analysis of profit (loss) before tax
AdjustedIFRSoperatingprofitbasedonlonger-term
investmentreturns
Short-termfluctuationsininvestmentreturns
onshareholder-backedbusiness
Amortisationofacquisitionaccountingadjustments
(Loss)gainondisposalofbusinessesandcorporate
transactionsnote D1.1
2018 £m
2017 £m
Insurance
Asset
management
note(i)
Eliminations
Total
Total
17,347
5
17,352
–
2,016
(6,784)
12,584
(8,790)
(15)
(2,010)
–
(10,815)
1,769
1,911
(100)
(42)
–
1,769
–
45
45
118
–
(20)
143
–
–
(135)
(38)
(173)
(30)
8
–
–
(38)
(30)
–
–
–
(68)
–
–
(68)
–
–
68
–
68
–
–
–
–
–
–
17,347
50
17,397
50
2,016
(6,804)
12,659
(8,790)
(15)
(2,077)
14,812
669
15,481
64
2,085
16,448
34,078
(31,205)
(16)
(2,257)
(38)
162
(10,920)
(33,316)
1,739
762
1,919
2,224
(100)
(42)
(38)
1,739
(1,568)
(56)
162
762
Notes
(i)
(ii)
In2017,theUStotalrevenueandtotalchargesincludedNPHbrokerdealerfeesof£542millionwithinotherincomeandotheroperatingexpenditure,respectively.TheGroup
disposedofitsUSindependentbroker-dealernetworkinAugust2017.
InOctober2018,JacksonenteredintoanagreementwithJohnHancockLifetoreinsure100percentofthegrouppayoutannuitybusiness.Thetransactionresultedinanaddition
togrosspremiumsearnedof£3.7billionandacorrespondingincreaseinbenefitsandclaimsof£4.1billionfortheincreaseinpolicyholderliabilitiesandadecreaseinother
operatingexpenditurefornegativecedingcommissionsof£0.4billionattheinceptionofthecontract.TherewasnomaterialimpactonadjustedIFRSoperatingprofitbasedon
longer-terminvestmentreturnsortotalprofitasaresultofthetransaction.
www.prudential.co.uk
AnnualReport2018 Prudential plc 203
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information B1 Analysis of performance by segment continued
B1.6 Additional analysis of performance by segment components continued
B1.6(c) UK and Europe
Earnedpremiums,netofreinsurance note (iii)
Otherincome note (ii)
Totalexternalrevenue
Intra-grouprevenue
Interestincome
Otherinvestmentreturn
Totalrevenue,netofreinsurance
Benefitsandclaimsandmovementsinunallocatedsurplus
ofwith-profitsfunds,netofreinsurance note (iii)
Acquisitioncostsandotheroperatingexpenditure note (ii), note B2
Totalcharges,netofreinsurance
Shareofprofitfromjointventuresandassociates,
netofrelatedtax
Profitbeforetax(beingtaxattributabletoshareholders’
andpolicyholders’returns)
Taxcredit(charge)attributabletopolicyholders’returns
Profitbeforetax
Analysis of profit (loss) before tax
AdjustedIFRSoperatingprofitbasedonlonger-term
investmentreturns
Short-termfluctuationsininvestmentreturnson
shareholder-backedbusiness
Lossondisposalofbusinessesandcorporate
transactionsnote D1.1
2018 £m
2017 £m
Insurance
Asset
management
note(i)
Eliminations
Total
Total
(76)
347
271
–
3,038
(6,459)
(3,150)
4,977
(1,571)
3,406
36
292
406
698
1,157
49
(508)
698
–
1,248
1,248
167
1
(17)
1,399
–
(953)
(953)
16
462
–
462
477
(15)
–
462
–
–
–
(164)
–
–
(164)
–
164
164
–
–
–
–
–
–
–
–
(76)
1,595
1,519
3
3,039
(6,476)
(1,915)
4,977
(2,360)
2,617
12,076
1,234
13,310
5
3,413
11,171
27,899
(23,025)
(3,206)
(26,231)
52
121
754
406
1,160
1,789
(425)
1,364
1,634
1,378
34
(14)
(508)
1,160
–
1,364
Notes
(i)
(ii)
(iii)
TherevenueforUKandEuropeassetmanagementof£1,102million(2017:£1,087million),comprisingtheamountsforassetmanagementfeeincome,investmentreturnand
otherincomeandperformance-relatedfeesshowninnoteB1.1(v),isdifferenttotheamountof£1,399millionshowninthetableabove.Thisisbecausethe£1,102million
(2017:£1,087million)isafterdeductingcommissionswhichwouldhavebeenincludedaschargesinthetableabove.Thedifferenceinthepresentationofcommissionisaligned
withhowmanagementreviewsthebusiness.ForfurtherinformationseenoteB1.1.
FollowingtheadoptionofIFRS15,the2017comparativeresultshavebeenre-presentedasdescribedinnoteA2.
Earnedpremiumsnetofreinsuranceincludesoutwardreinsurancepremiumsof£(12,149)millionpaidduringtheyearinrespectofthereinsuranceoftheUKannuityportfolio.
Theassociatedincreaseinreinsuranceassetsisincludedinoutwardreinsurers’shareofbenefitsandclaimsandtheconsequentialchangeinpolicyholderliabilitiesisincludedin
benefitsandclaims.SeenoteD1.1forfurtherdetails.
204 Prudential plc AnnualReport2018
www.prudential.co.uk
B Earnings performance continued B2 Acquisition costs and other expenditure
Acquisitioncostsincurredforinsurancepolicies
Acquisitioncostsdeferredlessamortisationofacquisitioncosts
Administrationcostsandotherexpenditure*
Movementsinamountsattributabletoexternalunitholdersofconsolidatedinvestmentfunds
Totalacquisitioncostsandotherexpenditure
2018 £m
2017 £m
(3,438)
59
(5,380)
(96)
(8,855)
(3,712)
911
(6,208)
(984)
(9,993)
*FollowingtheadoptionofIFRS15,the2017comparativeresultshavebeenre-presentedasdescribedinnoteA2.The2018administrationcostsandotherexpenditureincludesacredit
of£0.4billionforthenegativecedingcommissionsarisingfromthegrouppayoutannuitybusinessreinsuranceagreemententeredintobyJacksonwithJohnHancockLifeduringtheyear.
Totalacquisitioncostsandotherexpenditureincludes:
(a)Totaldepreciationandamortisationexpenseof£(1,136)million(2017:£(288)million)isincludedin‘Administrationcostsandother
expenditure’and‘Acquisitioncostsdeferredlessamortisationofacquisitioncosts’andrelatesprimarilytoamortisationofdeferred
acquisitioncostsofinsurancecontractsandassetmanagementcontracts.
(b)Thechargefornon-deferredacquisitioncostsandtheamortisationofthosecoststhatwerepreviouslydeferredwas£(3,379)million
(2017:£(2,801)million).Theseamountscomprise£(3,367)millionand£(12)millionforinsuranceandinvestmentcontracts
respectively(2017:£(2,772)millionand£(29)millionrespectively).
(c)MovementsinamountsattributabletoexternalunitholdersareinrespectofthoseOEICsandunittrustswhicharerequiredtobe
consolidatedandcompriseacreditof£201million(2017:chargeof£(719)million)fortheUKandEuropeinsuranceoperationsand
achargeof£(297)million(2017:£(265)million)forAsiainsuranceoperations.
(d)Allfeeexpensesrelatingtofinancialliabilitiesheldatamortisedcostin2018and2017arepartofthedeterminationoftheeffective
interestrateandareincludedin‘Administrationcostsandotherexpenditure’above.
(e)Thesegmentalanalysisofinterestexpense(otherthaninterestexpenseincorestructuralborrowings)anddepreciationand
amortisationincludedwithintotalacquisitioncostsandotherexpenditurewasasfollows:
Asiaoperations:
Insurance
Assetmanagement
USoperations:
Insurance
Assetmanagement
UKandEuropeoperations:
Insurance
Assetmanagement
Totalsegment
Unallocatedtoasegment(otheroperations)
Group total
Other interest expense
Depreciation and amortisation
2018 £m
2017 £m
2018 £m
2017 £m
–
–
(159)
–
(94)
–
(253)
(29)
(282)
–
–
(116)
–
(85)
–
(201)
(39)
(240)
(228)
(4)
(830)
(6)
(61)
(5)
(1,134)
(2)
(1,136)
(230)
(3)
20
(7)
(59)
(7)
(286)
(2)
(288)
B2.1 Staff and employment costs
TheaveragenumberofstaffemployedbytheGroupduringtheyearsshownwas:
Asiaoperations
USoperations
UKandEuropeoperations*
Total
*TheUKandEuropestaffnumbersincludestafffromcentraloperationsandAfricawhichareunallocatedtoasegment.
2018
16,798
4,285
7,123
28,206
2017
15,477
4,564
7,110
27,151
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AnnualReport2018 Prudential plc 205
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
B2 Acquisition costs and other expenditure continued
B2.1 Staff and employment costs continued
Thecostsofemploymentwere:
Wagesandsalaries
Socialsecuritycosts
Definedbenefitschemes*
Definedcontributionschemes
Total
*The(credit)incorporatestheeffectofactuarialgainsandlosses.
2018 £m
2017 £m
1,656
116
(29)
95
1,838
1,774
129
(3)
85
1,985
B2.2 Share-based payment
(a) Description of the plans
TheGroupoperatesanumberofshareawardandshareoptionplansthatprovidesPrudentialplcshares,orADRs,toparticipantsupon
vesting.TheplansinoperationincludethePrudentialLongTermIncentivePlan(PLTIP),AnnualIncentivePlan(AIP),savings-related
shareoptionschemes,sharepurchaseplansanddeferredbonusplans.SomeoftheseplansareparticipatedinbyExecutiveDirectors,
thedetailsofwhicharedescribedintheDirectors’remunerationreport.Inaddition,thefollowinginformationisprovided.
Share scheme
Description
Prudential
Corporation Asia
Long-Term
Incentive Plan
(PCA LTIP)
ThePCALTIPprovideseligibleemployeeswithconditionalawards.Awardsarediscretionaryandona
year-by-yearbasisdeterminedbyPrudential’sfullyearfinancialresultsandtheemployee’scontributionto
thebusiness.Awardsvestafterthreeyearssubjecttotheemployeebeinginemployment.Vestingofawards
mayalsobesubjecttoperformanceconditions.AllawardsaremadeinPrudentialshares,orADRs,except
forcountrieswhereshareawardsarenotfeasibleduetosecuritiesand/ortaxreasons,whereawardswillbe
replacedbythecashvalueofthesharesthatwouldotherwisehavevested.
Prudential Agency
Long-Term
Incentive Plan
CertainagentsinAsiaareeligibletobegrantedawardsunderthePrudentialAgencyLong-TermIncentivePlan.
TheseawardsarestructuredinasimilarwaytothePCALTIPdescribedabove.
Restricted Share
Plan (RSP)
TheCompanyoperatestheRSPforcertainemployees.Awardsunderthisplanarediscretionary,andthevesting
ofawardsmaybesubjecttoperformanceconditions.AllawardsaremadeinPrudentialsharesorADRs.
Deferred bonus
plans
Savings-related
share option
schemes
Share purchase
plans
TheCompanyoperatesanumberofdeferredbonusschemesincludingtheGroupDeferredBonusPlan(GDBP),
thePrudentialCorporationAsiaDeferredBonusPlan(PCADBP),thePrudentialCapitalDeferredBonusPlan
(PruCapDBP)andotherarrangements.Therearenoperformanceconditionsattachedtodeferredshareawards
madeunderthesearrangements.
EmployeesandeligibleagentsinanumberofgeographiesareeligibleforplanssimilartotheHMRC-approved
SaveAsYouEarn(SAYE)shareoptionschemeintheUK.EligibleemployeesparticipateintheInternational
Savings-RelatedShareOptionSchemewhileeligibleagentsbasedincertainregionsofAsiacanparticipate
intheInternationalSavings-RelatedShareOptionSchemeforNon-Employees.
EligibleemployeesoutsidetheUKareinvitedtoparticipateinarrangementssimilartotheCompany’s
HMRC-approvedUKSIP,whichallowsthepurchaseofPrudentialplcshares.StaffbasedinIrelandareeligible
toparticipateintheShareParticipationPlan.StaffbasedinAsiaareeligibletoparticipateinthePrudential
CorporationAsiaAllEmployeeSharePurchasePlan.
206 Prudential plc AnnualReport2018
www.prudential.co.uk
B Earnings performance continued
(b) Outstanding options and awards
ThefollowingtableshowsmovementinoutstandingoptionsandawardsundertheGroup’sshare-basedcompensationplans
at31December:
Options outstanding under SAYE schemes
Awards outstanding under
incentive plans
2018
2017
2018
2017
Number
of options
millions
Weighted
average
exercise
price
£
Number
of options
millions
Weighted
average
exercise
price
£
Number of awards
millions
6.4
0.3
(1.4)
(0.1)
(0.2)
(0.1)
4.9
0.8
11.74
13.94
10.85
12.25
12.43
12.60
12.10
10.37
7.1
1.4
(1.7)
(0.1)
(0.2)
(0.1)
6.4
0.4
10.74
14.55
10.07
10.83
11.19
10.86
11.74
11.06
33.6
10.7
(8.7)
(2.6)
–
(0.2)
32.8
30.2
12.7
(7.3)
(1.3)
(0.1)
(0.6)
33.6
Beginningofyear
Granted
Exercised
Forfeited
Cancelled
Lapsed/Expired
Endofyear
Optionsimmediatelyexercisable,endofyear
TheweightedaveragesharepriceofPrudentialplcfortheyearended31December2018was£17.36comparedto£17.51forthe
yearended31December2017.
ThefollowingtableprovidesasummaryoftherangeofexercisepricesforPrudentialplcoptionsoutstandingat31December:
Number
outstanding
(millions)
Outstanding
Weighted average
remaining
contractual life
(years)*
Exercisable
Weighted average
exercise prices
£
Number
exercisable
(millions)
Weighted average
exercise prices
£
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
–
0.3
3.0
0.3
1.3
4.9
–
0.5
4.5
–
1.4
6.4
–
0.4
1.6
4.1
2.6
2.1
0.4
1.4
2.2
–
3.9
2.5
–
9.01
11.19
13.94
14.55
12.10
6.29
9.01
11.21
–
14.55
11.74
–
0.3
0.5
–
–
0.8
–
–
0.4
–
–
0.4
–
9.01
11.11
–
–
10.37
6.29
–
11.55
–
–
11.06
Between£6and£7
Between£9and£10
Between£11and£12
Between£13and£14
Between£14and£15
*Theyearsshownaboveforweightedaverageremainingcontractuallifeincludethetimeperiodfromendofvestingperiodtoexpirationofcontract.
(c) Fair value of options and awards
Thefairvalueamountsestimatedonthedateofgrantrelatingtoalloptionsandawardsweredeterminedbyusingthefollowing
assumptions:
Dividendyield(%)
Expectedvolatility(%)
Risk-freeinterestrate(%)
Expectedoptionlife(years)
Weightedaverageexerciseprice(£)
Weightedaveragesharepriceatgrantdate(£)
Weightedaveragefairvalueatgrantdate(£)
2018
2017
Prudential
LTIP (TSR)
SAYE
options
Other
awards
Prudential
LTIP/RSP (TSR)
SAYE
options
–
24.03
1.19
–
–
17.46
6.64
2.52
21.09
0.97
3.94
13.94
16.64
3.29
–
–
–
–
–
–
17.04
–
23.17
0.62
–
–
16.80
8.30
2.85
20.15
0.56
3.49
14.55
17.74
3.29
Other
awards
–
–
–
–
–
–
16.12
www.prudential.co.uk
AnnualReport2018 Prudential plc 207
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information B2 Acquisition costs and other expenditure continued
B2.2 Share-based payment continued
Thecompensationcostsforallawardsandoptionsarerecognisedinnetincomeovertheplans’respectivevestingperiods.TheGroup
usestheBlack-ScholesmodeltovaluealloptionsandawardsotherthanthosewhichhaveTSRperformanceconditionsattached
(somePrudentialLTIPandRSPawards)forwhichtheGroupusesaMonteCarlomodelinordertoallowfortheimpactofthese
conditions.Thesemodelsareusedtocalculatefairvaluesforshareoptionsandawardsatthegrantdatebasedonthequotedmarket
priceofthestockatthemeasurementdate,theamount,ifany,thattheemployeesarerequiredtopay,thedividendyield,expected
volatility,risk-freeinterestratesandexerciseprices.
Foralloptionsandawards,theexpectedvolatilityisbasedonthemarketimpliedvolatilitiesasquotedonBloomberg.ThePrudential
specificat-the-moneyimpliedvolatilitiesareadjustedtoallowforthedifferenttermsanddiscountedexercisepriceonSAYEoptions
byusinginformationonthevolatilitysurfaceoftheFTSE100.
Risk-freeinterestratesaretakenfromgovernmentbondspotrateswithprojectionsfortwo-year,three-yearandfive-yeartermstomatch
correspondingvestingperiods.Dividendyieldsaredeterminedastheaverageyieldoveraperiodof12monthsuptoandincludingthe
dateofgrant.ForawardswithaTSRcondition,volatilitiesandcorrelationsbetweenPrudentialandabasketof15competitorcompaniesis
required.Forgrantsin2018,theaveragevolatilityforthebasketofcompetitorswas21.32percent.Correlationsforthebasketarecalculated
foreachpairingfromthelogofdailyTSRreturnsforthethreeyearspriortothevaluationdate.Marketimpliedvolatilitiesareusedforboth
Prudentialandthebasketofcompetitors.Changestothesubjectiveinputassumptionscouldmateriallyaffectthefairvalueestimate.
(d) Share-based payment expense charged to the income statement
Totalexpenserecognisedintheyearintheconsolidatedfinancialstatementsrelatingtoshare-basedcompensationisasfollows:
Share-basedcompensationexpense
Amountaccountedforasequity-settled
2018 £m
2017 £m
143
143
158
158
TheGrouphasnoliabilitiesoutstandingattheyearendrelatingtoawardswhicharesettledincash.
B2.3 Key management remuneration
KeymanagementconstitutestheDirectorsofPrudentialplcastheyhaveauthorityandresponsibilityforplanning,directingand
controllingtheactivitiesoftheGroup.
Totalkeymanagementremunerationisanalysedinthefollowingtable:
Salariesandshort-termbenefits
Post-employmentbenefits
Share-basedpayments
2018 £m
2017 £m
16.2
1.3
14.5
32.0
17.9
1.3
14.1
33.3
Theshare-basedpaymentschargecomprises£9.7million(2017:£8.3million),whichisdeterminedinaccordancewithIFRS2,
‘Share-basedPayment’(seenoteB2.2)and£4.8million(2017:£5.8million)ofdeferredshareawards.
TotalkeymanagementremunerationincludestotalDirectors’remunerationof£31.8million(2017:£40.2million)lessLTIPreleases
of£9.5million(2017:£15.2million)asshownintheDirectors’remunerationtableandrelatedfootnotesintheDirectors’remuneration
report.FurtherinformationonDirectors’remunerationisgivenintheDirectors’remunerationreport.
B2.4 Fees payable to the auditor
FeespayabletotheCompany’sauditorfortheauditoftheCompany’sannualaccounts
FeespayabletotheCompany’sauditoranditsassociatesforotherservices:
Auditofsubsidiariespursuanttolegislation
Audit-relatedassuranceservices*
Otherassuranceservices
Servicesrelatingtocorporatefinancetransactions
Allotherservices
Totalfeespaidtotheauditor
*Oftheaudit-relatedassuranceservicefeesof£4.7millionin2018,£1.4millionrelatestoservicesthatarerequiredbylaw.
Inaddition,therewerefeesincurredbypensionschemesof£0.2million(2017:£0.1million)forauditservices.
2018 £m
2017 £m
2.1
9.2
4.7
1.1
0.2
1.0
2.1
8.3
4.3
1.5
0.4
0.7
18.3
17.3
208 Prudential plc AnnualReport2018
www.prudential.co.uk
B Earnings performance continued B3 Effect of changes and other accounting matters on insurance assets and liabilities
Thefollowingmattersarerelevanttothedeterminationofthe2018results:
(i) Asia insurance operations
In2018,theadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsforAsiainsuranceoperationsincludedanetcreditof
£94million(2017:£75million)representingasmallnumberofitemsthatarenotexpectedtoreoccur,includingthenon-recurringimpact
ofarefinementtotherun-offoftheallowanceforprudencewithintechnicalprovisionswithinSingapore.
(ii) US insurance operations
Changesinthepolicyholderliabilitiesheldforvariableandfixedindexannuityguaranteesarereportedaspartofnon-operatingprofit
andareasdescribedinnoteB1.2.
(iii) UK and Europe insurance operations
Annuity and other shareholder-backed business
Allowance for credit risk
ForIFRSreporting,theresultsforUKshareholder-backedannuitybusinessareparticularlysensitivetotheallowancemadeforcreditrisk.
Theallowanceisreflectedinthedeductionfromthevaluationrateofinterestfordiscountingprojectedfutureannuitypayments
topolicyholdersthatwouldhaveotherwiseapplied.Thecreditriskallowancecomprisesanamountforlong-termbestestimatedefaults
andadditionalprovisionsforcreditriskpremium,thecostofdowngradesandshort-termdefaults.
TheIFRScreditriskallowancemadefortheUKshareholder-backedfixedandlinkedannuitybusinessequatedto40basispointsat
31December2018(31December2017:42basispoints).Theallowancerepresented22percentofthebondspreadoverswaprates
(31December2017:28percent).
Thereservesforcreditriskallowanceat31December2018fortheUKshareholder-backedbusinesswere£0.9billion(31December
2017:£1.6billion).The2018creditriskallowanceinformationisafterreflectingtheimpactofthereinsuranceof£12.0billionoftheUK
shareholder-backedannuityportfoliotoRothesayLifeenteredintoinMarch2018.SeenoteD1.1forfurtherdetails.
Other assumption changes
Fortheshareholder-backedbusiness,inadditiontothemovementinthecreditriskallowancediscussedabove,theneteffectofroutine
changestoassumptionsin2018wasacreditof£437million(2017:creditof£173million).Thisincluded,amongotheritems,abenefitto
adjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsof£441million(2017:£204million),relatingtochangesto
annuitantmortalityassumptionstoreflectcurrentmortalityexperience,whichhasshownaslowdowninlifeexpectancyimprovements
inrecentperiods,andtheadoptionoftheContinuousMortalityInvestigation(CMI)2016model(2017:adoptionof2015model).Further
informationonchangestomortalityassumptionsisgiveninnoteC4.1(d).
Longevity reinsurance and other management actions
AsidefromtheaforementionedreinsuranceagreementwithRothesayLife,nonewlongevityreinsurancetransactionswereundertaken
in2018(2017:longevityreinsurancetransactionscovering£0.6billionofIFRSannuityliabilitiescontributed£31milliontoprofit).Other
managementactionsgeneratedprofitsof£58million(2017:£245million).
With-profits sub-fund
Forthewith-profitssub-fund,theaggregateeffectofassumptionandothernon-recurringchangesin2018wasanetgaintounallocated
surplusof£394million(2017:netchargeof£58million)includingtheeffectofmortalityassumptionchanges.
www.prudential.co.uk
AnnualReport2018 Prudential plc 209
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information B4 Tax charge
(a) Total tax charge by nature of expense
Thetotaltaxchargeintheincomestatementisasfollows:
Tax charge
Attributabletoshareholders:
Asiaoperations
USoperations
UKandEurope
Otheroperations
Taxchargeattributabletoshareholders’returns
Attributabletopolicyholders:
Asiaoperations
UKandEurope
Tax(charge)creditattributabletopolicyholders’returns
Total tax charge
2018 £m
2017 £m
Current
tax
Deferred
tax
Total
Total
(199)
(87)
(255)
125
(416)
(92)
(188)
(280)
(696)
(78)
(168)
39
1
(206)
12
594
606
400
(277)
(255)
(216)
126
(622)
(80)
406
326
(296)
(253)
(508)
(267)
122
(906)
(249)
(425)
(674)
(1,580)
Theprincipalreasonforthedecreaseinthetaxchargeattributabletoshareholders’returnsistheinclusionin2017ofa£445million
deferredtaxchargearisingontheremeasurementoftheUSnetdeferredtaxassetsfrom35percentto21percentfollowingthe
enactmentoftheUStaxreformpackage,theTaxCutsandJobsAct.Themovementfromachargeof£674milliontoacreditof
£326millioninthetaxchargeattributabletopolicyholders’returnsmainlyreflectsadecreaseinthedeferredtaxliabilitiesonunrealised
gainsoninvestmentsinthewith-profitsfundsoftheUKandEuropeandofAsiacomparedto2017.
Thereconciliationoftheexpectedtoactualtaxchargeattributabletoshareholdersisprovidedin(b)below.Thetaxcreditattributable
topolicyholdersof£326millionaboveisequaltothelossbeforetaxattributabletopolicyholdersof£326million.Thisistheresultof
accountingforpolicyholderincomeafterthedeductionofexpensesandmovementonunallocatedsurplusesandonanafter-taxbasis.
Thetotaltaxchargecomprises:
Currenttaxexpense:
Corporationtax
Adjustmentsinrespectofprioryears
Totalcurrenttaxcharge
Deferredtaxarisingfrom:
Originationandreversaloftemporarydifferences
Impactofchangesinlocalstatutorytaxrates
Creditinrespectofapreviouslyunrecognisedtaxloss,taxcreditortemporarydifference
fromapriorperiod
Totaldeferredtaxcredit(charge)
Totaltaxcharge
2018 £m
2017 £m
(677)
(19)
(696)
385
8
7
400
(296)
(746)
50
(696)
(531)
(353)
–
(884)
(1,580)
Thecurrenttaxchargeof£696million(2017:£696million)includes£65million(2017:£59million)inrespectofthetaxchargeforthe
HongKongoperation.TheHongKongcurrenttaxchargeiscalculatedas16.5percentforbothyearsoneither(i)5percentofthenet
insurancepremiumor(ii)theestimatedassessableprofits,dependingonthenatureofthebusinesswritten.
Thetotaldeferredtaxchargearisesasfollows:
Unrealisedgainsandlossesoninvestments
Short-termtemporarydifferences
Balancesrelatingtoinvestmentandinsurancecontracts
Unusedtaxlosses
Capitalallowances
Deferredtaxcredit(charge)
2018 £m
2017 £m
667
(198)
(91)
23
(1)
400
(185)
(526)
(156)
(12)
(5)
(884)
210 Prudential plc AnnualReport2018
www.prudential.co.uk
B Earnings performance continued Themovementinunrealisedgainsandlossesininvestmentsfromachargeof£185millionin2017toacreditof£667millionin2018
reflectsadversestockmarketmovementsin2018.Theprincipalreasonforthereductioninthetaxchargeattributabletoshort-term
temporarydifferencesfrom£526millionin2017to£198millionin2018istheremeasurementofUSdeferredtaxbalancesin2017
from35percentto21percent.
In2018,ataxchargeof£270million(2017:chargeof£93million)hasbeentakenthroughothercomprehensiveincome.
(b) Reconciliation of shareholder effective tax rate
Inthereconciliationbelow,theexpectedtaxratesreflectthecorporationtaxratesthatareexpectedtoapplytothetaxableprofitofthe
relevantbusiness.Wherethereareprofitsofmorethanonejurisdictiontheexpectedtaxratesreflectthecorporationtaxratesweighted
byreferencetotheamountofprofitcontributingtotheaggregatebusinessresult.
Asia
operations
US
operations
note(i)
2018 £m
UK and
Europe
Other
operations*
Total
attributable to
shareholders
Percentage
impact on ETR
AdjustedIFRSoperatingprofit(loss)basedonlonger-term
investmentreturns
Non-operatingloss
Profit(loss)beforetax
Expectedtaxrate
Taxattheexpectedrate
Effectsofrecurringtaxreconciliationitems:
Incomenottaxableortaxableatconcessionaryrates
Deductionsnotallowablefortaxpurposes
Itemsrelatedtotaxationoflifeinsurance
businesses note (ii)
Deferredtaxadjustments
Effectofresultsofjointventuresandassociates note (iii)
Irrecoverablewithholdingtaxes note (iv)
Other
Total
Effectsofnon-recurringtaxreconciliationitems:
Adjustmentstotaxchargeinrelationtoprioryears
Movementsinprovisionsforopentaxmatters note (v)
Total
Totalactualtaxcharge(credit)
Analysedinto:
TaxonadjustedIFRSoperatingprofitbasedonlonger-
terminvestmentreturns
Taxonnon-operatingprofit
Actualtaxrate:
AdjustedIFRSoperatingprofitbasedonlonger-term
investmentreturns:
Includingnon-recurringtaxreconcilingitems
Excludingnon-recurringtaxreconcilingitems
Totalprofit
*Otheroperationsincluderestructuringcosts.
2,164
(527)
1,637
22%
360
1,919
(180)
1,739
21%
365
1,634
(474)
1,160
19%
220
(34)
39
(13)
(11)
(63)
–
(3)
(85)
–
2
2
277
(17)
3
(83)
–
–
–
–
(97)
(17)
4
(13)
255
(6)
15
(2)
2
(3)
–
3
9
(11)
(2)
(13)
(890)
(11)
(901)
19%
(171)
(2)
10
–
(30)
2
47
3
30
14
1
15
216
(126)
4,827
(1,192)
3,635
21%
774
(59)
67
(98)
(39)
(64)
47
3
(143)
(14)
5
(9)
622
21.3%
(1.6)%
1.8%
(2.7)%
(1.1)%
(1.8)%
1.3%
0.1%
(4.0)%
(0.4)%
0.2%
(0.2)%
17.1%
308
(31)
301
(46)
313
(97)
(130)
4
792
(170)
14%
14%
17%
16%
16%
15%
19%
20%
19%
15%
16%
14%
16%
16%
17%
www.prudential.co.uk
AnnualReport2018 Prudential plc 211
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information B4 Tax charge continued
Notes
(i)
(ii)
(iii)
(iv)
Impact of US tax reform
The2018taxchargeforUSoperationsreflectsthefullimpactoftheUStaxreformpackage,theTaxCutsandJobsAct,whichwasenactedinDecember2017andtookeffectfrom
1January2018.Theexpectedtaxrateof21percentreflectsthereducedUScorporateincometaxratecomparedto35percentfor2017.Thebenefitofthedividendreceived
deduction(showninItemsrelatedtothetaxationoflifeinsurancebusinesses)islowerin2018than2017reflectingthechangestohowthisdeductioniscomputed.In2017,the
reductionintheUScorporateincometaxrategaverisetoa£445millionunfavourablereconcilingiteminUSoperationsrelatingtotheremeasurementofthenetdeferredtaxasset
attributabletoshareholdersanda£134millionbenefitrecognisedinothercomprehensiveincome.
Items related to taxation of life insurance businesses
The£83million(2017:£238million)reconcilingiteminUSoperationsreflectstheimpactofthedividendreceiveddeductiononthetaxationofprofitsfromvariableannuity
business.TheprincipalreasonforthereductionintheAsiaoperationsreconcilingitemsfrom£92millionat2017to£13millionat2018reflectsnon-operatinginvestmentlossesin
HongKongwhichdonotattracttaxreliefoffsettingthebenefitofoperatingprofitsduetothetaxableprofitbeingcomputedas5percentofnetinsurancepremiums.
Effects of results of joint ventures and associates
ProfitbeforetaxincludesPrudential’sshareofprofitsaftertaxfromthejointventuresandassociates.Therefore,theactualtaxchargedoesnotincludetaxarisingfromprofit
orlossofjointventuresandassociatesandisreflectedasareconcilingiteminthetableabove.
Irrecoverable withholding taxes
The£47million(2017:£54million)adversereconcilingitemsreflectslocalwithholdingtaxesondividendspaidbycertainnon-UKsubsidiaries,principallyIndonesia,totheUK.
ThedividendsareexemptfromUKtaxandconsequentlythewithholdingtaxcannotbeoffsetagainstUKtaxpayments.
(v) Movements in provisions for open tax matters
Thecomplexityofthetaxlawsandregulationsthatrelatetoourbusinessesmeansthatfromtimetotimewemaydisagreewithtaxauthoritiesonthetechnicalinterpretationofa
particularareaoftaxlaw.ThisuncertaintymeansthatinthenormalcourseofbusinesstheGroupwillhavematterswhere,uponultimateresolutionoftheuncertainty,theamount
ofprofitsubjecttotaxmaybegreaterthantheamountsreflectedintheGroup’ssubmittedtaxreturns.Thestatementoffinancialpositioncontainsthefollowingprovisionsin
relationtoopentaxmatters:
£m
At31December2017
Movementsinthecurrentperiodincludedin:
Taxchargeattributabletoshareholders
Othermovements*
At31December2018
(139)
(5)
(5)
(149)
*OthermovementsincludeinterestarisingonopentaxmattersandamountsincludedintheGroup’sshareofprofitsfromjointventuresandassociates,netofrelatedtax.
AdjustedIFRSoperatingprofit(loss)basedonlonger-term
investmentreturns
Non-operatingprofit(loss)
Profit(loss)beforetax
Expectedtaxrate
Taxattheexpectedrate
Effectsofrecurringtaxreconciliationitems:
Incomenottaxableortaxableatconcessionaryrates
Deductionsnotallowablefortaxpurposes
Itemsrelatedtotaxationoflifeinsurancebusinesses
Deferredtaxadjustments
Effectofresultsofjointventuresandassociates
Irrecoverablewithholdingtaxes
Other
Total
Effectsofnon-recurringtaxreconciliationitems:
Adjustmentstotaxchargeinrelationtoprioryears
Movementsinprovisionsforopentaxmatters
ImpactofUStaxreform
Adjustmentsinrelationtobusinessdisposals
Total
Totalactualtaxcharge(credit)
Analysedinto:
TaxonadjustedIFRSoperatingprofitbasedon
longer-terminvestmentreturns
Taxonnon-operatingprofit
Actualtaxrate:
AdjustedIFRSoperatingprofitbasedonlonger-term
investmentreturns:
Includingnon-recurringtaxreconcilingitems
Excludingnon-recurringtaxreconcilingitems
Totalprofit
*Otheroperationsincluderestructuringcosts.
Asia
operations
US
operations
UK and
Europe
Other
operations*
Total
attributable to
shareholders
Percentage
impact on ETR
2017 £m
1,975
53
2,028
21%
426
(64)
26
(92)
11
(52)
–
(10)
(181)
(3)
19
–
(8)
8
253
2,224
(1,462)
762
35%
267
(11)
6
(238)
17
–
–
–
(226)
(15)
25
445
12
467
508
1,378
(14)
1,364
19%
259
(2)
13
(2)
(1)
(3)
–
6
11
(3)
–
–
–
(3)
(878)
20
(858)
19%
(163)
(14)
10
–
(5)
–
54
(1)
44
(3)
–
–
–
(3)
267
(122)
276
(23)
548
(40)
268
(1)
(121)
(1)
14%
13%
12%
25%
24%
67%
19%
20%
20%
14%
13%
14%
4,699
(1,403)
3,296
24%
789
(91)
55
(332)
22
(55)
54
(5)
(352)
(24)
44
445
4
469
906
971
(65)
21%
20%
27%
23.9%
(2.8)%
1.7%
(10.1)%
0.7%
(1.7)%
1.6%
(0.1)%
(10.7)%
(0.7)%
1.3%
13.5%
0.1%
14.2%
27.4%
212 Prudential plc AnnualReport2018
www.prudential.co.uk
B Earnings performance continued B5 Earnings per share
BasedonadjustedIFRSoperating
profitbasedonlonger-term
investmentreturns
Short-termfluctuationsin
investmentreturnson
shareholder-backedbusiness
Amortisationofacquisition
accountingadjustments
Lossondisposalofbusinessesand
corporatetransactions
Basedonprofitfortheyear
BasedonadjustedIFRSoperating
profitbasedonlonger-term
investmentreturns
Short-termfluctuationsin
investmentreturnson
shareholder-backedbusiness
Amortisationofacquisition
accountingadjustments
Cumulativeexchangegainonthe
soldKorealifebusiness
recycledfromother
comprehensiveincome
Profitattachingtothedisposalof
businesses
ImpactofUStaxreform
Basedonprofitfortheyear
Note
B1.2
D1.1
Note
2018
Before
tax
£m
B1.1
Tax
£m
B4
Non-
controlling
interests
£m
Net of tax
and non-
controlling
interests
£m
Basic
earnings
per share
Pence
Diluted
earnings
per share
Pence
4,827
(792)
(3)
4,032
156.6p
156.5p
(558)
(46)
(588)
3,635
Before
tax
£m
B1.1
53
9
108
(622)
–
–
–
(3)
(505)
(19.7)p
(19.7)p
(37)
(1.4)p
(1.4)p
(480)
3,010
(18.6)p
116.9p
(18.6)p
116.8p
2017
Tax
£m
B4
Non-
controlling
interests
£m
Net of tax
and non-
controlling
interests
£m
Basic
earnings
per share
Pence
Diluted
earnings
per share
Pence
4,699
(971)
(1)
3,727
145.2p
145.1p
B1.2
(1,563)
(63)
61
162
–
3,296
D1.1
B4
572
20
–
(82)
(445)
(906)
–
–
–
–
–
(1)
(991)
(38.6)p
(38.6)p
(43)
(1.7)p
(1.7)p
61
2.4p
2.4p
80
(445)
2,389
3.1p
(17.3)p
93.1p
3.1p
(17.3)p
93.0p
Earningspersharearecalculatedbasedonearningsattributabletoordinaryshareholders,afterrelatedtaxandnon-controllinginterests.
Theweightedaveragenumberofsharesforcalculatingearningspershare,whichexcludesthoseheldinemployeesharetrustsand
consolidatedunittrustsandOEICs,issetoutasbelow:
Weightedaveragenumber(inmillions)ofsharesforcalculationof:
Basicearningspershare
Sharesunderoptionatendofyear
Numberofsharesthatwouldhavebeenissuedatfairvalueonassumedoptionprice
Dilutedearningspershare
2018
2017
2,575
5
(4)
2,576
2,567
6
(5)
2,568
www.prudential.co.uk
AnnualReport2018 Prudential plc 213
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information B6 Dividends
Dividendsrelatingtoreportingyear:
Firstinterimordinarydividend
Secondinterimordinarydividend
Total
Dividendspaidinreportingyear:
Currentyearfirstinterimordinarydividend
Secondinterimordinarydividendforprioryear
Total
2018
2017
Pence
pershare
15.67p
33.68p
49.35p
15.67p
32.50p
48.17p
£m
Pence
pershare
406
873
1,279
404
840
1,244
14.50p
32.50p
47.00p
14.50p
30.57p
45.07p
£m
375
841
1,216
373
786
1,159
Dividend per share
Fortheyearended31December2017thesecondinterimordinarydividendof32.50penceperordinarysharewaspaidtoeligible
shareholderson18May2018.The2018firstinterimordinarydividendof15.67penceperordinarysharewaspaidtoeligible
shareholderson27September2018.
Thesecondinterimordinarydividendfortheyearended31December2018of33.68penceperordinarysharewillbepaidon17May
2019insterlingtoshareholdersontheUKregisterandtheIrishbranchregisteron29March2019(RecordDate),andinHongKong
dollarstoshareholdersontheHongKongbranchregisterat4.30pmHongKongtimeontheRecordDate(HKShareholders).Holdersof
USAmericanDepositaryReceipts(USShareholders)willbepaidtheirdividendsinUSdollarsonorabout24May2019.Thesecond
interimordinarydividendwillbepaidonorabout24May2019inSingaporedollarstoshareholderswithsharesstandingtothecreditof
theirsecuritiesaccountswithTheCentralDepository(Pte)Limited(CDP)at5.00pmSingaporetimeontheRecordDate(SG
Shareholders).ThedividendpayabletotheHKShareholderswillbetranslatedusingtheexchangeratequotedbytheWMCompanyat
thecloseofbusinesson12March2019.TheexchangerateatwhichthedividendpayabletotheSGShareholderswillbetranslated
intoSingaporedollars,willbedeterminedbyCDP.
ShareholdersontheUKregisterandIrishbranchregisterareeligibletoparticipateinaDividendReinvestmentPlan.
214 Prudential plc AnnualReport2018
www.prudential.co.uk
B Earnings performance continued
C Balance sheet notes
C1 Analysis of Group statement of financial position by segment
31 Dec 2018 £m
By operating segment
Assets
Goodwill
Deferredacquisitioncostsandotherintangibleassets
Property,plantandequipment
Reinsurers'shareofinsurancecontractliabilities
Deferredtaxassets
Currenttaxrecoverable
Accruedinvestmentincome note (i)
Otherdebtors note (i)
Investmentproperties
Investmentinjointventuresandassociatesaccountedforusing
theequitymethod
Loans
Equitysecuritiesandportfolioholdingsinunittrusts
Debtsecurities
Derivativeassets
Otherinvestments
Deposits
Assetsheldforsale*
Cashandcashequivalents note (ii)
Total assets
Total equity
Liabilities
Insurancecontractliabilities
Investmentcontractliabilitieswithdiscretionaryparticipation
features
Investmentcontractliabilitieswithoutdiscretionaryparticipation
features
Unallocatedsurplusofwith-profitsfunds
Corestructuralborrowingsofshareholder-financedbusinesses
Operationalborrowingsattributabletoshareholder-financed
businesses
Borrowingsattributabletowith-profitsbusinesses
Obligationsunderfunding,securitieslendingandsaleand
repurchaseagreements
Netassetvalueattributabletounitholdersofconsolidatedunit
trustsandsimilarfunds
Deferredtaxliabilities
Currenttaxliabilities
Accruals,deferredincomeandotherliabilities note (iii)
Provisions
Derivativeliabilities
Liabilitiesheldforsale*
Total liabilities
Total equity and liabilities
Note
C5.1
C5.2
C8.1
C8.2
D6
C3.3
C3.2
Asia
C2.1
US
C2.2
498
2,937
129
2,777
119
26
664
2,978
5
–
8,747
246
6,662
2,295
311
498
238
6
991
1,377
–
11,066
32,150 128,657
41,594
45,839
574
296
927
–
92
1,224
–
–
3,005
2,189
UK and
Europe
C2.3
1,359
195
1,031
2,812
126
244
1,511
4,189
17,914
742
5,567
53,810
85,956
2,513
5,585
10,320
10,578
4,749
Unallo-
cated
to a
segment
(central
opera-
tions)
note(iv)
Elimin-
ation
of intra-
group
debtors
and
creditors
Group
total
1,857
11,923
1,409
11,144
2,595
618
2,749
4,088
17,925
–
–
–
(1,109)
–
(81)
–
(5,285)
–
1,733
–
–
18,010
– 214,733
– 175,356
3,494
–
6,512
–
11,796
–
10,578
–
12,125
–
–
44
3
2
55
118
76
1,968
–
–
–
116
1,967
111
–
160
–
2,182
94,199 204,918 209,201
6,802
(6,475) 508,645
6,428
5,624
8,700
(3,485)
–
17,267
C4.1
72,349 182,432
68,957
37
(1,109) 322,666
C4.1
C4.1
C4.1
C6.1
C6.2
C6.2
C8.1
C8.2
C11
C3.4
375
–
67,038
–
492
2,511
–
3,168
–
196
15,560
13,334
–
2
–
7,468
61
19
328
–
106
3,921
–
5,765
1,224
2,617
1,257
133
7,641
251
65
–
–
1,688
115
5,324
23
255
–
9,013
1,061
326
6,442
743
2,208
10,568
503
–
–
21
16
75
1,126
61
978
–
–
–
–
–
–
–
–
–
–
(81)
(5,285)
–
–
–
67,413
19,222
15,845
7,664
998
3,940
6,989
11,651
4,022
568
15,248
1,078
3,506
10,568
87,771 199,294 200,501
10,287
(6,475) 491,378
94,199 204,918 209,201
6,802
(6,475) 508,645
*Assetsheldforsaleof£10,578millionincludes£10,568millioninrespectofthereinsuredUKannuitybusiness.Thecorrespondingpolicyholderandotherliabilitiesof£10,568millionis
reflectedinliabilitiesheldforsale.(seenoteD1.1).
www.prudential.co.uk
AnnualReport2018 Prudential plc 215
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C1 Analysis of Group statement of financial position by segment continued
31 Dec 2017 £m
Note
C5.1
C5.2
C8.1
C8.2
D6
C3.3
C3.2
D1
Asia
C2.1
US
C2.2
305
2,540
125
1,960
112
58
595
2,675
5
–
8,219
214
6,424
2,300
298
492
248
5
–
912
1,317
9,630
29,976 130,630
35,378
40,982
1,611
113
848
–
43
1,291
–
–
1,658
1,934
UK and
Europe
C2.3
1,177
210
447
2,521
157
244
1,558
3,118
16,487
504
5,986
62,670
92,707
2,954
4,774
9,540
38
5,808
84,900 197,998 210,900
C4.1
63,468 177,728
88,180
337
–
62,340
328
3,474
–
2,996
–
184
17,069
13,477
–
By operating segment
Assets
Goodwill
Deferredacquisitioncostsandotherintangibleassets
Property,plantandequipment
Reinsurers'shareofinsurancecontractliabilities
Deferredtaxassets
Currenttaxrecoverable
Accruedinvestmentincome note (i)
Otherdebtors note (i)
Investmentproperties
Investmentinjointventuresandassociatesaccountedforusing
theequitymethod
Loans
Equitysecuritiesandportfolioholdingsinunittrusts
Debtsecurities
Derivativeassets
Otherinvestments
Deposits
Assetsheldforsale
Cashandcashequivalents note (ii)
Total assets
Total equity
Liabilities
Insurancecontractliabilities
Investmentcontractliabilitieswithdiscretionaryparticipation
features
Investmentcontractliabilitieswithoutdiscretionaryparticipation
features
Unallocatedsurplusofwith-profitsfunds
Corestructuralborrowingsofshareholder-financedbusinesses
Operationalborrowingsattributabletoshareholder-financed
businesses
Borrowingsattributabletowith-profitsbusinesses
Obligationsunderfunding,securitieslendingandsaleand
repurchaseagreements
Netassetvalueattributabletounitholdersofconsolidatedunit
trustsandsimilarfunds
Deferredtaxliabilities
Currenttaxliabilities
Accruals,deferredincomeandotherliabilities note (iii)
Provisions
Derivativeliabilities
Total liabilities
Total equity and liabilities
C4.1
C4.1
C4.1
C6.1
C6.2
C6.2
C8.1
C8.2
C11
C3.4
508
–
148
3,706
4,304
1,358
–
50
10
–
3,631
1,152
122
6,069
254
79
–
1,845
47
5,109
24
5
5,243
1,703
377
6,609
784
1,661
78,974 192,750 202,655
84,900 197,998 210,900
Unallo-
cated
to a
segment
(central
opera-
tions)
note(iv)
Elimin-
ation
of intra-
group
debtors
and
creditors
Group
total
1,482
11,011
789
9,673
2,627
613
2,676
2,963
16,497
1,416
17,042
223,391
171,374
4,801
5,622
11,236
38
10,690
–
–
–
(1,235)
–
(80)
–
(5,199)
–
–
–
–
–
–
–
–
–
–
(6,514) 493,941
–
(1,235) 328,172
–
–
–
–
–
–
–
–
–
(80)
(5,199)
–
–
62,677
20,394
16,951
6,280
1,791
3,716
5,662
8,889
4,715
537
14,185
1,123
2,755
(6,514) 477,847
(6,514) 493,941
–
42
3
3
58
93
31
2,121
–
–
109
115
2,307
123
–
362
–
1,290
6,657
31
–
1
–
6,096
1,085
–
15
15
71
1,597
61
1,010
9,982
6,657
5,926
5,248
8,245
(3,325)
–
16,094
216 Prudential plc AnnualReport2018
www.prudential.co.uk
C Balance sheet notes continued Notes
(i)
Accrued investment income and other debtors
Interestreceivable
Other
Totalaccruedinvestmentincome
Otherdebtorscomprises:
Amountsduefrom
Policyholders
Intermediaries
Reinsurers
Other
Totalotherdebtors
Total accrued investment income and other debtors
Analysedas:
Expectedtobesettledwithinoneyear
Expectedtobesettledafteroneyear
Total accrued investment income and other debtors
(ii)
Cash and cash equivalents
Cash
Cashequivalents
Total cash and cash equivalents
Analysedas:
HeldcentrallyandavailableforgeneralusebytheGroup
OtherfundsnotavailableforgeneralusebytheGroup,includingfundsheldforthebenefitofpolicyholders
Total cash and cash equivalents
31 Dec
2018 £m
31 Dec
2017 £m
1,744
1,005
2,749
452
3
218
3,415
4,088
6,837
6,151
686
6,837
1,789
887
2,676
408
4
134
2,417
2,963
5,639
4,957
682
5,639
31 Dec
2018 £m
31 Dec
2017 £m
5,759
6,366
12,125
349
11,776
12,125
6,623
4,067
10,690
328
10,362
10,690
TheGroup’scashandcashequivalentsareheldinthefollowingcurrencies:poundssterling32percent,USdollars38percent,Euro15percentandothercurrencies15percent
(2017:poundssterling31percent,USdollars28percent,Euro24percentandothercurrencies17percent).
(iii) Accruals, deferred income and other liabilities
Accrualsanddeferredincome
Othercreditors
Creditorsarisingfromdirectinsuranceandreinsuranceoperations
Interestpayable
FundswithheldunderreinsuranceoftheREALICbusiness
Otheritems
Total accruals, deferred income and other liabilities
(iv) Unallocated to a segment includes central operations, Prudential Capital and Africa operations as per note B1.3.
31 Dec
2018 £m
31 Dec
2017 £m
1,700
7,074
2,363
117
2,941
1,053
1,233
7,289
2,296
100
2,664
603
15,248
14,185
www.prudential.co.uk
AnnualReport2018 Prudential plc 217
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
C2 Analysis of segment statement of financial position by business type
C2.1 Asia
31 Dec 2018 £m
Insurance
With-
profits
business*
Unit-
linked
assets and
liabilities
Note
Other
business
Total
Asset
manage-
ment
Elimin-
ations
Assets
Goodwill
Deferredacquisitioncostsandother
intangibleassets
Property,plantandequipment
Reinsurers'shareofinsurancecontract
liabilities
Deferredtaxassets
Currenttaxrecoverable
Accruedinvestmentincome
Otherdebtors
Investmentproperties
Investmentinjointventuresand
associatesaccountedforusingthe
equitymethod
Loans
Equitysecuritiesandportfolioholdings
inunittrusts
Debtsecurities
Derivativeassets
Deposits
Cashandcashequivalents
Total assets
Total equity
Liabilities
Insurancecontractliabilities
Investmentcontractliabilitieswith
discretionaryparticipationfeatures
Investmentcontractliabilitieswithout
discretionaryparticipationfeatures
Unallocatedsurplusofwith-profitsfunds
Operationalborrowingsattributableto
shareholder-financedbusinesses
Borrowingsattributabletowith-profits
businesses
Netassetvalueattributabletounit
holdersofconsolidatedunittrusts
andsimilarfunds
Deferredtaxliabilities
Currenttaxliabilities
Accruals,deferredincomeandother
liabilities
Provisions
Derivativeliabilities
Total liabilities
251
251
247
–
–
–
–
1
2
51
730
–
2,870
34
2,714
108
23
327
535
5
2,926
124
2,777
109
25
632
2,941
5
–
56
90
63
–
–
254
1,676
–
–
792
C3.3
C3.2
–
–
827
585
827
1,377
17,165
27,204
201
250
870
12,804
3,981
4
455
326
2,146
14,583
91
458
874
32,115
45,768
296
1,163
2,070
48,621
18,354
26,431
93,406
–
–
5,868
5,868
40,389
15,876
16,084
72,349
C4.1(b)
375
C4.1(b)
–
2,511
–
19
1,242
812
27
3,138
57
51
–
492
–
50
–
–
–
–
11
–
1,024
21
–
351
422
93
889
–
2
3,475
115
12
375
492
2,511
61
19
2,617
1,255
120
7,502
172
65
48,621
18,354
20,563
87,538
11
5
–
10
1
32
77
–
164
–
35
71
–
61
119
833
560
–
–
–
–
–
–
–
2
13
179
79
–
273
833
31 Dec
2017 £m
Total
Total
498
305
–
–
–
–
–
–
–
(40)
–
2,937
129
2,777
119
26
664
2,978
5
–
–
–
–
–
–
–
991
1,377
32,150
45,839
296
1,224
2,189
2,540
125
1,960
112
58
595
2,675
5
912
1,317
29,976
40,982
113
1,291
1,934
(40) 94,199
84,900
–
–
–
–
–
–
–
–
–
–
(40)
–
–
6,428
5,926
72,349
63,468
375
337
492
2,511
328
3,474
61
19
2,617
1,257
133
7,641
251
65
50
10
3,631
1,152
122
6,069
254
79
(40) 87,771
78,974
(40) 94,199
84,900
Total equity and liabilities
48,621
18,354
26,431
93,406
*Thestatementoffinancialpositionforwith-profitsbusinesscomprisesthewith-profitsassetsandliabilitiesoftheHongKong,MalaysiaandSingaporeoperations.Assetsandliabilitiesof
otherparticipatingbusinessareincludedinthecolumnfor‘Otherbusiness’.
218 Prudential plc AnnualReport2018
www.prudential.co.uk
C Balance sheet notes continued C2.2 US
31 Dec 2018 £m
31 Dec
2017 £m
Variable
annuity
separate
account
assets and
liabilities
Note
Insurance
Fixed
annuity,
GICs and
other
business
Asset
manage-
ment
Elimin-
ations
Total
Total
Total
Assets
Goodwill
Deferredacquisitioncostsandotherintangible
assets
Property,plantandequipment
Reinsurers'shareofinsurancecontractliabilities
Deferredtaxassets
Currenttaxrecoverable
Accruedinvestmentincome
Otherdebtors
Investmentproperties
Loans
Equitysecuritiesandportfolioholdingsinunit
trusts
Debtsecurities
Derivativeassets
Otherinvestments
Deposits
Cashandcashequivalents
Total assets
Total equity
C3.3
C3.2
Liabilities
Insurancecontractliabilities
Investmentcontractliabilitieswithoutdiscretionary
participationfeatures
C4.1(c)
Corestructuralborrowingsofshareholder-financed
businesses
Operationalborrowingsattributableto
shareholder-financedbusinesses
Obligationsunderfunding,securitieslendingand
saleandrepurchaseagreements
Netassetvalueattributabletounitholdersof
consolidatedunittrustsandsimilarfunds
Deferredtaxliabilities
Currenttaxliabilities
Accruals,deferredincomeandotherliabilities
Provisions
Derivativeliabilities
Total liabilities
Total equity and liabilities
–
–
–
–
–
–
–
–
–
–
–
–
8,747
243
6,662
2,271
309
493
230
6
11,066
8,747
243
6,662
2,271
309
493
230
6
11,066
128,220
–
–
–
–
–
433 128,653
41,594
574
926
–
2,976
41,594
574
926
–
2,976
128,220
76,530 204,750
–
5,584
5,584
128,220
54,212 182,432
–
–
–
–
–
–
–
–
–
–
3,168
3,168
196
328
196
328
5,765
5,765
–
1,688
114
5,197
23
255
–
1,688
114
5,197
23
255
128,220
70,946 199,166
128,220
76,530 204,750
–
–
3
–
24
2
5
76
–
–
4
–
–
1
92
29
–
–
–
–
–
–
–
–
–
(68)
–
–
8,747
246
6,662
2,295
311
498
238
6
11,066
8,219
214
6,424
2,300
298
492
248
5
9,630
– 128,657
41,594
–
574
–
927
–
92
–
3,005
–
130,630
35,378
1,611
848
43
1,658
236
40
(68) 204,918
197,998
–
5,624
5,248
–
–
–
–
–
–
–
1
195
–
–
196
236
– 182,432
177,728
–
–
–
–
3,168
2,996
196
328
184
508
5,765
4,304
–
–
–
(68)
–
–
–
1,688
115
5,324
23
255
–
1,845
47
5,109
24
5
(68) 199,294
192,750
(68) 204,918
197,998
www.prudential.co.uk
AnnualReport2018 Prudential plc 219
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C2 Analysis of segment statement of financial position by business type continued
C2.3 UK and Europe
31 Dec 2018 £m
31 Dec
2017 £m
Insurance
Other funds and
subsidiaries
With-
profits
business*
Unit-
linked
assets and
liabilities
Note
Annuity
and
other
long-term
business
Asset
manage-
ment
Elimin-
ations
Total
206
83
895
1,131
61
58
1,010
2,102
15,635
705
3,853
41,090
53,798
1,957
5,573
8,530
10
3,520
140,217
–
–
–
–
115
–
6
116
575
618
–
–
12,477
10,512
1
10
1,101
–
190
25,721
–
C3.3
C3.2
–
94
39
1,566
45
174
378
641
1,661
–
1,714
20
21,646
555
1
689
10,568
688
206
1,153
177
934
2,812
106
238
1,504
3,318
17,914
705
5,567
53,587
85,956
2,513
5,584
10,320
10,578
4,398
18
97
–
20
6
7
1,011
–
37
–
223
–
–
1
–
–
351
–
–
–
–
–
–
–
(140)
–
–
–
–
–
–
–
–
–
–
Total
Total
1,359
1,177
195
1,031
2,812
126
244
1,511
4,189
17,914
742
5,567
53,810
85,956
2,513
5,585
10,320
10,578
4,749
210
447
2,521
157
244
1,558
3,118
16,487
504
5,986
62,670
92,707
2,954
4,774
9,540
38
5,808
40,479 206,417
6,540
6,540
2,924
2,160
(140) 209,201
8,700
–
210,900
8,245
C4.1(d)
43,775
5,219
19,963
68,957
C4.1(d)
67,018
–
20
67,038
C4.1(d)
2
13,334
15,498
–
60
–
15,560
13,334
4
–
–
102
106
–
3,921
225
1,224
–
–
–
–
–
–
–
–
–
–
–
–
–
–
68,957
88,180
67,038
62,340
15,560
13,334
17,069
13,477
106
148
3,921
3,706
1,224
1,358
4,643
–
–
354
–
3
–
21
147
269
1,141
484
939
10,568
9,013
1,039
298
6,096
516
2,207
10,568
–
22
28
486
227
1
–
–
–
–
(140)
–
–
–
9,013
1,061
326
6,442
743
2,208
10,568
5,243
1,703
377
6,609
784
1,661
–
–
3,921
999
4,349
892
29
4,601
32
1,265
–
Assets
Goodwill
Deferredacquisitioncostsandother
intangibleassets
Property,plantandequipment
Reinsurers'shareofinsurancecontract
liabilities
Deferredtaxassets
Currenttaxrecoverable
Accruedinvestmentincome
Otherdebtors
Investmentproperties
Investmentinjointventuresandassociates
accountedforusingtheequitymethod
Loans
Equitysecuritiesandportfolioholdings
inunittrusts
Debtsecurities
Derivativeassets
Otherinvestments
Deposits
Assetsheldforsale
Cashandcashequivalents
Total assets
Total equity
Liabilities
Insurancecontractliabilities
Investmentcontractliabilitieswith
discretionaryparticipationfeatures
Investmentcontractliabilitieswithout
discretionaryparticipationfeatures
Unallocatedsurplusofwith-profitsfunds
Operationalborrowingsattributableto
shareholder-financedbusinesses
Borrowingsattributabletowith-profits
businesses
Obligationsunderfunding,securitieslending
andsaleandrepurchaseagreements
Netassetvalueattributabletounitholdersof
consolidatedunittrustsandsimilarfunds
Deferredtaxliabilities
Currenttaxliabilities
Accrualsdeferredincomeandotherliabilities
Provisions
Derivativeliabilities
Liabilitiesheldforsale
Total liabilities
Total equity and liabilities
140,217
140,217
25,721
25,721
33,939 199,877
40,479 206,417
764
2,924
(140) 200,501
(140) 209,201
202,655
210,900
*IncludestheScottishAmicableInsuranceFundwhich,at31December2018,hadtotalassetsandliabilitiesof£4,844million(2017:£5,768million).ThePACwith-profitssub-fund
(WPSF)mainlycontainswith-profitsbusinessbutitalsocontainssomenon-profitbusiness(unit-linked,termassurancesandannuities).TheUKwith-profitsfundincludes£9.5billion
(2017:£10.6billion)ofnon-profitsannuitiesliabilities.
220 Prudential plc AnnualReport2018
www.prudential.co.uk
C Balance sheet notes continued C3 Assets and liabilities
C3.1 Group assets and liabilities – measurement
(a) Determination of fair value
ThefairvaluesofthefinancialinstrumentsforwhichfairvaluationisrequiredunderIFRSaredeterminedbytheuseofcurrentmarketbid
pricesforexchange-quotedinvestmentsorbyusingquotationsfromindependentthirdpartiessuchasbrokersandpricingservicesorby
usingappropriatevaluationtechniques.
TheestimatedfairvalueofderivativefinancialinstrumentsreflectstheestimatedamounttheGroupwouldreceiveorpayinan
arm’s-lengthtransaction.Thisamountisdeterminedusingquotedpricesifexchangelisted,quotationsfromindependentthirdpartiesor
valuedinternallyusingstandardmarketpractices.
Otherthantheloanswhichhavebeendesignatedatfairvaluethroughprofitorloss,theloansandreceivableshavebeenshownnetof
provisionsforimpairment.Thefairvalueofloanshavebeenestimatedfromdiscountedcashflowsexpectedtobereceived.Thediscount
rateisupdatedforthemarketrateofinterestwhereapplicable.
Thefairvalueofinvestmentpropertiesisbasedonmarketvaluesasassessedbyprofessionallyqualifiedexternalvaluersorbythe
Group’squalifiedsurveyors.
Thefairvalueofthesubordinatedandseniordebtissuedbytheparentcompanyisdeterminedusingquotedpricesfromindependent
thirdparties.
Thefairvalueoffinancialliabilities(otherthanderivativefinancialinstruments)isdeterminedusingdiscountedcashflowsofthe
amountsexpectedtobepaid.
(b) Fair value measurement hierarchy of Group assets and liabilities
Assets and liabilities carried at fair value on the statement of financial position
ThetableoverleafshowstheassetsandliabilitiescarriedatfairvalueanalysedbyleveloftheIFRS13,‘FairValueMeasurement’defined
fairvaluehierarchy.Thishierarchyisbasedontheinputstothefairvaluemeasurementandreflectsthelowestlevelinputthatis
significanttothatmeasurement.
www.prudential.co.uk
AnnualReport2018 Prudential plc 221
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C3 Assets and liabilities continued
C3.1 Group assets and liabilities – measurement continued
Financial instruments at fair value
Analysis of financial investments, net of derivative liabilities
by business type
With-profits
Loans
Equitysecuritiesandportfolioholdingsinunittrusts
Debtsecurities
Otherinvestments(includingderivativeassets)
Derivativeliabilities
Totalfinancialinvestments,netofderivativeliabilities
Percentageoftotal
Unit-linked and variable annuity separate account
Equitysecuritiesandportfolioholdingsinunittrusts
Debtsecurities
Otherinvestments(includingderivativeassets)
Derivativeliabilities
Totalfinancialinvestments,netofderivativeliabilities
Percentageoftotal
Non-linked shareholder-backed
Loans
Equitysecuritiesandportfolioholdingsinunittrusts
Debtsecurities
Otherinvestments(includingderivativeassets)
Derivativeliabilities
Totalfinancialinvestments,netofderivativeliabilities
Percentageoftotal
Group total analysis, including other financial liabilities
held at fair value
Loans
Equitysecuritiesandportfolioholdingsinunittrusts
Debtsecurities
Otherinvestments(includingderivativeassets)
Derivativeliabilities
Totalfinancialinvestments,netofderivativeliabilities
Investmentcontractliabilitieswithoutdiscretionaryparticipationfeatures
heldatfairvalue
Borrowingsattributabletowith-profitsbusinesses
Netassetvalueattributabletounitholdersofconsolidatedunittrusts
andsimilarfunds
Otherfinancialliabilitiesheldatfairvalue
Totalfinancialinstrumentsatfairvalue
Percentageoftotal
31 Dec 2018 £m
Level 1
Level 2
Level 3
Quoted prices
(unadjusted)
in active
markets
Valuation
based on
significant
observable
market inputs
Valuation
based on
significant
unobservable
market inputs
–
52,320
31,210
143
(85)
83,588
57%
152,987
4,766
6
(2)
157,757
94%
–
2,957
17,687
61
(2)
20,703
24%
–
5,447
48,981
3,263
(1,231)
56,460
38%
505
9,727
3
(3)
10,232
6%
–
2
61,803
1,258
(1,760)
61,303
71%
1,703
488
811
4,325
–
7,327
5%
9
–
6
–
15
0%
3,050
18
371
941
(423)
3,957
5%
Total
1,703
58,255
81,002
7,731
(1,316)
147,375
100%
153,501
14,493
15
(5)
168,004
100%
3,050
2,977
79,861
2,260
(2,185)
85,963
100%
–
208,264
53,663
210
(89)
–
5,954
120,511
4,524
(2,994)
4,753
515
1,182
5,272
(423)
4,753
214,733
175,356
10,006
(3,506)
262,048
127,995
11,299
401,342
–
–
(16,054)
–
(6,852)
–
(3,811)
(2)
255,196
70%
108,128
29%
–
(1,606)
(988)
(3,404)
5,301
1%
(16,054)
(1,606)
(11,651)
(3,406)
368,625
100%
222 Prudential plc AnnualReport2018
www.prudential.co.uk
C Balance sheet notes continued Analysis of financial investments, net of derivative liabilities
by business type
With-profits
Loans
Equitysecuritiesandportfolioholdingsinunittrusts
Debtsecurities
Otherinvestments(includingderivativeassets)
Derivativeliabilities
Totalfinancialinvestments,netofderivativeliabilities
Percentageoftotal
Unit-linked and variable annuity separate account
Equitysecuritiesandportfolioholdingsinunittrusts
Debtsecurities
Otherinvestments(includingderivativeassets)
Derivativeliabilities
Totalfinancialinvestments,netofderivativeliabilities
Percentageoftotal
Non-linked shareholder-backed
Loans
Equitysecuritiesandportfolioholdingsinunittrusts
Debtsecurities
Otherinvestments(includingderivativeassets)
Derivativeliabilities
Totalfinancialinvestments,netofderivativeliabilities
Percentageoftotal
Group total analysis, including other financial liabilities
held at fair value
Loans
Equitysecuritiesandportfolioholdingsinunittrusts
Debtsecurities
Otherinvestments(includingderivativeassets)
Derivativeliabilities
Totalfinancialinvestments,netofderivativeliabilities
Investmentcontractliabilitieswithoutdiscretionaryparticipationfeatures
heldatfairvalue
Borrowingsattributabletowith-profitsbusinesses
Netassetvalueattributabletounitholdersofconsolidatedunittrusts
andsimilarfunds
Otherfinancialliabilitiesheldatfairvalue
Totalfinancialinstrumentsatfairvalue
Percentageoftotal
31 Dec 2017 £m
Level 1
Level 2
Level 3
Quoted prices
(unadjusted)
in active
markets
Valuation
based on
significant
observable
market inputs
Valuation
based on
significant
unobservable
market inputs
–
57,347
29,143
68
(68)
86,490
60%
158,631
4,993
12
–
163,636
97%
–
2,105
21,443
7
–
23,555
25%
–
4,470
45,602
3,638
(615)
53,095
36%
457
5,226
4
(1)
5,686
3%
–
10
64,313
2,270
(1,559)
65,034
71%
2,023
351
348
3,540
–
6,262
4%
10
–
8
–
18
0%
2,814
10
306
876
(512)
3,494
4%
Total
2,023
62,168
75,093
7,246
(683)
145,847
100%
159,098
10,219
24
(1)
169,340
100%
2,814
2,125
86,062
3,153
(2,071)
92,083
100%
–
218,083
55,579
87
(68)
–
4,937
115,141
5,912
(2,175)
4,837
371
654
4,424
(512)
4,837
223,391
171,374
10,423
(2,755)
273,681
123,815
9,774
407,270
–
–
(4,836)
–
268,845
72%
(17,397)
–
(3,640)
–
102,778
27%
–
(1,887)
(413)
(3,031)
4,443
1%
(17,397)
(1,887)
(8,889)
(3,031)
376,066
100%
Allassetsandliabilitiesheldatfairvalueareclassifiedasfairvaluethroughprofitorloss,exceptfor£40,849million(31December2017:
£35,293million)ofdebtsecuritiesclassifiedasavailable-for-sale.
www.prudential.co.uk
AnnualReport2018 Prudential plc 223
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C3 Assets and liabilities continued
C3.1 Group assets and liabilities – measurement continued
Investment properties at fair value
2018
2017
31 Dec £m
Level 1
Level 2
Level 3
Quoted prices
(unadjusted)
in active
markets
Valuation
based on
significant
observable
market inputs
Valuation
based on
significant
unobservable
market inputs
–
–
–
–
17,925
16,497
Total
17,925
16,497
Assets and liabilities at amortised cost and their fair value
Thetablebelowshowstheassetsandliabilitiescarriedatamortisedcostonthestatementoffinancialpositionandtheirfairvalue.The
assetsandliabilitiesthatarecarriedatamortisedcostbutwherethecarryingvalueapproximatesthefairvalue,areexcludedfromthe
analysisbelow.
31 Dec 2018 £m
Level 1
Level 2
Level 3
Quoted prices
(unadjusted)
in active
markets
Valuation
based on
significant
observable
market inputs
Valuation
based on
significant
unobservable
market inputs
Total
fair
value
Total
carrying
value
Assets
Loans note (i)
Liabilities
Investmentcontractliabilitieswithoutdiscretionary
participationfeatures
Corestructuralborrowingsofshareholder-financed
businesses note (ii)
Operationalborrowingsattributabletoshareholder-financed
businesses
Borrowingsattributabletothewith-profitsfunds
Obligationsunderfunding,securitieslendingandsaleand
repurchaseagreements
–
–
–
–
–
–
2,898
10,768
13,666
13,257
–
(3,157)
(3,157)
(3,168)
(7,847)
(994)
(2,035)
–
(7,847)
(7,664)
(4)
(68)
(998)
(2,103)
(998)
(2,334)
(1,258)
(5,750)
(7,008)
(6,989)
224 Prudential plc AnnualReport2018
www.prudential.co.uk
C Balance sheet notes continued 31 Dec 2017 £m
Level 1
Level 2
Level 3
Quoted prices
(unadjusted)
in active
markets
Valuation
based on
significant
observable
market inputs
Valuation
based on
significant
unobservable
market inputs
Total
fair
value
Total
carrying
value
Assets
Loans note (i)
Liabilities
Investmentcontractliabilitieswithoutdiscretionary
participationfeatures
Corestructuralborrowingsofshareholder-financed
businesses note (ii)
Operationalborrowingsattributabletoshareholder-financed
businesses
Borrowingsattributabletothewith-profitsfunds
Obligationsunderfunding,securitieslendingandsaleand
repurchaseagreements
–
–
–
–
–
–
2,756
10,183
12,939
12,205
–
(3,032)
(3,032)
(2,997)
(7,023)
(1,788)
(1,761)
–
(7,023)
(6,280)
(3)
(71)
(1,791)
(1,832)
(1,791)
(1,829)
(1,410)
(4,318)
(5,728)
(5,662)
Notes
(i)
(ii)
Thecarryingvalueofloansandreceivablesarereportednetofallowanceforloanlossesof£46million(31December2017:£28million).
Asat31December2018,£376million(31December2017:£312million)ofconvertiblebondswereincludedindebtsecuritiesand£981million(31December2017:£1,311million)
wereincludedinborrowings.
Thefairvalueoftheassetsandliabilitiesinthetableabove,withtheexceptionofthesubordinatedandseniordebtissuedbytheparent
company,hasbeenestimatedfromthediscountedcashflowsexpectedtobereceivedorpaid.Whereappropriate,theobservable
marketinterestratehasbeenusedandtheassetsandliabilitiesareclassifiedwithinlevel2.Otherwise,theyareincludedaslevel3assets
orliabilities.
Thefairvalueincludedforthesubordinatedandseniordebtissuedbytheparentcompanyisdeterminedusingquotedpricesfrom
independentthirdparties.
(c) Valuation approach for level 2 fair valued assets and liabilities
AsignificantproportionoftheGroup’slevel2assetsarecorporatebonds,structuredsecuritiesandothernon-nationalgovernmentdebt
securities.Theseassets,inlinewithmarketpractice,aregenerallyvaluedusingadesignatedindependentpricingserviceorquotefrom
third-partybrokers.Thesevaluationsaresubjecttoanumberofmonitoringcontrols,suchascomparisontomultiplepricingsources
whereavailable,monthlypricevariances,stalepricereviewsandvarianceanalysisonpricesachievedonsubsequenttrades.
Whenpricesarenotavailablefrompricingservices,quotesaresourceddirectlyfrombrokers.Prudentialseekstoobtainanumberof
quotesfromdifferentbrokerssoastoobtainthemostcomprehensiveinformationavailableontheirexecutability.Wherequotesare
sourceddirectlyfrombrokers,thepriceusedinthevaluationisnormallyselectedfromoneofthequotesbasedonanumberoffactors,
includingthetimelinessandregularityofthequotesandtheaccuracyofthequotesconsideringthespreadsprovided.Theselected
quoteistheonewhichbestrepresentsanexecutablequoteforthesecurityatthemeasurementdate.
Generally,noadjustmentismadetothepricesobtainedfromindependentthirdparties.Adjustmentismadeinonlylimited
circumstances,whereitisdeterminedthatthethird-partyvaluationsobtaineddonotreflectfairvalue(egeitherbecausethevalueis
staleand/orthevaluesareextremelydiverseinrange).Theseareusuallysecuritieswhicharedistressedorthatcouldbesubjecttoadebt
restructureorwherereliablemarketpricesarenolongeravailableduetoaninactivemarketormarketdislocation.Intheseinstances,
pricesarederivedusinginternalvaluationtechniquesincludingthoseasdescribedbelowinthisnotewiththeobjectiveofarrivingata
fairvaluemeasurementthatreflectsthepriceatwhichanorderlytransactionwouldtakeplacebetweenmarketparticipantsonthe
measurementdate.Thetechniquesusedrequireanumberofassumptionsrelatingtovariablessuchascreditriskandinterestrates.
Examplesofsuchvariablesincludeanaveragecreditspreadbasedonthecorporatebonduniverseandtherelevantdurationoftheasset
beingvalued.Prudentialdeterminestheinputassumptionsbasedonthebestavailableinformationatthemeasurementdates.Securities
valuedinsuchmannerareclassifiedaslevel3wherethesesignificantinputsarenotbasedonobservablemarketdata.
Ofthetotallevel2debtsecuritiesof£120,511millionat31December2018(31December2017:£115,141million),£15,425millionare
valuedinternally(31December2017:£13,910million).Themajorityofsuchsecuritiesarevaluedusingmatrixpricing,whichisbasedon
assessingthecreditqualityoftheunderlyingborrowertoderiveasuitablediscountraterelativetogovernmentsecuritiesofacomparable
duration.Undermatrixpricing,thedebtsecuritiesarepricedtakingthecreditspreadsoncomparablequotedpublicdebtsecuritiesand
applyingthesetotheequivalentdebtinstrumentsfactoringinaspecifiedliquiditypremium.Themajorityoftheparametersusedinthis
valuationtechniquearereadilyobservableinthemarketand,therefore,arenotsubjecttointerpretation.
www.prudential.co.uk
AnnualReport2018 Prudential plc 225
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C3 Assets and liabilities continued
C3.1 Group assets and liabilities – measurement continued
(d) Fair value measurements for level 3 fair valued assets and liabilities
Reconciliation of movements in level 3 assets and liabilities measured at fair value
Thefollowingtablereconcilesthevalueoflevel3fairvaluedassetsandliabilitiesat1January2018tothatpresentedat31December2018.
Financial instruments at fair value
£m
Total gains
(losses)
recorded
as other
compre-
hensive
income
Total
net gains
(losses) in
income
statement*
Purchases
Sales
Settled
Issued
Transfers
into
level 3
Transfers
out of
level 3
At
1 Jan
4,837
371
654
4,424
(512)
(78)
162
62
(178)
(331)
279
38
(7)
405
27
8
–
54
(1)
125
666
1,202
–
(35)
(131)
(813)
–
–
–
–
–
–
–
–
–
9,774
385
223
2,055 (1,157)
(331)
279
(1,887)
(23)
–
(413)
(3,031)
67
5
31
(170)
–
–
–
–
–
–
304
–
57
273
(697)
(481)
4,443
434
84
2,055 (1,157)
303
(899)
At
31 Dec
4,753
515
1,182
–
–
–
–
63
5,272
(423)
63
11,299
–
(1,606)
(33)
–
(988)
(3,404)
30
5,301
–
8
–
–
–
8
–
–
–
8
2,699
722
942
4,480
(516)
17
11
51
73
4
(235)
2,129
–
(311)
236
302
–
4,837
(5)
(11)
(133)
–
186
216
727
–
(468)
(522)
(725)
–
(6)
–
–
–
–
–
–
–
1
–
2
–
(70)
(22)
371
654
–
–
4,424
(512)
8,327
156
(384)
3,258
(1,715)
(317)
236
305
(92)
9,774
–
(13)
–
–
(883)
(2,851)
(559)
14
–
250
(13)
–
–
–
–
115
(1,989)
–
1,276
252
(234)
(311)
–
(385)
–
–
–
(1,887)
(413)
(3,031)
4,593
(402)
(134)
3,245
(1,715)
1,326
(2,298)
(80)
(92)
4,443
2018
Loans
Equitysecuritiesandportfolio
holdingsinunittrusts
Debtsecurities
Otherinvestments(including
derivativeassets)
Derivativeliabilities
Totalfinancialinvestments,
netofderivativeliabilities
Borrowingsattributableto
with-profitsbusinesses
Netassetvalueattributableto
unitholdersofconsolidated
unittrustsandsimilarfunds
Otherfinancialliabilities
Totalfinancialinstruments
atfairvalue
2017
Loans
Equitysecuritiesandportfolio
holdingsinunittrusts
Debtsecurities
Otherinvestments(including
derivativeassets)
Derivativeliabilities
Totalfinancialinvestments,
netofderivativeliabilities
Borrowingsattributableto
with-profitsbusinesses
Netassetvalueattributableto
unitholdersofconsolidated
unittrustsandsimilarfunds
Otherfinancialliabilities
Totalfinancialinstruments
atfairvalue
*Ofthetotalnetgainsand(losses)intheincomestatementof£434million(2017:£(402)million),£398million(2017:£(139)million)relatestonetunrealisedgainsandlossesoffinancial
instrumentsstillheldattheendoftheyear,whichcanbeanalysedasfollows:
Loans
Equitysecurities
Debtsecurities
Otherinvestments
Derivativeliabilities
Borrowingsattributabletowith-profitsbusinesses
Netassetvalueattributabletounitholdersofconsolidatedunittrustsandsimilarfunds
Otherfinancialliabilities
Total
2018 £m
2017 £m
(71)
38
(16)
370
27
(23)
67
6
398
20
(12)
(5)
(22)
4
(13)
(123)
12
(139)
226 Prudential plc AnnualReport2018
www.prudential.co.uk
C Balance sheet notes continued
Other assets at fair value – investment properties
At
1 Jan
16,497
14,646
Total
gains in
income
statement*
Total (losses)
in other
comprehensive
income
97
415
–
(21)
£m
Purchases
1,509
2,048
Transfers
into
level 3
Transfers
out of
level 3
–
–
–
–
Sales
(178)
(591)
At
31 Dec
17,925
16,497
2018
2017
*Ofthetotalnetgainsintheincomestatementof£97million(2017:£415million),£149million(2017:£394million)relatestonetunrealisedgainsofinvestmentpropertiesstillheldatthe
endoftheyear.
Valuation approach for level 3 fair valued assets and liabilities
Financial instruments at fair value
Investmentsvaluedusingvaluationtechniquesincludefinancialinvestmentswhichbytheirnaturedonothaveanexternallyquoted
pricebasedonregulartrades,andfinancialinvestmentsforwhichmarketsarenolongeractiveasaresultofmarketconditions,egmarket
illiquidity.Thevaluationtechniquesusedincludecomparisontorecentarm’s-lengthtransactions,referencetootherinstrumentsthatare
substantiallythesame,discountedcashflowanalysis,optionadjustedspreadmodelsand,ifapplicable,enterprisevaluation.These
techniquesmayincludeanumberofassumptionsrelatingtovariablessuchascreditriskandinterestrates.Changesinassumptions
relatingtothesevariablescouldpositivelyornegativelyimpactthereportedfairvalueoftheseinstruments.Whendeterminingthe
inputsintothevaluationtechniquesusedpriorityisgiventopubliclyavailablepricesfromindependentsourceswhenavailable,but
overallthesourceofpricingischosenwiththeobjectiveofarrivingatafairvaluemeasurementthatreflectsthepriceatwhichanorderly
transactionwouldtakeplacebetweenmarketparticipantsonthemeasurementdate.
Thefairvalueestimatesaremadeataspecificpointintime,baseduponavailablemarketinformationandjudgementsaboutthe
financialinstruments,includingestimatesofthetimingandamountofexpectedfuturecashflowsandthecreditstandingof
counterparties.Suchestimatesdonotreflectanypremiumordiscountthatcouldresultfromofferingforsaleatonetimeasignificant
volumeofaparticularfinancialinstrument,nordotheyconsiderthetaximpactoftherealisationofunrealisedgainsorlossesfromselling
thefinancialinstrumentbeingfairvalued.
InaccordancewiththeGroup’sriskmanagementframework,theestimatedfairvalueofderivativefinancialinstrumentsvalued
internallyusingstandardmarketpracticesaresubjecttoassessmentagainstexternalcounterparties’valuations.
At31December2018,theGroupheld£5,301million(31December2017:£4,443million)ofnetfinancialinstrumentsatfairvalue
withinlevel3.Thisrepresents1percent(31December2017:1percent)ofthetotalfairvaluedfinancialassetsnetoffairvaluedfinancial
liabilities.Theprincipalfinancialassets,netofcorrespondingliabilities,classifiedasfairvaluewithinlevel3asof31December2018are
describedbelow:
(i) £1,702millionofloans(31December2017:£1,983million)andacorresponding£1,606million(31December2017:£1,887million)
ofborrowingsareheldbyasubsidiaryoftheGroup’sUKwith-profitsfund,attachingtoaportfolioofbuy-to-letmortgagesandother
loansfinancedlargelybyexternalthird-party(non-recourse)borrowings.SeenoteC3.3(c)forfurtherdetails.TheGroup’sexposure
islimitedtotheinvestmentheldbytheUKwith-profitsfund,ratherthantotheindividualloansandborrowingsthemselves.Thefair
valuemovementsoftheseloansandborrowingshavenoeffectonshareholders’profitandequity.Themostsignificantnon-observable
inputstothemortgagefairvaluearetheleveloffuturedefaultsandprepaymentsbythemortgageholders.
(ii)Loansof£2,783millionat31December2018(31December2017:£2,512million),measuredastheloanoutstandingbalance,plus
accruedinvestmentincome,attachedtoacquiredREALICbusinessandheldtobacktheliabilitiesforfundswithheldunder
reinsurancearrangements.Thefundswithheldliabilityof£2,941millionat31December2018(31December2017:£2,664million)is
alsoclassifiedwithinlevel3,accountedforonafairvaluebasisbeingequivalenttothecarryingvalueoftheunderlyingassets.
(iii)Excludingtheabove,thelevel3fairvaluedfinancialassetsnetoffinancialliabilitiesare£5,363million(31December2017:
£4,499million).Ofthisamount,anetliabilityof£(298)million(31December2017:netliabilityof£(117)million)isinternallyvalued,
representinglessthan0.1percentofthetotalfairvaluedfinancialassetsnetoffinancialliabilities(31December2017:lessthan
0.1percent).Internalvaluationsareinherentlymoresubjectivethanexternalvaluations.Includedwithintheseinternallyvalued
netasset/liabilityare:
(a)Debtsecuritiesof£582million(31December2017:£500million),whichareeithervaluedonadiscountedcashflowmethodwith
aninternallydevelopeddiscountrateoronexternalpricesadjustedtoreflectthespecificknownconditionsrelatingtothese
securities(egdistressedsecuritiesorsecuritieswhichwerebeingrestructured).
(b)Privateequityandventureinvestmentsinbothdebtandequitysecuritiesof£512million(31December2017:£217million)
whicharevaluedinternallyusingdiscountedcashflowsbasedonmanagementinformationavailablefortheseinvestments.
Thesignificantunobservableinputsincludethedeterminationofexpectedfuturecashflowsontheinvestmentsbeingvalued,
determinationoftheprobabilityofcounterpartydefaultandprepaymentsandtheselectionofappropriatediscountrates.
ThevaluationisperformedinaccordancewithInternationalPrivateEquityandVentureCapitalAssociationValuationguidelines.
Theseinvestmentsareprincipallyheldbyconsolidatedinvestmentfundsthataremanagedonbehalfofthirdparties.
www.prudential.co.uk
AnnualReport2018 Prudential plc 227
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C3 Assets and liabilities continued
C3.1 Group assets and liabilities – measurement continued
(d) Fair value measurements for level 3 fair valued assets and liabilitiescontinued
(c)Equityreleasemortgageloaninvestmentsof£268millionandacorrespondingloanliabilitybackedbytheseinvestmentsof
£(354)million(31December2017:£302millionloaninvestmentsandacorrespondingliabilityof£(385)million)whicharevalued
internallyusingthediscountedcashflowmodels.Theinputsthataresignificanttothevaluationoftheseinvestmentsareprimarily
theeconomicassumptions,beingthediscountrate(risk-freerateplusaliquiditypremium)andpropertyvalues.
(d)Liabilitiesof£(898)million(31December2017:£(403)million)forthenetassetvalueattributabletoexternalunitholdersinrespect
oftheconsolidatedinvestmentfunds,whicharenon-recoursetotheGroup.Theseliabilitiesarevaluedbyreferencetothe
underlyingassets.
(e)Derivativeliabilitiesof£(423)million(31December2017:£(512)million)whicharevaluedinternallyusingthediscounted
cashflowmethodinlinewithstandardmarketpracticesbutaresubjecttoindependentassessmentagainstexternal
counterparties’valuations.
(f) Othersundryindividualfinancialinvestmentsof£15million(31December2017:£164million).
Oftheinternallyvaluednetliabilityreferredtoaboveof£(298)million(31December2017:netliabilityof£(117)million):
— Anetliabilityof£(53)million(31December2017:netasset£67million)isheldbytheGroup’sparticipatingfundsandtherefore
shareholders’profitandequityarenotimpactedbymovementsinthevaluationofthesefinancialinstruments;and
— Anetliabilityof£(245)million(31December2017:£(184)million)isheldtosupportnon-linkedshareholder-backedbusiness.
Ifthevalueofallthelevel3instrumentsheldtosupportnon-linkedshareholder-backedbusinessvaluedinternallydecreasedby
10percent,thechangeinvaluationwouldbe£24million(31December2017:£18million),whichwouldreduceshareholders’equity
bythisamountbeforetax.Allthisamountpassesthroughtheincomestatementsubstantiallyaspartofshort-termfluctuationsin
investmentreturnsoutsideofadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns.
Other assets at fair value – investment properties
TheinvestmentpropertiesoftheGroupareprincipallyheldbytheUKandEuropeinsuranceoperationsthatareexternallyvaluedby
professionallyqualifiedexternalvaluersusingtheRoyalInstitutionofCharteredSurveyors(RICS)valuationstandards.An‘income
capitalisation’techniqueispredominantlyappliedfortheseproperties.Thistechniquecalculatesthevaluethroughtheyieldandrental
valuedependingonfactorssuchastheleaselength,buildingquality,covenantandlocation.Thevariablesusedarecomparedtorecent
transactionswithsimilarfeaturestothoseoftheGroup’sinvestmentproperties.Asthecomparisonsarenotwithpropertiesthatare
virtuallyidenticaltotheGroup’sinvestmentproperties,adjustmentsaremadebythevaluerswhereappropriatetothevariablesused.
Changesinassumptionsrelatingtothesevariablescouldpositivelyornegativelyimpactthereportedfairvalueoftheproperties.
(e) Transfers into and transfers out of levels
TheGroup’spolicyistorecognisetransfersintoandtransfersoutoflevelsasoftheendofeachhalfyearreportingperiodexceptfor
materialtransferswhicharerecognisedasofthedateoftheeventorchangeincircumstancesthatcausedthetransfer.Transfersare
deemedtohaveoccurredwhenthereisamaterialchangeintheobservedvaluationinputsorachangeintheleveloftradingactivities
ofthesecurities.
Duringtheyear,thetransfersbetweenlevelswithintheGroup’sportfoliowereprimarilytransfersfromlevel1tolevel2of
£908millionandtransfersfromlevel2tolevel1of£976million.Thesetransferswhichrelatetoequitysecuritiesanddebtsecuritiesarose
toreflectthechangeintheobservedvaluationinputsandincertaincases,thechangeintheleveloftradingactivitiesofthesecurities.
Inaddition,thetransfersintolevel3duringtheyearwere£8millionandthetransfersoutoflevel3were£30million.Thesetransfers
wereprimarilybetweenlevels3and2forderivativeliabilities.
(f) Valuation processes applied by the Group
TheGroup’svaluationpolicies,proceduresandanalysesforinstrumentscategorisedaslevel3areoverseenbybusinessunitcommittees
aspartoftheGroup’swiderfinancialreportinggovernanceprocesses.Theproceduresundertakenincludeapprovalofvaluation
methodologies,verificationprocesses,andresolutionofsignificantorcomplexvaluationissues.InundertakingtheseactivitiestheGroup
makesuseoftheextensiveexpertiseofitsassetmanagementfunctions.Inaddition,theGrouphasminimumstandardsforindependent
priceverificationtoensurevaluationaccuracyisregularlyindependentlyverified.Adherencetothispolicyismonitoredacrossthe
businessunits.
228 Prudential plc AnnualReport2018
www.prudential.co.uk
C Balance sheet notes continued C3.2 Debt securities
ThisnoteprovidesanalysisoftheGroup’sdebtsecurities,includingasset-backedsecuritiesandsovereigndebtsecurities.
WiththeexceptionofcertaindebtsecuritiesforUSinsuranceoperationsclassifiedas‘available-for-sale’underIAS39asdisclosed
innotesC3.2(b)to(d)below,theGroup’sdebtsecuritiesarecarriedatfairvaluethroughprofitorloss.
(a) Credit rating
Debtsecuritiesareanalysedbelowaccordingtoexternalcreditratingsissued,withequivalentratingsissuedbydifferentratings
agenciesgroupedtogether.Standard&Poor’sratingshavebeenusedwhereavailable,ifthisisn’tthecaseMoody’sandthenFitchhave
beenusedasalternatives.FortheUS,NAICratingshavealsobeenusedwhererelevant.Inthetablebelow,AAAisthehighestpossible
rating.InvestmentgradefinancialassetsareclassifiedwithintherangeofAAAtoBBB-ratings.Financialassetswhichfalloutsidethis
rangeareclassifiedasbelowBBB-.Debtsecuritieswithnoexternalcreditratingareclassifiedas‘Other’.
Asia
With-profits
Unit-linked
Non-linkedshareholder-
backed
Assetmanagement
US
Non-linkedshareholder-
backed
UKandEurope
With-profits
Unit-linked
Non-linkedshareholder-
backed
Otheroperations
Totaldebtsecurities
Asia
With-profits
Unit-linked
Non-linkedshareholder-
backed
US
Non-linkedshareholder-
backed
UKandEurope
With-profits
Unit-linked
Non-linkedshareholder-
backed
Otheroperations
Totaldebtsecurities
AAA
AA+ to AA-
A+ to A-
2,873
817
1,034
11
12,379
100
3,552
–
4,142
492
3,717
60
31 Dec 2018 £m
BBB+ to
BBB-
3,760
1,431
2,934
–
678
7,383
10,286
14,657
6,890
1,041
3,007
619
9,332
2,459
6,413
1,089
11,779
2,215
4,651
151
14,712
3,501
1,515
41
Below BBB-
Other
Total
1,747
426
2,202
–
1,429
2,891
395
158
49
2,303
715
1,144
–
27,204
3,981
14,583
71
7,161
41,594
8,194
901
5,902
18
53,798
10,512
21,646
1,967
16,970
42,707
37,493
42,551
9,297
26,338
175,356
AAA
AA+ to AA-
A+ to A-
2,504
528
10,641
103
990
2,925
3,846
510
3,226
31 Dec 2017 £m
BBB+ to
BBB-
3,234
1,429
2,970
368
6,492
670
5,118
742
17,412
6,352
9,378
2,732
11,005
1,264
44,400
9,578
12,311
11,666
1,308
9,625
182
39,941
12,856
1,793
3,267
67
37,927
Below BBB-
Other
Total
1,810
372
1,879
1,000
2,877
91
258
36
8,323
2,397
565
1,053
5,769
7,392
117
6,062
16
24,432
3,507
13,043
35,378
50,661
6,711
35,335
2,307
23,371
171,374
Thecreditratings,informationordatacontainedinthisreportwhichareattributedandspecificallyprovidedbyStandard&Poor’s,Moody’sandFitchSolutionsandtheirrespective
affiliatesandsuppliers(‘ContentProviders’)isreferredtohereasthe‘Content’.ReproductionofanyContentinanyformisprohibitedexceptwiththepriorwrittenpermissionofthe
relevantparty.TheContentProvidersdonotguaranteetheaccuracy,adequacy,completeness,timelinessoravailabilityofanyContentandarenotresponsibleforanyerrorsoromissions
(negligentorotherwise),regardlessofthecause,orfortheresultsobtainedfromtheuseofsuchContent.TheContentProvidersexpresslydisclaimliabilityforanydamages,costs,
expenses,legalfees,orlosses(includinglostincomeorlostprofitandopportunitycosts)inconnectionwithanyuseoftheContent.Areferencetoaparticularinvestmentorsecurity,a
ratingoranyobservationconcerninganinvestmentthatispartoftheContentisnotarecommendationtobuy,sellorholdanysuchinvestmentorsecurity,nordoesitaddressthe
suitabilityofaninvestmentorsecurityandshouldnotbereliedonasinvestmentadvice.
www.prudential.co.uk
AnnualReport2018 Prudential plc 229
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C3 Assets and liabilities continued
C3.2 Debt securities continued
Securitieswithcreditratingsclassifiedas‘Other’canbefurtheranalysedasfollows:
Asia – non-linked shareholder-backed
Internallyrated:
Governmentbonds
Corporatebonds–ratedasinvestmentgradebylocalexternalratingsagencies
Other
TotalAsianon-linkedshareholder-backed
31 Dec
2018 £m
31 Dec
2017 £m
36
978
130
25
959
69
1,144
1,053
31 Dec
2017 £m
Total
Total
31 Dec 2018 £m
Mortgage
-backed
securities
Other
securities
US
ImplicitratingsofotherUSdebtsecuritiesbasedonNAIC*valuations
(seebelow)
NAIC1
NAIC2
NAIC3-6
TotalUS†
2,148
2
2
2,152
2,858
2,116
35
5,009
5,006
2,118
37
7,161
3,918
1,794
57
5,769
*TheSecuritiesValuationOfficeoftheNAICclassifiesdebtsecuritiesintosixqualitycategoriesrangingfromClass1(thehighest)toClass6(thelowest).Performingsecuritiesare
designatedasClasses1to5andsecuritiesinorneardefaultaredesignatedClass6.
†Mortgage-backedsecuritiestotalling£1,947millionat31December2018havecreditratingsissuedbyStandard&Poor’sofBBB-oraboveandhencearedesignatedasinvestmentgrade.
Othersecuritiestotalling£4,974millionat31December2018withNAICratings1or2arealsodesignatedasinvestmentgrade.
UK and Europe
Government
AAAtoA-
BBBtoB-
BelowB-orunrated
TotalUKandEurope
(b) Additional analysis of US insurance operations debt securities
Corporateandgovernmentsecurityandcommercialloans:
Government
PubliclytradedandSECRule144Asecurities*
Non-SECRule144Asecurities
Asset-backedsecurities(see note (e))
TotalUSdebtsecurities†
31 Dec
2018 £m
31 Dec
2017 £m
8,150
3,034
3,813
7,994
3,141
2,436
14,997
13,571
31 Dec
2018 £m
31 Dec
2017 £m
5,465
26,196
6,329
3,604
41,594
4,835
22,849
4,468
3,226
35,378
*A1990SECrulethatfacilitatestheresaleofprivatelyplacedsecuritiesunderRule144AthatarewithoutSECregistrationtoqualifiedinstitutionalinvestors.Therulewasdesignedto
developamoreliquidandefficientinstitutionalresalemarketforunregisteredsecurities.
†DebtsecuritiesforUSoperationsincludedinthestatementoffinancialpositioncomprise:
Available-for-sale
Fairvaluethroughprofitorloss
TotalUSdebtsecurities
31 Dec
2018 £m
31 Dec
2017 £m
40,849
745
41,594
35,293
85
35,378
Realisedgainsandlosses,includingimpairments,recordedintheincomestatementareasshowninnoteB1.2ofthisreport.
230 Prudential plc AnnualReport2018
www.prudential.co.uk
C Balance sheet notes continued
(c) Movements in unrealised gains and losses on Jackson available-for-sale securities
Themovementinthestatementoffinancialpositionvaluefordebtsecuritiesclassifiedasavailable-for-salewasfromanetunrealisedgain
of£1,205milliontoanetunrealisedlossof£414millionasanalysedinthetablebelow.
Assetsfairvaluedatbelowbookvalue
Bookvalue*
Unrealisedgain(loss)
Fairvalue(asincludedinstatementoffinancialposition)
Assetsfairvaluedatorabovebookvalue
Bookvalue*
Unrealisedgain(loss)
Fairvalue(asincludedinstatementoffinancialposition)
Total
Bookvalue*
Netunrealisedgain(loss)
Fairvalue(asincludedinthefootnoteaboveintheoverviewtableandthe
statementoffinancialposition)
*Bookvaluerepresentscost/amortisedcostofthedebtsecurities.
†TranslatedattheaveragerateofUS$1.3352:£1.00.
Reflected as part of movement
in other comprehensive income
Foreign
exchange
translation
Changes in
unrealised
appreciation†
£m
£m
2018
£m
25,330
(925)
24,405
15,933
511
16,444
41,263
(414)
40,849
(43)
(776)
41
(841)
(2)
(1,617)
2017
£m
6,325
(106)
6,219
27,763
1,311
29,074
34,088
1,205
35,293
(d) US debt securities classified as available-for-sale in an unrealised loss position
(i) Fair value of securities as a percentage of book value
Thefairvalueofthedebtsecuritiesinagrossunrealisedlosspositionforvariouspercentagesofbookvalue:
Between90%and100%
Between80%and90%
Below80%:
Otherasset-backedsecurities
Corporatebonds
Total
(ii) Unrealised losses by maturity of security
1yearto5years
5yearsto10years
Morethan10years
Mortgage-backedandotherdebtsecurities
Total
31 Dec 2018 £m
31 Dec 2017 £m
Fair
value
Unrealised
loss
23,662
707
–
36
36
24,405
(809)
(104)
–
(12)
(12)
(925)
Fair
value
6,170
36
10
3
13
Unrealised
loss
(95)
(6)
(4)
(1)
(5)
6,219
(106)
31 Dec
2018 £m
31 Dec
2017 £m
(72)
(436)
(372)
(45)
(925)
(7)
(41)
(39)
(19)
(106)
www.prudential.co.uk
AnnualReport2018 Prudential plc 231
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C3 Assets and liabilities continued
C3.2 Debt securities continued
(iii) Age analysis of unrealised losses for the periods indicated
Theageanalysisofalltheunrealisedlossesintheportfoliobyreferencetothelengthoftimethesecuritieshavebeeninanunrealised
lossposition:
31 Dec 2018 £m
31 Dec 2017 £m
Lessthan6months
6monthsto1year
1yearto2years
2yearsto3years
Morethan3years
Total
Non-
investment
grade
Investment
grade
(20)
(22)
(10)
–
(2)
(54)
(141)
(440)
(142)
(123)
(25)
(871)
Total
(161)
(462)
(152)
(123)
(27)
(925)
Non-
investment
grade
Investment
grade
(4)
(1)
–
(1)
–
(6)
(31)
(4)
(49)
(6)
(10)
Total
(35)
(5)
(49)
(7)
(10)
(100)
(106)
Theageanalysisasat31December,ofthesecuritieswhosefairvalueswerebelow80percentofthebookvalue:
Age analysis
Lessthan3months
3monthsto6months
Morethan6months
Total
31 Dec 2018 £m
31 Dec 2017 £m
Fair
value
Unrealised
loss
Fair
value
Unrealised
loss
32
2
2
36
(10)
(1)
(1)
(12)
2
1
10
13
–
(1)
(4)
(5)
(e) Asset-backed securities
TheGroup’sholdingsinAsset-BackedSecurities(ABS),whichcompriseResidentialMortgage-BackedSecurities(RMBS),Commercial
Mortgage-BackedSecurities(CMBS),CollateralisedDebtObligations(CDO)fundsandotherasset-backedsecuritiesareasfollows:
Shareholder-backed business
Asiaoperations note (i)
USoperations note (ii)
UKandEuropeoperations(2018:42%AAA,13%AA) note (iii)
Otheroperations note (iv)
With-profits business
Asiaoperations note (i)
UKandEuropeoperations(2018:66%AAA,12%AA) note (iii)
Total
31 Dec
2018 £m
31 Dec
2017 £m
121
3,604
1,406
445
5,576
235
5,270
5,505
118
3,226
1,070
589
5,003
233
5,658
5,891
11,081
10,894
232 Prudential plc AnnualReport2018
www.prudential.co.uk
C Balance sheet notes continued Notes
(i)
Asia operations
TheAsiaoperations’exposuretoasset-backedsecuritiesisprimarilyheldbythewith-profitsbusinesses.Ofthe£235million(31December2017:£233million),99.8percent
(2017:98.2percent)areinvestmentgrade.
(ii) US operations
USoperations’exposuretoasset-backedsecuritiesat31Decembercomprises:
RMBS
Sub-prime(2018:1%AAA,6%AA,2%A)
Alt-A(2018:3%AAA,42%A)
Primeincludingagency(2018:14%AAA,62%AA,10%A)
CMBS(2018:80%AAA,15%AA,2%A)
CDOfunds(2018:13%AA,24%A),including£nilexposuretosub-prime
OtherABS(2018:20%AAA,14%AA,49%A),including£77millionexposuretosub-prime
Total
31 Dec
2018 £m
31 Dec
2017 £m
96
105
441
1,945
13
1,004
3,604
112
126
440
1,579
28
941
3,226
(iii) UK and Europe operations
Themajorityofholdingsoftheshareholder-backedbusinessareUKsecuritiesandrelatetoPAC’sannuitybusiness.Oftheholdingsofthewith-profitsbusinesses,£1,823million
(31December2017:£1,913million)relatestoexposuretotheUSmarketswiththeremainingexposurebeingprimarilytotheUKmarket.
(iv) Other operations
Otheroperations’exposuretoasset-backedsecuritiesisheldbyPrudentialCapitalwithnosub-primeexposure.Ofthe£445million,99percent(31December2017:96percent)
aregradedAAA.
(f) Group sovereign debt and bank debt exposure
TheGroupexposuresheldbytheshareholder-backedbusinessandwith-profitsfundsinsovereigndebtsandbankdebtsecuritiesare
analysedasfollows:
Exposure to sovereign debts
Italy
Spain
France
Germany*
OtherEurozone
Total Eurozone
UnitedKingdom
UnitedStates†
Other,includingAsia
Total
31 Dec 2018 £m
31 Dec 2017 £m
Shareholder-
backed
business
With-profits
funds
Shareholder-
backed
business
With-profits
funds
–
36
–
239
103
378
3,226
5,647
5,142
14,393
57
18
50
281
34
440
3,013
11,858
2,745
18,056
58
34
23
693
82
890
5,918
5,078
4,638
16,524
63
18
38
301
31
451
3,287
10,156
2,143
16,037
*Includingbondsguaranteedbythefederalgovernment.
†TheexposuretotheUnitedStatessovereigndebtcomprisesholdingsoftheUS,theUKandEuropeandAsiainsuranceoperations.
www.prudential.co.uk
AnnualReport2018 Prudential plc 233
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
C3 Assets and liabilities continued
C3.2 Debt securities continued
Exposure to bank debt securities
Shareholder-backed business
Covered
Senior
Total
Tier 1
Tier 2
Total
Senior debt
Subordinated debt
31 Dec 2018 £m
Spain
France
Germany
Netherlands
OtherEurozone
Total Eurozone
UnitedKingdom
UnitedStates
Other,includingAsia
Total
With-profits funds
Italy
Spain
France
Germany
Netherlands
OtherEurozone
Total Eurozone
UnitedKingdom
UnitedStates
Other,includingAsia
Total
42
20
30
–
15
107
550
–
–
657
–
–
6
140
–
–
146
909
–
575
1,630
64
119
–
69
2
254
623
2,614
759
4,250
38
17
250
46
253
74
678
850
2,418
1,459
5,405
106
139
30
69
17
361
1,173
2,614
759
4,907
38
17
256
186
253
74
824
1,759
2,418
2,034
7,035
–
14
6
3
–
23
9
1
109
142
–
–
1
14
12
–
27
2
1
339
369
–
3
89
1
–
93
164
52
369
678
–
–
95
29
1
–
125
433
311
452
–
17
95
4
–
116
173
53
478
820
–
–
96
43
13
–
152
435
312
791
1,321
1,690
31 Dec
2017 £m
Total
68
86
117
71
15
357
1,382
2,619
1,163
5,521
31
16
286
180
199
27
739
1,938
2,518
2,531
7,726
Total
106
156
125
73
17
477
1,346
2,667
1,237
5,727
38
17
352
229
266
74
976
2,194
2,730
2,825
8,725
Thetablesaboveexcludeassetsheldtocoverlinkedliabilitiesandthoseoftheconsolidatedunittrustsandsimilarfunds.Inaddition,
thetablesaboveexcludetheproportionateshareofsovereigndebtholdingsoftheGroup’sjointventureoperations.
(g) Impairment of US available-for-sale debt securities and other financial assets
InaccordancewiththeGroup’saccountingpolicysetoutinnoteA3.1,impairmentreviewswereperformedforavailable-for-sale
securitiesandloansandreceivables.
Duringtheyearended31December2018,acreditforrecoveriesnetofimpairmentof£13million(2017:creditof£1million)was
recognised.Thisincludes£15million(2017:£8million)foravailable-for-salesecuritiesheldbyJackson,offsetbyachargeof£2million
(2017:£7million)forloansandreceivablesheldacrosstheGroup.
Jackson,withthesupportofinternalcreditanalysts,regularlymonitorsandreportsonthecreditqualityofitsholdingsofdebt
securities.Inaddition,thereisaperiodicreviewofitsinvestmentsonacase-by-casebasistodeterminewhetheranydeclineinfairvalue
representsanimpairment.Investmentsinstructuredsecuritiesaresubjecttoareviewoftheirfutureestimatedcashflows,including
expectedandstresscasescenarios,toidentifypotentialshortfallsincontractualpayments(bothinterestandprincipal).Impairment
chargesarerecordedonstructuredsecuritieswhentheCompanyforecastsacontractualpaymentshortfall.Situationswheresuch
ashortfallwouldnotleadtoarecognitionofalossarerare.Theimpairmentlossreflectsthedifferencebetweenthefairvalueand
bookvalue.
In2018,theGrouprealisedgrosslossesonsalesofavailable-for-salesecuritiesof£43million(2017:£155million)with49percent
(2017:97percent)oftheselossesrelatedtothedisposaloffixedmaturitysecuritiesofthetop10individualissuers,whichweredisposed
oftolimitfuturecreditlossexposure.Ofthe£43million(2017:£155million),£4million(2017:£3million)relatestolossesonsalesof
impairedanddeterioratingsecurities.
234 Prudential plc AnnualReport2018
www.prudential.co.uk
C Balance sheet notes continued Theeffectofchangesinthekeyassumptionsthatunderpintheassessmentofwhetherimpairmenthastakenplacedependsonthe
factorsdescribedinnoteA3.1.Akeyindicatorofwhethersuchimpairmentmayariseinfuture,andthepotentialamountsatrisk,isthe
profileofgrossunrealisedlossesforfixedmaturitysecuritiesaccountedforonanavailable-for-salebasisbyreferencetothetimeperiods
bywhichthesecuritieshavebeenheldcontinuouslyinanunrealisedlosspositionandbyreferencetothematuritydateofthesecurities
concerned.
For2018,theamountofgrossunrealisedlossesforfixedmaturitysecuritiesclassifiedasavailable-for-saleunderIFRSinanunrealised
losspositionwas£925million(2017:£106million).NoteB1.2providesfurtherdetailsontheimpairmentchargesandunrealisedlossesof
Jackson’savailable-for-salesecurities.
C3.3 Loans portfolio
(a) Overview of loans portfolio
Loansareaccountedforatamortisedcostnetofimpairmentexceptfor:
— CertainmortgageloanswhichhavebeendesignatedatfairvaluethroughprofitorlossoftheUKandEuropeinsuranceoperationsas
thisloanportfolioismanagedandevaluatedonafairvaluebasis;and
— CertainpolicyloansoftheUSinsuranceoperationsthatareheldtobackliabilitiesforfundswithheldunderreinsurancearrangements
andarealsoaccountedonafairvaluebasis.
Theamountsincludedinthestatementoffinancialpositionareanalysedasfollows:
31 Dec 2018 £m
31 Dec 2017 £m
Mortgage
loans*
Policy
loans†
Other
loans‡
Asia
With-profits
Non-linkedshareholder-backed
–
156
727
226
65
203
Total
792
585
Mortgage
loans*
Policy
loans†
Other
loans‡
–
177
613
216
112
199
Total
725
592
US
Non-linkedshareholder-backed
UKandEurope
With-profits
Non-linkedshareholder-backed
Otheroperations
Totalloanssecurities
7,385
3,681
–
11,066
6,236
3,394
–
9,630
2,461
1,655
–
3
–
–
11,657
4,637
1,389
59
–
1,716
3,853
1,714
–
2,441
1,681
–
4
–
–
18,010
10,535
4,227
1,823
37
109
2,280
4,268
1,718
109
17,042
*Allmortgageloansaresecuredbyproperties.
†IntheUS£2,783million(31December2017:£2,512million)policyloansarebackingliabilitiesforfundswithheldunderreinsurancearrangementsandareaccountedforatfairvalue
throughprofitorloss.Allotherpolicyloansareaccountedforatamortisedcost,lessanyimpairment.
‡OtherloansheldinUKwith-profitsfundsarecommercialloansandcomprisemainlysyndicatedloans.
(b) Additional information on US mortgage loans
IntheUS,mortgageloansareallcommercialmortgageloansthataresecuredbythefollowingpropertytypes:industrial,multi-family
residential,suburbanoffice,retailorhotel.Theaverageloansizeis£14.0million(2017:£12.6million).Theportfoliohasacurrent
estimatedaverageloantovalueof53percent(2017:55percent).
Jacksonhadnomortgageloanswherethecontractualtermsoftheagreementshadbeenrestructuredattheendofboth2018and2017.
(c) Additional information on UK mortgage loans
TheUKwith-profitsfundinvestsinanentitythatholdsaportfolioofbuy-to-letmortgageloans.Thevehiclefinanceditsacquisitions
throughtheissueofdebtinstruments,largelytoexternalparties,securitisedupontheloansacquired.Thesethird-partyborrowingshave
norecoursetoanyotherassetsoftheGroupandtheGroup’sexposureislimitedtotheamountinvestedbytheUKwith-profitsfund.
Bycarryingvalue,£1,237millionofthe£1,655million(31December2017:£1,267millionof£1,681million)mortgageloansheldby
theUKshareholder-backedbusinessrelatestolifetime(equityrelease)mortgagebusinesswhichhasanaverageloantopropertyvalue
of33percent(31December2017:31percent).
www.prudential.co.uk
AnnualReport2018 Prudential plc 235
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C3 Assets and liabilities continued
C3.4 Financial instruments – additional information
C3.4(a) Financial risk
(i) Liquidity analysis
Contractual maturities of financial liabilities on an undiscounted cash flow basis
Thefollowingtablesetsoutthecontractualmaturitiesforapplicableclassesoffinancialliabilities,excludingderivativeliabilitiesand
investmentcontractsthatareseparatelypresented.Thefinancialliabilitiesareincludedinthecolumnrelatingtothecontractual
maturitiesattheundiscountedcashflows(includingcontractualinterestpayments)duetobepaidassumingconditionsareconsistent
withthoseofyearend.
Total
carrying
value
1 year
or less
After 1
year to
5 years
After 5
years to
10 years
After 10
years to
15 years
After 15
years to
20 years
Over
20 years
No stated
maturity
Total
31 Dec 2018 £m
Financial liabilities
Corestructuralborrowings
ofshareholder-financed
businesses C6.1
Operationalborrowings
attributableto
shareholder-financed
businesses C6.2
Borrowingsattributableto
with-profitsfunds C6.2
Obligationsunderfunding,
securitieslendingand
saleandrepurchase
agreements
Accruals,deferredincome
andotherliabilities
Netassetvalueattributable
tounitholdersof
consolidatedunittrusts
andsimilarfunds
Financial liabilities
Corestructuralborrowings
ofshareholder-financed
businesses C6.1
Operationalborrowings
attributableto
shareholder-financed
businesses C6.2
Borrowingsattributableto
with-profitsfunds C6.2
Obligationsunderfunding,
securitieslendingand
saleandrepurchase
agreements
Accruals,deferredincome
andotherliabilities
Netassetvalueattributable
tounitholdersof
consolidatedunittrusts
andsimilarfunds
7,664
298
1,759
1,526
1,843
1,070
6,573
2,924
15,993
998
3,940
839
701
91
1,246
6,989
6,989
–
15,248
10,844
470
68
719
–
71
–
–
–
274
142
2,086
–
–
–
998
5,168
6,989
–
–
–
90
109
352
3,535
15,471
11,651
11,651
–
–
–
–
–
–
11,651
Total
46,490
31,322
3,566
2,384
2,207
1,321
9,011
6,459
56,270
Total
carrying
value
1 year
or less
After 1
year to
5 years
After 5
years to
10 years
After 10
years to
15 years
After 15
years to
20 years
Over
20 years
No stated
maturity
Total
31 Dec 2017 £m
6,280
473
784
1,350
1,389
576
3,324
3,160
11,056
1,791
1,130
3,716
905
5,662
5,662
14,185
10,088
597
922
–
469
8,889
8,889
–
69
32
–
68
–
–
29
–
85
–
–
29
–
106
–
711
–
–
1,796
1,810
104
3,831
–
–
5,662
320
3,267
14,403
–
–
8,889
5,454
6,531
45,637
Total
40,523
27,147
2,772
1,519
1,503
236 Prudential plc AnnualReport2018
www.prudential.co.uk
C Balance sheet notes continued Maturity analysis of derivatives
Thefollowingtableshowsthegrossandnetderivativepositionstogetherwithamaturityprofileofthenetderivativeposition:
Carrying value of net derivative £m
Maturity profile of net derivative position £m
Derivative
assets
Derivative
liabilities
3,494
4,801
(3,506)
(2,755)
Net
derivative
position
(12)
2,046
1 year
or less
292
2,359
After 1
year to
3 years
(8)
(16)
After 3
years to
5 years
(4)
(9)
After 5
years
30
(1)
Total
310
2,333
2018
2017
Themajorityofderivativeassetsandliabilitieshavebeenincludedatfairvaluewithintheoneyearorlesscolumn,representingthebasis
onwhichtheyaremanaged(ietomanageprincipallyassetorliabilityvalueexposures).TheGrouphasnocashflowhedgesand,in
general,contractualmaturitiesarenotconsideredessentialforanunderstandingofthetimingofthecashflowsfortheseinstruments.
Theonlyexceptioniscertainidentifiedinterestrateswapswhichareexpectedtobehelduntilmaturityforthepurposesofmatching
cashflowsonseparatelyheldassetsandliabilities.Fortheseinstrumentstheundiscountedcashflows(includingcontractualinterest
amounts)duetobepaidundertheswapcontractassumingconditionsareconsistentwiththoseatyearendareincludedinthecolumn
relatingtothecontractualmaturityofthederivative.
Maturity analysis of investment contracts
Thetablebelowshowsthematurityprofileforinvestmentcontractsonundiscountedcashflowprojectionsofexpectedbenefit
payments.
31 Dec 2018
31Dec2017
1 year
or less
8
8
After 1
year to
5 years
31
29
After 5
years to
10 years
After 10
years to
15 years
After 15
years to
20 years
29
27
20
19
12
13
Over
20 years
17
14
Total
undis-
counted
value
117
110
Total
carrying
value
87
83
£billion
Theundiscountedcashflowinmaturityprofileaboveexcludescertaincorporateunit-linkedbusinesswithgrosspolicyholderliabilities
withacarryingvalueof£11billion(31December2017:£12billion)whichhavenostatedmaturitybutwhicharerepayableondemand.
Mostinvestmentcontractshaveoptionstosurrenderearly,oftensubjecttosurrenderorotherpenalties.Therefore,mostcontracts
canbesaidtohaveacontractualmaturityoflessthanoneyear,buttheadditionalchargesandtermofthecontractsmeantheseare
unlikelytobeexercisedinpracticeandthemoreusefulinformationistopresentinformationonexpectedpayment.
ThevastmajorityoftheGroup’sfinancialassetsareheldtobacktheGroup’spolicyholderliabilities.Althoughasset/liabilitymatching
isanimportantcomponentofmanagingpolicyholderliabilities(boththoseclassifiedasinsuranceandthoseclassifiedasinvestments),
thisprofileismainlyrelevantformanagingmarketriskratherthanliquidityrisk.Withineachbusinessunitthisasset/liabilitymatchingis
performedonaportfolio-by-portfoliobasis.
Intermsofliquidityrisk,alargeproportionofthepolicyholderliabilitiescontaindiscretionarysurrendervaluesorsurrendercharges,
meaningthatmanyoftheGroup’sliabilitiesareexpectedtobeheldforthelongterm.MuchoftheGroup’sinvestmentportfoliosarein
marketablesecurities,whichcanthereforebeconvertedquicklytoliquidassets.
Forthereasonsprovidedabove,ananalysisoftheGroup’sassetsbycontractualmaturityisnotconsideredmeaningfultoevaluatethe
natureandextentoftheGroup’sliquidityrisk.
(ii) Credit risk
TheGroup’smaximumexposuretocreditriskoffinancialinstrumentsbeforeanyallowanceforcollateralorallocationoflossesto
policyholdersisrepresentedbythecarryingvalueoffinancialinstrumentsonthebalancesheetthathaveexposurestocreditrisk
comprisingcashandcashequivalents,deposits,debtsecurities,loansandderivativeassets,andotherdebtors,thecarryingvalueof
whicharedisclosedatthestartofthisnoteandnoteC3.4(b)belowforderivativeassets.Thecollateralinplaceinrelationtoderivativesis
describedinnoteC3.4(c)below.NoteC3.3describesthesecurityfortheloansheldbytheGroup.TheGroup’sexposuretocreditriskis
furtherdiscussedinnoteC7below.
Ofthetotalloansandreceivablesheld,£27million(31December2017:£23million)arepasttheirduedatebutarenotimpaired.Of
thetotalpastduebutnotimpaired,£22millionarelessthanoneyearpasttheirduedate(31December2017:£17million).TheGroup
expectsfullrecoveryoftheseloansandreceivables.
Financialassetsthatwouldhavebeenpastdueorimpairedhadthetermsnotbeenrenegotiatedamountedto£23million
(31December2017:£22million).
Inaddition,during2018and2017theGroupdidnottakepossessionofanyothercollateralheldassecurity.
FurtherdetailsofcollateralandpledgesareprovidedinnoteC3.4(c)below.
www.prudential.co.uk
AnnualReport2018 Prudential plc 237
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C3 Assets and liabilities continued
C3.4 Financial instruments – additional information continued
C3.4(a) Financial riskcontinued
(iii) Foreign exchange risk
Asat31December2018,theGroupheld26percent(31December2017:24percent)and13percent(31December2017:16percent)
ofitsfinancialassetsandfinancialliabilitiesrespectively,incurrencies,mainlyUSdollarandEuro,otherthanthefunctionalcurrencyof
therelevantbusinessunit.
Ofthesefinancialassets,49percent(31December2017:52percent)areheldbytheUKwith-profitsfund,allowingthefundto
obtainexposuretoforeignequitymarkets.
Ofthesefinancialliabilities,28percent(31December2017:28percent)areheldbytheUKwith-profitsfund,mainlyrelatingto
foreigncurrencyborrowings.
Theexchangerisksinherentintheseexposuresaremitigatedthroughtheuseofderivatives,mainlyforwardcurrencycontracts(note
C3.4(b)below).
Theamountofexchangegainrecognisedintheincomestatementin2018,exceptforthosearisingonfinancialinstrumentsmeasured
atfairvaluethroughprofitorloss,is£281million(2017:£112millionlossmainlyarisingoninvestmentsoftheUKwith-profitsfund).
C3.4(b) Derivatives and hedging
Derivatives
TheGroupentersintoavarietyofexchangetradedandover-the-counterderivativefinancialinstruments,includingfutures,options,
forwardcurrencycontractsandswapssuchasinterestrateswaps,cross-currencyswaps,swaptionsandcreditdefaultswaps.
Allover-the-counterderivativetransactions,withtheexceptionofsomeAsiatransactions,areconductedunderstandardisedISDA
(InternationalSwapsandDerivativesAssociationInc)masteragreementsandtheGrouphascollateralagreementsbetweenthe
individualGroupentitiesandrelevantcounterpartiesinplaceundereachofthesemarketmasteragreements.
UnderArticle11oftheEuropeanMarketInfrastructureRegulationonderivatives,centralcounterpartiesandtraderepositories
(‘EMIR’)andCommissionDelegatedRegulation(EU)2016/2251supplementingEMIR,marketparticipantstransactinginnon-cleared
OTCderivativesarerequiredtoexchangecollateraltocovervariationandinitialmargin.However,tradesbetweencounterparties
belongingtothesamegroupareexemptfromthesemarginrequirementssubjecttocertaincriteria.
PrudentialCapitalplc(LegalEntityIdentifierreference(‘LEI’)CHW8NHK268SFPTV63Z64)hasenteredintosuchderivative
agreementswiththefollowingsixentitiesintheGroup.Thesecounterpartypairingsmeetthecriteriatobeeligibleforintra-group
exemptionstothemarginrequirementsandhavebeenapprovedbytheFinancialConductAuthority:
31 Dec 2018
Legal Entity Identifier (LEI)
Relationship between parties
Type of
exemption
Aggregate notional of
OTC derivatives
contract £m
Counterparty
Prudentialplc
PrudentialHoldingsLimited
Prudential(USHoldCo1)Limited
5493001Z3ZE83NG
K8Y12
549300JVAI8CZD4
HD451
549300JNYGDP2X
OLWR47
PrudentialCorporationHoldingsLimited 549300KDOPLFHA
PrudentialLifetimeMortgagesLimited
PrudentialDistributionLimited
W51H26
5493001GSK4HF84
IOB02
549300I8LYOK91H
BX439
Partofthesamegroup
holdingcompany
Partofthesamegroup
holdingcompany
Partofthesamegroup
holdingcompany
Partofthesamegroup
holdingcompany
Partofthesamegroup
holdingcompany
Partofthesamegroup
holdingcompany
Full
Full
Full
Full
Full
Full
3,633
56
2,717
927
37
7
238 Prudential plc AnnualReport2018
www.prudential.co.uk
C Balance sheet notes continued Derivativesareusedforefficientportfoliomanagementtoobtaincosteffectivemanagementofexposuretovariousmarketsin
accordancewiththeGroup’sinvestmentstrategiesandtomanageexposuretointerestrate,currency,creditandotherbusinessrisks.
TheGroupalsousesinterestratederivativestoreduceexposuretointerestratevolatility.Inparticular:
— UKwith-profitsfundsusederivativesforefficientportfoliomanagementorreductionininvestmentrisks.ForUKannuitybusiness
derivativesareusedtoassistwithassetandliabilitycashflowmatching;
— USoperationsandsomeoftheUKandEuropeoperationsholdlargeamountsofinterest-ratesensitiveinvestmentsthatcontaincredit
risksonwhichacertainlevelofdefaultsisexpected.Thesebusinesseshavepurchasedsomeswaptionstomanagethedefaultrisk
oncertainunderlyingassetsandhencereducetheamountofregulatorycapitalheldtosupporttheassets;and
— Someproducts,especiallyintheUS,haveguaranteefeatureslinkedtoequityindices.Amismatchbetweenguaranteedproduct
liabilitiesandtheperformanceoftheunderlyingassetsexposestheGrouptoequityindexrisk.Inordertomitigatethisrisk,the
relevantbusinessunitspurchaseswaptions,equityoptionsandfuturestobettermatchassetperformancewithliabilitiesunder
equity-indexedproducts.
Hedging
TheGrouphasformallyassessedanddocumentedtheeffectivenessofthefollowingnetinvestmenthedgesunderIAS39.At
31December2018,theGrouphasdesignatedperpetualsubordinatedcapitalsecuritiestotallingUS$3.7billion(31December2017:
US$4.3billion)asanetinvestmenthedgetohedgethecurrencyrisksrelatedtothenetinvestmentinJackson.Thecarryingvalueofthe
subordinatedcapitalsecuritieswas£2,909millionasat31December2018(31December2017:£3,140million).Theforeignexchange
lossof£199million(2017:gainof£325million)ontranslationoftheborrowingstopoundssterlingatthestatementoffinancialposition
dateisrecognisedinthetranslationreserveinshareholders’equity.Thisnetinvestmenthedgewas100percenteffective.
TheGrouphasnocashflowhedgesorfairvaluehedgesinplace.
C3.4(c) Derecognition, collateral and offsetting
Securities lending and reverse repurchase agreements
TheGrouphasenteredintosecuritieslending(includingrepurchaseagreements)wherebyblocksofsecuritiesareloanedtothird
parties,primarilymajorbrokeragefirms.Typically,thevalueofcollateralassetsgrantedtotheGroupinthesetransactionsisinexcess
ofthevalueofsecuritieslent,withtheexcessdeterminedbythequalityofthecollateralassetsgranted.Collateralrequirementsare
calculatedonadailybasis.TheloanedsecuritiesarenotremovedfromtheGroup’sconsolidatedstatementoffinancialposition,rather
theyareretainedwithintheappropriateinvestmentclassification.Collateraltypicallyconsistsofcash,debtsecurities,equitysecurities
andlettersofcredit.
At31December2018,theGrouphas£8,278million(31December2017:£8,232million)oflentsecuritiesandassetssubjectto
repurchaseagreements,ofwhich£8,245million(31December2017:£8,182million)relatedtotheUKwith-profitsfund.Thecashand
securitiescollateralheldorpledgedundersuchagreementswere£8,750million(31December2017:£8,733million)ofwhich
£8,662million(31December2017:£8,679million)washeldbytheUKwith-profitsfund.
At31December2018,theGrouphadenteredintoreverserepurchasetransactionsunderwhichitpurchasedsecuritiesandhad
takenontheobligationtoresellthesecurities.Thefairvalueofthecollateralheldinrespectofthesetransactionswas£10,633million
(31December2017:£10,550million).
Collateral and pledges under derivative transactions
At31December2018,theGrouphadpledged£3,265million(31December2017:£2,302million)forliabilitiesandheldcollateralof
£2,012million(31December2017:£3,958million)inrespectofover-the-counterderivativetransactions.
Thesetransactionsareconductedundertermsthatareusualandcustomarytocollateralisedtransactionsincluding,whererelevant,
standardsecuritieslendingandrepurchaseagreements.
TheGrouphasenteredintocollateralarrangementsinrelationtoover-the-counterderivativetransactions,whichpermitsaleor
re-pledgingofunderlyingcollateral.Duringtheyear,theGrouphasnotsoldanycollateralheld(2017:nil).Asof31December2018,the
valueofcollateralre-pledgedbytheGroupamountedto£698million(31December2017:£852million).Allover-the-counterderivative
transactions,withtheexceptionofsomeAsiatransactions,areconductedunderstandardisedInternationalSwapsandDerivatives
Association(ISDA)masteragreements.Thecollateralmanagementforthesetransactionsisconductedundertheusualandcustomary
termsandconditionssetoutintheCreditSupportAnnextotheISDAmasteragreement.
Other collateral
At31December2018,theGrouphadpledgedcollateralof£2,793million(31December2017:£3,412million)inrespectofother
transactions.ThisprincipallyarisesfromJackson’smembershipoftheFederalHomeLoanBankofIndianapolisprimarilyforthepurpose
ofparticipatinginthebank’scollateralisedloanadvanceprogrammewithshort-termandlong-termfundingfacilities.
www.prudential.co.uk
AnnualReport2018 Prudential plc 239
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C3 Assets and liabilities continued
C3.4 Financial instruments – additional information continued
C3.4(c) Derecognition, collateral and offsettingcontinued
Offsetting assets and liabilities
TheGroup’sderivativeinstruments,repurchaseagreementsandsecuritieslendingagreementsaresubjecttomasternetting
arrangementsandcollateralarrangements.Amasternettingarrangementwithacounterpartycreatesarightofoffsetforamountsdueto
andduefromthatsamecounterpartythatisenforceableintheeventofadefaultorbankruptcy.TheGrouprecognisesamountssubject
tomasternettingarrangementsonagrossbasiswithintheconsolidatedbalancesheets.
ThefollowingtablespresentthegrossandnetinformationabouttheGroup’sfinancialinstrumentssubjecttomasternetting
arrangements:
Financialassets:
Derivativeassets
Reverserepurchaseagreements
Totalfinancialassets
Financialliabilities:
Derivativeliabilities
Securitieslendingandrepurchaseagreements
Totalfinancialliabilities
Financialassets:
Derivativeassets
Reverserepurchaseagreements
Totalfinancialassets
Financialliabilities:
Derivativeliabilities
Securitieslendingandrepurchaseagreements
Totalfinancialliabilities
Gross amount
included
in the
consolidated
statement of
financial
position
note(i)
31 Dec 2018 £m
Related amounts not offset in the consolidated
statement of financial position
Financial
instruments
note(ii)
Cash
collateral
Securities
collateral
note(iii)
Net amount
3,229
11,597
14,826
(1,261)
–
(1,261)
(1,687)
–
(1,687)
(166)
(11,606)
(11,772)
(3,189)
(1,258)
(4,447)
1,261
–
1,261
710
34
744
1,058
1,205
2,263
115
(9)
106
(160)
(19)
(179)
Gross amount
included
in the
consolidated
statement of
financial
position
note(i)
4,718
10,280
14,998
(2,301)
(1,410)
(3,711)
31 Dec 2017 £m
Related amounts not offset in the consolidated
statement of financial position
Financial
instruments
note(ii)
Cash
collateral
Securities
collateral
note(iii)
Net amount
(946)
–
(946)
946
–
946
(2,641)
–
(2,641)
(984)
(10,270)
(11,254)
420
52
472
893
1,332
2,225
147
10
157
(42)
(26)
(68)
Notes
(i)
(ii)
(iii)
TheGrouphasnotoffsetanyoftheamountsincludedintheconsolidatedstatementoffinancialposition.
RepresentstheamountthatcouldbeoffsetundermasternettingorsimilararrangementswheretheGroupdoesnotsatisfythefullcriteriatooffsetontheconsolidatedstatement
offinancialposition.
Excludesinitialmarginamountsforexchange-tradedderivatives.
Inthetablesabove,theamountsofassetsorliabilitiesincludedintheconsolidatedstatementoffinancialpositionwouldbeoffsetfirst
byfinancialinstrumentsthathavetherightofoffsetundermasternettingorsimilararrangementswithanyremainingamountreduced
bytheamountofcashandsecuritiescollateral.Theactualamountofcollateralmaybegreaterthanamountspresentedinthetables.
240 Prudential plc AnnualReport2018
www.prudential.co.uk
C Balance sheet notes continued C4 Policyholder liabilities and unallocated surplus
Thenoteprovidesinformationofpolicyholderliabilitiesandunallocatedsurplusofwith-profitsfundsheldontheGroup’sstatement
offinancialposition:
C4.1 Movement and duration of liabilities
C4.1(a) Group overview
(i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds
At1January2017
Comprising:
– Policyholder liabilities on the consolidated statement of financial position note (i)
– Unallocated surplus of with-profits funds on the consolidated statement
of financial position
– Group's share of policyholder liabilities of joint ventures and associate note (ii)
Premiums
Surrenders
Maturities/deaths
Netflows
Shareholders'transferspost-tax
Investment-relateditemsandothermovements
Foreignexchangetranslationdifferences
At 31 December 2017/1 January 2018
Comprising:
Asia
£m
noteC4.1(b)
US
£m
noteC4.1(c)
UK and
Europe
£m
noteC4.1(d)
Total
£m
62,784
177,626
169,304
409,714
53,716
177,626
157,654
388,996
2,667
6,401
11,863
(3,079)
(1,909)
6,875
(54)
8,182
(3,948)
–
–
15,219
(10,017)
(2,065)
3,137
–
16,251
(16,290)
11,650
–
14,810
(6,939)
(7,135)
736
(233)
11,146
113
14,317
6,401
41,892
(20,035)
(11,109)
10,748
(287)
35,579
(20,125)
73,839
180,724
181,066
435,629
– Policyholder liabilities on the consolidated statement of financial position note (i)
(excludes £32 million classified as unallocated to a segment)
62,898
180,724
167,589
411,211
– Unallocated surplus of with-profits funds on the consolidated statement
of financial position
– Group's share of policyholder liabilities of joint ventures and associate note (ii)
ReclassificationofreinsuredUKannuitycontractsasheldforsale note (iii)
Premiums
Surrenders
Maturities/deaths
Netflows
AdditionforclosedblockofgrouppayoutannuitiesintheUS note (iv)
Shareholders'transferspost-tax
Investment-relateditemsandothermovements
Foreignexchangetranslationdifferences
At 31 December 2018
Comprising:
3,474
7,467
–
13,187
(2,793)
(1,978)
8,416
–
(65)
(2,784)
3,357
–
–
–
13,940
(12,141)
(2,012)
(213)
4,143
–
(9,999)
10,945
13,477
–
(10,858)
14,011
(6,780)
(6,796)
435
–
(259)
(5,481)
(14)
16,951
7,467
(10,858)
41,138
(21,714)
(10,786)
8,638
4,143
(324)
(18,264)
14,288
82,763
185,600
164,889
433,252
– Policyholder liabilities on the consolidated statement of financial position note (i)
(excludes £39 million classified as unallocated to a segment)
72,107
185,600
151,555
409,262
– Unallocated surplus of with-profits funds on the consolidated statement
of financial position
– Group's share of policyholder liabilities of joint ventures and associate note (ii)
Averagepolicyholderliabilitybalances note (v)
2018
2017
2,511
8,145
–
–
13,334
–
15,845
8,145
75,309
182,126
162,287
419,722
65,241
179,175
162,622
407,038
www.prudential.co.uk
AnnualReport2018 Prudential plc 241
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C4 Policyholder liabilities and unallocated surplus continued
C4.1 Movement and duration of liabilities continued
C4.1(a) Group overviewcontinued
Notes
(i)
ThepolicyholderliabilitiesoftheAsiainsuranceoperationsof£72,107million(31December2017:£62,898million),showninthetableabove,isafterdeductingtheintra-group
reinsuranceliabilitiescededbytheUKandEuropeinsuranceoperationsof£1,109million(31December2017:£1,235million)totheHongKongwith-profitsbusiness.Includingthis
amounttotalAsiapolicyholderliabilitiesare£73,216million(31December2017:£64,133million).
TheGroup’sinvestmentsinjointventuresandassociateareaccountedforonanequitymethodbasisintheGroup’sbalancesheet.TheGroup’sshareofthepolicyholderliabilities
asshownaboverelatetolifebusinessesinChina,IndiaandoftheTakafulbusinessinMalaysia.
ThereclassificationasheldforsaleofthereinsuredUKannuitybusinessthatwillbetransferredtoRothesaylifeoncethePartVIIprocessiscompletereflectsthevalueof
policyholderliabilitiesheldat1January2018.
InOctober2018,JacksonenteredintoanagreementwithJohnHancockLifetoreinsure100percentofthegrouppayoutannuitybusiness.Thetransactionresultedinanincrease
topolicyholderliabilitiesofJackson£4.1billionattheinceptionofthecontract.
Averageshavebeenbasedonopeningandclosingbalancesandadjustedforacquisitions,disposalsandcorporatetransactionsarisingintheyearandexcludeunallocatedsurplus
ofwith-profitsfunds.
(ii)
(iii)
(iv)
(v)
Theitemsaboverepresenttheamountattributabletochangesinpolicyholderliabilitiesandunallocatedsurplusofwith-profitsfunds
asaresultofeachofthecomponentslisted.Thepolicyholderliabilitiesshownincludeinvestmentcontractswithoutdiscretionary
participationfeatures(asdefinedinIFRS4)andtheirfullmovementintheyearbutexcludeliabilitiesthathavenotbeenallocatedto
areportingsegment.Theitemsaboveareshowngrossofexternalreinsurance.
Theanalysisincludestheimpactofpremiums,claimsandinvestmentmovementsonpolicyholders’liabilities.Theimpactdoesnot
representpremiums,claimsandinvestmentmovementsasreportedintheincomestatement.Forexample,thepremiumsshownabove
willexcludeanydeductionsforfees/charges.Claims(surrenders,maturitiesanddeaths)representthepolicyholderliabilitiesprovision
releasedratherthantheclaimamountpaidtothepolicyholder.
(ii) Analysis of movements in policyholder liabilities for shareholder-backed business
At1January2017
Premiums
Surrenders
Maturities/deaths
Netflows note (i)
Investment-relateditemsandothermovements
Foreignexchangetranslationdifferences
At 31 December 2017/1 January 2018
Comprising:
– Policyholder liabilities on the consolidated statement of financial position
(excludes £32 million classified as unallocated to a segment)
– Group's share of policyholder liabilities relating to joint ventures
and associate
ReclassificationofreinsuredUKannuitycontractsasheldforsale note (ii)
Premiums
Surrenders
Maturities/deaths
Netflows note (i)
AdditionforclosedblockofgrouppayoutannuitiesintheUS note (iii)
Investment-relateditemsandothermovements
Foreignexchangetranslationdifferences
At 31 December 2018
Comprising:
Asia
£m
32,851
6,064
(2,755)
(1,008)
2,301
3,797
(1,547)
US
£m
177,626
15,219
(10,017)
(2,065)
3,137
16,251
(16,290)
UK and
Europe
£m
56,158
2,283
(2,433)
(2,571)
(2,721)
2,930
–
Total
£m
266,635
23,566
(15,205)
(5,644)
2,717
22,978
(17,837)
37,402
180,724
56,367
274,493
29,935
180,724
56,367
267,026
7,467
–
6,752
(2,455)
(1,046)
3,251
–
(1,204)
1,148
–
–
7,467
–
13,940
(12,141)
(2,012)
(213)
4,143
(9,999)
10,945
(10,858)
1,486
(2,016)
(2,244)
(2,774)
–
(1,975)
–
(10,858)
22,178
(16,612)
(5,302)
264
4,143
(13,178)
12,093
40,597
185,600
40,760
266,957
– Policyholder liabilities on the consolidated statement of financial position
(excludes £39 million classified as unallocated to a segment)
– Group's share of policyholder liabilities relating to joint ventures
32,452
185,600
40,760
258,812
and associate
8,145
–
–
8,145
Notes
(i)
(ii)
(iii)
IncludingnetflowsoftheGroup’sinsurancejointventuresandassociate.
ThereclassificationasheldforsaleofthereinsuredUKannuitybusinessthatwillbetransferredtoRothesaylifeoncethePartVIIprocessiscompletereflectsthosepolicyholder
liabilitiesheldat1January2018.
InOctober2018,JacksonenteredintoanagreementwithJohnHancockLifetoreinsure100percentofthegrouppayoutannuitybusiness.Thetransactionresultedinanincrease
topolicyholderliabilitiesofJackson£4.1billionattheinceptionofthecontract.
242 Prudential plc AnnualReport2018
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C Balance sheet notes continued (iii) Movement in insurance contract liabilities and unallocated surplus of with-profits funds
FurtheranalysisofthemovementintheyearoftheGroup’sinsurancecontractliabilities,grossandreinsuranceshare,investment
contractsandunallocatedsurplusofwith-profitsfunds(excludingthoseheldbyjointventuresandassociate)isprovidedbelow:
At1January2017
Incomeandexpenseincludedintheincomestatement
Othermovementsincludingamountsincludedinothercomprehensive
income note (i)
Foreignexchangetranslationdifferences
At 31 December 2017/1 January 2018
Incomeandexpenseincludedintheincomestatement
Othermovementsincludingamountsincludedinothercomprehensive
income note (ii)
Foreignexchangetranslationdifferences
At 31 December 2018
Insurance contract liabilities
Gross
£m
Reinsurers’
share
note(ii)
£m
Investment
contracts
note(iii)
£m
(316,436)
(31,106)
10,051
365
(72,560)
(11,179)
Unallocated
surplus of
with-profits
funds
£m
(14,317)
(2,871)
(78)
315
(35)
19,405
(328,172)
8,994
–
(743)
374
294
9,673
11,440
(83,071)
(4,009)
(16,951)
1,289
10,502
(13,990)
(10,502)
533
643
(198)
(38)
(145)
(322,666)
11,144
(86,635)
(15,845)
Notes
(i)
(ii)
(iii)
Othermovementsincludepremiumsreceivedandclaimspaidoninvestmentcontractswithoutdiscretionaryparticipatingfeatures,whicharetakendirectlytothestatement
offinancialpositioninaccordancewithIAS39,changesintheunallocatedsurplusofwith-profitsfundsresultingfromactuarialgainsandlossesontheGroup’sdefinedbenefit
pensionschemes,whicharerecogniseddirectlyinothercomprehensiveincomeandbalancesheetreallocationswhichtotalled£10,502millionin2018(2017:£(35)million).
The2018amountrepresentsthereclassificationofthereinsuredUKannuitybusinessasheldforsalevalueasat31December2018.
Includesreinsurers’shareofclaimsoutstandingof£1,005million(2017:£953million).
Thiscomprisesinvestmentcontractswithdiscretionaryparticipationfeaturesof£67,413million(2017:£62,677million)andinvestmentcontractswithoutdiscretionary
participationfeaturesof£19,222million(2017:£20,394million).
Thetotalchargeforbenefitandclaimsshownintheincomestatementcomprisestheamountsshownas‘incomeandexpenseincluded
intheincomestatement’inthetableabovetogetherwithclaimspaidof£32,396millionintheperiod(2017:£29,497million)netof
amountsattributabletoreinsurersof£2,114million(2017:£1,828million).In2017,theincomestatementchargealsoincludedthechange
inreservesfortheheldforsaleKoreabusinessof£72million.
(iv) Reinsurers’ share of insurance contract liabilities
Insurancecontractliabilities
Claimsoutstanding
Total
Asia
2,675
102
2,777
US
5,910
752
6,662
31 Dec 2018 £m
UK and
Europe
Unallocated to
a segment
1,554
149
1,703
–
2
2
Total
10,139
1,005
11,144
31 Dec
2017 £m
Total
8,720
953
9,673
TheGroupcedescertainbusinesstootherinsurancecompanies.AlthoughthecedingofinsurancedoesnotrelievetheGroupfrom
itsliabilitytoitspolicyholders,theGroupparticipatesinsuchagreementsforthepurposeofmanagingitslossexposure.TheGroup
evaluatesthefinancialconditionofitsreinsurersandmonitorsconcentrationofcreditriskfromsimilargeographicregions,activities
oreconomiccharacteristicsofthereinsurerstominimiseitsexposurefromreinsurerinsolvencies.Ofthereinsurers’shareofinsurance
contractliabilitiesbalanceof£11,144millionat31December2018(31December2017:£9,673million),86percent(31December2017:
97percent)ofthebalancewerefromreinsurerswithStandard&Poor’sratingA-andabove.
Thereinsurers’shareofinsurancecontractliabilitiesforAsiaprimarilyrelatestoprotectionbusinesswritteninHongKong.
ThereinsuranceassetforJacksonasshowninthetableaboveprimarilyrelatestocertainfullycollateralisedformerREALICbusiness
retainedbySwissRethrough100percentreinsuranceagreements.ApartfromthereinsuranceofREALICbusiness,theprincipal
reinsurancecededbyJacksonoutsidetheGroupisonterm-lifeinsurance,directandassumedaccidentandhealthbusinessandGMIB
variableannuityguarantees.Netcommissionsreceivedoncededbusinessandclaimsincurredcededtoexternalreinsurerstotalled
£7millionand£489millionrespectivelyduring2018(2017:£28millionand£526millionrespectively).Therewerenodeferredgains
orlossesonreinsurancecontractsineither2018or2017.
FurtherinformationonthereinsuranceagreementwithRothesayLifeenteredintobytheGroup’sUKandEuropeinsurancebusiness
in2018andlongevityreinsurancetransactionsoncertainaspectsoftheUK’sannuitybusinessin2017isprovidedinnotesD1.1and
B3(iii).Thegainsandlossesrecognisedinprofitorlossfortheotherreinsurancecontractswrittenintheyearwereimmaterial.
www.prudential.co.uk
AnnualReport2018 Prudential plc 243
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C4 Policyholder liabilities and unallocated surplus continued
C4.1 Movement and duration of liabilities continued
C4.1(b) Asia insurance operations
(i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds
Areconciliationofthetotalpolicyholderliabilitiesandunallocatedsurplusofwith-profitsfundsofAsiainsuranceoperationsfromthe
beginningoftheyeartotheendoftheyearisasfollows:
At1January2017
Comprising:
– Policyholder liabilities on the consolidated statement of financial position
– Unallocated surplus of with-profits funds on the consolidated statement
of financial position
– Group's share of policyholder liabilities relating to joint ventures
and associate note (i)
Premiums
Newbusiness
In-force
Surrenders note (ii)
Maturities/deaths
Netflows note (iii)
Shareholders'transferspost-tax
Investment-relateditemsandothermovements
Foreignexchangetranslationdifferences note (v)
At 31 December 2017/1 January 2018
Comprising:
With-profits
business
£m
note(vi)
Unit-linked
liabilities
£m
Other
business
£m
Total
£m
29,933
17,507
15,344
62,784
27,266
14,289
12,161
53,716
2,667
–
1,143
4,656
5,799
(324)
(901)
4,574
(54)
4,385
(2,401)
–
3,218
1,298
1,637
2,935
(2,288)
(150)
497
–
2,830
(807)
–
3,183
999
2,130
3,129
(467)
(858)
1,804
–
967
(740)
2,667
6,401
3,440
8,423
11,863
(3,079)
(1,909)
6,875
(54)
8,182
(3,948)
36,437
20,027
17,375
73,839
– Policyholder liabilities on the consolidated statement of financial position
– Unallocated surplus of with-profits funds on the consolidated statement
32,963
16,263
13,672
62,898
of financial position
3,474
–
–
3,474
– Group's share of policyholder liabilities relating to joint ventures
and associate note (i)
Premiums
Newbusiness
In-force
Surrenders note (ii)
Maturities/deaths
Netflows note (iii)
Shareholders'transferspost-tax
Investment-relateditemsandothermovements note (iv)
Foreignexchangetranslationdifferences note (v)
At 31 December 2018
Comprising:
–
3,764
3,703
7,467
1,155
5,280
6,435
(338)
(932)
5,165
(65)
(1,580)
2,209
1,426
1,767
3,193
(1,904)
(140)
1,149
–
(1,425)
431
1,085
2,474
3,559
(551)
(906)
2,102
–
221
717
3,666
9,521
13,187
(2,793)
(1,978)
8,416
(65)
(2,784)
3,357
42,166
20,182
20,415
82,763
– Policyholder liabilities on the consolidated statement of financial position
– Unallocated surplus of with-profits funds on the consolidated statement
39,655
16,368
16,084
72,107
of financial position
2,511
–
–
2,511
– Group's share of policyholder liabilities relating to joint ventures
and associate note (i)
Averagepolicyholderliabilitybalances note (vii)
2018
2017
–
3,814
4,331
8,145
36,309
30,115
20,105
18,767
18,895
16,359
75,309
65,241
244 Prudential plc AnnualReport2018
www.prudential.co.uk
C Balance sheet notes continued Notes
(i)
TheGroup’sinvestmentinjointventuresareaccountedforonanequitymethodandtheGroup’sshareofthepolicyholderliabilitiesasshownaboverelatetothelifebusiness
inChina,IndiaandoftheTakafulbusinessinMalaysia.
Therateofsurrendersforshareholder-backedbusiness(expressedasapercentageofopeningliabilities)was6.6percentin2018(2017:8.4percent).
(ii)
(iii) Netflowshaveincreasedby£1,541millionto£8,416millionin2018predominantlyreflectingcontinuedgrowthofthein-forcebook.
(iv)
Investment-relateditemsandothermovementsfor2018primarilyrepresentunrealisedinvestmentslossesfollowingunfavourableequitymarketsintheyearandrising
interestrates.
(v) Movementsintheyearhavebeentranslatedattheaverageexchangeratesfortheyear.Theclosingbalancehasbeentranslatedattheclosingspotratesasattheendoftheyear.
(vi)
Differencesuponretranslationareincludedinforeignexchangetranslationdifferences.
Thepolicyholderliabilitiesofthewith-profitsbusinessof£39,655million,showninthetableabove,isafterdeductingtheintra-groupreinsuranceliabilitiescededbytheUKand
Europeinsuranceoperationsof£1,109milliontotheHongKongwith-profitsbusiness(31December2017:£1,235million).IncludingthisamounttheAsiawith-profitspolicyholder
liabilitiesare£40,764million(31December2017:£34,198million).
(vii) Averageshavebeenbasedonopeningandclosingbalancesandexcludeunallocatedsurplusofwith-profitsfunds.
(ii) Duration of liabilities
Thetablebelowshowsthecarryingvalueofpolicyholderliabilitiesandthematurityprofileofthecashflowsonadiscountedbasis,
takingaccountofexpectedfuturepremiumsandinvestmentreturns:
Policyholderliabilities
Expectedmaturity:
0to5years
5to10years
10to15years
15to20years
20to25years
Over25years
31 Dec
2018 £m
72,107
31 Dec
2018 %
31 Dec
2017 £m
62,898
31 Dec
2017 %
20
19
15
12
10
24
21
19
16
12
10
22
(iii) Summary policyholder liabilities (net of reinsurance) and unallocated surplus
At31December2018,thepolicyholderliabilitiesandunallocatedsurplusforAsiaoperationsexcludingjointventuresandafter
deductingintra-groupreinsuranceliabilitiescededbyUKandEuropeof£74,618million(2017:£66,372million),netofexternal
reinsuranceof£2,777million(2017:£1,960million),comprisedthefollowing:
HongKong
Indonesia
Malaysia
Singapore
Taiwan
Otheroperations
TotalAsiaoperations
2018 £m
2017 £m
34,545
3,680
5,447
18,154
4,203
5,812
71,841
29,411
3,762
5,014
17,432
3,729
5,064
64,412
www.prudential.co.uk
AnnualReport2018 Prudential plc 245
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C4 Policyholder liabilities and unallocated surplus continued
C4.1 Movement and duration of liabilities continued
C4.1(c) US insurance operations
(i) Analysis of movements in policyholder liabilities
AreconciliationofthetotalpolicyholderliabilitiesofUSinsuranceoperationsfromthebeginningoftheyeartotheendoftheyear
isasfollows:
US insurance operations
At1January2017
Premiums
Surrenders
Maturities/deaths
Netflows note (ii)
Transfersfromgeneraltoseparateaccount
Investment-relateditemsandothermovements
Foreignexchangetranslationdifferences note (i)
At 31 December 2017/1 January 2018
Premiums
Surrenders
Maturities/deaths
Netflows note (ii)
AdditionforclosedblockofgrouppayoutannuitiesintheUS note (iii)
Transfersfromgeneraltoseparateaccount
Investment-relateditemsandothermovements note (iv)
Foreignexchangetranslationdifferences note (i)
At 31 December 2018
Averagepolicyholderliabilitybalances note (v)
2018
2017
Variable
annuity
separate
account
liabilities
£m
Fixed annuity,
GICs and other
business
£m
Total
£m
120,411
57,215
177,626
11,529
(6,997)
(1,026)
3,506
2,096
15,956
(11,441)
3,690
(3,020)
(1,039)
(369)
(2,096)
295
(4,849)
15,219
(10,017)
(2,065)
3,137
–
16,251
(16,290)
130,528
50,196
180,724
10,969
(8,797)
(1,085)
1,087
–
530
(11,561)
7,636
2,971
(3,344)
(927)
(1,300)
4,143
(530)
1,562
3,309
13,940
(12,141)
(2,012)
(213)
4,143
–
(9,999)
10,945
128,220
57,380
185,600
129,374
125,469
52,752
182,126
53,706
179,175
Notes
(i) MovementsintheyearhavebeentranslatedatanaveragerateofUS$1.34:£1.00(2017:US$1.29:£1.00).TheclosingbalanceshavebeentranslatedatclosingrateofUS$1.27:
£1.00(2017:US$1.35:£1.00).Differencesuponretranslationareincludedinforeignexchangetranslationdifferences.
(ii) Netoutflowswere£213million(2017:inflows£3,137million),withpositiveinflowstovariableannuitiesbusinessasnewbusinessexceedswithdrawalsandsurrendersoffsetby
(iii)
outflowsfromfixedannuity,GICsandotherbusinessastheportfoliomatures.
InOctober2018,JacksonenteredintoanagreementwithJohnHancockLifetoreinsure100percentofthegrouppayoutannuitybusiness.Thetransactionresultedinanincrease
topolicyholderliabilitiesofJackson£4.1billionattheinceptionofthecontract.
(iv) Negativeinvestment-relateditemsandothermovementsinvariableannuityseparateaccountliabilitiesof£(11,561)millionfor2018primarilyreflectsthedecreaseinequityand
bondvaluesduringtheyear.Fixedannuity,GICandotherbusinessinvestmentandothermovementsof£1,562millionprimarilyreflecttheinterestcreditedtothepolicyholder
accountsandincreaseintheguaranteereservesintheyear.
Averageshavebeenbasedonopeningandclosingbalancesandadjustedforacquisitions,disposalsandcorporatetransactionsarisingintheyear.
(v)
246 Prudential plc AnnualReport2018
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C Balance sheet notes continued (ii) Duration of liabilities
Thetablebelowshowsthecarryingvalueofpolicyholderliabilitiesandmaturityprofileofthecashflowsonadiscountedbasisfor2018
and2017:
31 Dec 2018
31 Dec 2017
Fixed annuity
and other
business
(including
GICs and
similar
contracts)
£m
Variable
annuity
separate
account
liabilities
£m
Fixed annuity
and other
business
(including
GICs and
similar
contracts)
£m
Total
£m
Variable
annuity
separate
account
liabilities
£m
Total
£m
Policyholderliabilities
57,380
128,220
185,600
50,196
130,528
180,724
Expectedmaturity:
0to5years
5to10years
10to15years
15to20years
20to25years
Over25years
%
51
24
12
7
3
3
%
%
40
28
16
9
4
3
43
27
15
8
4
3
%
50
25
12
7
3
3
%
%
42
29
15
8
4
2
44
28
14
8
4
2
(iii) Aggregate account values
Thetablebelowshowsthedistributionofaccountvaluesforfixedannuities(fixedinterestrateandfixedindex),thefixedaccountportion
ofvariableannuities,andinterest-sensitivelifebusinesswithintherangeofminimumguaranteedinterestratesasdescribedinnoteC4.2(b).
Minimum guaranteed interest rate
31 Dec 2018
31 Dec 2017
31 Dec 2018
31 Dec 2017
Fixed annuities and the
fixed account portion
of variable annuities
£m
Interest-sensitive
life business
£m
>0%–1.0%
>1.0%–2.0%
>2.0%–3.0%
>3.0%–4.0%
>4.0%–5.0%
>5.0%–6.0%
Total
7,584
6,789
10,075
1,274
1,794
225
27,741
6,887
7,385
9,799
1,272
1,744
220
27,307
–
–
229
2,394
2,106
1,703
6,432
–
–
221
2,341
2,059
1,651
6,272
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AnnualReport2018 Prudential plc 247
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C4 Policyholder liabilities and unallocated surplus continued
C4.1 Movement and duration of liabilities continued
C4.1(d) UK and Europe insurance operations
(i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds
Areconciliationofthetotalpolicyholderliabilitiesandunallocatedsurplusofwith-profitsfundsofUKandEuropeinsuranceoperations
fromthebeginningoftheyeartotheendoftheyearisasfollows:
At1January2017
Comprising:
– Policyholder liabilities on the consolidated statement of financial position
– Unallocated surplus of with-profits funds on the consolidated statement
of financial position
Premiums
Surrenders
Maturities/deaths
Netflows note (i)
Shareholders'transferspost-tax
Switches
Investment-relateditemsandothermovements
Foreignexchangetranslationdifferences
At 31 December 2017/1 January 2018
Comprising:
– Policyholder liabilities on the consolidated statement of financial position
– Unallocated surplus of with-profits funds on the consolidated statement
of financial position
ReclassificationofreinsuredUKannuitycontractsasheldforsale note (ii)
Premiums
Surrenders
Maturities/deaths
Netflows note (i)
Shareholders'transferspost-tax
Switches
Investment-relateditemsandothermovements note (iii)
Foreignexchangetranslationdifferences
At 31 December 2018
Comprising:
– Policyholder liabilities on the consolidated statement of financial position
– Unallocated surplus of with-profits funds on the consolidated statement
of financial position
Averagepolicyholderliabilitybalances note (iv)
2018
2017
Shareholder-backed funds
and subsidiaries
With-profits
sub-funds
£m
note(v)
Unit-linked
liabilities
£m
Annuity
and other
long-term
business
£m
Total
£m
113,146
22,119
34,039
169,304
101,496
22,119
34,039
157,654
11,650
12,527
(4,506)
(4,564)
3,457
(233)
(192)
8,408
113
–
1,923
(2,342)
(612)
(1,031)
–
192
1,865
–
–
360
(91)
(1,959)
(1,690)
–
–
873
–
11,650
14,810
(6,939)
(7,135)
736
(233)
–
11,146
113
124,699
23,145
33,222
181,066
111,222
23,145
33,222
167,589
13,477
–
12,525
(4,764)
(4,552)
3,209
(259)
(165)
(3,341)
(14)
–
–
–
(10,858)
13,477
(10,858)
1,147
(1,950)
(619)
(1,422)
–
165
(1,171)
–
339
(66)
(1,625)
(1,352)
–
–
(969)
–
14,011
(6,780)
(6,796)
435
(259)
–
(5,481)
(14)
124,129
20,717
20,043
164,889
110,795
20,717
20,043
151,555
13,334
–
–
13,334
111,009
106,359
21,931
22,632
29,347
33,631
162,287
162,622
Notes
(i)
(ii)
(iii)
Netinflowswere£435million(31December2017:netinflowsof£736million).Inflowsintothewith-profitsbusinesswereoffsetbyoutflowsfromboththeannuitybusiness,asthe
closedbookmatures,andtheunit-linkedbusiness.Thelevelsofinflows/outflowsfortheunit-linkedbusinessisdrivenbycorporatepensionschemeswithtransfersinoroutfrom
onlyasmallnumberofschemesinfluencingthelevelofflowsintheyear.
ThereclassificationasheldforsaleofthereinsuredUKannuitybusinessthatwillbetransferredtoRothesaylifeoncethePartVIIprocessiscompletereflectsthevaluepolicyholder
liabilitiesheldat1January2018.
Investment-relateditemsandothermovementsforwith-profitsbusinessprincipallycompriseinvestmentreturnattributabletopolicyholdersreflectingfallingequitymarketsinthe
laterquarteroftheyear.Forshareholder-backedannuityandotherlong-termbusiness,investment-relateditemsandothermovementsincludetheeffectofmovementsininterest
ratesandcreditspreads.
(iv) Averageshavebeenbasedonopeningandclosingbalancesandadjustedforacquisitions,disposalsandcorporatetransactionsarisingintheyearandexcludeunallocatedsurplus
ofwith-profitsfunds.
IncludestheScottishAmicableInsuranceFund.
(v)
248 Prudential plc AnnualReport2018
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C Balance sheet notes continued (ii) Duration of liabilities
Withtheexceptionofmostunitisedwith-profitsbondsandotherwholeoflifecontracts,themajorityofthecontractsofUKandEurope
insuranceoperationshaveacontractterm.Ineffect,thematuritytermoftheothercontractsreflectstheearlierofdeath,maturity,orthe
policylapsing.Inaddition,asdescribedinnoteA3.1,with-profitscontractliabilitiesincludeprojectedfuturebonusesbasedoncurrent
investmentvalues.TheactualamountspayablewillvarywithfutureinvestmentperformanceofSAIFandtheWPSF.
Thefollowingtablesshowthecarryingvalueofthepolicyholderliabilitiesandthematurityprofileofthecashflows,ona
discountedbasis:
With-profits business
31 Dec 2018 £m
Annuity business
(insurance contracts)
Other
Total
Insurance
contracts
Invest-
ment
contracts
Total
Non-
profit
annuities
within
WPSF
Shareholder
-backed
annuity
Total
Insurance
contracts
Invest-
ment
contracts
Total
Policyholderliabilities
34,242
67,020 101,262
9,533
19,119
28,652
6,063
15,578
21,641 151,555
Expectedmaturity:
0to5years
5to10years
10to15years
15to20years
20to25years
over25years
34
23
16
11
7
9
37
27
17
9
4
6
36
26
17
10
5
6
33
26
17
11
6
7
31 Dec 2018 %
27
23
19
14
9
8
29
24
18
13
8
8
31 Dec 2017 £m
44
25
15
8
4
4
32
24
18
12
7
7
36
24
17
11
6
6
35
25
17
10
6
7
Policyholderliabilities
38,285
62,328 100,613
10,609
32,572
43,181
6,714
17,081
23,795
167,589
Expectedmaturity:
0to5years
5to10years
10to15years
15to20years
20to25years
over25years
33
23
16
11
7
10
37
27
17
10
4
5
36
25
17
10
5
7
31
24
17
11
7
10
31 Dec 2017 %
26
23
18
13
9
11
27
23
18
13
9
10
41
26
15
9
5
4
31
22
18
13
8
8
34
23
17
12
7
7
34
25
17
11
6
7
— Thecashflowprojectionsofexpectedbenefitpaymentsusedinthematurityprofiletableabovearefromvalueofin-forcebusiness
andexcludethevalueoffuturenewbusiness,includingfuturevestingofinternalpensioncontracts.
— Benefitpaymentsdonotreflectthepatternofbonusesandshareholdertransfersinrespectofthewith-profitsbusiness.
— Shareholder-backedannuitybusinessincludestheex-PRILandthelegacyPACshareholderannuitybusinessbutexcludesthe
amountclassifiedasheldforsale.
— Investmentcontractsunder‘Other’comprisecertainunit-linkedandsimilarcontractsaccountedforunderIAS39andIFRS15.
— Forbusinesswithnomaturitytermincludedwithinthecontracts,forexample,with-profitsinvestmentbondssuchasPrudence
Bonds,anassumptionismadeastolikelydurationbasedonpriorexperience.
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AnnualReport2018 Prudential plc 249
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C4 Policyholder liabilities and unallocated surplus continued
C4.1 Movement and duration of liabilities continued
(iii) Annuitant mortality
MortalityassumptionsforUKannuitybusinessaresetinlightofrecentpopulationandinternalexperience,withanallowancefor
expectedfuturemortalityimprovements.Giventhelong-termnatureofannuitybusiness,longevityremainsasignificantassumptionin
determiningpolicyholderliabilities.Theassumptionsusedreferencerecentpopulationmortalitydata,withspecificriskfactorsapplied
onaperpolicybasistoreflectthefeaturesoftheCompany’sportfolio.
Therecentdecliningmortalityimprovementsobservedinpopulationdatawereconsideredaspartofthejudgementexercisedin
settingthe2018mortalitybasis.NewmortalityprojectionmodelsarereleasedregularlybytheContinuousMortalityInvestigation
(CMI).TheCMI2016modelwasusedtoproducethe2018resultsandtheCMI2015modelwasusedtoproducethe2017results.
ThedefaultcalibrationofCMI2016wasadoptedtoreflecttheCompany’sviewoffuturemortalityimprovementsbasedonarangeof
possibleoutcomes,withanappropriatemarginforprudence.Themortalityimprovementassumptionsusedaresummarisedinthe
tablebelow:
Year ended
CMI Model, with calibration to reflect future mortality improvements
31 December 2018
CMI 2016
31December2017
CMI2015
For males: with a long-term improvement rate of 2.25% pa
For females: with a long-term improvement rate of 2.00% pa
Formales:withalong-termimprovementrateof2.25%pa
Forfemales:withalong-termimprovementrateof2.00%pa
Forannuitiesindeferment,thetablesusedwereAM92–fouryears(males)andAF92–fouryears(females)for2018and2017.
C4.2 Products and determining contract liabilities
C4.2(a) Asia
Contract type
Description
Material features
Determination of liabilities
With-profits
and
participating
contracts
Providessavingsand/orprotection
wherethebasicsumassuredcanbe
enhancedbyaprofitshare(or
bonus)fromtheunderlyingfundas
determinedatthediscretionofthe
Company.
Participatingproductsoftenoffera
guaranteedmaturityorsurrender
value.Declaredregularbonuses
areguaranteedoncevested.Future
bonusratesandcashdividendsare
notguaranteed.Marketvalue
adjustmentsandsurrender
penaltiesareusedforcertain
productswherethelawpermits
suchadjustments.Guaranteesare
predominantlysupportedby
segregatedlifefundsandtheir
estates.
With-profitscontractsare
predominantlysoldinHongKong,
MalaysiaandSingapore.Thetotal
valueofthewith-profitsfundsisdriven
bytheunderlyingassetvaluationwith
movementsreflectedprincipallyinthe
accountingvalueofpolicyholder
liabilitiesandunallocatedsurplus.
InTaiwanandIndia,USGAAPis
appliedformeasuringinsuranceassets
andliabilities.TheotherAsia
operationsprincipallyadoptagross
premiumvaluationmethod.
250 Prudential plc AnnualReport2018
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C Balance sheet notes continued C4.2(a) Asia continued
Contract type
Description
Material features
Determination of liabilities
Term, whole
life and
endowment
assurance
Non-participatingsavingsand/or
protectionwherethebenefitsare
guaranteed,ordeterminedbya
setofdefinedmarket-related
parameters.
Theseproductsoftenoffera
guaranteedmaturityandsurrender
value.ItiscommoninAsiafor
regulationsormarket-driven
demandandcompetitionto
providesomeformofcapitalvalue
protectionandminimumcrediting
interestrateguarantees.Thisis
reflectedwithintheguaranteed
maturityandsurrendervalues.
Guaranteesareborneby
shareholders.
Unit-linked
Combinessavingswithprotection,
thecashvalueofthepolicydepends
onthevalueoftheunderlying
unitisedfunds.
Theapproachtodeterminingthe
contractliabilitiesisgenerallydriven
bythelocalsolvencybasis.Agross
premiumvaluationmethodisusedin
thosecountrieswherearisk-based
capitalframeworkisadoptedforlocal
solvency.Underthegrosspremium
valuationmethod,allcashflowsare
valuedexplicitlyusingbestestimate
assumptionswithasuitablemarginfor
prudence.
Thisisachievedeitherthroughadding
anexplicitallowanceforassumptions
todeviatefrombestestimateorby
applyinganoverlayconstraintsothat
ondayonenonegativereserves(ie
wherefuturepremiuminflowsare
expectedtoexceedprudentfuture
claimsandoutflows)arederivedatan
individualpolicyholderlevel,ora
combinationofboth.
InVietnam,theCompanyusesan
estimationbasisalignedsubstantially
tothatusedbythecountriesapplying
thegrosspremiumvaluationmethod.
ForIndiaandTaiwan,USGAAPis
appliedformeasuringinsurance
liabilities.Forthesebusinesses,the
futurepolicyholderbenefitprovisions
fornon-linkedbusinessaredetermined
usingthenetlevelpremiummethod,
withanallowanceforsurrenders,
maintenanceandclaimsexpenses.
Ratesofinterestusedinestablishing
thepolicyholderbenefitprovisions
varybyoperationdependingonthe
circumstancesattachingtoeachblock
ofbusiness.
TheotherAsiaoperationsprincipally
adoptanetpremiumvaluationmethod
todeterminethefuturepolicyholder
benefitprovisions.
Theattachingliabilitiesreflecttheunit
valueobligationdrivenbythevalueof
theinvestmentsoftheunitfund.
Additionaltechnicalprovisionsareheld
forguaranteedbenefitsbeyondthe
unitfundvalueusingagrosspremium
valuationmethod.Theseadditional
provisionsarerecognisedasa
componentofotherbusinessliabilities.
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01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C4 Policyholder liabilities and unallocated surplus continued
C4.2 Products and determining contract liabilities continued
C4.2(a) Asia continued
Contract type
Description
Material features
Determination of liabilities
Health and
protection
Healthandprotectionfeaturesare
offeredassupplementstothe
productslistedaboveorsoldas
standaloneproducts.Protection
coversmortalityormorbidity
benefitsincludinghealth,disability,
criticalillnessandaccident
coverage.
Thedeterminationoftheliabilities
ofhealthandprotectioncontracts
aredrivenbythelocalsolvencybasis.
Agrosspremiumvaluationmethod
isusedinthosecountrieswherea
risk-basedcapitalframeworkis
adoptedforlocalsolvency.Underthe
grosspremiumvaluationmethod,all
cashflowsarevaluedexplicitlyusing
bestestimateassumptionswitha
suitablemarginforprudence.
Thisisachievedeitherthroughadding
anexplicitallowanceforassumptions
todeviatefrombestestimateorby
applyinganoverlayconstraintsothat
ondayonenonegativereserves(ie
wherefuturepremiuminflowsare
expectedtoexceedprudentfuture
claimsandoutflows)arederivedatan
individualpolicyholderlevel,ora
combinationofboth.
252 Prudential plc AnnualReport2018
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C Balance sheet notes continued C4.2(b) US
Contract type
Description
Material features
Determination of liabilities
Guaranteedminimuminterest
rate.At31December2018,
Jacksonhadfixedinterestrate
annuitiestotalling£12.6billion
(2017:£12.6billion)inaccount
valuewithminimumguaranteed
ratesrangingfrom1.0percentto
5.5percentanda2.91percent
averageguaranteedrate(2017:
1.0percentto5.5percent
anda2.93percentaverage
guaranteedrate).
Fixed interest
rate annuities
Fixedinterestrateannuitiesare
primarilydeferredannuityproducts
thatareusedforassetaccumulation
inretirementplanningandfor
providingincomeinretirement.
At31December2018,fixedinterest
rateannuitiesaccountedfor
7percent(2017:7percent)ofpolicy
andcontractliabilitiesofJackson.
Thepolicyholderofafixedinterest
rateannuitypaysJacksona
premium,whichiscreditedtothe
policyholder’saccount.Periodically,
interestiscreditedtothe
policyholder’saccountandinsome
casesadministrativechargesare
deductedfromthepolicyholder’s
account.Jacksonmakesbenefit
paymentsatafuturedateas
specifiedinthepolicybasedonthe
valueofthepolicyholder’saccount
atthatdate.
ThepolicyprovidesthatatJackson’s
discretionitmayresettheinterest
rate,subjecttoaguaranteed
minimum.
Approximately64percent(2017:
60percent)ofthefixedinterest
rateannuitiesJacksonwrotein2018
providefora(positiveornegative)
marketvalueadjustment(MVA)
onsurrender.Thisformula-based
adjustmentapproximatesthe
changeinvaluethatassets
supportingtheproductwould
realiseasinterestratesmove.
AsexplainedinnoteA3.1allofJackson’s
insuranceliabilitiesarebasedon
USGAAP.Anoverviewofthedeferral
andamortisationofacquisitioncostsfor
JacksonisprovidedinnoteC5.2(b).
Withminorexceptionsthefollowingis
appliedtomostofJackson’scontracts.
Contractsareaccountedforasinvestment
contractsasdefinedforUSGAAP
purposesbyapplyingaretrospective
depositmethodtodeterminetheliability
forpolicyholderbenefits.
Thisisthenaugmentedby:
— Anyamountsthathavebeenassessed
tocompensatetheinsurerforservices
tobeperformedoverfutureperiods
(iedeferredincome);
— Anyamountspreviouslyassessed
againstpolicyholdersthatare
refundableonterminationofthe
contract;and
— Anyprobablefuturelossonthe
contract(iepremiumdeficiency).
Capitalisedacquisitioncostsanddeferred
incomeforthesecontractsareamortised
overthelifeofthebookofcontracts.
Thepresentvalueoftheestimatedgross
profitsiscomputedusingtherateof
interestthataccruestopolicyholder
balances(sometimesreferredtoasthe
contractrate).
Estimatedgrossprofitsincludeestimates
ofthefollowing,eachofwhichwillbe
determinedbasedonthebestestimate
ofamountsoverthelifeofthebookof
contractswithoutprovisionforadverse
deviation:
— Amountsexpectedtobeassessedfor
mortalitylessbenefitclaimsinexcess
ofrelatedpolicyholderbalances;
— Amountsexpectedtobeassessedfor
contractadministrationlesscosts
incurredforcontractadministration;
— Amountsexpectedtobeearnedfrom
theinvestmentofpolicyholder
balanceslessinterestcreditedto
policyholderbalances;
— Amountsexpectedtobeassessed
againstpolicyholderbalancesupon
terminationofcontracts(sometimes
referredtoassurrendercharges);and
— Otherexpectedassessmentsand
credits.
Theinterestguaranteesarenotexplicitly
valuedbutarereflectedastheyareearned
inthecurrentaccountliabilityvalue.
www.prudential.co.uk
AnnualReport2018 Prudential plc 253
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C4 Policyholder liabilities and unallocated surplus continued
C4.2 Products and determining contract liabilities continued
C4.2(b) US continued
Contract type
Description
Material features
Determination of liabilities
Guaranteedminimumratesare
generallysetat1.0to3.0percent.
At31December2018,Jacksonhad
fixedindexannuitiesallocatedto
indexedfundstotalling£6.0billion
(31December2017:£6.3billion)in
accountvaluewithminimum
guaranteedratesonindexaccounts
rangingfrom1.0percentto
3.0percentanda1.77percent
averageguaranteedrate(2017:
1.0percentto3.0percentanda
1.77percentaverageguarantee
rate).
Jacksonoffersanoptionallifetime
incomerider,whichcanbeelected
foranadditionalfee.
Jacksonalsooffersfixedinterest
accountsonsomefixedindex
annuityproducts.At31December
2018,fixedinterestaccountsof
fixedindexannuitiestotalled
£2.7billion(2017:£2.5billion)in
accountvalue.
Minimumguaranteedratesonfixed
interestaccountsrangefrom
1.0percentto3.0percentanda
2.57percentaverageguaranteed
rate(2017:1.0percentto
3.0percentanda2.58percent
averageguaranteedrate).
Thecontractsprovideannuity
paymentsthatmeetthe
requirementsofthespecific
pensionplanbeingcovered.In
somecases,thecontractshavepre-
retirementdeathand/or
withdrawalbenefits,pre-
retirementsurvivingspouse
benefits,and/orsubsidisedearly
retirementbenefits.
Theliabilityforpolicyholderbenefits
thatrepresenttheguaranteed
minimumreturnisdeterminedsimilarly
totheliabilitiesofthefixedinterest
annuityabove.Theequity-linked
returnoptionwithinthecontractis
treatedasanembeddedliabilityunder
USGAAPandthereforethiselementof
theliabilityisrecognisedatfairvalue.
Theliabilityforthelifetimeincome
riderisdeterminedeachperiodend
byestimatingtheexpectedvalueof
benefitsinexcessoftheprojected
accountbalanceandrecognisingthe
excessonaproratedbasisoverthelife
ofthecontractbasedontotalexpected
assessments.
Theliabilityforfuturebenefitsis
determinedunderUSGAAP
methodologyforlimited-payment
contracts,usingassumptionsasofthe
acquisitiondateastomortalityand
expenseplusprovisionsforadverse
deviation.
Fixed index
annuities
Fixedindexannuitiesvaryin
structurebutaregenerallydeferred
annuitiesthatenablepolicyholders
toobtainaportionofanequity-
linkedreturn(basedonparticipation
ratesandcaps),andprovidea
guaranteedminimumreturn.Fixed
indexannuitiesaccountedfor
5percent(2017:5percent)of
Jackson’spolicyandcontract
liabilitiesat31December2018.
Jacksonhedgestheequityreturn
riskonfixedindexproductsusing
offsettingequityexposureinthe
variableannuityproduct.Thecost
ofhedgingistakenintoaccountin
settingtheindexparticipationrates
orcaps.
Group
pay-out
annuities
Grouppayoutannuitiesconsistof
ablockofdefinedbenefitannuity
plansassumedfromJohnHancock
USA.Asinglepremiumpayment
fromanemployer(contractholder)
fundsthepensionbenefitsforits
employees(participants).The
contractsaretailoredtomeetthe
requirementsofthespecificpension
planbeingcovered.Thisisaclosed
blockofbusinessfromtwo
standpoints:(1)JohnHancockUSA
isnolongersellingnewcontracts
and(2)contractholders
(companies)arenolongeradding
additionalparticipantstothese
definedbenefitpensionplans.The
majorityofparticipantsareinthe
payoutphase,buttherearesome
participantsinthedeferralphase.
254 Prudential plc AnnualReport2018
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C Balance sheet notes continued C4.2(b) US continued
Contract type
Description
Material features
Determination of liabilities
Thegeneralprinciplesforfixedannuity
andfixedindexannuityalsoapplyto
variableannuities.
Theimpactofanyfixedaccount
interestguaranteesisreflectedasthey
areearnedinthecurrentaccount
value.
Jacksonregularlyevaluatesestimates
usedandadjuststhebenefitguarantee
liabilitybalances,witharelatedcharge
orcredittobenefitexpenseifactual
experienceorotherevidencesuggests
thatearlierassumptionsshouldbe
revised.
Variable
annuities
Variableannuitiesaredeferred
annuitiesthathavethesametax
advantagesandpayoutoptionsas
fixedinterestrateandfixedindex
annuities.Theyarealsousedfor
assetaccumulationinretirement
planningandtoprovideincomein
retirement.At31December2018,
variableannuitiesaccountedfor
75percent(2017:77percent)of
Jackson’spolicyandcontract
liabilities.
Therateofreturndependsuponthe
performanceoftheselectedfund
portfolio.Policyholdersmayallocate
theirinvestmenttoeitherthefixed
accountoraselectionofvariable
accounts.Subjecttobenefit
guarantees,investmentriskonthe
variableaccountisbornebythe
policyholder,whileinvestmentrisk
onthefixedaccountisborneby
Jacksonthroughguaranteed
minimumfixedratesofreturn.At
31December2018,5percent
(2017:5percent)ofvariableannuity
fundswereinfixedaccounts.
Jacksonhadvariableannuityfunds
infixedaccountstotalling
£6.4billion(2017:£5.9billion)with
minimumguaranteedratesranging
from1.0percentto3.0percent
anda1.70percentaverage
guaranteedrate(2017:1.0percent
to3.0percentanda1.68percent
averageguaranteedrate).
Jacksonoffersachoiceof
guaranteedbenefitoptionswithin
itsvariableannuityproduct
portfolio,whichcanbeelectedfor
additionalfees.Theseguaranteed
benefitsmightbeexpressedasthe
returnofeither:(a)totaldeposits
madetothecontractadjustedfor
anypartialwithdrawals,(b)total
depositsmadetothecontract
adjustedforanypartial
withdrawals,plusaminimum
return,or(c)thehighestcontract
valueonaspecifiedanniversary
dateadjustedforanywithdrawals
followingthatcontractanniversary.
Jacksonhedgestheserisksusing
derivativeinstrumentsasdescribed
innoteC7.3
www.prudential.co.uk
AnnualReport2018 Prudential plc 255
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C4.2 Products and determining contract liabilities continued
C4.2(b) US continued
Contract type
Description
Material features
Determination of liabilities
Variable
annuities
continued
Thebenefitguaranteetypesare
setoutbelow:
Benefitsthatarepayableinthe
eventofdeath(guaranteed
minimumdeathbenefit).
Benefitsthatarepayableuponthe
depletionoffunds(guaranteed
minimumwithdrawalbenefit).
TheliabilityforGuaranteedMinimum
DeathBenefit(GMDB)isdetermined
eachperiodendbyestimatingthe
expectedvalueofbenefitsinexcess
oftheprojectedaccountbalanceand
recognisingtheexcessrateablyover
thelifeofthecontractbasedontotal
expectedassessments.At
31December2018,theseliabilities
werevaluedusingaseriesofstochastic
investmentperformancescenarios,a
meaninvestmentreturnof7.4percent
(2017:7.4percent)netofexternalfund
managementfees,andassumptionsfor
policyholderbehaviour,mortalityand
expensethataresimilartothoseused
inamortisingthecapitalisedacquisition
costs.
TheliabilityfortheGuaranteed
MinimumWithdrawalBenefit
(GMWB)‘forlife’portionisdetermined
similarlytoGMDBabove.
Provisionsforbenefitsunder
GuaranteedMinimumWithdrawal
Benefit‘notforlife’featuresare
recognisedatfairvalueunder
USGAAP.
Non-performanceriskisincorporated
intothefairvaluecalculationthrough
theuseofdiscountinterestrates
sourcedfromanAAcorporatecredit
curveasaproxyforJackson’sown
creditrisk.Otherriskmargins,
particularlyforpolicyholderbehaviour
andlong-termvolatility,arealso
incorporatedintothemodelthrough
theuseofexplicitlyconservative
assumptions.Onaperiodicbasis,
Jacksonvalidatestheresultingfair
valuesbasedoncomparisonstoother
modelsandmarketmovements.
256 Prudential plc AnnualReport2018
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C Balance sheet notes continued C4.2(b) US continued
Contract type
Description
Material features
Determination of liabilities
Variable
annuities
continued
Life
insurance
Benefitsthatarepayableat
annuitisation(guaranteedminimum
incomebenefit).
Thisfeatureisnolongerofferedand
existingcoverageissubstantially
reinsured,subjecttodeductibles
andannualclaimlimits.
Benefitsthatarepayableattheend
ofaspecifiedperiod(guaranteed
minimumaccumulationbenefit).
Thisfeatureisnolongeroffered.
Excludingthebusinessthatis
subjecttotheretrocessiontreaties
at31December2018,Jacksonhad
interest-sensitivelifebusinessin
forcewithtotalaccountvalueof
£6.4billion(2017:£6.3billion),
withminimumguaranteedinterest
ratesrangingfrom2.5percentto
6.0percentwitha4.67percent
averageguaranteedrate(2017:
2.5percentto6.0percent
witha4.67percentaverage
guaranteedrate).
Lifeproductsincludetermlife,
traditionallifeandinterest-sensitive
life(universallifeandvariable
universallife).Lifeinsurance
productsaccountedfor9percent
(2017:9percent)ofJackson’s
policyandcontractliabilitiesat
31December2018.Jackson
discontinuednewsalesoflife
insuranceproductsin2012.
Termlifeprovidesprotectionfora
definedperiodandabenefitthatis
payabletoadesignatedbeneficiary
upondeathoftheinsured.
Traditionallifeprovidesprotection
foreitheradefinedperiodoruntil
astatedageandincludesa
predeterminedcashvalue.
ThedirectGuaranteedMinimum
IncomeBenefit(GMIB)liabilityis
determinedbyestimatingthe
expectedvalueoftheannuitisation
benefitsinexcessoftheprojected
accountbalanceatthedateof
annuitisationandrecognisingthe
excessrateablyoverthelifeofthe
contractbasedontotalexpected
assessments.
GuaranteedMinimumIncomeBenefits
arereinsured,subjecttoadeductible
andannualclaimlimits.Duetothe
netsettlementprovisionsofthe
reinsuranceagreement,underthe
‘grandfathered’USGAAP,itis
recognisedatfairvaluewiththe
changeinfairvalueincludedasa
componentofshort-termfluctuations.
Volatilityandnon-performancerisk
isconsideredasperGMWBabove.
ProvisionsforGuaranteedMinimum
AccumulationBenefit(GMAB)
arerecognisedatfairvalueunder
USGAAP.Volatilityandnon-
performanceriskisconsideredasper
GMWBabove.
Fortermandtraditionallifeinsurance
contracts,provisionsforfuturepolicy
benefitsaredeterminedunder
USGAAPusingthenetlevelpremium
methodandassumptionsasofthe
issuedateastomortality,interest,
policylapsesandexpensesplus
provisionsforadversedeviationfor
directlysoldbusinessandassumptions
atpurchaseforacquiredbusiness.
Foruniversallifeandvariableuniversal
lifearetrospectivedepositmethod
isusedtodeterminetheliabilityfor
policyholderbenefits.Thisisthen
augmentedbyadditionalliabilities
toaccountforno-lapseguarantees,
profitsfollowedbylosses,contract
featuressuchaspersistencybonuses,
andcostofinterestrateguarantees.
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AnnualReport2018 Prudential plc 257
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C4.2 Products and determining contract liabilities continued
C4.2(b) US continued
Contract type
Description
Material features
Determination of liabilities
Life
insurance
continued
Institutional
products
Universallifeprovidespermanent
individuallifeinsuranceforthelife
oftheinsuredandincludesa
savingselement.
Variableuniversallifeisatypeoflife
insurancepolicythatcombines
deathbenefitprotectionwiththe
abilityforthepolicyholderaccount
tobeinvestedinseparateaccount
funds.Forcertainfixeduniversallife
plans,additionalprovisionsareheld
toreflecttheexistenceof
guaranteesofferedinthepastthat
arenolongersupportedbyearnings
ontheexistingassetportfolio,orfor
situationswherefuturemortality
chargesarenotexpectedtobe
sufficienttoprovideforfuture
mortalitycosts.
Institutionalproductsare:
guaranteedinvestmentcontracts
(GICs),fundingagreements
(includingagreementsissuedin
conjunctionwithJackson’s
participationintheUSFederal
HomeLoanBankprogramme)and
MediumTermNotefunding
agreements.At31December2018,
institutionalproductsaccountedfor
1percentofcontractliabilities
(31December2017:1percent).
Institutionalproductsareclassified
asinvestmentcontracts,andare
accountedforasfinancialliabilities.
Thecurrencyriskoncontractsthat
representcurrencyobligationsother
thanUSdollarsarehedgedusing
cross-currencyswaps.
GICsfeaturealumpsum
policyholderdepositonwhich
interestispaidataratefixedat
inception.Marketvalue
adjustmentsaremadetothevalue
ofanyearlywithdrawals.
Fundingagreementsfeatureeither
lumpsumorperiodicpolicyholder
deposits.Interestispaidatafixed
orindexlinkedrate.Funding
agreementshaveadurationof
betweenoneand30years.In2018
and2017therewerenofunding
agreementsterminablebythe
policyholderwithlessthan90days’
notice.
258 Prudential plc AnnualReport2018
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C Balance sheet notes continued C4.2(c) UK and Europe
Contract type
Description
PruFund
contracts
Arangeofwith-profitscontracts
offerpolicyholdersachoiceof
investmentprofiles.
Unliketraditionalwith-profits
contracts,noregularbonusesare
declared.Totalpolicyholderreturn
isdeterminedbyanExpected
GrowthRate(EGR).AdifferentEGR
isappliedforeachofthedifferent
PruFundfundswithintherange,
eachrelatingtotheindividualasset
mixofthatfund.Theapplicable
EGR,netoftherelevantcharges,
isappliedtocalculatethesmoothed
unitvalueofpolicyholderfunds.
Innormalinvestmentconditionsthe
EGRisexpectedtoreflectPAC’s
viewofhowthefundswillperform
overthelongerterm.Anadjustment
ismadetothesmoothedunitvalueif
itmovesoutsideofaspecifiedrange
relativetothevalueofthe
underlyingassets.
With-profitscontractsprovide
returnstopolicyholdersthrough
bonusesthatare‘smoothed’.There
aretwotypesofbonuses:‘regular’
and‘final’.
Regularbonusratesaredetermined
foreachtypeofpolicyprimarilyby
targetingthebonuslevelata
prudentproportionofthelong-term
expectedfutureinvestmentreturn
onunderlyingassets,reducedas
appropriateforeachtypeofpolicy
toallowforitemssuchasexpenses,
charges,taxandshareholders’
transfers.
With-profits
contracts in
WPSF
Material features
Determination of liabilities
TheEGRsarereviewedand
updatedquarterly,withthe
smoothedunitvaluecalculated
daily.Prescribedadjustmentsto
thesmoothedunitvalueareapplied
quarterly,monthlyordaily,
dependingonspecificmarket
conditionrelatedtriggers.
Ifthecustomerterminatesthe
policythesmoothedunitvalueis
paidout.Forthepurposesof
determiningshareholdertransfers,
thedifferencebetweenthe
smoothedunitvalueonwithdrawal
andtheinitialinvestmentistreated
asaterminalbonus.
Regularbonusesaretypically
declaredonceayear,andonce
credited,areguaranteedin
accordancewiththetermsofthe
particularproduct.Finalbonus
ratesareguaranteedonlyuntilthe
nextbonusdeclaration.
Theshareholderreceivesoneninth
ofthecostofbonusesdeclaredto
thecustomerdistributedbythe
typicalregularandfinalbonuses.
TheliabilitiesforPruFundcontracts
arecalculatedinaccordancewith
themethodologyappliedtoother
with-profitssub-fundcontracts,
asdescribedbelow.
Thepolicyholderliabilitiesreported
fortheWPSFareprimarilyfortwo
broadtypesofbusiness.Theseare
accumulatingandconventional
with-profitscontracts.The
policyholderliabilitiesoftheWPSF
areaccountedforinaccordance
withtherequirementsof
‘grandfathered’FRS27.
Forwith-profitsbusinessamarket
consistentvaluationisperformed.
Additionalassumptionsrequiredare
forpersistencyandthemanagement
actionsunderwhichthefundis
managed.Assumptionsusedfora
market-consistentvaluationtypically
donotcontainmargins,whereasthose
usedforthevaluationofotherclasses
ofbusinessdo.
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AnnualReport2018 Prudential plc 259
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C4.2 Products and determining contract liabilities continued
C4.2(c) UK and Europe continued
Contract type
Description
Material features
Determination of liabilities
With-profits
contracts in
WPSF
continued
Innormalinvestmentconditions,
PACexpectschangesinregular
bonusratestobegradualovertime.
However,PACretainsthediscretion
whetherornottodeclarearegular
bonuseachyear,andthereisno
limitontheamountbywhichregular
bonusratescanchange.
Afinalbonuswhichisnormally
declaredannually,maybeadded
whenaclaimispaidorwhenunits
ofaunitisedproductarerealised.
Theratesoffinalbonususuallyvary
bytypeofpolicyandbyreference
totheperiod,usuallyayear,in
whichthepolicycommencesor
eachpremiumispaid.Theserates
aredeterminedbyreferencetothe
assetsharesforthesamplepolicies
butsubjecttothesmoothing
approachasexplainedopposite.
Theprovisionshavebeendetermined
onabasisconsistentwiththedetailed
methodologyincludedinregulations
containedinthePRA’spreviously
issuedrulesforthedeterminationof
reservesonthePRA’s‘realistic’Peak2
basis.Thoughnolongerinforcefor
regulatorypurposes,theserules
continuetobeappliedtodetermine
with-profitscontractliabilitiesin
accordancewithIFRS4.Inaggregate,
theregimehastheeffectofplacinga
valueontheliabilitiesofUKwith-
profitscontracts,whichreflectsthe
amountsexpectedtobepaidbasedon
thecurrentvalueofinvestmentsheld
bythewith-profitsfundsandcurrent
circumstances.Thesecontractsare
acombinationofinsuranceand
investmentcontractswith
discretionaryparticipationfeatures,
asdefinedbyIFRS4.
Theliabilitiescalculationunderthe
realisticregimerequirementis
explainedfurtherinnoteA3.1under
theUKregulatedwith-profitssection.
Persistencyassumptionsaresetbased
ontheresultsofthemostrecent
experienceanalysislookingatthe
experienceoverrecentyearsofthe
relevantbusiness.
Maintenanceand,forsomeclasses
ofbusiness,terminationexpense
assumptionsareexpressedasper
policyamounts.Theyaresetbasedon
theexpensesincurredduringtheyear,
includinganallowanceforongoing
investmentexpenditureandallocated
betweenentitiesandproductgroups
inaccordancewiththeoperation’s
internalcostallocationmodel.Expense
inflationassumptionsaresetconsistent
withtheeconomicbasisandbasedon
theinflationswapspotcurve.
Thecontractliabilitiesforwith-profits
businessalsorequireassumptionsfor
mortality.Thesearesetbasedonthe
resultsofrecentexperienceanalysis.
260 Prudential plc AnnualReport2018
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C Balance sheet notes continued C4.2(c) UK and Europe continued
Contract type
Description
Material features
Determination of liabilities
Provisionismadefortherisks
attachingtosomeSAIFunitised
with-profitspoliciesthathave
(MarketValueReduction)
MVR-freedatesandforthose
SAIFproductswhichhavea
guaranteedminimumbenefiton
deathormaturityofpremiums
accumulatedat4percentper
annum.
TheGroup’smainexposureto
guaranteedannuitiesintheUK
isthroughSAIFandaprovision
of£361millionwasheldin
SAIFat31December2018
(31December2017:
£503million)tohonourthe
guarantees.AsSAIFisa
separatesub-fundsolelyforthe
benefitofpolicyholdersofSAIF,
thisprovisionhasnoimpacton
thefinancialpositionofthe
Group’sshareholders’equity.
Asperwith-profitsproducts.
SAIF
with-profits
Annuities
– level, fixed
increase and
inflation-
linked
annuities
SAIFisaring-fencedwith-profits
sub-fundofPAC.Nonewbusiness
iswritteninSAIF,althoughregular
premiumsarestillbeingpaidon
in-forcepolicies.Thefundissolely
forthebenefitofpolicyholders
ofSAIF.Shareholdershaveno
interestintheprofitsofthisfund
althoughtheyareentitledtoasset
managementfeesonthisbusiness.
Theprocessfordetermining
policyholderbonusesofSAIF
with-profitspolicies,issimilarto
thatforthewith-profitspolicies
oftheWPSF.However,inaddition,
thesurplusassetsinSAIFare
allocatedtopoliciesinanorderly
andequitabledistributionover
timeasenhancementsto
policyholderbenefits.
Level
Provideafixedannuitypayment
overthepolicyholder’slife.
Fixed increase
Provideforaregularannuity
paymentwhichincorporates
automaticincreasesinannuity
paymentsbyfixedamountsoverthe
policyholder’slife.
Inflation-linked
Provideforaregularannuity
paymenttowhichanadditional
amountisaddedperiodicallybased
ontheincreaseintheUKRPI.
With-profits
Writteninthewith-profitsfund,
thesecombinetheincomefeatures
ofannuityproductswiththe
investmentsmoothingfeaturesof
with-profitsproductsandenable
policyholderstoobtainexposureto
investmentreturnonthewith-
profitsfundequityshares,property
andotherinvestmentcategories
overtime.
Theprocessofdetermining
policyholderliabilitiesofSAIFissimilar
tothatforthewith-profitspoliciesof
theWPSF.
Annuityliabilitiesarecalculatedasthe
expectedfuturevalueoffutureannuity
paymentsandexpensesdiscountedby
avaluationinterestrate.
Keyassumptionsinclude:
Mortality
Themortalityassumptionsaresetin
lightofrecentpopulationandinternal
experience.Theassumptionsused
areadjustedpercentagesofstandard
actuarialmortalitytableswithan
allowanceforfuturemortality
improvements,theeffectofanti-
selectionandcharacteristicsspecific
toeachindividualpolicyholder.
Whereannuitieshavebeensoldon
anenhancedbasistoimpairedlives
anadditionalageadjustmentismade.
Newmortalityprojectionmodelsare
releasedannuallybytheContinuous
MortalityInvestigation(CMI).The
CMI2016modelwasusedtoproduce
the2018resultscalibratedtoreflect
anappropriateviewoffuture
mortalityimprovements.
Forannuitiesinpayment,themortality
tablesusedaresetoutinC4.1(d)(iii).
www.prudential.co.uk
AnnualReport2018 Prudential plc 261
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C4 Policyholder liabilities and unallocated surplus continued
C4.2 Products and determining contract liabilities continued
C4.2(c) UK and Europe continued
Contract type
Description
Material features
Determination of liabilities
Annuities
– level, fixed
increase and
inflation-
linked
annuities
continued
Expense
Maintenanceexpenseassumptionsare
expressedasperpolicyamounts.They
aresetbasedontheexpensesincurred
duringtheyear,includinganallowance
forongoinginvestmentexpenditure
andallocatedbetweenentitiesand
productgroupsinaccordancewiththe
operation’sinternalcostallocation
model.Amarginforadversedeviation
isaddedtothisamount.Expense
inflationassumptionsaresetconsistent
withtheeconomicbasisandbasedon
theinflationswapspotcurve.
Valuation interest rates
Valuationinterestratesusedto
discounttheliabilitiesarebasedonthe
yieldsasatthevaluationdateonthe
assetsbackingthetechnicalprovisions.
Forfixedinterestsecuritiestheinternal
rateofreturnoftheassetsbackingthe
liabilitiesisused.Propertiesarevalued
usingtheredemptionyield,andfor
equitiesitisthegreaterofthedividend
yieldandtheaverageofthedividend
yieldandtheearningsyield.An
adjustmentismadetotheyieldon
non-risk-freefixedinterestsecurities
andpropertytoreflectcreditrisk.
Credit risk
ForIFRSreporting,theresultsforUK
shareholder-backedannuitybusiness
areparticularlysensitivetothe
allowancesmadeforcreditriskonfixed
interestsecurities.Furtherdetailson
creditriskallowanceareprovidedin
noteB3(ii).
262 Prudential plc AnnualReport2018
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C Balance sheet notes continued C4.2(c) UK and Europe continued
Contract type
Description
Material features
Determination of liabilities
Unit-linked
UKandEuropeinsurance
operationsalsohaveabookof
unit-linkedpolicies.
Therearenoguaranteed
maturityvaluesorguaranteed
annuityoptionsonunit-linked
policiesexceptforminor
amountsforcertainpolicies
linkedtocashunitswithinSAIF.
Forunit-linkedcontractstheattaching
liabilityreflectstheunitvalue
obligationand,inthecaseofpolicies
classifiedasinsurancecontracts,
provisionforexpensesandmortality
risk.Thelattercomponentis
determinedbyapplyingmortality
assumptionsonabasisthatis
appropriateforthepolicyholder
profile.
Forthosecontractswherethelevelof
insuranceriskisinsignificant,theassets
andliabilitiesarisingunderthe
contractsaredistinguishedbetween
thosethatrelatetothefinancial
instrumentliabilityandacquisition
costsanddeferredincomethatrelate
tothecomponentofthecontractthat
relatestoinvestmentmanagement.
Acquisitioncostsanddeferredincome
arerecognisedconsistentwiththelevel
ofserviceprovisioninlinewiththe
requirementsofIFRS15.
Tocalculatethenon-unitreservesfor
linkedbusiness,assumptionshave
beensetforthegrossunitgrowthrate
andtherateofinflationofmaintenance
expenses,aswellasforthevaluation
interestrate.
Operation of the UK with-profits sub-funds
TheWPSFmainlycontainswith-profitsbusinessbutitalsocontainssomenon-profitbusiness(unit-linked,termassurancesand
annuities).TheWPSF’sprofits,apportioned90percenttoitspolicyholdersand10percenttoshareholdersassurplusfordistribution,
aredeterminedviatheannualactuarialvaluation.
Application of significant judgement
DeterminingbonusesusingthetabledescribedinthematerialfeaturestableaboverequiresthePACBoardtoapplysignificant
judgementinmanyrespects,includinginparticularthefollowing:
— Determiningwhatconstitutesfairtreatmentofcustomers;
— Smoothingofinvestmentreturns;and
— Determiningatwhatleveltosetbonusestoensurethattheyarecompetitive.
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AnnualReport2018 Prudential plc 263
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C4.2 Products and determining contract liabilities continued
Key assumptions
Theoverallrateofreturnoninvestmentsandtheexpectationoffutureinvestmentreturnsarethemostimportantinfluencesinbonus
rates,subjecttothesmoothingdescribedbelow.Prudentialdeterminestheassumptionstoapplyinrespectofthesefactors,including
theeffectsofreasonablylikelychangesinkeyassumptions,inthecontextoftheoverarchingdiscretionaryandsmoothingframework
thatappliestoitswith-profitsbusiness.Assuch,itisnotpossibletospecificallyquantifytheeffectsofeachoftheseassumptions,orof
reasonablylikelychangesintheseassumptions.
conceptuallywiththeapproachadoptedbyotherfirmsthatmanageawith-profitsbusinessandisalsoconsistentwiththerequirements
ofthePrinciplesandPracticesofFinancialManagement(PPFM)thatareappliedinthemanagementoftheirwith-profitsfunds.
Prudential’sapproach,inapplyingsignificantjudgementanddiscretioninrelationtodeterminingbonusrates,isconsistent
Inaccordancewithindustry-wideregulatoryrequirements,thePACBoardhasappointed:
— AchiefactuarywhoprovidesthePACBoardwithallactuarialadvice;
— Awith-profitsactuarywhosespecificdutyistoadvisethePACBoardonthereasonablenessandproportionalityofthemannerin
whichitsdiscretionhasbeenexercisedinapplyingtheprinciplesandpracticesoffinancialmanagementandthemannerinwhich
anyconflictinginterestshavebeenaddressed;and
— Awith-profitscommitteeofindependentindividuals,whichassessesthedegreeofcompliancewiththePPFMandthemannerin
whichconflictingrightshavebeenaddressed.
Determination of bonus rates
IndeterminingbonusratesfortheUKwith-profitspolicies,smoothingisappliedtotheallocationoftheoverallearningsoftheUK
with-profitsfundofwhichtheinvestmentreturnisasignificantelement.
Thedegreeofsmoothingisillustratednumericallybycomparinginthefollowingtabletherelatively‘smoothed’levelofpolicyholder
bonusesdeclaredaspartofthesurplusfordistribution,withthemorevolatilemovementininvestmentreturnandotheritemsofincome
andexpenditureoftheUKcomponentoftheUKwith-profitsfundforeachyearpresented.
Netincomeofthefund:
Investmentreturn
Claimsincurred
Movementinpolicyholderliabilities
Addbackpolicyholderbonusesfortheyear(asshownbelow)
Claimsincurredandmovementinpolicyholderliabilities
(includingchargeforprovisionforassetsharesandexcludingpolicyholderbonuses)
Earnedpremiums,netofreinsurance
Otherincome
Acquisitioncostsandotherexpenditure
Shareofprofitsfrominvestmentjointventures
Taxcredit(charge)
Netincomeofthefundbeforemovementinunallocatedsurplus
Movementinunallocatedsurplus
Surplusfordistribution
Surplusfordistributionallocatedasfollows:
–90%policyholders'bonus(asshownabove)
–10%shareholders’transfers
2018 £m
2017 £m
(2,261)
(8,776)
(554)
2,345
(6,985)
12,505
36
(1,170)
36
273
2,434
170
2,604
9,985
(8,449)
(10,011)
2,071
(16,389)
12,508
35
(1,732)
106
(440)
4,073
(1,769)
2,304
2,345
259
2,604
2,071
233
2,304
264 Prudential plc AnnualReport2018
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C Balance sheet notes continued C5 Intangible assets
C5.1 Goodwill
Carryingvalueatbeginningofyear
AcquisitionofTMBAssetManagementCo.,Ltd.inThailand(seenoteD1.2)
Otheradditionsintheyear(seebelow)
Disposals/reclassificationstoheldforsale
Exchangedifferences
Carrying value at end of year
Comprising:
M&G–attributabletoshareholders
Other–attributabletoshareholders
Goodwill–attributabletoshareholders
Venturefundinvestments–attributabletowith-profitsfunds
31 Dec 2018 £m
31 Dec 2017 £m
Attributable to:
Shareholders With-profits
1,458
181
–
–
12
1,651
24
–
195
(10)
(3)
206
Total
1,482
181
195
(10)
9
1,857
1,153
498
1,651
206
1,857
Total
1,628
–
9
(155)
–
1,482
1,153
305
1,458
24
1,482
During2018,theUKwith-profitsfund,viaitsventurefundholdingsmanagedbyM&GPrudentialassetmanagement,madeasmall
numberofacquisitionsthatareconsolidatedbytheGroupresultinginanadditiontogoodwillof£195million.Asthesetransactionsare
withinthewith-profitsfund,theyhavenoimpactonshareholders’profitorequityfortheyearended31December2018.Theimpacton
theGroup’sconsolidatedrevenue,includinginvestmentreturns,isnotmaterial.Hadtheacquisitionsbeeneffectedat1January2018,
therevenueandprofitoftheGroupfor2018wouldnothavebeenmateriallydifferent.
Impairment testing
Goodwilldoesnotgeneratecashflowsindependentlyofothergroupsofassetsandthusisassignedtocash-generatingunitsforthe
purposesofimpairmenttesting.Thesecash-generatingunitsarebaseduponhowmanagementmonitorsthebusinessandrepresentthe
lowestleveltowhichgoodwillcanbeallocatedonareasonablebasis.
Assessment of whether goodwill may be impaired
Goodwillistestedforimpairmentbycomparingthecash-generatingunit’scarryingamount,includinganygoodwill,withitsrecoverable
amount.TheGroup’smethodologyofassessingwhethergoodwillmaybeimpairedforacquiredlifeandassetmanagementoperationsis
discussedbelow:
M&G
TherecoverableamountfortheM&Gbusiness(whichispartoftheUKandEuropeoperatingsegment)hasbeendeterminedby
calculatingthevalueinuseofM&GGroupLimitedanditssubsidiaries(consideredtobeacash-generatingunitduring2018).Thishas
beencalculatedbyaggregatingthepresentvalueoffuturecashflowsexpectedtobederivedfromtheM&Gbusiness.
Thediscountedcashflowvaluationhasbeenbasedonathree-yearplanpreparedbyM&G,andapprovedbymanagement,andcash
flowprojectionsforlateryears.
Thevalueinuseisparticularlysensitivetoanumberofkeyassumptionsasfollows:
— Thesetofeconomic,marketandbusinessassumptionsusedtoderivethethree-yearplan.Thedirectandsecondaryeffectsofrecent
developments,suchaschangesinglobalequitymarketsandtrendsinfundflows,areconsideredbymanagementinarrivingatthe
expectationsforthefinalprojectionsfortheplan;
— Theassumedgrowthrateonforecastcashflowsbeyondtheterminalyearoftheplanafterconsideringexpectedfutureandpast
growthrates.Agrowthrateof1.7percent(2017:1.7percent)hasbeenusedtoextrapolatebeyondtheplanperiod;
— Theriskdiscountrate.Differingdiscountrateshavebeenappliedinaccordancewiththenatureoftheindividualcomponent
businesses.Forthemostmaterialcomponentretailandinstitutionalbusiness,ariskdiscountrateof12percent(2017:12percent)has
beenappliedtopost-taxcashflows.Thepre-taxriskdiscountratewas15percent(2017:15percent);and
— Thatassetmanagementcontractscontinueonsimilarterms.Managementbelievesthatanyreasonablechangeinthekey
assumptionswouldnotcausetherecoverableamountofM&Gtofallbelowitscarryingamount.
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AnnualReport2018 Prudential plc 265
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C5 Intangible assets continued
C5.1 Goodwill continued
Other goodwill attributable to shareholders
OthergoodwillattributabletoshareholdersrepresentsamountsallocatedtoentitiesinAsiainrespectofbothacquiredasset
managementandlifebusinesses.Thegoodwillinrespectofassetmanagementbusinessesat31December2018comprisedmainlythe
goodwillarisingfromtheacquisitionofTMBAssetManagementCo.,Ltd.inThailandduringtheyear(seenoteD1.2).At31December
2018,therecoverableamountofthisbusinesshasbeendeterminedbyusingadiscountedcashflowvaluation.
Foracquiredlifebusinesses,theCompanyroutinelycomparestheaggregateofnetassetvalueandacquiredgoodwillonanIFRS
basisofacquiredlifebusinesswiththevalueofthecurrentin-forcebusinessasdeterminedusingtheEEVmethodology.Anyexcessof
IFRSoverEEVcarryingvalueisthencomparedwithEEVbasisvalueofcurrentandprojectedfuturenewbusinesstodeterminewhether
thereisanyindicationthatthegoodwillintheIFRSstatementoffinancialpositionmaybeimpaired.Themethodologyandassumptions
underpinningtheGroup’sEEVbasisofreportingareincludedintheEEVbasissupplementaryinformationinthisAnnualReport.
Venture fund investments
Goodwillforventurefundinvestmentsistestedforimpairmentbycomparingthebusiness’scarryingvalue,includinggoodwilltoits
recoverableamount(fairvaluelesscoststosell).Theaccumulatedimpairmentofgoodwillasat31December2018was£4.7million
(31December2017:nil),whollyattributabletowith-profitsfunds.
C5.2 Deferred acquisition costs and other intangible assets
Deferredacquisitioncostsandotherintangibleassetsattributabletoshareholders note (i)
Otherintangibleassets,includingcomputersoftware,attributabletowith-profitsfunds
Totalofdeferredacquisitioncostsandotherintangibleassets
(i) Deferred acquisition costs and other intangible assets attributable to shareholders
Totaldeferredacquisitioncostsandotherintangibleassetsattributabletoshareholderscomprise:
DeferredacquisitioncostsrelatedtoinsurancecontractsasclassifiedunderIFRS4
Deferredacquisitioncostsrelatedtoinvestmentmanagementcontracts,includinglifeassurancecontracts
classifiedasfinancialinstrumentsandinvestmentmanagementcontractsunderIFRS4
Deferredacquisitioncostsrelatedtoinsuranceandinvestmentcontracts note (ii)
Presentvalueofacquiredin-forcepoliciesforinsurancecontractsasclassifiedunderIFRS4(PVIF)
Distributionrightsandotherintangibles
Presentvalueofacquiredin-force(PVIF)andotherintangiblesattributabletoshareholders note (iii)
31 Dec
2018 £m
11,784
139
11,923
31 Dec
2017 £m
10,866
145
11,011
31 Dec
2018 £m
10,017
78
10,095
34
1,655
1,689
31 Dec
2017 £m
9,170
63
9,233
36
1,597
1,633
Totalofdeferredacquisitioncostsandotherintangibleassets note (a)
11,784
10,866
266 Prudential plc AnnualReport2018
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C Balance sheet notes continued Notes
(a)
Total deferred acquisition costs and other intangible assets can be further analysed by business operations as follows:
31 Dec 2018 £m
Deferred acquisition costs
31 Dec
2017 £m
Balance at 1 January
Additions
Amortisationtotheincomestatement: note (c)†
AdjustedIFRSoperatingprofitbasedon
longer-terminvestmentreturns
Non-operatingprofit
Disposalsandtransfers
Exchangedifferencesandothermovements
AmortisationofDACrelatedtonetunrealised
valuationmovementsontheUSinsurance
operation’savailable-for-salesecuritiesrecognised
withinothercomprehensiveincome
Balance at 31 December
Asia
insurance
946
419
(148)
–
(148)
–
47
US
insurance
note(b)
8,197
569
(683)
(114)
(797)
–
512
–
1,264
246
8,727
UK and
Europe
insurance
All
asset
manage-
ment
PVIF and
other
intangibles*
Total
Total
84
15
(11)
–
(11)
–
(2)
–
86
6
15
(3)
–
(3)
–
–
–
18
1,633
230
10,866
1,248
10,755
1,240
(179)
(4)
(183)
(14)
23
(1,024)
(118)
(1,142)
(14)
580
(709)
455
(254)
–
(799)
–
246
(76)
1,689
11,784
10,866
*PVIFandotherintangiblescomprisePVIF,distributionrightsandotherintangiblessuchassoftwarerights.Distributionrightsrelatetoamountsthathavebeenpaidorhave
becomeunconditionallydueforpaymentasaresultofpasteventsinrespectofbancassurancepartnershiparrangementsinAsia.Theseagreementsallowforbankdistribution
ofPrudential’sinsuranceproductsforafixedperiodoftime.Softwarerightsincludeadditionsof£34million,amortisationof£32million,foreignexchangelossesof£7millionand
abalanceat31December2018of£62million.
†UndertheGroup’sapplicationofIFRS4,USGAAPisusedformeasuringtheinsuranceassetsandliabilitiesofitsUSandcertainAsiaoperations.UnderUSGAAP,mostofthe
USinsuranceoperation’sproductsareaccountedforunderAccountingStandardsCodificationTopic944,FinancialServices–Insurance,oftheFinancialAccountingStandards
Boardwherebydeferredacquisitioncostsareamortisedinlinewiththeemergenceofactualandexpectedgrossprofitswhicharedeterminedusinganassumptionforlong-term
investmentreturnsfortheseparateaccountof7.4percent(2017:7.4percent)(grossofassetmanagementfeesandotherchargestopolicyholders,butnetofexternalfund
managementfees).TheamountsincludedintheincomestatementandothercomprehensiveincomeaffectthepatternofprofitemergenceandthustheDACamortisation
attaching.DACamortisationisallocatedtotheoperatingandnon-operatingcomponentsoftheGroup’ssupplementaryanalysisofprofitandothercomprehensiveincomeby
referencetotheunderlyingitems(seenoteC7.3(iv)).
(b)
The DAC amount in respect of US insurance operations comprises amounts in respect of:
Variableannuitybusiness
Otherbusiness
CumulativeshadowDAC(forunrealisedgainsbookedinothercomprehensiveincome)*
TotalDACforUSoperations
31 Dec
2018 £m
31 Dec
2017 £m
8,477
299
(49)
8,727
8,208
278
(289)
8,197
*Againof£246million(2017:alossof£(76)million)forshadowDACamortisationisbookedwithinothercomprehensiveincometoreflecttheimpactfromthenegativeunrealised
valuationmovementin2018of£1,617million(2017:positiveunrealisedvaluationmovementof£617million).Theseadjustmentsreflectmovementfromperiodtoperiod,inthe
changestothepatternofreportedgrossprofitsthatwouldhaveoccurrediftheassetsreflectedinthestatementoffinancialpositionhadbeensold,crystallisingtheunrealised
gainsandlosses,andtheproceedsreinvestedattheyieldscurrentlyavailableinthemarket.At31December2018,thecumulativeshadowDACbalanceasshowninthetable
abovewasnegative£49million(31December2017:negative£289million).
(c)
Furthermore,inthoseperiodswherethecaporfloorisrelevant,themeanreversiontechniqueprovidesnofurtherdampeningandadditionalvolatilitymayresult.
In2018,theDACamortisationchargeforadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnswasdeterminedafterincludingadebitforaccelerated
Sensitivity of amortisation charge
TheamortisationchargetotheincomestatementisreflectedinbothadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsandshort-termfluctuationsin
investmentreturns.TheamortisationchargetoadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsinareportingperiodcomprises:
– Acoreamountthatreflectsarelativelystableproportionofunderlyingpremiumsorprofit;and
– Anelementofaccelerationordecelerationarisingfrommarketmovementsdifferingfromexpectations.
Inperiodswherethecapandfloorfeatureofthemeanreversiontechnique(whichisusedformoderatingtheeffectofshort-termvolatilityininvestmentreturns)arenotrelevant,
thetechniqueoperatestodampenthesecondelementabove.Nevertheless,extrememarketmovementscancausematerialaccelerationordecelerationofamortisationinspite
ofthisdampeningeffect.
amortisationof£194million(2017:creditfordeceleratedamortisationof£86million).Theaccelerationarisingin2018reflectsamechanicalincreaseintheprojectedseparate
accountreturnforthenextfiveyearsunderthemean-reversiontechnique.Underthistechniquetheprojectedlevelofreturnforeachofthenextfiveyearsisadjustedsothat
incombinationwiththeactualratesofreturnfortheprecedingthreeyears(includingthecurrentperiod)theassumedlong-termannualseparateaccountreturnof7.4percent
isrealisedonaverageovertheentireeight-yearperiod.TheaccelerationinDACamortisationin2018isdrivenbothbytheactualseparatereturnintheyearbeinglowerthan
thatassumedandbythelowerthanexpectedreturnin2015fallingoutoftheeight-yearperiodineffectreversingthedecelerationexperiencedin2015underthemean
reversionformula.
themeanreversionassumptionlieswithinthecorridor.At31December2018,itwouldtakeapproximatemovementsinseparateaccountvaluesofmorethaneithernegative
22percentorpositive57percent(31December2017:negative32percentorpositive37percent)forthemeanreversionassumptiontomoveoutsidethecorridor.
Theapplicationofthemeanreversionformula(describedinnoteA3.1)hastheeffectofdampeningtheimpactofequitymarketmovementsonDACamortisationwhile
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AnnualReport2018 Prudential plc 267
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
C5 Intangible assets continued
C5.2 Deferred acquisition costs and other intangible assets continued
(ii) Deferred acquisition costs related to insurance and investment contracts
Themovementsindeferredacquisitioncostsrelatingtoinsuranceandinvestmentcontractsareasfollows:
DAC at 1 January
Additions
Amortisation
Exchangedifferences
ChangeinshadowDACrelatedtomovementinunrealisedappreciationof
Jackson’ssecuritiesclassifiedasavailable-for-sale
DAC at 31 December
2018 £m
2017 £m
Insurance
contracts
Investment
management
note
Insurance
contracts
Investment
management
note
9,170
991
(947)
557
246
10,017
63
26
(11)
–
–
78
9,114
1,000
(77)
(791)
(76)
9,170
64
11
(12)
–
–
63
Note
Alloftheadditionsarethroughinternaldevelopment.Thecarryingamountofthebalancecomprisesthefollowinggrossandaccumulatedamortisationamounts:
Grossamount
Accumulatedamortisation
Net book amount
2018 £m
2017 £m
181
(103)
78
156
(93)
63
(iii) Present value of acquired in-force (PVIF) and other intangibles attributable to shareholders
At 1 January
Cost
Accumulatedamortisation
Additions
Amortisationcharge
Disposalsandtransfers
Exchangedifferencesandother
movements
At 31 December
Comprising:
Cost
Accumulatedamortisation
2018 £m
2017 £m
PVIF
note(a)
Distribution
rights
note(b)
Other
intangibles
(including
software)
note(c)
227
(191)
36
–
(4)
–
2
34
232
(198)
34
1,793
(312)
1,481
181
(142)
–
18
1,538
1,999
(461)
1,538
363
(247)
116
49
(37)
(14)
3
117
313
(196)
117
Total
2,383
(750)
1,633
230
(183)
(14)
23
1,689
2,544
(855)
1,689
PVIF
note(a)
Distribution
rights
note(b)
Other
intangibles
(including
software)
note(c)
226
(183)
43
–
(7)
–
–
36
227
(191)
36
1,628
(196)
1,432
173
(121)
–
(3)
1,481
1,793
(312)
1,481
321
(219)
102
56
(37)
–
(5)
116
363
(247)
116
Total
2,175
(598)
1,577
229
(165)
–
(8)
1,633
2,383
(750)
1,633
Notes
(a)
AllofthePVIFbalancesrelatetoinsurancecontracts.ThePVIFattachingtoinvestmentcontractshavebeenfullyamortised.Amortisationischargedovertheperiodofprovision
ofassetmanagementservicesasthoseprofitsemerge.
(b) DistributionrightsrelatetofeespaidinrelationtothebancassurancepartnershiparrangementsforthebankdistributionofPrudential’sinsuranceproductsforafixedperiod
oftime.Thedistributionrightsamountsareamortisedonabasistoreflectthepatterninwhichthefutureeconomicbenefitsareexpectedtobeconsumedbyreferencetonew
businessproductionlevels.
Softwareisamortisedoveritsusefuleconomiclife,whichgenerallyrepresentsthelicenceperiodofthesoftwareacquired.
(c)
268 Prudential plc AnnualReport2018
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C Balance sheet notes continued
C6 Borrowings
C6.1 Core structural borrowings of shareholder-financed businesses
Holding company operations: note (i)
US$250m6.75%Notes(Tier1) note (vi)
US$300m6.5%Notes(Tier1) note (vi)
US$700m5.25%Notes(Tier2)
US$550m7.75%Notes(Tier1) note (v)
US$1,000m5.25%Notes(Tier2)
US$725m4.375%Notes(Tier2)
US$750m4.875%Notes(Tier2)
PerpetualSubordinatedCapitalSecurities
¤20mMediumTermNotes2023(Tier2) note (vii)
£435m6.125%Notes2031(Tier2)
£400m11.375%Notes2039(Tier2)
£600m5%Notes2055(Tier2)
£700m5.7%Notes2063(Tier2)
£750m5.625%Notes2051(Tier2) note (iv)
£500m6.25%Notes2068(Tier2) note (iv)
US$500m6.5%Notes2048(Tier2) note (iv)
SubordinatedNotes
Subordinateddebttotal
Seniordebt: note (ii)
£300m6.875%Bonds2023
£250m5.875%Bonds2029
Bankloan note (iii)
Holding company total
PrudentialCapitalbankloan note (iii)
JacksonUS$250m8.15%SurplusNotes2027 note (viii)
Total (per consolidated statement of financial position)
31 Dec
2018 £m
31 Dec
2017 £m
196
235
550
–
780
565
583
185
222
517
407
731
530
548
2,909
3,140
18
431
399
591
696
743
498
391
3,767
6,676
294
223
275
7,468
–
196
7,664
18
430
397
591
696
–
–
–
2,132
5,272
300
249
–
5,821
275
184
6,280
Notes
(i)
(ii)
(iii)
(iv)
(v)
(vi)
ThesedebttierclassificationsareconsistentwiththetreatmentofcapitalforregulatorypurposesundertheSolvencyIIregime.
TheGrouphasdesignatedUS$3,725million(31December2017:US$4,275million)ofitsUSdollardenominatedsubordinateddebtasanetinvestmenthedgeunderIAS39to
hedgethecurrencyrisksrelatedtothenetinvestmentinJackson.
Theseniordebtranksabovesubordinateddebtintheeventofliquidation.In2018,aspartofitspreparationtodemergeM&GPrudential,theGroupmadecertainmodificationsto
thetermsandconditionsoftheseniorbondswithbondholders’consent.Theamendmenttothetermsandconditionswillavoidaneventofatechnicaldefaultonthebonds,should
thedemergerproceed.Thefeespaidtobondholdershavebeenadjustedtothecarryingvalueofthebondsandwillbeamortisedinsubsequentperiods.Nootheradjustments
weremadetothecarryingvalueofthedebtasaresultofthemodification.
Thebankloanof£275millionisdrawnatacostof12-monthGBPLIBORplus0.33percent.Theloan,heldbyPrudentialCapitalasof31December2017,wasrenewedinDecember
2018,withPrudentialplcbecomingthenewholder.Theloanmatureson20December2022withanoptiontorepayannually.
InOctober2018,theCompanyissuedthefollowingthreesubstitutablecorestructuralborrowingsaspartoftheprocessrequiredbeforedemergertorebalancedebtacross
M&GPrudentialandPrudential(seebelow):
–£750million5.625percentTier2subordinatednotesdue2051.Theproceeds,netofcosts,were£743million;
–£500million6.25percentTier2subordinatednotesdue2068.Theproceeds,netofcosts,were£498million;and
–US$500million6.5percentTier2subordinatednotesdue2048.Theproceeds,netofcosts,were£389million(US$498million).
InDecember2018,theCompanypaid£434milliontoredeemitsUS$550million7.75percentTier1perpetualsubordinatednotes.
Theseborrowingscanbeconverted,inwholeorinpart,attheCompany’soptionandsubjecttocertainconditions,onanyinterestpaymentdate,intooneormoreseriesof
Prudentialpreferenceshares.
(vii) The¤20millionborrowingswereissuedat20-yearEuroConstantMaturitySwap(cappedat6.5percent).Thesehavebeenswappedintoborrowingsof£14millionwithinterest
payableatthree-monthGBPLIBORplus1.2percent.
Jackson’sborrowingsareunsecuredandsubordinatedtoallpresentandfutureindebtedness,policyclaimsandothercreditorclaimsofJackson.
(viii)
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AnnualReport2018 Prudential plc 269
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C6 Borrowings continued
C6.1 Core structural borrowings of shareholder-financed businesses continued
Priortothedemerger,theGroupexpectstorebalanceitsdebtcapitalacrossPrudentialandM&GPrudential.Thiswillincludetheultimate
holdingcompanyofM&GPrudentialbecominganissuerofnewdebt,includingdebtsubstitutedfromPrudential,andPrudential
redeemingsomeofitsexistingdebt.Followingtheseactions,theoverallabsolutequantumofdebtacrossPrudentialandM&GPrudential
iscurrentlyexpectedtoincrease,byanamountwhichisnotconsideredtobematerialinthecontextoftheGroup’stotaloutstandingdebt
asat30June2018,beforeanysubstitutabledebthadbeenissued,of£7.6billion(comprisingtheGroup’scorestructuralborrowingsof
£6.4billionandshareholderborrowingsfromshort-termfixedincomesecuritiesprogrammeof£1.2billion).
Atthetimeofthedemerger,PrudentialexpectsM&GPrudentialtobeholdingaround£3.5billionofsubordinateddebt.This
expectationissubjecttotheM&GPrudentialcapitalriskappetitebeingapprovedbytheBoardoftheultimateholdingcompanyof
M&GPrudential,oncefullyconstitutedtoincludeindependentnon-executivedirectors,andreflectsthecurrentoperatingenvironment
andeconomicconditions,materialchangesinwhichmayleadtoadifferentoutcome.
Ratings
PrudentialplchasdebtratingsfromStandard&Poor’s,Moody’sandFitch.Prudentialplc’slong-termseniordebtisratedA2byMoody’s,
AbyStandard&Poor’sandA-byFitch.
Prudentialplc’sshort-termdebtisratedasP-1byMoody’s,A-1byStandard&Poor’sandF1byFitch.
ThefinancialstrengthofThePrudentialAssuranceCompanyLimitedisratedA+byStandard&Poor’s,Aa3byMoody’sand
AA-byFitch.
JacksonNationalLifeInsuranceCompany’sfinancialstrengthisratedAA-byStandard&Poor’sandFitch,A1byMoody’sand
A+byA.M.Best.
PrudentialAssuranceCo.Singapore(Pte)Ltd.’s(PrudentialSingapore)financialstrengthisratedAA-byStandard&Poor’s.
AlltheGroup’sratingsareonastableoutlook.
C6.2 Other borrowings
(i) Operational borrowings attributable to shareholder-financed businesses
CommercialPaper
MediumTermNotes2018
Borrowingsinrespectofshort-termfixedincomesecuritiesprogrammes
Bankloansandoverdrafts
Obligationsunderfinanceleases
Otherborrowings
Otherborrowings note
Total
31 Dec
2018 £m
31 Dec
2017 £m
472
–
472
90
19
417
526
998
485
600
1,085
70
5
631
706
1,791
Note
OtherborrowingsmainlyincludeseniordebtissuedthroughtheFederalHomeLoanBankofIndianapolis(FHLB),securedbycollateralpostedwiththeFHLBbyJackson.Inaddition,other
borrowingsincludeamountswhoserepaymenttothelenderiscontingentuponfuturesurplusemergingfromcertaincontractsspecifiedunderthearrangement.Ifinsufficientsurplus
emergesonthosecontracts,thereisnorecoursetootherassetsoftheGroupandtheliabilityisnotpayabletothedegreeofshortfall.
270 Prudential plc AnnualReport2018
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C Balance sheet notes continued (ii) Borrowings attributable to with-profits businesses
Non-recourseborrowingsofconsolidatedinvestmentfunds*
£100m8.5%undatedsubordinatedguaranteedbondsofScottishAmicableFinanceplc†
Otherborrowings(includingobligationsunderfinanceleases)
Total
31 Dec
2018 £m
31 Dec
2017 £m
3,845
–
95
3,940
3,570
100
46
3,716
*Inallinstancestheholdersofthedebtinstrumentsissuedbythesesubsidiariesandfundsdonothaverecoursebeyondtheassetsofthesesubsidiariesandfunds.
†TheinterestsoftheholdersofthebondsissuedbyScottishAmicableFinanceplc,asubsidiaryoftheScottishAmicableInsuranceFund,aresubordinatedtotheentitlementsofthe
policyholdersofthatfund.Thesebondswereredeemedinfullon30June2018.
C6.3 Maturity analysis
ThefollowingtablesetsouttheremainingcontractualmaturityanalysisoftheGroup’sborrowingsasrecognisedinthestatementof
financialposition:
Lessthan1year
1to2years
2to3years
3to4years
4to5years
Over5years
Total
Shareholder-financed businesses
With-profits businesses
Core structural borrowings
Operational borrowings
Borrowings
31 Dec
2018 £m
31 Dec
2017 £m
31 Dec
2018 £m
31 Dec
2017 £m
31 Dec
2018 £m
31 Dec
2017 £m
–
–
–
275
312
7,077
7,664
275
–
–
–
–
6,005
6,280
840
89
1
–
–
68
998
1,723
1
1
–
–
66
1,791
573
71
90
5
102
3,099
3,940
351
371
184
59
1
2,750
3,716
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AnnualReport2018 Prudential plc 271
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C7 Risk and sensitivity analysis
C7.1 Group overview
The Group’s risk framework and the management of the risk, including those attached to the Group’s financial statements including
financial assets, financial liabilities and insurance liabilities, together with the inter-relationship with the management of capital have
been included in the audited sections of the ‘Chief Risk Officer’s Report of the risks facing our business and how these are managed’.
The financial and insurance assets and liabilities on the Group’s balance sheet are, to varying degrees, subject to market and insurance
risk and other changes of experience assumptions that may have a material effect on IFRS basis profit or loss and shareholders’ equity.
The market and insurance risks, including how they affect Group’s operations and how these are managed are discussed in the Risk
report referred to above.
The most significant items that the IFRS shareholders’ profit or loss and shareholders’ equity for the Group’s life assurance business
are sensitive to, are shown in the following tables. The distinction between direct and indirect exposure is not intended to indicate the
relative size of the sensitivity.
Type of business
Market and credit risk
Insurance and lapse risk
Asia insurance operations (see also section C7.2)
Investments/derivatives
Liabilities/unallocated surplus
Other exposure
All business
Currency risk
With-profits business
Net neutral direct exposure (indirect exposure only)
Unit-linked business
Net neutral direct exposure (indirect exposure only)
Non-participating
business
Credit risk
Asset/liability mismatch risk
Interest rates for those
operations where the basis
of insurance liabilities is
sensitive to current market
movements
Interest rate and price risk
US insurance operations (see also section C7.3)
All business
Variable annuity
business
Currency risk
Net effect of market risk arising from incidence of guarantee
features and variability of asset management fees offset by
derivative hedging programme
Fixed index annuity
business
Derivative hedge programme
to the extent not fully hedged
against liability
Incidence of equity
participation features
Fixed index annuities,
Fixed annuities and
GIC business
Credit risk
Interest rate risk
Profit and loss and shareholders’
equity are volatile for these risks as
they affect the values of derivatives
and embedded derivatives and
impairment losses. In addition,
shareholders’ equity is volatile
for the incidence of these risks
on unrealised appreciation of fixed
income securities classified as
available-for-sale under IAS 39
Mortality and
morbidity risk
Persistency risk
Investment performance
subject to smoothing
through declared
bonuses
Investment performance
through asset
management fees
Persistency risk
Risk that utilisation of
withdrawal benefits
or lapse levels differ
from those assumed
in pricing
Spread difference
between earned
rate and rate credited
to policyholders
Lapse risk, but the
effects of extreme
events may be
mitigated by the
application of market
value adjustments
272 Prudential plc Annual Report 2018
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C Balance sheet notes continued Type of business
Market and credit risk
Insurance and lapse risk
Investments/derivatives
Liabilities/unallocated surplus
Other exposure
UK and Europe insurance operations (see also section C7.4)
With-profits business
Net neutral direct exposure (indirect exposure only)
SAIF sub-fund
Net neutral direct exposure (indirect exposure only)
Unit-linked business
Net neutral direct exposure (indirect exposure only)
Shareholder-backed
annuity business
Credit risk for assets covering
liabilities and shareholder capital
Asset/liability mismatch risk
Interest rate risk for assets in
excess of liabilities, ie assets
representing shareholder capital
Investment performance
subject to smoothing
through declared
bonuses
Asset management
fees earned
Investment performance
through asset
management fees
Persistency risk to
future shareholder
transfers
Persistency risk
Mortality experience
and assumptions
for longevity
Detailed analysis of sensitivity of IFRS basis profit or loss and shareholders’ equity to key market and other risks by business unit is
provided in notes C7.2, C7.3, C7.4 and C7.5. The sensitivity analysis provided shows the effect on profit or loss and shareholders’ equity
to changes in the relevant risk variables, all of which are reasonably possible at the relevant balance sheet date. In the equity risk
sensitivity analysis shown below, the Group has considered the impact of an instantaneous 20 per cent fall in equity markets. If equity
markets were to fall by more than 20 per cent, the Group believes that this would not be an instantaneous fall but rather would be
expected to occur over a period of time during which the Group would be able to put mitigating management actions in place. In addition,
the equity risk sensitivity analysis provided assumed that all equity indices fall by the same percentage.
Impact of diversification on risk exposure
The Group benefits from diversification benefits achieved through the geographical spread of the Group’s operations and, within those
operations, through a broad mix of product types. Relevant correlation factors include:
Correlation across geographic regions:
— Financial risk factors; and
— Non-financial risk factors.
Correlation across risk factors:
— Longevity risk;
— Expenses;
— Persistency; and
— Other risks.
The sensitivities below do not reflect that assets and liabilities are actively managed and may vary at the time any actual market movement
occurs. There are strategies in place to minimise the exposure to market fluctuations. For example, as market indices fluctuate, Prudential
would take certain actions including selling investments, changing investment portfolio allocation and adjusting bonuses credited to
policyholders. In addition, this analysis does not consider the effect of market changes on new business generated in the future.
Other limitations on the sensitivities include: the use of hypothetical market movements to demonstrate potential risk that only
represent Prudential’s view of reasonably possible near-term market changes and that cannot be predicted with any certainty; the
assumption that interest rates in all countries move identically; the assumption that all global currencies move in tandem with the US
dollar against pound sterling; and the lack of consideration of the inter-relation of interest rates, equity markets and foreign currency
exchange rates.
www.prudential.co.uk
Annual Report 2018 Prudential plc 273
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C7 Risk and sensitivity analysis continued
C7.2 Asia insurance operations
Exposure and sensitivity of IFRS basis profit and shareholders’ equity to market and other risks
The Asia operations sell with-profits and unit-linked policies, and the investment portfolio of the with-profits funds contains a proportion
of equities. Non-participating business is largely backed by debt securities or deposits. The Group’s exposure to market risk arising from
its Asia operations is therefore at modest levels. This reflects the fact that the Asia operations have a balanced portfolio of with-profits,
unit-linked and other types of business.
In Asia, adverse persistency experience can impact the IFRS profitability of certain types of business written in the region. This risk is
managed at a business unit level through regular monitoring of experience and the implementation of management actions as necessary.
These actions could include product enhancements, increased management focus on premium collection, as well as other customer
retention efforts. The potential financial impact of lapses is often mitigated through the specific features of the products, eg surrender
charges, or through the availability of premium holiday or partial withdrawal policy features.
In summary, for Asia operations, the adjusted IFRS operating profit based on longer-term investment returns is mainly affected by the
impact of market levels on unit-linked persistency, and other insurance risks. At the total IFRS profit level the Asia result is affected by
short-term value movements on the asset portfolio for non-linked shareholder-backed business.
(i) Sensitivity to risks other than foreign exchange risk
Interest rate risk
Excluding its with-profits and unit-linked businesses, the results of the Asia business are sensitive to the movements in interest rates.
For the purposes of analysing sensitivity to variations in interest rates, reference has been made to the movements in the 10-year
government bond rates of the territories. At 31 December 2018, 10-year government bond rates vary from territory to territory and range
from 0.9 per cent to 8.1 per cent (31 December 2017: 1.0 per cent to 7.5 per cent).
For the sensitivity analysis as shown in the table below, the reasonably possible interest rate movement used is 1 per cent for all local
business units.
The estimated sensitivity to the decrease and increase in interest rates is as follows:
Profit before tax attributable to shareholders
Related deferred tax (where applicable)
Net effect on profit and shareholders’ equity
2018 £m
2017 £m
Decrease
of 1%
Increase
of 1%
Decrease
of 1%
Increase
of 1%
312
(15)
297
(338)
26
(312)
2
(7)
(5)
(443)
20
(423)
The pre-tax impacts, if they arose, would mostly be recorded within the category short-term fluctuations in investments returns in the
Group’s segmental analysis of profit before tax.
The degree of sensitivity of the results of the non-linked shareholder-backed business of the Asia operations to movements in interest
rates depends upon the degree to which the liabilities under the ‘grandfathered’ IFRS 4 measurement basis reflects market interest rates
from period-to-period. For example for countries applying US GAAP, the results can be more sensitive as the effect of interest rate
movements on the backing investments may not be offset by liability movements.
In addition, the degree of sensitivity of the results shown in the table above is dependent on the interest rate level at that point in time.
An additional factor to the direction of the sensitivity of the Asia operations as a whole is movement in the country mix.
Equity price risk
The non-linked shareholder-backed business has limited exposure to equity and property investment (31 December 2018:
£2,151 million; 31 December 2017: £1,764 million). Generally, changes in equity and property investment values are not directly offset by
movements in non-linked policyholder liabilities.
The estimated sensitivity to a 10 per cent and 20 per cent change in equity and property prices for shareholder-backed Asia other
business (including those held by the Group’s joint venture and associate businesses), which would be reflected in the short-term
fluctuation component of the Group’s segmental analysis of profit before tax, is as follows:
Profit before tax attributable to shareholders
Related deferred tax (where applicable)
Net effect on profit and shareholders’ equity
2018 £m
Decrease
2017 £m
Decrease
of 20%
of 10%
of 20%
of 10%
(557)
17
(540)
(279)
8
(271)
(478)
7
(471)
(239)
4
(235)
A 10 or 20 per cent increase in equity and property values would have an approximately equal and opposite effect on profit and
shareholders’ equity to the sensitivities shown above.
274 Prudential plc Annual Report 2018
www.prudential.co.uk
C Balance sheet notes continued
Insurance risk
Many of the business units in Asia are exposed to mortality/morbidity risk and provision is made within policyholder liabilities on a prudent
regulatory basis to cover the potential exposure. If these prudent assumptions were strengthened by 5 per cent then it is estimated that
post-tax profit and shareholders’ equity would be decreased by approximately £57 million (2017: £66 million). Mortality and morbidity have
a broadly symmetrical effect on the portfolio and any weakening of these assumptions would have a similar equal and opposite impact.
(ii) Sensitivity to foreign exchange risk
Consistent with the Group’s accounting policies, the profits of the Asia insurance operations are translated at average exchange rates
and shareholders’ equity at the closing rate for the reporting period. For 2018, the rates for the most significant operations are given
in note A1.
A 10 per cent increase (strengthening of the pound sterling) or decrease (weakening of the pound sterling) in these rates would have
reduced or increased profit before tax attributable to shareholders, profit for the year and shareholders’ equity, excluding goodwill
attributable to Asia insurance operations respectively as follows:
Profit before tax attributable to shareholders
Profit for the year
Shareholders’ equity, excluding goodwill, attributable to Asia operations
A 10% increase in local
currency to £ exchange rates
A 10% decrease in local
currency to £ exchange rates
2018 £m
2017 £m
2018 £m
2017 £m
(134)
(113)
(543)
(155)
(135)
(492)
164
138
664
189
165
601
C7.3 US insurance operations
Exposure and sensitivity of IFRS basis profit and shareholders’ equity to market and other risks
Jackson’s reported adjusted IFRS operating profit based on longer-term investment returns is sensitive to market conditions, both with
respect to income earned on spread-based products and indirectly with respect to income earned on variable annuity asset management
fees. Jackson’s main exposures to market risk are to interest rate risk and equity risk.
Jackson is exposed primarily to the following risks:
Risks
Equity risk
Risk of loss
— Related to the incidence of benefits related to guarantees issued in connection with its variable annuity
contracts; and
— Related to meeting contractual accumulation requirements in fixed index annuity contracts.
Interest rate risk
— Related to meeting guaranteed rates of accumulation on fixed annuity products following a sustained fall
in interest rates;
— Related to increases in the present value of projected benefits related to guarantees issued in connection with
its variable annuity contracts following a sustained fall in interest rates especially if in conjunction with a fall in
equity markets;
— Related to the surrender value guarantee features attached to the Company’s fixed annuity products and to
policyholder withdrawals following a sharp and sustained increase in interest rates; and
— The risk of mismatch between the expected duration of certain annuity liabilities and prepayment risk and
extension risk inherent in mortgage-backed securities.
www.prudential.co.uk
Annual Report 2018 Prudential plc 275
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
C7 Risk and sensitivity analysis continued
C7.3 US insurance operations continued
Jackson’s derivative programme is used to manage interest rate risk associated with a broad range of products and equity market risk
attaching to its equity-based products. Movements in equity markets, equity volatility, interest rates and credit spreads materially affect
the carrying value of derivatives that are used to manage the liabilities to policyholders and backing investment assets. Movements in
the carrying value of derivatives combined with the use of US GAAP measurement (as ‘grandfathered’ under IFRS 4) for the insurance
contracts assets and liabilities, which is largely insensitive to current period market movements, mean that the Jackson total profit
(ie including short-term fluctuations in investment returns) is sensitive to market movements. In addition to these effects the Jackson
shareholders’ equity is sensitive to the impact of interest rate and credit spread movements on the value of fixed income securities.
Movements in unrealised appreciation on these securities are included as movement in shareholders’ equity (ie outside the income
statement).
Jackson enters into financial derivative transactions, including those noted below to reduce and manage business risks. These
transactions manage the risk of a change in the value, yield, price, cash flows or quantity of, or a degree of exposure, with respect to
assets, liabilities or future cash flows, which Jackson has acquired or incurred.
Jackson uses free-standing derivative instruments for hedging purposes. Additionally, certain liabilities, primarily trust instruments
supported by funding agreements, fixed index annuities, certain variable annuity guaranteed benefit features and reinsured Guaranteed
Minimum Income Benefit variable annuity features are similar to derivatives. Jackson does not account for such items as either fair
value or cash flow hedges as might be permitted if the specific hedge documentation requirements of IAS 39 were followed. Financial
derivatives are carried at fair value, including derivatives embedded in certain host liabilities where these are required to be
valued separately.
The principal types of derivatives used by Jackson and their purpose are as follows:
Derivative
Purpose
Interest rate swaps
These generally involve the exchange of fixed and floating payments over the period for which Jackson holds
the instrument without an exchange of the underlying principal amount. These agreements are used to hedge
Jackson’s exposure to movements in interest rates.
Swaption contracts
These contracts provide the purchaser with the right, but not the obligation, to require the writer to pay the
present value of a long-duration interest rate swap at future exercise dates. Jackson both purchases and writes
swaptions in order to hedge against significant movements in interest rates.
Treasury futures
contracts
Equity index futures
contracts and equity
index options
These derivatives are used to hedge Jackson’s exposure to movements in interest rates.
These derivatives (including various call and put options and options contingent on interest rates and currency
exchange rates) are used to hedge Jackson’s obligations associated with its issuance of certain VA guarantees.
Some of these annuities and guarantees contain embedded options that are fair valued for financial
reporting purposes.
Cross-currency swaps Cross-currency swaps, which embody spot and forward currency swaps and additionally, in some cases,
interest rate swaps and equity index swaps, are entered into for the purpose of hedging Jackson’s foreign
currency denominated funding agreements supporting trust instrument obligations.
Credit default swaps These swaps represent agreements under which the buyer has purchased default protection on certain
underlying corporate bonds held in its portfolio. These contracts allow Jackson to sell the protected bonds at par
value to the counterparty if a default event occurs in exchange for periodic payments made by Jackson for the life
of the agreement.
The estimated sensitivity of Jackson’s profit and shareholders’ equity to equity and interest rate risks provided below is net of the
related changes in amortisation of DAC. The effect on the related changes in amortisation of DAC provided is based on the current
‘grandfathered’ US GAAP DAC basis but does not include any effect from an acceleration or deceleration of amortisation of DAC.
276 Prudential plc Annual Report 2018
www.prudential.co.uk
C Balance sheet notes continued (i) Sensitivity to equity risk
Jackson had variable annuity contracts with guarantees, for which the net amount at risk (NAR) is defined as the amount of guaranteed
benefit in excess of current account value, as follows:
31 December 2018
Return of net deposits plus a minimum return
GMDB
GMWB – premium only
GMWB*
GMAB – premium only
Highest specified anniversary account value minus withdrawals
post-anniversary
GMDB
GMWB – highest anniversary only
GMWB*
Combination net deposits plus minimum return, highest
specified anniversary account value minus withdrawals
post-anniversary
GMDB
GMIB‡
GMWB*
31 December 2017
Return of net deposits plus a minimum return
GMDB
GMWB – premium only
GMWB*
GMAB – premium only
Highest specified anniversary account value minus withdrawals
post-anniversary
GMDB
GMWB – highest anniversary only
GMWB*
Combination net deposits plus minimum return, highest
specified anniversary account value minus withdrawals
post-anniversary
GMDB
GMIB‡
GMWB*
Minimum
return
0-6%
0%
0-5%†
0%
Account
value
£m
98,653
1,924
197
26
8,531
2,220
535
0-6%
0-6%
0-8%†
5,454
1,256
91,788
Minimum
return
0-6%
0%
0-5%†
0%
Account
value
£m
100,451
2,133
235
38
9,099
2,447
667
0-6%
0-6%
0-8%†
5,694
1,484
93,227
Net
amount
at risk
£m
Weighted
average
attained age
Period until
expected
annuitisation
4,437
62
20
–
1,113
314
89
1,217
648
16,835
Net
amount
at risk
£m
1,665
20
13
–
96
51
47
426
436
4,393
66.5 years
67.1 years
69.5 years
0.1 years
Weighted
average
attained age
Period until
expected
annuitisation
66.0 years
66.5 years
69.0 years
0.4 years
* Amounts shown for GMWB comprise sums for the ‘not for life’ portion (where the guaranteed withdrawal base less the account value equals to the net amount at risk (NAR)), and a
‘for life’ portion (where the NAR has been estimated as the present value of future expected benefit payment remaining after the amount of the ‘not for life’ guaranteed benefits is zero).
† Ranges shown based on simple interest. The upper limits of 5 per cent or 8 per cent simple interest are approximately equal to 4.1 per cent and 6 per cent respectively, on a compound
interest basis over a typical 10-year bonus period. For example 1 + 10 x 0.05 is similar to 1.04 growing at a compound rate of 4 per cent for a further nine years.
‡ The GMIB guarantees are substantially reinsured.
www.prudential.co.uk
Annual Report 2018 Prudential plc 277
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
C7 Risk and sensitivity analysis continued
C7.3 US insurance operations continued
Account balances of contracts with guarantees were invested in variable separate accounts as follows:
Mutual fund type:
Equity
Bond
Balanced
Money market
Total
31 Dec 2018
£m
31 Dec 2017
£m
78,387
13,901
19,903
824
80,843
13,976
19,852
681
113,015
115,352
As noted above, Jackson is exposed to equity risk through the options embedded in the fixed index annuity liabilities and guarantees
included in certain variable annuity benefits as illustrated above. This risk is managed using an equity hedging programme to minimise
the risk of a significant economic impact as a result of increases or decreases in equity market levels. Jackson purchases futures and
options that hedge the risks inherent in these products, while also considering the impact of rising and falling guaranteed benefit fees.
Due to the nature of valuation under IFRS of the free-standing derivatives and the variable annuity guarantee features, this hedge,
while highly effective on an economic basis, would not automatically offset within the financial statements as the impact of equity market
movements resets the free-standing derivatives immediately while the hedged liabilities reset more slowly and fees are recognised
prospectively in the period in which they are earned.
In addition to the exposure explained above, Jackson is also exposed to equity risk from its holding of equity securities, partnerships
in investment pools and other financial derivatives.
The estimated sensitivity of Jackson’s profit and shareholders’ equity to immediate increases and decreases in equity markets
is shown below. The sensitivities are shown net of related changes in DAC amortisation, as described above.
Pre-tax profit, net of related changes
in amortisation of DAC
Related deferred tax effects
Net sensitivity of profit after tax
and shareholders’ equity*
31 Dec 2018 £m
31 Dec 2017 £m
Decrease
Increase
Decrease
Increase
of 20%
of 10%
of 20%
of 10%
of 20%
of 10%
of 20%
of 10%
1,058
(222)
427
(90)
58
(12)
(125)
26
1,107
(233)
336
(71)
619
(130)
262
(55)
836
337
46
(99)
874
265
489
207
* The table above has been prepared to exclude the impact of the instantaneous equity movements on the separate account fees. In addition, the sensitivity movements shown include
those relating to the fixed index annuity and the reinsurance of GMIB guarantees.
The above table provides sensitivity movements at a point in time while the actual impact on financial results would vary contingent upon
the volume of new product sales and lapses, changes to the derivative portfolio, correlation of market returns and various other factors
including volatility, interest rates and elapsed time.
The directional movements in the sensitivities reflect the hedging programme in place at 31 December 2018 and 2017.
278 Prudential plc Annual Report 2018
www.prudential.co.uk
C Balance sheet notes continued (ii) Sensitivity to interest rate risk
Except in the circumstances of interest rate scenarios where the guarantee rates included in contract terms are higher than crediting rates
that can be supported from assets held to cover liabilities, the accounting measurement of fixed annuity liabilities of Jackson’s products is
not generally sensitive to interest rate risk. This position derives from the nature of the products and the US GAAP basis of measurement.
The GMWB features attached to variable annuity business (other than ‘for life’ components) are accounted for under US GAAP at fair
value and, therefore, will be sensitive to changes in interest rates.
Debt securities and related derivatives are marked to fair value. Value movements on derivatives, again net of related changes to
amortisation of DAC and deferred tax, are recorded within the income statement. Fair value movements on debt securities, net of related
changes to amortisation of DAC and deferred tax, are recorded within other comprehensive income. The estimated sensitivity of these
items and policyholder liabilities to a 1 per cent and 2 per cent decrease and increase in interest rates is as follows:
31 Dec 2018 £m
31 Dec 2017 £m
Decrease
Increase
Decrease
Increase
of 2%
of 1%
of 1%
of 2%
of 2%
of 1%
of 1%
of 2%
Profit and loss:
Pre-tax profit effect (net of related changes
in amortisation of DAC)
Related effect on charge for deferred tax
(3,535)
742
(1,718)
361
1,201
(252)
2,210
(464)
(4,079)
857
(1,911)
401
Net profit effect
(2,793)
(1,357)
949
1,746
(3,222)
(1,510)
1,373
(288)
1,085
2,533
(532)
2,001
Other comprehensive income:
Direct effect on carrying value of debt
securities (net of related changes in
amortisation of DAC)
Related effect on movement in deferred tax
Net effect
4,134
(868)
2,346
(493)
(2,346)
493
(4,134)
868
3,063
(643)
3,266
1,853
(1,853)
(3,266)
2,420
Total net effect on shareholders’ equity
473
496
(904)
(1,520)
(802)
1,700
(357)
1,343
(167)
(1,700)
357
(3,063)
643
(1,343)
(2,420)
(258)
(419)
These sensitivities are shown for interest rates in isolation only and do not include other movements in credit risk that may affect credit
spreads and valuations of debt securities. Similar to the sensitivity to equity risk, the sensitivity movements provided in the table above
are at a point in time and reflect the hedging programme in place on the balance sheet date, while the actual impact on financial results
would vary contingent upon a number of factors.
(iii) Sensitivity to foreign exchange risk
Consistent with the Group’s accounting policies, the profits of the Group’s US operations are translated at average exchange rates and
shareholders’ equity at the closing rate for the reporting period. For 2018, the average and closing rates were US$1.34 (31 December
2017: US$1.29) and US$1.27 (31 December 2017: US$1.35) to £1.00 sterling respectively. A 10 per cent increase (weakening of the
dollar) or decrease (strengthening of the dollar) in these rates would reduce or increase profit before tax attributable to shareholders,
profit for the year and shareholders’ equity attributable to US insurance operations respectively as follows:
Profit before tax attributable to shareholders
Profit for the year
Shareholders’ equity attributable to US insurance operations
A 10% increase in US$:£
exchange rates
A 10% decrease in US$:£
exchange rates
2018 £m
2017 £m
2018 £m
2017 £m
(159)
(136)
(508)
(54)
(20)
(456)
194
166
620
66
24
557
www.prudential.co.uk
Annual Report 2018 Prudential plc 279
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C7 Risk and sensitivity analysis continued
C7.3 US insurance operations continued
(iv) Other sensitivities
The total profit of Jackson is sensitive to market risk on the assets covering liabilities other than variable annuity business segregated
in the separate accounts.
For term business, acquisition costs are deferred and amortised in line with expected premiums. For annuity and interest-sensitive life
business, acquisition costs are deferred and amortised in line with expected gross profits on the relevant contracts. For interest-sensitive
business, the key assumption is the expected long-term spread between the earned rate and the rate credited to policyholders. In addition,
expected gross profits depend on mortality assumptions, assumed unit costs and terminations other than deaths (including the related
charges) all of which are based on a combination of actual experience of Jackson, industry benchmarking and future expectations.
A detailed analysis of actual experience is measured by internally developed expense, mortality and persistency studies.
For variable annuity business, an assumption made is the expected long-term level of separate account returns, which for 2018 was
7.4 per cent (2017: 7.4 per cent). The impact of using this return is reflected in two principal ways, namely:
— Through the projected expected gross profits that are used to determine the amortisation of deferred acquisition costs. This is applied
through the use of a mean reversion technique which is described in more detail in note A3.1 above; and
— The required level of provision for claims for guaranteed minimum death, ‘for life’ withdrawal, and income benefits.
Jackson is sensitive to mortality risk, lapse risk and other types of policyholder behaviour, such as the utilisation of its GMWB product
features. Jackson’s persistency assumptions reflect a combination of recent experience for each relevant line of business and expert
judgement, especially where a lack of relevant and credible experience data exists. These assumptions vary by relevant factors, such as
product, policy duration, attained age and for variable annuity lapse assumptions, the extent to which guaranteed benefits are ‘in the
money’ relative to policy account values. Changes in these assumptions, which are assessed on an annual basis after considering recent
experience, could have a material impact on policyholder liabilities and therefore on profit before tax. See further information in note B1.2.
In addition, in the absence of hedging, equity and interest rate movements can both cause a loss directly or an increased future
sensitivity to policyholder behaviour. Jackson has an extensive derivative programme that seeks to manage the exposure to such altered
equity markets and interest rates.
C7.4 UK and Europe insurance operations
Exposure and sensitivity of IFRS basis profit and shareholders’ equity to market and other risks
The IFRS basis results of the shareholder-backed business for the UK and Europe insurance operations are most sensitive to the following
factors:
— Asset/liability matching;
— Default rate experience;
— Annuitant mortality; and
— The difference between the rates of return on corporate bonds and risk-free rates.
Further details are described below.
The adjusted IFRS operating profit based on longer-term investment returns for UK and Europe insurance operations is sensitive to
changes in longevity assumptions affecting the carrying value of liabilities to policyholders for UK shareholder-backed annuity business.
At the total IFRS profit level, the result is particularly sensitive to temporary value movements on assets backing the capital of the
shareholder-backed annuity business.
With-profits business
With-profits sub-fund business
The shareholder results of the UK with-profits business (including non-participating annuity business of the with-profits sub-fund)
are only sensitive to market risk through the indirect effect of investment performance on declared policyholder bonuses.
The investment assets of UK with-profits funds are subject to market risk. Changes in their carrying value, net of related changes
to asset-share liabilities of with-profits contracts, affect the level of unallocated surplus of the fund. Therefore, the level of unallocated
surplus is particularly sensitive to the level of investment returns on the portion of the assets that represents surplus. However,
as unallocated surplus is accounted for as a liability under IFRS, movements in its value do not affect shareholders’ profit and equity.
The shareholder results of the UK with-profits fund are currently one-ninth of the cost of bonuses declared to with-profits
policyholders. For certain unitised with-profits products, such as the PruFund range of funds, the bonuses represent the policyholders’
net return based on the smoothed unit price of the selected investment fund. Investment performance is a key driver of bonuses declared,
and hence the shareholder results. Due to the ‘smoothed’ basis of bonus declaration, the sensitivity to short-term investment performance
is relatively low. However, longer-term investment performance and persistency trends may affect future shareholder transfers.
280 Prudential plc Annual Report 2018
www.prudential.co.uk
C Balance sheet notes continued Shareholder-backed annuity business
Profits from shareholder-backed annuity business are most sensitive to:
— The extent to which the duration of the assets held closely matches the expected duration of the liabilities under the contracts;
— Actual versus expected default rates on assets held;
— The difference between long-term rates of return on corporate bonds and risk-free rates;
— The variance between actual and expected mortality experience;
— The extent to which changes to the assumed rate of improvements in mortality give rise to changes in the measurement of liabilities;
and
— Changes in renewal expense levels.
In addition, the level of profit is affected by change in the level of reinsurance cover.
A decrease in assumed mortality rates of 1 per cent would decrease pre-tax profit by approximately £37 million (2017: £66 million).
A decrease in credit default assumptions of five basis points would increase pre-tax profit by £99 million (2017: £198 million). A decrease
in renewal expenses (excluding asset management expenses) of 5 per cent would increase pre-tax profit by £21 million (2017: £40 million).
The effect on profit would be approximately symmetrical for changes in assumptions that are directionally opposite to those explained
above. The net effect on profit after tax and shareholders’ equity from all the changes in assumptions as described above would be an
increase of approximately £69 million (2017: £143 million). See C4.1(d)(iii) for further details on mortality assumptions.
Unit-linked and other business
Unit-linked and other business represents a comparatively small proportion of the in-force business of the UK and Europe insurance
operations.
Due to the matching of policyholder liabilities to attaching asset value movements, the UK unit-linked business is not directly affected
by market or credit risk. The liabilities of other business are also broadly insensitive to market risk. Profits from unit-linked and similar
contracts primarily arise from the excess of charges to policyholders for management of assets, over expenses incurred. The former is most
sensitive to the net accretion of funds under management as a function of new business, persistency and timing of death. The accounting
impact of the latter is dependent upon the amortisation of acquisition costs in line with the emergence of margins (for insurance contracts)
and amortisation in line with service provision (for the investment management component of investment contracts). By virtue of the
design features of most of the contracts that provide low levels of mortality cover, the profits are relatively insensitive to changes in
mortality experience.
Sensitivity to interest rate risk and other market risk
By virtue of the fund structure, product features and basis of accounting, the policyholder liabilities of the UK and Europe insurance
operations are, except annuity business, not generally exposed to interest rate risk. At 31 December 2018, annuity liabilities accounted
for 95 per cent (31 December 2017: 98 per cent) of UK non-linked shareholder-backed business liabilities. For annuity business, liabilities
are exposed to interest rate risk. However, the net exposure is substantially ameliorated by virtue of the close matching of assets with
appropriate duration. The level of matching from period to period can vary depending on management actions and economic factors
so it is possible for a degree of mis-matching profits or losses to arise.
The close matching by the Group of assets of appropriate duration to annuity liabilities is based on maintaining economic and
regulatory capital. Liabilities are measured differently under Solvency II reporting requirements than under IFRS resulting in an alteration
to the assets used to measure the IFRS annuity liabilities. As a result, IFRS has a different sensitivity to interest rate and credit risk than
under Solvency II.
The estimated sensitivity of the UK non-linked shareholder-backed business (principally annuities business) to a movement in interest
rates is as follows:
31 Dec 2018 £m
31 Dec 2017 £m
A
decrease
of 2%
A
decrease
of 1%
An
increase
of 1%
An
increase
of 2%
A
decrease
of 2%
A
decrease
of 1%
An
increase
of 1%
An
increase
of 2%
Carrying value of debt securities and derivatives
Policyholder liabilities
Related deferred tax effects
7,369
(4,784)
(446)
3,317
(2,162)
(199)
(2,792)
1,801
171
(5,193)
3,317
323
13,497
(9,426)
(658)
5,805
(4,210)
(254)
(4,659)
3,443
190
(8,541)
6,295
348
Net sensitivity of profit after tax and
shareholders’ equity
2,139
956
(820)
(1,553)
3,413
1,341
(1,026)
(1,898)
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Annual Report 2018 Prudential plc 281
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C7 Risk and sensitivity analysis continued
C7.4 UK and Europe insurance operations continued
In addition, the shareholder-backed portfolio of UK non-linked insurance operations (covering policyholder liabilities and shareholders’
equity) includes equity securities and investment properties. Excluding any offsetting effects on the measurement of policyholder
liabilities, a fall in their value would have given rise to the following effects on pre-tax profit, profit after tax and shareholders’ equity.
Pre-tax profit
Related deferred tax effects
Net sensitivity of profit after tax and shareholders’ equity
2018 £m
2017 £m
A decrease
of 20%
A decrease
of 10%
A decrease
of 20%
A decrease
of 10%
(336)
57
(279)
(168)
29
(139)
(332)
57
(275)
(166)
28
(138)
A 10 or 20 per cent increase in their value would have an approximately equal and opposite effect on profit and shareholders’ equity
to the sensitivities shown above. The market risk sensitivities shown above reflect the impact of temporary market movements and,
therefore, the primary effect of such movements would, in the Group’s segmental analysis of profits, be included within the short-term
fluctuations in investment returns.
C7.5 Asset management and other operations
(i) Asset management
(a) Sensitivities to foreign exchange risk
Consistent with the Group’s accounting policies, the profits of Eastspring Investments and US asset management operations are
translated at average exchange rates and shareholders’ equity at the closing rate for the reporting period. The rates for the functional
currencies of most significant operations are shown in note A1.
A 10 per cent increase in the relevant exchange rates (strengthening of the pound sterling) would have reduced reported profit before
tax attributable to shareholders, and shareholders’ equity excluding goodwill attributable to Eastspring Investments and US asset
management operations, by £10 million and £43 million respectively (2017: £30 million and £53 million, respectively).
(b) Sensitivities to other financial risks for asset management operations
The profits of asset management businesses are sensitive to the level of assets under management, as this significantly affects the value
of management fees earned by the business in the current and future periods. The Group’s asset management operations do not hold
significant investments in property or equities.
(ii) Other operations
The Group holds certain derivatives that are used to manage foreign currency movements and macroeconomic exposures. The fair value
of these derivatives is sensitive to the combined effect of movements in exchange rates, interest rates and inflation rates. The possible
permutations cover a wide range of scenarios. For indicative purposes, a reasonably possible range of fair value movements based on
historical experience could be plus or minus £150 million.
Other operations are sensitive to credit risk on the loan portfolio of the Prudential Capital operation. Total debt securities held at
31 December 2018 by Prudential Capital were £1,884 million (2017: £2,238 million). Debt securities held by Prudential Capital are
in general variable rate bonds and so market value is limited in sensitivity to interest rate movements and consequently any change in
interest rates would not have a material impact on profit or shareholders’ equity.
282 Prudential plc Annual Report 2018
www.prudential.co.uk
C Balance sheet notes continued C8 Tax assets and liabilities
C8.1 Deferred tax
Thestatementoffinancialpositioncontainsthefollowingdeferredtaxassetsandliabilitiesinrelationto:
Deferred tax assets
Unrealisedlossesorgainsoninvestments
Balancesrelatingtoinvestmentandinsurancecontracts
Short-termtemporarydifferences
Capitalallowances
Unusedtaxlosses
Total
Deferred tax liabilities
Unrealisedlossesorgainsoninvestments
Balancesrelatingtoinvestmentandinsurancecontracts
Short-termtemporarydifferences
Capitalallowances
Total
2018 £m
Movement
through
other
comprehensive
income and
equity
Movement
in income
statement
Other
movements
including
foreign
currency
movements
1
–
(266)
–
23
(242)
666
(91)
68
(1)
642
93
–
(8)
–
–
85
195
–
(15)
–
180
5
–
81
1
38
125
20
(39)
(109)
(1)
(129)
At 1 Jan
14
1
2,532
14
66
2,627
(1,748)
(872)
(2,041)
(54)
(4,715)
At 31 Dec
113
1
2,339
15
127
2,595
(867)
(1,002)
(2,097)
(56)
(4,022)
Oftheshort-termtemporarydifferencesof£2,339millionrelatingtodeferredtaxassets,£2,194millionrelatingtotheUSinsurance
operationsisexpectedtoberecoveredinlinewiththerunoffofthein-forcebook,andtheremainingbalancesofthe£145millionare
expectedtoberecoveredwithin10years.
Thedeferredtaxbalancesat31December2018and2017ariseinthefollowingpartsoftheGroup:
Asiaoperations
USoperations
UKandEurope
Otheroperations
Total
Deferred tax assets
Deferred tax liabilities
2018 £m
2017 £m
2018 £m
2017 £m
119
2,295
126
55
2,595
112
2,300
157
58
2,627
(1,257)
(1,688)
(1,061)
(16)
(4,022)
(1,152)
(1,845)
(1,703)
(15)
(4,715)
UnderIAS12,‘IncomeTaxes’,deferredtaxismeasuredatthetaxratesthatareexpectedtoapplytotheperiodwhentheassetisrealised
ortheliabilitysettled,basedonthetaxrates(andlaws)thathavebeenenactedoraresubstantivelyenactedattheendofthereporting
period.
Deferredtaxassetsarerecognisedtotheextentthattheyareregardedasrecoverable,thatistotheextentthat,onthebasisofall
availableevidence,itcanberegardedasmorelikelythannotthattherewillbesuitabletaxableprofitsfromwhichthefuturereversalof
theunderlyingtemporarydifferencescanbededucted.
www.prudential.co.uk
AnnualReport2018 Prudential plc 283
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C8 Tax assets and liabilities continued
C8.1 Deferred tax continued
ThetaxationregimesapplicableacrosstheGroupoftenapplyseparaterulestotradingandcapitalprofitsandlosses.Thedistinction
betweentemporarydifferencesthatarisefromitemsofeitheratradingorcapitalnaturemayaffecttherecognitionofdeferredtaxassets.
Forthe2018resultsandfinancialpositionat31December2018thefollowingtaxbenefitshavenotbeenrecognised:
Capitallosses
Tradinglosses
31 Dec 2018
31 Dec 2017
Tax benefit £m
Losses £bn
Tax benefit £m
Losses £bn
49
49
0.2
0.2
79
74
0.4
0.3
Oftheunrecognisedtradinglosses,lossesof£34millionwillexpirewithinthenext10years,theresthavenoexpirydate.
SomeoftheGroup’sbusinessesarelocatedinjurisdictionsinwhichawithholdingtaxchargeisincurreduponthedistributionof
earnings.Deferredtaxliabilitiesof£117million(2017:£120million)havenotbeenrecognisedinrespectofsuchwithholdingtaxes
astheGroupisabletocontrolthetimingofthedistributionsanditisprobablethatthetimingdifferenceswillnotreverseinthe
foreseeablefuture.
C8.2 Current tax
Ofthe£618million(31December2017:£613million)currenttaxrecoverable,themajorityisexpectedtoberecoveredinoneyear
orless.Thecurrenttaxrecoverableincludes£112millioninrelationtothelitigationrelatingtothehistorictaxtreatmentofdividends
receivedfromoverseasportfolioinvestmentsoflifeinsurancecompanies.ThePrudentialAssuranceCompanyLimited(PAC)was
thetestcaseforthelitigation.InJuly2018,theUKSupremeCourtruledinPAC’sfavouronmostofthesubstantiveissues.PACand
HMRevenue&Customs(HMRC)areworkingthroughthemechanicsofimplementingtheSupremeCourtdecision.PACexpectsto
receivefullandfinalrepaymentfromHMRCin2019.
Thecurrenttaxliabilityof£568million(31December2017:£537million)includes£149million(31December2017:£139million)of
provisionsforuncertaintaxmatters.FurtherdetailisprovidedinnoteB4.
C9 Defined benefit pension schemes
(i) Background and summary economic and IAS 19 financial positions
TheGroup’sbusinessesoperateanumberofpensionschemes.Thespecificfeaturesoftheseschemesvaryinaccordancewiththe
regulationsofthecountryinwhichtheemployeesarelocated,althoughtheyare,ingeneral,fundedbytheGroupandbasedeitherona
cashbalanceformulaoronyearsofserviceandsalaryearnedinthelastyearoryearsofemployment.Thelargestdefinedbenefitscheme
istheprincipalUKscheme,namelythePrudentialStaffPensionScheme(PSPS).PSPSaccountsfor82percent(2017:82percent)ofthe
underlyingschemeliabilitiesoftheGroup’sdefinedbenefitschemes.
TheGroupalsooperatestwosmallerUKdefinedbenefitschemesinrespectofScottishAmicable(SASPS)andM&G(M&GGPS).
Inaddition,therearetwosmalldefinedbenefitschemesinTaiwanwhichhavenegligibledeficits.
UnderIAS19,‘EmployeeBenefits’andIFRIC14,‘IAS19–TheLimitonaDefinedBenefitAsset,MinimumFundingRequirements
andtheirInteraction’,theGroupisonlyabletorecogniseasurplustotheextentthatitisabletoaccessthesurpluseitherthroughan
unconditionalrightofrefundorthroughreducedfuturecontributionsrelatingtoongoingserviceofactivemembers.TheGrouphasno
unconditionalrightofrefundtoanysurplusinPSPS.Accordingly,thePSPSsurplusrecognisedisrestrictedtothepresentvalueofthe
economicbenefittotheGroupfromthedifferencebetweentheestimatedfutureongoingcontributionsandthefullfuturecostofservice
fortheactivemembers.Incontrast,theGroupisabletoaccessthesurplusofSASPSandM&GGPS.Therefore,theamountsrecognised
fortheseschemesaretheIAS19valuationamount(eitherasurplusordeficit).
284 Prudential plc AnnualReport2018
www.prudential.co.uk
C Balance sheet notes continued TheGroupasset/liabilityinrespectofdefinedbenefitpensionschemesisasfollows:
Underlyingeconomicsurplus
(deficit)
Less:unrecognisedsurplus
Economicsurplus(deficit)
(includinginvestmentin
Prudentialinsurance
policies) note (c)
Attributableto:
UKwith-profitsfund
Shareholder-backed
business
Consolidationadjustment
againstpolicyholder
liabilitiesforinvestmentin
Prudentialinsurance
policies
IAS19pensionasset(liability)
ontheGroupstatementof
financialposition note (d)
31 Dec 2018 £m
31 Dec 2017 £m
PSPS
note(a)
SASPS
note(b)
M&GGPS
Other
schemes
Total
PSPS
note(a)
SASPS
note(b)
M&GGPS
Other
schemes
Total
908
(677)
(79)
–
131
–
(1)
–
959
(677)
721
(485)
(137)
–
109
–
(1)
–
692
(485)
231
162
69
(79)
131
(32)
–
(47)
131
(1)
–
(1)
282
130
152
236
165
71
(137)
109
(55)
(82)
–
109
(1)
–
(1)
207
110
97
–
–
(225)
–
(225)
–
–
(151)
–
(151)
231
(79)
(94)
(1)
57
236
(137)
(42)
(1)
56
Notes
(a)
(b)
(c)
NodeficitorotherfundingisrequiredforPSPS.Deficitfunding,whereapplicable,isapportionedintheratioof70/30betweentheUKwith-profitsfundandshareholder-backed
businessfollowingdetailedconsiderationsin2005ofthesourcingofpreviouscontributions.Employercontributionsforongoingserviceofcurrentemployeesareapportionedin
theratiorelevanttocurrentactivity.
ThedeficitofSASPShasbeenallocated40percenttotheUKwith-profitsfundand60percenttotheshareholders’fundasat31December2018and2017.
Theunderlyingpositiononaneconomicbasisreflectstheassets(includinginvestmentsinPrudentialinsurancepoliciesthatareoffsetagainstliabilitiestopolicyholdersonthe
Groupconsolidation)andtheliabilitiesoftheschemes.
(d) At31December2018,thePSPSpensionassetof£231million(31December2017:£236million)andtheotherschemes’pensionliabilitiesof£174million(31December2017:
£180million)areincludedwithin‘Otherdebtors’and‘Provisions’respectivelyontheconsolidatedstatementoffinancialposition.
Triennial actuarial valuations
DefinedbenefitpensionschemesintheUKaregenerallyrequiredtobesubjecttofullactuarialvaluationseverythreeyearsinorderto
assesstheappropriateleveloffundingforschemesinrelationtotheircommitments.Thesevaluationsincludeassessmentsofthelikely
rateofreturnontheassetsheldwithintheseparatetrusteeadministeredfunds.TheactuarialvaluationdiffersfromtheIAS19
accountingbasisvaluationinanumberofrespects,includingthediscountrateassumptionwhereIAS19prescribesaratebasedon
high-qualitycorporatebondswhileamore‘prudent’assumptionisusedfortheactuarialvaluation.
TheinformationonthelatestcompletedactuarialvaluationfortheUKschemesisshowninthetablebelow:
PSPS
Lastcompletedactuarial
5April2017
valuationdate
SASPS
31March2017
M&GGPS
31December2014*
Valuationactuary,allFellows
oftheInstituteandFaculty
ofActuaries
CGSinger
TowersWatsonLimited
JonathanSeed
XafinityConsultingLimited
PaulBelok
AONHewittLimited
Fundinglevelatthelast
105percent
75percent
99percent
valuation
Deficitfundingarrangement
agreedwiththeTrustees
basedonthelast
completedvaluation
Nodeficitorotherfunding
required.Ongoing
contributionsforactive
membersareattheminimum
levelrequiredunderthe
schemerules(approximately
£5millionperannum
excludingexpenses)
Deficitfundingof£26million
perannumfrom1April2017
until31March2027,orearlier
ifthescheme’sfundinglevel
reaches100percentbefore
thisdate.Thedeficitfunding
willbereviewedeverythree
yearsatsubsequentvaluations
Nodeficitfundingrequiredfrom
1January2016
*ThetriennialvaluationforM&GGPSasat31December2017iscurrentlyinprogress.
www.prudential.co.uk
AnnualReport2018 Prudential plc 285
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C9 Defined benefit pension schemes continued
(i) Background and summary economic and IAS 19 financial positions continued
ForPSPS,themarketvalueoftheschemeassetsasatthe5April2017fundingvaluationwas£7,766million.Theactuarialassumptions
usedindeterminingbenefitobligationsandthenetperiodicbenefitcostsforthepurposesofthe2017valuationwereasfollows:
Rateofincreaseinsalaries
Rateofinflation:
RetailPricesIndex(RPI)
ConsumerPricesIndex(CPI)
Rateofincreaseofpensionsinpaymentforinflation:
Guaranteed(maximum5%)
Guaranteed(maximum2.5%)
Discretionary
Expectedreturnsonplanassets
Mortality assumptions:
ThetablesusedforPSPSpensionsinpaymentat5April2017were:
%
Nil
3.4
2.6
2.6
2.5
Nil
1.5
Base post-retirement mortality
Formale(female)membersandmaledependants95percent(105percent)oftheSAPSS2PensionerAmountstable.Forfemale
dependants89percentoftheSAPSS2DependantsAmountstable.
Allowance for future improvements to post-retirement mortality
Assumedimprovementsupto2017arebasedontheCMI2015Coreprojectionsmodelwitha1.5percentperannumlong-termtrend.
From2018onwards,assumedimprovementsformales(females)arebasedontheCMI2015Coreprojectionsmodelwitha1.75percent
perannum(1.5percentperannum)long-termtrend.
Risks to which the defined benefit schemes expose the Group
Responsibilityofmakinggoodofanydeficitthatmayariseintheschemeslieswiththeemployersoftheschemes,whicharesubsidiaries
oftheGroup.Accordingly,thepensionschemesexposetheGrouptoanumberofrisksandthemostsignificantofwhichareinterestrate
andinvestmentrisk,inflationriskandmortalityrisk.
Corporate governance
TheGroup’sUKpensionschemesareestablishedundertrustandaresubjecttoUKlegalrequirements;thisincludesbeingsubjectto
regulationby‘ThePensionRegulator’inaccordancewiththePensionAct1995.Eachschemehasacorporatetrusteetowhichsome
directorsareappointedbyGroupemployerswiththeremainingdirectorsnominatedbymembersinaccordancewithUKlegal
requirements.ThetrusteeshavetheultimateresponsibilitytoensurethattheschemeismanagedinaccordancewiththeTrustDeed&
Rules.Thetrusteesactinthebestinterestsoftheschemes’beneficiaries;thisincludestakingappropriateaccountofeachemployer’s
legalobligationandfinancialabilitytosupporttheschemes,whensettinginvestmentstrategyandwhenagreeingfundingwiththe
employers.Theemployers’contributioncommitmentsareformallyupdatedateachtriennialvaluation;betweenvaluationsfunding
levelsandemployerstrengthcontinuetobemonitored,withtheTrusteesbeingabletobringforwardthenexttriennialvaluationifthey
consideritappropriatetodoso.
AlloftheGroup’sthreeUKdefinedbenefitpensionschemes(PSPS,SASPSandM&GGPS)arefinalsalaryschemes,whichareclosed
tonewentrants.
TheTrusteesofeachschemesetthegeneralinvestmentpolicyandspecifyanyrestrictionsontypesofinvestmentandthedegrees
ofdivergencepermittedfromthebenchmark,butdelegatetheresponsibilityforselectionandrealisationofspecificinvestmentstothe
InvestmentManagers.TheTrusteesconsultthePrincipalEmployer(egThePrudentialAssuranceCompanyLimitedforPSPS)onthe
investmentprinciples,buttheultimateresponsibilityfortheinvestmentoftheassetsoftheschemelieswiththeTrustees.
286 Prudential plc AnnualReport2018
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C Balance sheet notes continued TheTrusteesofeachoftheschemesmanagetheinvestmentstrategyoftheschemetoachieveanacceptablebalancebetween
investingintheassetsthatmostcloselymatchtheexpectedbenefitpaymentsandassetsthatareexpectedtoachieveagreaterreturn
inthehopeofreducingthecontributionsrequiredorprovidingadditionalbenefitstomembers.
ForPSPS,asignificantportionoftheschemeassetsareinvestedinliabilitymatchingassetssuchasbondsandgilts,including
index-linkedgilts,topartiallyhedgeagainstinflation.Inaddition,PSPShasmaintainedaportfolioofinterestrateandinflationswapsto
matchmorecloselythedurationandinflationprofileofitsassetstoitsliabilities.
TherisksarisingfromSASPSandM&GGPSaremanagedthroughadiversifiedmixofinvestments.Bothschemeshaveinvestedina
mixofbothreturn-seekingassets,suchasequitiesandpropertyandmatchingassetsincludingleveragedliabilitydriveninvestment
portfoliostoreflecttheliabilityprofileofthescheme.
(ii) Assumptions
Theactuarialassumptionsusedindeterminingbenefitobligationsandthenetperiodicbenefitcostsfortheyearsshownwereasfollows:
Discountrate*
Rateofincreaseinsalaries
Rateofinflation†
Retailpricesindex(RPI)
Consumerpricesindex(CPI)
Rateofincreaseofpensionsinpaymentforinflation:
PSPS:
Guaranteed(maximum5%)
Guaranteed(maximum2.5%)
Discretionary
Otherschemes
31 Dec
2018 %
31 Dec
2017 %
2.8
3.3
3.3
2.3
2.5
2.5
2.5
3.3
2.5
3.1
3.1
2.1
2.5
2.5
2.5
3.1
*Thediscountratehasbeendeterminedbyreferencetoan‘AA’corporatebondindex,adjustedwhereapplicabletoallowforthedifferenceindurationbetweentheindexandthepension
liabilities.
†Therateofinflationreflectsthelong-termassumptionforUKRPIorCPIdependingonthetrancheoftheschemes.
Thecalculationsarebasedoncurrentmortalityestimateswithanallowancemadeforexpectedfutureimprovementsinmortality.This
allowancereflectedtheCMI2015Coreprojectionsmodel(2017:CMI2014projectionsmodel,withscheme-specificcalibrations).In
2018,formemberspostretirementlong-termmortalityimprovementratesof1.75percentperannum(2017:1.75percentperannum)
and1.50percentperannum(2017:1.25percentperannum)wereappliedformalesandfemales,respectively.
www.prudential.co.uk
AnnualReport2018 Prudential plc 287
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C9 Defined benefit pension schemes continued
(iii) Estimated pension scheme surpluses and deficits
ThissectionillustratesthefinancialpositionoftheGroup’sdefinedbenefitpensionschemesonaneconomicbasisandtheIAS19basis.
Theunderlyingpensionpositiononaneconomicbasisreflectstheassets(includinginvestmentsinPrudentialpoliciesthatareoffset
againstliabilitiestopolicyholdersontheGroupconsolidation)andtheliabilitiesoftheschemes.TheIAS19basisexcludesthe
investmentsinPrudentialpolicies.At31December2018,M&GGPSheldinvestmentsinPrudentialinsurancepoliciesof£225million
(31December2017:£151million).
Movementsonthepensionschemesurplusdeterminedontheeconomicbasisareasfollows,withtheeffectoftheapplicationof
IFRIC14beingshownseparately:
All schemes
Underlying position (without the effect of IFRIC 14)
Surplus(deficit)
Less:amountattributabletoUKwith-profitsfund
Shareholders’share:
Grossoftaxsurplus(deficit)
Relatedtax
Netofshareholders’tax
Application of IFRIC 14 for the derecognition of PSPS surplus
Derecognitionofsurplus
Less:amountattributabletoUKwith-profitsfund
Shareholders’share:
Grossoftax
Relatedtax
Netofshareholders’tax
With the effect of IFRIC 14
Surplus(deficit)
Less:amountattributabletoUKwith-profitsfund
Shareholders’share:
Grossoftaxsurplus(deficit)
Relatedtax
Netofshareholders’tax
2018 £m
Surplus
(deficit)
in schemes
at 1 Jan
2018
(Charge)
credit
to income
statement
Actuarial gains
and losses
in other
comprehensive
income
Contributions
paid
Surplus
(deficit)
in schemes
at 31 Dec
2018
692
(473)
219
(42)
177
(485)
363
(122)
23
(99)
207
(110)
97
(19)
78
(88)
38
(50)
10
(40)
(13)
8
(5)
1
(4)
(101)
46
(55)
11
(44)
303
(178)
125
(24)
101
(179)
132
(47)
9
(38)
124
(46)
78
(15)
63
52
(20)
32
(6)
26
–
–
–
–
–
52
(20)
32
(6)
26
959
(633)
326
(62)
264
(677)
503
(174)
33
(141)
282
(130)
152
(29)
123
Underlying investments of the schemes
Onthe‘economicbasis’,afterincludingtheunderlyingassetsrepresentedbytheinvestmentsinPrudentialinsurancepoliciesasscheme
assets,theplans’assetscomprisethefollowinginvestments:
Equities
UK
Overseas
Bonds*
Government
Corporate
Asset-backedsecurities
Derivatives
Properties
Otherassets
Totalvalueofassets†
31 Dec 2018
31 Dec 2017
PSPS
£m
8
204
4,596
1,586
263
103
143
172
7,075
Other
schemes
£m
6
53
538
454
12
4
143
198
1,408
Total
£m
14
257
5,134
2,040
275
107
286
370
8,483
PSPS
£m
9
226
5,040
1,491
164
188
140
216
7,474
Other
schemes
£m
67
272
655
248
–
(6)
130
77
1,443
Total
£m
76
498
5,695
1,739
164
182
270
293
8,917
%
–
3
61
24
3
1
3
5
100
%
1
6
63
20
2
2
3
3
100
*87percentofthebondsareinvestmentgrade(2017:89percent).
†94percentofthetotalvalueoftheschemeassetsarederivedfromquotedpricesinanactivemarket(31December2017:96percent).NoneoftheschemeassetsincludedsharesinPrudentialplc
orpropertyoccupiedbythePrudentialGroup.TheIAS19basisplanassetsat31December2018of£8,258million(31December2017:£8,766million)isdifferentfromtheeconomicbasis
planassetsof£8,483million(31December2017:£8,917million)asshownaboveduetotheexclusionofinvestmentinPrudentialinsurancepoliciesbyM&GGPSasdescribedabove.
288 Prudential plc AnnualReport2018
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C Balance sheet notes continued ThemovementsintheIAS19pensionschemes’surplusanddeficitbetweenschemeassetsandliabilitiesasconsolidatedinthefinancial
statementswere:
Attributable to policyholders and shareholders
Present
value
of benefit
obligations
note(a)
Net surplus
(deficit)
(without
the effect
of IFRIC 14)
Effect of
IFRIC 14 for
derecognition
of PSPS
surplus
Economic
basis net
surplus
(deficit)
Other
adjustments
including for
investments
in Prudential
insurance
policies
note(b)
IAS 19
basis net
surplus
(deficit)
2018 £m
Netsurplus(deficit),beginningofyear
GMPequalisationprovision note (e)
Currentservicecost
Netinterestonnetdefinedbenefit
liability(asset)
Administrationexpenses
Benefitpayments
Employers’contributions note (c)
Employees’contributions
Actuarialgainsandlosses note (d)
TransferintoinvestmentinPrudential
insurancepolicies
Plan
assets
8,917
–
–
217
(8)
(475)
52
1
(221)
–
(8,225)
(53)
(44)
(200)
–
475
–
(1)
524
–
Netsurplus(deficit),endofyear
8,483
(7,524)
2017 £m
Netsurplus(deficit),beginningofyear
Currentservicecost
Netinterestonnetdefinedbenefit
liability(asset)
Administrationexpenses
Benefitpayments
Employers’contributions note (c)
Employees’contributions
Actuarialgainsandlosses note (d)
TransferintoinvestmentinPrudential
insurancepolicies
Netsurplus(deficit),endofyear
9,006
–
(8,443)
(46)
228
(8)
(479)
50
1
119
–
8,917
(214)
–
479
–
(1)
–
–
(8,225)
692
(53)
(44)
17
(8)
–
52
–
303
–
959
563
(46)
14
(8)
–
50
–
119
–
692
(485)
–
–
(13)
–
–
–
–
(179)
–
(677)
(558)
–
(14)
–
–
–
–
87
–
(485)
207
(53)
(44)
4
(8)
–
52
–
124
–
282
5
(46)
–
(8)
–
50
–
206
–
207
(151)
–
–
(4)
–
–
–
–
10
(80)
(225)
(134)
–
(3)
–
–
–
–
(6)
(8)
(151)
56
(53)
(44)
–
(8)
–
52
–
134
(80)
57
(129)
(46)
(3)
(8)
–
50
–
200
(8)
56
www.prudential.co.uk
AnnualReport2018 Prudential plc 289
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C9 Defined benefit pension schemes continued
(iii) Estimated pension scheme surpluses and deficits continued
Notes
(a) Maturity profile of the benefit obligations
Theweightedaveragedurationofthebenefitobligationsoftheschemesis18.4years(2017:18.6years).
Thefollowingtableprovidesanexpectedmaturityanalysisofthebenefitobligations:
All schemes £m
31 Dec 2018
31Dec2017
1 year
or less
257
255
After
1 year
to 5 years
After
5 years
to 10 years
After
10 years
to 15 years
After
15 years
to 20 years
1,142
1,108
1,593
1,589
1,641
1,667
1,631
1,661
Over
20 years
7,426
7,889
Total
13,690
14,169
(b)
(c)
(d)
TheadjustmentsforinvestmentsinPrudentialinsurancepoliciesareconsolidationadjustmentsforintra-groupassetsandliabilitieswithnoimpacttoadjustedIFRSoperatingprofit
basedonlonger-terminvestmentreturns.
TotalemployercontributionsexpectedtobepaidintotheGroupdefinedbenefitschemesfortheyearending31December2019amountto£52million(2018:£50million).
Theactuarialgainsandlossesattributabletopolicyholdersandshareholdersasshowninthetableaboveareanalysedasfollows:
2018 £m
2017 £m
Actuarialgainsandlosses
Returnontheschemeassetslessamountincludedininterestincome
Gains(losses)onchangesindemographicassumptions
Gains(losses)onchangesinfinancialassumptions
Experiencegainsonschemeliabilities
EffectofderecognitionofPSPSsurplus
ConsolidationadjustmentforinvestmentsinPrudentialinsurancepoliciesandotheradjustments
(221)
168
330
26
303
(179)
10
134
119
(10)
(101)
111
119
87
(6)
200
(e)
InOctober2018,theHighCourtruledthatpensionschemesarerequiredtoequalisebenefitsfortheeffectofguaranteedminimumpensions(GMPs).GMPsareaminimumbenefit
thatschemesthatwerecontracted-outonasalary-relatedbasisbetween1978and1997arerequiredtoprovide.
InlightofthisCourtruling,at31December2018,theGrouphasrecognisedanestimatedallowanceforGMPequalisationwithintheIAS19valuationforallthethreeUK
schemes(£31millionforPSPS,£17millionforSASPSand£5millionforM&GGPS).ThesecostsareallocatedbetweentheUKwith-profitsfundandtheshareholders’fundonthe
basisof70:30forPSPS,40:60forSASPSandwithM&GGPSbeingwhollyattributabletotheshareholders’fund.Theimpactonshareholdersprofitbeforetaxis£24million(before
takingintoaccountanychargetoPSPSsurplusrestriction)andonshareholders’equityposttaxis£12million.
(iv) Sensitivity of the pension scheme liabilities to key variables
Thesensitivityinformationbelowisbasedonthecoreschemeliabilitiesandassumptionsatthebalancesheetdate.Thesensitivitiesare
calculatedbasedonachangeinoneassumptionwithallotherassumptionsbeingheldconstant.Assuch,interdependenciesbetween
theassumptionsareexcluded.Theimpactoftherateofinflationassumptionsensitivityincludestheimpactofinflationontherateof
increaseinsalariesandrateofincreaseofpensionsinpayment.
Thesensitivitiesoftheunderlyingpensionschemeliabilitiesasshownbelowdonotdirectlyequatetotheimpactontheprofitorloss
attributabletoshareholdersorshareholders’equityduetotheeffectoftheapplicationofIFRIC14onPSPSandtheallocationofashare
oftheinterestinthefinancialpositionofPSPSandSASPStotheUKwith-profitsfundasdescribedabove.
.
Assumption applied
Impact of sensitivity on scheme liabilities on IAS 19 basis
Discountrate
2018
2.8%
2017
Sensitivity change in assumption
2018
2017
2.5% Decreaseby0.2%
Increaseinschemeliabilitiesby:
Discountrate
2.8%
2.5% Increaseby0.2%
Decreaseinschemeliabilitiesby:
PSPS
Otherschemes
Rateofinflation
3.3%
2.3%
3.1% RPI:Decreaseby0.2%
2.1% CPI:Decreaseby0.2%with
consequentreductionin
salaryincreases
PSPS
Otherschemes
Decreaseinschemeliabilitiesby:
PSPS
Otherschemes
3.5%
5.0%
3.3%
4.7%
0.6%
3.9%
3.5%
5.4%
3.4%
4.9%
0.6%
3.9%
Mortalityrate
Increaselifeexpectancy
Increaseinschemeliabilitiesby:
by1year
PSPS
Otherschemes
3.9%
3.9%
4.0%
3.8%
290 Prudential plc AnnualReport2018
www.prudential.co.uk
C Balance sheet notes continued
C10 Share capital, share premium and own shares
Number of
ordinary shares
Issued shares of 5p each fully paid
At 1 January
Sharesissuedundershare-basedschemes
2,587,175,445
5,868,964
At 31 December
2,593,044,409
2018
Share
capital
£m
129
1
130
Share
premium
£m
Number of
ordinary shares
1,948 2,581,061,573
6,113,872
16
1,964 2,587,175,445
2017
Share
capital
£m
129
–
129
Share
premium
£m
1,927
21
1,948
Amountsrecordedinsharecapitalrepresentthenominalvalueofthesharesissued.Thedifferencebetweentheproceedsreceivedon
issueofshares,netofissuecosts,andthenominalvalueofsharesissuediscreditedtothesharepremiumaccount.
At31December2018,therewereoptionsoutstandingundersaveasyouearnschemestosubscribeforsharesasfollows:
31 Dec 2018
31Dec2017
Number of
shares to
subscribe for
4,885,804
6,448,853
Share price range
from
901p
629p
to
Exercisable
by year
1,455p
1,455p
2024
2023
Transactions by Prudential plc and its subsidiaries in Prudential plc shares
TheGroupbuysandsellsPrudentialplcshares(‘ownshares’)eitherinrelationtoitsemployeeshareschemesorviatransactions
undertakenbyauthorisedinvestmentfundsthattheGroupisdeemedtocontrol.Thecostofownsharesof£170millionasat
31December2018(31December2017:£250million)isdeductedfromretainedearnings.TheCompanyhasestablishedtruststo
facilitatethedeliveryofsharesunderemployeeincentiveplans.At31December2018,9.6million(31December2017:
11.4million)Prudentialplcshareswithamarketvalueof£135million(31December2017:£218million)wereheldinsuchtrustsallof
whichareforemployeeincentiveplans.Themaximumnumberofsharesheldduring2018was14.9millionwhichwasinMarch2018.
TheCompanypurchasedthefollowingnumberofsharesinrespectofemployeeincentiveplans.Thesharespurchasedeachmonth
areasfollows:
January
February
March
April
May
June
July
August
September
October
November
December
Total
2018 share price
2017 share price
Number of
shares
51,555
55,765
55,623
1,664,334
63,334
181,995
55,888
60,384
82,612
148,209
67,162
73,744
2,560,605
Low
19.18
17.91
18.25
16.67
18.91
18.21
17.68
18.04
16.95
15.62
15.95
13.99
High
19.40
18.10
18.54
17.95
19.38
18.65
17.86
18.10
16.98
16.84
15.96
14.30
Cost
Number of
shares
996,536
1,004,362
1,025,238
29,113,556
1,216,136
3,335,725
993,779
1,090,283
1,400,868
2,477,127
1,071,633
1,045,278
62,388
65,706
70,139
3,090,167
55,744
182,780
51,984
55,857
51,226
136,563
53,951
53,519
44,770,521
3,930,024
Low
15.83
15.70
16.40
16.58
17.50
17.52
17.72
18.30
17.45
17.99
18.38
18.26
High
16.02
16.09
16.54
16.80
17.62
18.00
17.93
18.73
17.97
18.22
18.40
18.47
Cost
989,583
1,052,657
1,159,950
51,369,760
979,645
3,269,447
927,452
1,025,802
912,151
2,483,879
992,123
986,000
66,148,449
TheGrouphasconsolidatedanumberofauthorisedinvestmentfundswhereitisdeemedtocontrolthesefundsunderIFRS.Someof
thesefundsholdsharesinPrudentialplc.Thetotalnumberofsharesheldbythesefundsat31December2018was3.0million
(31December2017:6.4million)andthecostofacquiringthesesharesof£20million(2017:£71million)isincludedinthecostofown
shares.Themarketvalueofthesesharesasat31December2018was£42million(31December2017:£121million).During2018,these
fundsmadenetdisposalsof3,368,506Prudentialshares(2017:acquisitionsof372,029)foranetdecreaseof£50.5milliontobookcost
(2017:netincreaseof£9.4million).
AllsharetransactionsweremadeonanexchangeotherthantheStockExchangeofHongKong.
OtherthansetoutabovetheGroupdidnotpurchase,sellorredeemanyPrudentialplclistedsecuritiesduring2018or2017.
www.prudential.co.uk
AnnualReport2018 Prudential plc 291
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C11 Provisions
ProvisioninrespectofdefinedbenefitpensionschemesC9
Otherprovisions note
Total provisions
Note
Analysisofotherprovisions:
At 1 January
Chargedtoincomestatement:
Additionalprovisions
Unusedamountsreleased
Usedduringtheyear
Exchangedifferences
Total at 31 December
31 Dec
2018 £m
31 Dec
2017 £m
174
904
1,078
180
943
1,123
2018 £m
2017 £m
943
229
(18)
(262)
12
904
659
542
(9)
(239)
(10)
943
Otherprovisionscomprisestaffbenefitsprovisionsof£409million(31December2017:£453million)thataregenerallyexpectedtobe
paidoutwithinthenextthreeyears,otherprovisionsof£171million(31December2017:£121million)andaprovisionforreviewofpast
annuitysalesafterutilisationduringtheyearof£324million(31December2017:£369million).PrudentialhasagreedwiththeFinancial
ConductAuthority(FCA)toreviewannuitiessoldwithoutadviceafter1July2008toitscontract-baseddefinedcontributionpension
customers.Thereviewisexaminingwhethercustomersweregivensufficientinformationabouttheirpotentialeligibilitytopurchasean
enhancedannuity,eitherfromPrudentialoranotherpensionprovider.Agrossprovisionof£400million,beforecostsincurred,was
establishedat31December2017tocoverthecostsofundertakingthereviewandanyrelatedredressandfollowingareassessment,no
changehasbeenmadein2018.Themajorityoftheprovisionwillbeutilisedin2019.Theultimateamountthatwillbeexpendedbythe
Grouponthereviewwillremainuncertainuntiltheprojectiscompleted.Ifthepopulationsubjecttoredressincreasedordecreasedby
10percent,thentheprovisionwouldbeexpectedtoincreaseordecreasebycirca7percentaccordingly.Additionally,in2018,the
Groupagreedwithitsprofessionalindemnityinsurersthattheywillmeet£166millionoftheGroup’sclaimscosts,whichwillbepaidas
theGroupincurscosts/redress.ThishasbeenrecognisedontheGroup’sbalancesheetwithin‘Otherdebtors’at31December2018.
C12 Capital
C12.1 Group objectives, policies and processes for managing capital
(i) Capital measure
TheGroupmanagesitsGroupSolvencyIIownfundsasitsmeasureofcapital.At31December2018estimatedGroupSolvencyIIown
fundsare£30.2billion(31December2017:£26.4billion).
(ii) External capital requirements
SolvencyIIistheGroup’sconsolidatedcapitalregime.SolvencyIIisarisk-basedsolvencyframeworkrequiredundertheEuropean
SolvencyIIDirectiveasimplementedbythePrudentialRegulatoryAuthorityintheUK.TheSolvencyIIsurplusrepresentsthe
aggregatedcapitalheldbytheGrouplessSolvencyCapitalRequirements.
(iii) Meeting of capital management objectives
TheGroupSolvencyCapitalRequirementhasbeenmetduring2018.
AswellasholdingsufficientcapitaltomeetSolvencyIIrequirementsatGrouplevel,theGroupalsocloselymanagesthecashitholds
withinitscentralholdingcompaniessothatitcan:
— Maintainflexibility,fundnewopportunitiesandabsorbshockevents;
— Funddividends;and
— Covercentralcostsanddebtpayments.
MoredetailsonholdingcompanycashflowsandbalancesaregiveninsectionII(a)oftheAdditionalunauditedfinancialinformation.
WhiletheGroupataconsolidatedlevelissubjecttotheSolvencyIIrequirements,atabusinessunitlevelcapitalisdefinedbylocal
capitalregulationsandlocalbusinessneeds.
EachoftheGroup’slong-termbusinessoperationsiscapitalisedtoasufficientlystronglevelforitsindividualcircumstances.
TheGroupmanagesitsassets,liabilitiesandcapitallocally,inaccordancewithlocalregulatoryrequirementsandreflectingthe
differenttypesofliabilitiesineachbusinessunit.AsaresultofthediversityofproductsofferedbyPrudentialandthedifferentregulatory
regimesunderwhichitoperates,theGroupemploysdifferingmethodsofasset/liabilityandcapitalmanagement,dependingonthe
businessconcerned.
StochasticmodellingofassetsandliabilitiesisundertakenintheUK,USandAsiatoassesstheeconomiccapitalrequirements.
Astochasticapproachmodelstheinter-relationshipbetweenassetandliabilitymovements,takingintoaccountassetcorrelation,
managementactionsandpolicyholderbehaviourunderalargenumberofalternativeeconomicscenarios.
292 Prudential plc AnnualReport2018
www.prudential.co.uk
C Balance sheet notes continued
Inaddition,reserveadequacytestingunderarangeofscenariosanddynamicsolvencytestingiscarriedout,includingundercertain
scenariosmandatedbytheUK,USandAsiaregulators.
Thesensitivityofliabilitiesandothercomponentsoftotalcapitalvarydependinguponthetypeofbusinessconcernedandthis
conditionstheapproachtoasset/liabilitymanagement.
(iv) Post demerger
InAugust2018,theGroupannouncedthattheHongKongInsuranceAuthoritywouldbecomeitsleadregulatoruponsuccessful
completionofthedemerger.TheEuropeanSolvencyIIregimewillnolongerbeapplicabletoPrudentialplcgroupanditisproactively
engagingwiththeHongKongInsuranceAuthorityonthesupervisoryframeworkthatwillapplytotheGroupafterthedemerger.
C12.2 Local capital regulations
(i) Asia insurance operations
TheestimatedavailablecapitalpositionforAsialifeinsuranceoperationsexcludingwith-profitsfundswithreconciliationto
shareholdersequityisshownbelow:
IFRS shareholders’ equity
Adjustments to local regulatory basis
Removedeferredacquisitioncosts,goodwillandotherintangibles
Otheradjustments
Totaladjustments
Total available capital resources of life assurance businesses on a local regulatory basis
excluding with-profits funds note
31 Dec
2018 £m
5,868
(1,850)
631
(1,219)
31 Dec
2017 £m
5,525
(1,515)
306
(1,209)
4,649
4,316
Note
Theavailablecapitalresourcesonalocalregulatorybasisasat31December2018excludesthewith-profitsbusinessofHongKong,SingaporeandMalaysiaof£11,524million
(31December2017:£10,253million).
Thecapitalrequirementsofsignificantoperationsare:
China
Arisk-basedcapital,riskmanagementandgovernanceframework,knownastheChinaRiskOrientedSolvencySystem(C-ROSS),
appliesinChina.UnderC-ROSS,insurersarerequiredtomaintainacoresolvencyratio(corecapitaloverminimumcapital)anda
comprehensivesolvencyratio(actualcapitaloverminimumcapital)ofnotlowerthan50percentand100percent,respectively.The
actualcapitalisthedifferencebetweentheadmittedassetsandadmittedliabilities.
Hong Kong
Thecapitalrequirementvariesbyunderlyingriskanddurationofliabilities,butisgenerallydeterminedasapercentageofmathematical
reservesandcapitalatrisk.Mathematicalreservesarebasedonabestestimatebasiswithprudentmarginsforadversedeviations,
discountedatavaluationinterestratebasedonablendbetweentherisk-adjustedportfolioyieldandthereinvestmentrate.
Indonesia
Solvencycapitalisdeterminedusingarisk-basedcapitalapproach.InsurancecompaniesinIndonesiaareexpectedtomaintainthelevel
ofnetassetsabove100percentofsolvencycapital.
Malaysia
Arisk-basedcapitalframeworkappliesinMalaysia.Thelocalregulator,BankNegaraMalaysia(BNM),hassetaSupervisoryTargetCapital
Levelof130percentbelowwhichsupervisoryactionsofincreasingintensitywillbetaken.Eachinsurerisalsorequiredtosetitsown
IndividualTargetCapitalLeveltoreflectitsownriskprofileandthisisexpectedtobehigherthantheSupervisoryTargetCapitalLevel.
MarketliberalisationmeasureswereintroducedbyBNMinApril2009,whichincreasesthelimitfrom49percentto70percenton
foreignequityownershipforinsurancecompaniesandTakafuloperatorsinMalaysia.Ahigherforeignequitylimitbeyond70percentfor
insurancecompanieswillbeconsideredbyBNMonacasebycasebasisforcompanieswhosupportexpansionofinsuranceprovisionto
themostvulnerableinMalaysiansociety.
Singapore
Arisk-basedcapitalframeworkappliesinSingapore.AregisteredinsurerincorporatedinSingaporeisrequiredatalltimestomaintaina
minimumlevelofpaid-upordinarysharecapitalandtoensurethatitsfinancialresourcesarenotlessthanthegreaterof(i)thetotalrisk
requirementarisingfromtheassetsandliabilitiesoftheinsurer,calculatedinaccordancewiththeSingaporeInsuranceAct;or(ii)a
minimumamountofS$5million(Singaporedollars).Theregulatoralsohastheauthoritytodirectthattheinsurersatisfyadditionalcapital
adequacyrequirementsinadditiontothosesetforthundertheSingaporeInsuranceActifitconsiderssuchadditionalrequirements
appropriate.
www.prudential.co.uk
AnnualReport2018 Prudential plc 293
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C12 Capital continued
C12.2 Local capital regulations continued
(ii) US insurance operations
TheestimatedcapitalpositionforJacksonwithreconciliationtoshareholders’equityisshownbelow:
IFRS shareholders’ equity
Adjustments to regulatory basis
Removedeferredacquisitioncosts
Jacksonsurplusnotes
InvestmentandpolicyholderliabilitiesvaluationdifferencesbetweenIFRSandregulatorybasisforJackson
Otheradjustments*
Totaladjustments
Total available capital resources of life assurance businesses on a local regulatory basis
31 Dec
2018 £m
5,584
31 Dec
2017 £m
5,013
(8,727)
196
7,217
63
(1,251)
4,333
(8,197)
184
5,325
818
(1,870)
3,143
*OtheradjustmentsincludetheremovalofentitiesrecordedasUSinsuranceoperationsintheIFRSstatementswhichfalloutsidethescopeofJacksonNationalLifeInsuranceCompany.
TheregulatoryframeworkforJacksonisgovernedbytherequirementsoftheUSNAICapprovedRisk-BasedCapitalstandards.Under
theserequirementslifeinsurancecompaniesreportusingaformula-basedcapitalstandardwhichincludescomponentscalculatedby
applyingafter-taxfactorstovariousasset,premiumandreserveitemsandaseparatemodel-basedcomponentformarketriskassociated
primarilywithvariableannuityproducts.Theafter-taxfactorswereadjustedtoreflecttheimpactofUSTaxReformduring2018.
JacksonhadapermittedpracticeineffectasgrantedbythelocalregulatorallowingJacksontocarrycertaininterestrateswapsat
bookvalue,asifstatutoryhedgeaccountingwereinplace,insteadofatfairvalueaswouldhavebeenotherwiserequired.Jacksonis
requiredtodemonstratetheeffectivenessofitsinterestrateswapprogrammepursuanttotheMichiganInsuranceCode.Thetotal
effectofthispermittedpractice,netoftax,wastodecreasestatutorysurplusby£129million(31December2017:£355million).
UndertheequivalenceprovisionsofSolvencyII,JacksonisincorporatedintotheGroup’sSolvencyIIpositionatalevelequal
toavailablecapitalinexcessof100percentoftheUSlocalminimumrisk-basedcapitalrequirementlevelatwhichcorrective
actioncommences.
(iii) UK and Europe insurance operations
InsuranceoperationsintheUKandEuropearesubjecttoSolvencyIIcapitalrequirementsonanindividualbasis.Thesehavebeenmet
during2018.
(iv) Asset management operations – regulatory and other surplus
CertainassetmanagementsubsidiariesoftheGrouparesubjecttolocalregulatoryrequirements.Themovementintheyearofthe
estimatedsurplusregulatorycapitalpositionofthosesubsidiaries,combinedwiththemovementintheIFRSbasisshareholders’funds
forunregulatedassetmanagementoperations,isasfollows:
Regulatory and other surplus
Beginningofyear
Gainsduringtheyear
Movementincapitalrequirement
Capitalinjection
Distributionsmadetotheparentcompany
Exchangeandothermovements
Endofyear
Asset management operations
2018 £m
US
Eastspring
Investments
2017 £m
Total
Total
M&GPrudential
419
364
(10)
88
(197)
–
664
235
23
–
–
(97)
(121)
40
222
138
5
13
(104)
20
294
876
525
(5)
101
(398)
(101)
998
814
586
(73)
6
(433)
(24)
876
294 Prudential plc AnnualReport2018
www.prudential.co.uk
C Balance sheet notes continued C12.3 Transferability of available capital
IntheUK,PACisrequiredtomeettheSolvencyIIcapitalrequirementsasacompanyasawhole,iecoveringbothitsring-fenced
with-profitsfundsandnon-profitfunds.Further,thesurplusofthewith-profitsfundsisring-fencedfromtheshareholderbalancesheet
withrestrictionsastoitsdistribution.Distributionsfromthewith-profitsfundstoshareholderscontinuetoreflecttheshareholders’
one-ninthshareofthecostofdeclaredpolicyholders’bonuses.
ForJackson,capitalretentionismaintainedatalevelconsistentwithanappropriateratingbyStandard&Poor’s.CurrentlyJacksonis
ratedAA.Jacksoncanpaydividendsonitscapitalstockonlyoutofearnedsurplusunlesspriorregulatoryapprovalisobtained.
Furthermore,dividendsthatexceedthegreaterofstatutorynetgainfromoperationslessnetrealisedinvestmentslossesfortheprior
yearor10percentofJackson’sprioryearendstatutorysurplus,excludinganyincreasearisingfromtheapplicationofpermitted
practices,requirepriorregulatoryapproval.
ForAsiasubsidiaries,theamountsretainedwithinthecompaniesareatlevelsthatprovideanappropriatelevelofcapitalstrengthin
excessofthelocalregulatoryminimum.ThebusinessesinAsiamay,ingeneral,remitdividendstoUKparententities,providedthe
statutoryinsurancefundmeetsthelocalregulatorysolvencyrequirements.Forwith-profitsfunds,theexcessofassetsoverliabilitiesis
retainedwithinthefunds,withdistributiontoshareholderstiedtotheshareholders’shareofdeclaredbonuses.
Availablecapitalofthenon-insurancebusinessunitsistransferableaftertakingaccountofanappropriatelevelofoperatingcapital,
basedonlocalregulatorysolvencyrequirements,overandabovebaseliabilities.
C13 Property, plant and equipment
Property,plantandequipmentcompriseGroupoccupiedpropertiesandtangibleassets.Areconciliationofthecarryingamountofthese
itemsfromthebeginningoftheyeartotheendoftheyearisasfollows:
At 1 January
Cost
Accumulateddepreciation
Net book amount
Year ended 31 December
Openingnetbookamount
Exchangedifferences
Depreciationandimpairmentcharge
Additions
Arisingonacquisitionsofsubsidiaries
Disposalsandtransfers
Closing net book amount
At 31 December
Cost
Accumulateddepreciation
Net book amount
367
(72)
295
295
13
(10)
35
4
(8)
329
412
(83)
329
Group
occupied
property
2018 £m
Tangible
assets
Total
1,408
(619)
789
789
23
(137)
289
522
(77)
1,041
(547)
494
494
10
(127)
254
518
(69)
1,080
1,409
1,641
(561)
1,080
2,053
(644)
1,409
Group
occupied
property
2017 £m
Tangible
assets
439
(88)
351
351
(8)
(22)
17
–
(43)
295
367
(72)
295
1,077
(685)
392
392
(14)
(94)
117
178
(85)
494
1,041
(547)
494
Total
1,516
(773)
743
743
(22)
(116)
134
178
(128)
789
1,408
(619)
789
Tangible assets
Ofthe£1,080million(31December2017:£494million)oftangibleassets,£856million(31December2017:£360million)wereheldby
theGroup’swith-profitsbusinesses,primarilybytheconsolidatedsubsidiariesforventurefundandotherinvestmentpurposesoftheUK
with-profitsfund.
Capital expenditure: property, plant and equipment by segment
Thecapitalexpenditureof£254million(2017:£117million)aroseasfollows:£52million(2017:£55million)inAsia,£14million(2017:
£19million)inUSand£187million(2017:£41million)inUKandEuropewiththeremainingbalanceof£1million(2017:£2million)arising
fromunallocatedcorporateexpenditure.
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AnnualReport2018 Prudential plc 295
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C14 Investment properties
InvestmentpropertiesprincipallyrelatetotheUKwith-profitsfundandarecarriedatfairvalue.Areconciliationofthecarryingamountof
investmentpropertiesatthebeginningandendoftheyearissetoutbelow:
At 1 January
Additions:
Resultingfrompropertyacquisitions
Resultingfromexpenditurecapitalised
Disposals
Netgainfromfairvalueadjustments
Netforeignexchangedifferences
At 31 December
2018 £m
2017 £m
16,497
14,646
1,326
183
(178)
149
(52)
2,009
39
(591)
415
(21)
17,925
16,497
The2018incomestatementincludesrentalincomefrominvestmentpropertiesof£927million(2017:£876million)anddirectoperating
expensesincludingrepairsandmaintenancearisingfromthesepropertiesof£56million(2017:£82million).
Investmentpropertiesof£5,825million(31December2017:£5,689million)areheldunderfinanceleases.Thepresentvalueof
minimumleasepaymentsundertheseleasesis£42million(31December2017:£43million)and76percent(31December2017:
73percent)ofleasepaymentsaredueinoverfiveyears.
TheGroup’spolicyistoletinvestmentpropertiestotenantsthroughoperatingleases.Minimumfuturerentalstobereceivedon
non-cancellableoperatingleasesoftheGroup’sfreeholdinvestmentpropertiesarereceivableinthefollowingperiods:
Lessthan1year
1to5years
Over5years
Total
2018 £m
2017 £m
314
1,077
2,242
3,633
322
1,073
2,286
3,681
Thetotalminimumfuturerentalstobereceivedonnon-cancellablesub-leasesfortheGroup’sinvestmentpropertiesheldunderfinance
leasesat31December2018are£1,596million(31December2017:£1,527million).
296 Prudential plc AnnualReport2018
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C Balance sheet notes continued D Other notes
D1 Corporate transactions
D1.1 Gains/(losses) on disposal of businesses and corporate transactions
‘(Loss)gainondisposalofbusinessesandcorporatetransactions’comprisesthefollowing:
LossarisingonreinsuranceofpartofUKshareholder-backedannuityportfolio note (i)
Othertransactions note (ii)
2018 £m
2017 £m
(508)
(80)
(588)
–
223
223
Notes
(i)
Loss arising on reinsurance of part of UK shareholder-backed annuity portfolio
InMarch2018,M&GPrudentialannouncedthereinsuranceof£12.0billion(asat31December2017)ofitsshareholder-backedannuityportfoliotoRothesayLife.Undertheterms
oftheagreement,M&GPrudentialhasreinsuredtheliabilitiestoRothesayLife,whichisexpectedtobefollowedbyacourtsanctionedlegaltransfer,underPartVIIoftheFinancial
ServicesandMarketsAct2000(PartVII),ofmostoftheportfoliotoRothesayLifeby30June2019.
Thereinsuranceagreementbecameeffectiveon14March2018.Areinsurancepremiumof£12,149millionhasbeenrecognisedwithin‘Outwardreinsurancepremiums’inthe
incomestatementandsettledviathetransferoffinancialinvestmentsandotherassetstoRothesayLife.Afterallowingfortherecognitionofareinsuranceassetandassociated
changestopolicyholderliabilities,alossof£(508)millionwasrecognisedin2018inrelationtothetransaction.
ThereinsuredannuitybusinessthatwillbetransferredoncethePartVIIprocessiscompletehasbeenclassifiedasheldforsaleintheseconsolidatedfinancialstatementsin
accordancewithIFRS5,‘Non-currentassetsheldforsaleanddiscontinuedoperations’.
TheassetsandliabilitiesoftheM&GPrudentialannuitybusinessclassifiedasheldforsaleonthestatementoffinancialpositionareasfollows:
Assets
Reinsurer’sshareofinsurancecontractliabilities
Otherassets(includingcashandcashequivalents)
Assets held for sale
Liabilities
Policyholderliabilities
Otherliabilities
Liabilities held for sale
31 Dec 2018
£m
10,502
66
10,568
10,502
66
10,568
(ii) Other transactions
Othertransactioncostsof£80millionincurredbytheGroupin2018primarilyrelatetoadditionalcostsincurredinexitingfromtheNPHbroker-dealerbusinessandcostsrelatedto
preparationforthepreviouslyannouncedintentiontodemergeM&GPrudentialfromPrudentialplc,resultingintwoseparatelylistedentities.
In2017,theGroupcompleteditsdisposalofitsKorealifebusiness,realisingagainof£61millionprincipallyasaresultofrecyclingfromothercomprehensiveincomecumulative
exchangegainsofthisbusiness.On15August2017,theGroup,throughitssubsidiaryNationalPlanningHoldings,Inc.(NPH)solditsUSindependentbroker-dealernetworktoLPL
FinancialLLCwhichrealisedagainof£162millionin2017.Togetherthesetwotransactionsgeneratedagainondisposalofbusinessesandcorporatetransactionsof£223million.
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AnnualReport2018 Prudential plc 297
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information D1 Corporate transactions continued
D1.2 Acquisition of TMB Asset Management Co., Ltd. in Thailand
InSeptember2018,theGroupcompleteditsinitialacquisitionof65percentofTMBAssetManagementCo.,Ltd.(TMBAM),anasset
managementcompanyinThailand,fromTMBBankPublicLimited(TMB)for£197million.
Thetermsofthesaleagreementincludeacalloptionexercisable(bytheGroup)afterthreeyearsandaputoptionexercisable(by
TMB)afterfouryearswhich,ifexercised,triggersthepurchaseoftheremaining35percentofthebusiness.Theputoption,inlinewith
IFRS,hasbeenrecognisedasafinancialliabilityandareductioninshareholders’equityof£106millionasoftheacquisitiondate,being
thediscountedexpectedconsiderationpayablefortheremaining35percent(£109millionasof31December2018).
Thefairvalueoftheacquiredassets,assumedliabilitiesandresultinggoodwillareshowninthetablebelow:
Assets
Intangibleassets
Otherassets
Cashandcashequivalents
Total assets
Otherliabilities
Non-controllinginterests
Net assets acquired and liabilities assumed
Goodwillarisingonacquisition*
Purchase consideration
31 Dec 2018
£m
5
26
2
33
(10)
(7)
16
181
197
*Thegoodwillonacquisitionof£181million(retranslatedto£186millionat31December2018)ismainlyattributabletotheexpectedbenefitsfromnewcustomersandsynergies.Referto
noteC5.1forchangestothecarryingamountofgoodwillduringtheyear.
TheacquisitionofTMBAMcontributed£18milliontorevenueand£5milliontoadjustedIFRSoperatingprofitbasedonlonger-term
investmentreturnsandprofitbeforetaxoftheGroupforthepost-acquisitionperiodfrom27Septemberto31December2018.Thereis
nomaterialimpactontheGroup’srevenueandprofitfor2018iftheacquisitionhadoccurredon1January2018.
D2 Contingencies and related obligations
Litigation and regulatory matters
InadditiontothematterssetoutinnoteC11inrelationtotheFinancialConductAuthorityreviewofpastannuitysales,theGroupis
involvedinvariouslitigationandregulatoryissues.ThesemayfromtimetotimeincludeclassactionsinvolvingJackson.Whilethe
outcomeofsuchlitigationandregulatoryissuescannotbepredictedwithcertainty,theCompanybelievesthattheirultimateoutcome
willnothaveamaterialadverseeffectontheGroup’sfinancialcondition,resultsofoperations,orcashflows.
Guarantees
GuaranteefundsinboththeUKandtheUSprovideforpaymentstobemadetopolicyholdersonbehalfofinsolventlifeinsurance
companiesandarefinancedbypaymentsassessedonsolventinsurancecompaniesbasedonlocation,volumeandtypesofbusiness.
Theestimatedreserveforfutureguaranteefundassessmentsisnotsignificant.Thedirectorsbelievethatsufficientprovisionhasbeen
madeonthebalancesheetforallanticipatedpaymentsforknowninsolvencies.
TheGrouphasprovidedotherguaranteesandcommitmentstothird-partiesenteredintointhenormalcourseofbusinessbutthe
Groupdoesnotconsiderthattheamountsinvolvedaresignificant.
Support for with-profits sub-funds by shareholders’ funds
PACisliabletomeetitsobligationstowith-profitspolicyholderseveniftheassetsofthewith-profitssub-fundsareinsufficienttodoso.
Theassets,representedbytheunallocatedsurplusofwith-profitsfunds,inexcessofamountsexpectedtobepaidforfutureterminal
bonusesandrelatedshareholdertransfers(‘theexcessassets’)inthewith-profitssub-fundscouldbemateriallydepletedovertimeby,
forexample,asignificantorsustainedequitymarketdownturn,costsofsignificantfundamentalstrategicchangeoramaterialincreasein
thepensionmis-sellingprovision.Intheunlikelycircumstancethatthedepletionoftheexcessassetswithinthelong-termfundwassuch
thattheGroup’sabilitytosatisfypolicyholders’reasonableexpectationswasadverselyaffected,itmightbecomenecessarytorestrict
theannualdistributiontoshareholdersortocontributeshareholders’fundstothewith-profitssub-fundstoprovidefinancialsupport.
Mattersrelatingtowith-profitssub-funds:
— Pensionmis-sellingreview–theUKinsuranceregulatorrequiredallUKlifeinsurancecompaniestoreviewsalesofpersonalpensions
policiesforpotentialmis-selling.Offersofredresstoallcasesweremadeby30June2002.WhilstPrudentialbelieveditmetthe
regulator’srequirementstoissueoffersofredresstoallcustomersby30June2002thereisapopulationofcustomerswho,whilstan
attemptwasmadeatthetime,toinvitethemtoparticipateinthereview,maynothavereceivedtheirinvitation.Thesecustomersare
298 Prudential plc AnnualReport2018
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D Other notes continued beingre-engagedtoensurethattheyhavetheopportunitytotakepartinthereview.Costsarisingfromthisreviewaremetbythe
excessassetsoftheUKwith-profitssub-fundandhencehavenotbeenchargedtotheassetsharesusedinthedeterminationof
policyholderbonusrates.Prudentialhasgivenanassurancethatthesedeductionsfromexcessassetswillnotimpactitsbonusor
investmentpolicyforpolicieswithinthewith-profitssub-fundsthatwereinforceat31December2003.Thisassurancedoesnot
applytonewbusinesssince1January2004.Intheunlikelyeventthatsuchdeductionswouldaffectthebonusorinvestmentpolicyfor
therelevantpolicies,Prudentialhasstateditwouldmakeavailablesupporttothesub-fundfromshareholderresourcesforaslongas
thesituationcontinued,soastoensurethatpolicyholderswerenotdisadvantaged;
— ScottishAmicableInsurancesub-fund–policieswithinthissub-fund(awith-profitssub-fundclosedtonewbusiness)contain
minimumlevelsofguaranteedbenefittopolicyholders.Shouldtheassetsofthesub-fundbeinadequatetomeettheguaranteed
benefitobligationsofthepolicyholdersofSAIF,theUKwith-profitssub-fundwouldbeliabletocoveranysuchdeficiencyinthefirst
instance.Inaddition,certainpensionsproductswithinthissub-fundhaveguaranteedannuityratesatretirement,forwhicha
provisionof£361millionwasheldwithinthesub-fund(31December2017:£503million);and
— Guaranteedannuities–aprovisionforguaranteedannuityproductsof£49millionwasheld(31December2017:£53million)inthe
UKwith-profitssub-fund.
Intra-group capital support arrangements
PrudentialandPAChaveputinplaceintra-grouparrangementstoformalisecircumstancesinwhichcapitalsupportwouldbemade
availablebyPrudential.WhilePrudentialconsidersitunlikelythatsuchsupportwillberequired,thearrangementsareintendedto
provideadditionalcomforttoPACanditspolicyholders.
Inaddition,Prudentialhasputinplaceintra-grouparrangementstoformaliseundertakingsbyPrudentialtotheregulatorsoftheHong
Kongsubsidiariesregardingtheirsolvencylevels.
D3 Post balance sheet events
Dividends
Thesecondinterimordinarydividendfortheyearended31December2018,thatwasapprovedbytheBoardofDirectorsafter
31December2018,isdescribedinnoteB6.
Renewal of strategic bancassurance alliance with United Overseas Bank Limited
InJanuary2019,theGroupannouncedtherenewalofitsregionalstrategicbancassurancealliancewithUnitedOverseasBankLimited
(UOB).Thenewagreementextendstheoriginalalliance,whichcommencedin2010to2034andincreasesthegeographicalscopeto
includeafifthmarket,Vietnam,alongsidetheexistingmarketsacrossSingapore,Malaysia,ThailandandIndonesia.
Aspartofthistransaction,PrudentialhasagreedtopayUOBaninitialfeeof£662million(translatedusingaSingaporedollar:£
foreignexchangerateof1.7360)fordistributionrightswhichisnotdependentonfuturesalesvolumes.Thisamountwillbepaidinthree
instalmentsof£230millioninFebruary2019,£331millioninJanuary2020and£101millioninJanuary2021.InlinewiththeGroup’s
policy,theseamountswillbecapitalisedasadistributionrightsintangibleasset.
D4 Related party transactions
Transactions between the Company and its subsidiaries that are eliminated on consolidation
TheCompanyhastransactionsandoutstandingbalanceswithcertainunittrusts,Open-EndedInvestmentCompanies(OEICs),
collateraliseddebtobligationsandsimilarentitiesthatarenotconsolidatedandwhereaGroupcompanyactsasmanagerwhichare
regardedasrelatedpartiesforthepurposesofIAS24.ThebalancesareincludedintheGroup’sstatementoffinancialpositionatfair
valueoramortisedcostinaccordancewithIAS39classifications.Thetransactionsareincludedintheincomestatementandinclude
amountspaidonissueofsharesorunits,amountsreceivedoncancellationofsharesorunitsandamountspaidinrespectoftheperiodic
chargeandadministrationfee.
Inaddition,therearenomaterialtransactionsbetweentheGroup’sjointventuresandassociates,whichareaccountedforonan
equitymethodbasisandotherGroupcompanies.
ExecutiveofficersandDirectorsoftheCompanymayfromtimetotimepurchaseinsurance,assetmanagementorannuityproducts
marketedbyGroupcompaniesintheordinarycourseofbusinessonsubstantiallythesametermsasthoseprevailingatthetimefor
comparabletransactionswithotherpersons.
In2018and2017,othertransactionswithDirectorswerenotdeemedtobesignificantbothbyvirtueoftheirsizeandinthecontextof
theDirectors’financialpositions.Allofthesetransactionsareontermsbroadlyequivalenttothosethatprevailinarm’s-length
transactions.
ApartfromthesetransactionswithDirectors,noDirectorhadinterestsinshares,transactionsorarrangementsthatrequiredisclosure,
otherthanthosegivenintheDirectors’remunerationreport.KeymanagementremunerationisdisclosedinnoteB2.3.
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AnnualReport2018 Prudential plc 299
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information D5 Commitments
Operating leases and capital commitments
TheGroupleasesvariousofficestoconductitsbusiness.Leasesinwhichasignificantportionoftherisksandrewardsofownershipare
retainedbythelessorareclassifiedasoperatingleases.Paymentsmadeunderoperatingleases(netofanyincentivesreceivedfromthe
lessor)arechargedtotheincomestatementonastraight-linebasisovertheperiodofthelease.
Futureminimumleasepaymentsfornon-cancellableoperatingleasesfalldueduringthefollowingperiods:
Notlaterthan1year
Laterthan1yearandnotlaterthan5years
Laterthan5years
Futureminimumsub-leaserentalsreceivedfornon-cancellableoperatingleasesforlandandbuildings
Minimumleaserentalpaymentsincludedinconsolidatedincomestatement
2018 £m
2017 £m
120
404
408
42
139
113
284
118
56
123
Inaddition,theGrouphasprovided,fromtimetotime,certainguaranteesandcommitmentstothirdpartiesincludingfundingthe
purchaseordevelopmentoflandandbuildingsandotherrelatedmatters.Thecontractualobligationstopurchaseordevelopinvestment
propertiesat31December2018were£615million(31December2017:£176million).
At31December2018,Jacksonhasunfundedcommitmentsof£664million(31December2017:£414million)relatedtoits
investmentsinlimitedpartnershipsand£345million(31December2017:£214million)relatedtocommercialmortgageloansandother
fixedmaturities.Thesecommitmentswereenteredintointhenormalcourseofbusinessandamaterialadverseimpactontheoperations
isnotexpectedtoarisefromthem.
At31December2018,UKandEurope’sinsuranceoperationshadunfundedcommitmentsof£3,997million(31December2017:
£3,225million)relatedtoprivateequityandinfrastructurefunds.Inaddition,PrudentialCapitalhadunfundedcommitmentsof
£155million(31December2017:£162million)relatedtoitsbridgingloans.Thesecommitmentswereenteredintointhenormalcourse
ofbusinessandnomaterialadverseimpactontheoperationsisexpectedtoarise.
D6 Investments in subsidiary undertakings, joint ventures and associates
(a) Dividend restrictions and minimum capital requirements
CertainGroupsubsidiariesandjointventuresaresubjecttorestrictionsontheamountoffundstheymaytransferintheformofcash
dividendsorotherwisetotheparentcompany.
UnderUKcompanylaw,UKcompaniescanonlydeclaredividendsiftheyhavesufficientdistributablereserves.Further,UK
insurancecompaniesarerequiredtomaintainsolvencymarginsinaccordancewiththerulesofthePrudentialRegulationAuthority.
M&GPrudential’sassetmanagementcompany,M&GInvestmentManagementLtd,isalsorequiredtomaintaincapitalinaccordance
withregulatoryrequirementsbeforemakinganydistributiontotheparentcompany.
Jacksonissubjecttostatelawsthatlimitthedividendspayabletoitsparentcompanybasedonstatutorycapital,surplusandprioryear
earnings.Dividendsinexcessoftheselimitationsrequirepriorregulatoryapproval.
TheGroup’ssubsidiaries,jointventuresandassociatesinAsiamayremitdividendstotheGroup,ingeneral,providedthestatutory
insurancefundmeetsthecapitaladequacystandardrequiredunderlocalstatutoryregulationsandhassufficientdistributablereserves.
ForfurtherdetailsonlocalcapitalregulationsinAsiapleaserefertonoteC12.2.
(b) Investments in joint ventures and associates
Jointventuresrepresentarrangementswherethecontrollingpartiesthroughcontractualorotheragreementhavetherightstothenet
assetsofthearrangements.TheGrouphasshareholder-backedjointventureinsuranceandassetmanagementbusinessesinChinawith
CITICGroup,andajointventureassetmanagementbusinessinIndiawithICICIBank.Inaddition,thereisanassetmanagementjoint
ventureinHongKongwithBankofChinaInternationalHoldingsLimited(BOCI)andTakafulinsurancejointventureinMalaysia.
TheGrouphasvariousjointventuresrelatingtopropertyinvestmentsheldbytheUKwith-profitsfund.Theresultsofthesejoint
venturesarereflectedinthemovementintheunallocatedsurplusoftheUKwith-profitsfundsandthereforedonotaffectshareholders’
results.
FortheGroup’sjointventuresthatareaccountedforbyusingtheequitymethod,thenetoftaxresultsoftheseoperationsare
includedintheGroup’sprofitbeforetax.
TheGroup’sassociates,whicharealsoaccountedforundertheequitymethod,includetheIndianinsuranceentity(withthemajority
shareholderbeingICICIBank)andPPMSouthAfrica.Inaddition,theGrouphasinvestmentsinOpen-EndedInvestmentCompanies
(OEICs),unittrusts,fundsholdingcollateraliseddebtobligations,propertyunittrustsandventurecapitalinvestmentsoftheUK
with-profitsfundswheretheGrouphassignificantinfluence.AsallowedunderIAS28,theseinvestmentsareaccountedforonafair
valuethroughprofitorlossbasis.Theaggregatefairvalueofassociatesaccountedforatfairvaluethroughprofitorloss,wherethereare
publishedpricequotations,isapproximately£1.2billionat31December2018(31December2017:£2.4billion).
Forjointventuresandassociatesaccountedforusingtheequitymethod,the12monthsfinancialinformationoftheseinvestmentsup
to31December(coveringthesameperiodasthatoftheGroup)hasbeenusedintheseconsolidatedfinancialstatements.
300 Prudential plc AnnualReport2018
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D Other notes continued Key to classes of shares held
LBG
LPI
MI
NSB
OS
PI
PS
U
LimitedbyGuarantee
LimitedPartnershipInterest
MembershipInterest
Non-stockbasis
OrdinaryShares
PartnershipInterest
PreferenceShares
Units
TheGroup’sshareoftheprofits(includingshort-termfluctuationsininvestmentreturns),netofrelatedtax,andcarryingamountof
interestinjointventuresandassociates,whichareequityaccountedasshownintheconsolidatedincomestatementcomprisesthe
following:
Joint ventures and associates
Shareholder-backedbusiness
UKwith-profitsfund(priortooffsettingeffectinmovementinunallocatedsurplus)
Total
2018 £m
2017 £m
255
36
291
196
106
302
Share of profits from joint ventures and associates,
net of related tax
Insurance
Asset
management
Insurance
Asset
management
Asia
UK and Europe
2018
2017
178
121
61
60
36
106
16
15
Total
segment and
Group total
291
302
Thereisnoothercomprehensiveincomeinthejointventuresandassociates.Therehasbeennounrecognisedshareoflossesofajoint
ventureorassociatethattheGrouphasstoppedrecognisinginthetotalincome.
ThejointventureshavenosignificantcontingentliabilitiesorcapitalcommitmentstowhichtheGroupisexposednordoestheGroup
haveanysignificantcontingentliabilitiesorcapitalcommitmentsinrelationtoitsinterestsinthejointventures.
(c) Related undertakings
InaccordancewithSection409oftheCompaniesAct2006alistofPrudentialGroup’ssubsidiaries,jointventures,associatesand
significantholdings(beingholdingsofmorethan20percent)alongwiththeclassesofsharesheld,theregisteredofficeaddressandthe
countryofincorporationandtheeffectivepercentageofequityownedat31December2018isdisclosedbelow.
Thedefinitionsofasubsidiaryundertaking,jointventureandassociateinaccordancewiththeCompaniesAct2006aredifferentfrom
thedefinitionunderIFRS.Asaresult,therelatedundertakingsincludedwithinthelistbelowmaynotbethesameastheundertakings
consolidatedintheGroupIFRSfinancialstatements.TheGroup’sconsolidationpolicyisdescribedinnoteA3.1(b).
Direct subsidiary undertakings of the parent company, Prudential plc (shares held directly or via nominees)
Name of entity
M&GPrudentialLimited
Prudential(USHoldco1)Limited
PrudentialCapitalHoldingCompanyLimited
PrudentialCorporationAsiaLimited
PrudentialGroupHoldingsLimited
Classes of
shares held
Proportion
held
Registered office address and country of incorporation
OS
OS
OS
OS
OS
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
100.00%
13thFloor,OneInternationalFinanceCentre,1HarbourViewStreet,Central,
HongKong
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
Other subsidiaries, joint ventures, associates and significant holdings of the Group (no shares held directly by the
parent company, Prudential plc or its nominees)
Name of entity
95thAvenueRetailBuilding,LLC
AberdeenStandardSingaporeEquity
AberdeenStandardCashCreation
AlliedLifeBrokerageAgency,Inc
ANRPII(AIVVIFC),L.P.
BOCHKAggressiveGrowthFund
BOCHKAsiaPacificEquityFund
BOCHKBalancedGrowthFund
BOCHKChinaEquityFund
BOCHKConservativeGrowthFund
BOCHKGlobalBondFund
BOCHKInvestmentFunds-BOCHKHongKongEquityFund
BOCI-PrudentialAssetManagementLimited
Classes of
shares held
Proportion
held
Registered office address and country of incorporation
MI
OS
OS
OS
LPI
OS
OS
OS
OS
OS
OS
U
OS
100.00%
901S.,Ste.201,SecondSt.,Springfield,IL,62704-7909,UnitedStates
57.73%
21ChurchStreet,CapitalSquare2,#01-01,Singapore049480
22.91%
28thFloorBangkokCityTower,179SouthSathornRoad,Thungmahamek,
Sathorn,Bangkok10120,Thailand
100.00%
400EastCourtAvenue,DesMoines,IA50309,USA
36.58%
57.19%
27.18%
49.07%
66.00%
54.00%
30.25%
20.25%
36.00%
CaymanCorporateCentre,27HospitalRoad,GeorgeTown,KY-9008,
CaymanIslands
27thFloor,BankofChinaTower,1GardenRoad,CentralandWesternDistrict,
HongKong
12thFloorand25thFloor,CiticorpCentre,18WhitfieldRoad,CausewayBay,
WanChai,HongKong
27/FBankofChinaTower,1GardenRoad,CentralandWesternDistrict,
HongKong
12thFloor,25thFloor,CiticorpCentre,18WhitfieldRoad,CausewayBay,
WanChai,HongKong
27thFloor,BankofChinaTower,1GardenRoad,CentralandWesternDistrict,
HongKong
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AnnualReport2018 Prudential plc 301
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information D6 Investments in subsidiary undertakings, joint ventures and associates continued
(c) Related undertakings continued
Other subsidiaries, joint ventures, associates and significant holdings of the Group (no shares held directly by the
parent company, Prudential plc or its nominees) continued
Name of entity
BOCI-PrudentialTrusteeLimited
BrierCapitalLLC
Brooke(Holdco1)Inc
BrookeLifeInsuranceCompany
BWATRetailNominee(1)Limited
BWATRetailNominee(2)Limited
CalvinF1GPLimited
CalvinF2GPLimited
CanadaProperty(Trustee)No1Limited
CanadaPropertyHoldingsLimited
CardinalDistributionParkManagementLimited
CarrawayGuildford(NomineeA)Limited
CarrawayGuildford(NomineeB)Limited
CarrawayGuildfordGeneralPartnerLimited
CarrawayGuildfordInvestmentsUnitTrust
CarrawayGuildfordLP
CentaurusRetailLLP
CentreCapitalNon-QualifiedInvestorsIVAIVOrion,LP
CentreCapitalNon-QualifiedInvestorsIVAIV-ELS,LP
CentreCapitalNon-QualifiedInvestorsIVAIV-RA,LP
CentreCapitalNon-QualifiedInvestorsIV,LP
CentreCapitalNon-QualifiedInvestorsVAIV-ELSLP
CentreCapitalNon-QualifiedInvestorsVLP
CEPIV-AChicagoAIVLP
CEPIV-ACWVAIVLP
CEPIV-ADavenportAIVLP
CEPIV-AIndyAIVLP
CEPIV-ANMRAIVLP
CEPIV-AWBCTAIVLP
CFPrudentialEuropeanQISFund
CFPrudentialJapaneseQISFund
CFPrudentialNorthAmericanQISFund
CFPrudentialPacificMarketsTrustFund
CFPrudentialUKGrowthQISFund
CITIC-CPAssetManagementCo.,Ltd.
CITIC-PrudentialFundManagementCo.,Ltd.
CITIC-PrudentialLifeInsuranceCompanyLimited
ClairvestEquityPartnersIV-ALP
CribbsCausewayJVLimited
Classes of
shares held
Proportion
held
Registered office address and country of incorporation
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
LPI
LPI
LPI
LPI
LPI
LPI
LPI
LPI
LPI
LPI
LPI
LPI
LPI
LPI
OS
OS
OS
OS
OS
MI
MI
MI
LPI
OS
36.00%
12thFloorand25thFloor,CiticorpCentre,18WhitfieldRoad,CausewayBay,
WanChai,HongKong
100.00%
1CorporateWay,Lansing,MI48951,USA
100.00%
1105NorthMarketStreet,Suite1300,Wilmington,DE19801,USA
100.00%
1CorporateWay,Lansing,MI48951,USA
50.00%
LaurencePountneyHill,London,EC4R0HH,UK
50.00%
100.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
100.00%
100.00%
LimeGroveHouse,GreenStreet,StHelier,JE12ST,Jersey
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
66.00%
5thFloorCavendishHouse,39WaterlooStreet,Birmingham,B25PP,UK
100.00%
13CastleStreet,StHelier,Jersey,JE45UT
100.00%
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
13CastleStreet,StHelier,Jersey,JE45UT
100.00%
LloydsChambers,1PortsokenStreet,London,E18HZ,UK
50.00%
40Broadway,London,SW1H0BU,UK
76.80%
2711CentrevilleRoad,Suite400,Wilmington,DE19808,USA
76.53%
31.92%
73.06%
73.16%
67.16%
31.92%
615SouthDupontHighway,Dover,DE19901,USA
31.95%
850NewBurtonRoad,Suite201,Dover,DE19904,USA
31.92%
615SouthDupontHighway,Dover,DE19901,USA
31.92%
31.92%
31.91%
97.89%
17RochesterRow,London,SW1P1QT,UK
97.99%
98.87%
135Bishopsgate,London,EC2M3UR,UK
98.31%
LaurencePountneyHill,London,EC4R0HH,UK
98.92%
17RochesterRow,London,SW1P1QT,UK
26.95% No.128NorthZhangjiabangRoad,PudongDistrict,Shanghai,China
49.00%
Level9,HSBCBuilding,ShanghaiIFC,8CenturyAvenue,Pudong,Shanghai,China
50.00%
EastTower,WorldFinancialCentre,No.1EastThirdRingMiddleRoad,Chaoyang
District,Beijing,China
31.87%
22StClairAvenueEast,Suite1700,Toronto,ONM4T2S3,Canada
50.00%
40Broadway,London,SW1H0BU,UK
CribbsCausewayMerchantsAssociationLimited
LBG
100.00%
TheMallatCribbsCauseway,Bristol,BS345DG,UK
CribbsMallNominee(1)Limited
CurianCapital,LLC
CurianClearingLLC(Michigan)
DigitalInfrastructureInvestmentPartnersGPLLP
DigitalInfrastructureInvestmentPartnersGP1Limited
DigitalInfrastructureInvestmentPartnersLP
DigitalInfrastructureInvestmentPartnersSLPGPLLP
DigitalInfrastructureInvestmentPartnersSLPGP1Limited
DigitalInfrastructureInvestmentPartnersSLPGP2Limited
OS
OS
OS
LPI
OS
LPI
LPI
OS
OS
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
1CorporateWay,Lansing,MI48951,USA
100.00%
65.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
100.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
302 Prudential plc AnnualReport2018
www.prudential.co.uk
D Other notes continued Classes of
shares held
Proportion
held
100.00%
100.00%
Key to classes of shares held
LBG
LPI
MI
NSB
OS
PI
PS
U
LimitedbyGuarantee
LimitedPartnershipInterest
MembershipInterest
Non-stockbasis
OrdinaryShares
PartnershipInterest
PreferenceShares
Units
Registered office address and country of incorporation
Level25,MenaraHongLeong,No.6JalanDamanlela,BukitDamansara,
50490KualaLumpur,WilayahPersekutuan,Malaysia
15thFloor,ShinhanInvestmentTower,70Yoidae-ro,Youngdungpo-gu,Seoul
07325,Korea
100.00%
POBox309,UglandHouse,GrandCayman,KY1-1104,CaymanIslands
89.84%
26,BoulevardRoyal,Luxembourg,L-2449,Luxembourg
100.00%
3/FAziaCenter,1233LujiazuiRingRoad,Shanghai200120,China
97.95%
26,BoulevardRoyal,L-2449,Luxembourg
99.71%
100.00%
100.00%
99.90%
94.89%
98.67%
78.82%
98.69%
52.83%
10MarinaBoulevard,#32-01,MarinaBayFinancialCentre,Singapore018983
31.43%
26,BoulevardRoyal,L-2449,Luxembourg
100.00%
13thFloor,OneInternationalFinanceCentre,1HarbourViewStreet,Central,
HongKong
100.00%
26,BoulevardRoyal,L-2449,Luxembourg
100.00%
10MarinaBoulevard,#32-01,MarinaBayFinancialCentre,Singapore018983
99.98%
26,BoulevardRoyal,L-2449,Luxembourg
89.69%
84.57%
68.69%
77.26%
49.64%
81.00%
44.47%
100.00%
90.00%
95.08%
99.13%
26,BoulevardRoyal,Luxembourg,L-2449,Luxembourg
100.00%
Level25,MenaraHongLeong,No.6JalanDamanlela,BukitDamansara,
50490KualaLumpur,WilayahPersekutuan,Malaysia
53.72%
26,BoulevardRoyal,L-2449,Luxembourg
35.18%
99.76%
100.00%
23rdFloor,SaigonTradeCenter,37TonDucThangStreet,District1,HoChiMinh
City,Vietnam
95.43%
26,BoulevardRoyal,L-2449,Luxembourg
99.99%
98.88%
94.13%
99.89%
100.00%
874WalkerRoad,SuiteC,Dover,DE19904,USA
100.00%
3rdFloor,355NEX,RueduSavoir,CybercityEbene72201,Mauritius
69.74%
26,BoulevardRoyal,L-2449,Luxembourg
100.00%
3rdFloor,355NEX,RueduSavoir,CybercityEbene72201,Mauritius
100.00%
91.89%
26,BoulevardRoyal,L-2449,Luxembourg
100.00% MarunouchiParkBuilding,6-1Marunouchi2-chome,Chiyoda-Ku,Tokyo,Japan
100.00%
26,BoulevardRoyal,L-2449,Luxembourg
99.84%
100.00%
10MarinaBoulevard,#32-01,MarinaBayFinancialCentre,Singapore018983
OS
OS
PI
U
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
U
OS
OS
OS
OS
MI
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
Name of entity
EastspringAl-Wara’InvestmentsBerhad
EastspringAssetManagementKoreaCo.Ltd.
EastspringInfrastructureDebtFundL.P.
EastspringInvestments-JapanEquityFund
EastspringInvestmentManagement(Shanghai)CompanyLimited
EastspringInvestments-AsianLocalBondFund
EastspringInvestments-AsianSmallerCompaniesFund
EastspringInvestments-DevelopedandEmergingAsia
EquityFund
EastspringInvestments-EmergingEurope,MiddleEastandAfrica
DynamicFund
EastspringInvestments-GlobalEmergingMarketsCustomized
EquityFund
EastspringInvestments-GlobalEmergingMarketsDynamicFund
EastspringInvestments-GlobalLowVolatilityEquityFund
EastspringInvestments-GlobalTechnologyFund
EastspringInvestments-JapanFundamentalValueFund
EastspringInvestments-PanEuropeanFund
EastspringInvestments-USHighYieldBondFund
EastspringInvestments(HongKong)Limited
EastspringInvestments(Luxembourg)SA
EastspringInvestments(Singapore)Limited
EastspringInvestmentsAsiaPacificEquityFund
EastspringInvestmentsAsianBondFund
EastspringInvestmentsAsianDynamicFund
EastspringInvestmentsAsianEquityFund
EastspringInvestmentsAsianEquityIncomeFund
EastspringInvestmentsAsianHighYieldBondFund
EastspringInvestmentsAsianHighYieldBondMYFund
EastspringInvestmentsAsianInfrastructureEquityFund
EastspringInvestmentsAsianInvestmentGradeBondFund
EastspringInvestmentsAsianLowVolatilityEquityFund
EastspringInvestmentsAsianPropertySecuritiesFund
EastspringInvestments-AsianTotalReturnBondFund
EastspringInvestmentsBerhad
EastspringInvestmentsChinaEquityFund
EastspringInvestmentsDragonPeacockFund
EastspringInvestmentsEuropeanInvGradeBondFund
EastspringInvestmentsFundManagementLimited
LiabilityCompany
EastspringInvestmentsGlobalEmergingMarketsBondFund
EastspringInvestmentsGlobalEquityNavigatorFund
EastspringInvestmentsGlobalMarketNavigatorFund
EastspringInvestmentsGreaterChinaEquityFund
EastspringInvestmentsHongKongEquityFund
EastspringInvestmentsIncorporated
EastspringInvestmentsIndiaConsumerEquityOpenLimited
EastspringInvestmentsIndiaEquityFund
EastspringInvestmentsIndiaEquityOpenLimited
EastspringInvestmentsIndiaInfrastructureEquityOpenLimited
EastspringInvestmentsLatinAmericanEquityFund
EastspringInvestmentsLimited
EastspringInvestmentsGlobalMultiAssetIncomePlusGrowth
Fund
EastspringInvestmentsNorthAmericaValueFund
EastspringInvestmentsServicesPte.Ltd.
www.prudential.co.uk
AnnualReport2018 Prudential plc 303
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information D6 Investments in subsidiary undertakings, joint ventures and associates continued
(c) Related undertakings continued
Other subsidiaries, joint ventures, associates and significant holdings of the Group (no shares held directly by the
parent company, Prudential plc or its nominees) continued
Name of entity
EastspringInvestmentsSICAV-FIS-AlternativeInvestmentsFund
EastspringInvestmentsSICAV-FIS-AsiaPacificLoanFund
EastspringInvestmentsSICAV-FISAfricaEquityFund
EastspringInvestmentsSICAV-FISUniversalUSDBondFund
EastspringInvestmentsSICAV-FISUniversalUSDBondIIFund
EastspringInvestmentsUSBondFund
EastspringInvestmentsUSCorporateBondFund
EastspringInvestmentsUSEquityIncomeFund
EastspringInvestmentsUSHighInvGradeBondFund
EastspringInvestmentsUSInvestmentGradeBondFund
EastspringInvestmentsUSStrategicIncomeBondFund
EastspringInvestmentsUSTotalReturnBondFund
EastspringInvestmentsUnitTrust-DragonPeacockFund
EastspringInvestmentsUTSingaporeASEANEquityFund
EastspringInvestmentsUTSingaporeSelectBondFund
EastspringInvestmentsWorldValueEquityFund
EastspringOverseasInvestmentFundManagement(Shanghai)
CompanyLimited
EastspringRealAssetsPartners
EastspringSecuritiesInvestmentTrustCo.,Ltd.
EdgerInvestmentsLimited
Classes of
shares held
Proportion
held
Registered office address and country of incorporation
OS
OS
U
OS
OS
OS
OS
U
OS
OS
OS
OS
U
OS
OS
OS
OS
OS
OS
OS
100.00%
26,BoulevardRoyal,L-2449,Luxembourg
100.00%
100.00%
99.94%
100.00%
32.87%
89.61%
99.50%
92.77%
56.87%
100.00%
100.00%
97.40%
EastspringInvestments(Singapore)Limited,MarinaBayFinancialCentre,10,
MarinaBoulevard,#32-01,Singapore018983
100.00%
10MarinaBoulevard,#32-01,MarinaBayFinancialCentre,Singapore018983
85.39%
92.28%
26,BoulevardRoyal,L-2449,Luxembourg
100.00% Unit306-308,3/FAziaCenter,1233LujiazuiRingRoad,China(Shanghai)PilotFree
TradeZone,China
100.00%
POBox309,UglandHouse,GrandCayman,KY1-1104,CaymanIslands
99.54%
4thFloor,No.1SongzhiRoad,Taipei110,Taiwan
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
EdinburghPark(Management)Limited
LBG
100.00%
1ExchangeCrescent,ConferenceSquare,Edinburgh,EH38UL,UK
EmbankmentGPLimited
EmbankmentNominee1Limited
EmbankmentNominee2Limited
EmpireHoldingSARL(Inliquidation)
EuropeanSpecialistInvestmentFunds-M>otalReturnCredit
InvestmentFund
FalanGPLimited
FashionSquareECOLP(Inliquidation)
FidelityFunds-JapanFund
FirstStateChinaFocusFund
FirstStateGlobalPropertyA
FiveHotelHolding,LLC
FoliosIIIDesignatedActivityCompany
FoudryPropertiesLimited
FubonChinaCurrencyFund
FubonGlobalInvestmentGradeBondFund
FurnivalInsuranceCompanyPCCLimited
GennyGP1LLP
GennyGP2Limited
GennyGPLimited
GeorgeDigitalGP1LLP
GeorgeDigitalGP2Limited
GeorgeDigitalGPLimited
GGEGPLimited
GreenGPLimited
OS
OS
OS
OS
OS
OS
LPI
OS
OS
OS
MI
OS
OS
OS
OS
OS
LPI
OS
OS
LPI
OS
OS
OS
OS
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
100.00%
5,rueGuilllaumeKroll,L-1882,Luxembourg
26.13%
80,routed’Esch,L-1470,Luxembourg
100.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
100.00%
1209OrangeStreet,Wilmington,DE19801,USA
23.56%
2A,RueAlbertBorschette,BP274,Luxembourg,LU-LUL-1246,Luxembourg
60.97%
70SirJohnRogerson’sQuayDublin2D02R296Ireland
42.35% GroundFloor,Tower1,DarlingPark,201SussexStreet,Sydney,NSW2001,
Australia
100.00%
CTCorporationSystem,208SouthLaSalleStreet,Suite814,Chicago,IL60604,
USA
60.00%
FourthFloor,76LowerBaggotStreet,Dublin2
50.00%
ClearwaterCourt,VasternRoad,ReadingRG18DB,UK
25.10%
8F,No.108,Sec.1,DunhuaS.Rd.,SongshanDist.,Taipei,Taiwan
47.80%
8F,No.108,Sec.1,DunhuaS.Rd.,SongshanDist.,Taipei,Taiwan
100.00%
ThirdFloor,LaPlaiderieChambers,LaPlaiderie,StPeterPort,Guernsey,GY11WG
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
304 Prudential plc AnnualReport2018
www.prudential.co.uk
D Other notes continued Key to classes of shares held
LBG
LPI
MI
NSB
OS
PI
PS
U
LimitedbyGuarantee
LimitedPartnershipInterest
MembershipInterest
Non-stockbasis
OrdinaryShares
PartnershipInterest
PreferenceShares
Units
Classes of
shares held
Proportion
held
Registered office address and country of incorporation
OS
OS
OS
OS
OS
OS
OS
MI
OS
OS
OS
OS
OS
OS
OS
OS
OS
LPI
OS
OS
OS
LPI
OS
OS
OS
OS
LPI
OS
OS
LPI
OS
LPI
LPI
OS
OS
OS
OS
LPI
LPI
OS
OS
LPI
LPI
OS
OS
LPI
OS
OS
LPI
LPI
LPI
LPI
OS
LPI
LPI
OS
OS
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
100.00%
100.00%
1CorporateWay,Lansing,MI48951,USA
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
InternationalHouse,CastleHill,VictoriaRoad,Douglas,IM24RB,IsleofMan
100.00%
874WalkerRoad,SuiteC,Dover,DE19904,USA
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
49.00%
12thFloor,NarainManzil,23,BarakhambaRoad,NewDelhi110001,India
25.82%
25.82%
ICICIPruLifeTowers,1089AppasahebMaratheMarg,Prabhadevi,Mumbai
400025,India
49.00%
12thFloor,NarainManzil,23,BarakhambaRoad,NewDelhi110001,India
100.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
100.00%
100.00%
100.00%
LaurencePountneyHill,London,EC4R0HH,England
100.00%
100.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
100.00%
100.00%
100.00%
100.00%
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
26.52%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
100.00%
100.00%
31.56%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
100.00%
100.00%
6,rueEugèneRuppert,L-245,Luxembourg
Name of entity
Greenpark(Reading)GeneralPartnerLimited
Greenpark(Reading)NomineeNo.1Limited
GreenPark(Reading)NomineeNo.2Limited
GSTwentyTwoLimited
HermitageManagementLLC
HolbornBarsNomineesLimited
HoltwoodLimited(inliquidation)
HudsonSeasons,LLC
HydeHoldco1Limited
ICICIPrudentialAssetManagementCompanyLimited
ICICIPrudentialLifeInsuranceCompanyLimited
ICICIPrudentialPensionFundsManagementCompany
ICICIPrudentialTrustLimited
Infracapital(AIRI)GPLimited
Infracapital(Belmond)GPLimited
Infracapital(Bio)GPLimited
Infracapital(Churchill)GP1Limited
Infracapital(Churchill)GPLLP
Infracapital(GC)GPLimited
Infracapital(Gigaclear)GP1Limited
Infracapital(Gigaclear)GP2Limited
Infracapital(Gigaclear)GPLLP
Infracapital(ITPPP)GPLimited
Infracapital(Leo)GPLimited
Infracapital(Sense)GPLimited
Infracapital(TLSB)GPLimited
Infracapital(TLSB)SLPLP
InfracapitalABPGPLimited(Inliquidation)
InfracapitalCIIILimited
InfracapitalDFIIGPLLP
InfracapitalDFIILimited
InfracapitalEmployeeFeederGP1LLP
InfracapitalEmployeeFeederGP2LLP
InfracapitalEmployeeFeederGPLimited
InfracapitalF1GP2Limited
InfracapitalF2GP1Limited
InfracapitalF2GP2Limited
InfracapitalGP1LLP
InfracapitalGP2LLP
InfracapitalGPIILimited
InfracapitalGPLimited
InfracapitalGreenfieldDFGPLLP
InfracapitalGreenfieldPartners1SLPGPLLP
InfracapitalGreenfieldPartners1SLPGP1Limited
InfracapitalGreenfieldPartners1SLPGP2Limited
InfracapitalGreenfieldPartnersIEmployeeFeederGPLLP
InfracapitalGreenfieldPartnersIGP1Limited
InfracapitalGreenfieldPartnersIGP2Limited
InfracapitalGreenfieldPartnersIGPLLP
InfracapitalGreenfieldPartnersILP
InfracapitalGreenfieldPartnersISLP2GPLLP
InfracapitalGreenfieldPartnersISubholdingsGPLLP
InfracapitalGreenfieldPartnersISubholdingsGP1Limited
InfracapitalPartnersIILP
InfracapitalPartnersIISubholdingsGPLLP
InfracapitalPartnersIISubholdingsGP1Limited
InfracapitalPartnersIIIGPSARL
www.prudential.co.uk
AnnualReport2018 Prudential plc 305
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information D6 Investments in subsidiary undertakings, joint ventures and associates continued
(c) Related undertakings continued
Other subsidiaries, joint ventures, associates and significant holdings of the Group (no shares held directly by the
parent company, Prudential plc or its nominees) continued
Name of entity
InfracapitalPartnersIIISubholdings(Euro)GPLLP
InfracapitalPartnersIIISubholdings(Sterling)GPLLP
InfracapitalPartnersIIISubholdingsGP1Limited
InfracapitalPartnersIIISubholdingsGP2Limited
InfracapitalPartnersLP
InfracapitalRFGPLimited
InfracapitalSisuGPLimited
InfracapitalSLPIIGPLLP
InfracapitalSLPIILP
InfracapitalSLPLimited
InnisfreeM&GPPPLLP
InnisfreeM&GPPPLP
InvescoFixedMaturitySelectiveEmergingMarketBonds2024
INVESTFinancialCompanyInsuranceAgencyLLCofIllinois
JacksonCharitableFoundationInc
JacksonHoldingsLLC
JacksonNationalAssetManagementLLC
JacksonNationalLife(Bermuda)Limited
JacksonNationalLifeDistributorsLLC
JacksonNationalLifeInsuranceCompany
JacksonNationalLifeInsuranceCompanyofNewYork
JefferiesCapitalPartnersV,L.P.
JNLGlobalCreditLLC
LionCreditOpportunityFundPublicLimitedCompany-Credit
OpportunityFundXV
LIPPSARL(Inliquidation)
LivicosLimited(Inliquidation)
LondonStoneInvestmentsF3EmployeeFeederGPLLP
LondonStoneInvestmentsF3ILimited
LondonStoneInvestmentsF3IILimited
LondonStoneInvestmentsF3SPGPLLP
M&G(Guernsey)Limited
M&GAlternativesInvestmentManagementLimited
M&GAsiaPropertyFund
M&GCorporatebondFund
M&GDividendFund
M&GEpisodeMacroFund
M&GEuropeanCreditInvestmentFund
M&GEuropeanHighYieldCreditInvestmentFund
M&GEuropeanPropertyFundSICAV-FIS
M&GEuropeanSecuredPropertyIncomeFund
M&GEuropeanSelectFund
M&GEuropeanStrategicValueFund
M&GFinancialServicesLimited
M&GFounders1Limited
M&GGeneralPartnerInc
M&GGilt&FixedInterestIncomeFund
M&GGroupLimited
M&GIMPPP1Limited
M&GInternationalInvestmentsNomineesLimited
Classes of
shares held
Proportion
held
Registered office address and country of incorporation
LPI
LPI
OS
OS
LPI
OS
OS
LPI
LPI
OS
LPI
LPI
OS
OS
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
100.00%
33.04%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
100.00%
100.00%
34.00%
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
35.00%
BoundaryHouse,91-93CharterhouseStreet,London,EC1M6HR,UK
62.22%
57.31%
22ndFloor,No.1SongzhiRoad,Taipei,TW-TPE11047,Taiwan
100.00%
208SouthLaSalleStreet,Chicago,IL60604,USA
NSB
100.00%
1CorporateWay,Lansing,MI48951,USA
OS
OS
OS
OS
OS
OS
LPI
OS
OS
OS
OS
LPI
OS
OS
LPI
OS
OS
OS
OS
OS
OS
OS
OS
OS
U
OS
OS
OS
OS
OS
OS
OS
OS
OS
100.00%
1105NorthMarketStreet,Suite1300,Wilmington,DE19801,USA
100.00%
1CorporateWay,Lansing,MI48951,USA
100.00%
CedarHouse,Hamilton,Bermuda
100.00%
1209OrangeStreet,Wilmington,DE19801,USA
100.00%
1CorporateWay,Lansing,MI48951,USA
100.00%
2900WestchesterAvenue,Suite305,Purchase,NY10577,USA
21.92%
1209OrangeStreet,Wilmington,DE19801,USA
100.00%
874WalkerRoad,SuiteC,CityofDover,CountyofKent,StateofDelaware19904,
UnitedStates
98.44%
53MerrionSquareSouth,Dublin2,D02PR63,Ireland
100.00%
5,rueGuilllaumeKroll,L-1882,Luxembourg
100.00% MontagueHouse,AdelaideRoad,Dublin2,D02K039,Ireland
100.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
100.00%
100.00%
100.00%
100.00% DoreyCourt,AdmiralPark,St.PeterPort,GY12HT,Guernsey
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
54.01%
34-38,AvenuedelaLiberté,L-1930,Luxembourg
30.96%
LaurencePountneyHill,London,EC4R0HH,UK
58.33%
LaurencePountneyHill,London,EC4R0HH,UK
23.92%
82.48%
80,routed’Esch,L-1470,Luxembourg
99.99%
49.74%
34-38,AvenuedelaLiberté,L-1930,Luxembourg
23.98%
41.53%
LaurencePountneyHill,London,EC4R0HH,UK
79.22%
100.00%
100.00%
100.00% WalkerHouse,87MaryStreet,GrandCayman,KY1-9002,CaymanIslands
49.65%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
100.00%
306 Prudential plc AnnualReport2018
www.prudential.co.uk
D Other notes continued Key to classes of shares held
LBG
LPI
MI
NSB
OS
PI
PS
U
LimitedbyGuarantee
LimitedPartnershipInterest
MembershipInterest
Non-stockbasis
OrdinaryShares
PartnershipInterest
PreferenceShares
Units
Classes of
shares held
Proportion
held
Registered office address and country of incorporation
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
LPI
OS
OS
LPI
LPI
OS
OS
OS
OS
LPI
LPI
OS
OS
OS
OS
OS
OS
OS
LPI
LPI
OS
OS
OS
OS
LPI
OS
OS
OS
LPI
OS
OS
OS
OS
OS
OS
100.00%
34-38,AvenuedelaLiberté,L-1930,Luxembourg
100.00%
Talstrasse66,8001Zurich,Switzerland
41.56%
LaurencePountneyHill,London,EC4R0HH,UK
20.00%
51.96%
22.35%
59.02%
100.00%
100.00%
251LittleFallsDrive,Wilmington,DE,19801
100.00%
Level16,GrosvenorPlace,225GeorgeStreet,Sydney,NSW2000,Australia
100.00%
6thFloor,AlexandraHouse,18ChaterRoad,Central,HongKong
100.00%
10MarinaBoulevard,#32-01,MarinaBayFinancialCentre,Singapore018983
100.00%
3-1Toranomon,4Chome,Minato-ku,Tokyo,Japan
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
34-38,AvenuedelaLiberté,L-1930,Luxembourg
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
25.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
100.00%
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
100.00%
PlazadeColon,TorreII,Planta14,28046,Madrid,Spain
100.00%
LaurencePountneyHill,London,EC4R0HH
100.00%
100.00%
10MarinaBoulevard,#32-01,MarinaBayFinancialCentre,Singapore018983
100.00%
46.00%
4thFloor,76LowerBaggotStreet,Dublin2,D02Ek81
100.00%
34-38,AvenuedelaLiberté,L-1930,Luxembourg
100.00%
ShiroyamaTrustTower,Tokyo,Japan
100.00%
KyoboBuilding,Seoul,Korea
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
50.10%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
100.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
100.00%
ThirdFloor,LaPlaiderieChambers,LaPlaiderie,StPeterPort,Guernsey,GY11WG
100.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
28.00%
100.00%
100.00%
ThirdFloor,LaPlaiderieChambers,LaPlaiderie,StPeterPort,Guernsey,GY11WG
100.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
25.00%
100.00%
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
100.00%
100.00%
78SirJohnRogerson’sQuay,Dublin2,D02RK57,Ireland
Name of entity
M&GInternationalInvestmentsSA
M&GInternationalInvestmentsSwitzerlandAG
M&GInvestmentFunds(10)-M&GAbsoluteReturnBondFund
M&GInvestmentFunds(10)-M&GGlobalListedInfrastructure
Fund
M&GInvestmentFunds(10)-M&GPositiveImpactFund
M&GInvestmentFunds(4)-M&GEpisodeAllocationFund
M&GInvestmentFunds(7)-M&GGlobalConvertiblesFund
M&GInvestmentManagementLimited
M&GInvestments(Americas)Inc.
M&GInvestments(Australia)PtyLtd
M&GInvestments(HongKong)Limited
M&GInvestments(Singapore)Pte.Ltd.
M&GInvestmentsJapanCo.,LTD
M&GLimited
M&GLuxembourgSA
M&GManagementServicesLimited
M&GNomineesLimited
M&GPFI2018GPLLP
M&GPFI2018GP1Limited
M&GPFI2018GP2Limited
M&GPFICarryPartnership2016LP
M&GPFIPartnership2018LP
M&GPlatformNomineesLimited
M&GPrudential(Holdings)Limited
M&GPrudentialServiceCompanyLimited
M&GREEspana2016S.L.
M&GREUKEV(GP1)LLP
M&GREUKEV1-ALP
M&GRealEstateAsiaHoldingCompanyPte.Ltd
M&GRealEstateAsiaPTE.Ltd
M&GRealEstateDebtFinanceVIDesignatedActivityCompany
M&GRealEstateFundsManagementSARL
M&GRealEstateJapanCo.Ltd.
M&GRealEstateKoreaCo.Ltd.
M&GRealEstateLimited
M&GRealEstateUKEnhancedValueLP
M&GRealEstateUKEV(GP)LLP
M&GREDEmployeeFeederGPLimited
M&GREDIIEmployeeFeederGPLimited
M&GREDIIGPLimited
M&GREDIISLPGPLimited
M&GREDIISLPLP
M&GREDIIIEmployeeFeederGPLimited
M&GREDIIIGPLimited
M&GREDIIISLPGPLimited
M&GREDIIISLPLP
M&GREDSLPGPLimited
M&GRPFGPLimited
M&GRPFNominee1Limited
M&GRPFNominee2Limited
M&GSecuritiesLimited
M&GSIFManagementCompany(Ireland)Limited
www.prudential.co.uk
AnnualReport2018 Prudential plc 307
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information D6 Investments in subsidiary undertakings, joint ventures and associates continued
(c) Related undertakings continued
Other subsidiaries, joint ventures, associates and significant holdings of the Group (no shares held directly by the
parent company, Prudential plc or its nominees) continued
Name of entity
M&GSpecialtyFinanceFund(GP)Sárl
M&GSpecialtyFinanceFundCarryInterestPartnership(GP)Sárl
M&GUKCompaniesFinancingFundIILP
M&GUKPropertyFund
M&GUKPropertyGPLimited
M&GUKPropertyNominee1Limited
M&GUKPropertyNominee2Limited
M&GUKResidentialPropertyFund
M&GUKCFIIGPLimited
M&GUKEV(SLP)GeneralPartnerLLP
M&GUKEV(SLP)LP
ManchesterJVLimited
ManchesterNominee(1)Limited
ManulifeAsiaPacificBondFund
ManulifeChinaDimSumHighYieldBondFund
ManulifeChinaOffshoreBondFund
ManulifeSuperiorSelectionChinaFund
ManulifeUSDHighYieldBondFund
MCFS.r.l
MinsterCourtEstateManagementLimited
MissionPlansofAmerica,Inc
Murphy&PartnersFund,LP
NAPIREIT,Inc
NationalPlanningHoldings,LLC
NomuraSixYearsFixedMaturityEmergingMarketBondFund
NorthSathornHoldingsCompanyLimited
NovaSepaduSdn.Bhd.(Inliquidation)
OaktreeBusinessParkLimited
OldKingsway,LP
OptimusPointManagementCompanyLimited
Pacus(UK)Limited
PCAIPServicesLimited
PCALifeAssuranceCo.Ltd.
PCAReinsuranceCo.Ltd.
PGDS(UKOne)Limited
PGDS(USOne)LLC
PGFManagementCompany(Ireland)Limited
PPMAmericaCapitalPartnersII,LLC
PPMAmericaCapitalPartnersIV,LLC
PPMAmericaCapitalPartnersV,LLC
PPMAmericaCapitalPartnersVI,LLC
PPMAmericaCapitalPartnersVII,LLC
PPMAmericaPrivateEquityFundIIILP
PPMAmericaPrivateEquityFundIVLP
PPMAmericaPrivateEquityFundVLP
PPMAmericaPrivateEquityFundVILP
PPMAmericaPrivateEquityFundVIILP
PPMAmerica,Inc
Classes of
shares held
Proportion
held
Registered office address and country of incorporation
OS
OS
LPI
OS
OS
OS
OS
LPI
OS
LPI
LPI
OS
OS
OS
OS
OS
OS
U
LPI
OS
OS
LPI
OS
OS
OS
OS
OS
OS
LPI
OS
OS
OS
OS
OS
OS
OS
OS
MI
MI
MI
MI
MI
LPI
LPI
LPI
LPI
LPI
OS
100.00%
51,AvenueJ.F.Kennedy,L-1855Luxembourg
100.00%
48.32%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
16,BoulevardRoyal,L-2449,Luxembourg
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
58.42%
34-38,avenuedelaLiberté,L-1931,Luxembourg
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
50.00%
40Broadway,London,SW1H0BU,UK
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
20.33%
9thFloor,89SungrenRoad,Taipei,TW-TPE11073,Taiwan
36.45%
51.39%
21.74%
25.73%
45.00%
ViaRomagnosi18/a,00196Roma,Italy
75.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
1999BryanStreet,Suite900,Dallas,TX75201,USA
21.07%
2711CentrevilleRoad,Suite400,Wilmington,DE19808,USA
99.00%
300ELombardStreet,Baltimore,MD21202,USA
100.00%
1209OrangeStreet,Wilmington,DE19801,USA
43.40%
101Tower,30F,No.7Sec.5,Taipei,Taiwan
100.00%
3RajanakarnBuilding,20thFloor,SouthSathornRoad,YannawaSubdistrict,
SathornDistrict,Bangkok,Thailand
51.00%
Suite1005,10thFloorWismaHamzah-KwongHing,No.1LebohAmpang,50100
KualaLumpur,Malaysia
12.50%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
2711CentrevilleRoad,Suite400,Wilmington,DE19808,USA
100.00%
BarratHouseCartwrightWay,BardonHill,Coalville,LE671UF,UK
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
13thFloor,OneInternationalFinanceCentre,1HarbourViewStreet,Central,
HongKong
99.79%
8thFloor,No.1SongzhiRoad,Taipei11047,Taiwan
100.00% UnitLevel13(A),MainOfficeTower,FinancialParkLabuan,JalanMerdeka,87000
FederalTerritoryofLabuan,Malaysia
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
1209OrangeStreet,Wilmington,DE19801,USA
50.00%
5George’sDock,Dublin1,D01X8N7,Ireland
60.50%
774WalkerRoad,SuiteC,Dover,DE19904,USA
874WalkerRoad,SuiteC,CityofDover,CountyofKent,StateofDelaware19904,
UnitedStates
34.50%
34.00%
32.00%
100.00%
99.81%
99.84%
99.84%
99.85%
100.00%
100.00%
308 Prudential plc AnnualReport2018
www.prudential.co.uk
D Other notes continued Key to classes of shares held
LBG
LPI
MI
NSB
OS
PI
PS
U
LimitedbyGuarantee
LimitedPartnershipInterest
MembershipInterest
Non-stockbasis
OrdinaryShares
PartnershipInterest
PreferenceShares
Units
Classes of
shares held
Proportion
held
Registered office address and country of incorporation
OS
OS
PS
OS
OS
OS
OS
OS
OS
OS
OS
OS
MI
MI
OS
LPI
OS
OS
PS
OS
OS
OS
OS
LBG
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
POBox1093,QueensgateHouse,GrandCaymanKY1-1102,CaymanIslands
100.00% QueensgateHouse,SouthChurchStreet,GeorgeTown,GrandCaymanKY1-1102,
CaymanIslands
100.00%
POBox1093,QueensgateHouse,GrandCaymanKY1-1102,CaymanIslands
100.00%
774WalkerRoad,SuiteC,Dover,DE19904,USA
100.00%
84StateStreet,MA,Boston,Suffolk,02109
99.00%
C/OPPMAmerica,Inc.,WestWackerDrive,Suite1200,60606,Chicago,USA
99.00%
96.00%
97.00%
87.00%
100.00%
774WalkerRoad,SuiteC,Dover,DE19904,USA
100.00%
100.00%
100.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
25.00%
100.00% GloucesterTower,15QueensRoad,Central,HongKong
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
14.27%
7thfloor,ProsperityMillenniaPlaza,663King’sRoad,NorthPoint,HongKong
50.00%
BowBellsHouse,1BreadStreet,London,EC4M9HH,UK
100.00%
100.00%
9thFloor,UptownPlaceTower1,1East11thDrive,UptownBonifacio,1634Taguig
City,MetroManila,Philippines
2/F.,UptownParade2,36thStreet,UptownBonifacio,1634TaguigCity,
Philippines
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
13thFloor,OneInternationalFinanceCentre,1HarbourViewStreet,Central,
HongKong
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
20thFloor,#445,MonivongBlvd,BoeungProlit,7Makara,PhnomPenhTower,
PhnomPenh,Cambodia
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
5thNgongAvenue,Nairobi,Kenya
100.00%
30CecilStreet,#30-01PrudentialTower,Singapore049712
51.00%
Level3,MenaraPrudential,No.10JalanSultanIsmail,50250KualaLumpur,
Malaysia
100.00%
KampalaRoad,Kampala,Uganda
49.00%
Level8A,MenaraPrudential,No.10JalanSultanIsmail,50250KualaLumpur,
Malaysia
100.00%
10MarinaBoulevard,#32-01,MarinaBayFinancialCentre,Singapore018983
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
c/oHighgateLegalPtyLtd,33LexingtonDrive,BellaVista,NSW2153,Australia
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
1,RueHildegardvonBingen,L-1282Luxembourg
100.00%
100.00%
100.00%
Craigforth,Stirling,FK94UE,UK
25.49%
17RochesterRow,London,SW1P1QT,UK
28.77%
34.19%
34.55%
30.20%
53.48%
37.69%
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
100.00%
Name of entity
PPMCapital(Holdings)Limited
PPMCLO2Ltd.
PPMCLO2018-1Ltd.
PPMCLO3Ltd.
PPMFinance,Inc
PPMFunds
PPMFunds-PPMCorePlusFixedIncomeFund
PPMFunds-PPMCreditFund
PPMFunds-PPMFloatingRateIncomeFund
PPMFunds-PPMHighYieldCoreFund
PPMFunds-PPMStrategicIncomeFund
PPMHoldings,Inc
PPMLoanManagementCompanyLLC
PPMLoanManagementHoldingCompanyLLC
PPMManagersGPLimited
PPMManagersPartnershipCIVII(A)LP
PPMVentures(Asia)Limited(Inliquidation)
PPMCFirstNomineesLimited
PreneticsLimited
PropertyPartners(TwoRivers)Limited
PruLifeInsuranceCorporationofU.K.
PruLifeUKAssetManagementandTrustCorporation
PruLimited
PrudenceFoundation
PrudenceLimited
Prudential(Cambodia)LifeAssurancePlc
Prudential/M&GUKCFGPLimited
PrudentialAfricaHoldingsLimited
PrudentialAfricaServicesLimited
PrudentialAssuranceCompanySingapore(Pte)Limited
PrudentialAssuranceMalaysiaBerhad*
PrudentialAssuranceUgandaLimited
PrudentialBSNTakafulBerhad†
PrudentialCapital(Singapore)Pte.Ltd.
PrudentialCapitalplc
PrudentialCorporatePensionsTrusteeLimited
PrudentialCorporationAustralasiaHoldingsPtyLimited
PrudentialCorporationHoldingsLimited
PrudentialCreditOpportunities1SARL
PrudentialCreditOpportunitiesGPSARL
PrudentialCreditOpportunitiesScsp
PrudentialDistributionLimited
PrudentialDynamic0-30Portfolio
PrudentialDynamic10-40Portfolio
PrudentialDynamic20-55Portfolio
PrudentialDynamic40-80Portfolio
PrudentialDynamic60-100Portfolio
PrudentialDynamicFocused0-30Portfolio
PrudentialDynamicFocused20-55Portfolio
PrudentialEquityReleaseMortgagesLimited
PrudentialFinancialPlanningLimited
PrudentialFinancialServicesLimited
PrudentialFiveLimited
www.prudential.co.uk
AnnualReport2018 Prudential plc 309
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information D6 Investments in subsidiary undertakings, joint ventures and associates continued
(c) Related undertakings continued
Other subsidiaries, joint ventures, associates and significant holdings of the Group (no shares held directly by the
parent company, Prudential plc or its nominees) continued
Name of entity
PrudentialGeneralInsuranceHongKongLimited
PrudentialGlobalServicesPrivateLimited
PrudentialGPLimited
PrudentialGreenfieldGPLLP
PrudentialGreenfieldGP1Limited
PrudentialGreenfieldGP2Limited
PrudentialGreenfieldLP
PrudentialGreenfieldSLPGPLLP
PrudentialGroupPensionsLimited
PrudentialGroupSecretarialServicesLimited
PrudentialHolbornLifeLimited
PrudentialHoldingsLimited
PrudentialHongKongLimited
PrudentialInternationalAssuranceplc
PrudentialInternationalManagementServicesLimited
PrudentialInternationalStaffPensionsLimited
PrudentialInvestment(Luxembourg)2SARL
PrudentialInvestmentsLimited
PrudentialIPServicesLimited
PrudentialLeasingServicesLimited
PrudentialLifeAssurance(Lao)CompanyLimited
PrudentialLifeAssurance(Thailand)PublicCompanyLimited
PrudentialLifeAssuranceKenyaLimited
PrudentialLifeAssuranceZambiaLimited
PrudentialLifeInsuranceGhanaLimited
PrudentialLifetimeMortgagesLimited
PrudentialLoanInvestments1SARL
PrudentialLoanInvestmentsGPSARL
PrudentialLoanInvestmentsSCSp
PrudentialMauritiusHoldingsLimited
PrudentialMortgagesLimited
PrudentialNomineesLimited
PrudentialPensionsLimited
PrudentialPensionsManagementZambiaLimited
PrudentialPolskasp.z.o.o
PrudentialPortfolioManagementGroupLimited
PrudentialPortfolioManagers(SouthAfrica)(Pty)Limited
PrudentialPortfolioManagersLimited
PrudentialPropertiesTrustyPtyLimited
PrudentialPropertyHoldingLimited(Inliquidation)
PrudentialPropertyInvestmentManagersLimited
PrudentialPropertyInvestmentsLimited
PrudentialPropertyServicesLimited
PrudentialProtectLimited
PrudentialRealEstateInvestments1Limited
PrudentialRealEstateInvestments2Limited
PrudentialRealEstateInvestments3Limited
Classes of
shares held
Proportion
held
Registered office address and country of incorporation
OS
OS
OS
LPI
OS
OS
LPI
LPI
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
PS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
100.00%
59thFloor,OneIslandEast,18WestlandsRoad,QuarryBay,HongKong
100.00%
PrudentialHouse,Mumbai,India
100.00%
Craigforth,Stirling,FK94UE,UK
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
100.00%
100.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
100.00%
Craigforth,Stirling,FK94UE,UK
100.00%
59thFloor,OneIslandEast,18WestlandsRoad,QuarryBay,HongKong
100.00% MontagueHouse,AdelaideRoad,Dublin2,D02K039,Ireland
100.00%
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
34-38,AvenuedelaLiberté,L-1930,Luxembourg
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
100.00% UnitA,6thFloor,VientianePlazaHotelOfficeBuilding,SailomRoad,HatsadyNeua
Village,ChanthaboulyDistrict,VientianeCapital,Lao,PDR
99.93%
9/9SathornBuilding,20th–27thFloor,SouthSathornRoad,Yannawa,Sahtorn,
Bangkok10120,Thailand
100.00%
5thNgongAvenue,Nairobi,Kenya
100.00%
PrudentialHouse,ThaboMbekiRoad,Lusaka,Zambia
100.00%
35NorthStreet,Accra,Ghana
100.00%
100.00%
Craigforth,Stirling,FK94UE,UK
100.00%
1,RueHildegardvonBingen,L-1282Luxembourg
100.00%
100.00%
100.00%
3rdFloor,355NEX,RueduSavoir,CybercityEbene,72201,Mauritius
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
100.00%
PrudentialHouse,ThaboMbekiRoad,Lusaka,Zambia
100.00%
02-670Warszawa,Pulawska182,Poland
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
OS
AClassOS
49.99%
75.00%
POBox44813,Claremont7735,SouthAfrica
OS
OS
OS
OS
OS
PS
OS
OS
OS
OS
OS
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00% DarlingParkTower2,201SussexStreet,Sydney,NSW2000,Australia
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
310 Prudential plc AnnualReport2018
www.prudential.co.uk
D Other notes continued Classes of
shares held
Proportion
held
100.00%
100.00%
100.00%
100.00%
Key to classes of shares held
LBG
LPI
MI
NSB
OS
PI
PS
U
LimitedbyGuarantee
LimitedPartnershipInterest
MembershipInterest
Non-stockbasis
OrdinaryShares
PartnershipInterest
PreferenceShares
Units
Registered office address and country of incorporation
c/oMazarsLLP,90St.VincentStreet,Glasgow,G25UB,UK
Suite1005,10thFloor,WismaHamzah-KwongHing,No.1LebohAmpang,50100
KualaLumpur,Malaysia
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
1WallichStreet,#19-01GuocoTower,Singapore078881
100.00%
30CecilStreet,#30-01PrudentialTower,Singapore049712
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
Craigforth,Stirling,FK94UE,UK
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
100.00%
25thFloor,SaigonTradeCentre,37TonDucThangStreet,District1,HoChiMinh
City,Vietnam
34.42%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
99.95%
PrudentialTower,JI.JendralSudirmanKav.79,12910,JakartaSelatan,Indonesia
94.62%
100.00%
13thFloor,OneInternationalFinanceCentre,1HarbourViewStreet,Central,
HongKong
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
2711CentrevilleRoad,Suite400,Wilmington,DE19808,USA
100.00%
1999BryanStreet,Suite900,Dallas,TX75201,USA
99.95%
PrudentialTower,JI.JendralSudirmanKav.79,12910,JakartaSelatan,Indonesia
97.31%
64.64%
86.64%
98.33%
91.97%
69.58%
99.37%
PrudentialTower23rdfloor.Jln.JenderalSudirmanKavling79,SouthJakarta-
12910,Indonesia
100.00%
10MarinaBoulevard,#32-01,MarinaBayFinancialCentre,Singapore018983
100.00%
50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK
100.00%
100.00%
1209OrangeStreet,Wilmington,DE19801,USA
28.05%
7-8thFloor,SCBParkPlaza1,18RatchadapisekRoad,Chatuchak,Bangkok10900
Thailand
49.72%
138MarketStreet,#23-01CapitaGreen,Singapore048946
46.83%
SchroderInvestmentManagement(Guernsey)Limited,RegencyCourtGlategny
Esplanade,GlategnyEsplanade,StPeterPortGY13UF,Guernsey
61.92%
CapitaGreen,#23-01,CapitaGreen,Singapore048946,Singapore
41.40% HSBCInstitutionalTrustService(Asia)Limited,1Queen'sRoadCentral,
HongKong.
100.00%
Craigforth,Stirling,FK94UE,UK
100.00%
100.00%
100.00%
100.00%
45.00%
30CecilStreet#23-02PrudentialTower,Singapore,049712
100.00%
LimeGroveHouse,GreenStreet,StHelier,Jersey,JE12ST
100.00%
32.60%
5thFloorCavendishHouse,39WaterlooStreet,Birmingham,B25PP,UK
OS
PS
OS
PS
OS
OS
OS
OS
OS
OS
LPI
OS
OS
OS
OS
OS
OS
OS
LPI
OS
OS
OS
OS
OS
LPI
OS
OS
U
OS
OS
OS
OS
OS
U
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
Name of entity
PrudentialRetirementIncomeLimited(Inliquidation)
PrudentialServicesAsiaSdn.Bhd.
PrudentialServicesLimited
PrudentialServicesSingaporePte.Ltd.
PrudentialSingaporeHoldingsPte.Limited
PrudentialStaffPensionsLimited
PrudentialTrusteeCompanyLimited
PrudentialUKRealEstateGeneralPartnerLimited
PrudentialUKRealEstateLP
PrudentialUKRealEstateNominee1Limited
PrudentialUKRealEstateNominee2Limited
PrudentialUKServicesLimited
PrudentialUnitTrustsLimited
PrudentialVentureManagersLimited
PrudentialVietnamAssurancePrivateLimited
PrudentialVietnamFinanceCompanyLimited
Prudential/M&GUKCompaniesFinancingFundLP
PrutecLimited
PT.EastspringInvestmentsIndonesia
PT.PrudentialLifeAssurance
PVFCFinancialLimited
PVMPartnershipsLimited
RandolphStreetLP
REALICofJacksonvillePlans,Inc
ReksaDanaEastspringIDRFixedIncomeFund(NDEIFF)
ReksaDanaEastspringInvestmentsCashReserve
ReksaDanaEastspringInvestmentsIDRHighGrade
ReksaDanaEastspringInvestmentsValueDiscovery
ReksaDanaEastspringInvestmentsYieldDiscovery
ReksaDanaSyariahEastspringSyariahEquityIslamicAsiaPacific
USD
ReksaDanaSyariahEastspringSyariahFixedIncomeAmanah
ReksaDanaSyariahEastspringSyariahMoneyMarketKhazanah
RhodiumInvestmentFund
RiftGP1Limited
RiftGP2Limited
ROP,Inc
SCBSETBankingSectorIndex(Accumulation)
SchroderAsianInvestmentGradeCredit
SchroderEmergingMarketsFund
SchroderMulti-AssetRevolution
SchroderUSDollarMoneyFund
ScotAmPensionTrusteesLimited
ScottishAmicableFinanceplc
ScottishAmicableHoldingsLimited
ScottishAmicableLifeAssuranceSociety
Nosharecapital
ScottishAmicablePensionsInvestmentsLimited
ScottsSpazioPte.Ltd.
Sealand(No1)Limited
Sealand(No2)Limited
SectordateLimited
OS
OS
OS
OS
OS
www.prudential.co.uk
AnnualReport2018 Prudential plc 311
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Key to classes of shares held
LBG
LPI
MI
NSB
OS
PI
PS
U
LimitedbyGuarantee
LimitedPartnershipInterest
MembershipInterest
Non-stockbasis
OrdinaryShares
PartnershipInterest
PreferenceShares
Units
D6 Investments in subsidiary undertakings, joint ventures and associates continued
(c) Related undertakings continued
Other subsidiaries, joint ventures, associates and significant holdings of the Group (no shares held directly by the
parent company, Prudential plc or its nominees) continued
Name of entity
SellyOakShoppingPark(GeneralPartner)Limited
SellyOakShoppingPark(Nominee1)Limited
SellyOakShoppingPark(Nominee2)Limited
SellyOakShoppingParkLimitedPartnership
SilverfleetCapital2004LP
SilverfleetCapital2005LP
SilverfleetCapital2006LP
SilverfleetCapital2009LP
SilverfleetCapital2011/12LP
SilverfleetCapitalIIWPLF
SmithfieldLimited
SMLLC
SquireCapitalILLC
SquireCapitalIILLC
SquireReassuranceCompanyII,Inc
SquireReassuranceCompanyLLC
SriHanSuriaSdn.Bhd.
StEdwardHomesLimited
StEdwardsStrandPartnership
StableviewLimited
StapleLimited
StapleNomineesLimited
ThanachartLongTermFixedIncome
ThanachartLifeAssurancePublicCompanyLimited(Inliquidation)
TheCarAuctionUnitTrust
TheFirstBritishFixedTrustCompanyLimited
TheGreenpark(Reading)LP
TheHeightsManagementCompanyLimited
ThePrudentialAssuranceCompanyLimited
TheStEdwardHomesPartnership
TheStrandPropertyUnitTrust
TheTwoRiversTrust
ThreeSnowhillBirminghamSARL
TMBAssetManagementCo.,Ltd.
TwoRiversLP
TwoSnowhillBirminghamSARL
UOBSmartGlobalHealthcare
UOBSmartMillenniumGrowthFund
VFLInternationalLifeCompanySPC,Ltd.
WessexGateLimited(Inliquidation)
WestwackerLimited
WynnefieldPrivateEquityPartnersI,L.P.
WynnefieldPrivateEquityPartnersII,L.P.
Zenith-PrudentialLifeInsuranceCompanyLimited
Classes of
shares held
Proportion
held
Registered office address and country of incorporation
OS
OS
OS
LPI
LPI
LPI
LPI
LPI
LPI
LPI
OS
LPI
MI
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
OS
LPI
OS
OS
OS
LPI
OS
OS
OS
LPI
OS
OS
OS
OS
OS
OS
LPI
LPI
OS
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
100.00%
100.00%
100.00%
1RoyalPlaza,StPetersPort,Guernsey,GY12HL
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
1209OrangeStreet,Wilmington,DE19801,USA
100.00%
1CorporateWay,Lansing,MI48951,USA
100.00%
100.00%
40600AnnArborRoad,EastSuite201,Plymouth,MI48170,USA
100.00%
1CorporateWay,Lansing,MI48951,USA
51.00%
Suite1005,10thFloorWismaHamzah-KwongHing,No.1LebohAmpang,50100
KualaLumpur,Malaysia
50.00%
BerkeleyHouse,19PortsmouthRoad,Surrey,KT111JG,UK
50.00%
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
3RajanakarnBuilding,20thFloor,SouthSathornRoad,YannawaSubdistrict,
SathornDistrict,Bangkok,Thailand
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
27.79%
99.93%
231MBKLifeBuilding,5th-7thFloor,RajdamriRoad,Lumpini,Pathumwan,
Bangkok10330,Thailand
9/9SathornBuilding,20th–27thFloor,SouthSathornRoad,Yannawa,Sahtorn,
Bangkok10120,Thailand
50.00% DoreyCourt,AdmiralPark,St.PeterPort,GY12HT,Guernsey
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
50.00%
100.00%
49.95%
BerkeleyHouse,19PortsmouthRoad,Surrey,KT111JG,UK
50.00%
Libertehouse,19-23LaMotteStreet,StHelier,JE24SY,Jersey
50.00%
100.00%
5,rueGuilllaumeKroll,L-1882,Luxembourg
65.00%
32ndFL,AbdulrahimPlace,990RamaIVRd,Silom,Bangrak,Bangkok10500,
Thailand
50.00%
BowBellsHouse,1BreadStreet,London,EC4M9HH,UK
100.00%
5,rueGuilllaumeKroll,L-1882,Luxembourg
24.18%
33.18%
23A,25thFloor,AsiaCentreBuilding,173/27-30,32-33SouthSathonRoad,
Thungmahamek,Sathon,Bangkok10120,Thailand
100.00%
171ElginAvenue,GrandCayman,CaymanIslands
100.00%
LaurencePountneyHill,London,EC4R0HH,UK
100.00%
99.00%
1105NorthMarketStreet,Suite1300,Wilmington,DE19801,USA
99.00%
1209OrangeStreet,Wilmington,DE19801,USA
51.00%
Plot280,AjoseAdeogunStreet,VictoriaIsland,Nigeria
*PrudentialAssuranceMalaysiaBerhadisconsolidatedat100percentintheGroup’sfinancialstatementsreflectingtheeconomicinteresttotheGroup.
†PrudentialBSNTakafulBerhadisajointventurethatisaccountedforusingtheequitymethod,forwhichtheGrouphasaneconomicinterestof70percentforallbusinesssoldupto
23December2016andof49percentfornewbusinesssoldsubsequenttothisdate.
312 Prudential plc AnnualReport2018
www.prudential.co.uk
D Other notes continued E Further accounting policies
E1 Other significant accounting policies
InadditiontothecriticalaccountingpolicespresentedinnoteA3.1,thefollowingdetailedaccountingpoliciesareadoptedbytheGroup
topreparetheconsolidatedfinancialstatements.Theseaccountingpoliciesareappliedconsistentlyforallyearspresentedandnormally
arenotsubjecttochangeunlessnewaccountingstandards,interpretationsoramendmentsareintroducedbytheIASB.
(a) Basis of consolidation
TheGroupconsolidatesthoseinvesteesitisdeemedtocontrol.TheGrouphascontroloveraninvesteeifallthreeofthefollowingare
met:(1)ithaspoweroveraninvestee;(2)itisexposedto,orhasrightsto,variablereturnsfromitsinvolvementwiththeinvestee;and
(3)ithasabilitytouseitspowerovertheinvesteetoaffectitsownreturns.
(i) Subsidiaries
SubsidiariesarethoseinvesteesthattheGroupcontrols.ThemajorityoftheGroup’ssubsidiariesarecorporateentities,buttheGroup’s
insuranceoperationsalsoinvestinanumberoflimitedpartnerships.
TheGroupperformsare-assessmentofconsolidationwheneverthereisachangeinthesubstanceoftherelationshipbetweenthe
Groupandaninvestee.WheretheGroupisdeemedtocontrolanentityitistreatedasasubsidiaryanditsresults,assetsandliabilities
areconsolidated.WheretheGroupholdsaminorityshareinanentity,withnocontrolovertheentity,theinvestmentsarecarriedatfair
valuethroughprofitorlosswithinfinancialinvestmentsintheconsolidatedstatementoffinancialposition.
EntitiesconsolidatedbytheGroupincludeQualifyingPartnershipsasdefinedundertheUKPartnerships(Accounts)Regulations
2008(the‘PartnershipsAct’).Someoftheselimitedpartnershipshavetakenadvantageoftheexemptionunderregulation7ofthe
PartnershipsActfromthefinancialstatementsrequirements.Thisisunderregulations4to6,onthebasisthattheselimitedpartnerships
aredealtwithonaconsolidatedbasisinthesefinancialstatements.
(ii) Joint ventures and associates
JointventuresarejointarrangementsarisingfromacontractualagreementwherebytheGroupandotherinvestorshavejointcontrolof
thenetassetsofthearrangement.Inanumberofthesearrangements,theGroup’sshareoftheunderlyingnetassetsmaybelessthan
50percentbutthetermsoftherelevantagreementmakeitclearthatcontrolisjointlyexercisedbetweentheGroupandthethirdparty.
AssociatesareentitiesoverwhichtheGrouphassignificantinfluence,butitdoesnotcontrol.GenerallyitispresumedthattheGrouphas
significantinfluenceifitholdsbetween20percentand50percentvotingrightsoftheentity.
Withtheexceptionofthosereferredtobelow,theGroupaccountsforitsinvestmentsinjointventuresandassociatesbyusingthe
equitymethodofaccounting.TheGroup’sshareofprofitorlossofitsjointventuresandassociatesisrecognisedintheincomestatement
anditsshareofmovementsinothercomprehensiveincomeisrecognisedinothercomprehensiveincome.Theequitymethodof
accountingdoesnotapplytoinvestmentsinassociatesandjointventuresheldbytheGroup’sinsuranceorinvestmentfunds.This
includesventurecapitalbusiness,mutualfundsandunittrustsandwhich,asallowedbyIAS28,‘InvestmentsinAssociatesandJoint
Ventures’,arecarriedatfairvaluethroughprofitorloss.
(iii) Structured entities
Structuredentitiesarethosethathavebeendesignedsothatvotingorsimilarrightsarenotthedominantfactorindecidingwhocontrols
theentity.Votingrightsrelatetoadministrativetasks.Relevantactivitiesaredirectedbymeansofcontractualarrangements.TheGroup
investsinstructuredentitiessuchas:
— Open-EndedInvestmentCompanies(OEICs);
— UnitTrusts(UTs);
— Limitedpartnerships;
— Variableinterestentities;
— Investmentvehicleswithinseparateaccountsofferedthroughvariableannuities;
— Collateraliseddebtobligations;
— Mortgage-backedsecurities;and
— Similarasset-backedsecurities.
www.prudential.co.uk
AnnualReport2018 Prudential plc 313
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information E1 Other significant accounting policies continued
(a) Basis of consolidation continued
(iii) Structured entities continued
Open-ended investment companies and unit trusts
TheGroupinvestsinOEICsandUTs,whichinvestmainlyinequities,bonds,cashandcashequivalents,andproperties.TheGroup’s
percentageownershipintheseentitiescanfluctuateonadailybasisaccordingtotheparticipationoftheGroupandotherinvestors
inthem.
— WheretheentityismanagedbyaGroupassetmanager,andtheGroup’sownershipholdingintheentityexceeds50percent,the
Groupisjudgedtohavecontrolovertheentity.
— WheretheentityismanagedbyaGroupassetmanager,andtheGroup’sownershipholdingintheentityisbetween20percentand
50percent,thefactsandcircumstancesoftheGroup’sinvolvementintheentityareconsidered,includingtherightstoanyfees
earnedbytheassetmanagerfromtheentity,informingajudgementastowhethertheGrouphascontrolovertheentity.
— WheretheentityismanagedbyaGroupassetmanager,andtheGroup’sownershipholdingintheentityislessthan20percent,the
Groupisjudgedtonothavecontrolovertheentity.
— WheretheentityismanagedbyanassetmanageroutsidetheGroup,anassessmentismadeofwhethertheGrouphasexistingrights
thatgivesittheabilitytodirectthecurrentactivitiesoftheentityandthereforecontroltheentity.InassessingtheGroup’sabilityto
directanentity,theGroupconsidersitsabilityrelativetootherinvestors.TheGrouphasalimitednumberofOEICsandUTswhereit
considersithassuchability.
WheretheGroupisdeemedtocontroltheseentities,theyaretreatedasasubsidiaryandareconsolidated,withtheinterestsofinvestors
otherthantheGroupbeingclassifiedasliabilities,andappearasnetassetvalueattributabletounitholdersofconsolidatedunittrusts
andsimilarfunds.
WheretheGroupdoesnotcontroltheseentities(asitisdeemedtobeactingasanagent)andtheydonotmeetthedefinition
ofassociates,theyarecarriedatfairvaluethroughprofitorlosswithinfinancialinvestmentsintheconsolidatedstatementof
financialposition.
WheretheGroup’sassetmanagersetsupOEICsandUTsaspartofassetmanagementoperations,theGroup’sinterestislimitedto
theadministrationfeeschargedtomanagetheassetsofsuchentities.Withnoparticipationintheseentities,theGroupdoesnotretain
risksassociatedwithOEICsandUTs.Fortheseopen-endedinvestmentcompaniesandunittrusts,theGroupisnotdeemedtocontrol
theentitiesbuttobeactingasanagent.
TheGroupgeneratesreturnsandretainstheownershiprisksininvestmentvehiclescommensuratetoitsparticipationanddoesnot
haveanyfurtherexposuretotheresidualrisksoftheseinvestmentvehicles.
Jackson’s separate account assets
Theseareinvestmentvehiclesthatinvestcontractholders’premiumsinequity,fixedincome,bondsandmoneymarketmutualfunds.
Thecontractholderretainstheunderlyingreturnsandtheownershiprisksrelatedtotheunderlyinginvestments.Theshareholder’s
economicinterestinseparateaccountsislimitedtotheadministrativefeescharged.Theseparateaccountsaresetupasseparate
regulatedentitiesgovernedbyaBoardofGovernorsortrusteesforwhichthemajorityofthemembersareindependentofJackson
oranyaffiliatedentity.Theindependentmembersareresponsibleforanydecisionmakingthatimpactscontractholders’interest
andgoverntheoperationalactivitiesoftheentities’advisers,includingassetmanagers.Accordingly,theGroupdoesnotcontrolthese
vehicles.Theseinvestmentsarecarriedatfairvaluethroughprofitorlosswithinfinancialinvestmentsintheconsolidatedstatement
offinancialposition.
Limited partnerships
TheGroup’sinsuranceoperationsinvestinanumberoflimitedpartnerships,eitherdirectlyorthroughunittrusts,throughamixof
capitalandloans.Theselimitedpartnershipsaremanagedbygeneralpartners,inwhichtheGroupholdsequity.Suchinterestin
generalpartnersandlimitedpartnershipsprovidetheGroupwithvotingandsimilarrightstoparticipateinthegovernanceframework
oftherelevantactivitiesinwhichlimitedpartnershipsareengagedin.Accountingforthelimitedpartnershipsassubsidiaries,joint
ventures,associatesorotherfinancialinvestmentsdependsonthetermsofeachpartnershipagreementandtheshareholdingsinthe
generalpartners.
314 Prudential plc AnnualReport2018
www.prudential.co.uk
E Further accounting policies continued Other structured entities
TheGroupholdsinvestmentsinmortgage-backedsecurities,collateraliseddebtobligationsandsimilarasset-backedsecurities,the
majorityofwhichareactivelytradedinaliquidmarket.
TheGroupconsolidatesthevehiclesthatholdtheinvestmentswheretheGroupisdeemedtocontrolthevehicles.Whenassessing
controloverthevehicles,thefactorsconsideredincludethepurposeanddesignofthevehicle,theGroup’sexposuretothevariability
ofreturnsandthescopeoftheGroup’sabilitytodirecttherelevantactivitiesofthevehicleincludinganykick-outorremovalrights
thatareheldbythirdparties.Theoutcomeofthecontrolassessmentisdependentonthetermsandconditionsoftherespective
individualarrangements.
Themajorityofsuchvehiclesarenotconsolidated.InthesecasestheGroupisnotthesponsorofthevehiclesinwhichitholds
investmentsandhasnoadministrativerightsoverthevehicles’activities.TheGroupgeneratesreturnsandretainstheownership
riskscommensuratetoitsholdinganditsexposuretotheinvestments.AccordinglytheGroupdoesnothavepowerovertherelevant
activitiesofsuchvehiclesandallarecarriedatfairvaluethroughprofitorlosswithinfinancialinvestmentsintheconsolidatedstatement
offinancialposition.
Thetablebelowprovidesaggregatecarryingamountsoftheinvestmentsinunconsolidatedstructuredentitiesreportedinthe
Group’sstatementoffinancialposition:
31 December 2018 £m
31 December 2017 £m
OEICs/UTs
Separate
account
assets
Other
structured
entities
OEICs/UTs
Separate
account
assets
Other
structured
entities
Statement of financial position line items
Equitysecuritiesandportfolioholdingsinunit
trusts
Debtsecurities
Total
21,216
–
21,216
128,220
–
128,220
–
11,081
11,081
20,718
–
20,718
130,528
–
130,528
–
10,894
10,894
TheGroupgeneratesreturnsandretainstheownershiprisksintheseinvestmentscommensuratetoitsparticipationanddoesnothave
anyfurtherexposuretotheresidualrisksorlossesoftheinvestmentsorthevehiclesinwhichitholdsinvestments.
Asat31December2018,theGroupdoesnothaveanagreement,contractualorotherwise,orintentiontoprovidefinancialsupport
tostructuredentitiesthatcouldexposetheGrouptoaloss.
(b) Reinsurance
Themeasurementofreinsuranceassetsisconsistentwiththemeasurementoftheunderlyingdirectinsurancecontracts.Thetreatment
ofanygainsorlossesarisingonthepurchaseofreinsurancecontractsisdependentontheunderlyingaccountingbasisoftheentity
concerned.
(c) Earned premiums, policy fees and claims paid
Premiumsforconventionalwith-profitspoliciesandotherprotectiontypeinsurancepoliciesarerecognisedasrevenuewhendue.
Premiumsandannuityconsiderationsforlinkedpolicies,unitisedwith-profitsandotherinvestmenttypepoliciesarerecognisedas
revenuewhenreceivedor,inthecaseofunitisedorunit-linkedpolicies,whenunitsareissued.Theseamountsexcludepremiumtaxes
andsimilardutieswherePrudentialcollectsandsettlestaxesbornebythecustomer.
Policyfeeschargedonlinkedandunitisedwith-profitspoliciesformortality,assetmanagementandpolicyadministrationare
recognisedasrevenuewhenrelatedservicesareprovided.
Claimspaidincludematurities,annuities,surrendersanddeaths.Maturityclaimsarerecordedaschargesonthepolicymaturitydate.
Annuityclaimsarerecordedwheneachannuityinstalmentbecomesdueforpayment.Surrendersarechargedtotheincomestatement
whenpaidanddeathclaimsarerecordedwhennotified.
(d) Investment return
Investmentreturnincludedintheincomestatementprincipallycomprisesinterestincome,dividends,investmentappreciation/
depreciation(realisedandunrealisedgainsandlosses)oninvestmentsdesignatedasfairvaluethroughprofitorloss,andrealisedgains
andlosses(includingimpairmentlosses)onitemsheldatamortisedcostandJackson’sdebtsecuritiesdesignatedasavailable-for-sale.
Movementsinunrealisedappreciation/depreciationofJackson’sdebtsecuritiesdesignatedasavailable-for-salearerecordedinother
comprehensiveincome.Interestincomeisrecognisedasitaccrues,takingintoaccounttheeffectiveyieldoninvestments.Dividendson
equitysecuritiesarerecognisedontheex-dividenddateandrentalincomeisrecognisedonanaccrualbasis.
www.prudential.co.uk
AnnualReport2018 Prudential plc 315
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information E1 Other significant accounting policies continued
(e) Financial investments other than instruments classified as long-term business contracts
(i) Investment classification
TheGroupholdsfinancialinvestmentsinaccordancewithIAS39,wherebysubjecttospecificcriteria,financialinstrumentsarerequired
tobeaccountedforunderoneofthefollowingcategories:
— Financialassetsandliabilitiesatfairvaluethroughprofitorloss–thiscomprisesassetsandliabilitiesdesignatedbymanagementas
fairvaluethroughprofitorlossoninceptionandderivativesthatareheldfortrading.Theseinvestmentsaremeasuredatfairvalue
withallchangesthereonbeingrecognisedininvestmentreturnintheincomestatement;
— Financialinvestmentsonanavailable-for-salebasis–thiscomprisesassetsthataredesignatedbymanagementasavailable-for-sale
and/ordonotfallintoanyoftheothercategories.Theseassetsareinitiallyrecognisedatfairvalueplusattributabletransactioncosts.
Available-for-saleassetsaresubsequentlymeasuredatfairvalue.Interestincomeisrecognisedonaneffectiveinterestbasisinthe
incomestatement.Theeffectiveinterestrateistheratethatexactlydiscountsestimatedfuturecashreceiptsthroughtheexpected
lifeofthefinancialinstrumentor,whenappropriate,ashorterperiodtothenetcarryingamountofthefinancialasset.Exceptfor
foreignexchangegainsandlossesondebtsecurities,whichareincludedintheincomestatement,unrealisedgainsandlossesare
recognisedinothercomprehensiveincome.Upondisposalorimpairment,accumulatedunrealisedgainsandlossesaretransferred
fromothercomprehensiveincometotheincomestatementasrealisedgainsorlosses;and
— Loansandreceivables–exceptforthosedesignatedasatfairvaluethroughprofitorlossoravailable-for-sale,theseinstruments
comprisenon-quotedinvestmentsthathavefixedordeterminablepayments.Theseinstrumentsincludeloanscollateralisedby
mortgages,deposits,loanstopolicyholdersandotherunsecuredloansandreceivables.Theseinvestmentsareinitiallyrecognisedat
fairvalueplustransactioncosts.Subsequently,theseinstrumentsarecarriedatamortisedcostusingtheeffectiveinterestmethod.
TheGroupusesthetradedatemethodtoaccountforregularpurchasesandsalesoffinancialassets.SeenoteA3.1forfurtherdetailsof
valuationoffinancialinvestments.
(ii) Derivatives and hedge accounting
Derivativefinancialinstrumentsareusedtoreduceormanageinvestment,interestrateandcurrencyexposures,tofacilitateefficient
portfoliomanagementandforinvestmentpurposes.
TheGroupmaydesignatecertainderivativesashedges.
Forhedgesofnetinvestmentsinforeignoperations,theeffectiveportionofanychangeinfairvalueofderivativesorotherfinancial
instrumentsdesignatedasnetinvestmenthedgesisrecognisedinothercomprehensiveincome.Theineffectiveportionofchangesin
thefairvalueofthehedginginstrumentisrecordedintheincomestatement.
TheGroupdoesnotregularlyseektoapplyfairvalueorcashflowhedgingtreatmentunderIAS39.TheGrouphasnofairvalueand
cashflowshedgesunderIAS39at31December2018and2017.
Allderivativesthatarenotdesignatedashedginginstrumentsarecarriedatfairvalue,withmovementsinfairvaluebeingrecordedin
theincomestatement.
TheprimaryareasoftheGroup’scontinuingoperationswherederivativeinstrumentsareheldaretheUKwith-profitsfundsand
annuitybusinessandJackson.
ForUKwith-profitsfundsthederivativeprogrammeisusedforthepurposesofefficientportfoliomanagementorreductionin
investmentrisk.
Forshareholder-backedUKannuitybusinessthederivativesareheldtocontributetothematchingasfaraspractical,ofassetreturns
anddurationwiththoseofliabilitiestopolicyholders.Thecarryingvalueoftheseliabilitiesissensitivetothereturnonthematching
financialassetsincludingderivativesheld.
ForJackson’sderivativeprogrammeseenoteA3.1.
(iii) Guaranteed benefit options and embedded derivatives
Jackson’svariableannuityproductswithguaranteedbenefitoptionsarewithinthescopeofIFRS4andareaccountedforusing
‘grandfathered’USGAAP(SeeC4.2(b)).ThisresultsinliabilitiesforGuaranteedMinimumWithdrawalBenefit(‘notforlife’)and
GuaranteedMinimumAccumulationbenefitoptionsbeingbifurcatedandmeasuredatfairvalueinamannerconsistentwithIAS39.
Embeddedderivativesareembeddedwithinothernon-derivativehostfinancialinstrumentsandinsurancecontractstocreatehybrid
instruments.EmbeddedderivativesmeetingthedefinitionofaninsurancecontractareaccountedforunderIFRS4.Whereeconomic
characteristicsandrisksoftheembeddedderivativesarenotcloselyrelatedtotheeconomiccharacteristicsandrisksofthehost
instrument,andwherethehybridinstrumentisnotmeasuredatfairvaluewiththechangesinfairvaluerecognisedintheincome
statement,theembeddedderivativeisbifurcatedandcarriedatfairvalueasaderivativemeasuredinaccordancewithIAS39.
Inaddition,theGroupappliestheoptionunderIFRS4tonotseparateandfairvaluesurrenderoptionsembeddedinhostcontracts
andwith-profitsinvestmentcontractswhosestrikepriceiseitherafixedamountorafixedamountplusinterest.
(iv) Securities lending and reverse repurchase agreements
TheGroupispartytovarioussecuritieslendingagreements(includingrepurchaseagreements)underwhichsecuritiesareloanedto
thirdpartiesonashort-termbasis.Theloanedsecuritiesarenotderecognised;rather,theycontinuetoberecognisedwithinthe
appropriateinvestmentclassification.TheGroup’spolicyisthatcollateralinexcessof100percentofthefairvalueofsecuritiesloanedis
requiredfromallsecurities’borrowersandtypicallyconsistsofcash,debtsecurities,equitysecuritiesorlettersofcredit.
316 Prudential plc AnnualReport2018
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E Further accounting policies continued IncaseswheretheGrouptakespossessionofthecollateralunderitssecuritieslendingprogramme,thecollateral,andcorresponding
obligationtoreturnsuchcollateral,arerecognisedintheconsolidatedstatementoffinancialposition.
TheGroupisalsopartytovariousreverserepurchaseagreementsunderwhichsecuritiesarepurchasedfromthirdpartieswithan
obligationtoresellthesecurities.Thesecuritiesarenotrecognisedasinvestmentsinthestatementoffinancialposition.
(v) Derecognition of financial assets and liabilities
TheGroup’spolicyistoderecognisefinancialassetswhenitisdeemedthatsubstantiallyalltherisksandrewardsofownershiphave
beentransferred.
TheGroupderecognisesfinancialliabilitiesonlywhentheobligationspecifiedinthecontractisdischarged,cancelledorhasexpired.
(vi) Financial liabilities designated at fair value through profit or loss
ConsistentwiththeGroup’sriskmanagementandinvestmentstrategyandthenatureoftheproductsconcerned,theGrouphas
designatedunderIAS39classificationcertainfinancialliabilitiesatfairvaluethroughprofitorlossastheseinstrumentsaremanaged
andtheirperformanceevaluatedonafairvaluebasis.Theseinstrumentsincludeliabilitiesrelatedtoconsolidatedcollateraliseddebt
obligations,netassetsattributabletounitholdersofconsolidatedunittrustsandsimilarfundsandpolicyholderliabilitiesforinvestment
contractswithoutdiscretionaryparticipationfeaturesforUKandAsia.
(f) Segments
UnderIFRS8,‘OperatingSegments’,theGroupdeterminesandpresentsoperatingsegmentsbasedontheinformationthatisinternally
providedtotheGroupExecutiveCommitteewhichistheGroup’schiefoperatingdecisionmaker.
TheoperatingsegmentsidentifiedbytheGroupreflecttheGroup’sorganisationalstructure,whichisbybusinessunitsAsia,USand
UKandEurope.Allbusinessunitscontainbothinsuranceandassetmanagementoperations.
FurtherinformationontheGroup’soperatingsegmentsisprovidedinnoteB1.3.
(g) Borrowings
Althoughinitiallyrecognisedatfairvalue,netoftransactioncosts,borrowings,excludingliabilitiesofconsolidatedcollateraliseddebt
obligations,aresubsequentlyaccountedforonanamortisedcostbasisusingtheeffectiveinterestmethod.Undertheeffectiveinterest
method,thedifferencebetweentheredemptionvalueoftheborrowingandtheinitialproceeds(netofrelatedissuecosts)isamortised
throughtheincomestatementtothedateofmaturityorforhybriddebt,overtheexpectedlifeoftheinstrument.
(h) Investment properties
InvestmentsinleaseholdandfreeholdpropertiesnotforoccupationbytheGroup,includingpropertiesunderdevelopmentforfuture
useasinvestmentproperties,arecarriedatfairvalue,withchangesinfairvalueincludedintheincomestatement.Propertiesarevalued
annuallyeitherbytheGroup’squalifiedsurveyorsorbytakingintoconsiderationtheadviceofprofessionalexternalvaluersusingthe
RoyalInstitutionofCharteredSurveyorsvaluationstandards.Eachpropertyisexternallyvaluedatleastonceeverythreeyears.
LeasesofinvestmentpropertywheretheGrouphassubstantiallyalltherisksandrewardsofownershipareclassifiedasfinanceleases
(leaseholdproperty).Financeleasesarecapitalisedatthelease’sinceptionatthelowerofthefairvalueoftheleasedpropertyandthe
presentvalueoftheminimumleasepayments.
(i) Pension schemes
FortheGroup’sdefinedbenefitschemes,ifthepresentvalueofthedefinedbenefitobligationexceedsthefairvalueofthescheme
assets,thenaliabilityisrecordedintheGroup’sstatementoffinancialposition.Bycontrast,ifthefairvalueoftheassetsexceedsthe
presentvalueofthedefinedbenefitobligationthenthesurpluswillonlyberecognisedifthenatureofthearrangementsunderthetrust
deed,andfundingarrangementsbetweentheTrusteeandtheCompany,supporttheavailabilityofrefundsorrecoverabilitythrough
agreedreductionsinfuturecontributions.Inaddition,ifthereisaconstructiveobligationfortheCompanytopaydeficitfunding,thisis
alsorecognisedsuchthatthefinancialpositionrecordedfortheschemereflectsthehigherofanyunderlyingIAS19deficitandthe
obligationfordeficitfunding.
TheGrouputilisestheprojectedunitcreditmethodtocalculatethedefinedbenefitobligation.Thismethodseeseachperiodof
serviceasgivingrisetoanadditionalunitofbenefitentitlementandmeasureseachunitseparatelytobuildupthefinalobligation.
Estimatedfuturecashflowsarethendiscountedatahigh-qualitycorporatebondrate,adjustedtoallowforthedifferenceinduration
betweenthebondindexandthepensionliabilitieswhereappropriate,todetermineitspresentvalue.Thesecalculationsareperformed
byindependentactuaries.
TheplanassetsoftheGroup’spensionschemesincludeseveralinsurancecontractsthathavebeenissuedbytheGroup.
Theseassetsareexcludedfromplanassetsindeterminingthepensionsurplusordeficitrecognisedintheconsolidatedstatementof
financialposition.
Theaggregateoftheactuariallydeterminedservicecostsofthecurrentlyemployedpersonnel,andthenetinterestonthenetdefined
benefitliability(asset)atthestartoftheperiod,ischargedtotheincomestatement.Actuarialandothergainsandlossesasaresultof
changesinassumptionsorexperiencevariancesarerecognisedasothercomprehensiveincome.
ContributionstotheGroup’sdefinedcontributionschemesareexpensedwhendue.
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AnnualReport2018 Prudential plc 317
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information E1 Other significant accounting policies continued
(j) Share-based payments and related movements in own shares
TheGroupoffersshareawardandoptionplansforcertainkeyemployeesandaSaveAsYouEarnplanforallUKandcertainoverseas
employees.Sharesheldintrustrelatingtotheseplansareconditionallygiftedtoemployees.
Thecompensationexpensechargedtotheincomestatementisprimarilybaseduponthefairvalueoftheoptionsgranted,thevesting
periodandthevestingconditions.
TheCompanyhasestablishedtruststofacilitatethedeliveryofPrudentialplcsharesunderemployeeincentiveplansandsavings-
relatedshareoptionschemes.ThecosttotheCompanyofacquiringthesetreasurysharesheldintrustsisshownasadeductionfrom
shareholders’equity.
(k) Tax
Prudentialissubjecttotaxinnumerousjurisdictionsandthecalculationofthetotaltaxchargeinherentlyinvolvesadegreeofestimation
andjudgement.Currenttaxexpenseischargedorcreditedbaseduponamountsestimatedtobepayableorrecoverableasaresultof
taxableamountsforthecurrentyearandadjustmentsmadeinrelationtoprioryears.Thepositionstakenintaxreturnswhereapplicable
taxregulationissubjecttointerpretationarerecognisedinfullinthedeterminationofthetaxchargeinthefinancialstatementsifthe
Groupconsidersthatitisprobablethatthetaxationauthoritywillacceptthosepositions.Otherwise,provisionsareestablishedbasedon
management’sestimateandjudgementofthelikelyamountoftheliability,orrecoverybyprovidingforthesinglebestestimateofthe
mostlikelyoutcomeortheweightedaverageexpectedvaluewheretherearemultipleoutcomes.
Thetotaltaxchargeincludestaxexpenseattributabletobothpolicyholdersandshareholders.Thetaxexpenseattributableto
policyholderscomprisesthetaxontheincomeoftheconsolidatedwith-profitsandunit-linkedfunds.Incertainjurisdictions,suchasthe
UK,lifeinsurancecompaniesaretaxedonboththeirshareholders’profitsandontheirpolicyholders’insuranceandinvestmentreturns
oncertaininsuranceandinvestmentproducts.AlthoughbothtypesoftaxareincludedinthetotaltaxchargeintheGroup’sconsolidated
incomestatement,theyarepresentedseparatelyintheconsolidatedincomestatementtoprovidethemostrelevantinformationabout
taxthattheGrouppaysonitsprofits.
Deferredtaxesareprovidedundertheliabilitymethodforallrelevanttemporarydifferences.IAS12,‘IncomeTaxes’doesnotrequire
alltemporarydifferencestobeprovidedfor,inparticular,theGroupdoesnotprovidefordeferredtaxonundistributedearningsof
subsidiarieswheretheGroupisabletocontrolthetimingofthedistributionandthetemporarydifferencecreatedisnotexpectedto
reverseintheforeseeablefuture.Deferredtaxassetsareonlyrecognisedwhenitismorelikelythannotthatfuturetaxableprofitswillbe
availableagainstwhichtheselossescanbeutilised.
Deferredtaxismeasuredatthetaxratesthatareexpectedtoapplytotheperiodwhentheassetisrealisedortheliabilitysettled,
basedontaxrates(andlaws)thathavebeenenactedoraresubstantivelyenactedattheendofthereportingperiod.
(l) Business acquisitions and disposals
Businessacquisitionsareaccountedforbyapplyingthepurchasemethodofaccounting,whichadjuststhenetassetsoftheacquired
companytofairvalueatthedateofpurchase.Theexcessoftheacquisitionconsiderationoverthefairvalueoftheassetsandliabilities
oftheacquiredentityisrecordedasgoodwill.Expensesrelatedtoacquiringnewsubsidiariesarechargedtotheincomestatementin
theperiodinwhichtheyareincurred.Incomeandexpensesofacquiredentitiesareincludedintheincomestatementfromthedate
ofacquisition.
Incomeandexpensesofentitiessoldduringtheperiodareincludedintheincomestatementuptothedateofdisposal.Thegainor
lossondisposaliscalculatedasthedifferencebetweensaleproceedsnetofsellingcosts,lessthenetassetsoftheentityatthedateof
disposal,adjustedforforeignexchangemovementsattachingtothesoldentitythatarerequiredtoberecycledtotheincomestatement
underIAS21.
WheretheGroupwritesaputoptionoveritsnon-controllinginterestsaspartofitsbusinessacquisition,whichifexercisedtriggers
thepurchasebytheGroupofthenon-controllinginterests,theputoptionisrecognisedasafinancialliabilityattheacquisitiondatewith
acorrespondingamount,deducteddirectlyfromshareholder’sequity.Anysubsequentchangestothecarryingamountoftheput
liabilityarealsorecognisedwithinequity.
(m) Goodwill
GoodwillarisingonacquisitionsofsubsidiariesandbusinessesiscapitalisedandcarriedontheGroupstatementoffinancialpositionas
anintangibleassetatinitialvaluelessanyaccumulatedimpairmentlosses.Goodwillimpairmenttestingisconductedannuallyandwhen
thereisanindicationofimpairment.Forthepurposesofimpairmenttesting,goodwillisallocatedtocashgeneratingunits.Forfurther
detailsseenoteC5.1.
318 Prudential plc AnnualReport2018
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E Further accounting policies continued (n) Intangible assets
Intangibleassetsacquiredonthepurchaseofasubsidiaryorportfolioofcontractsaremeasuredatfairvalueonacquisition.Deferred
acquisitioncostsareaccountedforasdescribedinnoteA3.1(c).Otherintangibleassets,suchasdistributionrightsandsoftware,are
valuedinitiallyatthepricepaidtoacquirethemandaresubsequentlycarriedatcostlessamortisationandanyaccumulatedimpairment
losses.TheamortisationmethodsfordistributionrightsandsoftwareareasdescribedinnoteC5.2(iii).Forotherintangibles,
amortisationfollowsthepatterninwhichthefutureeconomicbenefitsareexpectedtobeconsumed.Ifthepatterncannotbe
determinedreliably,astraight-linemethodisapplied.Amortisationofintangibleassetsischargedtothe‘acquisitioncostsandother
expenditure’lineintheconsolidatedincomestatement.Impairmenttestingisconductedwhenthereisanindicationofimpairment.
(o) Cash and cash equivalents
Cashandcashequivalentsconsistofcashatbankandinhand,depositsheldatcallwithbanks,treasurybillsandothershort-termhighly
liquidinvestmentswithlessthan90daysmaturityfromthedateofacquisition.
(p) Shareholders’ dividends
Interimdividendsarerecordedintheperiodinwhichtheyarepaid.Finaldividendsarerecordedintheperiodinwhichtheyareapproved
byshareholders.
(q) Share capital
Sharesareclassifiedasequitywhentheirtermsdonotcreateanobligationtotransferassets.Thedifferencebetweentheproceeds
receivedonissueoftheshares,netofshareissuecosts,andthenominalvalueofthesharesissued,iscreditedtosharepremium.Where
theCompanypurchasessharesforthepurposesofemployeeincentiveplans,theconsiderationpaid,netofissuecosts,isdeductedfrom
retainedearnings.Uponissueorsaleanyconsiderationreceivediscreditedtoretainedearningsnetofrelatedcosts.
(r) Foreign exchange
TheGroup’sconsolidatedfinancialstatementsarepresentedinpoundssterling,theGroup’spresentationcurrency.Accordingly,the
resultsandfinancialpositionofforeignsubsidiariesmustbetranslatedintothepresentationcurrencyoftheGroupfromtheirfunctional
currencies,iethecurrencyoftheprimaryeconomicenvironmentinwhichtheentityoperates.Allassetsandliabilitiesofforeign
subsidiariesareconvertedatyearendexchangerateswhileallincomeandexpensesareconvertedataverageexchangerateswhere
thisisareasonableapproximationoftheratesprevailingontransactiondates.Theimpactofthesecurrencytranslationsisrecorded
asaseparatecomponentinthestatementofcomprehensiveincome.
ForeigncurrencyborrowingsthatareusedtoprovideahedgeagainstGroupequityinvestmentsinoverseassubsidiariesare
translatedatyearendexchangeratesandmovementsrecognisedinothercomprehensiveincome.Otherforeigncurrencymonetary
itemsaretranslatedatyearendexchangerateswithchangesrecognisedintheincomestatement.
Foreigncurrencytransactionsaretranslatedatthespotrateprevailingatthetime.
(s) Earnings per share
Basicearningspershareiscalculatedbydividingtheearningsattributabletoordinaryshareholdersbytheweightedaveragenumber
ofordinarysharesoutstandingduringtheyear,excludingthoseheldinemployeesharetrustsandconsolidatedunittrustsandOEICs,
whicharetreatedascancelled.
Fordilutedearningspershare,theweightedaveragenumberofsharesinissueisadjustedtoassumeconversionofalldilutive
potentialordinaryshares.TheGroup’sonlyclassofpotentiallydilutiveordinarysharesarethoseshareoptionsgrantedtoemployees
wheretheexercisepriceislessthantheaveragemarketpriceoftheCompany’sordinarysharesduringtheyear.Noadjustmentismade
iftheimpactisanti-dilutiveoverall.
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01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Statement of financial position
of the parent company
31 December
Fixed assets
Investments in subsidiary undertakings
Current assets
Debtors:
Amounts owed by subsidiary undertakings
Other debtors
Tax recoverable
Derivative assets
Pension asset
Cash at bank and in hand
Liabilities: amounts falling due within one year
Commercial paper
Other borrowings
Derivative liabilities
Amounts owed to subsidiary undertakings
Tax payable
Deferred tax liability
Accruals and deferred income
Net current assets
Total assets less current liabilities
Liabilities: amounts falling due after more than one year
Subordinated liabilities
Debenture loans
Other borrowings
Total net assets
Capital and reserves
Share capital
Share premium
Profit and loss account
Shareholders’ funds
Profit for the year
Note
2018 £m
2017 £m
5
6
7
8
8
6
9
8
8
8
10
10
11
10,825
10,798
5,904
5
42
5
69
22
6,047
(472)
–
(423)
(936)
(10)
(12)
(101)
4,732
5
40
5
71
143
4,996
(485)
(600)
(443)
(715)
(10)
(12)
(79)
(1,954)
(2,344)
4,093
14,918
(6,676)
(517)
(275)
(7,468)
7,450
130
1,964
5,356
7,450
2,652
13,450
(5,272)
(549)
–
(5,821)
7,629
129
1,948
5,552
7,629
2018 £m
2017 £m
1,041
1,235
The financial statements of the parent company on pages 320 to 328 were approved by the Board of Directors on
12 March 2019 and signed on its behalf.
Paul Manduca
Chairman
Mike Wells
Group Chief Executive
Mark FitzPatrick
Chief Financial Officer
320 Prudential plc Annual Report 2018
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Statement of changes in equity
of the parent company
£m
Balance at 1 January 2017
Share
capital
129
Share
premium
Profit and
loss account
1,927
5,449
Total comprehensive income for the year
Profit for the year
Actuarial gains recognised in respect of the defined benefit pension scheme
Total comprehensive income for the year
Transactions with owners, recorded directly in equity
New share capital subscribed
Share based payment transactions
Dividends
Total contributions by and distributions to owners
Balance at 31 December 2017
Balance at 1 January 2018
Impact of initial application of IFRS 9
Total comprehensive income for the year
Profit for the year
Actuarial gains recognised in respect of the defined benefit pension scheme
Total comprehensive income for the year
Transactions with owners, recorded directly in equity
New share capital subscribed
Share based payment transactions
Dividends
Total contributions by and distributions to owners
–
–
–
–
–
–
–
129
129
–
–
–
–
1
–
–
1
–
–
–
21
–
–
21
1,948
1,948
–
–
–
–
16
–
–
16
Balance at 31 December 2018
130
1,964
1,235
28
1,263
–
(1)
(1,159)
(1,160)
5,552
5,552
(9)
1,041
16
1,057
–
–
(1,244)
(1,244)
5,356
Total
equity
7,505
1,235
28
1,263
21
(1)
(1,159)
(1,139)
7,629
7,629
(9)
1,041
16
1,057
17
–
(1,244)
(1,227)
7,450
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Annual Report 2018 Prudential plc 321
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the parent company
financial statements
1 Nature of operations
Prudential plc (the Company) is a parent holding company. The Company together with its subsidiaries (collectively, the Group) is an
international financial services group with its operations in Asia, the US, UK and Europe and Africa. The Group offers a wide range of
retail financial products and services and asset management services throughout these operations. The retail financial products and
services primarily include life insurance, pensions and annuities as well as collective investment schemes. On 14 March 2018, the
Company announced its intention to demerge M&GPrudential, its UK and Europe business, from Prudential plc resulting in two
separately listed companies.
2 Basis of preparation
The financial statements of the Company, which comprise the statement of financial position, statement of changes in equity and related
notes, are prepared in accordance with UK Generally Accepted Accounting Practice, including Financial Reporting Standard 101
Reduced Disclosure Framework (‘FRS 101’) and Part 15 of the Companies Act 2006.
In preparing these financial statements, the Company applies the recognition, measurement and disclosure requirements in
International Financial Reporting Standards (‘IFRS’) as issued by the International Accounting Standards Board (‘IASB’) and endorsed
by the EU, but makes amendments where necessary in order to comply with the Companies Act 2006 and has set out below where
advantage of the FRS 101 disclosure exemptions has been taken. The Company has also taken advantage of the exemption under
Section 408 of the Companies Act 2006 from presenting its own profit and loss account.
In these financial statements, the Company has applied the exemptions available under FRS 101 in respect of the following disclosures:
— A cash flow statement and related notes;
— Disclosures in respect of transactions with wholly-owned subsidiaries within the Prudential Group;
— Disclosure in respect of capital management; and
— The effects of new but not yet effective IFRSs.
As the consolidated financial statements of the Group include the equivalent disclosures, the Company has also applied the exemptions
available under FRS 101 in respect of the following disclosures:
— IFRS 2 ‘Share Based Payments’ in respect of Group-settled share-based payments;
— Disclosure required by IFRS 7 ‘Financial Instrument Disclosures’ and IFRS 13 ‘Fair Value Measurement’, except for the consequential
amendments to IFRS 7 related to IFRS 9 which have not been adopted by the Group; and
— IFRS 15, ‘Revenue from Contracts with Customers’ in respect of revenue recognition.
In 2018, the Company adopted IFRS 9, ‘Financial Instruments’ which replaced IAS 39, ‘Financial Instruments – Recognition and
Measurement’. Under IFRS 9, except for derivative instruments that are mandatorily classified as fair value through profit or loss, all of
the financial assets and liabilities of the Company are classified as amortised cost. There was no significant change from previous IAS 39
classification. The Company changed its approach to assessing impairment on its loans and receivables from the IAS 39 incurred loss
approach to the IFRS 9 expected credit loss approach. This resulted in a small amount of expected credit losses (£9 million) recognised in
retained earnings as at 1 January 2018, the date of initial application relating to the amounts owed by subsidiary undertakings (£14 million
at 31 December 2018). As permitted by IFRS 9, the Company has not restated its 2017 comparatives. The expected credit loss on the
Company’s loans and receivables, the majority of which represent loans to its subsidiaries, have been assessed by taking into account the
probability of default on those loans. In all cases the subsidiaries are expected to have sufficient resources to repay the loan either now or
over time (based on projected earnings). The expected credit loss has therefore been limited to the impact of discounting the value of the
loan between the balance sheet date and the anticipated recovery date. The expected credit loss in the period was a charge of £5 million.
The Company has also adopted IFRS 15, ‘Revenue from Contracts with Customers’ and Amendments to IFRS 2, ‘Share-based
Payments’ as applied under FRS 101 in 2018, the adoption of which did not have an impact on the financial statements of the Company.
The accounting policies set out in note 3 below have, unless otherwise stated, been applied consistently to all periods presented in
these financial statements.
3 Significant accounting policies
Investments in subsidiary undertakings
Investments in subsidiary undertakings are shown at cost less impairment.
Amounts owed by subsidiary undertakings
Amounts owed by subsidiary undertakings are shown at cost, less provisions. Upon the adoption of IFRS 9 in 2018, the provisions
are determined using the expected credit loss approach.
Derivatives
Derivative financial instruments are held to manage certain macro-economic exposures. Derivative financial instruments are carried
at fair value with changes in fair value included in the profit and loss account.
322 Prudential plc Annual Report 2018
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Borrowings
Borrowings are initially recognised at fair value, net of transaction costs, and subsequently accounted for on an amortised cost basis using
the effective interest method. Under the effective interest method, the difference between the redemption value of the borrowing and
the initial proceeds, net of transaction costs, is amortised through the profit and loss account to the date of maturity or, for subordinated
debt, over the expected life of the instrument. Where modifications to borrowings do not result in a substantial difference to the terms of
the instrument, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining expected life of
the modified instrument.
Dividends
Interim dividends are recorded in the period in which they are paid.
Share premium
The difference between the proceeds received on issue of shares and the nominal value of the shares issued is credited to the share
premium account.
Foreign currency translation
Assets and liabilities denominated in foreign currencies, including borrowings that have been used to finance or provide a hedge against
Group equity investments in overseas subsidiaries, are translated at year end exchange rates. The impact of these currency translations
is recorded within the profit and loss account for the year.
Tax
Current tax expense is charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of
taxable amounts for the current year. To the extent that losses of an individual UK company are not offset in any one year, they can
be carried back for one year or carried forward indefinitely to be offset against profits arising from the same company.
Deferred tax assets and liabilities are recognised in accordance with the provisions of IAS 12, ’Income Taxes’. Deferred tax assets are
recognised to the extent that it is regarded as more likely than not that future taxable profits will be available against which these losses
can be utilised. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse,
using tax rates enacted or substantively enacted at the reporting date.
The Group’s UK subsidiaries each file separate tax returns. In accordance with UK tax legislation, where one domestic UK company
is a 75 per cent owned subsidiary of another UK company or both are 75 per cent owned subsidiaries of a common parent, the companies
are considered to be within the same UK tax group. For companies within the same tax group, trading profits and losses arising in the
same accounting period may be offset for the purposes of determining current and deferred taxes.
Pensions
The Company assumes a portion of the pension surplus or deficit of the Group’s main pension scheme, the Prudential Staff Pension
Scheme (‘PSPS’). The Company applies the requirements of IAS 19 ‘Employee Benefits’ (as revised in 2011) for the accounting of its
interest in the PSPS surplus or deficit. Further details are disclosed in note 7.
A pension surplus or deficit is recorded as the difference between the present value of the scheme liabilities and the fair value of the
scheme assets. The Company’s share of pension surplus is recognised to the extent that the Company is able to recover a surplus either
through reduced contributions in the future or through refunds from the scheme.
The assets and liabilities of the defined benefit pension schemes of the Prudential Group are subject to a full triennial actuarial
valuation using the projected unit method. Estimated future cash flows are then discounted at a high quality corporate bond yield,
adjusted to allow for the difference in duration between the bond index and the pension liabilities, where appropriate, to determine their
present value. These calculations are performed by independent actuaries.
The aggregate of the actuarially determined service costs of the currently employed personnel and the net income (interest) on the
net scheme assets (liabilities) at the start of the period, is recognised in the profit or loss account. Actuarial gains and losses as a result of
the changes in assumptions, experience variances or the return on scheme assets excluding amounts included in the net deferred benefit
asset (liability) are recorded in other comprehensive income.
Share-based payments
The Group offers share award and option plans for certain key employees and a Save As You Earn (‘SAYE’) plan for all UK and certain
overseas employees. The share-based payment plans operated by the Group are mainly equity-settled.
Under IFRS 2 ‘Share-based payment’, where the Company, as the parent company, has the obligation to settle the options or awards
of its equity instruments to employees of its subsidiary undertakings, and such share-based payments are accounted for as equity-settled
in the Group financial statements, the Company records an increase in the investment in subsidiary undertakings for the value of the
share options and awards granted with a corresponding credit entry recognised directly in equity. The value of the share options and
awards granted is based upon the fair value of the options and awards at the grant date, the vesting period and the vesting conditions.
www.prudential.co.uk
Annual Report 2018 Prudential plc 323
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 4 Reconciliation from the FRS 101 parent company results to the IFRS Group results
The parent company financial statements are prepared in accordance with FRS 101 and the Group financial statements are prepared
in accordance with IFRS as issued by the IASB and endorsed by the EU. At 31 December 2018, there were no differences between
FRS 101 and IFRS as issued by the IASB and endorsed by the EU in terms of their application to the parent company.
The tables below provide a reconciliation between the FRS 101 parent company results and the IFRS Group results.
Profit after tax
Profit for the financial year of the Company (including dividends from subsidiaries)
in accordance with FRS 101 and IFRS
Accounting policy difference*
Share in the IFRS result of the Group, net of distributions to the Company†
Profit after tax of the Group attributable to shareholders in accordance with IFRS
Net equity
Shareholders’ equity of the Company in accordance with FRS 101 and IFRS
Accounting policy difference*
Share in the IFRS net equity of the Group†
Shareholders’ equity of the Group in accordance with IFRS
2018 £m
2017 £m
1,041
5
1,964
3,010
1,235
–
1,154
2,389
2018 £m
2017 £m
7,450
14
9,785
7,629
–
8,458
17,249
16,087
* Adjustment represents difference in accounting policy for expected credit losses on loan assets, the Company has adopted IFRS 9 while the Group applies IAS 39.
† The ‘share in the IFRS result and net equity of the Group’ lines represent the parent company’s equity in the earnings and net assets of its subsidiaries and associates.
The profit for the financial year of the Company in accordance with IFRS includes dividends received in the year from subsidiary
undertakings of £1,495 million and £1,685 million for the years ended 31 December 2018 and 2017, respectively.
As stated in note 3, under FRS 101, the Company accounts for its investments in subsidiary undertakings at cost less impairment.
For the purpose of this reconciliation, no adjustment is made to the Company in respect of any valuation adjustments to shares in
subsidiary undertakings that would be eliminated on consolidation.
5 Investments in subsidiary undertakings
At 1 January
Capital injections
Amounts in respect of share based payments
At 31 December
2018 £m
2017 £m
10,798
88
(61)
10,825
10,859
–
(61)
10,798
In January 2018 the Company provided £88 million to M&G to support the seed funding of the new Luxembourg-based SICAV open-
ended collective investment schemes.
In November 2018, the Company transferred ownership of four of its subsidiaries associated with the UK and Europe business to
M&GPrudential under a share for share exchange, in preparation for the demerger of M&GPrudential and its subsidiaries from the
Group. Shares in the four entities transferred: The Prudential Assurance Company Limited, M&G Investments Management Limited,
Prudential Financial Services Limited and Prudential Property Services Limited, were transferred to M&GPrudential in return for shares in
M&GPrudential. There is no change to the value recorded in the Company’s financial statements.
Amounts in respect of share-based payments of £(61) million (2017: £(61) million) comprise of £5 million (2017: £6 million) in respect
of share-based payments reflecting the value of payments settled by the Company for employees of its subsidiary undertakings, less
£(66) million (2017: £(67) million) relating to cash received from subsidiaries in respect of share awards.
Subsidiary undertakings of the Company at 31 December 2018 are listed in note D6 of the Group financial statements.
324 Prudential plc Annual Report 2018
www.prudential.co.uk
Notes on the parent company financial statements continued 6 Derivative financial instruments
Cross-currency swap
Inflation-linked swap
Total
2018 £m
2017 £m
Fair value
assets
Fair value
liabilities
Fair value
assets
Fair value
liabilities
5
–
5
–
423
423
5
–
5
–
443
443
Derivative financial instruments are held to manage certain macro-economic exposures. The change in fair value of the derivative
financial instruments of the Company was a gain before tax of £20 million (2017: gain of £5 million).
7 Pension scheme financial position
The majority of UK Prudential staff are members of the Group’s pension schemes. The largest scheme is the Prudential Staff Pension
Scheme (the Scheme) which is primarily a closed defined benefit scheme.
At 31 December 2005, the allocation of surpluses and deficits attaching to the Scheme between the Company and the unallocated
surplus of UK with-profits fund was apportioned in the ratio 30/70 following detailed consideration of the sourcing of previous
contributions. This ratio was applied to the base deficit position at 1 January 2006 and for the purpose of determining the allocation of the
movements in that position up to 31 December 2018. The IAS 19 service charge and ongoing employer contributions are allocated by
reference to the cost allocation for current activity.
The last completed triennial actuarial valuation of the Scheme was as at 5 April 2017, which was finalised in 2018. Further details on
the results of this valuation and the total employer contributions to the Scheme for the year are provided in note C9 of the Group financial
statements, together with the key assumptions adopted, including mortality assumptions.
A description of the regulatory framework in which the Scheme operates, the governance of the Scheme, and the risks to which the
Scheme exposes the Company is provided in note C9 of the Group financial statements. The most recent full valuation has been updated
to 31 December 2018, applying the principles prescribed by IAS 19. The actuarial assumptions used in determining the IAS 19 benefit
obligations and the net periodic costs and sensitivity of IAS 19 benefit obligation to changes in the actuarial assumptions are also
provided in note C9 of the Group financial statements.
The assets and liabilities of the Scheme were:
31 Dec 2018 £m
31 December 2017 £m
Scheme assets:
Equities
UK
Overseas
Bonds*
Government
Corporate
Asset-backed securities
Properties
Derivatives
Other assets
Fair value of Scheme assets
Present value of benefit obligations
Underlying surplus in the Scheme
Effect of the application of IFRIC 14
for de-recognition of surplus
Surplus in the Scheme
Surplus in the Scheme recognised
by the Company†
Quoted
prices in
an active
market
8
194
4,596
1,457
243
–
103
117
6,718
Quoted
prices in
an active
market
9
216
5,040
1,430
156
–
188
192
7,231
Other
Total
–
10
–
129
20
143
–
55
357
8
204
4,596
1,586
263
143
103
172
7,075
(6,167)
908
(677)
231
69
Other
Total
–
10
–
61
8
140
–
24
243
9
226
5,040
1,491
164
140
188
216
7,474
(6,753)
721
(485)
236
71
* 93 per cent (2017: 93 per cent) of the bonds are investment grade.
† The surplus in the Scheme recognised in the balance sheet of the Company represents the amount that is recoverable through reduced future contributions and is net of the
apportionment to the UK with-profits fund.
www.prudential.co.uk
Annual Report 2018 Prudential plc 325
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 7 Pension scheme financial position continued
The changes in the fair value of the underlying Scheme assets and the present value of the underlying benefit obligations are as follows:
Balance at 1 January
Current service cost
GMP equalisation provision note (iv)
Net interest income (cost)
Administration expenses
Actuarial gains (losses) note (ii)
Contributions paid by the employer note (iii)
Contributions paid by the employee
Benefits paid
Balance at 31 December
Balance at 1 January
Current service cost
Net interest income (cost)
Administration expenses
Actuarial gains (losses) note (ii)
Contributions paid by the employer note (iii)
Contributions paid by the employee
Benefits paid
Balance at 31 December
Fair value of
Scheme assets
Present value
of benefit
obligations
note (i)
7,474
–
–
181
(7)
(186)
10
–
(397)
7,075
(6,753)
(26)
(31)
(163)
–
409
–
–
397
(6,167)
Fair value of
Scheme assets
Present value
of benefit
obligations
note (i)
7,627
–
193
(6)
40
11
–
(391)
7,474
(6,910)
(26)
(175)
–
(33)
–
–
391
(6,753)
2018 £m
Net surplus
without the
effect of
IFRIC 14
Effect of
IFRIC 14
for de-
recognition
of surplus
IAS 19
basis net
surplus
721
(26)
(31)
18
(7)
223
10
–
–
908
(485)
–
–
(13)
–
(179)
–
–
–
(677)
236
(26)
(31)
5
(7)
44
10
–
–
231
2017 £m
Net surplus
without the
effect of
IFRIC 14
Effect of
IFRIC 14
for de-
recognition
of surplus
IAS 19
basis net
surplus
717
(26)
18
(6)
7
11
–
–
721
(558)
–
(14)
–
87
–
–
–
(485)
159
(26)
4
(6)
94
11
–
–
236
Notes
(i)
£m
2018
2017
The weighted average duration of the benefit obligations of the Scheme is 17 years (2017: 17 years). The following table provides an expected maturity analysis of the undiscounted
benefit obligations as at 31 December:
1 year or less
After 1 year
to 5 years
After 5 years
to 10 years
After 10 years
to 15 years
After 15 years
to 20 years Over 20 years
240
238
1,061
1,030
1,449
1,445
1,426
1,452
1,349
1,375
5,265
5,554
Total
10,790
11,094
(ii)
The actuarial gains attributable to policyholders and shareholders are analysed as follows:
2018 £m
2017 £m
Return on Scheme assets excluding interest income*
Actuarial gains (losses)
Experience gains on Scheme liabilities
Actuarial gains (losses) – demographic assumptions
Actuarial gains (losses) – financial assumptions
Total actuarial gains (losses) without the effect of IFRIC 14
Actuarial gains attributable to the Company before tax†
(186)
1
125
283
409
223
19
40
70
(10)
(93)
(33)
7
34
* The total return on Scheme assets in 2018 was a loss of £(5) million (2017: gain £233 million).
† Actuarial gains attributable to the Company are net of the apportionment to the UK with-profits fund and are related to the surplus recognised in the balance sheet of the Company.
In 2018, the gains included a debit of £48 million (2017: credit £31 million) for the adjustment to the unrecognised portion of surplus.
The gains after tax of £16 million (2017: £28 million) are recorded in other comprehensive income.
(iii)
(iv)
Employer contributions to be paid into the Scheme for the year ending 31 December 2019 are expected to amount to £10 million, comprising ongoing service contributions
and expenses.
In October 2018, the High Court ruled that pension schemes are required to equalise benefits for the effect of guaranteed minimum pensions (GMPs). GMPs are a minimum benefit
that schemes that were contracted-out on a salary-related basis between 1978 and 1997 are required to provide.
In light of this Court ruling, at 31 December 2018, an estimated allowance for GMP equalisation of £31 million has been recognised within the IAS 19 valuation for the Scheme,
of which £9 million was allocated to the Company. The impact on profit before tax is £9 million (before taking into account any charge to PSPS surplus restriction). After taking into
account the change to the PSPS surplus restriction as reflected in the actuarial gains and losses within other comprehensive income, there was no impact on shareholders’ funds.
326 Prudential plc Annual Report 2018
www.prudential.co.uk
Notes on the parent company financial statements continued
8 Borrowings
Core structural borrowings note (i)
Subordinated liabilities note (ii)
Debenture loans
Bank loan
Other borrowings: note (iii)
Commercial paper
Medium Term Notes 2018
Total borrowings
Borrowings are repayable as follows:
Within 1 year
Between 1 and 5 years
After 5 years
Core structural borrowings
Other borrowings
Total
2018 £m
2017 £m
2018 £m
2017 £m
2018 £m
2017 £m
6,676
517
275
7,468
–
–
5,272
549
–
5,821
–
–
7,468
5,821
–
587
6,881
7,468
–
–
5,821
5,821
–
–
–
–
472
–
472
472
–
–
472
–
–
–
–
485
600
1,085
1,085
–
–
1,085
6,676
517
275
7,468
472
–
7,940
472
587
6,881
7,940
5,272
549
–
5,821
485
600
6,906
1,085
–
5,821
6,906
Notes
(i)
(ii)
(iii)
Further details on the core structural borrowings of the Company are provided in note C6.1 of the Group financial statements.
The interests of the holders of the subordinated liabilities are subordinate to the entitlements of other creditors of the Company.
These borrowings support a short-term fixed income securities programme.
9 Deferred tax liability
Deferred tax liability
Short-term temporary differences related to pension scheme
Total
10 Share capital and share premium
2018 £m
2017 £m
(12)
(12)
(12)
(12)
A summary of the ordinary shares in issue and the options outstanding to subscribe for the Company’s shares at 31 December 2018
is set out in note C10 of the Group financial statements.
www.prudential.co.uk
Annual Report 2018 Prudential plc 327
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 11 Retained profit of the Company
Retained profit at 31 December 2018 amounted to £5,356 million (31 December 2017: £5,552 million). The retained profit includes
distributable reserves of £2,814 million and non-distributable reserves of £2,542 million. The non-distributable reserves comprise
£2,405 million relating to gains made by intermediate holding companies following the transfer at fair value of certain subsidiaries to other
parts of the Group as part of internal restructuring exercises in previous years, £80 million of share-based payment reserves and
£57 million net of taxation in relation the pension benefit surplus of the Company. The amount of £2,405 million is not able to be regarded
as part of the distributable reserves of the parent company because the gains relate to intra-group transactions.
Under UK company law, Prudential may pay dividends only if sufficient distributable reserves of the Company are available for the
purpose and if the amount of its net assets is greater than the aggregate of its called up share capital and non-distributable reserves (such
as the share premium account) and the payment of the dividend does not reduce the amount of its net assets to less than that aggregate.
The retained profit of the Company is substantially generated from dividend income received from subsidiaries. The Group segmental
analysis illustrates the generation of profit across the Group (see note B1 of the Group financial statements). The Group and its
subsidiaries are subject to local regulatory minimum capital requirements, as set out in note C12 of the Group financial statements.
A number of the principal risks set out in the ‘Report of the risks facing our business and how these are managed’ could impact the
generation of profit in the Group’s subsidiaries in the future and hence impact their ability to pay dividends in the future.
In determining the dividend payment in any year the directors follow the Group dividend policy described in the Chief Financial
Officer’s report section of this Annual Report. The directors consider the Company’s ability to pay current and future dividends twice
a year by reference to the Company’s business plan and certain stressed scenarios.
12 Other information
a
b
c
d
e
Information on directors’ remuneration is given in the directors’ remuneration report section of this Annual Report and note B2.3
of the Group financial statements.
Information on transactions of the directors with the Group is given in note D4 of the Group financial statements.
The Company employs no staff.
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts were £0.1 million (2017: £0.1 million)
and for other services were £0.1 million (2017: £0.1 million).
In certain instances, the Company has guaranteed that its subsidiaries will meet their obligations when they fall due for payment.
13 Post balance sheet events
The second interim ordinary dividend for the year ended 31 December 2018, which was approved by the Board of Directors after
31 December 2018, is described in note B6 of the Group financial statements.
328 Prudential plc Annual Report 2018
www.prudential.co.uk
Notes on the parent company financial statements continued Statement of Directors’ responsibilities
in respect of the Annual Report and
the financial statements
TheDirectorsareresponsibleforpreparing
theAnnualReportandtheGroupand
parentcompanyfinancialstatementsin
accordancewithapplicablelawand
regulations.
CompanylawrequirestheDirectorsto
prepareGroupandparentcompany
financialstatementsforeachfinancialyear.
Underthatlaw,theDirectorsarerequired
topreparetheGroupfinancialstatements
inaccordancewithInternationalFinancial
ReportingStandardsasadoptedbythe
EuropeanUnion(IFRSsasadoptedbythe
EU)andapplicablelawandhaveelected
topreparetheparentcompanyfinancial
statementsinaccordancewithUK
AccountingStandardsandapplicablelaw
(UKGenerallyAcceptedAccounting
Practice)includingFRS101Reduced
DisclosureFramework.
Undercompanylaw,theDirectorsmust
notapprovethefinancialstatementsunless
theyaresatisfiedthattheygiveatrueand
fairviewofthestateofaffairsoftheGroup
andparentcompanyandoftheirprofitor
lossforthatperiod.Inpreparingeachof
theGroupandparentcompanyfinancial
statements,theDirectorsarerequiredto:
— Selectsuitableaccountingpoliciesand
thenapplythemconsistently;
TheDirectorsareresponsibleforkeeping
adequateaccountingrecordsthatare
sufficienttoshowandexplaintheparent
company’stransactionsanddisclosewith
reasonableaccuracyatanytimethe
financialpositionoftheparentcompany
andenablethemtoensurethatitsfinancial
statementscomplywiththeCompanies
Act2006.Theyhavegeneralresponsibility
fortakingsuchstepsasarereasonably
opentothemtosafeguardtheassetsofthe
Groupandtopreventanddetectfraudand
otherirregularities.
Underapplicablelawandregulations,the
directorsarealsoresponsibleforpreparing
astrategicreport,Directors’report,
directors’remunerationreportand
corporategovernancestatementthat
complywiththatlawandthoseregulations.
TheDirectorsareresponsibleforthe
maintenanceandintegrityofthecorporate
andfinancialinformationincludedonthe
Company’swebsite.Legislationinthe
UKgoverningthepreparationand
disseminationoffinancialstatementsmay
differfromlegislationinotherjurisdictions.
TheDirectorsofPrudentialplc,whose
namesandpositionsaresetoutonpages
89to94confirmthattothebestoftheir
knowledge:
— Makejudgementsandestimatesthat
— Thefinancialstatements,prepared
arereasonableandprudent;
— FortheGroupfinancialstatements,
statewhethertheyhavebeenprepared
inaccordancewithIFRSsasadoptedby
theEU;
— Fortheparentcompanyfinancial
statements,statewhetherapplicable
UKAccountingStandardshavebeen
followed,subjecttoanymaterial
departuresdisclosedandexplained
intheparentcompanyfinancial
statements;and
— Preparethefinancialstatementson
thegoingconcernbasisunlessitis
inappropriatetopresumethatthe
Groupandtheparentcompanywill
continueinbusiness.
inaccordancewiththeapplicableset
ofaccountingstandards,giveatrue
andfairviewoftheassets,liabilities,
financialpositionandprofitorlossof
theCompanyandtheundertakings
includedintheconsolidationtaken
asawhole;
— Thestrategicreportincludesafair
reviewofthedevelopmentand
performanceofthebusinessand
thepositionoftheGroupandthe
undertakingsincludedinthe
consolidationtakenasawhole,together
withadescriptionoftheprincipalrisks
anduncertaintiesthattheyface;and
— TheAnnualReportandfinancial
statements,takenasawhole,isfair,
balancedandunderstandableand
providestheinformationnecessaryfor
shareholderstoassesstheGroup’s
positionandperformance,business
modelandstrategy.
www.prudential.co.uk
AnnualReport2018 Prudential plc 329
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Independent auditor’s report to the
members of Prudential plc only
1 Our opinion is unmodified
Wehaveauditedthefinancialstatements
ofPrudentialplc(‘theGroupandparent
company’)fortheyearended
31December2018whichcomprise:
— theconsolidatedincomestatement,
consolidatedstatementof
comprehensiveincome,consolidated
statementofchangesinequity,
consolidatedstatementoffinancial
positionandconsolidatedstatement
ofcashflows,andtherelatednotes,
includingaccountingpoliciesinnotes
A3andE1;and
— thestatementoffinancialposition,
statementofchangesinequity,andthe
relatednotes,includingthesignificant
accountingpoliciesinnote3,ofthe
parentcompanyfinancialstatements.
Inouropinion:
— Thefinancialstatementsgiveatrueand
fairviewofthestateoftheGroup’sand
oftheparentcompany’saffairsasat
31December2018andoftheGroup’s
profitfortheyearthenended;
— TheGroupfinancialstatementshave
beenproperlypreparedinaccordance
withInternationalFinancialReporting
Standardsasadoptedbythe
EuropeanUnion;
— Theparentcompanyfinancial
statementshavebeenproperlyprepared
inaccordancewithUKAccounting
StandardsincludingFRS101Reduced
Disclosure Framework;and
— Thefinancialstatementshavebeen
preparedinaccordancewiththe
requirementsoftheCompaniesAct
2006and,asregardstheGroup
financialstatements,Article4ofthe
IASRegulation.
Basis for opinion
Weconductedourauditinaccordance
withInternationalStandardsonAuditing
(UK)(‘ISAs(UK)’)andapplicablelaw.
Ourresponsibilitiesaredescribedbelow.
Webelievethattheauditevidencewehave
obtainedisasufficientandappropriate
basisforouropinion.Ourauditopinion
isconsistentwithourreporttothe
auditcommittee.
Wewereappointedasauditorbythe
shareholdersinOctober1999.Theperiod
oftotaluninterruptedengagement
isforthe20financialyearsended
31December2018.Wehavefulfilled
ourethicalresponsibilitiesunder,and
weremainindependentoftheGroupin
accordancewith,UKethicalrequirements
includingtheFinancialReportingCouncil
(‘FRC’)EthicalStandardasappliedto
listedpublicinterestentities.Nonon-audit
servicesprohibitedbythatstandard
wereprovided.
2 Key audit matters: including our assessment of risks of material misstatement
Keyauditmattersarethosemattersthat,inourprofessionaljudgement,wereofmostsignificanceintheauditofthefinancialstatements
andincludethemostsignificantassessedrisksofmaterialmisstatement(whetherornotduetofraud)identifiedbyus,includingthose
whichhadthegreatesteffecton:theoverallauditstrategy;theallocationofresourcesintheaudit;anddirectingtheeffortsofthe
engagementteam.Wesummarisebelowthekeyauditmattersinarrivingatourauditopinionabove,togetherwithourkeyaudit
procedurestoaddressthosemattersand,asrequiredforpublicinterestentities,ourresultsfromthoseprocedures.Thesematterswere
addressed,andourresultsarebasedonproceduresundertaken,inthecontextof,andsolelyforthepurposeof,ourauditofthefinancial
statementsasawhole,andinformingouropinionthereon,andconsequentlyareincidentaltothatopinion,andwedonotprovidea
separateopiniononthesematters.
330 Prudential plc AnnualReport2018
www.prudential.co.uk
Valuation of policyholder liabilities (2018: £409,301 million, 2017: £411,243 million).
The risk compared to the prior year is unchanged.
Refer to page 115 (Audit Committee report), page 181 (accounting policy) and pages 241 to 264 (financial disclosures).
The risk
Our response
TheGrouphassignificantpolicyholderliabilitiesrepresenting
83percentoftheGroup’stotalliabilities.
Weusedourownactuarialspecialiststoassistusinperforming
ourproceduresinthisarea.
Subjective valuation
Thisisanareathatinvolvessignificantjudgementoveruncertain
futureoutcomes,mainlytheultimatetotalsettlementvalueoflong
termpolicyholderliabilities.Economicassumptions,including
investmentreturn,creditriskandassociateddiscountrates,and
operatingassumptionsincludingmortality,morbidity,expenses,
utilisationofguaranteesandpersistency(includingconsideration
ofpolicyholderbehaviour)arethekeyinputsusedtoestimate
theselongtermliabilities,inadditiontotheappropriatedesign
andcalibrationofcomplexreservingmodels.
Thespecificapplicationofthesejudgementstoindividual
segmentsisexplainedbelow.
FortheUSinsurancesegment,thevaluationoftheguarantees
inthevariableannuity(‘VA’)businessiscomplexasitinvolves
exercisingsignificantjudgementovertherelationshipbetweenthe
investmentreturnattachingtotheseproductsandtheguarantees
contractuallyprovidedtopolicyholdersandthelikelypolicyholder
behaviourinresponsetochangesininvestmentperformance.
FortheUKinsurancesegment,thevaluationofthepolicyholder
liabilitiesinrelationtotheannuitybusinessrequiressignificant
judgementoverthesettingofmortality,expensesandcreditrisk
assumptions.
FortheAsiainsurancesegment,thevaluationofthepolicyholder
liabilitiesrequiressignificantjudgementoverthesettingof
mortalityandmorbidityassumptions.
Theeffectofthesemattersisthat,aspartofourriskassessment,
wedeterminedthatthevaluationofpolicyholderliabilitieshasa
highdegreeofestimationuncertainty,withapotentialrangeof
reasonableoutcomesgreaterthanourmaterialityforthefinancial
statementsasawholeandpossiblymanytimesthatamount.
Ourproceduresincluded:
Methodology choice
Wehaveassessedthemethodologyforselectingassumptions
andcalculatingthepolicyholderliabilities.Thisincluded:
— Assessingthemethodologyadoptedforselectingassumptions
byapplyingourindustryknowledgeandexperienceand
comparingthemethodologyusedagainstindustrystandard
actuarialpractice;
— Assessingthemethodologyadoptedforcalculatingthe
policyholderliabilitiesbyreferencetotherequirementsofthe
accountingstandardandassessingtheimpactofcurrentyear
changesinmethodologyonthecalculationofpolicyholder
liabilities;
— Comparingchangesinmethodologytoourexpectationsderived
frommarketexperience;and
— Evaluatingtheanalysisofthemovementsinpolicyholder
liabilitiesduringtheyear,includingconsiderationofwhether
themovementswereinlinewiththemethodologyand
assumptionsadopted.
Control operation
WeusedourownITspecialiststoassistusinperformingour
proceduresinthisareawhichincludedtestingofthedesign,
implementationandoperatingeffectivenessofkeycontrolsoverthe
valuationprocessincludingadditionaltestinginrelationtomodel
evaluationasaresultofidentifiedweaknessesinthegeneralIT
controlenvironment.Controlstestinginrespectofthevaluation
processincludedassessmentandapprovalofthemethodsand
assumptionsadoptedoverthecalculationofpolicyholderliabilities
aswellasappropriateaccessandchangemanagementcontrolsover
theactuarialmodels.
Our procedures for the US insurance segment also included:
Historical comparison
— Assessingtheassumptionsrelatingtopolicyholderbehaviourby
comparingtorelevantcompanyandindustryhistorical
experiencedata.
Benchmarking assumptions and sector experience
— Assessingtheassumptionsforinvestmentmixandprojected
investmentreturnsbycomparingtocompanyspecificand
industrydataandforfuturegrowthratesbycomparingtomarket
trendsandmarketvolatility.
— Utilisingtheresultsofourindustrybenchmarkingofassumptions
andactuarialmarketpracticetoinformourchallengeof
assumptionsinrelationtopolicyholderbehaviour.
Model evaluation
— Assessingthecashflowprojectionsinthereservingmodelsby
referencetotheinclusionofrelevantproductfeatures.Wehave
alsoassessedtheimpactofmodellingandassumptionchanges
byinspectingpreandpostchangemodelrunsandcomparing
theoutcomesofthechangestoourexpectations.
www.prudential.co.uk
AnnualReport2018 Prudential plc 331
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Valuation of policyholder liabilities (2018: £409,301 million, 2017: £411,243 million).
The risk compared to the prior year is unchanged.
Refer to page 115 (Audit Committee report), page 181 (accounting policy) and pages 241 to 264 (financial disclosures).
The risk
Our response
Our procedures for the UK insurance segment also included:
Historical comparison
— Evaluatingthedatausedtopreparethemortalityexperience
analysisbyreferencetoactualmortalityexperienceofthe
policyholdersinordertoassesswhetherthissupportedthe
year-endassumptionsadopted.
— Assessingwhethertheexpenseassumptionsappropriately
reflecttheexpectedfuturecostsofadministeringtheunderlying
policiesbyanalysingcurrentyearunitcostsandthelikelyimpact
ofplannedactions.
Benchmarking assumptions and sector experience
— Comparingmortalityexperiencetoindustrydataoncurrent
mortalityandexpectationsoffuturemortalityimprovements.
— Evaluatingthecreditriskassumptions,whichaffectdiscount
rates,byreferencetoindustrypracticeandourexpectation
derivedfrommarketexperiencetakingintoconsideration
economicfactors.
— Usingtheresultsofourindustrybenchmarkingofassumptionsand
actuarialmarketpracticetoinformourchallengeoftheassumptions
inrelationtothemortality,creditriskandexpenseassumptions.
Model evaluation
— Evaluatingtheappropriatenessofthecalibrationofthe
ContinuousMortalityInvestigation(‘CMI’)model(theCMI
Bureaureleasesindustrywidemortalitytables),adoptedbased
ontheanalysisofthecharacteristicsofthepolicyholder
populationandactualmortalityexperience.
— Weusedourownvaluationmodelstoperformanindependent
recalculationofasampleofpolicyholderliabilitiestoassesswhether
theselectedmodelcalibrationhasbeenappropriatelyimplemented.
Our procedures for the Asia insurance segment also included:
Historical comparison
Evaluatingtheexperienceanalysisinrespectofthemortalityand
morbidityassumptionsbyreferencetoactualexperienceinorderto
assesswhetherthissupportedtheyear-endassumptionsadopted.
Benchmarking assumptions and sector experience
Usingoursectorexperienceandmarketknowledgetoinformour
challengeoftheassumptionsintheareasnotedabove.
Model evaluation
Wehaveassessedthereservingmodelsbyconsideringtheaccuracy
ofthecashflowprojectionsincludingbyreferencetotheinclusion
ofrelevantproductfeatures.Wehavealsoassessedtheimpact
ofmodellingandassumptionchangesbyinspectingpreandpost
changemodelrunsandcomparingtheoutcomesofthechanges
toourexpectations.
Assessing transparency
Weconsideredwhetherthedisclosuresinrelationtotheassumptions
usedinthevaluationofpolicyholderliabilitiesarecompliantwiththe
relevantaccountingrequirements.
Our result
Wefoundthevaluationofpolicyholderliabilitiestobeacceptable
(2017:acceptable).
332 Prudential plc AnnualReport2018
www.prudential.co.uk
Independent auditor’s report to the members of Prudential plc only continued Valuation of investments (2018: £418,105 million, 2017: £422,230 million).
The risk compared to the prior year is unchanged.
Refer to page 115 (Audit Committee report), page 187 (accounting policy) and pages 221 to 240 (financial disclosures)
The risk
Our response
TheGroup’sinvestmentportfoliorepresents82percentofthe
Group’stotalassets.
Weusedourownvaluationspecialistsinordertoassistusin
performingourproceduresinthisarea.
Theportfolioofquotedinvestmentsandinvestmentsthatare
valuedprimarilyusingobservableinputsmakesup78percentof
theGroup’stotalassets(byvalue).Wedonotconsiderthese
investmentstobeatahighriskofsignificantmisstatement,ortobe
subjecttoasignificantlevelofjudgementbecausetheycomprise
liquid,quotedinvestments.However,duetotheirmaterialityinthe
contextofthefinancialstatementsasawhole,theyareconsidered
tobeoneoftheareaswhichhadthegreatesteffectonouroverall
auditstrategyandallocationofresourcesinplanningand
completingouraudit.
Subjective valuation
Theareathatinvolvedsignificantauditeffortandjudgementin
2018wasthevaluationofcertainhardertovaluelevel2andlevel3
positionswithinthefinancialinvestmentsportfoliorepresenting
5percentoftheGroup’stotalassets.Theseincludedunlisteddebt
securities,unlistedloansandunlistedfundsthatarevaluedby
referencetotheirNetAssetValue(‘NAVfunds’).Forthese
positionsareliablethirdpartypricewasnotreadilyavailableand
thereforeinvolvedtheapplicationofexpertjudgementinthe
valuationsadopted.
Thevaluationoftheportfolioinvolvesjudgementdependingon
theobservabilityoftheinputsintothevaluationandfurther
judgementindeterminingtheappropriatevaluationmethodology
forhardertovalueinvestmentswhereexternalpricingsourcesare
eithernotreadilyavailableorareunreliable.
Theeffectofthesemattersisthat,aspartofourriskassessment,
wedeterminedthatthevaluationofinvestmentshasahighdegree
ofestimationuncertainty,withapotentialrangeofreasonable
outcomesgreaterthanourmaterialityforthefinancialstatements
asawholeandpossiblymanytimesthatamount.
Ourproceduresincluded:
Methodology choice
Weassessedtheappropriatenessofthepricingmethodologieswith
referencetorelevantaccountingstandardsaswellasindustry
practice.
For quoted investments:
Tests of details
Weperformedindependentpricechecksusingexternalquoted
pricesandbyagreeingtheobservableinputsthatwereusedinthe
Group’svaluationtechniquestoexternaldata.
For harder to value positions:
Control operation
Wetestedthedesign,implementationandoperatingeffectiveness
ofkeycontrolsoverthevaluationprocess,includingtheGroup’s
reviewandapprovaloftheestimatesandassumptionsusedforthe
valuationincludingkeyauthorisationanddatainputcontrols.
Benchmarking assumptions
Weassessedasampleofthevaluationassumptionswithreference
totheGroup’sownvaluationguidelinesaswellasindustrypractice.
Tests of details
Forasampleofunlisteddebtandloansecuritieswecomparedthe
priceadoptedtoourindependentlyderivedprice,usingour
valuationspecialists.
WeagreedthevaluationsfortheNAVfundstothemostrecentNAV
statements.Toassessreliabilityofthesestatementswecompared
toauditedfinancialstatementsofthefunds,whereavailable,
orperformedaretrospectivetestovertheNAVvaluationsforeach
fundtoassessifthefundvaluationsreportedintheauditedfinancial
statementsintheprioryearweremateriallyconsistentwiththemost
recentNAVvaluationstatementsavailableatthetime.
Assessing transparency
Weassessedwhetherthedisclosuresinrelationtothevaluation
ofinvestmentsarecompliantwiththerelevantaccounting
requirements.
Our result
Wefoundthevaluationofinvestmentstobeacceptable
(2017:acceptable).
www.prudential.co.uk
AnnualReport2018 Prudential plc 333
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Amortisation of US deferred acquisition costs (‘DAC’) (2018: £8,727 million, 2017: £8,197 million).
The risk compared to the prior year is unchanged.
Refer to page 115 (Audit Committee report), page 185 (accounting policy) and pages 266 to 268 (financial disclosures)
The risk
Our response
DACrepresents2percentoftheGroup’stotalassets.TheDAC
associatedwiththeUScomponent,whichrepresents86percent
ofthetotalDAC,involvesthegreatestjudgementinterms
ofmeasurement.
Accounting treatment
DACinvolvesjudgementsinrespectoftheidentificationofthe
acquisitioncoststhatmaybedeferredandtheappropriateness
ofthedeferralmethodologyadopted.
TheamortisationassessmentoftheDACassetintheUS
componentisrelatedtotheachievedandprojectedfutureprofit
profile.Thisinvolvesmakingassumptionsaboutfutureinvestment
returnsandtheconsequentialimpactonfeeincome;therefore
thereisagreaterlevelofsubjectivityinvolvedinrelationtothe
USDAC.
Theeffectofthesemattersisthat,aspartofourriskassessment,
wedeterminedthattheamortisationofDAChasahighdegree
ofestimationuncertainty,withapotentialrangeofreasonable
outcomesgreaterthanourmaterialityforthefinancialstatements
asawhole.
Weusedourownactuarialspecialiststoassistusinperforming
ourauditproceduresinthisarea.
Ourproceduresincluded:
Accounting analysis
Weevaluatedtheappropriatenessofthedeferralmethodology
byreferencetotherequirementsofrelevantaccountingstandards.
Testing application
Weevaluatedthejudgementsinvolvedindeterminingwhether
thecostsincurredaredeferredappropriatelybyreferencetothe
adopteddeferralmethodology.
Benchmarking assumptions and market experience
Allassumptionsthatarerelevanttothecalculationofthepolicyholder
liabilitiesarealsorelevanttothecalculationofDACamortisation.
Seefurtherdetailinourresponsetothatrisk.
Additionally,wechallengedthereasonablenessoftheselected
assumptionsrelatingtoprojectedinvestmentreturnbasedon
ourunderstandingofdevelopmentsinthebusinessandour
expectationsderivedfrommarketexperience.Ourworkincluded
comparingtheprojectedinvestmentreturnsagainsttheinvestment
portfoliomixandmarketreturndata,andcorroboratingthe
rationaleforanykeydifferences.
Historical comparison
Wehavealsoassessedtheappropriatenessoftheassumptionsused
indeterminingtheestimatedfutureprofitprofileandtheextentof
theassociatedadjustmentnecessarytotheamortisationoftheDAC
asset.Ourworkincludedcriticallyassessingthejudgementsthat
determinethefutureprofitprofilesinthecontextofactualhistorical
experienceaswellasbyreferencetomarkettrends.
Tests of detail
Weassessedtheaccuracyofthecalculationsperformedincluding
theextentoftheamortisationadjustmentdeterminedbasedonan
assessmentofthefutureprofitprofiles.
Assessing transparency
Weassessedwhetherthedisclosuresinrelationtotheamortisation
ofDACarecompliantwiththerelevantaccountingrequirements.
Our result
WefoundthecapitalisationandamortisationofDACtobe
acceptable(2017:acceptable).
334 Prudential plc AnnualReport2018
www.prudential.co.uk
Independent auditor’s report to the members of Prudential plc only continued Determination of pension asset (restricted surplus) in respect of the defined benefit pension scheme
(Pension asset (restricted surplus) – 2018: £69 million, 2017: £71 million).
The risk compared to the prior year is unchanged. The risk relates to the parent company financial statements.
Refer to page 115 (Audit Committee report), Refer to page 323 (accounting policy) and pages 284 to 290 (financial disclosures)
The risk
Our response
Theparentcompanyassumesaportionofthesurplusofthe
Group’smaindefinedbenefitpensionscheme.
Subjective valuation
Whereanentitydoesnothavearighttoarefundtheassetceiling
(limitoftheamountrecognised)isdeterminedbyreferenceto
thepresentvalueofthedifferencebetweentheestimatedfuture
servicecostandthecontributionspayablebytheentityoverthe
futureworkinglivesoftheactivemembers.Assumptionsaremade
overthefutureservicecosts.
Thecalculationofthedefinedbenefitobligationrequiresthe
determinationofanumberofassumptions,andjudgementis
requiredtodeterminetheappropriatenessofthese.Themost
significantassumptionsincludemortalityandthediscountrate.
Ourproceduresincluded:
Methodology choice
Weassessed,withthesupportofourpensionspecialists,
themethodologyforselectingassumptionsunderpinningthe
calculationofthedefinedbenefitpensionobligationandthe
estimatedfutureservicecostleadingtotheconsequentcalculation
oftherestrictedsurplus.
Tests of detail
Weassessedthereasonablenessofthemortalityassumptionsand
discountratebyreferencetoentityspecificdatainrespectofthe
demographiccharacteristicsofthepopulationofpensionscheme
membersandfactorssuchassalaryinflation.
Wealsoconsideredwhetherthemovementsinthedefinedbenefit
pensionobligationandtheestimatedfutureservicecost,including
theconsequentialcalculationoftherestrictedsurplus,were
consistentwiththechangesmadeintheassumptionsfromthe
prioryear.
Benchmarking assumptions
Wechallenged,withthesupportofourownpensionspecialists,
thekeyassumptionsappliedtothepensionobligation,beingthe
discountandmortalityrates,againstexternallyderiveddata.
Our result
Wefoundthepensionasset(restrictedsurplus)recognisedin
respectofthedefinedbenefitpensionschemetobeacceptable
(2017:acceptable).
www.prudential.co.uk
AnnualReport2018 Prudential plc 335
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information The impact of uncertainties due to the UK exiting the European Union on our audit
Refer to page 52 (Group Chief Risk Officer’s Report), page 68 (viability statement), page 115 (Audit Committee Report)
and page 194 (financial disclosures).
The risk
Our response
Levels of uncertainty due to Brexit
Allauditsassessandchallengethereasonablenessofestimates,
inparticularasdescribedinthevaluationofpolicyholderliabilities,
valuationofinvestmentsandthedeterminationofthedefined
benefitpensionasset(restrictedsurplus)above,andrelated
disclosuresandtheappropriatenessofthegoingconcernbasis
ofpreparationofthefinancialstatements(seebelow).Allofthese
dependonassessmentsofthefutureeconomicenvironment
andthegroup’sfutureprospectsandperformance.
Inaddition,wearerequiredtoconsidertheotherinformation
presentedintheAnnualReportincludingtheprincipalrisks
disclosureandtheviabilitystatementandtoconsiderthedirectors’
statementthattheannualreportandfinancialstatementstaken
asawholeisfair,balancedandunderstandableandprovides
theinformationnecessaryforshareholderstoassesstheGroup’s
positionandperformance,businessmodelandstrategy.
Brexitisoneofthemostsignificanteconomiceventsforthe
UKandatthedateofthisreportitseffectsaresubjectto
unprecedentedlevelsofuncertaintyofoutcomes,withthe
fullrangeofpossibleeffectsunknown.
Wedevelopedastandardisedfirm-wideapproachtothe
considerationoftheuncertaintiesarisingfromBrexitinplanning
andperformingouraudits.Ourproceduresincluded:
— OurBrexitknowledge–Weconsideredthedirectors’assessment
ofBrexit-relatedsourcesofriskfortheGroup’sbusinessand
financialresourcescomparedwithourownunderstandingofthe
risks.Weconsideredthedirectors’planstotakeactiontomitigate
therisks.
— Sensitivityanalysis–Whenaddressingthevaluationof
policyholderliabilities,valuationofinvestmentsandthe
determinationofthepensionasset(restrictedsurplus)inrespect
ofthedefinedbenefitpensionschemeandotherareasthat
dependonforecastswecomparedthedirectors’analysistoour
assessmentofthefullrangeofreasonablypossiblescenarios
resultingfromBrexituncertaintyand,whereforecastcashflows
arerequiredtobediscounted,consideredadjustmentstodiscount
ratesforthelevelofremaininguncertainty.
— Assessingtransparency–Aswellasassessingindividual
disclosuresaspartofourproceduresonvaluationofpolicyholder
liabilities,valuationofinvestmentsandthedeterminationofthe
pensionasset(restrictedsurplus)inrespectofthedefinedbenefit
pensionscheme,weconsideredalloftheBrexitrelateddisclosures
together,includingthoseinthestrategicreport,comparingthe
overallpictureagainstourunderstandingoftherisks.
Our result
Asreportedundervaluationofpolicyholderliabilities,valuationof
investmentsandthedeterminationofthepensionasset(restricted
surplus)inrespectofthedefinedbenefitpensionscheme,wefound
theresultingestimatesandrelateddisclosuresofthesemattersand
disclosuresinrelationtogoingconcerntobeacceptable.However,
noauditshouldbeexpectedtopredicttheunknowablefactorsorall
possiblefutureimplicationsforacompanyandthisisparticularlythe
caseinrelationtoBrexit.
3 Our application of materiality and
an overview of the scope of our audit
MaterialityfortheGroupfinancial
statementsasawholewassetat
£350million(2017:£350million)
determinedwithreferencetoabenchmark
ofIFRSshareholders’equity(ofwhichit
represents2percent(2017:2.2percent)).
WeconsiderIFRSshareholders’equityto
bethemostappropriatebenchmarkasit
representstheresidualinterestthatcanbe
ascribedtoshareholdersafterpolicyholder
assetsandcorrespondingliabilitieshave
beenaccountedfor;weconsiderthatthis
isthemostappropriatemeasureforthe
sizeofthebusinessandthatitprovidesa
stablemeasureyearonyear.Wecompared
ourmaterialityagainstotherrelevant
benchmarks,suchastotalassets,total
revenueandprofitbeforetaxtoensure
thematerialityselectedwasappropriate
forouraudit.
Wesetoutbelowthematerialitythresholdsthatarekeytotheaudit.
IFRS shareholders’ equity
£17.25 billion (2017: £16.09 billion)
Group materiality
£350 million (2017: £350 million)
A
A £350 million
Whole financial statements materiality
(2017: £350 million)
1
2
B
C
B £115 million
Range of materiality at 16 components
(£55 million to £115 million)
(2017: £80 million to £186 million)
C £18 million
Misstatements reported to the
Audit Committee (2017: £18 million)
1 IFRSshareholders’equity
2 Groupmateriality
336 Prudential plc AnnualReport2018
www.prudential.co.uk
Independent auditor’s report to the members of Prudential plc only continued ThesecomponentsaccountedforthefollowingpercentagesoftheGroup’sresults:
Group revenue
Group profit before tax
3%
93%
2%
92%
96%
(2017 94%)
6%
91%
10%
86%
97%
(2017 96%)
Group total assets
Group shareholders’ equity
5%
92%
5%
91%
97%
(2017 96%)
5%
89%
4%
90%
94%
(2017 94%)
FullscopeforGroupauditpurposes2018
Auditofaccountbalancesandspecifiedrisk-focusedauditprocedures2018
FullscopeforGroupauditpurposes2017
Auditofaccountbalances2017
Residualcomponents
Materialityfortheparentcompany
financialstatementsasawholewasset
at£115million(2017:£186million),
determinedwithreferencetoabenchmark
ofparentcompany’snetassets,ofwhich
itrepresents1.5percent(2017:
2.4percent).
WeagreedtoreporttotheGroupaudit
committeeanycorrectedoruncorrected
identifiedmisstatementsexceeding
£18million(2017:£18million)inaddition
tootheridentifiedmisstatementsthat
warrantreportingonqualitativegrounds.
WesubjectedtheGroup’soperations
toauditsforgroupreportingpurposes
asfollows:
Ofthe16(2017:16)reportingcomponents
scopedinfortheGroupaudit,we
subjected10(2017:10)tofullscopeaudits
forgroupreportingpurposes,5(2017:6)
toanauditofaccountbalancesand1
(2017:Nil)tospecifiedrisk-focusedaudit
procedures.Thecomponentsforwhich
weperformedworkotherthanfullscope
auditsforgroupreportingpurposeswere
notindividuallysignificantbutwere
includedinthescopeofourgroup
reportingworkastheydidpresentspecific
individualauditrisksthatneededtobe
addressedorinordertoprovidefurther
coverageovertheGroup’sresults.
Thecomponentssubjectedtofullscope
auditsincludedtheparentcompany;the
PrudentialAssuranceCompanyLimited
intheUKandtheinsuranceoperationsin
theUS,HongKong,Indonesia,Singapore,
Malaysia,ThailandandVietnam;andthe
fundmanagementoperationsofM&G.
Thecomponentssubjectedtoanaudit
ofaccountbalancesincludedPrudential
Capital,PrudentialPensionsLimited,
PrudentialLoanInvestmentFund(allbased
intheUK)andtheinsuranceoperationsin
ChinaandTaiwan.Theaccountbalances
auditedwerepolicyholderliabilities,
investmentsanddeferredacquisitioncosts.
Additionally,wesubjectedEastspring
Singaporetospecifiedrisk-focusedaudit
proceduresoverrevenue.
Fortheremainingoperations,we
performedanalysisatanaggregatedGroup
leveltore-examineourassessmentthat
therewerenosignificantrisksofmaterial
misstatementwithintheseoperations.
www.prudential.co.uk
AnnualReport2018 Prudential plc 337
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information TheGroupauditteamheldaglobal
planningconferencewithcomponent
auditorstoidentifyauditrisksanddecide
howeachcomponentteamshouldaddress
theidentifiedauditrisks.TheGroupaudit
teaminstructedcomponentauditors
astothesignificantareastobecovered,
includingtherelevantrisksdetailed
aboveandtheinformationtobereported.
TheGroupauditteamapprovedthe
componentmaterialities,whichranged
from£55millionto£115million(2017:
£80millionto£186million)acrossthe
components,havingregardtothesize
andriskprofileoftheGroupacrossthe
components.Theworkon15components
(2017:15components)wasperformed
bycomponentauditorsandworkonthe
remainingcomponent,whichwasthe
parentcompany,wasperformedbythe
Groupauditteam.
TheGroupauditteamvisitedall
componentauditorlocations.Video
andtelephoneconferencemeetingswere
alsoheldwiththesecomponentauditors.
Atthesevisitsandtelephoneconference
meetings,anassessmentwasmade
ofauditriskandstrategy,thefindings
reportedtotheGroupauditteamwere
discussedinmoredetail,keyworking
paperswereinspectedandanyfurther
workrequiredbytheGroupauditteamwas
thenperformedbythecomponentauditor.
TheSeniorStatutoryAuditor,inconjunction
withotherseniorstaffintheGroupand
componentauditteams,alsoregularly
attendedBusinessUnitauditcommittee
meetings(thesewereheldataregional
levelforAsia)andparticipatedinmeetings
withlocalcomponentstoobtainadditional
understanding,firsthand,ofthekeyrisks
andauditissuesatacomponentlevelwhich
mayaffecttheGroupfinancialstatements.
4 We have nothing to report
on going concern
TheDirectorshavepreparedthefinancial
statementsonthegoingconcernbasis
astheydonotintendtoliquidatethe
CompanyortheGrouportoceasetheir
operations,andastheyhaveconcluded
thattheCompany’sandtheGroup’s
financialpositionmeansthatthisisrealistic.
Theyhavealsoconcludedthatthereare
nomaterialuncertaintiesthatcouldhave
castsignificantdoubtovertheirability
tocontinueasagoingconcernforatleast
ayearfromthedateofapprovalof
thefinancialstatements(‘thegoing
concernperiod’).
Ourresponsibilityistoconcludeon
theappropriatenessoftheDirectors’
conclusionsand,hadtherebeenamaterial
uncertaintyrelatedtogoingconcern,to
makereferencetothatinthisauditreport.
However,aswecannotpredictallfuture
eventsorconditionsandassubsequent
eventsmayresultinoutcomesthatare
inconsistentwithjudgementsthatwere
reasonableatthetimetheyweremade,
theabsenceofreferencetoamaterial
uncertaintyinthisauditor’sreportisnot
aguaranteethattheGroupandthe
Companywillcontinueinoperation.
InourevaluationoftheDirectors’
conclusions,weconsideredtheinherent
riskstotheGroup’sandCompany’s
businessmodelandanalysedhowthose
risksmightaffecttheGroup’sand
Company’sfinancialresourcesorability
tocontinueoperationsoverthegoing
concernperiod.Therisksthatwe
consideredmostlikelytoadverselyaffect
theGroup’sandCompany’savailable
financialresourcesoverthisperiodwere:
— Adverseimpactsarisingfrom
fluctuationsornegativetrendsinthe
economicenvironmentwhichaffect
thevaluationsoftheGroup’s
investments,widercreditspreadsand
defaultsandvaluationofpolicyholder
liabilitiesduetotheimpactofthese
marketmovements;and
— Severelyadversepolicyholderlapse
orclaimsexperience.
Asthesewererisksthatcouldpotentially
castsignificantdoubtontheGroup’sand
theCompany’sabilitytocontinueasagoing
concern,weconsideredsensitivitiesover
thelevelofavailablefinancialresources
indicatedbytheGroup’sfinancialforecasts
takingaccountofreasonablypossible
(butnotunrealistic)adverseeffectsthat
couldarisefromtheserisksindividuallyand
collectivelyandevaluatedtheachievability
oftheactionstheDirectorsconsiderthey
wouldtaketoimprovethepositionshould
therisksmaterialise.Wealsoconsidered
lesspredictablebutrealisticsecondorder
impacts,suchasfailureofcounterparties
whohavetransactionswiththeGroup
(suchasbanksandreinsurers)tomeet
commitmentsthatcouldgiverisetoa
negativeimpactontheGroup’sfinancial
position,increasedilliquiditywhichalso
addstouncertaintyovertheaccessibility
offinancialresourcesandmayreduce
capitalresourcesasvaluationsdecline
andtheimpactofBrexitontheeconomic
environmentandtheresultingimpact
ontheGroup’scapitalresources.
Basedonthiswork,wearerequired
toreporttoyouif:
— Wehaveanythingmaterialtoaddor
drawattentiontoinrelationtothe
directors’statementinnoteA1tothe
financialstatementsontheuseofthe
goingconcernbasisofaccountingwith
nomaterialuncertaintiesthatmaycast
significantdoubtovertheGroupand
Company’suseofthatbasisforaperiod
ofatleastayearfromthedateof
approvalofthefinancialstatements;or
— TherelatedstatementundertheListing
Rulessetoutonpage128ismaterially
inconsistentwithourauditknowledge.
Wehavenothingtoreportinthese
respects,andwedidnotidentifygoing
concernasakeyauditmatter.
5 We have nothing to report
on the other information in the
Annual Report
Thedirectorsareresponsibleforthe
otherinformationpresentedinthe
AnnualReporttogetherwiththefinancial
statements.Ouropiniononthefinancial
statementsdoesnotcovertheother
informationand,accordingly,wedonot
expressanauditopinionor,exceptas
explicitlystatedbelow,anyformof
assuranceconclusionthereon.
Ourresponsibilityistoreadtheother
informationand,indoingso,consider
whether,basedonourfinancialstatements
auditwork,theinformationthereinis
materiallymisstatedorinconsistentwith
thefinancialstatementsorouraudit
knowledge.Basedsolelyonthatworkwe
havenotidentifiedmaterialmisstatements
intheotherinformation.
Strategic report and directors’ report
Basedsolelyonourworkontheother
information:
— wehavenotidentifiedmaterial
misstatementsinthestrategicreport
andthedirectors’report;
— inouropiniontheinformationgivenin
thosereportsforthefinancialyearis
consistentwiththefinancialstatements;
and
— inouropinionthosereportshavebeen
preparedinaccordancewiththe
CompaniesAct2006.
Directors’ remuneration report
InouropinionthepartoftheDirectors’
RemunerationReporttobeauditedhas
beenproperlypreparedinaccordance
withtheCompaniesAct2006.
338 Prudential plc AnnualReport2018
www.prudential.co.uk
Independent auditor’s report to the members of Prudential plc only continued Disclosures of principal risks
and longer-term viability
Basedontheknowledgeweacquired
duringouraudit,wehavenothingmaterial
toaddordrawattentiontoinrelationto:
— Thesectionoftheannualreport
describingtheworkoftheAudit
Committeedoesnotappropriately
addressmatterscommunicated
byustotheAuditCommittee.
— Thedirectors’confirmationwithin
theviabilitystatementonpage68,
thattheyhavecarriedoutarobust
assessmentoftheprincipalrisksfacing
theGroup,includingthosethatwould
threatenitsbusinessmodel,future
performance,solvencyandliquidity;
— Theprincipalrisksdisclosuresonpages
52to69describingtheserisksand
explaininghowtheyarebeingmanaged
andmitigated;and
— Thedirectors’explanationinthe
viabilitystatementofhowtheyhave
assessedtheprospectsoftheGroup,
overwhatperiodtheyhavedoneso
andwhytheyconsideredthatperiod
tobeappropriate,andtheirstatement
astowhethertheyhaveareasonable
expectationthattheGroupwillbeable
tocontinueinoperationandmeetits
liabilitiesastheyfalldueovertheperiod
oftheirassessment,includingany
relateddisclosuresdrawingattention
toanynecessaryqualifications
orassumptions.
UndertheListingRuleswearerequired
toreviewtheviabilitystatement.Wehave
nothingtoreportinthisrespect.
Ourworkislimitedtoassessingthese
mattersinthecontextofonlythe
knowledgeacquiredduringourfinancial
statementsaudit.Aswecannotpredict
allfutureeventsorconditionsandas
subsequenteventsmayresultinoutcomes
thatareinconsistentwithjudgementsthat
werereasonableatthetimetheywere
made,theabsenceofanythingtoreport
onthesestatementsisnotaguarantee
astotheGroup’slonger-termviability.
Corporate governance disclosures
Wearerequiredtoreporttoyouif:
— Wehaveidentifiedmaterial
inconsistenciesbetweentheknowledge
weacquiredduringourfinancial
statementsauditandthedirectors’
statementthattheyconsiderthatthe
annualreportandfinancialstatements
takenasawholeisfair,balancedand
understandableandprovidesthe
informationnecessaryforshareholders
toassesstheGroup’spositionand
performance,businessmodeland
strategy;or
Wearerequiredtoreporttoyouifthe
CorporateGovernanceStatementdoes
notproperlydiscloseadeparturefrom
the11provisionsoftheUKCorporate
GovernanceCodespecifiedbytheListing
Rulesforourreview.
Wehavenothingtoreportintheserespects.
6 We have nothing to report in
respect of the matters on which we
are required to report by exception
UndertheCompaniesAct2006weare
requiredtoreporttoyouif,inouropinion:
— Adequateaccountingrecordshavenot
beenkeptbytheparentcompany,or
returnsadequateforouraudithavenot
beenreceivedfrombranchesnotvisited
byus;or
— Theparentcompanyfinancial
statementsandthepartoftheDirectors’
RemunerationReporttobeauditedare
notinagreementwiththeaccounting
recordsandreturns;or
— Certaindisclosuresofdirectors’
remunerationspecifiedbylaware
notmade;or
— Wehavenotreceivedallthe
informationandexplanations
werequireforouraudit.
Wehavenothingtoreportintheserespects.
7 Respective responsibilities
Directors’ responsibilities
Asexplainedmorefullyintheirstatement
setoutonpage329,thedirectorsare
responsibleforthepreparationofthe
financialstatementsincludingbeing
satisfiedthattheygiveatrueandfairview.
Theyarealsoresponsiblefor:suchinternal
controlastheydetermineisnecessary
toenablethepreparationoffinancial
statementsthatarefreefrommaterial
misstatement,whetherduetofraudor
error;assessingtheGroupandparent
company’sabilitytocontinueasagoing
concern,disclosing,asapplicable,matters
relatedtogoingconcern;andusingthe
goingconcernbasisofaccountingunless
theyeitherintendtoliquidatetheGroupor
theparentcompanyortoceaseoperations,
orhavenorealisticalternativebuttodoso.
Auditor’s responsibilities
Ourobjectivesaretoobtainreasonable
assuranceaboutwhetherthefinancial
statementsasawholearefreefrom
materialmisstatement,whetherdueto
fraud,otherirregularities,orerror,andto
issueouropinioninanauditor’sreport.
Reasonableassuranceisahighlevelof
assurance,butdoesnotguaranteethatan
auditconductedinaccordancewithISAs
(UK)willalwaysdetectamaterial
misstatementwhenitexists.Misstatements
canarisefromfraud,otherirregularities
orerrorandareconsideredmaterialif,
individuallyorinaggregate,theycould
reasonablybeexpectedtoinfluencethe
economicdecisionsofuserstakenonthe
basisofthefinancialstatements.
Afullerdescriptionofourresponsibilities
isprovidedontheFRC’swebsiteat
www.frc.org.uk/auditorsresponsibilities
Irregularities – ability to detect
Weidentifiedareasoflawsandregulations
thatcouldreasonablybeexpectedtohave
amaterialeffectonthefinancialstatements
fromourgeneralcommercialandsector
experienceandthroughdiscussionwith
thedirectorsandothermanagement
(asrequiredbyauditingstandards),and
frominspectionoftheGroup’sregulatory
andlegalcorrespondenceanddiscussed
withthedirectorsandothermanagement
thepoliciesandproceduresregarding
compliancewithlawsandregulations.
Wecommunicatedidentifiedlawsand
regulationsthroughoutourteamand
remainedalerttoanyindicationsof
non-compliancethroughouttheaudit.
Thisincludedcommunicationfromthe
Grouptocomponentauditteamsof
relevantlawsandregulationsidentified
atgrouplevel.
Thepotentialeffectoftheselawsand
regulationsonthefinancialstatements
variesconsiderably.Firstly,theGroupis
subjecttolawsandregulationsthatdirectly
affectthefinancialstatementsincluding
financialreportinglegislation(including
relatedcompanieslegislation),distributable
profitslegislationandtaxationlegislation
andweassessedtheextentofcompliance
withtheselawsandregulationsaspart
ofourproceduresontherelatedfinancial
statementitems.
www.prudential.co.uk
AnnualReport2018 Prudential plc 339
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 8 The purpose of our audit work and
to whom we owe our responsibilities
ThisreportismadesolelytotheCompany’s
members,asabody,inaccordancewith
Chapter3ofPart16oftheCompaniesAct
2006.Ourauditworkhasbeenundertaken
sothatwemightstatetotheCompany’s
membersthosematterswearerequired
tostatetotheminanauditor’sreportand
fornootherpurpose.Tothefullestextent
permittedbylaw,wedonotacceptor
assumeresponsibilitytoanyoneother
thantheCompanyandtheCompany’s
members,asabody,forourauditwork,
forthisreport,orfortheopinionswe
haveformed.
Philip Smart
Senior Statutory Auditor
ForandonbehalfofKPMGLLP,
StatutoryAuditor
CharteredAccountants
London
12March2019
Secondly,theGroupissubjecttomany
otherlawsandregulationswherethe
consequencesofnon-compliancecould
haveamaterialeffectonamountsor
disclosuresinthefinancialstatements,
forinstancethroughtheimpositionoffines
orlitigationorthelossoftheGroup’s
licencetooperate.Weidentifiedtheareaof
regulatorycapitalasthatmostlikelytohave
suchaneffectrecognisingthefinancialand
regulatednatureoftheGroup’sactivities.
Auditingstandardslimittherequiredaudit
procedurestoidentifynon-compliance
withtheselawsandregulationstoenquiry
ofthedirectorsandothermanagement
andinspectionofregulatoryandlegal
correspondence,ifany.Theselimited
proceduresdidnotidentifyactualor
suspectednon-compliance.
Owingtotheinherentlimitationsofan
audit,thereisanunavoidableriskthat
wemaynothavedetectedsomematerial
misstatementsinthefinancialstatements,
eventhoughwehaveproperlyplanned
andperformedourauditinaccordance
withauditingstandards.Forexample,
thefurtherremovednon-compliancewith
lawsandregulationsisfromtheevents
andtransactionsreflectedinthefinancial
statements,thelesslikelytheinherently
limitedproceduresrequiredbyauditing
standardswouldidentifyit.Inaddition,
aswithanyaudit,thereremainedahigher
riskofnon-detectionofirregularities,
asthesemayinvolvecollusion,forgery,
intentionalomissions,misrepresentations,
ortheoverrideofinternalcontrols.
Wearenotresponsibleforpreventing
non-complianceandcannotbeexpected
todetectnon-compliancewithalllaws
andregulations.
340 Prudential plc AnnualReport2018
www.prudential.co.uk
Independent auditor’s report to the members of Prudential plc only continued 06
European Embedded Value
(EEV) basis results
Index to EEV basis results
Page
342
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www.prudential.co.uk
AnnualReport2018 Prudential plc 341
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Index to European Embedded Value (EEV)
basis results
Post-taxoperatingprofitbasedonlonger-terminvestmentreturns
Post-taxsummarisedconsolidatedincomestatement
Movementinshareholders’equity
Summarystatementoffinancialposition
Notes on the EEV basis results
1
2
Basisofpreparation
Resultsanalysisbybusinessarea
3 Analysisofnewbusinesscontribution
4 Operatingprofitfrombusinessinforce
5
6
Short-termfluctuationsininvestmentreturns
Effectofchangesineconomicassumptions
7 Netcorestructuralborrowingsofshareholder-financedbusinesses
8
9
Reconciliationofmovementinshareholders’equity
Analysisofmovementinnetworthandvalueofin-forceforlong-termbusiness
10 Analysisofmovementinfreesurplus
11 Expectedtransferofvalueofin-forcebusinessandrequiredcapitaltofreesurplus
12 Sensitivityofresultstoalternativeassumptions
13 Methodologyandaccountingpresentation
14 Assumptions
15 Insurancenewbusinesspremiums
16 ImpactofUStaxreform
17 Corporatetransactions
18 Postbalancesheetevents
StatementofDirectors’responsibilities
Auditor’sreport
Page
343
344
345
346
347
347
348
349
351
352
353
354
356
358
361
361
363
369
373
374
374
374
375
376
Description of EEV basis reporting
Inbroadterms,IFRSprofitforlong-termbusinessreflectstheaggregateofresultsonatraditionalaccountingbasis.
Bycontrast,EEVisawayofreportingthevalueofthelifeinsurancebusiness.
TheEEVbasisresultshavebeenpreparedinaccordancewiththeEEVPrinciplesdatedApril2016,issuedbytheEuropeanInsurance
CFOForum.TheEEVPrinciplesprovideconsistentdefinitions,aframeworkforsettingactuarialassumptions,andanapproachtothe
underlyingmethodologyanddisclosures.
ResultspreparedundertheEEVPrinciplescapturethediscountedvalueoffutureprofitsexpectedtoarisefromthecurrentbookof
long-termbusiness.Theresultsarepreparedbyprojectingcashflows,byproduct,usingbestestimateassumptionsforallrelevant
factors.Furthermore,indeterminingtheseexpectedprofits,fullallowanceismadefortherisksattachedtotheiremergenceandthe
associatedcostofcapital,takingintoaccountrecentexperienceinassessinglikelyfuturepersistency,mortality,morbidityandexpenses.
Furtherdetailsareexplainedinnotes13and14.
342 Prudential plc AnnualReport2018
www.prudential.co.uk
European Embedded Value (EEV) basis results
Post-tax operating profit based on longer-term investment returns
Asia operations
Newbusiness
Businessinforce
Long-termbusiness
Assetmanagement
Total
US operations
Newbusiness
Businessinforce
Long-termbusiness
Assetmanagement
Total
UK and Europe operations
Newbusiness
Businessinforce
Long-termbusiness
Generalinsurancecommission
Totalinsuranceoperations
Assetmanagement
Total
Otherincomeandexpenditure note (i)
Restructuringcosts note (ii)
Operating profit based on longer-term investment returns
Analysed as profit (loss) from:
Newbusiness
Businessinforce
Long-termbusiness
Assetmanagementandgeneralinsurancecommission
Otherresults
Note
2018 £m
2017 £m
note(iii)
3
4
3
4
3
4
3
4
2,604
1,783
4,387
159
4,546
921
1,194
2,115
3
2,118
352
1,022
1,374
15
1,389
392
1,781
(726)
(156)
7,563
3,877
3,999
7,876
569
(882)
7,563
2,368
1,337
3,705
155
3,860
906
1,237
2,143
7
2,150
342
673
1,015
13
1,028
403
1,431
(746)
(97)
6,598
3,616
3,247
6,863
578
(843)
6,598
Notes
(i)
(ii)
(iii)
EEVbasisotherincomeandexpenditurerepresentsthepost-taxIFRSbasisresultsforotheroperations(includingGroupandAsiaRegionalHeadOffice,holdingcompany
borrowings,AfricaoperationsandPrudentialCapital)lesstheunwindofexpectedmarginsontheinternalmanagementoftheassetsofthecoveredbusiness(asexplained
innote13(i)(g)).
Restructuringcostscomprisethepost-taxchargerecognisedonanIFRSbasisandtheadditionalamountrecognisedonanEEVbasisfortheshareholders’shareincurredby
thewith-profitsfunds,representingthecostofbusinesstransformationandintegration.
Thecomparativeresultshavebeenpreparedusingpreviouslyreportedaverageexchangeratesfortheyear.
www.prudential.co.uk
AnnualReport2018 Prudential plc 343
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information European Embedded Value (EEV) basis results continued
Post-tax summarised consolidated income statement
Asiaoperations
USoperations
UKandEuropeoperations
Otherincomeandexpenditure
Restructuringcosts
Operating profit based on longer-term investment returns
Short-termfluctuationsininvestmentreturns
Effectofchangesineconomicassumptions
Marktomarketvaluemovementsoncorestructuralborrowings
ImpactofUStaxreform
(Loss)profitattachingtocorporatetransactions
Totalnon-operating(loss)profit
Profit for the year
Attributableto:
EquityholdersoftheCompany
Non-controllinginterests
Basic earnings per share
Basedonpost-taxoperatingprofitincludinglonger-terminvestmentreturnsafternon-controllinginterests
(inpence)
Basedonpost-taxprofitattributabletoequityholdersoftheCompany(inpence)
Weightedaveragenumberofshares(millions)
Note
2018 £m
2017 £m
5
6
16
17
4,546
2,118
1,781
(726)
(156)
7,563
(3,219)
146
549
–
(451)
(2,975)
4,588
4,585
3
4,588
3,860
2,150
1,431
(746)
(97)
6,598
2,111
(102)
(326)
390
80
2,153
8,751
8,750
1
8,751
2018
2017
293.6p
178.1p
2,575
257.0p
340.9p
2,567
344 Prudential plc AnnualReport2018
www.prudential.co.uk
Movement in shareholders’ equity
ProfitfortheyearattributabletoequityholdersoftheCompany
Itemstakendirectlytoequity:
Exchangemovementsonforeignoperationsandnetinvestmenthedges
Externaldividends
MarktomarketvaluemovementsonJacksonassetsbackingsurplusandrequiredcapital
Otherreservemovements
Netincreaseinshareholders’equity
Shareholders’equityatbeginningofyear
Shareholders’ equity at end of year
Comprising:
Asiaoperations
USoperations
UKandEuropeoperations
Otheroperations
Shareholders’ equity at end of year
Note
2018 £m
2017 £m
4,585
8,750
1,706
(1,244)
(95)
132
5,084
44,698
49,782
8
8
8
(2,045)
(1,159)
40
144
5,730
38,968
44,698
Group
total
21,592
13,492
13,627
(4,013)
31 Dec 2018 £m
31 Dec 2017 £m
Long-term
business
operations
Asset
management
and other
operations
Long-term
business
operations
Asset
management
and other
operations
Group
total
25,132
14,690
13,584
(3,624)
552
40
2,175
(3,624)
24,580
14,650
11,409
–
50,639
21,191
13,257
11,713
–
46,161
401
235
1,914
(4,013)
(857)
49,782
(1,463)
44,698
Representing:
NetassetsattributabletoequityholdersoftheCompany
excludingacquiredgoodwill,holdingcompanynet
borrowingsandnon-controllinginterests
Acquiredgoodwill*
Holdingcompanynetborrowingsatmarketvalue note 7
50,388
251
–
50,639
2,105
1,400
(4,362)
52,493
1,651
(4,362)
(857)
49,782
45,917
244
–
46,161
1,562
1,214
(4,239)
47,479
1,458
(4,239)
(1,463)
44,698
*Acquiredgoodwillforassetmanagementandotheroperationsfor2018includesgoodwillrecognisedonacquisitionofTMBAssetManagementCo.,Ltd.asdiscussedinnoteD1.2ofthe
IFRSstatements.
www.prudential.co.uk
AnnualReport2018 Prudential plc 345
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information European Embedded Value (EEV) basis results continued
Summary statement of financial position
Total assets less liabilities, before deduction of insurance funds*
Lessinsurancefunds:
Policyholderliabilities(netofreinsurers’share)andunallocatedsurplusofwith-profitsfunds
Lessshareholders’accruedinterestinthelong-termbusiness
Lessnon-controllinginterests
Total net assets attributable to equity holders of the Company
Sharecapital
Sharepremium
IFRSbasisshareholders’reserves
TotalIFRSbasisshareholders’equity
AdditionalEEVbasisretainedprofit
Total EEV basis shareholders’ equity
*IncludingliabilitiesinrespectofinsuranceproductsclassifiedasinvestmentcontractsunderIFRS4.
Net asset value per share
Note
31 Dec 2018
£m
31 Dec 2017
£m
431,269
434,615
(414,002)
32,533
(381,469)
(18)
(418,521)
28,611
(389,910)
(7)
49,782
44,698
130
1,964
15,155
17,249
32,533
49,782
129
1,948
14,010
16,087
28,611
44,698
8
8
8
8
8
BasedonEEVbasisshareholders’equityof£49,782million(31December2017:£44,698million)(inpence)
Numberofissuedsharesatyearend(millions)
1,920p
2,593
1,728p
2,587
31 Dec 2018
31 Dec 2017
Annualised return on embedded value*
17%
17%
*AnnualisedreturnonembeddedvalueisbasedonEEVpost-taxoperatingprofitafternon-controllinginterests,asapercentageofopeningEEVbasisshareholders’equity.
Thesupplementaryinformationonpages343to374wasapprovedbytheBoardofDirectorson12March2019.
Paul Manduca
Chairman
Mike Wells
Group Chief Executive
Mark FitzPatrick
Chief Financial Officer
346 Prudential plc AnnualReport2018
www.prudential.co.uk
Notes on the EEV basis results
1 Basis of preparation
TheEEVbasisresultshavebeenpreparedinaccordancewiththeEEVPrinciplesdatedApril2016,issuedbytheEuropeanInsurance
CFOForum.Whereappropriate,theEEVbasisresultsincludetheeffectsofadoptionofEU-endorsedIFRS.
ThedirectorsareresponsibleforthepreparationofthesupplementaryinformationinaccordancewiththeEEVPrinciples.The2017
resultshavebeenderivedfromtheEEVbasisresultssupplementtotheCompany’sstatutoryaccountsfor2017.
AdetaileddescriptionoftheEEVmethodologyandaccountingpresentationisprovidedinnote13.
2 Results analysis by business area
The2017comparativeresultsareshownbelowonbothactualexchangerates(AER)andconstantexchangerates(CER)bases.The2017
CERcomparativeresultsaretranslatedat2018averageexchangerates.
Annual premium equivalents (APE) note 15
Asia
US
UKandEurope
Group total
Post-tax operating profit
Asia operations
Newbusiness
Businessinforce
Long-termbusiness
Assetmanagement
Total
US operations
Newbusiness
Businessinforce
Long-termbusiness
Assetmanagement
Total
UK and Europe operations
Newbusiness
Businessinforce
Long-termbusiness
Generalinsurancecommission*
Totalinsuranceoperations
Assetmanagement
Total
Otherincomeandexpenditure
Restructuringcosts
2018 £m
2017 £m
% change
Note
3
3,744
1,542
1,516
6,802
AER
3,805
1,662
1,491
6,958
CER
3,671
1,605
1,491
6,767
AER
(2)%
(7)%
2%
(2)%
2018 £m
2017 £m
% change
Note
AER
CER
AER
3
4
3
4
3
4
2,604
1,783
4,387
159
4,546
921
1,194
2,115
3
2,118
352
1,022
1,374
15
1,389
392
1,781
(726)
(156)
2,368
1,337
3,705
155
3,860
906
1,237
2,143
7
2,150
342
673
1,015
13
1,028
403
1,431
(746)
(97)
2,282
1,280
3,562
150
3,712
874
1,195
2,069
7
2,076
342
673
1,015
13
1,028
403
1,431
(740)
(97)
10%
33%
18%
3%
18%
2%
(3)%
(1)%
(57)%
(1)%
3%
52%
35%
15%
35%
(3)%
24%
3%
(61)%
CER
2%
(4)%
2%
1%
CER
14%
39%
23%
6%
22%
5%
0%
2%
(57)%
2%
3%
52%
35%
15%
35%
(3)%
24%
2%
(61)%
Operating profit based on longer-term
investment returns
7,563
6,598
6,382
15%
19%
www.prudential.co.uk
AnnualReport2018 Prudential plc 347
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the EEV basis results continued
2 Results analysis by business area continued
Analysed as profit (loss) from:
Newbusiness
Businessinforce
Totallong-termbusiness
Assetmanagementandgeneralinsurance
commission
Otherresults
Note
3
4
2018 £m
2017 £m
% change
AER
CER
AER
CER
3,877
3,999
7,876
569
(882)
7,563
3,616
3,247
6,863
578
(843)
6,598
3,498
3,148
6,646
573
(837)
6,382
7%
23%
15%
(2)%
(5)%
15%
11%
27%
19%
(1)%
(5)%
19%
*Themajorityofthegeneralinsurancecommissionisnotexpectedtorecurinfutureyears.
Post-tax profit
Operatingprofitbasedonlonger-term
investmentreturns
Short-termfluctuationsininvestmentreturns
Effectofchangesineconomicassumptions
Marktomarketvaluemovementsoncore
structuralborrowings
ImpactofUStaxreform
(Loss)profitattachingtocorporatetransactions
Totalnon-operating(loss)profit
Profit for the year
Basic earnings per share
Basedonpost-taxoperatingprofitincluding
longer-terminvestmentreturnsafter
non-controllinginterests(inpence)
Basedonpost-taxprofitattributabletoequity
holdersoftheCompany(inpence)
2018 £m
2017 £m
% change
Note
AER
CER
AER
CER
5
6
16
17
7,563
(3,219)
146
549
–
(451)
(2,975)
4,588
6,598
2,111
(102)
(326)
390
80
2,153
8,751
6,382
2,057
(91)
(326)
376
77
2,093
8,475
15%
19%
(48)%
(46)%
2018
2017
% change
AER
CER
AER
CER
293.6p
257.0p
248.6p
14%
18%
178.1p
340.9p
330.2p
(48)%
(46)%
3 Analysis of new business contribution
(i) Group summary for long-term business operations
Asia note (ii)
US
UKandEurope
Total
2018
Annual
premium
equivalents
(APE)
note15
£m
Present value
of new
business
premiums
(PVNBP)
note15
£m
3,744
1,542
1,516
6,802
20,754
15,423
14,073
50,250
New business
contribution
New business margin
APE
PVNBP
£m
2,604
921
352
3,877
%
70
60
23
57
%
12.5
6.0
2.5
7.7
348 Prudential plc AnnualReport2018
www.prudential.co.uk
Asia note (ii)
US
UKandEurope
Total
2017
Annual
premium
equivalents
(APE)
note15
£m
Present value
of new
business
premiums
(PVNBP)
note15
£m
3,805
1,662
1,491
6,958
20,405
16,622
13,784
50,811
New business
contribution
New business margin
APE
PVNBP
£m
2,368
906
342
3,616
%
62
55
23
52
%
11.6
5.5
2.5
7.1
Note
Afterallowingforforeignexchangeeffectsof£(118)million,thenewbusinesscontributionhasincreasedby£379milliononaCERbasis.Theincreaseisdrivenbyabeneficialeffectof
pricing,productmixandotheractionsof£278millionreflectingourstrategicemphasisonincreasingsalesfromhealthandprotectionbusinessinAsia,togetherwithchangesinlong-term
interestratesandothereconomicassumptions(£83million)andhighersalesvolumes(acontributionof£18million).
(ii) Asia new business contribution by business unit
China
HongKong
Indonesia
Taiwan
Other
Total
4 Operating profit from business in force
(i) Group summary for long-term business operations
Unwindofdiscountandotherexpectedreturns
Effectofchangesinoperatingassumptions
Experiencevariancesandotheritems
Grouptotal
Unwindofdiscountandotherexpectedreturns
Effectofchangesinoperatingassumptions
Experiencevariancesandotheritems
Grouptotal
2018 £m
2017 £m
149
1,729
122
46
558
2,604
AER
133
1,535
174
57
469
2,368
2018 £m
US
note(iii)
881
115
198
UK and
Europe
note(iv)
474
330
218
1,194
1,022
2017 £m
US
note(iii)
694
196
347
1,237
UK and
Europe
note(iv)
465
195
13
673
Asia
note(ii)
1,218
342
223
1,783
Asia
note(ii)
1,007
241
89
1,337
Note
Themovementinoperatingprofitfrombusinessinforceof£752millionfrom£3,247millionfor2017to£3,999millionfor2018comprises:
Movementinunwindofdiscountandotherexpectedreturns:
Growthinopeningvalueofin-forcebusiness
Effectofinterestratesandothereconomicassumptions
Foreignexchangemovements
Movementineffectofchangesinoperatingassumptions,experiencevariancesandotheritems
Netmovementinoperatingprofitfrombusinessinforce
CER
131
1,474
158
56
463
2,282
Group
Total
2,573
787
639
3,999
Group
Total
2,166
632
449
3,247
£m
368
101
(62)
407
345
752
www.prudential.co.uk
AnnualReport2018 Prudential plc 349
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the EEV basis results continued
4 Operating profit from business in force continued
(ii) Asia
Unwindofdiscountandotherexpectedreturns note (a)
Effectofchangesinoperatingassumptions note (b)
Experiencevariancesandotheritems note (c)
Total
2018 £m
2017 £m
1,218
342
223
1,783
1,007
241
89
1,337
Notes
(a)
(b)
(c)
The£211millionincreaseinunwindofdiscountandotherexpectedreturnsfrom£1,007millionin2017to£1,218millionin2018isprimarilydrivenbythegrowthinthein-force
bookandapositive£51millionimpactfrommovementsinlong-terminterestratesandothereconomicassumptions,partiallyoffsetbyanegativeeffectofforeignexchange
movementsof£(38)million.
Theeffectsofchangesinoperatingassumptionsof£342millionreflectstheoutcomefromtheannualreviewofpersistency,claimsandexpenseexperiencetogetherwiththe
benefitofmedicalrepricingmanagementactions.Italsoreflectsprofitsarisingafterreflectionofanumberoftaxchangesacrossanumberofcountries.
The£223millioneffectofexperiencevariancesandotheritemsin2018isdrivenbypositivemortalityandmorbidityexperiencesinanumberoflocalbusinessunits,together
withpositivepersistencyvariancesfromparticipatingandhealthandprotectionproducts.
(iii) US
Unwindofdiscountandotherexpectedreturns note (a)
Effectofchangesinoperatingassumptions note (b)
Experiencevariancesandotheritems:
Spreadexperiencevariance
Amortisationofinterest-relatedrealisedgainsandlosses
Other note (c)
Total
2018 £m
2017 £m
881
115
39
92
67
198
694
196
71
91
185
347
1,194
1,237
Notes
(a)
The£187millionincreaseinunwindofdiscountandotherexpectedreturnsfrom£694millionin2017to£881millionin2018reflectspriorperiodgrowthinthein-forcebook,
a£30millionbenefitfroma30basispointincreaseintheUS10-yeartreasuryyieldintheyearoffsetbya£(24)millionnegativeeffectforforeignexchangemovements.
Theeffectofoperatingassumptionchangesof£115million(2017:£196)millionmainlyrelatestoroutineupdatesforpersistencyandpolicyholderutilisation.
(b)
(c) Otherexperiencevariancesof£198millionincludetheeffectsofpositivemortalityandpersistencyexperienceintheyear.
(iv) UK and Europe
Unwindofdiscountandotherexpectedreturns note (a)
Changeinlongevityassumptionbasis note (b)
Otheritems note (c)
Total
2018 £m
2017 £m
474
330
218
1,022
465
195
13
673
Notes
(a)
(b)
Unwindofdiscountandexpectedreturnsfor2018isbroadlyconsistentwith2017andreflectsthebenefitfroma10basispointincreaseinthe15-yearswapyieldsoffsetbythe
impactfromthereinsuranceofpartofitsshareholderannuityportfoliotoRothesayLifeasdiscussedinnote17.
Thecreditof£330million(2017:£195million)relatestochangestoannuitantmortalityassumptionstoreflectcurrentmortalityexperience,whichhasshownaslowdowninlife
expectancyimprovementsinrecentperiods,andtheadoptionoftheContinuousMortalityInvestigation(CMI)2016model(2017:CMI2015)modelasthebasisforfuture
mortalityimprovements.
(c) Otheritemscomprisethefollowing:
Longevityreinsurance
Impactofspecificmanagementactionstoimprovesolvencyposition
Provisionforcostofundertakingpastnon-advisedannuitysalesreviewandrelatedredress note (d)
Insurancerecoveriesinrespectoftheabovecosts note (d)
Provisionforguaranteedminimumpensionequalisation note (e)
Other
2018 £m
2017 £m
–
141
–
138
(48)
(13)
218
(6)
127
(187)
–
–
79
13
(d)
(e)
TheUKbusinesshasagreedwiththeFinancialConductAuthority(FCA)toreviewannuitiessoldwithoutadviceafter1July2008toitscontract-baseddefinedcontribution
pensioncustomers.Agrossprovisionof£(330)million,post-taxandbeforecostsincurred,wasestablishedat31December2017,ofwhich£(187)millionwaschargedinfullyear
2017.During2018,theGroupagreedwithitsprofessionalindemnityinsurersthattheywillmeet£166millionoftheGroup’sclaimscosts,whichwillbepaidastheGroupincurs
costs/redress.ThishasbeenrecognisedontheGroupbalancesheetat31December2018andapost-taxcreditof£138millionisrecognisedintheEEVoperatingprofit.Formore
details,refertonoteC11oftheIFRSfinancialstatements.
AnallowancehasbeenmadeforhigherliabilitiesthatmayarisewhenapplyingtherecentHighCourtdecisiontoequaliseguaranteedminimumpension(GMP)benefitsbetween
malesandfemalesforcertainpensionproductssoldbytheUKbusiness.
350 Prudential plc AnnualReport2018
www.prudential.co.uk
5 Short-term fluctuations in investment returns
(i) Group summary
Asiaoperations note (ii)
USoperations note (iii)
UKandEuropeoperations note (iv)
Otheroperations
Grouptotal
(ii) Asia operations
HongKong
Singapore
Other
Total
2018 £m
2017 £m
(1,029)
(1,481)
(721)
12
(3,219)
887
582
621
21
2,111
2018 £m
2017 £m
(552)
(233)
(244)
(1,029)
531
126
230
887
Note
For2018,thechargeof£(1,029)millionmainlyrepresentsthereductionofbondandequityvaluesinHongKongandlowerthanexpectedinvestmentreturnsonparticipatingand
unit-linkedbusinessinIndonesia,SingaporeandMalaysia.
(iii) US operations
Investmentreturnrelatedexperienceonfixedincomesecurities note (a)
Investmentreturnrelatedimpactduetochangedexpectationofprofitsonin-force
variableannuitybusinessinfutureperiodsbasedoncurrentyear
separateaccountreturn,netofrelatedhedgingactivityandotheritems note (b)
Total
2018 £m
2017 £m
60
(46)
(1,541)
(1,481)
628
582
Notes
(a)
(b)
Thenetresultrelatingtofixedincomesecuritiesreflectsanumberofoffsettingitemsasfollows:
– Theimpactonportfolioyieldsofchangesintheassetportfoliointheyear;
– Thedifferencebetweenactualrealisedgainsandlossesandtheamortisationofinterest-relatedrealisedgainsandlossesthatisrecordedwithinoperatingprofit;and
– Creditexperience(versusthelonger-termassumption).
Thisitemreflectsthenetimpactof:
– Changesinprojectedfuturefeesandfuturebenefitcostsarisingfromthedifferencebetweentheactualgrowthinseparateaccountassetvaluesofnegative(5.4)percentand
thatassumedof6.2percent(2017:actualgrowthof17.5percentcomparedtoassumedgrowthof5.9percent);and
– Relatedhedgingactivityarisingfromrealisedandunrealisedgainsandlossesonequity-relatedhedgesandinterestrateoptions,andotheritems.
(iv) UK and Europe operations
Insuranceoperations:
Shareholder-backedannuitybusiness
With-profitsandotherbusiness
Assetmanagement
Total
2018 £m
2017 £m
(151)
(557)
(13)
(721)
387
229
5
621
Note
The£(721)millionfluctuationin2018primarilyrepresentstheimpactofachievinga(2.5)percentpre-taxreturnonthewith-profitsfund(includingunallocatedsurplus)comparedto
theassumedrateofreturnof4.2percent(2017:achievedreturnof9percentcomparedtoassumedrateof5percent),partiallyoffsetbytheeffectofapartialhedgeoffutureshareholder
transfersexpectedtoemergefromtheUK’swith-profitssub-fundenteredintotoprotectfutureshareholderwith-profittransfersfrommovementsintheUKequitymarket.Italsoreflects
lossesoncorporatebondsbackingshareholderannuitybusiness,reflectingchangestointerestratesandcreditspreadsovertheperiod.
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AnnualReport2018 Prudential plc 351
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the EEV basis results continued
6 Effect of changes in economic assumptions
(i) Group summary for long-term business operations
Asia note (ii)
US note (iii)
UKandEurope note (iv)
Grouptotal
(ii) Asia
HongKong
Indonesia
Malaysia
Singapore
Other
Total
2018 £m
2017 £m
115
197
(166)
146
(95)
(136)
129
(102)
2018 £m
2017 £m
165
(94)
(19)
70
(7)
115
(321)
81
59
131
(45)
(95)
Note
Thepositiveeffectin2018of£115millionlargelyarisesfrommovementsinlong-terminterestrates,resultinginhigherassumedfundearnedratesinHongKongandSingapore,partially
offsetbytheimpactofvaluingfutureprofitsforhealthandprotectionbusinessathigherdiscountratesinIndonesiaandMalaysia.
(iii) US
Variableannuitybusiness
Fixedannuityandothergeneralaccountbusiness
Total
2018 £m
2017 £m
365
(168)
197
(101)
(35)
(136)
Note
For2018,thecreditof£197millionmainlyreflectstheincreaseintheassumedseparateaccountreturnfollowingthe30basispointsincreaseintheUS10-yeartreasuryyieldovertheyear,
resultinginhigherprojectedfeeincomeandadecreaseinprojectedbenefitcostsforvariableannuitybusiness.Forfixedannuityandothergeneralaccountbusiness,theimpactreflects
theeffectonthepresentvalueoffutureprojectedspreadincomefromthecombinedincreaseininterestratesandcreditspreadsintheyear.InJune2018,theNationalAssociationof
InsuranceCommissioners(NAIC)formallyapprovedchangestoRBCcapitalfactorsthatreflectedtheDecember2017UStaxreform.Consequently,theeffectofchangesineconomic
assumptionsfor2018of£197millionincludesanegative£(23)millionimpactresultingfromthesechanges.
(iv) UK and Europe
Shareholder-backedannuitybusiness
With-profitsandotherbusiness
Total
2018 £m
2017 £m
1
(167)
(166)
28
101
129
Note
Thechargeof£(166)millionincludestheimpactofthemovementinexpectedlong-termratesofinvestmentreturn,resultingfrommarketmovementsandchangesintheassetmixinthe
year,andriskdiscountrates.Inaddition,theeffectofchangesineconomicassumptionsforwith-profitsandotherbusinessof£(167)millionincludesa£(78)millionchargefortheeffect
onlowerfundearnedratesonequitiesandpropertyasaresultofthechangeinUKindexationofcapitalgainsruleseffectivefrom1January2018.
352 Prudential plc AnnualReport2018
www.prudential.co.uk
7 Net core structural borrowings of shareholder-financed businesses
Holdingcompany(includingcentralfinance
subsidiaries)cashandshort-term
investments
Centralfunds
Subordinateddebt
Seniordebt
Bankloan
Holdingcompanynetborrowings
PrudentialCapitalbankloan
Jacksonsurplusnotes
Grouptotal
31 Dec 2018 £m
Mark to
market
value
adjustment
IFRS
basis
EEV
basis at
market
value
31 Dec 2017 £m
Mark to
market
value
adjustment
IFRS
basis
(3,236)
–
(3,236)
(2,264)
6,676
517
7,193
275
4,232
–
196
4,428
(44)
174
130
–
130
–
53
183
6,632
691
7,323
275
4,362
–
249
4,611
5,272
549
5,821
–
3,557
275
184
4,016
–
515
167
682
–
682
–
61
743
EEV
basis at
market
value
(2,264)
5,787
716
6,503
–
4,239
275
245
4,759
Note
InOctober2018,theCompanyissuedthreetranchesofsubstitutablecorestructuralborrowingsaspartoftheprocessrequiredbeforedemerger,torebalancedebtacross
M&GPrudentialandPrudentialplc.Totalproceeds,netofcosts,were£1,630million.InDecember2018,theCompanypaid£434milliontoredeemitsUS$550million7.75percentTier1
perpetualsubordinatednotes.ThemovementinthevalueofcorestructuralborrowingsalsoincludesforeignexchangeeffectsforUSdollardenominateddebts.Formoredetailsonthe
corestructuralborrowings,refertonoteC6.1oftheIFRSfinancialstatement.
www.prudential.co.uk
AnnualReport2018 Prudential plc 353
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the EEV basis results continued
8 Reconciliation of movement in shareholders’ equity
Long-termbusiness:
Newbusiness note 3
Businessinforce note 4
Assetmanagementandgeneralinsurancecommission
Restructuringcosts
Otherresults
Operating profit based on longer-term
investment returns
Non-operatingitems
Non-controllinginterests
Profit for the year attributable to equity holders
of the Company
Other items taken directly to equity:
Exchangemovementsonforeignoperationsandnet
investmenthedges
Intra-groupdividendsandinvestmentinoperations note (ii)
Externaldividends
MarktomarketvaluemovementsonJacksonassetsbacking
surplusandrequiredcapital
Othermovements note (iii)
Net increase in shareholders’ equity
Shareholders’equityatbeginningofyear
Shareholders’ equity at end of year
Representing:
IFRSbasisshareholders’equity:
Netassets(liabilities)
Goodwill
IFRSbasisshareholders’equity
Additionalretainedprofit(loss)onanEEVbasis
EEVbasisshareholders’equity
Balanceatbeginningofyear:
IFRSbasisshareholders’equity:
Netassets(liabilities)
Goodwill
IFRSbasisshareholders’equity
Additionalretainedprofit(loss)onanEEVbasis
EEVbasisshareholders’equity
Asia
operations
note(i)
US
operations
2018 £m
UK and
Europe
operations
Other
operations
note(i)
2,604
1,783
4,387
159
(19)
–
4,527
(925)
(1)
921
1,194
2,115
3
(17)
–
2,101
(1,313)
–
352
1,022
1,374
407
(109)
–
1,672
(1,263)
–
–
–
–
–
(11)
(726)
(737)
526
(2)
Group
total
note(iv)
3,877
3,999
7,876
569
(156)
(726)
7,563
(2,975)
(3)
3,601
788
409
(213)
4,585
1,028
(1,177)
–
–
81
3,533
21,348
24,881
5,921
247
6,168
18,713
24,881
5,620
61
5,681
15,667
21,348
862
(337)
–
(95)
(20)
1,198
13,492
14,690
–
(447)
–
–
(5)
(43)
13,627
13,584
5,624
–
5,624
9,066
7,547
1,153
8,700
4,884
14,690
13,584
5,248
–
5,248
8,244
7,092
1,153
8,245
5,382
13,492
13,627
(184)
1,961
(1,244)
–
76
396
(3,769)
(3,373)
(3,494)
251
(3,243)
(130)
(3,373)
(3,331)
244
(3,087)
(682)
(3,769)
1,706
–
(1,244)
(95)
132
5,084
44,698
49,782
15,598
1,651
17,249
32,533
49,782
14,629
1,458
16,087
28,611
44,698
354 Prudential plc AnnualReport2018
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Notes
(i)
(ii)
Otheroperationsof£(3,373)millionrepresentstheshareholders’equityof£(3,624)millionasshowninthemovementinshareholders’equityandincludesgoodwillof£251million
(2017:£244million)relatedtoAsialong-termoperations.
Intra-groupdividendsrepresentdividendsthathavebeendeclaredintheyearandinvestmentinoperationsreflectmovementsinsharecapital.Theamountsincludedforthese
itemsintheanalysisofmovementinfreesurplus(note10)areaspertheholdingcompanycashflowattransactionrates.Thedifferenceprimarilyrelatestointra-grouploans,
foreignexchangeandothernon-cashitems.
(iii) Othermovementsincludereservemovementsinrespectoftheshareholders’shareofactuarialgainsandlossesondefinedbenefitpensionschemes,sharecapitalsubscribed,
share-basedpaymentsandtreasurysharesandintra-grouptransfersbetweenoperationswhichhavenooveralleffectontheGroup’sembeddedvalue.Alsoincludedistheput
optionrecognisedonacquisitionofTMBAssetManagementCo.,Ltd.asdiscussedinnoteD1.2oftheIFRSfinancialstatements.
(iv) GrouptotalEEVbasisshareholders’equitycanbefurtheranalysedasfollows:
31 Dec 2018 £m
31 Dec 2017 £m
Asset
management
and general
insurance
commission
Total
long-term
business
operations
note9
Other
operations
note(v)
Group
total
Asset
management
and general
insurance
commission
Total
long-term
business
operations
note9
Other
operations
note(v)
Group
total
17,725
2,767
(3,243)
17,249
16,624
2,550
(3,087)
16,087
32,663
50,388
–
(130)
2,767
(3,373)
32,533
49,782
29,293
45,917
–
2,550
(682)
(3,769)
28,611
44,698
IFRSbasisshareholders’equity
Additionalretainedprofit(loss)onan
EEVbasis note (v)
EEVbasisshareholders’equity
(v)
TheadditionalretainedlossonanEEVbasisforotheroperationsrepresentsthemarktomarketvalueadjustmentforholdingcompanynetborrowingsofacumulativechargeof
£(130)million(31December2017:£(682)million)asshowninnote7.
www.prudential.co.uk
AnnualReport2018 Prudential plc 355
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the EEV basis results continued
9 Analysis of movement in net worth and value of in-force for long-term business
Group
Shareholders’equityatbeginningofyear
Newbusinesscontribution note 3
Existingbusiness–transfertonetworth
Expectedreturnonexistingbusiness note 4
Changesinoperatingassumptionsand
experiencevariances note 4
Restructuringcosts
Operating profit based on longer-term
investment returns
Non-operatingitems
Profit for the year
Exchangemovementsonforeignoperationsand
netinvestmenthedges
Intra-groupdividendsandinvestmentinoperations
Othermovements
Shareholders’ equity at end of year
Asia
Newbusinesscontribution note 3
Existingbusiness–transfertonetworth
Expectedreturnonexistingbusiness note 4
Changesinoperatingassumptionsand
experiencevariances note 4
Operating profit based on longer-term
investment returns
Non-operatingitems
Profit for the year
US
Newbusinesscontribution note 3
Existingbusiness–transfertonetworth
Expectedreturnonexistingbusiness note 4
Changesinoperatingassumptionsand
experiencevariances note 4
Restructuringcosts
Operating profit based on longer-term
investment returns
Non-operatingitems note (ii)
Profit for the year
2018 £m
Free
surplus
Required
capital
Total
net worth
Value of
in-force
business
note(i)
Total
embedded
value
6,242
(815)
3,439
201
778
(68)
3,535
(720)
2,815
201
(1,654)
(77)
7,527
(488)
1,370
68
62
1,012
(393)
619
(225)
1,462
54
125
(17)
1,399
(812)
587
10,265
619
(776)
195
69
–
107
(730)
(623)
206
–
–
16,507
(196)
2,663
396
847
(68)
3,642
(1,450)
2,192
407
(1,654)
(77)
29,410
4,073
(2,663)
2,177
579
(20)
4,146
(2,008)
2,138
1,465
–
–
45,917
3,877
–
2,573
1,426
(88)
7,788
(3,458)
4,330
1,872
(1,654)
(77)
9,848
17,375
33,013
50,388
158
(253)
55
185
145
15
160
288
(171)
69
6
–
192
164
356
(330)
1,117
123
2,934
(1,117)
1,095
247
318
1,157
(378)
779
63
1,291
123
131
(17)
1,591
(648)
943
3,230
(547)
2,683
858
(1,291)
758
182
–
507
(635)
(128)
2,604
–
1,218
565
4,387
(925)
3,462
921
–
881
313
(17)
2,098
(1,283)
815
356 Prudential plc AnnualReport2018
www.prudential.co.uk
2018 £m
Free
surplus
Required
capital
Total
net worth
Value of
in-force
business
note(i)
Total
embedded
value
UK and Europe
Newbusinesscontribution note 3
Existingbusiness–transfertonetworth
Expectedreturnonexistingbusiness note 4
Changesinoperatingassumptionsand
experiencevariances note 4
Restructuringcosts
Operating profit based on longer-term
investment returns
Non-operatingitems
Profit for the year
(102)
607
79
591
(51)
1,124
485
1,609
173
(352)
71
(122)
–
(230)
(909)
(1,139)
71
255
150
469
(51)
894
(424)
470
281
(255)
324
79
(20)
409
(826)
(417)
Notes
(i)
Thenetvalueofin-forcebusinesscomprisesthevalueoffuturemarginsfromcurrentin-forcebusinesslessthecostofholdingrequiredcapitalforlong-termbusinessas
shownbelow:
31 Dec 2018 £m
31 Dec 2017 £m
Asia
US
UK and
Europe
Total
Asia
US
Valueofin-forcebusinessbeforedeductionof
costofcapitalandtimevalueofguarantees
Costofcapital
Costoftimevalueofguarantees*
Netvalueofin-forcebusiness
Totalnetworth
Total embedded value note 8(iv)
21,867
(566)
(981)
20,320
4,009
11,811
(296)
(1,446)
10,069
4,581
3,083
(459)
–
2,624
8,785
36,761
(1,321)
(2,427)
33,013
17,375
24,329
14,650
11,409
50,388
17,539
(588)
(186)
16,765
4,182
20,947
10,486
(232)
(650)
9,604
3,653
13,257
11,713
UK and
Europe
3,648
(607)
–
3,041
8,672
352
–
474
548
(71)
1,303
(1,250)
53
Total
31,673
(1,427)
(836)
29,410
16,507
45,917
*Thecostoftimevalueofguaranteesarisesfromthevariabilityofeconomicoutcomesinthefutureandis,whereappropriate,calculatedasthedifferencebetweenafullstochastic
valuationandasingledeterministicvaluationasdescribedinnote13(i)(d).Bothvaluationsreflectthelevelofpolicyholderbenefits(includingguaranteedbenefitsanddiscretionary
bonuses)andassociatedcharges,togetherwithmanagementactionsinresponsetoemerginginvestmentandfundsolvencyconditions.Theincreaseinthecostoftimevalueof
guaranteesforAsiaoperationsfrom£(186)millionat31December2017to£(981)millionat31December2018reflectstheinteractionbetweentheseeffectsonthetwovaluationsat
therespectivelevelofinterestratesandequitymarkets,aswellasgrowthinthebusinessovertheyear.TheincreaseinthecostoftimevalueofguaranteesfortheUSoperationsfrom
£(650)millionat31December2017to£(1,446)millionat31December2018primarilyreflectsthereductioninUSequitymarketsduringthefourthquarterof2018.
(ii)
InJune2018,theNationalAssociationofInsuranceCommissioners(NAIC)formallyapprovedchangestoRBCcapitalfactorsthatreflectedtheDecember2017UStaxreform.
The2018EEVresultsreflectthesechanges,witharesultingincreaseinrequiredcapitalandacorrespondingreductioninfreesurplusof£(165)million.
www.prudential.co.uk
AnnualReport2018 Prudential plc 357
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the EEV basis results continued
10 Analysis of movement in free surplus
ForEEVcoveredbusiness,freesurplusistheexcessoftheregulatorybasisnetassetsforEEVreportingpurposes(networth)overthe
capitalrequiredtosupportthecoveredbusiness.Whereappropriate,adjustmentsaremadetothenetworthsothatbackingassetsare
includedatfairvalueratherthancostsoastocomplywiththeEEVPrinciples.InAsiaandtheUSoperations,assetsdeemedtobe
inadmissibleonlocalregulatorybasisareincludedinnetworthwhereconsideredfullyrecognisableonanEEVbasis.Freesurplusfor
assetmanagementoperationsandtheUKgeneralinsurancecommissionistakentobeIFRSbasispost-taxearningsandshareholders’
equitynetofgoodwill.Freesurplusforotheroperations(includingGroupandAsiaRegionalHeadOffice,holdingcompanyborrowings,
AfricaoperationsandPrudentialCapital)istakentobeEEVbasispost-taxearningsandshareholders’equitynetofgoodwill,with
subordinateddebtrecordedasfreesurplustotheextentthatitisclassifiedasavailablecapitalunderSolvencyII.
(i) Underlying free surplus generated – insurance and asset management operations
The2017comparativeresultsareshownbelowonbothactualexchangerates(AER)andconstantexchangerates(CER)bases.The2017
CERcomparativeresultsaretranslatedat2018averageexchangerates.
Asia operations
Underlyingfreesurplusgeneratedfromin-forcelifebusiness
Investmentinnewbusiness note (iii)(a)
Long-termbusiness
Assetmanagement
Total
US operations
Underlyingfreesurplusgeneratedfromin-forcelifebusiness
Investmentinnewbusiness note (iii)(a)
Long-termbusiness
Assetmanagement
Total
UK and Europe operations
Underlyingfreesurplusgeneratedfromin-forcelifebusiness
Investmentinnewbusiness note (iii)(a)
Long-termbusiness
Generalinsurancecommission
Totalinsuranceoperations
Assetmanagement
Total
Underlying free surplus generated from insurance
and asset management operations before
restructuring costs
Restructuringcosts
Underlying free surplus generated from insurance
and asset management operations
2018 £m
2017 £m
% change
AER
CER
AER
CER
1,500
(488)
1,012
159
1,171
1,641
(225)
1,416
3
1,419
1,277
(102)
1,175
15
1,190
392
1,582
1,407
(484)
923
155
1,078
1,575
(254)
1,321
7
1,328
1,343
(466)
877
150
1,027
1,520
(245)
1,275
7
1,282
1,070
(175)
1,070
(175)
895
13
908
403
895
13
908
403
1,311
1,311
7%
(1)%
10%
3%
9%
4%
11%
7%
(57)%
7%
19%
42%
31%
15%
31%
(3)%
21%
12%
(5)%
15%
6%
14%
8%
8%
11%
(57)%
11%
19%
42%
31%
15%
31%
(3)%
21%
4,172
(125)
3,717
(77)
3,620
(77)
12%
(62)%
15%
(62)%
4,047
3,640
3,543
11%
14%
358 Prudential plc AnnualReport2018
www.prudential.co.uk
Representing:
Expectedin-forcecashflows(includingexpectedreturn
onnetassets)
Effectsofchangesinoperatingassumptions,operating
experiencevariancesandotheritemsbefore
restructuringcosts
Underlyingfreesurplusgeneratedfromin-forcelifebusiness
beforerestructuringcosts
Investmentinnewbusiness note (iii)(a)
Totallong-termbusiness
Assetmanagementandgeneralinsurancecommission
Restructuringcosts
(ii) Underlying free surplus generated – Group total
Underlyingfreesurplusgeneratedfrom
insuranceandassetmanagementoperations note (i)
Otherincomeandexpenditure
Grouptotal
(iii) Movement in free surplus
2018 £m
2017 £m
% change
AER
CER
AER
CER
3,640
3,417
3,315
7%
10%
778
635
618
23%
26%
4,418
(815)
3,603
569
(125)
4,047
4,052
(913)
3,139
578
(77)
3,640
3,933
(886)
3,047
573
(77)
3,543
9%
11%
15%
(2)%
(62)%
11%
12%
8%
18%
(1)%
(62)%
14%
2018 £m
2017 £m
% change
AER
CER
AER
CER
4,047
(737)
3,310
3,640
(756)
2,884
3,543
(750)
2,793
11%
3%
15%
14%
2%
19%
Underlyingfreesurplusgeneratedbefore
restructuringcosts
Restructuringcosts
Underlyingfreesurplusgenerated notes (i)(ii)
Non-operatingitems note (b)
Netcashflowstoparentcompany note (c)
Externaldividends
Exchangeratemovements,timingdifferences
andotheritems note (d)
Net movement in free surplus
Balanceatbeginningofyear
Balance at end of year
Asia
operations
US
operations
1,171
(19)
1,152
(393)
759
(699)
–
(496)
(436)
2,470
2,034
1,419
(17)
1,402
(842)
560
(342)
–
21
239
1,928
2,167
2018 £m
UK and
Europe
operations
Total
insurance
and asset
management
operations
1,582
(89)
1,493
472
1,965
(691)
–
239
1,513
3,180
4,693
4,172
(125)
4,047
(763)
3,284
(1,732)
–
(236)
1,316
7,578
8,894
Other
operations
Group
total
(726)
(11)
(737)
(22)
(759)
1,732
(1,244)
1,505
1,234
1,774
3,008
3,446
(136)
3,310
(785)
2,525
–
(1,244)
1,269
2,550
9,352
11,902
www.prudential.co.uk
AnnualReport2018 Prudential plc 359
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the EEV basis results continued
10 Analysis of movement in free surplus continued
(iii) Movement in free surplus continued
Underlyingfreesurplusgeneratedbefore
restructuringcosts
Restructuringcosts
Underlyingfreesurplusgenerated notes(i)(ii)
Non-operatingitems note (b)
Netcashflowstoparentcompany note (c)
Externaldividends
Exchangeratemovements,timingdifferences
andotheritems note (d)
Net movement in free surplus
Balanceatbeginningofyear
Balance at end of year
Asia
operations
US
operations
2017 £m
UK and
Europe
operations
Total insurance
and asset
management
operations
Other
operations
Group
total
1,078
(14)
1,064
330
1,394
(645)
–
(421)
328
2,142
2,470
1,328
–
1,328
(1,203)
125
(475)
–
(140)
(490)
2,418
1,928
1,311
(63)
1,248
572
1,820
(668)
–
22
1,174
2,006
3,180
3,717
(77)
3,640
(301)
3,339
(1,788)
–
(539)
1,012
6,566
7,578
(746)
(10)
(756)
27
(729)
1,788
(1,159)
226
126
1,648
1,774
2,971
(87)
2,884
(274)
2,610
–
(1,159)
(313)
1,138
8,214
9,352
Freesurplusinvestedinnewbusinessprimarilyrepresentsacquisitioncostsandamountssetasideforrequiredcapital.
Notes
(a)
(b) Non-operatingitemsincludeshort-termfluctuationsininvestmentreturns,theeffectofchangesineconomicassumptionsforlong-termbusinessoperationsandtheeffectof
corporatetransactionsasdescribedinnote17.Inaddition,for2018thisincludestheimpactofacapitalmodellingenhancementintheUKandintheUSchangestoRBCfactors
followingtheUStaxreform,whichwereformallyapprovedbytheNationalAssociationofInsuranceCommissioners(NAIC)inJune2018.For2017thisincludedtheimpactofUS
taxreform(seenote16).
Netcashflowstoparentcompanyforlong-termbusinessoperationsreflecttheflowsasincludedintheholdingcompanycashflowattransactionrates.
Exchangeratemovements,timingdifferencesandotheritemsrepresent:
(c)
(d)
Exchangeratemovements
MarktomarketvaluemovementsonJacksonassets
backingsurplusandrequiredcapital
Otheritems note (e)
Exchangeratemovements
MarktomarketvaluemovementsonJacksonassets
backingsurplusandrequiredcapital
Otheritems note (e)
Asia
operations
US
operations
88
–
(584)
(496)
131
(95)
(15)
21
Asia
operations
US
operations
(113)
–
(308)
(421)
(190)
40
10
(140)
2018 £m
UK and
Europe
operations
Total
insurance
and asset
management
operations
–
–
239
239
219
(95)
(360)
(236)
2017 £m
UK and
Europe
operations
Total
insurance
and asset
management
operations
6
–
16
22
(297)
40
(282)
(539)
Other
operations
(6)
–
1,511
1,505
Group
total
213
(95)
1,151
1,269
Other
operations
Group
total
(13)
–
239
226
(310)
40
(43)
(313)
(e) Otheritemsincludetheeffectofthenetissuanceof£1.2billionofsubordinateddebtforotheroperationsin2018,intra-grouploansandotherintra-grouptransfersbetween
operationsandothernon-cashitems.
360 Prudential plc AnnualReport2018
www.prudential.co.uk
11 Expected transfer of value of in-force business and required capital to free surplus
Thediscountedvalueofin-forcebusinessandrequiredcapitalforlong-termbusinessoperationscanbereconciledtothe2018and2017
totalemergenceoffreesurplusasfollows:
Requiredcapital note 9
Valueofin-forcebusiness(VIF) note 9
Addback:deductionforcostoftimevalueofguarantees note 9
Otheritems*
Totallong-termbusinessoperations
2018 £m
2017 £m
9,848
33,013
2,427
(2,169)
43,119
10,265
29,410
836
(1,371)
39,140
*‘Otheritems’representamountsincorporatedintoVIFwherethereisnodefinitivetimeframeforwhenthepaymentswillbemadeorreceiptsreceived.Inparticular,otheritemsincludethe
deductionoftheshareholders’interestinthewith-profitsestate,thevalueofwhichisderivedbyincreasingfinalbonusratessoastoexhausttheestateoverthelifetimeofthein-force
with-profitsbusiness.Thisisanassumptiontogiveanappropriatevaluation.Tobeconservativethisitemisexcludedfromtheexpectedfreesurplusgenerationprofilebelow.
Cashflowsareprojectedonadeterministicbasisandarediscountedattheappropriateriskdiscountrate.Themodelledcashflowsuse
thesamemethodologyunderpinningtheGroup’sEEVreportingandsoaresubjecttothesameassumptionsandsensitivities.
ThetablebelowshowshowtheVIFgeneratedbythein-forcebusinessandtheassociatedrequiredcapitalforlong-termbusiness
operationsismodelledasemergingintofreesurplusoverfutureyears.
Asia
US
UKandEurope
Total
Asia
US
UKandEurope
Total
2018 £m
Expected period of conversion of future post-tax distributable earnings
and required capital flows to free surplus
1-5 years
6-10 years
11-15 years
16-20 years
21-40 years
40+ years
6,276
6,928
2,616
15,820
37%
4,185
4,094
1,713
9,992
23%
2,762
1,771
1,053
5,586
13%
2,053
378
633
3,064
7%
2017 £m
5,399
123
476
5,998
14%
2,657
–
2
2,659
6%
Expected period of conversion of future post-tax distributable earnings
and required capital flows to free surplus
1-5 years
6-10 years
11-15 years
16-20 years
21-40 years
40+ years
5,583
6,247
3,012
14,842
38%
3,638
3,993
2,066
9,697
25%
2,418
1,697
1,289
5,404
14%
1,655
401
899
2,955
7%
3,845
117
704
4,666
12%
1,553
–
23
1,576
4%
2018 total as
shown above
23,332
13,294
6,493
43,119
100%
2017 total as
shown above
18,692
12,455
7,993
39,140
100%
12 Sensitivity of results to alternative assumptions
(i) Sensitivity analysis – economic assumptions
Thetablesbelowshowthesensitivityoftheembeddedvalueasat31December2018and31December2017andthenewbusiness
contributionaftertheeffectofrequiredcapitalfor2018and2017forlong-termbusinessoperationsto:
— 1percentincreaseinthediscountrates;
— 1percentincreaseininterestratesandriskdiscountrates,includingconsequentialchanges(assumedinvestmentreturnsforallasset
classes,marketvaluesoffixedinterestassets);
— 0.5percentdecreaseininterestratesandriskdiscountrates,includingconsequentialchanges(assumedinvestmentreturnsforall
assetclasses,marketvaluesoffixedinterestassets);
— 1percentriseinequityandpropertyyields;
— 10percentfallinmarketvalueofequityandpropertyassets(embeddedvalueonly);
— ThestatutoryminimumcapitallevelincontrasttoEEVbasisrequiredcapital(embeddedvalueonly);and
— 5basispointsincreaseinUKlong-termexpecteddefaults.
Ineachsensitivitycalculation,allotherassumptionsremainunchangedexceptwheretheyaredirectlyaffectedbytherevised
economicconditions.
www.prudential.co.uk
AnnualReport2018 Prudential plc 361
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the EEV basis results continued
12 Sensitivity of results to alternative assumptions continued
(i) Sensitivity analysis – economic assumptions continued
New business contribution from long-term business operations
New business contribution note 3
Discountrates–1%increase
Interestrates–1%increase
Interestrates–0.5%decrease
Equity/propertyyields–1%rise
Long-termexpecteddefaults–
5bpsincrease
2018 £m
2017 £m
US
921
(42)
94
(66)
115
–
UK and
Europe
352
(33)
43
(23)
45
–
Total
3,877
(624)
(65)
(31)
290
Asia
2,368
(477)
(103)
(59)
130
–
–
US
906
(34)
124
(85)
130
–
UK and
Europe
342
(48)
44
(23)
52
(1)
Total
3,616
(559)
65
(167)
312
(1)
Asia
2,604
(549)
(202)
58
130
–
Embedded value of long-term business operations
31 Dec 2018 £m
31 Dec 2017 £m
Asia
US
UK and
Europe
Total
Asia
US
UK and
Europe
Total
Shareholders' equity note 8
24,329
14,650
11,409
50,388
20,947
13,257
11,713
45,917
Discountrates–1%increase
Interestrates–1%increase
Interestrates–0.5%decrease
Equity/propertyyields–1%rise
Equity/propertymarketvalues–
10%fall
Statutoryminimumcapital
Long-termexpecteddefaults–
5bpsincrease
(3,292)
(1,564)
366
1,041
(473)
110
(513)
119
(273)
1,011
(498)
217
(648)
(668)
363
377
(4,453)
(2,113)
456
2,429
(461)
–
(1,432)
327
(2,560)
(944)
121
873
(429)
169
(440)
26
(166)
896
(209)
158
(774)
(635)
384
425
(479)
–
(3,774)
(1,553)
339
2,194
(1,117)
327
–
–
(76)
(76)
–
–
(135)
(135)
Thesensitivitiesshownabovearefortheimpactofinstantaneouschangesontheembeddedvalueoflong-termbusinessoperations
andincludethecombinedeffectonthevalueofin-forcebusinessandnetassetsatthebalancesheetdatesindicated.Ifthechangein
assumptionsshowninthesensitivitiesweretooccur,thentheeffectshownabovewouldberecordedwithintwocomponentsofthe
profitanalysisforthefollowingyear,namelytheeffectofeconomicassumptionchangesandshort-termfluctuationsininvestment
returns.Inadditiontothesensitivityeffectsshownabove,theothercomponentsoftheprofitforthefollowingyearwouldbecalculated
byreferencetothealteredassumptions,forexamplenewbusinesscontributionandunwindofdiscount,togetherwiththeeffectof
otherchangessuchasalteredcorporatebondspreads.Inadditionforchangesininterestrates,theeffectshownaboveforJackson
wouldalsoberecordedwithinthefairvaluemovementsonassetsbackingsurplusandrequiredcapital,whicharetakendirectlyto
shareholders’equity.
(ii) Sensitivity analysis – non-economic assumptions
Thetablesbelowshowthesensitivityoftheembeddedvalueasat31December2018and31December2017andthenewbusiness
contributionaftertheeffectofrequiredcapitalfor2018and2017forlong-termbusinessoperationsto:
— 10percentproportionatedecreaseinmaintenanceexpenses(forexamplea10percentsensitivityonabaseassumptionof£10
perannumwouldrepresentanexpenseassumptionof£9perannum);
— 10percentproportionatedecreaseinlapserates(forexamplea10percentsensitivityonabaseassumptionof5percentwould
representalapserateof4.5percentperannum);and
— 5percentproportionatedecreaseinbasemortalityandmorbidityrates(ieincreasedlongevity).
362 Prudential plc AnnualReport2018
www.prudential.co.uk
New business contribution from long-term business operations
New business contribution note 3
Maintenanceexpenses–10%decrease
Lapserates–10%decrease
Mortalityandmorbidity–5%decrease
2018 £m
2017 £m
Asia
2,604
40
154
70
US
921
11
24
4
UK and
Europe
352
2
17
1
Total
3,877
53
195
75
Asia
2,368
38
133
69
US
906
14
24
4
UK and
Europe
342
3
20
(2)
Total
3,616
55
177
71
Embedded value of long-term business operations
31 Dec 2018 £m
31 Dec 2017 £m
Asia
US
UK and
Europe
Total
Asia
US
UK and
Europe
Total
Shareholders’ equity note 8
24,329
14,650
11,409
50,388
20,947
13,257
11,713
45,917
Maintenanceexpenses–10%decrease
Lapserates–10%decrease
Mortalityandmorbidity–5%decrease
Changerepresentingeffecton:
Lifebusiness
Annuities
254
972
835
835
–
178
619
141
196
(55)
80
87
(294)
13
(307)
512
1,678
682
1,044
(362)
213
753
668
668
–
169
659
214
214
–
64
64
(442)
13
(455)
446
1,476
440
895
(455)
13 Methodology and accounting presentation
(i) Methodology
Overview
Theembeddedvalueisthepresentvalueoftheshareholders’interestintheearningsdistributablefromassetsallocatedtocovered
businessaftersufficientallowancehasbeenmadefortheaggregaterisksinthatbusiness.Theshareholders’interestintheGroup’s
long-termbusinesscomprises:
— Thepresentvalueoffutureshareholdercashflowsfromin-forcecoveredbusiness(valueofin-forcebusiness),lessdeductionsfor:
– Thecostoflocked-inrequiredcapital;and
– Thetimevalueofcostofoptionsandguarantees;
— Locked-inrequiredcapital;and
— Theshareholders’networthinexcessofrequiredcapital(freesurplus).
Thevalueoffuturenewbusinessisexcludedfromtheembeddedvalue.
Notwithstandingthebasisofpresentationofresultsasexplainedinnote13(ii)(c),nosmoothingofmarketoraccountbalancevalues,
unrealisedgainsorinvestmentreturnisappliedindeterminingtheembeddedvalueorprofit.Separately,theanalysisofprofitis
delineatedbetweenoperatingprofitbasedonlonger-terminvestmentreturnsandotherconstituentitems,asexplainedinnote13(ii)(a).
(a) Covered business
TheEEVresultsfortheGrouparepreparedfor‘coveredbusiness’,asdefinedbytheEEVPrinciples.Coveredbusinessrepresentsthe
Group’slong-terminsurancebusiness,includingtheGroup’sinvestmentsinjointventureandassociateinsuranceoperations,forwhich
thevalueofnewandin-forcecontractsisattributabletoshareholders.Thepost-taxEEVbasisresultsfortheGroup’scoveredbusiness
arethencombinedwiththepost-taxIFRSbasisresultsoftheGroup’sassetmanagementandotheroperations(includingGroupandAsia
RegionalHeadOffice,holdingcompanyborrowings,AfricaoperationsandPrudentialCapital).UndertheEEVPrinciples,theresultsfor
coveredbusinessincorporatetheprojectedmarginsofattachinginternalassetmanagement,asdescribedinnote13(i)(g).
Thedefinitionoflong-termbusinessoperationscomprisesthosecontractsfallingunderthedefinitionforregulatorypurposes
togetherwith,forUSoperations,contractsthatareinsubstancethesameasguaranteedinvestmentcontracts(GICs)butdonotfall
withinthetechnicaldefinition.
CoveredbusinesscomprisestheGroup’slong-termbusinessoperations,withtwoexceptions:
— TheclosedScottishAmicableInsuranceFund(SAIF)whichisexcludedfromcoveredbusiness.SAIFisaring-fencedsub-fundofThe
PrudentialAssuranceCompanyLimited(PAC)long-termfund,establishedbyaCourtApprovedSchemeofArrangementinOctober
1997.SAIFisclosedtonewbusinessandtheassetsandliabilitiesofthefundarewhollyattributabletothepolicyholdersofthefund;and
— ThepresentationaltreatmentoftheGroup’sprincipaldefinedbenefitpensionscheme,thePrudentialStaffPensionScheme(PSPS).
ThepartialrecognitionofthesurplusforPSPSisrecognisedin‘Other’operations.
AsmallamountofUKgrouppensionsbusinessisalsonotmodelledforEEVreportingpurposes.
www.prudential.co.uk
AnnualReport2018 Prudential plc 363
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the EEV basis results continued
13 Methodology and accounting presentation continued
(i) Methodology continued
(b) Valuation of in-force and new business
Theembeddedvalueresultsarepreparedincorporatingbestestimateassumptionsaboutallrelevantfactorsincludinglevelsoffuture
investmentreturns,expenses,persistency,mortalityandmorbidity,asdescribedinnote14(vii).Theseassumptionsareusedtoproject
futurecashflows.Thepresentvalueofthefuturecashflowsisthencalculatedusingadiscountratewhichreflectsboththetimevalueof
moneyandthenon-diversifiablerisksassociatedwiththecashflowsthatarenototherwiseallowedfor.
New business
IndeterminingtheEEVbasisvalueofnewbusiness,premiumsareincludedinprojectedcashflowsonthesamebasisof
distinguishingannualandsinglepremiumbusinessassetoutforstatutorybasisreporting.
Newbusinesspremiumsreflectthosepremiumsattachingtocoveredbusiness,includingpremiumsforcontractsclassifiedas
investmentproductsforIFRSbasisreporting.Newbusinesspremiumsforregularpremiumproductsareshownonanannualisedbasis.
Internalvestingbusinessisclassifiedasnewbusinesswherethecontractsincludeanopenmarketoption.
Thepost-taxcontributionfromnewbusinessrepresentsprofitsdeterminedbyapplyingoperatingandeconomicassumptionsasat
theendoftheyear.NewbusinessprofitabilityisakeymetricfortheGroup’smanagementofthedevelopmentofthebusiness.In
addition,post-taxnewbusinessmarginsareshownbyreferencetoannualpremiumequivalents(APE)andthepresentvalueofnew
businesspremiums(PVNBP).ThesemarginsarecalculatedasthepercentageofthevalueofnewbusinessprofittoAPEandPVNBP.APE
iscalculatedastheaggregateofregularpremiumsonnewbusinesswrittenintheperiodandone-tenthofsinglepremiums.PVNBPis
calculatedastheaggregateofsinglepremiumsandthepresentvalueofexpectedfuturepremiumsfromregularpremiumnewbusiness,
allowingforlapsesandtheotherassumptionsmadeindeterminingtheEEVnewbusinesscontribution.
Valuation movements on investments
WiththeexceptionofdebtsecuritiesheldbyJackson,investmentgainsandlossesduringtheyear(totheextentthatchangesincapital
valuesdonotdirectlymatchchangesinliabilities)areincludeddirectlyintheprofitfortheyearandshareholders’equityastheyarise.
TheresultsforanycoveredbusinessconceptuallyreflecttheaggregateoftheIFRSresultsandthemovementsontheadditional
shareholders’interestrecognisedontheEEVbasis.ThusthestartpointforthecalculationoftheEEVresultsforJackson,asforother
businesses,reflectsthemarketvaluemovementsrecognisedonanIFRSbasis.
However,indeterminingthemovementsontheadditionalshareholders’interest,thebasisforcalculatingtheEEVresultforJackson
acknowledgesthat,fordebtsecuritiesbackingliabilities,theaggregateEEVresultsreflectthefactthatthevalueofin-forcebusiness
insteadincorporatesthediscountedvalueoffuturespreadearnings.Thisvalueisnotaffectedgenerallybyshort-termmarket
movementsonsecuritiesthat,broadlyspeaking,areheldforthelongerterm.
FixedincomesecuritiesbackingthefreesurplusandrequiredcapitalforJacksonareaccountedforatfairvalue.However,consistent
withthetreatmentappliedunderIFRSforJacksonsecuritiesclassifiedasavailable-for-sale,movementsinunrealisedappreciation/
depreciationonthesesecuritiesareaccountedforinequityratherthanintheincomestatement,asshowninthemovementin
shareholders’equity.
(c) Cost of capital
Achargeisdeductedfromtheembeddedvalueforthecostoflocked-inrequiredcapitalsupportingtheGroup’slong-termbusiness.The
costisthedifferencebetweenthenominalvalueofthecapitalandthediscountedvalueoftheprojectedreleasesofthiscapital,allowing
forpost-taxinvestmentearningsonthecapital.
Theannualresultisaffectedbythemovementinthiscostfromyeartoyearwhichcomprisesachargeagainstnewbusinessprofitand
generallyareleaseinrespectofthereductionincapitalrequirementsforbusinessinforceasthisrunsoff.
Whererequiredcapitalisheldwithinawith-profitslong-termfund,thevalueplacedonsurplusassetsinthefundisalready
discountedtoreflectitsexpectedreleaseovertimeandnofurtheradjustmentisnecessaryinrespectofrequiredcapital.
(d) Financial options and guarantees
Nature of financial options and guarantees in Prudential’s long-term business
Asia
Subjecttolocalmarketcircumstancesandregulatoryrequirements,theguaranteefeaturesdescribedbelowinrespectofUKandEurope
businessbroadlyapplytosimilartypesofparticipatingcontractsinAsiawhichareprincipallywritteninHongKong,Singaporeand
Malaysia.Participatingproductshavebothguaranteedandnon-guaranteedelements.
Therearealsovariousnon-participatinglong-termproductswithguarantees.Theprincipalguaranteesarethoseforwhole-of-life
contractswithfloorlevelsofpolicyholderbenefitsthataccrueatratessetatinceptionanddonotvarysubsequentlywithmarket
conditions.
364 Prudential plc AnnualReport2018
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US (Jackson)
TheprincipalfinancialoptionsandguaranteesinJacksonareassociatedwiththefixedannuity(FA)andvariableannuity(VA)lines
ofbusiness.
Fixedannuitiesprovidethat,atJackson’sdiscretion,itmayresettheinterestratecreditedtopolicyholders’accounts,subjectto
aguaranteedminimum.Theguaranteedminimumreturnvariesfrom1.0percentto5.5percentforbothyears,dependingonthe
particularproduct,jurisdictionwhereissued,anddateofissue.At31December2018,88percentoftheaccountvaluesonfixed
annuitiesareforpolicieswithguaranteesof3percentorless(31December2017:87percent),andtheaverageguaranteerateis
2.6percentforbothyears.
Fixedannuitiesalsopresentariskthatpolicyholderswillexercisetheiroptiontosurrendertheircontractsinperiodsofrapidlyrising
interestrates,possiblyrequiringJacksontoliquidateassetsataninopportunetime.
Jacksonissuesvariableannuity(VA)contractsforwhichitcontractuallyguaranteestothecontractholder,subjecttospecific
conditions,either:a)returnofnolessthantotaldepositsmadetothecontractadjustedforanypartialwithdrawals;b)totaldepositsmade
tothecontractadjustedforanypartialwithdrawalsplusaminimumreturn;orc)thehighestcontractvalueonaspecifiedanniversarydate
adjustedforanywithdrawalsfollowingthespecifiedcontractanniversary.Theseguaranteesincludebenefitsthatarepayableupon
depletionoffunds(GuaranteedMinimumWithdrawalBenefit(GMWB)),asdeathbenefits(GuaranteedMinimumDeathBenefits
(GMDB))orasincomebenefits(GuaranteedMinimumIncomeBenefits(GMIB)).Theseguaranteesgenerallyprotectthepolicyholders’
valueintheeventofpoorequitymarketperformance.JacksonhedgestheGMWBandGMDBguaranteesthroughtheuseofequity
optionsandfuturescontracts,andessentiallyfullyreinsurestheGMIBguarantees.
Jacksonalsoissuesfixedindexannuities(FIA)thatenablepolicyholderstoobtainaportionofanequity-linkedreturnwhileproviding
aguaranteedminimumreturn.Theguaranteedminimumreturnsareofasimilarnaturetothosedescribedaboveforfixedannuities.
UK and Europe (M&GPrudential)
TheonlysignificantfinancialoptionsandguaranteesinM&GPrudential’scoveredbusinessariseinthewith-profitsfund.
With-profitsproductsprovidereturnstopolicyholdersthroughbonusesthataresmoothed.Therearetwotypesofbonuses:annual
andfinal.Annualbonusesaredeclaredonceayearand,oncecredited,areguaranteedinaccordancewiththetermsoftheparticular
product.Finalbonusesareguaranteedonlyuntilthenextbonusdeclaration.TheUKwith-profitsfundalsoheldaprovisionof£49million
at31December2018(31December2017:£53million)tohonourguaranteesonasmallnumberofguaranteedannuityoptionproducts.
TheGroup’smainexposuretoguaranteedannuityoptionsinM&GPrudentialisthroughthenon-coveredbusinessofSAIF.
Aprovisionof£361millionwasheldinSAIFat31December2018(31December2017:£503million)tohonourtheguarantees.
Asdescribedinnote13(i)(a),theassetsandliabilitiesarewhollyattributabletothepolicyholdersofthefund.Thereforethemovement
intheprovisionhasnodirectimpactonshareholders’funds.
Time value
Thevalueoffinancialoptionsandguaranteescomprisestwoparts:
— Thefirstpartarisesfromadeterministicvaluationonbestestimateassumptions(theintrinsicvalue);and
— Thesecondpartarisesfromthevariabilityofeconomicoutcomesinthefuture(thetimevalue).
Whereappropriate,afullstochasticvaluationhasbeenundertakentodeterminethetimevalueofthefinancialoptionsandguarantees.
Theeconomicassumptionsusedforthestochasticcalculationsareconsistentwiththoseusedforthedeterministiccalculations.
Assumptionsspecifictothestochasticcalculationsreflectlocalmarketconditionsandarebasedonacombinationofactualmarketdata,
historicmarketdataandanassessmentoflong-termeconomicconditions.CommonprincipleshavebeenadoptedacrosstheGroupfor
thestochasticassetmodels,forexample,separatemodellingofindividualassetclassesbutwithanallowanceforcorrelationbetween
thevariousassetclasses.Detailsofthekeycharacteristicsofeachmodelaregiveninnotes14(iv),(v)and(vi).
Inderivingthetimevalueoffinancialoptionsandguarantees,managementactionsinresponsetoemerginginvestmentandfund
solvencyconditionshavebeenmodelled.Managementactionsencompass,butarenotconfinedto,investmentallocationdecisions,
levelsofreversionaryandterminalbonusesandcreditedrates.Bonusratesareprojectedfromcurrentlevelsandvariedinaccordance
withassumedmanagementactionsapplyingintheemerginginvestmentandfundsolvencyconditions.
Inallinstances,themodelledactionsareinaccordancewithapprovedlocalpracticeandthereforereflecttheoptionsactually
availabletomanagement.FortheUKwith-profitsfund,theactionsassumedareconsistentwiththosesetoutinthePrinciplesand
PracticesofFinancialManagementwhichexplainshowregularandfinalbonusrateswithinthediscretionaryframeworkaredetermined,
subjecttothegenerallegislativerequirementsapplicable.
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AnnualReport2018 Prudential plc 365
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13 Methodology and accounting presentation continued
(i) Methodology continued
(e) Level of required capital
InadoptingtheEEVPrinciples,Prudentialhasbasedrequiredcapitalontheapplicablelocalstatutoryregulations,includingany
amountsconsideredtoberequiredabovethelocalstatutoryminimumrequirementstosatisfyregulatoryconstraints.
Forwith-profitsbusinessinAsiaandtheUK,theavailablecapitalinthefundissufficienttomeetthecapitalrequirements.
ForM&GPrudential,aportionoffutureshareholdertransfersexpectedfromthewith-profitsfundisrecognisedwithinnetworth,
togetherwiththeassociatedcapitalrequirements.
Forshareholder-backedbusiness,thefollowingcapitalrequirementsforlong-termbusinessoperationsapply:
— Asia:thelevelofrequiredcapitalhasbeensettoanamountatleastequaltolocalstatutorynotificationrequirements.ForChina
operations,thelevelofrequiredcapitalfollowstheapproachforembeddedvaluereportingissuedbytheChinaAssociationof
Actuaries(CAA)reflectingtheC-ROSSregime;
— US:thelevelofrequiredcapitalhasbeensetat250percentoftherisk-basedcapital(RBC)requiredbytheNationalAssociation
ofInsuranceCommissioners(NAIC)attheCompanyActionLevel(CAL);and
— UKandEurope:thecapitalrequirementsaresetattheSolvencyIISolvencyCapitalRequirement(SCR)forshareholder-backed
businessasawhole.Followingtheannounceddemerger,from1January2018thisdoesnotallowfordiversificationoutsidethe
plannedperimeterofthebusinesstobedemerged.
(f) With-profits business and the treatment of the estate
TheproportionofsurplusallocatedtoshareholdersfromtheUKwith-profitsfundhasbeenbasedonthepresentlevelof10percent.
Thevalueattributedtotheshareholders’interestintheestateisderivedbyincreasingfinalbonusrates(andrelatedshareholder
transfers)soastoexhausttheestateoverthelifetimeofthein-forcewith-profitsbusiness.Inanyscenarioswherethetotalassetsofthe
lifefundareinsufficienttomeetpolicyholderclaimsinfull,theexcesscostisfullyattributedtoshareholders.Similarprinciplesapply,
whereappropriate,forotherwith-profitsfundsoftheGroup’sAsiaoperations.
(g) Internal asset management
Thein-forceandnewbusinessresultsfromlong-termbusinessincludetheprojectedvalueofprofitsorlossesfromassetmanagement
andservicecompaniesthatsupporttheGroup’scoveredinsurancebusinesses.TheresultsoftheGroup’sassetmanagementoperations
includethecurrentyearprofitsfromthemanagementofbothinternalandexternalfunds.EEVbasisshareholders’otherincomeand
expenditureisadjustedtodeducttheunwindoftheexpectedinternalassetmanagementprofitmarginfortheyearasincludedin‘Other
operations’.Thedeductionisonabasisconsistentwiththatusedforprojectingtheresultsforcoveredinsurancebusiness.Group
operatingprofitaccordinglyincludesthevariancebetweenactualandexpectedprofitinrespectofmanagementoftheassetsfor
coveredbusiness.
(h) Allowance for risk and risk discount rates
Overview
UndertheEEVPrinciples,discountratesusedtodeterminethepresentvalueoffuturecashflowsaresetbyreferencetorisk-freerates
plusariskmargin.
ForAsiaandtheUS,therisk-freeratesarebasedon10-yearlocalgovernmentbondyields.ForUKandEurope,theEEVrisk-freerate
isbasedonthefulltermstructureofinterestrates,ieayieldcurve,whichisusedtodeterminetheembeddedvalueattheendofthe
reportingperiod.
Theriskmarginshouldreflectanynon-diversifiableriskassociatedwiththeemergenceofdistributableearningsthatisnotallowedfor
elsewhereinthevaluation.Inordertobetterreflectdifferencesinrelativemarketriskvolatilityinherentineachproductgroup,Prudential
setstheriskdiscountratestoreflecttheexpectedvolatilityassociatedwiththecashflowsforeachproductcategoryintheembedded
valuemodel,ratherthanataGrouplevel.
SincefinancialoptionsandguaranteesareexplicitlyvaluedundertheEEVmethodology,riskdiscountratesunderEEVareset
excludingtheeffectoftheseproductfeatures.
Theriskmarginrepresentstheaggregateoftheallowanceformarketrisk,additionalallowanceforcreditriskwhereappropriate,
andallowancefornon-diversifiablenon-marketrisk.Noallowanceisrequiredfornon-marketriskswheretheseareassumedtobe
fullydiversifiable.
Market risk allowance
Theallowanceformarketriskrepresentsthebetamultipliedbyanequityriskpremium.ExceptforUKshareholder-backedannuity
business(asexplainedbelow),suchanapproachhasbeenusedfortheGroup’sbusinesses.
Thebetaofaportfolioorproductmeasuresitsrelativemarketrisk.Theriskdiscountratesreflectthemarketriskinherentineach
productgroupandhencethevolatilityofproductcashflows.Thesearedeterminedbyconsideringhowtheprofitsfromeachproduct
areaffectedbychangesinexpectedreturnsonvariousassetclasses.Byconvertingthisintoarelativerateofreturn,itispossibleto
deriveaproduct-specificbeta.
Productlevelbetasreflectthemostrecentproductmixtoproduceappropriatebetasandriskdiscountratesforeachmajor
productgrouping.
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Additional credit risk allowance
TheGroup’smethodologyistoallowappropriatelyforcreditrisk.Theallowancefortotalcreditriskistocover:
— Expectedlong-termdefaults;
— Creditriskpremium(toreflectthevolatilityindowngradeanddefaultlevels);and
— Short-termdowngradesanddefaults.
Theseallowancesareinitiallyreflectedindeterminingbestestimatereturnsandthroughthemarketriskallowancedescribedabove.
However,forthosebusinesseslargelybackedbyholdingsofdebtsecurities,theseallowancesintheprojectedreturnsandmarketrisk
allowancesmaynotbesufficientandanadditionalallowancemaybeappropriate.
Thepracticalapplicationoftheallowanceforcreditriskvariesdependinguponthetypeofbusinessasdescribedbelow:
Asia
ForAsia,theallowanceforcreditriskincorporatedintheprojectedratesofreturnandthemarketriskallowanceareconsideredtobe
sufficient.Accordingly,noadditionalallowanceforcreditriskisrequired.
Theprojectedratesofreturnforholdingsofcorporatebondscomprisetherisk-freerateplusanassessmentoflong-termspreadover
therisk-freerate.
US (Jackson)
ForJacksonbusiness,theallowanceforlong-termdefaultsof0.17percent(31December2017:0.19percent)isreflectedintherisk
marginreserve(RMR)chargethatisdeductedindeterminingtheprojectedspreadmarginbetweentheearnedrateontheinvestments
andthepolicyholdercreditingrate.
Theriskdiscountrateincorporatesanadditionalallowanceforcreditriskpremiumandshort-termdowngradesanddefaults
(0.2percentforvariableannuitybusinessand1.0percentfornon-variableannuitybusinessforbothyears),asshowninnote14(ii).
Indeterminingthisallowanceanumberoffactorshavebeenconsidered.Thesefactors,inparticular,include:
— Howmuchofthecreditspreadondebtsecuritiesrepresentsanincreasedshort-termcreditrisknotreflectedintheRMRlong-term
defaultassumptions,andhowmuchisliquiditypremium(whichisthepremiumrequiredbyinvestorstocompensatefortheriskof
longer-terminvestmentswhichcannotbeeasilyconvertedintocashatthefairmarketvalue).Inassessingthiseffect,consideration
hasbeengiventoanumberofapproachestoestimatingtheliquiditypremiumbyconsideringrecentstatisticaldata;and
— PolicyholderbenefitsforJacksonfixedannuitybusinessarenotfixed.Itispossibleinadverseeconomicscenariostopasson
acomponentofcreditlossestopolicyholders(subjecttoguaranteefeatures)throughlowerinvestmentreturnscreditedto
policyholders.Consequently,itisonlynecessarytoallowforthebalanceofthecreditriskintheriskdiscountrate.
Theleveloftheadditionalallowanceisassessedateachreportingperiodtotakeaccountofprevailingcreditconditionsandasthe
businessinforcealtersovertime.Theadditionalallowanceforvariableannuitybusinesshasbeensetatone-fifthofthenon-variable
annuitybusinesstoreflecttheproportionoftheallocatedholdingsofgeneralaccountdebtsecurities.
ThelevelofallowancediffersfromthatforUKannuitybusinessforinvestmentportfoliodifferencesandtotakeaccountofthe
managementactionsavailableinadverseeconomicscenariostoreducecreditingratestopolicyholders,subjecttoguaranteefeatures
oftheproducts.
UK and Europe (M&GPrudential)
(1) Shareholder-backed annuity business
Forshareholder-backedannuitybusiness,Prudentialhasusedamarketconsistentembeddedvalue(MCEV)approachtoderivean
impliedriskdiscountratewhichisthenappliedtotheprojectedbestestimatecashflows.
IntheannuityMCEVcalculations,astheassetsaregenerallyheldtomaturitytomatchliabilities,thefuturecashflowsarediscounted
usingtheswapyieldcurveplusanallowanceforliquiditypremiumbasedontheSolvencyIIallowanceforcreditrisk.TheSolvencyII
allowanceissetbytheEuropeanInsuranceandOccupationalPensionsAuthority(EIOPA)usingaprudentassumptionthatallfuture
downgradeswillbereplacedannually,andallowingforthecreditspreadfloor.
ForthepurposesofpresentationintheEEVresults,theresultsproducedonthisbasisarereconfigured.Underthisapproachthe
projectedearnedrateofreturnonthedebtsecuritiesheldisdeterminedafterallowingforabestestimatecreditriskallowance.The
remainingelementsofprudencewithintheSolvencyIIallowanceareincorporatedintotheriskmarginincludedinthediscountrate,
showninnote14(iii).
(2) With-profits fund non-profit annuity business
Fornon-profitannuitybusinessattributabletotheUKwith-profitsfund,thebasisfordeterminingtheaggregateallowanceforcreditrisk
isconsistentwiththatappliedforUKshareholder-backedannuitybusiness(asdescribedabove).Theallowanceforcreditriskforthis
businessistakenintoaccountindeterminingtheprojectedcashflowsfromthewith-profitsfund,whichareinturndiscountedattherisk
discountrateapplicabletoalloftheprojectedcashflowsfromthefund.
(3) With-profits fund holdings of debt securities
Thewith-profitsfundholdsdebtsecuritiesaspartofitsinvestmentportfoliobackingpolicyholderliabilitiesandunallocatedsurplus.
Theassumedearnedrateforwith-profitholdingsofcorporatebondsisdefinedastherisk-freerateplusanassessmentofthelong-term
spreadoverriskfree,netofexpectedlong-termdefaults.Thisapproachissimilartothatappliedforequitiesandpropertiesforwhichthe
projectedearnedrateisdefinedastherisk-freerateplusalong-termriskpremium.
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13 Methodology and accounting presentation continued
(i) Methodology continued
Allowance for non-diversifiable non-market risks
Themajorityofnon-marketandnon-creditrisksareconsideredtobediversifiable.Anallowancefornon-diversifiablenon-marketrisksis
estimatedassetoutbelow:
Abaselevelallowanceof50basispointsisappliedtocoverthenon-diversifiablenon-marketrisksassociatedwiththeGroup’s
businesses.FortheGroup’sAsiaoperationsinIndonesia,thePhilippines,Taiwan,ThailandandVietnam,additionalallowancesare
appliedforemergingmarketriskrangingfrom100to250basispoints.Theleveloftheseallowancesarereviewedandupdatedbasedon
anassessmentofarangeofpre-definedemergingmarketriskindicators,aswellastheGroup’sexposureandexperienceinthebusiness
units.At31December2018,theChinaallowancefornon-marketriskwasreducedreflectingthegrowthinthesizeofthebusiness,
increasingmanagementexposureandexperienceinthecountryandanimprovementinourriskassessmentofthemarket.Forthe
Group’sUSbusinessandUKandEuropebusiness,noadditionalallowanceisnecessary.
(i) Foreign currency translation
Foreigncurrencyprofitsandlosseshavebeentranslatedataverageexchangeratesfortheyear.Foreigncurrencyassetsandliabilities
havebeentranslatedatyear-endexchangerates.TheprincipalexchangeratesareshowninnoteA1oftheIFRSfinancialstatements.
(j) Taxation
Indeterminingthepost-taxprofitfortheyearforcoveredbusiness,theoveralltaxrateincludestheimpactoftaxeffectsdeterminedon
alocalregulatorybasis.Taxpaymentsandreceiptsincludedintheprojectedcashflowstodeterminethevalueofin-forcebusinessare
calculatedusingratesthathavebeenannouncedandsubstantivelyenactedbytheendofthereportingperiod.
(k) Inter-company arrangements
TheEEVresultsforcoveredbusinessincorporateannuitiesestablishedinthePACnon-profitsub-fundfromvestingpensionpoliciesin
SAIF(whichisnotcoveredbusiness).TheEEVresultsalsoincorporatetheeffectofthereinsurancearrangementofnon-profitimmediate
pensionannuityliabilitiesofSAIFtothePACnon-profitsub-fund.
(ii) Accounting presentation
(a) Analysis of post-tax profit
Totheextentapplicable,thepresentationoftheEEVpost-taxprofitfortheyearisconsistentwiththeclassificationbetweenoperating
andnon-operatingresultswiththebasisthattheGroupappliesfortheanalysisofIFRSbasisresults.Operatingresultsreflectunderlying
resultsincludinglonger-terminvestmentreturns,whicharedeterminedasdescribedinnote13(ii)(b)andincorporatethefollowing:
— Newbusinesscontribution,asdefinedinnote13(i)(b);
— Unwindofdiscountonthevalueofin-forcebusinessandotherexpectedreturns,asdescribedinnote13(ii)(c);
— Theimpactofroutinechangesofestimatesrelatingtooperatingassumptions,asdescribedinnote13(ii)(d);and
— Operatingexperiencevariances,asdescribedinnote13(ii)(e).
Non-operatingresultscomprise:
— Short-termfluctuationsininvestmentreturns;
— Themarktomarketvaluemovementsoncorestructuralborrowings;
— Theeffectofchangesineconomicassumptions;and
— Theimpactofcorporatetransactionsundertakenintheyear.
Inaddition,operatingresultsincludetheeffectofchangesintaxlegislation,unlessthesechangesareone-offandstructuralinnature,
suchastheimpactoftheUStaxreformin2017(seenote16),orprimarilyaffectthelevelofprojectedinvestmentreturns,inwhichcase
theyarereflectedasanon-operatingresult.
Totalprofitattributabletoshareholdersandbasicearningspershareincludetheseitems,togetherwithactualinvestmentreturns.
TheGroupbelievesthatoperatingprofit,asadjustedfortheseitems,betterreflectsunderlyingperformance.
ForM&GPrudential,theembeddedvalueincorporatesSolvencyIItransitionalmeasures,whicharerecalculatedusingmanagement’s
estimateoftheimpactofoperatingandmarketconditionsatthevaluationdate.Theimpactofthisrecalculationisrecordedwithinthe
correspondingcomponentoftheanalysisofpost-taxprofit.
(b) Investment returns included in operating profit
Fortheinvestmentelementoftheassetscoveringthenetworthoflong-terminsurancebusiness,investmentreturnsarerecognisedin
operatingresultsattheexpectedlong-termrateofreturn.Theseexpectedreturnsarecalculatedbyreferencetotheassetmixofthe
portfolio.Forthepurposeofcalculatingthelonger-terminvestmentreturntobeincludedintheoperatingresultofthewith-profits
fundofM&GPrudential,whereassetsbackingtheliabilitiesandunallocatedsurplusaresubjecttomarketvolatility,assetvaluesatthe
beginningofthereportingperiodareadjustedtoremovetheeffectsofshort-termmarketmovementsasexplainedinnote13(ii)(c).
368 Prudential plc AnnualReport2018
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Forthepurposeofdeterminingthelong-termreturnsfordebtsecuritiesofUSoperationsforfixedannuityandothergeneralaccount
business,ariskmarginreservechargeisincludedwhichreflectstheexpectedlong-termrateofdefaultbasedonthecreditqualityofthe
portfolio.ForJackson,interest-relatedrealisedgainsandlossesareamortisedtotheoperatingresultsoverthematurityperiodofthesold
bondsandforequity-relatedinvestments,along-termrateofreturnisassumed,whichreflectstheaggregationofend-of-periodrisk-free
ratesandtheequityriskpremium.ForUSvariableannuityseparateaccountbusiness,operatingprofitincludestheunwindofdiscount
ontheopeningvalueofin-forcebusinessadjustedtoreflectend-of-periodprojectedratesofreturnwiththeexcessordeficitofthe
actualreturnrecognisedwithinnon-operatingprofit,togetherwithrelatedhedgingactivity.
ForUKannuitybusiness,rebalancingoftheassetportfoliobackingtheliabilitiestopolicyholdersmay,fromtimetotime,takeplaceto
alignitmorecloselywiththeinternalbenchmarkofcreditqualitythatmanagementapplies.Suchrebalancingwillresultinachangeinthe
projectedyieldontheassetportfolioandtheallowancefordefaultrisk.Theneteffectofthesechangesisincludedintheoperatingresult
fortheyear.
(c) Unwind of discount and other expected returns
TheGroup’smethodologyindeterminingtheunwindofdiscountandotherexpectedreturnsisbyreferenceto:
— Thevalueofin-forcebusinessatthebeginningoftheyear(adjustedfortheeffectofcurrentyeareconomicandoperatingassumption
changes);and
— Requiredcapitalandsurplusassets.
Inapplyingthisgeneralapproach,theunwindofdiscountincludedinoperatingprofitforM&GPrudentialisdescribedbelow.
M&GPrudential
Theunwindisdeterminedbyreferencetoanimpliedsingleriskdiscountrate.TheEEVrisk-freerateisbasedonayieldcurve(assetout
innote13(i)(h)),whichisusedtoderiveanimpliedsinglediscountratewhich,ifthisratehadbeenused,wouldreproducethesame
embeddedvalueasthatcalculatedbyreferencetotheyieldcurve.Thedifferencebetweentheoperatingprofitdeterminedusingthe
singleimplieddiscountrateandthatderivedusingtheyieldcurveisincludedwithinnon-operatingprofit.
Forwith-profitsbusiness,theopeningvalueofin-forceisadjustedfortheeffectofshort-terminvestmentvolatilityduetomarket
movements(iesmoothed).Inthesummarystatementoffinancialpositionandfortotalprofitreporting,assetvaluesandinvestment
returnsarenotsmoothed.At31December2018,theshareholders’interestinthesmoothedsurplusassetsusedforthispurposeonly
were£12millionhigher(31December2017:£57millionlower)thanthesurplusassetscarriedinthestatementoffinancialposition.
(d) Effect of changes in operating assumptions
Operatingprofitincludestheeffectofchangestonon-economicassumptionsonthevalueofin-forceattheendoftheyear.For
presentationalpurposestheeffectofchangesisdelineatedtoshowtheeffectontheopeningvalueofin-forceasoperatingassumption
changes,withtheexperiencevariancessubsequentlybeingdeterminedbyreferencetotheend-of-yearassumptions(seenote13(ii)(e)).
(e) Operating experience variances
Operatingprofitincludestheeffectofexperiencevariancesonnon-economicassumptions,suchaspersistency,mortalityandmorbidity,
expensesandotherfactors,whicharecalculatedwithreferencetotheend-of-yearassumptions.
(f) Effect of changes in economic assumptions
Movementsinthevalueofin-forcebusinessatthebeginningoftheyearcausedbychangesineconomicassumptions,netoftherelated
changeinthetimevalueofcostofoptionsandguarantees,arerecordedinnon-operatingresults.
14 Assumptions
Principal economic assumptions
TheEEVbasisresultsfortheGroup’soperationshavebeendeterminedusingeconomicassumptionswherethelong-termexpected
ratesofreturnoninvestmentsandriskdiscountratesaresetbyreferencetoyear-endrisk-freeratesofreturn(definedbelowforeachof
theGroup’sinsuranceoperations).Expectedreturnsonequityandpropertyassetclassesandcorporatebondsarederivedbyaddinga
riskpremium,basedontheGroup’slong-termview,totherisk-freerate.
Thetotalprofitthatemergesoverthelifetimeofanindividualcontractascalculatedusingtheembeddedvaluebasisisthesameover
timeasthatcalculatedundertheIFRSbasis.Sincetheembeddedvaluebasisreflectsdiscountedfuturecashflows,undertheEEV
methodologytheprofitemergenceisadvanced,thusmorecloselyaligningthetimingoftherecognitionofprofitwiththeeffortsandrisks
ofcurrentmanagementactions,particularlywithregardtobusinesssoldduringtheyear.
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AnnualReport2018 Prudential plc 369
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14 Assumptions continued
Principal economic assumptions continued
(i) Asia
Therisk-freeratesofreturnforAsiaaredefinedas10-yeargovernmentbondyieldsattheendoftheyear.
Risk discount rate %
New business
In-force business
10-year government bond
yield %
Expected long-term
Inflation %
31 Dec
2018
31 Dec
2017
31 Dec
2018
31 Dec
2017
31 Dec
2018
31 Dec
2017
31 Dec
2018
31 Dec
2017
China
HongKong notes (b)(d)
Indonesia
Malaysia note (d)
Philippines
Singapore note (d)
Taiwan
Thailand
Vietnam
Totalweightedriskdiscountrate note (a)
8.1
4.4
12.4
6.6
14.5
3.4
4.5
10.0
12.6
5.4
9.7
4.1
10.6
6.4
12.7
3.5
4.3
9.8
12.6
5.3
8.1
4.4
12.4
6.6
14.5
4.2
4.4
10.0
12.6
5.8
9.7
4.1
10.6
6.5
12.7
4.4
3.9
9.8
12.6
5.7
3.3
2.7
8.2
4.1
7.0
2.1
0.9
2.5
5.1
3.9
2.4
6.4
3.9
5.2
2.0
0.9
2.3
5.1
3.0
2.5
4.5
2.5
4.0
2.0
1.5
3.0
5.5
3.0
2.5
4.5
2.5
4.0
2.0
1.5
3.0
5.5
Notes
(a)
(b)
(c)
(d)
TheweightedriskdiscountratesforAsiaoperationsshownabovehavebeendeterminedbyweightingeachmarket’sriskdiscountratesbyreferencetothepost-taxEEVbasis
newbusinesscontributionandtheclosingvalueofin-forcebusiness.ThechangesintheriskdiscountratesforindividualAsiabusinessunitsreflectthemovementsin10-year
governmentbondyields,changesintheeconomicbasisandchangesinproductmix.
ForHongKongtheassumptionsshownareforUSdollardenominatedbusiness.Forotherbusinessunits,theassumptionsareforlocalcurrencydenominatedbusiness.
EquityriskpremiumsinAsiarangefrom4.0percentto9.4percent(2017:4.0percentto9.4percent).
ThemeanequityreturnassumptionsforthemostsignificantequityholdingsoftheAsiaoperationsare:
HongKong
Malaysia
Singapore
(ii) US
Therisk-freeratesofreturnfortheUSaredefinedasthe10-yeartreasurybondyieldattheendoftheyear.
31 Dec 2018 % 31 Dec 2017 %
6.7
10.6
8.6
6.4
10.4
8.5
31 Dec 2018 % 31 Dec 2017 %
7.1
0.2
4.4
1.0
6.9
6.8
2.7
0.17
6.7
2.9
4.0
17.5
6.8
0.2
4.1
1.0
6.7
6.5
2.4
0.19
6.4
3.0
4.0
18.0
31 Dec 2018 %
31 Dec 2017 %
January to
June
issues
July to
December
issues
January to
June
issues
July to
December
issues
1.75
2.00
0.50
1.75
2.00
0.50
1.50
1.75
0.50
1.25
1.50
0.50
Riskdiscountrate:
Variableannuity:
Riskdiscountrate
Additionalallowanceforcreditriskincludedinriskdiscountrate note 13(i)(h)
Non-variableannuity:
Riskdiscountrate
Additionalallowanceforcreditriskincludedinriskdiscountrate note 13(i)(h)
Weightedaveragetotal:
Newbusiness
In-forcebusiness
US10-yeartreasuryyield
Allowanceforlong-termdefaultsincludedinprojectedspread note 13(i)(h)
Pre-taxexpectedlong-termnominalrateofreturnforUSequities
Expectedlong-termrateofinflation
Equityriskpremium
S&Pequityreturnvolatility
Note
Assumednewbusinessspreadmarginsareasfollows:
Fixedannuitybusiness*†
Fixedindexannuitybusiness*
Institutionalbusiness
*Theassumedspreadmargingradesuplinearlyby25basispointstoalong-termassumptionoverfiveyears.
†Includingtheproportionofvariableannuitybusinessinvestedinthegeneralaccount.
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(iii) UK and Europe
Therisk-freerateisbasedonthefulltermstructureofinterestrates,ieayieldcurve,whichisusedtodeterminetheembeddedvalueat
theendofthereportingperiod.Theseyieldcurvesareusedtoderivepre-taxexpectedlong-termnominalratesofinvestmentreturnand
riskdiscountrates.Forthepurposeofdeterminingtheunwindofdiscountintheanalysisofoperatingprofit,theseyieldcurvesareused
toderiveasingleimpliedriskdiscountrate,asexplainedinnote13(i)(h).
Thissingleimpliedriskdiscountrateisshown,alongwiththe15-yearnominalrateofinvestmentreturnand15-yearrateofinflation
basedontheinflationyieldcurve.
Shareholder-backed annuity in-force business: note (a)
Riskdiscountrate
Pre-taxexpected15-yearnominalratesofinvestmentreturn note (c)
With-profits and other business:
Riskdiscountrate: note (b)
Newbusiness
In-forcebusiness
Pre-taxexpected15-yearnominalratesofinvestmentreturn: note (c)
Overseasequities
Property
15-yeargiltyield
Corporatebonds
Expected15-yearrateofinflation
Equityriskpremium
31 Dec 2018 % 31 Dec 2017 %
4.7
3.1
4.9
5.0
4.0
2.6
4.7
4.8
6.5 to 10.1
4.4
1.7
3.5
3.6
4.0
6.2to10.1
4.4
1.6
3.4
3.5
4.0
Notes
(a)
(b)
(c)
Forshareholder-backedannuitybusiness,themovementsinthepre-taxlong-termnominalratesofreturnandriskdiscountratesreflecttheeffectofchangesinassetyields.
Theriskdiscountratesforwith-profitsandotherbusinessshownaboverepresentsaweightedaveragetotaloftheratesappliedtodeterminethepresentvalueoffuturecashflows,
includingtheportionoffuturewith-profitsbusinessshareholders’transfersrecognisedinnetworth.
ThetablebelowshowsthepatternoftheUKrisk-freeSolvencyIIspotyieldcurveattheendof31December:
31 Dec 2018
31Dec2017
1 year
1.0%
0.6%
5 year
10 year
15 year
20 year
1.2%
0.9%
1.3%
1.2%
1.4%
1.3%
1.5%
1.4%
Stochastic assumptions
Detailsaregivenbelowofthekeycharacteristicsofthemodelsusedtodeterminethetimevalueofthefinancialoptionsandguarantees
asreferredtoinnote13(i)(d).
(iv) Asia
— ThestochasticcostofguaranteesisprimarilyofsignificancefortheHongKong,Malaysia,SingaporeandTaiwanoperations;
— Theprincipalassetclassesaregovernmentandcorporatebonds;
— TheassetreturnmodelsaresimilartothemodelsasdescribedforM&GPrudentialbelow;and
— Thevolatilityofequityreturnsrangesfrom18percentto35percentforbothyears,andthevolatilityofgovernmentbondyields
rangesfrom1.1percentto2.0percent(2017:from1.1percentto2.0percent).
(v) US (Jackson)
— Interestratesandequityreturnsareprojectedusingalog-normalgeneratorreflectinghistoricalmarketdata;
— Corporatebondreturnsarebasedontreasuryyieldsplusaspreadthatreflectscurrentmarketconditions;and
— Thevolatilityofequityreturnsrangesfrom17percentto26percent(2017:from18percentto27percent),andthestandard
deviationofinterestratesrangesfrom3.4percentto3.7percent(2017:from2.5percentto2.8percent).
(vi) UK and Europe (M&GPrudential)
— Interestratesareprojectedusingastochasticinterestratemodelcalibratedtothecurrentmarketyields;
— Equityreturnsareassumedtofollowalog-normaldistribution;
— Thecorporatebondreturniscalculatedbasedonarisk-freereturnplusamean-revertingspread;
— Propertyreturnsarealsomodelledbasedonarisk-freereturnplusariskpremiumwithastochasticprocessreflectingtotalproperty
returns;and
— Thestandarddeviationofequitiesandpropertyrangesfrom14percentto20percentforbothyears.
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AnnualReport2018 Prudential plc 371
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the EEV basis results continued
14 Assumptions continued
Operating assumptions
(vii) Best estimate assumptions
Bestestimateassumptionsareusedforthecashflowprojections,wherebestestimateisdefinedasthemeanofthedistributionoffuture
possibleoutcomes.Theassumptionsarereviewedactivelyandchangesaremadewhenevidenceexiststhatmaterialchangesinfuture
experiencearereasonablycertain.
Assumptionsrequiredinthecalculationofthevalueofoptionsandguarantees,forexamplerelatingtovolatilitiesandcorrelations,or
dynamicalgorithmslinkingliabilitiestoassets,havebeensetequaltothebestestimatesand,wherevermaterialandpractical,reflectany
dynamicrelationshipsbetweentheassumptionsandthestochasticvariables.
Demographic assumptions
Persistency,mortalityandmorbidityassumptionsarebasedonananalysisofrecentexperience,butalsoreflectexpectedfuture
experience.Whererelevant,whencalculatingthetimevalueoffinancialoptionsandguarantees,policyholderwithdrawalratesvaryin
linewiththeemerginginvestmentconditionsaccordingtomanagement’sexpectations.Whenprojectingcashflowsformedical
reimbursementbusinessthatisrepricedannually,explicitallowanceismadeforexpectedfuturepremiumsinflationandseparatelyfor
futuremedicalclaimsinflation.The2018EEVresultsreflectthisapproach.Previously,medicalclaimsinflationwasimplicitlyallowedfor
byassumingthatallincreasesinmedicalclaimcostsweredirectlyoffsetbyfuturepremiumincreaseswithnoimpactonprofits.
Expense assumptions
Expenselevels,includingthoseofservicecompaniesthatsupporttheGroup’slong-termbusinessoperations,arebasedoninternal
expenseanalysisandareappropriatelyallocatedtoacquisitionofnewbusinessandrenewalofin-forcebusiness.Formaturebusiness,it
isPrudential’spolicynottotakecreditforfuturecostreductionprogrammesuntiltheactionstoachievethesavingshavebeendelivered.
Anallowanceismadeforshort-termrequiredexpenses,thatarenotrepresentativeofthelonger-termexpenseloadingsoftherelevant
businesses.At31December2018,theallowanceheldforthesecostsacrosstheGroupwas£(436)millionmainlyarisinginAsia.Expense
overrunsarereportedwheretheseareexpectedtobeshort-lived,includingbusinessesthataregrowingrapidlyoraresub-scale.
ForAsiaoperations,theexpensescomprisecostsbornedirectlyandrechargedcostsfromtheAsiaRegionalHeadOfficethatare
attributabletocoveredbusiness.Theassumedfutureexpensesfortheseoperationsalsoincludeprojectionsofthesefuturerecharges.
Developmentexpensesarechargedasincurred.
Corporateexpenditure,whichisincludedinotherincomeandexpenditure,comprises:
— ExpenditureforGroupHeadOffice,totheextentnotallocatedtotheUKwith-profitsfunds,togetherwithrestructuringcosts
incurredacrossthegroup;and
— ExpenditureoftheAsiaRegionalHeadOfficethatisnotallocatedtothecoveredbusinessorassetmanagementoperationswhichis
chargedasincurred.Thesecostsareprimarilyforcorporaterelatedactivitiesandareincludedwithincorporateexpenditure.
(viii) Tax rates
Theassumedlong-termeffectivetaxratesforoperationsreflecttheincidenceoftaxableprofitsandlossesintheprojectedcashflowsas
explainedinnote13(i)(j).
Thelocalstatutorycorporatetaxratesapplicableforthemostsignificantoperationsfor2018and2017areasfollows:
Asiaoperations:
HongKong
Indonesia
Malaysia
Singapore
USoperations
UKoperations
%
16.5percenton5percentofpremiumincome
25.0
24.0
17.0
2017:35.0;2018:21.0
2017and2018:19.0;from1April2020:17.0
372 Prudential plc AnnualReport2018
www.prudential.co.uk
15 Insurance new business premiumsnote(i)
Asia
US
UKandEurope
Group total
Asia
Cambodia
HongKong
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
South-east Asia operations including
Hong Kong
China note (ii)
Taiwan
India note (iii)
Total
US
Variableannuities
EliteAccess(variableannuity)
Fixedannuities
Fixedindexannuities
Wholesale
Total
UK and Europe
Bonds
Corporatepensions
Individualpensions
Incomedrawdown
Otherproducts
Total
Single premiums
Regular premiums
Annual premium
equivalents (APE)
note13(i)(b)
Present value of new
business premiums
(PVNBP)
note13(i)(b)
2018 £m 2017 £m
2018 £m 2017 £m
2018 £m 2017 £m
2018 £m 2017 £m
2,316
15,423
13,382
2,299
16,622
13,044
31,121
31,965
–
343
205
84
43
930
217
20
–
582
288
73
62
859
139
8
1,842
103
292
79
2,316
2,011
179
46
63
2,299
10,810
1,681
340
251
2,341
11,536
2,013
454
295
2,324
15,423
16,622
3,539
69
5,681
2,555
1,538
3,509
103
5,747
2,218
1,467
13,382
13,044
3,513
–
177
3,690
20
1,663
215
243
83
369
95
144
2,832
292
182
207
3,513
–
–
–
–
–
–
–
117
35
–
25
177
3,575
–
187
3,762
16
1,667
268
271
71
361
70
133
2,857
276
208
234
3,575
–
–
–
–
–
–
–
130
32
–
25
187
3,744
1,542
1,516
6,802
20
1,697
236
251
87
462
117
146
3,016
302
211
215
3,744
1,081
168
34
25
234
1,542
354
124
603
256
179
3,805
1,662
1,491
6,958
16
1,725
297
278
77
447
84
134
3,058
294
213
240
3,805
1,154
201
45
30
232
1,662
351
140
607
222
171
20,754
15,423
14,073
20,405
16,622
13,784
50,250
50,811
89
10,200
910
1,322
296
3,611
609
708
70
10,027
1,183
1,398
287
3,463
421
659
17,745
1,313
788
908
17,508
1,299
634
964
20,754
20,405
10,810
1,681
340
251
2,341
11,536
2,013
454
295
2,324
15,423
16,622
3,540
443
5,832
2,555
1,703
3,510
533
5,897
2,218
1,626
1,516
1,491
14,073
13,784
Group total
31,121
31,965
3,690
3,762
6,802
6,958
50,250
50,811
Notes
(i)
Thetablesshownaboveareprovidedasanindicativevolumemeasureoftransactionsundertakeninthereportingperiodthathavethepotentialtogenerateprofitsfor
shareholders.Theamountsshownarenot,andnotintendedtobe,reflectiveofpremiumincomerecordedintheIFRSincomestatement.AreconciliationofAPEandgrossearned
premiumsonanIFRSbasisisprovidedinnoteIII(g)withintheunauditedfinancialinformation.
(ii) NewbusinessinChinaisincludedatPrudential’s50percentinterestintheChinalifeoperation.
(iii) NewbusinessinIndiaisincludedatPrudential’s26percentinterestintheIndialifeoperation.
www.prudential.co.uk
AnnualReport2018 Prudential plc 373
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Notes on the EEV basis results continued
16 Impact of US tax reform
On22December2017,TheTaxCutsandJobsActintheUSwasenactedintolaweffectivefrom1January2018.Thetaxreformpackage
asawhole,whichincludedareductioninthecorporateincometaxratefrom35percentto21percentandanumberofspecificmeasures
affectingUSlifeinsurers,resultedina£390millionbenefitinnon-operatingprofitreflectedwithinthe2017results.Thepositiveimpact
onanEEVbasisrepresentedthebenefitoffutureprofitsbeingtaxedatalowerrate,partiallyoffsetbyareductioninthenetdeferredtax
assetheldinthebalancesheettoreflectremeasurementatthenewlowertaxrate,togetherwithareductioninthebenefitfromthe
dividendreceiveddeductionontaxableprofitsfromvariableannuitybusiness.InJune2018,theNationalAssociationofInsurance
Commissioners(NAIC)formallyapprovedchangestoRBCcapitalfactorsthatreflectedtheDecember2017UStaxreformandthe2018
EEVresultsreflectthesechangesasshowninnotes6and9.
17 Corporate transactions
Disposals and other corporate transactions
TransactionsassociatedwithM&GPrudential note (i)
Othertransactions note (ii)
2018 £m
2017 £m
(376)
(75)
(451)
–
80
80
Notes
(i)
Transactions associated with M&GPrudential
ThefollowingtransactionsreducedtheGroup’sEEVby£(376)million,whichprimarilyreflectsthelossofprofitsontheportionofannuityliabilitiessold.
Intention to demerge the Group’s UK and Europe business and transfer of Hong Kong insurance subsidiaries
InMarch2018,theGroupannounceditsintentiontodemergeitsUKandEuropebusiness(M&GPrudential)fromPrudentialplc,resultingintwoseparatelylistedcompanies.In
preparationfortheUKdemergerprocess,duringDecember2018,thelegalownershipofPrudentialplc’sHongKonginsurancesubsidiarieswastransferredfromThePrudential
AssuranceCompanyLimited(M&GPrudential’sUKregulatedInsuranceentity)toPrudentialCorporationAsiaLimited.
Sale of shareholder annuity portfolio
InMarch2018,M&GPrudentialreinsured£12.0billionofitsshareholderannuityportfolio(IFRSliabilitiesvaluedasat31December2017)toRothesayLife.Underthetermsofthe
agreement,thereinsuranceisexpectedtobefollowedbyaPartVIItransferofmostofthereinsuredportfolioby30June2019.The2018EEVresultsincludetheimpactonEEV
resultingfromthistransfer.
(ii) Other transactions
In2018,othercorporatetransactionsresultedinanEEVlossof£(75)million(2017:£80milliongain).ThisprimarilyrelatestoadditionalcostsincurredinexitingtheUS
broker-dealerbusiness(whichrealisedapost-taxgainof£80millionwhentheindependentbroker-dealernetworkwassoldtoLPLFinancialLLCin2017)andcostsrelatedtothe
preparationfortheannounceddemergerdiscussedabove.
18 Post balance sheet events
Renewal of strategic bancassurance alliance with United Overseas Bank Limited
InJanuary2019,theGroupannouncedtherenewalofitsregionalstrategicbancassurancealliancewithUnitedOverseasBankLimited
(UOB).Thenewagreementextendstheoriginalalliancewhichcommencedin2010to2034andincreasesthegeographicalscopeto
includeafifthmarket,Vietnam,alongsidetheexistingmarketsacrossSingapore,Malaysia,ThailandandIndonesia.
Aspartofthistransaction,PrudentialhasagreedtopayUOBaninitialfeeof£662million(translatedusingaSingaporedollar:£
foreignexchangerateof1.7360)fordistributionrightswhichisnotdependentonfuturesalesvolumes.Thisamountwillbepaidinthree
instalmentsof£230millioninFebruary2019,£331millioninJanuary2020and£101millioninJanuary2021.InlinewiththeGroup’s
policy,theseamountswillbecapitalisedasdistributionrightsintangibleasset.
374 Prudential plc AnnualReport2018
www.prudential.co.uk
Statement of Directors’ responsibilities in
respect of the European Embedded Value
(EEV) basis supplementary information
The directors have chosen to prepare supplementary information in accordance with the
European Embedded Value Principles dated April 2016 by the European Insurance CFO
Forum (‘the EEV Principles’) using the methodology and assumptions set out in the Notes
on the EEV basis results.
WhencompliancewiththeEEVPrinciples
isstated,thoseprinciplesrequirethe
directorstopreparesupplementary
informationinaccordancewiththe
EmbeddedValueMethodology(EVM)
containedintheEEVPrinciplesandto
discloseandexplainanynon-compliance
withtheEEVguidanceincludedintheEEV
Principles.
InpreparingtheEEVsupplementary
information,thedirectorshave:
— Preparedthesupplementary
informationinaccordancewiththeEEV
Principles;
— Identifiedanddescribedthebusiness
coveredbytheEVM;
— AppliedtheEVMconsistentlytothe
coveredbusiness;
— Determinedassumptionsonarealistic
basis,havingregardtopast,currentand
expectedfutureexperienceandtoany
relevantexternaldata,andthenapplied
themconsistently;
— Madeestimatesthatarereasonableand
consistent;and
— Describedthebasisonwhichbusiness
thatisnotcoveredbusinesshasbeen
includedinthesupplementary
information,includinganymaterial
departuresfromtheaccounting
frameworkapplicabletotheGroup’s
financialstatements.
www.prudential.co.uk
AnnualReport2018 Prudential plc 375
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Independent auditor’s report to Prudential plc
on the European Embedded Value (EEV) basis
supplementary information
Opinions and conclusions arising
from our audit
Our opinion on the EEV basis
supplementary information is
unmodified
WehaveauditedtheEEVbasis
supplementaryinformation
ofPrudentialplc(“theCompany”)forthe
yearended31December2018setoutin
theEEVbasisresultsandNotesonthe
EEVbasisresultspages.TheEEVbasis
supplementaryinformationshouldbe
readinconjunctionwiththeGroup
financialstatements.
Inouropinion,theEEVbasis
supplementaryinformationofthe
Companyfortheyearended31December
2018hasbeenproperlyprepared,inall
materialrespects,inaccordancewiththe
EuropeanEmbeddedValuePrinciples
datedApril2016bytheEuropean
InsuranceCFOForum(“theEEV
Principles”)usingthemethodologyand
assumptionssetoutintheNotesonthe
EEVbasisresults.
The impact of uncertainties due to
the UK exiting the European Union
on our audit
Uncertaintiesrelatedtotheeffectsof
Brexitarerelevanttounderstandingour
auditofthefinancialstatements.Allaudits
assessandchallengethereasonableness
ofestimatesmadebythedirectorsand
relateddisclosuresandtheappropriateness
ofthegoingconcernbasisofpreparation
ofthefinancialstatements.Allofthese
dependonassessmentsofthefuture
economicenvironmentandthegroup’s
futureprospectsandperformance.Brexit
isoneofthemostsignificanteconomic
eventsfortheUK,andatthedateof
thisreportitseffectsaresubjectto
unprecedentedlevelsofuncertaintyof
outcomes,withthefullrangeofpossible
effectsunknown.Weapplieda
standardisedfirm-wideapproachin
responsetothatuncertaintywhen
assessingthegroup’sfutureprospects
andperformance.However,noaudit
shouldbeexpectedtopredictthe
unknowablefactorsorallpossiblefuture
implicationsforacompanyandthisis
particularlythecaseinrelationtoBrexit.
Respective responsibilities of
directors and auditor
AsexplainedmorefullyintheDirectors’
ResponsibilitiesStatementsetouton
page375,thedirectorshaveaccepted
responsibilityforthepreparationof
thesupplementaryinformationonthe
EEVbasisinaccordancewiththe
EEVPrinciples.
Ourresponsibilityistoaudit,andexpress
anopinionon,thesupplementary
informationinaccordancewiththeterms
ofourengagementandinaccordancewith
InternationalStandardsonAuditing(UK).
Thosestandardsrequireustocomply
withtheFinancialReportingCouncil’s
EthicalStandard.
Scope of an audit of financial
statements performed in
accordance with ISAs (UK)
Adescriptionofthescopeofanaudit
offinancialstatementsisprovidedon
ourwebsiteatwww.kpmg.com/uk/
auditscopeukco2014a.Thisreportis
madesubjecttoimportantexplanations
regardingourresponsibilities,aspublished
onthatwebsite,whichareincorporated
intothisreportasifsetoutinfulland
shouldbereadtoprovideanunderstanding
ofthepurposeofthisreport,thework
wehaveundertakenandthebasisof
ouropinions.
The purpose of this report and
restrictions on its use by persons
other than the Company
ThisreportismadesolelytotheCompany
inaccordancewiththetermsofour
engagement.Ourauditworkhasbeen
undertakensothatwemightstatetothe
Companythosematterswehavebeen
engagedtostateinthisreportandforno
otherpurpose.Tothefullestextent
permittedbylaw,wedonotacceptor
assumeresponsibilitytoanyoneotherthan
theCompanyforourauditwork,forthis
report,orfortheopinionswehaveformed.
Philip Smart
(SeniorStatutoryAuditor)
forandonbehalfofKPMGLLP,
StatutoryAuditor
CharteredAccountants
London
12March2019
376 Prudential plc AnnualReport2018
www.prudential.co.uk
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Additional information
Index to the additional unaudited financial information
Risk factors
Glossary
Shareholder information
How to contact us
Page
378
407
416
420
423
www.prudential.co.uk
AnnualReport2018 Prudential plc 377
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Index to the additional unaudited
financial information*
I
IFRS profit and loss before tax
(a) Analysisoflong-terminsurancebusinessadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsbydriver
(b) Asiaoperations–analysisofoperatingprofitbybusinessunit
(c) Analysisofassetmanagementoperatingprofitbasedonlonger-terminvestmentreturns
(d) ContributiontoUKlong-termfinancialmetricsfromspecificmanagementactionsundertakentopositionthebalancesheet
moreefficientlyundertheSolvencyIIregime
II Other information
(a) Holdingcompanycashflow
(b) Fundsundermanagement
(c) SolvencyIIcapitalposition
(d) Reconciliationofexpectedtransferofvalueofin-forcebusiness(VIF)andrequiredcapitaltofreesurplus
(e) Foreigncurrencysourceofkeymetrics
(f) Optionschemes
(g) SelectedhistoricalfinancialinformationofPrudential
III Calculation of alternative performance measures
(a) ReconciliationofadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnstoprofitbeforetax
(b) CalculationofreturnonIFRSshareholders’funds
(c) CalculationofIFRSgearingratio
(d) CalculationofIFRSshareholders’fundspershare
(e) Calculationofassetmanagementcost/incomeratio
(f) ReconciliationofAsiarenewalinsurancepremiumtogrossearnedpremiums
(g) ReconciliationofAPEnewbusinesssalestoearnedpremiums
(h) ReconciliationbetweenIFRSandEEVshareholders’funds
(i) ReconciliationofEEVoperatingprofitbasedonlonger-terminvestmentreturns
(j) Calculationofreturnonembeddedvalue
(k) CalculationofEEVshareholders’fundspershare
Page
379
385
385
387
388
389
390
394
399
399
401
403
404
404
404
404
405
405
406
406
406
406
*Inthisadditionalunauditedfinancialinformation‘operatingprofit’referstoadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns.
378 Prudential plc AnnualReport2018
www.prudential.co.uk
Additional unaudited financial information
I IFRS profit and loss information
I(a) Analysis of long-term insurance business adjusted IFRS operating profit based on longer-term investment
returns by driver
ThisscheduleclassifiestheGroup’sadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsfromlong-terminsurance
operationsintotheunderlyingdrivers,usingthefollowingcategories:
— Spread incomerepresentsthedifferencebetweennetinvestmentincomeandamountscreditedtocertainpolicyholderaccounts.
Itexcludestheoperatinginvestmentreturnonshareholdernetassets,whichhasbeenseparatelydisclosedasexpectedreturnon
shareholderassets.
— Fee incomerepresentsprofitsdrivenbynetinvestmentperformance,beingassetmanagementfeesthatvarywiththesizeofthe
underlyingpolicyholderfundsnetofinvestmentmanagementexpenses.
— With-profitsrepresentthepre-taxshareholders’transferfromthewith-profitsfundsfortheyear.
— Insurance marginprimarilyrepresentsprofitsderivedfromtheinsurancerisksofmortalityandmorbidity.
— Margin on revenuesprimarilyrepresentsamountsdeductedfrompremiumstocoveracquisitioncostsandadministrationexpenses.
— Acquisition costs and administration expensesrepresentexpensesincurredintheyearattributabletoshareholders.These
excludeitemssuchasrestructuringcostswhicharenotincludedinthesegmentprofitforinsurance,aswellasitemsthataremore
appropriatelyincludedinothersourcesofearningslines(eginvestmentexpensesarenettedagainstinvestmentincomeaspartof
spreadincomeorfeeincomeasappropriate).
— DAC adjustments compriseDACamortisationfortheyear,excludingamountsrelatedtoshort-termfluctuationsininvestment
returns,netofcostsdeferredinrespectofnewbusiness.
Analysis of adjusted IFRS operating profit based on longer-term investment returns by source and margin analysis
of Group long-term insurance business
ThefollowinganalysisexpressescertainoftheGroup’ssourcesofadjustedIFRSoperatingprofitbasedonlong-terminvestmentreturns
asamarginofpolicyholderliabilitiesorotherrelevantdrivers.DetailsonthecalculationoftheGroup’saveragepolicyholderliability
balancesaregiveninnote(iv)attheendofthissection.
Average
liability
note(iv)
85,850
175,443
147,318
Margin
bps
note(ii)
105
155
27
6,802
265,597
(34)%
(91)
Spreadincome
Feeincome
With-profits
Insurancemargin
Marginonrevenues
Expenses:
Acquisitioncosts note (i)
Administrationexpenses
DACadjustments note (v)
Expectedreturnonshareholderassets
Shareofrelatedtaxchargesfromjointventures
andassociate note (vi)
Longevityreinsuranceandothermanagement
actionstoimprovesolvency
Changesinlongevityassumptionbasis
Provisionforguaranteedminimumpension
equalisation
Insurancerecoveriesofcostsassociatedwith
reviewofpastannuitysales
Long-termbusinessadjustedIFRSoperating
profitbasedonlonger-terminvestment
returns
Asia
US
2018 £m
UK and
Europe
583
2,445
–
949
–
(759)
(1,204)
(114)
11
1,911
232
210
71
1,481
2,105
(1,503)
(1,029)
326
129
2,022
(40)
84
56
320
50
149
(57)
(180)
4
102
528
–
58
441
(55)
166
Total
899
2,711
391
2,480
2,254
(2,319)
(2,413)
216
242
4,461
(40)
58
441
(55)
166
1,982
1,911
1,138
5,031
www.prudential.co.uk
AnnualReport2018 Prudential plc 379
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information I IFRS profit and loss information continued
I(a) Analysis of long-term insurance business adjusted IFRS operating profit based on longer-term investment
returns by driver continued
Spreadincome
Feeincome
With-profits
Insurancemargin
Marginonrevenues
Expenses:
Acquisitioncosts note (i)
Administrationexpenses
DACadjustments note (v)
Expectedreturnonshareholderassets
Shareofrelatedtaxchargesfromjointventures
andassociate note (vi)
Longevityreinsuranceandothermanagement
actionstoimprovesolvency
Changesinlongevityassumptionbasis
Provisionforreviewofpastannuitysales
Long-termbusinessadjustedIFRSoperating
profitbasedonlonger-terminvestment
returns
Spreadincome
Feeincome
With-profits
Insurancemargin
Marginonrevenues
Expenses:
Acquisitioncosts note (i)
Administrationexpenses
DACadjustments note (v)
Expectedreturnonshareholderassets
Shareofrelatedtaxchargesfromjointventures
andassociate note (vi)
Longevityreinsuranceandothermanagement
actionstoimprovesolvency
Changesinlongevityassumptionbasis
Provisionforreviewofpastannuitysales
Long-termbusinessadjustedIFRSoperating
profitbasedonlonger-terminvestment
returns
Average
liability
note(iv)
88,908
166,839
136,474
Margin
bps
note(ii)
126
156
25
6,958
261,114
(35)%
(88)
Average
liability
note(iv)
87,553
162,267
136,496
Margin
bps
note(ii)
124
155
25
6,767
255,313
(35)%
(87)
Asia
US
2017 AER £m
UK and
Europe
234
205
59
1,341
2,098
(1,499)
(967)
241
126
1,838
(39)
–
–
–
751
2,343
–
906
–
(876)
(1,174)
260
4
2,214
–
–
–
–
137
61
288
55
189
(68)
(164)
4
104
606
–
276
204
(225)
Total
1,122
2,609
347
2,302
2,287
(2,443)
(2,305)
505
234
4,658
(39)
276
204
(225)
1,799
2,214
861
4,874
Asia
US
2017 CER £m
note(iii)
UK and
Europe
228
195
57
1,293
2,021
(1,450)
(933)
235
120
1,766
(39)
–
–
–
725
2,262
–
875
–
(846)
(1,134)
251
4
2,137
–
–
–
–
137
61
288
55
189
(68)
(164)
4
104
606
–
276
204
(225)
Total
1,090
2,518
345
2,223
2,210
(2,364)
(2,231)
490
228
4,509
(39)
276
204
(225)
1,727
2,137
861
4,725
380 Prudential plc AnnualReport2018
www.prudential.co.uk
Additional unaudited financial information continued
(iv)
TheratioofacquisitioncostsiscalculatedasapercentageofAPEsalesincludingwith-profitssales.Acquisitioncostsincludeonlythoserelatingtoshareholder-backedbusiness.
Notes to sources of earnings tables throughout I(a)
(i)
(ii) Marginrepresentstheoperatingreturnearnedintheyearasaproportionoftherelevantclassofaveragepolicyholderliabilitiesexcludingunallocatedsurplus.
(iii)
The2017comparativeinformationhasbeenpresentedatAERandCERtoeliminatetheimpactofforeignexchangetranslation.CERresultsarecalculatedbytranslatingprior
yearresultsusingthecurrentyearforeignexchangerates.AllCERprofitfigureshavebeentranslatedatcurrentyearaveragerates.ForAsiaCERaveragepolicyholderliability
calculations,theamountshavebeentranslatedusingcurrentyearopeningandclosingexchangerates.FortheUSCERaverageliabilitycalculations,theamountshavebeen
translatedatthecurrentyearmonth-endclosingexchangerates.SeenoteA1intheIFRSfinancialstatementsforforeignexchangeratesused.
ForUKandEuropeandAsia,openingandclosingpolicyholderliabilitieshavebeenusedtoderiveanaveragebalancefortheyear,asaproxyforaveragebalancesthroughout
theyear.ThecalculationofaverageliabilitiesforJacksonisgenerallyderivedfrommonth-endbalancesthroughouttheyear,asopposedtoopeningandclosingbalancesonly.
TheaverageliabilitiesforfeeincomeinJacksonhavebeencalculatedusingdailybalancesinsteadofmonth-endbalancesinordertoprovideamoremeaningfulanalysisofthe
feeincome,whichischargedonthedailyaccountbalance.Averageliabilitiesforspreadincomearebasedonthegeneralaccountliabilitiestowhichspreadincomeattaches.
AverageliabilitiesusedtocalculatetheadministrationexpensemarginexcludetheREALICliabilitiesreinsuredtothirdpartiespriortotheacquisitionbyJackson.
TheDACadjustmentscontainacreditof£55millioninrespectofjointventuresandassociatein2018(2017:AERcreditof£43million).
(v)
(vi) UnderIFRS,theGroup’sshareofresultsfromitsinvestmentsinjointventuresandassociateaccountedforusingtheequitymethodisincludedintheGroup’sprofitbeforetaxona
netofrelatedtaxbasis.In2018,theGroupalteredthepresentationofitsanalysisofAsiaadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsbydrivertoshow
thesetaxchargesseparatelyinorderforthecontributionfromthejointventuresandassociatetobeincludedinthemarginanalysisonaconsistentbasisastherestoftheAsia
operations.2017comparativeshavebeenre-presentedaccordingly.
Margin analysis of long-term insurance business – Asia
Spreadincome
Feeincome
With-profits
Insurancemargin
Marginonrevenues
Expenses:
Acquisitioncosts note (i)
Administrationexpenses
DACadjustments note (v)
Expectedreturnonshareholderassets
Shareofrelatedtaxchargesfromjoint
venturesandassociate note (vi)
AdjustedIFRSoperatingprofitbased
onlonger-terminvestmentreturns
2017 AER
Average
liability
note(iv)
£m
16,359
18,767
30,115
Margin
note(ii)
bps
143
109
20
3,805
35,126
(39)%
(275)
2018
Average
liability
note(iv)
£m
18,895
20,105
36,309
Margin
note(ii)
bps
123
104
20
Profit
£m
232
210
71
1,481
2,105
(1,503)
3,744
(1,029) 39,000
(40)%
(264)
326
129
2,022
(40)
1,982
Profit
£m
234
205
59
1,341
2,098
(1,499)
(967)
241
126
1,838
(39)
1,799
2017 CER note(iii)
Average
liability
note(iv)
£m
16,351
18,638
30,137
Margin
note(ii)
bps
139
105
19
3,671
34,989
(39)%
(267)
Profit
£m
228
195
57
1,293
2,021
(1,450)
(933)
235
120
1,766
(39)
1,727
Analysis of Asia adjusted IFRS operating profit based on longer-term investment returns by driver:
— SpreadincomehasincreasedonaCERbasisby2percent(AER:decreasedby1percent)to£232millionin2018,withadecrease
inthemarginonaCERbasisfrom139basispointsin2017to123basispointsin2018(AER:decreasedfrom143basispointsin2017
to123basispointsin2018)predominantlyreflectingthechangeininvestmentmix,countryandproductmix.
— Feeincomehasincreasedby8percentonaCERbasis(AER:2percent)to£210millionin2018,broadlyinlinewiththeincreasein
movementinaverageunit-linkedpolicyholderliabilities.
— Insurancemarginhasincreasedby15percentonaCERbasis(AER:10percent)to£1,481millionin2018,primarilyreflectingthe
continuedgrowthofthein-forcebook,whichcontainsarelativelyhighproportionofrisk-basedproducts.
— Marginonrevenueshasincreasedby4percentonaCERbasis(AER:lessthan1percent)to£2,105millionin2018,primarily
reflectinghigherpremiumstogetherwiththeeffectofchangesinproductmixandhigherpremiumallocationtopolicyholders.
— Acquisitioncostshaveincreasedby4percentonaCERbasis(AER:lessthan1percent)to£1,503millionin2018,comparedtoa
2percentincreaseinAPEsalesonaCERbasis,resultinginanincreaseintheacquisitioncostsratio.Theanalysisinthetableabove
usesshareholderacquisitioncostsasaproportionoftotalAPEsales.Ifwith-profitssaleswereexcludedfromthedenominator,the
acquisitioncostratiowouldbecome69percent(2017:67percentonaCERbasis),theincreasebeingtheresultofproductand
countrymix.
— Administrationexpensesincludingrenewalcommissionshaveincreasedby10percentonaCERbasis(AER:6percent)to
£1,029millionin2018asthebusinesscontinuestoexpand.OnaCERbasis,theadministrationexpenseratiohasdecreasedfrom
267basispointsin2017to264basispointsin2018asaresultofchangesincountryandproductmix.
www.prudential.co.uk
AnnualReport2018 Prudential plc 381
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information I IFRS profit and loss information continued
I(a) Analysis of long-term insurance business adjusted IFRS operating profit based on longer-term investment
returns by driver continued
Margin analysis of long-term insurance business – US
Spreadincome
Feeincome
Insurancemargin
Expenses:
Acquisitioncosts note (i)
Administrationexpenses
DACadjustments
Expectedreturnonshareholderassets
AdjustedIFRSoperatingprofitbased
onlonger-terminvestmentreturns
2018
Average
liability
note(iv)
£m
Profit
£m
583
37,608
2,445 133,407
949
Margin
note(ii)
bps
155
183
2017 AER
Average
liability
note(iv)
£m
Profit
£m
751
38,918
2,343 125,440
906
Margin
note(ii)
bps
193
187
2017 CER note(iii)
Profit
£m
Average
liability
note(iv)
£m
725
37,571
2,262 120,997
875
Margin
note(ii)
bps
193
187
(759)
1,542
(1,204) 175,319
(49)%
(69)
(876)
1,662
(1,174) 169,725
(53)%
(69)
(846)
1,605
(1,134) 164,061
(53)%
(69)
(114)
11
1,911
260
4
2,214
251
4
2,137
Analysis of US adjusted IFRS operating profit based on long-term investment returns by driver:
— Spreadincomehasdecreasedby20percentonaCERbasis(AER:22percent)to£583millionin2018.Thereportedspreadmargin
decreasedto155basispointsfrom193basispointsin2017,primarilyduetotheimpactofincreasingLIBORoninterestrateswaps,
lowerinvestmentyieldsandmaturingofswapspreviouslyenteredintotomorecloselymatchtheassetandliabilityduration.
Excludingtheeffectofthesehistoricswaptransactions,thespreadmarginwouldhavebeen130basispoints(2017:144basispoints
atCERandAER).
— Feeincomehasincreasedby8percentonaCERbasis(AER:4percent)to£2,445millionduring2018,primarilyduetohigher
averageseparateaccountbalancesresultingfrompositivenetflowsfromvariableannuitybusinessandmarketappreciationduring
mostof2018beforeadeclineinthefourthquarterof2018.Feeincomemarginhasdecreasedto183basispoints(2017:187basis
pointsatCERandAER)primarilyreflectingachangeinbusinessmix.
— Insurancemarginrepresentsprofitsfrominsurancerisks,includingvariableannuityguaranteesandothersundryitems.Insurance
marginincreasedby8percentonaCERbasis(AER:5percent)to£949millionin2018mainlyduetohigherincomefromvariable
annuityguaranteesandfavourablemortalityexperience.
— Acquisitioncosts,whicharecommissionsandexpensesincurredtoacquirenewbusiness,includingthosethatarenotdeferrable,
havedecreasedby10percentonaCERbasis(AER:13percent).Thisreflectsa4percentdecreaseinAPEsalesandlowerlevelof
front-endedcommissions.
— Administrationexpensesincreasedby6percentonaCERbasis(AER:3percent)to£(1,204)millionduring2018,primarilyasaresult
ofhigherasset-basedcommissions.Excludingtheseasset-basedcommissions,theresultingadministrationexpenseratiowouldbe
lowerat34basispoints(2017:35basispointsatCERandAER).
— DACadjustmentsin2018wasnegative£(114)million(comparedto£251millioncreditin2017onaCERbasis)duetoanincreasein
theDACamortisationcharge.ThehigherDACamortisationchargeariseslargelyfromanaccelerationofamortisationof£(194)million
(2017:creditfordecelerationof£83milliononaCERbasis)primarilyrelatingtothemarketreturnsin2018andthereversalofthe
benefitreceivedin2015underthemeanreversionformula.
382 Prudential plc AnnualReport2018
www.prudential.co.uk
Additional unaudited financial information continued Analysis of adjusted IFRS operating profit based on longer-term investment returns before and after acquisition
costs and DAC adjustments
2018 £m
Acquisition costs
2017 AER £m
Acquisition costs
2017 CER £m
note(iii)
Acquisition costs
Before
acquisi-
tion costs
and DAC
adjust-
ments
After
acquisi-
tion costs
and DAC
adjust-
ments
Before
acquisi-
tion costs
and DAC
adjust-
ments
Incurred Deferred
After
acquisi-
tion costs
and DAC
adjust-
ments
Before
acquisi-
tion costs
and DAC
adjust-
ments
After
acquisi-
tion costs
and DAC
adjust-
ments
Incurred Deferred
Incurred Deferred
Totaladjusted
IFRSoperating
profitbased
onlonger-term
investment
returnsbefore
acquisition
costsandDAC
adjustments
Lessnewbusiness
strain
Amortisationof
previously
deferred
acquisition
costs:
Normal
(Accelerated)
decelerated
2,784
2,784
2,830
2,830
2,732
2,732
(759)
569
(190)
(876)
663
(213)
(846)
640
(206)
Total
2,784
(759)
(114) 1,911
2,830
(876)
(489)
(489)
(194)
(194)
(489)
(489)
86
260
86
2,214
2,732
(846)
(472)
(472)
83
251
83
2,137
Analysis of adjusted IFRS operating profit based on longer-term investment returns for US operations by product
Spreadbusiness
Feebusiness
Lifeandotherbusiness
Total insurance operations note
USassetmanagementandbroker-dealer
Total US operations
2018 £m
2017 £m
2018 vs 2017 %
297
1,532
82
1,911
8
1,919
AER
317
1,788
109
2,214
10
2,224
CER
306
1,726
105
2,137
9
2,146
AER
(6)%
(14)%
(25)%
(14)%
(20)%
(14)%
CER
(3)%
(11)%
(22)%
(11)%
(11)%
(11)%
Note
TheanalysisofadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsforUSoperationsbyproductrepresentsthenetprofitgeneratedbyeachlineofbusinessafter
allocationofcosts.Broadly:
–Spreadbusinessisthenetprofitforfixedannuity,fixedindexedannuityandguaranteedinvestmentcontractsandlargelycomprisesspreadincomelesscosts.
–Feebusinessrepresentsprofitsfromvariableannuityproducts.Aswellasfeeincome,revenueforthisproductlineincludesspreadincomefrominvestmentsdirectedtothegeneral
accountandothervariableannuityfeesincludedininsurancemargin.
–LifeandotherbusinessincludestheprofitsfromtheREALICbusinessandotherclosedlifebooks.Revenueallocatedtothisproductlineincludesspreadincomeandpremiumsand
policychargesforlifeprotection,whichareincludedininsurancemarginafterclaimcosts.Insurancemarginformsthevastmajorityofrevenue.
www.prudential.co.uk
AnnualReport2018 Prudential plc 383
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information I IFRS profit and loss information continued
I(a) Analysis of long-term insurance business adjusted IFRS operating profit based on longer-term investment
returns by driver continued
Margin analysis of long-term insurance business – UK and Europe
Spreadincome
Feeincome
With-profits
Insurancemargin
Marginonrevenues
Expenses:
Acquisitioncosts note (i)
Administrationexpenses
DACadjustments
Expectedreturnonshareholderassets
Longevityreinsuranceandothermanagement
actionstoimprovesolvency
Changesinlongevityassumptionbasis
Provisionforguaranteedminimumpension
equalisation
Insurancerecoveriesofcostsassociatedwith
reviewofpastannuitysales
Provisionforreviewofpastannuitysales
AdjustedIFRSoperatingprofitbasedon
longer-terminvestmentreturns
Profit
£m
84
56
320
50
149
(57)
(180)
4
102
528
58
441
(55)
166
–
1,138
2018
Average
liability
note(iv)
£m
29,347
21,931
111,009
Margin
note(ii)
bps
29
26
29
1,516
51,278
(4)%
(35)
2017
Average
liability
note(iv)
£m
33,631
22,632
106,359
Margin
note(ii)
bps
41
27
27
1,491
56,263
(5)%
(29)
Profit
£m
137
61
288
55
189
(68)
(164)
4
104
606
276
204
–
–
(225)
861
Analysis of UK and Europe adjusted IFRS operating profit based on longer-term investment returns by driver:
— Spreadincomehasreducedfrom£137millionin2017to£84millionin2018reflectingtherun-offofthein-forceannuityportfolio
andtheeffectofthereinsuranceof£12.0billionofannuityportfoliostoRothesayLifeenteredintoinMarch2018.
— Feeincomeprincipallyrepresentsassetmanagementfeesfromunit-linkedbusiness(includingdirectinvestmentonlybusinessto
Grouppensionschemeswhereliabilityflowsaredrivenbyasmallnumberoflargesinglemandatetransactionsandmostlyarises
withintheUKandEuropeassetmanagementbusiness).Feeincomeisaftercostsrelatingtomanagingtheunderlyingfundswhich
includerecentrationalisationactivitytoremovesub-scalefunds.Ifthesecostsandthedirectinvestmentonlyschemesareexcluded,
thefeemarginontheremainingbalanceswouldbe36basispoints(2017:40basispoints).
— Marginonrevenuesrepresentspremiumchargesforexpensesofshareholder-backedbusinessandothersundrynetincome.
— The£441millionfavourableeffectoflongevityassumptionrelatestochangestoannuitantmortalityassumptionstoreflectcurrent
mortalityexperienceandtheadoptionoftheContinuousMortalityInvestigation(CMI)2016model.Furtherinformationonchanges
tomortalityassumptionsisgiveninnoteC4.1(d)intheIFRSfinancialstatements.
— Anallowanceprovisionof£(55)millionhasbeenmadein2018toreflectthecostsofequalisingguaranteedminimumpensionbenefits
onpensionproductssoldbytheinsurancebusinessfollowingtherulingbytheHighCourtinOctober2018.Furtherinformationis
providedinnoteC9intheIFRSfinancialstatements.
— The2018insurancerecoveriesofcostsassociatedwithundertakingareviewofpastannuitysalesof£166million(2017:£nil)is
explainedinnoteC11,‘Provisions’,intheIFRSfinancialstatements.
384 Prudential plc AnnualReport2018
www.prudential.co.uk
Additional unaudited financial information continued
I(b) Asia operations – analysis of IFRS operating profit by business unit
Operatingprofitbasedonlonger-terminvestmentreturnsforAsiaoperationsisanalysedasfollows:
HongKong
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
South-east Asia operations including Hong Kong
China
Taiwan
Other
Non-recurrentitems note
Total insurance operations
Shareofrelatedtaxchargesfromjointventuresandassociate*
Developmentexpenses
Total long-term business operating profit
Assetmanagement(EastspringInvestments)
Total Asia operations
2018 £m
AER
2017 £m
CER
2017 £m
2017 AER
vs 2018
2017 CER
vs 2018
443
416
194
43
329
113
149
1,687
143
51
51
94
2,026
(40)
(4)
1,982
182
2,164
346
457
173
41
272
107
135
1,531
121
43
71
75
1,841
(39)
(3)
1,799
176
1,975
332
415
178
38
269
108
129
1,469
119
41
67
73
1,769
(39)
(3)
1,727
171
1,898
28%
(9)%
12%
5%
21%
6%
10%
10%
18%
19%
(28)%
25%
10%
(3)%
(33)%
10%
3%
10%
33%
0%
9%
13%
22%
5%
16%
15%
20%
24%
(24)%
29%
15%
(3)%
(33)%
15%
6%
14%
*UnderIFRS,theGroup’sshareofresultsfromitsinvestmentsinjointventuresandassociateaccountedforusingtheequitymethodisincludedintheGroup’sprofitbeforetaxonanet
ofrelatedtaxbasis.In2018,theGroupalteredthepresentationofitsanalysisofAsiaoperatingprofittoshowthesetaxchargesseparatelyinorderforthecontributionfromthejoint
venturesandassociatetobeincludedintheoperatingprofitanalysisonaconsistentbasisastherestoftheAsia’soperations.2017comparativeshavebeenre-presentedaccordingly.
Note
In2018,theIFRSoperatingprofitbasedonlonger-terminvestmentreturnsforAsiainsuranceoperationsincludedanetcreditof£94million(2017:£75million)representingasmall
numberofitemsthatarenotexpectedtoreoccur,includingtheimpactofarefinementtotherun-offoftheallowanceforprudencewithintechnicalprovisions,withinSingapore.
I(c) Analysis of asset management operating profit based on longer-term investment returns
Operatingincomebeforeperformance-relatedfees
Performance-relatedfees
Operatingincome(netofcommission) note (i)
Operatingexpense note (i)
Shareofassociate’sresults
Group’sshareoftaxonjointventures’operatingprofit
Operatingprofitbasedonlonger-terminvestmentreturns
Averagefundsundermanagement
Marginbasedonoperatingincome*
Cost/incomeratio†
2018 £m
M&GPrudential
asset
management
note(ii)
Eastspring
Investments
note(ii)
1,100
15
1,115
(654)
16
–
477
424
17
441
(232)
–
(27)
182
£276.6bn
40bps
59%
£146.3bn
29bps
55%
www.prudential.co.uk
AnnualReport2018 Prudential plc 385
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information I IFRS profit and loss information continued
I(c) Analysis of asset management operating profit based on longer-term investment returns continued
Operatingincomebeforeperformance-relatedfees
Performance-relatedfees
Operatingincome(netofcommission) note (i)
Operatingexpense note (i)
Shareofassociate’sresults
Group'sshareoftaxonjointventures'operatingprofit
Operatingprofitbasedonlonger-terminvestmentreturns
Averagefundsundermanagement
Marginbasedonoperatingincome*
Cost/incomeratio†
2017 £m
M&GPrudential
asset
management
note(ii)
Eastspring
Investments
note(ii)
1,034
53
1,087
(602)
15
–
500
421
17
438
(238)
–
(24)
176
£275.9bn
37bps
58%
£128.4bn
33bps
56%
*Marginrepresentsoperatingincomebeforeperformance-relatedfeesasaproportionoftherelatedfundsundermanagement(FUM).Monthlyclosinginternalandexternalfunds
managedbytherespectiveentityhavebeenusedtoderivetheaverage.AnyfundsheldbytheGroup’sinsuranceoperationsthataremanagedbythirdpartiesoutsidethePrudential
Groupareexcludedfromtheseamounts.M&GPrudentialoperatingexpenseincludes£27millionofBrexitpreparationcosts.
†Cost/incomeratiorepresentscostasapercentageofoperatingincomebeforeperformance-relatedfees.
Notes
(i)
OperatingincomeandexpenseincludetheGroup’spre-taxshareofcontributionfromjointventuresbutexcludesanycontributionfromassociate.Intheconsolidatedincome
statementoftheIFRSfinancialstatements,thenetpost-taxincomeofthejointventuresandassociateisshownasasinglelineitem.
(ii) OperatingincomebeforeperformancerelatedfeesandmarginonrelatedfundsundermanagementforM&GPrudentialassetmanagementandEastspringInvestmentscanbe
furtheranalysedasfollows:
2018
2017
2018
2017
*Institutionalincludesinternalfunds.
M&GPrudential asset management
Operating income before performance related fees
Margin
bps
Institutional*
£m
Margin
bps
85
85
438
430
22
21
Eastspring Investments
Operating income before performance related fees
Margin
bps
Institutional*
£m
Margin
bps
50
57
172
172
18
20
Total
£m
1,100
1,034
Total
£m
424
421
Retail
£m
662
604
Retail
£m
252
249
Margin
bps
40
37
Margin
bps
29
33
386 Prudential plc AnnualReport2018
www.prudential.co.uk
Additional unaudited financial information continued I(d) Contribution to UK long-term financial metrics from specific management actions undertaken to position
the balance sheet more efficiently under the Solvency II regime
In2018,furthermanagementactionsweretakentoimprovethesolvencyoftheUKandEuropeinsuranceoperationsandtomitigate
marketrisks.Theseactionsincludedrepositioningthefixedincomeassetportfoliotoimprovethetrade-offbetweenyieldandcreditrisk.
Nonewlongevityreinsurancetransactionswereundertakenin2018(2017:longevityreinsurancetransactionsenteredintocovering
£0.5billionofIFRSannuityliabilities).
TheeffectoftheseactionsontheUK’slong-termIFRSoperatingprofit,underlyingfreesurplusgenerationandEEVoperatingprofit,
beforerestructuringcosts,isshowninthetablesbelow.
IFRS operating profit of UK long-term business before tax
Longevityreinsurancetransactions
Shareholder-backedannuitynewbusiness
In-forcebusiness:
Othermanagementactionstoimprovesolvency
Changesinlongevityassumptionbasis
Provisionforthereviewofpastannuitysales
Insurancerecoveriesinrespectofabovecosts
Provisionforguaranteedminimumpensionequalisation
With-profitsandotherin-force
TotalIFRSoperatingprofitbeforerestructuringcosts
Underlying free surplus generation of UK long-term business
Expectedin-forceandreturnonnetworth
Longevityreinsurancetransactions
Othermanagementactionstoimprovesolvency
Changesinlongevityassumptionbasis
Provisionforthereviewofpastannuitysales
Insurancerecoveriesinrespectofabovecosts
Provisionforguaranteedminimumpensionequalisation
Otherin-force
Underlyingfreesurplusgeneratedfromin-forcebusiness
Newbusinessstrain
Totalfreesurplusgenerationbeforerestructuringcosts
EEV post-tax operating profit of UK long-term business
Unwindofdiscountandotherexpectedreturn
Longevityreinsurancetransactions
Othermanagementactionstoimprovesolvency
Changesinlongevityassumptionbasis
Provisionforthereviewofpastannuitysales
Insurancerecoveriesinrespectofabovecosts
Provisionforguaranteedminimumpensionequalisation
Otherin-force
Operatingprofitfromin-forcebusiness
Newbusinessprofit
TotalEEVoperatingprofitbeforerestructuringcosts
2018 £m
2017 £m
9
–
58
441
–
166
(55)
610
519
1,138
9
31
245
204
(225)
–
–
255
597
861
2018 £m
2017 £m
686
–
54
364
–
138
(95)
461
130
1,277
(102)
1,175
706
15
385
179
(187)
–
–
392
(28)
1,070
(175)
895
2018 £m
2017 £m
474
–
141
330
–
138
(48)
561
(13)
1,022
352
1,374
465
(6)
127
195
(187)
–
–
129
79
673
342
1,015
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AnnualReport2018 Prudential plc 387
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
II Other information
II(a) Holding company cash flow*
Net cash remitted by business units:
Asia
US
UK and Europe:
With-profitsremittance
Assetmanagementremittance
Shareholder-backedinsurancebusinessremittance
OtherUKpaidtotheGroup(includingPrudentialCapital)
Total UK net remittances to the Group
Net remittances to the Group from business units note (i)
Netinterestpaid
Taxreceived
Corporateactivities
Total central outflows
Operating holding company cash flow before dividend
Dividendpaid
Operating holding company cash flow after dividend
Non-operatingnetcashflow note (ii)
Totalholdingcompanycashflow
Cashandshort-terminvestmentsatbeginningofyear
Foreignexchangemovements
Cash and short-term investments at end of year note (iii)
2018 £m
2017 £m
699
342
233
97
324
654
37
691
1,732
(366)
142
(206)
(430)
1,302
(1,244)
58
913
971
2,264
1
3,236
645
475
215
105
323
643
25
668
1,788
(415)
152
(207)
(470)
1,318
(1,159)
159
(511)
(352)
2,626
(10)
2,264
*TheholdingcompanycashflowdiffersfromtheIFRScashflowstatement,whichincludesallcashflowsintheperiodincludingthoserelatingtobothpolicyholderandshareholderfunds.
TheholdingcompanycashflowisthereforeamoremeaningfulindicationoftheGroup’scentralliquidity.
Netcashremittancescomprisedividendsandothertransfersfrombusinessunitsthatarereflectiveofemergingearningsandcapitalgeneration.
Notes
(i)
(ii) Non-operatingnetcashflowprincipallyrelatestotheissueofsubordinateddebtlessrepaymentofdebt,andpaymentsfordistributionrightsandacquisitionofsubsidiaries.
(iii)
Includingcentralfinancesubsidiaries.
388 Prudential plc AnnualReport2018
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Additional unaudited financial information continued II(b) Funds under management
(a) Summary
Forourassetmanagementbusinesses,fundsmanagedonbehalfofthirdpartiesarenotrecordedonthebalancesheet.Theyare,
however,adriverofprofitability.Wethereforeanalysethemovementinthefundsundermanagementeachperiod,focusingonthose
whichareexternaltotheGroupandthoseprimarilyheldbytheinsurancebusinesses.Thetablebelowanalyses,bysegment,thefunds
oftheGroupheldinthestatementoffinancialpositionandtheexternalfundsthataremanagedbyPrudential’sassetmanagement
operations.
Asiaoperations:
Internalfunds
EastspringInvestments’externalfunds
USoperations:internalfunds
UKandEuropeoperations:
Internalfunds,includingPruFund-backedproducts
Externalfunds
Otheroperations
Grouptotalfundsundermanagement note
Note
Totalfundsundermanagementcomprise:
Totalinvestmentspertheconsolidatedstatementoffinancialposition
ExternalfundsofM&GPrudentialandEastspringInvestments(asanalysedinnote(b)below)
Internallymanagedfundsheldinjointventuresandotheradjustments
Grouptotalfundsundermanagement
(b) Investment products – external funds under management
31 Dec 2018
£bn
31 Dec 2017
£bn
89.5
61.1
150.6
81.4
55.9
137.3
183.1
178.3
174.3
146.9
321.2
2.4
657.3
186.8
163.9
350.7
3.0
669.3
31 Dec 2018
£bn
31 Dec 2017
£bn
449.6
208.0
(0.3)
657.3
451.4
219.8
(1.9)
669.3
2018 £m
2017 £m
At 1 Jan
2018
Market
gross
inflows Redemptions
Market
and other
movements
At 31 Dec
2018
At 1 Jan
2017
Market
gross
inflows Redemptions
Market
and other
movements
At 31 Dec
2017
M&GPrudential
Wholesale/Direct
79,697
24,584
(29,452)
(5,364) 69,465
64,209
30,949
(19,906)
4,445
79,697
M&GPrudential
Institutional
Total
84,158
12,954
(18,001)
(1,630) 77,481
72,554
15,220
(8,926)
5,310
84,158
M&GPrudential note (i) 163,855
37,538
(47,453)
(6,994) 146,946
136,763
46,169
(28,832)
9,755 163,855
Eastspring
Investments note (ii)
55,885 212,070
(212,156)
5,258
61,057
45,756 215,907
(211,271)
5,493
55,885
Total note (iii)
219,740 249,608
(259,609)
(1,736) 208,003
182,519 262,076
(240,103)
15,248 219,740
Notes
(i)
TheresultsexcludecontributionfromPruFundproducts:netinflowsof£8.5billionin2018(2017:£9.0billion);fundsundermanagementof£43billionasat31December2018
(31December2017:£35.9billion).
(ii) MarketandothermovementsduringtheyearforEastspringinvestmentsincludeinflowof£9.3billionfundsundermanagementfromacquisitionofTMBAssetManagementCo.,
(iii)
Ltd.(‘TMBAM’)inThailand.SeenoteD1.2oftheconsolidatedfinancialstatementsforfurtherdetails.
The£208billion(31December2017:£219.7billion)investmentproductscomprise£196.4billion(31December2017:£210.4billion)plusAsiaMoneyMarketFundsof
£11.6billion(31December2017:£9.3billion).
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AnnualReport2018 Prudential plc 389
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information II Other information continued
II(b) Funds under management continued
(c) M&G and Eastspring Investments – total funds under management
M&G,theassetmanagementbusinessofM&GPrudentialandEastspringInvestments,theGroup’sassetmanagementbusinessinAsia,
managefundsfromexternalpartiesandalsofundsfortheGroup’sinsuranceoperations.Thetablebelowanalysesthetotalfundsunder
managementmanagedbyM&GandEastspringInvestmentsrespectively.
Externalfundsundermanagement
Internalfundsundermanagement
Totalfundsundermanagement
M&G
Eastspring Investments
31 Dec 2018
31 Dec 2017
£bn
146.9
118.2
265.1
£bn
163.9
134.6
298.5
31 Dec 2018
note
£bn
31 Dec 2017
note
£bn
61.1
90.2
151.3
55.9
83.0
138.9
Note
TheexternalfundsundermanagementforEastspringInvestmentsincludeAsiaMoneyMarketFundsat31December2018of£11.6billion(31December2017:£9.3billion).
II(c) Solvency II capital position
TheestimatedGroupshareholderSolvencyIIsurplusat31December2018was£17.2billion,beforeallowingforpaymentofthe2018
secondinterimordinarydividendandreflectingapprovedregulatorytransitionalmeasuresasat31December2018.
Estimated Group shareholder Solvency II capital position*
OwnFunds(£bn)
SolvencyCapitalRequirement(£bn)
Surplus (£bn)
Solvencyratio(%)
31 Dec 2018
31 Dec 2017
30.2
13.0
17.2
232%
26.4
13.1
13.3
202%
*TheGroupshareholdercapitalpositionexcludesthecontributiontoOwnFundsandtheSolvencyCapitalRequirementfromringfencedwith-profitfundsandstaffpensionschemes
insurplus.Theestimatedsolvencypositionsincludemanagement’scalculationofUKtransitionalmeasuresreflectingoperatingandmarketconditionsateachvaluationdate,whichfor
both2018and2017reflectstheapprovedregulatoryposition.
InaccordancewithSolvencyIIrequirements,theseresultsallowfor:
— CapitalinJacksoninexcessof250percentoftheUSlocalRiskBasedCapitalrequirement.AsagreedwiththePrudentialRegulation
Authority,thisisincorporatedintheresultaboveasfollows:
– Ownfunds:representsJackson’slocalUSRiskBasedavailablecapitalless100percentoftheUSRiskBasedCapitalrequirement
(CompanyActionLevel);
– SolvencyCapitalRequirement:represents150percentofJackson’slocalUSRiskBasedCapitalrequirement(CompanyAction
Level);and
– NodiversificationbenefitsaretakenintoaccountbetweenJacksonandtherestoftheGroup.
— MatchingadjustmentforUKannuitiesandvolatilityadjustmentforUSdollardenominatedHongKongwith-profitsbusiness,based
onapprovalsfromthePrudentialRegulationAuthorityandcalibrationspublishedbytheEuropeanInsuranceandOccupational
PensionsAuthority;and
— UKtransitionalmeasures,whichhavebeenrecalculatedusingmanagement’sestimateoftheimpactofoperatingandmarket
conditionsatthevaluationdate.Anapplicationtorecalculatethetransitionalmeasuresasat31December2018hasbeenapproved
bythePrudentialRegulationAuthorityandthisrecalculationwillthereforebereflectedintheformalregulatoryQuantitative
ReportingTemplatesasat31December2018.
TheGroupshareholderSolvencyIIcapitalpositionexcludes:
— AportionofSolvencyIIsurpluscapital(£1.7billionat31December2018)relatingtotheGroup’sAsianlifeoperations,primarilydue
totheSolvencyIIdefinitionof‘contractboundaries’whichpreventssomeexpectedfuturecashflowsfrombeingrecognised;
— ThecontributiontoOwnFundsandtheSolvencyCapitalRequirementfromring-fencedwith-profitsfundsinsurplus(representing
£5.5billionofsurpluscapitalfromUKwith-profitsfundsat31December2018)andfromtheshareholders’shareoftheestateof
with-profitsfunds;and
— ThecontributiontoOwnFundsandtheSolvencyCapitalRequirementfrompensionfundsinsurplus.
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Additional unaudited financial information continued
ItalsoexcludesunrealisedgainsoncertainderivativeinstrumentstakenouttoprotectJacksonagainstdeclinesinlong-terminterest
rates.AtJackson’srequest,theDepartmentofInsuranceFinancialServicesreneweditsapprovaltocarrytheseinstrumentsatbook
valueinthelocalstatutoryreturnsfortheperiod31December2018to1October2019.At31December2018,applyingthisapprovalhad
theeffectofdecreasinglocalavailablestatutorycapitalandsurplus(andbyextensionSolvencyIIOwnFundsandSolvencyIIsurplus)by
£0.1billion,netoftax.Thisarrangementreflectsanelectivelong-standingpracticefirstputinplacein2009,whichcanbeunwoundat
Jackson’sdiscretion.
The31December2018SolvencyIIresultsaboveallowforthereinsuranceof£12.0billionoftheUKannuityportfoliotoRothesayLife
effectivefrom14March2018andthetransferofPrudentialplc’sHongKongsubsidiariestoPrudentialCorporationAsiaLimited.Intotal
theseitemshaveresultedinadecreasetoUKSolvencyIIsurplusin2018of£3.3billionwithGroupSolvencyIIsurplusincreasingby
£0.4billion.
Analysis of movement in Group capital position
AsummaryoftheestimatedmovementinGroupSolvencyIIsurplusfrom£13.3billionatyearend2017to£17.2billionatyearend2018
issetoutinthetablebelow.ThemovementfromtheGroupSolvencyIIsurplusat31December2016totheSolvencyIIsurplusat
31December2017isincludedforcomparison.
Analysis of movement in Group shareholder surplus
Estimated Solvency II surplus at beginning of year
Underlyingoperatingexperience
Managementactions
Operatingexperience
Non-operatingexperience(includingmarketmovements)
M&GPrudentialtransactions
Other capital movements
Netsubordinateddebtissuance/redemption
Foreigncurrencytranslationimpacts
Dividendspaid
Modelchanges
Estimated Solvency II surplus at end of year
2018
Surplus
£bn
13.3
2017
Surplus
£bn
12.5
4.1
0.1
4.2
(1.2)
0.4
1.2
0.5
(1.2)
0.0
17.2
3.2
0.4
3.6
(0.6)
–
(0.2)
(0.7)
(1.2)
(0.1)
13.3
TheestimatedmovementinGroupSolvencyIIsurplusover2018isdrivenby:
— Operating experience of £4.2 billion: generatedbyin-forcebusinessandnewbusinesswrittenin2018,afterallowingforamortisation
oftheUKtransitionalmeasuresandtheimpactofone-offmanagementoptimisationsimplementedovertheyear.Thisincludesa
£0.4billionbenefitfromtheimpactofupdatestoUKlongevitybestestimateassumptionsanda£0.1billionbenefitfromaninsurance
recoveryrelatingtothecostsandanyrelatedredressofreviewinginternallyvestingannuitiessoldwithoutadviceafter1July2008;
— Non-operating experience of £(1.2) billion: resultingmainlyfromthenegativeimpactofmarketmovements,afterallowingforthe
recalculationoftheUKtransitionalmeasuresatthevaluationdate,theimpactofUSRiskBasedCapitalupdatesannouncedinJune
2018toreflectUStaxreformchangesandthe£(0.3)billionimpactfromtheacquisitionofTMBAssetManagementCo.,Ltd.
(seeIFRSFinancialStatementsnoteD1.2forfurtherinformation);
— M&GPrudential transactions of £0.4 billion: thebeneficialimpactontheGroupSolvencyIIsurplusoftheUKannuitiesreinsurance
transactioneffectivefrom14March2018andthetransferofPrudentialplc’sHongKongsubsidiariestoPrudentialCorporationAsia
LimitedafterallowingfortheimpactofrecalculationoftheUKtransitionalmeasuresasaresultofthesetransactions;
— Other capital movements: comprisinganincreaseinsurplusfromthenetimpactofdebtraisedoffsetbydebtredeemedduring2018,
abenefitfromforeigncurrencytranslationandareductioninsurplusfrompaymentofdividends;and
— Model changes: reflectinginternalmodelchangesapprovedbythePrudentialRegulationAuthorityandotherminorinternalmodel
calibrationchangesmadein2018.
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AnnualReport2018 Prudential plc 391
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information II Other information continued
II(c) Solvency II capital position continued
Analysis of Group Solvency Capital Requirements
ThesplitoftheGroup’sestimatedSolvencyCapitalRequirementbyrisktypeincludingthecapitalrequirementsinrespectofJackson’s
riskexposuresbasedon150percentofUSRiskBasedCapitalrequirements(CompanyActionLevel)butwithnodiversificationbetween
JacksonandtherestoftheGroup,isasfollows:
Split of the Group’s estimated Solvency Capital Requirements
Market
Equity
Credit
Yields(interestrates)
Other
Insurance
Mortality/morbidity
Operational/expense
FX translation
Lapse
Longevity
31 Dec 2018
31 Dec 2017
% of
undiversified
Solvency
Capital
Requirements
% of
diversified
Solvency
Capital
Requirements
% of
undiversified
Solvency
Capital
Requirements
% of
diversified
Solvency
Capital
Requirements
57%
13%
23%
16%
5%
24%
5%
15%
4%
12%
7%
70%
23%
38%
6%
3%
20%
2%
17%
1%
8%
2%
57%
14%
24%
13%
6%
26%
5%
14%
7%
11%
6%
71%
23%
38%
7%
3%
21%
2%
17%
2%
7%
1%
Reconciliation of IFRS equity to Group Solvency II Shareholder Own Funds
Reconciliation of IFRS equity to Group Solvency II Shareholder Own Funds
IFRSshareholders’equity
RestateUSinsuranceentitiesfromIFRStolocalUSstatutorybasis
RemoveDAC,goodwillandintangibles
Addsubordinateddebt
Impactofriskmargin(netoftransitionalmeasures)
Addvalueofshareholdertransfers
Liabilityvaluationdifferences
Increaseinnetdeferredtaxliabilitiesresultingfromliabilityvaluationdifferencesabove
Other
Estimated Solvency II Shareholder Own Funds
31 Dec 2018
£bn
31 Dec 2017
£bn
17.2
(2.5)
(4.6)
7.2
(3.8)
5.3
13.3
(1.5)
(0.4)
30.2
16.1
(3.0)
(4.0)
5.8
(3.9)
5.3
12.1
(1.6)
(0.4)
26.4
Thekeyitemsofthereconciliationasat31December2018are:
— £(2.5)billionrepresentstheadjustmentrequiredtotheGroup’sshareholders’fundsinordertoconvertJackson’scontributionfroman
IFRSbasistothelocalstatutoryvaluationbasis.Thisitemalsoreflectsade-recognitionofOwnFundsof£1.0billion,equivalenttothe
valueof100percentofRiskBasedCapitalrequirements(CompanyActionLevel),asagreedwiththePrudentialRegulationAuthority;
— £(4.6)billionduetotheremovalofDAC,goodwillandintangiblesfromtheIFRSbalancesheet;
— £7.2billionduetotheadditionofsubordinateddebtwhichistreatedasavailablecapitalunderSolvencyIIbutasaliabilityunderIFRS;
— £(3.8)billionduetotheinclusionofariskmarginforUKandAsianon-hedgeablerisks,netof£1.6billionfromtransitionalmeasures
(afterallowingforrecalculationofthetransitionalmeasuresasat31December2018)whicharenotapplicableunderIFRS;
— £5.3billionduetotheinclusionofthevalueoffutureshareholdertransfersfromwith-profitsbusiness(excludingtheshareholders’
shareofthewith-profitsestate,forwhichnocreditisgivenunderSolvencyII),whichisexcludedfromthedeterminationofthe
Group’sIFRSshareholders’funds;
— £13.3billionmainlyduetodifferencesininsurancevaluationrequirementsbetweenSolvencyIIandIFRS,withSolvencyIIOwnFunds
partiallycapturingthevalueofin-forcebusinesswhichisexcludedfromIFRS;
— £(1.5)billionduetotheimpactonthevaluationofnetdeferredtaxliabilitiesresultingfromtheliabilityvaluationdifferencesnoted
above;and
— £(0.4)billionduetootheritems,includingtheimpactofrevaluingloans,borrowingsanddebtfromIFRStoSolvencyII.
392 Prudential plc AnnualReport2018
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Additional unaudited financial information continued Sensitivity analysis
TheestimatedsensitivityoftheGroupshareholderSolvencyIIcapitalpositiontosignificantchangesinmarketconditionsisasfollows:
Impact of market sensitivities
Base position
Impact of:
20%instantaneousfallinequitymarkets
40%fallinequitymarkets1
50basispointsreductionininterestrates2,3
100basispointsincreaseininterestrates3
100basispointsincreaseincreditspreads4
31 Dec 2018
31 Dec 2017
Surplus £bn
Ratio
Surplus £bn
17.2
(1.6)
(4.0)
(1.8)
1.2
(1.7)
232%
(10)%
(28)%
(21)%
20%
(9)%
13.3
0.7
(2.1)
(1.0)
1.2
(1.4)
Ratio
202%
9%
(11)%
(14)%
21%
(6)%
Notes
1
2
3
4
Wherehedgesaredynamic,rebalancingisallowedforbyassuminganinstantaneous20percentfallfollowedbyafurther20percentfalloverafour-weekperiod.
SubjecttoafloorofzeroforAsiaandUSinterestrates.
Allowingforfurthertransitionalmeasuresrecalculationaftertheinterestratestress.
USRiskBasedCapitalsolvencypositionincludedusingastressof10timesexpectedcreditdefaults.
TheGroupbelievesitispositionedtowithstandsignificantdeteriorationsinmarketconditionsandwecontinuetousemarkethedges
tomanagesomeofthisexposureacrosstheGroup,wherewebelievethebenefitoftheprotectionoutweighsthecost.Thesensitivity
analysisaboveallowsforpredeterminedmanagementactionsandthosetakentodate,butdoesnotreflectallpossiblemanagement
actionswhichcouldbetakeninthefuture.
UK Solvency II capital position1,2
Onthesamebasisasabove,theestimatedshareholderSolvencyIIsurplusforThePrudentialAssuranceCompanyLimited(‘PAC’)and
itssubsidiaries2at31December2018was£3.7billion,afterallowingforrecalculationoftransitionalmeasuresasat31December2018.
Thisrelatestoshareholder-backedbusinessincludingfuturewith-profitsshareholdertransfers,butexcludestheshareholders’shareof
theestateinlinewithSolvencyIIrequirements.
Estimated UK shareholder Solvency II capital position*
OwnFunds(£bn)
SolvencyCapitalRequirement(£bn)
Surplus (£bn)
Solvencyratio(%)
31 Dec 2018
31 Dec 2017
8.8
5.1
3.7
172%
14.0
7.9
6.1
178%
*TheUKshareholdercapitalpositionexcludesthecontributiontoOwnFundsandtheSolvencyCapitalRequirementfromring-fencedwith-profitfundsandstaffpensionschemes
insurplus.Theestimatedsolvencypositionsincludemanagement’scalculationofUKtransitionalmeasuresreflectingoperatingandmarketconditionsateachvaluationdate,whichfor
both2018and2017reflectstheapprovedregulatoryposition.
ThePrudentialAssuranceCompanyLimitedshareholderSolvencyIIpositionat31December2018includestheactualimpactofthe
transferofPrudentialplc’sHongKongsubsidiariestoPrudentialCorporationAsiaLimited,andtheimpactofthereinsuranceof
£12.0billionoftheUKannuityportfoliotoRothesayLife.IntotaltheseitemshaveresultedinadecreasetoUKSolvencyIIsurplusin2018
of£3.3billion.
UponcompletionofthePartVIItransferafurthercirca£0.1billionofSolvencyCapitalRequirementisexpectedtobereleased.
WhilstthereisalargesurplusintheUKwith-profitsfunds,thisisring-fencedfromtheshareholderbalancesheetandistherefore
excludedfromboththeGroupandtheUKshareholderSolvencyIIsurplusresults.TheestimatedUKwith-profitsfundsSolvencyII
surplusat31December2018was£5.5billion,afterallowingforrecalculationoftransitionalmeasuresasat31December2018.
Estimated UK with-profits Solvency II capital position*
OwnFunds(£bn)
SolvencyCapitalRequirement(£bn)
Surplus (£bn)
Solvencyratio(%)
31 Dec 2018
31 Dec 2017
9.7
4.2
5.5
231%
9.6
4.8
4.8
201%
*Theestimatedsolvencypositionsincludemanagement’scalculationofUKtransitionalmeasuresreflectingoperatingandmarketconditionsateachvaluationdate,whichforboth2018
and2017reflectstheapprovedregulatoryposition.
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AnnualReport2018 Prudential plc 393
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information II Other information continued
II(c) Solvency II capital position continued
Reconciliation of UK with-profits IFRS unallocated surplus to Solvency II Own Funds1
AreconciliationbetweentheIFRSunallocatedsurplusandSolvencyIIOwnFundsforUKwith-profitsbusinessisasfollows:
Reconciliation of UK with-profits funds
IFRSunallocatedsurplusofUKwith-profitsfunds
Valueofshareholdertransfers
Riskmargin(netoftransitionalmeasures)
Othervaluationdifferences
Estimated Solvency II Own Funds
31 Dec
2018 £bn
31 Dec
2017 £bn
13.3
(2.4)
(1.0)
(0.2)
9.7
13.5
(2.7)
(0.7)
(0.5)
9.6
Annual regulatory reporting
TheGroupwillpublishitsSolvencyandFinancialConditionReportandrelatedquantitativetemplatesnolaterthan4June2019.The
templateswillrequireustocombinetheGroupshareholdersolvencypositionwiththoseofallotherringfencedfundsacrosstheGroup.
Incombiningthesesolvencypositions,thecontributiontoownfundsfromtheseringfencedfundswillbesetequaltotheiraggregate
solvencycapitalrequirements,estimatedat£5.6billion(iethesolvencysurplusintheseringfencedfundswillnotbecapturedinthe
templates).TherewillbenoimpactonthereportedGroupSolvencyIIsurplus.
Statement of independent review in respect of Solvency II Capital Position at 31 December 2018
Themethodology,assumptionsandoverallresulthavebeensubjecttoexaminationbyKPMGLLP.
Notes
1
2
3
TheUKwith-profitscapitalpositionincludesthePACwith-profitssub-fund,theScottishAmicableInsuranceFundandtheDefinedChargeParticipatingSub-Fund.
TheinsurancesubsidiariesofPACarePrudentialInternationalAssuranceplcandPrudentialPensionsLimited.PrudentialGeneralInsuranceHongKongLimitedandPrudential
HongKongLimitedarenolongersubsidiariesofPACfollowingthetransferoftheseHongKongsubsidiariestoPrudentialCorporationAsiaLimitedin2018.
Thisreviewisseparatefromthatsetoutonpage330.
II(d) Reconciliation of expected transfer of value of in-force business (VIF) and required capital to free surplus
Thetablesbelowshowhowthevalueofin-forcebusiness(VIF)generatedbythein-forcelong-termbusinessandtheassociatedrequired
capitalismodelledasemergingintofreesurplusoverthenext40years.Althoughasmallamount(circa5percent)oftheGroup’s
embeddedvalueemergesafterthisdate,analysisofcashflowsemergingintheyearsshowninthetablesisconsideredmostmeaningful.
ThemodelledcashflowsusethesamemethodologyunderpinningtheGroup’sembeddedvaluereportingandsoaresubjecttothesame
assumptionsandsensitivitiesusedtoprepareour2018results.
Inadditiontoshowingtheamounts,bothdiscountedandundiscounted,expectedtobegeneratedfromallin-forcebusinessat
31December2018,thetablesalsopresenttheexpectedfuturefreesurplustobegeneratedfromtheinvestmentmadeinnewbusiness
during2018overthesame40-yearperiodforlong-termbusinessoperations.
394 Prudential plc AnnualReport2018
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Additional unaudited financial information continued Expected period of emergence
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039-2043
2044-2048
2049-2053
2054-2058
Undiscounted expected generation from
all in-force business*
Undiscounted expected generation
from new business written*
31 Dec 2018 £m
Asia
1,560
1,504
1,446
1,441
1,438
1,371
1,345
1,332
1,309
1,266
1,177
1,169
1,145
1,131
1,115
1,061
1,059
1,081
1,113
1,104
6,131
5,843
5,452
4,964
US
1,584
1,674
1,737
1,674
1,625
1,629
1,407
1,249
1,224
1,143
1,056
962
798
645
422
448
242
135
94
102
320
–
–
–
UK and
Europe
593
609
591
572
555
537
521
497
472
448
425
402
379
465
435
405
375
346
319
292
1,137
696
329
157
Total
3,737
3,787
3,774
3,687
3,618
3,537
3,273
3,078
3,005
2,857
2,658
2,533
2,322
2,241
1,972
1,914
1,676
1,562
1,526
1,498
7,588
6,539
5,781
5,121
Asia
204
200
195
206
187
166
176
167
155
163
131
134
122
120
137
119
120
120
120
129
884
944
922
897
US
205
153
147
154
122
73
60
166
163
147
136
129
108
97
85
74
51
49
44
44
84
–
–
–
UK and
Europe
31
34
36
38
42
38
36
35
34
34
32
31
29
30
29
27
25
24
23
22
83
49
31
17
Total
440
387
378
398
351
277
272
368
352
344
299
294
259
247
251
220
196
193
187
195
1,051
993
953
914
Totalfreesurplusexpectedtoemerge
inthenext40years
47,557
20,170
11,557
79,284
6,718
2,291
810
9,819
*TheanalysisexcludesamountsincorporatedintoVIFat31December2018wherethereisnodefinitivetimeframeforwhenthepaymentswillbemadeorreceiptsreceived.Inparticular,
itexcludesthevalueoftheshareholders’interestinthewith-profitsestate.Italsoexcludesanyfreesurplusemergingafter2058.
Theaboveamountscanbereconciledtothenewbusinessamountsasfollows:
Undiscountedexpectedfreesurplusgenerationforyears2019to2058
Less:discounteffect
Discountedexpectedfreesurplusgenerationforyears2019to2058
Discountedexpectedfreesurplusgenerationforyearsafter2058
Less:Freesurplusinvestmentinnewbusiness
Otheritems*
Post-taxEEVnewbusinessprofitforlong-termbusinessoperations
Asia
6,718
(3,964)
2,754
863
(488)
(525)
2,604
2018 £m
US UK and Europe
Total
2,291
(905)
1,386
–
(225)
(240)
921
810
(352)
458
1
(102)
(5)
352
9,819
(5,221)
4,598
864
(815)
(770)
3,877
*Otheritemsrepresenttheimpactofthetimevalueofoptionsandguaranteesonnewbusiness,foreignexchangeeffectsandothernon-modelleditems.Foreignexchangeeffectsarise
asEEVnewbusinessprofitamountsaretranslatedataverageexchangeratesandtheexpectedfreesurplusgenerationusesyearendclosingrates.
www.prudential.co.uk
AnnualReport2018 Prudential plc 395
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information II Other information continued
II(d) Reconciliation of expected transfer of value of in-force business (VIF) and required capital to free surplus
continued
Theundiscountedexpectedfreesurplusgenerationfromallin-forcebusinessat31December2018shownbelowcanbereconciled
totheamountthatwasexpectedtobegeneratedasat31December2017asfollows:
Group
2017expectedfreesurplusgeneration
2018
£m
2019
£m
2020
£m
2021
£m
2022
£m
2023
£m
Other
£m
Total
£m
foryears2018to2057
3,528
3,462
3,456
3,467
3,318
3,253
49,636
70,120
Less:Amountsexpectedtoberealised
inthecurrentyear
(3,528)
–
–
–
–
–
–
(3,528)
Add:Expectedfreesurplustobe
generatedinyear2058*
Foreignexchangedifferences
Newbusiness
Operatingmovements
Non-operatingandothermovements
2018expectedfreesurplusgeneration
foryears2019to2058
Asia operations
2017expectedfreesurplusgeneration
–
–
–
–
–
–
–
129
440
(52)
(242)
–
132
387
(60)
(128)
–
137
378
(22)
(186)
–
132
398
23
(184)
–
132
351
56
(174)
649
1,916
7,865
649
2,578
9,819
615
(354)
3,737
3,787
3,774
3,687
3,618
60,681
79,284
2018
£m
2019
£m
2020
£m
2021
£m
2022
£m
2023
£m
Other
£m
Total
£m
foryears2018to2057
1,393
1,352
1,299
1,256
1,239
1,202
30,029
37,770
Less:Amountsexpectedtoberealised
inthecurrentyear
(1,393)
–
–
40
204
(24)
(12)
–
–
40
200
(38)
3
–
–
41
195
(42)
(4)
–
–
42
206
(25)
(21)
–
–
43
187
(22)
28
–
(1,393)
610
1,304
5,726
610
1,510
6,718
2,499
2,342
1,560
1,504
1,446
1,441
1,438
40,168
47,557
–
–
–
–
–
–
Add:Expectedfreesurplustobe
generatedinyear2058*
Foreignexchangedifferences
Newbusiness
Operatingmovements
Non-operatingandothermovements
2018expectedfreesurplusgeneration
foryears2019to2058
*Excluding2018newbusiness.
US operations
2017expectedfreesurplusgeneration
2018
£m
2019
£m
2020
£m
2021
£m
2022
£m
2023
£m
Other
£m
Total
£m
foryears2018to2057
1,464
1,425
1,483
1,551
1,441
1,433
9,847
18,644
Less:Amountsexpectedtoberealised
inthecurrentyear
Foreignexchangedifferences
Newbusiness
Operatingmovements
Non-operatingandothermovements
2018expectedfreesurplusgeneration
foryears2019to2058
(1,464)
–
–
–
–
–
89
205
(25)
(110)
–
92
153
(18)
(36)
–
96
147
27
(84)
–
90
154
58
(69)
–
89
122
85
(104)
–
612
1,510
(1,464)
1,068
2,291
(93)
(369)
–
1,584
1,674
1,737
1,674
1,625
11,876
20,170
396 Prudential plc AnnualReport2018
www.prudential.co.uk
Additional unaudited financial information continued M&GPrudential insurance
operations
2017expectedfreesurplusgeneration
foryears2018to2056
Less:Amountsexpectedtoberealised
inthecurrentyear
Add:Expectedfreesurplustobe
generatedinyear2058*
Newbusiness
Operatingmovements
Non-operatingandothermovements
2018expectedfreesurplusgeneration
foryears2019to2058
*Excluding2018newbusiness.
2018
£m
671
(671)
–
–
–
–
–
2019
£m
685
–
–
31
(3)
(120)
2020
£m
674
–
–
34
(4)
(95)
2021
£m
660
–
–
36
(7)
(98)
2022
£m
2023
£m
Other
£m
Total
£m
638
–
–
38
(10)
(94)
618
9,760
13,706
–
–
42
(7)
(98)
–
(671)
39
629
39
810
(1,791)
(2,327)
593
609
591
572
555
8,637
11,557
At31December2018,thetotalfreesurplusexpectedtobegeneratedoverthenextfiveyears(2019to2023inclusive),usingthesame
assumptionsandmethodologyasthoseunderpinningour2018embeddedvaluereportingwas£18.6billion,anincreaseof£1.4billion
fromthe£17.2billionexpectedoveranequivalentperiodfromtheendof2017.
Thisincreaseprimarilyreflectsthenewbusinesswrittenin2018,whichisexpectedtogenerate£1,954millionoffreesurplusoverthe
nextfiveyears.
At31December2018,thetotalfreesurplusexpectedtobegeneratedonanundiscountedbasisinthenext40yearsis£79.3billion,
upfromthe£70.1billionexpectedattheendof2017,reflectingtheeffectofnewbusinesswrittenacrossallthreebusinessoperations
of£9.8billion,apositiveforeignexchangetranslationeffectof£2.6billionanda£(0.4)billionneteffectreflectingoperating,market
assumptionchangesandotheritems.The£2.3billionimpactinAsiaofoperating,non-operatingandothermovementsincludesthenet
benefitfromchangesinoperatingassumptionsfollowingtheannualreviewofexperience,togetherwiththebenefitofmanagement
actionsandgenerallyhigherinterestratesincreasingprojectedreturns.The£(0.4)billionimpactintheUSmainlyreflectstheeffectof
lowerthanexpectedseparateaccountreturnintheyear,partiallyoffsetbythepositiveeffectfrompersistencyassumptionupdatesand
higherinterestratesincreasingfutureseparateaccountreturn.The£(2.3)billionimpactintheUKandEuropereflectstheeffectoflower
thanassumedinvestmentreturnsonwith-profitsfundsandthereinsuranceofpartofitsshareholderannuityportfoliotoRothesayLife
asdiscussedinnote17.TheoverallgrowthintheGroup’sundiscountedvalueoffreesurplusreflectsourabilitytowritebothgrowingand
profitablenewbusiness.
Actualunderlyingfreesurplusgeneratedin2018fromlifebusinessinforce,beforerestructuringcosts,attheendof2018was
£4.4billionincluding£0.8billionofchangesinoperatingassumptionsandexperiencevariances.Thiscompareswiththeexpected2018
realisationattheendof2017of£3.5billion.IntheUKandEurope,thedifferencebetweenthetransfertofreesurplusrecognisedin2018
andthefreesurplusexpectedtobegeneratedat31December2017reflectsthereinsuranceoftheshareholderannuityportfolioto
RothesayLife(asdiscussedinnote17)whichwasnotknownat2017.Thiscanbeanalysedfurtherasfollows:
Transfertofreesurplusin2018
Expectedreturnonfreeassets
Changesinoperatingassumptionsandexperiencevariances
Underlying free surplus generated from in-force life business
before restructuring costs in 2018
2018freesurplusexpectedtobegeneratedat31December2017
Asia
£m
1,370
68
62
1,500
1,393
US
£m
UK and Europe
£m
1,462
54
125
1,641
1,464
607
79
591
1,277
671
Total
£m
3,439
201
778
4,418
3,528
www.prudential.co.uk
AnnualReport2018 Prudential plc 397
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information II Other information continued
II(d) Reconciliation of expected transfer of value of in-force business (VIF) and required capital to free surplus
continued
Theequivalentdiscountedamountsoftheundiscountedexpectedtransfersfromin-forcebusinessandrequiredcapitalintofreesurplus
shownpreviouslyareasfollows:
Expected period of emergence
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039-2043
2044-2048
2049-2053
2054-2058
Discounted expected generation from
all in-force business
Discounted expected generation from
new business written
31 Dec 2018 £m
Asia
1,495
1,353
1,217
1,140
1,071
965
895
835
776
714
624
588
548
516
486
436
415
409
407
386
1,951
1,509
1,128
811
US
1,497
1,486
1,447
1,307
1,191
1,120
910
760
694
610
527
452
355
273
164
165
93
52
33
35
123
–
–
–
UK and
Europe
579
568
531
488
450
411
379
341
308
274
245
215
187
218
188
163
139
123
110
98
324
110
38
4
Total
3,571
3,407
3,195
2,935
2,712
2,496
2,184
1,936
1,778
1,598
1,396
1,255
1,090
1,007
838
764
647
584
550
519
2,398
1,619
1,166
815
Asia
194
176
161
159
138
116
118
106
92
92
68
65
56
52
56
47
45
43
41
43
285
251
197
153
US
198
139
126
121
92
52
41
100
92
77
67
60
46
39
32
25
16
14
12
11
26
–
–
–
UK and
Europe
31
32
33
34
35
31
28
26
24
22
20
18
16
16
14
12
10
9
8
6
21
10
2
–
Total
423
347
320
314
265
199
187
232
208
191
155
143
118
107
102
84
71
66
61
60
332
261
199
153
Totaldiscountedfreesurplusexpected
toemergeinthenext40years
20,675
13,294
6,491
40,460
2,754
1,386
458
4,598
TheaboveamountscanbereconciledtotheGroup’sEEVbasisfinancialstatementsasfollows:
Discountedexpectedgenerationfromallin-forcebusinessforyears2019to2058
Discountedexpectedgenerationfromallin-forcebusinessforyearsafter2058
Discountedexpectedgenerationfromallin-forcebusinessat31December2018
Add:Freesurplusoflifeoperationsheldat31December2018
Less:Timevalueofguarantees
Othernon-modelleditems
TotalEEVforlong-termbusinessoperations
31 Dec 2018
£m
40,460
2,659
43,119
7,527
(2,427)
2,169
50,388
398 Prudential plc AnnualReport2018
www.prudential.co.uk
Additional unaudited financial information continued II(e) Foreign currency source of key metrics
ThetablesbelowshowtheGroup’skeyfreesurplus,IFRSandEEV,metricsanalysisbycontributionbycurrencygroup:
Free surplus and Group IFRS results
USdollarlinked note (i)
OtherAsiacurrencies
TotalAsia
UKsterling notes (ii),(iv)
USdollar note (iv)
Total
Group EEV post-tax results
USdollarlinked note (i)
OtherAsiacurrencies
TotalAsia
UKsterling notes (ii),(iv)
USdollar note (iv)
Total
Underlying
free surplus
generated for
total insurance
and asset
management
operations
note(iii)
15%
13%
28%
39%
33%
IFRS pre-tax
operating
profit
notes(ii),(iv)
IFRS
shareholders’
funds
notes(ii),(iv)
28%
17%
45%
15%
40%
22%
15%
37%
49%
14%
100%
100%
100%
New business
profit
Operating
profit
notes(ii),(iv)
Shareholders’
funds
notes(i),(iv)
57%
10%
67%
9%
24%
53%
7%
60%
12%
28%
40%
10%
50%
26%
24%
100%
100%
100%
Notes
(i)
(ii)
(iii)
(iv)
USdollarlinkedcomprisetheHongKongandVietnamoperationswherethecurrenciesarepeggedtotheUSdollarandtheMalaysiaandSingaporeoperationswherethe
currenciesaremanagedagainstabasketofcurrenciesincludingtheUSdollar.
Foroperatingprofitandshareholders’funds,UKsterlingincludesamountsinrespectofM&GPrudentialandotheroperations(includingcentraloperationsandPrudentialCapital).
OperatingprofitforcentraloperationsincludesamountsforcorporateexpenditureforGroupHeadOfficeaswellasAsiaRegionalHeadOfficewhichisincurredinHKdollarsas
wellasrestructuringcostsincurredbytheGroup.
Foroperatingfreesurplusgeneration,UKsterlingincludesamountsinrespectofrestructuringcostsincurredbyinsuranceandassetmanagementoperations.
Forshareholders’funds,theUSdollargroupingincludesUSdollardenominatedcorestructuralborrowings.Sterlingoperatingprofitsincludeallinterestpayableassterling
denominated,reflectinginterestratecurrencyswapsinplace.
II(f) Option schemes
TheGrouppresentlygrantsshareoptionsthroughfourschemes,andexercisesoftheoptionsaresatisfiedbytheissueofnewshares.
ExecutivedirectorsandeligibleemployeesbasedintheUKmayparticipateinthePrudentialSavings-RelatedShareOptionScheme.
ExecutivesandeligibleemployeesbasedinAsiaaswellaseligibleemployeesbasedinEuropecanparticipateinthePrudential
InternationalSavings-RelatedShareOptionScheme,whileagentsbasedincertainregionsofAsiacanparticipateinthePrudential
InternationalSavings-RelatedShareOptionSchemeforNon-Employees.EmployeesbasedinDublinareeligibletoparticipateinthe
PrudentialInternationalAssuranceSharesavePlan,whichcurrentlyhasnooutstandingoptionsinissue.Furtherdetailsoftheschemes
andaccountingpoliciesaredetailedinnoteB2.2oftheIFRSbasisconsolidatedfinancialstatements.
Alloptionsweregrantedat£nilconsideration.Nooptionshavebeengrantedtosubstantialshareholders,suppliersofgoodsor
services(excludingoptionsgrantedtoagentsunderthePrudentialInternationalSavings-RelatedShareOptionSchemeforNon-
employees)orinexcessoftheindividuallimitfortherelevantscheme.
Theoptionsschemeswillterminateasfollows,unlessthedirectorsresolvetoterminatetheplansatanearlierdate:
— PrudentialSavings-RelatedShareOptionScheme:16May2023;
— PrudentialInternationalSavings-RelatedShareOptionScheme:19May2021;
— PrudentialInternationalAssuranceSharesavePlan:3August2019;and
— PrudentialInternationalSavings-RelatedShareOptionSchemeforNon-Employees2012:12May2022.
TheweightedaveragesharepriceofPrudentialplcfortheyearended31December2018was£17.36(2017:£17.51).
ParticularsofoptionsgrantedtodirectorsareincludedintheDirectors’remunerationreportonpage154.
Theclosingpriceofthesharesimmediatelybeforethedateonwhichtheoptionsweregrantedduringtheyearwas£16.81.
Thefollowinganalysesshowthemovementinoptionsforeachoftheoptionschemesfortheyearended31December2018.
www.prudential.co.uk
AnnualReport2018 Prudential plc 399
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
II Other information continued
II(f) Option schemes continued
Prudential Savings-Related Share Option Scheme
Exercise period
Number of options
Date of
grant
Exercise
price £
21Sep12
20Sep13
23Sep14
23Sep14
22Sep15
22Sep15
21Sep16
21Sep16
21Sep17
21Sep17
6.29
9.01
11.55
11.55
11.11
11.11
11.04
11.04
14.55
14.55
Beginning
End
01Dec17 31May18
01Dec18 31May19
01Dec17 31May18
01Dec19 31May20
01Dec18 31May19
01Dec20 31May21
01Dec19 31May20
01Dec21 31May22
01Dec20 31May21
01Dec22 31May23
Beginning
of year
25,239
66,202
156,359
359,247
847,546
213,547
663,871
145,658
809,303
138,097
Granted
Exercised
Cancelled
Forfeited
Lapsed
End of year
(24,762)
–
–
(37,927)
– (156,048)
–
(36,474)
– (553,825)
(13,870)
–
(34,921)
–
(5,372)
–
(13,978)
–
(1,226)
–
–
–
–
(3,409)
(9,443)
(4,185)
(44,340)
(7,224)
(58,878)
(11,849)
–
–
–
(2,901)
(19,537)
(4,266)
(21,317)
(2,715)
(23,350)
(3,833)
(477)
(543)
(311)
(12,747)
(7,997)
(10,700)
(24,366)
(9,242)
(44,821)
(5,842)
–
27,732
–
303,716
256,744
180,526
538,927
121,105
668,276
115,347
3,425,069
– (878,403) (139,328)
(77,919) (117,046)
2,212,373
Thetotalnumberofsecuritiesavailableforissueundertheschemeis2,212,373whichrepresents0.085percentoftheissuedshare
capitalat31December2018.
Theweightedaverageclosingpriceofthesharesimmediatelybeforethedatesonwhichtheoptionswereexercisedduringthe
currentperiodwas£16.22.
Therewerenooptionsgrantedundertheplanduringthecurrentperiod.
Prudential International Savings-Related Share Option Scheme
Exercise period
Number of options
Granted
Exercised
Cancelled
Forfeited
Lapsed
End of year
Date of
grant
Exercise
price £
21Sep12
20Sep13
23Sep14
23Sep14
22Sep15
22Sep15
21Sep16
21Sep17
21Sep17
18Sep18
18Sep18
6.29
9.01
11.55
11.55
11.11
11.11
11.04
14.55
14.55
13.94
13.94
Beginning
End
01Dec17 31May18
01Dec18 31May19
01Dec17 31May18
01Dec19 31May20
01Dec18 31May19
01Dec20 31May21
01Dec19 31May20
01Dec20 31May21
01Dec22 31May23
01Dec21 31May22
01Dec23 31May24
Beginning
of year
662
38,352
2,414
4,464
23,556
3,240
15,516
12,542
3,298
–
–
–
–
–
–
–
–
–
–
–
22,005
1,076
(662)
(14,364)
(2,414)
–
(13,836)
–
–
–
–
–
–
–
(4,659)
–
(51)
(4,860)
(540)
(4,088)
(2,722)
–
–
–
–
(942)
–
–
–
–
(652)
–
–
–
–
104,044
23,081
(31,276)
(16,920)
(1,594)
–
–
–
–
–
–
–
–
–
–
–
–
–
18,387
–
4,413
4,860
2,700
10,776
9,820
3,298
22,005
1,076
77,335
Thetotalnumberofsecuritiesavailableforissueundertheschemeis77,335whichrepresents0.003percentoftheissuedsharecapital
at31December2018.
Theweightedaverageclosingpriceofthesharesimmediatelybeforethedatesonwhichtheoptionswereexercisedduringthe
currentperiodwas£15.80.
Theweightedaveragefairvalueofoptionsgrantedundertheplanintheperiodwas£3.13.
400 Prudential plc AnnualReport2018
www.prudential.co.uk
Additional unaudited financial information continued Prudential International Assurance Sharesave Plan
Therearenosecuritiesavailableforissueundertheschemeat31December2018.
Prudential International Savings-Related Share Option Scheme for Non-Employees
Exercise period
Number of options
Date of
grant
Exercise
price £
21Sep12
20Sep13
23Sep14
23Sep14
22Sep15
22Sep15
21Sep16
21Sep16
21Sep17
21Sep17
18Sep18
18Sep18
6.29
9.01
11.55
11.55
11.11
11.11
11.04
11.04
14.55
14.55
13.94
13.94
Beginning
End
01Dec17 31May18
01Dec18 31May19
01Dec17 31May18
01Dec19 31May20
01Dec18 31May19
01Dec20 31May21
01Dec19 31May20
01Dec21 31May22
01Dec20 31May21
01Dec22 31May23
01Dec21 31May22
01Dec23 31May24
Beginning
of year
15,264
388,250
237,637
472,145
452,343
383,962
329,712
198,415
267,661
174,351
–
–
–
–
–
–
–
–
–
–
–
–
184,780
118,243
(15,264)
(148,769)
(236,372)
–
(181,067)
–
–
–
–
–
–
–
–
(3,494)
(1,265)
(12,980)
(9,784)
(7,290)
(671)
(1,358)
(2,731)
(2,060)
–
–
–
–
–
–
–
–
(2,445)
–
(1,103)
–
–
–
2,919,740
303,023 (581,472)
(41,633)
(3,548)
–
–
–
–
(14)
–
–
–
–
–
–
–
(14)
–
235,987
–
459,165
261,478
376,672
326,596
197,057
263,827
172,291
184,780
118,243
2,596,096
Granted
Exercised
Cancelled
Forfeited
Lapsed
End of year
Thetotalnumberofsecuritiesavailableforissueundertheschemeis2,596,096whichrepresents0.100percentoftheissuedshare
capitalat31December2018.
Theweightedaverageclosingpriceofthesharesimmediatelybeforethedatesonwhichtheoptionswereexercisedduringthe
currentperiodwas£16.72.
Theweightedaveragefairvalueofoptionsgrantedundertheplanintheperiodwas£3.30.
II(g) Selected historical financial information of Prudential
ThefollowingtablesetsforthPrudential’sselectedconsolidatedfinancialdatafortheperiodsindicated.Certaindataisderivedfrom
Prudential’sauditedconsolidatedfinancialstatementspreparedinaccordancewithInternationalFinancialReportingStandards(IFRS)
asissuedbytheInternationalAccountingStandardsBoard(IASB)andasadoptedbytheEuropeanUnion(EU)andEuropeanEmbedded
Value(EEV).
ThistableisonlyasummaryandshouldbereadinconjunctionwithPrudential’sconsolidatedfinancialstatementsandtherelated
notesincludedelsewhereinthisdocument.
www.prudential.co.uk
AnnualReport2018 Prudential plc 401
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information II Other information continued
II(g) Selected historical financial information of Prudential continued
Income statement data
IFRS basis results
Grosspremiumsearned
Outwardreinsurancepremiums note (v)
Earnedpremiums,netofreinsurance
Investmentreturn
Otherincome note (vi)
Totalrevenue,netofreinsurance
Benefitsandclaimsandmovementinunallocatedsurplus
ofwith-profitsfunds,netofreinsurance
Acquisitioncostsandotherexpenditure note (vi)
Financecosts:interestoncorestructuralborrowings
ofshareholder-financedbusinesses
(Loss)gainondisposalofbusinessesandcorporatetransactions
Re-measurementofthesoldKorealifebusiness
Totalcharges,netofreinsuranceand(loss)gainondisposal
2018 £m
2017 £m
2016 £m
2015 £m
2014 £m
47,224
(14,023)
33,201
(10,263)
1,993
24,931
44,005
(2,062)
41,943
42,189
2,258
86,390
38,981
(2,020)
36,961
32,511
2,246
71,718
36,663
(1,157)
35,506
3,304
2,356
41,166
32,832
(799)
32,033
25,787
2,137
59,957
(12,568)
(8,855)
(72,532)
(9,993)
(59,366)
(8,724)
(29,656)
(8,069)
(50,169)
(6,583)
(410)
(80)
–
(425)
223
5
(360)
–
(238)
(312)
(46)
–
(341)
(13)
–
ofbusinesses
(21,913)
(82,722)
(68,688)
(38,083)
(57,106)
Shareofprofitsfromjointventuresandassociates,
netofrelatedtax
Profitbeforetax (being tax attributable to shareholders’
and policyholders’ returns) note (i)
Taxcredit(charges)attributabletopolicyholders’returns
Profitbeforetaxattributabletoshareholders
Taxchargesattributabletoshareholders’returns
Profitfortheyear
Basedonprofitfortheyearattributabletotheequityholders
oftheCompany(inpence):
Basicearningspershare
Dilutedearningspershare
Dividendpersharedeclaredandpaidinreportingperiod
Interimordinarydividend/finalordinarydividend
Specialdividend
Supplementary IFRS income statement data
Operatingprofitbasedonlonger-terminvestmentreturns note (ii)
Non-operatingitems
Profitbeforetaxattributabletoshareholders
Operatingearningspershare(inpence)
Supplementary EEV income statement data (post-tax)
Operatingprofitbasedonlonger-terminvestmentreturns note (ii)
Non-operatingitems
Profitattributabletoshareholders
Operatingearningspershare(inpence)
291
302
182
238
303
3,309
326
3,635
(622)
3,013
3,970
(674)
3,296
(906)
2,390
3,212
(937)
2,275
(354)
1,921
3,321
(173)
3,148
(569)
2,579
3,154
(540)
2,614
(398)
2,216
2018
2017
2016
2015
2014
116.9p
116.8p
48.17p
48.17p
–
93.1p
93.0p
45.07p
45.07p
–
75.0p
75.0p
49.40p
39.40p
10.00p
101.0p
100.9p
38.05p
38.05p
–
86.9p
86.8p
35.03p
35.03p
–
2018 £m
2017 £m
2016 £m
2015 £m
2014 £m
4,827
(1,192)
3,635
156.6p
4,699
(1,403)
3,296
145.2p
4,256
(1,981)
2,275
131.3p
3,969
(821)
3,148
124.6p
3,154
(540)
2,614
95.7p
2018 £m
2017 £m
2016 £m
2015 £m
2014 £m
7,563
(2,975)
4,588
6,598
2,153
8,751
5,497
(981)
4,516
4,840
(889)
3,951
4,108
235
4,343
293.6p
257.0p
214.7p
189.6p
161.2p
402 Prudential plc AnnualReport2018
www.prudential.co.uk
Additional unaudited financial information continued
New business data
Annualpremiumequivalent(APE)sales
EEVnewbusinessprofit(NBP)(post-tax)
NBPmargin(%ofAPE)
Statement of financial position data
2018 £m
2017 £m
2016 £m
2015 £m
2014 £m
6,802
3,877
57%
6,958
3,616
52%
6,320
3,088
49%
5,466
2,609
48%
4,514
2,104
47%
31 December
2018 £m
2017 £m
2016 £m
2015 £m
2014 £m
Totalassets
Totalpolicyholderliabilitiesandunallocatedsurplusof
with-profitsfunds
Corestructuralborrowingsofshareholder-financedbusinesses
Totalliabilities
Totalequity
508,645
493,941
470,498
386,985
369,204
425,146
7,664
491,378
17,267
428,194
6,280
477,847
16,094
403,313
6,798
455,831
14,667
335,614
5,011
374,029
12,956
321,989
4,304
357,392
11,812
Other data
31 December
2018 £bn
2017 £bn
2016 £bn
2015 £bn
2014 £bn
Fundsundermanagement note (iii)
EEVshareholders’equity,excludingnon-controllinginterests
GroupshareholderSolvencyIIsurplus note (iv)
InsuranceGroupsDirectivecapitalsurplusbeforefinaldividend
657
49.8
17.2
n/a
669
45
13.4
n/a
602
39.0
12.5
n/a
509
32.4
9.7
5.5
496
29.2
n/a
4.7
Notes
(i)
(ii) Operatingprofitsaredeterminedonthebasisofincludinglonger-terminvestmentreturns.EEVandIFRSoperatingprofitsarestatedafterexcludingtheeffectofshort-term
Thismeasureistheformalprofit(loss)beforetaxmeasureunderIFRSbutisnottheresultattributabletoshareholders.
fluctuationsininvestmentreturnsagainstlong-termassumptions,gainondilutionoftheGroup’sholdings,thecostsarisingfromthedomesticationoftheHongKongbusiness,
profit(loss)attachingtothesaleofJapanlifeandprofit(loss)attachingtotheheldforsaleKorealifebusiness.SeparatelyontheIFRSbasis,operatingprofitalsoexcludes
amortisationofacquisitionaccountingadjustments.Inaddition,forEEVbasisresults,operatingprofitexcludestheeffectofchangesineconomicassumptions,themarketvalue
movementoncoreborrowingsandin2012,thegainarisingontheacquisitionofREALIC.
FundsundermanagementcomprisefundsoftheGroupheldinthestatementoffinancialpositionandexternalfundsthataremanagedbyPrudentialassetmanagementoperations.
The2018surplusisestimated.
(iii)
(iv)
(v) Outwardreinsurancepremiumsof£(14,023)millionincludes£(12,149)millionpaidduringtheyearinrespectofthereinsuranceoftheUKannuityportfolio.SeenoteD1.1ofthe
IFRSfinancialstatementsforfurtherdetails.
Thecomparativeresultsfrom2014to2017havebeenre-presentedfromthosepreviouslypublishedforthedeductionofcertainexpensesagainstrevenuefollowingtheadoption
ofIFRS15.SeenoteA2oftheIFRSfinancialstatements.
(vi)
III Calculation of alternative performance measures
Theannualreportusesalternativeperformancemeasures(APMs)toprovidemorerelevantexplanationsoftheGroup’sfinancialposition
andperformance.ThissectionsetsoutexplanationsforeachAPMandreconciliationstorelevantIFRSbalances.
III(a) Reconciliation of adjusted IFRS operating profit based on longer-term investment returns to profit before tax
Theannualreportusesalternativeperformancemeasures(APMs)toprovidemorerelevantexplanationsoftheGroup’sfinancialposition
andperformance.ThissectionsetsoutexplanationsforeachAPMandreconciliationstorelevantIFRSbalances.
AdjustedIFRSoperatingprofitattributabletoshareholdersbasedonlonger-terminvestmentreturnspresentstheoperating
performanceofthebusiness.ThismeasurementbasisadjustsforthefollowingitemswithintotalIFRSprofitbeforetax:
— Short-termfluctuationsininvestmentreturnsonshareholder-backedbusiness;
— Amortisationofacquisitionaccountingadjustmentsarisingonthepurchaseofbusiness;and
— Gainorlossoncorporatetransactions,suchasdisposalsundertakenintheyear.
MoredetailsonhowadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsisdeterminedareincludedinnoteB1.3
oftheIFRSfinancialstatements.
www.prudential.co.uk
AnnualReport2018 Prudential plc 403
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information
III Calculation of alternative performance measures continued
III(b) Calculation of return on IFRS shareholders’ funds
ReturnonIFRSshareholders’fundsiscalculatedasoperatingprofitbasedonlonger-terminvestmentreturnsnetoftaxandnon-controlling
interestsdividedbyopeningshareholders’funds.Operatingprofitbasedonlonger-terminvestmentreturnsisreconciledtoIFRSprofit
beforetaxinnoteB1totheIFRSfinancialstatements.
Operatingprofitbasedonlonger-terminvestmentreturns
Taxonoperatingprofit
Profitattributabletonon-controllinginterests
Operatingprofitbasedonlonger-terminvestmentreturns,
netoftaxandnon-controllinginterests
Openingshareholders’funds
Return on shareholders’ funds
Note
B1.1
2018 £m
2017 £m
4,827
(792)
(3)
4,032
16,087
25%
4,699
(971)
(1)
3,727
14,666
25%
III(c) Calculation of IFRS gearing ratio
Gearingratioiscalculatedasnetcorestructuralborrowingsofshareholder-financedoperationsdividedbyclosingIFRSshareholders’
fundsplusnetcorestructuralborrowings.
Corestructuralborrowingsofshareholder-financedoperations
Less:Holdingcompanycashandshort-terminvestments
Net core structural borrowings of shareholder-financed operations
Closingshareholders’funds
Shareholders’ funds plus net core structural borrowings
Gearing ratio
Note
C6.1
II(a)
31 Dec 2018
£m
31 Dec 2017
£m
7,664
(3,236)
4,428
17,249
21,677
20%
6,280
(2,264)
4,016
16,087
20,103
20%
III(d) Calculation of IFRS shareholders’ funds per share
IFRSshareholders’fundspershareiscalculatedasclosingIFRSshareholders’fundsdividedbythenumberofissuedsharesatthe
balancesheetdate.
Closingshareholders’funds(£million)
Numberofissuedsharesatyearend(millions)
Shareholders’ funds per share (pence)
Note
31 Dec 2018
31 Dec 2017
C10
17,249
2,593
665
16,087
2,587
622
III(e) Calculation of asset management cost/income ratio
Theassetmanagementcost/incomeratioiscalculatedasassetmanagementoperatingexpenses,adjustedforcommissionandjoint
venturecontribution,dividedbyassetmanagementtotalIFRSrevenueadjustedforcommission,jointventurecontribution,
performance-relatedfeesandnon-operatingitems.
Operating income used in cost/income ratio
Commission
Performance-relatedfees
Investmentreturn
Short-termfluctuationsininvestmentreturnsonshareholder-backedbusiness
Total IFRS revenue
Operating expense used in cost/income ratio
Investmentreturn
Commission
Charges
Cost/income ratio – Operating expense/operating income
M&GPrudential asset
management
2018 £m
2017 £m
1,100
313
15
(14)
(15)
1,399
654
(14)
313
953
59%
1,034
351
53
–
6
1,444
602
–
351
953
58%
404 Prudential plc AnnualReport2018
www.prudential.co.uk
Additional unaudited financial information continued Operating income before performance-related fees used in cost/income ratio
Shareofjointventurerevenue
Commission
Performance-relatedfees
Total IFRS revenue
Operating expense used in cost/income ratio
Shareofjointventureexpense
Commission
IFRS charges
Cost/income ratio – Operating expense/operating income before performance-related fees
Eastspring Investments
2018 £m
2017 £m
424
(188)
118
17
371
232
(100)
118
250
55%
421
(176)
103
17
365
238
(92)
103
249
56%
III(f) Reconciliation of Asia renewal insurance premium to gross earned premiums
AsiarenewalinsurancepremiumiscalculatedasIFRSgrossearnedpremiumslessnewbusinesspremiumsandadjustedforthe
contributionfromjointventures.
Asia renewal insurance premium
Add:Generalinsurancepremium
Add:IFRSgrossearnedpremiumfromnewregularandsingle
premiumbusiness
Less:Renewalpremiumsfromjointventures
Add:premiumsrelatingtosoldKorealifebusiness
AsiasegmentIFRSgrossearnedpremium
Note
B1.4
2018 £m
12,856
90
4,809
(1,286)
–
16,469
AER
2017 £m
11,482
89
4,986
(1,068)
199
15,688
CER
2017 £m
11,087
87
4,819
(1,022)
197
15,168
III(g) Reconciliation of APE new business sales to earned premiums
TheGroupreportsAPEnewbusinesssalesasameasureofthenewpoliciessoldintheyear.ThisdiffersfromtheIFRSmeasureof
premiumsearnedasshownbelow:
Annual premium equivalents as published
Adjustmenttoinclude100%ofsinglepremiumsonnewbusinesssoldintheyear note (i)
Premiumsfromin-forcebusinessandotheradjustments note (ii)
Gross premiums earned
Outwardreinsurancepremiums note (iii)
Earned premiums, net of reinsurance as shown in the IFRS financial statements
Note
B1.4
B1.4
B1.4
2018 £m
6,802
28,009
12,413
47,224
(14,023)
33,201
2017 £m
6,958
28,769
8,278
44,005
(2,062)
41,943
APEnewbusinesssalesonlyincludeonetenthofsinglepremiums,recordedonpoliciessoldintheyear.Grosspremiumsearnedinclude100percentofsuchpremiums.
Notes
(i)
(ii) Otheradjustmentsprincipallyincludeamountsinrespectofthefollowing:
–Grosspremiumsearnedincludepremiumsfromexistingin-forcebusinessaswellasnewbusiness.ThemostsignificantamountisrecordedinAsia,whereasignificantportion
ofregularpremiumbusinessiswritten.Asiain-forcepremiumsformthevastmajorityoftheotheradjustmentamount;
–InOctober2018,Jacksonenteredintoa100percentreinsuranceagreementwithJohnHancockLifeInsuranceCompanytoacquireaclosedblockofgrouppay-outannuity
business.Thetransactionresultedinanadditiontogrosspremiumsearnedof£3.7billion.NoamountswereincludedinAPEnewbusinesssales.
–APEincludesnewpolicieswrittenintheyearwhichareclassifiedasinvestmentcontractswithoutdiscretionaryparticipationfeaturesunderIFRS4,arisingmainlyinJackson
forguaranteedinvestmentcontractsandinM&GPrudentialforcertainunit-linkedsavingsandsimilarcontracts.Theseareexcludedfromgrosspremiumsearnedandrecorded
asdeposits;
–APEnewbusinesssalesareannualisedwhilegrosspremiumsearnedarerecordedonlywhenrevenuesaredue;and
–ForthepurposeofreportingAPEnewbusinesssales,weincludetheGroup’sshareofamountssoldbytheGroup’sinsurancejointventuresandassociates.UnderIFRS,
jointventuresandassociatesareequityaccountedandsonoamountsareincludedwithingrosspremiumsearned.
(iii) Outwardreinsurancepremiumsin2018include£(12,149)millioninrespectofthereinsuranceoftheUKannuityportfolio.
www.prudential.co.uk
AnnualReport2018 Prudential plc 405
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information III Calculation of alternative performance measures continued
III(h) Reconciliation between IFRS and EEV shareholders’ funds
ThetablebelowshowsthereconciliationofEEVshareholders’fundsandIFRSshareholders’fundsattheendoftheyear:
EEV shareholders’ funds
Less:Valueofin-forcebusinessoflong-termbusiness note (i)
DeferredacquisitioncostsassignedzerovalueforEEVpurposes
Other note (ii)
IFRS shareholders’ funds
31 Dec 2018
£m
31 Dec 2017
£m
49,782
(33,013)
10,077
(9,597)
17,249
44,698
(29,410)
9,227
(8,428)
16,087
Notes
(i)
TheEEVshareholders’fundscomprisesthepresentvalueoftheshareholders’interestinthevalueofin-forcebusiness,networthoflong-termbusinessoperationsandIFRS
shareholders’fundsofassetmanagementandotheroperations.Thevalueofin-forcebusinessreflectsthepresentvalueoffutureshareholdercashflowsfromlong-termin-force
businesswhicharenotcapturedasshareholders’interestonanIFRSbasis.NetworthrepresentsthenetassetsforEEVreportingpurposesthatreflecttheregulatorybasisposition,
sometimeswithadjustmentstoachieveconsistencywiththeIFRStreatmentofcertainitems.
(ii) OtheradjustmentsrepresentassetandliabilityvaluationdifferencesbetweenIFRSandthelocalregulatoryreportingbasisusedtovaluenetworthforlong-terminsurance
operations.FortheUK,thiswouldbethedifferencebetweenIFRSandSolvencyII.
ItalsoincludesthemarktomarketoftheGroup’scorestructuralborrowingswhicharefairvaluedunderEEVbutnotIFRS.Themostsignificantvaluationdifferencesrelateto
changesinthevaluationofinsuranceliabilities.Forexample,inJacksonwhereIFRSliabilitiesarehigherthanthelocalregulatorybasisastheyareprincipallybasedonpolicyholder
accountbalances(withadeferredacquisitioncostsrecognisedasanasset)whereasthelocalregulatorybasisusedforEEVisbasedonfuturecashflowsduetothepolicyholder
onaprudentbasiswithconsiderationofanexpenseallowanceasapplicable,butwithnoseparatedeferredacquisitioncostasset.
III(i) Reconciliation of EEV operating profit based on longer-term investment returns
Totheextentapplicable,thepresentationoftheEEVpost-taxprofitfortheyearisconsistentintheclassificationbetweenoperatingand
non-operatingresultswiththebasisthattheGroupappliesfortheanalysisofIFRSbasisresults.Operatingresultsreflectunderlying
resultsincludinglonger-terminvestmentreturns,whicharedeterminedfollowingtheEEVPrinciplesissuedbytheEuropeanInsurance
CFOForum.
Non-operatingresultscomprise:
— Short-termfluctuationsininvestmentreturns;
— Themarktomarketvaluemovementsoncorestructuralborrowings;
— Theeffectofchangesineconomicassumptions;and
— Theimpactofcorporatetransactionsundertakenintheyear.
MoredetailsonhowEEVpost-taxprofitisdeterminedandthecomponentsofEEVoperatingprofitareincludedinnote13oftheEEV
supplementarybasisofresults.
III(j) Calculation of return on embedded value
ReturnonembeddedvalueiscalculatedastheEEVpost-taxoperatingprofitbasedonlonger-terminvestmentreturns,asapercentage
ofopeningEEVbasisshareholders’funds.
EEVoperatingprofitbasedonlonger-terminvestmentreturns(£million)
OpeningEEVbasisshareholders’funds(£million)
Return on embedded value (%)
Note
2
8
2018
7,563
44,698
17%
2017
6,598
38,968
17%
III(k) Calculation of EEV shareholders’ funds per share
EEVshareholders’fundspershareiscalculatedasclosingEEVshareholders’fundsdividedbythenumberofissuedsharesatthebalance
sheetdate.EEVshareholders’fundspershareexcludinggoodwillattributabletoshareholdersiscalculatedinthesamemanner,except
goodwillattributabletoshareholdersisdeductedfromclosingEEVshareholders’funds.
ClosingEEVshareholders’funds(£million)
Less:Goodwillattributabletoshareholders(£million)
ClosingEEVshareholders’fundsexcludinggoodwillattributabletoshareholders(£million)
Numberofissuedsharesatyearend(millions)
Shareholders’ funds per share (in pence)
Shareholders’ funds per share excluding goodwill attributable to shareholders
(in pence)
Note
31 Dec 2018
31 Dec 2017
8
8
49,782
(1,651)
48,131
2,593
1,920p
44,698
(1,458)
43,240
2,587
1,728p
1,856p
1,671p
406 Prudential plc AnnualReport2018
www.prudential.co.uk
Additional unaudited financial information continued Risk factors
AnumberofriskfactorsaffectPrudential’s
operatingresultsandfinancialcondition
and,accordingly,thetradingpriceofits
shares.Theriskfactorsmentionedbelow
shouldnotberegardedasacompleteand
comprehensivestatementofallpotential
risksanduncertainties.Theinformation
givenisasofthedateofthisdocument,
andanyforward-lookingstatementsare
madesubjecttothereservationsspecified
under‘Forward-lookingstatements’.
Prudential’sapproachestomanaging
risksareexplainedinthesectionofthis
documentheaded‘GroupChiefRisk
Officer’sReportoftherisksfacingour
businessandhowthesearemanaged’.
Risks relating to Prudential’s
business
Prudential’s businesses are
inherently subject to market
fluctuations and general economic
conditions
Uncertainty,fluctuationsornegative
trendsininternationaleconomicand
investmentclimatescouldhaveamaterial
adverseeffectonPrudential’sbusiness
andprofitability.Prudentialoperatesina
macroeconomicandglobalfinancialmarket
environmentthatpresentssignificant
uncertaintiesandpotentialchallenges.
Forexample,governmentinterestrates
intheUS,theUKandsomeAsiancountries
inwhichPrudentialoperatesremainlow
relativetohistoricallevels.
Globalfinancialmarketsaresubjectto
uncertaintyandvolatilitycreatedbya
varietyoffactors.Thesefactorsinclude
thecontinuingreductioninaccommodative
monetarypoliciesintheUS,theUKand
otherjurisdictionstogetherwithitsimpact
onthevaluationofallassetclasses,effects
oninterestratesandtheriskofdisorderly
repricingofinflationexpectations
andglobalbondyields,concernsover
sovereigndebt,ageneralslowingin
worldgrowth,theincreasedlevelof
geopoliticalriskandpolicy-related
uncertainty(includingtheimpositionof
tradebarriers)andpotentiallynegative
socio-politicalevents.
Theadverseeffectsofsuchfactorscould
befeltprincipallythroughthefollowing
items:
— Reducedinvestmentreturnsarising
ontheGroup’sportfoliosincluding
impairmentofdebtsecuritiesandloans,
whichcouldreducePrudential’scapital
andimpairitsabilitytowritesignificant
volumesofnewbusiness,increasethe
potentialadverseimpactofproduct
guarantees,and/orhaveanegative
impactonitsassetsundermanagement
andprofit;
— Highercreditdefaultsandwidercredit
andliquidityspreadsresultingin
realisedandunrealisedcreditlosses;
— Failureofcounterpartieswhohave
transactionswithPrudential(egbanks
andreinsurers)tomeetcommitments
thatcouldgiverisetoanegativeimpact
onPrudential’sfinancialpositionand
ontheaccessibilityorrecoverability
ofamountsdueor,forderivative
transactions,adequatecollateralnot
beinginplace;
— Estimatesofthevalueoffinancial
instrumentsbecomingmoredifficult
becauseincertainilliquidorclosed
markets,determiningthevalueat
whichfinancialinstrumentscanbe
realisedishighlysubjective.Processes
toascertainsuchvaluesrequire
substantialelementsofjudgement,
assumptionsandestimates(which
maychangeovertime);and
— Increasedilliquidity,whichalsoadds
touncertaintyovertheaccessibility
offinancialresourcesandmayreduce
capitalresourcesasvaluationsdecline.
Thiscouldoccurwhereexternalcapital
isunavailableatsustainablecost,
increasedliquidassetsarerequiredto
beheldascollateralunderderivative
transactionsorredemptionrestrictions
areplacedonPrudential’sinvestments
inilliquidfunds.Inaddition,significant
redemptionrequestscouldalsobe
madeonPrudential’sissuedfundsand
whilethismaynothaveadirectimpact
ontheGroup’sliquidity,itcouldresultin
reputationaldamagetoPrudential.The
potentialimpactofincreasedilliquidity
ismoreuncertainthanforotherrisks
suchasinterestrateorcreditrisk.
Ingeneral,upheavalsinthefinancial
marketsmayaffectgenerallevelsof
economicactivity,employmentand
customerbehaviour.Asaresult,insurers
mayexperienceanelevatedincidenceof
claims,lapses,orsurrendersofpolicies,
andsomepolicyholdersmaychooseto
deferorstoppayinginsurancepremiums.
Thedemandforinsuranceproductsmay
alsobeadverselyaffected.Inaddition,
theremaybeahigherincidenceof
counterpartyfailures.Ifsustained,this
environmentislikelytohaveanegative
impactontheinsurancesectorovertime
andmayconsequentlyhaveanegative
impactonPrudential’sbusinessandits
balancesheetandprofitability.For
example,thiscouldoccuriftherecoverable
valueofintangibleassetsforbancassurance
agreementsanddeferredacquisitioncosts
arereduced.Newchallengesrelatedto
marketfluctuationsandgeneraleconomic
conditionsmaycontinuetoemerge.
Forsomenon-unit-linkedinvestment
products,inparticularthosewritteninsome
oftheGroup’sAsiaoperations,itmaynotbe
possibletoholdassetswhichwillprovide
cashflowstomatchthoserelatingto
policyholderliabilities.Thisisparticularly
trueinthosecountrieswherebondmarkets
arenotdevelopedandincertainmarkets
whereregulatedpremiumandclaimvalues
aresetwithreferencetotheinterestrate
environmentprevailingatthetimeofpolicy
issue.Thisresultsinamismatchduetothe
durationanduncertaintyoftheliabilitycash
flowsandthelackofsufficientassetsofa
suitableduration.Whilethisresidualasset/
liabilitymismatchriskcanbemanaged,it
cannotbeeliminated.Whereinterestrates
inthesemarketsremainlowerthanthose
usedtocalculatepremiumandclaimvalues
overasustainedperiod,thiscouldhave
amaterialadverseeffectonPrudential’s
reportedprofit.
Jacksonwritesasignificantamountof
variableannuitiesthatoffercapitalor
incomeprotectionguarantees.Thevalue
oftheseguaranteesisaffectedbymarket
factors(suchasinterestrates,equityvalues,
bondspreadsandrealisedvolatility)and
policyholderbehaviour.Jacksonusesa
derivativehedgingprogrammetoreduce
itsexposuretomarketrisksarisingonthese
guarantees.Therecouldbemarket
circumstanceswherethederivativesthat
Jacksonentersintotohedgeitsmarket
risksmaynotcoveritsexposuresunderthe
guarantees.Thecostoftheguarantees
thatremainunhedgedwillalsoaffect
Prudential’sresults.
www.prudential.co.uk
AnnualReport2018 Prudential plc 407
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Inaddition,Jacksonhedgestheguarantees
onitsvariableannuitybookonan
economicbasis(withconsiderationof
thelocalregulatoryposition)and,thus,
acceptsvariabilityinitsaccountingresults
intheshortterminordertoachievethe
appropriateresultonthesebases.
Inparticular,forPrudential’sGroupIFRS
reporting,themeasurementoftheJackson
variableannuityguaranteesistypicallyless
sensitivetomarketmovementsthanfor
thecorrespondinghedgingderivatives,
whichareheldatmarketvalue.However,
dependingonthelevelofhedging
conductedregardingaparticularrisktype,
certainmarketmovementscandrive
volatilityintheeconomicorlocalregulatory
resultsthatmaybelesssignificantunder
IFRSreporting.
Also,Jacksonhasasignificantspread
basedbusinesswiththesignificant
proportionofitsassetsinvestedinfixed
incomesecuritiesanditsresultsare
thereforeaffectedbyfluctuationsin
prevailinginterestrates.Inparticular,fixed
annuitiesandstablevalueproductswritten
byJacksonexposePrudentialtotherisk
thatchangesininterestrates,whicharenot
fullyreflectedintheinterestratescredited
tocustomers,willreducespread.The
spreadisthedifferencebetweentherate
ofreturnJacksonisabletoearnonthe
assetsbackingthepolicyholders’liabilities
andtheamountsthatarecreditedto
policyholdersintheformofbenefit
increases,subjecttominimumcrediting
rates.Declinesinspreadfromthese
productsorotherspreadbusinesses
thatJacksonconducts,andincreases
insurrenderlevelsarisingfrominterest
raterises,couldhaveamaterialimpact
onitsbusinessesorresultsofoperations.
Asignificantpartoftheprofitfrom
M&GPrudential’sinsuranceoperations
isrelatedtobonusesforpolicyholders
declaredonwith-profitsproducts,
whicharebroadlybasedonhistorical
andcurrentratesofreturnonequity,real
estateandfixedincomesecurities,aswell
asPrudential’sexpectationsoffuture
investmentreturns.Thisprofitcould
belowerinasustainedlowinterest
rateenvironment.
Prudential is subject to the risk
of potential sovereign debt credit
deterioration owing to the amounts
of sovereign debt obligations held
in its investment portfolio
Investinginsovereigndebtcreates
exposuretothedirectorindirect
consequencesofpolitical,socialor
economicchanges(includingchangesin
governments,headsofstateormonarchs)
inthecountriesinwhichtheissuersare
locatedandthecreditworthinessofthe
sovereign.Investmentinsovereigndebt
obligationsinvolvesrisksnotpresentin
debtobligationsofcorporateissuers.
Inaddition,theissuerofthedebtorthe
governmentalauthoritiesthatcontrolthe
repaymentofthedebtmaybeunableor
unwillingtorepayprincipalorpayinterest
whendueinaccordancewiththetermsof
suchdebt,andPrudentialmayhavelimited
recoursetocompelpaymentintheeventof
adefault.Asovereigndebtor’swillingness
orabilitytorepayprincipalandtopay
interestinatimelymannermaybeaffected
by,amongotherfactors,itscashflow
situation,itsrelationswithitscentralbank,
theextentofitsforeigncurrencyreserves,
theavailabilityofsufficientforeign
exchangeonthedateapaymentisdue,
therelativesizeofthedebtserviceburden
totheeconomyasawhole,thesovereign
debtor’spolicytowardlocaland
internationallenders,andthepolitical
constraintstowhichthesovereigndebtor
maybesubject.
Moreover,governmentsmayuseavariety
oftechniques,suchasinterventionbytheir
centralbanksorimpositionofregulatory
controlsortaxes,todevaluetheir
currencies’exchangerates,ormayadopt
monetaryandotherpolicies(includingto
managetheirdebtburdens)thathavea
similareffect,allofwhichcouldadversely
impactthevalueofaninvestmentin
sovereigndebtevenintheabsenceof
atechnicaldefault.Periodsofeconomic
uncertaintymayaffectthevolatilityof
marketpricesofsovereigndebttoagreater
extentthanthevolatilityinherentindebt
obligationsofothertypesofissuers.
Inaddition,ifasovereigndefaultorother
sucheventsdescribedabovewereto
occur,otherfinancialinstitutionsmayalso
sufferlossesorexperiencesolvencyor
otherconcerns,andPrudentialmightface
additionalrisksrelatingtoanydebtheldin
suchfinancialinstitutionsheldinits
investmentportfolio.Thereisalsoriskthat
publicperceptionsaboutthestabilityand
creditworthinessoffinancialinstitutions
andthefinancialsectorgenerallymightbe
adverselyaffected,asmightcounterparty
relationshipsbetweenfinancialinstitutions.
Ifasovereignweretodefaultonits
obligations,oradoptedpoliciesthat
devaluedorotherwisealteredthe
currenciesinwhichitsobligationswere
denominatedthiscouldhaveamaterial
adverseeffectonPrudential’sfinancial
conditionandresultsofoperations.
Prudential is subject to the risk of
exchange rate fluctuations owing
to the geographical diversity of
its businesses
Duetothegeographicaldiversityof
Prudential’sbusinesses,Prudentialis
subjecttotheriskofexchangerate
fluctuations.Prudential’soperationsinthe
USandAsia,whichrepresentasignificant
proportionofoperatingprofitbasedon
longer-terminvestmentreturnsand
shareholders’funds,generallywrite
policiesandinvestinassetsdenominated
inlocalcurrencies.Althoughthispractice
limitstheeffectofexchangerate
fluctuationsonlocaloperatingresults,
itcanleadtosignificantfluctuationsin
Prudential’sconsolidatedfinancial
statementsuponthetranslationofresults
intopoundssterling.Thisexposureisnot
currentlyseparatelymanaged.The
currencyexposurerelatingtothe
translationofreportedearningscould
impactfinancialreportingratiossuchas
dividendcover,whichiscalculatedas
operatingprofitaftertaxonanIFRSbasis,
dividedbythedividendsrelatingtothe
reportingyear.Theimpactofgainsor
lossesoncurrencytranslationsisrecorded
asacomponentofshareholders’funds
withinothercomprehensiveincome.
Consequently,thiscouldimpact
Prudential’sgearingratios(definedas
debtoverdebtplusshareholders’funds).
TheGroup’ssurpluscapitalpositionfor
regulatoryreportingpurposesmayalsobe
affectedbyfluctuationsinexchangerates
withpossibleconsequencesforthedegree
offlexibilitythatPrudentialhasin
managingitsbusiness.
408 Prudential plc AnnualReport2018
www.prudential.co.uk
Risk factors continued Prudential conducts its businesses
subject to regulation and associated
regulatory risks, including the
effects of changes in the laws,
regulations, policies and
interpretations and any accounting
standards in the markets in which
it operates
Changesingovernmentpolicyand
legislation(includinginrelationtotax),
capitalcontrolmeasuresoncompanies
andindividuals,regulationorregulatory
interpretationapplyingtocompaniesinthe
financialservicesandinsuranceindustries
inanyofthemarketsinwhichPrudential
operates(includingthoserelatedtothe
conductofbusinessbyPrudentialorits
thirdpartydistributors),ordecisionstaken
byregulatorsinconnectionwiththeir
supervisionofmembersoftheGroup,
whichinsomecircumstancesmaybe
appliedretrospectively,mayadversely
affectPrudential.Theproposeddemerger
ofM&GPrudentialfromPrudentialplcwill
resultinachangetoPrudential’sgroup-
widesupervisortotheHongKong
InsuranceAuthority,andasaconsequence
willchangethegroup-widesupervisory
frameworktowhichPrudentialissubject,
thefinalformofwhichremainsuncertain.
Theimpactfromanyregulatorychanges
mayaffectPrudential’sproductrange,
distributionchannels,competitiveness,
profitability,capitalrequirements,risk
managementapproaches,corporateor
governancestructureand,consequently,
reportedresultsandfinancing
requirements.Also,regulatorsin
jurisdictionsinwhichPrudentialoperates
mayimposerequirementsaffectingthe
allocationofcapitalandliquiditybetween
differentbusinessunitsintheGroup,
whetheronageographic,legalentity,
productlineorotherbasis.Regulators
maychangethelevelofcapitalrequiredto
beheldbyindividualbusinesses,the
regulationofsellingpractices,solvency
requirementsandcouldintroduce
changesthatimpacttheproductssold.
Furthermore,asaresultofinterventionsby
governmentsinlightoffinancialandglobal
economicconditions,theremaycontinue
tobechangesingovernmentregulation
andsupervisionofthefinancialservices
industry,includingthepossibilityofhigher
capitalrequirements,restrictionson
certaintypesoftransactionsandenhanced
supervisorypowers.
Recentshiftsinthefocusofsomenational
governmentstowardmoreprotectionist
orrestrictiveeconomicandtradepolicies
couldimpactonthedegreeandnature
ofregulatorychangesandPrudential’s
competitivepositioninsomegeographic
markets.Thiscouldtakeeffect,for
example,throughincreasedfrictionin
cross-bordertradeormeasuresfavouring
localenterprisessuchaschangestothe
maximumlevelofnon-domesticownership
byforeigncompanies.
TheEuropeanUnion’sSolvencyIIDirective
cameintoeffecton1January2016.
Themeasureofregulatorycapitalunder
SolvencyIIismorevolatilethanunderthe
previousSolvencyIregimeandregulatory
policymayfurtherevolveunderthe
regime.TheEuropeanCommissionbegan
areviewinlate2016ofsomeaspectsofthe
SolvencyIIlegislativepackage,whichis
expectedtocontinueuntil2021and
includesareviewoftheLongTerm
Guaranteemeasures.Prudentialapplied
for,andhasbeengrantedapprovalbythe
UKPrudentialRegulationAuthoritytouse
thefollowingmeasureswhencalculating
itsSolvencyIIcapitalrequirements:the
useofaninternalmodel,the‘matching
adjustment’forUKannuities,the‘volatility
adjustment’forselectedUSdollar-
denominatedbusiness,andUKtransitional
measuresontechnicalprovisions.
Prudentialalsohaspermissiontouse
‘deductionandaggregation’asthemethod
bywhichthecontributionoftheGroup’s
USinsuranceentitiestotheGroup’s
solvencyiscalculated,whichineffect
recognisessurplusinUSinsuranceentities
inexcessof250percentoflocalUSRisk
BasedCapitalrequirements.Foraslongas
Prudentialoritsbusinessesremainsubject
toSolvencyII,thereisariskthatchanges
mayberequiredtoPrudential’sapproved
internalmodelorotherSolvencyII
approvals,whichcouldhaveamaterial
impactontheGroupSolvencyIIcapital
position.Whereinternalmodelchanges
aresubjecttoregulatoryapproval,there
isariskthattheapprovalisdelayedornot
given.Insuchcircumstances,changesin
ourriskprofilewouldnotbeabletobe
appropriatelyreflectedinourinternal
model,whichcouldhaveamaterialimpact
ontheGroup’sSolvencyIIcapitalposition.
Currentlytherearealsoanumberofother
globalregulatorydevelopmentswhich
couldimpactPrudential’sbusinessesin
itsmanyjurisdictions.Theseincludethe
Dodd-FrankWallStreetReformand
ConsumerProtectionAct(Dodd-Frank
Act)intheUS,theworkoftheFinancial
StabilityBoard(FSB)intheareaofsystemic
riskincludingthedesignationofGlobal
SystemicallyImportantInsurers(G-SIIs),
theInsuranceCapitalStandard(ICS)being
developedbytheInternationalAssociation
ofInsuranceSupervisors(IAIS),theEU
MarketsinFinancialInstrumentsDirective
(the‘MiFIDIIDirective’)andassociated
implementingmeasures,whichcame
intoforceon3January2018andtheEU
GeneralDataProtectionRegulation,
whichcameintoforceon25May2018.
Inaddition,regulatorsinanumberof
jurisdictionsinwhichtheGroupoperates
arefurtherdevelopinglocalcapital
regimes;thisincludespotentialfuture
developmentsunderSolvencyIIintheUK
(asreferredtoabove),NationalAssociation
ofInsuranceCommissioners’(NAIC)
reformsintheUSandamendmentsto
certainlocalstatutoryregimesinsome
territoriesinAsia.Thereremainsahigh
degreeofuncertaintyoverthepotential
impactofthesechangesontheGroup.
TheDodd-FrankActprovidesfora
comprehensiveoverhaulofthefinancial
servicesindustrywithintheUSincluding
reformstofinancialservicesentities,
productsandmarkets.Thefullimpact
oftheDodd-FrankActonPrudential’s
businessesremainsunclear,asmany
ofitsprovisionsareprimarilyfocusedon
thebankingindustry,haveadelayed
effectivenessand/orrequirerule-making
orotheractionsbyvariousUSregulators
overthecomingyears.Thereisalso
potentialuncertaintysurroundingfuture
changestotheDodd-FrankActunderthe
currentUSadministration.
Prudential’sdesignationasaG-SIIwaslast
reaffirmedon21November2016.The
FSB,inconjunctionwiththeIAIS,didnot
publishanewlistofG-SIIsin2017anddid
notengageinG-SIIidentificationfor2018
followingIAIS’launchoftheconsultation
ontheHolisticFramework(HF)on
14November2018,whichaimstoassess
andmitigatesystemicriskintheinsurance
sectorandisintendedtoreplacethe
currentG-SIImeasures.TheIAISintends
toimplementtheHFin2020anditis
proposedthatG-SIIidentificationbe
suspendedfromthatyear.Intheinterim,
therelevantgroup-widesupervisorshave
committedtocontinueapplyingexisting
enhancedG-SIIsupervisorypolicy
measureswithsomesupervisory
discretion,whichincludesarequirement
tosubmitenhancedriskmanagement
plans.InNovember2022,theFSBwill
reviewtheneedtoeitherdiscontinueor
re-establishanannualidentificationof
G-SIIsinconsultationwiththeIAISand
nationalauthorities.TheHigherLoss
Absorbency(HLA)standard(aproposed
additionalcapitalmeasureforG-SII
designatedfirms,plannedtoapplyfrom
www.prudential.co.uk
AnnualReport2018 Prudential plc 409
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 2022)isnotpartoftheproposedHF.
However,theHFproposesmore
supervisorypowersofintervention
formitigatingsystemicriskincluding
temporaryfinancialreinforcement
measuressuchascapitaladd-onsand
suspensionofdividends.
TheIAISisalsodevelopingtheICSaspart
ofComFrame–theCommonFramework
forthesupervisionofInternationally
ActiveInsuranceGroups(IAIGs).The
implementationofICSwillbeconductedin
twophases–afive-yearmonitoringphase
followedbyanimplementationphase.
ComFramewillmoregenerallyestablish
asetofcommonprinciplesandstandards
designedtoassistsupervisorsin
addressingrisksthatarisefrominsurance
groupswithoperationsinmultiple
jurisdictions.TheComFrameproposals,
includingICS,couldresultinenhanced
capitalandregulatorymeasuresforIAIGs,
forwhichPrudentialsatisfiesthecriteria.
Inlate2018,theUSNAICconcluded
anindustryconsultationwiththeaimof
reducingthenon-economicvolatilityin
thevariableannuitystatutorybalance
sheetandenhancingriskmanagement.
TheNAICistargetingaJanuary2020
effectivedateforthenewframework,
whichwillhaveanimpactonJackson’s
business.Jacksoncontinuestoassessand
testthechanges.TheNAICalsohasan
ongoingreviewoftheC-1bondfactorsin
therequiredcapitalcalculation,onwhich
furtherinformationisexpectedtobe
providedinduecourse.TheGroup’s
preparationstomanagetheimpactof
thesereformswillcontinue.
On27July2017,theUKFCAannounced
thatitwillnolongerpersuade,oruseits
powerstocompel,panelbankstosubmit
ratesforthecalculationofLIBORafter
2021.ThediscontinuationofLIBORin
itscurrentformanditsreplacementwith
theSterlingOvernightIndexAverage
benchmark(SONIA)intheUK(and
otheralternativebenchmarkratesin
othercountries)could,amongotherthings,
impacttheGroupthroughanadverse
effectonthevalueofPrudential’sassets
andliabilitieswhicharelinkedtoorwhich
referenceLIBOR,areductioninmarket
liquidityduringanyperiodoftransition
andincreasedlegalandconductrisksto
theGrouparisingfromchangesrequired
todocumentationanditsrelated
obligationstoitsstakeholders.
VariousjurisdictionsinwhichPrudential
operateshavecreatedinvestor
compensationschemesthatrequire
mandatorycontributionsfrommarket
participantsinsomeinstancesintheevent
ofafailureofamarketparticipant.Asa
majorparticipantinthemajorityofits
chosenmarkets,circumstancescould
ariseinwhichPrudential,alongwithother
companies,mayberequiredtomake
suchcontributions.
TheGroup’saccountsarepreparedin
accordancewithcurrentInternational
FinancialReportingStandards(IFRS)
applicabletotheinsuranceindustry.
TheInternationalAccountingStandards
Board(IASB)introducedaframeworkthat
itdescribedasPhaseIwhich,underits
standardIFRS4permittedinsurersto
continuetousethestatutorybasisof
accountingforinsuranceassetsand
liabilitiesthatexistedintheirjurisdictions
priortoJanuary2005.InMay2017,the
IASBpublisheditsreplacementstandard
oninsuranceaccounting(IFRS17,
‘InsuranceContracts’),whichwillhavethe
effectofintroducingfundamentalchanges
tothestatutoryreportingofinsurance
entitiesthatprepareaccountsaccording
toIFRSfrom2021.InNovember2018,
theIASBtentativelydecidedtodelaythe
effectivedateofIFRS17byoneyearto
periodsbeginningonorafter1January
2022andisconsideringintroducingfurther
amendmentstothisnewstandard.The
EuropeanUnionwillapplyitsusualprocess
forassessingwhetherthestandardmeets
thenecessarycriteriaforendorsement.
TheGroupisreviewingthecomplex
requirementsofthisstandardand
consideringitspotentialimpact.The
effectofchangesrequiredtotheGroup’s
accountingpoliciesasaresultof
implementingthenewstandardiscurrently
uncertain,butthesechangescanbe
expectedto,amongstotherthings,alter
thetimingofIFRSprofitrecognition.
Giventheimplementationofthisstandard
islikelytorequiresignificantenhancements
toIT,actuarialandfinancesystemsofthe
Group,itwillalsohaveanimpactonthe
Group’sexpenses.
AnychangesormodificationofIFRS
accountingpoliciesmayrequireachange
inthewayinwhichfutureresultswillbe
determinedand/oraretrospective
adjustmentofreportedresultsto
ensureconsistency.
The implementation of complex
strategic initiatives gives rise to
significant execution risks, may
affect the operational capacity
of the Group, and may adversely
impact the Group if these initiatives
fail to meet their objectives
Aspartoftheimplementationofits
businessstrategies,Prudentialhas
commencedanumberofsignificant
changeinitiativesacrosstheGroup,many
ofwhichareinterconnectedand/oroflarge
scale,thatmayhavefinancial,operational,
regulatory,customerandreputational
implicationsifsuchinitiativesfail(either
whollyorinpart)tomeettheirobjectives
andcouldplacestrainontheoperational
capacity,orweakenthecontrol
environment,oftheGroup.Implementing
furtherstrategicinitiativesmayamplify
theserisks.TheGroup’scurrentsignificant
changeinitiativesincludethecombination
ofM&GandPrudentialUKandEurope,
theproposeddemergerofM&GPrudential
andtheintendedsaleofpartoftheUK
annuityportfolio.Significantoperational
executionrisksarisefromtheseinitiatives,
includinginrelationtotheseparationand
establishmentofstandalonegovernance
underrelevantregulatoryregimes,
businessfunctionsandprocesses(data,
systems,people)andthirdparty
arrangements.
The proposed demerger of
M&GPrudential carries with it
execution risk and will continue
to require significant management
attention
TheproposeddemergerofM&GPrudential
issubjecttoanumberoffactorsand
dependencies(includingprevailingmarket
conditions,theappropriateallocation
ofdebtandcapitalbetweenthetwo
groupsandapprovalsfromregulatorsand
shareholders).Inaddition,preparingfor
andimplementingtheproposeddemerger
isexpectedtocontinuetorequire
significanttimefrommanagement,which
maydivertmanagement’sattentionfrom
otheraspectsofPrudential’sbusiness.
Thereforetherecanbenocertaintyasto
thetimingofthedemerger,orthatitwillbe
completedasproposed(oratall).Further,
iftheproposeddemergeriscompleted,
therecanbenoassurancethateither
PrudentialplcorM&GPrudentialwill
realisetheanticipatedbenefitsofthe
transaction,orthattheproposeddemerger
willnotadverselyaffectthetradingvalue
orliquidityofthesharesofeitherorboth
ofthetwobusinesses.
410 Prudential plc AnnualReport2018
www.prudential.co.uk
Risk factors continued The intended UK exit from the EU
may adversely impact economic
conditions, increase market
volatility, increase political and
regulatory uncertainty, and cause
operational disruption (including
reduced access to EU markets)
which could have adverse effects
on Prudential’s business and
its profitability
On29March2017,theUKsubmittedthe
formalnotificationofitsintentionto
withdrawfromtheEUpursuanttoArticle
50oftheTreatyontheEuropeanUnion,
asamended.Followingsubmissionofthis
notification,theUKhasamaximumperiod
oftwoyearstonegotiatethetermsofits
withdrawalfromtheEU.Ifnoformal
withdrawalagreementisreachedbetween
theUKandtheEU,thenitisexpected
theUK’smembershipoftheEUwill
automaticallyterminateat11.00pmGMT
on29March2019.TheUK’sdecisionto
leavetheEUwillhavepolitical,legaland
economicramificationsforboththeUK
andtheEU,althoughtheseareexpected
tobemorepronouncedfortheUK.
TheGrouphasseveralUK-domiciled
operations,principallyM&GPrudential,
andthesewillbeimpactedbyaUK
withdrawalfromtheEU,although
contingencyplanshavebeendeveloped
andenactedsincethereferendumresult
toensurethatPrudential’sbusinessisnot
undulyaffectedbytheUKwithdrawal.
Theoutcomeofthenegotiationsonthe
UK’swithdrawalandanysubsequent
negotiationsontradeandaccesstothe
country’smajortradingmarkets,including
thesingleEUmarket,iscurrentlyunknown.
Asaresult,thereisongoinguncertainty
overthetermsunderwhichtheUKwill
leavetheEU,inparticularafterthe
transitionalperiodendinginDecember
2020(whichitselfisyettobeagreedina
legallybindingmanner),andthepotential
foradisorderlyexitbytheUKwithouta
negotiatedagreement.WhiletheGroup
hasundertakensignificantworktoplanfor
andmitigatesuchrisks,therecanbeno
assurancethattheseplansandeffortswill
besuccessful.
Inparticular,dependingonthenature
oftheUK’sexitfromtheEU,someorallof
thefollowingrisksmaymaterialise,which
mayimpactthebusinessoftheGroupand
itsprofitability:
— TheUKandEUmayexperience
adownturnineconomicactivity.
Theeffectofanydownturnisexpected
tobemorepronouncedfortheUK
particularlyintheeventofadisorderly
exitbytheUKfromtheEU.Market
volatilityandilliquiditymayincrease
(includingforpropertyfunds,where
redemptionrestrictionsmaybeapplied)
intheperiodleadingupto,and
following,theUK’swithdrawal.This
couldleadtopotentialdowngradesin
sovereignandcorporatedebtratings
intheUKandtheEUandfallsinUK
propertyvalues.Inaseverescenario
wheretheUK’ssovereignratingis
downgradedbypotentiallymorethan
onenotch,thismayalsoimpactonthe
ratingsofUKcompanies,including
Prudential’sUKbusiness.Furtheror
prolongedinterestratereductionsmay
occurduetomonetaryeasing.These
impactsmayresultintheadverse
effectsoutlinedinthemarketand
generaleconomicconditionsriskfactor.
— TheUK’sexitfromtheEUcould
resultinsignificantchangestothe
legalandregulatoryregimeunder
whichtheGroup(and,inparticular,
M&GPrudential)operates,thenature
andextentofwhichremainuncertain
whiletheoutcomeofnegotiations
regardingtheUK’swithdrawalfrom
theEUandtheextentandtermsofany
futureaccesstothesingleEUmarket
remainstobeagreed.Theremaybe
anincreaseincomplexityandcosts
associatedwithoperatinginan
additionalregulatoryjurisdiction.
— Theremaybeincreasedriskof
operationaldisruptiontothebusiness,
inparticulartoM&GPrudential.Access
totheEUmarket,andtheabilityto
serviceEUclients,maybeadversely
impacted.Negativemarketsentiment
towardstheUKfrominvestorsmay
resultinnegativefundflowsandEU
serviceprovidersmaybelesswilling,
orunabletoserviceUKfundmanagers,
bothofwhichmaynegativelyimpact
ontheassetmanagementbusiness
ofM&GPrudential.Theinsurance
businessmayexperiencehigher
productlapsesresultingfromfund
outflows.Theabilitytoretainand
attractappropriatelyskilledstafffrom
theEUmaybeadverselyimpacted.
Contractualdocumentationmayneed
toberenegotiatedorredraftedinorder
toremaineffective.
The resolution of several issues
affecting the financial services
industry could have a negative
impact on Prudential’s reported
results or on its relations with
current and potential customers
Prudentialis,andinthefuturemaybe,
subjecttolegalandregulatoryactionsin
theordinarycourseofitsbusiness,both
intheUKandinternationallyonmatters
relevanttothedeliveryofcustomer
outcomes.Suchactionsmayrelatetothe
applicationofcurrentregulationsfor
exampletheFinancialConductAuthority’s
(FCA)principlesandconductofbusiness
rulesorthefailuretoimplementnew
regulations.Theseactionscouldinvolvea
reviewoftypesofbusinesssoldinthepast
underacceptablemarketpracticesatthe
time,suchastherequirementintheUKto
provideredresstocertainpastpurchasers
ofpensionsandmortgageendowment
policies,changestothetaxregime
affectingproducts,andregulatoryreviews
ofproductssoldandindustrypractices,
including,inthelattercase,linesof
businessithasclosed.Currentregulatory
actionsincludetheUKinsurancebusiness’s
undertakingtotheFCAtoreviewannuities
soldwithoutadviceafter1July2008toits
contract-baseddefinedcontribution
pensioncustomers.Thiswillresultinthe
UKinsurancebusinessbeingrequiredto
provideredresstocertainsuchcustomers.
Aprovisionhasbeenestablishedtocover
thecostsofundertakingthereviewand
anyrelatedredressbuttheultimateamount
requiredremainsuncertain.
Regulatorsmayalsofocusontheapproach
thatproductprovidersusetoselect
third-partydistributorsandtomonitorthe
appropriatenessofsalesmadebythem.
Insomecases,productproviderscanbe
heldresponsibleforthedeficienciesof
third-partydistributors.
IntheUS,therehasbeensignificant
attentiononthedifferentregulatory
standardsappliedtoinvestmentadvice
deliveredtoretailcustomersbydifferent
sectorsoftheindustry.Asaresultof
reportsrelatingtoperceptionsofindustry
abuses,therehavebeennumerous
regulatoryinquiriesandproposalsfor
legislativeandregulatoryreforms.This
includesfocusonthesuitabilityofsalesof
certainproducts,alternativeinvestments
andthewideningofthecircumstances
underwhichapersonorentityproviding
investmentadvicewithrespecttocertain
employeebenefitandpensionplanswould
beconsideredafiduciarysubjectingthe
personorentitytocertainregulatory
www.prudential.co.uk
AnnualReport2018 Prudential plc 411
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information requirements.Thereisariskthatnew
regulationsintroducedmayhaveamaterial
adverseeffectonthesalesoftheproducts
byPrudentialandincreasePrudential’s
exposuretolegalrisks.
heightenedcompetitionfortalentedand
skilledemployeesandagentswithlocal
experience,particularlyinAsia,maylimit
Prudential’spotentialtogrowitsbusiness
asquicklyasplanned.
Litigation, disputes and regulatory
investigations may adversely affect
Prudential’s profitability and
financial condition
Prudentialis,andmayinthefuturebe,
subjecttolegalactions,disputesand
regulatoryinvestigationsinvarious
contexts,includingintheordinarycourse
ofitsinsurance,investmentmanagement
andotherbusinessoperations.Theselegal
actions,disputesandinvestigationsmay
relatetoaspectsofPrudential’sbusinesses
andoperationsthatarespecificto
Prudential,orthatarecommonto
companiesthatoperateinPrudential’s
markets.Legalactionsanddisputesmay
ariseundercontracts,regulations
(includingtax)orfromacourseofconduct
takenbyPrudential,andmaybeclass
actions.AlthoughPrudentialbelievesthat
ithasadequatelyprovidedinallmaterial
respectsforthecostsoflitigationand
regulatorymatters,noassurancecan
beprovidedthatsuchprovisionsare
sufficient.Giventhelargeorindeterminate
amountsofdamagessometimessought,
othersanctionsthatmightbeimposedand
theinherentunpredictabilityoflitigation
anddisputes,itispossiblethatanadverse
outcomecouldhaveanadverseeffect
onPrudential’sreputation,resultsof
operationsorcashflows.
Prudential’s businesses are
conducted in highly competitive
environments with developing
demographic trends and continued
profitability depends upon
management’s ability to respond
to these pressures and trends
Themarketsforfinancialservicesinthe
UK,USandAsiaarehighlycompetitive,
withseveralfactorsaffectingPrudential’s
abilitytosellitsproductsandcontinued
profitability,includingpriceandyields
offered,financialstrengthandratings,
rangeofproductlinesandproductquality,
brandstrengthandnamerecognition,
investmentmanagementperformance,
historicalbonuslevels,theabilitytorespond
todevelopingdemographictrends,
customerappetiteforcertainsavings
productsandtechnologicaladvances.
Insomeofitsmarkets,Prudentialfaces
competitorsthatarelarger,havegreater
financialresourcesoragreatermarket
share,offerabroaderrangeofproducts
orhavehigherbonusrates.Further,
InAsia,theGroup’sprincipalcompetitors
includegloballifeinsurerssuchasAllianz,
AXA,andManulifetogetherwithregional
insurerssuchasAIA,FWDandGreat
Eastern,andmultinationalassetmanagers
suchasFranklinTempleton,HSBCGlobal
AssetManagement,J.P.MorganAsset
ManagementandSchroders.Inmost
markets,therearealsolocalcompanies
thathaveamaterialmarketpresence.
M&GPrudential’sprincipalcompetitors
includemanyofthemajorretailfinancial
servicescompaniesandfundmanagement
companiesincluding,forexample,Aviva,
JanusHenderson,Jupiter,Legal&General,
SchrodersandStandardLifeAberdeen.
Jackson’scompetitorsintheUSinclude
majorstockandmutualinsurance
companies,mutualfundorganisations,
banksandotherfinancialservices
companiessuchasAegon,AIG,Allianz,
AXAEquitableHoldingsInc.,Brighthouse,
LincolnFinancialGroup,MetLifeand
PrudentialFinancial.
Prudentialbelievescompetitionwill
intensifyacrossallregionsinresponse
toconsumerdemand,digitalandother
technologicaladvances,theneedfor
economiesofscaleandtheconsequential
impactofconsolidation,regulatoryactions
andotherfactors.Prudential’sabilityto
generateanappropriatereturndepends
significantlyuponitscapacitytoanticipate
andrespondappropriatelytothese
competitivepressures.
Downgrades in Prudential’s
financial strength and credit
ratings could significantly impact
its competitive position and damage
its relationships with creditors
or trading counterparties
Prudential’sfinancialstrengthandcredit
ratings,whichareusedbythemarketto
measureitsabilitytomeetpolicyholder
obligations,areanimportantfactor
affectingpublicconfidenceinPrudential’s
products,andasaresultits
competitiveness.Downgradesin
Prudential’sratingsasaresultof,for
example,decreasedprofitability,increased
costs,increasedindebtednessorother
concernscouldhaveanadverseeffecton
itsabilitytomarketproducts,retaincurrent
policyholders,andontheGroup’sfinancial
flexibility.Inaddition,theinterestrates
Prudentialpaysonitsborrowingsare
affectedbyitscreditratings,whichare
inplacetomeasuretheGroup’sability
tomeetitscontractualobligations.
Prudentialplc’slong-termseniordebtis
ratedasA2byMoody’s,AbyStandard&
Poor’sandA-byFitch.
Prudentialplc’sshort-termdebtisratedas
P-1byMoody’s,A-1byStandard&Poor’s
andF1byFitch.
ThePrudentialAssuranceCompany
Limited’sfinancialstrengthisratedAa3
byMoody’s,A+byStandard&Poor’sand
AA-byFitch.
Jackson’sfinancialstrengthisratedAA-
byStandard&Poor’sandFitch,A1by
Moody’sandA+byA.M.Best.
PrudentialAssuranceCo.Singapore(Pte)
Ltd’sfinancialstrengthisratedAA-by
Standard&Poor’s.
Allratingsaboveareonastableoutlook
andarestatedasatthedateofthis
document.
Inaddition,changesinmethodologiesand
criteriausedbyratingagenciescouldresult
indowngradesthatdonotreflectchanges
inthegeneraleconomicconditionsor
Prudential’sfinancialcondition.
Adverse experience in the
operational risks inherent in
Prudential’s business, and those of
its material outsourcing partners,
could disrupt its business functions
and have a negative impact on its
results of operations
Operationalrisksarepresentinallof
Prudential’sbusinesses,includingtherisk
(frombothPrudentialanditsoutsourcing
andexternaldatahostingpartners)of
directorindirectlossresultingfrom
inadequateorfailedinternalandexternal
processes,systemsorhumanerror,fraud,
theeffectsofnaturalorman-made
catastrophicevents(suchasnatural
disasters,pandemics,cyber-attacks,
actsofterrorism,civilunrestandother
catastrophes)orfromotherexternal
events.Exposuretosucheventscould
disruptPrudential’ssystemsand
operationssignificantly,whichmayresult
infinanciallossandreputationaldamage.
Prudential’sbusinessisdependenton
processingalargenumberoftransactions
acrossnumerousanddiverseproducts,
anditemploysalargenumberofmodels,
anduserdevelopedapplications,someof
whicharecomplex,initsprocesses.The
long-termnatureofmuchoftheGroup’s
businessalsomeansthataccuraterecords
havetobemaintainedforsignificant
412 Prudential plc AnnualReport2018
www.prudential.co.uk
Risk factors continued periods.Further,Prudentialoperatesinan
extensiveandevolvinglegalandregulated
environment(includinginrelationtotax)
whichaddstotheoperationalcomplexity
ofitsbusinessprocessesandcontrols.
Thesefactors,amongothers,resultin
significantrelianceon,andrequire
significantinvestmentin,theinformation
technology(IT)infrastructure,compliance
andotheroperationalsystems,personnel
andprocessesfortheperformanceofthe
Group’scorebusinessactivities.During
timesofsignificantchange,theoperational
effectivenessofthesecomponentsmay
beimpacted.
AlthoughPrudential’sIT,complianceand
otheroperationalsystems,modelsand
processesincorporatecontrolsdesigned
tomanageandmitigatetheoperationaland
modelrisksassociatedwithitsactivities,
therecanbenoassurancethatsuch
controlswillalwaysbeeffective.Due
tohumanerroramongotherreasons,
operationalandmodelriskincidentsdo
happenperiodicallyandnosystemor
processcanentirelypreventthemalthough
therehavenotbeenanymaterialeventsto
date.Prudential’slegacyandotherIT
systemsandprocesses,aswithoperational
systemsandprocessesgenerally,maybe
susceptibletofailureorsecuritybreaches.
Sucheventscould,amongotherthings,
harmPrudential’sabilitytoperform
necessarybusinessfunctions,resultin
thelossofconfidentialorproprietarydata
(exposingittopotentiallegalclaimsand
regulatorysanctions)anddamageits
reputationandrelationshipswithits
customersandbusinesspartners.Similarly,
anyweaknessinadministrationsystems
(suchasthoserelatingtopolicyholder
recordsormeetingregulatory
requirements)oractuarialreserving
processescouldhaveamaterialadverse
effectonitsresultsofoperationsduring
theeffectiveperiod.
Inaddition,Prudentialalsoreliesona
numberofoutsourcing(includingexternal
datahosting)partnerstoprovideseveral
businessoperations,includingasignificant
partoftheUKbackofficeandcustomer
facingoperationsaswellasanumber
ofITsupportfunctionsandinvestment
operations.Thiscreatesrelianceupon
theoperationalperformanceofthese
outsourcingpartners,andfailureto
adequatelyoverseetheoutsourcing
partner,orthefailureofanoutsourcing
partner(oritskeyITandoperational
systemsandprocesses)couldresult
insignificantdisruptiontobusiness
operationsandcustomers.
Attempts to access or disrupt
Prudential’s IT systems, and
loss or misuse of personal data,
could result in loss of trust from
Prudential’s customers and
employees, reputational damage
and financial loss
Prudentialanditsbusinesspartnersare
increasinglyexposedtotheriskthat
individualsorgroupsmayattempttodisrupt
theavailability,confidentialityandintegrity
ofitsITsystems,whichcouldresultin
disruptiontokeyoperations,makeitdifficult
torecovercriticalservices,damageassets
andcompromisetheintegrityandsecurity
ofdata(bothcorporateandcustomer).This
couldresultinlossoftrustfromPrudential’s
customersandemployees,reputational
damageanddirectorindirectfinancialloss.
Thecybersecuritythreatcontinuesto
evolvegloballyinsophisticationand
potentialsignificance.Prudential’s
increasingprofileinitscurrentmarkets
andthoseinwhichitisentering,growing
customerinterestininteractingwiththeir
insuranceprovidersandassetmanagers
throughtheinternetandsocialmedia,
improvedbrandawarenessandthe
classificationofPrudentialasaG-SIIcould
alsoincreasethelikelihoodofPrudential
beingconsideredatargetbycyber
criminals.Further,therehavebeenchanges
tothethreatlandscapeandtheriskfrom
untargetedbutsophisticatedand
automatedattackshasincreased.
Thereisanincreasingrequirementand
expectationonPrudentialanditsbusiness
partners,tonotonlyholdcustomer,
shareholderandemployeedatasecurely,
butuseitinatransparentandappropriate
way.Developmentsindataprotection
worldwide(suchastheimplementationof
EUGeneralDataProtectionRegulationthat
cameintoforceon25May2018)mayalso
increasethefinancialandreputational
implicationsforPrudentialfollowinga
significantbreachofits(oritsthird-party
suppliers’)ITsystems.Todate,Prudential
hasnotidentifiedafailureorbreach,oran
incidentofdatamisuse,whichhashada
materialimpactinrelationtoitslegacyand
otherITsystemsandprocesses.However,
ithasbeen,andlikelywillcontinuetobe,
subjecttopotentialdamagefromcomputer
viruses,attemptsatunauthorisedaccess
andcybersecurityattackssuchas‘denial
ofservice’attacks(which,forexample,
cancausetemporarydisruptionto
websitesandITnetworks),phishingand
disruptivesoftwarecampaigns.
Prudentialiscontinuallyenhancingits
ITenvironmenttoremainsecureagainst
emergingthreats,togetherwithincreasing
itsabilitytodetectsystemcompromise
andrecovershouldsuchanincidentoccur.
However,therecanbenoassurancethat
sucheventswillnottakeplacewhich
mayhavematerialadverseconsequential
effectsonPrudential’sbusinessand
financialposition.
The failure to understand and
respond effectively to the risks
associated with environmental,
social or governance (ESG) factors
could adversely affect Prudential’s
achievement of its long term
strategy
Thebusinessenvironmentinwhich
Prudentialoperatesiscontinually
changing.ESG-relatedissuesmaydirectly
orindirectlyimpactkeystakeholders,
rangingfromcustomerstoinstitutional
investors,employees,suppliersand
regulators,allofwhomhaveexpectations
inthisarea.Afailuretomanagethose
materialriskswhichhaveESGimplications
mayadverselyimpactonthereputation
andbrandoftheGroup,theresultsofits
operations,itscustomers,anditsability
todeliveronitslong-termstrategyand
thereforeitslong-termsuccess.
ClimatechangeisoneESGthemethat
posespotentiallysignificantrisksto
Prudentialanditscustomers,notonly
fromthephysicalimpactsofclimate
change,drivenbybothspecificshort-term
climate-relatedeventssuchasnatural
disastersandlonger-termimpacts,but
alsofromtransitionrisksassociated
withtheshifttoalowcarboneconomy.
Climate-drivenchangesincountriesin
whichPrudentialoperatescouldchange
itsclaimsprofile.Thereisanincreasing
expectationfromstakeholdersfor
Prudentialtounderstand,manageand
provideincreasedtransparencyofits
exposuretoclimate-relatedrisks.For
example,theFSB’sTaskForceonClimate-
relatedDisclosuresrecommendationswere
publishedin2017toprovideavoluntary
frameworkoncorporateclimate-related
financialdisclosuresfollowingtheFSB’s
concernthattheremaybesystemicrisk
inthefinancialsystemrelatedto
climatechange.
Asgovernmentsandpolicymakerstake
actiontoreducegreenhousegasemissions
andlimitglobalwarming,thetransition
toalowcarboneconomycouldhavean
adverseimpactonglobalinvestmentasset
valuationswhilstatthesametimepresent
investmentopportunitieswhichtheGroup
willneedtomonitor.Inparticular,thereis
ariskthatthistransitioncouldresultin
someassetsectorsfacingsignificantly
www.prudential.co.uk
AnnualReport2018 Prudential plc 413
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information highercostsandadisorderlyadjustment
totheirassetvalues.Thiscouldleadtoan
adverseimpactonthevalueandthefuture
performanceoftheinvestmentassets
oftheGroup.Thepotentialbroader
economicimpactfromthismayimpact
uponcustomerdemandfortheGroup’s
products.GiventhatPrudential’s
investmenthorizonsarelongterm,
itispotentiallymoreexposedtothe
long-termimpactofclimatechangerisks.
Additionally,Prudential’sstakeholders
increasinglyexpectresponsibleinvestment
principlestobeadoptedtodemonstrate
thatESGconsiderations(includingclimate
change)areeffectivelyintegratedinto
investmentdecisionsandfiduciaryand
stewardshipduties.
Adverse experience relative to
the assumptions used in pricing
products and reporting business
results could significantly affect
Prudential’s results of operations
Incommonwithotherlifeinsurers,the
profitabilityoftheGroup’sbusinesses
dependsonamixoffactorsincluding
mortalityandmorbiditylevelsandtrends,
policysurrendersandtake-uprateson
guaranteefeaturesofproducts,investment
performanceandimpairments,unitcost
ofadministrationandnewbusiness
acquisitionexpenses.TheGroup’s
businessesaresubjecttoinflationrisk.
Inparticular,theGroup’smedicalinsurance
businessesinAsiaarealsoexposedto
medicalinflationrisk.
Prudentialneedstomakeassumptions
aboutanumberoffactorsindetermining
thepricingofitsproducts,forsetting
reserves,andforreportingitscapitallevels
andtheresultsofitslong-termbusiness
operations.Forexample,theassumption
thatPrudentialmakesaboutfuture
expectedlevelsofmortalityisparticularly
relevantforitsUKannuitybusiness,where
paymentsareguaranteedforatleastas
longasthepolicyholderisalive.Prudential
conductsrigorousresearchintolongevity
risk,usingindustrydataaswellasitsown
substantialannuitantexperience.Aspart
ofitspensionannuitypricingandreserving
policy,Prudential’sUKbusinessassumes
thatcurrentratesofmortalitycontinuously
improveovertimeatlevelsbasedon
adjusteddataandinformedbymodels
fromtheContinuousMortality
Investigation(CMI)aspublishedbythe
InstituteandFacultyofActuaries.
Assumptionsaboutfutureexpectedlevels
ofmortalityarealsoofrelevancetothe
GuaranteedMinimumWithdrawalBenefit
(GMWB)ofJackson’svariableannuity
business.Ifmortalityimprovementrates
significantlyexceedtheimprovement
assumed,Prudential’sresultsofoperations
couldbeadverselyaffected.
Afurtherfactoristheassumptionthat
Prudentialmakesaboutfutureexpected
levelsoftheratesofearlyterminationof
productsbyitscustomers(knownas
persistency).Thisisrelevanttoanumber
oflinesofbusinessintheGroup,especially
forJackson’sportfolioofvariableannuities.
Prudential’spersistencyassumptions
reflectacombinationofrecentpast
experienceforeachrelevantlineof
businessandexpertjudgement,especially
wherealackofrelevantandcredible
experiencedataexists.Anyexpected
changeinfuturepersistencyisalso
reflectedintheassumption.Ifactuallevels
offuturepersistencyaresignificantly
differentthanassumed,theGroup’sresults
ofoperationscouldbeadverselyaffected.
Furthermore,Jackson’svariableannuity
productsaresensitivetoothertypesof
policyholderbehaviour,suchasthe
take-upofitsGMWBproductfeatures.
Inaddition,Prudential’sbusinessmaybe
adverselyaffectedbyepidemicsandother
effectsthatgiverisetoalargenumberof
deathsoradditionalsicknessclaims,aswell
asincreasestothecostofmedicalclaims.
Significantinfluenzaandotherepidemics
haveoccurredanumberoftimes
historicallybutthelikelihood,timing,or
theseverityoffutureepidemicscannotbe
predicted.Theeffectivenessofexternal
parties,includinggovernmentaland
non-governmentalorganisations,in
combatingthespreadandseverityofany
epidemicscouldhaveamaterialimpacton
theGroup’slossexperience.
As a holding company, Prudential
is dependent upon its subsidiaries
to cover operating expenses and
dividend payments
TheGroup’sinsuranceandinvestment
managementoperationsaregenerally
conductedthroughdirectandindirect
subsidiaries,whicharesubjecttothe
risksdiscussedelsewhereinthis
‘Riskfactors’section.
Asaholdingcompany,Prudential’s
principalsourcesoffundsareremittances
fromsubsidiaries,shareholder-backed
funds,theshareholdertransferfrom
long-termfundsandanyamountsthatmay
beraisedthroughtheissuanceofequity,
debtandcommercialpaper.
CertainofPrudential’ssubsidiariesare
subjecttoapplicableinsurance,foreign
exchangeandtaxlaws,rulesand
regulationsthatcanlimittheirabilityto
makeremittances.Insomecircumstances,
thiscouldlimitPrudential’sabilitytopay
dividendstoshareholdersortomake
availablefundsheldincertainsubsidiaries
tocoveroperatingexpensesofother
membersoftheGroup.
Prudential operates in a number
of markets through joint ventures
and other arrangements with third
parties, involving certain risks
that Prudential does not face
with respect to its consolidated
subsidiaries
Prudentialoperates,andincertainmarkets
isrequiredbylocalregulationtooperate,
throughjointventuresandothersimilar
arrangements.ForsuchGroupoperations,
managementcontrolisexercisedin
conjunctionwithotherparticipants.The
levelofcontrolexercisablebytheGroup
dependsonthetermsofthecontractual
agreements,inparticular,theallocationof
controlamong,andcontinuedcooperation
between,theparticipants.Inaddition,the
levelofcontrolexercisablebytheGroup
couldalsobesubjecttochangesinthe
maximumlevelofnon-domesticownership
imposedonforeigncompaniesincertain
jurisdictions.Prudentialmayfacefinancial,
reputationalandotherexposure(including
regulatorycensure)intheeventthatany
ofitspartnersfailstomeetitsobligations
underthearrangements,encounters
financialdifficulty,orfailstocomplywith
localorinternationalregulationand
standardssuchasthosepertainingtothe
preventionoffinancialcrime.Inaddition,
asignificantproportionoftheGroup’s
productdistributioniscarriedoutthrough
arrangementswiththirdpartiesnot
controlledbyPrudentialandistherefore
dependentuponcontinuationofthese
relationships.Atemporaryorpermanent
disruptiontothesedistribution
arrangements,suchasthroughsignificant
deteriorationinthereputation,financial
positionorothercircumstancesofthethird
partyormaterialfailureincontrols(suchas
thosepertainingtothethird-partysystem
failureorthepreventionoffinancialcrime)
couldadverselyaffecttheresultsof
operationsofPrudential.
414 Prudential plc AnnualReport2018
www.prudential.co.uk
Risk factors continued Prudential’s Articles of Association
contain an exclusive jurisdiction
provision
UnderPrudential’sArticlesofAssociation,
certainlegalproceedingsmayonlybe
broughtinthecourtsofEnglandand
Wales.Thisappliestolegalproceedings
byashareholder(initscapacityassuch)
againstPrudentialand/oritsdirectors
and/oritsprofessionalserviceproviders.
Italsoappliestolegalproceedings
betweenPrudentialanditsdirectors
and/orPrudentialandPrudential’s
professionalserviceprovidersthatarise
inconnectionwithlegalproceedings
betweentheshareholderandsuch
professionalserviceproviders.This
provisioncouldmakeitdifficultforUS
andothernon-UKshareholderstoenforce
theirshareholderrights.
Changes in tax legislation may
result in adverse tax consequences
Taxrules,includingthoserelatingtothe
insuranceindustry,andtheirinterpretation
maychange,possiblywithretrospective
effect,inanyofthejurisdictionsinwhich
Prudentialoperates.Significanttax
disputeswithtaxauthorities,andany
changeinthetaxstatusofanymember
oftheGrouporintaxationlegislationor
itsscopeorinterpretationcouldaffect
Prudential’sfinancialconditionandresults
ofoperations.
www.prudential.co.uk
AnnualReport2018 Prudential plc 415
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Glossary
A
Actual exchange rates (AER)
Actual historical exchange rates for the
specific accounting period, being the
average rates over the period for the income
statement and the closing rates at the
balance sheet date for the balance sheet.
Annual premium equivalent (APE)
A measure of new business activity that
is calculated as the sum of annualised
regular premiums from new business plus
10 per cent of single premiums on new
business written during the period.
Asset-backed security (ABS)
A security whose value and income
payments are derived from and
collateralised (or ‘backed’) by a specified
pool of underlying assets. The pool of assets
is typically a group of small and illiquid
assets that are unable to be sold individually.
Available for sale (AFS)
Securities that have been acquired neither
for short-term sale nor to be held to
maturity. AFS securities are measured at
fair value on the statement of financial
position with unrealised gains and losses
being booked in Other Comprehensive
Income instead of the income statement.
B
Back book of business
The insurance policies sold in past periods
that are still in force and hence are still
recorded on the insurer’s balance sheet.
Bancassurance
The relationship with a bank to offer
insurance products to the bank’s customers.
Bonuses
Bonuses refer to the non-guaranteed benefit
added to participating life insurance policies
and are the way in which policyholders receive
their share of the profits of the policies.
There are normally two types of bonus:
— Regular bonus: expected to be added
every year during the term of the policy.
It is not guaranteed that a regular bonus
will be added each year, but once it is
added, it cannot be reversed, also
known as annual or reversionary bonus;
and
— Final bonus: an additional bonus
expected to be paid when policyholders
take money from the policies.
If investment return has been low over
the lifetime of the policy, a final bonus
may not be paid. Final bonuses may
vary and are not guaranteed.
C
Cash surrender value
The amount of cash available to a policy
holder on the surrender of or withdrawal
from a life insurance policy or annuity
contract.
Closed-book life insurance business
A ‘closed book’ is essentially a group of
insurance policies that are no longer sold,
but are still featured on the books of a life
insurer as a premium-paying policy. The
insurance company has “closed the books”
on new sales of these products which will
remain in run-off until the policies expire
and all claims are settled.
Constant exchange rate (CER)
Prudential plc reports its results at both
actual exchange rates (AER) to reflect
actual results and also constant exchange
rates (CER) to eliminate the impact from
exchange translation. CER results are
calculated by translating prior year results
using current period foreign currency
exchange rates ie current period average
rates for the income statements and
current period closing rate for the
balance sheet.
Core structural borrowings
Borrowings which Prudential considers
to form part of its core capital structure
and exclude operational borrowings.
Credit risk
The risk of loss if another party fails to
meet its obligations, or fails to do so in
a timely fashion.
Currency risk
The risk that asset or liability values, cash
flows, income or expenses will be affected
by changes in exchange rates. Also
referred to as foreign exchange risk.
D
Deferred acquisition costs (DAC)
Acquisition costs are expenses of an
insurer which are incurred in connection
with the acquisition of new insurance
contracts or the renewal of existing
insurance policies. They include
commissions and other variable sales
inducements and the direct costs of
issuing the policy, such as underwriting
and other policy issue expenses. Typically,
under IFRS, an element of acquisition
costs are deferred ie not expensed in
the year incurred, and instead amortised
in the income statement in line with
the emergence of surpluses on the
related contracts.
Deferred annuities
Annuities or pensions due to be paid
from a future date or when the policyholder
reaches a specified age.
Discretionary participation features
(DPF)
A contractual right to receive, as a
supplement to guaranteed benefits,
additional benefits:
— That are likely to be a significant portion
of the total contractual benefits;
— Whose amount or timing is
contractually at the discretion of the
issuer; and
— That are contractually based on asset,
fund, company or other entity
performance.
Dividend cover
Dividend cover is calculated as operating
profit after tax on an IFRS basis, divided by
the current year interim dividend plus the
proposed final dividend.
E
Endowment product
An ordinary individual life insurance
product that provides the insured party
with various guaranteed benefits if it
survives specific maturity dates or periods
stated in the policy. Upon the death of the
insured party within the coverage period,
a designated beneficiary receives the face
value of the policy.
European Embedded Value (EEV)
Financial results that are prepared on
a supplementary basis to the Group’s
consolidated IFRS results and which are
prepared in accordance with a set of
Principles issued by the CFO Forum of
European Insurance Companies dated
April 2016. The principles are designed to
capture the value of the new business sold
in the period and of the business in force.
F
Fixed annuities (FA)
Fixed annuity contracts written in the US
which allow for tax-deferred accumulation
of funds, are used for asset accumulation
in retirement planning and for providing
income in retirement and offer flexible
pay-out options. The contract holder pays
the insurer a premium, which is credited to
the contract holders’ account. Periodically,
interest is credited to the contract holders’
account and administrative charges are
deducted, as appropriate.
416 Prudential plc Annual Report 2018
www.prudential.co.uk
Guaranteed minimum death benefit
(GMDB) (US)
The basic death benefit offered under
variable annuity contracts, which specifies
that if the owner dies before annuity
income payments begin, the beneficiary
will receive a payment equal to the greater
of the contract value or purchase payments
less withdrawals.
Guaranteed minimum income
benefit (GMIB) (US)
A guarantee that ensures, under certain
conditions, that the owner may annuitise
the variable annuity contract based on the
greater of (a) the actual account value or (b)
a pay-out base equal to premiums credited
with some interest rate, or the maximum
anniversary value of the account prior
to annuitisation.
Guaranteed minimum withdrawal
benefit (GMWB) (US)
A guarantee in a variable annuity that
promises that the owner may make annual
withdrawals of a defined amount for the life
of the owner or until the total guaranteed
amount is recovered, regardless of market
performance or the actual account balance.
H
Health and protection
These comprise health and personal
accident insurance products, which
provide morbidity or sickness benefits and
include health, disability, critical illness and
accident coverage. Health and protection
products are sold both as standalone
policies and as riders that can be attached
to life insurance products. Health and
protection riders are presented together
with ordinary individual life insurance
products for purposes of disclosure of
financial information.
Fixed indexed annuities (FIA)
These are similar to fixed annuities in that
the contract holder pays the insurer a
premium, which is credited to the contract
holders’ account and, periodically, interest
is credited to the contract holders’ account
and administrative charges are deducted,
as appropriate. An annual minimum
interest rate may be guaranteed, although
actual interest credited may be higher and
is linked to an equity index over its indexed
option period.
Funds under management (FUM)
These comprise funds of the Group held
in the statement of financial position and
external funds that are managed by
Prudential asset management operations.
G
Group free surplus
Group free surplus at the end of the period
comprises free surplus for the insurance
businesses, representing the excess of
the net worth over the required capital
included in the EEV results, and IFRS
net assets for the asset management
businesses excluding goodwill. The free
surplus generated during the period
comprises the movement in this balance
excluding foreign exchange, capital, and
other reserve movements. Specifically,
it includes amounts maturing from the
in-force operations during the period
less the investment in new business, the
effect of market movements and other
one-off items.
Guaranteed annuities
Policies that pay out a fixed amount
of benefit for a defined period.
Guaranteed investment contract
(GIC) (US)
An investment contract between an
insurance company and an institutional
investor, which provides a stated rate of
return on deposits over a specified period
of time. They typically provide for partial
or total withdrawals at book value if needed
for certain liquidity needs of the plan.
Guaranteed minimum accumulation
benefit (GMAB) (US)
A guarantee that ensures that the contract
value of a variable annuity contract will be
at least equal to a certain minimum amount
after a specified number of years.
I
In-force
An insurance policy or contract reflected
on records that has not expired, matured or
otherwise been surrendered or terminated.
Internal rate of return (IRR)
The IRR is equivalent to the discount rate
at which the present EEV value of the
post-tax cash flows expected to be earned
over the life time of the business written in
shareholder-backed life funds is equal to
the total invested capital to support the
writing of the business. The capital
included in the calculation of the IRR
is equal to the amount required to pay
acquisition costs and set up reserves less
premiums received, plus encumbered
capital. The impact of the time value of
options and guarantees is included in
the calculation.
Internal vesting
Internal vesting relates to proceeds from
a Prudential policy which the policyholder
has decided to reinvest in a Prudential
annuity product.
International Financial Reporting
Standards (IFRS)
Accounting standards that all publicly
listed groups in the European Union are
required to apply in preparing consolidated
financial statements.
Investment grade
Investments rated BBB- or above for S&P,
Baa3 or above for Moody’s. Generally they
are bonds that are judged by the rating
agency as likely enough to meet payment
obligations that banks are allowed to invest
in them.
Investment-linked products
or contracts
Insurance products where the surrender
value of the policy is linked to the value of
underlying investments (such as collective
investment schemes, internal investment
pools or other property) or fluctuations in
the value of underlying investment or
indices. Investment risk associated with
the product is usually borne by the
policyholder. Insurance coverage,
investment and administration services
are provided for which the charges are
deducted from the investment fund assets.
Benefits payable will depend on the price
of the units prevailing at the time of
surrender, death or the maturity of the
product, subject to surrender charges.
These are also referred to as unit-linked
products or unit-linked contracts.
www.prudential.co.uk
Annual Report 2018 Prudential plc 417
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information L
Liquidity coverage ratio (LCR)
Prudential calculates this as assets and
resources available to us that are readily
convertible to cash to cover corporate
obligations in a prescribed stress scenario.
We calculate this ratio over a range of time
horizons extending to twelve months.
Liquidity premium
This comprises the premium that is
required to compensate for the lower
liquidity of corporate bonds relative to
swaps and the mark to market risk premium
that is required to compensate for the
potential volatility in corporate bond
spreads (and hence market values) at
the time of sale.
M
Market value reduction (MVR)
A reduction applied to the payment on
with-profits bonds when policyholders
surrender in adverse market conditions.
Money Market Fund (MMF)
An MMF is an open-ended mutual fund that
invests in short-term debt securities such as
US treasury bills and commercial paper. The
purpose of an MMF is to provide investors
with a safe place to invest easily accessible
cash-equivalent assets characterised as
a low-risk, low-return investment.
Mortality rate
Rate of death, varying by such parameters
as age, gender, and health, used in pricing
and computing liabilities for future
policyholders of life and annuity products,
which contain mortality risks.
Morbidity rate
Rate of sickness, varying by such
parameters as age, gender and health,
used in pricing and computing liabilities
for future policyholders of health products,
which contain morbidity risks.
N
Net premiums
Life insurance premiums, net of
reinsurance ceded to third-party reinsurers.
Net worth
Net assets for EEV reporting purposes
that reflect the regulatory basis position,
sometimes with adjustments to achieve
consistency with the IFRS treatment of
certain items.
New business margin
The value of new business on an EEV basis
expressed as a percentage of the present
value of new business premiums expected
to be received from the new business.
New business profit
The profits, calculated in accordance with
European Embedded Value Principles,
from business sold in the financial reporting
period under consideration.
Non-participating business
A life insurance policy where the
policyholder is not entitled to a share of the
company’s profits and surplus, but receives
certain guaranteed benefits. Also known
as non-profit in the UK. Examples include
pure risk policies (eg fixed annuities, term
insurance, critical illness) and unit-linked
insurance contracts.
O
Open-ended investment company
(OEIC)
A collective investment fund structured as
a limited company in which investors can
buy and sell shares.
Operational borrowings
Borrowings which arise in the normal
course of the business.
P
Participating funds
Distinct portfolios where the policyholders
have a contractual right to receive at the
discretion of the insurer additional benefits
based on factors such as the performance
of a pool of assets held within the fund, as
a supplement to any guaranteed benefits.
The insurer may either have discretion as to
the timing of the allocation of those benefits
to participating policyholders or may have
discretion as to the timing and the amount
of the additional benefits. For Prudential
the most significant participating funds are
with-profits funds for business written in the
UK, Hong Kong, Malaysia and Singapore.
Participating policies or
participating business
Contracts of insurance where the
policyholders have a contractual right to
receive, at the discretion of the insurer,
additional benefits based on factors such as
investment performance, as a supplement
to any guaranteed benefits. This is also
referred to as with-profits business.
Payback period
Payback period is the time in which the
initial ‘cash’ outflow of investment is
expected to be recovered from the ‘cash’
inflows generated by the investment.
We measure cash outflow by our
investment of free surplus in new
business sales. The payback period
equals the time taken for this business
to generate free surplus to cover this
investment. Payback periods are
measured on an undiscounted basis.
Persistency
The percentage of policies remaining
in force from period to period.
Present value of new business
premiums (PVNBP)
The present value of new business
premiums is calculated as equalling
single premiums plus the present value
of expected premiums of new regular
premium business, allowing for lapses and
other assumptions made in determining
the EEV new business contribution.
Prudential Regulation Authority
(PRA)
The PRA is a UK regulatory body
responsible for Prudential regulation and
supervision of banks, building societies,
credit unions, insurers and major
investment firms.
R
Regular premium product
A life insurance product with regular
periodic premium payments.
Rider
A supplemental plan that can be attached
to a basic insurance policy, with payment
of additional premium.
Risk margin reserve (RMR)
An RMR is included within operating profit
based on longer-term investment returns
and represents a charge for long-term
expected defaults of debt securities,
determined by reference to the credit
quality of the portfolio.
418 Prudential plc Annual Report 2018
www.prudential.co.uk
Glossary continued V
Variable annuity (VA) (US)
An annuity whose value is determined by
the performance of underlying investment
options that frequently includes securities.
A variable annuity’s value is not guaranteed
and will fluctuate, depending on the value
of its underlying investments. The holder
of a variable annuity assumes the
investment risk and the funds backing a
variable annuity are held in the insurance
companies separate account. VAs are
similar to unit-linked annuities in the UK.
Value of in-force business (VIF)
The present value of future shareholder
cash flows projected to emerge from the
assets backing liabilities of the in-force
covered business.
W
Whole of life
A type of life insurance policy that provides
lifetime protection; premiums must usually
be paid for life. The sum assured is paid out
whenever death occurs. Commonly used
for estate planning purposes.
With-profits funds
See ‘participating funds’ above.
Y
Yield
A measure of the income received from an
investment compared to the price paid for
the investment. Normally expressed as
a percentage.
T
Takaful
Insurance that is compliant with Islamic
principles.
Time value of options and
guarantees (TVOG)
The value of financial options and
guarantees comprises two parts, the
intrinsic value and the time value. The
intrinsic value is given by a deterministic
valuation on best estimate assumptions.
The time value is the additional value
arising from the variability of economic
outcomes in the future.
Total shareholder return (TSR)
TSR represents the growth in the value
of a share plus the value of dividends paid,
assuming that the dividends are reinvested
in the Company’s shares on the ex-
dividend date.
U
Unallocated surplus
Unallocated surplus is recorded wholly
as a liability and represents the excess
of assets over policyholder liabilities for
Prudential’s with-profits funds. The
balance retained in the unallocated surplus
represents cumulative income arising on
the with-profits business that has not been
allocated to policyholders or shareholders.
Unit-linked products or unit-linked
contracts
See ‘investment-linked products or
contracts’ above.
Universal life
An insurance product where the customer
pays flexible premiums, subject to specified
limits, which are accumulated in an account
and are credited with interest (at a rate
either set by the insurer or reflecting
returns on a pool of matching assets). The
customer may vary the death benefit and
the contract may permit the customer to
withdraw the account balance, typically
subject to a surrender charge.
S
Scottish Amicable Insurance Fund
(SAIF)
SAIF is a ring-fenced sub-fund of the
Prudential Assurance Company’s
long-term fund following the acquisition
of the mutually owned Scottish Amicable
Life Assurance Society in 1997. The fund
is solely for the benefit of policyholders
of SAIF. Shareholders of Prudential plc
have no interest in the profits of this
fund although they are entitled to asset
management fees on this business.
Separate account
A separate account is a pool of investments
held by an insurance company not in
or ‘separate’ from its general account.
The returns from the separate account
generally accrue to the policyholder.
A separate account allows an investor to
choose an investment category according
to his individual risk tolerance, and desire
for performance.
Single premiums
Single premium policies of insurance are
those that require only a single lump sum
payment from the policyholder.
Stochastic techniques
Stochastic techniques incorporate results
from repeated simulations using key
financial parameters which are subject to
random variations and are projected into
the future.
Subordinated debt
A fixed interest issue or debt that ranks
below other debt in order of priority for
repayment if the issuer is liquidated.
Holders are compensated for the added
risk through higher rates of interest. Under
EU insurance regulation, subordinated
debt is not treated as a liability and counts
towards the coverage of the required
minimum margin of solvency,
with limitations.
Surrender
The termination of a life insurance policy
or annuity contract at the request of the
policyholder after which the policyholder
receives the cash surrender value, if any,
of the contract.
Surrender charge or surrender fee
The fee charged to a policyholder when
a life insurance policy or annuity contract
is surrendered for its cash surrender
value prior to the end of the surrender
charge period.
www.prudential.co.uk
Annual Report 2018 Prudential plc 419
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Shareholder information
Communication with shareholders
The Group maintains a corporate website
containing a wide range of information
relevant for private and institutional
investors, including the Group’s financial
calendar: www.prudential.co.uk
Annual General Meeting
The 2019 Annual General Meeting (AGM)
will be held in the Churchill Auditorium at
The QEII Centre, Broad Sanctuary,
Westminster, London SW1P 3EE on
16 May 2019 at 11.00am.
Prudential will continue its practice of
calling a poll on all resolutions and the
voting results, including all proxies lodged
prior to the meeting, will be displayed at
the meeting and subsequently published
on the Company’s website.
Details of the 2018 AGM, including the
major items discussed at the meeting and
the results of the voting, can be found on
the Company’s website.
In accordance with relevant legislation,
shareholders holding 5 per cent or more
of the fully paid up issued share capital are
able to require the Directors to hold a
general meeting. Written shareholder
requests should be addressed to the
Group Company Secretary at the
registered office.
Documents on display
The terms and conditions of all Directors’
appointments are available for inspection
at the Company’s registered office during
normal business hours and at the AGM.
Company constitution
Prudential is governed by the Companies
Act 2006, other applicable legislation and
regulations, and provisions in its Articles
of Association (Articles). In 2018, the
Company reviewed and updated its
Articles in order to reflect changes to
English company law and bring them into
line with best practice. These updates were
put to shareholders at the Company’s AGM
held on 17 May 2018 and duly approved.
The principal changes were summarised
for shareholders in an appendix to the
notice of meeting, these included, deleting
articles relating to the allotment of shares
and disapplication of pre-emption rights to
reflect the Company’s practice of seeking
authority from shareholders annually,
giving the Company the ability to hold
hybrid general meetings, amending
the deemed delivery provision for
communications sent to overseas
shareholders and streamlining the process
for selling shares belonging to untraced
shareholders. Other amendments were
made which were of a minor, technical or
Analysis of shareholder accounts as at 31 December 2018
clarifying nature. The current
Memorandum and Articles are available
on the Company’s website.
Share capital
Issued share capital
The issued share capital as at 31 December
2018 consisted of 2,593,044,409 (2017:
2,587,175,445) ordinary shares of 5 pence
each, all fully paid up and listed on the
London Stock Exchange and the Hong
Kong Stock Exchange. As at 31 December
2018, there were 47,260 (2017: 48,086)
accounts on the register. Further
information can be found in note C10
on page 291.
Prudential also maintains secondary
listings on the New York Stock Exchange
(in the form of American Depositary
Receipts which are referenced to ordinary
shares on the main UK register) and the
Singapore Stock Exchange.
Prudential has maintained a sufficiency
of public float throughout the reporting
period as required by the Hong Kong
Listing Rules.
Size of shareholding
1,000,001 upwards
500,001–1,000,000
100,001–500,000
10,001–100,000
5,001–10,000
1,001–5,000
1–1,000
Total
Number of
shareholder
accounts
% of total
number of
shareholder
accounts
Number of
shares
% of total
number of
shares
306
143
527
1,481
1,590
10,128
33,085
47,260
0.65
0.30
1.12
3.13
3.36
21.43
70.01
2,280,599,311
99,039,149
125,806,041
45,716,873
11,038,090
22,194,679
8,650,266
100
2,593,044,409
87.95
3.82
4.85
1.76
0.43
0.86
0.33
100
420 Prudential plc Annual Report 2018
www.prudential.co.uk
Major shareholders
The table below shows the holdings
of major shareholders in the Company’s
issued ordinary share capital, as at
31 December 2018, as notified and
disclosed to the Company in accordance
with the Disclosure Guidance and
Transparency Rules.
they may do so at their discretion provided
it would be considered to be in the best
interests of the beneficiaries of the trust and
permitted under the relevant trust deed.
As at 12 March 2019, Trustees held
0.38 per cent of the issued share capital
under the various plans in operation.
% of total
voting rights
Rights to dividends under the various
schemes are set out in the Directors’
remuneration report.
Restrictions on transfer
In accordance with English company law,
shares may be transferred by an instrument
of transfer or through an electronic system
(currently CREST) and any transfer is not
restricted except that the Directors may,
in certain circumstances, refuse to register
transfers of shares but only if such refusal
does not prevent dealings in the shares
from taking place on an open and proper
basis. If the Directors make use of that
power, they must send the transferee
notice of the refusal within two months.
Certain restrictions may be imposed
from time to time by applicable laws and
regulations (for example, insider trading
laws) and pursuant to the Listing Rules of
both the Financial Conduct Authority and
the Hong Kong Stock Exchange, as well
as under the rules of some of the Group’s
employee share plans.
All Directors are required to hold a
minimum number of shares under
guidelines approved by the Board, which
they would also be expected to retain as
described on page 158 of the Directors’
remuneration report.
Authority to issue shares
The Directors require authority from
shareholders in relation to the issue of
shares. Whenever shares are issued, these
must be offered to existing shareholders
pro rata to their holdings unless the
Directors have been given authority by
shareholders to issue shares without
offering them first to existing shareholders.
Prudential seeks authority from its
shareholders on an annual basis to issue
shares up to a maximum amount, of which
a defined number may be issued without
pre-emption. Disapplication of statutory
pre-emption procedures is also sought for
rights issues. The existing authorities to
issue shares and to do so without observing
pre-emption rights are due to expire at
the end of this year’s AGM. Relevant
resolutions to authorise share capital
issuances will be put to shareholders at
the AGM on 16 May 2019.
Details of shares issued during 2018 and
2017 are given in note C10 on page 291.
In accordance with the terms of a waiver
granted by the Hong Kong Stock
Exchange, Prudential confirms that it
complies with the applicable law and
regulation in the UK in relation to the
holding of shares in treasury and with the
conditions of the waiver in connection
with the purchase of own shares and any
treasury shares it may hold.
Authority to purchase own shares
The Directors also require authority from
shareholders in relation to the purchase
of the Company’s own shares. Prudential
seeks authority by special resolution on
an annual basis for the buyback of its own
shares in accordance with the relevant
provisions of the Companies Act 2006 and
other related guidance. This authority has
not been used since it was last granted at
the AGM in 2018. This existing authority
is due to expire at the end of this year’s
AGM and a special resolution to renew the
authority will be put to shareholders at the
AGM on 16 May 2019.
Shareholders
registered on
the UK register
and Hong Kong
and Irish branch
registers
28 March 2019
Holders of US
American
Depositary
Receipts
Shareholders with
ordinary shares
standing to the
credit of their
CDP securities
accounts
–
28 March 2019
29 March 2019
29 March 2019
29 March 2019
17 May 2019
On or about
24 May 2019
On or about
24 May 2019
As at 31 December 2018
Capital Group Companies,
Inc.
BlackRock, Inc
Norges Bank
9.87
5.08
3.99
As at 12 March 2019, no notifications have
been received since the year end.
Rights and obligations
The rights and obligations attaching to the
Company’s shares are set out in full in the
Articles. There are currently no voting
restrictions on the ordinary shares, all of
which are fully paid, and each share carries
one vote on a poll. If votes are cast on a
show of hands, each shareholder present
in person or by proxy, or in the case of a
corporation, each of its duly authorised
corporate representatives, has one vote
except that if a proxy is appointed by more
than one member, the proxy has one vote
for and one vote against if instructed by
one or more members to vote for the
resolution and by one or more members
to vote against the resolution.
Where, under an employee share scheme,
participants are the beneficial owners of
the shares but not the registered owners,
the voting rights are normally exercisable
by the trustee on behalf of the registered
owner in accordance with the relevant plan
rules. The Trustees would not usually vote
any unallocated shares held in trust but
Dividend information
2018 second interim dividend
Ex-dividend date
Record date
Payment date
A number of dividend waivers are in place and these relate to shares issued but not allocated under the Group’s employee share plans.
These shares are held by the Trustees and will, in due course, be used to satisfy requirements under the Group’s employee share plans.
www.prudential.co.uk
Annual Report 2018 Prudential plc 421
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Shareholder enquiries
For enquiries about shareholdings, including dividends and lost share certificates, please contact the Company’s registrars:
Register
UK register
By post
By telephone
Equiniti Limited, Aspect House, Spencer Road,
Lancing, West Sussex, BN99 6DA, UK.
Irish branch register
Link Asset Services, Link Registrars Limited,
PO Box 7117, Dublin 2, Ireland.
Hong Kong register
Singapore register
ADRs
Computershare Hong Kong Investor Services Limited,
17M Floor, Hopewell Centre, 183 Queen’s Road East,
Wan Chai, Hong Kong.
Shareholders who have shares standing to the credit of
their securities accounts with The Central Depository
(PTE) Limited (CDP) in Singapore may refer queries to
the CDP at 9 North Buona Vista Drive, #01-19/20, The
Metropolis, Singapore 138588. Enquiries regarding
shares held in Depository Agent Sub-accounts should
be directed to your Depository Agent or broker.
JPMorgan Chase Bank N.A, PO Box 64504, St. Paul,
MN 55164-0504, USA.
Dividend mandates
Shareholders may have their dividends
paid directly to their bank or building
society account. If you wish to take
advantage of this facility, please call
Equiniti and request a Cash Dividend
Mandate form. Alternatively, shareholders
may download the form from
www.prudential.co.uk/investors/
shareholder-information/forms
Cash dividend alternative
The Company operates a Dividend
Re-investment Plan (DRIP). Shareholders
who have elected for the DRIP will
automatically receive shares for all future
dividends in respect of which a DRIP
alternative is offered. The election may be
cancelled at any time by the shareholder.
Further details of the DRIP and the
timetable are available at
www.shareview.co.uk/4/Info/Portfolio/
default/en/home/shareholders/Pages/
ReinvestDividends.aspx
Electronic communications
Shareholders are encouraged to elect
to receive shareholder documents
electronically by registering with
Shareview at www.shareview.co.uk
This will save on printing and distribution
costs, and create environmental benefits.
Shareholders who have registered will
be sent an email notification whenever
shareholder documents are available
on the Company’s website and a link will
be provided to that information. When
registering, shareholders will need their
shareholder reference number which can
be found on their share certificate or proxy
form. The option to receive shareholder
documents electronically is not available to
shareholders holding shares through CDP.
Please contact Equiniti if you require any
assistance or further information.
Tel 0371 384 2035
Textel 0371 384 2255
(for hard of hearing).
Lines are open from 8.30am to 5.30pm
(UK), Monday to Friday.
International shareholders
Tel +44 121 415 7026
Tel +353 1 553 0050
Tel +852 2862 8555
Tel +65 6535 7511
Tel +1 800 990 1135,
or from outside the US
+1 651 453 2128 or log on
to www.adr.com
Share dealing services
The Company’s registrars, Equiniti, offer a
postal dealing facility for buying and selling
Prudential plc ordinary shares; please
see the Equiniti address or telephone
0371 384 2248. They also offer a telephone
and internet dealing service, Shareview,
which provides a simple and convenient
way of selling Prudential shares. For
telephone sales, call 0345 603 7037
between 8.00am and 4.30pm, Monday
to Friday, and for internet sales log on to
www.shareview.co.uk/dealing
ShareGift
Shareholders who have only a small
number of shares, the value of which
makes them uneconomic to sell, may wish
to consider donating them to ShareGift
(Registered Charity 1052686). The
relevant share transfer form may be
downloaded from our website
www.prudential.co.uk/investors/
shareholder-information/forms or
from Equiniti. Further information
about ShareGift may be obtained
on +44 (0)20 7930 3737 or from
www.ShareGift.org
422 Prudential plc Annual Report 2018
www.prudential.co.uk
Shareholder information continued How to contact us
Prudential plc
Laurence Pountney Hill, London EC4R 0HH
www.prudential.co.uk
Tel +44 (0)20 7220 7588
It is intended that the Company’s registered office will change to
1 Angel Court, London EC2R 7AG during April 2019.
Media enquiries
Tel +44 (0)20 7548 2776
Email: media.relations@prudential.co.uk
Board
Paul Manduca
Chairman
Non-executive Directors
Philip Remnant
Senior Independent Director
Sir Howard Davies
David Law
Kai Nargolwala
Anthony Nightingale
Alice Schroeder
Lord Turner
Tom Watjen
Fields Wicker-Miurin
Business units
M&GPrudential
10 Fenchurch Avenue
London
EC3M 5AG
www.pru.co.uk
Tel +44 (0)800 000 000
www.mandg.co.uk
Tel +44 (0)800 328 3192
John Foley
Chief Executive of
M&GPrudential
Shareholder contacts
Tel +44 (0)20 7548 3300
Email: investor.relations@prudential.co.uk
UK Register private
shareholder enquiries
Tel 0371 384 2035
International shareholders
Tel +44 (0)121 415 7026
Group Executive Committee
Executive Directors
Mike Wells
Group Chief Executive
Mark FitzPatrick
Chief Financial Officer
James Turner
Group Chief Risk Officer
Michael Falcon
Chief Executive Officer of
Jackson Holdings LLC
John Foley
Chief Executive of
M&GPrudential
Nic Nicandrou
Chief Executive of
Prudential Corporation Asia
Functional specialists
Julian Adams
Group Regulatory and
Government Relations Director
Jonathan Oliver
Group Communications Director
Alan Porter
Group General Counsel and
Company Secretary
Al-Noor Ramji
Group Chief Digital Officer
Tim Rolfe
Group Human Resources Director
Prudential Corporation Asia
13th Floor
One International Finance Centre
1 Harbour View Street
Central
Hong Kong
www.prudentialcorporation-asia.com
Tel +852 2918 6300
Jackson Holdings LLC
1 Corporate Way
Lansing
Michigan 48951
USA
www.jackson.com
Tel +1 517 381 5500
Nic Nicandrou
Chief Executive of
Prudential Corporation Asia
Michael Falcon
Chief Executive Officer of
Jackson Holdings LLC
Irish Branch Register private
shareholder enquiries
Tel +353 1 553 0050
US American Depositary
Receipts holder enquiries
Tel +1 651 453 2128
Hong Kong Branch Register
private shareholder enquiries
Tel +852 2862 8555
The Central Depository (Pte)
Limited shareholder enquiries
Tel +65 6535 7511
www.prudential.co.uk
Annual Report 2018 Prudential plc 423
01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Forward-looking statements
This Prudential Annual Report may contain ‘forward-looking statements’ with respect to certain of Prudential’s plans and its goals and
expectations relating to its future financial condition, performance, results, strategy and objectives. Statements that are not historical
facts, including statements about Prudential’s beliefs and expectations and including, without limitation, statements containing the
words ‘may’, ‘will’, ‘should’, ‘continue’, ‘aims’, ‘estimates’, ‘projects’, ‘believes’, ‘intends’, ‘expects’, ‘plans’, ‘seeks’ and ‘anticipates’, and
words of similar meaning, are forward-looking statements. These statements are based on plans, estimates and projections as at the time
they are made, and therefore undue reliance should not be placed on them. By their nature, all forward-looking statements involve risk
and uncertainty. A number of important factors could cause Prudential’s actual future financial condition or performance or other
indicated results to differ materially from those indicated in any forward-looking statement. Such factors include, but are not limited to,
the timing, costs and successful implementation of the demerger of the M&GPrudential business; the future trading value of the shares
of Prudential plc and the trading value and liquidity of the shares of the to-be-listed M&GPrudential business following such demerger;
future market conditions, including fluctuations in interest rates and exchange rates, the potential for a sustained low-interest rate
environment, and the performance of financial markets generally; the policies and actions of regulatory authorities, including, for
example, new government initiatives; the political, legal and economic effects of the UK’s decision to leave the European Union; the
impact of continuing designation as a Global Systemically Important Insurer or ‘G-SII’; the impact of competition, economic uncertainty,
inflation and deflation; the effect on Prudential’s business and results from, in particular, mortality and morbidity trends, lapse rates and
policy renewal rates; the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; the
impact of internal projects and other strategic actions failing to meet their objectives; disruption to the availability, confidentiality or
integrity of Prudential’s IT systems (or those of its suppliers); the impact of changes in capital, solvency standards, accounting standards
or relevant regulatory frameworks, and tax and other legislation and regulations in the jurisdictions in which Prudential and its affiliates
operate; and the impact of legal and regulatory actions, investigations and disputes. These and other important factors may, for example,
result in changes to assumptions used for determining results of operations or re-estimations of reserves for future policy benefits.
Further discussion of these and other important factors that could cause Prudential’s actual future financial condition or performance
or other indicated results to differ, possibly materially, from those anticipated in Prudential’s forward-looking statements can be found
under the ‘Risk factors’ section in this document.
Any forward-looking statements contained in this Annual Report 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 report 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.
424 Prudential plc Annual Report 2018
www.prudential.co.uk
History
Providing financial security since 1848
Successive generations have looked to Prudential to safeguard their financial
security – from industrial workers and their families in Victorian Britain to
over 26 million customers worldwide today. Our financial strength, heritage,
prudence and focus on our customers’ long-term needs ensure that people
continue to turn to our trusted brands to help them plan for today and tomorrow.
1848 Prudential is established as
Prudential Mutual Assurance, Investment
and Loan Association in Hatton Garden,
London, offering loans and life assurance
to professional people.
1912 Following the National Insurance
Act, Prudential works with the government
to run Approved Societies, providing
sickness and unemployment benefits
to five million people.
2000 Prudential plc is listed on the New
York Stock Exchange. Prudential becomes
the first UK life insurer to enter the
Mainland China market through its joint
venture with CITIC Group.
1854 Prudential opens the Industrial
Department to sell a new type of
insurance, Industrial Insurance, to the
working classes, for premiums of a penny
and upwards.
1871 The Company becomes one
of the first in the City to employ women.
Calculating machines are also introduced,
bringing efficiencies to the processing
of an increasing volume of business.
1879 Prudential moves into Holborn
Bars, a purpose-built office complex
designed by Alfred Waterhouse. The
building becomes a London landmark,
and remains part of Prudential’s property
portfolio to this day.
1923 Prudential’s first overseas life
branch is established in India, with the first
policy being sold to a tea planter in Assam.
1924 Prudential shares are floated on the
London Stock Exchange.
1949 The ‘Man from the Pru’ advertising
campaign is launched.
1986 Prudential acquires Jackson National
Life Insurance in the United States.
1994 Prudential Corporation Asia is
formed in Hong Kong as a regional head
office to expand operations beyond an
existing presence in Malaysia, Singapore
and Hong Kong.
1999 Prudential acquires M&G, pioneer
of unit trusts in the UK and a leading
provider of investment products.
2010 Prudential plc is listed on stock
exchanges in Hong Kong and Singapore.
2014 Prudential acquires businesses in
Ghana and Kenya, marking its entry into
the fast-growing African life insurance
industry.
2017 M&G and Prudential UK & Europe
combine to form M&GPrudential, a leading
savings and investments business ideally
positioned to target growing customer
demand for comprehensive financial
solutions.
2018 Prudential plc announces its
intention to demerge its UK and Europe
business, M&GPrudential, resulting in two
separately listed companies, with different
investment characteristics and
opportunities.
Entering the computer age
Prudential has a long history of
innovation. Between 1964 and 1966,
Prudential installed two Ferranti ‘Orion’
computers at its head office in London,
forming one of the UK’s most powerful
commercial computing resources at the
time. The success of the first two Orions
led Prudential to install a third in 1969.
The Orions were used to streamline the
administration of customer policy records.
Prior to computerisation, records were
maintained using mechanical punch cards
and punching, sorting and tabulating
machines. Computerisation was a huge
step forward: 300 cards could be
mechanically punched in an hour, but
the Orion could carry out 100,000
calculations every second.
While huge by modern standards, the
Orions also saved valuable space. A reel
of magnetic tape weighing less than eight
pounds could hold the equivalent of
500,000 punched cards, which would
have required 300 square feet of storage
space and weighed over a tonne.
www.prudential.co.uk
Annual Report 2018 Prudential plc
Prudential public limited company
Incorporated and registered
in England and Wales
Registered office
Laurence Pountney Hill
London
EC4R 0HH
Registered number 1397169
www.prudential.co.uk
It is intended that the Company’s
registered office will change to
1 Angel Court, London EC2R 7AG
during April 2019. An announcement
will be made to the market to confirm
this at the relevant time.
Principal place of business
in Hong Kong
13th Floor
One International Finance Centre
1 Harbour View Street
Central
Hong Kong
Prudential plc is a holding company,
subsidiaries of which are authorised and
regulated, as applicable, by the Prudential
Regulation Authority and the Financial
Conduct Authority.
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