Prudential Bancorp
Annual Report 2019

Plain-text annual report

P r u d e n t i a l p l c A n n u a l R e p o r t 2 0 1 9 H K S t o c k C o d e : 2 3 7 8 We do life. Prudential plc Annual Report 2019 2019 highlights Prudential helps people de‑risk their lives and deal with their biggest financial concerns. We provide our customers with the freedom to face the future with confidence. Our year in numbers Summary financials Adjustedoperatingprofitfromcontinuingoperations1 OperatingfreesurplusgeneratedfromcontinuingoperationsbeforeUS EEVmodellingenhancements2,3 Lifenewbusinessprofitfromcontinuingoperations4 IFRSprofitaftertaxfromcontinuingoperations5 Netcashremittancesfrombusinessunitsfromcontinuingoperations6 LCSMshareholdersurplusoverGroupminimumcapitalrequirement7 2019 2018 $5,310m $4,409m $3,764m $3,410m $4,405m $4,707m Changeonan actualexchange ratebasis8 Changeona constantexchange ratebasis8 20% 10% (6)% 20% 10% (6)% $1,953m $2,881m (32)% (33)% $1,465m $1,417m $9.5bn $9.7bn 3% (2)% – – Totalfull-yearordinarydividend 46.26 cents TheGroup’s2020dividendwillbedeterminedunderthe Group’sdividendpolicyfroma2019baseof36.84cents9 Notes 1 ‘Adjustedoperatingprofit’referstoadjustedIFRSoperatingprofitbasedonlonger-term investmentreturnsfromcontinuingoperations.Thisalternativeperformancemeasureis reconciledtoIFRSprofitfortheyearinnoteB1.1oftheIFRSfinancialstatements. 2 Forinsuranceoperations,operatingfreesurplusgeneratedrepresentsamountsmaturingfrom thein-forcebusinessduringtheyearlessinvestmentinnewbusinessandexcludes non-operatingitems.Forassetmanagementbusinesses,itequatestopost-taxoperatingprofit fortheyear.Furtherinformationissetoutinnote11oftheEEVbasisresults. 3 During2019,aspartoftheimplementationoftheNAIC’schangestotheUSstatutoryreserve andcapitalframeworkenhancementsweremadetothemodelusedtoallowforhedging withinUSstatutoryreportingwhichhavebeenincorporatedintotheEEVmodel.Thisresulted inafallinoperatingfreesurplusof$(903)millionfromalowerexpectedtransfertonetworth. Afterallowingforthis,operatingfreesurplusgeneratedis$2,861million,down16percenton bothaconstantandactualexchangeratebasis. transactions,amortisationofacquisitionaccountingadjustmentsandthetotaltaxcharge fortheyear. 6 Netcashremittedbybusinessunitsareincludedintheholdingcompanycashflow,whichis disclosedindetailinnoteI(iii)oftheAdditionalunauditedfinancialinformation.This comprisesdividendsandothertransfersfrombusinessunitsthatarereflectiveofemerging earningsandcapitalgeneration. 7 SurplusoverGroupminimumcapitalrequirementandestimatedbeforeallowingforsecond interimordinarydividend.Shareholderbusinessexcludestheavailablecapitalandminimum capitalrequirementofparticipatingbusinessinHongKong,SingaporeandMalaysia.2018 surplusexcludesM&Gplcandincludes$3.7billionofsubordinateddebtissuedby PrudentialplcthatwastransferredtoM&Gplcon18October2019.Furtherinformation onthebasisofcalculationoftheLCSMmeasureiscontainedinnoteI(i)oftheAdditional unauditedfinancialinformation. 4 Newbusinessprofit,onapost-taxbasis,onbusinesssoldintheyear,calculatedinaccordance 8 FurtherinformationonactualandconstantexchangeratebasesissetoutinnoteA1ofthe 5 withEEVprinciples. IFRSprofitaftertaxfromcontinuingoperationsreflectsthecombinedeffectsofoperatingresults determinedonthebasisoflonger-terminvestmentreturns,togetherwithshort-terminvestment varianceswhichfor2019weredrivenbynon-operatinglossesinJackson,corporate IFRSfinancialstatements. 9 TheGroup’sdividendpolicywillbedeterminedfroma2019USdollarbaseof36.84centsper share,representingthefull-yearordinarydividendfor2019of46.26centslessthe contributionofthediscontinuedM&Gplcbusiness(9.42centspershare). prudentialplc.com Prudential plc AnnualReport2019 01 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationPositive Asia-led performance $5,310m +20% adjusted operating profit from continuing operations1 46.26¢ full-year ordinary dividend $9.5bn LCSM shareholder surplus over Group minimum capital requirement7 $1,953m IFRS profit after tax from continuing operations (2018: $2,881 million) 18,125 employees worldwide $29.1m community investment 20m life customers 103,775hrs of volunteer service by 10,834 employees Contents 01 Group overview Chairman’sstatement GroupChiefExecutive’sreport 02 Strategic report Ataglance Ourbusinessmodel Ourperformance Ourbusinesses GroupChiefFinancialOfficerand ChiefOperatingOfficer’sreport onthe2019financialperformance GroupChiefRiskandCompliance Officer’sreportontherisks facingourbusinessandhow thesearemanaged ESGsummary 03 03 06 10 12 14 16 18 34 51 72 03 Governance 88 90 92 97 98 108 Chairman’sintroduction BoardofDirectors GroupExecutiveCommittee Howweoperate Riskmanagementand internalcontrol 110 Committeereports Statutoryandregulatorydisclosures 133 135 IndextoprincipalDirectors’ reportdisclosures 04 Directors’ 136 138 remuneration report Annualstatementfromthe ChairmanoftheRemuneration Committee OurExecutiveDirectors’ remunerationataglance Annualreportonremuneration 144 NewDirectors’remunerationpolicy 174 192 Additionalremuneration disclosures 142 05 Financial statements 196 06 European Embedded Value 330 (EEV) basis results 07 Additional information Indextotheadditionalunaudited financialinformation Riskfactors Glossary Shareholderinformation Howtocontactus 360 362 388 396 400 403 TheDirectors’ReportofPrudentialplcfortheyearended 31December2019issetoutonpages3to9,90to135and 362to403,andincludesthesectionsoftheAnnualReport referredtointhesepages. 02 Prudential plc AnnualReport2019 prudentialplc.com CHAIRMAN’SSTATEMENT Secondordinarydividend 25.97¢ Continuing to deliver long-term value I am pleased to report that Prudential has produced a positive performance during 2019. We continue to focus on how we deliver for our customers, shareholders and wider stakeholders. Prudentialhelpspeoplede-risktheir livesandcopewiththeirbiggestfinancial concerns,helpingthemtofacethefuture withconfidence.Ourcontinuedprogress in2019,ayearofconsiderableeconomic uncertainty,isareflectionofourpurpose- drivenapproach. Oursuccessfulcompletionofthedemerger ofM&GplcfromtheGroup,aheadof schedulein2019,wasoneofthemost complexchangestoourbusinessfor manyyears.Iamproudofthewayour peopleworkedtowardsthissignificant achievementwhilecontinuingtoperform forourcustomersandinvestors. OurambitionforJacksonisthatitshould playabroaderroleintheUSretirement incomemarket,throughastrategyof diversifyingitsproductrangeand distributionnetwork.Inviewofthis, Jacksonwillneedaccesstoadditional investment,whichwebelievewouldbest beprovidedbythirdparties.Overthe pastninemonths,wehaveundertaken prudentialplc.com Prudential plc AnnualReport2019 03 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationCHAIRMAN’SSTATEMENT CONTINUED significantworkwithouradviserstoassess optionsforintroducingthird-partyfinance intoJackson.TheBoardhasdetermined thatthepreferredroutetoachievethisis toseekalistingofJacksonintheUS, subjecttomarketconditions.Wewill nowbegindetailedengagementwithkey stakeholders,withaviewtoensuringthat Jacksonwillhavethecapitalstrengthas aseparatelylistedbusinesstosupport itscontinuedsuccessasabroadprovider ofretirementsolutionsforAmerica’s ageingpopulation. Dividend TheBoardhasapproveda2019second interimordinarydividendof25.97cents pershare,equivalenttothe19.60pence persharepreviouslyannouncedin thedemergerCircularalongsidethe newdividendpolicyfortheGroup post-demerger. TheGroup’s2020dividendunderthis newprogressivedividendpolicywillbe determinedfroma2019USdollarbase of36.84centspershare. Board changes AstronganddecisiveBoardisatthe coreofawellruncompany.Therobust governanceprovidedbyourBoardis keytoensuringwecontinuetomeetallour objectives.Developingtheskills,diversity andexperienceofourBoardrequiresa flexibleapproachandopennesstochange, justastheGroup’sshapeisitselfchanging. During2019,wemadeanumberof changestotheBoard’scomposition, allofwhichhavehelpedtoreinforceits capabilitiesandpositionitstronglyfor thefuture,andweputplansinplacefor refreshingtheBoardintheyearstocome. AmyYipjoinedusinSeptemberasa Non-executiveDirectorandamemberof theRemunerationCommittee,bringing considerableexpertiseinfinancialservices inChinaandSouth-eastAsia.Atthe beginningofJanuary2020,Jeremy AndersonjoinedusasaNon-executive DirectorandamemberoftheRiskand AuditCommittees,providingsubstantial experienceininternationalfinancial services,particularlyinauditandrisk management.Iwouldliketowelcome AmyandJeremytotheBoardandIwould particularlyliketothankHowardDavies, whowillstepdownfromtheBoardatthe conclusionofthe2020AnnualGeneral Meeting,forhissignificantcontribution duringhistenureandhisleadershipofthe RiskCommitteesinceitsinception.Jeremy AndersonwillsucceedHowardasChairof theRiskCommitteeattheconclusionofthe AnnualGeneralMeetinginMay2020. AttheendofJanuary2020,weannounced thatShritiVaderawilljointheBoardon 1MayasaNon-executiveDirectorand memberoftheNomination&Governance Committee,andthatsheisexpectedto succeedmeasChairoftheBoardandthe Nomination&GovernanceCommitteeon 1January2021.Shritiisanexcellentchoice forthefutureChair,andIlookforwardto workingwithherontheBoardandduring thetransition. Our customers and wider stakeholders Wearedeterminedtobuildnew capabilitiesinourstructuralgrowth markets,offeringourproductstomore customersinAsiaacrossanincreasing rangeofchannels;andreachingnew customersinAfrica,oneofthefastest- growingregionsintheworld.IntheUS,the world’slargestretirementmarket,wearea leaderinprovidingassetaccumulationand incomeproducts.Theloyaltyofour existingcustomerbaseisanimportant sourceoffinancialresiliencefortheGroup, andweworkcontinuouslytoimprove serviceandoutcomes.Thenatureofour businessmodelmeansthatweinvestour customers’savingsincompaniesand infrastructurethathelptodriveprosperity andstrengthenthecommunitiesweserve. Ourbusinessprovidessocialbenefitsto ourcustomersandtotheircommunities.In particular,wearecommittedtobroadening accesstohealthcareandfinanceandto providingsolutionstoissuesemerging fromdemographicchange.Wearewell awareoftheriskclimatechangepresents andarebroadeningtheroleourbusinesses canplayinthetransitiontoasustainable economy.Weareasignatorytothe recommendationsoftheFinancialStability Board’sTaskForceonClimate-Related FinancialDisclosures,andweare deepeningourunderstandingoftherisks facedbythebusiness.Wewillcontinue toworkwithgovernments,regulators, civilsocietyandotherbusinessesas wedeveloparangeofapproachesto theseissues. TheBoardremainscommittedtoensuring thatwemakeapositiveimpactacross allouractivities.Youwillfindreferences throughoutthisreporttothatimpact, whileanoverviewofwhatwehavedone acrossallareasofenvironmental,social andgovernance(ESG)activityin2019 canbefoundinourESGSummaryon page72ofthisreport.Furtherdetailsarein our2019ESGReportonthePrudentialplc website. Our shareholders TheBoard’sroleistorepresenttheinterests ofalloftheCompany’sshareholders.We havedeliveredsignificantchangetothe businessduringaperiodofmacroeconomic andindustryheadwinds,andwehave steppedupourregularandfrankdialogue withourshareholderstoensureweare responsivetotheirprioritiesandconcerns, whileensuringtheyfullyunderstandthe widerbackdroptoourperformance. Ongoingshareholderengagementenables ustogatherimportantfeedbackthat informsourdecisionsasaBoard.Forme personally,thesediscussionsarehighly valuableandtheideasandsuggestions generatedareinvariablyusefulandalways takenseriously. Changesinthepolicyandregulatory environmentinwhichweworkcan haveasignificantimpactonourbusiness andwhatwecandoforourcustomers. Webuildanddeveloppositiveand openrelationshipswithoursupervisors, governmentsandcivilsociety,andweare gratefulfortheconstructiveworkofour regulators,inparticulartheHongKong InsuranceAuthority.Welookforwardto continuingtoworkcloselywiththeminto thefuture. 04 Prudential plc AnnualReport2019 prudentialplc.com Duringearly2020,ourbusinesshasbeen respondingwithagilitytotheglobal challengesposedbythecoronavirus outbreak.Wehavebeenproviding customerswithadditionalbenefitsand service,offeringadviceandflexible workingoptionstocolleagues,and collaboratingwithgovernmentstodirectly supportaffectedcommunities.Thevirus outbreakisalsoimpactingfinancial markets.Wearemonitoringdevelopments closelyandwillcontinuetobeproactivein helpingourcolleaguesandcustomers. Iwouldliketothankallmycolleagueson theBoard,inmanagementandthroughout thebusiness,andallourstakeholdersfor theirsupportandforeverythingtheyhave donetoensurethesuccessofPrudential duringmytimeasChairman. Looking forward OurBoardishighlyresponsivetothe interestsofourstakeholdersandwewill continuetomakeimprovementstothe structureoftheGroupwherewebelieve theywillgeneratematerialbenefitsover thelongterm.Wearewellpositionedto benefitfromstrongstructuralgrowth opportunitiesandcontinuetoprovide benefitsforourcustomersandvalue forourinvestorswellintothefuture. Paul Manduca Chairman Our people Ourbusinessisbuiltaroundourpurpose andourstrategy,butitisourpeoplewho implementthatstrategy.Inourbusinesses aroundtheworldwehaveexcellentteams workinghardtoensurewemeetour commitmentstoourcustomers.The needs,prioritiesandconcernsofour colleaguesareafocalpointfortheBoard. During2019,twoofourNon-executive Directors,KaiNargolwalaforAsiaand AfricaandTomWatjenfortheUSandthe UK,wereappointedtoactasaconduit betweenemployeesandtheBoard,and theywillcontinuetodeepentheiractivity inthisarea.Youcanreadmoreabouttheir activitiesinthisareaonpage74of thisreport. Wearecommittedtoprovidinganinclusive workingenvironmentinwhichwedevelop ourtalent,rewardperformance,protect ourpeopleandvalueourdifferences. Diversityandinclusionisanimportant priorityfortheGroup.Wearemakinggood progressinthisareaandIamconfidentwe willcontinuetodoso. Wearecontinuingouractiveprogramme ofcommunityinvestmentinourbusinesses aroundtheworld.Aswecollectpremiums inthemanymarketsinwhichweoperate, wealsounderstandtheneedtohelpthose communitiestostrengthenanddevelop. Ourcontributionincludesprojects coveringanumberofareassuchasSafe Steps,whichprovidesadvicearound naturaldisasters,roadsafetyandfirstaid; FirstRead,whichhelpsparentstodevelop theirchildren’snumeracyandliteracy;and Cha-Ching,thefirstglobalfinancial educationprogramme.Ourpeoplearound theworldcontinuetomakearemarkable effortvolunteeringtheirtimeandskillsfor thebenefitoftheircommunities.Iam particularlyproudofthesecontributions, andIsupportthisvolunteeringactivity personallythroughtheChairman’s Challenge,ourflagshipinternational volunteeringprogramme,whichbrings teamstogetheracrosstheGrouptohelp intheircommunities.Thisprogramme continuestoappealtocolleagues,with morethan5,400signingupin2019to participateacross21projects. prudentialplc.com Prudential plc AnnualReport2019 05 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationGROUPCHIEFEXECUTIVE’SREPORT 20% Increaseinadjustedoperatingprofit fromcontinuingoperations2 $1,953m IFRSprofitaftertaxfromcontinuing operations(2018:$2,881m) Delivering profitable growth and positioning ourselves for the future We have delivered a positive operating performance during 2019, led by continued growth in our Asian business. Ourclearstrategyandfocusedexecution, combinedwithimprovementsinour operations,haveenabledusbothtodeliver profitablegrowthandtopositionourselves forcontinuedgrowthintothefuture. Weexisttotakethefinancialriskout ofthebiggesteventsinthelivesofour customers,enablingthemtofacethe futurewithconfidence.Inadditionto fulfillingourtraditionalroleofproviding lifeandhealthprotection,savings opportunitiestomeetfamilygoalsand retirementincome,weaspiretoleadin newareasalignedwiththispurpose. During2019,collectivelyourcontinuing businessesagreedtopayover$29billion toourcustomersinclaimsandsavings pay-outs.Ourproductshelpconsumers postponeandpreventill-healththrough digitalinnovation,increaseaccessto finance,andprovidesolutionsforanageing world.Atthesametime,weareinvesting ourcustomers’savingsintherealeconomy, helpingtodrivesustainablegrowth. 06 Prudential plc AnnualReport2019 prudentialplc.com Aswestatedatourhalf-yearresults,in ordertodiversifyatpace,Jacksonwillneed accesstoadditionalinvestmentwhichwe believewouldbestbeprovidedbythird parties.Sincethen,wehaveundertaken significantworkwithouradviserstoassess optionsforintroducingthirdpartyfinance intoJackson.TheBoardhasdetermined thatthepreferredroutetoachievethisisto seekalistingofJacksonintheUSindue course,subjecttomarketconditions. Accordingly,wearetodayannouncingthat preparationshavecommencedfora minorityinitialpublicoffering(IPO)of Jacksonandhavealreadytakenanumber ofmanagementactionstosupportthis path.Wewillnowcommencedetailed engagementwithkeystakeholders,witha viewtoensuringthatJacksonwillhavethe capitalstrengthasaseparatelylisted businesstosupportitscontinuedsuccess asabroadproviderofretirementsolutions forAmerica’sagingpopulation.Wewill provideanupdateatourHY20results scheduledfor11August2020. Macroeconomic environment Thecoredemandforourlong-termsavings andprotectionproductshasremained strongdespiteuncertainconditionsin themacroeconomicenvironment. Acombinationoflowinterestrates,trade disputesandvolatileinternationalpolitics hascreateddifficultconditionsacross manysectors.TheUSgovernment10-year bondyieldfellto1.9percentattheendof 2019(2018:2.7percent).Equitymarkets finished2019higherthanthestartofthe year,especiallyintheUS,wherethe S&P500indexwasup28.9percent,and valuationsinthecreditmarketswerealso elevatedwellabovehistoricnorms. Wecontinuetomanageourbusiness conservativelyforthelongterm,witha cautiousallocationofshareholderfunds andextensivehedgeprogrammesin Jackson.Thesehedgeprogrammes managetheeconomicrisk,with considerationofthelocalregulatory position,oftheguaranteescontained withintheproductssoldtocustomers. Ourbusinessisbuiltaroundlong-term structuralopportunities.Inourfast- growingmarketsinAsiathereisa strongandgrowingneedforhealthand protection,forsavingsopportunitiesand forwaystoinvest,andthereisasignificant gapforproductsthatmeetthoseneeds. Bymeetingimportantfinancialneeds,we expecttobuildlong-termrelationships withourcustomers.Thistranslatesinto recurringincomestreamsandlowlapse rates,whichinturnproducehigh-quality earnings. Wearewellpositionedtomeetstructural opportunities.Wearediversifiedby geography,withoperationsin15markets intheregion,throughourproducts offeringhealthandprotection,savingsand assetmanagement,andinourmixof channels,providingourproductsthrough ourlargeagencyforceandournetworkof partnershipswithbanksacrosstheregion. Wearealsoinnovatingatpaceandscaleto digitalisethecustomerjourneyend-to- end,anddeliveringnewvalue-added solutions,suchasPulsebyPrudential, ournewdigitalhealthapp. IntheUS,wherethecontinuingtransition ofmillionsofAmericansintoretirement createsasubstantialopportunityfor Jackson’sproducts,wehavedelivered organicdiversificationandJacksonhas paidadividendof$525million1. During2019,wesuccessfullycompleted thedemergerofM&GplcfromtheGroup, enablingustofocusonstructuralgrowth markets.Weareworkingcollaboratively withournewGroup-wideregulator,the HongKongInsuranceAuthority,andour othersupervisorsacrossourmarkets. TheUSistheworld’slargestretirement marketwithtrillionsofdollarsexpectedto movefromsavingsintoretirementincome productsoverthenextdecade.Asa top-twoannuityprovider,Jacksonisa leaderinmeetingtheneedsofAmericans whoaspiretoasecureretirementwitha guaranteedincome. Jackson’sambitionistoplaythefullestrole possiblethroughastrategyofdiversifying bothitsproductrangeanddistribution network.Overtime,thisisexpectedtolead toamorebalancedmixofpolicyholder liabilitiesandenhancestatutorycapitaland cashgeneration. Financial performance TheadjustedIFRSoperatingprofitbased onlonger-terminvestmentreturns (adjustedoperatingprofit2)for2019from ourcontinuingoperationsincreasedby 20percentonbothaconstantandactual exchangeratebasis,reflectingthe continuedgrowthandresilienceofour Asianbusinessesandthebeneficialimpact ofstrong2019capitalreturnsondeferred acquisitioncostamortisationintheUS. TheIFRSprofitaftertaxfromcontinuing operationswas$1,953millionin2019 (2018:$2,881milliononanactual exchangeratebasis).Thisisaftera $(380)millionpost-taxlossinJackson, whereaccountingvolatilitycontinuesto beexpectedgiventheeconomicnature ofourhedgingprogrammeandtherelated accountingmismatchesthatexist. Alongsideourfinancialperformancewe havemadesignificantinvestments,funded regionallyandcentrally.During2019,this includedtherenewalofourregional strategicbancassurancealliancewith UnitedOverseasBankLimitedforaninitial feeof$853million,($301millionofwhich waspaidin2019),enteringintoan exclusivebancassurancepartnershipwith SeABank,ouracquisitionof50.1percent ofThanachartFundManagementCo.,Ltd for$142million3andatotalinvestmentof $619millionoffreesurplusinwriting profitablenewbusinessinAsia,along withaninvestmentof$539millioninfree surplusinUSnewbusiness. Asia OurAsianoperationscontinuedtodrive ourperformance.Thefast-growing marketsofAsiaofferlong-termstructural opportunitiesforus,withtheregion’s growingpopulationhavingaclearand increasingneedfortheproductswe deliver.InsurancepenetrationinAsiais only2.7percentofGDP,comparedwith 7.5percentintheUK4,whilemutualfund penetrationisjust12percentinAsia, comparedwith96percentintheUS5. Wehavedemonstratedthestrengthofour portfolioofbusinessesintheregionby deliveringdouble-digitgrowthinAPE6 salesinsixmarketsandinnewbusiness profit7ineight,reinforcingthevalueofour diverseportfolioanddemonstratingthe breadthofearningsstreamsandnew businessspreadinAsia. prudentialplc.com Prudential plc AnnualReport2019 07 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationGROUPCHIEFEXECUTIVE’SREPORT CONTINUED OutsideHongKong,wedelivereda 17percent8increaseinAPE6salesanda 29percent8riseinnewbusinessprofit7. WithinHongKong,ourdomesticbusiness wasresilientdespitetheeffectofsocial unrest,withAPE6salesgrowingby 8percent8.OurdomesticHongKong businesshascontinuedtoexpandand invest,drivenbynewhealth,protection andretirementsolutionsandsupportedby focusedsalesinitiatives.Fewervisitors frommainlandChinacausedafallintotal HongKongAPE6salesby11percent8and afallinnewbusinessprofit7of12percent8. Wehavecontinuedtoaccelerateourjoint venturebusinessinChina,whereAPE6 salesovertheyearwere53percent8 higher,drivingnewbusinessprofit7growth of38percent8.Werecentlyestablisheda newbranchinShaanxi,our20thinthe country,andaddedsevencitiesand 14salesandservicingoffices.Weare developingrapidlyinanumberofourother marketsintheregion,includingVietnam andthePhilippines,whereAPE6sales grewby12percent8and34percent8 respectivelyandwearemakinggood progressinIndonesia,whereoursales grewby23percent8intheyearincluding 41percent8inthesecondhalf.Overallour Asialifebusinessesdelivered4percent8 growthinoverallAPE6salesanda 2percent8growthinoverallnew businessprofit7. Thebenefitsofourlongheldfocuson writinghighquality,recurringpremium business,contributingtoresilientand broad-basedin-forcegrowthareevident inthe12percent8increaseinrenewal insurancepremium9and14percent8 increaseinadjustedoperatingprofit2, withdouble-digitgrowth8ineight insurancemarketsincluding24percent adjustedoperatingprofitgrowthin HongKongand20percent8growth inmainlandChina. Atthesametime,ourAsianassetmanager, Eastspring,hascontinuedtogrowwell. Averageassetsundermanagementwere upby15percent(onanactualexchange ratebasis),whileearningswereupby 18percent8andnetexternalinflows totalled$8.9billion10.Eastspringis continuingtoexpanditsfootprintinthe region,andinDecemberacquireda controllingstakeinoneofThailand’s leadingassetmanagers,ThanachartFund ManagementCo.,Ltd,withtheoptionto acquiretheremainingequityinthis businessinduecourse. Wehavebroadandefficientchannels inAsia,throughbothouragencyforce andourbankpartners.During2019,we continuedtostrengthenournetwork ofbankpartnerships,renewingand expandingoursuccessfulstrategicalliance withUnitedOverseasBankinfivemarkets acrosstheregionandsigningtwonew partnershipagreementsinVietnam. Wearecontinuingtodeliverdigital innovationtosupportoursuccessful agencyandbankchannels.Weare diversifyingintonewareas,including employeebenefitsinsuranceforboth largeandsmallemployersintheregion, andatthesametimewearebuildingnew value-addedservicessuchasPulseby Prudential,ournewend-to-enddigital healthapp. Africa Wearecontinuingtomakegoodprogress inournewermarketsinAfrica.In2019we enhancedourgrowingscaleintheregion byacquiringamajoritystakeinaleading lifeinsureroperatinginCameroon,Côte d’IvoireandTogo,whichhaveacombined populationofmorethan65million.We nowoperateineightmarketsinAfricawith atotalpopulationofalmost400million. In2019,theAfricabusinessdelivereda 76percent8increaseinAPE6salesto $82million(2018:$47million). US IntheUS,ourproductinnovationand distributionleaveuswellpositionedto provideanageingpopulationwithfinancial strategiesforstableretirements.TheUSis theworld’slargestretirementsavings market11,withapproximatelyfourmillion Americansreachingretirementageevery year12.Thistransitioncontinuestotrigger theunprecedentedshiftoftrillionsof dollarsfromsavingsaccumulationto retirementincomegeneration13. WeprovideproductsthatofferAmericans theretirementstrategiestheyneed, includingvariable,fixedandfixedindex annuities.Ourdiversifiedproduct approachhasenabledustodeliverAPE6 salesup8percent,withincreasesinboth fixedindexandfixedannuityproducts. Newbusinessprofit7declinedby 28percent,reflectinglowerinterest ratesandchangesinproductmix. IntheUS,wehaveoneoftheleading distributionteams14.Weareagileand successfulinlaunchingwelldesigned, customer-centricproducts,have successfulriskmanagementandhedge programmesareinvestingintechnology platformsandhaveaward-winning customerservice.Wearecontinuingto worktowardsfurtherdiversificationand growth,withinahighlycompetitive industry. OurUSbusinesshastakenimportant stepsinthedeliveryofitsdiversification announcedwithourhalfyearresultsin August2019andhasmaintainedacautious approachtomanagingriskthroughits dynamichedgingprogramme.The financialresultsoftheUSbusinessreflect theexecutionofthisstrategy.While adjustedoperatingprofit2increasedby 20percentto$3,070million,theeffects ofstrongUSequitymarketperformance andlowerinterestratesintheperiod ledtoapost-taxIFRSlossintheUSof $(380)million.Wecontinuetoaccept adegreeofvolatilityinourIFRSresults 08 Prudential plc AnnualReport2019 prudentialplc.com baseandfocusonhealthandprotection products.Thesedrivers,combinedwith thediversityoftheAsiaplatformand qualityofitsexecution,areexpectedto outweightheeffectsofanyoneperiod’s newsales. IntheUS,wehavecommenced preparationsforaminorityIPOofJackson asourpreferredroutetointroducethird partyfinanceintoJackson.Aspreviously announced,from2020Jackson’s remittancesareexpectedtobemore evenlyspreadoverthecalendaryearthan inpriorperiods. TheGroup’sstrategyremainsfocusedon structuralgrowthopportunities.The Groupwillprioritisetheconsiderable attractiveinvestmentopportunities availablewhenconsideringthe deploymentofcapitalandapplying itsprogressivedividendpolicy. Interestrateshavedeclinedmaterially in2019andaretrendinglowerin2020. Equitymarketshavebeenvolatileandhave declinedinthecurrentyeartodatefrom theirpeaksinQ42019.Thesemarket conditions,aswellasthecoronavirus outbreak,createheadwindsinrespectof near-termnewbusinessprofitandIFRS fee-basedandspreadearnings.However, ourperformancein2019demonstrates thattheopportunitieswehaveidentified areclearandlongtermandthatweare addressingtheseopportunitieswell.We arecontinuingtodelivergrowthbasedon thestrengthofthoseopportunities,the diversificationofourbusinessandthe resilienceofourearnings.Iamconfident that,withourclearfocusonourstructural growthmarketsandourcontinuing operationalimprovements,wewill continuetodeliverprofitablegrowth forourinvestorsandbenefitsforour stakeholdersoverthemediumand longterm. Mike Wells GroupChiefExecutive sinceourhedgingprogrammeisbased onmanagingtheeconomicrisksinthe businessandprotectingstatutorysolvency inthecircumstancesoflargemarket movements.Furtherdetailisprovided intheGroupChiefFinancialOfficerand ChiefOperatingOfficer’sreport. Outlook Wecontinuetomonitorcloselythe developmentofthecoronavirusoutbreak. Ourpriorityisthehealthandwellbeingfor ourcustomersandstaffduringthis challengingtime. Whilethecoronavirusoutbreakhasslowed downeconomicactivityintheyeartodate anddampenedoursalesmomentumin HongKongandChina,weremain confidentinthemediumtolong-term prospectsoftheseeconomiesandtheir respectiveinsurancesectors.Ourbroad geographicspreadacrosstheregionand thestrengthofourrecurringpremium businessmodellendsconsiderable resiliencetoourearnings. Giventheimpactofthecoronavirus outbreakontravelandactivityinthe marketsinwhichweoperate,lowerlevels ofnewsalesactivityinthoseaffected marketsaretobeexpected.Ourbookof existingbusinessisprovingresilientandwe aretakingmeasurestomanagetheeffect ofloweractivitywhilemaintainingour investmentinproducts,distributionand technology.Existingcustomersinboth HongKongandmainlandChinacontinue tocontributetotheirpolicieswith premiumsbeingpaidthroughabroad rangeofremotepaymentfacilities. Thelongertermstructuraldriversofgrowth inourAsiamarketsremainunchangedand compelling.Theresilientandhighquality natureoftheIFRSoperatingearnings growthofourAsiabusinessremains supportedbythecompoundingnatureofa highlyenduringregularpremiumincome Notes 1 During2019,theGroup’sholdingcompanycashflowwasmanagedinsterlingandsignificant remittanceswerehedgedandrecordedonthatbasis.Amountsreceivedweretherefore distortedbytheonwardstranslationintoUSdollars.ThedividendpaidbyJacksonintheUS inUSdollarsin2019was$525million(2018:$450million).Theamountrecordedasreceived intheholdingcompanycashflowwas$509million(2018:$452million). 2 AdjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsismanagement’s primarymeasureofprofitabilityandprovidesanunderlyingoperatingresultbasedon longer-terminvestmentreturnsandexcludesnon-operatingitems.Furtherinformationonits definitionandreconciliationtoprofitfortheyearissetoutinnoteB1.1oftheIFRSfinancial statements. 3 Cashpaymentsmadeover2019and2020. 4 Source:SwissReSigma2017.Insurancepenetrationcalculatedaspremiumsonpercent ofGDP.Asiapenetrationcalculatedonaweightedpopulationbasis. 5 Source:InvestmentCompanyInstitute,industryassociationandLipper. 6 APEsalesisameasureofnewbusinessactivitythatcomprisestheaggregateofannualised regularpremiumsandone-tenthofsinglepremiumsonnewbusinesswrittendownduringthe yearforallinsuranceproducts,includingpremiumsforcontractsdesignatedasinvestment contractsunderIFRS4.ItisnotrepresentativeofpremiumincomerecordedintheIFRS financialstatements.SeenoteIIoftheAdditionalunauditedfinancialinformationfor furtherexplanation. 7 Newbusinessprofitonapost-taxbasis,onbusinesssoldintheperiod,calculatedin accordancewithEEVprinciples. 8 Year-on-yearpercentageincreasesarestatedonaconstantexchangeratebasisunless otherwisestated.Asinpreviousyears,wecommentonourperformanceinlocalcurrency terms(expressedonaconstantexchangeratebasis)toshowtheunderlyingbusinesstrends inperiodsofcurrencymovement. 9 SeenoteIIoftheAdditionalunauditedfinancialinformationfordefinitionandreconciliation toIFRSbalances. 10ExcludesMoneyMarketFunds. 11 Source:WillisTowersWatsonGlobalPensionAssetStudy2019. 12 AnnualEstimatesoftheResidentPopulationbySingleYearofAgeandSexfortheUnited States:1April2010to1July2018.Source:USCensusBureau,PopulationDivision. 13 2016FederalReserveBoard’sTriennialSurveyofConsumerFinances. 14Source:IndependentresearchandMarketMetrics,aStrategicInsightBusiness:U.S.Advisor Metrics2019,asof30September2019. prudentialplc.com Prudential plc AnnualReport2019 09 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information02 Strategic report 10 Prudential plc Annual Report 2019 prudentialplc.com 02 G r o u p o v e r v e w i i S t r a t e g c r e p o r t G o v e r n a n c e D i r e c t o r s ’ r e m u n e r a t i o n r e p o r t i F n a n c a i At a glance Our business model Our performance Our businesses Asia United States Group Chief Financial Officer and Chief Operating Officer’s report on the 2019 financial performance Group Chief Risk and Compliance Officer’s report on the risks facing our business and how these are managed ESG summary Page 12 14 16 18 18 28 34 51 72 l s t a t e m e n t s E u r o p e a n E m b e d d e d V a u e ( E E V ) b a s i s r e s u l t s l A d d i t i o n a l i n f o r m a t i o n prudentialplc.com Prudential plc Annual Report 2019 11 AT A GLANCE Group at a glance Focused on structural growth markets. Serving 20 million customers worldwide. Asia growth Pan-regional multi-channel network Asia GDP growth projections ($) 2015—20241 Health, protection, savings and asset management in 15 markets. 16.6tn 31.1tn Top three position in nine life markets2. Low insurance and mutual fund penetration. Africa opportunity Establishing a network with market-leading initiatives Africa GDP growth projections ($) 2015—20241 Building a presence in one of the world’s most under‑penetrated markets. Operating in eight markets with a total population of almost 400 million. 0.7tn 1.2tn 12 Prudential plc Annual Report 2019 prudentialplc.com Our purpose Our purpose is to help people de-risk their lives and deal with their biggest financial concerns. We provide our customers with the freedom to face the future with confidence. Our strategy Our strategy is to capture the long-term structural opportunities for our markets and geographies, while operating with discipline and seeking to enhance our capabilities through innovation to deliver high-quality resilient outcomes for our customers. We aim to do this by: — Serving the protection and investment needs of the growing middle class in Asia; — Offering products to new customers in Africa, one of the fastest-growing regions in the world; and — Providing asset accumulation and retirement income products to US retirees. Structural growth over the last 20 years has allowed our business to reach the scale where it can support its long- term goals through execution of its strategy and disciplined capital allocation. Prudential plc has a portfolio of businesses with access to the world’s largest and fastest-growing markets. US retirement Strength and flexibility of our distribution network gives us a distinctive advantage Leading position in the retirement income industry. US GDP growth projections ($) 2015—20241 10,000 Americans reach retirement age each day for the next 20 years. Largest wholesaling force in the annuity industry. 18.2tn 25.8tn Note 1 GDP of markets in which Prudential plc operates as at 31 December 2019. 2 Source: IMF World Economic Outlook. Source: Based on formal (Competitors’ results release, local regulators and insurance associations) and informal (industry exchange) market share data. Ranking based on new business (APE or weighted FYP depending on the availability of data). prudentialplc.com Prudential plc Annual Report 2019 13 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional 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 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 … and enhancing capabilities We capture the structural opportunities by offering the products and solutions demanded by customers and wider society We enhance our capabilities by developing our digital offerings and expanding our partnerships, further strengthening our distribution networks Asia Asia’s long‑term structural trends are powerful drivers of sustainable growth. These trends underpin a strong and growing demand for savings and protection across the region, as markets are challenged by low life insurance penetration and a large pension funding gap. We are well placed to capture this opportunity, providing products that meet our customers’ needs and gaining political and regulatory support in our markets. Asia We continue to invest significantly in tech‑driven capabilities and partnerships to address developing customer demand. Significant developments include the launch of Pulse by Prudential, our health and fitness app, and 18 new digital partnerships across the region. Our productive distribution footprint across Asia is diversified across a substantial agency force and bank partner network. Recent developments include the renewal of our UOB partnerships for 15 years, and a new partnership with OVO in Indonesia. Africa We have also continued to expand our presence in Africa, one of the world’s most under penetrated markets where the population is forecast to grow by a billion by 2045. In July, we completed our acquisition of a 51 per cent stake in a leading life insurer, Group Beneficial, operating in West and Central Africa. We now operate in eight markets with a population of almost 400 million. US In the US, an extra 22 million individuals will need retirement solutions by 20351, and pension provision has been declining2. We see a growing demand for retirement products and an ongoing shift to fee‑based solutions. Jackson is evolving its product range to address these needs. Africa We continue to grow and develop our footprint through our agency network and bancassurance partners. We are harnessing technology to improve customer service, innovate in distribution and build a business which is scalable. US We have invested in a single technology platform to deliver one of the most efficient and scalable operating platforms across the industry. Jackson is the clear leader in each variable annuity distribution channel3, and is well positioned to further enhance its market‑leading annuity position in the brokerage market. Our product innovation and distribution strategies will enable us to capture the industry trends towards advisory‑based distribution models. Operating with discipline Risk management and disciplined allocation of capital underpin our activities The Group has a proven track record of disciplined capital allocation. Our governance, processes and controls enable us to deal with uncertainty effectively, which is critical to the achievement of our strategy. Our Group Risk Framework and risk appetite allow us to control our risk exposure successfully throughout the year. Read more in the Group Chief Risk and Compliance Officer’s report on page 51. Notes 1 United Nations, Department of Economic and Social Affairs, Population Division (2019). World Population Prospects 2019, Online Edition. Rev. 1. Population aged 65 and over as at 2019 versus 2035. 2 US Department of Labor, ‘Private Pension Plan Bulletin Historical Tables and Graphs 1975 – 2017’, September 2019. 3 ©2020 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 2019. Jackson ranks #1 out of 25 companies in the Independent NASD channel, #1 out of 19 companies in the Bank channel, #1 out of 15 companies in the Wirehouse channel, and #3 out of 19 companies in the Regional Firms channel. 14 Prudential plc Annual Report 2019 prudentialplc.com … creating high-quality resilient outcomes … for our stakeholders. >$29 billion Customer claims incurred +10%8 on 2018 $5,310m Adjusted operating profit1,4 +20%3 on 2018 $4,405m New business profit1,2 ‑6%3 on 2018 $9.5bn LCSM shareholder surplus5 2,103¢ EEV per share6 46.26¢ Full-year ordinary dividend per share The Group’s 2020 dividend will be determined under the Group’s dividend policy from a 2019 base of 36.84¢7 The Group has a number of key performance indicators internally to measure financial performance. Read more on page 16. Notes 1 From continuing operations. 2 New business profit, on a post‑tax basis, on business sold in the period, calculated in accordance with EEV principles. 3 Growth rates on a constant exchange rate basis. 4 Adjusted IFRS operating profit based on longer‑term investment returns. This alternative performance measure is reconciled to IFRS profit for the period in note B1.1 of the IFRS financial statements. 5 Surplus over Group minimum capital requirement and estimated before allowing for second interim ordinary dividend. Shareholder business excludes the available capital and minimum capital requirement of participating business in Hong Kong, Singapore and Malaysia. Further information on the basis of calculation of the LCSM measure is contained in note I(i) of the Additional unaudited financial information. 6 EEV shareholders’ funds at 31 December 2019 are not directly comparable to Group shareholders’ funds reported at 31 December 2018, as the prior year balance included shareholders’ funds of M&G plc which, following demerger, are not part of the Group as at 31 December 2019. The reported 31 December 2018 EEV shareholders’ funds were 2,445 cents. 7 The Group’s dividend policy will be determined from a 2019 US dollar base of 36.84 cents per share, representing the full‑year ordinary interim dividend for 2019 of 46.26 cents less the contribution of the discontinued M&G plc business (9.42 cents). 8 Growth rates on an actual exchange rate basis. Customers We provide financial security and wealth creation by providing the right products through appropriate distribution. In the light of technological advances and evolving customer needs, we actively embrace the latest technology and embed digital capabilities in our business. Read more on pages 18 to 33, 73, 76 and 77 Investors We aim to build long‑term shareholder value, exhibited in growing dividends and share price performance. Read more on pages 16 to 87 Government and regulators We monitor governmental, legislative and regulatory activity in the markets in which we operate, and meet periodically with government and regulator representatives, to help us understand their objectives, priorities and concerns, and how they affect or shape our business. Read more on page 74 Employees We provide an inclusive working environment in which we develop our talent, reward great performance, protect our people and value our differences, and we believe that such an environment is essential to enabling us to deliver our strategy. Read more on pages 74, 81 and 82 Communities We support communities where we operate, through investment in business and infrastructure, tax revenues and community support activities. Responsible and ethical behaviour are embedded in our business and flow into every part of what we do, from our financial performance and tax practices to the way we fight financial crime and deal with our suppliers. We take an active approach in helping tackle environmental and social challenges and recognise that we are responsible for understanding our impact on the environment and doing what we can to minimise any damage. Read more on pages 86 and 87 Sustainability All of our stakeholders require us to undertake the actions to build a sustainable business, which we do through our products and the development of our capabilities. Responsible investment is a key component of sustainability. We take an inclusive approach to responsible investments, seeking to integrate environmental, social and governance considerations into our investment processes and stewardship activities through ownership practices and engagement with investee companies. Read more on pages 75, 77 to 80 and 84 to 86 prudentialplc.com Prudential plc Annual Report 2019 15 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional 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 returns (adjusted operating profit)2 $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, adjusted operating profit based on longer‑term investment returns gives a more relevant measure of the performance of the business. Other distorting items are excluded from adjusted 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. 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. Group adjusted operating profit in 2019 is 20 per cent higher on a constant and actual exchange rate basis compared with 2018. Adjusted operating profit from Asia life and asset management operations was up 14 per cent on a constant exchange rate basis (13 per cent on an actual exchange rate basis). In the US, adjusted operating profit was up 20 per cent reflecting a lower market related deferred acquisition cost amortisation charge. EEV new business profit in 2019 decreased by 6 per cent on a constant and actual exchange rate basis compared with 2018. New business profit generated by our Asian business was up 2 per cent on a constant exchange rate basis, with a 29 per cent increase from Asian businesses excluding Hong Kong. Hong Kong fell by 12 per cent broadly in line with the fall in APE sales given the decline in mainland China visitors in the second half of the year. US new business profit decreased by 28 per cent, with an increase in sales being more than offset by a fall in interest rates and the planned diversification of product mix. 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 2019 decreased by 12 per cent on a constant exchange rate basis (12 per cent on an actual exchange rate basis) compared with 2018. In addition to the decrease in new business profit described above, in force profit was lower due, in part, to falling interest rates. 6,445 2,036 4,409 2018 5,177 470 +20%* 5,310 2019 –6%* 4,707 4,405 2018 10,098 2,232 2019 –12%* 7,866 6,905 2018 2019 16 Prudential plc Annual Report 2019 prudentialplc.com Operating 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. Operating free surplus from continuing operations was $2,861 million in the year. This comprises $4,958 million generated from the in‑force business and asset management, up 12 per cent, before allowing for $(903) million of US EEV hedge modelling enhancements, new business strain of $(1,158) million, up 22 per cent following the planned diversification of sales in the US towards higher strain fixed index and fixed annuities, and restructuring costs of $(36) million. 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. Cash remitted to the Group from continuing operations in 2019 amounted to $1,465 million, including $950 million from Asia (up 4 per cent) and $509 from the US (up 13 per cent). During 2019, the Group’s holding company cash flows were managed in sterling and significant remittances were hedged. If local currency remittances in Asia had been translated directly into US dollars then the growth rate in Asia remittances would have been 8 per cent. The dividend paid by Jackson was $525 million (2018: $450 million). Group local capital summation method6 $bn Following the demerger of M&G plc from Prudential plc, the Hong Kong Insurance Authority (IA) has assumed the role of the Group‑wide supervisor for the Prudential Group. The Group is no longer subject to Solvency II capital requirements and currently applies the local capital summation method (LCSM) that has been agreed with the Hong Kong IA to determine Group regulatory capital requirements (both minimum and prescribed levels). The Group’s available capital, as recorded on a LCSM basis, covers the Group’s minimum capital requirement over three times. In 2019, capital generation from the in‑force business has been used to invest in new business, pay the external dividend and invest in new bancassurance agreements and a new Thai asset manager. After these impacts and market movements, LCSM surplus fell slightly from $9.7 billion at 31 December 2018 to $9.5 billion at 31 December 2019. Key Continuing Discontinued Continuing *Growth rates relate to continuing operations. 5,404 1,994 3,410 2018 2,259 842 −16%* 2,861 2019 +3%* 1,417 1,465 2018 2019 9.7 9.5 356% 309% 2018 2019 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 2019 financial performance. Growth rates for 2018 to 2019 are on an AER basis. 2 Adjusted operating profit is management’s primary measure of profitability and provides an underlying operating result based on longer‑term investment returns and excludes non‑operating items. This alternative performance measure is reconciled to IFRS profit for the year in note B1.1 of the IFRS financial statements. 3 The EEV basis results have been prepared in accordance with EEV principles discussed in note 1 of the EEV basis results. See note II of Additional unaudited financial information for definition and reconciliation to IFRS balances. 4 For insurance operations, operating free surplus generated represents amounts maturing from the in‑force business during the period less investment in new business and excludes non‑operating items. For asset management businesses, it equates to post‑tax operating profit for the period. Restructuring costs are presented separately from the operating business unit amount. Further information is set out in note 11 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 I(iii) of the Additional unaudited 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 Surplus over Group minimum capital requirement and estimated before allowing for second interim ordinary dividend. Shareholder business excludes the available capital and minimum capital requirement of participating business in Hong Kong, Singapore and Malaysia. 2018 surplus excludes M&G plc and includes $3.7 billion of subordinated debt issued by Prudential plc that was transferred to M&G plc on 18 October 2019. Further information on the basis of calculation of the LCSM measure is contained in note I(i) of the Additional unaudited financial information. prudentialplc.com Prudential plc Annual Report 2019 17 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationOUR BUSINESSES Asia Continued progress towards our strategic priorities. 2019 performance highlights — Continued strong performance in key earnings and value metrics: adjusted operating profit up 14 per cent1 and European Embedded Value up 23 per cent2 to $39,235 million — We expanded our presence in China with a new branch in Shaanxi, the addition of seven cities and a strong start to our wholly owned private fund manager — We renewed our successful regional strategic bancassurance alliance with United Overseas Bank Limited (UOB) to 2034 and expanded its coverage — We secured one of a few 100 per cent licences in Myanmar, our 13th life market in Asia — Eastspring total funds under management grew to $241 billion, up 25 per cent2 — We developed over 160 products in 2019, contributing 16 per cent of life new business profit — Our digital health SuperApp, branded Pulse by Prudential, is live in eight markets and over one million people have downloaded the app 18 Prudential plc Annual Report 2019 prudentialplc.com Asia G r o u p o v e r v e w i i S t r a t e g c r e p o r t G o v e r n a n c e D i r e c t o r s ’ r e m u n e r a t i o n r e p o r t i F n a n c a i Our business Our business model is underpinned by the breadth and quality of our operations in the life insurance and asset management sectors. We have an outstanding reputation with customers and regulators alike and we operate in markets with compelling structural drivers that support sustained future growth. We have a top-three position in nine insurance markets in the region and have built an Asian asset management business with one of the largest regional market footprints. This diversity, combined with our continued focus on customer outcomes and profitability, has provided protection from cyclical headwinds. We have made significant investments during 2019 to strengthen further and grow our Asia business. We renewed our successful regional bancassurance partnership with UOB until the end of 2034 and expanded its coverage to include Vietnam as well as UOB’s digital bank, TMRW. We extended our life insurance footprint to Myanmar, our 13th life market, and acquired a controlling stake in Thanachart Fund which makes us the fourth largest mutual fund manager in the attractive Thailand market with a 12 per cent market share. To date, over one million people have downloaded the ‘Pulse by Prudential’ app since its launch. Our focus on growing our presence in China saw our reach expand to a further seven cities, bringing our footprint to 94 cities, while our wholly owned private fund manager established in Shanghai in December 2018 has secured over one billion Yuan in its first year of operation. We are able to translate these hallmarks of our business into financial success, with diversified growth in 2019 maintaining our strong track record of high-quality performance. We achieved a 14 per cent1 increase in adjusted operating profit, with eight markets growing at a double-digit rate. This is supported by a 12 per cent1 expansion in renewal premiums3, which reflects the long-term nature of our insurance business, and a 25 per cent2 increase in funds under management at Eastspring helped by strong third party net-inflows of $8.9 billion4. We also delivered 29 per cent1 growth in new business profit outside Hong Kong, with eight markets expanding at a double-digit rate, which underpinned a 23 per cent2 increase in European Embedded Value to $39,235 million. prudentialplc.com Prudential plc Annual Report 2019 19 l s t a t e m e n t s E u r o p e a n E m b e d d e d V a u e ( E E V ) b a s i s r e s u l t s l A d d i t i o n a l i n f o r m a t i o n OUR BUSINESSES CONTINUED Market opportunities We seek to enhance the health and wealth of consumers in Asia by providing life insurance and asset management solutions to address their protection and savings needs at all ages. The industry remains in the early stages of development, as characterised by the low penetration rates across the region for both insurance and asset management, and low levels of financial inclusion. In particular, most of our markets are approaching the level of per capita annual income when demand increases sharply. As a consequence, Asia is predicted to contribute about two-thirds of the global life insurance growth in the next 10 years5 and achieve a share of 42 per cent of the global insurance market by 2029 compared with just 32 per cent currently6. The Asia Pacific asset and wealth management industry is also expected to add about $13 trillion of assets under management between 2020 and 20257. There are many structural drivers supporting the significant growth potential in Asia. The health protection gap, estimated at $1.8 trillion8, is already substantial as consumers in Asia are under-insured and social safety nets remain limited. Meanwhile, medium-term economic growth prospects are superior to those of developed markets in the west, with continued income growth and rising wealth levels expected to raise the awareness of, and demand for, protection and wealth management solutions. Similarly, demographic trends are also favourable, as youthful emerging markets with growing working-age populations remain a core source of demand for traditional protection and savings products and more mature markets with ageing populations create demand for retirement and wealth management solutions. While these secular trends offer attractive prospects, we remain vigilant and focused in our execution. We have carefully managed our businesses through a range of unforeseen external events during 2019, including heightened capital market volatility arising from trade tensions between the US and China, a slowdown in the growth of the Chinese economy, suppressed yields on US dollar and other Asian currency fixed-income instruments, and social unrest in Hong Kong that led to a notable decline in mainland China visitor arrivals. We have also embraced the opportunities brought about by government initiatives. Our widening product offerings and new partnerships support many Asian regulators’ vision to provide greater financial inclusion and promote the health and wellbeing of the people. For example, in Hong Kong we have seen strong demand for our annuity and medical reimbursement products that are eligible for tax incentives that were newly introduced by the government. We also successfully refreshed products of our Malaysia conventional business to comply with the new regulations on minimum allocation rate. In addition, our expertise in economic capital reporting, protection-focused business mix and conservative balance sheet position us well for the migration to risk-based solvency frameworks across the region. Strategic priorities We run our business with a focus on customers, quality growth and profitability. We favour health and protection products due to their resilience to market cycles and healthy margins. Collectively, such products produced 67 per cent of our new business profit in 2019 and contributed to our high mix of regular premiums, which comprised 93 per cent of our APE sales in 2019 and 99 per cent of our life weighted premium income9. This results in 86 per cent10 of our life IFRS operating income (excluding other income) arising from insurance margin and fee income, which in turn supports stable profit progression across market cycles and strong returns on equity. This performance also reflects the disciplined execution of our four strategic priorities, which align with the evolving sources of demand across the region and help position our business for continued growth. Diversification Adjusted operating profit by region Full year 2019 $3,276m +14% 11 1 10 9 8 7 6 5 2 4 3 Market 1 Hong Kong Indonesia 2 Singapore 3 4 Eastspring 5 Malaysia 6 Vietnam 7 China Thailand 8 9 Taiwan 10 Philippines 11 Others Adjusted operating profit $734m $540m $493m $283m $276m $237m $219m $170m $74m $73m $177m Share of total Asia Growth +24% 23% −3% 17% +14% 15% +18% 9% +10% 8% +20% 7% +20% 7% +8% 5% +10% 2% +26% 2% +30% 5% Growth rate vs 2018 constant exchange rates First, we seek to enhance the core of our existing business and made excellent progress in this regard in 2019. Significantly, our sales in Indonesia grew 23 per cent1 in the full year and this growth accelerated to 41 per cent1 in the second half from 4 per cent1 in the first half, following a substantial reform of our agency channel and new product launches. We made successful business mix improvements in the Philippines by shifting towards higher-margin health and protection products, which resulted in a 5 percentage point increase in APE sales mix11 for these products and supported the more than doubling of new business profit. On the distribution side, we have extended our exclusive partnership with UOB until the end of 2034 with an expanded scope to include Vietnam and UOB’s digital bank, TMRW, and have established an exclusive 20-year partnership with SeAbank who have 1.2 million retail customers and almost 170 branches in Vietnam. 20 Prudential plc Annual Report 2019 prudentialplc.com Secondly, we aim to create ‘best-in-class’ health capabilities. This is being delivered by enhancing customer access to healthcare products and services. Through our digital health SuperApp branded Pulse by Prudential, which is live in 8 markets, we collaborate with various digital partners and use artificial intelligence technology to offer users a wide range of affordable and easy-to-access consumer services such as health assessments, risk factor identification, triage, telemedicine, wellness and digital payment. Meanwhile, we have launched new protection products to meet the evolving needs of our customers, including two certified VHIS plans in Hong Kong and PRUCritical Benefit 88, our first standalone critical illness product in Indonesia. In 2019, we increased our new business profit from health and protection products by 23 per cent in Asia ex-Hong Kong, as we expanded our APE sales of such products in seven markets with notable success in India, where such sales saw 50 per cent underlying growth12. Thirdly, we plan to accelerate growth in Eastspring by expanding its product and distribution capabilities. We have continued to develop new solutions, including our first fund offerings in China and Thailand as well as fixed maturity plans in Taiwan, Singapore, Malaysia and India. We maintained our strong investment performance with 60 per cent of retail and institutional funds outperforming over the past year, collectively helping to attract strong net flows from third parties. This in turn raised our funds under management by 25 per cent2 to $241.1 billion. Further streamlining of our front and middle-office operations was delivered in 2019, following the completion of BlackRock’s Aladdin system implementation across 10 markets. Meanwhile, our disciplined focus on costs has led to further improvement in the cost-income ratio, which fell three percentage points to 52 per cent in 2019, and contributed to the 18 per cent growth in adjusted operating profit for the year to $283 million. Following our acquisition of majority stakes in Thanachart Fund and TMB Asset Management, Eastspring is now Thailand’s fourth largest mutual fund manager, with a market share of 12 per cent13 and combined assets under management of $22 billion4. Finally, we continue to expand our presence in China across both the insurance and asset management sectors. We recently established a new branch in Shaanxi, our 20th in the country, and have added seven cities and 14 sales services offices in 2019, extending our reach to 94 cities and 229 sales offices. Our current presence gives us access to 77 per cent of China’s population14 and 83 per cent of the insurance market15. Coupled with our continued strong focus on execution, our geographic expansion has helped us achieve strong NBP growth of 38 per cent, with strong double-digit growth across both the agency and bancassurance channels. Our life joint venture also recently received regulatory approval to establish its own asset management company, which will further strengthen our capabilities in savings and retirement products. Furthermore, our wholly owned private fund manager established in Shanghai in December 2018 has secured over one billion Yuan in its first year of operation. Customers We believe that excellent customer service has been key to our strong reputation and leading pan-Asia franchise. During 2019, we added a further 1.4 million new life customers18, bringing the total to over 15 million life customers, of which about one-third are our health customers. Customer loyalty is high, as reflected by our strong retention ratio which has consistently remained in excess of 90 per cent. The satisfaction and trust our customers have in our business also translates into a high proportion of repeat sales, which comprised 45 per cent of APE sales in 2019. The result of these dynamics is a portfolio of close to 25 million in-force policies, with each policyholder holding 1.6 policies on average. At Eastspring, the expansion in assets under management was driven by strong underlying growth of 26 per cent in external client funds, excluding the M&G related assets that were reclassified following the demerger. Overall external client funds reached $124.7 billion and contributed to 52 per cent of the total funds under management at the end of 2019. Our customer centric health ecosystem, which empowers consumers to take control of their personal health and wellbeing in an affordable way any time and anywhere, has made a promising start. The number of individuals who have downloaded the Pulse by Prudential app has exceeded one million since launch in August 2019. Pulse will help us acquire and retain users at pace as we enhance its reach by expanding the scope of service and onboard new partners. We continue to identify and target new customer groups and segments outside our traditional focus in the mass and affluent space in order to accelerate our future growth. We first expanded into the high net worth segment in 2018 with Opus in Singapore, which provided a differentiated experience for our customers, including a dedicated service team, wealth planners and external experts covering trust and legal matters. APE sales in this segment delivered impressive growth of 46 per cent in 2019 to $76 million. Similarly, we also developed tailored offerings for SMEs, a segment that remains under-served and offers significant growth potential. This strategy is advanced through our all-inclusive platform, PRUworks, which provides a digitally-enabled HR solution for business owners and their employees, providing access to employee benefits and lifestyle programmes. In 2019, we achieved 22 per cent growth in our employee benefits APE in Singapore17 and leveraged this experience to extend our coverage to Indonesia. We have also developed strategies to reach the digitally-savvy millennial segment through TMRW, UOB’s digital bank, and new partners such as OVO in Indonesia. Products We offer a wide range of insurance products that are tailored to local market requirements and fast-changing individual needs, with 67 per cent of new business profit contributed by health and protection solutions and the rest by savings products that include participating, linked and other traditional products. The diversity and resilience of our business is supported by the continued enhancements we make to our product range, which include broadening coverage for new risks and adding innovative features. Indeed, last year 16 per cent of new business profit and 55 per cent of external net inflows4 arose from the 166 products and 109 funds that were developed in 2019. prudentialplc.com Prudential plc Annual Report 2019 21 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationOUR BUSINESSES CONTINUED In Hong Kong, our new and innovative product offerings have contributed to the resilience of the domestic segment, which achieved 8 per cent APE sales growth in the full year. This growth accelerated to 12 per cent in the second half from 5 per cent in the first half despite the economic slowdown and social unrest. Our new qualified deferred annuity product was well received by customers in both the agency and bancassurance channels, and with sales of $162 million accounted for 11 per cent of our Hong Kong APE sales since its launch on 1 April 2019. PruActive retirement marked our entry into the annuity market in Singapore, contributing 6 per cent to our Singapore APE sales since its launch in August. We also launched PRUHealth Cancer ReCover in Hong Kong, a first-in-market cancer protection plan tailored for cancer survivors and which also offers holistic homecare services to support in-home recovery. The improvement of our Indonesia business, whose new business profit rose strongly by 39 per cent1 in 2019, was also helped by the broadening of our product offering. Following the success of our upgraded unit-linked product, PRUlink Generasi Baru, that was launched in late 2018, we offered a number of new and refreshed products in 2019. To raise the productivity of our trainee agents we launched PRUCritical Benefit 88, our first standalone critical illness product, which accounted for around 10 per cent of the case count in this agent segment. Similarly, we refreshed our medical product, PRUprime Healthcare Plus, offering customers a simpler and faster process to upgrade health protection, and this was our best-selling product in Indonesia last year. We also plan to introduce new offerings to our critical illness and Shariah products, which we expect will help sustain the growth momentum in 2020. We currently boast a number one position in agency APE sales in Hong Kong and have increased MDRT qualifiers by 35 per cent in our markets outside Hong Kong, reflecting our focus on agent recruitment, training and productivity across different markets. For example, in Indonesia, our segmented agency strategy is delivering positive early results and played a key role in driving APE sales growth in 2019, with the Elite segment growing APE sales by 57 per cent to account for 25 per cent of total agency APE sales for the year. Our partnerships also made exceptional progress last year. The bancassurance channel achieved APE sales growth of 14 per cent1, with particularly strong performances in China JV and Vietnam and 24 per cent growth from UOB following the renewal of the strategic partnership at the beginning of the year. Meanwhile, we also extended our collaboration with new partners to widen our access to new customer segments, underlined by our new strategic partnership with OVO, the largest digital payment platform in Indonesia with access to 115 million devices. We anticipate that this partnership will significantly enhance our reach to digitally-savvy consumers in the country through the joint development of digital propositions that encompass health, wellness and wealth products. The experience will also help us in designing and managing distribution strategies in our existing markets as well as in targeting new or recent points of entry. Distribution We believe in a multi-channel strategy for our business which can adapt and respond flexibly depending on local market conditions. Our distribution network is one of the strongest and most diversified in the Asia region. We have over 600,000 licensed tied agents across our life insurance markets, and this proprietary distribution channel is the core component of our success, comprising 83 per cent of our new business profit. We also have a leading bancassurance franchise that provides access to over 18,000 bank outlets through our strategic partnerships with multi-national banks and prominent domestic banks, which grew new business profit by 12 per cent in 2019. In recent years, we have also established non-traditional partnerships to broaden our reach further, with partners added in 2019 including Viettel, the largest telecommunications service provider in Vietnam. In total, we have more than 300 life insurance and asset management distribution partnerships in Asia. Our focus on the agency channel positions us well for sustainable growth, as customers continue to have a strong preference for face-to-face advice from a trusted financial adviser, especially regarding complex protection and wealth solutions. We have created a culture whereby agents aspire to attain membership of the Million Dollar Round Table (MDRT), an industry-recognised indicator of quality. We place great emphasis on agent professionalism and promote career progression by providing tailored training programmes that share experience and best practice across different markets. In addition, to further assist our agents during the sales process and enhance productivity we continually upgrade the tools at their disposal. 22 Prudential plc Annual Report 2019 prudentialplc.com New business profit by product Full year 2019 % 4 1 3 2 1 Health and protection 2 Par 3 Non-par Linked 4 67% 21% 5% 7% New business profit by channel Full year 2019 % 3 1 2 1 Agency 2 Bancassurance 3 Others 83% 15% 2% Cambodia Life insurance Market ranking19 Population20 Penetration6 China Life insurance Market ranking19,21 Population20 Penetration6 Average health protection gap per household8 Eastspring Funds under management22 Hong Kong Life insurance Market ranking19 Population20 Penetration6 Average health protection gap per household8 Eastspring Funds under management22 India24 Life insurance Market ranking19 Population20 Penetration6 Average health protection gap per household8 Eastspring Funds under management22 Indonesia25 Life insurance Market ranking19 Population20 Penetration6 Average health protection gap per household8 Eastspring Funds under management22 Japan Eastspring Funds under management22 Korea Eastspring Funds under management22 Laos Life insurance Market ranking19 Population20 Penetration6 Malaysia26 Life insurance Market ranking19 Population20 Penetration6 Average health protection gap per household8 Eastspring Funds under management22 Philippines Life insurance Market ranking19 Population20 Penetration6 Average health protection gap per household8 Singapore Life insurance Market ranking19 Population20 Penetration6 Average health protection gap per household8 Eastspring Funds under management22 Taiwan Life insurance Market ranking19 Population20 Penetration6 Average health protection gap per household8 Eastspring Funds under management22 Thailand Life insurance Market ranking19 Population20 Penetration6 Average health protection gap per household8 Eastspring Funds under management22 Vietnam Life insurance Market ranking19 Population20 Penetration6 Average health protection gap per household8 Eastspring Funds under management22 1st 32m 3.3% $6,864 $11.8bn 3rd 108m 1.3% $1,406 3rd 6m 6.2% $13,776 $129.2bn 12th 24m 17.5% $4,823 $8.0bn 8th 70m 3.6% $287 $23.3bn 3rd 96m 1.6% $1,251 $4.4bn 1st 16m 0.1% 4th 1.4bn 2.3% $1,724 $7.8bn 2nd 7m 16.8% $9,156 $5.0bn 2nd 1.4bn 2.7% $1,382 $25.3bn 1st 271m 1.5% $1,230 $5.6bn $6.7bn $12.2bn Top 3 7m 0.0% prudentialplc.com Prudential plc Annual Report 2019 23 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationOUR BUSINESSES CONTINUED Digital In the face of rapidly evolving customer needs and technological disruption, we actively embrace change and the latest technology. Our digital strategy is being executed in two waves. The first focuses on increasing automation and improving digital capabilities in our current business model for better customer experience leading to better business results. The second adds a new business model based on a customer centric digital ecosystem which is manifested in our SuperApp branded Pulse by Prudential. First wave: Enhancing our current business model In the first wave we are continually increasing the automation of our operations so as to improve both business efficiency and customer experience. For example, 83 per cent of all new business was submitted through e-point-of-sale technology in 2019, representing an increase of 11 percentage points year-on- year, with the enhancement particularly pronounced in our bancassurance partners in Thailand, Taiwan and Malaysia. Our smart underwriting tool, which is now used in 64 per cent of all new sales, offers dynamic underwriting that streamlines the application process and communicates instant underwriting decisions to customers. We provide our rapidly growing digital-savvy customer-base with efficient and secure digital payment solutions, for example, through our recent partnership with Boost, a leading lifestyle e-wallet in Malaysia. We have established a strategic relationship with the global technology services company Tech Mahindra to leverage their scale and expertise in Cloud and Mobile to ensure faster deliveries across all markets. At Eastspring, in addition to embedding BlackRock’s Aladdin system, we have also made other digital advancements, with our Malaysian entity winning the ‘Fintech Innovation in Asset Management’ award in Asia Asset Management’s ‘2020 Best-of-the-Best awards’. This reflected the continued enhancements to our online platform, myEastspring, which enables our clients to access, monitor and transact online and includes tools for our agents to help clients predict their future savings needs. We also launched a new digital facility that empowers members of the Employees Provident Fund to take control of their investments and make transactions at nearly zero cost. Prudential Corporation Asia automation rates trend New business e-submission Auto-underwriting 100% 80% 60% 40% 20% 0% Dec-16 Dec-17 Dec-18 Dec-19 Second wave: Building an ecosystem-based business model In the second wave, to aid the expansion of our role from providing protection to making customers healthier, we have added an ecosystem-based business model which is manifested in our Pulse by Prudential app. Built on the latest architecture, Pulse is scalable and is based on real data and artificial intelligence (AI) technology focusing on positive outcomes for customers and our businesses. This business model also uses a wide range of partnerships and the latest trends in health and wealth technology, allowing us to fulfil our strategic imperative to add prevention and postponement to our protection business. So far we have secured 18 market-leading partners across an array of different elements. We believe this will help us to acquire users at pace and gain access to new data, whilst enabling our customers to enjoy a wide range of affordable healthcare and value-added services to help them live longer and healthier lives. Currently live in eight markets, Pulse will continuously improve as we roll out new functionalities, increase partnerships and learn from direct user feedback over time. The component of Pulse designed for the fast-growing small and medium enterprise (SME) segment in Asia is known as PruWorks. Following its launch in Singapore and Indonesia, we are now enhancing this further with a fully integrated, new administration system as well as direct connectivity to enhance customer experience for SMEs and their employees. Corporate responsibilities We have a large number of staff and agents across our life and asset management businesses across Asia, and an explicit inclusive approach to hiring and monitoring diversity. Progressively, we seek to ensure that mobility is not just seen as part of the opportunity provided to improve our individuals’ skills but is also a source of key competitive advantage as we take learnings from one operation and apply them in another. The change in the method of managing agents in Indonesia using techniques developed in Vietnam is a prime example of this. 24 Prudential plc Annual Report 2019 prudentialplc.com Highlights of key ecosystems partners Ecosystem partners Markets (to be) covered Ecosystem elements Regional Malaysia Indonesia Regional Regional Hong Kong Indonesia Malaysia Malaysia Regional Regional Regional Myanmar Myanmar Thailand Vietnam Thailand Thailand Health assessment, triage, AI symptom checker Online consultation, telemedicine Telemedicine Telemedicine Wellness, engagement and rewards DNA testing e-payment, alternative distribution channel e-payment Dengue alert SME cloud computing Data analytics and lead generation UOB’s digital bank Digital healthcare Wellness, engagement and rewards Digital service provider, Group business Telecommunication and e-payment Customers and behavioural data, alternative distribution Telemedicine We have long-standing and strong relationships with the regulators in the markets we operate in. This is built on a culture of compliance with the rules and our promotion of financial services in the context of public policy. To drive the insurance penetration rates in protection and savings products which are desired by governments and regulators in the region, we support the process of deepening capital markets, building robust regulatory and legal frameworks and enhancing financial literacy in the markets in which we operate, which in turn supports economic growth and stability. We see our investment appetite and risk management approach as contributing to the development and stability of the capital markets for the markets in which we operate. We actively engage with fellow market counterparties and governments to foster greater depth, transparency and liquidity of markets. The responsible and sustainable management of our tax affairs also 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 understand the importance of paying the right amount of tax on time. We manage our tax affairs transparently and seek to build constructive relationships with tax authorities in all the countries in which we operate. prudentialplc.com Prudential plc Annual Report 2019 25 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationOUR BUSINESSES CONTINUED COVID-19 update We continue to monitor closely the development of the coronavirus outbreak. Our priority is the health and wellbeing of our customers and staff during this challenging time. In China and Hong Kong, we were one of the first insurance companies to launch extra free protection and coverage against this disease. Similarly, in another eight Asian markets we are offering additional free hospital cash benefits and other lump sum benefits to customers diagnosed with this disease, alongside a series of measures and services to support affected customers in a timely manner, such as dedicated hotlines and simplified claims procedures. For our staff, we have put in place flexible work arrangements, for example on work hours and work location, as well as enhanced hygienic tools in the office. While the coronavirus outbreak has slowed down economic activities in the year-to- date and dampened our sales momentum in Hong Kong and China, we remain confident in the medium to long-term prospects of these economies and their respective insurance sectors. Our broad geographic spread across the region and the strength of our recurring premium business model lends considerable resilience to our earnings. We will continue to collaborate actively with the relevant governments and uphold our corporate and social responsibilities. This is exemplified by the recent donation of RMB15 million to support efforts in fighting against the disease by our joint ventures in China18. We will also continue to stand by our customers steadfastly and make them healthier with our ‘best-in-class’ health and protection capabilities. Business outlook Asia’s growth fundamentals and demographic trends remain robust and we expect will continue to support strong growth for the insurance and asset management industries in Asia. We are well placed to capture these structural prospects given our market- leading positions, focused strategic priorities, high-quality execution and expanding digital capabilities. We have built a track record of consistent and resilient expansion across cycles over the past decades, and we are confident in continuing to replicate our past success and to make our customers in Asia healthier and wealthier in the years to come. Nic Nicandrou Chief Executive Prudential Corporation Asia Notes 1 2 3 See note II of the Additional unaudited financial information for definition and reconciliation to Increase stated on a constant exchange rate basis. Increase stated on an actual exchange rate basis. IFRS balances. 4 Excludes Money Market Fund. 5 Source: Allianz Global Insurance Market at a crossroads, May 2019. Global life insurance premium derived from total insurance premium. 6 Market penetration: Swiss Re (Sigma) – based on insurance premiums as a percentage of GDP in 2018 (estimated). 7 Source: PWC Asset & Wealth Management 2025 report. 8 Swiss Re Institute: The health protection gap in Asia, October 2018. Average gap per household is calculated as ‘total health protection gap divided by estimated number of households hospitalised under the mentioned gap range’. Report excludes Cambodia and Laos. 9 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. 10 Total insurance margin ($2,244 million) and fee income ($286 million) of $2,530 million divided by total life income excluding other income of $2,958 million (Comprised of total life income of $6,187 million less other income of $3,229 million). For discussion on the basis of preparation of the sources of earnings see note I(iv) of the Additional unaudited financial information. 11 APE sales mix refers to the proportion of total market APE sales accounted for by each product type. 12 Assuming no change in our shareholding. 13 Mutual fund market shares; mutual fund assets under management as at 31 December 2019. 14 Source: National Bureau of Statistics of China. 15 By life and health GWP in 2019. 16 Excluding India. 17 Excluding broker channel. 18 RMB10 million by CPL and RMB5 million by Citic Pru FMC. 19 Based on full year 2019 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). Full year 2019 data is not yet available for Hong Kong; full year 2018 has been used instead. 20 United Nations, Department of Economic and Social Affairs, Population Division, World Population Prospects 2019 Revision. 21 Total joint venture/foreign players only. 22 Full year 2019 FUM reported based on the country where the funds are managed. 23 IFRS gross premiums earned for Asia segment. 24 Excludes Jiwasraya. 25 Includes Takaful sales and excludes Group business. 26 Prudential plc Annual Report 2019 prudentialplc.com Driving our business 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. Products We listen to our customers to help us understand their changing needs and tailor our design of product solutions and services. 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. Creating value and benefiting our stakeholders +15m life customers 93% of APE sales in regular premium 83% of all new business submitted through e-point-of-sale technology +600,000 agents Access to over 18,000 bank outlets Now in 94 cities in China Launched over 160 insurance products and more than 100 funds $241bn Eastspring Investments’ total funds under management prudentialplc.com Prudential plc Annual Report 2019 27 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationOUR BUSINESSES United States 2019 performance highlights Providing America’s ageing population with financial strategies  for their retirement through product innovation and developing market- leading distribution capabilities. — Launches of Jackson’s RateProtector, a single premium, multi-year guarantee fixed annuity, as well as MarketProtector and MarketProtector Advisory fixed index annuity products, contributing to an 8 per cent increase in new business sales — Continued growth of advisory sales, with new business sales up 30 per cent as distribution models continue to evolve — Expanded advisory distribution footprint with Morgan Stanley, DPL Financial Partners, TD Ameritrade and RetireOne — Awarded ‘Contact Center World Class CX Certification’ and ‘Highest Customer Service for the Financial Industry’ awards by The Service Quality Measurement Group, Inc — Actively engaged with FinTech partners including Envestnet, MoneyGuidePro and eMoney — Adjusted operating profit up 20 per cent to $3,070 million and new business profit down 28 per cent to $883 million 28 Prudential plc Annual Report 2019 prudentialplc.com United States The US is the world’s largest retirement savings market with approximately four million Americans reaching retirement age every year. This transition continues to trigger the unprecedented shift of trillions of dollars from savings accumulation to retirement income generation. 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 being withdrawn, and state and government plans are underfunded as the impact of increased administrative costs and lower interest rates continue to reduce the affordability of the post-war pensions model. 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. Achieving this will reduce the gap many retirees face between income needed during retirement and the income they can generate from their retirement assets and social security. Reducing this gap is a public benefit as it helps reduce strain on supplemental government programmes for those in need. Jackson believes that a retirement plan integrated with an income guarantee annuity will mitigate much of the risk of retirees running out of money during retirement. In response to this demand and the ongoing shift to fee-based solutions, Jackson has positioned itself with product innovation and distribution strategies to provide a wide spectrum of choice when selecting the retirement product that best fits customer needs. This will allow Jackson to enhance further our market-leading variable annuity position in the brokerage market, diversify in the fixed annuity and fixed index annuity space and grow in the advisory retirement solutions market. Jackson has demonstrated its ability to diversify during the year, growing the proportion of APE sales accounted for by fixed annuity, fixed index annuity and wholesale business to 34 per cent, from 19 per cent in the prior year. prudentialplc.com Prudential plc Annual Report 2019 29 G r o u p o v e r v e w i i S t r a t e g c r e p o r t G o v e r n a n c e D i r e c t o r s ’ r e m u n e r a t i o n r e p o r t i F n a n c a i l s t a t e m e n t s E u r o p e a n E m b e d d e d V a u e ( E E V ) b a s i s r e s u l t s l A d d i t i o n a l i n f o r m a t i o n OUR BUSINESSES CONTINUED 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 as discussed below: Variable annuity A Jackson variable annuity, with investment freedom, represents an attractive option for retirees and soon-to-be-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. Jackson also provides access to guaranteed lifetime income as an add-on benefit. 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 product, Perspective II1. 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, Elite Access Advisory II and the innovative MarketProtector Advisory, the industry’s first fully-liquid advisory fixed index annuity, to serve advisers and distributors with a preference for advisory products. In June 2019, Jackson launched RateProtector, a single premium, multi-year guarantee fixed annuity. RateProtector offers consumers the opportunity to protect and grow their assets through guaranteed interest rates that will not fluctuate during a select period, combined with the ability to defer taxes on any earnings until money is withdrawn. Market reception for these products has been positive and these have contributed to the delivery of the organic diversification of Jackson sales in 2019, with new business APE sales up 8 per cent to $2,223 million (2018: $2,059 million). The planned transition to a more balanced portfolio has resulted in higher investment in new business in 2019 which over time is expected to enhance statutory capital and cash generation. Jackson operates within a well-defined risk framework and takes into account the expected cost of hedging when pricing its products. It aggregates financial risks across the company, obtains a unified view of its risk positions, and actively manages net risks through a hedging programme which aims to manage economic risk. Some accounting volatility is expected in periods of large market movements as was seen in 2019, given the economic focus described above, and this has impacted IFRS profitability in the year, as further discussed in the Group Chief Financial Officer and Chief Operating Officer’s report. However, the benefits of Jackson’s hedging programme have been demonstrated in times of equity market decline, for example during the fourth quarter of 2018 and during the recent market turbulence. At the end of 2019 Jackson’s surplus of available capital over required capital was $3,795 million after adopting the NAIC’s changes to its framework for variable annuities. This equates to a ratio of 366 per cent (2018: 458 per cent using the previous NAIC framework). Jackson continues to monitor closely the recent changes in markets and take the appropriate actions through its dynamic hedging strategy. If these conditions persist management could take additional actions to assist in mitigating the impact. 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 third in regional firms2. Jackson’s distribution strength also sets us apart from our competitors. Our highly productive wholesaling force is the largest3 in the 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 second most productive variable annuity wholesale distribution force in the US3. In 2019, Jackson invested significant time and resources with fintech partners to help illustrate the benefits a lifetime income solution can provide within a comprehensive wealth management plan. This gives the financial adviser the necessary tools to customise according to the unique needs and goals of the client. Additionally, investment freedom within VA investment options allows the adviser to build a diversified portfolio that is customised to meet their clients’ individual priorities and preferences, rather than locking them into restrictive allocation models. Some of the fintech platforms where Jackson is actively engaged include eMoney, MoneyGuidePro and Envestnet. 30 Prudential plc Annual Report 2019 prudentialplc.com In 2019, Jackson announced distribution agreements with DPL Financial Partners (DPL), TD Ameritrade and RetireOne to provide our protected lifetime income solutions to independent registered investment advisers (RIAs). The collaboration expands Jackson’s distribution footprint and provides Jackson with access to new opportunities in the independent RIA channel. In addition to these new relationships, Jackson’s distribution partnership announced in late 2018 with State Farm is targeted to roll out in the first quarter of 2020. These new partnerships show Jackson’s determination and progress on channel diversification. Regulatory landscape The regulatory outlook for the industry has improved since the passing of the Securities and Exchange Commission’s (SEC) Best Interest Regulation in June 2019. This replaced proposed legislation known as the DOL Fiduciary Duty Rule. The SEC’s finalised rule creates a best interest standard of conduct for broker- dealers and is designed to be ‘product agnostic’ meaning that it is not intended to give preference to or target any specific product. Instead, the rule enhances the diligence required when advising customers about suitable, albeit more complex, products such as variable annuities. The rule became effective 60 days after being published in the Federal Register (12 July 2019) and includes a transition period until 30 June 2020. Despite lower interest rates, the life insurance industry saw increased total annuity sales as of the third quarter of 2019, primarily due to a clearer regulatory environment and more aggressive product feature changes (ie withdrawal percentages) implemented by competitors. Higher industry sales of fixed annuities were offset slightly by lower variable annuity sales. 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 the retirement strategies that investors need. Because of its strong distribution, leadership in the annuities market, best-in-class service and an efficient operation, we believe that Jackson is well positioned to take advantage of this opportunity. In December 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was passed into law, bringing positive changes to the US retirement system. A significant change includes the portability of lifetime income products, permitting participants to preserve their lifetime income investments and avoid surrender charges and fees. Another provision of the Act clarifies the existing Employee Retirement Income Security Act safe harbour and removes ambiguity about the applicable fiduciary standard that currently acts as a roadblock to offering lifetime income benefit options under a defined contribution plan. Under this provision, for purposes of fulfilling their fiduciary duty to select an annuity provider, defined contribution plan fiduciaries may rely on representations from insurers regarding their status under state insurance laws. The enactment of these provisions, and the SECURE Act as a whole, are important steps in facilitating Americans’ ability to achieve financial freedom for life. We believe that Jackson is well positioned to manage the impact of these regulatory changes and welcome the outcomes of the revised regulations. At 31 December 2019, Jackson early adopted the new US regulatory regime enacted by the National Association of Insurance Commissioners in respect of variable annuities. The effect of this change is further discussed in the Group Chief Financial Officer and Chief Operating Officer’s report on the 2019 financial performance. Corporate responsibility As a 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. Jackson seeks to provide the best retirement solutions that we can, while striving to communicate information about those 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. In 2018, Jackson led the creation of a groundbreaking, industry-wide coalition seeking to help mitigate America’s looming retirement crises, the Alliance for Lifetime Income. The Alliance is a tremendous leap forward in Jackson’s ongoing commitment to educating Americans about the importance of lifetime income in retirement planning. At Jackson, we take an inclusive approach to responsible investment, seeking to integrate environmental, social and governance (ESG) considerations into our investment processes and stewardship activities through active ownership practices and engagement with investee companies. We also maintain the ability to exclude entities from our internal investment mandates, where their practices, policies or procedures conflict with our values, or where we see a need to explicitly recognise international consensus. As a long-term investor, Jackson considers both financial and non-financial factors in our investment processes, decision- making and ownership practices that may have a meaningful impact on our customers’ long-term investment outcomes. Similarly, as active asset owners of the capital we invest on behalf of our customers, we believe that due consideration of the various factors that can impact investment returns is part of our fiduciary duty to our customers. Jackson also takes pride in helping the communities in which we operate, providing significant employment, tax revenues, charitable programmes and contributions, as well as the investment of general account assets, all of which provide valuable public services and build infrastructure for the benefit of the wider community and economy. prudentialplc.com Prudential plc Annual Report 2019 31 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationOUR BUSINESSES CONTINUED Investment for growth We believe that a significant opportunity exists to reach even more American retirees and serve their needs with annuity products going forward. This is because there are trillions of dollars of adviser- distributed assets across distribution platforms that have not historically been a focus for the business, such as the dual-registered investment adviser channel, which we can seek to access. 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. Jackson is making significant investments in new technologies, which allows us to provide better service that will give our customers what they want, when they want it. These new technologies will also provide higher quality data so that our executives and staff across the business can make better informed decisions with regard to risk, and with how and where to invest. Jackson’s competitive strengths are even more critical as we work towards diversification and growth, within a highly competitive insurance industry. The breadth and depth of our best-in-class distribution team, our agility and success in launching well designed customer-centric products, the continued success of our risk management and hedge programmes through many economic cycles, and our significant investment in technology platforms and award-winning customer service will provide Americans with the retirement strategies they so desperately need. Jackson’s discipline helps enable us to be positioned to potentially capture additional growth during times of transition into the future. Michael Falcon Chairman and Chief Executive Officer Jackson Holdings LLC Notes 1 ©2020 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 2019. Jackson’s Perspective II for base states ranks #1 out of 927 VA contracts with reported sales to Morningstar’s quarterly sales survey as of 3Q YTD 2019. 2 ©2020 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 2019. Jackson ranks #1 out of 25 companies in the Independent NASD channel, #1 out of 19 companies in the Bank channel, #1 out of 15 companies in the Wirehouse channel, and #3 out of 19 companies in the Regional Firms channel. 3 Independent research and Market Metrics, a Strategic Insight Business: U.S. Advisor Metrics 2019, as of 30 September 2019. 4 LIMRA/Secure Retirement Institute, US Individual Annuity Participants Report 3Q YTD 2019. 5 2018 annual estimate. Annual estimates of the residential population by single year of age and sex for the United States: 1 April 2010 to 1 July 2018. U.S. Census Bureau, Population Division. 6 2020 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 2019. Jackson ranks #1 out of 677 VA contracts with reported sales in the Independent Channel in 3Q YTD 2019. 7 WealthManagement.com, FUSE research. 8 New advisers defined as producers who have not sold Jackson products since 2013. 32 Prudential plc Annual Report 2019 prudentialplc.com 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. Average of 10,000 Americans retire per day5 Assisting four million customers with their financial needs Products Jackson’s products provide 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. #2 seller of individual annuities in the US4 Perspective II is the #1 selling variable annuity contract1 #1 selling variable annuity contract in the independent channel since 20036 Distribution Jackson’s distribution teams set us apart from our competitors. Jackson’s annuity wholesaling force is the largest and one of the 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 adapt efficiently and effectively to what our customers and regulatory environment require. Jackson 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. Corporate responsibility Jackson is committed to be a responsible partner with customers, employees, shareholders and the community. Largest annuity wholesale distribution force in the US3 New partnerships with State Farm, Morgan Stanley, DPL financial partners, TD Ameritrade and RetireOne, adding significant distribution access Ranked #2 overall in terms of Top Firms for Quality of Wholesalers7 Actively engaging with fintech partners Envestnet, eMoney and MoneyGuidePro Approximately 24% of Jackson’s 2019 advisory annuity sales from new advisers8 Jackson Charitable Foundation reached more than 1.75m students through partnership with Discovery Education, Junior Achievement USA and Ramsey Education, advancing financial education across the United States 1,840 associates volunteered 48,000+ hours in 2019 Through sponsorships, grants, matching gifts and volunteer support, Jackson provided $6.7m to charitable causes across the country prudentialplc.com Prudential plc Annual Report 2019 33 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationGROUP CHIEF FINANCIAL OFFICER AND CHIEF OPERATING OFFICER’S REPORT ON THE 2019 FINANCIAL PERFORMANCE Maintaining focus on the execution of our strategy 14% increase in Asia adjusted operating profit1 $9.5bn LCSM surplus6 over the Group minimum capital requirement (31 December 2018: $9.7bn) Mark FitzPatrick Group Chief Financial Officer and Chief Operating Officer I am pleased to report that we maintained focus on the execution of our strategy alongside the successful completion of the demerger of M&G plc and that this has continued to deliver positive financial performance in 2019. Growth has once again been led by our businesses in Asia, which reflects the benefits of our well positioned and broad-based portfolio, which has long focused on high quality, recurring premium business. In 2019, this saw our life businesses outside Hong Kong deliver overall new business profit growth of 29 per cent1, and within this 10 markets increasing new business profit. While Hong Kong has seen a more challenging sales environment, the resilience of its business model is demonstrated by its 24 per cent1 growth in adjusted operating profit, which contributed to the 14 per cent1 increase in adjusted operating profit delivered by our overall Asia business. Our US business took its first steps in the execution of its diversification strategy, broadened its presence across the US annuity market, delivered increased remittances to the Group, and early adopted the new National Association of Insurance Commissioners (NAIC) variable annuity framework. Jackson has successfully demonstrated its ability both to develop and distribute new products in order to diversify its product range. Over time, this will contribute to a more balanced mix of policyholder liabilities which will enhance statutory capital and cash generation. During 2019, this transition has resulted in a higher investment in new business than has been seen in recent periods, with resulting impacts on capital generation and new business profit margins. During 2019 our head office activities incurred costs of $(460) million (2018: $(490) million2). The demerger of M&G plc provides us with the opportunity to optimise the operating model of our Group functions across our head office. We are well advanced in developing and executing plans that will deliver total savings of circa $180 million3, targeting a revised run-rate from 1 January 20214. We have already completed the first phase of this work which will deliver annual savings5 of $55 million. Over 2019, global equity markets rallied strongly. In the US markets the S&P 500 index increased by 29 per cent over 2019, but government bond yields were generally lower over the period, with the US 10 year government bond yield ending the year at 1.9 per cent (2018: 2.7 per cent). The impact of these market effects are most prevalent in the US’s results. Jackson’s hedging programme is focused on managing the economic risks in the business and protecting statutory solvency in the circumstance of large market movements. The hedging programme does not aim to hedge IFRS accounting results and this can lead to volatility in the IFRS results in periods of significant market movements, as was seen in 2019. In particular, while higher equity markets are expected to deliver ultimately increased profitability to Jackson through higher future fee income, this benefit is not fully recognised in the IFRS results in the short term. This contrasts with the impact on the derivatives within the hedging programme, designed to provide protection when markets fall, where rises in equity markets lead to short term losses in the IFRS results. These losses have been exacerbated by falling interest rates in 2019, which have led to an increase in the IFRS liabilities for the guarantees attaching to variable annuities given lower discount rates and lower assumed future separate account growth, impacting directly on the income statement. Collectively, these factors led 34 Prudential plc Annual Report 2019 prudentialplc.com to an IFRS loss after tax of $(380) million for the US over 2019. The interest rate falls have also led to gains on bonds, which are recognised outside the income statement, and US’s IFRS segment shareholders’ equity increased from $7,163 million at the end of 2018 to $8,929 million at the end of 2019. EEV has fewer mismatches (for example future fee income is fully recognised), but fluctuations in interest rates also impact Jackson’s EEV results, since EEV discount rates and future expectations of separate account returns are based on current risk free rates. While our IFRS and EEV results in 2019 may therefore show a degree of volatility, we believe that the Jackson business is positioned to enhance its capital and cash generation over time as it continues to focus on the US retirement market opportunity. We have presented the results of the UK and Europe operations (referred to as M&G plc) as discontinued operations and have adopted the US dollar as our presentational currency which better reflects the economic footprint of our business going forward. Prior year comparatives have been restated, as required under IFRS. However comparative balance sheet amounts are not restated for discontinued operations. As in previous years, growth rates referred to are on a constant exchange rate basis unless otherwise stated. Adjusted operating profit before tax from continuing operations Prudential’s adjusted IFRS operating profit based on longer-term investment returns (adjusted operating profit) from continuing operations increased in 2019 to $5,310 million (20 per cent higher on a constant and actual exchange rate basis). This increase was driven by higher earnings from our Asia life insurance and asset management operations, and by lower market-related DAC amortisation charges compared with the prior year in the US, as a result of the strong equity market returns achieved in 2019. Other income and expenditure generated a net cost of $(926) million (2018: $(967) million2). Of this, $(179) million related to interest costs in respect of debt instruments transferred to M&G plc on 18 October 2019 prior to completion of the demerger. Excluding these amounts, interest costs for the continuing Group would have been $(337) million, lower than 2018 following the redemption of debt in the first half of 2019. IFRS basis non-operating items from continuing operations Non-operating items in 2019 consist of short-term fluctuations in investment returns on shareholder-backed business of negative $(3,203) million (2018: negative $(791) million on an actual exchange rate basis), the net loss arising from corporate transactions undertaken in the year of negative $(142) million (2018: negative $(107) million on an actual exchange rate basis), and the amortisation of acquisition accounting adjustments of negative $(43) million (2018: negative $(61) million on an actual exchange rate basis) arising mainly from the REALIC business acquired by Jackson in 2012. The $(142) million cost of corporate transactions reflects gains from disposals offset by the $(407) million incurred in the year in connection with the demerger of M&G plc from Prudential plc, in line with our previous guidance. Further information is set out in note D1.1 to the financial statements. Negative short-term fluctuations comprised positive $657 million (2018: negative $(684) million on an actual exchange rate basis) for Asia, negative $(3,757) million (2018: negative $(134) million) in the US and negative $(103) million (2018: positive $27 million on an actual exchange rate basis) in other operations. Falling interest rates in certain parts of Asia led to unrealised bond gains in the year which are accounted for within non- operating profit. In the US, rising equity markets and falling interest rates have resulted in negative effects primarily reflecting net losses on hedge instruments used to manage the market exposure of Jackson’s products and by changes in the IFRS value for these features. Further discussion of Jackson’s non-operating items is contained in the US section of this report. After allowing for non-operating items, the total profit after tax from continuing items was $1,953 million (2018: $2,881 million2). In addition to the effects seen above, falling interest rates resulted in unrealised gains of $2.7 billion being recognised outside the income statement as part of other comprehensive income, partially mitigating the adverse effect of market movements on the Group’s IFRS shareholders’ funds. IFRS loss after tax from discontinued operations In the period prior to demerger, $1,319 million IFRS profit after tax was recognised from the discontinued M&G plc business. On distribution to shareholders as a dividend in specie the net assets of the business were remeasured to the market value of M&G plc on listing, resulting in a gain of $188 million recognised within the loss from discontinued operations for the year. As a result of representing the historical results of M&G plc in US dollars (as opposed to sterling), a loss of $(2,668) million was recognised at the date of demerger representing cumulative foreign exchange differences held in the currency translation reserve. This arose from the fall in the sterling/US dollar exchange rate over the period since the currency translation reserve was established in 2004. This was matched by an equal and opposite gain in other comprehensive income resulting in no overall impact on shareholders’ funds. Reflecting the above, the total loss from discontinued operations after tax was $(1,161) million. The rest of this report focuses solely on the continuing operations of the Group. IFRS effective tax rates In 2019, the effective tax rate on adjusted operating profit based on longer-term investment returns from continuing operations was 15 per cent. This was unchanged from 2018. The 2019 effective tax rate on total IFRS profit was negative (2) per cent (2018: 16 per cent). The decrease in the 2019 effective tax rate reflects increased derivative losses in the US where the effective tax rate on these items is higher (at 21 per cent) than the effective tax rate on profit from Asia operations. Total tax contribution from continuing operations The Group continues to make significant tax contributions in the jurisdictions in which it operates, with $2,168 million remitted to tax authorities in 2019. This increased from the equivalent amount of $1,829 million2 remitted in 2018, primarily due to the timing of when various tax payments became due. Tax strategy The Group publishes its tax strategy annually which, in addition to complying with the mandatory UK (Finance Act 2016) requirements, also includes a number of additional disclosures, including a breakdown of revenues, profits and taxes for all jurisdictions where more than $5 million tax was paid. This disclosure is included as a way of demonstrating that our tax footprint (ie where we pay taxes) is consistent with our business footprint. An updated version of the tax strategy, including 2019 data, will be available on the Group’s website before 31 May 2020. prudentialplc.com Prudential plc Annual Report 2019 35 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationGROUP CHIEF FINANCIAL OFFICER AND CHIEF OPERATING OFFICER’S REPORT ON THE 2019 FINANCIAL PERFORMANCE CONTINUED Total segment profit from continuing operations 6,346 5,451 IFRS profit Adjusted operating profit based on longer-term investment returns before tax from continuing operations Asia Long-term business Asset management Total Asia US Long-term business Asset management Total US Other income and expenditure Total adjusted operating profit based on longer-term investment returns before tax and restructuring costs Restructuring costs Total adjusted operating profit based on longer-term investment returns before tax from continuing operations Non-operating items: Short-term fluctuations in investment returns on shareholder-backed business Amortisation of acquisition accounting adjustments Gain (loss) on disposal of businesses and corporate transactions Profit from continuing operations before tax attributable to shareholders Tax credit (charge) attributable to shareholders’ returns Profit from continuing operations for the year Profit for the year from discontinued operations Remeasurement of discontinued operations on demerger Cumulative exchange loss recycled through other comprehensive income (Loss) profit from discontinued operations for the year, net of related tax Profit for the year IFRS earnings per share Actual exchange rate Constant exchange rate 2019 $m 2018 $m Change % 2018 $m Change % 2,993 283 3,276 3,038 32 3,070 2,646 242 2,888 2,552 11 2,563 (926) (967) 5,420 (110) 4,484 (75) 13 17 13 19 191 20 16 4 21 (47) 2,633 239 2,872 2,552 11 2,563 5,435 (933) 4,502 (73) 14 18 14 19 191 20 17 1 20 (51) 5,310 4,409 20 4,429 20 (3,203) (43) (142) 1,922 31 1,953 1,319 188 (2,668) (1,161) 792 (791) (61) (107) 3,450 (569) 2,881 1,142 – – 1,142 4,023 (305) 30 (33) (44) 105 (32) 15 n/a n/a (202) (80) (796) (61) (106) 3,466 (570) 2,896 1,092 – – 1,092 3,988 (302) 30 (34) (45) 105 (33) 21 n/a n/a (206) (80) Actual exchange rate Constant exchange rate 2019 cents 2018 cents Change % 2018 cents Change % Basic earnings per share based on adjusted operating profit after tax from continuing operations 175.0 145.2 21 146.0 20 Basic earnings per share based on: Total profit after tax from continuing operations Total (loss) profit after tax from discontinued operations 75.1 (44.8) 111.7 44.3 (33) (201) 112.5 42.4 (33) (206) 36 Prudential plc Annual Report 2019 prudentialplc.com Group capital position Following the demerger of M&G plc from Prudential plc, the Hong Kong Insurance Authority (IA) is now the Group-wide supervisor for the Prudential Group. Ultimately, the Group will become subject to the Group-wide Supervision (GWS) Framework which is currently under development by the Hong Kong IA for the industry and is expected to be finalised in the second half of 2020. Until it comes into force, Prudential is applying the local capital summation method (LCSM) that has been agreed with the Hong Kong IA to determine Group regulatory capital requirements. At 31 December 2019, the Group’s LCSM surplus over the Group minimum capital requirement (GMCR) was estimated at $9.5 billion on a shareholder basis6, equivalent to a solvency ratio of 309 per cent, and compares with a like-for-like position at 31 December 2018 of $9.7 billion and ratio of 356 per cent. The high quality and recurring nature of the Group’s operating capital generation and disciplined approach to managing balance sheet risk is evident from the $2.5 billion of in-force capital generation in the period, which supported $0.6 billion of investment in new business (on an LCSM basis), inorganic investment in Asia along with external dividends. The movement in LCSM surplus also includes demerger and other capital related items. More information is set out in note I(i) of the Additional unaudited financial information. The Group’s LCSM position is resilient to external macro movements as demonstrated by the sensitivity disclosure contained in note I(i) of the Additional unaudited financial information, alongside further information on the basis of calculation of the LCSM measure. The Group is no longer subject to Solvency II capital requirements nor regulated by the Bank of England. Estimated Group LCSM capital position6 Available capital ($ billion) Group minimum capital requirement (GMCR) ($ billion) LCSM surplus (over GMCR) ($ billion) LCSM ratio (over GMCR) (%) 31 December 2019 31 December 2018† Total Shareholder* Total Shareholder* 33.1 9.5 23.6 348% 14.0 4.5 9.5 309% 27.0 7.6 19.4 355% 13.5 3.8 9.7 356% * The shareholder LCSM amounts exclude the available capital and minimum capital requirements of the participating business in Hong Kong, Singapore and Malaysia. † Excludes M&G plc and includes $3.7 billion of subordinated debt issued by Prudential plc that was transferred to M&G plc on 18 October 2019. Financing and liquidity Net core structural borrowings of shareholder-financed businesses7 Subordinated debt substituted to M&G plc in 2019 Other core structural borrowings Total borrowings of shareholder-financed businesses Less: holding company cash and short-term investments Net core structural borrowings of shareholder- financed businesses Gearing ratio* 31 December 2019 $m 31 December 2018 $m IFRS basis – 5,594 5,594 Mark-to- market value – 633 633 EEV basis – 6,227 IFRS basis 3,718 6,043 6,227 9,761 (2,207) – (2,207) (4,121) 3,387 15% 633 4,020 5,640 20% Mark-to- market value 82 151 233 – 233 EEV basis 3,800 6,194 9,994 (4,121) 5,873 * Net core structural borrowings as proportion of IFRS shareholders’ funds plus net debt, as set out in note II of the Additional unaudited financial information. The total borrowings of the shareholder- financed businesses decreased by $(4.2) billion, from $9.8 billion to $5.6 billion in 2019. This reflected the substitution of $4,161 million Tier 2 subordinated notes to M&G plc as part of the demerger (including £300 million 3.875 per cent Tier 2 subordinated notes issued in July 2019), and the redemption of £400 million 11.375 per cent Tier 2 subordinated notes in May 2019. The Group had central cash resources of $2.2 billion at 31 December 2019 (31 December 2018: $4.1 billion), resulting in net core structural borrowings of the shareholder-financed businesses of $3.4 billion at end 2019 (2018: $5.6 billion). In addition to its net core structural borrowings of shareholder-financed businesses set out above, the Group has access to funding via the medium-term note programme, the US shelf programme (the platform for issuance of SEC registered bonds in the US market), a commercial paper programme and committed revolving credit facilities. All of these are available for general corporate purposes. Prudential plc has maintained a consistent presence as an issuer in the commercial paper market for the past decade and had $520 million in issue at the year end (2018: $601 million). prudentialplc.com Prudential plc Annual Report 2019 37 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationGROUP CHIEF FINANCIAL OFFICER AND CHIEF OPERATING OFFICER’S REPORT ON THE 2019 FINANCIAL PERFORMANCE CONTINUED As at 31 December 2019, the Group had a total of £2.0 billion of undrawn committed facilities, expiring in 2024. Apart from small drawdowns to test the process, these facilities have never been drawn, and there were no amounts outstanding at 31 December 2019. In addition to the Group’s traditional sources of liquidity and financing, Jackson also has access to funding via the Federal Home Loan Bank of Indianapolis with advances secured against collateral posted by Jackson. Given the wide range of Jackson’s product set and breadth of its customer base including retail, corporate and institutional clients, further sources of liquidity also include premiums and deposits. Cash remittances Holding company cash flow7 Prudential plc seeks to maintain its financial strength rating which derives, in part, from the high level of financial flexibility to issue debt and equity instruments which is intended to be maintained and enhanced in the future. From continuing operations Asia US Other UK (including Prudential Capital) Total net cash remitted from continuing operations From discontinued operations M&G plc Net cash remitted by business units Central outflows Dividends paid Other movements Total holding company cash flow Cash and short-term investments at beginning of year Foreign exchange movements Cash and short-term investments at end of year Actual exchange rate 2019* $m 2018* $m Change % 4 13 (88) 3 (19) (5) 950 509 6 1,465 684 2,149 (522) (1,634) (1,999) (2,006) 4,121 92 2,207 916 452 49 1,417 842 2,259 (572) (1,662) 1,153 1,178 3,063 (120) 4,121 * The holding company cash flow describes the movement in the cash and short-term investments of the centrally managed group holding companies. As highlighted in my report for the first half of 2019, holding company cash was expected to reduce in the second half of 2019. Cash and short-term investments totalled $2.2 billion at the end of the year (2018: $4.1 billion on an actual exchange rate basis), commensurate with the reduced size of the Group post-demerger. The Group will seek to manage its financial condition such that it has sufficient resources available to provide a buffer to support the retained businesses in stress scenarios and to provide liquidity to service central outflows. Cash remitted to the Group from continuing operations in 2019 amounted to $1,465 million, included $950 million from Asia and $509 million from the US. In addition, $684 million of remittances were received pre-demerger from M&G plc (excluding the $3,841 million pre- demerger dividend used to offset the payment due to M&G plc in return for the substitution of debt). During 2019, the Group’s holding company cash flow was managed in sterling and significant remittances were hedged and recorded on that basis. Growth rates are therefore distorted by the onwards translation into US dollars for presentation purposes. If local currency remittances in Asia had been translated directly into US dollars8, then the growth rate in Asia remittances year-on-year would have been 8 per cent (compared with 4 per cent shown in the table above). The dividend paid by the US in 2019 was $525 million (2018: $450 million). From 1 January 2020, holding company cash flow will be managed in US dollars and no such distortions will occur. Cash remittances were used to meet central costs of $(522) million, pay dividends of $(1,634) million and meet other expenditure of $(1,999) million. Corporate expenditure includes net interest paid of $(527) million of which $(231) million relates to that expended on debt substituted to M&G plc. Corporate expenditure is net of receipts of $265 million in 2019 from tax received. The level of tax receipts is expected to decline sharply in 2020, and then is not expected to recur going forward given the demerger of UK operations and the level of UK income which can be used to offset central UK expenditure. Other expenditure of $(1,999) million relates to amounts paid in connection with the demerger and other corporate transactions in the year, including the redemption of subordinated debt in the first half of 2019. Further information is contained in note I(iii) of the Additional unaudited financial information. 38 Prudential plc Annual Report 2019 prudentialplc.com Shareholders’ funds IFRS EEV 2019 $m 2018 $m 2019 $m 2018 $m Adjusted operating profit after tax and non-controlling interests from continuing operations9 4,528 3,739 6,896 7,862 Profit after tax for the year9 Exchange movements, net of related tax Unrealised gains and losses on US fixed income securities classified as available-for-sale Demerger dividend in specie of M&G plc Other dividends Mark-to-market value movements on Jackson assets backing surplus and required capital Other Net increase (decrease) in shareholders’ funds Shareholders’ funds at beginning of the year Shareholders’ funds at end of the year Shareholders’ value per share10,11 783 2,943 2,679 (7,379) (1,634) – 117 (2,491) 21,968 19,477 749¢ 4,019 (714) (1,446) – (1,662) – 9 206 21,762 21,968 847¢ (645) 666 – (7,379) (1,634) 206 95 (8,691) 63,402 54,711 2,103¢ 6,122 (1,574) – – (1,662) (127) 176 2,935 60,467 63,402 2,445¢ Group IFRS shareholders’ funds in the 12 months to 31 December 2019 decreased by 11 per cent to $19.5 billion (31 December 2018: $22.0 billion on an actual exchange rate basis) principally as a result of the demerger of M&G plc which reduced shareholders’ funds by $(7.4) billion. Excluding this effect, shareholders’ funds increased by $4.9 billion primarily as a result of profit after tax from continuing businesses of $1.9 billion, profit generated by M&G plc up to the date of demerger of $1.3 billion and unrealised gains on fixed income securities of Jackson of $2.7 billion following a decrease in US long-term interest rates. These amounts were offset by dividends paid in the year of $(1.6) billion. The total return from continuing operations (including other comprehensive income) on Group’s closing shareholders’ funds for the year was 27 per cent12, after excluding items arising from the demerger of $528 million (being costs of undertaking the demerger and interest). The demerger alters the size of the Group’s shareholders’ equity and the nature of its operations, rendering a comparison with the prior year return on shareholders’ funds value unrepresentative. The Group’s EEV basis shareholders’ funds at 31 December 2019 was $54.7 billion. This compares with $46.1 billion at 31 December 2018 if the $17.3 billion in respect of the UK & Europe operations is excluded. The growth over the year is primarily driven by EEV profit from continuing operations of $4.2 billion, total inter-group dividends from M&G plc in the period before demerger of $5.5 billion less external dividends of $(1.6) billion. On a per share basis, the Group’s embedded value at 31 December 2019 equated to 2,103 cents. More information on the Group’s EEV results are included in the segmental detail that follows. Free surplus generation from continuing operations13 Free surplus generation is the financial metric we use to measure the internal cash generation of our business operations and is based (with adjustments) on the capital regimes that apply locally in the various jurisdictions in which the Group operates. For life insurance operations, it represents amounts emerging from the in-force business during the year, net of amounts reinvested in writing new business. For asset management businesses, it equates to post-tax adjusted operating profit for the year. Operating free surplus generated from continuing operations before the adjustments to reflect hedge modelling changes and restructuring costs increased to $3.8 billion (2018: $3.5 billion1). This was after $(1,158) million of investment in new business (2018: $(946) million1). Asia operating free surplus generation14 increased by 13 per cent to $1,772 million in line with business growth, higher asset management earnings and stable levels of new business investment. US operating free surplus generation before the 2019 hedge modelling changes was $2,028 million (2018: $1,895 million) with the increase from in-force business, including a one-off benefit from the integration of the John Hancock business, offset by higher new business investment. As part of the implementation of the NAIC’s changes to the US statutory reserve and capital framework enhancements were made to the model used to allow for hedging within US statutory reporting. As a consequence, the Group has chosen to utilise this new model within its EEV results, resulting in a $3.2 billion reduction in Jackson’s EEV at the start of the year and a subsequent fall in operating free surplus of $(903) million from a lower expected transfer to net worth. Further information is included in the US segmental discussion and in the EEV basis results. After allowing for this effect and restructuring costs, operating free surplus generation for the Group was down 16 per cent to $2,861 million. prudentialplc.com Prudential plc Annual Report 2019 39 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationGROUP CHIEF FINANCIAL OFFICER AND CHIEF OPERATING OFFICER’S REPORT ON THE 2019 FINANCIAL PERFORMANCE CONTINUED Analysis of movement in free surplus for insurance and asset management operations13 Actual exchange rate Constant exchange rate 2019 $m 2018 $m Change % 2018 $m Change % 10 25 10 n/a (16) 3,462 (47) 3,415 – 3,415 10 23 10 n/a (16) Operating free surplus generated before restructuring costs and US EEV hedge modelling enhancements Restructuring costs Operating free surplus generated before US EEV hedge modelling enhancements Impact of 2019 US EEV hedge modelling enhancements Operating free surplus generated Non-operating (loss) profit Net cash flows paid to parent company Foreign exchange movements on foreign operations, timing differences and other items Total movement in free surplus from continuing operations Free surplus at 1 January from continuing operations Free surplus at 31 December from continuing operations Analysis of operating free surplus generated from in-force life business and asset management before restructuring costs and US EEV hedge modelling enhancements 3,800 (36) 3,764 (903) 2,861 (568) (1,475) (172) 646 5,351 5,997 3,458 (48) 3,410 – 3,410 (1,649) (1,368) (991) (598) 5,949 5,351 Asia US Total 1,772 2,028 3,800 1,563 1,895 3,458 13 7 10 1,567 1,895 3,462 13 7 10 This policy is expected to result, over the medium term, in future central outflows, ie dividends, debt interest costs and other central expenses (including central payments for bancassurance distribution agreements and restructuring costs) net of tax recoverables, being covered by remittances from business units. The Board intends to maintain the Group’s existing formulaic approach to first interim dividends, which are calculated as one-third of the previous year’s full-year dividend. Dividend The Board has approved a 2019 second interim ordinary dividend of 25.97 cents per share, equivalent to the 19.60 pence per share previously indicated in the demerger Circular. The Board considers dividends to be an important component of total shareholder return and adopted a progressive dividend policy for the Group following the demerger. The level of dividend growth will be determined after taking into account the Group’s capital generation capacity, financial prospects and investment opportunities, as well as market conditions. The Group’s 2020 dividend under the new progressive dividend policy will be determined from a 2019 US dollar base of $958 million15 (36.84 cents per share), equivalent to the circa £750 million previously disclosed in the Circular. 40 Prudential plc Annual Report 2019 prudentialplc.com Asia Operational and financial highlights Our 2019 Asia financial results reflect the benefits of our diverse and well-positioned portfolio across the Asia region, the resilience of the longer-term growth drivers in these markets, our long-held prioritisation of high quality, recurring premium life insurance business and focused execution on our key strategic priorities. This is reflected in diversified growth, with 10 markets expanding new business profit and our Asia ex-Hong Kong businesses growing new business profit by 29 per cent. Our earnings continue to be supported by high quality drivers with a 14 per cent increase in insurance margin, underpinned by our protection propositions for customers, alongside 18 per cent growth in asset management earnings, helped by a 15 per cent increase in average funds under management. This led to a 14 per cent increase in overall Asia adjusted operating profit with eight insurance markets delivering double-digit growth. These drivers are also reflected in the EEV operating profit of $6,138 million (2018: $6,052 million1), driving a 23 per cent increase in embedded value to $39.2 billion. At the same time, a 13 per cent increase in operating free surplus generation14 supported a higher cash remittance of $950 million for the year. New business profit Adjusted operating profit* EEV operating profit* Operating free surplus generation* * Before restructuring costs Actual exchange rate Constant exchange rate 2019 $m 2018 $m Change % 2018 $m Change % 3,522 3,276 6,138 1,772 3,477 2,888 6,070 1,563 1 13 1 13 3,460 2,872 6,052 1,567 2 14 1 13 New business performance Life EEV new business profit and APE new business sales (APE sales) Actual exchange rate Constant exchange rate 2019 $m 2018 $m Change % 2018 $m Change % APE sales New business profit APE sales New business profit APE sales New business profit APE sales New business profit APE sales New business profit 2,016 590 390 2,165 5,161 2,042 262 227 991 3,522 2,266 403 315 2,015 4,999 2,309 199 163 806 3,477 (11) 46 24 7 3 (12) 32 39 23 1 2,268 386 316 1,989 4,959 2,310 190 163 797 3,460 (11) 53 23 9 4 (12) 38 39 24 2 3,145 1,480 2,733 1,168 15 27 2,691 1,150 17 29 Hong Kong China JV Indonesia Other life insurance markets Total Asia Total Asia excluding Hong Kong Total new business margin 68% 70% 70% Life insurance new business APE sales increased by 4 per cent to $5,161 million and related new business profit increased by 2 per cent with eight markets achieving double-digit growth in new business profit. Lower levels of APE sales and new business profit in Hong Kong (down 11 and 12 per cent respectively) were more than offset by higher overall APE sales and new business profit in markets outside Hong Kong (up 17 and 29 per cent respectively). Our Asia ex-Hong Kong businesses accelerated strongly, as new APE sales growth steadily increased throughout the year, with 11 per cent growth in the first quarter rising to 26 per cent growth in the fourth quarter. We continue to favour health and protection products due to their resilience to market cycles and superior margins. Collectively, such products achieved new business profit growth of more than 20 per cent outside Hong Kong and produced 67 per cent of our overall Asia new business profit in 2019. This also contributed to our high mix of regular premiums, which comprised 93 per cent of our APE sales in 2019. Our partnerships also made encouraging progress last year. The bancassurance channel achieved APE sales growth of 14 per cent, with particularly strong performances in our China joint venture and Vietnam and 24 per cent growth from UOB following the renewal of the strategic partnership at the beginning of the year. In Hong Kong, our domestic business was resilient with new product launches and focused management actions leading to an 8 per cent increase in local APE sales. This was supported by strong take-up of our new qualified deferred annuity product which accounted for 11 per cent of our Hong Kong APE sales since its launch on 1 April 2019 as well as our VHIS plans, both of which are eligible for tax incentives that were newly introduced by the government. Our Hong Kong life insurance business serves the health and savings needs of both domestic as well as visiting mainland Chinese consumers. The social unrest drove a decline in mainland Chinese visitors in the second half of 2019 inhibiting sales to this segment which led to a 41 per cent reduction in related APE sales compared with the second half of 2018, and to a 21 per cent reduction in APE sales prudentialplc.com Prudential plc Annual Report 2019 41 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information GROUP CHIEF FINANCIAL OFFICER AND CHIEF OPERATING OFFICER’S REPORT ON THE 2019 FINANCIAL PERFORMANCE CONTINUED over the year as a whole. Overall Hong Kong APE sales and new business profit were 11 and 12 per cent lower respectively. In our China JV, APE sales were 53 per cent higher at $590 million. This growth reflects a strong performance by both our agency and bancassurance channels with the latter reflecting the success of our strategy to drive increased branch activation. Higher volumes helped deliver an increase in new business profit by 38 per cent. In Indonesia, the benefits of a recent restructuring of our agency channel and successful new product launches supported a 23 per cent increase in APE sales and this growth accelerated to 41 per cent in the second half from 4 per cent in the first half. The 39 per cent increase in new business profit reflected the benefit of increased volumes, as well as operational improvements from new product launches in the year. The broad-based performance of our other life insurance markets led to a 9 per cent increase in related new sales, with particularly strong growth in the Philippines (34 per cent higher), while shifting towards higher-margin health and protection products. The 24 per cent increase in new business profit contribution from our other life markets is driven by higher new sales volumes, favourable assumption changes and modelling enhancements. EEV basis results New business profit Business in force Operating profit from long-term business Asset management Operating profit from long-term business and asset management before restructuring costs Restructuring costs Non-operating profit (loss) Profit for the year Other movements Net increase (decrease) in embedded value Embedded value at 1 January Embedded value at 31 December % New business profit/closing embedded value % Operating profit/closing embedded value Actual exchange rate Constant exchange rate 2019 $m 2018 $m Change % 2018 $m Change % 1 (1) 1 18 1 (24) 259 68 3,460 2,383 5,843 209 6,052 (24) (1,232) 4,796 2 (1) 1 20 1 (29) 259 68 3,522 2,366 5,888 250 6,138 (31) 1,962 8,069 3,477 2,381 5,858 212 6,070 (25) (1,235) 4,810 (842) (1,681) 7,227 32,008 39,235 9% 16% 3,129 28,879 32,008 11% 19% Asia EEV operating profit increased marginally compared with the prior period to $6,138 million (2018: $6,052 million1), driven by the 2 per cent increase in life new business profit, balanced by a 1 per cent reduction in the contribution from in-force life business. The development of the in-force life result of $2,366 million (2018: $2,383 million1) reflects a 4 per cent reduction in the expected return, partly offset by higher, favourable operating assumption changes and experience development. Under our active EEV assumption framework, the lower expected return is a function of lower period end interest rates leading to lower period end risk discount rates. These lower risk discount rates are applied to the opening embedded value in this analysis, and result in a lower expected return compared with the prior period, only partly offset by a higher starting embedded value position. Operating assumption and experience developments were positive at $824 million (2018: $769 million1) and are driven by favourable persistency and mortality/morbidity effects among other factors, and again reflect the high quality of our in-force life business. Overall Asia segment embedded value increased by 23 per cent to $39.2 billion (2018: $32.0 billion). Of this, $37.8 billion (2018: $31.0 billion) relates to the value of the long-term business. The remainder represents Asia asset management and goodwill which are carried at IFRS net asset value under the EEV framework. The asset management segment operating profit after tax increased by 20 per cent to $250 million (2018: $209 million1), which is discussed in more detail below. Non-operating profit was $1,962 million (2018: $(1,232) million1), mainly reflecting higher than assumed equity and fixed income returns in the period, partly offset by the effect of lower period end interest rates leading to a reduction in future assumed investment returns, among other factors. 42 Prudential plc Annual Report 2019 prudentialplc.com Asia analysis of movement in free surplus13 Actual exchange rate Constant exchange rate 2019 $m 2018 $m Change % 2018 $m Change % Operating free surplus generated from in-force life business and asset management before restructuring costs Investment in new business Operating free surplus generated before restructuring costs Restructuring costs Operating free surplus generated Non-operating (loss) profit Net cash flows to parent company Foreign exchange movements on foreign operations, timing differences and other items Total movement in free surplus Free surplus at 1 January Free surplus at 31 December 2,391 (619) 1,772 (31) 1,741 1,195 (950) (357) 1,629 2,591 4,220 2,215 (652) 1,563 (25) 1,538 (525) (916) (847) (750) 3,341 2,591 Overall Asia operating free surplus generated14, after investment in new business, was $1,772 million, an increase of 13 per cent compared with the prior period, driven by higher in-force generation and a lower level of investment in new business. The 8 per cent increase in the in-force return reflects growth in the in-force life portfolio, favourable operating experience effects and strong growth in asset management earnings, which more than offsets less favourable economic effects. The level of investment in new business reduced by 4 per cent, despite higher new sales, and reflects the net impact of assumption changes and various country and business mix effects. In turn, this growth in operating free surplus generation supported an increased net cash remittance of $950 million for the year (2018: $916 million). Non-operating profit of $1,195 million mainly relates to the net effect of bond and equity gains across most Asia markets. Local statutory capital We maintained a resilient balance sheet with a robust shareholder LCSM surplus of $4.7 billion and coverage ratio of 253 per cent at 31 December 2019 (31 December 2018: $3.6 billion and 244 per cent) supported by our expertise in risk management and a conservative approach to credit risk. We seek to safeguard our business from market volatility through our strong focus on protection products and our prudent asset and liability management strategy, which continues to be well-matched by both currency and duration. This is demonstrated by the relatively low sensitivity of our new business profit and our embedded value to a wide range of capital market fluctuations. 8 5 13 (24) 13 2,213 (646) 1,567 (24) 1,543 8 4 13 (29) 13 IFRS earnings Overall, Asia adjusted operating profit increased by 14 per cent to $3,276 million, with life insurance earnings up 14 per cent and asset management earnings up 18 per cent. Our Asia life insurance earnings growth is broad-based and at scale, reflecting the benefits of our focus on high quality recurring premium business and well diversified business portfolio. 86 per cent16 of our total life income (excluding other income described below) arises from insurance margin and fee income, again supporting stable profit progression across market cycles. Overall, eight insurance markets reported double-digit growth, with five delivering growth of 20 per cent or more. Six markets delivered annual adjusted operating profit of above $200 million and three in the region of $500 million or higher. At a market level, highlights include Hong Kong (up 24 per cent) driven by the high quality of its in-force growth, China JV (up 20 per cent), Vietnam (up 20 per cent) and the Philippines (up 26 per cent). Adjusted operating profit in Indonesia of $540 million remains at a high level, but was 3 per cent below the prior period. prudentialplc.com Prudential plc Annual Report 2019 43 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationGROUP CHIEF FINANCIAL OFFICER AND CHIEF OPERATING OFFICER’S REPORT ON THE 2019 FINANCIAL PERFORMANCE CONTINUED Profit margin analysis of Asia long-term insurance and asset management operations17 Actual exchange rate Constant exchange rate 2019 2018 2018 Spread income Fee income With-profits Insurance margin Other income Total life income Expenses: Acquisition costs Administration expenses DAC adjustments Share of related tax charges from joint ventures and associates Long-term insurance business pre-tax adjusted operating profit Eastspring Adjusted operating profit from long-term business and asset management before restructuring costs Tax charge Adjusted operating profit after tax for the year before restructuring costs Non-operating profit after tax Profit for the year after tax before restructuring costs $m 321 286 107 2,244 3,229 6,187 (2,156) (1,437) 430 (31) 2,993 283 3,276 (436) 2,840 885 3,725 Margin bps 108 105 18 (42)% (252) $m 310 280 95 1,978 2,982 5,645 (2,007) (1,374) 435 (53) 2,646 242 2,888 (411) 2,477 (662) 1,815 Our earnings continue to be based on high-quality drivers. The overall 14 per cent growth in Asia life insurance adjusted operating profit to $2,993 million (2018: $2,633 million1) was driven principally by 14 per cent growth in insurance margin related revenues and reflects our ongoing focus on recurring premium health and protection products, and the associated continued growth of our in-force business. Renewal premiums10, reflecting the long-term nature of our insurance business, grew 12 per cent. Fee income increased by three per cent, broadly in line with the increase in average unit-linked liabilities, while spread income rose by five per cent given changes in product and geographical mix and lower interest rates in the period. With-profits earnings relate principally to the shareholders’ share in bonuses declared to policyholders. As these bonuses are typically weighted to the end of a contract, under IFRS, with-profit earnings consequently emerge only gradually over time. The 14 per cent growth in with-profits earnings reflects the ongoing growth in these portfolios. Other income primarily represents amounts deducted from premiums to cover acquisition costs and administration expenses. As such, the 9 per cent increase in margin on revenues largely reflects ongoing business growth and the associated continued growth in overall premiums received. Acquisition costs borne by shareholders increased by 8 per cent in relation to a 4 per cent Margin bps 125 106 20 (40)% (269) Margin bps 124 106 20 (40)% (268) $m 305 277 94 1,966 2,962 5,604 (1,991) (1,359) 430 (51) 2,633 239 2,872 (408) 2,464 (665) 1,799 increase in overall APE sales. The ratio of shareholder acquisition costs to shareholder related APE sales (excluding with-profits related sales) reduced to 66 per cent (2018: 69 per cent on an actual exchange rate) as a result of changes in product mix. Administration expenses, including renewal commissions, increased by 6 per cent reflecting ongoing business growth. 44 Prudential plc Annual Report 2019 prudentialplc.com Asset management Total external net flows External funds under management ($bn) Internal funds under management ($bn) Total funds under management ($bn) Analysis of adjusted operating profit Retail operating income Institutional operating income Operating income before performance-related fees Performance-related fees Operating income (net of commission) Operating expense Group’s share of tax on joint ventures’ adjusted operating profit Adjusted operating profit Adjusted operating profit post-tax Average funds managed by Eastspring Margin based on operating income Cost/income ratio10 Eastspring delivered a strong performance in 2019 reflecting positive operating momentum and the benefit of recent acquisitions. Overall funds under management of $241.1 billion and adjusted operating profit of $283 million, are at record levels. The increase in external funds under management to $124.7 billion (2018: $77.8 billion) reflected $8.9 billion18 (2018: $(2.1) billion18) in positive third-party net flows, favourable market performance and $7.5 billion from the TFUND acquisition in December 2019. In addition, following the demerger of M&G plc, $26.7 billion of M&G related assets have been reclassified to external from internal funds under management. Third party net inflows were positive in both retail and institutional products and across both equity and fixed income funds, reflecting the benefit of new products and mandates. Overall funds under management were also supported by continued positive internal net flows resulting in total funds under management of $241.1 billion at year end (2018: $192.7 billion on an actual exchange rate basis). Actual exchange rate 2019 $m 2018 $m Change % 8,909 (2,118) n/a 124.7 116.4 241.1 77.8 114.9 192.7 392 244 636 12 648 (329) (36) 283 250 336 230 566 23 589 (311) (36) 242 212 60 1 25 17 6 12 (48) 10 (6) – 17 18 $214.0bn 30bps 52% $186.3bn 30bps 55% 15 – (3) ppts An increase in average funds managed by Eastspring of 15 per cent2 resulted in adjusted operating profit rising by 18 per cent (up 17 per cent on an actual exchange rate basis) to $283 million and growth in operating income of 10 per cent2. Disciplined cost management has led to an improvement in its cost- income ratio10 to 52 per cent (2018: 55 per cent on an actual exchange rate basis), with operating expenses increasing at a slower rate of 8 per cent (6 per cent on an actual exchange rate basis). Return on segment equity Asia return on closing IFRS shareholders’ funds Operating return on closing shareholders’ funds (%) Total comprehensive return on closing shareholders’ funds (%) 2019 26 36 2018 30 20 The benefit of our focus on profitable and capital efficient health and protection, with-profit and asset management businesses is evident in the attractive 26 per cent (2018: 30 per cent) return delivered on closing segment equity over 2019. prudentialplc.com Prudential plc Annual Report 2019 45 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information United States Operational and financial highlights The financial performance of the US business in the period reflects the impact of the execution of the first steps of its strategic diversification together with the varying financial effects of strong US equity market performance and lower interest rates in the period. We have decided to adopt early as at 31 December 2019 the new National Association of Insurance Commissioners (NAIC) capital rules related to variable annuities and have made consequential updates to our EEV basis results. All of the results below reflect the whole US segment, except for the discussion on local statutory capital which covers Jackson National Life only. New business profit Adjusted operating profit* EEV operating profit* Jackson RBC ratio (%) * Before restructuring costs New business performance Life EEV new business profit and APE new business sales (APE sales) Variable annuities Elite Access (variable annuity) Fixed annuities Fixed index annuities Wholesale Total APE sales % APE variable annuities % APE other products Total new business profit New business margin 2019 $m 2018 $m Change % 883 3,070 1,782 366 1,230 2,563 2,828 458 (28) 20 (37) (92) ppts 2019 $m 2018 $m Change % 1,270 200 119 382 252 2,223 66 34 883 40% 1,443 225 46 33 312 2,059 81 19 1,230 60% (12) (11) 159 1,058 (19) 8 (15) 15 (28) Overall new US APE sales increased to $2,223 million (2018: $2,059 million), with the proportion of general account products (fixed annuities, fixed index annuities and wholesale business) at 34 per cent (2018: 19 per cent) of new sales reflecting our intention to diversify our product mix over time to balance the overall risk profile of Jackson better. This was supported by new product launches and additional distribution initiatives. New business profit was lower at $883 million (2018: $1,230 million). Of this $(347) million reduction, $(155) million is a result of lower interest rates and other changes in economic assumptions compared with the prior period. The remainder reflects the change in product mix and other assumption change impacts. Movement in policyholder liabilities At 1 January Premiums Surrenders Maturities/deaths Net flows Addition for closed block of group pay-out annuities in the US Transfers from general to separate account Investment-related items and other movements 2019 $m 2018 $m Separate account liabilities General account and other liabilities Separate account liabilities General account and other liabilities 163,301 12,776 (12,767) (1,564) (1,555) – 951 32,373 73,079 8,200 (4,575) (1,823) 1,802 – (951) 549 176,578 14,646 (11,746) (1,449) 1,451 – 708 (15,436) 67,905 3,967 (4,465) (1,238) (1,736) 5,532 (708) 2,086 At 31 December 195,070 74,479 163,301 73,079 Overall US net flows were $0.2 billion over the year (2018: $(0.3) billion). Separate account net flows were negative at $(1.6) billion (2018: positive $1.5 billion), reflecting lower new sales of variable annuities in the period and expected higher levels of surrenders as the in-force book develops. Investment related movements reflect favourable investment performance driven by strong capital market returns. General account net flows were $1.8 billion (2018: $(1.7) billion), driven by higher new sales in the period. Total year-end policyholder liabilities were $269.5 billion (2018: $236.4 billion), with separate account liabilities at $195.1 billion and general account and other liabilities at $74.5 billion. 46 Prudential plc Annual Report 2019 prudentialplc.com GROUP CHIEF FINANCIAL OFFICER AND CHIEF OPERATING OFFICER’S REPORT ON THE 2019 FINANCIAL PERFORMANCE CONTINUEDIFRS earnings Profit margin analysis of US long-term insurance and asset management operations17 2019 2018 Spread income Fee income Insurance margin Other income Total life income Expenses: Acquisition costs Administration expenses DAC adjustments Long-term insurance business pre-tax adjusted operating profit Asset management Adjusted operating profit from long-term business and asset management before restructuring costs Tax charge Adjusted operating profit after tax for the year before restructuring costs Non-operating profit after tax (Loss) profit for the year after tax before restructuring costs Margin bps 155 183 (49)% (69) $m 642 3,292 1,317 26 5,277 (1,074) (1,675) 510 3,038 32 3,070 (437) 2,633 (3,013) (380) Margin bps 112 182 (48)% (68) $m 778 3,265 1,267 14 5,324 (1,013) (1,607) (152) 2,552 11 2,563 (402) 2,161 (179) 1,982 Adjusted operating profit US long-term adjusted operating profit was $3,038 million (2018: $2,552 million), and reflects the benefit of favourable market- related DAC adjustments in the period compared with unfavourable DAC adjustments in the prior period. Fee income was marginally higher compared with the prior period, with the benefit of a 2 per cent increase in average separate account balances largely offset by a modest decline in the average fee margin17. Spread income declined to $642 million (2018: $778 million) reflecting the combination of lower core spread income and lower income derived from swaps held for duration management purposes. The development of the core spread income was driven by the effect of lower invested asset yields and the full consolidation of the assets acquired with the John Hancock transaction towards the end of 2018, resulting in a reduction in the spread margin to 112 basis points (2018: 155 basis points). Insurance margin primarily represents income from variable annuity guarantees and profits from legacy life businesses. This increased by 4 per cent to $1,317 million (2018: $1,267 million) mainly as a result of higher income from variable annuity guarantees. Acquisition costs increased by 6 per cent, broadly in line with the 8 per cent increase in new APE sales. Administrative expenses increased from $(1,607) million in 2018 to $(1,675) million in 2019, primarily as a result of higher asset-based commissions. Excluding these asset-based commissions, the resulting administration expense ratio would be 33 basis points (2018: 34 basis points). DAC adjustments, being the cost deferred on sales in the period net of amortisation of amounts deferred previously, of $510 million (2018: $(152) million) were favourable compared with the prior period, in part due to higher sales in the period. Over 2019, strong capital market returns resulted in a separate account investment performance materially in excess of that assumed within the DAC mean reversion formula which led to a favourable DAC deceleration effect of $280 million (2018: unfavourable DAC acceleration effect of $(259) million). Non-operating items The non-operating result was negative $(3,795) million pre-tax (2018: negative $(241) million pre-tax) and contributed to a net loss after tax of $(380) million (2018: net income $1,982 million). In the US, Jackson provides certain guarantees on its annuity products, the value of which would typically rise when equity markets fall and long-term interest rates decline. Jackson charges fees for these guarantees which are in turn used to purchase downside protection, in particular options and futures to mitigate the effect of equity market falls. Under IFRS, accounting for the movement in the valuation of these derivatives, which are all fair valued, is asymmetrical to the movement in guarantee liabilities, which are not fair valued in all cases. Jackson designs its hedge programme to protect the economics of the business from large movements in investment markets and accepts the variability in accounting results. Non-operating losses of $(3,795) million in the year mainly reflect the effect of lower interest rates on guarantee liabilities and the impact of higher equity markets on both guarantee liabilities and associated derivatives given that the S&P 500 index ended the year 28.9 per cent higher than at the start of the year. While the resulting negative mark-to-market movements on these hedging instruments are recorded in the current year, the related increases in fee income that arise from the higher asset values managed, will be recognised and reported in future years. In addition to the effects seen above, falling interest rates resulted in gains of $2.7 billion being recognised outside the income statement on bonds held by Jackson’s general account. In total, Jackson’s segment shareholders’ funds increased to $8,929 million (2018: $7,163 million). prudentialplc.com Prudential plc Annual Report 2019 47 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information2019 $m 2018 $m Change % (28) (45) (38) 525 (37) 78 (124) (282) 883 874 1,757 25 1,782 (5) (3,802) (2,025) (342) (2,367) 18,709 16,342 5% 11% 1,230 1,594 2,824 4 2,828 (23) (1,695) 1,110 (654) 456 18,253 18,709 7% 15% Economic assumption changes of $(1,201) million largely reflect the impact of lower interest rates in the period on the projected future fund growth rates for the variable annuity business. These projected lower growth rates reduce the expected growth in fund values for policyholders and hence the expected profitability for shareholders. Overall segment embedded value ended the year at $16.3 billion (2018: $18.7 billion). EEV basis results New business profit Business in force Operating profit from long-term business Asset management Operating profit from long-term business and asset management before restructuring costs Restructuring costs Non-operating loss Profit for the year Other movements (including dividends) Net increase (decrease) in embedded value Embedded value at 1 January Embedded value at 31 December % New business profit / closing embedded value % Operating profit / closing embedded value EEV operating profit from the long-term business reduced to $1,757 million (2018: $2,824 million) reflecting lower new business profit in the period and a reduction in the level of expected return on business in force. During 2019, following the implementation of the NAIC’s changes to the US statutory reserve and capital framework, enhancements were made to the model used to allow for hedging within US statutory reporting. As a consequence, the Group has chosen to utilise the model for its EEV reporting to update its allowance for the long-term cost of hedging, resulting in a $(3,233) million reduction in Jackson’s EEV at the start of the year. The reduction in expected return from business in force reflects lower period end interest rates which reduce the expected unwind, and a lower starting balance of EEV shareholders’ funds compared with the prior period. This is a function of weak equity markets in the fourth quarter of 2018, and the adoption of a new hedge model as discussed above. The EEV non-operating loss of $(3,802) million mainly includes negative $(3,233) million from the adoption of the new hedging model (as discussed above), and negative $(1,201) million from economic effects, offset by positive $876 million from favourable investment movements. The investment return variances are driven by the benefit of strong capital market performance in the period leading to separate account returns materially in excess of those assumed, more than offsetting hedging losses on instruments held for risk management purposes. 48 Prudential plc Annual Report 2019 prudentialplc.com GROUP CHIEF FINANCIAL OFFICER AND CHIEF OPERATING OFFICER’S REPORT ON THE 2019 FINANCIAL PERFORMANCE CONTINUEDUS analysis of movement in free surplus13 Operating free surplus generated from in-force life business and asset management before restructuring costs and EEV hedge modelling enhancements Investment in new business Operating free surplus generated before restructuring costs and EEV hedge modelling enhancements Restructuring costs Operating free surplus generated before EEV hedge modelling enhancements Impact of 2019 EEV hedge modelling enhancements Operating free surplus generated Non-operating (loss) profit Net flows paid to parent company Timing differences and other items Total movement in free surplus Free surplus at 1 January Free surplus at 31 December 2019 $m 2018 $m Change % 17 (80) 7 78 8 – (40) 2,567 (539) 2,028 (5) 2,023 (903) 1,120 (1,763) (525) 185 (983) 2,760 1,777 2,195 (300) 1,895 (23) 1,872 – 1,872 (1,124) (452) (144) 152 2,608 2,760 The US in-force business generated $2,567 million (2018: $2,195 million) prior to allowing for the change to the allowance for hedging costs discussed above. This included a $355 million benefit following the integration of the John Hancock business acquired in 2018. Offsetting this increase was a higher investment in new business (up 80 per cent to $(539) million). The increase in investment in new business to $(539) million (2018: $(300) million) is a function of a higher weight of general account new sales in the period. Operating free surplus generated14 after allowing for the impact of changes to hedge modelling was $1,120 million. Non-operating assumptions and variances related to free surplus development were $(1,763) million (2018: $(1,124) million) and reflect higher losses on hedge instruments compared with those assumed under the new basis. Circa $395 million of these hedge losses were incurred in managing the risk profile of the business as Jackson transitioned from the previous US statutory and reserving framework to the new framework following updates made by the NAIC which is further discussed below. Local statutory capital – Jackson National Life (Jackson) Jackson applies the US statutory reserve and capital framework required by the NAIC and adopted the NAIC’s changes to this framework for variable annuities with effect from 31 December 2019. This new capital methodology incorporates a unified approach to reserving and required capital determination. In addition, with effect from 1 October 2019, Jackson chose not to renew its long-standing permitted practice to exclude unrealised gains on certain derivative instruments taken out to protect Jackson against declines in long-term interest rates. After adopting this new regime, the surplus of available capital over required capital (set at 100 per cent of the Company Action Level) was $3,795 million. This equated to a risk-based capital ratio of 366 per cent (2018: 458 per cent using the previous NAIC framework). An analysis of the estimated movement in Jackson’s risk-based capital position over 2019 is set out below. Jackson continues to remain within its existing risk appetite and expects the new capital regime to result in a more stable RBC ratio than under the previous regime, in low interest rate scenarios. 1 January 2019 Capital generation from new business written during 2019 Operating capital generation from business in force at 1 January 2019* Operating capital generation Adoption of NAIC reforms (see above) Other non-operating movements, including market effects and removal of the permitted practice Dividends paid 31 December 2019 * Includes operating experience variances and the impact of John Hancock Total available capital $m 5,519 119 1,406 1,525 279 (1,577) (525) 5,221 Required capital $m 1,204 263 (125) 138 137 (53) – 1,426 Surplus $m 4,315 (144) 1,531 1,387 142 (1,524) (525) 3,795 Ratio % 458 (75) 141 66 (17) (104) (37) 366 prudentialplc.com Prudential plc Annual Report 2019 49 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information Over the period, statutory operating capital generation of $1.4 billion increased the RBC ratio by 66 percentage points, comprising 118 percentage points ($1.2 billion) from in-force capital generation, reduced by 75 percentage points ($(0.1) billion) for the capital strain of writing new business, and 23 percentage points ($0.3 billion) of one-off benefits related to the recent John Hancock acquisition. In line with the product diversification strategy previously outlined and Jackson’s accelerated sales growth of fixed index and new fixed annuity products, the capital strain from selling non-VA products was 64 percentage points of the total 75 percentage points of new business strain. Non-operating and other capital movements reduced the RBC ratio by 121 percentage points ($(1.4) billion) due to: — adoption of the new capital regime at 31 December 2019, resulting in a one-off reduction in the RBC ratio of 17 percentage points; — one-off hedge losses in respect of managing through the changeover to the new regime representing a 28 percentage point fall in the RBC ratio; — an increase in deferred tax assets not admitted as statutory capital, which reduced the RBC ratio by 26 percentage points, bringing the total non-admitted DTA to $0.9 billion at 31 December 2019. $0.5 billion of this non-admitted DTA balance relates to hedge losses incurred in 2019 which are required to be spread over three years for tax purposes and so is expected to be carried forward to be deducted from Jackson’s taxable income in the next two years; and — other non-operating items that reduced the RBC ratio by 50 percentage points, primarily representing variable annuity net hedge losses in the period given asymmetries between the statutory accounting basis and the economics hedged by Jackson. During 2019 Jackson remitted $(525) million to Prudential, representing around half of Jackson’s operating capital generation in the period (excluding John Hancock effects), which reduced the RBC ratio by 37 percentage points. As previously announced, from 2020 Jackson’s remittances are expected to be more evenly spread over the calendar year than in prior periods. In respect of the previously noted ongoing NAIC review of the C-1 bond factors in the required capital calculation, the expected implementation has been delayed to 2021 or thereafter. After adoption of the new capital regime, the estimated reduction in RBC ratio under the current proposal is circa 10 to 20 points. Return on segment equity US return on closing IFRS shareholders’ funds. Operating return on closing shareholders’ funds (%) Total comprehensive return on closing shareholders’ funds (%) 2019 29 26 2018 30 7 The US operating return on segment equity was 29 per cent (2018: 30 per cent). The total comprehensive return on segment equity, including non-operating and other comprehensive income movements, described above, was 26 per cent (2018: 7 per cent). Notes 1 On a constant exchange rate basis. 2 On an actual exchange rate basis. 3 As compared with 2018 and before a planned $10 million increase in Africa costs as business grows. 4 Approximately half of the corporate expenditure is incurred in sterling and our assumptions forecast an exchange rate of £1=$1.2599. 5 From 1 January 2021. 6 Surplus over Group minimum capital requirement and estimated before allowing for second interim ordinary dividend. Shareholder business excludes the available capital and minimum requirement of participating business in Hong Kong, Singapore and Malaysia. Further information on the basis of calculation of the LCSM measure is contained in note I(i) of the Additional unaudited financial information. 7 Net cash remitted by business units are included in the holding company cash flow, which is disclosed in detail in note I(iii) of the Additional unaudited financial information. This comprises dividends and other transfers from business units that are reflective of emerging earnings and capital generation. 8 Using the relevant month-end spot rate. 9 Excluding profit for the year attributable to non-controlling interests. 10 See note II of the Additional unaudited financial information for definition and reconciliation to IFRS balances. 11 For EEV shareholders’ value per share, see note II(x) of the Additional unaudited financial information. 12 See note I(iii) of the Additional unaudited financial information for the basis of calculation. 13 For insurance operations, operating free surplus generated represents amounts maturing from the in-force business during the period less investment in new business and excludes non-operating items. For asset management businesses, it equates to post-tax operating profit for the period. Restructuring costs are presented separately from the operating business unit amount. Further information is set out in note 11 of the EEV basis results. 14 Operating free surplus generated before restructuring costs. 15 The pro forma dividend for 2019 of the $958 million represents the first interim ordinary dividend paid of $528 million (£428 million based on spot exchange rate at the payment date) plus the second interim ordinary dividend of $675 million (£510 million based on spot rate at 31 December 2019) less the contribution of remittances from the discontinued M&G plc business to the second interim ordinary dividend of $245 million (£185 million based on spot exchange rates at 31 December 2019). 16 Total insurance margin ($2,244 million) and fee income ($286 million) of $2,530 million divided by total life income excluding other income of $2,958 million (Comprised of total life income of $6,187 million less other income of $3,229 million). 17 For discussion on the basis of preparation of the sources of earnings in the table see note I(iv) of the Additional unaudited financial information. 18 Excludes Money Market Funds. 50 Prudential plc Annual Report 2019 prudentialplc.com GROUP CHIEF FINANCIAL OFFICER AND CHIEF OPERATING OFFICER’S REPORT ON THE 2019 FINANCIAL PERFORMANCE CONTINUEDGROUPCHIEFRISKANDCOMPLIANCEOFFICER’SREPORTONTHERISKSFACINGOURBUSINESS ANDHOWTHESEAREMANAGED Enabling business growth and change through risk management TheGroupwelcomestheHongKong InsuranceAuthority(IA)asitsnew Group-widesupervisorandistransitioning toanewsupervisoryframework.Amature andwell-embeddedriskframeworkwill enabletherepositionedbusinessto capturetheopportunitiesinthegrowth marketsinwhichitisnowfocusedwhile operatingwithdiscipline. The world economy Economicgrowthworldwideslowedin 2019drivenbyacontractioninglobal manufacturing,inparticularinthe Eurozone,UKandsomeAsianeconomies. Variousfactorscontributedtothis slowdown,includinggeopoliticaltensions (inparticularthosearoundtrade),steps takeninChinatodeleverageitsfinancial system,andtightenedfinancialconditions intheUSduringthefirsthalfoftheyear. Facedwiththeprospectofslowing economicgrowthandcontinuedsubdued inflation,themajorcentralbanksacross NorthAmerica,EuropeandAsia implementedsignificantchangesin monetarypolicy,deployingboth conventionalandnon-conventional accommodation.TheUSFederalReserve cutitsbenchmarkfederalfundsrateby 75basispointsover2019,whiletheECB delivereda10basispointinterestratecut andannouncedaresumptionofits quantitativeeasingprogrammein September.Atthestartof2020,the prospectsforglobalgrowthinitially appearedtohaveimprovedwiththe signingofthe‘PhaseOne’initialtrade agreementbytheUSandChinainJanuary andsignsthatmacroeconomicdatawas stabilisingthroughouttheEurozoneand partsofAsia.Sincethenhowever,itis becomingincreasinglyevidentthatthe coronavirusoutbreakhasimpacted economicactivityinHongKongandChina withspillovertotherestoftheglobal economy.Thishaspromptedtheworld’s majorcentralbankstocommittomeasures tomanagethepotentialeconomiceffects andinearlyMarch2020theUSFederal Reservecutitsbenchmarkfederalfunds rateby50basispoints.Thisdemonstrates thefragilityofanyimprovementinthe growthoutlook,withgeopoliticalrisks representinganothersourceofpotential disruption,includingaresurfacingintrade tensions,aresumptionoftheprotestsin HongKongand,lookingforward,political uncertaintythatmayarisefromtheUS presidentialelectiontowardstheend of2020. Financial markets Afteravolatile2018,whichwasmarked bysharpfallsinequitymarketsinthefinal quarter,2019sawasignificantrebound withallmajorriskassets,particularlyglobal equities,providingstrongreturnsover thecourseoftheyear.Governmentbonds alsosawgoodreturnsasyieldsdeclined significantly,withtheUS10-year governmentbondyieldfallingbycirca 80basispointsovertheyear.Corporate bondsperformedsimilarlywell,withcredit spreadstighteningandmirroringthe strongequityreturnsobserved.Theyear waslargelycharacterisedbyrelatively defensiveinvestorsentimentanda preferenceforhighercreditqualitywithin assetclasses.Thispositiveperformance wasfacilitatedbytheaccommodative environmentdrivenbytheshiftin monetarypolicybymajorcentralbanks, butcameamidadeteriorationin macroeconomicindicators,anincreasein perceivedUSrecessionriskandthetrade negotiationsbetweentheUSandChina whichebbedandflowed,allofwhich negativelyimpactedglobalrisksentiment. Politicalheadlinesandthemonetarypolicy shiftbycentralbanksweretheprimary driversofcurrencymarketmovements during2019,withtheUS-Chinatrade negotiationsanddevelopments surroundingtheUK’sdeparturefromthe EUimpactingtheUSdollar(inparticular theUSD-RMBrate)andUKpound respectively.Fundingmarketscameunder significantpressureinSeptemberwhena suddenspikeinreporateswasobserved, promptingtheUSFederalReserveto interveneandinjectsignificantfunding throughacombinationofpermanent andtemporaryopenmarketoperations. Globalfinancialmarketsremainhighly susceptibletoreversalsinrisksentiment, asdemonstratedinQ12020withthe coronavirusoutbreak,whichhasincreased marketdownsideriskssignificantly. (Geo)political landscape Thegeopoliticallandscapeover2019 continuedtoreflectaworldinanunsettled stateoftransition.Somenationscontinue tofacethechallengeofreconcilingthe inter-connectednessoftheglobal economywithheightenednationalistic sentiment.Thishasplayedoutin James Turner GroupChiefRiskand ComplianceOfficer OurGroupRiskFrameworkandrisk appetitehaveallowedustocontrolourrisk exposuresuccessfullythroughouttheyear. Ourgovernance,processesandcontrols enableustodealwithuncertainty effectively,whichiscriticaltothe achievementofourstrategyofhelping ourcustomersachievetheirlong-term financialgoals. Thissectionexplainsthemainrisks inherentinourbusinessandhowwe managethoserisks,withtheaimof ensuringanappropriateriskprofileis maintained. 1 Introduction Group structure On21October2019,just18monthsafter announcingitsintentiontodoso,theGroup completedthedemergerofM&Gplc, markingthesuccessfulandcontrolled deliveryofacomplexandhistoricchange tothebusiness,inwhichtheRiskfunction playedacentralrole.Anunsettled macroeconomicandgeopolitical environmentaddedtothechallengesin completingastrategicinitiativeofthis magnitudeandtothekeyobjectiveof deliveringtwodistinctandstrongly capitalisedgroups.Strongstewardshipwas providedbytheRiskfunctionthroughrisk opinions,guidanceandassuranceoncritical activity,aswellasassessmentsandongoing monitoringofexternalrisks.Atthesame time,thefunctionretaineditsfocuson managingtherisksoftheongoingbusiness performingitsdefinedroleinprovidingrisk managementsupportandoversight,aswell asobjectivechallengetoensuretheGroup remainedwithinitsriskappetite. prudentialplc.com Prudential plc AnnualReport2019 51 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationGROUPCHIEFRISKANDCOMPLIANCEOFFICER’SREPORTONTHERISKSFACINGOURBUSINESS ANDHOWTHESEAREMANAGED CONTINUED internationaltradedisputes,notably betweentheUSandChinaduring2019. Increasingpolarisationhasbecomeadriver ofgeopoliticalrisk,bothbetweennations andwithinthem.Populationsappeartobe increasinglyactiveinvoicingandacting collectivelyontheirdiscontent.2019has beendescribedas‘theyearofthestreet protestor’withmassdemonstrations havingtakenplaceacrosstheworld, includinginSpain,France,HongKong, IndiaandtheMiddleEastoverthecourse oftheyearandcontinuinginto2020. Aweakeningofcivilorderanddomestic disruptionarepotentialconsequences,and thisistestingtheresilienceofbusinesses andgovernments.Asaglobalorganisation, theGrouphasdevelopedplanstomitigate businessrisksarisingagainstthisbackdrop andengageswithnationalbodieswhere itcaninordertoensureitspolicyholders, employeesandotherkeystakeholders arenotadverselyimpacted. Regulations Prudentialoperatesinhighlyregulated markets,andthenatureandfocus ofregulationandlawsremainsfluid. Anumberofnationalandinternational regulatorydevelopmentsareinprogress, withacontinuingfocusonsolvencyand capitalstandards,conductofbusiness, systemicrisksandmacroprudential policy.Someofthesechangeswillhave asignificantimpactonthewaythatthe Groupoperates,conductsbusiness andmanagesitsrisks.Theseregulatory developmentswillcontinuetobemonitored atanationalandgloballevelandformpartof Prudential’sengagementwithgovernment policyteamsandregulators.Inadditionto theevolvingregulatorylandscape,and followingthecompletionofthedemerger inOctober,Prudential’sGroup-wide supervisorchanged,withtheHongKongIA assumingtheroleinOctober2019. Constructiveengagementcontinuesonthe Group-wideSupervisionFramework(GWS) thatwillapplytotheGroup,whichis expectedtobefinalisedin2020. Societal developments Increasingly,astrongsenseofpurposefor anenterpriseisbeingseenasadriverof 2 Key internal, regulatory, economic and (geo)political events over the past 12 months  On25March,theHongKongIAandPrudentialplcsigntheRegulatory  OverQ1,signscontinueofamoderationinUSgrowthandasharper Q1 2019 Letterspecifyingthesupervisoryframeworkimmediatelyfollowingthe demergerofM&Gplc.TheGrouphassinceagreedwiththesupervisorto applythelocalcapitalsummationmethod(LCSM)todetermineGroup regulatorycapitalrequirements.TheHongKongIA’sGroup-wide SupervisionFrameworkisexpectedtobefinalisedinH22020.  InIndonesia,theOtoritasJasaKeuangan(OJK)approves ‘grandfathering’ofPrudential’sexisting94.6percentshareholdinginPT. PrudentialLifeAssurance,ourIndonesiansubsidiary,withfuturecapital injectionsnotpermittedtoincreasethepercentageofforeignownership.  InMarch,theGroupannouncesfurtherexpansioninWestAfricavia theacquisitionofamajoritystakeinGroupBeneficial,aleadinglifeinsurer operatinginCameroon,Côted’IvoireandTogo.Theacquisitioncompletes inQ3. slowdownintherestoftheworld,withEurope’sgrowthexpectations droppingprogressivelythroughoutthequarter.Chinareportsitslowest quarterlyGDPgrowthratein30yearsof6.2percent.Centralbank rhetoricstartstoturndovish,andthisisoneofthefactorsdrivingtheS&P 500toitsbestquartersinceQ22009(risingby13.6percent),alongwith returningpositiverisksentiment.Meanwhile,yieldsfallsharplyin responsetothesofteningeconomicoutlookanddovishturnbycentral banks.  On29March,EIOPAreleasesadiscussionpaperonsystemicriskand macroprudentialpolicyininsurance,settingoutitsthinkingonhowthis areashouldbeaddressedinthe2020SolvencyIIreview.Thepaper suggestsarangeofpotentialmacroprudentialtoolsandmeasures.  InFebruary,inasummitinHanoi,theUSandNorthKoreafailtoreach anagreementonnucleardisarmamentandaliftingofUS-ledinternational sanctions.DonaldTrumpbecomesthefirstsittingUSpresidenttoenter NorthKoreainJuneasthetwocountriesagreetoresumetalks,although thesestallinQ4.  Prudential’sPulseapplaunchesinAprilinMalaysia,providing affordabledigitalhealthandwellnessservicestoconsumers.InJune, PrudentialannouncesastrategicpartnershipwithOVOtooffercustomers wellness,healthandwealthproductsandservicesinIndonesia.  SuspensionoftheWoodfordEquityIncomeFundinJuneraises questionsovertheabilityofthefundmanagementindustrytomeet redemptionrequests,inparticularforthosefundsheavilyinvestedin illiquidassets. Q2 2019  TheHongKongIAissuesitsGuidelinesonEnterpriseRiskManagement inJuly,settingoutobjectivesandrequirementsonERMandtheOwnRisk SolvencyAssessmentunderPillar2ofitsproposedRBCregimeforsolo entities.  InApril,thePRAissuesSupervisoryStatement(SS3/19)on‘enhancing banksandinsurers’approachestomanagingthefinancialrisksfrom climatechange’whichoutlinestheregulatoryexpectationsforfinancial servicesfirmstoassessimpactsfromclimatechange. Key  Prudential  Regulatory  (Geo)political  Markets/economies  SeveralkeyelectionsareheldacrossAsiainthefirstandsecond quarters.LegislativeelectionstakeplaceinThailandinMarch,with theoutcomemarkingthecountry’sreturntocivilianrule;inAprilthe incumbentPresidentWidodowinsthepresidentialelectioninIndonesia; andinMaythelegislativeelectionsinIndiaseeavictoryforPrimeMinister NarendraModi.Theelectionresultsalignbroadlytoconsensuspolls.  FromJuneonwardsandcontinuingover2019,large-scale demonstrationstakeplaceinHongKong,sparkedbyanextradition billproposedbytheHongKonggovernment.  GeopoliticaltensionsriseintheMiddleEastasIranannounces astep-upinitsproductionofenricheduranium.ThisfollowstheUS’ withdrawalfromthe2015nucleardealanditssubsequentimpositionof economicsanctions.Tensionsultimatelyspikeatthestartof2020when theUSassassinatesIranianmilitaryleaderQassamSoleimani. 52 Prudential plc AnnualReport2019 prudentialplc.com long-termprofitability,andthisismaking companiesevaluatetheirplacein,and contributionto,society.The‘whyandhow’ abusinessactshasbecomearguablyat leastasimportantaswhatitproducesor theservicesthatitprovides.Similarly, understandingandmanagingthe environmental,socialandgovernance (ESG)implicationsoftheGroup’s businessisfundamentaltoPrudential’s brand,reputationandultimately long-termsuccess.Ensuringhighlevels oftransparencyandresponsiveness tostakeholdersisakeyaspectofthis. Keysocialissueswithimplicationsfor theGroupincluderisksarisingfrom demographicchangesaswellasthose arisingfromprivacyanddatasecurity requirementsandexpectations. Recentchangesindemographic, geographicalandenvironmentalfactors havedrivenpublichealthtrends,suchas obesity,andchangedthenature,likelihood andimpactofextremeeventssuchas pandemics,withaconsequentialimpact onPrudential’sunderwritingassumptions andproductdesign.Giventheuniqueset ofvariablesassociatedwithextreme events,pastexperienceisnotanindication ofthelikelyimpactorabilitytodealwith futureoccurrences.Thecoronavirus outbreakdemonstratestheunpredictable natureofsucheventsandtheimpacton thefunctioningofsociety,with consequentialdisruptiontobusiness operations,staff,customersandsales. TheGroupisactivelymanagingthisimpact includingassistingaffectedpolicyholders andstaffinmeetingtheirneeds. Insupportofincreasedsocialinclusion andtomeetevolvingcustomerneeds, theGroupisincreasingitsuseofdigital services,technologiesanddistribution methodsfortheproductsandservices thatitoffers.Thisamplifiestherisksto Prudentialassociatedwithregulations andexpectationsinrelationtoprivacyand datasecurity.ThesechangestotheGroup’s useoftechnologyanddistributionmodels havebroadimplications,touchingon Prudential’sconductofbusiness, increasingtherisksoftechnologyand databeingcompromisedormisusedand potentiallyleadingtonewandunforeseen regulatoryissues. Q3 2019  Centralbankmonetarypolicybecomesincreasinglyaccommodative, contributingtoareversalintheweaknessinriskassets.InAugust, followingarecordhighinJuly,theS&P500correctsamidrecessionfears andtradetensions.TheindexcontinuestostruggleinSeptemberbut reboundsstronglyoverQ4.  Governmentbondyieldsdeclinesignificantly,withthe10-yearUS Treasuryyieldfallingbycirca50basispointsto1.5percentoverAugust (representingacirca120basispointsdropovertheyear),itslowestrate since2017.InJapanandEurope,thevolumeofnegative-yieldingdebt surgessignificantly.  FollowingthelaunchofICSfield-testingfor2019inApril,theGroup submitsitsresultstotheIAISon31July2019.Thisisthelastfield-testing exercisepriortothefinalisationoftheICS2.0specificationsandthestart ofafive-yearmonitoringperiodin2020.  InSeptember,USPresidentDonaldTrumpandChinesePresidentXi Jinpingagreetoresumetradetalksfollowingearlierbreakdownsin negotiationsinMayandAugust.TalkscontinuepositivelyintoQ4 culminatinginthesigningofa‘PhaseOne’tradedealbetweenthetwo countriesinJanuary2020. Q4 2019  On21October2019,M&Gplc’ssharesbegintradingontheLondon StockExchange,markingthesuccessfulcompletionofitsdemergerfrom thePrudentialGroup.TheHongKongIAformallyassumesitsroleas Group-widesupervisorforPrudentialplc.  Eastspringsuccessfullycompletestheacquisitionof50.1percent ofThanachartFund,whichmanages$7.5billionofmutualfundsin Thailand,forcirca$142million,withanoptiontoincreaseitsownershipto 100percentinfuture.TheacquisitionmakesEastspringthefourth-largest assetmanagerinThailand.  Thebroadereconomiccyclecontinuestodeteriorate.USdomestic databeginstoshoweconomicweaknessinNovember.Despitethis, equitymarketsreachnewall-timehighsoverthequarter,supported bycontinuedapplicationofaccommodativemonetarypolicyby centralbanks.  InSeptember,theECBdeliversapackageofeasingmeasures,including arenewalofquantitativeeasing.Followingthis,theUSFederalReserve lowersitsbenchmarkfederalfundstargetrateforthethirdtimeinfour monthsinOctober.CentralbanksinChinaandotheremergingmarkets turnmoredovishamidcontinuedweaknessineconomicdata.  The26thAnnualConferenceoftheIAIStakesplaceinAbuDhabion14 and15November,anditisagreedthattheICSprojectwillmovefromField TestingintotheMonitoringPeriodphaseandICSv2.0isreleased.The HolisticFramework(HF)forsystemicriskisendorsedbytheFSBatthe conferenceforimplementationbytheIAISin2020.TheFSBalsoconfirms thatG-SIIdesignationswillbesuspendeduntilitsreviewin2022,although anumberofthepreviousG-SIIrequirementsareincludedeitherintothe InsuranceCorePrinciplesortheComFrame.  FollowingtheEastAsiaSummitinBangkokinNovember,15ofthe16 negotiatingparticipantsagreetosignuptotheRegionalComprehensive EconomicPartnership(RCEP),mostlikelyinQ12020,withIndiadeciding nottoparticipate.  HongKongenterstechnicalrecessioninQ3,withitseconomyshrinking by2.9percentoverallover2019,astheprotests,whichpeakinviolence duringNovember,impacttheterritory’seconomy.On27November,the USpresidentsignstheHongKongHumanRightsandDemocracyActinto law,requiringannualreviewsofHongKong’sspecialtradestatusunderUS law,aswellassanctionsagainstanyofficialdeemedresponsibleforhuman rightsabusesorforunderminingthecity’sautonomy.  TheNationalAssociationofInsuranceCommissioners(NAIC) implementschangestotheUSstatutoryreserveandcapitalframeworkfor variableannuities,effectivefrom1January2020.Jacksonchoosestoearly adoptthechangesat31December2019forUSstatutoryreporting. Q1 2020  InDecember,casesofwhatappeartobeviralpneumoniaarereported inWuhan,China.InJanuary2020,thevirusisidentifiedasanovel coronavirus(theresultingdiseasehassincebeennamedCOVID-19)and overQ12020thousandsofcasesarereportedwiththevirusproceeding tospreadtocountriesacrossAsiaandtheworld. PrudentialCorporationAsiarollsoutAsia-wideinitiativesandacampaign tosupportcustomersandstaff.  Followingitslaunch,downloadsofPulsebyPrudentialexceedone millioninFebruary2020.Thedigitalhealthplatformisnowoneofthemost popularhealthandwellnessappsofferedbyaninsurerintheregion. prudentialplc.com Prudential plc AnnualReport2019 53 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationGROUPCHIEFRISKANDCOMPLIANCEOFFICER’SREPORTONTHERISKSFACINGOURBUSINESS ANDHOWTHESEAREMANAGED CONTINUED 3 Managing the risks in implementing our strategy ThissectionprovidesanoverviewoftheGroup’sstrategy,thesignificantrisksarisingfromthedeliveryofthisstrategyandcurrent riskmanagementfocus.Therisksoutlinedbelow,whicharenotexhaustive,arediscussedinmoredetailinsections5and6. Our strategy Significant risks arising from the delivery of the strategy Risk management focus Group-wide Ourstrategyistocapture thelong-termstructural opportunitiesforourmarkets andgeographies,while operatingwithdiscipline andseekingtoenhanceour capabilitiesthroughinnovation todeliverhigh-qualityresilient outcomesforourcustomers. Asia Servingtheprotectionand investmentneedsofthe growingmiddleclassinAsia. United States Providingassetaccumulation andretirementincome productstoUSretirees. Africa Offeringproductstonew customersinAfrica,oneof thefastest-growingregions intheworld. Transformation risks around key change programmes, including those related to the Group’s digital strategy Continuingthefocuson,andensuringconsistency intransformationriskmanagementacrosstheGroup’s businessunits. Provisionofindependentriskassurance,challengeandadvice onfirstlineprogrammeriskidentificationandassessments. Group-wide regulatory risks Information security and data privacy risks Business disruption and third-party risks Conduct risk Financial risks Persistency risk Morbidity risk Financial risks Engagementwithnationalgovernments,regulatorsand industrygroupsonmacroprudentialandsystemicrisk-related regulatoryinitiatives,internationalcapitalstandards,andother initiativeswithGroup-wideimpacts. EngagementwiththeHongKongIAon,andimplementation of,theGroup-wideSupervisionFramework,whichisexpected tobefinalisedinH22020. ContinuingtheimplementationoftheGroup-wide organisationalstructureandgovernancemodelforcyber securitymanagement. Focusoncompliancewithapplicableprivacylawsacrossthe Groupandtheappropriateuseofcustomerdata. ContinuedapplicationoftheGroup’sglobalbusiness continuitymanagement,withanenhancedfocuson operationalresilienceasitrelatestocustomeroutcomes. Applyingthedistinctoversightandriskmanagement requiredovertheGroup’sthirdparties,includingitsstrategic partnershipsforproductdistribution,non-traditionalservices andprocessingactivities. ContinuingtheenhancementoftheGroup-widecustomer conductriskmanagementframeworkbuildingontheGroup’s existingcustomercommitmentspolicy. Maintaining,andenhancingwherenecessary,risklimitsand implementingbusinessinitiativestomanagefinancialrisks, includingassetallocation,bonusrevisions,productrepricing andreinsurancewhererequired. Implementationofbusinessinitiativestomanagepersistency risk,includingadditionalpaymentmethods,enhancing customerexperience,revisionstoproductdesignand incentivestructures.Ongoingexperiencemonitoring. Implementationofbusinessinitiativestomanagemorbidity risk,includingproductrepricingwhererequired.Ongoing experiencemonitoring. Maintaining,andenhancingwherenecessary,risklimits, hedgingstrategies,modellingtoolsandriskoversight appropriatetoJackson’sproductmix. Policyholder behaviour risk Continuedmonitoringofpolicyholderbehaviourexperience andreviewofassumptions. TheGroupcontinuestoincreaseitsfocusonPrudentialAfrica’smostsignificantrisks,being thoserelatedtophysicalandinformationsecurityandfinancialcrime,asitspresencethere expandsandgrowsinmateriality. 54 Prudential plc AnnualReport2019 prudentialplc.com In2019,theGroupreviewedandupdated itspoliciesandprocessesforalignment withtherequirementsofitsnewGroup- widesupervisor.Theframeworksrelating tooversightoftransformationriskand modelriskwerefurtherembeddedand theGroupfocusedondevelopmentof aGroup-widecustomerconductrisk framework,buildingonitsexisting customercommitmentspolicy. Thefollowingsectionprovidesmore detailonourriskgovernance,riskculture andriskmanagementprocess. 4 Risk governance a System of governance Appropriatelymanagedrisksallow Prudentialtotakebusinessopportunities andenablethegrowthofitsbusiness. Effectiveriskmanagementistherefore fundamentalintheexecutionofthe Group’sbusinessstrategy.Prudential’s approachtoriskmanagementmustbe bothwellembeddedandrigorous,closely alignedtotheGroup’skeystakeholders andoperateacrosstheentiregroup. Astheeconomicandpoliticalenvironment inwhichweoperatechanges,itshould alsobesufficientlybroadanddynamic torespondtothesechanges. Prudentialhasinplaceasystemof governancethatpromotesandembedsa clearownershipofrisk,processesthatlink riskmanagementtobusinessobjectives andaproactiveBoardandsenior managementprovidingoversightofrisks. Mechanismsandmethodologiestoreview, discussandcommunicaterisksareinplace togetherwithriskpoliciesandstandards toensurerisksareidentified,measured, managed,monitoredandreported. How ‘risk’ is defined Prudentialdefines‘risk’astheuncertainty thatisfacedinimplementingtheGroup’s strategiesandachievingitsobjectives successfully,andincludesallinternalor externalevents,actsoromissionsthathave thepotentialtothreatenthesuccessand survivaloftheGroup.Accordingly,material riskswillberetainedselectivelywhenitis consideredthatthereisvalueindoingso, andwhereitisconsistentwiththeGroup’s riskappetiteandphilosophytowards risk-taking. How risk is managed Riskmanagementisembeddedacrossthe GroupthroughtheGroupRiskFramework, whichisownedbytheBoardanddetails Prudential’sriskgovernance,risk managementprocessesandriskappetite. TheGroup’sriskgovernancearrangements arebasedontheconceptofthe‘threelines ofdefence’model,comprisingrisktaking andmanagement,riskcontroland oversight,andindependentassurance andhasbeendevelopedtomonitorthe riskstoourbusiness.TheaggregateGroup exposuretoitskeyriskdriversismonitored andmanagedbytheGroupRiskfunction whichisresponsibleforreviewing, assessing,providingoversightandreporting ontheGroup’sriskexposureandsolvency positionfromtheGroupeconomic, regulatoryandratingsperspectives. Risk management Identified major risk categories n Risk identifi c ati o Risk measure m e n t a n d a s s e s s m e n t Risk governance and culture Business strategy Capital management Stress and scenario testing M o n i t o r a n d r e p ort a g e and control n M a s to our fi nan cial sit u liq ark M Risk et a uidity ris n d k n t i o a E g c e o o n p o o l m i t i i c c a a l n r d i s k s u r b Risks from o Operational, disruption and cyber risks k is n r o i t a m r o f s n a Tr Credit risk s I n u si n e s s a n d i n d u s t r y k e ris c n u r a C o n d u c t r i s k Group risk profile t u r e r i s k – S o c i a l p e o p l e a n d c u l G overnance risk E S G ris k s k s s ure n ris clo sitio ate dis d tra Clim n n a Regulatory capital developments R c o e g m plia ula t o r y n c e s n d regulatory risk a l a g e L R e g u l a t o r y c h a n g e prudentialplc.com Prudential plc AnnualReport2019 55 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information GROUPCHIEFRISKANDCOMPLIANCEOFFICER’SREPORTONTHERISKSFACINGOURBUSINESS ANDHOWTHESEAREMANAGED CONTINUED — TheGroupworkstobuildskillsand capabilitiesinriskmanagement,which areneededbybothseniormanagement andriskmanagementspecialists,while attemptingtoallocatescarceresources appropriately;and — Employeesunderstandandcareabout theirroleinmanagingrisk–theyare awareofanddiscussriskopenlyas partofthewaytheyperformtheirrole. TheGroupRiskCommitteealsohas akeyroleinprovidingadvicetothe RemunerationCommitteeonrisk managementconsiderationstobeapplied inrespectofexecutiveremuneration. Prudential’sGroupCodeofBusiness ConductandGroupGovernanceManual includeaseriesofguidingprinciplesthat governtheday-to-dayconductofallits peopleandanyorganisationsactingon itsbehalf.Thisissupportedbyspecific risk-relatedpolicieswhichrequirethat theGroupactinaresponsiblemanner. Theseinclude,butarenotlimitedto, policiesrelatedtofinancialcrimecovering anti-moneylaundering,financialcrimeand anti-briberyandcorruption.TheGroup’s third-partysupplypolicyensuresthat humanrightsandmodernslavery considerationsareembeddedacrossallof itssupplierandsupplychainarrangements. Embeddedprocedurestoallowindividuals tospeakoutsafelyandanonymously againstunethicalbehaviourandconduct arealsoinplace. TheESGExecutiveCommitteeisfocused ontheholisticassessmentofESGmatters materialtotheGroup,raisingmattersfor Boarddecision-makingandoverseeing theimplementationofresultingdecisions, supportingthesustainabledeliveryofthe Group’sstrategy.ItreportstotheBoard throughtheGroupNominationand GovernanceCommitteewhichcomprises theGroup’sChairman,theSenior IndependentDirector,andthechairsofthe Audit,RemunerationandRiskcommittees andisregularlyattendedbytheGroup ChiefExecutive. b Group Risk Framework i Risk governance and culture Prudential’sriskgovernancecomprisesthe Boardorganisationalstructures,reporting relationships,delegationofauthority,roles andresponsibilities,andriskpoliciesthat theGroupHeadOfficeandthebusiness unitsestablishtomakedecisionsand controltheiractivitiesonrisk-related matters.Itincludesindividuals,Group- widefunctionsandcommitteesinvolved inoverseeingandmanagingrisk. Theriskgovernancestructureisledby theGroupRiskCommittee,supported byindependentnon-executivedirectors onriskcommitteesoftheGroup’smain subsidiaries.Thesecommitteesmonitor thedevelopmentoftheGroupRisk Framework,whichincludesriskappetite, limits,andpolicies,aswellasriskculture. TheGroupRiskCommitteereviewsthe GroupRiskFrameworkandrecommends totheBoardanychangesrequiredto ensurethatitremainseffectivein identifyingandmanagingtherisks facedbytheGroup.Anumberofcore riskpoliciesandstandardssupportthe Frameworktoensurethatriskstothe Groupareidentified,assessed,managed andreported.Inaddition,asetofpolicies ownedbyotherGroupfunctionssupport theeffectiveimplementationoftheGroup RiskFramework. CultureisastrategicpriorityoftheBoard, whichrecognisesitsimportanceintheway thattheGroupdoesbusiness.Risk cultureisasubsetofPrudential’sbroader organisationalculture,whichshapesthe organisation-widevaluesthatweuseto prioritiseriskmanagementbehaviours andpractices. RiskcultureformspartoftheGroup RiskFrameworkandtheGroupworks topromotearesponsibleriskculture inthefollowingways: — Seniormanagementinbusinessunits promotearesponsiblecultureofrisk managementbyemphasisingthe importanceofbalancingriskwith profitabilityandgrowthindecision- making.Thisbalanceisincludedin theperformanceevaluationofkey individuals,includingbothsenior managementandthosedirectly responsibleforriskmanagement; ii The risk management cycle  Theriskmanagementcyclecomprises processestoidentify,measureandassess, manageandcontrol,andmonitorand reportonourrisks. Risk identification Group-wideriskidentificationtakes placethroughouttheyearastheGroup’s businessesundertakeacomprehensive bottom-upprocesstoidentify,assessand documentitsrisks.Thisconcludeswith anannualtop-downidentificationofthe Group’sprincipalrisks,whichconsiders thoserisksthathavethegreatestpotential toimpacttheGroup’soperatingresultsand financialconditionandisusedtoinform riskreportingtotheriskcommitteesand theBoardfortheyear. Ourriskidentificationprocessalsoincludes theGroup’sOwnRiskandSolvency Assessment(ORSA)andhorizon-scanning performedaspartofouremergingrisk managementprocess.Inadditiontorisk identification,theORSAisalsothe ongoingprocessofassessing,controlling, monitoringandreportingtheriskstowhich thebusinessisexposed.Itincludesan assessmentofcapitaladequacytoensure thattheGroup’ssolvencyneedsaremet atalltimesaswellasquantitativeand qualitativeassessmentsoftheGroup’srisk profileandsolvencyneedsonaforward- lookingbasis,incorporatingtheGroup’s strategyandbusinessplan.TheGroup’s regularORSAreportwasproducedin H12019,withanadditionalORSAreport producedinOctober2019inanticipation ofthecompletionofthedemergerofM&G plcwhichincludedaforward-looking assessmentofthepostdemergerGroup’s capitalandliquiditypositionunderarange ofstressesandscenarios. Inaccordancewithprovision28oftheUK CorporateGovernanceCode,aprocess isinplacetosupportGroup-wide identificationofthecompany’semerging andprincipalrisksandthiscombinesboth top-downandbottom-upviewsofrisks attheleveloftheGroupanditsbusiness units.TheBoardperformsarobust assessmentandanalysisoftheseprincipal andemergingrisksfacingthecompany throughtheriskidentificationprocess, theGroupORSAreportandtherisk assessmentsundertakenaspartofthe businessplanningreview,includinghow theyaremanagedandmitigated,which supportsdecision-making. 56 Prudential plc AnnualReport2019 prudentialplc.com Themethodsandriskmanagementtools thattheGroupemploystomitigateeachof itsmajorcategoriesofrisksaredetailedin thefurtherriskinformationsectionbelow. Risk monitoring and reporting TheidentificationoftheGroup’skeyrisks informsthemanagementinformation receivedbytheGroupriskcommitteesand theBoard.Riskreportingofkeyexposures againstappetiteisalsoincluded,aswellas ongoingdevelopmentsintheGroup’s principalandemergingrisks. iii Risk appetite, limits and triggers TheGrouprecognisesthatinterestsof itscustomersandshareholdersanda managedacceptanceofriskliesatthe heartofitsbusiness,andthateffectiverisk managementcapabilitiesrepresentakey sourceofcompetitiveadvantage.The extenttowhichPrudentialiswillingtotake riskinthepursuitofitsbusinessstrategy andobjectivetocreateshareholdervalue isdefinedbyanumberofqualitativeand quantitativeexpressionsofriskappetite, operationalisedthroughmeasuressuchas limits,triggersandindicators.TheGroup Riskfunctionisresponsibleforreviewing thescopeandoperationoftheserisk appetitemeasuresatleastannuallyto determinethattheyremainrelevant. TheBoardapprovesallchangesmadeto theGroup’saggregateriskappetiteand hasdelegatedauthoritytotheGroupRisk Committeetoapprovechangestothe systemoflimits,triggersandindicators. Groupriskappetiteisdefinedand monitoredinaggregateforfinancial andnon-financialrisksbythesetting ofobjectivesforitsliquidity,capital requirementsandnon-financialrisk exposure.Furtherdetailisincludedin sections5and6,aswellascoveringrisks toshareholders,includingthosefrom participatingandthird-partybusiness. Grouplimitsoperatewithinthese expressionsofriskappetitetoconstrain materialrisks,whiletriggersandindicators providefurtherconstraintanddefined pointsforescalation. Capital requirements Limitsoncapitalrequirementsaimto ensurethattheGroupmaintainssufficient capitalsuchthatinbusiness-as-usualand stressedconditionsitexceedsitsinternal economiccapitalrequirements,achieves itsdesiredtargetratingtomeetitsbusiness objectives,andsupervisoryintervention isavoided.Thetwomeasurescurrently inuseattheGrouplevelaretheregulatory localcapitalsummationmethod(LCSM) capitalrequirements(bothminimumand prescribedlevels)andinternaleconomic capital(ECap)requirements.Inaddition, capitalrequirementsaremonitoredon localstatutorybases. TheGroupRiskCommitteeisresponsible forreviewingtherisksinherentinthe Group’sbusinessplanandforproviding theBoardwithinputontherisk/reward trade-offsimplicittherein.Thisreview issupportedbytheGroupRiskfunction, whichusessubmissionsfromlocalbusiness unitstocalculatetheGroup’saggregated positionrelativetotheaggregaterisklimits. Liquidity TheobjectiveoftheGroup’sliquidityrisk appetiteistoensurethattheGroupisable togeneratesufficientcashresourcesto meetfinancialobligationsastheyfall dueinbusiness-as-usualandstressed scenarios.Riskappetitewithrespectto liquidityriskismeasuredusingaliquidity coverageratio(LCR)whichconsidersthe sourcesofliquidityagainstliquidity requirementsunderstressscenarios. Non-financial risks TheGroupisexposedtonon-financial risksasanoutcomeofitschosenbusiness activitiesandstrategy.Itaimstomanage theseriskseffectivelytomaintainits operationalresilienceanditscommitments tocustomers,andtoavoidmaterialadverse impactonitsreputation. Stressandscenariotesting,whichincludes reversestresstestingrequiringtheGroup toascertainthepointofbusinessmodel failure,isanothertoolthathelpsusto identifythekeyrisksandscenariosthat mayhaveamaterialimpactontheGroup. Theriskprofileisakeyoutputfromthe riskidentificationandriskmeasurement processesandisusedasabasisfor settingGroup-widelimits,management information,assessmentofsolvency needs,anddeterminingappropriatestress andscenariotesting.TheGroup’sannual setofprincipalrisksisgivenenhanced managementandreportingfocus. Risk measurement and assessment Allidentifiedrisksareassessedbasedon anappropriatemethodologyforthatrisk. Allquantifiablerisks,whicharematerial andmitigatedbyholdingcapital,are modelledintheGroup’sinternalmodel, whichisusedtodetermineeconomic capitalrequirements.Governance arrangementsareinplacetosupportthe internalmodel,includingindependent validationandprocessesandcontrols aroundmodelchangesandlimitations. Risk management and control Thecontrolproceduresandsystems establishedwithintheGroupare designedtomanagetheriskoffailingto meetbusinessobjectives.Thesefocuson aligningthelevelsofrisk-takingwiththe Group’sstrategyandcanonlyprovide reasonable,andnotabsolute,assurance againstmaterialmisstatementorloss. Riskmanagementandcontrol requirementsaresetoutintheGrouprisk policies,andformpartoftheholisticrisk managementapproachundertheGroup’s ORSAprocess.Theseriskpoliciesdefine: — TheGroup’sriskappetiteinrespectof materialrisks,andtheframeworkunder whichtheGroup’sexposuretothose risksislimited; — TheprocessestoenableGroupsenior managementtoeffectthemeasurement andmanagementoftheGroupmaterial riskprofileinaconsistentandcoherent way;and — Theflowsofmanagementinformation requiredtosupportthemeasurement andmanagementoftheGroup’s materialrisks. prudentialplc.com Prudential plc AnnualReport2019 57 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationGROUPCHIEFRISKANDCOMPLIANCEOFFICER’SREPORTONTHERISKSFACINGOURBUSINESS ANDHOWTHESEAREMANAGED CONTINUED Risk management Risk identification Riskidentificationcovers Group-wide: — Top-downriskidentification — Bottom-upriskidentification — Emergingriskidentification Risk measurement and assessment Risksareassessedinterms ofmateriality. Materialriskswhicharemodelled areincludedinappropriately validatedcapitalmodels. Manage and control Riskappetiteandlimitsallow forthecontrolledgrowthofour business,inlinewithbusiness strategyandplan. Processesthatsupportthe oversightandcontrolofrisks include: — TheRiskandControl Assessmentprocess. — TheOwnRiskandSolvency Assessment(ORSA). — Groupapprovedlimitsand earlywarningtriggers. — Largeriskapprovalprocess. — Globalcounterpartylimit framework. — Financialincidentsprocedures. — Stressandscenariotesting, includingreversestresstesting. Monitor and report Escalationrequirementsinthe eventofabreachareclearly defined.Riskreportingprovides regularupdatestotheGroup’s Boardandriskcommitteeson exposuresagainstBoard-approved appetitestatementsandlimits. ReportingalsocoverstheGroup’s keyrisks. n Risk identifi c ati o Risk measure m e n t a n d a s s e s s m e n t Risk governance and culture Business strategy Capital management Stress and scenario testing M o n i t o r a n d r e p ort a g e and control n M a Risk governance and culture Riskgovernancecomprisesthe Board,organisationalstructures, reportingrelationships,delegation ofauthority,rolesandresponsibilities, andriskpolicies.Riskcultureisa subsetofbroaderorganisational culture,andshapestheorganisation- widevaluesusedtoprioritiserisk managementbehaviours. Capital management Capitaladequacyismonitoredto ensurethatinternalandregulatory capitalrequirementsaremet,and thatsolvencybuffersareappropriate, overthebusinessplanninghorizon andunderstress. Business strategy Businessstrategyandthebusiness planprovidedirectiononfuture growthandinformtheleveloflimits onsolvency,liquidityandearnings andforourkeyrisks.TheGroupRisk functionprovidesinputandopinion onkeyaspectsofbusinessstrategy. Stress and scenario testing Stressandscenariotestingis performedtoassesstherobustness ofcapitaladequacyandliquidity, andtheappropriatenessofrisklimits. Recoveryplanningassessesthe effectivenessoftheGroup’srecovery measuresandtheappropriateness ofactivationpoints. 58 Prudential plc AnnualReport2019 prudentialplc.com 5 Summary risks Broadly,therisksassumedacrossthe Groupcanbecategorisedasthoserelating toitsfinancialsituation,itsbusinessand industry,regulatoryandlegalcompliance andthoserelatingtoESG.Principalrisks, whethermaterialisingwithintheGroupor atthirdpartiesonwhichtheGrouprelies, mayhaveafinancialimpactandcould alsoimpacttheperformanceofproducts orservicesprovidedtocustomersand distributors,anditsabilitytofulfil commitmentstocustomers,givingrise topotentialriskstoitsbrandandreputation. Theserisks,whicharenotexhaustive, aresummarisedbelow.Themateriality oftheserisks,whethermaterialatthelevel oftheGrouporitsbusinessunits, isalsoindicated.Furtherinformation onsomeoftheserisksandtherisk managementandmitigationinplace areincludedinsection6.TheGroup’s disclosurescoveringriskfactorsarealigned tothesamecategoriesandcanbefound attheendofthisdocument. Risks to the Group’s financial situation (including those from the external macroeconomic and geopolitical environment) TheglobaleconomicandgeopoliticalenvironmentmayimpactontheGroupdirectlybyaffectingtrendsinfinancialmarkets andassetvalues,aswelldrivingshort-termvolatility. Risksinthiscategoryincludethemarketriskstoourinvestments,thecreditqualityofourinvestmentportfolioaswellas liquidityrisk. Global economic conditions ChangesinglobaleconomicconditionscanimpactPrudential directly;forexample,byleadingtoreducedinvestment returnsandfundperformanceandliquidity,andincreasing thecostofpromises(guarantees)thathavebeenmadetoour customers.Changesineconomicconditionscanalsohavean indirectimpactontheGroup;forexample,leadingtoa decreaseinthepropensityforpeopletosaveandbuy Prudential’sproducts,aswellaschangingprevailingpolitical attitudestowardsregulation.Thisisariskwhichisconsidered materialattheleveloftheGroup. Geopolitical risk Thegeopoliticalenvironmentcandirectlyimpactonthe Groupinawiderangeofways.Financialmarketsand economicsentimenthavebeenhighlysusceptibleto geopoliticaldevelopmentsinrecentyears,withimplications fortheGroup’sfinancialsituation.Geopoliticaltensionscan resultinmasscivilprotestsand/ordisobedienceaswellasthe impositionofrestrictiveregulatoryandtradingrequirements bygovernmentsandregimes;increasingoperational,business disruptionandregulatoryrisks,andpotentiallyimpacting salesdirectly.DevelopmentsintheHongKongprotestsand therecentCOVID-19outbreakacrossAsiaarebeingclosely monitoredbytheGroupandplanshavebeenenactedto ensurethatanypotentialimpacttothebusiness,our employeesandcustomersaremanagedwithinourexisting businessresilienceprocesses. Market risks to our investments ThisisthepotentialforreducedvalueofPrudential’s investmentsresultingfromthevolatilityofassetprices, drivenbyfluctuationsinequityprices,interestrates, foreignexchangeratesandpropertyprices. IntheAsiabusiness,themainmarketrisksarisefromthevalue offeesfromitsfee-earningproductsaswellasfromthe guaranteesofsomenon-linkedproducts.IntheUS,Jackson’s fixedandvariableannuitybooksareexposedtoavarietyof marketrisksduetotheassetsbackingthesepolicies. Interestratesremainlowrelativetohistoricallevelsanda persistentlylowinterestrateenvironmentposeschallenges toboththecapitalpositionoflifeinsurersaswellastonew businessprofitability. Liquidity risk Thisistheriskofnothavingsufficientliquidassetstomeet obligationsastheyfalldue,andtheGrouplooksatthisunder bothnormalandstressedconditions.Thisisariskwhich isconsideredmaterialattheleveloftheGroup. Credit risk TheGroup’sassetportfoliogivesrisetoinvestedcreditrisk, beingthepotentialforareductioninthevalueofPrudential’s investmentsdrivenbytheloweringofcreditqualityand likelihoodofdefaults.TheassetsbackingtheJacksongeneral accountportfolioandtheAsiashareholderbusinessmeans creditriskisconsideredamaterialriskfortheGroup’s businessunits. TheGroupisalsoexposedtocounterpartydefaultrisk throughactivitiessuchasreinsuranceandderivativehedging aswellastheoperationalmanagementofcash. prudentialplc.com Prudential plc AnnualReport2019 59 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationGROUPCHIEFRISKANDCOMPLIANCEOFFICER’SREPORTONTHERISKSFACINGOURBUSINESS ANDHOWTHESEAREMANAGED CONTINUED Risks from the nature of our business and our industry TheseincludetheGroup’snon-financialrisks(includingoperationalandfinancialcrimerisk),transformationrisksfrom significantchangeactivityandtheinsurancerisksassumedbytheGroupinprovidingitsproducts. Transformation risk Thisistheriskarisingfromthedesignandexecutionof amaterialandcomplexchangeinitiative,oracombination ofinitiatives. Anumberofsignificantchangeprogrammesarecurrently inprogressthateffectboththeGroup’sstrategicvision, enableitsfuturecompliancewithimpendingregulatory changesandtomaintaintheGroup’smarketcompetitiveness. Thebreadthoftheseactivities,andtheirconsequences, includingthereputationalimpact,totheGroupshouldthey failtomeettheirobjectives,meanthatthisriskremains materialattheleveloftheGroup. Non-financial risks AcombinationofthecomplexityoftheGroup,itsactivities andtheextentoftransformationinprogresscreatesa challengingoperatingenvironment. Operationalriskistheriskoflossorunintendedgain frominadequateorfailedprocesses,personnel,systems andexternalevents,andcanarisethroughbusiness transformation,introducingnewproducts,newtechnologies, andenteringintonewmarketsandgeographies. Implementingthebusinessstrategyandprocessesfor ensuringregulatorycompliance(includingthoserelatingto theconductofitsbusiness)requiresinterconnectedchange initiativesacrosstheGroup,thepaceofwhichintroduces furthercomplexity.TheGroup’soutsourcingandthird-party relationshipsintroducetheirowndistinctrisks.Such operationalrisks,iftheymaterialise,couldresultinfinancial lossand/orreputationaldamage.Theserisksareconsidered tobematerialattheleveloftheGroup. BusinessdisruptionrisksmayimpactonPrudential’sability tomeetitskeyobjectives,ensurecontinuityofservicesto customers,andprotectitsbrandandreputation.TheGroup’s businessresilienceisacorepartofawell-embeddedbusiness continuitymanagementprogramme,whichcontributesto thewideroperationalresilienceoftheGroup. Informationsecurityanddataprivacyrisksaresignificant considerationsforPrudentialandthecybersecuritythreat continuestoevolvegloballyinsophisticationandpotential significance.Thisincludestheriskofmaliciousattackon itssystems,networkdisruptionandrisksrelatingtodata security,integrity,privacyandmisuse.Thescaleofthe Group’sITinfrastructureandnetwork(andtheservices requiredtomonitorandmanageit),stakeholderexpectations andhigh-profilecybersecurityanddatamisuseincidents acrossindustriesmeanthattheserisksareconsidered materialattheleveloftheGroup. Prudentialandtheinsuranceindustryaremakingincreasing useofemergingtechnologicaltoolsanddigitalservices, orformingpartnershipswiththirdpartiesthatprovidethese capabilities.Whilethisprovidesnewopportunities,opening upmarkets,improvinginsightsandincreasingscalability, italsocomeswithadditionalriskswhicharemanagedwithin theGroup’sexistinggovernanceandriskmanagement processes,includingadditionaloperationalrisksand increasedrisksarounddatasecurityandmisuse.Automated digitaldistributionchannelsincreasethecriticalityofsystem andprocessresilienceinordertodeliveruninterrupted servicetocustomers. Aswithallfinancialservicesfirms,thenatureoftheGroup’s businessanditsoperationsmeansthatitisexposedtofinancial crimeriskssuchasthoserelatingtomoneylaundering,fraud, sanctionscomplianceandbriberyandcorruption. Insurance risks ThenatureoftheproductsofferedbyPrudentialexposesit toinsurancerisks,whichformasignificantpartoftheoverall Groupriskprofile. Theinsurancerisksthatthebusinessisexposedtobyvirtue ofitsproductsincludepersistency risk(customerslapsing theirpoliciesatdifferentlevelsthanexpected,andatypeof policyholderbehaviourrisk);mortality risk(highernumber ofpolicyholderswithlifeprotectiondyingthanexpected); morbidity risk(morepolicyholderswithhealthprotection becomingillthanexpected)andlongevity risk(policyholders livinglongerthanexpected).Themedicalinsurancebusinessin Asiaisalsoexposedtomedical inflation risk (theincreasing costofmedicaltreatmentsbeinghigherthanexpected). ThepricingofPrudential’sproductsrequiresittomake anumberofassumptions,anddeviationsfromthese mayimpactitsreportedprofitabilityandcapitalposition. Acrossitsbusinessunits,someinsurancerisksaremore materialthanothers. Persistencyandmorbidityrisksareamongthemostmaterial insurancerisksfortheAsiabusinessgiventhefocusonhealth andprotectionproductsintheregion. TheJacksonbusinessismostexposedtopolicyholder behaviourrisk,includingpersistency,whichimpactsthe profitabilityofthevariableannuitybusinessandisinfluenced bymarketperformanceandthevalueofpolicyguarantees. Conduct risk Prudential’sconductofbusiness,especiallythedesignand distributionofitsproductsiscrucialinensuringthatthe Group’scommitmenttomeetingcustomers’needsand expectationsaremet.TheGroup’sconductriskframework isownedbythefirstlinewhichreflectsmanagementfocus onachievinggoodcustomeroutcomes. 60 Prudential plc AnnualReport2019 prudentialplc.com Risks related to regulatory and legal compliance Theseincluderisksassociatedwithprospectiveregulatoryandlegalchangesandcompliancewithexistingregulationsand laws–includingtheirretrospectiveapplication–withwhichtheGroupmustcomplywithintheconductofitsbusiness. Prudentialoperatesundertheever-evolvingrequirements setoutbydiverseregulatory,legalandtaxregimes.The increasingshifttowardsmacroprudentialregulationandthe numberofregulatorychangesunderwayacrossAsiaandUS (inparticularfocusingoncapitalrequirementsandconsumer protection)arekeyareasoffocus.Regulatoryreforms canhaveamaterialimpactonPrudential’sbusinesses. From21October2019,Prudential’sGroup-widesupervisor changedtotheHongKongIA.Asaresult,theGroupis nowapplyingthelocalcapitalsummationmethod(LCSM) todetermineGroupregulatorycapitalrequirements (bothminimumandprescribedlevels).TheHongKongIA’s Group-wideSupervision(GWS)Frameworkisexpected tobefinalisedinthesecondhalfof2020. Astheindustry’suseofemergingtechnologicaltoolsand digitalservicesincreases,thisislikelytoleadtonewand unforeseenregulatoryissues.TheGroupismonitoringthe regulatorydevelopmentsandstandardsemergingaround thegovernanceandethicaluseoftechnologyanddata. The Group’s ESG-related risks Theseincludeenvironmentalrisksassociatedwithclimatechange(includingphysicalandtransitionrisks),socialrisksthatarise fromthediversepeopleandcommunitiesthattheGroupinteractswithandgovernance-relatedrisks. AsaGroup,respondingeffectivelytothosematerialriskswith ESGimplicationsiscrucialinmaintainingPrudential’sbrand andreputation,andinturnitsfinancialperformanceand deliveryofitslong-termstrategy. Theseincludetheenvironmental risksassociated withclimatechangeandtheimpactofthisonthebusiness, suchasthephysicalimpactsontheGroup’soperational resilience,underwritingassumptionsandclaimsprofile, aswellastheimpacttolong-termassetvaluationsresulting fromthetransitiontoalowcarboneconomy.Social risks affectingPrudentialmayarisefrompublichealthand demographicchanges(suchasincreasingobesityand urbanisation),whichmayimpactonproductclaimsprofiles. Socialrisksmayalsoarisefromafailuretoconsidertherights, diversity,well-being,andinterestsofpeopleand communitiesinwhichtheGroup,oritsthird-parties, operates.ThisincludestheresponsibilitiestheGroup assumesasaresponsibleemployer.Governance risks mayarisefromafailuretomaintainhighstandardsof corporategovernance(includingcommitteeindependence anddiversity)seniormanagementbehavioursandoversight ofkeyrisks. PoliciesandprocedurestosupporthowtheGroupoperates inrelationtocertainESGissuesareincludedintheGroup GovernanceManual.FurtherinformationonhowPrudential addressesmaterialrisksassociatedwithESGthemesare includedintheESGSummary. 6 Further risk information Inreadingthesectionsbelow,itisuseful tounderstandthattherearesomerisks thatPrudential’spolicyholdersassume byvirtueofthenatureoftheirproducts, andsomerisksthattheCompanyandits shareholdersassume.Examplesofthe latterincludethoserisksarisingfromassets helddirectlybyandfortheCompanyorthe riskthatpolicyholderfundsareexhausted. Thisreportisfocusedmainlyonrisksto theshareholderbutwillincludethose whichariseindirectlythroughour policyholderexposures. 6.1 Risks to the Group’s financial situation, including those from the external macroeconomic and geopolitical environment a Market risk (Audited) Themaindriversofmarketriskinthe Groupare: — Investmentrisk,whichariseson ourholdingsofequityandproperty investments,thepricesofwhich canchangedependingonmarket conditions.Themaininvestmentrisk exposurearisesfromtheportion oftheprofitsfromtheHongKong with-profitsfundswhichthe shareholdersareentitledtoreceive; thevalueofthefuturefeesfrom thefee-earningproductsinthe Asiabusiness;andfromtheasset returnsbackingJackson’svariable annuitiesbusiness; — Interestraterisk,whichisdrivenby thevaluationofPrudential’sassets (particularlythebondsthatitinvestsin) andliabilities,whicharedependenton marketinterestratesandexposesitto theriskofthosemovinginawaythatis detrimental.TheGroup’sinterestrate riskisdrivenbyJackson’sfixedannuity business,thecostofguaranteesin itsfixedindexandvariableannuity business,andtheguaranteesofsome non-unit-linkedinvestmentsavings productsinAsia.Theimpactoflower interestratesalsomanifeststhrough reducedsolvencylevelsinsomeofthe Asianbusinessesaswellasreduced newbusinessprofitability;and — Foreignexchangerisk,through translationofitsprofitsandassetsand liabilitiesdenominatedinvarious currencies,giventhegeographical diversityofthebusiness. prudentialplc.com Prudential plc AnnualReport2019 61 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationGROUPCHIEFRISKANDCOMPLIANCEOFFICER’SREPORTONTHERISKSFACINGOURBUSINESS ANDHOWTHESEAREMANAGED CONTINUED TheGrouphasappetiteformarketrisk whereitarisesfromprofit-generating insuranceactivitiestotheextentthatit remainspartofabalancedportfolioof sourcesofincomeforshareholdersandis compatiblewitharobustsolvencyposition. TheGroup’smarketrisksaremanaged andmitigatedbythefollowing: — TheGroupmarketriskpolicy; — TheGroupAssetLiabilityCommittee –afirst-lineriskmanagementadvisory committeetotheGroupChief ExecutiveOfficerwhichsupports theidentification,assessmentand managementofkeyfinancialrisks significanttotheachievementof theGroup’sbusinessobjectives; — Riskappetitestatements,limits andtriggers; — Ourassetandliabilitymanagement programmeswhichinclude managementactionssuchasasset allocation,bonusrevisions,repricing andtheuseofreinsurancewhere appropriate; — Hedgingderivatives,includingequity optionsandfutures,interestrateswaps andswaptionsandcurrencyforwards; — Themonitoringandoversightofmarket risksthroughtheregularreporting ofmanagementinformation;and — Regulardeepdiveassessments. Equity and property investment risk InAsia,theshareholderexposuretoequity pricemovementsresultsfromunit-linked products,wherefeeincomeislinkedto themarketvalueofthefundsunder management.Furtherexposurearises fromwith-profitsbusinesseswhere bonusesdeclaredarebasedbroadlyon historicalandcurrentratesofreturnfrom theAsiabusiness’sinvestmentportfolios, whichincludeequities. InJackson,investmentriskarisesfromthe assetsbackingcustomerpolicies.Equity riskisdrivenbythevariableannuity business,wheretheassetsareinvestedin bothequitiesandbondsandthemainrisk totheshareholdercomesfromproviding theguaranteedbenefitsoffered.The exposuretothisisprimarilycontrolledby usingaderivativehedgingprogramme, aswellasthroughtheuseofreinsurance topassontherisktothird-partyreinsurers. Whileacceptingtheequityexposurethat arisesonfuturefees,theGrouphaslimited appetiteforexposurestoequityprice movementstoremainunhedgedorfor volatilitywithinpolicyholderguarantees aftertakingintoaccountanynaturaloffsets andbufferswithinthebusiness. Interest rate risk SomeproductsthatPrudentialoffers aresensitivetomovementsininterest rates.AspartoftheGroup’songoing managementofthisrisk,anumberof mitigatingactionstothein-forcebusiness havebeentaken,aswellasrepricingand restructuringnewbusinessofferingsin responsetorecentrelativelylowinterest rates.Nevertheless,somesensitivityto interestratemovementsisstillretained. TheGroup’sappetiteforinterestraterisk islimitedtowhereassetsandliabilities canbetightlymatchedandwhereliquid assetsorderivativesexisttocoverinterest rateexposures. InAsia,ourexposuretointerestraterisk arisesfromtheguaranteesofsomenon-unit- linkedinvestmentsavingsproducts, includingtheHongKongwith-profitsand non-profitbusiness.Thisexposureexists becauseofthepotentialforanasset andliabilitymismatch,wherelong-dated liabilitiesandguaranteesarebacked byshort-datedassets,whichcannotbe eliminated,butismonitoredandmanaged throughlocalriskandassetliability managementcommitteesagainstrisk appetitealignedwiththeGroup’slimit framework. Jacksonisaffectedbyinterestrate movementstoitsfixedannuitybookwhere theassetsareprimarilyinvestedinbonds andshareholderexposurecomesfrom themismatchbetweentheseassetsand theguaranteedratesthatareofferedto policyholders.Interestrateriskresults fromthecostofguaranteesinthevariable annuityandfixedindexannuitybusiness, whichmayincreasewheninterestrates fall.Thelevelofsalesofvariableannuity productswithguaranteedlivingbenefits isactivelymonitored,andtherisklimits wehaveinplacehelptoensureweare comfortablewiththelevelofinterest rateandmarketrisksincurredasaresult. Derivativesarealsousedtoprovide someprotection. Foreign exchange risk ThegeographicaldiversityofPrudential’s businessesmeansthatithassome exposuretotheriskofforeignexchange ratefluctuations.Someentitieswithinthe Groupthatwritepolicies,investinassets orenterintoothertransactionsinlocal currenciesorcurrenciesnotlinkedtothe USdollar.Althoughthislimitstheeffect ofexchangeratemovementsonlocal operatingresults,itcanleadtofluctuations intheGroupfinancialstatementswhen resultsarereportedinUSdollars.Thisrisk isacceptedwithinourappetiteforforeign exchangerisk. Incaseswhereanon-USdollar denominatedsurplusarisesinan operationwhichistobeusedtosupport Groupcapital,orwhereasignificant cashpaymentisduefromasubsidiary totheGroup,thiscurrencyexposure maybehedgedwhereitisbelievedtobe favourableeconomicallytodoso.Further, theGroupgenerallydoesnothaveappetite forsignificantdirectshareholderexposure toforeignexchangerisksincurrencies outsidethecountriesinwhichitoperates, butitdoeshavesomeappetiteforthis onfeeincomeandonnon-sterling investmentswithinthewith-profitsfund. Whereforeignexchangeriskarises outsideappetite,currencyswapsand otherderivativesareusedtomanage theexposure. b Credit risk (Audited) Prudentialinvestsinbondsthatprovide aregular,fixedamountofinterestincome (fixedincomeassets)inordertomatchthe paymentsneededtopolicyholders.Italso entersintoreinsuranceandderivative contractswiththirdpartiestomitigate varioustypesofrisk,aswellasholding cashdepositsatcertainbanks.Asaresult, itisexposedtocreditriskandcounterparty riskacrossitsbusiness. Creditriskisthepotentialforreductionin thevalueofinvestmentswhichresultsfrom theperceivedlevelofriskofaninvestment issuerbeingunabletomeetitsobligations (defaulting).Counterpartyriskisatype ofcreditriskandrelatestotheriskofthe counterpartytoanycontractweenterinto beingunabletomeettheirobligations causingustosufferloss. TheGrouphassomeappetitetotakecredit riskwhereitarisesfromprofit-generating insuranceactivities,totheextentthatit remainspartofabalancedportfolioof sourcesofincomeforshareholdersandis compatiblewitharobustsolvencyposition. Anumberofriskmanagementtoolsare usedtomanageandmitigatethiscredit risk,includingthefollowing: — Acreditriskpolicyanddealingand controlspolicy; — Riskappetitestatementsandlimits thathavebeendefinedonissuers, andcounterparties; 62 Prudential plc AnnualReport2019 prudentialplc.com — Collateralarrangementsforderivative, securedlendingreverserepurchase andreinsurancetransactions; — TheGroupCreditRiskCommittee’s oversightofcreditandcounterparty creditriskandsectorand/orname- specificreviews; — Regularassessments;and — Closemonitoringorrestrictionson investmentsthatmaybeofconcern. Debt and loan portfolio Creditriskalsoarisesfromthedebt portfoliointheAsiabusinesscomprising theshareholder,with-profitandunit-linked funds,thevalueofwhichwas$74.7billion at31December2019.Themajority (67percent)oftheportfolioisinunit- linkedandwith-profitsfundsand soexposureoftheshareholdertothis componentisminimal.Theremaining 33percentofthedebtportfolioisheld tobacktheshareholderbusiness. InthegeneralaccountoftheGroup’sUS business,$58.5billionofdebtsecurities areheldtosupportshareholderliabilities includingthosefromourfixedannuities,fixed indexannuitiesandlifeinsuranceproducts. Theshareholder-backeddebtportfolio oftheGroup’sotheroperationswas $1.3billionasat31December2019. Furtherdetailsofthecompositionand qualityofourdebtportfolio,andexposure toloans,canbefoundintheIFRSfinancial statements. Group sovereign debt Prudentialalsoinvestsinbondsissued bynationalgovernments.Thissovereign debtholdingsrepresented21percent or$18.0billion1oftheshareholderdebt portfoliooftheGroupasat31December 2019(31December2018:20percentor $14.8billionoftheshareholderdebt portfolioattributabletocontinuing operations).Onepercentofthiswasrated AAAand83percentwasconsidered investmentgrade(31December2018: 84percentofthesovereigndebtholdings attributabletocontinuingoperationswas consideredinvestmentgrade). Theparticularrisksassociatedwithholding sovereigndebtaredetailedfurtherinour disclosuresonriskfactors. Theexposuresheldbytheshareholder- backedbusinessandwith-profitsfundsin sovereigndebtsecuritiesat31December 2019aregiveninnoteC3.2(d)ofthe Group’sIFRSfinancialstatements. Shareholder exposure by rating AAA AA A BBB BBorbelow 6% 22% 32% 32% 8% Shareholder exposure by sector Government Financial Consumer,non-cyclical Utilities Industrial Energy Communications Consumer,cyclical Basicmaterials Technology Other 26.74% 25.72% 10.74% 10.72% 6.59% 6.34% 3.78% 3.61% 2.57% 2.09% 1.10% Bank debt exposure and counterparty credit risk Prudential’sexposuretobanksisakeypart ofitscoreinvestmentbusiness,aswellas beingimportantforthehedgingandother activitiesundertakentomanageitsvarious financialrisks.Giventheimportanceof itsrelationshipwithitsbanks,exposure tothesectorisconsideredamaterialrisk fortheGroup. Theexposuresheldbytheshareholder- backedbusinessandwith-profitsfundsin bankdebtsecuritiesat31December2019 aregiveninnoteC3.2(d)oftheGroup’s IFRSfinancialstatementsforcontinuing operations. Theexposuretoderivativecounterparty andreinsurancecounterpartycreditriskis managedusinganarrayofriskmanagement tools,includingacomprehensivesystem oflimits.Whereappropriate,Prudential reducesitsexposure,buyscredit protectionorusesadditionalcollateral arrangementstomanageitslevelsof counterpartycreditrisk. At31December2019: — 92percentoftheGroup’sshareholder portfolioisinvestmentgraderated2.In particular,61percentoftheportfoliois rated2A-andabove(orequivalent);and — TheGroup’sshareholderportfoliois welldiversified:noindividualsector3 makesupmorethan15percentofthe totalportfolio(excludingthefinancial andsovereignsectors). c Liquidity risk (Audited) Prudential’sliquidityriskarisesfromthe needtohavesufficientliquidassetstomeet policyholderandthird-partypayments astheyfalldue.Thisincorporatestherisk arisingfromfundscomposedofilliquid assetsandresultsfromamismatch betweentheliquidityprofileofassets andliabilities.Liquidityriskmayimpacton marketconditionsandvaluationofassets inamoreuncertainwaythanforotherrisks likeinterestrateorcreditrisk.Itmayarise, forexample,whereexternalcapitalis unavailableatsustainablecost,increased liquidassetsarerequiredtobeheldas collateralunderderivativetransactions orwhereredemptionrequestsaremade againstPrudentialexternalfunds. prudentialplc.com Prudential plc AnnualReport2019 63 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationGROUPCHIEFRISKANDCOMPLIANCEOFFICER’SREPORTONTHERISKSFACINGOURBUSINESS ANDHOWTHESEAREMANAGED CONTINUED Prudentialhasnoappetiteforliquidityrisk, ieforanybusinesstohaveinsufficient resourcestocoveritsoutgoingcashflows, orfortheGroupasawholetonotmeet cashflowrequirementsfromitsdebt obligationsunderanyplausiblescenario. TheGrouphassignificantinternalsources ofliquidity,whicharesufficienttomeetall ofourexpectedcashrequirementsforat least12monthsfromthedatethefinancial statementsareapproved,withouthaving toresorttoexternalsourcesoffunding. TheGrouphasatotalof£2.0billionof undrawncommittedfacilitiesthatcanbe madeuseof,expiringin2024.Accessto furtherliquidityisavailablethroughthe debtcapitalmarketsandanextensive commercialpaperprogrammeisinplace, andPrudentialhasmaintainedaconsistent presenceasanissuerinthemarketfor thepastdecade. Anumberofriskmanagementtoolsare usedtomanageandmitigatethisliquidity risk,includingthefollowing: — TheGroup’sliquidityriskpolicy; — Riskappetitestatements,limits andtriggers; — RegularassessmentbytheGroup andbusinessunitsofLCRswhichare calculatedunderbothbasecaseand stressedscenariosandarereported tocommitteesandtheBoard; — TheGroup’sLiquidityRisk ManagementPlan,whichincludes detailsoftheGroupLiquidityRisk Frameworkaswellasgapanalysis ofliquidityrisksandtheadequacy ofavailableliquidityresourcesunder normalandstressedconditions; — Regularstresstesting; — Ourcontingencyplansandidentified sourcesofliquidity; — TheGroup’sabilitytoaccessthe moneyanddebtcapitalmarkets; — Regulardeepdiveassessments;and — TheGroup’saccesstoexternal committedcreditfacilities. 6.2 Risks arising from the nature of the Group’s business and industry a Transformation risk Anumberofsignificantchange programmesarecurrentlyrunninginorder toimplementtheGroup’sstrategicvision, complywithimpendingregulatorychanges andtomaintainmarketcompetitiveness. Manyoftheseprogrammesare interconnectedwithcomplex dependenciesand/oroflargescale, andmayhavefinancialandnon-financial implicationsiftheyfailtomeettheir objectives.Additionally,theseprogrammes inherentlygiverisetodesignandexecution risks,andmayintroducenew,orincrease existing,businessrisks.Theseinclude anincreasedstrainontheoperational capacity,newly-implementedcontrols beingineffectiveorgeneralweakening ofthecontrolenvironmentoftheGroup. Implementingfurtherstrategicinitiatives mayamplifytheserisks.Furthermore, theseprogrammesrequireongoing oversight,coordinatedindependent assuranceandregularmonitoringand consolidatedreporting,aspartofthe Group’sTransformationRiskFramework, tomitigatetheriskstothebusiness. TheGroup’scurrentsignificantchange programmesrelatetoanexpansionofits useoftechnology,platformsandanalytics, improvingtheefficiencyofcertainbusiness functionsandprocesses(data,systems, people)andtheestablishmentofnew third-partyarrangements.TheGroup’s transformationportfolioalsoincludes programmesrelatedtoregulatorychange, includingbutnotlimitedto,thetransition totheHongKongIA’sGWSframework, thediscontinuationofIBORsandthe implementationofIFRS17–seesection 6.3forfurtherinformation. b Non-financial risks Inthecourseofdoingbusiness,theGroup isexposedtonon-financialrisksarising fromitsoperations,thebusiness environmentanditsstrategy.Themain risksacrosstheseareasaredetailedbelow. Operational risk Prudentialdefinesoperationalriskasthe riskofloss(orunintendedgainorprofit) arisingfrominadequateorfailedinternal processes,personnelorsystems,orfrom externalevents.Thisincludesemployee error,modelerror,systemfailures,fraudor someothereventwhichdisruptsbusiness processesorhasadetrimentalimpactto customers.Processesareestablishedfor activitiesacrossthescopeofourbusiness, includingoperationalactivity,regulatory compliance,andthosesupportingESG activitiesmorebroadly,anyofwhichcan exposeustooperationalrisks.Alarge volumeofcomplextransactionsis processedbytheGroupacrossanumber ofdiverseproductsandaresubjecttoa highnumberofvaryinglegal,regulatory andtaxregimes.Prudentialhasnoappetite formateriallosses(directorindirect) sufferedasaresultoffailingtodevelop, implementormonitorappropriatecontrols tomanageoperationalrisks. TheGroup’soutsourcingandthird-party relationshipsrequiredistinctoversight andriskmanagementprocesses.Anumber ofimportantthird-partyrelationships existwhichprovidethedistribution andprocessingofPrudential’sproducts, bothasmarketcounterpartiesandas outsourcingpartners,andnewITand technologypartnersarebeingengaged. InAsia,theGroupcontinuestoexpand itsstrategicpartnershipsandrenew bancassurancearrangementsandinAfrica Prudentialiscontinuingitsexpansion throughacquisitions.Thesethird-party arrangementssupportPrudentialin providingahighlevelandcost-effective servicetoourcustomers,buttheyalso makeusreliantontheoperational resilienceandperformanceofour outsourcingpartners. 64 Prudential plc AnnualReport2019 prudentialplc.com TheGroup’srequirementsforthe managementofmaterialoutsourcing arrangements,whichareinaccordance withrelevantapplicableregulations,are includedthroughitswell-established Group-widethird-partysupplypolicy. Third-partymanagementisalsoincluded intheGroup-wideframeworkandrisk managementforoperationalrisk(see below).Third-partymanagementforms partoftheGroup’soperationalrisk categorisationsandadefinedqualitative riskappetitestatement,limitsandtriggers areinplace. TheperformanceoftheGroup’score businessactivitiesplacesrelianceonthe ITinfrastructure,providedbyourexternal ITandtechnologypartners,thatsupports day-to-daytransactionprocessingand administration.TheITenvironmentmust alsobesecure,andanincreasingcyber riskthreatneedstobeaddressedasthe Group’sdigitalfootprintincreasesandthe sophisticationofcyberthreatscontinueto evolve–seeseparateinformationsecurity risksub-sectionbelow.Exposureto operationalandotherexternalevents couldimpactoperationalresilienceby significantlydisruptingsystems,operations andservicestocustomers,whichmay resultinfinancialloss,customerimpacts andreputationaldamage. Operationalchallengesalsoexistinkeeping pacewithregulatorychanges.Thisrequires implementingprocessestoensureweare, andremain,compliantonanongoingbasis, includingregularmonitoringandreporting. Seesection6.3forfurtherdetailonthe Group’sregulatoryandlegalrisks. Business disruption risk Prudentialrecognisesthatbusiness disruptionisakeyrisktoeffectivebusiness operationsanddeliveryofbusiness services,andhasthepotentialtoimpact ourcustomersandthemarketmore broadly.TheGroupthereforecontinuously seekstodevelopgreaterbusiness resiliencethroughplanning,preparation, testingandadaption.Businesscontinuity management(BCM)isoneofanumber ofactivitiesundertakenbytheGroup SecurityfunctionthathelpstheGroup toprotectitskeystakeholdersandits systems,andbusinessresilienceisatthe coreoftheGroup’sembeddedBCM programme.TheBCMprogrammeand frameworkareappropriatelylinkedtoall businessactivities,andincludesbusiness impactanalyses,riskassessments,incident managementplans,disasterrecovery plans,andtheexercisingandexecutionof theseplans.Basedonindustrystandards, theBCMprogrammeisdesignedto providebusinesscontinuitythatmatches theGroup’sevolvingbusinessneeds andisappropriatetothesize,complexity andnatureoftheGroup’soperations. Prudentialisalsotakingabroader, multi-functionalapproachtobuilding greaterbusinessresilience,workingwith ourexternalthird-partyprovidersand ourservicedeliveryteamstoimproveour abilitytowithstand,absorbandrecover fromdisruptiontoourbusinessservices, whileminimisingtheimpactonour customers.TheGroupcontinuously reviewsanddevelopsitscontingency plansanditsabilitytorespondeffectively whendisruptiveincidentsoccur,suchas thoseresultingfromtheHongKongprotests andtherecentCOVID-19outbreak. Businessdisruptionrisksareclosely monitoredbytheGroupSecurityfunction, withkeyoperationaleffectivenessmetrics andupdatesonspecificactivitiesbeing reportedtotheGroupRiskCommittee anddiscussedbycross-functional workinggroups. Information security risk and data privacy Informationsecurityriskremainsanarea ofheightenedfocusafteranumberof recenthigh-profileattacksanddatalosses acrossindustries.Criminalcapabilityin thisareaismaturingandindustrialising, withanincreasedlevelofunderstanding ofcomplexfinancialtransactionswhich increasestheriskstothefinancial servicesindustry.Thethreatlandscape iscontinuouslyevolving,andthesystemic riskofsophisticatedbutuntargeted attacksisrising,particularlyduringtimes ofheightenedgeopoliticaltensions. Developmentsindataprotection requirements,suchasGDPRthatcame intoforceinMay2018andtheCalifornia ConsumerProtectionActwhichcameinto forceon1January2020,continuetoevolve worldwide.Thisincreasesfinancialand reputationalimplicationsforPrudentialin theeventofabreachofits(orthird-party suppliers’)ITsystems.Aswellasprotecting data,stakeholdersexpectcompaniesand organisationstousepersonalinformation transparentlyandappropriately.Giventhis, bothinformationsecurityanddataprivacy arekeyrisksfortheGroup.Aswellas havingpreventativeriskmanagementin place,itisfundamentalthattheGrouphas robustcriticalrecoverysystemsinplace intheeventofasuccessfulattackonits infrastructure,abreachofitsinformation securityorafailureofitssystemsinorder toretainitscustomerrelationshipsand trustedreputation. During2019,therevisedorganisational structureandgovernancemodelforcyber securitymanagementwasimplemented. Thischangehasresultedinacentralised Group-wideInformationSecurityand Privacyfunction,leveragingskills,tools andresourcesacrossthebusinessunder a‘centreofexcellence’model.This organisationalchangehasincreasedthe Group’sefficiencyandagilityinresponding tocybersecurityrelatedincidentsandhas facilitatedincreasedcollaborationbetween businessunitsleveragingtheirrespective strengthsindeliveringtheGroup-wide informationsecurityprogramme. Thestrategicobjectivesoftheprogramme includeachievingconsistencyinthe executionofsecuritydisciplinesacross theGroup,improvingvisibilityacross Prudential’sbusinessesanddeployment ofautomationtodetectandaddress threats.Italsoincludesachievingsecurity bydesignbyaligningsubjectmatter expertisetotheGroup’sdigitaland businessinitiativestoembedsecurity controlsacrossplatformsandecosystems. Implementationoftheoperatingmodel andprogressagainstthesestrategic objectiveshavecontinuedovertheyear. TheBoardreceivesperiodicupdateson informationsecurityriskmanagement throughouttheyear.Groupfunctions workwiththebusinessunitstoaddress riskslocallywithinthenationalandregional contextofeachbusinessfollowingthe strategicdirectionoftheGroup-wide informationsecurityfunction. prudentialplc.com Prudential plc AnnualReport2019 65 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationGROUPCHIEFRISKANDCOMPLIANCEOFFICER’SREPORTONTHERISKSFACINGOURBUSINESS ANDHOWTHESEAREMANAGED CONTINUED Financial crime risk Aswithallfinancialservicesfirms, Prudentialisexposedtorisksrelating tomoneylaundering(theriskthatthe productsorservicesoftheGroupare usedbycustomersorotherthirdpartiesto transferorconcealtheproceedsofcrime); fraud(theriskthatfraudulentclaimsor transactions,orprocurementofservices, aremadeagainstorthroughthebusiness); sanctionscompliance(theriskthatthe Groupundertakesbusinesswith individualsandentitiesonthelistsofthe mainsanctionsregimes);andbriberyand corruption(theriskthatemployeesor associatedpersonsseektoinfluencethe behaviourofotherstoobtainanunfair advantageorreceivebenefitsfromothers forthesamepurpose). Prudentialoperatesinsomehigh-risk countrieswhere,forexample,the acceptanceofcashpremiumsfrom customersmaybecommonpractice, large-scaleagencynetworksmaybe inoperationwheresalesareincentivised bycommissionandfeesorwherethere isahigherconcentrationofexposure topolitically-exposedpersons. TheGroup-widepolicieswehaveinplace onanti-moneylaundering,fraud,sanctions andanti-briberyandcorruptionreflectthe values,behavioursandstandardsthatare expectedacrossthebusiness.AcrossAsia, screeningandtransactionmonitoring systemsareinplaceandaseriesof improvementsandupgradesarebeing implemented,whileaprogrammeof compliancecontrolmonitoringreviewsis beingundertaken.Riskassessmentsare performedannuallyathigherrisklocations. Duediligencereviewsandassessments againstPrudential’sfinancialcrimepolicies areperformedaspartoftheGroup’s businessacquisitionprocess.TheGroup continuestoundertakestrategicactivity tomonitorandevaluatetheevolvingfraud risklandscape,mitigatethelikelihoodof fraudoccurringandincreasetherateof detection. TheGrouphasinplaceamature confidentialreportingsystemthrough whichstaffandotherstakeholderscan reportconcernsrelatingtopotential misconduct.Theprocessandresults ofthisareoverseenbytheGroup AuditCommittee. Group-wide framework and risk management for operational risk Therisksdetailedaboveformkeyelements oftheGroup’soperationalriskprofile.In ordertoidentify,assess,manage,control andreporteffectivelyonalloperational risksacrossthebusiness,aGroup-wide operationalriskframeworkisinplace. Thekeycomponentsoftheframeworkare: TheGroupOperationalRiskPolicy, standardsandoperationalriskappetite frameworksitalongsideotherriskpolicies andstandardsthatindividuallyengage withkeyoperationalrisks,including outsourcingandthird-partysupply, businesscontinuity,financialcrime, technologyanddata,operations processesandextentoftransformation. — Applicationofariskandcontrol assessment(RCA)process,where operationalriskexposuresareidentified andassessedaspartofaperiodical cycle.TheRCAprocessconsidersa rangeofinternalandexternalfactors, includinganassessmentofthecontrol environment,todeterminethe business’smostsignificantrisk exposuresonaprospectivebasis; — Aninternalincidentmanagement process,whichidentifies,quantifies andmonitorsremediationconducted throughrootcauseanalysisand applicationofactionplansforrisk eventsthathaveoccurredacross thebusiness; Thesepoliciesandstandardsinclude subjectmatterexpert-ledprocessesthat aredesignedtoidentify,assess,manage andcontroloperationalrisks,including: — Atransformationriskframeworkthat assesses,managesandreportsonthe end-to-endtransformationlifecycle, projectprioritisationandtherisks, interdependenciesandpossible conflictsarisingfromalargeportfolio oftransformationactivities; — Internalandexternalreviewofcyber securitycapabilityanddefences; — Regularupdatingandtestingof elementsofdisaster-recoveryplansand theCriticalIncidentProcedureprocess; — Ascenarioanalysisprocessforthe — Groupandbusinessunit-level quantificationofextreme,yetplausible manifestationsofkeyoperationalrisks acrossthebusinessonaforward- lookingbasis.Thisiscarriedoutatleast annuallyandsupportsexternaland internalcapitalrequirementsaswellas informingriskoversightactivityacross thebusiness;and — Anoperationalriskappetiteframework thatarticulatesthelevelofoperational riskexposurethebusinessiswilling totolerate,coveringalloperational riskcategories,andsetsoutescalation processesforbreachesofappetite. Outputsfromtheseprocessesand activitiesperformedbyindividualbusiness unitsaremonitoredbytheGroupRisk function,whichprovidesanaggregated viewoftheriskprofileacrossthebusiness totheGroupRiskCommitteeandBoard. Thesecoreframeworkcomponentsare embeddedacrosstheGroupviatheGroup OperationalRiskPolicyandStandards documents,whichsetoutthekey principlesandminimumstandardsfor themanagementofoperationalriskacross theGroup. complianceoversightandtestingin respectofadherencewithin-force regulations; — Regulatorychangeteamsinplace toassistthebusinessinproactively adaptingandcomplyingwith regulatorydevelopments; — Onfinancialcrimerisks,screening andtransactionmonitoringsystems areinplaceandaprogrammeof compliancecontrolmonitoringreviews isundertaken,aswellasregularrisk assessments; — Aframeworkisinplaceforemerging riskidentificationandanalysisin ordertocapture,monitorandallow ustoprepareforoperationalrisks thatmaycrystallisebeyondthe short-termhorizon; — Corporateinsuranceprogrammesto limitthefinancialimpactofoperational risks;and — Reviewsofkeyoperationalrisksand challengeswithinGroupandbusiness unitbusinessplans. 66 Prudential plc AnnualReport2019 prudentialplc.com Theseactivitiesarefundamentalin maintaininganeffectivesystemof internalcontrol,andassuchoutputs fromthesealsoinformcoreRCA,incident managementandscenarioanalysis processesandreportingonoperational risk.Furthermore,theyalsoensurethat operationalriskconsiderationsare embeddedinkeybusinessdecision- making,includingmaterialbusiness approvalsandinsettingandchallenging theGroup’sstrategy. c Insurance risks (Audited) Insuranceriskmakesupasignificant proportionofPrudential’soverallrisk exposure.Theprofitabilityofitsbusinesses dependsonamixoffactors,includinglevels of,andtrendsin,mortality(policyholders dying),morbidity(policyholdersbecoming ill)andpolicyholderbehaviour(variabilityin howcustomersinteractwiththeirpolicies, includingutilisationofwithdrawals,take-up ofoptionsandguaranteesandpersistency, ielapsingofpolicies),andincreasesinthe costsofclaims,includingthelevelof medicalexpensesincreasesoverand abovepriceinflation(claiminflation). TheGrouphasappetiteforretaining insurancerisksinordertocreate shareholdervalueintheareaswhereit believesithasexpertiseandcontrolsto managetheriskandcansupportsuchrisk withitscapitalandsolvencyposition. TheprincipaldriversoftheGroup’s insuranceriskvaryacrossitsbusinessunits. AcrossAsia,whereasignificantvolume ofhealthandprotectionbusinessiswritten, themostsignificantinsurancerisksare morbidityrisk,persistencyrisk,andmedical inflationrisk.InJackson,policyholder behaviourriskisparticularlymaterial, especiallyinthetakeupofoptionsand guaranteesonvariableannuitybusiness. InAsia,Prudentialwritessignificant volumesofhealthandprotectionbusiness, andsoakeyassumptionistherateof medicalinflation,whichisofteninexcess ofgeneralpriceinflation.Thereisariskthat theexpensesofmedicaltreatmentincrease morethanexpected,sothemedicalclaim costpassedontoPrudentialishigherthan anticipated.Medicalexpenseinflationrisk isbestmitigatedbyretainingtherightto repriceourproductseachyearandby havingsuitableoverallclaimlimitswithin ourpolicies,eitherlimitspertypeofclaim orintotalacrossapolicy.Prudential’s morbidityriskismitigatedbyappropriate underwritingwhenpoliciesareissuedand claimsarereceived.Ourmorbidity assumptionsreflectourrecentexperience andexpectationoffuturetrendsforeach relevantlineofbusiness. TheGroup’spersistencyassumptions reflectsimilarlyacombinationofrecent pastexperienceforeachrelevantlineof businessandexpertjudgement,especially wherealackofrelevantandcredible experiencedataexists.Anyexpected changeinfuturepersistencyisalso reflectedintheassumptions.Persistency riskismanagedbyappropriatetrainingand salesprocesses(includingactivecustomer engagementandservicequality)and managedlocallypost-salethrough regularexperiencemonitoringandthe identificationofcommoncharacteristics ofbusinesswithhighlapserates.Where appropriate,allowanceismadeforthe relationship(eitherassumedorobserved historically)betweenpersistencyand investmentreturnsandanyadditionalrisk isaccountedfor.Modellingthisdynamic policyholderbehaviourisparticularly importantwhenassessingthelikely take-uprateofoptionsembeddedwithin certainproducts.Theeffectofpersistency ontheGroup’sfinancialresultscanvary butdependsmostlyonthevalueofthe productfeaturesandmarketconditions. Prudential’sinsurancerisksaremanaged andmitigatedusingthefollowing: — TheGroup’sinsurance,productand underwritingriskpolicies; — Theriskappetitestatements,limits andtriggers; — Usingpersistency,morbidityand longevityassumptionsthatreflect recentexperienceandexpectationof futuretrends,andindustrydataand expertjudgementwhereappropriate; — Usingreinsurancetomitigatemortality andmorbidityrisks; — Ensuringappropriatemedical underwritingwhenpoliciesareissued andappropriateclaimsmanagement practiceswhenclaimsarereceived inordertomitigatemorbidityrisk; — Maintainingthequalityofsales processes,trainingandusinginitiatives toincreasecustomerretentioninorder tomitigatepersistencyrisk; — Usingproductrepricingandother claimsmanagementinitiativesinorder tomitigatemedicalexpenseinflation risk;and — Regulardeepdiveassessments. 6.3 Risks related to regulatory and legal compliance RegulatoryrisksmayimpactPrudential’s businessorthewayinwhichitis conducted.Thiscoversabroadrangeof risksincludingchangesingovernment policyandlegislation,capitalcontrol measures,andnewregulationsateither nationalorinternationallevel.Inaddition totherisksarisingfromregulatorychange, thebreadthoflocalandGroup-wide regulatoryarrangementspresentsthe riskthatregulatoryrequirementsarenot fullymet,resultinginspecificregulator interventionsoractionsincluding retrospectiveinterpretationofstandards byregulatorswhichmayresultin regulatorycensureorsignificantadditional coststothebusiness. On21October2019,theHongKong IAbecamePrudential’sGroup-wide supervisor,andtheGroupcontinues toengagewiththesupervisoronthe Group-wideSupervision(GWS) Framework,whichisexpectedtobe finalisedinthesecondhalfof2020. Thefocusofsomegovernmentstoward moreprotectionistorrestrictiveeconomic andtradepoliciescouldimpactonthe degreeandnatureofregulatorychanges andPrudential’scompetitivepositionin somegeographicmarkets.Thiscouldtake effect,forexample,throughincreased frictionincross-bordertrade,capital controlsormeasuresfavouringlocal enterprisessuchaschangestothe maximumlevelofnon-domesticownership byforeigncompanies.Thesedevelopments continuetobemonitoredbytheGroup atanationalandgloballevelandthese considerationsformpartoftheGroup’s ongoingengagementwithgovernment policyteamsandregulators. Effortstocurbsystemicriskandpromote financialstabilityarealsounderway. Attheinternationallevel,theFinancial StabilityBoard(FSB)continuestodevelop recommendationsfortheasset managementandinsurancesectors, includingongoingassessmentofsystemic riskmeasures.TheInternational AssociationofInsuranceSupervisors(IAIS) hascontinueditsfocusonthefollowing twokeydevelopments. prudentialplc.com Prudential plc AnnualReport2019 67 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationGROUPCHIEFRISKANDCOMPLIANCEOFFICER’SREPORTONTHERISKSFACINGOURBUSINESS ANDHOWTHESEAREMANAGED CONTINUED TheIAISisdevelopingtheICSaspartof ComFrame.TheimplementationofICSwill beconductedintwophases–afive-year monitoringphasefollowedbyan implementationphase.ComFramewill moregenerallyestablishasetofcommon principlesandstandardsdesignedtoassist supervisorsinaddressingrisksthatarise frominsurancegroupswithoperations inmultiplejurisdictions.TheComFrame proposals,includingICS,couldresultin enhancedcapitalandregulatorymeasures forIAIGs,forwhichPrudentialislikely tosatisfythecriteria.TheAggregation Methodisoneoftheapproachesbeing consideredaspartoftheICSandthe relatedproposalsarebeingledbythe NationalAssociationofInsurance Commissioners(NAIC).Alongsidethe currentICSdevelopments,theNAICisalso developingitsGroupCapitalCalculation (GCC)forthesupervisionofinsurance groupsintheUS.TheGCCisintendedto bearisk-basedcapital(RBC)aggregation methodology.IndevelopingtheGCC, theNAICwillalsoconsiderGroupcapital developmentsbytheUSFederalReserve Board,whichwillinformtheUSregulatory associationinitsconstructionofaUSgroup capitalcalculation. TheFSBhasendorsedanewholistic framework(HF)forsystemicriskfor implementationbytheIAISin2020and suspendedG-SIIdesignationsuntila reviewtobeundertakenin2022.Manyof thepreviousG-SIImeasureshavealready beenadoptedintotheinsurancecore principles(ICPs)andComFrame–the commonframeworkforthesupervision ofinternationallyactiveinsurancegroups (IAIGs).Prudentialislikelytosatisfythe criteriaofanIAIGandthereforecontinue tobesubjecttothesemeasures.TheHF alsoincludesamonitoringelementforthe identificationofabuild-upofsystemicrisk andtoenablesupervisorstotakeaction whereappropriate.TheIAIShasalready consultedonanapplicationpaperonthe liquidityriskelementsintroducedinto theICPsandComFramewithafurther consultationfocusedonmacroeconomic elementsexpectedtofollowin2021. IncertainjurisdictionsinwhichPrudential operatestherearealsoanumberof ongoingpolicyinitiativesandregulatory developmentsthatarehaving,andwill continuetohave,animpactontheway Prudentialissupervised.Decisionstaken byregulators,includingthoserelatedto solvencyrequirements,corporateor governancestructures,capitalallocation, financialreportingandriskmanagement mayhaveanimpactonourbusiness. InMay2017,theInternationalAccounting StandardsBoard(IASB)publishedIFRS17 whichwillintroducefundamentalchanges totheIFRS-basedreportingofinsurance entitiesthatprepareaccountsaccording toIFRSfrom2021.InJune2019,theIASB publishedanexposuredraftproposinga numberoftargetedamendmentstothis newstandardincludingthedeferralof theeffectivedatebyoneyearfrom2021 to2022.Asaresultofcommentson thisexposuredraft,theIASBplansto redeliberateonanumberofareasofIFRS 17,withanamendedstandardexpectedto beissuedinmid-2020.IFRS17isexpected to,amongotherthings,includealteringthe timingofIFRSprofitrecognition,andthe implementationofthestandardislikely torequirechangestotheGroup’sIT, actuarialandfinancesystems.TheGroup isreviewingthecomplexrequirements ofthisstandardandconsideringits potentialimpact. IntheUS,variousinitiativesareunder waytointroducefiduciaryobligationsfor distributorsofinvestmentproducts,which mayreshapethedistributionofretirement products.Jacksonhasintroduced fee-basedvariableannuityproductsin responsetothepotentialintroduction ofsuchrules,andweanticipatethatthe business’sstrongrelationshipswith distributors,historyofproductinnovation andefficientoperationsshouldfurther mitigateanyimpacts. InAsia,regulatoryregimesare developingatdifferentspeeds,drivenby acombinationofglobalfactorsandlocal considerations.Newlocalcapitalrules andrequirementscouldbeintroducedin theseandotherregulatoryregimesthat challengelegalorownershipstructures, orcurrentsalespractices,orcouldbe appliedtosalesmadepriortotheir introductionretrospectively,whichcould haveanegativeimpactonPrudential’s businessorreportedresults. InJuly2014,theFinancialStabilityBoard (FSB)announcedwidespreadreforms toaddresstheintegrityandreliability ofinter-bankofferrates(IBORs).The discontinuationofIBORsintheircurrent formandtheirreplacementwithalternative risk-freereferenceratessuchasthe SterlingOvernightIndexAverage benchmark(SONIA)intheUKandthe SecuredOvernightFinancingRate(SOFR) intheUScould,amongotherthings, impacttheGroupthroughanadverse effectonthevalueofPrudential’sassets andliabilitieswhicharelinkedto,orwhich referenceIBORs,areductioninmarket liquidityduringanyperiodoftransition andincreasedlegalandconductrisksto theGrouparisingfromchangesrequired todocumentationanditsrelated obligationstoitsstakeholders. Riskmanagementandmitigationof regulatoryriskatPrudentialincludes thefollowing: — RiskassessmentoftheBusinessPlan whichincludesconsiderationofcurrent strategies; — Closemonitoringandassessment ofourbusinessenvironmentand strategicrisks; — Theconsiderationofriskthemes instrategicdecisions;and — Ongoingengagementwithnational regulators,governmentpolicyteams andinternationalstandardsetters. 68 Prudential plc AnnualReport2019 prudentialplc.com Afailuretomaintainhighstandardsof corporategovernancemayadversely impacttheGroupanditscustomers,staff andemployees,throughpoordecision- makingandalackofoversightofitskey risks,particularlyinjointventuresor partnershipswherePrudentialdoes nothavedirectoverallcontrol.Poor governancemayarisewherekey governancecommitteeshaveinsufficient independence,alackofdiversity,skillsor experienceintheirmembers,orunclear (orinsufficient)oversightresponsibilities andmandates.Inadequateoversightover remunerationincreasestheriskofpoor seniormanagementbehaviours.Prudential operatesacrossmultiplejurisdictionsand hasagroupandsubsidiarygovernance structurewhichmayaddfurther complexitytotheseconsiderations. FurtherinformationonhowPrudential addressesmaterialrisksassociated withESGthemesisincludedinthe ESGSummary. changeincountriesinwhichPrudential,or itskeythirdparties,operatecouldimpact onitsoperationalresilienceandcould changeitsclaimsprofile.Moreinformation abouttheactivitiestheGroupis undertakingtoincreaseitsunderstanding andriskmanagementoftheseclimate- relatedriskscanbefoundintheclimate sectionoftheESGSummary. SocialrisksthatcouldimpactPrudential includetheemergingpopulationrisks associatedwithpublichealthtrends(such asanincreaseinobesity)anddemographic changes(suchaspopulationurbanisation) whichmayimpactcustomerlifestylesand thereforemayimpactclaimsagainstthe Group’sinsuranceproductofferings.Asa lifeandhealthinsurer,wearecommitted toplayingagreaterroleinpreventingand postponingillnessinordertoprotectour customers.Furtherinformationabouthow weareinvestinginartificialintelligence technologytoenableaccesstoan affordableandqualityhealthcaredigital offeringcanbefoundwithinthePulse casestudyincludedintheESGSummary. Othersocialrisksmayarisefromafailure toconsidertherights,diversity,well-being, andinterestsofpeopleandcommunities inwhichtheGroup,oritsthirdparties, operates.Theserisksareincreasedas Prudentialoperatesinmultiplejurisdictions withdistinctlocalculturesand considerations.Asanemployer,theGroup isalsoexposedtotheriskofbeingunable toattract,retainanddevelophighly-skilled staff,whichcanbeincreasedwhere Prudentialdoesnothaveresponsible workingpractices. 6.4 Environmental, social and governance risks Thebusinessenvironmentinwhich Prudentialoperatesiscontinuallychanging andrespondingeffectivelytothose materialrisksassociatedwithESGthemes iscrucialinmaintainingPrudential’sbrand andreputation,itsabilitytoattractand retaincustomersandstaff,andinturnits financialperformanceanditslong-term strategy.TheGroupmaintainsactive engagementwithitskeystakeholdersasit respondstoESG-relatedmatters,including investors,customers,employees, governments,policymakersandregulators initskeymarkets,aswellaswith internationalinstitutions–allofwhomhave expectationsinthisareawhichmaydiffer. Policiesandprocedurestosupporthow theGroupoperatesinrelationtocertain ESGtopicsareincludedintheGroup GovernanceManual.Prudentialmanages keyESGissuesthroughamulti-disciplinary approachwithfunctionalownershipfor ESGtopics.TheESGExecutiveCommittee coordinatestheseactivitiesandseeks, asoneofitsaims,toensureaconsistent approachinmanagingESGconsiderations initsbusinessactivities,including investmentactivities.Itissupported byseniorfunctionalleadersand representativesfromtheGroup’sbusiness units,includingthechiefinvestment officersoftheGroup’sassetmanagers. Theenvironmentalrisksassociatedwith climatechangeisoneESGareathatposes significantriskstoPrudentialandits customers.Theglobaltransitiontoalower carboneconomycouldpotentiallysee thefinancialassetsofcarbon-intensive companiesre-priceasaresultoffacing significantlyhighercostsordecreasing demandfortheirproductsandservices. Thespeedofthistransition,includingthe extenttowhichitisorderlyandmanaged, willbeinfluencedbyfactorssuchaspublic policy,technologyandchangesinmarket orinvestorsentiment.This‘transitionrisk’ mayadverselyimpactthevaluationof investmentsheldbytheGroup.TheGroup expectsthephysicalimpactsofclimate change,drivenbybothspecificshort-term climate-relatedeventssuchasnatural disastersandlonger-termchangesin thenaturalenvironment,toincreasingly influencethelongevity,mortalityand morbidityriskassessmentsofthe Group’sproductofferings.Climate-driven prudentialplc.com Prudential plc AnnualReport2019 69 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationGROUPCHIEFRISKANDCOMPLIANCEOFFICER’SREPORTONTHERISKSFACINGOURBUSINESS ANDHOWTHESEAREMANAGED CONTINUED Assessment of principal risks over the period TheGroup’sbusinessplanimplementsthe Group’sstrategicobjectivesthroughthe businessmodelandactivitiesdiscussed onpages12to15.Mattersconsideredas partofthatplanningprocessincludedthe impactofpursuingamorediversified productmixintheUS,theimpactofthe recentprotestsinHongKongonsales andtheeconomicoutlookforHongKong. Assessmentoftheriskstoachievingthe projectedperformanceremainsanintegral partoftheplanningprocess.TheGroup’s approachtoriskmanagementanda summaryofthekeyrisksfacingtheGroup aresetoutonpages51to71. ForthepurposesofassessingtheGroup’s viability,theDirectorsconsideredthose riskswheretheimpactofpossibleadverse externaldevelopmentscouldbeofsuch speedandseveritytopresentashockto theGroup’sfinancialposition.Therisks considered,fromthosedetailedonpages 59to61are:marketrisk,creditrisk, liquidityriskandregulatoryrisk.The Directorsconsideredthemacroeconomic environmentandgeopoliticalrisksinthe marketswhichtheGroupoperates,aswell assubsequentlyconsideringtheimpactof theoutbreakofcoronavirus(‘COVID-19’), whichcouldtriggerwidereconomic consequencessuchasslowdownor recessioninkeyeconomiesandnegative impactsintheglobalfinancialmarket. AlloftheGroup’sactivitiesare underpinnedbyongoingrisk management,implementedviatheGroup RiskFrameworkandriskappetitelimits describedonpages55to58.TheGroup’s managementofwiderenvironmental, socialandgovernanceissuesthatcould poseariskinthefuturetotheGroupis setoutintheEnvironmental,Socialand Governancesummaryreportonpages76 to87.Thisfocussupportsthesustainability ofourbusinessoverthelongerterm. TheGroupasawholeandeachofits lifeassuranceoperationsaresubjectto extensiveregulationandsupervision, whicharedesignedprimarilytoreinforce theGroup’smanagementofitslong-term solvency,liquidityandviabilitytoensure thatitcancontinuetomeetobligations topolicyholders.Furtherdetailsonthe currentcapitalstrengthoftheGroupare providedonpages37to39. Period of viability assessment TheDirectorshaveassessedtheviability oftheGroupforaperiodlongerthan the12monthsrequiredbythegoing concernstatement. TheDirectorsperformedtheassessment byreferencetothethree-yearplanperiod to31December2022.Threeyearsis consideredanappropriateperiodasit representstheperiodcoveredbythe detailedbusinessplanthatisprepared annuallyonarollingthree-yearbasis. Inapprovingthebusinessplan,the DirectorsreviewedtheGroup’sprojected performancewithregardstoprofitability, cashgenerationandcapitalposition, togetherwiththeparentcompany’s liquidityoverthisthree-yearperiod. Thisprojectioninvolvessettinganumber ofeconomicandotherassumptionsthat areinherentlyvolatileoveramuchlonger reportingperiod.Suchassumptions includeforeignexchangerates,interest rates,economicgrowthrates,theimpact onthebusinessenvironmentarisingfrom geopoliticaleventsandcontinuedlevel ofchangesinregulationandsupervision. TheDirectorsaresatisfiedthatthis periodissufficienttoenableareasonable assessmentofviabilitytobemade. Viability statement prepared in accordance with Provision 31 of the UK Corporate Governance Code The Group’s longer-term prospects Prudentialaimstomeetthesavingsand investmentneedsofitscustomers,which bytheirverynaturecanoftenbeovera timeframeofmanyyears.Alignedwiththis objective,inthemarketsinwhichit operatesitseekstoprovideproductsand servicesthatalignwithimportantglobal socialneeds,suchasaccesstohealthcare, protectionagainstpoverty,securityfor ageingpopulationsandinvestmentin infrastructureandtherealeconomy. Prudentialisfocusedoncapturingthe structuralgrowthopportunityarisingfrom theseneeds.Thedriversforthisstructural growth,suchasthelowpenetrationrates acrosstheAsianregion,arediscussed onpages18to27alongsidetheactivities weundertooktoexpandourproductset andcustomerreachduring2019.In undertakingtheseactivitiesweaimtoboth meettheevolvingneedsofourcustomers andprovidesustainablegrowthforour shareholders,whichwillultimatelyleadto theviabilityofourbusinessoverthelonger term.IntheUS,theGroupisfocusedon deliveringproductsthatwillhelpmitigate theworrymanyretireeshaveofrunning outofmoneyduringretirement,as employer-basedplansaredisappearing andmanyindividualshaveinsufficient accumulationofassetsovertheirworking life.FurtherdetailsofhowJacksonis meetingthisneedaresetoutonpages 28to33. Aswellascapturingthestructuralgrowth opportunitiesoutlinedabove,theGroup seekstocontinuallyenhanceitscapabilities withaviewtoremainingrelevantinan ever-changingworld.Recentfocushas beenondigitaldevelopmentandinvesting innewandexistingpartnershipstoensure ourproductsreachthecustomersweseek toserve.InAsia,wedeveloped‘Pulseby Prudential’HealthEcosystem,anall-in-one digitalapp,andenteredintoanew strategicpartnershipwithOVO,thelargest digitalpaymentplatforminIndonesia. IntheUS,wehavebeenactivelyengaged withFinTechpartnerstohelpillustrate thebenefitsalifetimeincomesolutioncan providewithinacomprehensivewealth managementplan.Thisisintendedtogive thefinancialadviserthenecessarytoolsto customiseaccordingtotheuniqueneeds andgoalsoftheclient. 70 Prudential plc AnnualReport2019 prudentialplc.com Theimpactonthebusinessofknownareas ofregulatorychangewhosefinancial implicationscanbereasonablyquantified isalsoconsideredaspartoftheplan. Aswellasknownareasofregulatory change,theGroupisexposedtotherisk ofsuddenandunexpectedchangesin regulatoryrequirementsattheGroupand locallevels.Whileunexpectedchanges cannotbefullyanticipatedandhence modelled,theriskofregulatorychange ismitigatedbycapitalheldbytheGroup anditssubsidiariesinexcessofGroupand localregulatoryrequirements,theGroup anditssubsidiaries’abilitytogenerate significantcapitalannuallythrough operationaldeliveryandtheavailability ofcompensatingactionsdesignedto restorekeycapitalmetrics. Conclusion on viability Basedonthisassessment,theDirectors haveareasonableexpectationthatthe Groupwillbeabletocontinueinoperation andmeetitsliabilitiesastheyfalldue overthethree-yearplanperiodto December2022. Stress and scenario testing Asnotedabove,underpinningthe projectionsinthebusinessplanarea numberofeconomicandother assumptions.ToevaluatetheGroup’s resiliencetosignificantdeteriorationsin marketandcreditconditionsandother shockevents,theserisksaregrouped togetherintoscenarioswhicharethen appliedtotheassumptionsunderlyingthe businessplansconsidered.Forexample, scenarioswereusedtoassessthepotential impactofupordowninterestrate movementscombinedwithcorporatecredit spreadwidening,fallingequityvaluesand insurancestresses(suchaschangesin policyholderbehaviour,includinglapses, andincreasedmorbidityinAsia),together withtheimpactoncentralliquidityofa scenarioassumingtheclosureofshort- termdebtmarkets,aswellasadditional callsonliquiditybythebusinessunits. Thescenariostestedshowedthatthe Groupwouldbeabletomaintainviability overthethree-yearperiodunder assessment,aftertakingaccountofthe actionsavailabletomanagementto mitigatetheimpactsoncapitalandliquidity insuchscenarios.Inaddition,theGroup conductsanannualreversestresstest whichgivestheDirectorsan understandingofthemaximumresilience oftheGrouptoextremelysevereadverse scenarios.Thisanalysisassistsin identifyingmanagementactionsthat couldbeimplementedtorestorethe Group’scapitalandliquidityresources fromextremepositions.Thisanalysisalso informstheGroup’srecoveryplanand liquidityriskmanagementplan. Notes 1 Excludingassetsheldtocoverlinkedliabilitiesandthose oftheconsolidatedunittrustsandsimilarfunds. 2 BasedonhierarchyofStandard&Poor’s,Moody’sand Fitch,whereavailableandifunavailable,NAICandother externalratingshavebeenused. 3 Sourceofsegmentation:BloombergSector,Bloomberg GroupandMerrillLynch.Anythingthatcannotbeidentified fromthethreesourcesnotedisclassifiedasother.Excludes debtsecuritiesfromotheroperations. prudentialplc.com Prudential plc AnnualReport2019 71 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationESG SUMMARY Purpose and responsibility We exist to take the financial risk out of the biggest events in the lives of our customers, enabling them to face the future with confidence. As well as providing life and health protection, savings opportunities to meet family goals, and retirement income, we aspire to lead in new areas aligned with this purpose. We are helping consumers postpone and prevent ill-health through digital innovation, increasing access to finance and providing solutions for an ageing world. At the same time, we are investing our customers’ savings in the real economy, helping to drive sustainable growth. We are working every day to be a better and more sustainable business that continues, through our strong and clear sense of purpose, to have a positive impact. We are committed to delivering the best possible performance across all areas of our environmental, social and governance (ESG) activity, and we are continuing to develop to improve the way we work in the interest of all our stakeholders. Non-financial information statement We recognise that to help our customers de-risk their lives, 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 to ensure that we are managing these issues sustainably and delivering long-term value. Further information on our engagement with our stakeholders can be found in our Section 172 statement below. This strategic report complies with the Non-Financial Reporting requirements contained in sections 414CA and 414CB of the Companies Act 2006. This ESG summary provides an overview of our activities and progress in 2019 across a range of areas in which we have helped to provide benefits to stakeholders throughout the markets in which we operate. For us, ESG means: — What we do – the products we offer, our customer service, our human capital and the assets we own and operate; and — How we do it – understanding our customers and providing suitable solutions that meet their needs, fostering long-term relationships with our stakeholders, investing in our people and making responsible investments, in order to generate sustainable long-term returns in line Responsible investment Environment Climate Overview, relevant risks and associated management practices – page 78 Relevant KPIs: greenhouse gas emissions – page 84 People Overview, relevant risks and associated management practices – page 81 Relevant KPIs: gender diversity – page 81 People Overview, relevant risks and associated management practices – page 82 Employees Environmental matters Human rights Group-wide policies and due diligence – pages 75 to 76 Anti-bribery and anti-corruption matters Social matters Business integrity Overview, relevant risks and associated management practices – page 80 Business model – pages 14 to 15 Principal risks – pages 59 to 69 Communities Technology Relevant KPIs: community investment, fundraising and donations, employee volunteering hours – page 86 72 Prudential plc Annual Report 2019 prudentialplc.com with our risk appetite, meet our customers’ needs and help build the communities in which we operate. 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 ESG activities is available in our 2019 ESG report found at www.prudentialplc.com/ investors/reports/2019. UK Companies Act, Section 172 Statement Section 172 of the UK Companies Act requires each Director to act in a way that he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. In doing this, Section 172 requires a Director to have regard (among other matters) to the needs of employees, suppliers, customers and other wider stakeholder interests. During 2019 we engaged with our various stakeholder groups closely and we took account of their concerns in our decision-making. Below we have outlined how we have engaged with our stakeholders and the outcome of that engagement. How we meet our Section 172 duty We ensure that our Board meets its duty under Section 172 of the UK Companies Act in a number of ways. A briefing note is circulated in advance of each Board meeting reminding Directors of their statutory duties under Section 172 and reiterating who the Group’s key stakeholders are. The annual Board evaluation process takes into account how the operation of the Board affects the consideration of stakeholder issues and seeks to identify improvements in this area. We ensure that our Section 172 obligations are taken into account in our Board succession planning and training, stakeholder engagement is addressed in the Board’s Terms of Reference, and there is guidance for individuals who prepare Board papers that references Section 172 duties and our key stakeholders. We ensure that we take account of any conflicts between different stakeholder concerns, and resolve such conflicts as smoothly as possible at the highest level necessary. The Board ensures that it listens to and acts on the views of a diverse range of shareholders, from large institutions to individuals, recognising that different types of investor have different investment mandates and varied stewardship approaches. Information on the independence of our Non-executive Directors can be found in the Governance report on page 115. Through our Group Code of Business Conduct, we ensure that we maintain the highest standards of behaviour throughout our business. Our Group Code of Business Conduct sets out the standards the Board expects in relation to employee behaviour and our business units run mandatory training programmes to highlight the personal obligations applicable to each individual. The Board reviews both the content of the Group Code of Business Conduct and business unit compliance each year. Meanwhile our Group-wide whistleblowing programme, Speak Out, enables all stakeholders to raise concerns, helping to maintain the highest standards of behaviour. Alongside continuing to build our business and serve the needs of our customers, during 2019 our main activity was the demerger of M&G plc from the Group, which we completed successfully on 21 October 2019. The demerger had an impact for all our stakeholders, and we took steps to ensure that we engaged with all our stakeholder groups on the long-term consequences of this significant step in the history of our business. We are confident that this decision was the right one for the long-term interests of the Group. Customers Helping to de-risk the lives of our customers and deal with their biggest financial concerns is at the centre of what we do, and listening to and understanding their concerns is key to the sustainability of our business. We engage directly with our customers through face-to-face advice, contact centres, dedicated account managers, sales support units, business processing and servicing, mobile phone apps and telephone technical support teams. The outcome of our engagements with customers is transmitted through the business and used to shape the design of our products and how and where we distribute those products, and ultimately to inform strategic decisions made at Board level. Decisions about which markets to access, what kind of products to offer and how to develop our agency force, our bank partnerships and our digital capabilities, are all driven by an understanding of what customers want, based on engagement with those customers. During 2019, as well as making decisions on markets, products and platforms provided by the business, the Board paid close attention to the effect on customers of the progress towards and conclusion of the demerger of M&G plc, including steps to ensure that customers were not disadvantaged and ensuring that they were fully informed of developments and prepared for the demerger when it was concluded. Other concerns raised by customers during the year included service delivery and issues with business processing, and these were dealt with through the business units, applying the highest standards of professional care and service in line with our Customer Commitments Policy. Investors We engaged with our investors through our annual and half-year reports, ESG Report and other regular reporting, including press releases and regulatory announcements. We held regular meetings with investors, including our Annual General Meeting, analyst meetings and investor roadshows, and a General Meeting to propose the demerger for approval by shareholders. Our Chairman met key investors on governance matters to address any other concerns they may have had, and our Senior Independent Director and the Chairs of our Board Committees made themselves available to meet investors. The main concerns of investors during this period were around the demerger, in particular its execution and timing, as well as the nature and strategy of the post- demerger Group and our post-demerger dividend policy. The demerger was subject to shareholders’ approval and was approved in line with the Board’s recommendation. The demerger dividend policy was approved by the Board. Investors were also consulted on the principal changes to the Directors’ Remuneration Policy. To strengthen the alignment between Executive Directors and the workforce, the policy includes pension benefits for new Executive Directors of 13 per cent of salary and a reduction in the pension benefits of incumbent Executive Directors. Climate- related financial risk also emerged as an issue of increasing importance to investors during the year, and we have responded to that concern by proceeding with our intensive work towards meeting the recommendations of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD). prudentialplc.com Prudential plc Annual Report 2019 73 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationESG SUMMARY CONTINUED Colleagues During 2019 two of our Non-executive Directors, Kai Nargolwala for Asia and Africa and Tom Watjen for the US and the UK, were appointed to represent employee interests in line with new requirements under the revised UK Corporate Governance Code. They both conducted formal meetings with colleagues, including town halls and smaller-group meetings, and informal activities, including job shadowing and floorwalking. The Board is updated biannually on their activity and reflections. Across the business, we also held a variety of events to engage with colleagues, including town halls, smaller- group meetings and one-to-ones, and we used our various intranets for two-way communication, encouraging colleagues to submit questions and suggestions. In 2019 the key concerns of colleagues were around the demerger, including what it meant for jobs, working arrangements and transfer of roles to M&G plc, and what it meant for the future of the business. Throughout this process, we kept our people informed about the progress of the demerger and the outlook for the Group, responded to all questions promptly and transparently, and escalated concerns to senior executives and the Board as appropriate. Ahead of the demerger, we also initiated a consultation on a set of proposed changes to our pension schemes for all our UK colleagues. A formal 60-day consultation took place to enable colleagues to understand the proposed changes in detail and respond to them. One-to-one, group and education sessions were held, and we received individual feedback submissions and questions to our helpline. Having discussed and reviewed the feedback, the pensions proposals were updated for both defined benefit and defined contribution members. Colleagues were also concerned about the impact of the demerger on shares, share options and existing employee share plans. In response, the Remuneration Committee approved a method for converting the value of the demerger dividend in specie into additional Prudential plc shares in respect of outstanding share awards of employees. In order to support the Group’s strategic direction and the focus of our technology resources on the development of customer-facing applications, the Board took the decision to outsource certain IT infrastructure and operations activities that were previously performed in-house within Prudential Corporation Asia and Jackson. A significant factor in the choice of supplier was the strength of the employee proposition offered by the successful supplier. The vendor chosen committed to re-hire all identified impacted employees on substantially similar terms and conditions, for a minimum of 12 months. The firm was noted as a growing IT-focused service company, which would provide transferred staff with greater opportunities for growth and exposure and to work on new innovative technologies, and around 97 per cent of the affected colleagues agreed to transfer to the new provider. Regulators Prior to the demerger of M&G plc, the Group was subject to the consolidated supervision of the UK’s Prudential Regulation Authority. Following the demerger, the Hong Kong Insurance Authority (IA) became Prudential’s Group-wide supervisor. We have engaged with both regulators on a regular basis, sharing an agreed range of management information. The Board receives regular updates on our engagement with the Hong Kong IA regarding the shape of its legislative and regulatory framework. Hong Kong IA applies principles and standards to the Group through existing requirements to ensure that we are a fit and proper controller of regulated insurance companies. Hong Kong IA’s principles include financial integrity, effective corporate governance and sound risk management. We undertook gap analysis of the Group’s policies and processes against Hong Kong IA requirements. Governments We regard governments and legislatures in the markets in which we operate as important stakeholders. We monitor governmental and legislative activity, and meet periodically with government ministers and officials, elected or permanent, and legislators, legislative committees and committee members, either bilaterally or as part of wider groups, to help us understand their objectives, priorities and concerns, and how they affect or shape our business. Across the many markets where we operate, the company engages governmental and political stakeholders (including ministers, officials and legislators) to inform and influence public policy debate in a range of areas, including regulatory development, financial inclusion, fairness and consumer protection, capital market development, sustainable finance, job creation and skills, tax policy, trade policy, demography and ageing, health and wellbeing, and the digital economy. During 2019 a number of key points emerged from these exchanges. One key area that arose and prompted action from us was life insurance penetration. Prudential was granted a life insurance licence from the Ministry of Planning and Finance of Myanmar, enabling us to start offering life insurance products and solutions in this market. Another was the gap in structural protection in Asia. After meeting with the former Deputy Prime Minister of Singapore, we committed to supporting the Global Asia Insurance Partnership for five years. A third area was digital innovation, and during the 2019 UK-Singapore Economic and Financial Dialogue, Prudential Singapore expanded its PruFintegrate initiative to London. Another key area was financial inclusion, and in Zambia we partnered with the Securities and Exchange Commission and Junior Achievement Zambia to roll out our global financial education and responsibility programme for children, Cha-Ching. Suppliers Each of our critical suppliers has a nominated contact within Prudential, and we meet those suppliers on a regular basis to address concerns on both sides. Ahead of the demerger of M&G plc, we engaged with 217 suppliers in the UK to explain the impacts of the demerger and contracting changes. During 2019, we found that our suppliers were primarily concerned about revenue protection during the demerger. We introduced an e-procurement system in our London head office to improve the control and monitoring of our purchasing activities and to provide suppliers with greater visibility over their payments. Civil society We respond to ad hoc requests from NGOs and hold meetings with them throughout the year. Our AGM provides the Board with an opportunity to engage with a range of NGOs that are shareholders, and the Board also receives an annual update on our community investment activity. During 2019, NGOs were primarily concerned with our climate impact, and in response we have proceeded with our work around meeting the recommendations of the TCFD, as well as closely monitoring our impact on the environment. In response to questions about our modern slavery risk, we conducted an analysis of all supplier spend in our London head office against the Walk Free Foundation’s Global Slavery Index. Further details will be available in our 2019 Modern Slavery Statement, 74 Prudential plc Annual Report 2019 prudentialplc.com which will be published on the Group website in May. How we govern ESG Our ESG Executive Committee leads on how we identify, manage and report on material ESG risks and opportunities. The ESG Executive Committee is chaired by our ESG sponsor, our Group Director of Communications, supported by senior leaders from Group functions across financial reporting, risk, governance and human resources, with representation from our business units. The ESG Executive Committee meets quarterly and raises matters to the Nomination & Governance Committee as appropriate. We make sure that the ESG issues that are important to our stakeholders are understood and managed. This enables the Group to manage risks more effectively and better inform key decision-making. We strive to meet the expectations of our stakeholders in a transparent and fair manner, and this is underpinned by our comprehensive identification process, which enables us to address our material ESG issue effectively and constructively. 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 The Group Code of Business Conduct details our required Standards of Business Conduct to be used across the Group and covers our employees and individuals or organisations acting on our behalf. The Code sets out our values around ownership, partnership and stewardship, and the personal standards we adhere to in the areas of: 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 Sanctions 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 and 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 whistleblowing 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. Third-Party Supply Policy 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. 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 5 Ensure that our complaints processes provide an effective and fair means of arbitration between the Group’s businesses and customers. 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. prudentialplc.com Prudential plc Annual Report 2019 75 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationESG SUMMARY CONTINUED Material ESG issues Our Group-wide policies 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 Code of Business Conduct and underpinned by our Group Responsible Investment Standards. Technology Privacy Policy governs the protection of data 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 2019 can be found in our Governance statement on pages 110 to 117. 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 in which we operate as active and supportive members. This also outlines our strategy for investing in the community and how we make investments and report against them. Summary of ESG issues Our key ESG issues can be categorised into the following areas: customers, responsible investments, climate, business integrity, people, technology, environment and supporting our communities. Customers Our relationships with our customers are at the heart of our business. We deliver products that meet their needs and help them to de-risk their lives, and we ensure that we treat them with the highest standards of care. We are continually innovating to find new ways to improve the products we deliver, how we deliver them and how we serve our customers. Our customer commitments Helping customers achieve their long-term financial needs through our products and services lies at the heart of our business strategy. Our Customer Commitments Policy applies to all members of the Prudential Group that deal directly or indirectly with customers. These commitments are: 1 2 3 4 5 Treat customers fairly, openly and honestly Provide and promote a range of products and services that meet customer needs, are clearly explained and deliver real value Maintain the confidentiality of our customer information Provide and promote high standards of customer service Act fairly to address customer complaints and any errors. Customer-first brand commitment in Asia In 2019 Prudential Corporation Asia launched its new brand commitment, ‘Listening. Understanding. Delivering.’ The commitment reinforces our focus on human connections, simplicity and innovation for our customers. The commitment is about: — Focusing on customers, anticipating their needs and enhancing their experience with easy access to information and services; — Delivering comprehensive solutions for protection, health and wellness, savings and retirements; and — Capturing innovation with a human touch. 76 Prudential plc Annual Report 2019 prudentialplc.com In line with our commitment to help 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. Across Asia, consumers, healthcare providers, insurers and governments are confronted with problems such as a rising, underinsured middle class and a growing ageing population. As lifestyles in Asia have changed and income levels have risen, there has been a rise in non- communicable diseases such as diabetes. This has led to a growing demand for healthcare for more complex conditions, many of which require long-term treatment or management. We are taking steps to meet the needs of an ageing workforce and help people prepare for longer life. Our digital health tools aim to empower the broader consumer group to take control of their personal health and wellbeing anytime and anywhere. We also offer a wide range of insurance products that are tailored to local market requirements and fast-changing individual needs, such as Prudential Malaysia PRUMy Critical Care, which provides comprehensive financial protection against 160 critical illnesses, and Prudential Hong Kong’s first-in-market cancer protection plan for cancer sufferers. Financial security in the US In the US, 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. Through our distribution partners, Jackson provides products that offer Americans the retirement strategies they need. Jackson seeks to provide the best retirement solutions that we can, while striving to communicate information about those products in a fair and transparent way. Jackson continues to be a leader in shifting perspectives and simplifying the language around financial products. Expanding our distribution We continue to expand our distribution platform in 2019, including by: — Completing our acquisition of a majority stake in a leading life insurer in West and Central Africa — Renewing our strategic Asian bancassurance alliance with United Overseas Banks, increasing its geographical scope — Signing long-term exclusive partnerships with two banks in Vietnam. Customer care We are committed to offering our customers the highest standards of professional care and service. We take our commitment 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 and in accordance with our Customer Commitments Policy and local regulatory requirements. Business units conduct analysis of complaints to understand their underlying causes, with the aim of reducing the overall number of complaints, and perform ongoing monitoring to identify issues that could lead to customer detriment and take prompt action to address any errors. Awards In Asia in 2019, we won awards for our services to customers in Hong Kong, Malaysia, Thailand and Vietnam, and in the US we won awards for the quality of our customer contact, our service and our digital initiatives. Responsible investment As a life insurer, asset owner and manager, we believe that the quality of corporate governance practices, and how companies manage the environmental and social aspects of their operations, can be material to delivering superior financial returns and longer-term shareholder value. Responsible investment at Prudential involves incorporating ESG factors into our investment decisions, alongside traditional financial analysis, to better manage risk and generate sustainable, long-term returns for our customers. Responsible investment landscape Across the Group’s footprint, the policy and regulatory landscape continues to evolve with respect to sustainable finance and ESG. For example, the Monetary Authority of Singapore (MAS) has signalled its commitment to promote sustainable practices by encouraging financial institutions to adopt ESG best practices and encourage the development of the green bond market. We are highly supportive of these efforts and are an active industry contributor, working closely with the regulator to advance this aim. Among policymakers, we continue to see increasing focus on the need to develop a view of the exposure of the insurance sector to climate-related financial risk. The Task Force on Climate-related Financial Disclosures (TCFD) recommendations were released in 2017 to provide a framework for companies to develop voluntary, climate-related financial risk disclosures. Following Board discussion, Prudential plc became a signatory to the recommendations in 2018 in order to meet the growing expectations of our investors and regulators, and to support the ambitions of our business units in the local markets in which we operate. prudentialplc.com Prudential plc Annual Report 2019 77 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationESG SUMMARY CONTINUED Strengthening our governance of responsible investment Following the successful completion of the demerger of M&G plc in late 2019, we took the opportunity to further integrate our responsible investment activities within the ESG Executive Committee by extending membership of the Committee to the chief investment officers of our asset owner businesses. Our Group-wide Responsible Investment Framework is designed to draw together the ESG-related approaches of our asset management businesses (Eastspring in Asia and PPM America in the US) and our asset owner insurance businesses (Prudential Corporation Asia in Asia and Jackson in the US). The ESG Executive Committee now maintains our Group-wide Responsible Investment Standards, which are based upon our Group Code of Business Conduct and set minimum requirements for each of our business units. These Group-level standards require all of our businesses to develop and maintain their own local responsible investment policies, which capture their own approaches to responsible investment and are appropriate to the jurisdictions in which they operate. The strength of the commitment of our asset management businesses to responsible investment and helping to build a sustainable financial system can be demonstrated by the fact that they are both signatories to the United Nations-supported Principles for Responsible Investment (Eastspring since February 2018 and PPM America since October 2018). ESG integration in the investment process Integrating ESG analysis into our investment processes is an ongoing activity that will continue to progress over time as the characteristics of each asset class and each of our investment strategies evolve. When making investment decisions, PPM America and Eastspring’s Singapore-based equity team look to identify all material risks to sustainable earnings for a company. ESG issues are incorporated into our fundamental analysis and integrated into our decision-making process when we believe they could have a material impact on a company’s valuation and financial performance. This analysis incorporates the governance of a company, as well as its social and environmental impact, including any plans or strategies to improve environmental performance and resilience, in our assessment of the drivers of longer-term returns. In 2019, both PPM America and Eastspring made progress in enhancing the integration of ESG factors into their respective investment processes. Since implementing its Responsible Investment Policy in 2018, PPM America has continued to integrate ESG information in its processes, wherever possible, so that its investment professionals can assess and evaluate potential ESG risks. During 2019, the fixed income team at Eastspring Singapore built on its ESG approach and launched its first investment strategy focusing on sustainable bonds. For Eastspring Singapore’s fixed income team, assessment and monitoring of ESG factors are an integral part of the bottom-up credit research process. ESG issues are incorporated in the fundamental analysis of individual companies to assess their impact on an issuer’s financial performance, its risk of default and the valuation of the bonds it issues. This process involves an assessment of the quality of corporate governance, as well as material environmental and social issues that could have an impact on a business’s day-to-day operation, financial performance, and subsequently the ability to pay back its obligations. Industry engagement, memberships and collaborative bodies During 2019, Eastspring continued to engage with industry participants to promote awareness and understanding of responsible investment across Asia, organising a number of workshops in Asia to continue to help improve the understanding of climate-related risks across the region. These were jointly held in partnership with organisations including the Asia Investor Group on Climate Change (AIGCC), the World Wildlife Fund and ISS Climate. Eastspring is an active member of the AIGCC, which aims to create awareness among Asia’s asset owners and financial institutions about the risks and opportunities associated with climate change and low-carbon investing. Eastspring continued to participate in industry roundtable discussions throughout 2019 and was a Sustainable Finance panel member at Euromoney’s Asia Sustainable & Responsible Capital Markets Forum in June. In April, Eastspring Singapore also hosted a Bloomberg Buy-side Women’s Network on Responsible Investment and ESG Integration. Both Eastspring and Prudential Corporation Asia are members of the Asian Corporate Governance Association (ACGA), and during 2019 Eastspring contributed to a number of ACGA white papers on corporate governance in the China and Japan equity markets. Eastspring Indonesia also engaged with the ACGA regarding strategies related to improved corporate governance practices in relation to proxy voting. Climate We recognise that climate change presents long-term risks to the sustainability of our business, as well as a range of opportunities associated with the transition to a low-carbon economy. In 2018, following Board discussion, Prudential became a supporter of the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD). This reflects both the growing expectations of our external stakeholders and colleagues, and the ambition among our businesses to develop their capabilities to pursue products and services aligned to the global need to address the impacts of climate change. Risks and opportunities We are committed to developing a more granular understanding of the diverse risks we face and to working collaboratively with governments, peers and business partners to identify opportunities at scale for our businesses. During 2019, we focused on enhancing access to ESG and climate risk data sources and the carbon footprinting of sample Asian investment portfolios. During 2020, our priorities are to determine the Group’s exposure to carbon-intensive sectors and companies, extend carbon footprinting across the Group’s investment book and to refine the initial stress testing of the investment book for climate-related scenarios. Governance Our ESG Executive Committee, established in 2018, is focused on the holistic assessment of ESG matters material to the Group, raising matters to the Nomination & Governance Committee as appropriate. One of the ESG Executive Committee’s principal responsibilities is to oversee the Group’s progress towards fulfilling our commitment to report against the TCFD recommendations. This involves oversight of our Group-wide efforts to assess the climate-related risks and opportunities facing our businesses, and to subsequently identify and deliver the supporting implementation activities. Following the successful completion of the demerger of M&G plc in late 2019, we took the opportunity to increase Committee representation from our businesses in Asia. We also took steps to further integrate our 78 Prudential plc Annual Report 2019 prudentialplc.com In order to assess our exposure to transition and physical risk, respectively, we have begun to explore the impact of temperature increase scenarios, over medium and long-term time horizons, on our investment portfolios. For this, we are using the guidance provided by the UK’s insurance regulator, the Prudential Regulation Authority, and informed by the IPCC, as part of the regulator’s August 2019 stress test exercise. As a global business, we recognise the need for the Group to understand and mitigate the physical risks associated with climate change. The location of a significant number of our markets increases their vulnerability to climate change. Local environmental risks, including their potential short and medium-term impacts, are tracked and managed by our business units, with support from Group Risk and Security teams. This includes but is not limited to forecasts and reporting, business continuity advice and incident management planning. We manage the physical risk to our operations through comprehensive risk assessment during the selection of properties, including factors such as location, geography and weather events. Our business units manage morbidity and mortality risk by analysing our experience from our customers, supplemented by industry data and stress testing. We assess changes in morbidity and mortality that have been observed in the past and consider how they may emerge in the future. As a life and health insurer, we are committed to playing a greater role in preventing and postponing illness in order to protect our customers. We are investing in artificial intelligence technology to enable access to affordable and quality healthcare and enhancing our digital offering to help improve access to finance and health protection products. responsible investment activities within the ESG Executive Committee by extending participation on the Committee to the chief investment officers of our asset owner businesses, reflecting the increasing importance of our investment activities within the development of our overall ESG strategies. Committee members include: the chief investment officers of our asset management businesses (PPM America and Eastspring), the Chief Investment Officer of Prudential Corporation Asia, Jackson’s General Counsel, Prudential Corporation Asia’s Chief Operating Officer, and representatives from Group functions. The ESG Executive Committee meets quarterly and is required to report to the Board at least twice each year, with additional ad hoc reporting provided as necessary. The ESG Executive Committee reports to the Board through the Group Nomination & Governance Committee, which comprises the Group’s Chairman, the Senior Independent Director, and the chairs of the Audit, Remuneration and Risk Committees, and is regularly attended by the Group Chief Executive. Strategy As an asset owner and asset manager, we rely on investment returns to fulfil the longer-term obligations of our saving, annuity and health and protection liabilities. We recognise that in the transition to a low-carbon economy, there may be a disorderly adjustment to the value of the assets that we hold, arising from regulatory and technological change. The physical impacts of climate change, such as rising temperatures, rising sea levels and increased occurrence of extreme weather events, may also impact the value of the Group’s assets. Such physical risks may also cause disruption to our customers, employees and property portfolio. We also recognise that climate-related opportunities can support the delivery of the Group’s strategy. For example, Eastspring is a member of the Sustainable Development Investment Partnership initiative, coordinated by the World Economic Forum with support from the OECD, working with others to scale the use of finance in sustainable infrastructure investments in emerging and developing countries. Since 2016, our US asset manager’s approach to ESG integration was a key factor in the sale of $55 million of utilities credits that generate electricity primarily by coal, and the purchase of $105 million of single-asset project bonds that generate 100 per cent of their electricity through renewables. As a life insurer, the potential impact of climate change on life expectancy (mortality risk) and medical health and well-being (morbidity risk) could impact the profitability of our protection and health insurance products respectively. The long-term impact of climate change on the life insurance sector is complex, as climate change acts in conjunction with other factors, including demographic and social change and rapid urbanisation, all of which place increased demand on health services. As the risks from climate change intensify, so will the consequences for humanity and the natural environment – from disruptions in food, water and energy supplies to rising sea levels and increased occurrence of extreme weather events. In some regions, the negative impacts of climate change may have serious implications on public health, for example increasing the levels of life-threatening vector-borne diseases. Against this backdrop, there is a need for us to develop products and services that help to provide protection and support climate change adaptation. Risk management As a long-term investor, the Group’s most significant exposure to climate-related risk is through our role as an asset owner and manager, with $543.9 billion of assets under management. Our portfolio is exposed both to physical risk and transition risk as a result of climate change and we are using a range of methodologies to develop a more accurate understanding of the carbon intensity of our asset book and its exposure under a range of climate change scenarios. Through this process, we are seeking to develop metrics for actionable insights, which will help to inform the Group’s Responsible Investment Standards and to direct our investments in the low-carbon economy, and reduce our exposure to climate risk. We have begun to assess the climate transition risk exposure of our portfolios using a third-party carbon footprinting data and software provider. Our Asian asset manager, Eastspring, has taken the lead across the Group in starting to measure and interpret the carbon footprint for listed equities in sample portfolios. This tool allows us to assess the carbon footprint of the portfolio constituents compared to historical constituents, the carbon efficiency of the portfolio, the exposure of a portfolio to fossil fuels, potential emissions from fossil fuels, the strength of carbon risk management relative to industry peers and a portfolio’s exposure to clean technology. prudentialplc.com Prudential plc Annual Report 2019 79 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationESG SUMMARY CONTINUED We continue to engage with policymakers and NGOs on this topic. We also work collaboratively with our peers through a range of networks, including the CRO Forum, the Asian Investor Group on Climate Change and ClimateWise. During 2019, we contributed to a ShareAction/AODP report entitled ‘Insuring a low-carbon future’, exploring leading practice and common barriers in managing climate-related risks and opportunities. Metrics and targets We participate in external benchmarks that assess our management of climate change risks and opportunities. In 2019 we continued to participate in CDP (formerly the Carbon Disclosure Project) and maintained our score with a B grading (2018: B). We continue to participate in ClimateWise, which in 2019 changed significantly to align itself with the TCFD framework. The Group score, similar to other organisations, is down from our previous submission (2019: 51, 2018: 78), but we remain committed to enhancing our climate change disclosures, in line with TCFD. Our scoring in CDP and ClimateWise is based on the performance of the pre-demerger Group, including M&G plc. We seek to minimise the impact of our direct operations on the environment. More detail on our environmental performance is included in the Environment section on page 84 of this report. Business integrity We are strongly aware of our purpose, which is to help people de-risk their lives and deal with their biggest financial concerns. In line with this purpose, responsible and ethical behaviour are embedded in our business. Our governance framework is clear about our standards of behaviour and those standards flow into every part of what we do, from our financial performance and tax practices to the way we fight financial crime and deal with our suppliers. Our Code of Conduct Our governance framework, setting out the principles by which we conduct our business and ourselves, includes our Group Code of Business Conduct, which is a central feature of our Group Governance Manual. Our Group Code of Business Conduct sets outs the ethical standards that the Board expects of itself, our employees, our agents and others working on behalf of the Group. The Group Governance Manual consists of a range of policies covering all of our business units, setting out our principles for good governance. We review these policies on a regular basis to ensure that we meet the expectations of our stakeholders. Financial strength We contribute to financial stability and sustainability in all of the markets in which we operate. We fulfil our purpose by seeking to provide products and services that align with important global social needs and thereby generate sustainable value for stakeholders. Our products and services are designed and delivered with that purpose clearly in mind. Through the combination of our consistent strategy, our diversified portfolio of businesses and our disciplined execution, we have continued to create long-term value for customers, shareholders and other stakeholders. Responsible tax practices 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. Tax revenues are fundamental to sustainable development in those communities. We understand the importance of paying the right amount of tax on time. We manage our tax affairs transparently and seek to build constructive relationships with tax authorities in all the countries in which we operate. Our Tax Risk Policy outlines our processes to identify, measure, control and report on risk across four categories: technical judgements, operations, regulations and reputation. Our tax strategy is published annually and, as well as complying with the mandatory requirements under the UK 2016 Finance Act, includes additional disclosures, including a breakdown of the types and amounts of taxes we pay globally, which includes taxes borne and collected on employee income, for example social security. Furthermore, we disclose the revenues, profits, average employee numbers and taxes on a country-by- country basis where more than $5 million of tax was paid. We are due to publish our updated tax strategy, which will include more information on the tax we paid in 2019, how we manage our tax affairs and the governance and management of tax risk, by 31 May 2020. Fighting financial crime We take the fight against money laundering, terrorist financing, bribery and corruption and fraud seriously and are committed to implement and maintain industry-leading policies and standards. In the majority of our markets we maintain business relationships with agents and intermediaries, who act on our behalf. We provide training to our staff to ensure they are familiar with international standards and best practice, as well as being well equipped to implement our policies in their respective markets. Our Group-wide financial crime policies were updated in 2019 to reflect the requirements of our new lead regulator, the Hong Kong Insurance Authority. Our Group anti-bribery and corruption policy provides guidance to our diverse businesses on gifts and hospitality and how we deal with government officials, and highlights the importance of due diligence when dealing with third parties. All of our Group-level financial crime policies are cascaded down to local business units through regional compliance teams, which ensure adherence to the Group requirements and applicable laws and expectations of local regulators. These policies are part of the Group governance framework, with business units attesting their compliance in addition to compliance and internal audit reviews. The Group Risk Committee continues to review the effectiveness of the financial crime programme and the Group Financial Crime Compliance team regularly updates the Committee on risks and controls, and on the improvements made to processes in the financial crime framework. Any material matters on financial crime are reported to the Committee. Whistleblowing Our Group-wide whistleblowing procedures apply to all our colleagues and are supported by Speak Out, our Group-wide whistleblowing programme. Speak Out is available both internally and externally to staff, contractors, vendors, 80 Prudential plc Annual Report 2019 prudentialplc.com agents, clients and the public, enabling reporters to raise concerns in a choice of languages through web and hotline channels. Reporters are able to log concerns covering a range of issues, including but not limited to anti-bribery and corruption, compliance breaches, discrimination and harassment and health and safety. Concerns are recorded by an independent third party and investigated by appropriately trained and skilled investigators. Qualitative programme improvements in 2019 included updates to the website, case management system upgrades, refreshed staff training and enhanced training for line managers. Since launching Speak Out in 2016, the number of concerns reported has increased by nearly 200 per cent. Supply chain Our Group Code of Business Conduct outlines the values and standards that are required by each of our suppliers. Our Group Third-Party Supply policy is core to our supply chain governance and specifies our position on supply chain management, setting out our approach to due diligence, selection criteria, contractual requirements and ongoing monitoring of relationships. Business units conduct due diligence before engaging with and ultimately selecting a new supplier. We perform regular due diligence, review meetings and audits where required, and our policies and procedures are supported by regular employee training exercises. In July 2019, we introduced the Workday platform, an e-procurement and general ledger system, at our London head office to improve the control and monitoring of purchasing activities. This system also allows us to better understand the composition of our supply chain and to automate our payments to help make sure we pay businesses in a timely way. Being a responsible business also requires organisations to ensure that they meet and strive to surpass commitments to the UN’s Declaration of Human Rights. 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. People We provide an inclusive working environment in which we develop our talent, reward great performance, protect our people and value our differences, and we believe that such an environment is essential to enabling us to deliver for our customers, shareholders and communities. Diversity and inclusion Having the benefit of diverse perspectives and experiences within our organisation is important to our success and fulfilling our purpose. Diversity and Inclusion (D&I) is an important priority for Prudential and the Group HR Director is the executive sponsor for D&I across the Group. Through the Group D&I Policy we ensure that we provide equal opportunities to our workforce, fostering a collaborative and supportive environment in which our employees are treated with dignity and respect. Our strategic, long-term approach to D&I is reviewed regularly to ensure that it remains outcomes-focused and enables Prudential plc to be appropriately placed to become a more diverse and inclusive organisation over time. The Board of Prudential plc is committed to recruiting the best available talent and appointing the best candidate for a role, from Board level to any role within the wider company, ensuring the necessary diversity of experience, skillsets and professional backgrounds. As a signatory to the HMT Women in Finance Charter since 2016, we have an externally disclosed target of having 30 per cent women in senior management by the end of 2021. At 31 December 2019 the figure was 28 per cent and we remain on track to meet our 2021 target. We give full and fair consideration to applications for employment by disabled people. If an employee incurs a disability while employed by us, efforts are made to continue their employment. Training, career development and promotion opportunities are equally applied for all our employees, regardless of disability. Prudential headcount as at 31 December 2019 Gender diversity: senior management 72% 69% 71% 75% 83% * Pre-demerger position Male Female 2019 28% 21 Oct 2019* 2018* 2017* 2012* 31% 29% 25% 17% Gender diversity: all employees Headcount Total Male Female Undisclosed2 Unspecified3 Chairman and 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 3 7 7 3 6 3 0 1 53 38 15 – – – – – – – – 18,125 8,137 9,914 41 33 Notes 1 Excludes Prudential Corporation Asia joint ventures. 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’. prudentialplc.com Prudential plc Annual Report 2019 81 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information ESG SUMMARY CONTINUED Responsible working practices We are committed to supporting human rights and to acting responsibly and with integrity at all times. Our policies are guided by the principles of the UN’s Universal Declaration of Human Rights and the International Labor Organization’s core labour standards, which are incorporated into our Group Code of Business Conduct, setting out our values and standards of employee behaviour, and into our Group Third-Party Supply Policy. Our Group Employee Relations and Resourcing polices are available on the Group website at www.prudentialplc.com/ investors/governance-and-policies/ employee-relations-policy, along with our Board-approved Modern Slavery Act statement at www.prudentialplc.com/ investors/governance-and-policies/ modern-slavery-statement. Our business units implement policies and practices at a local level that aim to ensure compliance with statutory and regulatory requirements in the local labour market and the prevention of slavery, human trafficking and child and forced labour. Compliance with Group policies is certified annually through our Group Governance Manual attestation process. In 2019, we again participated in ShareAction’s Workforce Disclosure Initiative (WDI), which aims to create transparency for investors about how companies manage their workers, both in their direct operations and supply chains. Talent development Developing our people is key to achieving our strategic objectives as a responsible business and to the long-term success of the company. Prior to the demerger of M&G plc from the Group, we created two full boards and senior management teams for two FTSE 100 companies, providing individuals with development opportunities and career progression. Our priority now is to ensure that we have the diverse short, medium and long-term talent we need in an inclusive environment to deliver on the strategic priorities of the newly shaped organisation. Group HR focuses on developing senior leadership through an annual process of talent review, and we use succession planning to continue developing leaders and critical specialists, segmenting our talent to identify short, medium and long-term successors. We develop our senior executive leaders through a bespoke exercise based on their aspirations and the skillsets they need to continue to be successful, including fostering innovation, leading transformation and driving digital capability and execution through collaboration. The Board receives an in-depth talent review, led by the Group HR Director, once a year. Employee engagement We want to foster an environment in which employees feel empowered and which provides them with an opportunity to make 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. In the US, Jackson’s Organisational Survey ensures that all associates have an opportunity to share their thoughts and make the organisation an even better place to work. The 2019 results show that associates are satisfied with their work and proud to be a part of Jackson. The areas of ethics and corporate responsibility were among the highest-scoring. The Group’s community investment strategy is closely aligned with our business purpose and one of the principal themes is employee engagement. Many of our employees play an active role in their communities through volunteering, charitable donations and fundraising. Chairman’s Challenge is our flagship international volunteering programme, bringing people together across the Group to help their communities. More information is available in the Supporting our communities section on page 86. The Board has considered options to ensure its decisions are informed by an appreciation of employees’ views and in line with expectations of the UK Corporate Governance Code. Performance and reward We structure our reward arrangements to attract, motivate and retain high-calibre people. Our people contribute to the success of the Group and are rewarded accordingly. We recognise and reward high performance and are committed to a fair and transparent system of reward. Among our benefits, we offer employees competitive pension arrangements. We also believe in the importance of giving employees the opportunity to benefit from the Group’s success through share ownership, and operate share plans for employees in the UK and Asia. This includes the award-winning PruSharePlus plan, which enables employees in Asia to share in the longer-term success of the business and actively encourages share ownership and engagement. Similar all-employee share plans operate in the UK. Executive remuneration The Group’s executive remuneration arrangements reward the achievement of Group, business, functional and personal targets, provided that performance is aligned to the Group’s risk framework and appetite and that our conduct expectations, as well as those of our regulators and other stakeholders, are met. For the seventh consecutive year, salary increases in 2019 for executives were aligned with the bottom of the range of pay budgets for the wider workforce. In order to strengthen the community of interest between executives and other shareholders, remuneration is linked to sustained performance over the longer term. For example, 40 per cent of Executive Directors’ bonus is deferred in shares for three years. The Remuneration Committee’s Terms of Reference were updated in 2019 to incorporate updates to the Corporate Governance Code and to reference the Hong Kong Insurance Authority’s remuneration requirements. More details on executive remuneration can be found in the Directors’ Remuneration Report on page 136. Technology In the face of technological advancements and evolving customer needs, we actively embrace the latest technology and embed digital capabilities in our business model. We continually increase the automation of our operations in order to improve both business efficiency and customer satisfaction. Increasing access to digital health tools in Asia Access to physicians remains a challenge for many communities across Asia. To aid the expansion of our role from providing protection to preventing and postponing adverse health events, we have launched Pulse by Prudential, an all-in-one digital app that forms the core component of our pioneering digital health proposition. Accessible to everyone, Pulse uses artificial intelligence-powered self-help tools and real-time information to offer holistic health management to customers in Asia. Pulse is an evolving platform and consists of a range of partnerships with health and technology companies. Our partnership with Babylon enables users to monitor their health status online. We are also working 82 Prudential plc Annual Report 2019 prudentialplc.com with a range of local and regional partners to provide increasingly personalised health management services to consumers. For example, through our partnership with Tictrac, we are able to provide personalised wellness services to consumers by combining a user’s lifestyle signals from their apps and wearables with contextual information about their surroundings. This information helps guide users to achieve their health objectives, such as preventing diabetes or reducing stress levels, by establishing good nutritional and fitness habits or instilling behaviours that are beneficial to their health. Using technology to enhance our capabilities In 2019, Jackson invested significant time and resources with fintech partners to help illustrate the benefits a lifetime income solution can provide within a comprehensive wealth management plan. The fintech platforms where Jackson is actively engaged include eMoney, MoneyGuidePro, and Envestnet. The technology solutions provided by eMoney reach more that 60,000 financial professionals, serving nearly four million households nationwide. During 2019, Prudential Singapore strengthened its partner network of fintech, insurtech, healthtech and medtech companies with the third edition of its flagship innovation initiative – the PRU Fintegrate Partnership. Our smart underwriting tool, which is now used in 64 per cent of all new sales, offers dynamic underwriting that streamlines the application process and communicates instant underwriting decisions to customers. Promoting financial inclusion, protection and participation In June, we announced a strategic partnership with OVO, a digital payments, rewards and financial services platform in Indonesia. Available on over 115 million devices, OVO is the preferred digital payments platform for Indonesians, with over 500,000 merchants and a presence in 319 cities. The partnership significantly enhances our reach to digitally minded consumers in one of Asia’s fastest-growing insurance markets and is a key step in our broader commitment to make health and wealth services affordable and accessible to all Asians. Recognising the high cost of and unequal access to healthcare in the Philippines, Pru Life UK, our life insurance business in the Philippines, has the ambition to make health accessible and affordable to all through the use of mobile digital health. In 2019 PruLife UK published an independent study, which it commissioned to examine the readiness of the country’s regulatory and legal framework to support the development of mobile digital health. Information security As consumers seek on-demand, 24-hour access to our products and services, loss of access has the potential to have a significant impact on our customer relationships and our brand reputation. Furthermore, many of the social benefits of new technology, such as financial inclusion and greater access to primary healthcare, may not be realised. In this context, information risk remains an area of prominent concern and focus for ourselves, regulators and businesses globally. For us, information security is rated as a principal risk, demonstrating our continued commitment to securely managing the information our customers entrust to us. During 2019, we implemented a long-term shift from federated information security teams within each business unit to a single Group-wide team leveraging skills, experience and resource globally via a “centres of excellence” model. This new model will support collaboration and skills-sharing across the whole Group. Throughout 2019, the transition to the new model has been progressing under the newly appointed Group Chief Information Security Officer. To support the new model, we developed a new Global Information Security Policy, which came into force in 2020. The policy has been mapped to numerous international and local standards. How we manage information security risk Effective risk management is key to the successful execution of our objectives and the newly formed Group-wide Information Security and Privacy Committee defines and provides governance and the risk management framework for information security risks across the Group. This Committee meets at least quarterly and is a sub-committee of the Group Executive Risk Committee (GERC), which is chaired by the Group Chief Risk and Compliance Officer and of which the Group Chief Information Security Officer is a standing member. The Information Security team also works closely with the Group Risk function to define information security as a risk within the business. The Information Security team regularly reports on security risk and performance to the Group Risk Committee and the GERC, demonstrating the priority and level of executive oversight assigned to information security risk and the management of these risks. We monitor our information security risks through our Group-wide key performance indicators, which map to the industry-leading National Institute of Standards and Technology Cyber Security Framework and other frameworks.Our Security function retains its overarching commitment to protect the business, comply with all applicable laws and regulations, and support the growth of the Group securely. In 2019 we launched several projects to enhance our approach to information security assurance using automation and analytics. In Asia we have introduced automated firewall rule analytics to provide deep-dive real-time reviews on the performance of our on-premise firewalls. Projects such as these are driving our approach to innovating our assurance processes to provide greater visibility in a faster and more efficient manner, while protecting the information entrusted to us. Training, awareness and Board oversight of information security risk Our staff are critical to protecting the information entrusted to us by our customers. Consequently, information security awareness training is integral to ensuring that our information and systems remain safe. All members of staff, including temporary staff, across all of our businesses are mandated to complete this training at least annually. Training is provided locally to support local languages and reflect any local regulatory and legal requirements. Completion is tracked within each business. This training is supplemented with simulated phishing campaigns quarterly to test how staff respond to these attacks in ‘real world’ scenarios. This focus extends to our Board and executives. Throughout the year our Non-executive Directors have access to one-to-one training, often delivered by the Group Chief Information Security Officer, on topics including cyber threat and privacy. Incident response and resilience While our aim at Prudential is always to prevent incidents wherever possible, we must ensure that we are prepared to respond to any incident in a timely and effective manner. Incident response plans are developed, maintained and tested regularly, and the Group Information Security & Privacy team maintains a close working relationship with business continuity and disaster recovery teams to ensure alignment of plans and support in the event of an incident. Regular scenario- prudentialplc.com Prudential plc Annual Report 2019 83 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationESG SUMMARY CONTINUED based testing of these processes serves both to confirm the effectiveness of the plans and provide assurance that staff, including senior executives, are prepared for such an event. Privacy and data protection In 2019, our focus was dedicated to maintaining awareness as well as enhancing and embedding activities that were implemented as part of the General Data Protection Regulation programme, in order to strengthen and sustain ongoing compliance. Our Group Privacy Office, which we established in 2018, continues to maintain oversight of privacy compliance. In addition, the Office works with Group businesses across Asia, Africa and the US to support and advise on ongoing privacy compliance as well as to provide a point of escalation for resolving data privacy issues. Environment We are determined to minimise our impact on the environment in line with our purpose of improving the lives of our customers and their communities. We are responsible for understanding our impact on the environment and doing what we can to minimise any damaging effects. We measure our environmental performance and take action to ensure that we improve that performance year after year. Managing our direct impact Our Group Governance Manual underpins all our activities, including minimising the direct impacts of our operations on the environment. Our Group Environmental Policy applies to our operational properties worldwide, guiding our approach to the management of the direct impacts of our business units, including compliance with environmental laws and regulations with respect to emissions, energy consumption, water use, waste disposal, environmental supply chain management and the adoption of risk management principles for all property-related matters. Business unit performance is monitored against the Group Environmental Policy and updates are provided to the Board. We participate in external benchmarks that assess our management of climate change risks and opportunities. More information is available in the Climate section on page 78 and information on our wider environmental impact can be found in the Responsible Investment section, on page 77. Global environmental targets framework In 2016 we developed a global environmental targets framework to drive improvements in environmental operational performance. This framework was aligned to the operational footprint of the pre-demerger Prudential Group and, as such, a number of targets are no longer relevant to the demerged Group. The Group’s new operational footprint provides an opportunity to develop targets that are more closely aligned with that footprint and our ambition in this area. During 2020, we are reviewing our global environmental targets framework for the demerged Group and new targets will be established to start from 2021. The highlights of our 2019 environmental performance are available below. These metrics cover the performance of the demerged Prudential Group for 2019 and form the new baseline data from which we will measure future environmental performance. The demerged Prudential Group is 24 per cent smaller (based on headcount) than the Prudential Group including M&G plc. Consequently, the reported figures are much lower than the values reported in 2018. Our environmental performance 1  Energy and climate change –  understanding our impacts, reducing our  greenhouse gas emissions and developing  longer-term actions In 2019, our global energy use (for the provision of small power, heating and cooling) across our occupied estate was 91,921 MWh. Across our occupied estate, our global absolute Scope 1 and 2 (market-based) greenhouse gas emissions were 56,421 tCO2e. When normalised against net lettable floor area, our Scope 1 and 2 emissions were 105 kg CO2e/m2. In Asia, we completed seven site assessments as part of our work towards achieving our target to conduct energy assessments of our 20 highest energy- consuming sites. In the US, Jackson continues to reduce energy usage and decrease our carbon footprint, and in 2019 completed a range of projects at our Corporate Way campus in Lansing, including installing high-efficiency rooftop CO2 sensors, high-efficiency water heaters, an energy recovery ventilation unit and a new dust-collector filtration system to reduce exhaust and recover energy in printing facilities. As in 2018, we have disclosed our Scope 3 air travel booked from the UK. We will continue to work with our business units across all of our regions to extend our Scope 3 emissions reporting. In 2019 our reported air travel emissions were 6,092 tCO2e. During 2019 we chose to offset our air travel, covering both our reported and unreported emissions. Our full greenhouse gas emissions statement can be found below. 2  Construction and refurbishment –  delivering sustainable outcomes through  property projects and improved wellbeing  of our employees  Refurbishment projects and new office builds provide an opportunity to improve the environmental performance of our estate. Each business unit has the autonomy to deliver sustainable building certification most relevant to its region and develop standards or guidelines considered most appropriate in its market. Our new London office, which we occupied in April 2019, is rated as BREEAM Excellent. In Malaysia we have consolidated our headquarters operations into a new LEED Gold building in the Tun Razak Exchange, part of Kuala Lumpur’s new business and international Financial District. In order to align and promote sustainable best practices throughout the life-cycle of our occupied estate, Prudential Corporation Asia developed a Smart Leasing Toolkit and an Environmental Design and Construction Guide. 3  Waste and recycling – reducing  the waste we generate and diverting  waste from landfill through recycling  and recovery  During 2019, we generated 864 tonnes of waste in the UK and the US. The quality of the data being collected in Asia on waste continues to become more reliable and will be a focus area for ongoing reporting in 2020. Of the UK and US total, 63 per cent was diverted from landfill through recycling, composting or incineration. Scope 3 carbon emissions associated with our waste are calculated at 42 tCO2e, a minor contribution to our overall corporate footprint in comparison with the energy use of our buildings and air travel. We continue to work with our suppliers to seek opportunities to increase recycling rates and decrease waste generation in the first instance. 84 Prudential plc Annual Report 2019 prudentialplc.com of our Scope 3 reporting and increase coverage where practicable. Our 2019 reporting covers the period 1 October 2018 to 30 September 2019. Please refer to our Basis of Reporting and supplementary reporting online for further detail on our methodology, reported consumption and drivers of variation. 4  Water consumption – assessing  and reducing our use of water In 2019, absolute use of water across our global occupied estate was 229,268 m3. When normalised against headcount, our use of water was 12.6 m3/employee. In the US, irrigation central control has been installed and activated for systems in part of Jackson’s Corporate Way campus. Desktop software and mobile phone applications are being used to monitor water usage, providing automated shut-off capability should there be any breaks in water supply lines. 5  Sustainable procurement – partnering  our supply chain to deliver sustainable  solutions and source responsibly  The continued support of our supply chain is key in becoming a sustainable business. Our procurement team ensures that environmental requirements are integrated into procurement frameworks and form part of the supplier selection criteria. Prudential plc – greenhouse gas emissions statement We have compiled our global GHG emissions 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 booked business travel for the occupied estate, global water consumption from the occupied estate and waste generated from occupied properties (UK and US). We continue to work with our business units to review the extent Group total (including continuing and discontinued operations) Emissions source Scope 1 Scope 2 – location based Scope 2 – market based Scope 3 Total scope 1 & 2 Total scope 1, 2 & 3 Carbon intensity Kg per m2 – Scope 1 & 2 Tonnes per employee – scope 1 & 2 Kg per m2 – Scope 1, 2 & 3 Discontinued operations Emissions source Scope 1 Scope 2 – location based Scope 2 – market based Scope 3 Total scope 1 & 2 Total scope 1, 2 & 3 Carbon intensity Kg per m2 – Scope 1 & 2 Tonnes per employee – scope 1 & 2 Kg per m2 – Scope 1, 2 & 3 2018 % change 2019 9,353 54,155 50,717 17,747 60,070 77,817 9,192(1) 56,543(1) 52,127 22,545 61,319 97,033 96 2.5 124 24 3.1 32 2% (4)% (3)% (21)% (2)% (19)% 300% (19)% 288% 2019 2,041 5,247 1,609 11,471 3,650 15,121 40 0.7 164 prudentialplc.com Prudential plc Annual Report 2019 85 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationContinuing operations Emissions source Scope 1 Scope 2 – location based Scope 2 – market based Scope 3 Total scope 1 & 2 Total scope 1, 2 & 3 Carbon intensity Kg per m2 – Scope 1 & 2 Tonnes per employee – scope 1 &2 Kg per m2 – Scope 1, 2 &3 2019 7,312 48,908 49,109 6,275 56,421 62,696 105 3.1 117 Data notes: Reporting period: 1 October 2018 to 30 September 2019. Baseline year: 1 October 2017 to 30 September 2018. Independent assurance: 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 2019 to 31 December 2019) 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 2019 GHG Conversion Factors. Scope 2 calculations use the IEA GHG 2019 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. Accounting methodology: The Greenhouse Gas Protocol Corporate Accounting and Reporting Standard. Materiality threshold: Five per cent. Data restatements: (1) 2018 figure restated as accurate data became available from suppliers. Supporting our communities Our community investment strategy is closely aligned with our business purpose and with our stakeholders’ concerns and interests, and is focused around four principal themes: social inclusion, education and life skills, disaster preparedness and employee engagement. We take an active approach in helping tackle environmental and social challenges. Our strong contribution, harnessing the commitment of our people, continues to improve lives and build communities, wherever we work. Our approach to community investment Our relationships with our charity partners are long-term, involving support through both funding and skills-based employee volunteering. Our business units are guided by the Group’s strategy and framework for investing in the community, as laid out in our Group-wide Community Investment Policy, but within that framework they have the autonomy to manage their own community investment programmes. Our Group-wide Community Investment Policy sets minimum standards, as well as prohibiting political funding and contributions to religious organisations that have a clear aim to propagate a set faith. Understanding the issues faced by local communities is part of being a responsible business, and those best placed to manage community investment are our local businesses. In Asia and Africa this is done through the Prudence Foundation, a unified charitable organisation governed by a statutory board of directors, which maximises the impact of our community investment across these regions. In the US, a governance committee of Jackson and the Jackson Charitable Foundation board of directors regularly review our community investment activity, strategy and spend. The plc Board reviews the Group’s community investment performance and approves our strategy annually, while our Material Subsidiary Boards oversee corporate responsibility initiatives undertaken by our business units. Paul Manduca, Chairman of Prudential plc, is the Board sponsor for corporate responsibility. Monitoring and measuring our programmes We take a strategic, long-term approach to community investment, and we ensure that all our community investment activities meet our objectives. We use performance metrics aligned to the London Benchmarking Group (LBG) guidelines, which are used to monitor progress and guide the valuation of both cash and in-kind contributions, employee volunteering and management costs. In 2019, the Group spent $29.1 million supporting community activities. Direct cash donations to charitable organisations amounted to $20.6 million. The balance includes in-kind donations as set out on the Group website at www.prudentialplc.com/ about-us/esg/performance/community- investment that are calculated in accordance with LBG guidelines. This included 10,834 employees who contributed 103,775 hours of volunteer service in their communities. Our 2019 community investment reporting is assured by Deloitte LLP. Further information and Deloitte’s assurance statement can be found on the Prudential plc website at www.prudentialplc.com/about-us/esg/ performance/external-assurance-of- responsibility-reporting. 2019 highlights Volunteering across the globe Many of our employees play an active role in their communities through volunteering, charitable donations and fundraising. Chairman’s Challenge is our flagship international volunteering programme, bringing people together across the Group to help their communities. The programme continues to appeal to colleagues, with over 5,400 signing up to participate across 21 projects. Each volunteering project focuses on one or more of our community priorities and enables us to support both large, well established charities and innovative, smaller-scale activities with volunteers and financial support. As well as volunteering on behalf of the Chairman’s Challenge, employees around the Group volunteered on a huge range of other charitable projects, from providing disaster relief to mentoring schoolchildren supporting the elderly and skills-sharing. 86 Prudential plc Annual Report 2019 prudentialplc.com ESG SUMMARY CONTINUEDPrudential RideLondon Prudential RideLondon is a major mass-participation and charity fundraising event in the UK which has raised more than £77.5 million for charity in the last seven years. In 2019 it raised more than £11.5 million for over 980 charities. We have sponsored the event since its inception in 2013, and in 2019 our community engagement partnership, PruGOals, supported 273 young people from 21 schools across the UK to improve their self-esteem, aspiration and educational outcomes. 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 to incur any such expenditure in 2019. More detailed information on our ESG activities is available in our 2019 ESG report found at www.prudentialplc.com/investors/ reports/2019 Early childhood development The Prudence Foundation has supported the First Read programme since 2013, partnering with Save the Children to invest 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 their children’s development. Since 2013, more than 330,000 children and their parents have benefited through this home-based early childhood development programme, while over one million people have benefited indirectly through shared knowledge and resources developed from First Read. Jackson Career Exploration Centre In partnership with Junior Achievement of Middle Tennessee, Jackson has underwritten the Jackson Career Exploration Centre in JA Finance Park. This state-of-the-art programme serves seventh- to 12th-grade students across Middle Tennessee, combining hands-on classroom activities with real-world simulation, which allows students to put their money-management skills to the test, giving them a solid foundation for making intelligent personal finance decisions throughout their lives. The programme will host 10,000 students each school year, serving 22 counties in the region. Cha-Ching – the first global financial education programme Developed by Prudential to address the gap in financial literacy, Cha-Ching is a global financial education and responsibility programme for children aged from seven to 12. Now in its ninth year, the programme has expanded from its origins in Asia to the US and Africa. It has been very positively received in all markets, with strong feedback from parents, teachers, children and government stakeholders. Safe Steps Safe Steps is a ground-breaking, Asia and Africa public service programme aimed at enhancing awareness about natural disasters, road safety and first aid through the dissemination of survival tips. The programme was created and developed by the Prudence Foundation. Principal partners involved in the programme’s development and continuing to support its roll-out are National Geographic, the International Federation of Red Cross and Red Crescent Societies and the Federation Internationale de l’Automobile. The programme continues to reach an estimated 250 million people every day across Asia through partnerships with government, humanitarian and private sector organisations. Safe Schools During 2019, the Prudence Foundation continued to support the Safe Schools programme in partnership with Plan International and Save the Children in Cambodia, the Philippines and Thailand. This programme primarily focuses on disaster preparedness for students, teachers and local community members. Since 2013, almost 90,000 students and 43,000 adults have participated in the programme. Strategic report approval by the Board of Directors The strategic report set out on pages 10 to 87 is approved by the Board of Directors. Signed on behalf of the Board of Directors Mike Wells Group Chief Executive 10 March 2020 prudentialplc.com Prudential plc Annual Report 2019 87 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information03 Governance 88 Prudential plc Annual Report 2019 prudentialplc.com 03 G r o u p o v e r v e w i i S t r a t e g c r e p o r t G o v e r n a n c e D i r e c t o r s ’ r e m u n e r a t i o n r e p o r t i F n a n c a i Chairman’s introduction Board of Directors Group Executive Committee How we operate Risk management and internal control Committee reports Nomination & Governance Committee Audit Committee Risk Committee Statutory and regulatory disclosures Index to principal Directors’ report disclosures Page 90 92 97 98 108 110 110 118 127 133 135 l s t a t e m e n t s E u r o p e a n E m b e d d e d V a u e ( E E V ) b a s i s r e s u l t s l A d d i t i o n a l i n f o r m a t i o n prudentialplc.com Prudential plc Annual Report 2019 89 CHAIRMAN’S INTRODUCTION Robust and transparent governance supporting our long-term sustainable success Dear shareholder Good governance encourages decisions to be made in a way that is most likely to promote the long-term sustainable success of the Company for the benefit of its members, taking into account the views and interests of the Group’s wider stakeholders. We aim to achieve this through a governance framework that supports decision-making, facilitates challenge, is continuously updated to meet the Group’s business needs, and encompasses a prudent system of internal controls and rigorous processes for identifying, managing and mitigating key risks. Set out below are some of the principal strategic and governance items the Board has considered over 2019. The demerger of M&G plc Following the announcement in 2018 of the Board’s intention to demerge M&G plc from the remainder of the Prudential Group, the demerger was completed on 21 October 2019 on an accelerated timetable. The effort by management and employees during the year to achieve this milestone should not be underestimated and the Board is grateful for the efforts of all those involved across the business. During 2019, the Board has been focused on overseeing the execution of the demerger in a manner that promotes the long-term sustainable success of both groups. A number of workshops were held outside the usual cycle of meetings to facilitate more detailed discussions about the execution of the demerger, taking into account all stakeholder interests and ensuring the effective delivery of this complex transaction, and to consider the challenges and opportunities facing both groups post-demerger. The Board has found these workshops to be valuable and intends to continue this approach, as appropriate, when addressing key strategic matters, to ensure that additional time to discuss and challenge is available. Time was spent ensuring M&G plc would have in place a suitable governance framework for a listed group at the point of demerger, including establishing a board with the desired skills and experience to progress M&G’s strategic aims. Consideration was also given to the allocation of capital and resources between the two groups. As part of these discussions the Board considered and managed potential conflicts of interests between the two groups in order to create a fair outcome. As Prudential no longer has operations in the UK and Europe, the Hong Kong Insurance Authority (the Hong Kong IA) has assumed the role of Group-wide supervisor. However, our long-standing governance framework has remained in place. Our purpose, culture and values Prudential has been delivering on its purpose throughout its 171 year history and we have taken the opportunity presented by the demerger of M&G plc to improve the articulation and communication of this purpose. We help people de-risk their lives and deal with their biggest financial concerns, providing them with the freedom to face the future with confidence. We deliver economic and social benefits for our customers, our employees and the communities in which we operate, while creating financial benefits and delivering growing returns for our investors. A description of how Prudential considers and delivers on this purpose is set out in the ESG report on pages 72 to 87. We recognise that culture is an important contributor to long-term success and sustainable growth. The Board dedicated time in 2019 to reviewing Prudential’s culture, focusing as part of our preparations for the demerger on the transition to our new operating environment and challenges. We made progress in defining and communicating our culture, recognising and rewarding behaviours that embody our culture, and measuring progress. Now that the demerger is complete, we are focusing in more detail on how to shape our culture to support our changing business model and embrace new ways of thinking, working and leading. It is one of our key objectives to ensure that Prudential continues to be guided by its values and behaviours and demonstrates ongoing commitment to our stakeholders and to innovation, performance and excellence in execution. We are developing plans for assessing and monitoring culture as we move forward, including regular reporting to the Board. Developing a shared culture and behaviours across multiple jurisdictions presents a number of challenges and so we are focusing efforts on developing a Group-wide culture framework, which includes a common purpose and shared mindsets, behaviours and capabilities but allows tailoring for local context. Details of our risk governance and culture can be found in the Group Chief Risk and Compliance Officer’s Report on pages 51 to 71. Our Group-wide Internal Audit function considers the risk and control culture of the organisation throughout its activities, and our Group Code of Business Conduct underlies everything we do, shaping our culture and linking culture explicitly to values and behaviours. 90 Prudential plc Annual Report 2019 prudentialplc.com I am pleased we have strengthened the Board’s composition further to ensure the Group is well-placed to develop and deliver on our strategic objectives post-demerger. Effective governance is based on the appropriate level of oversight and challenge. As such, the methodology and results of our 2019 Board evaluation are set out on pages 102 and 103 and I hope reading this report will demonstrate to you the work that we have done in ensuring that oversight and challenge continue to ensure that the Board is promoting the long-term success of the Company. I hope that this report and the reports of my fellow Committee Chairs will demonstrate to you the work we have undertaken over the course of the year as well as the tangible and positive impact this has had on our business. Paul Manduca Chairman Looking after our stakeholders and wider community initiatives At Prudential, we recognise that our stakeholders are key to our long-term success. We seek to engage proactively with them, to understand their views and to take these views into account when making decisions. In response to the emphasis that the UK Corporate Governance Code places on wider stakeholders, the Board has designated two Non-executive Directors to represent the workforce at Board level and is taking action to improve oversight of workforce policies and practices in order to help ensure consistency with the Group’s culture and values, including a review of relevant policies to be completed in 2020. Further information about how the Board has taken into account the views of the Group’s key stakeholders, including employees, can be found on pages 73 to 76 and 81 to 84. Our ESG Executive Committee has responsibility for identifying ESG themes and overseeing ESG reporting. This management Committee provides updates to the Nomination & Governance Committee. You can read more about our corporate social responsibility actions in the ESG summary and in our 2019 ESG report which will be published on our website. Board composition The Nomination & Governance Committee has undertaken significant work during 2019 to ensure that the Board’s skills and experience remain appropriate to formulate and oversee delivery of the strategy for the Group following the demerger and that there is an orderly and planned succession strategy in place for key roles. We announced last year that my tenure as Chairman had been extended until May 2021 in order both to help oversee the demerger of M&G plc and to ensure continuing smooth governance afterwards. The early delivery of the demerger has focused the Board’s attention on succession planning. Following an extensive search which considered both internal and external candidates and which was led by Philip Remnant in his capacity as Senior Independent Director, we announced the appointment of Shriti Vadera as a Non-executive Director with effect from 1 May 2020. I intend to step down from the Board with effect from 31 December 2020 and Shriti is expected to succeed me and become Chair of the Board and Chair of the Nomination & Governance Committee on 1 January 2021. I believe that Shriti is an excellent choice and I look forward to working with her during the transition to her becoming Chair. I would also like to welcome Amy Yip and Jeremy Anderson to the Board and to thank Howard Davies, who will step down from the Board at the conclusion of the 2020 Annual General Meeting, for his significant contribution during his tenure and his leadership of the Risk Committee since inception. As announced on 11 March 2020, Jeremy will succeed Howard Davies as Chair of the Risk Committee at the conclusion of the Annual General Meeting in May 2020. I would also like to note the expansion of the roles of Mark FitzPatrick and James Turner, as announced on 10 July 2019, in preparation for the demerger. Mark’s role is now Group Chief Financial Officer and Chief Operating Officer. This extension of his responsibilities encompasses oversight of key Group support functions including Legal, Government Relations and Communications. James assumed responsibility for Compliance and became Group Chief Risk and Compliance Officer. prudentialplc.com Prudential plc Annual Report 2019 91 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationBoard of Directors Chairman Relevant skills and experience Paul will continue to draw on his extensive experience in leadership roles and his knowledge of the Group’s core businesses, international markets and industry sectors, and his technical knowledge, to provide effective leadership during a period of change for the Group. Paul has held a number of senior leadership roles. Notable appointments include serving as chairman of the Association of Investment Companies (1991 to 1993), acting as founding CEO of Threadneedle Asset Management Limited (1994 to 1999), global CEO of Rothschild Asset Management (1999 to 2002), directorships of Eagle Star and Allied Dunbar, holding the offices of European CEO of Deutsche Asset Management (2002 to 2005), chairman of Bridgewell Group plc and a director of Henderson Smaller Companies Investment Trust plc. Other previous appointments include the chairmanship of Aon UK Limited and JPM European Smaller Companies Investment Trust Plc. From September 2005 until March 2011, Paul was a non-executive director of Wm Morrison Supermarkets Plc, including as senior independent director, audit committee chairman and remuneration committee chairman. He was a non-executive director and audit committee chairman of KazMunaiGas Exploration & Production until the end of September 2012 and chairman of Henderson Diversified Income Limited until July 2017. Paul is the Chairman of the Board. He initially joined the Board in October 2010 as the Senior Independent Director and member of the Audit and Remuneration Committees, roles he held until his appointment as Chairman in July 2012. On becoming Chairman, Paul was also appointed Chair of the Nomination & Governance Committee, having been a member of the Committee since January 2011. Chief Executive Relevant skills and experience Mike continues to develop the operational management of the Group on behalf of the Board, implementing Board decisions and leading the Executive Directors and senior executives in the management of all aspects of the day-to-day business of the Group. Mike has more than three decades’ experience in insurance and retirement services, having started his career at the US brokerage house Dean Witter, before going on to become a managing director at Smith Barney Shearson. Mike joined the Prudential Group in 1995 and became Chief Operating Officer and Vice-Chairman of Jackson in 2003. In 2011, he was appointed President and Chief Executive Officer of Jackson, and joined the Board of Prudential. During his leadership of Jackson, Mike was responsible for the development of Jackson’s market-leading range of retirement solutions. He was also part of the Jackson teams that purchased and successfully integrated a savings institute and two life companies. Mike is Group Chief Executive, a position he has held since June 2015. Other appointments — International Advisory Panel of the Monetary Authority of Singapore — San Diego University Advisory Board Paul Manduca Chairman Appointments Board: October 2010 Chairman of the Board: July 2012 N&G : July 2012 Age: 68 Michael Wells Group Chief Executive Appointments Board: January 2011 Group Chief Executive: June 2015 Age: 59 92 Prudential plc Annual Report 2019 prudentialplc.com Following the change of Group-wide supervisor in October 2019 to the Hong Kong Insurance Authority, the composition of the Prudential Corporation Asia Limited board of directors mirrors the Prudential Board. Board changes Executive Directors Key to Committee membership Chair Chair Audit Audit N&G Nomination & Governance Rem Remuneration Risk Risk Non-executive Directors As announced on 28 February 2019, Lord Turner stepped down from the Board with effect from the conclusion of the 2019 AGM held on 16 May 2019. As announced on 10 May 2019, Amy Yip was appointed to the Board as a Non-executive Director and member of the Remuneration Committee with effect from 2 September 2019. As announced on 10 December 2019, Jeremy Anderson was appointed to the Board as a Non-executive Director and member of the Risk and Audit Committees with effect from 1 January 2020. As announced on 30 January 2020, Shriti Vadera will join the Board as a Non-executive Director and member of the Nomination & Governance Committee with effect from 1 May 2020. Executive Directors As announced on 28 February 2019, in preparation for the demerger of M&G plc, Michael Falcon, John Foley and Nic Nicandrou ceased to be Directors of Prudential plc at the conclusion of the 2019 AGM held on 16 May 2019. Michael Falcon and Nic Nicandrou maintained their positions as chief executives of their respective business units and as members of the Group Executive Committee. As the chief executive of M&G plc, John Foley ceased to be a member of the Group Executive Committee at demerger on 21 October 2019. Mark FitzPatrick CA Group Chief Financial Officer and Chief Operating Officer Appointment Board: July 2017 Age: 51 James Turner FCA FCSI FRM Group Chief Risk and Compliance Officer Appointment Board: March 2018 Age: 50 Relevant skills and experience Mark has a strong background across financial services, insurance and investment management, encompassing wide geographical experience relevant to the Group’s key markets. Mark previously worked at Deloitte for 26 years, building his industry focus on insurance and investment management globally. During this time, Mark was managing partner for Clients and Markets, a member of the executive committee and a member of the board of Deloitte UK. He was a vice chairman of Deloitte for four years, leading the CFO Programme and developing the CFO Transition labs. Mark previously led the Insurance & Investment Management audit practice and the insurance industry practice. Mark is Group Chief Financial Officer and Chief Operating Officer, a position he has held since July 2019. He joined the Board as Chief Financial Officer in July 2017. Relevant skills and experience Having held senior positions at Prudential for a number of years, James has a wide-ranging understanding of the business and draws on previous experience across internal audit, finance and compliance, as well as technical knowledge, relevant to his role. James has led internal audit teams in UBS in both the UK and Switzerland. Prior to joining Prudential, James was the deputy head of compliance for Barclays plc. He also held a number of senior internal audit roles across the Barclays group, leading teams that covered the UK, the US, Western Europe, Africa and Asia retail and commercial banking activities. James joined Prudential in November 2010 as the Director of Group-wide Internal Audit and was appointed Director of Group Finance in September 2015, with responsibility for delivery of the Group’s internal and external financial reporting, business planning, performance monitoring and capital and liquidity planning. He also led the development of the Group’s Solvency II internal model. James joined the Board as an Executive Director and Group Chief Risk Officer in March 2018. Prior to the demerger of M&G plc, he led the discussions with Hong Kong IA on the revised capital framework for the Group and in July 2019 assumed responsibility for Group Compliance, becoming the Group Chief Risk and Compliance Officer, relocating to Hong Kong in August 2019. Other appointment — West Bromwich Building Society (non-executive director) prudentialplc.com Prudential plc Annual Report 2019 93 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationBOARD OF DIRECTORS CONTINUED Non-executive Directors The Hon. Philip Remnant CBE FCA Senior Independent Director Appointments Board: January 2013 Audit : January 2013 N&G : January 2013 Rem : January 2013 Age: 65 Relevant skills and experience Philip contributes experience across a number of sectors and in particular listed company experience and the financial services industry, including asset management, in the UK and Europe. Philip was a senior adviser at Credit Suisse and a vice chairman of Credit Suisse First Boston (CSFB) Europe and head of the UK Investment Banking Department. He was twice seconded to the role of director general of the Takeover Panel. Philip also served on the board of Northern Rock plc and as chairman of the Shareholder Executive. Until July 2018, he also served on the board of UK Financial Investments Limited. Philip joined the Board in January 2013 as a Non-executive Director, as Senior Independent Director and as a member of each of the Audit Committee, the Remuneration Committee and the Nomination & Governance Committee. He also chaired the M&G Group Limited board from April 2016 until October 2018. Other appointments — Severn Trent plc — City of London Investment Trust (chairman) — Takeover Panel (deputy chairman) Jeremy Anderson CBE Appointments Board: January 2020 Audit : January 2020 Risk : January 2020 Age: 61 Sir Howard Davies Appointments Board: October 2010 Audit : November 2010 N&G : July 2012 Risk : October 2010 Age: 68 Relevant skills and experience Jeremy contributes substantial leadership experience of the financial services sector across Asia and the US. He has extensive technical knowledge on audit and risk management, particularly concerning international companies. Jeremy joined KPMG Consulting in 1985 and held the role of Chief Executive Officer in 2001 before being appointed as head of UK operations at Atos Origin and a member of the Management Board of Atos Origin SA in 2002. From 2006, following two years as head of financial services at KPMG UK, Jeremy held the role of KPMG’s head of financial services for Europe followed by head of clients & markets in 2008. He served as KPMG’s Chairman of Global Financial Services until 2017. Jeremy also served on the board of the UK Commission for Employment and Skills, and now serves as a non-executive director and chairman of the audit committee of UBS Group AG. Jeremy joined the Board in January 2020 as a Non-executive Director and member of the Audit and Risk Committees. Other appointments — UBS Group AG (chairman of audit committee) — The Productivity Group — The Kingham Hill Trust Relevant skills and experience Howard has a wealth of experience in the financial services industry, across the Civil Service, consultancy, asset management, regulatory and academia. He also contributes his detailed knowledge of the Group’s key international markets including the UK, Europe, North America and Asia as well as international regulatory experience. Howard was previously chairman of the Phoenix Group and an independent director of Morgan Stanley Inc. Howard joined the Board in October 2010 as a Non-executive Director and Chair of the Risk Committee. He joined the Audit Committee in November 2010 and the Nomination & Governance Committee in July 2012. Other appointments — Royal Bank of Scotland (chairman) — China Banking and Insurance Regulatory Commission international advisory board — China Securities Regulatory Commission international advisory board (chairman) — Institut d’Études Politiques (Sciences Po) — Millennium LLC regulatory advisory board 94 Prudential plc Annual Report 2019 prudentialplc.com Key to Committee membership Chair Chair Audit Audit N&G Nomination & Governance Rem Remuneration Risk Risk David Law ACA Appointments Board: September 2015 Audit : May 2017 Risk : May 2017 N&G : May 2017 Age: 59 Kaikhushru Nargolwala FCA Appointments Board: January 2012 Rem : January 2012 Risk : January 2012 Employee Engagement Director: May 2019 Age: 69 Anthony Nightingale CMG SBS JP Appointments Board: June 2013 N&G : May 2015 Rem : May 2015 Age: 72 Relevant skills and experience David has experience across the Group’s key international markets including North America and Asia, and across a number of industry sectors. He contributes extensive technical knowledge of audit, accounting and financial reporting essential to his role as Chair of the Audit Committee. David was the global leader of PricewaterhouseCoopers (PwC) insurance practice, a partner in PwC’s UK firm, and worked as the lead audit partner for multi-national insurance companies until his retirement in 2015. During his time at PwC David’s responsibilities also included leadership of PwC’s insurance and investment management assurance practice in London and the firm’s Scottish assurance division. David’s role as a director and CEO of L&F Holdings Limited and its subsidiaries (the professional indemnity captive insurance group which serves the PwC network and its member firms), ceased in July 2019. David joined the Board in September 2015 as a Non-executive Director and member of the Audit Committee. David was appointed Chair of the Audit Committee and a member of the Risk Committee and of the Nomination & Governance Committee in May 2017. Other appointment — University of Edinburgh (Member of the court and policy and resources committee) Relevant skills and experience Kai has experience across some of the Group’s key international markets, particularly Hong Kong and the wider Asian market. In addition to his experience with listed groups, he contributes knowledge of the financial services sector. Kai spent 19 years at Bank of America and was based in Hong Kong in roles as group executive vice president and head of the Asia Wholesale Banking Group from 1990 to 1995. He spent 10 years working for Standard Chartered PLC in Singapore as group executive director responsible for Asia governance and risk from 1998 to 2007. Kai was chief executive officer of the Asia Pacific Region of Credit Suisse AG from 2008 to 2010 and now serves as director and chairman of their remuneration committee. Kai has served on a number of other boards, including Singapore Telecommunications and Tate and Lyle plc. Kai joined the Board in January 2012 as a Non-executive Director and member of the Remuneration and Risk Committees. Kai acts as a designated Non-executive Director for employee engagement matters as set out in the UK Code, for the Group’s workforce in Asia and Africa. Other appointments — Clifford Capital Pte. Ltd (chair) — Credit Suisse Group AG — PSA International Pte Ltd — Co-Chair of Sustainable Finance Steering Committee formed by Temasek (effective 1 March 2020) Relevant skills and experience Anthony has long executive experience of listed companies and, in particular, extensive knowledge of Asian markets. Anthony spent his career in Asia, where he joined the Jardine Matheson Group in 1969, holding a number of senior positions before joining the board of Jardine Matheson Holdings in 1994. He was managing director of the Jardine Matheson Group from 2006 to 2012. He was a member of the Hong Kong-APEC trade policy study group until 2018 and a member of the UK-ASEAN Business Council until 2019. Anthony joined the Board in June 2013 as a Non-executive Director and member of the Remuneration Committee. He became Chair of the Remuneration Committee and a member of the Nomination & Governance Committee in May 2015. Other appointments — Jardine Matheson Holdings (and other Jardine Matheson group companies) — Schindler Holding Limited (until 19 March 2020) — Shui On Land Limited — Vitasoy International Holdings Limited — The Innovation and Strategic Development Council in Hong Kong prudentialplc.com Prudential plc Annual Report 2019 95 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationBOARD OF DIRECTORS CONTINUED Non-executive Directors continued Alice Schroeder Appointments Board: June 2013 Audit : June 2013 Risk : March 2018 Age: 63 Thomas Watjen Appointments Board: July 2017 Rem : July 2017 Risk : November 2018 Employee Engagement Director: May 2019 Age: 65 Fields Wicker-Miurin OBE Appointments Board: September 2018 Rem : September 2018 Age: 61 Relevant skills and experience Alice has experience across the insurance, asset management, technology and financial services industries in the US. Alice began her career as a qualified accountant at Ernst & Young. She joined the Financial Accounting Standards Board as a manager in 1991, overseeing the issuance of several significant insurance accounting standards. From 1993, she led teams of analysts specialising in property-casualty insurance as a managing director at CIBC Oppenheimer, PaineWebber (now UBS) and Morgan Stanley. Alice was also an independent board member of the Cetera Financial Group and held the office of CEO and chair of WebTuner (now Showfer Media LLC), until its sale in 2017. She was also a director of Bank of America Merrill Lynch International until December 2018. Alice joined the Board in June 2013 as a Non-executive Director and member of the Audit Committee. She became a member of the Risk Committee in March 2018. Other appointments — Quorum Health Corporation — Natus Medical Incorporated Relevant skills and experience Tom has experience across the insurance, asset management and financial services industries as well as experience with listed companies in the UK and the US. Tom started his career at Aetna Life and Casualty before joining Conning & Company, an investment and asset management provider, where he became a partner in the consulting and private capital areas. He joined Morgan Stanley in 1987, and became a managing director in its insurance practice. In 1994 he was appointed executive vice president and chief financial officer of Provident Companies Inc. He was a key member of the team associated with Provident’s merger with Unum in 1999 and was appointed president and chief executive officer of the renamed Unum Group in 2003, a role he held until May 2017. Tom also served on the board of Sun Trust Banks from 2010 until April 2019. In 2019, Tom joined the boards of LocatorX, Inc and in 2020 he joined the board of Arch Capital Group Limited. Tom joined the Board in July 2017 as a Non-executive Director and member of the Remuneration Committee. He became a member of the Risk Committee in November 2018. Tom acts as a designated Non-executive Director for employee engagement matters as set out in the UK Code, for the Group’s workforce in the US and UK. Other appointments — Arch Capital Group Limited — LocatorX, Inc Relevant skills and experience Fields has extensive international boardroom experience, combining knowledge of the Group’s key geographic markets with experience across the global financial services industry. Fields started her career at Philadelphia National Bank in 1982 before joining Strategic Planning Associates (now Oliver Wyman) as a senior partner in 1989. She became chief financial officer and director of strategy at the London Stock Exchange in 1994, leader of the global markets practice of AT Kearney in 1998 and managing director of Vesta Capital Advisors in 2000. She was appointed to Nasdaq’s Technology Advisory Council in 2000 and was a member of the panel of experts advising the European Parliament on financial markets harmonisation for four years from 2002. She became a non-executive director and chair of the audit committee of Savills plc in 2002 and a non-executive director and chair of the investment committee of the Royal London Group in 2003. Fields was also a non-executive board member at the Department for Digital, Culture, Media & Sport from January 2016 until January 2020. Fields joined the Board in September 2018 as a Non-executive Director and member of the Remuneration Committee. Other appointments — BNP Paribas — SCOR SE — Leaders’ Quest (partner) 96 Prudential plc Annual Report 2019 prudentialplc.com Key to Committee membership Chair Chair Audit Audit N&G Nomination & Governance Rem Remuneration Risk Risk Group Executive Committee The Group Executive Committee (GEC) comprises the Executive Directors, the Chief Executive of each of Prudential Corporation Asia and Jackson Holdings LLC, the Group Human Resources Director and Group Chief Digital Officer. The GEC is a management committee constituted to support the Group Chief Executive, who also chairs the GEC. For the purposes of the Hong Kong Listing Rules, Senior Management is defined as the members of the GEC. Jolene Chen Group Human Resources Director Appointment to the GEC: June 2019 Age: 60 Relevant skills and experience Jolene is the Group Human Resources Director and Chief Human Resources Officer for Prudential Corporation Asia. She is also a member of the Prudential Corporation Asia Executive Board and a Councillor of Prudence Foundation, the community investment arm of Prudential in Asia. Jolene has more than 30 years’ experience, including eight as Chief Human Resources Officer for Prudential Corporation Asia. Prior to joining us she spent over 21 years with multinational companies in a variety of resourcing, organisational design, talent management, learning and development and human resources roles. Michael Falcon Chief Executive Officer, Jackson Holdings LLC Appointment to the GEC: January 2019 Age: 57 Relevant skills and experience Michael is Chief Executive Officer of Jackson Holdings LLC, which includes Jackson’s US subsidiaries and affiliates. Before joining Prudential in January 2019, he was based in Hong Kong as chief executive officer of Asia Pacific for J.P. Morgan Asset Management, a role he held from 2015, and was head of Asia Pacific funds from 2014. Michael is also a director of a number of Group subsidiaries within Jackson. Michael joined J.P. Morgan Asset Management in New York as head of retirement in 2010, before which he was at Merrill Lynch in a number of roles including as head of the retirement group. He has served as a trustee and executive committee member of the Employee Benefit Research Institute (EBRI) and was founding chairman of the Advisory Board of EBRI’s Center for Retirement Income Research. Nicolaos Nicandrou Chief Executive, Prudential Corporation Asia Appointment to the GEC: October 2009 Age: 54 Relevant skills and experience Nic became Chief Executive of Prudential Corporation Asia in July 2017 and is responsible for Prudential Corporation Asia’s life insurance and asset management business across 14 markets in Asia. Nic is also the chairman of CITIC-Prudential Life Insurance Limited. Nic started his career at PricewaterhouseCoopers (PwC). Before joining Prudential as an Executive Director and Chief Financial Officer in 2009, he worked at Aviva, where he held a number of senior finance roles, including as Norwich Union Life’s finance director and board member, Aviva group financial control director, Aviva group financial management and reporting director and CGNU group financial reporting director. Al-Noor Ramji Group Chief Digital Officer Appointment to the GEC: January 2016 Age: 65 Relevant skills and experience Al-Noor, who joined Prudential in 2016 in the newly-created role of Group Chief Digital Officer, is responsible for developing and executing an integrated, long-term digital strategy for the Group. Before joining Prudential, he worked at Northgate Capital, a venture capital firm in Silicon Valley, where he ran the technology- focused funds. Prior to that, Al-Noor was at Misys, the financial services software group, and he has previously held leading technology and innovation roles at BT Group, Qwest Communications, Dresdner Kleinwort Benson and Swiss Bank Corporation. Amy Yip Appointments Board: September 2019 Rem : September 2019 Age: 68 Relevant skills and experience Amy has extensive experience of China and South-east Asia following a 40-year career in banking, insurance, asset management and government. Amy started her career at Morgan Guaranty Trust of New York in 1978 before joining the Management Analysis Centre in Boston and Hong Kong as a consultant in 1986. She became executive director of Rothschild Asset Management in Hong Kong in 1988, vice president of Citibank Private Bank North Asia in 1991 and executive director (Reserves Management) of the Hong Kong Monetary Authority in 1996. She was group head of wealth management of DBS Bank, chair of DBS Asset Management and chief executive officer of DBS Bank Hong Kong between 2006 and 2010. Since 2011 she has been an adviser to Vita Green, a health supplements provider based in Hong Kong, and a founder and partner of RAYS Capital Partners, a Hong Kong investor in Asian equities. Amy became a non-executive director of AIG Insurance Hong Kong Limited in 2011 and chair of its audit committee in 2017, a non-executive director and member of the compensation and nomination committees of Temenos Group AG in 2014, a non-executive director and member of the Technology Committee of Deutsche Börse AG in 2015 and a non-executive director of Fidelity Funds in 2017. In August 2019, she became the chair of the Asia Pacific advisory board of EFG Bank International. Amy joined the Board in September 2019 as a Non-executive Director and member of the Remuneration Committee. Other appointments — AIG Insurance Hong Kong Limited — Deutsche Börse AG — Fidelity Funds — RAYS Capital Partners (founder partner) — Temenos Group AG prudentialplc.com Prudential plc Annual Report 2019 97 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information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 The Company has dual primary listings in London (premium listing) and Hong Kong and has therefore adopted a governance structure based on the UK and Hong Kong Corporate Governance Codes (the UK and HK Codes). This report explains how the principles set out in the UK and HK Codes have been applied. The Board confirms that, for the year under review, the Company has complied with the principles and provisions of the UK Code. In respect of provision 38 of the UK Code, Prudential has committed to aligning the level of pension contributions for newly appointed Executive Directors with that of the workforce. As recognised by the FRC’s Board Effectiveness Guidance, there are practical considerations in amending arrangements for incumbents. Accordingly, Executive Directors who were in office before the 2018 UK Code came into force will have their pension contributions reduced over time, as described on page 171 of the Directors’ remuneration report. The Company has also complied with the provisions of the HK Code other than as follows: Provision B.1.2(d) of the HK Code requires companies, on a comply or explain basis, to have a remuneration committee which makes recommendations to a main board on the remuneration of non-executive directors. This provision is not compatible with provision 34 of the UK Code which recommends that the board determines the remuneration of non-executive directors. Prudential has chosen to adopt a practice in line with the recommendations of the UK Code. The UK Code is available from: www.frc.org.uk The HK Code is available from: www.hkex.com.hk Our governance framework The Group has established a governance framework for the business, which is approved by the Board, and is designed to promote appropriate behaviours across the Group. The Nomination & Governance Committee reviews the Group Governance framework annually. The governance framework includes the key mechanisms through which the Group sets strategy, plans its objectives, monitors performance, considers risk management, holds business units to account for delivering on business plans and arranges governance. The Group Governance Manual (the Manual) sets out the policies and procedures under which the Group operates, taking into account statutory, regulatory and other relevant matters. The Manual includes the Group Code of Business Conduct which is regularly reviewed by the Board. The Audit Committee monitors compliance with the Manual and the Risk Committee approves the Group risk framework and monitors compliance with it across the Group. Business units manage and report compliance with the Group-wide mandatory requirements set out in the Manual through annual attestations. This includes compliance with our risk management framework, details of which are set out on pages 108 and 109 of this report. The content of the Manual is reviewed regularly, reflecting the developing nature of both the Group and the markets in which it operates, with significant changes on key policies reported to the relevant Board Committee. Subsidiary governance Following the demerger of M&G plc, the Group is reviewing subsidiary governance to ensure this remains appropriate to the business and regulatory environment in which the Group operates. Reflecting changes in that environment, the composition of the Prudential Corporation Asia Limited board of directors now mirrors the Prudential Board and Board meetings are held concurrently. As part of demerger preparations, Prudential Corporation Asia Limited became the intermediate holding company for the Group’s subsidiaries in the US and Africa. Dialogue between the Group Chair, Group Risk Committee Chair and Group Audit Committee Chair and their counterparts at subsidiary level provided an effective information flow throughout the year and these arrangements continue where relevant. Each of the Group Chair, Group Risk Committee Chair and Group Audit Committee Chair report to the Board or relevant Group Committee on the outcome of those dialogues, with any urgent issues being escalated between meetings as required. The Nomination & Governance Committee is responsible for oversight of governance arrangements for the material subsidiaries. This and other activities of the Nomination & Governance Committee during 2019 are described on pages 110 to 117. Regulatory environment Prior to the demerger of M&G plc on 21 October 2019, the Group was subject to the consolidated supervision of the UK’s Prudential Regulation Authority (PRA) under Solvency II. Following completion of the demerger, the Group-wide supervisor is now Hong Kong’s Insurance Authority (Hong Kong IA). Prior to demerger, Prudential undertook to maintain the Group-wide corporate governance framework for the Group post-demerger. This included maintaining appropriate internal controls for the oversight of the businesses, including in relation to conduct of business, the identification and mitigation of conflicts of interest and intra-group transactions. Prudential also undertook to maintain its group-wide risk management system and independent risk management function. Individual regulated entities within the Group continue to be subject to entity-level regulatory requirements in the relevant jurisdictions in which they carry on business. Interactions with regulators shape the Group’s governance framework and the Chairman and Group Chief Executive play a leading role in representing the Group to regulators and ensuring our dialogue with them is constructive. Terms of reference for each of the Board’s principal Committees have been updated to ensure their duties align with the post- demerger business and regulatory regime. Stakeholder engagement The Board has identified the Group’s key stakeholders as including customers, investors, employees, regulators, civil society and suppliers. Examples of Board 98 Prudential plc Annual Report 2019 prudentialplc.com engagement and discussion on stakeholder views as part of the Board decision-making process can be found on pages 73 to 76. Additional information can be found on our website at www.prudentialplc.com/ about-us/esg/our-approach Employee voice Having considered the suggested methods for strengthening workforce engagement as described in the UK Code, the Board concluded that the most appropriate method for achieving effective engagement, taking into account the international nature of the business and the geographic spread of the workforce, would be to designate a Non-executive Director based in Asia and a Non-executive Director based in the US to represent the workforce in those regions. During the year, the Board designated responsibility to Kai Nargolwala for engagement with the workforce in Asia, as well as in Africa, and to Tom Watjen for engagement with the workforce in the US, as well as staff in London. An initial framework of activities was established, combining both formal and informal interactions with employees as well as access to relevant material. In particular, during the course of the year Kai Nargolwala attended townhall sessions with staff in Singapore and Hong Kong, and Tom Watjen visited staff in Nashville in 2019 and in London in January 2020. The key focus of those discussions was the impact on staff of organisational changes following the demerger. In addition, Tom Watjen and Kai Nargolwala received briefings from the Group HR Director on workforce-related matters. The Board received an initial update in December 2019 on activities undertaken during the year. The framework will be expanded in 2020 to provide the designated Non-executive Directors with further opportunities for interactions with the workforce and includes regular reporting to the Board on a six-monthly basis. This will include updates on activities undertaken and themes arising for the Board to consider. If necessary, key items will be escalated outside of the six-monthly reporting cycle and in addition, Kai Nargolwala and Tom Watjen will offer their insight to Board discussions and decisions as part of the Board’s consideration of the workforce as key stakeholders. They will also continue to work with the Group HR Director and the Company Secretary to identify key issues requiring engagement with the workforce, the most appropriate means of doing so and reporting on these activities. Shareholders The Board recognises the importance of maintaining an appropriate level of two-way communication with shareholders. Throughout 2019, Prudential engaged with institutional shareholders, focusing primarily on matters relating to the demerger of M&G plc and strategic direction following the demerger. The executive management team of the Group, Prudential Corporation Asia and Jackson met with key target investors as part of a demerger marketing programme. In October 2019, a General Meeting was convened to allow shareholders to consider and approve the demerger of M&G plc. Shareholders demonstrated their overwhelming support for the demerger resolution which received 99.4 per cent of votes in favour. These demerger-related activities were held in addition to the Group’s usual full global programme of engagement with shareholders, potential investors and analysts, in the UK and overseas, which is conducted each year by the Group Chief Executive and the Group Chief Financial Officer and Chief Operating Officer, led by the Investor Relations team. The Group intends to maintain its regular engagement with investors and analysts which provides opportunity for the executive team to communicate progress and strategy outside of the financial reporting cycle. Going forward, this may include investor conferences or more specific events focused on particular aspects of our business. The Group Chief Executive, Group Chief Financial Officer and Chief Operating Officer and Investor Relations team also attend major financial services conferences to present to, and meet with, the Company’s shareholders. In 2019, as part of the investor relations and demerger marketing programme, over 320 meetings were held with around 300 individual institutional investors in the UK, continental Europe, the US and Asia. The Group holds an ongoing programme of regular contact with major shareholders, conducted by the Chairman, to discuss their views on the Group’s governance. The Senior Independent Director offers meetings to major shareholders as needed. Engagement with institutional investors on the Directors’ Remuneration Policy and implementation is led by the Remuneration Committee Chair on an annual basis. This has allowed key investors to provide feedback on the Directors’ Remuneration Policy prior to its adoption proposed to shareholders at the 2020 Annual General Meeting. All Non-executive Directors, and in particular Committee Chairs, are available to meet with major shareholders on request. Shareholder feedback and key issues from these meetings are communicated to the Board. The Annual General Meeting is an opportunity for further shareholder engagement, for the Chairman to explain the Company’s progress and, along with other members of the Board, to answer any questions. The Committee Chairs each attend the Annual General Meeting and are available for shareholders who wish to ask questions on the activities of their respective Committees. Further information, including aggregate shareholdings, details of the 2019 Annual General Meeting and General Meeting as well as the 2020 Annual General Meeting, dividend payment dates, and confirmation of sufficiency of public float can be found in the shareholder information section on pages 400 to 402. Operation of the Board How the Board leads the Group The Group is headed by a Board led by the Chairman. The Board consists of 14 Directors, of which a majority, excluding the Chairman, are independent Non-executive Directors. Biographical details of each of the Directors can be found on pages 92 to 97 and further details of the roles of the Chairman, Group Chief Executive, Senior Independent Director, Committee Chairs and the Non-executive Directors can be found on pages 104 to 106. The Board is collectively responsible to shareholders for the long-term sustainable success of the business through: — Approving the Group’s long-term strategic objectives, annual budgets and business plans, as recommended by the Group Chief Executive, and any material changes to them; — Monitoring the implementation of strategic objectives, annual budgets and business plans; — Establishing the Company’s purpose, values and strategy and satisfying itself that these are aligned with the Group’s culture; and — Assessing and monitoring culture, including alignment with policy, practices, behaviours and risk appetite. prudentialplc.com Prudential plc Annual Report 2019 99 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationHOW WE OPERATE CONTINUED Specific matters are reserved for decision by the Board, including: — Approval of the three-year business and financial plan; — Responsibility for an effective system of internal control and risk management; — Approving dividend policy and determination of dividends; — Approval of strategic projects; — Approval of the Group’s full and — Overseeing the Group’s corporate half-yearly results announcements and any other periodic financial reporting; social responsibility programmes; and — Ensuring effective engagement with, and encouraging participation from, key stakeholder groups. Key areas of focus – how the Board spent its time The Board held 10 meetings during 2019. The table below gives an indication of the key topics considered at each meeting. Feb Mar1 May Jun Jul Aug Sep Oct Dec Strategy and implementation Approval and review of strategic priorities Strategic priorities monitoring Approval of three-year operating plan Strategic projects2 Group Chief Executive’s report Report from Committee Chairs Audit Nomination & Governance Remuneration Risk Financial reporting and dividends Group Chief Financial Officer’s performance report Full-year and 2018 second interim dividend Half-year and 2019 first interim dividend Cash, capital and operations reports Business unit Chief Executive updates Prudential Corporation Asia Jackson M&G3 Risk, regulatory and compliance Relationship with Regulators and Regulatory and compliance updates Group Chief Risk and Compliance Officer’s report Government relations Governance and stakeholders Governance updates Culture and employee engagement Board evaluation and actions tracking Succession planning Corporate responsibility reporting and ESG Diversity and inclusion Non-executive Directors’ fees Investor updates including feedback on investor meetings l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l Notes 1 The Board held two meetings in March 2019. 2 Strategic projects considered during the year included the demerger of M&G plc, the acquisition of fund manager Thanachart in Thailand, entering into an exclusive bancassurance arrangement with Southeast Asia Commercial Joint Stock Bank, an IT outsourcing project as well as other confidential matters. 3 The effective date of the demerger of M&G plc was 21 October 2019. 100 Prudential plc Annual Report 2019 prudentialplc.com The Board held a separate two-day strategy event in June in the US. The Board also held four workshops during the year to discuss key strategic matters, focusing on the demerger of M&G plc and strategy for the Prudential Group post-demerger, facilitating more in-depth discussion and challenge ahead of formal meetings and decisions. One of the Board meetings in March 2019 was to consider the Group’s 2018 full-year report only and the meeting in August 2019 was primarily to consider the Group’s 2019 half-year report and accounts. In addition to the March Board meeting, the Board received a separate in-depth update from the management team of Prudential Corporation Asia covering progress against strategic priorities, key risks facing the business in Asia, future opportunities, customer- orientated initiatives, brand, culture, the Eastspring business and the activities of the Prudence Foundation. Between meetings, the Board is provided with monthly update reports from management. Board and Committee meeting attendance throughout 2019 Individual Directors’ attendance at meetings throughout the year is set out in the table below. Chairman Paul Manduca2 Executive Directors Nomination & Governance Committee 3 meetings lll Audit Committee 12 meetings Board 10 meetings llllllllll llllllllll Mike Wells llllllllll Mark FitzPatrick llllllllll James Turner llll Michael Falcon3 llll John Foley3 llll Nic Nicandrou3 llllllllll llllllllllll lll Philip Remnant llllllllll lllllllllll lll Howard Davies llllllllll llllllllllll lll David Law llllllllll Kai Nargolwala Anthony Nightingale llllllllll llllllllll llllllllllll Alice Schroeder llll Lord Turner4 llllllllll Tom Watjen Fields Wicker-Miurin llllllllll llllllllll Amy Yip5 lllll lll Remuneration Committee 8 meetings Risk Committee 5 meetings Joint Audit and Risk Committee 1 meeting llllllll l lllll l lllll l llllllll lllll l llllllll lllll l l ll llllllll lllll l llllllll llllllll General Meetings 2 meetings1 ll ll ll ll l l l ll l l l l l l l l Non- executive Directors Notes 1 In addition to the Annual General Meeting held in May each year, a General Meeting of shareholders was held on 15 October 2019. The purpose of the General Meeting was for shareholders to vote on the proposed demerger of M&G plc and election of Amy Yip as a Director of the Company. The nature of the business of the meeting meant that it was not considered necessary for the entire Board to be present. In addition to the Chairman and Senior Independent Director, each of the Executive Directors was present at the General Meeting and available to answer questions from shareholders about the business of the meeting. 2 Paul Manduca recused himself from a meeting of the Nomination & Governance Committee which was convened to discuss his succession plans. Further information about Paul Manduca’s succession may be found in the Nomination & Governance Committee report. 3 Michael Falcon, John Foley and Nic Nicandrou stepped down from the Board with effect from the conclusion of the AGM held on 16 May 2019. Michael Falcon and Nic Nicandrou each continue in their role as chief executive of their respective business units as well as their membership of the Group Executive Committee. John Foley maintained his position as chief executive of M&G plc and continued as a member of the Group Executive Committee until demerger on 21 October 2019. Lord Turner stepped down from the Board with effect from the conclusion of the AGM held on 16 May 2019. 4 5 Amy Yip was appointed a member of the Board and of the Remuneration Committee with effect from 2 September 2019. Board and Committee papers are usually provided one week in advance of a meeting. Where a Director is unable to attend a meeting, his or her views are canvassed in advance by the Chairman of that meeting where possible. prudentialplc.com Prudential plc Annual Report 2019 101 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information HOW WE OPERATE CONTINUED Board effectiveness Actions during 2019 arising from the 2018 review The performance evaluation of the Board and its principal Committees for 2018 was conducted internally at the end of 2018 through a questionnaire. The findings were presented to the Board in February 2019 and an action plan agreed to address areas of focus identified by the evaluation. The review confirmed that the Board continued to operate effectively during the year and no major areas requiring improvement were highlighted. Set out below are the themes, summary of actions and progress updates: Theme Summary of actions Progress Board composition and process — Continuing work on Board succession with a focus — During the year, Amy Yip joined the Board, on gender and geographic diversity. — Reduction in Board and Committee paper volume. strengthening the overall diversity of skills, gender and experience. Risk, capital and audit — Cyber risk focus for Board agenda for 2019. — Board training on the Hong Kong IA regulatory regime. Stakeholders — Review of stakeholder groups. — Review of workforce voice and its representation at Board level. People — Develop diversity and inclusion reporting to the Board. — Ensure overseas and ‘home’ Boards give scope for Non-executives to meet colleagues below Group Executive Committee level. — Diversity remains a key factor in ongoing succession planning. The Nomination & Governance Committee reviews the diversity policy and how diversity initiatives align with strategic objectives. — Management is considering whether paper volumes can be further decreased as part of changes to the meeting structure post-demerger. — A cyber risk update was provided to a joint meeting of the Risk and Audit Committees in April 2019, to which all Board members were invited. — Board members were briefed on the new regulatory regime in December 2019. — Stakeholder groups are reviewed and reported on in the ESG Report, which was approved by the Board in March 2020. — Workforce engagement mechanisms were approved by the Board during the year and a report on engagement activities was reviewed at the Board meeting in December 2019. This will be an area of continued focus in 2020 as the framework of Non-executive Director engagement is developed and their reporting to the Board embedded. — The Board received an update on key initiatives to promote diversity and invest in talent for the long-term success of the Company. — The Nomination & Governance Committee will receive more reporting in this area going forward given its extended remit. — Both the Board visit to Hong Kong in March and the Board strategy session in Lansing in June provided opportunities for Non-executive Directors to meet with management below the Group Executive Committee level as part of presentations by Prudential Corporation Asia and Jackson management and in informal settings. — Non-executive Directors continue to engage directly with management as part of their meeting preparations, particularly for Committee meetings. 102 Prudential plc Annual Report 2019 prudentialplc.com 2019 review and actions for 2020 The performance evaluation of the Board and its principal Committees for 2019 was conducted internally at the end of 2019 through a questionnaire. The findings were presented to the Board in February 2020 and an action plan agreed to address areas of focus identified by the evaluation. The review confirmed that the Board continued to operate effectively during the year and no major areas requiring improvement were highlighted. Theme Summarised actions Board composition and process — Continue to use workshops, as appropriate, to support discussions. — Monitor Board meeting arrangements in the post-demerger context and ensure strategic focus areas, including culture and values, continue to receive appropriate agenda time. Risk, capital and audit — Keep Board training in this area under review and schedule additional sessions as appropriate. Stakeholders — Continue to develop and embed reporting by the designated Non-executive Directors on workforce engagement. People — Continue to develop reporting on talent management, succession pipeline and Diversity & Inclusion, utilising the expanded role of the Nomination & Governance Committee. In accordance with the UK Code, the 2020 Board evaluation will be externally facilitated. The process for identifying and appointing the external evaluator will be overseen by the Nomination & Governance Committee. Committee effectiveness and evaluation Committee Chairs have responsibility for ensuring each Committee operates effectively. In order for Committees to provide effective challenge to management, the Committee Chairs each encourage open debate and contributions from all Committee members. The effectiveness of each Committee is monitored via the annual Board effectiveness programme. Each Committee was found to be operating effectively. More details are set out in each of the Committee reports. Director evaluation The performance of the Non-executive Directors and the Group Chief Executive during 2019 was evaluated by the Chairman in individual meetings. Philip Remnant, the Senior Independent Director, led the Non-executive Directors in a performance evaluation of the Chairman. Executive Directors are subject to regular review and the Group Chief Executive individually appraised the performance of each of the Executive Directors as part of the annual Group-wide performance evaluation of all employees. The Chair of the Risk Committee provides feedback to the Group Chief Executive on the performance of the Group Chief Risk and Compliance Officer. The outcome of each of these evaluation processes is reported to the Nomination & Governance Committee in February each year in order to inform the Committee’s recommendation for Board members to be put forward for re-election by shareholders. Executive Director performance is also reviewed by the Remuneration Committee as part of its deliberations on bonus payments. prudentialplc.com Prudential plc Annual Report 2019 103 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationHOW WE OPERATE CONTINUED Directors Board roles and governance 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 — Responsible for setting the Board agenda, ensuring the right issues are brought to the Board’s attention through collaboration with the Group Chief Executive and the Company Secretary Governance — Leading the Board’s determination of appropriate corporate governance and business values, including ethos, values and culture at Board level and throughout the Group — Facilitating open, honest and constructive debate among Directors. When chairing meetings, ensuring there is sufficient time to consider all topics, all views are heard and all Board members, and in particular Non-executive Directors, have an opportunity to constructively challenge management — Meeting with Non-executive Directors throughout the year. In 2019, the Chairman met with Non-executive Directors without Executive Directors being present on four occasions and also met with each Non-executive Director individually — Ensuring information brought to the Board is accurate, clear, timely and contains sufficient analysis appropriate to the scale and nature of the decisions to be made — Promoting effective reporting of Board Committee business at Board meetings through regular Committee Chair updates Membership and composition of the Board — Leading the Nomination & Governance Committee in succession planning and the identification of potential candidates, having regard to the skills and experience the Board needs to fulfil its strategy, and making recommendations to the Board — Considering the development needs of the Directors so that Directors continually update their skills and knowledge required to fulfil their duties, including the provision of a comprehensive induction for new Directors — Maintaining an effective dialogue with the Non-executive Directors to encourage engagement and maximise their contributions — Working with the Company Secretary to ensure continued good governance — Acting as key contact for independent chairs of Material Subsidiaries1 — Meeting with the independent chairs of the Group’s Material Subsidiaries1 on a regular basis and reporting to the Board on the outcome of those meetings Relationship with the Group Chief Executive — Discussing broad strategic plans with the Group Chief Executive prior to submission to the Board — Ensuring the Board is aware of the necessary resources to achieve the strategic plan — Providing support and advice to the Group Chief Executive Relations with shareholders and other stakeholders — Representing the Board externally at business, political and community level. Presenting the Group’s views and positions as determined by the Board — Playing a major role in the Group’s engagement with regulators — Balancing the interests of different categories of stakeholders, preserving an independent view and ensuring effective communication — Engaging in a programme of meetings with key shareholders throughout the year and reporting to the Board on the issues raised at those meetings External positions — Approving Directors’ external appointments prior to them being accepted, taking into account the required time commitment and escalating consideration of conflicts of interests to the Nomination & Governance Committee as needed 104 Prudential plc Annual Report 2019 prudentialplc.com Group Chief Executive – Mike Wells Senior Independent Director – Philip Remnant The Group Chief Executive leads the Executive Directors and senior executives and is responsible for the operational management of the Group on behalf of the Board on a day-to-day basis: — Responsible for the implementation of Board decisions The Senior Independent Director acts as an alternative conduit to the Board for shareholder concerns and leads the evaluation of the Chairman: — Acts as a sounding board for the Chairman, providing support in the delivery of the Chairman’s objectives — Establishes processes to ensure operations are compliant — Leads the Non-executive Directors in conducting the Chairman’s annual evaluation and leads the Chairman’s succession planning — Holds meetings with Non-executive Directors without management being present, typically at least once a year to evaluate the performance of the Chairman — Offers meetings to major shareholders to provide them with an additional communication point on request and is generally available to any shareholder to address concerns not resolved through normal channels with regulatory requirements — Sets policies, provides day-to-day leadership and makes decisions on matters affecting the operation, performance and strategy of the Group, seeking Board approval for matters reserved to the Board — Supported by the Group Executive Committee which he chairs and which receives reports on performance and implementation of strategy for each business unit and discusses major projects and other activities related to the attainment of strategy — Chairs the Chief Executive’s Committee meetings which are held weekly to review matters requiring approval under the Group’s framework of delegated authorities — Keeps in regular contact with the Chairman and briefs him on key issues — Meets with key regulators worldwide — Leads on day-to-day effective stakeholder engagement Committee Chairs Non-executive Directors Each of the Committee Chairs is responsible for the effective operation of their respective Committees: — Responsible for the leadership and governance of their Committee — Sets the agenda for Committee meetings — Reports to the Board on the activities of each Committee meeting and the business considered, including, where appropriate, seeking Board approval for actions in accordance with the Committees’ terms of reference All of the Non-executive Directors are deemed to be independent and together have a wide range of experience which can be applied to attain the strategic aims of the Group through: — Constructive and effective challenge — Providing strategic guidance and offering specialist advice — Scrutinising and holding to account the performance of management in meeting agreed goals and objectives — Works with the Company Secretary to ensure the — Serving on at least one of the Board’s principal continued good governance of each Committee during the year In addition to Committee duties, the Chairs of the Audit and Risk Committees act as key contact points for the independent chairs of the audit and risk committees of the Material Subsidiaries1 Committees — Engaging with Executive Directors and other senior management at Board and Committee meetings as well as at training sessions and on an informal basis — Taking part in one-to-one meetings with the Group Strategy team and participation in the annual strategy session prudentialplc.com Prudential plc Annual Report 2019 105 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationHOW WE OPERATE CONTINUED The Board has established four principal 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. The terms of reference for each Committee are reviewed at least annually. The functions of the principal Committees are summarised below. Nomination & Governance Committee Remuneration Committee Chair Paul Manduca Chair Anthony Nightingale Audit Committee Chair David Law — Keeps leadership needs under review in support of the Group’s strategic objectives — Develops succession planning for the Board and senior executives based on merit against objective criteria promoting diversity in all areas — Oversees development of a diverse pipeline in succession planning — Monitors the Group’s diversity initiatives — Recommends appointments to the Board, its principal Committees and appointments of non-executive chairs to the boards of Material Subsidiaries1 — Oversees the governance of Material Subsidiaries1 and the Group’s overall governance framework — Ensures there is a formal and transparent process for establishing the Directors’ Remuneration Policy — Responsible for the integrity of the Group’s financial reporting, including scrutinising accounting policies — Approves individual — Monitors the effectiveness of internal control and risk management systems — Monitors the effectiveness and objectivity of internal and external auditors — Approves the internal audit plan — Recommends the appointment of the external auditor remuneration packages of the Chairman, Executive Directors, senior executives and Material Subsidiary1 non-executive directors — Approves the overall Remuneration Policy for the Group — Reviews the design and development of share plans and approves and assesses performance targets where applicable and ensures alignment with the Group’s culture — Reviews workforce remuneration practices and policies when setting executive remuneration Risk Committee Chair Howard Davies — Leads on and oversees the Group’s overall risk appetite, risk tolerance and strategy — Approves the Group’s risk management framework and monitors its effectiveness — From 2020 the Committee has full responsibility for all aspects of compliance — Supports the Board and management in embedding and maintaining a supportive culture in relation to the management of risk — Provides advice to the Remuneration Committee on risk management considerations to inform remuneration decisions See Nomination & Governance Committee Report on pages 110 to 117 See Remuneration Committee Report on pages 136 to 195 See Audit Committee Report See Risk Committee Report on pages 118 to 126 on pages 127 to 132 Terms of reference for the principal Committees can be accessed at www.prudentialplc.com/investors/ governance-and-policies/board-and- committees-governance The Board has established a Standing Committee which can meet as required to assist with any business of the Board. It is typically used for ad hoc or urgent matters which cannot be delayed until the next scheduled Board meeting. All Directors are members of the Standing Committee and have the right to attend all meetings and receive papers. Notice of a Standing Committee meeting is sent to all Directors and if an individual is unable to attend, he/she can give comments to the Chairman or Company Secretary ahead of the meeting for consideration by the Standing Committee. Before taking decisions on any matter, the Standing Committee must first determine that the business it is considering is appropriate for a Committee of the Board and does not properly need to be brought before the whole Board. All Standing Committee meetings are reported in full to the next scheduled Board meeting. This governance structure allows for fast decision-making where necessary, while ensuring that the full Board has oversight of all matters under consideration and all Non-executives can contribute. Over 2019, the Company held three meetings of the Standing Committee. Note 1 Following the demerger of M&G plc, the Group is reviewing subsidiary governance to ensure this remains appropriate to the business and regulatory environment in which the Group operates. 106 Prudential plc Annual Report 2019 prudentialplc.com Building Directors’ knowledge Induction – new Directors Amy Yip received a comprehensive induction, tailored to reflect her experience and position as a Non-executive Director. A summary of the general and specific induction programme for Amy Yip is set out below: General induction programme relevant to new Non-executive Directors Understanding our governance Understanding our business — Meetings with the Chairman and Group Chief Executive separately — Explanation of Prudential’s corporate structure, Board and Executive Committee structure — Briefings on Group governance framework and key policies — Training as needed on the rules and governance requirements of the London and Hong Kong Stock Exchanges and on fulfilling the statutory duties of a Director — Explanation of the Group’s strategy and business plan — Tailored briefings with each business unit to gain a comprehensive understanding of each of their business models, product suites, pricing arrangements and governance structures — Tailored meetings with all Group functions — Comprehensive briefings on the regulatory environment in which the Group operates — Briefings on top risks and internal controls — Induction briefings and training as a whole give Directors an understanding of the interests of the Group’s key stakeholders Role-specific induction programme for Amy Yip — Orientation to the work and role of the Remuneration Committee — Updates on current UK remuneration topics — Meeting with the Chair of the Remuneration Committee to discuss the annual cycle of Committee work, its current focus and focus for 2020 and beyond Jeremy Anderson was appointed to the Board as a Non-executive Director with effect from 1 January 2020. His induction commenced in early 2020 and included a particular focus on risk matters to support his role as a member of the Risk Committee. Continuing development of knowledge and skills During 2019, the Board and its Committees received a number of technical and business updates as part of their scheduled meetings, providing information on external developments relevant to the Group and on particular products or operations. Below is an overview of how Directors are kept up to date: — The Board holds an annual strategy session, which allows for detailed updates on each of the business units and deep dives on strategic direction and objectives for the Group. In 2019, these included a particular focus on the demerger of M&G plc and updates on the views of investors and other stakeholders; — The Board receives updates on brand, environment, health and safety, culture, diversity and inclusion and employee engagement activities, usually once a year; — The Board receives updates on corporate governance, political and regulatory developments in the US, UK, Europe and Asia and the dynamics of equity and currency markets at every scheduled meeting. Governance topics included gender pay gap reporting, the BEIS committee report on the future of audit and the Government’s response to it, the Hampton-Alexander review publication, guidelines from investment institutions, the Financial Reporting Council’s Lab report on climate-related corporate reporting and the publication of the updated Stewardship Code. The Board was also updated on the impact of the discontinuation of LIBOR; — In April 2019, the Group ran a focused cyber security and information security update for members of the Risk and Audit Committees, which was particularly aimed at developing the knowledge of the Non-executive Directors; — The Board reviews each business unit in depth at least once a year and conducts periodic site visits as part of this. In 2019, the Board received a presentation on Jackson Holdings. Other training included an overview of Jackson’s distribution and products; — The Nomination & Governance Committee received updates on the Climate Change and TCFD implementation as part of its expanded ESG remit; — The Board and the Risk Committee receive regular updates on market developments and key risks. The Risk Committee reviews top risks on an annual basis and deep dives into specific topics in response to the identification of key risks. This review covers the financial, operational and strategic risks, whilst also identifying and addressing business environment and insurance risks within the Group; — The Risk Committee received updates on regulatory developments focusing on the supervision of the Prudential Regulation Authority and discussions with the Hong Kong IA on the new Group-wide regulatory framework. A deep-dive review of artificial intelligence and digital transformation was undertaken as well as updates on civil unrest in Hong Kong; — The Audit Committee received updates on developments affecting financial reporting and the work of audit committees more widely. In 2019, this included financial reporting disclosure developments and audit industry updates. These updates included consideration of the accounting treatment of the M&G Group, information security, financial crime and fraud prevention, working capital arrangements and the implementation of IFRS 17; and — The Remuneration Committee receives updates on regulatory and governance developments affecting the Group’s remuneration arrangements. In 2019, these included updates on discussions with the Hong Kong IA on the new regulatory regime, compliance with the UK Corporate Governance Code 2018 and guidelines from investment institutions. All Directors have the opportunity to discuss their individual development needs as part of the annual Board effectiveness review and are encouraged to request specific updates during the year. At the start of the year, suggested topics are shared with the Board for feedback. Directors are asked to provide a record of training received externally on an annual basis. All Directors have the right to obtain professional advice at Prudential’s expense. Board training materials are also made available, as relevant, to Group Executive Committee members, who have an opportunity to request any additional training as needed. prudentialplc.com Prudential plc Annual Report 2019 107 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationRisk management and internal control The Board is responsible for ensuring that an appropriate and effective system of risk management and internal control is in place across the Group. The framework of risk management and internal control centres on clear delegated authorities to ensure Board oversight and control of important decisions. The framework is underpinned by the Group Code of Business Conduct, which sets out the ethical standards the Board requires of itself, employees, agents and others working on behalf of the Group. The framework is designed to monitor and manage, rather than eliminate, the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss. Internal control The Group Governance Manual (the Manual) sets out delegated authorities and establishes the requirements for subsidiaries to seek approvals from, or report to, Group Head Office. Group-wide policies are included within the Manual, and standards are established through these policies and other governance arrangements. Internal controls and processes, based on the provisions established in the Manual, are in place across the Group. These include controls covering the preparation of financial reporting. The operation of these controls and processes facilitates the preparation of reliable financial reporting and the preparation of local and consolidated financial statements in accordance with the applicable accounting standards, and requirements of the Sarbanes-Oxley Act. These controls include certifications by the Chief Executive and Chief Financial Officer of each business unit with respect to the accuracy of information provided for use in preparation of the Group’s consolidated financial reporting, and the assurance work carried out in respect of US reporting requirements. The Board has delegated authority to the Audit Committee to review the framework and effectiveness of the Group’s systems of internal control. The Audit Committee is supported in this responsibility by the assurance work carried out by Group-wide Internal Audit and the work of the business unit audit committees, which oversee the effectiveness of controls in each respective business unit. Details of how the Audit Committee oversees the framework of controls and their effectiveness on an ongoing basis, is set out more fully in the report on pages 118 to 126. Risk management A key component of the Manual is the Group Risk Framework, which requires all business units to establish processes for identifying, evaluating and managing the risks facing the business. The Board determines the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. The Board has delegated authority to the Risk Committee to assist it in providing leadership, direction and oversight of the Group’s overall risk appetite, risk tolerance and strategy, overseeing and advising on the current and potential future risk exposures of the Group, reviewing and approving the Group’s risk management framework, including changes to risk limits within the overall Board-approved risk appetite, monitoring the effectiveness of the risk management framework and adherence to the various risk policies. Regular activities are detailed in the report on pages 127 to 132. The Group’s risk governance arrangements, which support the Board, the Risk Committee and the Audit Committee, are based on the principles of the ‘three lines of defence’ model: risk taking and management, risk control and oversight, and independent assurance. Formal review of controls A formal evaluation of the systems of risk management and internal control is carried out at least annually. Prior to the Board reaching a conclusion on the effectiveness of the systems in place, the report is considered by the Disclosure Committee and Audit Committee, with risk specific disclosures within the report also reviewed by the Risk Committee. This evaluation takes place prior to the publication of the Annual Report. As part of the evaluation, the Chief Executive and Chief Financial Officer of each business unit, including Group Head Office, certify compliance with the Group’s governance policies and the risk management and internal control requirements. The Group Risk function facilitates a review of the matters raised in this certification process. This includes the assessment of any risk and control issues reported during the year, risk and control matters identified and reported by the other Group oversight functions and the findings from the reviews undertaken by Group-wide Internal Audit, which carries out risk-based audit plans across the Group. Issues arising from any external regulatory engagement are also taken into account. First line of defence (risk taking and management) — Takes and manages risk exposures in accordance with the risk appetite, mandate and limits set by the Board; — Identifies and reports the risks that the Group is exposed to, and those that are emerging; — Promptly escalates any limit breaches or any violations of risk management policies, mandates or instructions; — Identifies and promptly escalates significant emerging risk issues; and — Manages the business to ensure full compliance with the Group risk management framework as set out in the Manual, which among other requirements, includes the Group Risk Framework and associated policies as well as approval requirements. Second line of defence (risk control and oversight) — Assists the Board to formulate the risk appetite and limit framework, risk management plans, risk policies, risk reporting and risk identification processes; and — Reviews and assesses the risk-taking activities of the first line of defence, providing risk opinions and where appropriate challenging the actions being taken to manage and control risks. Third line of defence (independent assurance) — Provides independent assurance on the design, effectiveness and implementation of the overall system of internal control, including risk management and compliance. Each business unit is required to implement a governance structure based on the three lines of defence model, proportionate to its size, nature and complexity, and to the risks that it manages. 108 Prudential plc Annual Report 2019 prudentialplc.com Lines of defence Board Board Nomination & Governance Committee Remuneration Committee Risk Committee Audit Committee 3 r d l i n e o f d e f e n c e Executives 1 s t l i n e o f d e f e n c e Chief Executive Committee Group Chief Executive 2 n d l i n e o f d e f e n c e Group Executive Committee Group Asset and Liability Management Committee Balance Sheet and Capital Management Committee Management Group Chief Financial Officer and Chief Operating Officer Group Chief Risk and Compliance Officer Group Executive Risk Committee (GERC) GERC Sub-committees Group Finance Chief Information Security Office Group Risk, Compliance and Security Group-wide Internal Audit Executive personnel Exec/Management committees Head office functions Board-level committees Direct reporting line Regular communication and escalation For the purposes of the effectiveness review, the Group has followed the FRC Guidance on Risk Management, Internal Control and Related Financial and Business Reporting. In line with this guidance, the certification outlined above does not apply to certain material joint ventures where the Group does not exercise full management control. In these cases, the Group satisfies itself that suitable governance and risk management arrangements are in place to protect the Group’s interests. However, the relevant Group company which is party to the joint venture must, in respect of any services it provides in support of the joint venture, comply with the requirements of the Group’s internal governance framework. Effectiveness of controls In accordance with provision 29 of the UK Code and provisions C.2.1, C.2.2 and C.2.3 of the HK Code, the Board reviewed the effectiveness and performance of the systems of risk management and internal control during 2019. This review covered all material controls, including financial, operational and compliance controls, risk management systems, budgets and the adequacy of resources, qualifications and experience of staff of the Group’s accounting, internal audit and financial reporting functions. The review identified a number of areas for improvement, and the necessary actions have been or are being taken. The Audit Committees at Group and subsidiary level collectively monitor outstanding actions regularly and ensure sufficient resource and focus is in place to resolve them within a reasonable time frame. This included oversight of M&G plc whilst it was a subsidiary of the Group. The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, including the demerged M&G plc business prior to 21 October 2019, which has been in place throughout the period and up to the date of this report, and confirms that the system remains effective. prudentialplc.com Prudential plc Annual Report 2019 109 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information Committee reports Paul Manduca Chair of the Nomination & Governance Committee Committee members — Paul Manduca (Chair) — Howard Davies — David Law — Anthony Nightingale — Philip Remnant Regular attendees — Group Chief Executive — Group Human Resources Director — Company Secretary Number of meetings in 2019: Three. (Two regular meetings and an additional meeting to consider Chair succession, held in September.) During the year, the Committee also recommended the appointment of Amy Yip to the Board as a Non-executive Director. Amy brings 40 years of experience in insurance, asset management and government gained across China and South-east Asia. Diversity Improving gender diversity at Board level continues to receive considerable attention from the Committee and diversity in its wider sense is an important factor in identifying candidates for Board level succession. The Committee considers this when making recommendations and talent search agencies are briefed on the Group’s requirements in this respect when identifying candidates. Gender representation has improved at Board level during 2019, however there remains scope for improvement in this important area. Progress has been made via the appointment of Non-executive Directors and there is a continuing focus on the executive talent pipeline in order to increase diversity, in its widest sense, on both the Group Executive Committee and ultimately the Board. The Board exceeds the recommendation of the Parker review in respect of ethnic diversity. The Committee also considers the diversity of experience on the Board, including expertise across the geographical markets in which the post-demerger Group operates. The Committee has responsibility for reviewing and monitoring diversity initiatives across the Group as a whole. I am pleased that the Group remains on target by the end of 2021 to achieve 30 per cent representation of women in senior leadership roles in accordance with our commitment to the HM Treasury Women in Finance Charter. Nomination & Governance Committee report Dear shareholder This report highlights some of the key areas of focus considered by the Committee during 2019. The Committee’s role has expanded recently to include taking a wider role in overseeing diversity initiatives, the wider talent pipeline, and receiving updates on ESG matters. Accordingly, the number of regular Committee meetings in 2020 will increase to three. Ongoing succession planning One of the Committee’s main roles is to ensure the Board retains an appropriate balance of skills to support the strategic objectives of the Group. As part of this, the Committee helps maintain a rigorous and transparent approach to the identification of candidates for appointment as Directors. A significant part of the Committee’s activities over 2019 was focused on determining the most appropriate combination of skills and experience needed by the Board to drive the strategic focus of the Group post-demerger as well as supporting the creation of the M&G plc board prior to demerger. This included consideration of my successor as Chair of the Board and as Committee Chair. Philip Remnant led discussions on my succession in his capacity as Senior Independent Director culminating in the announcement of the appointment of Shriti Vadera. A separate report from Philip is set out below. As a member of the Committee and ultimately as the new Chair of the Group, Shriti will have an opportunity to shape the future composition of the Board. In accordance with the UK Code, Howard Davies, who has been a member of the Board and Chair of the Risk Committee since its inception in 2010, will not be standing for re-election at the 2020 Annual General Meeting. The Committee has therefore been focused on identifying a suitable successor and recommended the appointment of Jeremy Anderson, who contributes substantial leadership and international experience in financial services, particularly in audit and risk. Having appointed Jeremy as a Non-executive Director with effect from January 2020, we subsequently announced that he would assume the role of Risk Committee Chair from the conclusion of the 2020 Annual General Meeting. 110 Prudential plc Annual Report 2019 prudentialplc.com ESG considerations The Committee received updates on primary ESG-related reporting developments and the proposed approach to ESG reporting, and reports from the newly created ESG Executive Committee. The Committee also received updates on progress against implementing the Task Force on Climate-related Financial Disclosures, including how to quantify risks and their potential financial impact on the Group. Governance Further changes have been made to the Committee’s Terms of Reference to reflect the Committee’s oversight of the process surrounding the annual evaluation of the effectiveness of the Board and its Committees. Committee members have taken a more active role in planning the Board evaluation in respect of 2019 and reviewed the actions arising from that evaluation. In 2020, the Committee will oversee the process for the appointment of an external specialist to conduct the next Board evaluation. How the Committee spent its time during 2019 The Committee continues to oversee governance arrangements for the Group’s subsidiaries to ensure they remain appropriate for the post-demerger Group. The effectiveness of the Committee was reviewed as part of the annual Board evaluation, which confirmed that the Committee continued to operate effectively during the year and no major areas requiring improvement or action points were highlighted. Committee members noted that the focus in 2020 should include continuing enhancements on Diversity and Inclusion reporting in respect of the executive pipeline and developing the Committee’s role in monitoring ESG strategy and reporting. Feb Sep Oct Year-end matters, re-election and tenure Review external positions, conflicts of interests and independence, time commitment, tenure and terms of appointment Review performance of Chairman and Non-executive Directors Review relevant disclosures in the Annual Report and Accounts Recommend election of Directors by shareholders Succession planning, diversity and appointments Chairman Non-executive Directors Group Chief Executive Executive Directors Group Executive Committee composition Risk Committee Chair Succession pipeline, diversity and inclusion governance Governance and ESG Membership review of principal Board Committees Committee terms of reference Group governance framework ESG, climate change and TCFD implementation update Material Subsidiary governance Subsidiary governance arrangements, board composition, non-executive succession planning and appointments Subsidiary board, chair and director evaluations l l l l l l l l l l l l l l l l l l l l l prudentialplc.com Prudential plc Annual Report 2019 111 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationReport from Philip Remnant Philip Remnant Senior Independent Director As announced on 30 January 2020, Shriti Vadera will join the Board with effect from 1 May 2020 as a Non- executive Director and member of the Nomination & Governance Committee, and is expected to succeed Paul Manduca as Chair of the Board and Chair of the Nomination & Governance Committee on 1 January 2021. Paul will step down as Chair and as a Director with effect from 31 December 2020. Paul was first appointed to the Board in October 2010, meaning that the UK Code would have prescribed his retirement in October 2019. As I reported last year, the Board considered that it would have been disruptive for Paul to step down as Chair during a time of substantial change associated with the oversight and execution of the demerger itself and also for a period afterwards. It was expected that a search for a suitable successor to Paul would commence in 2020, with the intention that he would not stand for re-election at Prudential’s Annual General Meeting in May 2021. However, the accelerated completion of the demerger meant it was considered appropriate to bring this timing forward. The search for suitable candidates was influenced by the views of the Board, taking account of the strategic needs of the post-demerger Group. Paul provided his views on the scope of the role and the individual attributes required. However, he recused himself from further discussions about the selection process. I am delighted that Prudential has been able to secure such a high calibre individual to succeed Paul. Shriti was the unanimous choice of the Board following a rigorous assessment of internal and external candidates from around the world. She has senior boardroom experience at complex organisations with extensive international operations, and strong strategic and financial services experience. Key matters considered during the year Why it is important to Prudential How is this considered Key outcomes Succession planning Board composition The Committee plays an important role in ensuring that the Board retains an appropriate balance of skills to support the strategic objectives of the Group and in ensuring that an effective framework of succession planning is maintained. The Committee keeps succession plans for Executive and Non-executive Directors under review throughout the year and also considers the ongoing appointment of all Board members. Succession plans are supported and informed by the results of the annual Board evaluation and individual Director evaluations. The Committee takes account of the size, structure and composition of the Board and its Committees, including existing knowledge, experience and diversity. In doing so, the Committee considers the Group’s strategic goals and anticipates future requirements, skills and experience. Succession planning includes both longer-term options and emergency cover. In February 2020, the Committee concluded that each of the Directors in office at the time continued to perform effectively and was able to devote appropriate time to fulfil their duties and that collectively, the Board had an appropriate mix of skills and experience. The Committee considered the Non-executive Directors continued to demonstrate the desired attributes, contributing effectively to decision-making and exercising sound independent judgement in holding management to account. Accordingly, the Committee recommended to the Board those Directors standing for election at the 2020 Annual General Meeting. 112 Prudential plc Annual Report 2019 prudentialplc.com COMMITTEE REPORTS CONTINUEDKey matters considered during the year continued Why it is important to Prudential How is this considered Key outcomes Succession planning for the Non-executive Directors and principal Committees Succession planning for Non-executive Directors and the Board’s principal Committees ensures the Board is regularly refreshed and maintains appropriate levels of independent challenge to management. The balance of Non-executive and Executive Directors required on the Board is considered on a regular basis, including the overall number, skills and experience. The Committee made use of a skills map which identifies skills, experience by sector, geography and technical skills, which are desirable for the Board as a whole, taking account of the Group’s strategic objectives. Succession planning for Non-executive Directors is supported by Egon Zehnder and Ridgeway Partners. The Committee regularly reviews the membership of all principal Board Committees and makes recommendations to the Board as appropriate. This year, the Committee considered the requirements for the role of Risk Committee Chair as Howard Davies will not stand for re-election at the 2020 Annual General Meeting as his nine-year tenure will have ended. When making recommendations, the Committee takes account of the current composition of each of the principal Committees, the skills and experience of the members and the strategic objectives of the Group. Executive Directors, Group Chief Executive and Group Executive Committee Executive succession planning helps to ensure continuous and effective leadership of the Group. The Committee reviews the succession plans in place for the Group Chief Executive, other Executive Directors and Group Executive Committee roles annually. Succession plans for the Group Executive Committee were discussed with the Group Chief Executive to identify business requirements and to plan for future succession needs. Succession planning for Executive Directors and the Group Executive Committee includes both longer-term planning and emergency cover. External mapping is undertaken for Executive Directors to identify possible external candidates. Planning for emergency cover for Executive Directors is assisted by a broad annual review of talent across the Group and recognises the possible difficulties in identifying and attracting suitable talent on potentially short notice. During the year, the Committee recommended the appointment of Amy Yip as a Non-executive Director and member of the Remuneration Committee with effect from 2 September 2019. The Committee also recommended the appointment of Jeremy Anderson to the Board as a Non-executive Director and member of the Audit and Risk Committees with effect from 1 January 2020. Biographical details for Amy Yip and Jeremy Anderson are set out on pages 94 and 97. The appointment of Amy Yip to the Remuneration Committee and Jeremy Anderson to the Audit and Risk Committees helped to refresh the membership of these Committees. Given his extensive experience in risk management, the Committee recommended that Jeremy Anderson succeed Howard Davies as Chair of the Risk Committee with effect from the conclusion of the 2020 Annual General Meeting. Shriti Vadera will join the Committee on her appointment in May 2020 to facilitate her transition to Chair of the Board and of the Committee, effective from 1 January 2021. The Committee received feedback on the performance of each Executive Director from the Group Chief Executive and confirmed the Executive Director succession plans. The Committee also directed development and renewal of these plans through the Group HR Director, supported by Egon Zehnder in the case of the Group Chief Executive and by Talent Intelligence in the case of the other Executive Directors and Group Executive Committee roles. The Committee discussed the changes to the Group Executive Committee roles brought about by the demerger and consequent shift in priorities and operating model, and agreed updates to succession plans as a result. prudentialplc.com Prudential plc Annual Report 2019 113 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationKey matters considered during the year continued Why it is important to Prudential How is this considered Key outcomes Senior leadership below Group Executive Committee The Committee has oversight of a diverse pipeline of leadership talent extending below the level of the Group Executive Committee and seeks to attract, retain and develop the next generation of emerging leadership. The Committee considered succession planning for senior management below Group Executive Committee level which is supported by an annual update on talent and diversity at different levels of the organisation and includes consideration of risk retention mitigation initiatives such as leadership development programmes. This review is usually undertaken and reported on in the fourth quarter of each year and prior to 2019, was undertaken by the Board. Reporting on activities in 2019 was moved to February 2020 in order to allow for a fuller review of talent succession planning across the post-demerger business. The focus was on building new capabilities to support the changing business model and future direction of the business. The internal pipeline was being rebuilt in support of new roles, new capability and increased complexity. Diversity Board and Group Executive Committee Given the global reach of the Group’s operations, its business strategy and long-term focus, the Board makes every effort to ensure it is able to recruit Directors from different backgrounds, with diverse experience, perspective and skills. The diversity not only contributes to Board effectiveness but is essential for successfully delivering the strategy of an international business. The Group’s Diversity and Inclusion policy applies at all levels of the business including the Board and Group Executive Committee. The Committee is responsible for overseeing a diverse pipeline for the Board and other senior executives. The Board does not endorse quotas but is committed to recruiting the best available talent and appointing the most suitable candidate for each role, while at the same time aiming for appropriate diversity on the Board. Succession plans are based on merit against clear objective criteria and promote diversity across gender, social and ethnic background and cognitive and personal strengths. An element of Executive Directors’ remuneration is based on achieving a diversity target. Further information is set out in the Directors’ remuneration report. The Board considers that its diversity of experience and skills set has increased as a result of Board level succession in 2019. The diversity of the Board, including skills and experience, of each Director is set out in the individual biographies of Directors on pages 92 to 97. The Committee considers the pipeline for diverse talent below the Group Executive Committee level which remains strong, with 32 per cent female representation of those who report directly to the Group Executive Committee. Further details of the gender make-up of the Board, the Group Executive Committee, management and employees can be found on page 81. Process for appointing new Directors The Committee assists the Board in ensuring that there is a formal, rigorous and transparent approach to the appointment of new Directors. The Committee is involved from the start when a vacancy or a gap in the Board’s skills is identified. Led by the Chairman, and working with the Group Chief Executive and the Group Human Resources Director, a role specification is prepared, reflecting the desired skills and experience and the Group’s Diversity and Inclusion policy. This specification takes into account feedback from the Committee. Once agreed, specialist talent agencies are typically engaged to create a shortlist of candidates which is reviewed by the Committee and other stakeholders. Interviews with individuals then take place with selected Committee members and feedback is provided to all members. In this manner, a preferred candidate is selected and the Committee then recommends the individual to the Board for appointment. For the appointment of Executive Directors, the process is led by the Group Chief Executive working closely with the Chairman. The Senior Independent Director leads the Committee in the process of appointing a new Chairman. Contemporaneously with this process, due diligence checks are undertaken on the candidate and Prudential liaises with the relevant regulatory authorities. The Committee is kept updated on this process as necessary. Note In addition to acting as search consultant in respect of the appointment of the Chair, the Chair of the Risk Committee and certain executive hires, Egon Zehnder also provides support for senior development assessments. Talent Intelligence also provides additional succession planning support to the Group below Group Executive Committee level. Ridgeway Partners also provided support for succession planning in respect of certain subsidiary company board committees. 114 Prudential plc Annual Report 2019 prudentialplc.com COMMITTEE REPORTS CONTINUEDKey matters considered during the year continued Why it is important to Prudential How is this considered Key outcomes Group-wide oversight Following an update to its terms of reference in December 2018, the Committee’s remit includes reviewing the Group’s diversity initiatives to see that these are in line with strategic objectives. The Group’s Diversity and Inclusion policy aims to provide equal opportunities for all who apply and who perform work for our organisation, irrespective of sex, race, age, ethnic origin, educational, social and cultural background, marital status, pregnancy and maternity, civil partnership status, any gender reassignment, religion or belief, sexual orientation, disability, or part time/fixed term work. The Committee keeps this under review across all its succession planning. As part of the Group’s commitment to diversity, Prudential is a signatory to the HM Treasury ‘Women in Finance Charter’ which aims to increase the number of women working in senior management in financial services companies. We have set a gender diversity target of 30 per cent women in senior management by the end of 2021. In line with the Committee’s expanded remit, consideration was given to updating and developing the approach to overseeing talent development and Diversity and Inclusion initiatives across the Group. A review of the approach was subsequently provided to the Committee in February 2020, including an update on activities across the Group’s business units and details of the 2020 Diversity & Inclusion and Talent strategy. A description of the Group’s activities on Diversity and Inclusion can be found in the ESG summary. As at 31 December 2019 the percentage of women in senior management was 28 per cent and the Group remains on track to meet the 30 per cent target by the end of 2021. Non-executive Directors, independence, time commitment and terms of appointment Independence Monitoring and safeguarding the independence of the Non-executive Directors is essential to comply with their statutory and regulatory obligations. The Committee considers the independence of the Non-executive Directors as required by the UK Code and HK Listing Rules as part of any recommendation of the appointment of new Non-executive Directors and when recommending Non-executive Directors for election. Independence helps ensure effective scrutiny of management and individual Executive Directors against agreed objectives. Each Non-executive Director provides an annual confirmation of his or her independence as required under the HK Listing Rules. Prior to his appointment as a Non-executive Director, the Committee carefully considered the independence of Jeremy Anderson. In particular, the Committee reviewed the potential impact of his former position as a partner at KPMG (including any financial interest) which ended with effect from 31 December 2017 and noted that he had not been involved in any way in the audit of Prudential plc or its subsidiaries. The Committee considered Jeremy Anderson’s independence with reference to the UK Code and HK Listing Rules, alongside relevant auditor independence and ethical guidance applicable in the UK and the US which generally recommend that independence of an external auditor is maintained by prohibiting a former partner from becoming a Director of an audit client for a period of two years after their employment has ceased. In line with US regulatory requirements, the Committee annually reviews the independence of the Audit Committee with reference to the requirements of the Sarbanes-Oxley legislation. All Non-executive Directors were considered to be independent, taking into account UK and HK requirements. Although Howard Davies has exceeded the nine-year tenure suggested by the UK Code and Kai Nargolwala will exceed from January 2021 (subject to re-election of Kai by shareholders in May 2020), both continue to demonstrate independence of judgement. Amy Yip and Shriti Vadera were deemed to be independent on appointment. Prudential also deems Jeremy Anderson to be independent in accordance with the UK and HK Codes, notwithstanding his former position as a partner at KPMG, having taken account of all circumstances set out in the UK Code and other applicable guidance in other jurisdictions. On balance, the Committee and the Board concluded that Jeremy Anderson could be expected to demonstrate objectivity and independence of judgement noting that two years had elapsed since his position at KPMG (including any financial interest) ended. The members of the Audit Committee were considered to be independent within the meaning of the Sarbanes-Oxley legislation. prudentialplc.com Prudential plc Annual Report 2019 115 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationKey matters considered during the year continued Why it is important to Prudential How is this considered Key outcomes Time commitment Setting out clear expectations on time commitment means Non-executive Directors are able to ensure they devote sufficient time for the proper performance of their duties. The Committee reviews the time commitment required of the Non-executive Directors. Time requirements take account of preparation for and attendance at Board meetings and other regular commitments, as well as additional time that may be required for unforeseen events or future projects. All Non-executive Directors currently serve on at least one of the Board’s principal Committees, which requires an additional commitment of time dependent on the Committee and role. The Committee considers the external commitments of Non-executive candidates and on appointment, all Non-executive Directors confirm they are able to devote sufficient time to the Group’s affairs to meet the demands of the role. All Non-executive Directors are required to discuss any additional commitments which might impact the time which he or she is able to devote to their role with the Chairman prior to accepting and the Chairman escalates to the Committee as appropriate. Terms of appointment It is important that the Non-executive Directors have clear terms of appointment which set out their duties towards Prudential and that their tenure is considered as part of ongoing succession activities. Non-executive Directors are appointed for an initial term of three years. Subject to review by the Committee and re-election by shareholders, it is expected that Non-executive Directors serve a second term of three years. After six years, Non-executive Directors may be appointed for a further year, up to a maximum of three years in total. Reappointment is subject to rigorous review as well as re-election by shareholders. The Directors’ remuneration report sets out the terms of the Non-executive Directors’ letters of appointment and the terms of Executive Directors’ service contracts. The tenure of each Non-executive Director is shown in the Directors’ remuneration report. The Committee concluded that the expected time commitment of 32.5 days per annum remained appropriate. The external commitments of Directors were considered as part of the Committee’s recommendation of Directors’ election at the next Annual General Meeting. Prudential recognises the need for Non-executive Directors to dedicate sufficient time to their role while also developing a wide range of experience and skills through seeking external appointments. The Committee considered and approved the appointment of Tom Watjen as a non-executive director of Arch Capital Group Ltd., a specialist financial services group with shares listed in Bermuda. The Committee considered the expected time commitment of the role and, taking into account any other commitments, concluded that he continued to have sufficient time to commit to his duties as a Non-executive Director. No conflicts of interest were identified in connection with the proposed appointment. Kai Nargolwala, Anthony Nightingale, Philip Remnant and Alice Schroeder have all been in office for six years or more. When considering their re-election at the next AGM, the Committee considered their continuing appointment particularly carefully. The Committee recommended that they each serve for a further term of one year, subject to shareholder re-election. Both Amy Yip and Jeremy Anderson were provided with letters of appointment confirming their duties and obligations. These letters are on standard terms applicable to all Non-executive Directors. 116 Prudential plc Annual Report 2019 prudentialplc.com COMMITTEE REPORTS CONTINUEDKey matters considered during the year continued Why it is important to Prudential How is this considered Key outcomes Conflicts of interest Directors have a statutory duty to exercise independent judgement when carrying out their role and to avoid conflicts of interests. The Company has in place procedures to identify and, where necessary, mitigate potential conflicts of interest. These processes help to ensure decisions are made in the best interests of the Company. Subsidiary governance The Committee has an important role in reviewing the Group’s governance arrangements. The Committee confirmed the authorisations with updates as appropriate. The Committee considered the external positions of Amy Yip, Jeremy Anderson and Shriti Vadera prior to recommending their appointment to the Board. The Board considers that the procedures for dealing with conflicts of interests operate effectively. In 2019, the Committee considered the outcomes of the board effectiveness reviews and individual non-executive director evaluations for each of Jackson National Life Insurance Company, Prudential Corporation Asia Limited, M&G Group Limited and The Prudential Assurance Company Limited. The Committee concluded that each of these boards remained effective and also approved the continued appointments of the non- executive directors. The Committee was provided an update on the governance arrangements for Jackson National Life and Prudential Corporation Asia in October 2019. The Board has delegated authority to the Committee to identify and, where necessary, authorise any actual or potential conflicts of interest. Prior to proposing Directors for election or re-election, the Committee considered the external appointments of Directors and reviewed existing conflict authorisations, reaffirming or updating any terms or conditions attached to authorisations where necessary. The Chairman considers potential conflicts of interest in connection with proposed external appointments and escalates to the Committee for authorisation where a conflict or potential conflict could arise. The Committee had oversight of the search for and appointment of candidates to the M&G plc board in preparation for the demerger. During the year, the Committee carried out various activities relating to subsidiary governance, which encompassed M&G Group Limited, The Prudential Assurance Company Limited, Jackson National Life Insurance Company, and Prudential Corporation Asia Limited until demerger, including: — Reviewing succession planning arrangements for non-executive directors of the Group’s main subsidiaries; — Considering the outputs of the 2018 performance review of the Group’s main subsidiary boards, chairs and directors. The effectiveness of the subsidiary boards were assessed using an internal process utilising questionnaires; and — Reviewing governance arrangements for the Group’s subsidiaries with a particular focus on changes to the risk and audit committee arrangements for Prudential Corporation Asia in the context of the demerger, reflecting that the composition of the Prudential Corporation Asia Limited board now mirrors the Prudential Board and Board meetings are held concurrently. The Committee continues to oversee governance arrangements for the Group’s subsidiaries to ensure they remain appropriate for the post-demerger Group. prudentialplc.com Prudential plc Annual Report 2019 117 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationAudit Committee report Dear shareholder As Chair of the Audit Committee, I am pleased to present this report on the Committee’s activities during 2019. The Committee provides the Board with assurance as to the integrity of the Group’s financial reporting and, together with the Risk Committee, monitors the effectiveness of the second and third lines of defence, which are an integral part of our internal control environment. With regard to the Group’s financial reporting, the Committee’s work is focused on ensuring appropriate financial accounting policies are adopted and implemented, and on assessing key judgements and disclosures. We also have throughout the year received updates on the programme to implement IFRS 17 given the significant system and accounting changes it entails. The Committee held additional meetings during the year to focus on matters relating to the demerger of M&G plc. The Committee supported the Board’s review of the shareholder Circular and reviewed the various supporting processes and assurances received. When considering matters relating to the demerger, the Committee was conscious of the need to balance potential conflicts of interests between Prudential and M&G. The Committee also discussed the appropriate governance arrangements for the Group’s subsidiary audit committees post-demerger, together with associated transitional arrangements. I worked closely with the chair of the M&G plc audit committee to ensure a smooth transition of the oversight of the M&G business between the two committees. External auditor An important part of the Committee’s work consists of overseeing the Group’s relationship with KPMG LLP (KPMG), including safeguarding independence, approving non-audit fees and satisfying ourselves that it is in the best interests of shareholders to recommend the re-appointment of KPMG. During the year, we enhanced the review of their effectiveness by adding an interview process conducted by a senior KPMG partner, independent of the audit team, with senior management across the Group and with Committee members. The results were discussed directly with the Committee. Overall feedback was positive and the KPMG audit team is following up on areas where potential enhancements were highlighted. The Committee also requested earlier an enhanced review of the M&G half year key judgements, particularly longevity, in advance of the half year results announcement. Under the relevant audit tender rules the Group is required to change audit firm no later than the 2023 financial year end. The Committee has previously agreed that in light of the significant change to the Group being undertaken, with the demerger of M&G plc, and the introduction of a new insurance accounting standard (IFRS 17) in the near term, that a new auditor should be engaged for the 2023 year end but that a competitive tender for the 2023 audit should commence in the first half of 2020. Planning for the tender has commenced and meetings with audit firms (not restricted to the ‘Big-Four’) have been held to assess their ability to tender in relation to the complexity of Prudential’s geographically diverse business and their barriers to becoming independent. A formal tender process to identify KPMG’s successor will be undertaken in the first half of 2020 and a Board decision is expected in July. Internal audit Throughout 2019, the Committee continued to receive regular briefings from the Group Chief Internal Auditor. During the year, Group-wide Internal Audit (GwIA) undertook a programme of risk-based audits covering matters across the business units in addition to assurance work on the demerger and significant change programmes. The work undertaken by GwIA during the year was important in supporting the demerger, the Group maintaining a stable control environment through a period of significant change and the creation of two appropriately-sized, resourced and experienced independent internal audit functions. The effectiveness of GwIA was assessed in 2019, together with a review of progress against suggested enhancements identified by the external review undertaken by Deloitte in 2017. I have met regularly with the Group Chief Internal Auditor and the Group-wide Quality Assurance Audit Director to discuss internal audit work and matters arising. The Committee has also asked that management responsible for rectifying some of the issues identified attend the Committee to ensure that appropriate action was being taken. The Committee also approved the 2019 and 2020 internal audit plans, which have taken account of the business and organisational changes arising from the demerger. David Law Chair of the Audit Committee Committee members — David Law (Chair) — Jeremy Anderson (from January 2020) — Howard Davies — Philip Remnant — Alice Schroeder Regular attendees — Chairman of the Board — Group Chief Executive — Group Chief Financial Officer and Chief Operating Officer — Group Chief Risk and Compliance Officer — Director of Group Finance — Director of Group Financial Accounting and Reporting — Company Secretary — Director of Group Compliance (until January 2020) — Group Chief Internal Auditor — External Audit Partner Number of meetings in 2019: Twelve. (Nine regular meetings were held, including four shorter meetings to discuss full-year and half-year reporting matters, and three additional meetings to consider demerger related activities. A joint meeting was also held with the Risk Committee.) 118 Prudential plc Annual Report 2019 prudentialplc.com COMMITTEE REPORTS CONTINUEDCompliance The Committee received updates on matters arising from the annual Compliance Plan throughout 2019. The plan focused on a number of areas to help strengthen the compliance framework, which is intended to aid the Group in meeting regulatory obligations, including monitoring compliance with key elements of the compliance framework such as conflicts of interest, anti-money laundering and anti-bribery and corruption policies. Following a change in management responsibility, Howard Davies and I agreed that, the Risk Committee should take on responsibility for all aspects of overseeing the compliance function with effect from 1 January 2020. Committee governance The Committee works closely with the Risk Committee to make sure both Committees are updated and aligned on matters of common interest. Where responsibilities are perceived to overlap between the two Committees, Howard Davies and I agree the most appropriate Committee to consider the matter. During 2019, there was one joint session which, similar to the prior year, focused on cyber and information security, more details of which are set out in the Risk Committee report on page 127. In advance of each of the main Committee meetings, I speak to the chairs of our main subsidiary audit committees and update the Committee on important points raised. I also report to the full Board after each Committee meeting on the main matters discussed. In April we held a private session as a Committee to discuss our evaluation and key objectives for the year. We assessed our performance against these objectives and I am pleased with the feedback received. The demerger, IFRS 17 and key accounting judgements were particular areas of focus. One area we will monitor for the future is how we are kept abreast of Asian market developments. One of my key focuses over the past two years has been the Group’s whistleblowing procedures. I regularly meet privately with the Group Resilience Director to discuss whistleblowing cases and their resolution. These are also discussed in private sessions with the Committee or the relevant local audit committee. The Committee also meets privately with GwIA and KPMG. The effectiveness of the Committee was reviewed as part of the annual Board evaluation, which confirmed that the Committee continued to operate effectively during the year and no major areas requiring improvement were highlighted. How the Committee spent its time during 2019 Financial reporting and external auditor Periodic financial reporting including: — Full and half-yearly report and accounts — Key accounting judgements and disclosures, including tax — Solvency II results and governance processes (up to the demerger) — Associated audit reports Audit planning, fees, independence, effectiveness and reappointment Environmental, social and governance reporting Internal control framework Internal control framework including effectiveness Internal audit Status updates and effectiveness Internal audit plan Compliance Status updates Compliance plan Financial crime and whistleblowing Financial crime prevention and whistleblowing – regular updates Governance and reporting Updates from main subsidiary level audit committees Internal governance framework including effectiveness Business unit audit committee effectiveness and terms of reference Committee terms of reference and effectiveness Note 1 Two meetings were held in each of February and March 2019. Feb1 Mar1 Apr May Jun Jul Aug Sep Oct Dec l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l prudentialplc.com Prudential plc Annual Report 2019 119 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationKey matters considered during the year Matter considered How the Committee addressed the matter Financial reporting Overview Key assumptions and judgements One of the Committee’s key responsibilities is to monitor the integrity of the financial statements and any other periodic financial reporting. This has primarily focused on the Annual Report and Accounts but also covers the Group’s environmental, social and governance report and Tax Strategy Report. The Committee also reviewed the 2018 Solvency and Financial Condition Report and associated Pillar 3 returns submitted to the Prudential Regulation Authority as required under the Solvency II regime. Post-demerger, this regime is no longer applicable. In reviewing these and other items, the Committee received reports from management and, as appropriate, reports from internal and external assurance providers, which in some cases were provided at the explicit request of the Committee. When considering financial reporting, the Committee assesses compliance with relevant accounting standards, regulations and governance codes. During 2019, the Group adopted IFRS 16 ‘Leases’ and, as described in note A3, this resulted in a recognition of $895 million right-of-use asset and an equivalent amount of lease liabilities on the balance sheet on day one. The Committee continued to receive updates on the Group’s plans to implement IFRS 9 ‘Financial Instruments’ and IFRS 17 ‘Insurance Contracts’, which are not expected to be effective before 2022. The approach to adopting these standards is further discussed in note A3. The following sections set out the key assumptions, judgements and other matters considered as part of their review of the 2019 Annual Report and Accounts. The Committee reviewed the key assumptions and judgements supporting the Group’s IFRS results, including those made in valuing the Group’s investments, insurance liabilities and deferred acquisition costs under IFRS, together with reports on the operation of internal controls to derive these amounts. It also reviewed the assumptions underpinning the Group’s European Embedded Value (EEV) metrics. Assumption setting The measurement of insurance liabilities are based on estimates of future cash flows, including those to and from policyholders, over a long period of time. These estimates can, depending on the type of business, be highly judgemental. The Committee considered changes to assumptions and other estimates used to derive IFRS insurance liabilities and EEV reporting. Peer benchmarking was considered where available. The key assumptions reviewed were: — Persistency, mortality, morbidity (including in relation to medical inflation) and expense assumptions within the Asia life businesses; — Policyholder behaviour (eg guaranteed benefit utilisation and persistency) and mortality assumptions affecting the measurement of Jackson guaranteed liabilities (see note C4.2(b) of the IFRS financial statements); — Economic assumptions, including investment return and associated discount rates; and — Changes to the allowance within EEV for future hedge costs in connection to the Jackson variable annuity business. This is discussed further in note 7 of the EEV basis results. The Committee was satisfied that the assumptions adopted by management were appropriate. Further information on the effects of material changes to insurance assets and liabilities is included in note B3 to the IFRS financial statements and in the EEV basis results. Valuation of investments The Committee received information on the carrying value of investments in the Group’s balance sheet including information on how those values were calculated for those investments which require more judgement (for example private placement loans). Further information on the valuation of assets is contained in note C3 of the IFRS financial statements. The Committee satisfied itself that overall investments were valued appropriately. Intangible assets including deferred acquisition costs (DAC) The Committee received information to enable it to review the more material intangible asset balances. This included the assumptions that supported the amortisation profile of the DAC balance in the US, as described in note A4.1 ‘Other items requiring application of critical estimates or judgements’ and whether there had been any indication of impairment of the Group’s distribution rights assets. The Committee was satisfied that there was no impairment of the Group’s intangibles at 31 December 2019. Further information is contained in note C5 of the IFRS financial statements. 120 Prudential plc Annual Report 2019 prudentialplc.com COMMITTEE REPORTS CONTINUEDKey matters considered during the year continued Matter considered How the Committee addressed the matter Other financial reporting matters Demerger of M&G plc The Committee reviewed the Class 1 Shareholder Circular prepared by management in accordance with the UK’s Listing Rules for the demerger of M&G plc in October 2019. Assurance was sought from external parties including the Group’s reporting accountant and financial advisers. The Committee reviewed the procedures undertaken to support the verification of material statements made in the Circular. The Committee reviewed drafts of documents throughout 2019 and so were able to comment on the approach and content throughout the process. Change in presentation currency of the Group financial statements Following the demerger of M&G plc, the Audit Committee approved management’s proposal to change the Group’s presentation currency in these financial statements from pounds sterling to US dollars. Given that a significant majority of the Group’s earnings post demerger are denominated in US dollars, the Group believes that the presentation currency change will give investors and other stakeholders a clearer understanding of Prudential’s performance over time. The Committee reviewed the methodology and process for the currency conversion as explained in note A1 of the IFRS financial statements. It also reviewed and agreed that, from 31 December 2019, the functional currency of the parent company had changed to US dollars from pounds sterling given the change to loans and dividend payments arising at that date. Taxation The Committee regularly receives updates on the Group’s tax matters and provisions for certain open tax items including tax matters in litigation. The Committee was satisfied that the level of provisioning adopted by management was appropriate. See note B4 of the IFRS financial statements. Going concern and viability statements The Committee considered various analyses from management regarding Group and subsidiary capital and liquidity prior to recommending to the Board that it could conclude that the financial statements should continue to be prepared on the going-concern basis and that the disclosures on the Group’s longer-term viability were both reasonable and appropriate. The Committee considered information on the risks to the Group’s liquidity and capital position when making this assessment. Fair, balanced and understandable requirement The Committee carried out a formal review of whether the Annual Report and Accounts were ‘fair, balanced and understandable’ as required by the UK Corporate Governance Code. In particular, they considered whether the report gave a full picture of the Group’s performance in the year with important messages appropriately highlighted, the level of consistency between financial statements and narrative sections and whether performance measures were clearly explained. They also considered the prominence of alternative performance measures. After completion of its detailed review, the Committee was satisfied that, taken as a whole, the Group’s Annual Report and Accounts were fair, balanced and understandable. Parent company financial statements The Committee reviewed the parent company profit and loss account and balance sheet, which included the recoverability of the parent company’s investment in subsidiaries by assessing whether the net assets of the relevant subsidiaries, being an approximation of their minimum recoverable amount, were in excess of their carrying value at the balance sheet date and whether those subsidiaries have historically been profit making. prudentialplc.com Prudential plc Annual Report 2019 121 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationKey matters considered during the year continued Matter considered How the Committee addressed the matter External audit Review of effectiveness, non-audit services and auditor reappointment External audit effectiveness The Group’s external auditor is KPMG LLP (KPMG) and oversight of the relationship with them is one of the Committee’s key responsibilities. The Committee reviews the effectiveness of the audit throughout the year taking into account: — The detailed audit strategy for the year and coverage of the highlighted risks; — Group materiality and how that is applied to the individual business units; — Insight around the key accounting judgements, including benchmarking, and the way KPMG applied constructive challenge and professional scepticism in dealing with management; — The outcome of management’s internal evaluation of the auditor as discussed below; and — Other external evaluations of KPMG, with a focus on the Financial Reporting Council’s Annual Quality Review. There is an open dialogue on emerging risks and issues between the Group Lead Partner and Committee members via a regular schedule of meetings aligned to key reporting milestones. The Committee formally meets with the Group Lead Partner without management present. Internal evaluation of KPMG was conducted using a questionnaire that was circulated to the Committee members, Material Subsidiary audit committee members, the Group Chief Financial Officer and the Group’s senior financial leadership for completion. A key component of the evaluation is the degree of challenge and robustness of approach to the audit. The survey asked 27 questions over four categories (audit quality and execution, team performance, process and communication) in relation to the 2018 audit. As noted above the Committee enhanced the 2019 effectiveness review by arranging for a series of interviews to be conducted by a senior partner independent from the engagement team. KPMG were given the opportunity to respond to the findings in the reports. As a result of the reports, KPMG proposed enhancements to the audit and team. 122 Prudential plc Annual Report 2019 prudentialplc.com COMMITTEE REPORTS CONTINUEDKey matters considered during the year continued Matter considered How the Committee addressed the matter Auditor independence and objectivity The Committee has responsibility for monitoring auditor independence and objectivity and is supported in doing so by the Group’s Auditor Independence Policy (the Policy). The Policy is updated annually and approved by the Committee. It sets out the circumstances in which the external auditor may be permitted to undertake non-audit services and is based on four key principles which specify that the auditor should not: — Audit its own firm’s work; — Act as management or employees for the Group; — Have a mutual or conflicting interest with the Group; or — Be put in a position of being an advocate for the Group. The Policy has two permissible service types: those that require specific approval by the Committee on an engagement basis and those that are pre-approved by the Committee with an annual monetary limit capped at no more than 5 per cent of the Group audit fee in the proposed year and capped at $65,000 (£50,000) individually. In accordance with the Policy, the Committee approved these permissible services, classified as either audit or non-audit services, and monitored the usage of the annual limits on a quarterly basis. Non-audit services undertaken by KPMG were agreed prior to the commencement of work and were confirmed as permissible for the external auditor to undertake in accordance with the Policy which complies with the rules and regulations of the UK Financial Reporting Councils’ Ethical Standard (2016), the US Securities and Exchange Commission (SEC) and the standards of the Public Company Accounting Oversight Board (PCAOB). The Committee considered potential impacts on independence that could have arisen from the increase in non-audit services during the year, with the non-audit fee ratio increasing to 43 per cent (2018: 12 per cent). The increase was driven by non-audit services completed by KPMG in their role as reporting accountant for the demerger of M&G plc. The Committee concluded that as the Group’s auditor it was appropriate for KPMG to act as reporting accountant and this did not impair their independence. The audit partner was not involved in the delivery of services as the reporting accountant for the demerger and neither he nor members of the audit team are incentivised on, or rewarded in respect of, the provision of non-audit services to Prudential plc. In keeping with professional ethical standards, KPMG also confirmed their independence to the Committee and set out the supporting evidence for their conclusion in a report that was considered by the Committee prior to publication of the financial results. During the year, the Committee considered the proposals put forward by the Financial Reporting Council in December 2019 in a revision to its Ethical Standard and Auditing Standards on the Policy. The Committee agreed to implement their proposals for the 2020 year end. The key change is to establish a specific ‘white-list’ of non-audit services that the external auditor will be permitted to perform. The Committee will continue to monitor developments to ensure the Group’s policies and processes around audit effectiveness and independence evolve in line with market practice. The fees paid to KPMG for the year ended 31 December 2019 amounted to $30.4 million (2018: $24.4 million) of which $13.0 million (2018: $3.0 million) was payable in respect of non-audit services. Non-audit services accounted for 43 per cent (2018:12 per cent) of total fees payable. A breakdown of the fees payable to KPMG can be found in note B2.4 to the IFRS financial statements. Of the $13.0 million (2018: $3.0 million) non-audit services fees, $11.7 million (2018: $1.0 million) was for one-off services associated with the demerger of M&G plc. Excluding these one-off fees associated with the demerger, non-audit services accounted for 7 per cent (2018: 9 per cent) of total fees payable. The remaining $1.3 million (2018: $1.5 million out of the remaining $2.0 million) of non-audit services fees was in respect of other assurance services. These services covered assurance over the Group’s assurance reports on internal controls of certain Group companies that are made available for third parties, comfort letter procedures to support debt raising in the year and Solvency II external disclosures up to the demerger. In all these cases, the audit firm was considered the most appropriate to carry out the work, given its knowledge of the Group and the synergies that arise from running these engagements alongside its main audit. All non-audit services were pre-approved by the Committee and were in line with the Policy discussed above. Fees paid to the auditor prudentialplc.com Prudential plc Annual Report 2019 123 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationKey matters considered during the year continued Matter considered Reappointment Audit tender How the Committee addressed the matter Based on the outcome of the effectiveness evaluation and all other considerations, the Committee concluded that there was nothing in the performance of the auditor which would require a change. The Committee therefore recommended that KPMG be reappointed as the auditor. A resolution to this effect will be proposed to shareholders at the 2020 Annual General Meeting. The Committee acknowledges the provisions contained in the UK Code in respect of audit tendering, along with European rules on mandatory audit rotation and audit tendering. In conformance with these requirements, the Company will be required to change audit firm no later than for the 2023 financial year end. The external audit was last put out to competitive retender in 1999 when the present auditor, KPMG, was appointed. Since 2005, the Committee has annually considered the need to retender the external audit service. The Audit Committee assessed in February 2019 that in light of the significant change to the Group being undertaken, with the demerger of M&G plc, and the introduction of a new insurance accounting standard (IFRS 17) in the near term, that a new auditor should be engaged in time for the 2023 year end. In conducting this review, the Committee concluded that it would be appropriate to commence a competitive tender for the 2023 audit in the first half of 2020. The planning for this tender process has commenced with the Committee Chair meeting with a number of firms, including firms outside of the ‘Big Four’, to assess interest and ability to tender for the audit, with focus on capability and resource to service the key Asian business units. This was supplemented by a formal request for information to those firms who indicated they would be interested in tendering. A formal invitation to tender will be issued to those firms that confirmed they are able to undertake the audit in March 2020, with the Committee’s recommendation of which firm to appoint to be considered for approval by the Board in July 2020. The tender process is being led by the Audit Committee with the support of Internal Audit and while the selection criteria are yet to be formally set, audit quality will be at the core of the decision. The auditor tender timeline takes into account the complexity of the Group and the expected timing of the introduction of IFRS 17 and allows the appointee time to ensure they meet the audit independence requirements to which the Group is subject. The timing remains subject to the Committee’s normal annual review of auditor performance and recommendation to shareholders. The Company has complied throughout the 2019 financial year with the provisions of the Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 issued by the Competition and Markets Authority. In line with the Financial Reporting Council’s Ethical Standard, the rules and regulations of the SEC and the standards of the PCAOB, a new Group Lead Partner, Philip Smart, was appointed in respect of the 2017 financial year. Mr Smart is expected to be in place for a five-year term until the completion of the 2021 reporting cycle. A new Group Lead Partner will be required for the 2022 audit and an appropriate transition plan developed. Second line oversight Compliance, financial crime prevention, whistleblowing Compliance oversight The Group Compliance Director provided the Committee with regular reports that included updates on: the progress against the 2019 Compliance Plan; key Compliance activities; the effectiveness of the Compliance function; results of Compliance monitoring reviews; material regulatory issues; and the impact of any regulatory change and the establishment of the Hong Kong IA as the Group-wide supervisor. From 1 January 2020, the Risk Committee assumed responsibility for Compliance oversight from the Committee in order to align governance with changes to management’s reporting responsibilities. Financial crime prevention The Committee received the Annual Financial Crime Report that assessed the effectiveness of the Group’s systems and controls to manage financial crime risks. In addition the Committee received regular updates on anti-bribery and corruption, anti-money laundering and sanctions screening. 124 Prudential plc Annual Report 2019 prudentialplc.com COMMITTEE REPORTS CONTINUEDKey matters considered during the year continued Matter considered Whistleblowing Third line oversight Internal audit Regular reporting How the Committee addressed the matter The Group continues to operate a Group-wide whistleblowing programme (‘Speak Out’), hosted by an independent third party (Navex). The Speak Out programme received ad hoc reports from a wide variety of channels, including a web portal, hotline, email and letters. Reports are captured, confidentially recorded by Navex, and flagged for investigation by the appropriate team. The Committee is responsible for oversight of the effectiveness of the Group’s whistleblowing arrangements. The Committee received regular reports on the most serious cases and other significant matters raised through the programme and the actions taken to address them. The Committee was also briefed on emerging Speak Out trends and themes. The Committee may, and has, requested further reviews of particular areas of interest. The Committee reviews the Group’s Speak Out programme annually, satisfying itself that it continues to comply with regulatory and governance requirements. The Committee also considered the consistency of approach adopted across subsidiary audit committees. The Speak Out programme has been further strengthened during the year by enhanced training for managers and staff; improved mechanisms for reporters to feed back on their experience and case management workflow improvements that focus on tracking (post-investigation) management action and, where relevant, the Committee requested information on the sharing of lessons learnt. The Chair and Committee spent time privately with the Group Resilience Director to understand outcomes of investigations, ensure that investigations were adequately resourced and appropriately managed, that there had been no retaliation against anyone making a report and that investigations were not improperly influenced. A review of the Speak Out programme and its oversight is being undertaken in 2020. The Committee received regular updates from GwIA on audits conducted and management’s progress in addressing audit findings within agreed timelines. Any delays in implementing remediation actions were escalated to the Committee and given particular scrutiny. The independent assurance provided by GwIA formed a key part of the Committee’s deliberations on the Group’s overall control environment. During 2019, the areas reviewed included: change management and transformation (in particular relating to the demerger), financial controls, outsourcing and third-party supply, customer outcomes, cyber risk, compliance and regulatory and second line of defence. In addition, GwIA performed more business monitoring during 2019 to obtain a broader view of the business and enable more regular assessments of emerging risks and changes in the control environment. This has been achieved through a variety of methods including stakeholder discussions and an increasing use of data analytics. The Group Chief Internal Auditor reports functionally to the Committee Chair and for management purposes to the Group Chief Executive, and also has direct access to the Chair of the Board. In addition to formal Committee meetings, the Committee meets with the Group Chief Internal Auditor in private to discuss matters relating to, for example, the effectiveness of the internal audit function, significant audit findings and the risk and control culture of the organisation. The Committee Chair also meets with GwIA’s Quality Assurance Director to discuss the outcome of the quality reviews of GwIA’s work and actions arising. Annual internal audit plan and focus for 2020 GwIA now operates a rolling six-month approach to audit planning. The Committee approved the plan for the second half of 2019. It also considered and approved the Internal Audit Plan, resource and budget for the first half of 2020. The 2020 Internal Audit Plan was formulated based on a bottom-up risk assessment of audit needs mapped against various metrics combined with top-down challenge. The plan was then mapped against a series of risk and control parameters, including the top risks identified by the Risk Committee, to verify that it is appropriately balanced between financial, business change, regulatory and operational risk drivers and provides appropriate coverage of key risk areas and audit themes within a risk-based cycle of coverage. Key areas of focus for 2020 include: strategic change initiatives, customer outcomes, cyber security, financial risk and financial controls, culture, outsourcing and digitisation. prudentialplc.com Prudential plc Annual Report 2019 125 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationKey matters considered during the year continued Matter considered How the Committee addressed the matter Effectiveness of Internal Audit The Committee is responsible for approval of the GwIA charter, audit plan, resources, and for monitoring the effectiveness of the function. In addition, the Committee approved the new, post-demerger target operating model for internal audit in Prudential plc. The Committee also assesses the effectiveness of GwIA through a combination of External Quality Assessment reviews, required every five years, and an annual internal effectiveness review. A 2019 Internal Effectiveness review, performed by the GwIA Quality Assurance Director, was conducted in accordance with the professional practice standards of the Chartered Institute of Internal Auditors (CIIA) and assessed continued conformance with the CIIA guidance for Effective Internal Audit in the Financial Services (the CIIA Code). The review concluded that GwIA continued to comply with the requirements of internal audit policies, procedures and practices, and standards in all material respects relating to audit planning and execution, and continued to be aligned with its mandated objectives and maintained general conformance with the CIIA Code. During 2019, GwIA also continued to develop its practices with enhancements to methodology, approaches to audits and the use of data analytics. In preparation for the demerger, the function successfully completed the creation of two appropriately skilled and sized, independent internal audit functions, where previously there had been a single function. The Committee is responsible for reporting and making recommendations to the Board on the effectiveness of Group-wide internal control and risk management systems. The Committee considered the outcome of the annual review of the systems of internal control and risk management. This considered M&G plc to the extent it was relevant to the amounts disclosed within the Group 2019 financial statements. The review identified a number of areas for improvement and the necessary actions that have been, or are being, taken. The audit committees at Group and subsidiary level collectively monitor outstanding actions regularly and ensure sufficient resource and focus is in place to resolve them within a reasonable time frame. The Group Governance Manual sets out the policies and procedures by which the Group operates within its framework of internal governance, taking into account relevant statutory and regulatory matters. It is a platform for mandating specific ways of working across the Group and each business unit attests annually to compliance with: — Mandatory requirements set out in Group-wide policies, including matters which must be reported to the Group functions; and — Matters requiring prior approval from those parties with delegated authority. The Committee reviewed the results of the Group Governance Manual annual content review and the results of the year end certification of compliance with Group Governance Manual requirements for the year ended 31 December 2019. Internal control Internal control and risk management systems Governance Group governance framework Competence and experience In relation to the provisions of the UK Code and HK Listing Rules, the Board is satisfied that David Law has recent and relevant financial experience and that the Committee as a whole has competence relevant to the sectors in which the business operates. Full biographies of the Committee members including experience and professional qualifications, are set out on pages 94 to 96. The Board has determined that David Law qualifies as the Audit Committee financial expert under the requirements of Form 20-F. 126 Prudential plc Annual Report 2019 prudentialplc.com COMMITTEE REPORTS CONTINUEDRisk Committee report Dear shareholder As Chair of the Risk Committee, I am pleased to report on the Committee’s activities and focus during 2019. This will be my last report as Risk Committee Chair. Having served as a Non-executive Director and chaired the Committee since October 2010, I will not offer myself for re-election at the 2020 Annual General Meeting. I would like to take this opportunity to thank my fellow Committee members for their diligence and also everyone on the Prudential team who has supported me and the Committee over the years. As announced on 11 March 2020, Jeremy Anderson will succeed me as Chair of the Committee. Committee operation The Committee assists the Board in providing leadership, direction and oversight of the Group’s overall risk appetite, limits and strategy. 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. The Committee received regular reports from the Group Chief Risk and Compliance Officer (CRCO), who is advised by the Group Executive Risk Committee (GERC). I provided feedback on the performance of the CRCO 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 function and updates from other areas of the business as needed. Regulatory matters On 25 March 2019 the Hong Kong Insurance Authority (Hong Kong IA) and the Group signed a Regulatory Letter, which outlines the interim supervision framework applicable to the Group until the Hong Kong IA’s Group-wide Supervision (GWS) Framework becomes effective. The required legislative process is expected to be finalised in the second half of 2020. The Committee considered the capital aspects of the Regulatory Letter as well as considering regular updates on GWS developments over the year. The CRCO briefed the Committee regularly on developments in systemic risk regulation and the Insurance Capital Standards (ICS). We considered the results of ICS field testing in July and the implications of the IAIS announcement in November of a unified path to convergence of comparable group capital standards across jurisdictions. During the year, the Group remained subject to the policy requirements resulting from its prior designation in 2016 as a Global Systemically Important Insurer (G-SII). The Committee therefore considered and approved the Group’s 2019 Systemic Risk Management Plan, Liquidity Risk Management Plan and Recovery Plan. Transformation risk, including the demerger, and other in-depth reviews During 2019, a key area of consideration for the Committee was the risk associated with the Group’s portfolio of key strategic change initiatives, which included the demerger of M&G plc, as well as, notably, those related to IFRS 17, the Group’s digital transformation, LIBOR transition and further implementation of the Aladdin system. During the year, the Committee considered updates, risk opinions, guidance and assurance on this critical change activity. Ongoing reviews were also performed on the financial and non-financial risks to the execution of the demerger. The Committee considered and recommended for approval the risk disclosures included in the Prudential plc shareholder Circular published on 25 September 2019. Howard Davies Chair of the Risk Committee Committee members — Howard Davies (Chair) — Jeremy Anderson (from January 2020) — David Law — Kai Nargolwala — Alice Schroeder — Tom Watjen Regular attendees — Chairman of the Board — Group Chief Executive — Group Chief Risk and Compliance Officer — Group Chief Financial Officer and Chief Operating Officer — Company Secretary — Group Chief Internal Auditor — Chief risk officers of the main subsidiaries and members of the Group Risk Leadership Team are invited to attend each meeting as appropriate. Number of meetings in 2019: Five. (In addition a joint meeting was held with the Audit Committee in April 2019.) prudentialplc.com Prudential plc Annual Report 2019 127 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationInformation security and privacy Information security and data privacy also received attention from the Committee in 2019. We reviewed progress achieved on the implementation of the Group’s information security and privacy operating model and received updates on the Group’s compliance with the EU’s General Data Protection Regulation (GDPR). In April 2019, a joint session with the Audit Committee on cyber security included an update on progress against the Group’s key 2019 objectives in this area and included training aimed at enhancing the knowledge of Non-executive Directors on both the increasing regulatory expectations and the threats faced by the Group. Committee governance The Committee works closely with the Audit Committee to ensure both Committees are updated and aligned on matters of common interest. Where responsibilities are perceived to overlap between the two Committees, David Law and I agree the most appropriate Committee to consider the matter. Aligned with the consolidation of the Risk, Compliance and Security functions under the leadership of the CRCO during 2019, the Committee assumed responsibility for Compliance oversight from the Audit Committee with effect from 1 January 2020. The Committee considered and approved the Risk and Compliance plan for the first half of 2020 and will receive a plan for the second half of 2020 at mid-year. The effectiveness of the Committee was reviewed as part of the annual Board evaluation, which confirmed that the Committee continued to operate effectively during the year and no major areas requiring improvement were highlighted. In-depth reviews were performed in existing and emerging high risk areas including the interest rate risk profile and asset liability management of our Asia business; Prudential’s artificial intelligence and digital transformation initiatives and their associated risks, ethical considerations and governance; together with the reinsurance arrangements in place across the Group. Risk appetite and principal risks During 2019, the Committee reviewed the Group’s risk policies and proposed changes to the Group risk appetite statements. Aligned with these reviews, proposals to amend associated limits were also considered. The amendments were recommended and approved to reflect the changes in the Group’s risk profile and the evolving regulatory environment following the demerger. The Committee also considered the principal risks facing the Group and received updates on these through the course of the year as well as reports from the chief risk officers of our main subsidiaries, who regularly attend Committee meetings. A fuller explanation of principal risks facing the Group and the way in which the Group manages these is set out in the Group Chief Risk and Compliance Officer’s report on pages 51 to 71. During 2019, the Committee considered risk assessments and opinions on key areas covering the risks associated with the Group’s Business Plan, the Group’s revised dividend policy and executive remuneration, further details of which are noted below. In respect of our principal risks, we continued to focus on the risks to the Group’s financial viability and non-financial sustainability including those arising from the external business and macroeconomic environment in which it operates; risks arising from the nature of the Group’s business and industry; and the risks around global legal and regulatory compliance. We regularly reviewed the strength of our capital and liquidity positions (including the results of stress and scenario analyses) and the impact of the transition to the Hong Kong IA’s Local Capital Summation Method (LCSM) in determining the Group’s regulatory capital requirements. 128 Prudential plc Annual Report 2019 prudentialplc.com COMMITTEE REPORTS CONTINUEDHow the Committee spent its time during 2019 Markets and Group risk updates Group risk updates Main subsidiary updates Risk Management Group principal risk identification Principal risk discussions Business unit specific risk matters Risk assessment of Business Plan Risk function effectiveness Risk oversight of remuneration Transformation risk Demerger financial viability and operation resilience Information security and privacy Regulatory matters Regulatory matters Risk framework Internal model development and changes Group risk appetite review Risk limit updates Risk policy framework refresh and updates Risk-related compliance policies Group-wide Internal Audit update Governance and reporting Full and half-year risk disclosure Global Systemically Important Insurer: Liquidity Risk Management Plan, Systemic Risk Management Plan and Recovery Plan Own Risk and Solvency Assessment Full and half-year ECap results Group Regulatory and Compliance reporting Committee terms of reference Feb Apr Jul Oct Nov l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l prudentialplc.com Prudential plc Annual Report 2019 129 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationKey matters considered during the year Matter considered How the Committee addressed the matter Risk framework The Group Risk Framework and risk policies were subject to both an annual review and a further specific update to ensure compliance with the Hong Kong IA Regulatory Letter. Changes were recommended by the Committee for approval by the Board. Annually, business units are required to assess and certify their compliance with the Group Risk Framework and associated policies as part of the annual Group Governance Manual certification process. The certification process is facilitated by Group Risk and Compliance and subject to oversight by the Committee. The Committee conducted its annual review of risk effectiveness in February. It also considered the effectiveness of, and approved updates to, the Group Risk Mandate which formally sets out the purpose and responsibilities of the Group Risk function and its effectiveness in overseeing the key risks to the Group. The Committee also reviewed the methodology and calibration of the Group internal model. Risk appetite The Committee is responsible for recommending changes in the Group’s overall risk appetite and tolerance to the Board for approval. The Committee considered the revised Group Risk Appetite Statement and associated limits that would apply after the demerger of M&G plc. These were defined in aggregate for financial and non-financial risks by the setting of objectives for its liquidity, capital requirements and non-financial risk exposure. Hong Kong Insurance Authority (IA) In August 2018, it was announced that the Hong Kong IA would become the Group-wide supervisor for Prudential plc after the demerger of M&G plc. Business Plan Key updates on the discussions with the Hong Kong IA on the regulatory requirements applying immediately following the demerger, and those anticipated in the longer term, were provided to the Committee as part of the CRCO’s regular reporting. As part of its role in overseeing and advising the Board on future risk exposures and strategic risks, the Committee reviewed Group Risk’s assessment of the Business Plan, which included key financial risks (including those associated with the macroeconomic environment, such as prolonged low interest rates) and non-financial risks (including those from the regulatory environment) to the post-demerger Group. The analysis reviewed included sensitivity assessments of the impact of various plausible scenarios. As part of its review of the risk assessment of the Business Plan, the Committee approved proposed changes to Group Approved Limits. Own Risk and Solvency Assessment (ORSA) The ORSA is a key ongoing process for identifying, assessing, controlling, monitoring and reporting the risks to which the Group is exposed and assessing capital adequacy over the business planning horizon. In April, the Committee considered the Group’s ORSA report, based on the Business Plan, prior to its approval by the Board. An additional ORSA report was considered by the Committee in October which included a forward-looking assessment of the demerged Group’s capital and liquidity position, and the outcome of a range of stress and scenario testing to inform the Committee of potential future capital solvency and liquidity levels. Stress and scenario testing The Committee is responsible for reviewing the outcome and results of stress and scenario testing, which is a key risk identification, measurement and management tool for the Group. Stress and scenario testing is a key component of the Group’s ORSA and the risk assessment of the Business Plan, as described above, as well as its Recovery Planning and Reverse Stress Testing (RST). The Group’s Recovery Plan, considered by the Committee in October, included an assessment of the effectiveness of the post-demerger business’s recovery options under market and idiosyncratic scenarios. An updated year-end 2018 RST exercise was performed for the post-demerger Group, which confirmed that it remains resilient to all business model failure scenarios considered. The Committee recommended the Group’s Recovery Plan and RST Report for approval by the Board. 130 Prudential plc Annual Report 2019 prudentialplc.com COMMITTEE REPORTS CONTINUEDKey matters considered during the year continued Matter considered How the Committee addressed the matter Global Systemically Important Insurer (G-SII) The FSB has endorsed a new Holistic Framework for systemic risk management to be implemented by the IAIS in 2020 and suspended G-SII designations until a review is undertaken in 2022. Transformation activity and demerger of M&G plc Group principal risks In 2019, the Group remained subject to G-SII measures due to its prior designation in 2016. The Committee therefore considered, and recommended for approval by the Board, updated deliverables associated with this designation. These included the Systemic Risk Management Plan, Recovery Plan and Liquidity Risk Management Plan. Many of the G-SII measures have been adopted into the Insurance Core Principles and ComFrame – the common framework for the supervision of Internationally Active Insurance Groups (IAIGs). As Prudential is expected to satisfy the criteria of an IAIG these measures are anticipated to continue for the Group. During 2019, a key area of consideration for the Committee was the demerger of M&G plc from the rest of the Group, which contributed to the portfolio of key strategic change activity across the Group. The Committee’s work included overseeing the conflict management process around the demerger. The Committee also discussed the appropriate governance arrangements for the Group’s subsidiary risk committees post-demerger and associated transitional arrangements. The Committee was provided with updates on demerger and transformation activity throughout the year, and considered the results of risk opinions, guidance and assurance work. It received regular updates on the Group’s portfolio of key strategic change initiatives, including those related to IFRS 17, the Group’s digital transformation, LIBOR transition and implementation of the Aladdin system. Ongoing analyses of the key financial risks to the execution of the demerger under various stress scenarios were provided to the Committee, as well as progress updates on operational separation activity. In particular, the Committee considered and approved changes to the following items, which were all updated to appropriately reflect the position of the demerged Group: risk assessment of the Group Business Plan; risk framework and policies; risk appetite and associated limits; ORSA report; and G-SII deliverables. The Committee also considered the risk disclosures included in the Prudential plc shareholder Circular in advance of its publication. The Committee evaluated the Group’s principal risks, considering recommendations for promoting additional risks and changes in the scope of existing risks. The Committee received regular reporting on principal and emerging risks, external events such as the UK’s exit from the EU and the Hong Kong protests and mitigating actions over the course of the year within the Group CRCO’s regular report to the Committee. Further information about how the Group identifies emerging and principal risks can be found in the Group Chief Risk and Compliance Officer’s report. These reports also provided the Committee with: regulatory updates; developments in the Group’s internal model; the implications of the developing global capital standards including the engagement with the Hong Kong IA on the development of an industry group capital and risk management framework; and developments in relation to the Group’s designation as a G-SII. Deep dives As part of its risk oversight responsibilities, the Committee also considers the result of ‘deep dive’ risk reviews performed over the year. In 2019, these focused on risks embedded within the assets and liabilities and the portfolio of products in our US and Asia businesses and the Group’s digital transformation initiatives. Information security and privacy During 2019, updates were provided to the Committee on progress made in the implementation of the operating model for information security and privacy. In April, in a joint session of the Risk and Audit Committee, an update on cyber security was provided on the latest regulatory expectations, an assessment of the threats facing the Group and the means to enable appropriate oversight. The Committee received regular updates on Group-wide information security and privacy metrics providing a view of security posture across the businesses. Specifically in the key area of data privacy, the Committee received an update in February on progress on residual Group-wide activity to ensure compliance with General Data Protection Regulations. In November, the Committee was provided with an update on Group-wide privacy activities and emerging privacy regulations in the US and Asia. prudentialplc.com Prudential plc Annual Report 2019 131 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationKey matters considered during the year continued Matter considered How the Committee addressed the matter Jackson oversight Remuneration Compliance and audit reporting The Committee received regular updates on the Jackson business throughout 2019 including in relation to the financial risk oversight of the business, which remains a key area of focus. Updates were provided to each Committee meeting on the effectiveness of the hedging programme and the impact of market movements on Jackson’s estimated Risk Based Capital ratio. The Committee approved changes to limits used in the monitoring of the market and credit risks of the Jackson business. Additionally, the Committee considered the results of in-depth reviews performed on the methodology and assumptions of a tool for the estimation of Jackson capital adequacy under stress. In October, the Committee approved Jackson’s adoption of the NAIC Variable Annuity Reform Framework. The Committee has a formal role in the provision of advice to the Remuneration Committee on risk management considerations in respect of executive remuneration. It considered risk management assessments of proposed executive remuneration structures and outcomes during the year, making related recommendations to the Remuneration Committee for their consideration. The assessments considered included those relating to executives of M&G plc at the point of demerger and proposals relating to the Jackson bonus pool. The Committee received regular reporting on key compliance risks and mitigation activity throughout the year. It also reviewed and approved updates to regulatory compliance risk-related policies including changes to the regulatory communications policy in advance of the transfer of Group-wide supervisory responsibilities from the PRA to the Hong Kong IA in October. The Committee received updates from Group-wide Internal Audit throughout the year relating to effectiveness of risk management and internal control systems and other matters relating to its responsibilities. 132 Prudential plc Annual Report 2019 prudentialplc.com COMMITTEE REPORTS CONTINUEDStatutory and regulatory disclosures Powers of the Board The Board may exercise all powers conferred on it by the Company’s Articles and the Companies Act 2006. This includes the powers of the Company to borrow money and to mortgage or charge any of its assets (subject to the limitations set out in the Companies Act 2006 and the Company’s Articles) and to give a guarantee, security or indemnity in respect of a debt or other obligation of the Company. Rules governing the appointment of Directors The appointment and removal of Directors is governed by the provisions in the Articles of Association (the Articles), the UK Code, the HK Code (as appended to the Hong Kong Listing Rules) and the Companies Act 2006. Director indemnities Subject to the provisions of the Companies Act 2006, the Company’s Articles permit the Directors and officers of the Company to be indemnified in respect of liabilities incurred as a result of their office. Suitable insurance cover is in place in respect of legal action against directors and senior managers of companies within the Group. Qualifying third-party indemnity provisions are also available for the benefit of the Directors of the Company and certain other such persons, including certain directors of other companies within the Group. These indemnities were in force for 2019 and remain so. Prior to the demerger of M&G plc qualifying pension scheme indemnity provisions were in place for the benefit of certain pension trustee directors within the Group. Financial reporting The Directors have a duty to report to shareholders on the performance and financial position of the Group and are responsible for preparing the financial statements on pages 196 to 318 and the supplementary information on pages 330 to 357. It is the responsibility of the auditor to form independent opinions, based on its audit of the financial statements and its audit of the EEV basis supplementary information, and to report its opinions to the Company’s shareholders and to the Company. Its opinions are given on pages 320 to 329 and page 359. Company law requires the Directors to prepare financial statements for each financial year that give a true and fair view of the financial affairs of the Company and of the Group. The criteria applied in the preparation of the financial statements are set out in the Statement of Directors’ responsibilities on pages 319 and 358. Company law also requires the Board to approve the Strategic report. In addition, the UK Code requires the Directors’ statement to state that they consider the Annual Report and financial statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. The Directors are further required to confirm that the Strategic report includes a fair review of the development and performance of the business, with a description of the principal risks and uncertainties. Such confirmation is included in the statement of Directors’ responsibilities on page 319. The Strategic report provides, on pages 10 to 87, a description of the Group’s capital position, financing and liquidity. The risks facing the Group’s business are discussed in the Group Chief Risk and Compliance Officer’s report of the risks facing our business and how these are managed on pages 51 to 71. The Directors who held office at the date of approval of this Directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditor is unaware; each Director has taken all the steps that he or she ought to have taken as a Director to make himself or herself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006. Going concern In accordance with the guidance issued by the Financial Reporting Council in September 2014, ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting’, after making sufficient enquiries the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue their operations for a period of at least 12 months from the date that the financial statements are approved. In support of this expectation, the Company’s business activities, together with the factors likely to affect its future development, successful performance and position in the current economic climate, are set out in the Strategic report on pages 10 to 87. The risks facing the Group’s capital and liquidity positions are referred to in the Strategic report on pages 51 to 71 with further information on capital (including sensitivities) set out in note I(i) ‘Group Capital Position’ within Additional unaudited financial information. In addition, the Directors considered the macro-economic environment and geopolitical risks in the markets which the Group operates, as well as the impact of the outbreak of coronavirus (‘COVID-19’). The Group’s IFRS financial statements include the details of the Group’s borrowings in note C6 on pages 280 and 281, the market risks and liquidity analysis associated with the Group’s assets and liabilities can be found in note C3.4(a) on pages 256 to 258, policyholder liability maturity profile by business units in notes C4.2(iii) and C4.3(ii) on pages 266 and 267 respectively, cash flow details in the consolidated statement of cash flows and provisions and contingencies in notes C11 and D3. The Directors therefore consider it appropriate to continue to adopt the going concern basis of accounting in preparing the financial statements for the year ended 31 December 2019. prudentialplc.com Prudential plc Annual Report 2019 133 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationSTATUTORY AND REGULATORY DISCLOSURES CONTINUED US regulation and legislation As a result of its listing on the New York Stock Exchange, the Company is required to comply with the relevant provisions of the Sarbanes-Oxley Act 2002 as they apply to foreign private issuers and have adopted procedures to ensure such compliance. In particular, in relation to Section 302 of the Sarbanes-Oxley Act 2002 which covers disclosure controls and procedures, a Disclosure Committee has been established, reporting to the Group Chief Executive, chaired by the Chief Financial Officer and comprising members of head office management. The work of the Disclosure Committee supports the Group Chief Executive and Chief Financial Officer in making the certifications regarding the effectiveness of the Group’s disclosure procedures. Change of control Under the agreements governing Prudential Corporation Holdings Limited’s life insurance and fund management joint ventures with China International Trust & Investment Corporation (CITIC), if there is a change of control of the Company, CITIC may terminate the agreements and either, (i) purchase the Company’s entire interest in the joint venture or require the Company to sell its interest to a third party designated by CITIC, or (ii) require the Company to purchase all of CITIC’s interest in the joint venture. The price of such purchase or sale is to be the fair value of the shares to be transferred, as determined by the auditor of the joint venture. Customers The five largest customers of the Group constituted in aggregate less than 30 per cent of its total revenue from sales for each of 2019 and 2018. Contract of significance At no time during the year did any Director hold a material interest in any contract of significance with the Company or any subsidiary undertaking. Securities dealing and inside information Prudential has adopted securities dealing rules relating to transactions by Directors on terms no less exacting than required by Appendix 10 to the HK Listing Rules and by relevant UK regulations. Having made specific enquiry of all Directors, the Directors have complied with these rules throughout the period. The Group has adopted an Inside Information Policy which includes guidance and procedures for the identification, dissemination and escalation of inside information as well as appropriate controls on the disclosure of such information in line with regulatory requirements. All staff are made aware of the policy and receive communications reminding them of their obligations when they work on any confidential matters in the business or are notified when the Company enters or exits a closed period. Requirements of Listing Rule 9.8.4 Information to be included in the Annual Report and Accounts under Listing Rule 9.8.4 may be found as follows: Listing Rule Description Page 9.8.4 (4) Details of long-term incentive schemes required by Listing Rule 9.4.3 9.8.4 (10) Contracts of Significance involving a Director 9.8.4 (12) Details of shareholder waiver of dividends 9.8.4 (13) Details of shareholder waiver of future dividends 168 134 401 401 134 Prudential plc Annual Report 2019 prudentialplc.com 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 ESG summary Employment practices Greenhouse gas emissions Charitable donations Political donations and expenditure ESG summary ESG summary ESG summary ESG summary ESG summary 133 92 to 97 72 to 87 72 to 87 72 to 87 86 87 Remuneration Committee report Directors’ remuneration report 136 to 173 Directors’ interests in shares Agreements for compensation for loss of office or employment on takeover Directors’ remuneration report Directors’ remuneration report Details of qualifying third-party indemnity provisions Internal control and risk management Powers of Directors Governance report Governance report Governance report Rules governing appointment of Directors Governance report Significant agreements impacted by a change of control Governance report Future developments of the business of the Company Group Chief Executive’s report Post-balance sheet events Note D4 of the notes on the Group financial statements Shareholder information 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 and note C10 of the notes on the Group financial statements 400, 401 and 290 Group overview and Strategic report Strategic report and note C6 of the notes on the Group financial statements Group overview and Strategic report Strategic report and Additional information 166 186 133 108 and 109 133 133 134 6 to 9 298 400 3 to 87 63, 64 and 280 4 and 40 51 to 71 and 388 to 390 98 Corporate governance codes – statement of compliance How we operate In addition, the risk factors set out on pages 388 to 395 and the additional unaudited financial information set out on pages 362 to 387, are incorporated by reference into the Directors’ report. The Directors’ report is signed on behalf of the Board of Directors by Tom Clarkson Company Secretary 10 March 2020 prudentialplc.com Prudential plc Annual Report 2019 135 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information04 Directors’ remuneration report 136 Prudential plc Annual Report 2019 prudentialplc.com G r o u p o v e r v e w i i S t r a t e g c r e p o r t G o v e r n a n c e D i r e c t o r s ’ r e m u n e r a t i o n r e p o r t i F n a n c a i Annual statement from the Chairman of the Remuneration Committee Our Executive Directors’ remuneration at a glance Annual report on remuneration New Directors’ remuneration policy Additional remuneration disclosures Page 138 142 144 174 192 This report has been prepared to comply with Schedule 8 of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, The Companies (Miscellaneous Reporting) Regulations 2018, The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019, as well as the Companies Act 2006 and other related regulations. The following sections were subject to audit: Table of 2019 and 2018 Executive Director total remuneration (the ‘single figure’) and related notes, salary information table in section entitled Remuneration in respect of performance in 2019, Pension entitlements, Long-term incentives awarded in 2019, Chairman and Non-executive Director remuneration in 2019, Statement of Directors’ shareholdings, Outstanding share options, Recruitment arrangements and Payments to past Directors and payments for loss of office. l s t a t e m e n t s E u r o p e a n E m b e d d e d V a u e ( E E V ) b a s i s r e s u l t s l A d d i t i o n a l i n f o r m a t i o n prudentialplc.com Prudential plc Annual Report 2019 137 DIRECTORS’ REMUNERATION REPORT Annual statement from the Chairman of the Remuneration Committee Anthony Nightingale CMG SBS JP Chairman of the Remuneration Committee Dear shareholder, I am pleased to present the Remuneration Committee’s report for the year to 31 December 2019. The Committee’s report is presented in the following sections: 1 2 3 An ‘at a glance’ summary of the Group’s remuneration arrangements on pages 142 and 143. This includes a summary of the key features of operation of the current Directors’ remuneration policy and outlines our proposed changes to the policy for 2020. The current policy was approved by shareholders at the 2017 AGM; Our Annual report on remuneration on pages 144 to 173 which describes how the Committee applied the Directors’ remuneration policy in 2019 and the decisions it has made in respect of 2020; Our new Directors’ remuneration policy on pages 174 to 191 which describes how we propose paying Directors from 14 May 2020. This will be subject to an ordinary resolution of shareholders at the 2020 AGM; and 4 Supplementary information on pages 192 to 195. By way of preface, I would like to share the context for the key decisions the Committee took during 2019, in particular, the decisions we took in connection with the demerger, how we rewarded performance achieved during the year, the remuneration arrangements for those stepping down from the Board and the decisions relating to remuneration arrangements in 2020 and the new Directors’ remuneration policy. In line with our approach to shareholder engagement and given the above, I corresponded with and met the majority of our major shareholders, as well as organisations that represent and advise shareholders during late 2019 and early 2020. I am pleased to say that we have had the benefit of substantive feedback from 41 per cent of our shareholder register and that the majority of shareholders and advisory bodies who provided input were content with our proposals and commended the manner in which we conducted the consultation process. On behalf of the Committee, I would like to thank the shareholders and advisory bodies for their engagement to date and look forward to continuing this open dialogue into the future. Further, I am delighted to welcome Amy Yip, who joined the Committee in September 2019. Demerger-related decisions The M&G plc business demerged from the Group with effect from 21 October 2019. As I described last year, the Committee established a set of principles to underpin decisions on remuneration relating to the demerger, including: — Executives should not be advantaged or disadvantaged by the demerger; the value of outstanding awards and their key terms (release dates, holding periods, malus and clawback provisions) should be unaffected; — Where performance conditions need to be revised, the new conditions should be no more or less stretching than those originally attached to the awards; and — Where the Committee has applied discretion, this will be disclosed clearly. These principles were the basis for the decisions taken by the Committee, including the treatment of outstanding share awards which was set out in the Shareholder Circular published on 25 September 2019 and voted upon and approved by shareholders at the October 2019 General Meeting. This treatment, together with adjustments made to the targets of in-flight Prudential Long Term Incentive Plan (PLTIP) awards as a result of the demerger, are detailed in ‘Remuneration decisions taken in relation to the demerger’ section of this report. Changes to the executive team The Company made a number of changes to the senior leadership team of the Group in preparation for the demerger. On 16 May 2019, John Foley, Chief Executive of M&GPrudential, Nic Nicandrou, Chief Executive of Prudential Corporation Asia, and Michael Falcon, Chairman and Chief Executive Officer of Jackson Holdings LLC stepped down as Executive Directors of Prudential plc. They did not receive any loss of office payment in respect of their service as Executive Directors. Details of remuneration earned in respect of their service on the Prudential plc Board is provided in this report. When John Foley left the Group on the demerger of M&G plc, his outstanding PLTIP and deferred bonus awards were exchanged for replacement awards over M&G plc shares of an equivalent value and subject to equivalent malus and clawback provisions, and performance conditions which the Remuneration Committee of M&G plc determined were no more or less onerous than those which originally applied. Mr Foley’s 2019 bonus will be assessed and determined by M&G plc Remuneration Committee and will be paid by M&G plc. In July 2019 Mark FitzPatrick, in addition to his role as Group Chief Financial Officer, became Chief Operating Officer while James Turner, Group Chief Risk Officer, became additionally responsible for the Group Compliance function. Their titles were changed to reflect these new duties. In August 2019, Mr Turner relocated to Hong Kong to support our dialogue with the Hong Kong Insurance Authority (Hong Kong IA), our Group-wide supervisor from the date of the demerger. The Company supported Mr Turner’s relocation and, in order to recognise the expansion of his role and his development since joining the Board, he received an uplift in salary of 9 per cent and an increased bonus opportunity from 160 per cent of base salary to 175 per cent from the date of his move. No changes were made to Mr Turner’s long-term incentive award level or to Mr FitzPatrick’s 2019 remuneration arrangements. 138 Prudential plc Annual Report 2019 prudentialplc.com Key Continuing Discontinued (M&G plc) Continuing Continuing operations after hedge modelling changes Hedge modelling changes Rewarding 2019 performance Prudential’s executive remuneration arrangements reward the achievement of Group, business, functional and personal targets, provided that this performance is delivered within the Company’s risk framework and appetites, and that the conduct expectations of Prudential, our regulators and other stakeholders are met. As set out in the ‘Strategic report’ section earlier in this Annual report, the Group delivered results which demonstrate operating earnings growth and the benefits of the diverse portfolio in Asia. These results have been achieved in parallel with the demerger of the M&G plc business. The table below illustrates achievement of KPIs: Performance measures Group performance ($m)4 2018-2019 growth5 2019 bonus achievement6 +20% Above target, approaching stretch target level. Adjusted operating profit1 Prudential’s primary measure of profitability and a key driver of shareholder value. Group free surplus generation2,3 A measure of the internal cash generation of our business units. 6,445 2,036 4,409 5,310 2018 2019 5,404 1,994 3,410 3,764 (903) 2,861 2018 2019 +10% before hedge modelling changes Business unit remittances7 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. 2,259 842 +3% 1,417 1,465 2018 2019 Adjusted operating profit accounted for 35 per cent of Group financial bonus targets. Above stretch target level. Group free surplus generation accounted for 30 per cent of Group financial bonus targets. Above target, approaching stretch target level. A cash flow measure was used to determine 20 per cent of the Group financial bonus targets. EEV new business profit A measure of the future profitability of the new business sold during the year and indicates the profitable growth of the Group. 5,177 470 4,707 4,405 2018 2019 -6% reflecting economic conditions, US product mix changes and Hong Kong protest disruption. PCA ex Hong Kong +29% Above target, approaching stretch target level. EEV new business profit accounted for 15 per cent of Group financial bonus targets. Notes 1 2 For insurance operations, operating free surplus generated represents amounts maturing from the in-force business during the period less investment in new business and In this report ’adjusted operating profit’ refers to adjusted IFRS operating profit based on longer-term investment returns and are as previously reported. 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. 3 Operating free surplus generated before US modelling changes. During 2019, as part of the implementation of the NAIC’s changes to the US statutory reserve and capital framework enhancements were made to the model used to determine the cost of hedging for US statutory reporting which have been incorporated into the EEV model, resulting in a fall in operating free surplus of $(903) million from a lower expected transfer to net worth. After allowing for this, operating free surplus generated is $2,861 million, down 16 per cent on a constant and actual exchange rate basis. 4 As reported basis. 5 Growth rates on continuing operations. 6 Executive Directors’ bonus awards have been assessed against targets that assumed M&G plc performance up to the date of demerger. Targets and the level of achievement are set out in the ‘Annual bonus outcomes for 2019’ section of the Annual report on remuneration. 7 Group cash flow includes BU remittances net of dividends and corporate costs. prudentialplc.com Prudential plc Annual Report 2019 139 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationANNUAL STATEMENT FROM THE CHAIRMAN OF THE REMUNERATION COMMITTEE CONTINUED 2019 Adjusted operating profit was 20 per cent higher than prior year on a constant exchange rate basis reflecting the performance outlined in the business performance review, which delivered a result approaching the Board approved stretch targets. Group EEV new business profit was 6 per cent lower than prior year on a constant exchange rate basis. This reflected the significant reduction in interest rates during the year and the challenging trading environment in Hong Kong in the second half of the year as a direct result of political unrest in the region. Excluding Hong Kong, Asia new business profit was 29 per cent above prior year and given the strong performance of NBP absent the Hong Kong protests, the Committee considered it appropriate to adjust the EEV new business profit target to reflect the reduction in Hong Kong sales driven by the protests, which was considered to be outside of management’s control. Allowing for this adjustment, Group EEV new business profit was between target and stretch target. Group free surplus generation was 10 per cent higher than 2018 on a constant exchange rate basis, excluding the impact of EEV methodology changes outlined in the CFO report (Operating Free Surplus Generation is 16 per cent lower than prior year including the impact of EEV methodology changes). This result was above the Board approved stretch target. All of our business units achieved target remittance levels, which were 3 per cent higher than 2018 for our continuing operations, enabling us to maintain significant cash stock at the centre, after dividends, corporate costs, demerger effects and investing in profitable opportunities within the business units. The business unit remittances contributed to Group cashflow, which approached the stretch target level. The Group achieved these results while maintaining appropriate levels of capital and while operating within the Group’s risk framework and appetites. The Committee believes that the bonuses it awarded to Executive Directors for 2019 (between 93 per cent and 96 per cent of executives’ maximum AIP opportunities) appropriately reflect this performance. Performance in 2019 has continued to deliver on the momentum achieved in recent years. The Group delivered total adjusted operating profits of $19,021 million in the 2017, 2018 and 2019 financial years. Based on this strong cumulative adjusted operating profit performance over the period and performance against our sustainability scorecard, the Committee determined that between 61.75 and 68.75 per cent of the Prudential Long Term Incentive Plan (PLTIP) awards made to Executive Directors in 2017 would vest (depending on the business unit). These awards will be released to participants from April 2020. The portion of the awards related to Prudential’s total shareholder return (TSR) lapsed as TSR performance was ranked below median of the peer group. The total 2019 remuneration or ‘single figure’ for the Group Chief Executive, Mike Wells, is 11.25 per cent lower than his total restated 2018 ‘single figure’, notwithstanding his exceptional leadership and personal performance. This chiefly reflects his housing support ending in November 2018 and the impact of the lower value of the 2017 PLTIP vesting compared to the 2016 PLTIP vesting due to lower share price growth over the performance period. Reviewing the Directors’ remuneration policy Ahead of the renewal of the Directors’ remuneration policy at the AGM in 2020, the Committee carefully considered and debated a range of potential remuneration models, taking into account the demerger of the M&G plc business from the Group, the views of our shareholders, the UK Corporate Governance Code and the broader regulatory and competitive environment. The Committee concluded that the current model continues to connect remuneration with the achievement of the Group’s ambitious goals to build long-term shareholder value by continuing to focus on achieving sustainable, profitable growth and retaining a resilient balance sheet, with a disciplined approach to active capital allocation. In addition, the Committee decided to retain the key features of the current remuneration model since it is appropriate for a growth company, is well understood and drives the right behaviour and outcomes. On this basis, the Committee decided to retain the current remuneration model while making a number of improvements to ensure that it continues to be aligned with the Group’s remuneration principles, business priorities and evolving stakeholder expectations. The proposed new Directors’ remuneration policy set out on pages 174 to 191 has been designed to: 1 Align reward with the strategic priorities and capital framework of the post-demerger business The Committee intends to align the Prudential Long Term Incentive Plan (PLTIP) performance conditions with the strategic priorities of the post-demerger business by introducing a new a return on equity performance measure, operating return on average shareholders’ funds, for the 2020 PLTIP awards, incentivising the efficient use of capital as well as shareholder returns. Using this metric alongside our established metrics of Total Shareholder Return (TSR) and a sustainability scorecard will ensure that the full value of long-term incentive awards is attained only where capital is effectively deployed in a way which creates shareholder returns superior to those delivered by peers while conduct and diversity expectations are met. The proportion of 2019 long-term incentive awards which will vest for threshold performance was reduced to 20 per cent (from 25 per cent for previous awards). This level of threshold vesting is formalised in the 2020 policy and will apply to all future awards. The proposed new Directors’ remuneration policy seeks to reintroduce a financial element to the bonus for the Group Chief Risk and Compliance Officer from 2020, effectively reverting to a similar approach used until 2015. Specifically, it is proposed that the 2020 bonus for this role is based on 40 per cent functional objectives, 40 per cent Group financial measures and 20 per cent personal measures. This is in line with the current draft of the Hong Kong IA’s guideline on the remuneration of key persons in control functions and reflects our view that it is important that this role and other control function staff continue to demonstrate long-term commercial sensitivity and are rewarded in a way which allows the Company to recruit the very best talent to these roles. 140 Prudential plc Annual Report 2019 prudentialplc.com In conclusion 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 2019 and of the Committee’s proposed new Directors’ remuneration policy. Anthony Nightingale, CMG SBS JP Chairman of the Remuneration Committee 10 March 2020 3 Foster alignment between the remuneration of executives and the wider workforce The Committee is aware that the greater alignment of reward arrangements of executives with those of the wider workforce is an area of attention for many investors, particularly in light of the expectations set out in the UK Corporate Governance Code. The Committee intends to reflect this focus in a number of ways, including those set out below. The Committee is mindful of the need for continued restraint in base salary increases. With effect from 1 January 2020, salary increases of 2 per cent were awarded for all Executive Directors. 2020 will be the eighth consecutive year in which the increases generally offered to executives have been below or close to the bottom of the salary increase budget ranges for the broader workforce. Subject to approval of the new Policy, it is proposed that Executive Directors recruited externally or internally from the date of the 2020 AGM will be offered pension benefits of 13 per cent of salary, aligned with the employer pension contribution available to the UK workforce. We also propose to reduce incumbent Executive Directors’ pension benefits from 25 per cent to 20 per cent of salary by May 2021. The Committee recognises that pension benefits are an increasingly important area of focus and believe that the proposal is an active step towards aligning executives with the wider workforce whilst recognising the existing contractual commitments in place. This is an area where market practice is evolving rapidly and one which the Committee will keep under close review. Following the Hong Kong IA assuming the role of our Group-wide supervisor, Prudential ceased to be subject to Solvency II capital requirements. It is therefore proposed that the Solvency II underpin under the AIP and the Solvency II capital metric within the PLTIP sustainability scorecard are replaced with measures aligned to the Hong Kong IA capital framework. 2 Strengthen the community of interest between executives and other shareholders The Committee has decided to build on the share ownership guidelines which apply to executives during their employment by introducing a formal, post-employment shareholding guideline. This guideline will require Executive Directors to hold their full in-employment share ownership guideline for a period of two years from the date of their retirement from the Board (or their actual shareholding from this date if lower). As described above, Mr FitzPatrick’s role expanded in July 2019 when he became Chief Operating Officer in addition to his role as Group Chief Financial Officer. In this capacity, he became responsible for a number of key Group functions including Legal, Government Affairs and Communications. In recognition of Mr FitzPatrick’s expanded role and responsibilities, together with the Board’s view of his strong performance, potential and criticality to the Group, the Committee propose increasing the value of his 2020 long-term incentive award to 300 per cent of base salary (from 250 per cent at present). The Committee chose to recognise the increased scope of Mr FitzPatrick’s role in this way to promote stewardship and long-term focus. It is imperative that incentive payments are based on performance which is well-founded and sustainable. The Committee currently has the scope to reduce, cancel or recover these payments and intends to build on these discretionary powers in the 2020 policy by formalising and extending the circumstances which might trigger the use of malus and clawback to include non-financial issues and personal conduct which falls short of the Company’s expectations. prudentialplc.com Prudential plc Annual Report 2019 141 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationOur Executive Directors’ remuneration at a glance What performance means for Executive Directors’ pay At Prudential, remuneration packages are designed to ensure a strong alignment between pay and performance. As you can see from the charts within the Annual statement from the Chairman of the Remuneration Committee, we are continuing to deliver profitable growth for our shareholders. This has been reflected in both the annual bonuses paid and the release of long-term incentive awards, as set out in the Annual report on remuneration. In particular, the long-term incentives awarded to Executive Directors in 2017 had stretching performance conditions attached to vesting and were denominated in shares or ADRs. The value of the performance-related elements of remuneration is added to the fixed packages provided to Executive Directors to calculate the 2019 ‘single figure’ of total remuneration. The total 2019 ‘single figure’ for the Group Chief Executive is 11.25 per cent less than the total 2018 ‘single figure’. This chiefly reflects his housing support ending in November 2018 and the impact of the lower value of the 2017 PLTIP vesting compared to the 2016 PLTIP vesting due to lower share price growth over the performance period. The values for the current Executive Directors are outlined in the table below: Executive Director Role Mark FitzPatrick James Turner2 Mike Wells Group Chief Financial Officer and Chief Operating Officer Group Chief Risk and Compliance Officer Group Chief Executive Fixed pay Performance related 2019 salary Pension and benefits 2019 bonus LTIP vesting 2019 single figure 2018 single figure1 £760,000 £339,000 £1,279,000 £1,082,000 £3,460,000 £2,261,000 £678,000 £1,149,000 £507,000 £513,000 £1,052,000 £2,197,000 £303,000 £2,860,000 £2,540,000 £6,719,000 £1,913,000 £7,571,000 Notes 1 Revised 2018 single figure, in line with the regulations, reflecting the actual value of 2018 LTIP releases and additional dividends paid as set out in the notes to the 2018 single figure table. 2 Mr Turner relocated to Hong Kong on 1 August 2019 and has since been paid in HK dollars. Exchange rate fluctuations will therefore impact the reported sterling value. Actual amounts paid and the rates of exchange used to convert into a single currency are set out in the Notes to the ‘single figure’ table in the Annual report of remuneration. Aligning 2020 pay to performance The Committee awarded salary increases to the Executive Directors for 2020 of 2 per cent, which was below the lower end of the range of salary increase budgets for the wider workforce. As discussed in the ‘Annual statement from the Chairman of the Remuneration Committee’ and in the ‘Statement of implementation in 2020’ sections, in the interests of recognising Mr FitzPatrick’s expanded role and responsibilities and to support the promotion of stewardship and long-term focus, the Committee intends to increase the value of 2020 long-term incentive award to be made to the Group Chief Financial Officer and Chief Operating Officer within the limit provided for by the current Directors’ remuneration policy. Remuneration packages for 2020, effective 1 January 2020, are set out in detail in the Annual report on remuneration and are summarised below: Executive Director Role Mark FitzPatrick James Turner2 Mike Wells Group Chief Financial Officer and Chief Operating Officer Group Chief Risk and Compliance Officer Group Chief Executive Annual Incentive Plan (AIP) 2020 salary Maximum bonus (% of salary) Bonus deferred (% of bonus) PLTIP award (% of salary)1 £776,000 HK$7,480,000 £1,172,000 175% 175% 200% 40% 40% 40% 300% 250% 400% Notes 1 The PLTIP award is subject to a three-year performance period and a holding period which ends on the fifth anniversary of the award. 2 James Turner relocated to Hong Kong on 1 August 2019 and has since been paid in HK dollars. 142 Prudential plc Annual Report 2019 prudentialplc.com Summary of proposed changes to the Directors’ remuneration policy Current key elements of remuneration 0 2 0 2 1 2 0 2 2 2 0 2 3 2 0 2 4 2 0 2 5 Key features of operation 2 of the current policy1 0 2 Outline of proposed changes for 2020 Fixed pay Salary and benefits Pension Cash bonus Deferred bonus Prudential Long Term Incentive Plan (PLTIP) Short-term variable pay One-year performance assessed on financial or functional objectives and personal objectives, set with reference to business plans approved by the Board. Awards are subject to the achievement of a Solvency II capital underpin Long-term variable pay Three-year performance assessed on a combination of: — Financial measures; and/or — Total Shareholder Return (TSR) relative to international insurance peers; and — Sustainability scorecard of capital, conduct and diversity measures. Share ownership guidelines Share ownership guidelines Performance period Holding period Salaries reviewed annually with increases generally aligned with those of the workforce. Benefits reflect individual circumstances and are competitive in the local market Entitled to receive pension contributions and/or a cash supplement up to 25% of salary. Executive Directors based in Hong Kong receive this in addition to contributions into the Hong Kong Mandatory Provident Fund No change to salary and benefits policy Offer new, externally recruited and promoted Executive Directors pension benefits aligned with the UK workforce at 13% of salary and move incumbent Executive Directors towards a contribution rate of 20% of salary by 14 May 2021 No change to Hong Kong Mandatory Provident Fund contributions for Executive Directors based in Hong Kong The maximum opportunity is up to 200% of salary No change to opportunity levels2, payment scale, level of deferral or malus and clawback 40% of bonus is deferred into shares for three years Award is subject to malus and clawback provisions The measures for the Group Chief Risk and Compliance Officer are based on functional and personal targets only Solvency II underpin replaced with a Pillar I capital underpin aligned with the Hong Kong IA3 capital framework Reintroduce financial measures for the Group Chief Risk and Compliance Officer in line with current draft Hong Kong IA guideline and weight the 2020 bonus measures as follows: 40% Group financial measures, 40% functional objectives and 20% personal measures Formalise and extend the circumstances which might trigger the use of malus and clawback to include non-financial issues and personal conduct which falls short of the Company’s expectations Maximum award under the Plan is 550% of salary although regular awards are below this level Increase the regular award level for Group Chief Financial Officer and Chief Operating Officer to 300% of salary (from 250% of salary) No change to award levels for other Executive Directors Adopt a Return on Equity (RoE) measure within the PLTIP for all Executive Directors in addition to the relative TSR and the sustainability scorecard measures. In the scorecard, replace Solvency II capital with a measure aligned with the Hong Kong IA capital framework Weight of 2020 PLTIP measures as follows: 50% TSR, 30% RoE and 20% sustainability scorecard No other changes to the sustainability scorecard metrics and the 20% vesting for threshold performance to be formalised Formalise and extend the circumstances which might trigger the use of malus and clawback to include non-financial issues and personal conduct which falls short of the Company’s expectations Introduce a requirement that Executive Directors leaving the Board hold the lower of their actual shareholding at their retirement date and their in-employment share ownership guideline for a period of two years, subject to Remuneration Committee discretion Awards are subject to a three-year vesting period from date of grant and a further two-year holding period from the end of the vesting period Awards are subject to malus and clawback provisions 2019 awards have relative TSR and sustainability scorecard targets only The proportion of 2019 awards which will vest for threshold performance was reduced to 20% (from 25% for previous awards) Significant in-employment share ownership guidelines for all Executive Directors as follows: — 400% of salary for the Group Chief Executive — 250% of salary for other Executive Directors Executives have five years from the later of the date of their appointment, or the date of an increase these guidelines, to build this level of ownership Notes 1 2 The Group Chief Risk and Compliance Officer’s maximum bonus opportunity was increased during 2019 to recognise his expanded role and development since joining ‘Policy’ refers to the 2017 Directors’ remuneration policy. the Board. ‘Hong Kong IA’ refers to the Hong Kong Insurance Authority, the Company’s Group wide supervisor following the demerger. 3 prudentialplc.com Prudential plc Annual Report 2019 143 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationAnnual report on remuneration The Board has established Audit, Remuneration, Risk and Nomination & Governance Committees as principal standing committees of the Board. These committees form a key element of the Group governance framework. The operation of the Remuneration Committee Members Anthony Nightingale (Chair of the Committee) Kai Nargolwala Philip Remnant Thomas Watjen Fields Wicker-Miurin Amy Yip (member since 2 September 2019) Individual Directors’ attendance at meetings throughout 2019 is set out in the ‘Governance’ section. Role and responsibility The role and responsibilities of the Committee are set out in its terms of reference, which are reviewed by the Committee and approved by the Board on an annual basis, and which can be found on the Company’s website. The Committee’s role is to assist the Board in meeting its responsibilities regarding the determination, implementation and operation of the overall remuneration policy for the Group, including the remuneration of the Chairman, Executive Directors, Group Executive Committee and Company Secretary, as well as overseeing the remuneration arrangements of other staff within its purview. The principal responsibilities of the Committee during 2019 were: — Determining and recommending to the Board for approval, the framework and policy for the remuneration of the Chairman, Executive Directors and other members of the Group Executive Committee; — Approving the design of performance-related pay schemes operated for the Executive Directors and other members of the Group Executive Committee, and determining the targets and individual payouts under such schemes; — Reviewing the design and development of all share plans requiring approval by the Board and/or the Company’s shareholders; — Approving the share ownership guidelines for the Chairman and Executive Directors and other members of the Group Executive Committee, and monitoring compliance; — Reviewing and approving individual packages for the Executive Directors and other members of the Group Executive Committee, and the fees of the Chairman and the Non-executive Directors of the Group’s material subsidiaries; — Reviewing and approving packages to be offered to newly recruited Executive Directors and other members of the Group Executive Committee; — Reviewing and approving the structure and quantum of any severance package for Executive Directors and other members of the Group Executive Committee to ensure they are fair and do not reward failure; — Ensuring the process for establishing remuneration policy is transparent and consistent with the Group’s risk framework and appetites, encouraging strong risk management and solvency management practices; — Reviewing the workforce remuneration practices and related policies across the Group when setting the remuneration policy for Executive Directors, as well as the alignment of incentives and awards with culture; — Monitoring the remuneration and risk management implications of remuneration of senior executives across the Group, other selected roles and those with an opportunity to earn in excess of £1 million in a particular year; and — Overseeing the implementation of the Group remuneration policy for those roles within scope of the specific arrangements referred to in Article 275 of Solvency II. 144 Prudential plc Annual Report 2019 prudentialplc.com In 2019, the Committee met eight times. Key activities at each meeting are shown in the table below: Meeting Key activities January 2019 Consider shareholder feedback received from consultation. Early March 2019 Approve the 2018 Directors’ remuneration report; consider 2018 bonus awards for Executive Directors; consider vesting of long-term incentive awards with a performance period ending on 31 December 2018; approve 2019 long-term incentive awards and performance measures; note an update on regulation affecting remuneration; note an update on the Board’s review of the Committee’s effectiveness; and review the appointment of the Committee’s independent adviser. Mid-March 2019 Confirm 2018 annual bonuses and the vesting of long-term incentive awards with a performance period ending on 31 December 2018, in light of audited financial results; approve the revised total shareholder return (TSR) peer group for the 2019 PLTIP awards; and approve Executive Directors’ personal objectives for the 2019 annual incentive plan. May 2019 June 2019 July 2019 September 2019 December 2019 Approve the remuneration arrangements for those executives retiring from the Board; approve amendments to share plan rules and the remuneration terms of the Group Chief Risk and Compliance Officer’s relocation package; review the remuneration of senior executives across the Group, employees with a remuneration opportunity over £1 million per annum and employees within the scope of the Solvency II remuneration rules; note the remuneration sections of the draft Shareholder Circular and Demerger Agreement; and review the executive remuneration model and its appropriateness for the ongoing international business. Review proposals on Executive Directors’ remuneration arrangements; note an update on regulation affecting remuneration; review progress towards share ownership guidelines by the Chairman, Executive Directors and other Group Executive Committee members; and approve the expense approval process for the Group Chief Executive and Chairman; and approve the Chairman’s fees. Review an initial draft of the 2020 Directors’ remuneration policy; approve the Solvency II Remuneration Policy Statement for the 2018 performance year; and discuss the methodology for converting the dividend-in-specie (the ‘demerger dividend’) into additional Prudential plc shares for Prudential plc share plan participants. Approve the draft 2020 Directors’ remuneration policy and review proposed 2020 remuneration arrangements for Executive Directors ahead of consultation with shareholders; note an update on regulation affecting remuneration; approve minor amendments to the share plan rules and adjustments to outstanding Options; review the indicative incentive outcomes for Group Executive Committee members transferring to M&G plc; and review the workforce remuneration dashboard. Review level of participation in the Company’s all-employee share plans and dilution levels resulting from the Company’s share plans; approve the Group Executive Committee members’ 2020 salaries and incentive opportunities; consider the annual bonus measures and targets to be used in 2020; consider shareholder feedback; review an initial draft of the 2019 Annual report on remuneration and the 2020 Directors’ remuneration policy; approve the Committee’s 2020 Schedule of Business; approve the fees for independent non-executive directors of Material Subsidiaries; review the Group’s remuneration arrangements and approve amendments to the 2020 Group remuneration policy in light of the draft Hong Kong IA Guideline on Group-Wide Corporate Governance; approve the Committee’s terms of reference for recommendation to the Board; and note an update on regulation affecting remuneration. Additionally, a number of resolutions in writing were approved by the Committee between these meetings relating to the remuneration sections of the Circular and Demerger Agreement, the draft 2020 Directors’ remuneration policy, and matters relating to the demerger. The Chairman and the Group Chief Executive attend meetings by invitation. The Committee also had the benefit of advice from: — Group Chief Risk and Compliance Officer; — Group Chief Financial Officer and Chief Operating Officer; — Group Human Resources Director; and — Director of Group Reward and Employee Relations. Individuals are not present when their own remuneration is discussed and the Committee is always careful to manage potential conflicts of interest when receiving views from Executive Directors or senior management about executive remuneration proposals. prudentialplc.com Prudential plc Annual Report 2019 145 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationANNUAL REPORT ON REMUNERATION CONTINUED In line with our approach to shareholder engagement and given the additional context of the demerger and the review of the Directors’ remuneration policy, the Chairman of the Committee held meetings with shareholders and the principle advisory bodies (the Investment Association, Institutional Shareholder Services and Glass Lewis) to discuss decisions taken in respect of the demerger; the principle changes proposed as part of the renewal of the Directors’ remuneration policy; and Executive Directors’ remuneration arrangements for 2020. We have had the benefit of substantive feedback from 41 per cent of our shareholder register and are pleased that the majority of shareholders and advisory bodies who provided input were content with our proposals and commended the manner in which we conducted the consultation process. During 2019, Deloitte LLP was the independent adviser to the Committee. Deloitte was appointed by the Committee in 2011 following a competitive tender process. As part of this process, the Committee considered the services that Deloitte provided to Prudential and its competitors, as well as other potential conflicts of interest. Deloitte is a member of the Remuneration Consultants’ Group and voluntarily operates under their code of conduct when providing advice on executive remuneration in the UK. Deloitte regularly meets with the Chair of the Committee without management present. The Committee is comfortable that the Deloitte engagement partner and team providing remuneration advice to the Committee do not have connections with Prudential that may impair their independence and objectivity. The total fees paid to Deloitte for the provision of independent advice to the Committee in 2019 were £73,250 charged on a time and materials basis. During 2019, Deloitte gave Prudential management advice on remuneration, including advice on the new Directors’ remuneration policy, as well as providing guidance on the demerger, the deployment of Workday, capital optimisation, digital and technology, taxation, internal audit, real estate, global mobility and other financial, risk and regulatory matters. Remuneration advice is provided by an entirely separate team within Deloitte. As set out in the table above, the Committee reviewed Deloitte’s appointment in March 2019 and considered Deloitte to be independent. The Committee will conduct a competitive tender process for this appointment during 2020. In addition, management received external advice and data from a number of other providers. This included market data and legal counsel. This advice, and these services, are not considered to be material. The effectiveness of the Committee was reviewed as part of the annual Board evaluation, which confirmed that the Committee continued to operate effectively during the year and no major areas requiring improvement or action points were highlighted. During the year, the Company has acted in a manner that is consistent with the appropriate provisions of the UK Corporate Governance Code regarding Directors’ remuneration. Remuneration decisions taken in relation to the demerger The M&G plc business demerged from the Group with effect from 21 October 2019. As disclosed last year, the Committee established a set of principles to underpin decisions on remuneration relating to the demerger, including: — Executives should not be advantaged or disadvantaged by the demerger; the value of outstanding awards and their key terms (release dates, holding periods, malus and clawback provisions) should be unaffected; — Where performance conditions need to be revised, the new conditions should be no more or less stretching than those originally attached to the awards; and — Where the Committee has applied discretion, this will be disclosed clearly. These principles formed the basis for the treatment of outstanding share awards which was set out in the Shareholder Circular published on 25 September 2019 and approved by shareholders at the October 2019 General Meeting. In summary, employees of Prudential plc (including the Executive Directors of the Company) have: — Received the demerger dividend through which the demerger was effected, on their outstanding deferred bonus and long-term incentive awards in the form of additional Prudential plc shares. These will be released on the same timetable and to the same extent as their original share awards. The Committee decided that it was appropriate that, wherever possible, executives should be rewarded in the shares of the business which they continue to lead; — Received the demerger dividend on the shares they hold outright through the all-employee UK SIP plan in the form of M&G plc shares, in the same way as other shareholders; and — Had no adjustment made to the Options they hold under the all-employee UK sharesave plan, in line with the rules laid out by the UK tax authorities. 146 Prudential plc Annual Report 2019 prudentialplc.com Adjusting in-flight PLTIP performance conditions The Committee decided that the financial targets for the 2017 and in-flight 2018 PLTIP awards should be adjusted to exclude the M&G plc components of the Plan on which the targets were based, with effect from the date of the demerger, in order to appropriately account for the period they are not part of the Group. The revised targets will be disclosed in the remuneration report for the year in which the awards vest. The 2019 PLTIP award targets exclude M&G plc performance from the point of demerger. As set out in the announcement of Prudential’s 2019 half-year results, post-demerger, the Hong Kong IA assumed the role of the Group-wide supervisor for Prudential plc from the PRA. Prudential therefore ceased to be subject to Solvency II capital requirements and will no longer calculate or disclose a Solvency II position after 30 June 2019. The Group will ultimately be subject to the Group-wide Supervisory framework, which is currently under development by the Hong Kong IA. In the meantime, Prudential will apply and report the Hong Kong IA’s local capital summation method (LCSM), which was calculated and reported for the first time at Half Year 2019. LCSM was not calculated in previous Plans and therefore is not available to replace the Solvency II operating capital generation. As an alternative, operating free surplus generation (OFSG) will replace Solvency II operating capital generation for in-flight awards. While there are methodological differences between those two measures, OFSG is the closest proxy to LCSM that is available in the Board approved 2018 – 2020 and 2019 – 2021 Plans and OFSG and LCSM are both prepared using the same underlying local statutory capital positions. Therefore the Committee agreed the Solvency II metric in the sustainability scorecard for in-flight PLTIP awards should be retained for the period to 30 June 2019 and then, for the remainder of each performance period, be replaced with the OFSG measure. Performance for these in-flight PLTIP awards will be assessed using a weighted average between Solvency II and OFSG achievement to reflect the portion of the performance period for which each was in place. No changes have been made to the TSR peer groups for outstanding awards held by Prudential plc staff. The TSR peer group for the 2019 PLTIP awards was developed in anticipation of the demerger to reflect the post-demerged business, with extensive input from shareholders. Demerger share calculation The demerger of M&G plc from Prudential plc was accomplished through a dividend in specie (the ‘demerger dividend’); with shareholders receiving one share in M&G plc for every share they hold in Prudential plc at the record time and date. The Committee approved the approach to converting the demerger dividend into additional Prudential plc shares and ADRs for those with outstanding awards at the date of the demerger. Prudential plc employees who held awards over Prudential shares or ADRs received the value of the demerger dividend in the form of additional Prudential plc shares or ADRs respectively. These additional shares/ADRs are managed in the same way as other dividend equivalents, that is they will vest on the same timetable and to the same extent as the original award. The Committee considered a number of approaches for converting the demerger dividend into additional Prudential plc shares/ ADRs. It decided to determine the number of additional Prudential plc shares/ADRs to be awarded as a dividend by dividing the average value of M&G plc shares during the five trading days immediately after the demerger by the Prudential plc share price/ADR price over a five-day period starting on the date on which the Prudential plc share and ADR prices reflected the removal of the M&G business. For share plan participants with ADR denominated awards, the sterling to US dollar conversion was based on an exchange rate averaged over five trading days immediately following the demerger. TSR calculation The Committee determined that the calculation of TSR for in-flight PLTIP awards should be adjusted to reflect the demerger of M&G plc. This involved the application of an adjustment factor calculated in line with standard methodologies. No changes have been made to the TSR peer groups for outstanding awards held by Prudential plc staff. prudentialplc.com Prudential plc Annual Report 2019 147 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationANNUAL REPORT ON REMUNERATION CONTINUED Table of 2019 Executive Director total remuneration (the ‘single figure’) £000s Michael Falcon1,2,3 Mark FitzPatrick John Foley2,4 Nic Nicandrou2,3,5 James Turner3,6 Mike Wells Total 2019 taxable benefits* 2019 total bonus† 2019 LTIP releases‡ 2019 pension benefits§ 2019 Other payments¶ Total 2019 remuneration the ‘single figure’^ Total 2019 remuneration the ‘single figure’ in USD ($000)# 126 149 114 141 338 226 1,227 1,279 – 707 1,052 2,197 – 1,082 – 931 303 2,860 59 190 75 103 169 287 883 4,950 – – – – – 4,950 6,599 3,460 489 2,293 2,540 6,719 8,424 4,417 624 2,927 3,242 8,577 22,100 28,211 3,535 1,094 6,462 5,176 2019 salary 237 760 300 411 678 1,149 * Benefits include (where provided) the cost of providing the use of a car and driver, medical insurance, security arrangements, relocation/expatriate benefits and shares awarded due to participation in the Share Incentive Plan (SIP). † The total value of the bonus, comprising both the 60 per cent delivered in cash and 40 per cent bonus deferred into Prudential plc shares or ADRs for three years. The deferred part of the bonus is subject to malus and clawback in accordance with the malus and clawback policies but no further conditions. ‡ In line with the regulations, the estimated value of the 2019 PLTIP releases for all Executive Directors excluding John Foley has been calculated based on the average share/ADR price over the last three months of 2019 (£13.85/US$36.37) and includes the accumulated dividends delivered in the form of shares/ADRs. The Committee’s approach to determining the level of vesting for this award is set out in the ‘Remuneration in respect of performance periods ending in 2019’ section. The number of Prudential plc shares/ADRs under award have been adjusted in line with the approach set out in the section on ‘Remuneration decisions taken in relation to the demerger’. The actual value of vesting PLTIP awards, based on the share price on the date awards are released, will be shown in the 2020 report. In line with the requirements under the UK Companies (Miscellaneous Reporting) Regulations 2018, it is estimated that 6.2 per cent of the value of the 2019 LTIP releases is attributable to share price growth over the vesting period as awards were granted using a share/ADR price of £16.75/US$42.12 for all Executive Directors other than Mark FitzPatrick and £18.005 for Mark FitzPatrick in 2017. The Committee concluded that no discretion will be applied in determining the remuneration resulting from the 2019 LTIP releases as a result of share price appreciation. § 2019 pension benefits include cash supplements for pension purposes and contributions into defined contribution schemes as outlined on page 151. ¶ The value of Mr Falcon’s buy-out award has been included in its entirety as it was granted without performance conditions during his period of Board service. The award vests in line with the original vesting schedule with the final tranche vesting 30 days commencing on the date of release of Prudential plc’s results for 2020. ^ Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded figures. Total remuneration is calculated using the methodology prescribed by Schedule 8 of Statutory Instrument 2013 No. 1981 - The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. # Total 2019 remuneration has been converted to US dollars using the exchange rate of 1 GBP to USD 1.2765. Notes 1 Michael Falcon was appointed to the Board on 7 January 2019 as Chairman and Chief Executive Officer, Jackson Holdings LLC. 2 Michael Falcon, Nic Nicandrou and John Foley stepped down from the Board on 16 May 2019. The remuneration above was paid in respect of their service as Executive Directors. While salary and certain monthly paid benefits reflect what was actually delivered during the period, other benefits, bonus, LTIP releases and pension benefits are pro-rata for the period. The 2019 LTIP release for Mr Nic Nicandrou has been pro-rated for 28.5 months of the LTIP’s 36 month performance period to reflect his time as an Executive Director during the LTIP’s performance period. 3 Michael Falcon, Nic Nicandrou and James Turner are paid in their local currency and exchange rate fluctuations will therefore impact the reported sterling value. 4 John Foley stepped down from the Board on 16 May 2019. He subsequently left the Company on the demerger of M&G plc from Prudential plc on 21 October 2019. As an Executive Director of Prudential plc during 2019 Mr Foley was eligible to receive a 2019 bonus award of up to 180% of salary. Since transferring to M&G plc it was agreed with M&G plc that his 2019 bonus will be assessed and determined by the M&G plc Remuneration Committee and will be paid by M&G plc. No 2019 bonus award has been paid to Mr Foley by Prudential plc. Mr Foley’s 2017-2019 PLTIP award has been exchanged for an equivalent award over M&G plc shares. Under the terms of the Demerger Agreement this replacement award should be of an equivalent value; with the same release schedule; subject to equivalent malus and clawback provisions and subject to performance conditions which are relevant to M&G plc and which are no more or less onerous than those which originally applied. The amount of any bonus payment (including any deferred component) to John Foley in respect of 2019 (including that awarded for performance and service during the pre-demerger period) and the vesting of Mr Foley’s replacement 2017-2019 long-term incentive award are due to be disclosed by M&G plc and described in the M&G plc Directors’ remuneration report as set out in the M&G plc 2019 Annual Report. These details were not known by Prudential plc prior to the finalisation of this report. 5 To facilitate Nic Nicandrou’s relocation to Hong Kong, benefits include £95,000 to cover accommodation. 6 James Turner relocated to Hong Kong on 1 August 2019 and since has been paid in HK dollars; benefits include £160,000 to cover accommodation. 148 Prudential plc Annual Report 2019 prudentialplc.com Table of 2018 Executive Director total remuneration (the ‘single figure’) 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 – 1,571 1,489 – 2,983 360 3,623 186 195 258 62 217 130 282 2,261 3,856 4,858 413 9,072 1,913 7,571 Total 2018 remuneration the ‘single figure’ in USD ($000)^ 3,019 5,149 6,486 551 12,113 2,554 10,109 5,312 1,296 11,980 7,189 4,791 10,026 1,330 29,944 39,981 £000s Mark FitzPatrick John Foley Nic Nicandrou1,6 Anne Richards2 Barry Stowe3,6 James Turner4 Mike Wells5 Total * Benefits include (where provided) the cost of providing the use of a car and driver, medical insurance, security arrangements and relocation/expatriate benefits. † The deferred part of the bonus is subject to malus and clawback in accordance with the malus and clawback policies, but no further conditions. ‡ In line with the regulations, the estimated value of 2018 LTIP releases has been recalculated based on the actual share/ADR price on the date awards were released, being £15.61 for the April release. The restated value of those awards released in June also reflects dividends paid on those awards in June. In line with the requirements under the UK Companies (Miscellaneous Reporting) Regulations 2018,16.8 per cent of the value of the 2018 LTIP releases is attributable to share price growth over the vesting period as awards were granted using a share/ADR price of £12.99/US$37.29 in 2016. The Committee concluded that no discretion will be applied in determining the remuneration resulting from the 2018 LTIP releases as a result of share price appreciation. § 2018 pension benefits include cash supplements for pension purposes and contributions into Defined Contribution (DC) schemes. ¶ Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded figures. Total remuneration is calculated using the methodology prescribed by Schedule 8 of Statutory Instrument 2013 No. 1981 - The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. ^ Total 2018 remuneration has been converted to US dollars using the exchange rate of 1 GBP to USD 1.3352. Notes 1 To facilitate Nic Nicandrou’s relocation to Hong Kong, Nic’s benefits include £267,000 to cover accommodation. 2 Anne Richards stepped down from the Board on 10 August 2018. The remuneration above was paid in respect of her service as an Executive Director. 3 Barry Stowe retired from the Board on 31 December 2018. 4 James Turner was appointed to the Board on 1 March 2018. 5 To facilitate his appointment as Group Chief Executive and move to the UK in 2015, Mike Wells’s benefits include £311,000 to cover mortgage interest, which ceased effective 30 November 2018. 6 Barry Stowe and Nic Nicandrou are paid in their local currency and exchange rate fluctuations will therefore impact the reported sterling value. prudentialplc.com Prudential plc Annual Report 2019 149 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationANNUAL REPORT ON REMUNERATION CONTINUED Remuneration in respect of performance in 2019 Base salary Executive Directors’ salaries were reviewed in 2018 with changes effective from 1 January 2019. When the Committee took these decisions it considered: — The salary increase budgets for other employees, which vary across our business units, reflecting local market conditions; — The performance and experience of each Executive Director; — The relative size of each Executive Director’s role; and — The performance of the Group. As reported last year, after careful consideration by the Committee, all Executive Directors received a salary increase of 2 per cent. The 2019 salary increase budgets for other employees across our business units were between 2 per cent and 5.5 per cent. To provide context for the market review, information was also drawn from the following market reference points: Executive Role Mark FitzPatrick Group Chief Financial Officer and Chief Operating Officer Michael Falcon1,2 Chairman and CEO, Jackson Holdings John Foley2 Chief Executive, M&GPrudential Nic Nicandrou2 Chief Executive, Prudential Corporation Asia James Turner3 Group Chief Risk and Compliance Officer Mike Wells Group Chief Executive Benchmark(s) used to assess remuneration — FTSE 40 — International insurance companies — Willis Towers Watson US Financial Services Survey — LOMA US Insurance Survey — FTSE 40 — International insurance companies — Willis Towers Watson Asian Insurance Survey — FTSE 40 — FTSE 50 insurers — FTSE 40 — International insurance companies Notes 1 Michael Falcon was appointed to the Board on 7 January 2019 as Chairman and CEO, Jackson Holdings LLC. His salary was reviewed on appointment. 2 Michael Falcon, Nic Nicandrou and John Foley stepped down from the Board on 16 May 2019. 3 James Turner relocated to Hong Kong on 1 August 2019. His remuneration was reviewed in light of his relocation. In July 2019, the Group Chief Risk Officer became additionally responsible for the Group Compliance function and in August 2019, Mr Turner relocated to Hong Kong to support our dialogue with the Hong Kong IA. The Company supported Mr Turner’s relocation and, in order to recognise the expansion of his role and his development since joining the Board, the Committee determined an uplift in base salary of 9 per cent and an increased maximum bonus incentive opportunity from 160 per cent to 175 per cent of base salary were appropriate. No other changes were made during the year to Executive Directors’ maximum opportunities under either the annual incentive or the long-term incentive plans. As a result, Executive Directors received the following salary increases: Executive Director Michael Falcon1 Mark FitzPatrick John Foley1 Nic Nicandrou1 James Turner2 Mike Wells 2018 salary 2019 salary N/A £745,000 £781,000 $800,000 £760,000 £797,000 HK$10,710,000 HK$10,930,000 £625,000 HK$7,330,000 £1,149,000 £1,126,000 Notes 1 Michael Falcon, John Foley and Nic Nicandrou stepped down from the Board on 16 May 2019. The annualised 2019 salaries above were paid in respect of their service as Executive Directors and pro-rated for the portion of the year for which they were Executive Directors. 2 James Turner was appointed to the Board on 1 March 2018. The 2018 annualised salary above was paid in respect of his service as Group Chief Risk Officer. Mr Turner’s salary as at 1 January 2019 was £638,000. He relocated to Hong Kong on 1 August 2019 and his new annualised 2019 salary was paid in Hong Kong dollars. This was an annual base salary of HK$7,330,000. 150 Prudential plc Annual Report 2019 prudentialplc.com Pension benefit entitlements Pension benefit arrangements in 2019 are set out in the table below. The proposed arrangements for 2020 are described in the ‘Statement of implementation in 2020’ and in the ‘New Directors’ remuneration policy’ sections. Executive Director 2019 pension benefit Pension supplement of 25 per cent of salary, part of which is paid as a contribution to an approved US retirement plan. Pension supplement in lieu of pension of 25 per cent of salary and a HK$18,000 employer payment to the Hong Kong Mandatory Provident Fund. Life assurance provision Two times salary Eight times salary Michael Falcon Nic Nicandrou James Turner For the period 1 January 2019 to 31 July 2019: pension contribution to defined contribution plan and/or pension supplement in lieu of pension of 25 per cent of salary. For the period 1 January 2019 to 31 July 2019: up to four times salary plus a dependants’ pension For the period 1 August 2019 to 31 December 2019: pension supplement in lieu of pension of 25 per cent of salary and a HK$18,000 employer payment to the Hong Kong Mandatory Provident Fund. For the period 1 August 2019 to 31 December 2019: eight times salary UK-based executives Pension contribution to defined contribution plan and/or pension supplement in lieu of pension of 25 per cent of salary. Up to four times salary plus a dependants’ pension John Foley previously participated in a non-contributory defined benefit scheme that was open at the time he joined the Company. The scheme provided an accrual of 1/60th of final pensionable earnings for each year of pensionable service. John received pension payments of £16,061 per annum which increased to £16,462 per annum from 1 April 2019, in line with the Consumer Prices Index. The pension will continue to be subject to statutory increases in line with the Consumer Prices Index. Mr Foley left the Company on the demerger of M&G plc from Prudential plc on 21 October 2019. Annual bonus outcomes for 2019 Target setting For the financial AIP metrics which comprise 80 per cent of the bonus opportunity for all Executive Directors apart from the Group Chief Risk and Compliance Officer, the performance ranges are set by the Committee prior to, or at the beginning of, the performance period. These ranges are based on the annual business plans approved by the Board and reflect the ambitions of the Group and business units, in the context of anticipated market conditions. The financial element of Executive Directors’ 2019 bonuses was determined by the achievement of four Group measures, namely adjusted operating profit, operating free surplus generation, EEV new business profit and cash flow, which are aligned to the Group’s growth and cash generation focus. The financial element of 2019 bonus award for the Chief Executive, Prudential Corporation Asia is similarly determined by business unit measures in addition to Group measures. The targets set assumed 10 months of M&G plc performance up to the date of demerger. Personal objectives comprise 20 per cent of the bonus opportunity for all Executive Directors apart from the Group Chief Risk and Compliance Officer, for whom this accounts for 50 per cent of the total bonus opportunity. These objectives are established at the start of the year and reflect the Company’s Strategic Priorities set by the Board. Functional objectives account for the remaining 50 per cent of the Group Chief Risk and Compliance Officer’s bonus opportunity. These are based on the Group Risk Plan and are developed with input from the Chairman of the Group Risk Committee. AIP payments are subject to meeting minimum capital thresholds which are aligned to the Group and business unit risk framework and appetites (as adjusted for any Group Risk Committee and/or business unit risk committees approved counter-cyclical buffers). The Committee seeks advice from the Group Risk Committee on risk management considerations to inform decisions about remuneration architecture and performance measures to ensure that risk management, culture and conduct are appropriately reflected in the design and operation of Executive Directors’ remuneration. prudentialplc.com Prudential plc Annual Report 2019 151 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information ANNUAL REPORT ON REMUNERATION CONTINUED Performance assessment The Committee determines the overall value of the bonus, taking account of the inputs described above and any other factors which it considers relevant. The table below illustrates the weighting of performance measures for 2019 and the level of achievement under the AIP: Executive Director Michael Falcon2,3 Mark FitzPatrick Nic Nicandrou2 James Turner4 Mike Wells 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 2019 AIP outcome1,5 (% of total bonus opportunity) 80% 80% 20% – 80% – – 60% – – 20% 20% 20% 100% 20% 96% 96% 96% N/A 96% 91% 95% 97% 93% 92% 95% 96% 97% 93% 96% Notes 1 All bonus awards are subject to 40 per cent deferral for three years and the deferred bonus will be paid in Prudential plc shares or ADRs. 2 Michael Falcon and Nic Nicandrou stepped down from the Board on 16 May 2019. The bonus awards illustrated in the table above are in relation to their Board service only. 3 Michael Falcon is also eligible to receive 10 per cent of the Jackson bonus pool for 2019. 4 James Turner’s maximum bonus opportunity increased from 160 per cent of salary to 175 per cent of salary on 1 August 2019. 5 John Foley stepped down from the Board on 16 May 2019. He subsequently left the Company on the demerger of M&G plc from Prudential plc on 21 October 2019. As an Executive Director of Prudential plc during 2019, Mr Foley was eligible to receive a 2019 bonus award of up to 180 per cent of salary. Since transferring to M&G plc it was agreed with M&G plc that his 2019 bonus will be assessed and determined by the M&G plc Remuneration Committee and will be paid by M&G plc. No 2019 bonus award has been paid to Mr Foley by Prudential plc. Financial performance The Committee reviewed performance against the performance ranges at its meeting in February 2020. Group adjusted operating profit was approaching the stretch targets. Group free surplus generation exceeded the stretching targets established by the Board. All of our business units achieved target remittance levels, which were 3 per cent higher than 2018 for our continuing operations, enabling us to maintain significant cash stock at the centre, after dividends, corporate costs, demerger effects and investing in profitable opportunities within the business units. The business unit remittances contributed to Group cashflow, which approached the stretch target level. Group EEV new business profit was 6 per cent lower than prior year on a constant exchange rate basis. This reflected the significant reduction in interest rates during the year and the challenging trading environment in Hong Kong in the second half of the year as a direct result of political unrest in the region. Excluding Hong Kong, Asia new business profit was 29 per cent above prior year and given the strong performance of NBP absent the Hong Kong protests, the Committee considered it appropriate to adjust the EEV new business profit target to reflect the reduction in Hong Kong sales driven by the protests, which was considered to be outside of management’s control. Allowing for this adjustment, Group EEV new business profit was between target and stretch target. The Committee considered a report from the Group Chief Risk and Compliance Officer which had been approved by the Group Risk Committee. This report confirmed that the 2019 results were achieved within the Group’s and business units’ risk framework and appetite. The Group Chief Risk and Compliance Officer also considered the effectiveness of risk management and internal controls, and specific actions taken to mitigate risks, particularly where these may be at the expense of profits or sales. The report also confirmed that the Group met minimum capital thresholds which were aligned to the Group and business unit risk framework and appetites. The Committee took into account this advice when determining AIP outcomes for Executive Directors. The level of performance required for threshold, plan and maximum payment against the Group’s 2019 AIP financial measures and the results achieved are set out below: 2019 AIP measure Group adjusted operating profit Group operating free surplus generated Group cash flow Group EEV new business profit Weighting Threshold ($m) Target ($m) Stretch target ($m) Achievement ($m) 35% 30% 20% 15% 5,491 4,269 (375) 4,388 5,936 4,493 (118) 4,619 6,381 4,718 53 4,850 6,360 4,794 (7) 4,713 The Committee had regard to the achievement against the performance measures and the Group Chief Risk and Compliance Officer’s report and decided to apply a discretionary adjustment to the arithmetic outcome under the financial element of the 2019 bonus as discussed above. The impact of this adjustment was an increase in bonus awards of approximately 9.8 per cent for the Group Chief Executive and Group Chief Financial Officer and Chief Operating Officer. The Board believes that, due to the commercial sensitivity of the business unit targets, disclosing further details of these targets may damage the competitive position of the Group. 152 Prudential plc Annual Report 2019 prudentialplc.com Personal performance As set out in our Directors’ remuneration policy, a proportion of the annual bonus for each Executive Director is based on the achievement of personal objectives including: — The executive meeting their individual conduct and customer measures; — The executive’s contribution to Group strategy as a member of the Board; and — Specific goals related to the function for which they are responsible and progress on major projects including the demerger. For 2019, the Committee decided that, in addition to personal objectives for which they were each accountable, the Executive Directors should be given shared objectives relating to the demerger in light of the importance this had for the Group. At the end of the year, the Committee considered the performance of all executives eligible for a Prudential plc bonus in respect of their 2019 Board service against objectives established at the start of the year. At its meeting in February 2020, it concluded that there had been a high level of performance against these 2019 objectives. All executives met their individual conduct measures and each Executive Director made a significant contribution to the achievement of Group strategy during 2019. The below summarises performance against the shared and individual personal objectives for the current Executive Directors: Key shared 2019 objectives for Executive Directors Achievement Oversee the maintenance of appropriate financial resilience, within a set framework, across Group pre and post the planned demerger of M&G plc. — Successfully managed the Group’s credit rating agency relationship through the demerger with unchanged ratings, maintaining a resilient balance sheet with a robust shareholder LCSM ratio over Group minimum capital requirement of 309 per cent at 31 December 2019 supported by our conservative approach to risk management and, in particular, to credit risk, through the transition from the PRA to the Hong Kong IA. Proactively engage with the Hong Kong IA to embed the new risk and capital frameworks, supporting the Hong Kong IA in assuming the role of Group-wide supervisor. Refresh Group Strategy post the demerger. Redevelop and embed the revised approach to Group capital allocation, which integrates risk-based decisions and funding with Group risk appetite and corporate strategy. — Significant personal and team engagement in ascertaining, embedding and activating the new risk and capital framework. — Announced and executed on a clear allocation of future capital resources towards Asia. Made a decision to require Jackson to explore reinsurance and third-party financing for the execution of its future bolt on acquisitions above its internal capacity for capital generation; — Maintained a financial strength rating in the AA- range. This rating derives, in part, from the high level of financial flexibility that we have to issue debt and equity instruments; and — Determined and communicated high and resilient RoE and cash generation from the Asian business model. prudentialplc.com Prudential plc Annual Report 2019 153 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationANNUAL REPORT ON REMUNERATION CONTINUED Mark FitzPatrick 2019 key objectives Achievement Execute on all necessary steps to support the demerger of M&G plc from Prudential at the earliest opportunity. — Took day-to-day execution and management responsibility for the management of the demerger process, in particular designing and executing the process to achieve the required approvals of bond holders, shareholders and regulators. Build and development of a new Group Treasury function and the material progression of IFRS 17 implementation in a way that aligns to the broader Group strategy and operating model. Lead Group Strategy formulation and execution ensuring opportunities to evolve the business continue to be explored. — Recruited a new Group Treasurer and the established an effective Treasury team; — Integrated the Treasury team in the existing Group Finance structures; and — Directed the implementation of IFRS 17, overseeing the design, resourcing of central functions and business unit specifications for consistent implementation into the Group’s accounting functions groupwide. Sponsored the team to select and manage mobilisation of global implementation partner and system vendors. — Led the strategic plan design and process from which was drawn the revised equity story to be used in the demerger documentation. Recognising Mr FitzPatrick’s very strong performance against both his individual and shared personal objectives during 2019, the Committee judged that 19 per cent of a maximum of 20 per cent attributable to personal objectives was appropriate. James Turner 2019 key objectives Achievement Act as a trusted adviser and partner to the Group Chief Executive and members of the Board/Group Executive Committee. Drive the operation of the Risk and Compliance team as a Group-wide function promoting the collaboration of the teams across location. — Ensured that key Board decisions in relation to the demerger were supported by clear and concise Risk opinions. These included consideration of external and internal financial and non-financial risks and scenarios relevant to the demerger timeline and readiness decisions, and contributed to the completion of the demerger of M&G plc on 21 October 2019; and — Assessed the risk management considerations to support the Group’s early adoption of the NAIC regulatory framework in Q4 2019. — Steered the operation of the combined Risk and Compliance functions, having taken additional responsibility for Group Compliance in July 2019. — Initiated significant operational and structural changes to align the newly formed Group-wide function more closely with the lead regulator and operational businesses in Asia and US; and — Directly supported re-alignment of the function with key operational businesses and the lead regulator with personal relocation to Hong Kong in August 2019. Lead strategic communications between Prudential and key regulators and oversee the internal regulatory communication policy to ensure that responses are appropriate, complete and timely. — Positive and proactive engagement with both the PRA and Hong Kong IA ensuring our commitment of timely information flow to both Regulators was met and to support the successful handover of regulatory responsibilities on 21 October 2019; — Concluded discussions to confirm Hong Kong IA regulatory requirements in advance of the demerger; — Throughout 2019, led frequent and productive interaction with the Hong Kong IA and industry peers to support the drafting of Group-wide Supervisory standards which are expected to apply from the second half of 2020; and — Actively engaged with the Hong Kong IA and the Inaugural Regulatory College in October 2019, providing insight into the Prudential Group strategy, operations and risk and compliance frameworks to support the successful and complete transition of Group Regulator responsibilities by 21 October 2019. Recognising Mr Turner’s very strong performance against both his individual and shared personal objectives during 2019, the Committee judged that 47 per cent of a maximum of 50 per cent attributable to personal objectives was appropriate. 154 Prudential plc Annual Report 2019 prudentialplc.com Mike Wells 2019 key objectives Achievement Demonstrate personal leadership which effectively mobilises, secures and directs the team delivering the demerger of M&G plc from Prudential plc. — Took overall responsibility for the management of the demerger process, in particular gaining the required approvals of senior stakeholders. At the same time, conducted and continued significant relationship building for the PCA and Jackson businesses while focusing business unit leadership on operational delivery. Develop the capability and effectiveness of the Group, ensuring that the culture fosters delivery, positive internal and external relationships and co-operation across the Group. Develop plans to determine the Group’s exposure to climate-related risks and opportunities, and Group’s actions as a consequence and implement actions to increase connectivity between the Group and business units, including revisions to operating models. — Committed significant time and leadership resource to the extensive roadshow marketing of the demerger process; and — Engaged employees through personal appearances and through the use of video and social media to support the demerger, communicating changes and addressing employees’ questions and concerns. — Enhanced membership of the Environmental, Social and Governance (ESG) Executive Committee to increase business unit representation; — Created a roadmap for the implementation of the recommendations of the Task Force on Climate-Related Financial Disclosures; and — Enhanced access to ESG and climate risk data sources across the Group to support carbon footprinting work and initiated work on the stress-testing of the investment book against different climate change scenarios. Recognising Mr Wells’s very strong performance against both his individual and shared personal objectives during 2019, the Committee judged that 18 per cent of a maximum of 20 per cent attributable to personal objectives was appropriate. Functional performance The Group Chief Executive and the Chair of the Group Risk Committee undertakes the assessment of performance against functional objectives for the Group Chief Risk and Compliance Officer. 2019 achievement is summarised below: Summary of 2019 functional objectives Achievement Define and provide oversight of the Group’s adherence to the framework of the Group-wide risk and compliance policies, risk appetite and limits during 2019 and ensuring oversight responsibilities across the Group and business units, in accordance with internal and regulatory requirements. Establish strong Risk and Compliance capabilities across both in co-ordination with the M&G CRO and the M&G Compliance Director. Deliver regulatory requirements, including those required under Solvency II until the point of demerger and the Hong Kong IA regulatory letter requirements thereafter. — Led discussions resulting in Board approval of revised Group Risk Appetite Framework, including incorporating revisions to regulatory capital requirements and a clear focus on non-financial risks; — Successfully revised the defined system of policies, risk appetite and limits to reflect the new regulatory environment of the Group from the point of demerger and led the embedding of this across the Group; — Provided key insights and analysis of emerging issues both in relation to the demerger and to broader business operations; — Ensured two strong Risk and Compliance functions within Prudential and M&G in advance of demerger by overseeing the reallocation of resources, including people and technology and the build and revision of key risk framework elements for both businesses in advance of demerger; and — Delivered an extensive set of regulatory requirements under Solvency II until the point of demerger and under the Hong Kong IA regulatory letter from 21 October 2019 with increased frequency (for example to the Group’s Own Risk and Solvency Assessment) and significant changes (for example in terms of capital disclosures) as a result of the demerger. In recognition of James Turner’s very strong performance against his functional objectives during 2019, the Committee judged that 46 per cent of a maximum of 50 per cent attributable to functional objectives was appropriate. prudentialplc.com Prudential plc Annual Report 2019 155 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationANNUAL REPORT ON REMUNERATION CONTINUED The below summarises performance against the personal objectives for the Executive Directors who retired from the Board during the year and who remain employed by the Group: Michael Falcon Key objectives Prioritise the success of the demerger of M&G plc from Prudential plc and support Group activities and synergy actions for the post-demerger environment. Develop the capability and effectiveness of the Jackson team, ensuring that the culture fosters delivery, positive internal and external relationships and cooperation across the Group and develop and implement (as appropriate) opportunities to optimise Jackson’s capital deployment. Achievement — Committed significant time and leadership resource to the extensive roadshow marketing of the demerger process. — Refreshed leadership of Jackson in distribution and commercial areas to position for the retirement markets. Enhanced quality and frequency of Group-wide co-ordination for example, with Group Strategy and IT outsourcing; — Delivered organic diversification by driving product and additional distribution initiatives to support Jackson’s intent to better balance the overall risk profile, and to provide a higher absolute level of capital thereby optimising Jackson’s capital deployment; — Determined and commenced programme from August 2019 of seeking inorganic opportunities with reinsurance and third-party financing, to deliver enhanced value to shareholders, taking into account the interests of customers, regulators, rating agencies and capital providers; — Expanded advisory distribution footprint with Morgan Stanley, DPL Financial Partners, TD Ameritrade and RetireOne; — Awarded ‘Contact Center World Class CX Certification’ and ‘Highest Customer Service for the Financial Industry’ awards by The Service Quality Measurement Group, Inc.; and — Actively engaged with FinTech partners including Envestnet, MoneyGuidePro and eMoney. Recognising Mr Falcon’s very strong performance against both his individual and shared personal objectives during the year to 16 May 2019, the Committee judged that 18 per cent of a maximum of 20 per cent attributable to personal objectives was appropriate. Nic Nicandrou Key objectives Prioritise the success of the demerger of M&G plc from Prudential plc and support Group activities and synergy actions for the post-demerger environment. Build, deploy and leverage digital enablers for customer proposition, operational efficiency and distribution and evolve the business operating model, improve ways of working and deepen capabilities of strategic importance. Achievement — Committed significant time and leadership resource to the extensive roadshow marketing of the demerger process. — Commenced execution of Prudential Corporation Asia -wide digital strategy as part of the drive for high quality earnings and management of operating leverage through removal of duplication and modernisation of operating structures; — Launched ‘Pulse by Prudential’ Health Ecosystem, an all-in-one digital app, and entered into a new strategic partnership with OVO, the largest digital payment platform in Indonesia and commenced the roll-out of this programme over the Prudential Corporation Asia businesses; — Through our Health Ecosystem, collaborated with various partners to offer users a wide range of affordable and easy-to-access value-added services such as health assessments, risk factor identification, triage, telemedicine, wellness and digital payment; — Built on our distribution channels by renewing our regional strategic bancassurance alliance with UOB, entering into an exclusive bancassurance partnership with SeABank and by acquiring a majority stake in Thanachart Fund Management Co., Ltd; — Conducted extensive business renewal of products and the expansion of distribution channels in Indonesia and Hong Kong as well as built execution plans for the fast-growing SME segment; — Continued to expand our presence in China across both the insurance and asset management sectors, establishing a new branch in Shaanxi, our twentieth province launching our first fund offerings in China; — 83 per cent of all new business was submitted through e-point-of-sale technology in 2019, representing an increase of 11 percentage points year-on-year; and — Enhanced our growing scale in Africa by acquiring a majority stake in a leading life insurer operating in Cameroon, Côte d’Ivoire and Togo. Recognising Mr Nicandrou’s very strong performance against both his individual and shared personal objectives during the year to 16 May 2019, the Committee judged that 19 per cent of a maximum of 20 per cent attributable to personal objectives was appropriate. 156 Prudential plc Annual Report 2019 prudentialplc.com 2019 Jackson bonus pool In 2019, the Jackson bonus pool was determined by Jackson National Life Insurance Company’s profitability, remittances to Group and advisory sales. Financial performance in the period reflects the impact of strong equity markets, lower interest rates, and a more diverse product mix. Further detail on this performance is set out on pages 28 to 33. The Committee also considered performance in a number of key activities and the delivery against certain non-financial Group requirements. As a result of this assessment, the Committee determined that Michael Falcon’s share of the bonus pool for his service on the Board was $1,282,000. Forty per cent of this award is deferred into shares for three years. 2019 bonus awards The Committee determined the following 2019 AIP awards on the basis of the performance of the Group and its business units and its consideration of the total bonus value in light of its view of all relevant circumstances, including: — The successful completion of the demerger of M&G plc from the Group; — The overall contribution of the executive; and — Behavioural, conduct and risk management considerations. 40 per cent of all awards are deferred into shares for three years: Executive Director Role Michael Falcon2,3 Mark FitzPatrick Chairman and CEO, Jackson Holdings Group Chief Financial Officer and Chief Operating Officer Nic Nicandrou2 James Turner4 Chief Executive, Prudential Corporation Asia Group Chief Risk and Compliance Officer Mike Wells Group Chief Executive 2019 salary1 $302,000 £760,000 HK$4,113,000 £372,000/ HK$3,054,000 £1,149,000 Maximum 2019 AIP (% of salary) Actual 2019 AIP award (% of maximum opportunity) 2019 bonus award (including cash and deferred elements) 100% 175% 180% 160%/ 175% 200% 95% 96% 96% 93% 96% £1,227,000 £1,279,000 £707,000 £1,052,000 £2,197,000 Notes 1 Salary paid in respect of services as an Executive Director. 2 Michael Falcon and Nic Nicandrou stepped down from the Board on 16 May 2019. The maximum bonus opportunities shown represent their annual opportunity as an Executive 3 Director. The 2019 bonus awards shown are in respect of their service as Executive Directors. In addition to the AIP, Michael Falcon also participates in the Jackson bonus pool. The figure reflects both payments. 40 per cent of both the AIP and Jackson bonus award pool amounts is deferred. 4 The salary amounts shown above were actually delivered to Mr Turner for the portion of the year he was in the UK and the portion of the year he was in Hong Kong. Mr Turner’s maximum bonus opportunity increased from 160 per cent of salary to 175 per cent of salary on 1 August 2019 on his relocation to Hong Kong. The 2019 bonus award was pro-rated to reflect the portion of the year he was in the UK and the portion of the year he was in Hong Kong. 5 John Foley stepped down from the Board on 16 May 2019. He subsequently left the Company on the demerger of M&G plc from Prudential plc on 21 October 2019. As an Executive Director of Prudential plc during 2019, Mr Foley was eligible to receive a 2019 bonus award of up to 180 per cent of salary. Since transferring to M&G plc it was agreed with M&G plc that Mr Foley’s 2019 bonus will be assessed and determined by the M&G plc Remuneration Committee and will be paid by M&G plc. No 2019 bonus award has been paid to Mr Foley by Prudential plc. prudentialplc.com Prudential plc Annual Report 2019 157 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationANNUAL REPORT ON REMUNERATION CONTINUED Remuneration in respect of performance periods ending in 2019 Prudential Long Term Incentive Plan (PLTIP) Target setting Our long-term incentive plans have stretching performance conditions that are aligned to the strategic priorities of the Group. In 2017, all Executive Directors were granted awards under the PLTIP. In determining the financial targets the Committee had regard to the stretching nature of the three-year Business Plan for adjusted operating profit and capital positions as set by the Board. Further, in setting the conduct and diversity targets under the sustainability scorecard, the Committee considered input from Group-wide Internal Audit and the Group Chief Risk and Compliance Officer on conduct risk for the conduct measure and had regard to the Company’s commitment under the Women in Finance Charter for the diversity measure. The weightings of the measures are detailed in the table below: Executive Director1 Mark FitzPatrick Nic Nicandrou8 James Turner9 Mike Wells Adjusted operating profit (Group or business unit)3 Weighting of measures Sustainability Scorecard Solvency II operating capital generation4 ECap operating capital generation5 Conduct6 Diversity7 50% 50% 50% 50% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% Group TSR2 25% 25% 25% 25% Notes 1 This table includes Executive Directors who served on the Board during 2019 with 2017 PLTIP awards. Nic Nicandrou and John Foley stepped down from the Board on 16 May 2019 and John Foley subsequently left the Company on the demerger of M&G plc from Prudential plc on 21 October 2019. Mr Foley’s 2017 PLTIP award was exchanged for an equivalent award of M&G plc shares. The M&G plc Remuneration Committee is responsible for determining, approving and settling the release of the 2017 long-term incentive award to Mr Foley. 2 Group TSR is measured on a ranked basis over three years relative to peers. 3 Adjusted operating profit is measured on a cumulative basis over three years. 4 Solvency II operating capital generation is cumulative three-year Solvency II Group operating capital generation. As set out in the ‘Remuneration decisions taken in relation to the demerger’ section, Solvency II operating capital generation was replaced with Group free surplus generation from 1 July 2019. 5 This is cumulative three-year ECap Group operating capital generation, less cost of capital (based on the capital position at the start of the performance period). 6 Conduct is assessed through appropriate management action, ensuring there are no significant conduct/culture/governance issues that could result in significant capital add-ons or material fines. 7 Diversity is measured as the percentage of the Leadership Team that is female at the end of 2019. The target for this metric has been based on progress towards the goal that the Company set when it signed the Women in Finance Charter, where 30 per cent of our Leadership Team should be female by the end of 2021. 8 Nic Nicandrou was granted this award when he was in the role of Chief Financial Officer. The performance measures attached to his PLTIP award did not change following his appointment to the role of Chief Executive, Prudential Corporation Asia in 2017. 9 James Turner was granted this award when he was in his previous role of Director of Group Finance. As discussed in the section on ‘Remuneration decisions taken in relation to the demerger’, the Committee adjusted the performance conditions attached to the 2017 PLTIP awards in order to take account of the demerger, ensuring that the revised performance conditions are no more or less stretching than those originally attached to the awards. The performance assessment provided overleaf is based on these adjusted targets. Under the Group TSR measure used for 2017 PLTIP awards, 25 per cent of the award vests for TSR at the median of the peer group increasing to full vesting for performance within the upper quartile. TSR is measured on a local currency basis since this has the benefit of simplicity and directness of comparison. No adjustments to the peer group has been made for the demerger. The peer group for the 2017 awards is set out below: Aegon Aviva Manulife Standard Life AIA AXA MetLife Sun Life Financial AIG Generali Old Mutual Zurich Insurance Group Allianz Legal & General Prudential Financial Following the merger of Standard Life and Aberdeen Asset Management during the three-year performance period, the Committee determined that Standard Life would be retained in the peer group for the pre-merger period and the combined entity would be included in the peer group from the date of the merger for all outstanding PLTIP awards. In addition, following the demerger of Quilter from Old Mutual and Old Mutual’s delisting from the FTSE on 26 June 2018, the Committee determined that Old Mutual be retained as a TSR peer with no adjustment to its performance during the period prior to its demerger and delisting, and that Old Mutual’s TSR performance from the date of its demerger and delisting would track an index of the peers (excluding Prudential plc) for all outstanding PLTIP awards. 158 Prudential plc Annual Report 2019 prudentialplc.com Performance assessment In deciding the proportion of the awards to be released, the Committee considered actual financial results against performance targets. The Committee also reviewed underlying Company performance to ensure vesting levels were appropriate, including an assessment of whether results were achieved within the Group’s and business units’ risk framework and appetite. The Directors’ remuneration policy contains further details of the design of Prudential’s long-term incentive plans. Group adjusted operating profit performance Under the adjusted operating profit measure, 25 per cent of the 2017 awards vest for meeting the threshold adjusted operating profit target set at the start of the performance period, increasing to full vesting for performance at or above the stretch level. The table below illustrates the cumulative performance achieved over 2017 to 2019 compared to the adjusted Group targets which exclude M&G plc from the point of demerger: Group Adjusted operating profit 2017-19 adjusted cumulative targets Threshold Plan Maximum 2017-19 cumulative achievement Vesting under the adjusted operating profit element $15,063m $16,737m $18,411m $19,021m 100% The Committee determined that the cumulative adjusted operating profit target established for the PLTIP should be expressed using exchange rates consistent with the reported disclosures. Individual business units achieved between 86 per cent and 100 per cent vesting under this element. Details of business unit adjusted operating profit targets have not been disclosed as the Committee considers that these are commercially sensitive and disclosure of targets at such a granular level would put the Company at a disadvantage compared to its competitors. TSR performance Prudential’s TSR performance during the performance period (1 January 2017 to 31 December 2019) was ranked below median of the peer group. The portion of the awards related to TSR will therefore lapse. Sustainability scorecard performance Capital measure – Group Solvency II operating capital generation/Group operating free surplus generation The vesting profile for the Group Solvency II operating capital generation and Group operating free surplus generation measure is binary, awarding full vesting for achieving plan and no vesting for any level of performance below plan. The weighted average of the adjusted Group Solvency II operating capital generation from 1 January 2017 to 30 June 2019 (target $7.4bn) and the Group operating free surplus generation from 1 July 2019 to 31 December 2019 (target $2.2 bn), which excludes M&G plc performance from the point of demerger, was in excess of the cumulative target and therefore generated 100 per cent vesting on this element. Capital measure – Group ECap operating capital generation The vesting profile for the Group ECap operating capital generation measure is binary, awarding full vesting for achieving plan and no vesting for any level of performance below plan. The adjusted cumulative Group ECap operating capital generation was below the target of $8.5bn (which excludes M&G plc from the point of demerger) and therefore generated a zero per cent vesting outcome on this element of the PLTIP. Details of cumulative achievement under the capital measures have not been disclosed as the Committee considers that these are commercially sensitive and would put the Company at a disadvantage compared to its competitors. The Committee will keep this disclosure policy under review based on whether, in its view, disclosure would compromise the Company’s competitive position. Conduct assessment The vesting profile of this element is binary with full vesting being awarded where there are no significant conduct/culture/governance issues that result in significant capital add-ons or material fines. On 30 September 2019, the FCA fined M&G plc £23,875,000 for failures related to the non-advised sale of annuities between July 2008 and September 2017. Since this occurred before the demerger of M&G plc from the Group, the Committee determined that the portion of the 2017 PLTIP awards related to conduct held by Group Executive Directors should lapse. Diversity assessment On 31 December 2019, 28 per cent of our Leadership Team was female. Since this was above the 27 per cent level required for full vesting, the portion of the awards related to diversity that therefore vested was 100 per cent. prudentialplc.com Prudential plc Annual Report 2019 159 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationANNUAL REPORT ON REMUNERATION CONTINUED PLTIP vesting The Committee considered a report from the Group Chief Risk and Compliance Officer which had been approved by the Group Risk Committee. This report confirmed that the financial results were achieved within the Group’s and business units’ risk framework and appetite. On the basis of this report and the performance of the Group and its business units described above, the Committee decided not to apply a discretionary adjustment to the arithmetic vesting outcome under the 2017 PLTIP awards and determined the vesting of each Executive Director’s PLTIP awards as set out below: Executive Director Mark FitzPatrick Nic Nicandrou3 James Turner Mike Wells Maximum value of award at full vesting1 Percentage of the LTIP award vesting Number of shares vesting2 Value of shares vesting1 £1,730,807 £1,882,617 £485,387 £4,576,469 62.5% 62.5% 62.5% 62.5% 78,104 67,255 21,903 206,517 £1,081,740 £931,482 £303,357 £2,860,260 Notes 1 The share price used to calculate the value of the PLTIP awards with performance periods which ended on 31 December 2019 and vest in April 2020 for all Executive Directors other than Mark FitzPatrick and in August 2020 for Mark FitzPatrick, was the average share price for the three months up to 31 December 2019, being £13.85. The number of Prudential plc shares under award has been adjusted in line with the approach set out in the section on ‘Remuneration decisions taken in relation to the demerger’. 2 The number of shares vesting includes accrued dividends. 3 The vesting of Nic Nicandrou’s 2017 PLTIP award is in relation to his service as an Executive Director. 4 John Foley stepped down from the Board on 16 May 2019. He subsequently left the Company on the demerger of M&G plc from Prudential plc on 21 October 2019. Mr Foley’s 2017-2019 PLTIP award has been exchanged for an equivalent award over M&G plc shares. Under the terms of the Demerger Agreement this replacement award should be of an equivalent value; with the same release schedule; subject to equivalent malus and clawback provisions and subject to performance conditions which are relevant to M&G plc and which are no more or less onerous than those which originally applied. The vesting of Mr Foley’s replacement 2017-2019 long-term incentive award is due to be disclosed by M&G plc and described in the M&G plc Directors’ remuneration report as set out in the M&G plc 2019 Annual report. These details were not known by Prudential plc prior to the finalisation of this report. Long-term incentives awarded in 2019 2019 share-based long-term incentive awards The table below shows the awards of conditional shares made to Executive Directors who served on the Board in 2019 under the PLTIP and the performance conditions attached to these awards. Further details on the performance measures were disclosed on page 164 of the 2018 Annual Report. Executive Director Role Michael Falcon1 Chairman and Chief Executive Number of shares or ADRs subject to award* Percentage of awards released for achieving threshold targets‡ Face value of award† Officer, Jackson 78,856 $3,199,976 20% Mark FitzPatrick Chief Financial Officer John Foley1,2 Chief Executive, 123,376 £1,899,990 20% M&GPrudential 129,383 £1,992,498 20% Nic Nicandrou1 Chief Executive, Prudential Corporation Asia 172,743 £2,660,242 20% James Turner Group Chief Risk Officer Mike Wells Group Chief Executive 103,571 £1,594,993 20% 298,441 £4,595,991 20% Weighting of performance conditions Group TSR Sustainability scorecard§ 75% 75% 75% 75% 75% 75% 25% 25% 25% 25% 25% 25% End of performance period 31 December 2021 31 December 2021 31 December 2021 31 December 2021 31 December 2021 31 December 2021 * Awards over shares were awarded to all Executive Directors other than Michael Falcon whose awards were over ADRs. † Awards for Executive Directors are calculated based on the average share price over the three dealing days prior to the grant date, being £15.40 for all Executive Directors other than Michael Falcon and an ADR price of US$40.58 for Michael Falcon. ‡ The percentage of awards released for achieving maximum targets is 100 per cent. § Each of the four measures within the sustainability scorecard has equal weighting. They are Group Solvency II operating capital generation, Group ECap operating capital generation, diversity and conduct. Notes 1 Michael Falcon, Nic Nicandrou and John Foley stepped down from the Board on 16 May 2019. 2 John Foley left the Company on the demerger of M&G plc from Prudential plc on 21 October 2019. His 2017-2019 PLTIP award has been exchanged for an equivalent award over M&G plc shares. 160 Prudential plc Annual Report 2019 prudentialplc.com Update on performance against targets for awards made in 2018 and 2019 As set out in the section on ‘Remuneration decisions taken in relation to the demerger’, the Committee has adjusted the performance conditions attached to the 2018 and 2019 awards in order to take account of the demerger, ensuring that the revised performance conditions are no more or less stretching than those originally attached to the awards. The performance update provided below is based on these adjusted targets. Group adjusted operating profit Prudential’s Group adjusted operating profit performance between 1 January 2018 and 31 December 2019 was above the stretch target established for the 2018 PLTIP awards. Group adjusted operating profit was not used as a performance measure for the 2019 PLTIP awards. TSR Performance As at 31 December 2019, Prudential’s TSR performance ranked below the peer group median for the elapsed portions of the 2018 and 2019 performance periods. Sustainability scorecard of strategic measures Between 1 January 2018 and 31 December 2019, the Group also made good progress towards meeting the measures under the sustainability scorecard used for the 2018 and 2019 PLTIP awards: — Capital measure – Group Solvency II operating capital generation/Group operating free surplus generation For the elapsed portions of the 2018 and 2019 PLTIP performance periods, the Group’s Solvency II operating capital generation and the Group’s operating free surplus generation was above the established Plan levels for both awards. — Capital measure – Group ECap operating capital generation For the elapsed portions of the 2018 and 2019 PLTIP performance periods, the Group’s ECap operating capital generation was below the Plan levels established for the both awards. — Conduct measure During 2018 and 2019, there were no significant conduct/culture/governance issues that resulted in significant capital add-ons or material fines. This assessment is unaffected by the FCA fine since the issues identified relate to a period which ended in 2017. — Diversity measure As at 31 December 2019, 28 per cent of our Leadership Team was female. This represented strong progress against the threshold level that at least 27 per cent of the Leadership Team be female by the end of 2020 for the 2018 PLTIP award, and the threshold level that at least 28 per cent of the Leadership Team be female by the end of 2021 for the 2019 PLTIP award. prudentialplc.com Prudential plc Annual Report 2019 161 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationANNUAL REPORT ON REMUNERATION CONTINUED Pay comparisons Performance graph and table The chart below illustrates the TSR performance of Prudential, the FTSE 100 (as the Company has a premium listing on the London Stock Exchange) and the peer group of international insurers used to benchmark the Company’s performance for the purposes of the 2019 PLTIP awards. The chart illustrates the performance of a hypothetical investment of £100 in ordinary shares of Prudential plc over the 10-year period 1 January 2010 to 31 December 2019 compared to a similar investment in the FTSE 100 or an index of the Company’s peers. Total shareholder return is based on Returns Index data calculated on a daily share price growth plus re-invested dividends (as measured at the ex-dividend dates). Prudential TSR vs FTSE 100 and peer group average – total return per cent over 10 years to December 2019 £ Prudential FTSE 100 Peer group Note The index of Prudential’s peers represents the average daily total shareholder return performance of the peer group used for the 2019 PLTIP awards (excluding companies not listed at the start of the period). The information in the table below shows the total remuneration for the Group Chief Executive over the same period: £000 2010 2011 2012 2013 2014 2015 2015 2016 2017 2018 2019 Group Chief Executive Salary, pension and benefits Annual bonus payment (As % of maximum) LTIP vesting (As % of maximum) Other payments Group Chief Executive ‘single figure’ of total remuneration2 T Thiam T Thiam T Thiam T Thiam T Thiam T Thiam1 M Wells M Wells M Wells M Wells M Wells 1,189 1,241 1,373 1,411 1,458 613 1,992 2,244 1,872 1,815 1,662 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%) 3,623 (62.5%) – 2,197 (96%) 2,860 (62.5%) – 5,293 5,339 9,533 8,702 13,418 4,699 7,526 7,370 8,560 7,571 6,719 Notes 1 Tidjane Thiam left the Company on 31 May 2015. Mike Wells became Group Chief Executive on 1 June 2015. The figures shown for Mike Wells’s remuneration in 2015 relate only to his 2 service as Group Chief Executive. Further detail on the ‘single figure’ is provided in the ‘single figure’ table for the relevant year. The figures provided reflect the value of vesting LTIP awards on the date of their release other than for 2019 (for which an estimate is used). 162 Prudential plc Annual Report 2019 prudentialplc.com 20092010£347£208£20520114504003503002502001501005020192018201720162015201420132012Percentage change in remuneration The table below sets out how the change in remuneration for the Group Chief Executive between 2018 and 2019 compared to a wider employee comparator group: Group Chief Executive All UK employees Salary 2.0% 3.9% Benefits (44.5)% (3.4)% Bonus 3.0% 6.7% The employee comparator group used for the purpose of this analysis is all UK employees. This is considered to be an appropriate comparator group as the Group Chief Executive’s remuneration arrangements are similar in structure to the majority of these employees and it reflects the economic environment where the Group Chief Executive is employed. For 2018 this group included employees in M&GPrudential and Group Head Office. For 2019, this group included UK-based Group Head Office employees only. Employees in M&G plc have been excluded from the calculation of average pay in 2019 as M&G plc demerged from Prudential plc on 21 October 2019. M&G plc employees are no longer within the Group and Prudential plc does not have any influence over or knowledge of pay decisions, including 2019 bonus awards, for employees within M&G plc. The salary increase includes uplifts made through the annual salary review, as well as any additional changes in the year; for example to reflect promotions or role changes. The decrease in benefits paid to the Group Chief Executive is driven by the cessation of the payment of mortgage interest on 30 November 2018. The decrease in benefits paid to all UK employees is due to the reduction in the cost to the Company of providing certain benefits. There has been no change to the level of taxable benefit coverage received by employees. Group Chief Executive pay compared with employee pay To increase further transparency of executive remuneration and its alignment with the pay of other employees, we published our CEO pay ratio one year in advance of the disclosure becoming a requirement under the UK Companies (Miscellaneous Reporting) Regulations 2018 in the 2018 Directors’ remuneration report. The employee comparator group used for the purpose of this 2018 analysis was all UK employees comprising employees in M&GPrudential and Group Head Office in 2018. In light of the demerger of the M&G plc business from Prudential plc on 21 October 2019, we have prepared the 2019 CEO pay ratio based on UK-based Group Head Office employees since Prudential plc no longer has any influence over or knowledge of pay decisions, including 2019 bonus awards, for employees within M&G plc. On this basis, the Committee has decided that the 2018 CEO pay ratio will not be restated in this report and that the 2019 CEO pay ratio will form the base year of reporting given the fundamental changes to the UK workforce which have resulted from the demerger. The table below compares the Group Chief Executive’s ‘single figure’ of total remuneration to that received by three representative UK employees in 2019. Year 2019 Method Option B 25th percentile pay ratio 87 : 1 Median pay ratio 67 : 1 75th percentile pay ratio 43 : 1 Under the regulations there is a choice of three methodologies to determine the 25th, median and 75th full-time equivalent remuneration of our UK employees. This is the most recently collected data in accordance with the Equality Act 2010 (Gender Pay Gap Information) Regulations 2017 and includes all UK employees. The Company has chosen to use the 2019 hourly rate gender pay gap information as this method uses data that is aligned with other disclosures made under our gender pay gap reporting (‘Option B’ in the table above). The employees used in the calculations were identified using the most recent gender pay gap data for 2019, on 23 January 2020, following the end of the financial year. Base salary and total remuneration for these identified employees has then been calculated based on their actual remuneration for 2019. The Committee determined that the identified employees are reasonably representative since the structure of their remuneration arrangements is in line with that of the majority of employees within the UK-based Group Head Office workforce. The same methodology used for calculating the ‘single figure’ of the Group Chief Executive has been used for calculating the pay and benefits of these three UK employees. prudentialplc.com Prudential plc Annual Report 2019 163 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationANNUAL REPORT ON REMUNERATION CONTINUED The salary and total remuneration received during 2019 by the indicative employees used in the above analysis are set out below: 2019 salary Total 2019 remuneration 25th percentile £56,000 £77,000 Median £74,000 £100,000 75th percentile £110,000 £155,000 The Committee believes the median pay ratio is consistent with the pay, reward and progression policies for our UK-based Group Head Office employees. The base salary and total remuneration levels for the Group Chief Executive and the median representative employee are competitively positioned within the relevant markets and reflect the operation of our remuneration structures which are effective in appropriately incentivising staff, having regard to our risk framework, risk appetites and to rewarding the ‘how’ as well as the ‘what’ of performance. Gender pay gap Our UK business, Prudential Services Limited, is the employing entity for almost all of our London Head Office staff including the UK-based Group Chief Executive and his direct reports. Prudential Services Limited has recently reported its 2019 UK gender pay gap data and details can be found on the Group’s website. There has been a further narrowing of most of the pay gap figures. Where men and women perform similar roles, they are paid equally but the gender pay gap reflects that men and women are doing different roles. We remain focused on closing the remaining pay gap as soon as possible and on ensuring that we attract applicants from all backgrounds and create opportunities for all our employees to develop and progress in order to ensure that we have the diverse talent needed by the Group to better reflecting the communities we serve. However, the gender pay gap demonstrated the demographic profile of the business (and the financial services sector more widely): there is a greater proportion of males in more senior and front-office roles and a greater proportion of females in more junior, support and back-office non-finance roles. All the Group’s businesses are continuing to work on initiatives to increase the proportion of women in senior management and operating roles as part of the Group’s strategic focus on diversity and inclusion as described in the diversity and inclusion statement on our website. This important priority is reflected in the Group’s reward structure through the diversity measure attached to PLTIP awards granted from 2017 onwards. Consideration of workforce pay and approach to engagement During the year, the Committee considered workforce remuneration and related policies in the business units across the Group. Information presented to the Committee, by way of a dashboard, included how the Company’s incentive arrangements are aligned with the culture and informed the Committee’s decision-making on executive pay and policy. By way of example, business unit salary increase budgets are considered as part of the year-end review of Executive Director compensation and salary increases. As part of the Board’s wider initiatives, which included the appointment of designated Non-executive Directors who led on workforce engagement during the year as detailed in the ‘Governance’ section earlier in this Annual report, the Committee took additional measures in 2019 to explain how the remuneration of Executive Directors aligns with the wider company pay policy. The Company established a microsite on its intranet that outlines executive pay arrangements during the previous financial year and key areas of change for 2019. It explains to employees that total remuneration for Executive Directors is made up of a number of elements and is governed by both the Directors’ remuneration policy and the Group’s remuneration policy (which is also published on the Company’s website) with the relevant links to these documents. Relative importance of spend on pay The table below sets out the amounts payable in respect of 2018 and 2019 on all employee pay and dividends: All employee pay including M&G plc ($m)1,2 All employee pay excluding M&G plc ($m)1,3 Dividends including demerger dividend ($m)4 Dividends excluding demerger dividend ($m)4 2018 2,454 1,672 1,638 1,638 2019 2,143 1,466 8,582 1,203 Percentage change (12.7)% (12.3)% 423.9% (26.6)% Notes 1 All employee pay as taken from note B2.1 to the financial statements. 2 This includes the costs of employment for M&G plc employees up to the demerger in October 2019. 3 This excludes the costs of employment of M&G plc employees for 2018 and 2019 in order to present a like for like comparison between the two years. 4 Dividends taken from note B6 to the financial statements. 164 Prudential plc Annual Report 2019 prudentialplc.com Chairman and Non-executive Director remuneration in 2019 Chairman’s fees The Chairman’s fee was reviewed by the Committee during 2019 and increased by 2 per cent to £765,000 with effect from 1 July 2019 in order to reflect inflation. Non-executive Directors’ fees The Non-executive Directors’ fees were reviewed by the Board during 2019 and the basic fee was increased from £97,000 to £99,000, the Remuneration Committee Chair fee increased from £60,000 to £65,000 while the Nomination & Governance Committee member fee increased from £12,500 to £15,000. No other fees were increased. The Board also introduced a £30,000 fee for each designated Non-executive Director carrying out a workforce engagement role. Annual fees Basic fee Additional fees: Audit Committee Chair Audit Committee member Remuneration Committee Chair Remuneration Committee member Risk Committee Chair Risk Committee member Nomination & Governance Committee Chair1 Nomination & Governance Committee member Senior Independent Director Workforce engagement role From 1 July 2018 (£) From 1 July 2019 (£) 97,000 99,000 75,000 30,000 60,000 30,000 75,000 30,000 – 12,500 50,000 N/A 75,000 30,000 65,000 30,000 75,000 30,000 – 15,000 50,000 30,000 Note 1 There is no fee paid for the role of Nomination & Governance Committee Chair. If, in a particular year, the number of meetings is materially greater than usual, the Company may determine that the provision of additional fees is fair and reasonable. The resulting fees paid to the Chairman and Non-executive Directors are: £000s 2019 fees 2018 fees Chairman Paul Manduca Non-executive Directors Howard Davies David Law Kai Nargolwala1 Anthony Nightingale Philip Remnant Alice Schroeder Lord Turner2 Thomas Watjen Fields Wicker-Miurin Amy Yip3 758 217 217 173 174 222 158 59 173 128 43 742 212 212 155 168 216 150 155 131 41 – 2019 taxable benefits* 2018 taxable benefits* Total 2019 remuneration: the ‘single figure’† Total 2019 remuneration: the ‘single figure’ in USD ($000s)‡ Total 2018 remuneration: the ‘single figure’† Total 2018 remuneration: the ‘single figure’ in USD ($000s)‡ 172 136 930 1,187 878 1,172 – – – – – – – – – – – – – – – – – – 217 217 173 174 222 158 59 173 128 43 277 277 221 222 283 202 75 221 163 55 212 212 155 168 216 150 155 131 41 283 283 207 224 288 200 207 175 55 – Total 2,322 2,182 172 136 2,494 3,183 2,318 3,094 * Benefits include the cost of providing the use of a car and driver, medical insurance and security arrangements (including any tax thereon). † Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded figures. Total remuneration is calculated using the methodology prescribed by Schedule 8 of the Companies Act. The Chairman and Non-executive Directors are not entitled to participate in annual bonus plans or long-term incentive plans. ‡ Total remuneration has been converted to US dollars using the exchange rate of 1 GBP to 1.2765 USD for the 2019 single figure calculations and 1 GBP to 1.3352 USD for the 2018 single figure calculations. In 2019 Kai Nargolwala also received an annual fee of £250,000 in respect of his non-executive chairmanship of Prudential Corporation Asia Limited. Notes 1 2 Lord Turner stepped down from the Board on 16 May 2019. 3 Amy Yip joined the Board and the Remuneration Committee on 2 September 2019. prudentialplc.com Prudential plc Annual Report 2019 165 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information ANNUAL REPORT ON REMUNERATION CONTINUED Statement of Directors’ shareholdings The interests of Directors in ordinary shares of the Company are set out below. ‘Beneficial interest’ includes shares owned outright, shares acquired under the Share Incentive Plan (SIP) and deferred annual incentive awards, detailed in the ‘Supplementary information’ section. It is only these shares that count towards the share ownership guidelines. 1 January 2019 (or on date of appointment) Total beneficial interest (number of shares) During 2019 31 December 2019 (or on date of retirement) Share ownership guidelines Number of shares acquired Number of shares disposed Total beneficial interest* (number of shares) Number of shares subject to performance conditions† Total interest in shares Share ownership guidelines‡ (% of salary/fee) Beneficial interest as a percentage of basic salary/ basic fees§ 42,500 – – 42,500 – 42,500 100% 82% – 28,333 329,834 295,085 20,876 812,252 9,514 9,066 70,000 50,000 6,916 14,500 6,719 10,340 1,000 – 51,988 43,968 129,385 138,162 72,942 313,142 – – 78,889 134,555 13,194 149,122 299 – – – – – – – 3,500 – – – – – – – – – – – 51,988 72,301 380,330 298,692 80,624 976,272 9,813 9,066 70,000 50,000 6,916 14,500 6,719 10,340 4,500 – 157,712 382,627 355,323 419,946 255,145 946,508 209,700 454,928 735,653 718,638 335,769 1,922,780 – – – – – – – – – – 9,813 9,066 70,000 50,000 6,916 14,500 6,719 10,340 4,500 – N/A 250% N/A N/A 250% 400% 100% 100% 100% 100% 100% 100% N/A 100% 100% 100% N/A 140% N/A N/A 175% 1247% 147% 136% 1049% 749% 104% 217% N/A 155% 67% 0% Chairman Paul Manduca Executive Directors Michael Falcon1 Mark FitzPatrick John Foley2 Nic Nicandrou3 James Turner Mike Wells4 Non-executive Directors Howard Davies David Law Kai Nargolwala Anthony Nightingale Philip Remnant Alice Schroeder5 Lord Turner6 Thomas Watjen7 Fields Wicker-Miurin Amy Yip8 * There were no changes of Directors’ interests in ordinary shares between 31 December 2019 and 10 March 2020 with the exception of the UK based Executive Directors due to their participation in the monthly Share Incentive Plan (SIP). Mark FitzPatrick acquired a further 42 shares in the SIP and Mike Wells acquired a further 43 shares in the SIP during this period. † Further information on share awards subject to performance conditions are detailed in the ‘Share-based long-term incentive awards’ section of the Supplementary information. ‡ Holding requirement of the Articles of Association (2,500 ordinary shares) must be obtained within one year of appointment to the Board. The increased guidelines for Executive Directors were introduced with effect from January 2013 and increased again in 2017. Executive Directors normally have 5 years from this date (or date of joining or role change, if later) to reach the enhanced guideline. The guideline for Non-executive Directors was introduced on 1 July 2011. Non-executive Directors normally have 3 years from their date of joining to reach the guideline. During 2019, the periods available to reach the guidelines for Executive Directors and Non-executive Directors were revised to recognise that shares they beneficially held in M&G post demerger no longer counted towards the guideline. Directors are expected to rebuild the value of their shareholding in line with the share ownership guidelines within a reasonable timeframe. § Based on the average closing price for the six months to 31 December 2019 £14.68. The Company and its Directors, Chief Executives and shareholders have been granted a partial exemption from the disclosure requirements under Part XV of the Securities and Futures Ordinance (SFO). As a result of this exemption, Directors, Chief Executives and shareholders do not have an obligation under the SFO to notify the Company of shareholding interests, and the Company is not required to maintain a register of Directors’ and Chief Executives’ interests under section 352 of the SFO, nor a register of interests of substantial shareholders under section 336 of the SFO. The Company is, however, required to file with the Stock Exchange of Hong Kong Limited any disclosure of interests notified to it in the United Kingdom. Notes 1 Michael Falcon was appointed to the Board on 7 January 2019. He stepped down from the Board on 16 May 2019. Total interest in shares is shown at the date he stepped down from the Board. For the 16 May 2019 figure, Michael Falcon’s beneficial interest in shares is made up of 25,994 ADRs (representing 51,988 ordinary shares). 2 John Foley stepped down from the Board on 16 May 2019. Total interest in shares is shown at this date. 3 Nic Nicandrou stepped down from the Board on 16 May 2019. Total interest in shares is shown at this date. 4 For the 1 January 2019 figure, Mike Wells’s beneficial interest in shares is made up of 297,320 ADRs (representing 594,640 ordinary shares) and 217,612 ordinary shares. For the 31 December 2019 figure, his beneficial interest in shares is made up of 297,320 ADRs (representing 594,640 ordinary shares) and 381,632 ordinary shares. 5 For the 1 January 2019 figure, Alice Schroeder’s beneficial interest in shares is made up of 7,250 ADRs (representing 14,500 ordinary shares). For the 31 December 2019 figure, the beneficial interest in shares is made up of 7,250 ADRs (representing 14,500 ordinary shares). 6 Lord Turner stepped down from the Board on 16 May 2019. Total interest in shares is shown at this date. 7 For the 1 January 2019 figure, Thomas Watjen’s beneficial interest in shares is made up of 5,170 ADRs (representing 10,340 ordinary shares). For the 31 December 2019 figure, the beneficial interest in shares is made up of 5,170 ADRs (representing 10,340 ordinary shares). 8 Amy Yip was appointed to the Board on 2 September 2019. 166 Prudential plc Annual Report 2019 prudentialplc.com The bar chart below illustrates the Executive Directors’ shareholding as a percentage of base salary versus the share ownership guideline. % Share ownership guidelines as % of salary Beneficial interest as at 31 December 2019, as % of salary Outstanding share options The following table sets out the share options held by the Executive Directors in the UK Savings-Related Share Option Scheme (SAYE) as at the end of the period. No other directors participated in any other option scheme. Date of grant Exercise price (pence) Market price at 31 Dec 2019 (pence) Exercise period Number of options Beginning End Beginning of period Granted Exercised Cancelled Forfeited Lapsed End of period Mark FitzPatrick 21 Sep 17 21 Sep 17 James Turner 1455 1455 1449 01 Dec 22 31 May 23 30 Jun 21 1449 01 Jan 21 2,061 1,237 – – – – – – – – – – 2,061 1,237 Notes 1 No Directors exercised SAYE options in 2019. 2 No price was paid for the award of any option. 3 The highest and lowest closing share prices during 2019 were £17.90 and £12.80 respectively. 4 All exercise prices are shown to the nearest pence. Directors’ terms of employment and external appointments Details of the service contracts of each Executive Director are outlined in the table below. The Directors’ remuneration policy contains further details of the terms included in Executive Director service contracts. Subject to the Group Chief Executive’s or the Chairman’s approval, Executive Directors are able to accept external appointments as non-executive directors of other organisations. Fees payable are retained by the Executive Directors. Executive Directors Michael Falcon Mark FitzPatrick John Foley Nic Nicandrou James Turner Mike Wells Service contracts External appointment Date of contract Notice period to the Company Notice period from the Company External appointment during 2019 Fee received in the period the Executive Director was a Group Director 11 October 2018 17 May 2017 8 December 2010 27 April 2009 1 March 2018 21 May 2015 12 months 12 months 12 months 12 months 12 months 12 months 12 months 12 months 12 months 12 months 12 months 12 months – – – – Yes – – – – – £60,000 – Directors served on the boards of educational, charitable and cultural organisations without receiving a fee for these services. Details of changes to the Board of Directors during the year are set out in the ‘Governance’ report. prudentialplc.com Prudential plc Annual Report 2019 167 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationMark FitzPatrickJames TurnerMike Wells1,4001,2001,00080060040020002501402504001,247175 ANNUAL REPORT ON REMUNERATION CONTINUED Letters of appointment of the Chairman and Non-executive Directors Details of Non-executive Directors’ individual appointments are outlined below. The Directors’ remuneration policy contains further details on their letters of appointment. Chairman/Non-executive Director Appointment by the Board Notice period Time on the Board at 2020 AGM Chairman Paul Manduca Non-executive Directors Philip Remnant Howard Davies David Law Kai Nargolwala Anthony Nightingale Alice Schroeder Thomas Watjen Fields Wicker-Miurin Amy Yip 15 October 2010 (Chairman from July 2012) 12 months 9 years 7 months 1 January 2013 15 October 2010 15 September 2015 1 January 2012 1 June 2013 10 June 2013 11 July 2017 3 September 2018 2 September 2019 6 months 6 months 6 months 6 months 6 months 6 months 6 months 6 months 6 months 7 years 4 months 9 years 7 months 4 years 8 months 8 years 4 months 6 years 11 months 6 years 11 months 2 years 10 months 1 year 8 months 8 months Note On 10 December 2019 and 30 January 2020 the Company announced the appointment of Non-executive Directors, Jeremy Anderson and Shriti Vadera, to the Board effective 1 January 2020 and 1 May 2020 respectively. Recruitment and relocation arrangements In making decisions about the remuneration arrangements for those joining the Board, the Committee worked within the current Directors’ remuneration policy approved by shareholders and was mindful of: — The skills, knowledge and experience that each new Executive Director brought to the Board; — The need to support the relocation of executives to enable them to assume their roles; and — Its commitment to honour legacy arrangements. Appointing high-calibre executives to the Board and to different roles on the Board is necessary to ensure the Company is well positioned to develop and implement its strategy and deliver long-term value. As the Company operates in an international market place for talent, the best internal and external candidates are sometimes asked to move location to assume their new roles. Where this happens, the Company will offer relocation support. The support offered will depend on the circumstances of each move but may include paying for travel, shipping services, the provision of temporary accommodation and other housing benefits. Executives may receive support with the preparation of tax returns, but no current Executive Director is tax equalised. Michael Falcon Michael Falcon was appointed as Chairman and Chief Executive Officer, Jackson National Holdings LLC and joined the Board on 7 January 2019. Details of his remuneration arrangements on appointment, including the terms of his buy-out awards, were disclosed in the 2018 Directors’ Remuneration Report. Details of the remuneration he received during 2019 in his role as Executive Director of Prudential plc, including his buy-out award, are set out in the 2019 ‘single figure’ table. James Turner James Turner relocated to Hong Kong in August 2019 in order to support our dialogue with the Hong Kong IA. Relocation support was provided in line with the current Directors’ remuneration policy and included shipping of personal effects from the UK, temporary accommodation, a housing allowance for his permanent Hong Kong residence and support for visa applications and the preparation of necessary Hong Kong tax returns. Ongoing benefits will be provided in line with the local Prudential Corporation Asia policies. Since Mr Turner has moved with his school-aged child, he received education support on the same basis as other executives based in Hong Kong. Details of the remuneration he received during 2019 in his role as Group Chief Risk and Compliance Officer, including this relocation support are set out in the 2019 ‘single figure’ table. 168 Prudential plc Annual Report 2019 prudentialplc.com Payments to past Directors and payments for loss of office The Committee’s approach when exercising its discretion under the policy is to be mindful of the particular circumstance of the departure and the contribution the individual made to the Group. On 21 May 2019, the Company confirmed that John Foley, Chief Executive of M&GPrudential, Nic Nicandrou, Chief Executive of Prudential Corporation Asia, and Michael Falcon, Chairman and Chief Executive Officer, Jackson Holdings LLC, stepped down as members of the Prudential plc Board at the end of the Annual General Meeting on 16 May 2019 as part of our progress towards the demerger of M&G plc. They remained in their executive roles and continued to be members of the Group Executive Committee with Mr Foley leaving the Group on 21 October 2019 on the demerger of M&G plc. The remuneration of these executives was managed in line with the currently approved Directors’ remuneration policy and they have not received any loss of office payment in respect of their service as Directors. Michael Falcon An annual incentive award has been paid to Michael Falcon for the whole of 2019 as he remained a member of the Group Executive Committee after leaving the Board. This award was determined on performance achieved when the 2019 results were known. Sixty per cent of it was paid in cash in the usual way, and 40 per cent was deferred into Prudential ADRs (to be released in the Spring of 2023). In addition, he was eligible to receive a 10 per cent share of the Jackson bonus pool of which 40 per cent is similarly deferred. These awards continue to be subject to malus and clawback provisions. Mr Falcon’s 2019 PLTIP award will vest in line with the original vesting date, subject to the satisfaction of the original performance conditions. These awards will also continue to be subject to the original malus and clawback provisions, and awards will remain subject to a two-year holding period following the end of the three-year performance period. The terms of Mr Falcon’s buy-out awards as disclosed in the 2018 Directors’ remuneration report have not been changed and awards will vest in line with the original vesting schedule. The number of Prudential ADRs over which options have been granted has been adjusted in line with the approach set out in the section on ‘Remuneration decisions taken in relation to the demerger’. In November 2019, Mr Falcon exercised the first tranche of this replacement award. The gross value of the award exercised (which included dividend equivalents) was $464,198. Mr Falcon is the sole participant in this arrangement and no further awards will be made to Mr Falcon under this plan. Details of the remuneration received during 2019 in respect of his role as an Executive Director are set out in the 2019 single figure table. John Foley Following his retirement from the Board on 16 May 2019, John Foley’s employment with the Group ended on 21 October 2019 on the demerger of M&G plc and he continued as the Chief Executive Officer, M&G plc. The Committee determined that Mr Foley would not receive a bonus from Prudential plc for any part of the 2019 performance year. On the demerger date, Mr Foley’s unvested awards under the Prudential deferred AIP and the PLTIP were cancelled by Prudential plc. These awards were converted by M&G plc into awards over M&G plc shares in line with the M&G plc Directors’ remuneration policy. Further information on Mr Foley’s 2019 remuneration arrangements may be found in the M&G plc 2019 Directors’ remuneration report. Nic Nicandrou An annual incentive award has been paid to Nic Nicandrou for the whole of 2019 as he remained a member of the Group Executive Committee after leaving the Board. This award was determined on performance achieved when the 2019 results were known. Sixty per cent of it was paid in cash in the usual way, and 40 per cent was deferred into Prudential plc shares (to be released in the Spring of 2023). This award continues to be subject to malus and clawback provisions. Details of the remuneration received during 2019 in respect of his role as an Executive Director are set out in the 2019 ‘single figure’ table. Mr Nicandrou’s unvested awards under the Prudential deferred AIP will be released on the original timetable and remain subject to malus and clawback provisions. Outstanding long-term incentive awards will vest in line with the original vesting dates, subject to the satisfaction of the original performance conditions. The number of Prudential plc shares under award have been adjusted in line with the approach set out in the section on ‘Remuneration decisions taken in relation to the demerger’. These awards will also continue to be subject to the original malus and clawback provisions, and awards will remain subject to a two-year holding period following the end of the three-year performance period. prudentialplc.com Prudential plc Annual Report 2019 169 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationANNUAL REPORT ON REMUNERATION CONTINUED Barry Stowe Barry Stowe retired as Chairman and Chief Executive, NABU on 31 December 2018. He remained as an adviser to the Group until his employment ended on 31 December 2019. Mr Stowe received US$1,466,000 in respect of salary, benefits, and pension between 1 January and 31 December 2019. As disclosed in the 2018 Directors’ remuneration report, the Committee exercised its discretion in accordance with the approved Directors’ remuneration policy and determined that Mr Stowe should be allowed to keep his unvested 2017 and 2018 PLTIP awards which will vest in line with the original vesting dates, subject to the satisfaction of the performance conditions under the plan rules, remain subject to malus and clawback provisions, and will be pro-rated for service to the date Mr Stowe retired from the Board to 31 December 2018. Mr Stowe was not eligible for a 2019 bonus and was not granted a 2019 PLTIP award. As set out in the section ‘Remuneration in respect of performance in 2019’ the performance conditions attached to Mr Stowe’s 2017 PLTIP awards were partially met and 68.75 per cent will be released in 2020. The number of Prudential plc ADRs under award have been adjusted in line with the approach set out in the section on ‘Remuneration decisions taken in relation to the demerger’. The details of Mr Stowe’s award are set out below: Award Prudential LTIP Number of ADRs vesting1 Value of ADRs vesting2 62,395 £1,777,756 Notes 1 The number of ADRs vesting include accrued dividends. 2 The ADR price used to calculate the value was the average ADR price for the three months up to 31 December 2019, being US$36.37. Tony Wilkey Tony Wilkey stepped down from the Board on 17 July 2017 and his employment ended with the Group on 17 July 2018. As disclosed in the 2017 Directors’ remuneration report, the Committee exercised its discretion in accordance with the approved Directors’ remuneration policy and determined that Mr Wilkey should be allowed to keep his unvested PLTIP awards granted in 2017. This award will vest in accordance with the original timetable, subject to the original performance conditions, remain subject to malus and clawback provisions, and will be pro-rated for service. This is the last PLTIP award that will vest to Mr Wilkey. As set out in the section ‘Remuneration in respect of performance in 2019’ the performance conditions attached to Mr Wilkey’s 2017 PLTIP awards were partially met and 61.75 per cent will be released in 2020. The number of Prudential plc shares under award have been adjusted in line with the approach set out in the section on ‘Remuneration decisions taken in relation to the demerger’. The details of Mr Wilkey’s award are set out below: Award Prudential LTIP Number of shares vesting1 Value of shares vesting2 44,969 £622,821 Notes 1 The number of shares vesting include accrued dividend shares. 2 The share price used to calculate the value was the average share price for the three months up to 31 December 2019, being £13.85. Other Directors A number of former Directors receive retiree medical benefits for themselves and their partner (where applicable). This is consistent with other senior members of staff employed at the same time. A de minimis threshold of £10,000 has been set by the Committee; any payments or benefits provided to a past Director above this amount will be reported. 170 Prudential plc Annual Report 2019 prudentialplc.com Statement of voting at general meeting At the 2017 Annual General Meeting, shareholders were asked to vote on the current Directors’ remuneration policy and at the 2019 Annual General Meeting, shareholders were asked to vote on the 2018 Directors’ remuneration report. Each of these resolutions received a significant vote in favour by shareholders and the Committee is grateful for this support and endorsement by our shareholders. The votes received were: Resolution To approve the Directors’ remuneration Votes for % of votes cast Votes against % of votes cast Total votes cast Votes withheld policy (2017 AGM) 1,773,691,171 90.71 181,582,497 9.29 1,955,273,668 45,820,585 To approve the Directors’ remuneration report (2019 AGM) 1,948,451,528 95.71 87,313,483 4.29 2,035,765,011 6,608,034 Statement of implementation in 2020 Base salary Executive Directors’ remuneration packages were reviewed in 2019 with changes effective from 1 January 2020. When the Committee took these decisions, it considered the salary increases awarded to other employees in 2019 and the expected increases in 2020. The external market reference points used to provide context to the Committee were similar to those used for 2019 salaries. All Executive Directors received a salary increase of 2 per cent. The 2020 salary increase budgets for other employees across the Group’s business units were between 2.5 per cent and 5.1 per cent. Pension entitlements from 2020 As set out in the Annual statement from the Chairman of the Remuneration Committee, externally or internally-recruited Executive Directors appointed on or after the date of the 2020 AGM will be offered pension benefits of 13 per cent of salary, aligned with the employer pension contribution available to the UK workforce and broadly reflecting the pension benefits for the workforce in locations across Asia and the US. The Committee intends to reduce incumbent Executive Directors’ pension benefits from 25 per cent to 20 per cent of salary on the following basis: — From 14 May 2020 (the effective date of the new policy), incumbent Executive Directors’ pension benefits will be reduced to 22.5 per cent of base salary; and — From 14 May 2021, incumbent Executive Directors’ pension benefits will be reduced to 20 per cent of base salary. In addition, statutory contributions will continue to be made into mandatory pension arrangements in the country in which the Executive Directors are based, in line with the local requirements. Annual bonus No changes have been made to the bonus opportunities for Executive Directors for 2020. In recent years, bonuses for the Group Chief Risk and Compliance Officer have been based entirely on a combination of personal and functional measures, an approach aligned with Solvency II remuneration requirements under the PRA. In 2020 the Committee has introduced a financial element in the bonus for the Group Chief Risk and Compliance Officer. The 2020 bonus for this role will be based on 40 per cent Group financial measures, 40 per cent functional objectives and 20 per cent personal measures. This is in line with the current draft of the Hong Kong IA’s guideline on the remuneration of key persons in control functions. It reflects the Committee’s view that it is important that this role and other control function staff continue to demonstrate long-term commercial sensitivity and are rewarded in a way which allows the Company to recruit the very best talent to these roles. AIP payments for all Executive Directors have been previously subject to meeting Solvency II minimum capital thresholds which were aligned to the Group and business unit risk framework and appetites (as adjusted for any Group Risk Committee and/or business unit risk committees approved counter-cyclical buffers). This will be replaced with LCSM minimum capital thresholds aligned to the Group and business unit framework and appetites. No other changes have been made to the bonus performance measures and weightings for the other Executive Directors. prudentialplc.com Prudential plc Annual Report 2019 171 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationANNUAL REPORT ON REMUNERATION CONTINUED 2020 share-based long-term incentive awards Award levels No change to the PLTIP award levels of the Group Chief Executive of 400 per cent of base salary or the Group Chief Risk and Compliance Officer of 250 per cent of base salary are proposed. In recognition of Mark FitzPatrick’s expanded role and responsibilities in 2019, together with the Board’s view of his strong performance, potential and criticality to the Group, the Committee intends to increase the value of his long-term incentive award within the current policy limit for 2020 to 300 per cent of base salary (from 250 per cent at present). This approach is also considered to support the promotion of stewardship and long-term focus. Performance conditions The post-demerger Prudential Group is focused on capturing the structural growth opportunity across the Asian and African markets under Prudential Corporation Asia, its Asian business unit. In the US, its business unit, Jackson, will seek to benefit from the growing retirement market and to provide enhanced cash generation to the post-demerger Prudential Group. The Executive Directors’ long-term incentive awards will continue to be made under the PLTIP. The Company will look to build long-term shareholder value by continuing to focus on achieving sustainable, profitable growth and retaining a resilient balance sheet, with a disciplined approach to active capital allocation. As set out in the 2018 Directors’ remuneration report and following our conversations with investors last year, the vesting of the major part of 2019 awards under the PLTIP is dependent on the achievement of a relative TSR target. As also indicated in last year’s report, this was appropriate in the context of the demerger and the Committee intended to develop performance measures for 2020 and subsequent years in light of the evolving priorities of the business. To this end, the Committee will introduce a new return on equity performance measure, operating return on average shareholders’ funds, for the 2020 PLTIP awards, incentivising the efficient use of capital as well as shareholder returns. Using this metric alongside TSR and a sustainability scorecard will ensure that the full value of long-term incentive awards is attained only where capital is effectively deployed in a way that creates shareholder returns superior to those delivered by peers while conduct and diversity expectations are met. The weighting of measures for the 2020 PLTIP awards will be as follows: — Relative TSR (50 per cent of award); — A return on equity measure (30 per cent of award); and — Sustainability scorecard of strategic measures (20 per cent of award). The proportion of 2020 long-term incentive awards which will vest for threshold performance will remain at 20 per cent. This level of threshold vesting is formalised in the proposed 2020 Directors’ remuneration policy. Since these measures are in line with the remuneration requirements for control staff under the draft Hong Kong IA Corporate Governance Guideline, the weightings of the Group Chief Risk and Compliance Officer’s PLTIP performance targets will be the same as that of the other Executive Directors. Relative TSR Under the Group TSR measure, 20 per cent of the award will vest for TSR at the median of the peer group, increasing to full vesting for performance within the upper quartile. TSR is measured on a local currency basis since this has the benefit of simplicity and directness of comparison. A comprehensive review of the TSR peer group which anticipated the Group’s post-demerger footprint was undertaken for the 2019 PLTIP awards. The companies were selected based on organisational size, product mix and geographical footprint. The peer group for 2020 PLTIP awards is the same as that used for 2019 and is set out below: Aegon Great Eastern Ping An Insurance AIA Lincoln National Principal Financial AXA Equitable Manulife Prudential Financial China Taiping Insurance MetLife Sun Life Financial Operating return on average shareholders’ funds Operating return on average shareholders’ funds is calculated as adjusted IFRS operating profit based on longer-term investment returns (‘adjusted operating profit’) after tax and net of non-controlling interests divided by average shareholders’ funds, is assessed at Group level. 20 per cent of the award will vest for achieving the threshold level of performance of 16.7 per cent, increasing to full vesting for reaching the stretch level of at least 22.9 per cent. 172 Prudential plc Annual Report 2019 prudentialplc.com Sustainability scorecard Under the 2020 sustainability scorecard, performance will be assessed for each of the four measures, at the end of the three-year performance period. Performance will be assessed on a sliding scale. Each of the measures has equal weighting and the 2020 measures are set out below: Capital measure: Cumulative three-year ECap Group operating capital generation relative to plan, less cost of capital (based on the capital position at the start of the performance period). Vesting basis: 20 per cent vesting for achieving Plan, increasing to full vesting for performance above stretch level. The plan figure for this metric will be published in the Annual Report for the final year of the performance period. Capital measure: Cumulative three-year LCSM operating capital generation relative to plan Vesting basis: 20 per cent vesting for achieving Plan, increasing to full vesting for performance above stretch level. The plan figure for this metric will be published in the Annual Report for the final year of the performance period. Conduct measure: Through strong risk management action, ensure there are no significant conduct/culture/governance issues that result in significant capital add-ons or material fines. Vesting basis: 20 per cent vesting for partial achievement of the Group’s expectations, increasing to full vesting for achieving the Group’s expectations. Diversity measure: Percentage of the Leadership Team that is female at the end of 2022. The target for this metric will be based on progress towards the goal that the Company set when it signed the Women in Finance Charter, specifically that 30 per cent of our Leadership Team will be female by the end of 2021. Vesting basis: 20 per cent vests for meeting the threshold of at least 27 per cent of our Leadership Team being female at the end of 2022, increasing to full vesting for reaching the stretch level of at least 33 per cent being female at that date. Changes in line with the 2020 Directors’ remuneration policy Post-directorship share ownership The Committee is building on the share ownership guidelines which apply to executives during their employment by introducing a formal, post-employment shareholding guideline. Executive Directors will, on leaving the Board, be required to maintain their in-employment share ownership guideline for a period of two years or their actual shareholding on the date of their retirement from the Board if lower. This obligation will be implemented by requiring retiring Executive Directors to obtain clearance to deal in the Company’s shares during the two years following their retirement in the same way as they must during the time on the Board. No changes have been made to Executive Directors’ in-employment share ownership guidelines. Chairman and Non-executive Directors Fees for the Chairman and Non-executive Directors were reviewed in 2019 with changes effective from 1 July 2019, as set out under the ‘Chairman and Non-executive Director remuneration in 2019’ section. The next review will be effective 1 July 2020. Fees for the Chairman will be paid in US dollars from May 2020. prudentialplc.com Prudential plc Annual Report 2019 173 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information New Directors’ remuneration policy This section sets out the revised Directors’ remuneration policy which will be put forward to shareholders for a binding vote at the 2020 AGM on 14 May 2020. If approved this policy will apply immediately for three years following the AGM. This policy has evolved from the current policy which was approved at the AGM held on 18 May 2017 and has applied from that date. As discussed in the Annual statement from the Chairman of the Remuneration Committee, the current policy has operated as intended. Full details of the existing policy can be found on pages 135 to 150 of the 2016 Annual Report or on our website at www.prudentialplc.com/investors/governance-and-policies/directors-remuneration-policy During 2019, the Committee reviewed the policy, taking into account the demerger, the views of our shareholders, the new UK Corporate Governance Code, evolving market practice and the broader regulatory and competitive environment. It also considered workforce remuneration and related policies in the business units across the Group, including how the Company’s incentive arrangements are aligned with culture. Input was sought from the management team, while ensuring that conflicts of interest were suitably mitigated. In reviewing the policy, alternative remuneration structures were considered. Following careful consideration, the Committee decided to retain the key features of the current remuneration model since it is appropriate for a growth company, is well understood and drives the right behaviour and outcomes. However, as described in the Chairman’s letter, the Committee felt that it was important to make changes to specific components in order to: — Align reward with the strategic priorities and capital framework of the post-demerger business; — Strengthen the community of interest between executives and other shareholders; and — Foster alignment between the remuneration of executives and the wider workforce. Fixed pay policy for Executive Directors Component and purpose Operation Opportunity Annual salary increases for Executive Directors will normally be in line with the increases for other employees unless there is a change in role or responsibility. Base salary Paying salaries at a competitive level enables the Company to recruit and retain key executives. Prudential’s policy is to offer all Executive Directors base salaries that are competitive within their local market. The Committee reviews salaries annually with changes normally effective from 1 January. In determining base salary for each executive, the Committee considers factors such as: — Salary increases for other employees across the Group; — The performance and experience of the executive; — The size and scope of the role; — Group financial performance; — Internal relativities; and — External factors such as economic conditions and market data, taking into account the geographies and markets in which the Company operates. While salaries are typically paid in the local currency of the country where the executive is based, the Committee may determine that the salary of an executive is set or paid in an alternative currency. 174 Prudential plc Annual Report 2019 prudentialplc.com Component and purpose Operation Opportunity Benefits Provided to executives to assist them in carrying out their duties efficiently. Prudential’s policy is for the Committee to have the discretion to offer Executive Directors benefits which reflect their individual circumstances and are competitive within their local market, including: Expatriate and relocation benefits allow Prudential to attract high calibre executives in the international talent market and to deploy them appropriately within the Group. Provision for an income in retirement Pension benefits provide executives with opportunities to save for an income in retirement. — Health and wellness benefits; — Protection and security benefits; — Transport benefits; — Family and education benefits; — All employee share plans and savings plans; — Relocation and expatriate benefits; and — Reimbursed business expenses (including any tax liability) incurred when travelling overseas in performance of duties. Prudential’s policy is to offer all Executive Directors a pension provision that is competitive and appropriate in the context of pension benefits for the wider workforce. Executives have the option to: — Receive payments into a defined contribution scheme; and/or — Take a cash supplement in lieu of contributions. In addition, Executive Directors may receive statutory contributions to mandatory pension arrangements in the country in which they are based in line with local requirements. The maximum paid will be the cost to the Company of providing these benefits. The cost of these benefits may vary from year to year but the Committee is mindful of achieving the best value from providers. New Executive Directors, either externally recruited or promoted from within the Company, will be entitled to receive pension contributions or a cash supplement (or a combination of the two) of 13 per cent of base salary. Current Executive Directors are entitled to receive pension contributions or a cash supplement (or combination of the two) of 22.5 per cent of base salary from the date of this Policy (a reduction from 25 per cent of base salary in the previous Policy) and 20 per cent of base salary from 14 May 2021. In addition, statutory contributions will be made to mandatory pension arrangements in the country in which the Executive Directors are based, in line with the local requirements. Annual bonus policy for Executive Directors Annual bonus Payments under the Annual Incentive Plan (AIP) incentivise the delivery of stretching financial, functional and/or personal objectives which are drawn from the annual business plan. Operation Currently all Executive Directors participate in the AIP. The AIP payments for all Executive Directors are subject to the achievement of financial, functional and/or personal objectives. Form and timing of payment All Executive Directors are required to defer a percentage of their total annual bonus into Prudential shares. Currently all Executive Directors defer 40 per cent of their bonus for three years, with the remaining proportion of their bonus paid in cash following the end of the performance year. The release of deferred bonus awards is not subject to any further performance conditions. Deferred bonus awards carry the right to accumulate an amount to reflect the dividends paid on the released shares during the deferral period. These dividend equivalents will normally be settled in shares, but there is the flexibility to deliver them in cash. The Committee has the authority to apply clawback and/or a malus adjustment to all, or a portion of, the cash and deferred award elements of the bonus. More details about clawback and malus are set out below. See the ‘Policy on corporate transactions’ section for details of the Committee’s powers in the case of corporate transactions. prudentialplc.com Prudential plc Annual Report 2019 175 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationNEW DIRECTORS’ REMUNERATION POLICY CONTINUED Determining annual bonus awards Opportunity Performance measures Amendments Committee discretions In assessing financial performance, the Committee determines the AIP award for each Executive Director with reference to the performance achieved against approved performance ranges. In assessing performance, the Committee will take into account the personal performance of the Executive Director and the Group’s risk framework and appetite, as well as other relevant factors. To assist them in their assessment the Committee considers advice from the Group Risk Committee on adherence to the Group’s risk framework and appetite and to all relevant conduct standards. The Committee may adjust the formulaic outcome based on the performance targets to reflect the underlying performance of the Company by applying discretion within the limits of the Policy. The Committee will disclose in the next Directors’ Remuneration Report where discretion is used. The maximum AIP opportunity is up to 200 per cent of salary for Executive Directors. Annual awards are disclosed in the relevant Annual report on remuneration. The Committee has the discretion, for each Executive Director, to determine the specific performance conditions attached to each AIP cycle and to set annual targets for these measures with reference to the business plans approved by the Board. The financial measures used for the AIP will typically include profit and cash flow targets and payments depend on the achievement of minimum capital thresholds and operation within the Board approved risk framework and appetite. For the measures to be used in 2020, please refer to the Annual report on remuneration. No bonus is payable under the AIP for performance at or below the threshold level, increasing to 100 per cent for achieving or exceeding the maximum level. The weightings of the performance measures for 2020 for all Executive Directors, other than the Group Chief Risk and Compliance Officer, are 80 per cent Group financial measures and 20 per cent personal measures. For the Group Chief Risk and Compliance Officer, the weightings of performance measures for 2020 are 40 per cent Group financial measures, 40 per cent functional objectives and 20 per cent personal measures. The Committee retains the discretion to adjust and/or set different performance measures and/or targets if events occur (such as a change in strategy, a material acquisition and/or divestment of a Group business, a change in share capital of the Company, a change in the capital framework, or the requirements of the Company’s regulators or a change in prevailing market conditions) which cause the Committee to determine that the measures and/or targets are no longer appropriate and that amendment is required so that they achieve their original purpose (or comply with such regulatory requirements). The Committee may make amendments to the rules of the deferred bonus plan which it considers appropriate (such as amendments which benefit the administration of the plan) but it will not make any amendments which are incompatible with the approved Directors’ remuneration policy. In determining awards under the AIP, the Committee retains the discretion to adjust the formulaic outcome against any or all measures if it considers that the outcome does not reflect the underlying financial or non- financial performance of the participant or any member of the Group over the performance period and/or there exists any other reason why an adjustment is appropriate, taking into account such factors as the Committee considers relevant. 176 Prudential plc Annual Report 2019 prudentialplc.com Long-term incentive policy for Executive Directors Prudential Long Term Incentive Plan (PLTIP) The Prudential Long Term Incentive Plan is designed to incentivise the delivery of: — Longer-term business plans; — Sustainable long-term returns for shareholders; and — Group strategic priorities, such as disciplined risk and capital management. Operation Currently all Executive Directors participate in the PLTIP. Prudential’s policy is that Executive Directors may receive long-term incentive awards with full vesting only achieved if the Company meets stretching performance targets. The rules of the PLTIP were approved by shareholders in 2013. Subsequent to this, minor amendments have been made to the rules to incorporate clawback provisions, provide for a holding period and to ensure participants were no better or no worse off as a result of the demerger of M&G plc from Prudential plc. Granting awards The PLTIP is a conditional share plan: the shares which are awarded will ordinarily vest after three years to the extent that performance conditions have been met. If performance conditions are not achieved, the unvested portion of any award lapses and performance cannot be retested. The PLTIP has a three-year performance period (although the Committee has the discretion to apply shorter or longer performance periods when the PLTIP is used for buy-out awards on recruitment – see the ‘Approach to recruitment remuneration’ section). Holding period Awards made under this Policy are normally subject to a holding period which ends on the fifth anniversary of the award (except for buyout awards made under the PLTIP or, for example, in the case of the death of an executive). The Company may sell such number of shares as is required to satisfy any tax liability that arises on vesting. The balance of shares will be subject to the holding period. Determining the release of the award The Committee has the authority to apply clawback and/or a malus adjustment to all, or a portion of, a PLTIP award. More details about clawback and malus are set out below. Awards carry the right to accumulate an amount to reflect the dividends paid on the released shares, during the period between the awards being granted and the award vesting. Dividend equivalents will normally be settled in shares, but there is the flexibility to deliver them in cash. Opportunity The value of shares awarded under the PLTIP (in any given financial year) may not exceed 550 per cent of the executive’s annual basic salary. Awards made in a particular year are usually significantly below this limit. In 2020, the Committee intends to make awards at the following levels under the PLTIP (as a percentage of base salary): Group Chief Executive 400 per cent Group Chief Financial Officer and Chief Operating Officer 300 per cent Group Chief Risk and Compliance Officer 250 per cent The Committee would consult with major shareholders before making any increase to current award levels. Award levels are disclosed in the relevant Annual report on remuneration. The maximum vesting under the PLTIP is 100 per cent of the original share award plus accrued dividend equivalents. prudentialplc.com Prudential plc Annual Report 2019 177 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information NEW DIRECTORS’ REMUNERATION POLICY CONTINUED Performance measures Committee discretions The performance conditions attached to PLTIP 2020 awards for all Executive Directors are: — Relative TSR (50 per cent of award); — A Return on Equity measure (30 per cent of award); and — Sustainability scorecard measures (20 per cent of award). Using a Return on Equity metric alongside TSR and a sustainability scorecard will ensure that the full value of long-term incentive awards is attained only where capital is effectively created and deployed in a way which creates shareholder returns superior to those delivered by peers while conduct and diversity expectations are met. The Committee may decide to attach different performance conditions and/or change the conditions’ weighting for future PLTIP awards. The performance conditions attached to each award will be disclosed in the relevant Annual report on remuneration. Relative TSR is measured over three years. 20 per cent of this portion of each award will vest for achieving the threshold level of median, increasing to full vesting for meeting the stretch level of upper quartile. TSR is measured against a peer group of international insurers similar to Prudential in size, geographic footprint and products. The peer group for each award is disclosed in the relevant Annual report on remuneration. Three year cumulative Return on Equity, defined as Operating return on average shareholder funds, calculated as adjusted IFRS operating profit based on longer-term investment returns (‘adjusted operating profit’) after tax and net of non-controlling interests divided by average shareholder funds, is assessed at Group level. Threshold and maximum achievement levels will be set at the beginning of the performance periods in line with the three-year business plan. 20 per cent of this portion of the award will vest for achieving threshold performance increasing to full vesting for meeting stretch targets. Performance against the measures in the scorecard of sustainability measures is assessed at the end of the three-year performance period. For the 2020 awards these measures will be equally weighted. 20 per cent of this portion of the award will vest for achieving threshold performance increasing to full vesting for meeting stretch targets. The scorecard measures for each award are disclosed in the relevant Annual report on remuneration for the year of grant. The Committee also considers advice from the Group Risk Committee on whether results were achieved within the Group’s and business units’ risk framework and appetite and to all relevant conduct standards. For any award made under the PLTIP to vest, the Committee must be satisfied that the quality of the Company’s underlying financial performance justifies the level of reward delivered at the end of the performance period. The Committee receives data about factors such as risk management and the cost of capital to support their decision. The Committee has the discretion to alter or disapply the holding period if it believes that it is appropriate. See the ‘Policy on corporate transactions’ section for details of the Committee’s powers in the case of corporate transactions. The Committee retains the ability to amend the performance conditions and/or targets attached to an award and/ or set different performance measures (or to revise the weighting of measures) which apply to new or outstanding long-term incentive awards if: — events occur which cause the Committee to determine that circumstances relevant to the performance conditions have changed such that the measures described in this section are no longer appropriate; and — that amendment is required so that they achieve their original purpose, provided the Committee is satisfied that the amended measure and/or target range will be a fairer measure of performance and no more or less demanding than the original condition. Examples of such events could include a change in strategy, a material acquisition and/or divestment of a Group business or a change in the share capital of the Company, a change in the requirements of the Company’s regulators or a change in prevailing market conditions. The Committee would seek to consult with major shareholders before revising performance conditions on outstanding awards under the PLTIP. It is the intention of the Committee that PLTIP awards should normally reflect the outcomes of performance measures set. However, the Committee may, in its discretion, adjust (including by reducing to nil) the formulaic outcome under the PLTIP if it considers that: (i) the extent to which any performance condition has been met does not reflect the underlying financial or non-financial performance of the participant or any member of the Group over the performance period; or (ii) there exists any other reason why an adjustment is appropriate, taking into account such factors as the Committee considers relevant, including the context of circumstances that were unexpected or unforeseen at the date of grant. Amendments The Committee may make amendments to the rules of the Plan which are minor and benefit the administration of the Plan, which take account of any changes in legislation, and/or which obtain or maintain favourable tax, exchange control or regulatory treatment. Otherwise no amendments may be made to certain key provisions of the PLTIP to the advantage of participants without prior shareholder approval. 178 Prudential plc Annual Report 2019 prudentialplc.com Share ownership guidelines for Executive Directors It is imperative that the Company’s remuneration arrangements align the interests of executives and other shareholders. The following reinforces this alignment. In-employment guidelines Under the Articles of Association, all Executive Directors are required to hold at least 2,500 shares and have one year, from their date of appointment to the Board, to acquire these. The share ownership guidelines for the Executive Directors during their employment are: — 400 per cent of salary for the Group Chief Executive; — 250 per cent of salary for the Group Chief Financial Officer and Chief Operating Officer; and — 250 per cent of salary for the Group Chief Risk and Compliance Officer. Executives normally have five years from the later of the date of their appointment or promotion, or the date of an increase in these guidelines, to build this level of ownership. Shares earned and deferred under the AIP are included in calculating the Executive Director’s shareholding for these purposes, as are shares held by members of an Executive Director’s household. Unvested share awards under long-term incentive plans are not included but vested share awards under long-term incentive plans which are subject to the holding period are included. Progress against the share ownership guidelines is detailed in the ‘Statement of Directors’ shareholdings’ section of the Annual report on remuneration. Should an Executive Director not meet the share ownership guidelines, the Remuneration Committee retains the discretion to determine how this should be addressed, taking account all of the prevailing circumstances. In the absence of mitigating circumstances, if an Executive Director fails to comply with the share ownership guideline in the required timeframe and has not (in the opinion of the Remuneration Committee) taken reasonable steps to achieve compliance, despite encouragement to do so, then the Remuneration Committee may take steps including preventing the individual from selling shares/ADRs or mandating the use of any cash bonuses to buy Prudential plc shares/ADRs. Post Directorship guidelines When an Executive Director leaves the Board, they will be required to hold the lower of their actual shareholding on the date of their retirement from the Board and their in-employment share ownership guideline for a period of two years. The Committee has the discretion to disapply or reduce this requirement in extenuating circumstances, for example if the Executive Director takes up a role with a Regulator or for compassionate reasons (such as genuine financial hardship or on death). prudentialplc.com Prudential plc Annual Report 2019 179 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationNEW DIRECTORS’ REMUNERATION POLICY CONTINUED Malus and clawback policy As detailed in the policy table, the Committee may apply clawback and/or a malus adjustment to variable pay in certain circumstances as set out below. The Committee can delay the release of awards pending the completion of an investigation which could lead to the application of malus or clawback. Malus (applies in respect of any annual bonus or long-term incentive award) Allows unvested shares awarded under deferred bonus and LTIP plans to be forfeited or reduced in certain circumstances. Clawback Allows cash and share awards, including shares subject to the holding period, to be recovered before or after release in certain circumstances. Circumstances when the Committee may exercise its discretion to apply malus or clawback to an award Where a business decision taken during the performance period by the business which the participant leads has resulted in a material breach of any law, regulation, code of practice or other instrument that applies to companies or individuals within the business. Where there is a materially adverse restatement of the accounts for any year during the performance period of (i) the business unit in which the participant worked at any time in that year; and/or (ii) any member of the Group which is attributable to incorrect information about the affairs of that business unit; or (iii) for awards made in 2020 or later, it becomes apparent that the calculation of payments was based on erroneous or misleading data or otherwise incorrect. Where an individual’s personal conduct during the relevant performance period has resulted in the Company, or any member of the Group, suffering significant reputational or financial damage; the potential to cause significant reputational or financial damage; and/or the material breach of the Group’s business code of conduct or law. Where any matter arises which the Committee believes affects or may affect the reputation of the Company or any member of the Group. Clawback may be applied: — For the PLTIP, where at any time before the fifth anniversary of the award date, and — For the AIP, where at any time before the fifth anniversary of the end of the bonus performance period where either (i) there is a materially adverse restatement of the Company’s published accounts in respect of any financial year which (in whole or part) comprised part of the performance period; or (ii) it becomes apparent that a material breach of a law or regulation took place during the performance period which resulted in significant harm to the Company or its reputation, and the Committee considers it appropriate, taking account of the extent of the participants’ responsibility for the relevant restatement or breach, that clawback be applied to the relevant participant; or (iii) for awards made in 2020 or later, it becomes apparent that the calculation of payments was based on erroneous or misleading data or otherwise incorrect. Where an individual’s personal conduct during the relevant performance period has resulted in the Company, or any member of the Group, suffering significant reputational or financial damage; the potential to cause significant reputational or financial damage; and/or the material breach of the Group’s business code of conduct or law. Notes to the remuneration policy table for Executive Directors Committee’s judgement The Committee is required to make judgements when assessing Company and individual performance under the Directors’ remuneration policy. In addition, the Committee has discretions under the Company’s share plans, for example, determining if a leaver should retain or lose their unvested awards and whether to apply malus or clawback to an award. Exercise of such discretion during the year will be reported and explained in the next Annual report on remuneration. The Committee may approve payments or awards in excess of, in a different form to, or calculated or delivered other than as described above, where the Committee considers such changes necessary or appropriate in light of regulatory requirements. If these changes are considered by the Committee to be material, the Company will seek to consult with its major shareholders. Determining the performance measures The Committee selected the performance measures that currently apply to variable pay plans on the following basis: AIP The performance measures are selected to incentivise the delivery of the Group’s business plan, specifically to ensure that financial objectives are delivered while maintaining adequate levels of capital. Executives are also rewarded for the achievement of functional and/or personal objectives. These objectives include the executive’s contribution to Group strategy as a member of the Board, achievement of the Group’s strategic priorities and, for the Group Chief Risk and Compliance Officer, specific goals related to the Risk and Compliance function. 180 Prudential plc Annual Report 2019 prudentialplc.com PLTIP Awards made under the PLTIP in 2020 are subject to the achievement of Return on Equity, relative TSR and a sustainability scorecard : — Return on Equity was selected as a performance measure for the PLTIP because it is a familiar measure for investors, is comparable across the market and also aligns performance incentives to the generation of long-term shareholder value. — Relative TSR was selected as a performance measure because it focuses on the value delivered to shareholders – aligning the long-term interests of shareholders with those of executives. — A sustainability scorecard was selected to ensure an alignment with the Group’s strategic objectives, which are approved by the Board each year, and to reflect Prudential’s cultural values. The Committee may decide to attach different performance conditions and/or change the conditions’ weighting for future PLTIP awards. Setting the performance ranges for financial targets Where variable pay has performance conditions based on business plan measures (for example the financial metrics of the AIP and the Return on Equity element of the PLTIP) the performance ranges are set by the Committee prior to, or at the beginning of, the performance period. Performance is based on the annual and longer-term plans approved by the Board. These reflect the long-term ambitions of the Group and business units, in the context of anticipated market conditions. For market-based performance conditions (eg relative TSR) the Committee requires that performance is in the upper quartile, relative to Prudential’s peer group, for awards to vest in full. Targets used to determine annual bonus outcomes will be disclosed in the Directors’ remuneration report for the year for which the bonus is paid. Wherever possible, the targets attached to long-term incentive awards will be disclosed prospectively at the time of the award. Where long-term incentive targets are commercially sensitive, they will be published in the Annual Report for the final year of the performance period. Key differences between Directors’ remuneration and the remuneration of the wider workforce Across the Group, remuneration is reviewed regularly with the intention that all employees are paid appropriately in the context of their local market and given their individual skills, experience and performance. The Committee regularly receives information on workforce remuneration and related policies and takes this into account when determining Executive Director remuneration, for example it considers salary increase budgets for the workforce when determining the salaries of Executive Directors. The remuneration principles that apply to Executive Directors are cascaded to employees as appropriate. Employees are regularly provided with an explanation of how decisions on executive pay are made and how they reflect the wider Company remuneration policy. Legacy payments The Committee reserves the right to make any remuneration payments and/or payments for loss of office (including exercising any discretions available to it in connection with such payments) notwithstanding that they are not in line with the policy set out above where the terms of the payment were agreed (i) before 15 May 2014 (the date the Company’s first shareholder-approved Directors’ remuneration policy came into effect); (ii) before this policy came into effect, provided that the terms of the payment were consistent with the shareholder-approved Directors’ remuneration policy in force at the time they were agreed; or (iii) at a time when the relevant individual was not a Director of the Company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming or having been a Director of the Company. For these purposes ‘payments’ includes the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment are ’agreed’ at the time the award is granted. References to ‘shares’ In this policy, references to shares include American Depositary Receipts (ADRs). Directors may receive awards denominated in ADRs rather than shares. prudentialplc.com Prudential plc Annual Report 2019 181 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationNEW DIRECTORS’ REMUNERATION POLICY CONTINUED Scenarios of total remuneration The chart below provides an illustration of the future total remuneration for each Executive Director in respect of their remuneration opportunity for 2020. Four scenarios of potential outcome are provided based on underlying assumptions shown in the notes to the chart. The Committee is satisfied that the maximum potential remuneration of the Executive Directors is appropriate. Prudential’s policy is to offer Executive Directors remuneration which reflects the performance and experience of the executive, internal relativities and Group financial and non-financial performance. In order for the maximum total remuneration to be payable: — Financial performance must exceed the Group’s stretching business plan; — Relative TSR must be at or above the upper quartile relative to the peer group; — The sustainability scorecard, aligned to the Group’s strategic priorities, must be fully satisfied; — Functional and personal performance objectives must be fully met; and — Performance must be achieved within the Group’s risk framework and appetite. The fourth scenario below illustrates the maximum potential remuneration (shown in the third scenario) on the assumption that the Company’s share price grows by 50 per cent over three years. £000 12,000 10,000 8,000 6,000 4,000 2,000 1,099 100% 0 4,785 49% 28% 23% 3,175 44% 21% 35% 5,949 59% 23% 18% 5,369 52% 25% 23% 4,434 42% 30% 28% 3,032 37% 22% 41% 1,256 100% 11,037 64% 8,693 5,646 54% 50% 21% 29% 1,661 100% 27% 21% 19% 15% Minimum In line with expectations Maximum Share price growth Minimum In line with expectations Maximum Share price growth Minimum In line with expectations Maximum Share price growth Mark FitzPatrick James Turner Mike Wells Fixed Short-term incentives Long-term incentives Notes The scenarios in the chart above have been calculated on the following assumptions: Minimum In line with expectations Maximum Share price growth Fixed pay Base salary at 1 January 2020. Pension allowance for the year has been calculated at 22.5% of salary in line with this policy Estimated value of benefits based on amounts paid in 2019. James Turner is paid in HK$ and figures have been converted to GBP for the purposes of this chart. Annual bonus No bonus paid. 50% of maximum AIP. 100% of maximum AIP. No PLTIP vesting. Long-term incentives (excludes dividends) Vesting of 60% of award under PLTIP (midway between threshold and maximum) Vesting of 100% of award under PLTIP. Vesting of 100% of award under PLTIP plus share price growth of 50 per cent over three years. 182 Prudential plc Annual Report 2019 prudentialplc.com Approach to recruitment remuneration The table below outlines the approach that Prudential will take when recruiting a new Executive Director. This approach would also apply to internal promotions. The approach to recruiting a Non-executive Director or a Chairman is outlined on page 188. Element Base pay Benefits and pension Variable remuneration opportunity Awards and contractual rights forfeited when leaving previous employer Principles Potential variations The salary for a new Executive Director will be set using the approach set out in the fixed pay policy table on page 174. The benefits for a new Executive Director will be consistent with those outlined in the fixed pay policy table. The variable remuneration opportunities for a new Executive Director would be consistent with the limits and structures outlined in the variable pay policy table. On joining the Board from within the Group, the Committee may allow an executive to retain any outstanding deferred bonus and/or long-term incentive awards and/or other contractual arrangements that they held on their appointment. These awards (which may have been made under plans not listed in this policy) would remain subject to the original rules, performance conditions and vesting schedule applied to them when they were awarded. If an externally-appointed Executive Director forfeits one or more bonuses (including outstanding deferred bonuses) on leaving a previous employer, these payments or awards may be replaced in either cash, Prudential shares or options over Prudential shares with an award of an equivalent value. Replacement awards will normally be released on the same schedule as the foregone bonuses. If an externally-appointed Executive Director forfeits one or more long-term incentive awards on leaving a previous employer, these may be replaced with Prudential awards with an equivalent value. Replacement awards will generally be made under the terms of a long-term incentive plan approved by shareholders, and vest on the same schedule as the foregone awards. Where foregone awards were subject to performance conditions, performance conditions will normally be applied to awards replacing foregone long-term incentive awards; these will usually be the same as those applied to the long-term incentive awards made to Prudential executives in the year in which the forfeited award was made. The Committee may consider compensating a newly-appointed executive for other relevant contractual rights forfeited when leaving their previous employer. The use of Listing Rule 9.4.2 to facilitate the recruitment of an Executive Director is now only relevant in ‘unusual circumstances’. The Committee does not anticipate using this rule on a routine basis but reserves the right to do so in an exceptional circumstance. For example, this rule may be required if, for any reason, like-for-like replacement awards on recruitment could not be made under existing plans. This provision would only be used to compensate for remuneration forfeited on leaving a previous employer. prudentialplc.com Prudential plc Annual Report 2019 183 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationNEW DIRECTORS’ REMUNERATION POLICY CONTINUED Policy on payment on loss of office Element Principle Potential variations Notice periods Outstanding deferred bonus awards Unvested long-term incentive awards If an Executive Director is dismissed for cause their contract would be terminated with immediate effect and they would not receive any payments in relation to their notice period. Should an executive die, their estate would not be entitled to receive payments and benefits in respect of their notice period – provisions are made under the Company’s life assurance scheme to provide for this circumstance. Should an Executive Director step down from the Board but remain employed by the Group, they would not receive any payment in lieu of notice in respect of their service as a Director. The Company’s policy is that Executive Directors’ service contracts will not require the Company to give an executive more than 12 months’ notice without prior shareholder approval. A shorter notice period may be offered where this is in line with market practice in an executive’s location. The Company is required to give to, and to receive from, each of the current Executive Directors 12 months’ notice of termination. An Executive Director whose contract is terminated would be entitled to 12 months’ salary and benefits in respect of their notice period. The payment of the salary and benefits would either be phased over the notice period or, alternatively, a payment in lieu of notice may be made. In agreeing the terms of departure for any Executive Director, other than on death or disablement, the Company will have regard to the need to mitigate the costs for the Company, which would be reduced or cease if departing Executives secure alternative paid employment during the notice period. The treatment of outstanding deferred bonuses will be decided by the Committee taking into account the circumstances of the departure including the performance of the Executive Director. Deferred bonus awards are normally retained by participants leaving the Company. Awards will vest on the original timetable and will not normally be released early on termination. Prior to release, awards remain subject to the malus terms originally applied to them. The clawback provisions will continue to apply. Any Executive Director dismissed for cause would forfeit all outstanding deferred bonus awards. Should an executive die, outstanding deferred bonus awards will be released as soon as possible after the date of death. Should an Executive Director step down from the Board but remain employed by the Group, they would retain any outstanding deferred bonus awards. These awards would remain subject to the original rules and vesting schedule applied to them when they were awarded. The treatment of unvested long-term incentives will be decided by the Committee taking into account the circumstances of the departure including the performance of the Executive Directors. Where an Executive Director is determined to be a good leaver, unvested long-term incentive awards will normally subsist. These awards will ordinarily be pro-rated based on time employed, will vest on the original timescale and will remain subject to the original performance conditions assessed over the entire performance period. Good leavers are defined as injury or disability, retirement with the approval of the employing company, the employing company ceasing to be a member of the Group, the business in which the individual is employed being transferred to a transferee that is not a member of the Group, or any other circumstances at the discretion of the Committee. Individuals who die in service will also be treated as good leavers. Where an individual is not determined to be a good leaver, unvested long-term incentive awards will lapse on cessation of employment. Prior to release, awards remain subject to the malus and clawback terms and holding periods originally applied to them. Any Executive Director dismissed for cause would forfeit all unvested long-term incentive awards. If the Committee has judged that the departing Executive Director should retain their unvested long-term incentive awards with the expectation that: (i) the Executive Director is retiring from their professional executive career; and/or (ii) the Executive Director will not be seeking to secure alternative employment with another organisation of comparable size as the Company or that is within the financial services sector the Committee retains the power to lapse all unvested long-term incentive awards should the Committee deem that the Executive Director has secured similar paid executive employment elsewhere. On death, disablement and in other exceptional circumstances, the Committee has discretion to release unvested long-term incentive awards earlier than the end of the vesting period. The malus and clawback provisions will continue to apply. Should an Executive Director step down from the Board but remain employed by the Group, an executive would retain any outstanding long-term incentive awards which they held on their change of role. These awards would remain subject to the original rules, performance conditions and vesting schedule. 184 Prudential plc Annual Report 2019 prudentialplc.com Element Principle Potential variations On death, disablement and in other exceptional circumstances, the Committee has discretion to release vested long-term incentive awards earlier than the end of the holding period. The malus clawback provisions will continue to apply. Should an Executive Director step down from the Board but remain employed by the Group, they would retain any vested long-term incentive awards that remain subject to the holding period. These awards would remain subject to the original rules and release schedule applied to them when they were awarded (ie the holding period will continue to apply). Any Executive Director dismissed for cause would not be eligible for any bonus that has not been paid. Should an Executive Director die whilst serving as an employee a time pro-rated bonus may be awarded. In such circumstances, deferral will not be applied and the payment will be made solely in cash. The Committee may decide to award an executive stepping down from the Board but remaining with the Group a bonus pro-rated to reflect the portion of the financial year which had elapsed on the date of their change of role. This would be calculated with reference to financial, functional and/or personal performance measures in the usual way. The Committee may determine that a portion of such a bonus must be deferred. Vested long-term incentive awards, subject to the holding period Bonus for final year of service Other payments The treatment of vested long-term incentives will be decided by the Committee taking into account the circumstances of the departure. Executive Directors will normally retain their vested long-term incentive awards that remain subject to the holding period. Normally these awards will be released in accordance with the original timescale and will remain subject to the holding period. Prior to release, awards remain subject to the malus and clawback terms originally applied to them. The payment of a bonus for the final year of service will be decided by the Committee giving full consideration to the circumstances of the departure including the performance of the Executive Director. The Committee may award a departing executive a bonus which will usually be pro-rated to reflect the portion of the final financial year in which they served which had elapsed on the last day of their employment. Any such bonus would be calculated with reference to financial, functional and/or personal performance measures in the usual way. The normal portion of any such bonus awarded must be deferred. Consistent with other employees, Executive Directors may receive payments to compensate them for the loss of employment rights on termination. Payments may include: — A nominal amount for agreeing to non-solicitation and confidentiality clauses; — Directors and Officers insurance cover for a specified period following the executives’ termination date; — Payment for outplacement services; — Reimbursement of legal fees; and — Repatriation assistance. The Committee reserves the right to make additional exit payments where such payments are made in good faith: — In discharge of an existing legal obligation (or by way of damages for breach of such an obligation); or — By way of settlement or compromise of any claim arising in connection with the termination of a Director’s office or employment. Post-Directorship guidelines When an Executive Director leaves the Board they will be subject to post-Director Share ownership guidelines. Further details are included in the section on ‘Share ownership guidelines for Executive Directors’. Further details are included in the section on ‘Share ownership guidelines for Executive Directors’. prudentialplc.com Prudential plc Annual Report 2019 185 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationNEW DIRECTORS’ REMUNERATION POLICY CONTINUED Policy on corporate transactions Treatment Deferred Annual Incentive Plan Awards In the event of a corporate transaction (eg takeover, material merger, winding up etc), the Committee will determine whether awards will: — Vest in part or in full; — Continue in accordance with the rules of the plan; and/or — Lapse and, in exchange, the participant will be granted an award under any other share or cash incentive plan which the Committee considers to be broadly equivalent to the award. Prudential Long Term Incentive Plan In the case of a corporate transaction (eg takeover, material merger, winding up etc), the Committee will determine whether awards will: — Be exchanged for replacement awards (either in cash or shares) of equal value unless the Committee and successor company agree that the original award will continue; or — Vest in part or in full and be released. Where awards vest/ are released the Committee will have regard to the performance of the Company, the time elapsed between the date of grant and the relevant event and any other matter that the Committee considers relevant or appropriate. Service contracts Executive Directors’ service contracts provide details of the broad types of remuneration to which they are entitled, and about the kinds of plans in which they may be invited to participate. The service contracts offer no certainty as to the value of performance-related reward and confirm that any variable payment will be at the discretion of the Company. Copies of the service contract between the Prudential Group and each of the Executive Directors are available for inspection at Prudential’s registered office during normal hours of business and will also be available at any General Meeting of the Company. Details of the duration of the Executive Directors’ service contracts are set out in the ‘Directors’ terms of employment and external appointments’ section of the Annual report on remuneration. Statement of consideration of conditions elsewhere in the Company Across the Group, remuneration is reviewed regularly with the intention that all employees are paid appropriately in the context of their local market and given their individual skills, experience and performance. Each business unit’s salary increase budget is set with reference to local market conditions. The Committee considers salary increase budgets across the workforce when determining the salaries of Executive Directors. Prudential does not specifically consult with employees when setting the Directors’ remuneration policy: Prudential is a global organisation with employees and agents in multiple business units and geographies. We do have a mechanism for designated Non-executive Directors to gather employees’ views on a range of topics and for these views to be represented to the Board. As many employees are also shareholders, they are able to participate in binding votes on the Directors’ remuneration policy and annual votes on the Annual report on remuneration. Statement of consideration of shareholder views The Committee and the Company undertake regular consultation with key institutional investors on the Directors’ remuneration policy and implementation. This engagement is led by the Committee Chairman and is an integral part of the Company’s investor relations programme. The Committee is grateful to shareholders for the feedback that is provided and takes this into account when determining executive remuneration. 186 Prudential plc Annual Report 2019 prudentialplc.com Remuneration policy for Non-executive Directors and the Chairman Fees Benefits Share Ownership Guidelines Non-executive Directors do not currently receive benefits or a pension allowance or participate in the Group’s employee pension schemes. Travel and business expenses for Non-executive Directors are incurred in the normal course of business, for example, in relation to attendance at Board and Committee meetings. The costs associated with these are all met by the Company, including any tax liabilities arising on these business expenses. Under the Articles of Association, all Non-executive Directors are required to hold at least 2,500 shares and have one year, from their date of appointment to the Board, to acquire these. It is further expected that Non-executive Directors will hold shares with a value equivalent to one times the annual basic fee (excluding additional fees for chairmanship and membership of any committees). Non-executive Directors will normally be expected to attain this level of share ownership within three years of their date of appointment. Non-executive Directors All Non-executive Directors receive a basic fee for their duties as a Board member. Additional fees are paid for added responsibilities such as chairmanship and membership of committees, acting as the Senior Independent Director or designation to carry out the workforce engagement role. Fees are paid to Non-executive Directors, subject to the appropriate deductions. The basic and additional fees are reviewed annually by the Board with any changes effective from 1 July. In determining the level of fees the Board considers: — The time commitment and other requirements of the role; — Group financial performance; — Salary increases for all employees; and — Market data. If, in a particular year, the number of meetings is materially greater than usual, the Company may determine that the provision of additional fees in respect of that year is fair and reasonable. Should a new committee be formed, or the remit of an existing committee be materially expanded, the new or additional fees paid for the chairmanship or membership of the committee will be commensurate with the new or additional responsibilities and time commitment involved. Non-executive Directors are not eligible to participate in annual bonus plans or long-term incentive plans. prudentialplc.com Prudential plc Annual Report 2019 187 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationNEW DIRECTORS’ REMUNERATION POLICY CONTINUED Chairman Fees Benefits Share Ownership Guidelines Under the Articles of Association, the Chairman is required to hold at least 2,500 shares and has one year, from their date of appointment to the Board, to acquire these. The Chairman has a share ownership guideline. This is currently one times the annual fee and it is normally expected that this level of share ownership would be attained within five years of the date of appointment. The Chairman receives an annual fee for the performance of their role. This fee is agreed by the Committee and is paid to the Chairman in cash, subject to the appropriate deductions. On appointment, the fee may be fixed for a specified period of time. Following the fixed period (if applicable) this fee will be reviewed annually. Changes in the fee are effective from 1 July. In determining the level of the fee for the Chairman the Committee considers: — The time commitment and other requirements of the role; The Chairman may be offered benefits including: — Health and wellness benefits; — Protection and security benefits; — Transport benefits; — Reimbursement of business expenses (and any associated tax liabilities) incurred when travelling overseas in performance of duties; and — The performance and experience — Relocation and expatriate of the Chairman; — Internal relativities; — Company financial performance; and — Market data. The Chairman is not eligible to participate in annual bonus plans or long-term incentive plans. benefits (where appropriate). The maximum paid will be the cost to the Company of providing these benefits. The Chairman is not eligible to receive a pension allowance or to participate in the Group’s employee pension schemes. Recruitment of a new Chairman or Non-executive Director The fees for a new Non-executive Director will be consistent with the current basic fee paid to other Non-executive Directors (as set out in the Annual report on remuneration for that year) and will be reflective of their additional responsibilities as chair and/or members of Board committees. The fee for a new Chairman will be set with reference to the time commitment and other requirements of the role, the experience of the candidate, as well as internal relativities among the other Executive and Non-executive Directors. To provide context for this decision, data would be sought for suitable market reference point(s). Notice periods – Non-executive Directors and Chairman Non-executive Directors are appointed pursuant to letters of appointment with notice periods of six months without liability for compensation. A contractual notice period of 12 months by either party applies for the Non-executive Chairman. The Chairman would not be entitled to any payments for loss of office. Details of the individual appointments of the Chairman and Non-executive Directors are set out in the ‘Letters of appointment of the Chairman and Non-executive Directors’ section of the Annual report on remuneration. For information on the terms of appointment for the Chairman and Non-executive Directors please see page 168. 188 Prudential plc Annual Report 2019 prudentialplc.com Changes from 2017 policy The proposed Directors’ remuneration policy generally reflects that approved by shareholders in May 2017. The principal differences are set out below. Additionally, minor changes have been made to provide alignment with the UK Corporate Governance Code and to generally improve clarity. — The Solvency II capital metric in the AIP and PLTIP scorecard is to be replaced with a Pillar I capital metric; — The weightings of the AIP performance measures for the Group Chief Risk and Compliance Officer are 40 per cent Group financial measures, 40 per cent functional objectives and 20 per cent personal measures. In the 2017 policy, the measures were entirely based on a combination of personal and functional measures; — A Return on Equity measure replaces the operating profit measure in the PLTIP; — Under the PLTIP, 20 per cent of each portion of the award will vest for achieving threshold performance. This change was implemented for 2019 PLTIP awards and it is now reflected in this policy. For prior awards, threshold performance resulted in 25 per cent of awards vesting; — The Committee intends to make a 2020 PLTIP award of 300 per cent of salary to the Group Chief Financial Officer and Chief Operating Officer (increased from 250 per cent of salary); — From the date of this policy, current Executive Directors will receive pension contributions of 22.5 per cent of base salary, reducing to 20 per cent of base salary from 14 May 2021. New Executive Directors, either externally recruited or promoted from within the Company, will be entitled to receive pension contributions or a cash supplement (or a combination of the two) of 13 per cent of base salary. In addition, statutory contributions will continue to be made to mandatory pension arrangements in the country in which the Executive Directors are based in line with the local requirements. The 2017 policy offered all Executive Directors pension benefits of 25 per cent of salary; and — Executive Directors will, on leaving the Board, be required to hold the lower of their actual shareholding on the date of their retirement from the Board and their in-employment share ownership guideline for a period of two years. prudentialplc.com Prudential plc Annual Report 2019 189 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationNEW DIRECTORS’ REMUNERATION POLICY CONTINUED Principles underlying the policy In particular, when determining the new Directors’ remuneration policy the Committee had regard to a number of key principles as illustrated below and opposite: Simplicity The Committee has decided to retain the key features of the current policy. It continues to consist of fixed remuneration, annual and long-term incentives only. Stakeholders are familiar with the operation of current reward arrangements and there is a demonstrable link between performance and reward outcome. Risk The Group Risk Committee formally provides advice to the Committee on risk management considerations to inform decisions over bonus payments and long-term incentive vesting levels. The current policy provides the Committee with substantial flexibility to adjust incentive outcomes, to reduce or cancel unvested awards and to reclaim both bonus and long-term incentive payments. The Committee’s discretionary powers have been formalised and additional malus and clawback triggers for personal conduct introduced in relation to the AIP and PLTIP to take into account non-financial and individual factors. The time horizon for our long-term incentives extends for five years, including the holding period on awards. There are currently significant in-employment share ownership guidelines for all Executive Directors providing a material connection to the sustained success of the Company. Executives have five years from the later of the date of their appointment, or the date of an increase these guidelines, to build this level of ownership. A post-employment shareholding requirement has been introduced for Executive Directors leaving the Board to maintain their in-employment share ownership guideline for a period of two years or their actual shareholding on the date of their retirement from the Board if lower, subject to Committee discretion. This obligation will be implemented by requiring Executive Directors retiring from the Board to obtain clearance to deal in the Company’s shares during the two years following their retirement. Executive Directors recruited externally or internally from the date of the 2020 AGM will be offered pension benefits of 13 per cent of salary, aligned with the employer pension contribution available to the UK workforce. For existing Directors, pension benefits will be reduced from 25 per cent to 20 per cent of salary by May 2021. The conduct measure in the PLTIP rewards for appropriate management action in ensuring that there are no significant conduct/culture/governance issues that result in significant capital add-ons or material fines. The pay arrangements for Executive Directors are aligned with that of the senior leadership team. The vesting period attached to the long-term incentives reflects the time horizon of the business plan. The additional post-vesting holding period and post-employment shareholding requirement strengthens the community of interests between Executives and other stakeholders. Alignment to culture 190 Prudential plc Annual Report 2019 prudentialplc.com Clarity The Committee has consulted with the Company’s largest shareholders and their advisers on the changes to the policy and executive pay decisions before they are implemented. Details on Executive Director pay are clearly set out in the Annual report on remuneration. Proportionality There are no incentive awards for below threshold performance. Financial targets are set against the Board approved Plan. Under the PLTIP, 20 per cent of each portion of the award will vest for achieving threshold performance. The Committee approves the termination arrangements of Executive Directors to ensure that there is no reward for failure. The PLTIP leaver rules are another safeguard that there is no reward for failure under this plan. The Committee’s discretionary powers have been formalised and additional malus and clawback triggers for personal conduct introduced in relation to the AIP and PLTIP to take into account non-financial and individual factors. Predictability The level of awards under incentive awards to Executive Directors at threshold, on-target and maximum levels are defined and have been outlined in the scenarios of total remuneration charts for the new policy. Signed on behalf of the Board of Directors Anthony Nightingale, CMG SBS JP Chair of the Remuneration Committee 10 March 2020 Paul Manduca Chairman 10 March 2020 prudentialplc.com Prudential plc Annual Report 2019 191 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information Additional remuneration disclosures Directors’ outstanding long-term incentive awards Share-based long-term incentive awards Conditional share awards outstanding at 1 Jan 2019 Year of award Plan name Conditional awards in 2019 Demerger adjustment in 20191 (Number of shares) (Number of shares) 101,360 106,611 15,687 16,499 19,094 123,376 207,971 123,376 51,280 33,116 27,940 89,439 4,324 13,842 16,029 103,571 Market price at date of award (pence) 1828 1750 1605.5 1279 1672 1750 1605.5 Dividend equivalents on vested shares2 (Number of shares released) Rights exercised in 2019 Conditional share awards outstanding at 31 Dec 2019 Rights lapsed in 2019 Date of end of performance period (Number of shares) 117,047 31 Dec 19 123,110 31 Dec 20 142,470 31 Dec 21 – – – 382,627 1,905 20,697 12,419 – 31 Dec 18 32,264 31 Dec 19 103,281 31 Dec 20 119,600 31 Dec 21 150,495 103,571 34,195 1,905 20,697 12,419 255,145 332,870 263,401 257,813 40,765 39,900 46,188 1279 1672 1750 1605.5 298,441 19,174 208,043 124,827 – 31 Dec 18 304,166 31 Dec 19 297,713 31 Dec 20 344,629 31 Dec 21 854,084 298,441 126,853 19,174 208,043 124,827 946,508 Mark FitzPatrick PLTIP PLTIP PLTIP James Turner Mike Wells PLTIP PLTIP PLTIP PLTIP PLTIP PLTIP PLTIP PLTIP 2017 2018 2019 2016 2017 2018 2019 2016 2017 2018 2019 Notes 1 The table above reflects the adjustments made to outstanding awards at the time of the demerger. 2 A dividend equivalent was accumulated on these awards. 192 Prudential plc Annual Report 2019 prudentialplc.com Other share awards The table below sets out Executive Directors’ deferred bonus share awards: Year of grant Conditional share awards outstanding at 1 Jan 2019 (Number of shares) Conditionally awarded in 2019 (Number of shares) Dividends accumulated in 20191 (Number of shares) Shares released in 2019 (Number of shares) Demerger adjustment2 Conditional share awards outstanding at 31 Dec 2019 (Number of shares) 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 Deferred 2017 annual incentive award Deferred 2018 annual incentive award James Turner Deferred 2015 group deferred bonus plan award Deferred 2018 28,119 907 4,492 33,518 31 Dec 20 1750 2019 28,119 32,223 32,223 1,040 1,947 5,148 38,411 31 Dec 21 1605.5 – 9,640 71,929 2016 5,440 5,440 – 31 Dec 18 01 Apr 19 1279 1557 2018 annual incentive award 2019 20,605 20,605 664 664 5,440 3,291 24,560 31 Dec 21 1605.5 5,440 3,291 24,560 2016 112,720 112,720 – 31 Dec 18 01 Apr 19 1279 1557 Mike Wells Deferred 2015 annual incentive award Deferred 2016 annual incentive award Deferred 2017 annual incentive award Deferred 2017 54,060 2018 48,664 2018 annual incentive award 2019 215,444 55,394 55,394 1,744 1,570 1,787 8,636 64,440 31 Dec 19 7,774 58,008 31 Dec 20 1672 1750 8,849 66,030 31 Dec 21 1605.5 5,101 112,720 25,259 188,478 Notes 1 A dividend equivalent was accumulated on these awards. 2 The table above reflects the adjustments made to outstanding awards at the time of the demerger. prudentialplc.com Prudential plc Annual Report 2019 193 G r o u p o v e r v e w i i S t r a t e g c r e p o r t G o v e r n a n c e D i r e c t o r s ’ r e m u n e r a t i o n r e p o r t i F n a n c a i l s t a t e m e n t s E u r o p e a n E m b e d d e d V a u e ( E E V ) b a s i s r e s u l t s l A d d i t i o n a l i n f o r m a t i o n ADDITIONAL REMUNERATION DISCLOSURES CONTINUED All-employee share plans It is important that all employees are offered the opportunity to own shares in Prudential, connecting them both to the success of the Company and to the interests of other shareholders. Executive Directors are invited to participate in these plans on the same basis as other staff in their location. Save As You Earn (SAYE) schemes UK-based Executive Directors are normally eligible to participate in the HM Revenue and Customs (HMRC) approved Prudential Savings-Related Share Option Scheme. This scheme allows all eligible employees to save towards the exercise of options over Prudential plc shares with the option price set at the beginning of the savings period at a discount of up to 20 per cent of the market price. Since 2014 participants have been able to elect to enter into savings contracts of up to £500 per month for a period of three or five years. At the end of this term, participants may exercise their options within six months and purchase shares. If an option is not exercised within six months, participants are entitled to a refund of their cash savings plus interest if applicable under the rules. Shares are issued to satisfy those options which are exercised. No options may be granted under the schemes if the grant would cause the number of shares which have been issued, or which remain issuable pursuant to options granted in the preceding 10 years under the scheme and any other option schemes operated by the Company, or which have been issued under any other share incentive scheme of the Company, to exceed 10 per cent of the Company’s ordinary share capital at the proposed date of grant. In anticipation of the demerger of the M&G plc business the Company did not operate the SAYE in 2018 and it was relaunched in November 2019. Details of Executive Directors’ rights under the SAYE scheme are set out in the ‘Outstanding share options’ table. Share Incentive Plan (SIP) UK-based Executive Directors are also eligible to participate in the Company’s Share Incentive Plan (SIP). Since April 2014, all UK-based employees have been able to purchase Prudential plc shares up to a value of £150 per month from their gross salary (partnership shares) through the SIP. For every four partnership shares bought, an additional matching share is awarded which is purchased by Prudential plc on the open market. Dividend shares accumulate while the employee participates in the plan. If the employee withdraws from the plan, or leaves the Group, matching shares may be forfeited. The table below provides information about shares purchased under the SIP together with matching shares (awarded on a 1:4 basis) and dividend shares: Mark FitzPatrick James Turner Mike Wells Year of initial grant Share Incentive Plan awards held in Trust at 1 Jan 2019 (Number of shares) Partnership shares accumulated in 2019 (Number of shares) Matching shares accumulated in 2019 (Number of shares) Dividend shares accumulated in 2019 (Number of shares) Share Incentive Plan awards held in Trust at 31 Dec 2019 (Number of shares) 2017 2011 2015 214 709 548 119 76 120 30 19 30 9 25 21 372 829 719 Cash-settled long-term incentive awards This information has been prepared in line with the reporting requirements of the Hong Kong Stock Exchange and sets out Executive Directors’ outstanding share awards and share options. For details of the cash-settled long-term incentive awards held by one Executive Director, please see our 2018 Annual report on remuneration. Dilution Releases from the Prudential Long Term Incentive Plan and the Prudential Agency Long Term Incentive Plan are satisfied using new issue shares rather than by purchasing shares in the open market. Shares relating to options granted under all-employee share plans are also satisfied by new issue shares. The combined dilution from all outstanding shares and options at 31 December 2019 was 1 per cent of the total share capital at the time. Deferred bonus awards will continue to be satisfied by the purchase of shares in the open market. 194 Prudential plc Annual Report 2019 prudentialplc.com Remuneration of the five highest-paid individuals and the remuneration of senior management In line with the requirements of the Stock Exchange of Hong Kong Limited, the following table sets out, on an aggregate basis, the annual remuneration of i) the five highest-paid employees, and ii) senior management for the year ended 31 December 2019. Of the five individuals with the highest emoluments in 2019, one was an Executive Director for the full year whose emoluments are disclosed in this report. The aggregate of the emoluments of the other four individuals for 2019 were are set out in the table below. In light of a change to the Board’s definition of senior management during 2019, senior management comprised the Executive Directors, plus from 1 August 2019, members of the Group Executive Committee. The table sets outs the aggregate of the emoluments paid to the senior management team: Components of remuneration Base salaries, allowances and benefits in kind Pension contributions Performance related pay Payments made on appointment Payments made on separation Total Their emoluments for 2019 were within the following bands: Five highest paid Senior management HK$000 28,727 4,598 124,502 49,505 62,681 270,013 £000 HK$000 2,872 460 12,448 4,950 6,267 26,997 63,251 11,777 152,481 49,505 – 277,014 £000 6,324 1,178 15,246 4,950 – 27,698 Remuneration band HKD 7,500,001 – 8,000,000 8,500,001 – 9,000,000 10,000,001 – 10,500,000 25,000,001 – 25,500,000 34,500,001 – 35,000,000 39,500,001 – 40,000,000 48,000,001 – 48,500,000 62,500,001 – 63,000,000 67,000,001 – 67,500,000 83,500,001 – 84,000,000 92,000,001 – 92,500,000 Remuneration band GBP equivalent Number of employees Five highest paid Senior management 749,888 – 799,880 849,873 – 899,865 999,850 – 1,049,843 2,499,625 – 2,549,618 3,449,483 – 3,499,475 3,949,408 – 3,999,400 4,799,280 – 4,849,273 6,249,063 – 6,299,055 6,698,995 – 6,748,988 8,348,748 – 8,398,740 9,198,620 – 9,248,613 – – – – – – 1 1 1 – 1 1 1 1 1 1 1 – – 1 1 – prudentialplc.com Prudential plc Annual Report 2019 195 G r o u p o v e r v e w i i S t r a t e g c r e p o r t G o v e r n a n c e D i r e c t o r s ’ r e m u n e r a t i o n r e p o r t i F n a n c a i l s t a t e m e n t s E u r o p e a n E m b e d d e d V a u e ( E E V ) b a s i s r e s u l t s l A d d i t i o n a l i n f o r m a t i o n 05 Financial statements 196 Prudential plc Annual Report 2019 prudentialplc.com 05 G r o u p o v e r v e w i i S t r a t e g c r e p o r t G o v e r n a n c e D i r e c t o r s ’ r e m u n e r a t i o n r e p o r t i F n a n c a i 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 Page 198 310 312 319 320 l s t a t e m e n t s E u r o p e a n E m b e d d e d V a u e ( E E V ) b a s i s r e s u l t s l A d d i t i o n a l i n f o r m a t i o n prudentialplc.com Prudential plc Annual Report 2019 197 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 199 200 201 203 204 Section Page Section Notes to the primary statements A A1 A2 A3 A4 Basis of preparation and accounting policies Basis of preparation and exchange rates Discontinued operations New accounting pronouncements in 2019 Accounting policies Critical accounting policies, estimates and judgements New accounting pronouncements not yet effective B B1 B2 B3 B4 B5 B6 C C1 C2 C3 A4.1 A4.2 B1.1 B1.2 B1.3 B1.4 B1.5 B1.6 B2.1 B2.2 B2.3 B2.4 B4.1 B4.2 B6.1 B6.2 C2.1 C2.2 C3.1 C3.2 C3.3 C3.4 Earnings performance Analysis of performance by segment Segment results 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 from continuing operations Total tax charge by nature of expense Reconciliation of shareholder effective tax rate Earnings per share Dividends Demerger dividend in specie of M&G plc Other dividends Financial position notes Analysis of Group statement of financial position by segment Analysis of segment statement of financial position by business type Asia US Assets and liabilities Group assets and liabilities – measurement Debt securities Loans portfolio Financial instruments – additional information C4 C5 C6 C7 C8 C9 C10 C11 C12 C13 D D1 D2 D3 D4 D5 D6 D7 C4.1 C4.2 C4.3 C4.4 C5.1 C5.2 C6.1 C6.2 C7.1 C7.2 C7.3 C7.4 C8.1 C8.2 Policyholder liabilities and unallocated surplus Group overview Asia insurance operations US insurance operations Products and determining contract liabilities Intangible assets Goodwill Deferred acquisition costs and other intangible assets Borrowings Core structural borrowings of shareholder-financed businesses Operational borrowings Risk and sensitivity analysis Group overview Asia insurance operations US insurance operations Asset management and other operations Tax assets and liabilities Current tax Deferred 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 D1.1 D1.2 Other information Gain (loss) on disposal of business and corporate transactions Gain (loss) on disposal of business Other corporate transactions Discontinued UK and Europe operations Contingencies and related obligations Post balance sheet events Related party transactions Commitments Investments in subsidiary undertakings, joint ventures and associates 205 206 206 208 208 215 219 220 221 225 227 227 229 229 230 232 233 233 233 234 235 237 238 238 239 242 242 243 244 250 255 256 Page 262 262 265 267 268 276 277 280 281 282 283 285 289 289 289 289 290 290 292 292 293 294 295 296 296 296 297 298 298 298 299 299 198 Prudential plc Annual Report 2019 prudentialplc.com Consolidated income statement Continuing operations: Gross premiums earned Outward reinsurance premiums Earned premiums, net of reinsurance Investment return Other income Total revenue, net of reinsurance Benefits and claims Reinsurers’ share of benefits and claims Movement in unallocated surplus of with-profits funds Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance Acquisition costs and other expenditure Finance costs: interest on core structural borrowings of shareholder-financed businesses (Loss) on disposal of businesses and corporate transactions Total charges net of reinsurance Share of profit from joint ventures and associates net of related tax Profit before tax (being tax attributable to shareholders’ and policyholders’ returns) note Remove tax charge attributable to policyholders’ returns Profit before tax attributable to shareholders’ returns Total tax charge attributable to shareholders’ and policyholders’ returns Remove tax charge attributable to policyholders’ returns Tax credit (charge) attributable to shareholders’ returns Profit from continuing operations Discontinued UK and Europe operations’ profit after tax Re-measurement of discontinued operations on demerger Cumulative exchange loss recycled from other comprehensive income (Loss) profit from discontinued operations Profit for the year Attributable to: Equity holders of the Company From continuing operations From discontinued operations Non-controlling interests from continuing operations Profit for the year Earnings per share (in cents) Based on profit attributable to equity holders of the Company: Basic Based on profit from continuing operations Based on (loss) profit from discontinued operations Diluted Based on profit from continuing operations Based on (loss) profit from discontinued operations Note 2019 $m 2018* $m B1.4 B1.4 B1.4 B1.4 C4.1(iii) C4.1(iii) C4.1(iii) B1.4 B2 D1.1 B1.4 D7 B1.1 B4.1 B4.1 D2 D2 D2 45,064 (1,583) 43,481 49,555 700 93,736 (85,475) 2,985 (1,415) (83,905) (7,283) (516) (142) (91,846) 397 2,287 (365) 1,922 (334) 365 31 1,953 1,319 188 (2,668) (1,161) 792 1,944 (1,161) 9 792 45,614 (1,183) 44,431 (9,117) 531 35,845 (26,518) 1,598 1,494 (23,426) (8,527) (547) (107) (32,607) 319 3,557 (107) 3,450 (676) 107 (569) 2,881 1,142 – – 1,142 4,023 2,877 1,142 4 4,023 Note B5 2019 2018* 75.1¢ (44.8)¢ 30.3¢ 75.1¢ (44.8)¢ 30.3¢ 111.7¢ 44.3¢ 156.0¢ 111.7¢ 44.3¢ 156.0¢ * The 2018 comparative results have been re-presented from those previously published to reflect the change in the Group’s presentation currency from pounds sterling to US dollars (as described in note A1) and the reclassification of the Group’s UK and Europe operations as discontinued operations in 2019 (as described in note A2). Note This measure is the formal profit before tax measure under IFRS. It is not the result attributable to shareholders principally because total corporate tax of the Group includes those on the income of consolidated with-profits and unit-linked funds that, through adjustments to benefits, are borne by policyholders. These amounts are required to be included in the tax charge of the Company under IAS 12. Consequently, the IFRS profit before tax measure is not representative of pre-tax profit attributable to shareholders as it is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of with-profits funds after adjusting for tax borne by policyholders. prudentialplc.com Prudential plc Annual Report 2019 199 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information Consolidated statement of comprehensive income Profit for the year from continuing operations Other comprehensive income (loss) from continuing operations: Items that may be reclassified subsequently to profit or loss Exchange movements on foreign operations and net investment hedges: Exchange movements arising during the year Related tax Valuation movements on available-for-sale debt securities: Net unrealised gains (losses) on holdings Deduct net gains included in the income statement on disposal and impairment Related change in amortisation of deferred acquisition costs Related tax Total items that may be reclassified subsequently to profit or loss Items that will not be reclassified to profit or loss Shareholders’ share of actuarial gains and losses on defined benefit pension schemes: Net actuarial (losses) gains on defined benefit pension schemes Related tax Total items that will not be reclassified to profit or loss Other comprehensive income (loss) from continuing operations Total comprehensive income from continuing operations (Loss) profit from discontinued operations Cumulative exchange loss recycled through profit or loss Other items, net of related tax Total comprehensive income from discontinued operations Total comprehensive income for the year Attributable to: Equity holders of the Company From continuing operations From discontinued operations Non-controlling interests from continuing operations Total comprehensive income for the year Note 2019 $m 2018* $m 1,953 2,881 C5.2 D2 D2 D2 152 (15) 137 4,208 (185) 4,023 (631) (713) 2,679 2,816 (108) 19 (89) 2,727 4,680 (1,161) 2,668 203 1,710 6,390 4,669 1,710 11 6,390 (39) 7 (32) (2,144) (15) (2,159) 328 385 (1,446) (1,478) 26 (5) 21 (1,457) 1,424 1,142 – (605) 537 1,961 1,419 537 5 1,961 * The 2018 comparative results have been re-presented from those previously published to reflect the change in the Group’s presentation currency from pounds sterling to US dollars (as described in note A1) and the reclassification of the Group’s UK and Europe operations as discontinued operations in 2019 (as described in note A2). 200 Prudential plc Annual Report 2019 prudentialplc.com Consolidated statement of changes in equity Year ended 31 Dec 2019 $m Note Share capital Share premium Retained earnings Translation reserve* Available- for-sale securities reserves Share- holders’ equity Non- controlling interests Total equity Reserves Profit from continuing operations Other comprehensive income (loss) from continuing operations: Exchange movements on foreign operations and net investment hedges net of related tax Net unrealised valuation movements net of related change in amortisation of deferred acquisition costs and related tax Shareholders’ share of actuarial gains and losses on defined benefit pension schemes net of related tax Total other comprehensive income (loss) from continuing operations Total comprehensive income from continuing operations Total comprehensive income (loss) from discontinued operations Total comprehensive income for the year Demerger dividend in specie of M&G plc Other dividends Reserve movements in respect of share-based payments Change in non-controlling interests Movements in respect of option to acquire non-controlling interests Share capital and share premium New share capital subscribed Impact of change in presentation currency in relation to share capital and share premium Treasury shares Movement in own shares in respect of share-based payment plans Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS Net increase (decrease) in equity Balance at beginning of year Balance at end of year B6.1 B6.2 C10 C10 – – – – – – – – – – – – – – 6 – – – 1,944 – – 1,944 9 1,953 – – – – – – – – – – – – 22 101 – – – – (89) 135 – 135 – – 2,679 2,679 – (89) (89) 135 2,679 2,725 1,855 135 2,679 4,669 (1,098) 2,808 – 757 2,943 2,679 (7,379) (1,634) 64 – (143) – – 38 55 – – – – – – – – – – – – – – – – – – 1,710 6,379 (7,379) (1,634) 64 – – 158 (143) 22 107 38 55 – – – – – 2 – – 2 11 – 11 – – 137 2,679 (89) 2,727 4,680 1,710 6,390 (7,379) (1,634) 64 158 (143) 22 107 38 55 6 166 172 123 2,502 (8,242) 21,817 2,943 (2,050) 2,679 (2,491) (467) 21,968 2,625 13,575 893 2,212 19,477 169 23 192 (2,322) 21,991 19,669 * The $2,808 million movement in translation reserve from discontinued operations is recognised in other comprehensive income and represents an exchange gain of $140 million on translating the results from discontinued operations during the period of ownership and the recycling of the cumulative exchange loss of $2,668 million through the profit or loss upon the demerger. The Group’s accounting principles on foreign exchange translation are described in note A1. prudentialplc.com Prudential plc Annual Report 2019 201 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationCONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONTINUED Year ended 31 Dec 2018* $m Note Share capital Share premium Retained earnings Translation reserve Available- for-sale securities reserves Share- holders’ equity Non- controlling interests Total equity – 2,877 – – 2,877 4 2,881 Reserves Profit from continuing operations Other comprehensive income (loss) from continuing operations: Exchange movements on foreign operations and net investment hedges net of related tax Net unrealised valuation movements net of related change in amortisation of deferred acquisition costs and related tax Shareholders’ share of actuarial gains and losses on defined benefit pension schemes net of related tax Total other comprehensive income (loss) from continuing operations Total comprehensive income (loss) from continuing operations Total comprehensive income from discontinued operations Total comprehensive income (loss) for the year Dividends Reserve movements in respect of share-based payments Change in non-controlling interests Movements in respect of option to acquire non-controlling interests Share capital and share premium New share capital subscribed Impact of change in presentation currency in relation to share capital and share premium Treasury shares Movement in own shares in respect of share-based payment plans Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS Net increase (decrease) in equity Balance at beginning of year Balance at end of year – – – – – – – – – – – – 1 B6.2 C10 – – (9) 175 166 C10 (10) (155) – – – – – – – – – – – 22 – – – – 21 21 (33) – (33) – – (1,446) (1,446) – 21 (33) (1,446) (1,458) 2,898 (33) (1,446) 1,419 1,218 (681) – 537 4,116 (714) (1,446) 1,956 (1,662) 92 – (146) – – 39 69 – – – – – – – – – – – – – – – – (1,662) 92 – (146) 23 (165) 39 69 (133) 2,635 2,508 19,309 (714) (1,336) (1,446) 979 206 21,762 2,502 21,817 (2,050) (467) 21,968 1 – – 1 5 – 5 – – 9 – – – – – 14 9 23 (32) (1,446) 21 (1,457) 1,424 537 1,961 (1,662) 92 9 (146) 23 (165) 39 69 220 21,771 21,991 * The 2018 comparative results have been re-presented from those previously published to reflect the change in the Group’s presentation currency from pounds sterling to US dollars (as described in note A1) and the reclassification of the Group’s UK and Europe operations as discontinued operations in 2019 (as described in note A2). 202 Prudential plc Annual Report 2019 prudentialplc.com Consolidated statement of financial position Assets Goodwill Deferred acquisition costs and other intangible assets Property, plant and equipment note (i) Reinsurers’ share of insurance contract liabilities Deferred tax assets Current tax recoverable Accrued investment income Other debtors Investment properties Investments in joint ventures and associates accounted for using the equity method Loans Equity securities and holdings in collective investment schemes note (ii) Debt securities note (ii) Derivative assets Other investments note (ii) Deposits Assets held for sale Cash and cash equivalents Total assets Equity Shareholders’ equity Non-controlling interests Total equity Liabilities Insurance contract liabilities Investment contract liabilities with discretionary participation features Investment contract liabilities without discretionary participation features Unallocated surplus of with-profits funds Core structural borrowings of shareholder-financed businesses Operational borrowings note (i) Obligations under funding, securities lending and sale and repurchase agreements Net asset value attributable to unit holders of consolidated investment funds Deferred tax liabilities Current tax liabilities Accruals, deferred income and other liabilities Provisions Derivative liabilities Liabilities held for sale Total liabilities Total equity and liabilities The parent company statement of financial position is presented on page 310. Note C5.1 C5.2 C13 C4.1(iv) C8.2 C8.1 C1 C1 C3.3 C3.2 C3.4 C1 C4.1 C4.1 C4.1 C4.1 C6.1 C6.2 C8.2 C8.1 C11 C3.4 C1 31 Dec 2019 $m note (iii) 31 Dec 2018 $m notes (iii),(iv) 1 Jan 2018 $m notes (iii),(iv) 969 17,476 1,065 13,856 4,075 492 1,641 2,054 25 1,500 16,583 247,281 134,570 1,745 1,302 2,615 – 6,965 454,214 19,477 192 19,669 380,143 633 4,902 4,750 5,594 2,645 8,901 5,998 5,237 396 14,488 466 392 – 434,545 454,214 2,365 15,185 1,795 14,193 3,305 787 3,501 5,207 22,829 2,207 22,938 273,484 223,333 4,450 8,294 15,023 13,472 15,442 647,810 21,968 23 21,991 410,947 85,858 24,481 20,180 9,761 6,289 8,901 14,839 5,122 723 19,421 1,373 4,465 13,459 625,819 647,810 2,005 14,896 1,067 13,086 3,554 829 3,620 4,009 22,317 1,916 23,054 302,203 231,835 6,495 7,605 15,200 51 14,461 668,203 21,762 9 21,771 443,952 84,789 27,589 22,931 8,496 7,450 7,660 12,025 6,378 726 19,190 1,519 3,727 – 646,432 668,203 Notes (i) (ii) (iii) (iv) As at 1 January 2019, the Group applied IFRS 16 ‘Leases’, using the modified retrospective approach. Under this approach, comparative information is not restated. The application of the standard has resulted in the recognition of an additional lease liability and a corresponding ‘right-of-use’ asset of a similar amount as at 1 January 2019. See note A3 and note C13 for further details. Included within equity securities and holdings in collective investment schemes, debt securities and other investments are $90 million of lent securities as at 31 December 2019 (31 December 2018: $10,543 million, of which $107 million were from continuing operations). The Group has adopted a change in its presentation currency from pounds sterling to US dollars at 31 December 2019 as described in note A1. Accordingly, the 31 December 2018 and 1 January 2018 comparative statements of financial position and the 2018 related notes have been re-presented retrospectively from the previously published results. As a result of this change, the statement of financial position as at 1 January 2018 has been re-presented in accordance with IAS 1. The 31 December 2018 and 1 January 2018 comparative statements of financial position included discontinued UK and Europe operations. The consolidated financial statements on pages 199 to 309 were approved by the Board of Directors on 10 March 2020. They were signed on its behalf: Paul Manduca Chairman prudentialplc.com Mike Wells Group Chief Executive Mark FitzPatrick Group Chief Financial Officer and Chief Operating Officer Prudential plc Annual Report 2019 203 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information Consolidated statement of cash flows Continuing operations: Cash flows from operating activities Profit before tax (being tax attributable to shareholders’ and policyholders’ returns) Adjustments to profit before tax for non-cash movements in operating assets and liabilities: Investments Other non-investment and non-cash assets Policyholder liabilities (including unallocated surplus) Other liabilities (including operational borrowings) Investment income and interest payments included in profit before tax Operating cash items: Interest receipts and payments Dividend receipts Tax paid Other non-cash items Net cash flows from operating activities Cash flows from investing activities Purchases of property, plant and equipment Acquisition of business and intangibles note (i) Disposal of businesses Net cash flows from investing activities Cash flows from financing activities Structural borrowings of shareholder-financed operations: note (ii) Issue of subordinated debt, net of costs Redemption of subordinated debt Fees paid to modify terms and conditions of debt issued by the Group Interest paid Equity capital: Issues of ordinary share capital External dividends Net cash flows from financing activities Net (decrease) increase in cash and cash equivalents from continuing operations note (iii) Net cash flows from discontinued operations note (iii) Cash and cash equivalents at beginning of year Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents at end of year Comprising: Cash and cash equivalents from continuing operations Cash and cash equivalents from discontinued operations Note 2019 $m 2018* $m 2,287 3,557 (60,812) (2,487) 56,067 5,097 (4,803) 4,277 978 (717) (96) (209) (64) (635) 375 (324) 367 (504) (182) (526) 22 (1,634) (2,457) (2,990) (5,690) 15,442 203 6,965 6,965 – 2,236 (1,996) (1,641) 860 (4,148) 3,912 744 (477) 308 3,355 (134) (442) – (576) 2,079 (553) (44) (502) 23 (1,662) (659) 2,120 (610) 14,461 (529) 15,442 9,394 6,048 C13 C6.1 D2 D2 * The 2018 comparative results have been re-presented from those previously published to reflect the change in the Group’s presentation currency from pounds sterling to US dollars (as described in note A1) and the reclassification of the Group’s UK and Europe operations as discontinued operations in 2019 (as described in note A2). Notes (i) (ii) (iii) Cash flows arising from the acquisition of business and intangibles includes amounts paid for distribution rights. Structural borrowings of shareholder-financed businesses exclude borrowings to support short-term fixed income securities programmes, non-recourse borrowings of investment subsidiaries of shareholder-financed businesses and other borrowings of shareholder-financed businesses. Cash flows in respect of these borrowings are included within cash flows from operating activities. The changes in the carrying value of the structural borrowings of shareholder-financed businesses for the Group are analysed in note C6.1. The cash flows shown above are presented excluding any transactions between continuing and discontinued operations. 204 Prudential plc Annual Report 2019 prudentialplc.com A Basis of preparation and accounting policies A1 Basis of preparation and exchange rates Prudentialplc(‘theCompany’)togetherwithitssubsidiaries(collectively,‘theGroup’or‘Prudential’)isaninternationalfinancialservices group.TheGrouphasoperationsinAsia,theUS,Africaand,priortothedemergerofM&GplcinOctober2019,UKandEurope.The Grouphelpsindividualstode-risktheirlivesanddealwiththeirbiggestfinancialconcernsthroughlifeandhealthinsurance,and retirementandassetmanagementsolutions.On21October2019,theCompanycompletedthedemergerofM&Gplc,itsUKandEurope operations,fromPrudentialplcresultingintwoseparately-listedcompanies.Ithasthereforereclassifiedtheseoperationsas discontinuedinthesefinancialstatements(seenoteA2). Basis of preparation ThesestatementshavebeenpreparedinaccordancewithIFRSasissuedbytheInternationalAccountingStandardsBoard(IASB)andas endorsedbytheEuropeanUnion(EU)asrequiredbyEUlaw(IASRegulationEC1606/2032).EU-endorsedIFRSmaydifferfromIFRS issuedbytheIASBif,atanypointintime,neworamendedIFRShavenotbeenendorsedbytheEU.At31December2019,therewereno unendorsedstandardseffectiveforthetwoyearsended31December2019whichimpacttheconsolidatedfinancialstatementsofthe GroupandtherewerenodifferencesbetweenIFRSendorsedbytheEUandIFRSissuedbytheIASBintermsoftheirapplicationtothe Group.Forfinancialyearsbeginningafter31December2020,theGroupwillprepareitsconsolidatedfinancialstatementsinaccordance withUK-adoptedinternationalaccountingstandards,insteadoftheEU-endorsedIFRS. TheDirectorsconsideritappropriatetoadoptthegoingconcernbasisofaccountinginpreparingthesefinancialstatementsasset outintheGovernanceReportonpage121.TheparentcompanystatementoffinancialpositionpreparedinaccordancewiththeUK GenerallyAcceptedAccountingPractice(includingFinancialReportingStandard101ReducedDisclosureFramework)ispresentedon page310.TheGroupIFRSaccountingpoliciesarethesameasthoseappliedfortheyearended31December2018withtheexceptionof theadoptionofthenewandamendedaccountingstandardsasdescribedinnoteA3. Exchange rates FollowingthedemergerofitsUKandEuropeoperations,theDirectorshaveelectedtochangetheGroup’spresentationcurrencyin thesefinancialstatementsfrompoundssterlingtoUSdollarswhichbetterreflectstheeconomicfootprintofourbusinessgoingforward. TheGroupbelievesthatthepresentationcurrencychangewillgiveinvestorsandotherstakeholdersaclearerunderstandingof Prudential’sperformanceovertime.Thechangeinpresentationcurrencyisavoluntarychangewhichisaccountedforretrospectivelyin thecomparativeinformationandallcomparativestatementsandnoteshavebeenrestatedaccordinglyapplyingtheforeignexchange translationprinciplesassetoutbelow. TheexchangeratesappliedforbalancesandtransactionsinthepresentationcurrencyoftheGroup,USdollars($),andother currencieswere: $ : local currency China HongKong Indonesia Malaysia Singapore Thailand UK Vietnam Closing rate at 31 Dec 2019 Average rate for 2019 Closing rate at 31 Dec 2018 Average rate for 2018 Opening rate at 1 Jan 2018 6.97 7.79 13,882.50 4.09 1.34 29.75 0.75 23,172.50 6.91 7.84 14,140.84 4.14 1.36 31.05 0.78 23,227.64 6.87 7.83 14,380.00 4.13 1.36 32.56 0.79 23,195.00 6.61 7.84 14,220.82 4.03 1.35 32.30 0.75 23,017.17 6.51 7.82 13,567.00 4.05 1.34 32.59 0.74 22,708.16 Foreign exchange translation InordertopresenttheconsolidatedfinancialstatementsinUSdollars,theresultsandfinancialpositionofentitiesnotusingUSdollarsas functionalcurrency(iethecurrencyoftheprimaryeconomicenvironmentinwhichtheentityoperates)mustbetranslatedintotheUS dollars.Thegeneralprincipleforconvertingforeigncurrencytransactionsistotranslateatthefunctionalcurrencyspotrateprevailingat thedateofthetransactions.Thisincludesexternaldividendsdeterminedandpaidtoshareholdersinpoundssterling.Prudentialwill determineanddeclareitsdividendinUSdollarscommencingwithdividendspaidin2020,includingthe2019secondinterimdividend. AllassetsandliabilitiesofentitiesnotoperatinginUSdollarsareconvertedatclosingexchangerateswhileallincomeandexpensesare convertedataverageexchangerateswherethisisareasonableapproximationoftheratesprevailingontransactiondates.Theimpactof thesecurrencytranslationsisrecordedasaseparatecomponentinthestatementofcomprehensiveincome.At31December2019the functionalcurrencyoftheGroup’sparentcompanychangedtoUSdollars.TheGroupandparentcompanyhavechosen,for presentationalpurposes,toretranslatetheirsharecapitalandsharepremiumasat31December2019usingtheclosingexchangerateas atthatdate,andcomparativeamountsattherelativeclosingexchangerates.Theforeignexchangeadjustmentsarisingontheshare capitalandsharepremiumbalancesof$2,797million(31December2018:$2,668million)adjustthetranslationreservemovementinthe statementofothercomprehensiveincome.Asthisamountarisesonthetranslationoftheparentcompany’ssharecapitalandshare premium,thecorrespondingimpacttothecurrencytranslationreserveof$980millionwillneverberecycledondisposalofanyforeign operations. During2019and2018,borrowingsthatareusedtoprovideahedgeagainstGroupequityinvestmentsinoverseasentitieswere translatedatyearendexchangeratesandmovementsrecognisedinothercomprehensiveincome.Otherforeigncurrencymonetary itemsaretranslatedatyearendexchangerateswithchangesrecognisedintheincomestatement. prudentialplc.com Prudential plc AnnualReport2019 205 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationA1 Basis of preparation and exchange rates continued Certainnotestothefinancialstatementspresent2018comparativeinformationatconstantexchangerates(CER),inadditiontothe reportingatactualexchangerates(AER)usedthroughouttheconsolidatedfinancialstatements.AERareactualhistoricalexchangerates forthespecificaccountingperiod,beingtheaverageratesovertheperiodfortheincomestatementandtheclosingratesatthebalance sheetdateforthestatementoffinancialposition.CERresultsarecalculatedbytranslatingpriorperiodresultsusingthecurrentperiod foreignexchangerate,iecurrentperiodaverageratesfortheincomestatementandcurrentperiodclosingratesforthestatementof financialposition. Theeffectofforeignexchangemovementfromcontinuingoperationsarisingduringtheyearsshownrecognisedinother comprehensiveincomeis: Asiaoperations Unallocatedtoasegment(otherfunds) A2 Discontinued operations 2019 $m 2018 $m 194 (42) 152 (206) 167 (39) TheGroupcompletedthedemergerofitsUKandEuropeoperations,M&Gplc,fromthePrudentialplcgroupon21October2019.In accordancewithIFRS5‘Non-CurrentAssetsHeldforSaleandDiscontinuedOperations’,theresultsofM&Gplchavebeenreclassified asdiscontinuedoperationsintheseconsolidatedfinancialstatements. ConsistentwithIFRS5requirements,profitaftertaxattributabletothediscontinuedUKandEuropeoperationsin2019havebeen showninasinglelineintheincomestatementwith2018comparativesbeingrestatedaccordingly,withfurtheranalysisprovidedinnote D2.NotesB1toB5havealsobeenpreparedonthisbasis. IFRS5doesnotpermitthecomparative31December2018and1January2018statementoffinancialpositiontobere-presented,as theUKandEuropeoperationswerenotreclassifiedasheldforsaleatthesedates.Intherelatedbalancesheetnotes,prioryearbalances havebeenpresentedtoshowtheamountsfromdiscontinuedoperationsseparatelyfromcontinuingoperationsinordertopresentthe resultsofthecontinuingoperationsonacomparablebasis.Additionally,intheanalysisofmovementsinGroup’sassetsandliabilities betweenthebeginningandendoftheyears,thebalancesofthediscontinuedUKandEuropeoperationsareremovedfromtheopening balancestoshowtheunderlyingmovementsfromcontinuingoperations. ProfitfromthediscontinuedUKandEuropeoperationsuptothedemergerispresentedintheconsolidatedincomestatementafter theeliminationofintragrouptransactionswithcontinuingoperationswhereitisappropriatetoprovideamoremeaningfulpresentation ofthepositionoftheGroupimmediatelyafterthedemerger.Thestatementofcashflowsispresentedexcludingintragroupcashflows betweenthecontinuinganddiscontinuedUKandEuropeoperationsuptodemerger. A3 New accounting pronouncements in 2019 IFRS 16 ‘Leases’ TheGrouphasadoptedIFRS16‘Leases’from1January2019.Thenewstandardbringsmostleaseson-balance-sheetforlesseesunder asinglemodel,eliminatingthedistinctionbetweenoperatingandfinanceleases. IFRS16appliesprimarilytooperatingleasesofmajorpropertiesoccupiedbytheGroup’sbusinesseswherePrudentialisalessee. UnderIFRS16,theseleasesarebroughtontotheGroup’sstatementoffinancialpositionwitha‘right-of-use’assetbeingestablished andacorrespondingliabilityrepresentingtheobligationtomakeleasepayments.Therentalaccrualchargeintheincomestatement underIAS17isreplacedwithadepreciationchargeforthe‘right-of-use’assetandaninterestexpenseontheleaseliabilityleadingto amorefront-loadedoperatingleasecostprofilecomparedtoIAS17. AspermittedbyIFRS16,theGrouphaschosentoadoptthemodifiedretrospectiveapproachupontransitiontothenewstandard. Undertheapproachadopted,thereisnoadjustmenttotheGroup’sretainedearningsat1January2019andtheGroup’s2018 comparativeinformationisnotrestated.The‘right-of-use’assetandleaseliabilityat1January2019aresetatanamountequaltothe discountedremainingleasepaymentsadjustedbyanyprepaidoraccruedleasepaymentbalanceimmediatelybeforethedateofinitial applicationofthestandard. 206 Prudential plc AnnualReport2019 prudentialplc.com A BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUED895 895 955 (60) 895 Total Group $m 955 210 1,165 (48) (6) 1,111 Whenmeasuringleaseliabilitiesonadoption,theGroupdiscountedleasepaymentsusingitsincrementalborrowingrateat1January 2019.Theweightedaveragerateappliedis3.4percent.Theaggregateeffectoftheadoptionofthestandardonthestatementof financialpositionat1January2019isshowninthetablebelow: Effect of adoption of IFRS 16 at 1 January 2019 Assets Property,plantandequipment(right-of-useassets) Total assets Liabilities Operationalborrowings(leaseliability) Accruals,deferredincomeandotherliabilities(accruedleasepaymentbalanceunderIAS17) Total liabilities Reconciliation of IFRS 16 lease liability and IAS 17 lease commitments Continuing operations $m Discontinued operations $m Total Group $m 527 527 541 (14) 527 368 368 414 (46) 368 IFRS 16 operating lease liability shown in the table above Addbackimpactofdiscounting IFRS 16 operating lease liability on an undiscounted basis Differenceinleaserentalpaymentsduetoprobablerenewalsorearlyterminationdecisionsreflectedabove Other Total operating lease commitments at 31 December 2018* *AsdisclosedinnoteD5oftheGroup’sIFRSfinancialstatementsfortheyearended31December2018andafterexcluding$76millionfortheamountrelatingtocertainlease commitmentsfromthecentraloperationstothediscontinuedUKwith-profitsfund. TheGrouphasappliedthepracticalexpedienttograndfatherthedefinitionofaleaseontransition.ThismeansthatIFRS16hasbeen appliedtoallcontractsthatwereidentifiedasleasesinaccordancewithIAS17andIFRIC4‘DeterminingwhetheranArrangement containsaLease’enteredintobefore1January2019.Therefore,thedefinitionofaleaseunderIFRS16isappliedonlytocontracts enteredintoorchangedonorafter1January2019. TheGrouphasusedthefollowingpracticalexpedients,inadditiontotheaforementioned,whenapplyingIFRS16toleasespreviously classifiedasoperatingleasesunderIAS17: — Applyingasinglediscountratetoaportfolioofleaseswithsimilarcharacteristics.Accordingly,forsuchportfolios,theincremental borrowingratesusedtodiscountthefutureleasepaymentswillbedeterminedbasedonmarketspecificrisk-freeratesadjustedwith amargin/spreadtoreflecttheGroup’screditstanding,leasetermandtheoutstandingleasepayments;and — Usinghindsightwhendeterminingtheleasetermifthecontractcontainsoptionstoextendorterminatethelease. Other new accounting pronouncements Inadditiontotheabove,thefollowingnewaccountingpronouncementswerealsoeffectivefrom1January2019: — IFRICInterpretation23‘UncertaintyoverIncomeTaxTreatments’; — AmendmentstoIAS28‘Long-termInterestsinAssociatesandJointVentures’; — AmendmentstoIFRS9‘PrepaymentFeatureswithNegativeCompensation’; — AnnualImprovementstoIFRSs2015-2017cycle;and — AmendmentstoIAS19‘PlanAmendment,CurtailmentorSettlement’. TheGrouphasappliedtheprincipleswithintheAmendmentstoIAS19‘PlanAmendment,CurtailmentorSettlement’whenaccounting forthechangestothepensionbenefitsofitsUKdefinedbenefitschemesduringtheyear.Theotherpronouncementshavehadno significantimpactontheGroupfinancialstatements. prudentialplc.com Prudential plc AnnualReport2019 207 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationA4 Accounting policies NoteA4.1presentsthecriticalaccountingpolicies,accountingestimatesandjudgementsappliedinpreparingtheGroup’sconsolidated financialstatements.Otheraccountingpolicies,wheresignificant,arepresentedintherelevantindividualnotes.Allaccountingpolicies areappliedconsistentlyforbothyearspresentedandnormallyarenotsubjecttochangesunlessnewaccountingstandards, interpretationsoramendmentsareintroducedbytheIASB. A4.1 Critical accounting policies, estimates and judgements ThepreparationofthesefinancialstatementsrequiresPrudentialtomakeestimatesandjudgementsabouttheamountsofassets, liabilities,revenuesandexpenses,whicharebothrecognisedandunrecognised(egcontingentliabilities)intheprimaryfinancial statements.Prudentialevaluatesitsestimates,includingthoserelatedtolong-termbusinessprovisioningandthefairvalueofassetsas required.Thenotesbelowsetoutthosecriticalaccountingpolicies,theapplicationofwhichrequirestheGrouptomakecriticalestimates andjudgements.AlsosetoutarefurthercriticalaccountingpoliciesaffectingthepresentationoftheGroup’sresultsandotheritemsthat requiretheapplicationofcriticalestimatesandjudgements. (a) Critical accounting policies with associated critical estimates and judgements Classification of insurance and investment contracts IFRS4requirescontractswrittenby insurerstobeclassifiedaseither ‘insurance’contractsor‘investment’ contracts.Theclassificationofthecontract determinesitsaccounting. Impacts$397.6billionofreported contractliabilities,requiringclassification, includingthoseheldbythejointventure andassociate. Judgementisappliedinconsidering whetherthematerialfeaturesofa contractgivesrisetothetransferof significantinsurancerisk.  ContractsthattransfersignificantinsurancerisktotheGroupareclassifiedasinsurance contracts.Thisjudgementismadeatthepointofcontractinceptionandisnotrevisited. ForthemajorityoftheGroup’scontracts,classificationisbasedonareadilyidentifiable scenariothatdemonstratesasignificantdifferenceincashflowsifthecoveredevent occurs(asopposedtodoesnotoccur)reducingthelevelofjudgementinvolved. ContractsthattransferfinancialrisktotheGroupbutnotsignificantinsuranceriskare classifiedasinvestmentcontracts.Certaininvestmentcontractscontaindiscretionary participatingfeaturesasdiscussedinIFRS4.Insurancecontractsandinvestment contractswithdiscretionaryparticipationfeaturesareaccountedforunderIFRS4. Investmentcontractswithoutsuchdiscretionaryparticipationfeaturesareaccountedfor asfinancialinstrumentsunderIAS39. Insurance business units Asia US DiscontinuedUK andEurope Insurance contracts and investment contracts with discretionary participation features — With-profitscontracts — Non-participatingterm contracts — Wholelifecontracts — Unit-linkedpolicies — Accidentandhealth policies Investment contracts without discretionary participation features — Minoramountsfora numberofsmall categoriesofbusiness — Variableannuity contracts — Fixedannuitycontracts — Fixedindexannuity contracts — Grouppay-outannuity — Guaranteed investment contracts(GICs) — Minoramountsof ‘annuitycertain’ contracts contracts — Lifeinsurance contracts — With-profitscontracts — Bulkandindividual annuitybusiness — Non-participatingterm contracts — Certainunit-linked savingsandsimilar contracts 208 Prudential plc AnnualReport2019 prudentialplc.com A BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUEDMeasurement of policyholder liabilities and unallocated surplus of with-profits Themeasurementbasisofpolicyholder liabilitiesisdependentuponthe classificationofthecontractsunderIFRS4 describedabove. Impacts$402.3billionofpolicyholder liabilitiesandunallocatedsurplusof with-profits. Policyholderliabilitiesareestimatedbased onanumberofactuarialassumptions(eg mortality,morbidity,policyholder behaviourandexpenses). Measurementofinsurancecontract liabilitiesandinvestmentcontractliabilities withdiscretionaryparticipationfeatures Asia insurance operations US insurance operations (Jackson) Discontinued UK and Europe insurance operations Measurementofinvestmentcontract liabilitieswithoutdiscretionary participationfeatures IFRS4permitsthecontinuedusageofpreviouslyappliedGenerallyAcceptedAccounting Practices(GAAP)forinsurancecontractsandinvestmentcontractswithdiscretionary participatingfeatures. AmodifiedstatutorybasisofreportingwasadoptedbytheGrouponfirsttimeadoptionof IFRSin2005.ThiswassetoutintheStatementofRecommendedPracticeissuedbythe AssociationofBritishInsurers(ABISORP).AnexceptionwasforUKregulatedwith- profitsfundswhichweremeasuredunderFRS27,‘LifeAssurance’asdiscussedbelow. FRS27andtheABISORPwerewithdrawnfortheaccountingperiodsbeginninginorafter 2015.Asusedintheseconsolidatedfinancialstatements,theterms‘grandfathered’FRS 27andthe‘grandfathered’ABISORPrefertotherequirementsofthesepronouncements priortotheirwithdrawal.Forinvestmentcontractsthatdonotcontaindiscretionary participatingfeatures,IAS39isappliedand,wherethecontractincludesaninvestment managementelement,IFRS15‘RevenuefromContractswithCustomers’applies. Thepoliciesappliedineachbusinessunitarenotedbelow.Whenmeasuringpolicyholder liabilities,anumberofassumptionsareappliedtoestimatefutureamountsduetoorfromthe policyholder.Thenatureofassumptionsvariesbyproductandamongthemostsignificantis policyholderbehaviour,particularlyintheUS.Additionaldetailsofvaluationmethodologies andassumptionsappliedformaterialproducttypesarediscussedinnoteC4.2. ThepolicyholderliabilitiesforbusinessesinAsiaaregenerallydeterminedinaccordance withmethodsprescribedbylocalGAAP,adjustedtocomplywiththemodifiedstatutory basiswherenecessary.Refinementstothelocalreservingmethodologyaregenerally treatedaschangesinestimates,dependentontheirnature.InTaiwanandIndia,USGAAP principlesareapplied. ThesensitivityofAsiainsuranceoperationstovariationsinkeyestimatesand assumptions,includingmortalityandmorbidity,isdiscussedinnoteC7.2. ThepolicyholderliabilitiesforJackson’sconventionalprotection-typepoliciesare determinedunderUSGAAPprincipleswithlockedinassumptionsformortality,interest, policylapsesandexpensesalongwithprovisionsforadversedeviations.Forother policies,thepolicyholderliabilitiesincludethepolicyholderaccountbalance. ForthoseinvestmentcontractsintheUSwithfixedandguaranteedterms,theGroupuses theamortisedcostmodeltomeasuretheliability.TheUShasnoinvestmentcontracts withdiscretionaryparticipationfeatures. ThesensitivityofUSinsuranceoperationstovariationsinkeyestimatesandassumptions, includingpolicyholderbehaviour,isdiscussedinnoteC7.3. TheUKregulatedwith-profitsfunds’liabilitiesaretherealisticbasisliabilitiesin accordancewith‘grandfathered’FRS27.Therealisticbasisrequiresthevalueofliabilities tobecalculatedasthesumofawith-profitsbenefitsreserve,futurepolicy-related liabilitiesandtherealisticcurrentliabilitiesofthefund. Theinterestratesusedinestablishingpolicyholderbenefitprovisionsforpension annuitiesinthecourseofpaymentareadjustedeachreportingperiodandincludean allowanceforcreditrisk.Mortalityratesusedinestablishingpolicyholderbenefitsare basedonpublishedmortalitytablesadjustedtoreflectactualexperience. Investmentcontractswithoutdiscretionaryparticipationfeaturesaremeasuredin accordancewithIAS39toreflectthedepositnatureofthearrangement,withpremiums andclaimsreflectedasdepositsandwithdrawals,andtakendirectlytothestatement offinancialpositionasmovementsinthefinancialliabilitybalance. Investmentcontractswithoutfixedandguaranteedtermsareclassifiedasfinancial instrumentsanddesignatedasfairvaluethroughprofitorlossbecausetheresulting liabilitiesaremanagedandtheirperformanceisevaluatedonafairvaluebasis.Wherethe contractincludesasurrenderoption,itscarryingvalueissubjecttoaminimumcarrying valueequaltoitssurrendervalue. Otherinvestmentcontractsaremeasuredatamortisedcost. prudentialplc.com Prudential plc AnnualReport2019 209 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationA4 Accounting policies continued A4.1 Critical accounting policies, estimates and judgements continued Measurement of policyholder liabilities and unallocated surplus of with-profits continued Measurementofunallocatedsurplusof with-profitsfunds Liabilityadequacytest Unallocatedsurplusofwith-profitsfundsrepresentstheexcessofassetsover policyholderliabilitiesdeterminedinaccordancewiththeGroup’saccountingpoliciesand basedonlocalGAAPfortheGroup’swith-profitsfundsinHongKong,Malaysiaand,upto itsdemerger,theUKandEuropeoperationsthathaveyettobeappropriatedbetween policyholdersandshareholders.Theunallocatedsurplusisrecordedwhollyasaliability withnoallocationtoequity.Theannualexcessorshortfallofincomeoverexpenditureof thewith-profitsfunds,afterdeclarationandattributionofthecostofbonusesto policyholdersandshareholders,istransferredtoorfromtheunallocatedsurpluseach periodthroughachargeorcredittotheincomestatement.Thebalanceretainedinthe unallocatedsurplusrepresentscumulativeincomearisingonthewith-profitsbusinessthat hasnotbeenallocatedtopolicyholdersorshareholders.Thebalanceoftheunallocated surplusisdeterminedafterfullprovisionfordeferredtaxonunrealisedappreciationor depreciationoninvestments. TheGroupperformsadequacytestingonitsinsuranceliabilitiestoensurethatthe carryingamounts(netofrelateddeferredacquisitioncosts)and,whererelevant,present valueofacquiredin-forcebusinessissufficienttocovercurrentestimatesoffuturecash outflows.Anydeficiencyisimmediatelychargedtotheincomestatement. Jackson’sliabilitiesforinsurancecontracts,whichincludethoseforseparateaccounts (reflectingseparateaccountassets),policyholderaccountvaluesandguarantees measuredasdescribedinnoteC4.2andtheassociateddeferredacquisitioncostasset, aremeasuredunderUSGAAPandliabilityadequacytestingisperformedinthiscontext. UnderUSGAAP,mostofJackson’sproductsareaccountedforunderAccounting StandardsCodificationTopic944,FinancialServices–InsuranceoftheFinancial AccountingStandardsBoard(ASC944)wherebydeferredacquisitioncostsareamortised inlinewithexpectedgrossprofits.Recoverabilityofthedeferredacquisitioncostsinthe balancesheetistestedagainsttheprojectedvalueoffutureprofitusingcurrentestimates andthereforenoadditionalliabilityadequacytestisrequiredunderIFRS4.Thedeferred acquisitioncostassetrecoverabilitytestisperformedinlinewithUSGAAPrequirements, whichinpracticeisatagroupedlevelofthosecontractsmanagedtogether. (b) Further critical accounting policies affecting the presentation of the Group’s results Measurement and presentation of derivatives and debt securities of US insurance operations (Jackson) Jacksonholdsanumberofderivative instrumentsanddebtsecurities.The selectionoftheaccountingapproachfor theseitemssignificantlyaffectsthe volatilityofprofitbeforetax. $(4,225)millionoftheUSinvestment returnintheincomestatementarisesfrom suchderivativesanddebtsecurities. Jacksonentersintoderivativeinstrumentstomitigateeconomicexposures.TheGroup hasconsideredwhetheritisappropriatetoundertakethenecessaryoperationalchanges toqualifyforhedgeaccountingsoastoachievematchingofvaluemovementsinhedging instrumentsandhedgeditemsintheperformancestatements.Thekeyfactorsconsidered inthisassessmentwerethecomplexityofassetandliabilitymatchinginJackson’sproduct rangeandthedifficultyandcostofapplyingthemacrohedgeprovisionsunderIAS39 (whicharemoresuitedtobankingarrangements)toJackson’sderivativebook. TheGrouphasdecidedthat,exceptforoccasionalcircumstances,applyinghedge accountingusingIAS39toderivativeinstrumentsheldbyJacksonwouldnotimprovethe relevanceorreliabilityofthefinancialstatementstosuchanextentthatwouldjustifythe difficultyandcostofapplyingtheseprovisions.Asaresultofthisdecision,thetotal incomestatementresultsaremorevolatileasthemovementsinthefairvalueofJackson’s derivativesarereflectedwithinit.Thisvolatilityisreflectedinthelevelofshort-term fluctuationsininvestmentreturns,asshowninnotesB1.1andB1.2. UnderIAS39,unlesscarriedatamortisedcost(subjecttoimpairmentprovisionswhere appropriate)undertheheld-to-maturitycategory,debtsecuritiesarecarriedatfairvalue. TheGrouphaschosennottoclassifyanyfinancialassetsasheld-to-maturity.Debt securitiesofJacksonaredesignatedasavailable-for-salewithvaluemovements,unless impaired,beingrecordedasmovementswithinothercomprehensiveincome. Impairmentsarerecordedintheincomestatement,asdiscussedinnote(c)below. 210 Prudential plc AnnualReport2019 prudentialplc.com A BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUEDPresentation of results before tax attributable to shareholders ProfitbeforetaxisasignificantIFRSincome statementitem.TheGrouphaschosento presentameasureofprofitbeforetax attributabletoshareholderswhich distinguishesbetweentaxborneby shareholdersandtaxattributableto policyholderstosupportunderstandingof theperformanceoftheGroup. ThetotaltaxchargefortheGroupreflectstaxthat,inadditiontothatrelatingto shareholders’profit,isalsoattributabletopolicyholdersthroughtheinterestinwith- profitsorunit-linkedfunds.FurtherdetailisprovidedinnoteB4.ReportedIFRSprofit beforethetaxmeasureisthereforenotrepresentativeofpre-taxprofitattributableto shareholders.Accordingly,inordertoprovideameasureofpre-taxprofitattributableto shareholders,theGrouphaschosentoadoptanincomestatementpresentationofthetax chargeandpre-taxresultsthatdistinguishesbetweenpolicyholdersandshareholders returns. Profitfromcontinuingoperationsbefore taxattributabletoshareholdersis $1,922millionandcomparestoprofit fromcontinuingoperationsbeforetax of$2,287million. Segmental analysis of results and earnings attributable to shareholders TheGroupusesadjustedIFRSoperating profitbasedonlonger-terminvestment returnsasthesegmentalmeasureofits results. TotalsegmentaladjustedIFRSoperating profitfromcontinuingoperationsbased onlonger-terminvestmentreturnsis $6,346millionandisshowninnoteB1.1. ThebasisofcalculationofadjustedIFRSoperatingprofitbasedonlonger-terminvestment returnsisprovidedinnoteB1.3. Forshareholder-backedbusiness,withtheexceptionofdebtsecuritiesheldbyJackson andtheGroup’snewtreasurycompany,whicharetreatedasavailable-for-sale,and assetsclassifiedasloansandreceivablesatamortisedcost,allfinancialinvestments andinvestmentpropertiesaredesignatedasassetsatfairvaluethroughprofitorloss. Short-termfluctuationsinfairvalueaffecttheresultfortheyearandtheGroupprovides additionalanalysisofresultsbeforeandaftertheeffectsofshort-termfluctuationsin investmentreturns,togetherwithotheritemsthatareofashort-term,volatileorone-off nature.Theeffectsofshort-termfluctuationsincludeasymmetricimpactswherethe measurementbasesoftheliabilitiesandassociatedderivativesusedtomanagethe JacksonannuitybusinessdifferasdescribedinnoteB1.2. Short-termfluctuationsininvestmentreturnsonassetsheldbywith-profitsfundsinHong Kong,MalaysiaandSingaporedonotaffectdirectlyreportedshareholderresults.Thisis because(i)theunallocatedsurplusofwith-profitsfundsisaccountedforasaliabilityand (ii)excessordeficitofincomeandexpenditureofthefundsovertherequiredsurplusfor distributionaretransferredtoorfrompolicyholderliabilities(includingtheunallocated surplus). (c) Other items requiring application of critical estimates or judgements Deferred acquisition costs (DAC) for insurance contracts TheGroupappliesjudgementin determiningqualifyingcoststhatshouldbe capitalised(iethosecostsofacquiringnew insurancecontractsthatmeetthecriteria undertheGroup’saccountingpolicyfor deferredacquisitioncosts). TheGroupestimatesprojectedfuture profits/marginstoassesswhether adjustmentstothecarryingvalueor amortisationprofileofdeferredacquisition costassetarenecessary. Impacts$14.2billionofdeferred acquisitioncostsasshowninnoteC5.2(i). Costsofacquiringnewinsurancebusinessareaccountedforinawaythatisconsistent withtheprinciplesofthe’grandfathered’ABISORPwithdeferralandamortisationagainst marginsinfuturerevenuesontherelatedinsurancepolicies.Therecoverabilityofthe deferredacquisitioncosts(DAC)ismeasuredandtheDACassetisdeemedimpairedifthe projectedmargins(whichareestimatedbasedonanumberofassumptionssimilarto thoseunderlyingpolicyholderliabilities)arelessthanthecarryingvalue.Totheextentthat thefuturemarginsdifferfromthoseanticipated,anadjustmenttothecarryingvaluewill benecessaryeitherthroughanimpairment(iftheprojectedmarginsarelowerthan carryingvalue)orthroughachangeintheamortisationprofile. prudentialplc.com Prudential plc AnnualReport2019 211 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationA4 Accounting policies continued A4.1 Critical accounting policies, estimates and judgements continued Deferred acquisition costs (DAC) for insurance contracts continued Asia insurance operations ForthosebusinessunitsapplyingUSGAAPtoinsuranceassetsandliabilities,as permittedbythe‘grandfathered’ABISORP,principlessimilartothosesetoutintheUS insuranceoperationsparagraphbelowareappliedtothedeferralandamortisationof acquisitioncosts.ForotherbusinessunitsinAsia,thegeneralprinciplesofthe ‘grandfathered’ABISORPareapplied.Ingeneral,deferralofacquisitioncostsisshownby anexplicitcarryingvalueinthebalancesheet.However,insomeAsiaoperationsthe deferralisimplicitthroughthereservingbasis. US insurance operations Themostmaterialestimatesandassumptionsappliedinthemeasurementand amortisationofDACbalancesrelatetotheUSinsuranceoperations. TheGroup’sUSinsuranceoperationsapplyFASBASU2010-26on‘AccountingforCosts AssociatedwithAcquiringorRenewingInsuranceContracts’andcapitaliseonlythose incrementalcostsdirectlyrelatingtosuccessfullyacquiringacontract. Fortermlifebusiness,acquisitioncostsaredeferredandamortisedinlinewithexpected premiums.Forannuityandinterest-sensitivelifebusiness,acquisitioncostsaredeferred andamortisedinlinewithexpectedgrossprofitsontherelevantcontracts.Forfixedand fixedindexannuityandinterest-sensitivelifebusiness,thekeyassumptionisthe long-termspreadbetweentheearnedrateoninvestmentsandtheratecreditedto policyholders. Forvariableannuitybusiness,akeyassumptionisthelong-terminvestmentreturnfrom theseparateaccounts,whichfor2019is7.4percent(2018:7.4percent).Theimpactof usingthisreturnisreflectedintwoprincipalways,namely: — Throughtheprojectedexpectedgrossprofitsthatareusedtodeterminethe amortisationofdeferredacquisitioncosts.Thisisappliedthroughtheuseofamean reversiontechniquewhichisdescribedinmoredetailbelow;and — Therequiredlevelofprovisionforclaimsforguaranteedminimumdeath,‘forlife’ withdrawal,andincomebenefits. Inaddition,expectedgrossprofitsdependonmortalityassumptions,lapses(includingthe relatedcharges),assumedunitcostsandfuturehedgecosts,whicharebasedona combinationofJackson’sactualexperience,industrybenchmarkingandfuture expectations. Jacksonusesameanreversionmethodologythatsetstheprojectedlevelofreturnfor eachofthenextfiveyearssuchthatthesereturnsincombinationwiththeactualratesof returnfortheprecedingthreeyears(includingthecurrentyear)averagetheassumed long-termannualreturn(grossofassetmanagementfeesandotherchargesto policyholders,butnetofexternalfundmanagementfees)overtheeight-yearperiod. Projectedreturnsafterthemeanreversionperiodrevertbacktothelong-terminvestment return.Forfurtherdetailsoncurrentbalances,assumptionsandsensitivity,refertonote C5.2(i). Toensurethatthemethodologyinextrememarketmovementsproducesfutureexpected returnsthatarerealistic,themeanreversiontechniquehasacapandfloorfeature wherebytheprojectedreturnsineachofthenextfiveyearscanbenomorethan 15percentperannumandnolessthanzeropercentperannum(bothgrossofasset managementfeesandotherchargestopolicyholders,butnetofexternalfund managementfees)ineachyear. JacksonmakescertainadjustmentstotheDACassetswhicharerecogniseddirectlyin othercomprehensiveincome(‘shadowaccounting’)tomatchtherecognitionof unrealisedgainsorlossesonavailable-for-salesecuritiescausingtheadjustments.More precisely,shadowDACadjustmentsreflectthechangeinDACthatwouldhavearisenif theassetsheldinthestatementoffinancialpositionhadbeensold,crystallisingunrealised gainsorlosses,andtheproceedsreinvestedattheyieldscurrentlyavailableinthemarket. 212 Prudential plc AnnualReport2019 prudentialplc.com A BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUEDCarrying value of distribution rights intangible assets TheGroupappliesjudgementtoassess whetherfactorssuchasthefinancial performanceofthedistribution arrangement,changesinrelevant legislationandregulatoryrequirements indicateanimpairmentofintangibleassets representingdistributionrights. Todeterminetheimpairedvalue,the Groupestimatesthediscountedfuture expectedcashflowsarisingfrom distributionrights. Affects$3.0billionofassetsasshown innoteC5.2. Financial investments – Valuation Distributionrightsrelatetobancassurancepartnershiparrangementsforthedistribution ofproductsforthetermofthecontractualagreementwiththebankpartner,forwhichan assetisrecognisedbasedonfeespaid.Distributionrightsimpairmenttestingisconducted whenthereisanindicationofimpairment. Toassessindicatorsofanimpairment,theGroupmonitorsanumberofinternaland externalfactors,includingindicationsthatthefinancialperformanceofthearrangementis likelytobeworsethanexpectedandchangesinrelevantlegislationandregulatory requirementsthatcouldimpacttheGroup’sabilitytocontinuetosellnewbusiness throughthebancassurancechannel,andthenappliesjudgementtoassesswhetherthese factorsindicatethatanimpairmenthasoccurred. Ifanimpairmenthasoccurred,achargeisrecognisedintheincomestatementforthe differencebetweenthecarryingvalueandrecoverableamountoftheasset.The recoverableamountisthegreateroffairvaluelesscoststosellandvalueinuse.Valuein useiscalculatedasthepresentvalueoffutureexpectedcashflowsfromtheassetorthe cashgeneratingunittowhichitisallocated. Financialinvestmentsheldatfairvalue represent$388.1billionoftheGroup’stotal assets. TheGroupholdsthemajorityofitsfinancialinvestmentsatfairvalue(eitherthroughprofit orlossoravailable-for-sale).Financialinvestmentsheldatamortisedcostprimarily compriseloansanddeposits. Financialinvestmentsheldatamortised costrepresent$15.6billionoftheGroup’s totalassets. TheGroupestimatesthefairvalueof financialinvestmentsthatarenotactively tradedusingquotationsfromindependent thirdpartiesorinternallydevelopedpricing models. Determination of fair value ThefairvaluesofthefinancialinstrumentsforwhichfairvaluationisrequiredunderIFRS aredeterminedbytheuseofcurrentmarketbidpricesforexchange-quotedinvestments orbyusingquotationsfromindependentthirdpartiessuchasbrokersandpricingservices orbyusingappropriatevaluationtechniques. Theestimatedfairvalueofderivativefinancialinstrumentsreflectstheestimatedamount theGroupwouldreceiveorpayinanarm’s-lengthtransaction.Thisamountisdetermined usingquotedpricesifexchangelisted,quotationsfromindependentthirdpartiesor valuedinternallyusingstandardmarketpractices. Currentmarketbidpricesareusedtovalueinvestmentshavingquotedprices.Actively tradedinvestmentswithoutquotedpricesarevaluedusingpricesprovidedbythird partiessuchasbrokersorpricingservices.Financialinvestmentsmeasuredatfairvalue areclassifiedintoathree-levelhierarchyasdescribedinnoteC3.1(b). IfthemarketforafinancialinvestmentoftheGroupisnotactive,theGroupestablishesfair valuebyusingquotationsfromindependentthirdparties,suchasbrokersorpricing services,orbyusinginternallydevelopedpricingmodels.Priorityisgiventopublicly availablepricesfromindependentsourceswhenavailable,butoverallthesourceof pricingand/orthevaluationtechniqueischosenwiththeobjectiveofarrivingatafair valuemeasurementwhichreflectsthepriceatwhichanorderlytransactionwouldtake placebetweenmarketparticipantsonthemeasurementdate.Thevaluationtechniques includetheuseofrecentarm’slengthtransactions,referencetootherinstrumentsthatare substantiallythesame,discountedcashflowanalysis,option-adjustedspreadmodels and,ifapplicable,enterprisevaluationandmayincludeanumberofassumptionsrelating tovariablessuchascreditriskandinterestrates.Changesinassumptionsrelatingtothese variablescouldpositivelyornegativelyimpactthereportedfairvalueofthesefinancial investments.Detailsofthefinancialinvestmentsclassifiedas‘level3’towhichvaluation techniquesareappliedandthesensitivityofprofitbeforetaxtoachangeinthevaluation oftheseitems,arepresentedinnoteC3.1(d). prudentialplc.com Prudential plc AnnualReport2019 213 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationA4 Accounting policies continued A4.1 Critical accounting policies, estimates and judgements continued Financial investments – Determining impairment of “available-for-sale” and “amortised cost” assets TheGroupappliesjudgementtoassess whetherfactorssuchastheseverityand durationofthedeclineinfairvalue,the financialconditionandtheprospectsofthe issuerindicateanimpairmentinvalueof financialinvestmentsclassifiedas ‘available-for-sale’or‘heldatamortised cost’. Ifevidenceforimpairmentexists,valuation techniques,includingestimates,arethen appliedindeterminingtheimpairedvalue, whichisbasedonitsexpectationof discountedfuturecashflows.Ifthe impairedvalueislessthanbookcost,an impairmentlossisrecognisedintheincome statement. Affects$73.9billionofassets. Forfinancialinvestmentsclassifiedas‘availableforsale’or‘atamortisedcost’,ifaloss eventthatwillhaveadetrimentaleffectoncashflowsisidentified,animpairmentlossis recognisedintheincomestatement.Thelossrecognisedisdeterminedasthedifference betweenthebookcostandthefairvalueorestimatedfuturecashflowsoftherelevant impairmentassets.Thelosscomprisestheeffectoftheexpectedlossofcontractualcash flowsandanyadditionalmarket-pricedriventemporaryreductionsinvalues. Available-for-sale securities TheGroup’savailable-for-salesecuritiesareprincipallyheldbytheUSinsurance operations.Forthesesecurities,theconsiderationofevidenceofimpairmentrequires management’sjudgement.Inmakingthisdetermination,arangeofmarketandindustry indicatorsareconsideredincludingtheseverityanddurationofthedeclineinfairvalue andthefinancialconditionandprospectsoftheissuer.Thefactorsreviewedinclude economicconditions,creditlossexperience,otherissuer-specificdevelopmentsand futurecashflows.Theseassessmentsarebasedonthebestavailableinformationatthe time.Factorssuchasmarketliquidity,thewideningofbid/askspreadsandachangein cashflowassumptionscancontributetofuturepricevolatility.Ifactualexperiencediffers negativelyfromtheassumptionsandotherconsiderationsusedintheconsolidated financialstatements,unrealisedlossescurrentlyinequitymayberecognisedinthe incomestatementinfutureperiods. ForUSresidentialmortgage-backedandotherasset-backedsecurities,allofwhichare classifiedasavailable-for-sale,impairmentisestimatedusingamodelofexpectedfuture cashflows.Keyassumptionsusedinthemodelincludeassumptionsabouthowmuchof thecurrentlydelinquentloanswilleventuallydefaultandassumedlossseverity. Additionaldetailsonthemethodologyandestimatesusedtodetermineimpairmentsof theavailable-for-salesecuritiesofJacksonaredescribedinnoteC3.2(e). Assets held at amortised cost Whenassetsheldatamortisedcostaresubjecttoimpairmenttesting,estimatedfuture cashflowsarecomparedtothecarryingvalueoftheasset.Inestimatingfuturecashflows, theGrouplooksattheexpectedcashflowsoftheassetsandapplieshistoricalloss experienceofassetswithsimilarcreditrisksthathasbeenadjustedforconditionsinthe historicallossexperiencewhichnolongerexist,orforconditionsthatareexpectedto arise.Theestimatedfuturecashflowsarediscountedusingthefinancialasset’soriginalor variableeffectiveinterestrateandexcludecreditlossesthathavenotyetbeenincurred. Reversal of impairment losses If,insubsequentperiods,animpaireddebtsecurityheldonanavailable-for-salebasisor animpairedloanorreceivablerecoversinvalue(inpartorinfull)andthisrecoverycanbe objectivelyrelatedtoaneventoccurringaftertheimpairment,thenanyamount determinedtohavebeenrecoveredisreversedthroughtheincomestatement. 214 Prudential plc AnnualReport2019 prudentialplc.com A BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUEDA4.2 New accounting pronouncements not yet effective Thefollowingstandards,interpretationsandamendmentshavebeenissuedbutarenotyeteffectivein2019,includingthosewhich havenotyetbeenadoptedintheEU.FollowingUK’swithdrawalfromtheEuropeanUnion,theGroupwillcontinuetopreparethese statementsinaccordancewithIASBissuedstandardsasendorsedbytheEUuntiltheendofthetransitionperiodon31December2020. ThisincludesaccountingstandardsalreadyendorsedbytheEUbutnotyeteffectiveaswellasanyneworamendedstandardsadopted bytheEUbeforethe31December2020.Forfinancialyearsbeginningafter31December2020,theGroupwillberequiredtoprepare financialstatementsinaccordancewithUK-adoptedinternationalaccountingstandards.TheGovernmentisintheprocessof establishingtheUKEndorsementBoardtoundertaketheworkofassessing,endorsingandadoptinganyneworamendedInternational AccountingStandardspublishedbytheIASB. Thisisnotintendedtobeacompletelistasonlythosestandards,interpretationsandamendmentsthatcouldhaveamaterialimpact ontheGroup’sfinancialstatementsarediscussed. IFRS 9 ‘Financial instruments: Classification and measurement’ InJuly2014,theIASBpublishedacompleteversionofIFRS9withtheexceptionofmacrohedgeaccounting.Thestandardbecame mandatorilyeffectivefortheannualperiodsbeginningonorafter1January2018,withearlyapplicationpermittedandtransitionalrules apply. TheGroupmettheeligibilitycriteriafortemporaryexemptionundertheAmendmentstoIFRS4fromapplyingIFRS9in2018andhas accordinglydeferredtheadoptionofIFRS9untilthedatewhenIFRS17‘InsuranceContracts’isexpectedtobeadopteduponitscurrent mandatoryeffectivedate.TheGroupmadeareassessmentduringtheyearfollowingthedemergeroftheUKandEuropeoperations inOctober2019andconfirmedthatitremainedqualifiedforthetemporaryexemption.TheGroupiseligibleasitsactivitiesare predominantlytoissueinsurancecontractsbasedonthecriteriaassetoutintheamendmentstoIFRS4.Thedisclosureofthefairvalueof theGroup’sfinancialassets,showingtheamountsforinstrumentsthatmeetthe‘SolelyforPaymentofPrincipalandInterest’(SPPI) criteriathatdonotmeetthedefinitionofheldfortradingoraremanagedandevaluatedonafairvaluebasisseparatelyfromallother financialassets,asrequiredforentitiesapplyingthetemporaryexemptionisprovidedbelow. WhenadoptedIFRS9replacestheexistingIAS39‘FinancialInstruments–RecognitionandMeasurement’andwillaffectthe followingthreeareas: The classification and the measurement of financial assets and liabilities IFRS9redefinestheclassificationoffinancialassets.Basedonthewayinwhichtheassetsaremanagedinordertogeneratecashflows andtheircontractualcashflowcharacteristics(whetherthecashflowsrepresent‘solelypaymentsofprincipalandinterest’),financial assetsareclassifiedintooneofthefollowingcategories:amortisedcost,fairvaluethroughothercomprehensiveincome(FVOCI)andfair valuethroughprofitorloss(FVTPL).AnoptionisalsoavailableatinitialrecognitiontoirrevocablydesignateafinancialassetasatFVTPL ifdoingsoeliminatesorsignificantlyreducesaccountingmismatches. UnderIAS39,82percentoftheGroup’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.ThisaspectisthemostcomplexareaofIFRS9toimplementandwill involvesignificantjudgementsandestimationprocesses.TheGroupiscurrentlyassessingthescopeofassetstowhichthese requirementswillapply. The hedge accounting requirements which are more closely aligned with the risk management activities of the Company NosignificantchangetotheGroup’shedgeaccountingiscurrentlyanticipated,butthisremainsunderreview. TheGroupisassessingtheimpactofIFRS9andimplementingthisstandardinconjunctionwithIFRS17aspermitted.Furtherdetails onIFRS17areprovidedbelow. TheparentcompanyandanumberofintermediateholdingcompaniesintheUKandnon-insurancesubsidiariesinAsiaadoptedIFRS 9in2018intheirindividualorseparatefinancialstatementswherethesestatementsarepreparedinaccordancewithIFRS,includingthe UKFinancialReportingStandard101ReducedDisclosureFramework.Thepublicavailabilityofthefinancialstatementsfortheseentities variesaccordingtothelocallawsandregulationsofeachjurisdiction.TheresultsfortheseentitiescontinuetobeaccountedforonanIAS 39basisintheseconsolidatedfinancialstatements. ThefairvalueoftheGroup’sdirectlyheldfinancialassetsat31December2019and2018areshownbelow.The2018comparative informationincludesfinancialassetsrelatedtoM&Gplc,whichwasdemergedfromtheGroupinOctober2019.Financialassetswith contractualtermsthatgiveriseonspecifieddatestocashflowsthataresolelypaymentsofprincipalandinterest(SPPI)asdefinedbyIFRS 9areshownseparately.Thisexcludesfinancialassetsthatmeetthedefinitionofheldfortradingoraremanagedandevaluatedonafair valuebasis. prudentialplc.com Prudential plc AnnualReport2019 215 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationA4 Accounting policies continued A4.2 New accounting pronouncements not yet effective continued Financial assets, net of derivative liabilities, on the Group’s statement of financial position at 31 Dec 2019 Accruedinvestmentincome Otherdebtors Loans note (1) Equitysecuritiesandholdingsincollectiveinvestmentschemes Debtsecurities note (2) Derivativeassets,netofderivativeliabilities Otherinvestments Deposits Cashandcashequivalents Totalfinancialassets,netofderivativeliabilities Financial assets, net of derivative liabilities, on the Group’s statement of financial position at 31 Dec 2018 Accruedinvestmentincome Otherdebtors Loans note (1) Equitysecuritiesandholdingsincollectiveinvestmentschemes Debtsecurities note (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 2019 $m Movement in the fair value during the year $m Fair value at 31 Dec 2019 $m Movement in the fair value during the year $m 1,641 2,054 13,484 – 56,365 – – 2,615 6,965 83,124 – – 517 – 4,114 – – – – 4,631 – – 3,614 247,281 78,205 1,353 1,302 – – 331,755 – – 2 44,250 5,594 (5,825) 44 – – 44,065 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 3,501 5,207 15,175 – 50,335 – – 15,023 15,442 104,683 – – (658) – (2,102) – – – – (2,760) – – 8,284 273,484 172,998 (15) 8,294 – – 463,045 – – (233) (21,843) (4,464) (1,256) 622 – – (27,174) Notes (1) (2) TheloansthatpasstheSPPItestinthetableaboveareprimarilycarriedatamortisedcostunderIAS39.FurtherinformationontheseloansisasprovidedinnoteC3.3. ThedebtsecuritiesthatpasstheSPPItestinthetableaboveareprimarilyheldbyJacksonandareclassifiedasavailable-for-saleunderIAS39.Thecreditratingsofthesesecurities, analysedonthesamebasisofthosedisclosedinnoteC3.2,areasfollows: Available-for-sale debt securities that pass the SPPI test AAA AA+toAA- A+toA- BBB+toBBB- BelowBBB- Other Totalfairvalue 31 Dec 2019 $m 31 Dec 2018 $m 1,117 11,328 15,140 17,972 814 9,994 56,365 830 9,236 13,009 18,232 1,074 7,954 50,335 216 Prudential plc AnnualReport2019 prudentialplc.com A BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUEDTheunderlyingfinancialassetsoftheGroup’sjointventuresandassociatesaccountedforusingtheequitymethodareanalysedbelow intothosewhichmeettheSPPIconditionofIFRS9,excludinganyfinancialassetsthatmeetthedefinitionofheldfortradingorare managedandevaluatedonafairvaluebasis,andallotherfinancialassets.Fairvalueinformationforjointventuresandassociatesisalso setoutinthetablebelow: Financial assets, net of derivative liabilities, held by the Group’s joint ventures and associates accounted for using the equity method at 31 Dec 2019 Accruedinvestmentincome Otherdebtors Loans Equitysecuritiesandholdingsincollectiveinvestmentschemes Debtsecurities Deposits Cashandcashequivalents Totalfinancialassets,netofderivativeliabilities Financial assets, net of derivative liabilities, held by the Group’s joint ventures and associates accounted for using the equity method at 31 Dec 2018 Accruedinvestmentincome Otherdebtors Loans Equitysecuritiesandholdingsincollectiveinvestmentschemes 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 2019 $m Movement in the fair value during the year $m Fair value at 31 Dec 2019 $m Movement in the fair value during the year $m 161 329 197 – – 521 513 1,721 – – – – – – – – – – – 5,999 6,080 – – 12,079 – – – 444 86 – – 530 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 167 270 149 – – 452 504 1,542 – – – – – – – – – – – 4,683 5,409 – – 10,092 – – – (375) 115 – – (260) IFRS 17 ‘Insurance Contracts’ InMay2017,theIASBissuedIFRS17‘InsuranceContracts’toreplacetheexistingIFRS4‘InsuranceContracts’.Thestandard,whichis subjecttoendorsementintheEUandotherregions,appliestoannualperiodsbeginningonorafter1January2021.InJune2019,the IASBissuedanexposuredraftproposingamendmentstoIFRS17whichincludesadelayoftheeffectivedateofIFRS17byoneyearto periodsbeginningonorafter1January2022.Asaresultofcommentsonthisexposuredraft,theIASBredeliberatedonanumberof areasoftheIFRS17withanamendedstandardexpectedtobeissuedinmid-2020.TheIASBstaffhaveproposedthattheIASBBoard delaytheeffectivedatebyafurtheryearto1January2023.TheIASBwillmakeadecisiononthisproposalatits16-20March2020 meeting.EarlyapplicationofIFRS17ispermittedafterthestandardhasbeenendorsed,providedtheentityalsoappliesIFRS9onor beforethedateitfirstappliesIFRS17.TheGroupintendstoadoptthenewstandardonitsmandatoryeffectivedate,alongsidethe adoptionofIFRS9. IFRS4permittedinsurerstocontinuetousethestatutorybasisofaccountingforinsuranceassetsandliabilitiesthatexistedintheir jurisdictionspriortoJanuary2005.IFRS17replacesthiswithanewmeasurementmodelforallinsurancecontracts. IFRS17requiresliabilitiesforinsurancecontractstoberecognisedasthepresentvalueoffuturecashflows,incorporatinganexplicit riskadjustment,whichisupdatedateachreportingdatetoreflectcurrentconditions,andacontractualservicemargin(CSM)thatis initiallysetequalandoppositetoanyday-onegainarisingoninitialrecognition.Lossesarerecogniseddirectlyintotheincomestatement. Formeasurementpurposes,contractsaregroupedtogetherintocontractsofsimilarrisk,profitabilityprofileandissueyear,withfurther divisionsforcontractsthataremanagedseparately. ProfitforinsurancecontractsunderIFRS17isrepresentedbytherecognitionoftheservicesprovidedtopolicyholdersintheperiod (releaseoftheCSM),releasefromnon-economicrisk(releaseofriskadjustment)andinvestmentprofit. TheCSMisreleasedasprofitoverthecoverageperiodoftheinsurancecontract,reflectingthedeliveryofservicestothe policyholder.Forcertaincontractswithparticipatingfeatures(whereasubstantialshareofthefairvalueoftherelatedinvestmentsand otherunderlyingitemsispaidtopolicyholders),theCSMreflectsthevariablefeetoshareholders.Forthesecontracts,theCSMis adjustedtoreflectthechangesineconomicexperienceandassumptions.ForallothercontractstheCSMisonlyadjustedfornon- economicassumptions.ThescopeofcontractssubjecttothevariablefeeremainsunderconsiderationbytheGroup. prudentialplc.com Prudential plc AnnualReport2019 217 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationA4 Accounting policies continued A4.2 New accounting pronouncements not yet effective continued IFRS17introducesanewmeasureofinsurancerevenue,basedonthedeliveryofservicestopolicyholdersandexcludinganypremiums relatedtotheinvestmentelementsofpolicies,whichwillbesignificantlydifferentfromexistingpremiumrevenuemeasures,currently reportedintheincomestatement.InordertotransitiontoIFRS17,theamountofdeferredprofit,beingtheCSMattransitiondate,needs tobedetermined. IFRS17requiresthisCSMtobecalculatedasifthestandardhadappliedretrospectively.Howeverifthisisnotpracticalanentityis requiredtochooseeitherasimplifiedretrospectiveapproachortodeterminetheCSMbyreferencetothefairvalueoftheliabilitiesatthe transitiondate.TheapproachfordeterminingtheCSMwillhaveasignificantimpactonbothshareholders’equityandontheamountof profitsonin-forcebusinessinfuturereportingperiods. IFRS 17 Implementation Programme IFRS17isexpectedtohaveasignificantimpactastherequirementsofthenewstandardarecomplexandrequiresafundamentalchange toaccountingforinsurancecontractsaswellastheapplicationofsignificantjudgementandnewestimationtechniques.Theeffectof changesrequiredtotheGroup’saccountingpoliciesasaresultofimplementingthesestandardsarecurrentlyuncertain,particularlyas therequirementsofthestandardcontinuetobedeliberatedbytheIASB.Thesechangescanbeexpectedto,amongotherthings,alter thetimingofIFRSprofitrecognition.GiventheimplementationofthisstandardwillinvolvesignificantenhancementstoIT,actuarialand financesystemsoftheGroup,itwillalsohaveanimpactontheGroup’sexpenses. TheGrouphasaGroup-wideimplementationprogrammeunderwaytoimplementIFRS17andIFRS9.Theprogrammeisresponsible forsettingGroup-wideaccountingpoliciesanddevelopingapplicationmethodologies,establishingappropriateprocessesandcontrols, sourcingappropriatedataandimplementingactuarialandfinancesystemchanges. AGroup-wideSteeringCommittee,chairedbytheGroupChiefFinancialOfficerandChiefOperatingOfficerwithparticipationfrom theGroupRiskfunctionandtheGroup’sandbusinessunits’seniorfinancemanagers,providesoversightandstrategicdirectiontothe implementationprogramme.Anumberofsub-committeesarealsoinplacetoprovidegovernanceoverthetechnicalinterpretationand accountingpoliciesselected,programmemanagement,designanddeliveryoftheprogramme. TheGroupismakingprogresstowardsprovidingIFRS17financialstatementsinlinewiththerequirementsforinterimreportingatits effectivedate. Other new accounting pronouncements Inadditiontotheabove,thefollowingnewaccountingpronouncementshavealsobeenissuedandarenotyeteffectivebuttheGroupis notexpectingthemtohaveasignificantimpactontheGroup’sfinancialstatements: — RevisedConceptualFrameworkforFinancialReporting,issuedinMarch2018andeffectivefrom1January2020; — AmendmenttoIFRS3‘BusinessCombinations’issuedinOctober2018andeffectivefrom1January2020; — AmendmentstoIAS1andIAS8‘Definitionofmaterial’issuedinOctober2018andeffectivefrom1January2020; — AmendmentstoIFRS9,IAS39andIFRS7‘Interestratebenchmarkreform’issuedinSeptember2019andeffectivefrom1January 2020;and — AmendmentstoIAS1‘Classificationofliabilitiesascurrentornon-current’issuedinJanuary2020andeffectivefrom1January2022. ForthoseIASBstandardsandamendmentsthathaveaneffectivedateafter31December2020,theGroup’sfinancialstatements willbepreparedinaccordancewithUK-adoptedinternationalaccountingstandards,whichiscurrentlybeingfinalised,insteadof EU-endorsedIFRS. 218 Prudential plc AnnualReport2019 prudentialplc.com A BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUEDB Earnings performance B1 Analysis of performance by segment B1.1 Segment results Asia Insuranceoperations Assetmanagement TotalAsia US Jackson(USinsuranceoperations) Assetmanagement TotalUS Total segment profit from continuing operations Other income and expenditure Investmentreturnandotherincome Interestpayableoncorestructuralborrowings note (ii) Corporateexpenditure note (iii) Totalotherincomeandexpenditure Restructuringcosts note (iv) Adjusted IFRS operating profit based on longer-term investment returns Short-termfluctuationsininvestmentreturnson shareholder-backedbusiness Amortisationofacquisitionaccountingadjustments note (v) (Loss)ondisposalofbusinessesandcorporatetransactions Note B3(a) B3(b) 2019 $m 2018 $m 2019 vs 2018% AER note(i) CER note(i) AER note(i) CER note(i) 2,993 283 3,276 3,038 32 3,070 6,346 50 (516) (460) (926) (110) 2,646 242 2,888 2,552 11 2,563 5,451 70 (547) (490) (967) (75) 2,633 239 2,872 2,552 11 2,563 5,435 67 (523) (477) (933) (73) 13% 17% 13% 19% 191% 20% 16% (29)% 6% 6% 4% 14% 18% 14% 19% 191% 20% 17% (25)% 1% 4% 1% (47)% (51)% 5,310 4,409 4,429 20% 20% B1.2 D1 (3,203) (43) (142) (791) (61) (107) (796) (61) (106) (305)% 30% (33)% (302)% 30% (34)% Profit from continuing operations before tax attributable to shareholders Taxcredit(charge)attributabletoshareholders’returns Profit from continuing operations Profitfromdiscontinuedoperations Re-measurementofdiscontinuedoperationsondemerger Cumulativeexchangelossrecycledfromothercomprehensiveincome B4 D2 D2 D2 (Loss) profit from discontinued operations Profit for the year Attributable to: EquityholdersoftheCompany Fromcontinuingoperations Fromdiscontinuedoperations Non-controllinginterestsfromcontinuingoperations  1,922 31 1,953 1,319 188 (2,668) (1,161) 792 1,944 (1,161) 9 792 3,450 (569) 3,466 (570) 2,881 1,142 – – 1,142 4,023 2,877 1,142 4 4,023 2,896 1,092 – – 1,092 3,988 2,892 1,092 4 3,988 (44)% 105% (32)% 15% – – (45)% 105% (33)% 21% – – (202)% (206)% (80)% (80)% (32)% (202)% 125% (33)% (206)% 125% (80)% (80)% Basic earnings per share (in cents) BasedonadjustedIFRSoperatingprofitbasedonlonger-term investmentreturns,netoftax,fromcontinuingoperations note (vi) Basedonprofitfortheyearfromcontinuingoperations Basedon(loss)profitfortheyearfromdiscontinuedoperations 2019 2018 2019 vs 2018% Note AER note(i) CER note(i) AER note(i) CER note(i) B5 B5 B5 175.0¢ 75.1¢ (44.8)¢ 145.2¢ 111.7¢ 44.3¢ 146.0¢ 112.5¢ 42.4¢ 21% (33)% (201)% 20% (33)% (206)% FordefinitionsofAERandCERrefertonoteA1. InterestchargedtotheincomestatementondebtthatwassubstitutedtoM&GplcinOctober2019for2019was$(179)million(2018:$(128)million). Notes (i) (ii) (iii) CorporateexpenditureasshownaboveisprimarilyforheadofficefunctionsinLondonandHongKong. (iv) Restructuringcostsincludegroup-widecostsincurredforIFRS17implementationin2019fromcontinuingoperations. (v) (vi) AmortisationofacquisitionaccountingadjustmentsprincipallyrelatetotheREALICbusinessofJacksonwhichwasacquiredin2012. Taxchargeshavebeenreflectedasoperatingandnon-operatinginthesamewayasforthepre-taxitems.FurtherdetailsontaxchargesareprovidedinnoteB4. prudentialplc.com Prudential plc AnnualReport2019 219 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationB1 Analysis of performance by segment continued B1.2 Short-term fluctuations in investment returns on shareholder-backed business Asiaoperations note (i) USoperations note (ii) Otheroperations Total 2019 $m 2018 $m 657 (3,757) (103) (3,203) (684) (134) 27 (791) Notes (i)  Asia operations InAsia,thepositiveshort-termfluctuationsof$657million(2018:negative$(684)million)principallyreflectnetvaluemovementsonshareholders’assetsandrelatedliabilities followingdecreasesinbondyieldsduringtheyear. (ii) US operations  Theshort-termfluctuationsininvestmentreturnsforUSinsuranceoperationsarereportednetoftherelatedcreditforamortisationofdeferredacquisitioncostsof$1,248millionas showninnoteC5.2(i)(2018:debitof$(152)million)andcompriseamountsinrespectofthefollowingitems: 2019 $m 2018 $m Netequityhedgeresult note (a) Otherthanequity-relatedderivatives note (b) Debtsecurities note (c) Equity-typeinvestments:actuallesslonger-termreturn Otheritems TotalnetofrelatedDACamortisation Notes (a) Netequityhedgeresult  (4,582) 678 156 18 (27) (3,757) (78) (85) (42) 51 20 (134)       Thepurposeoftheinclusionofthisiteminshort-termfluctuationsininvestmentreturnsistosegregatetheamountincludedinpre-taxprofitthatrelatestotheaccounting effectofmarketmovementsonboththevalueofguaranteesinJackson’svariableannuityandfixedindexannuityproductsandontherelatedderivativesusedtomanagethe exposuresinherentintheseguarantees.Theleveloffeesrecognisedinnon-operatingprofitisdeterminedbyreferencetothatallowedforwithinthereservingbasis.The variableannuityguaranteesarevaluedinaccordancewitheitherAccountingStandardsCodification(ASC)Topic820,FairValueMeasurementsandDisclosures(formerlyFAS 157)orASCTopic944,FinancialServices–Insurance(formerlySOP03-01)dependingonthetypeofguarantee.Bothapproachesrequireanentitytodeterminethetotalfee (‘thefeeassessment’)thatisexpectedtofundfutureprojectedbenefitpaymentsarisingusingtheassumptionsapplicableforthatmethod.ThemethodunderFAS157requires thisfeeassessmenttobefixedatthetimeofissue.Asthefeesincludedwithintheinitialfeeassessmentareearned,theyareincludedinnon-operatingprofittomatchthe correspondingmovementintheguaranteeliability.Otherguaranteefeesareincludedinoperatingprofit,whichin2019was$699million(2018:$657million),netofrelated DACamortisation.AstheGroupappliesUSGAAPforthemeasuredvalueoftheproductguarantees,thenetequityhedgeresultalsoincludesasymmetricimpactswherethe measurementbasesoftheliabilitiesandassociatedderivativesusedtomanagetheJacksonannuitybusinessdiffer.  –Thevariableannuityguaranteesandfixedindexannuityembeddedoptionsbeingonlypartiallyfairvaluedunder‘grandfathered’USGAAP; –Theinterestrateexposurebeingmanagedthroughtheotherthanequity-relatedderivativeprogrammeexplainedinnote(b)below;and –Jackson’smanagementofitseconomicexposuresforanumberofotherfactorsthataretreateddifferentlyintheaccountingframeworkssuchasfuturefeesandassumed Thenetequityhedgeresultthereforeincludessignificantaccountingmismatchesandotherfactorsthatdonotrepresenttheeconomicresult.Theseotherfactorsinclude: volatilitylevels.  Thenetequityhedgeresultcanbesummarisedasfollows: Fairvaluemovementsonequityhedgeinstruments* Accountingvaluemovementsonthevariableandfixedindexannuityguaranteeliabilities Feeassessmentsnetofclaimpayments TotalnetofrelatedDACamortisation 2019 $m 2018 $m (5,314) (22) 754 (4,582) 399 (1,194) 717 (78) *HeldtomanageequityexposuresofthevariableannuityguaranteesandfixedindexannuityoptionsasdiscussedintheGroupChiefFinancialOfficerandChiefOperating Officer’sreport.  (b) Otherthanequity-relatedderivatives      Thefluctuationsforthisitemcomprisetheneteffectof: –Fairvaluemovementsonfree-standing,otherthanequity-relatedderivatives; –FairvaluemovementsontheGuaranteedMinimumIncomeBenefit(GMIB)reinsuranceassetthatarenotmatchedbymovementsintheunderlyingGMIBliability,whichis notfairvalued;and –RelatedamortisationofDAC.  Thefree-standing,otherthanequity-relatedderivatives,areheldtomanageinterestrateexposuresanddurationswithinthegeneralaccountandthevariableannuity guaranteesandfixedindexannuityembeddedoptionsdescribedinnote(a)above.Accountingmismatchesarisebecauseofdifferencesbetweenthemeasurementbasisand presentationofthederivatives,whicharefairvaluedwithmovementsrecordedintheincomestatement,andtheexposurestheyareintendedtomanage. 220 Prudential plc AnnualReport2019 prudentialplc.com B EARNINGS PERFORMANCE CONTINUED  (c) Short-termfluctuationsrelatedtodebtsecurities 2019 $m 2018 $m (Charges)creditsintheyear: Lossesonsalesofimpairedanddeterioratingbonds Bondwrite-downs Recoveries/reversals Total(charges)creditsintheyear RiskmarginallowancedeductedfromadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns*  Interest-relatedrealisedgains(losses): Gains(losses)arisingintheyear Less:AmortisationofgainsandlossesarisingincurrentandprioryearstoadjustedIFRSoperatingprofitbased onlonger-terminvestmentreturns Relatedamortisationofdeferredacquisitioncosts Totalshort-termfluctuationsrelatedtodebtsecuritiesnetofrelatedDACamortisation (28) (15) 1 (42) 109 67 220 (129) 91 (2) 156 (6) (5) 25 14 104 118 (12) (155) (167) 7 (42) *ThedebtsecuritiesofJacksonareheldinthegeneralaccountofthebusiness.Realisedgainsandlossesarerecordedintheincomestatementwithnormalisedreturns includedinadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnswithvariationsfromyeartoyearincludedintheshort-termfluctuationscategory.Therisk marginreservechargeforlonger-termcredit-relatedlossesincludedinadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsofJacksonfor2019isbased onanaverageannualriskmarginreserveof17basispoints(2018:18basispoints)onaveragebookvaluesof$62.6billion(2018:$57.1billion)asshownbelow: 2019 2018 Moody’s rating category (or equivalent under NAIC ratings of mortgage-backed securities) A3orhigher Baa1,2or3 Ba1,2or3 B1,2or3 BelowB3 Total  Relatedamortisationofdeferredacquisitioncosts RiskmarginreservechargetoadjustedIFRSoperating profitbasedonlonger-terminvestmentreturnsfor longer-termcredit-relatedlosses Average book value $m 38,811 22,365 1,094 223 75 62,568 RMR % 0.10 0.24 0.85 2.56 3.39 0.17 Annual expected loss Average book value $m 29,982 25,814 1,042 289 11 57,138 $m (38) (53) (9) (6) (3) (109) 19 (90) RMR % 0.10 0.21 0.98 2.64 3.69 0.18 Annual expected loss $m (31) (55) (10) (8) – (104) 22 (82) InadditiontotheaccountingforrealisedgainsandlossesdescribedaboveforJacksongeneralaccountdebtsecurities,includedwithin thestatementofothercomprehensiveincomeisapre-taxgainof$3,392millionfornetunrealisedgainsondebtsecuritiesclassifiedas available-for-salenetofrelatedamortisationofdeferredacquisitioncosts(2018:chargeof$(1,831)million).Temporarymarketvalue movementsdonotreflectdefaultsorimpairments.AdditionaldetailsofthemovementinthevalueoftheJacksonportfolioareincluded innoteC3.2(b). B1.3 Determining operating segments and performance measure of operating segments Operating segments TheGroup’soperatingsegmentsforfinancialreportingpurposesaredefinedandpresentedinaccordancewithIFRS8‘Operating Segments’onthebasisofthemanagementreportingstructureanditsfinancialmanagementinformation. UndertheGroup’smanagementandreportingstructure,itschiefoperatingdecisionmakeristheGroupExecutiveCommittee(GEC). Inthemanagementstructure,responsibilityisdelegatedtotheChiefExecutiveOfficersofPrudentialCorporationAsia,theNorth AmericanBusinessUnitand,uptothedateofdemerger,M&Gplcfortheday-to-daymanagementoftheirbusinessunits(withinthe frameworksetoutintheGroupGovernanceManual).FinancialmanagementinformationusedbytheGECalignswiththesebusiness segments.Theseoperatingsegmentsderiverevenuefrombothinsuranceandassetmanagementactivities. On21October2019,theGroupcompletedthedemergerofM&GplcfromthePrudentialplcgroup,resultingintwoseparately listedcompanies.Accordingly,UKandEuropeoperationsdonotrepresentanoperatingsegmentattheyearend.TheresultsofM&Gplc havebeenreclassifiedasdiscontinuedoperationsintheseconsolidatedfinancialstatementsinaccordancewithIFRS5‘Non-current AssetsHeldforSaleandDiscontinuedOperations’andhavethereforebeenexcludedintheanalysisofperformancemeasureof operatingsegments. Operationswhichdonotformpartofanybusinessunitarereportedas‘Unallocatedtoasegment’.Theseincludeheadofficecostsin LondonandHongKong.TheGroup’sAfricaoperationsandtreasuryfunctiondonotformpartofanyoperatingsegmentunderthe structure,andtheirassetsandliabilitiesandprofitorlossbeforetaxarenotmaterialtotheoverallfinancialpositionoftheGroup. TheGroup’streasuryfunctionandAfricaoperationsarethereforealsoreportedas‘Unallocatedtoasegment’. prudentialplc.com Prudential plc AnnualReport2019 221 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information B1 Analysis of performance by segment continued B1.3 Determining operating segments and performance measure of operating segments continued Performance measure TheperformancemeasureofoperatingsegmentsutilisedbytheCompanyisadjustedIFRSoperatingprofitattributabletoshareholders basedonlonger-terminvestmentreturns,asdescribedbelow.ThismeasurementbasisdistinguishesadjustedIFRSoperatingprofit basedonlonger-terminvestmentreturnsfromotherconstituentsoftotalprofitfortheyearasfollows: — Short-termfluctuationsininvestmentreturnsonshareholder-backedbusiness.Thisincludestheimpactofshort-termmarketeffects onthecarryingvalueofJackson’sguaranteeliabilitiesandrelatedderivativesasexplainedbelow; — Amortisationofacquisitionaccountingadjustmentsarisingonthepurchaseofbusiness.Thiscomprisesprincipallythechargeforthe adjustmentsarisingonthepurchaseofREALICin2012;and — Gainorlossoncorporatetransactions,suchasdisposalsundertakenintheyearandcostsconnectedtothedemergerofM&Gplc fromPrudentialplc. Determination of adjusted IFRS operating profit based on longer-term investment returns for investment and liability movements (a) With-profits business ForAsia’swith-profitsbusinessinHongKong,SingaporeandMalaysia,theadjustedIFRSoperatingprofitbasedonlonger-term investmentreturnsreflectstheshareholders’shareinthebonusesdeclaredtopolicyholders.Valuemovementsintheunderlyingassets ofthewith-profitsfundsonlyaffecttheshareholderresultsthroughindirecteffectsofinvestmentperformanceondeclaredpolicyholder bonusesandtherefore,donotaffectdirectlythedeterminationofadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns. (b) Unit-linked business including the US variable annuity separate accounts Thepolicyholderunitliabilitiesaredirectlyreflectiveoftheunderlyingassetvaluemovements.Accordingly,theadjustedIFRSoperating profitbasedonlonger-terminvestmentreturnsreflectthecurrentperiodvaluemovementsinboththeunitliabilitiesandthebacking assets. (c) US variable annuity and fixed index annuity business ThisbusinesshasguaranteeliabilitieswhicharemeasuredonacombinationoffairvalueandotherUSGAAPderivedprinciples.These liabilitiesaresubjecttoanextensivederivativeprogrammetomanageequityandinterestrateexposureswhosefairvaluemovements passthroughtheincomestatementeachperiod. ThefollowingvaluemovementsforJackson’svariableandfixedindexannuitybusinessareexcludedfromadjustedIFRSoperating profitbasedonlonger-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 mannerconsistentwithIAS39underwhichtheprojectedfuturegrowthrateoftheaccountbalanceisbasedonthegreaterofUS Treasuryratesandcurrentswaprates(ratherthanexpectedratesofreturn)withonlyaportionoftheexpectedfutureguaranteefees included.Reservevaluemovementsontheseliabilitiesaresensitivetochangestolevelsofequitymarkets,impliedvolatilityandinterest rates.TheequityindexoptionforfixedindexannuitybusinessismeasuredundertheUSGAAPbasisappliedforIFRSinamanner consistentwithIAS39underwhichtheprojectedfuturegrowthisbasedoncurrentswaprates. 222 Prudential plc AnnualReport2019 prudentialplc.com B EARNINGS PERFORMANCE CONTINUED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. (d) Policyholder liabilities that are sensitive to market conditions UnderIFRS,thedegreetowhichthecarryingvaluesofliabilitiestopolicyholdersaresensitivetocurrentmarketconditionsvaries betweenbusinessunitsdependinguponthenatureofthe‘grandfathered’measurementbasis. Movementsinliabilitiesforsometypesofbusinessdorequirebifurcationbetweentheelementsthatrelatetolonger-termmarket conditionandshort-termeffectstoensurethatatthenetlevel(ieafterallocatedinvestmentreturnandchargeforpolicyholderbenefits) theadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsreflectslonger-termmarketreturns. ForcertainAsianon-participatingbusiness,forexampleinHongKong,theeconomicfeaturesaremoreakintoassetmanagement productswithpolicyholderliabilitiesreflectingassetsharesoverthecontractterm.Consequently,fortheseproducts,thechargefor policyholderbenefitsintheadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsreflectstheassetsharefeaturerather thanvolatilemovementsthatwouldotherwisebereflectedifthelocalregulatorybasis(asappliedfortheIFRSbalancesheet)wasused. ForothertypesofAsianon-participatingbusiness,expectedlonger-terminvestmentreturnsandinterestratesareusedtodetermine themovementinpolicyholderliabilitiesfordeterminingadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns.This ensuresassetsandliabilitiesarereflectedonaconsistentbasis. (e) Assets backing other shareholder-financed long-term insurance business Exceptinthecaseofassetsbackingliabilitieswhicharedirectlymatched(suchasunit-linkedbusiness)adjustedIFRSoperatingprofit basedonlonger-terminvestmentreturnsforassetsbackingshareholder-financedbusinessisdeterminedonthebasisofexpected longer-terminvestmentreturns.Longer-terminvestmentreturnscompriseactualincomereceivablefortheperiod(interest/dividend income)andforbothdebtandequity-typesecuritieslonger-termcapitalreturns. Debt securities and loans Inprinciple,fordebtsecuritiesandloans,thelonger-termcapitalreturnscomprisetwoelements: — Riskmarginreservebasedchargefortheexpectedlevelofdefaultsfortheperiod,whichisdeterminedbyreferencetothecredit qualityoftheportfolio.Thedifferencebetweenimpairmentlossesinthereportingperiodandtheriskmarginreservechargetothe adjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsisreflectedinshort-termfluctuationsininvestmentreturns; and — Theamortisationofinterest-relatedrealisedgainsandlossestoadjustedIFRSoperatingprofitbasedonlonger-terminvestment returnstothedatewhensoldbondswouldhaveotherwisematured. At31December2019,thelevelofunamortisedinterest-relatedrealisedgainsandlossesrelatedtopreviouslysoldbondsfortheGroup wasanetgainof$916million(2018:$776million). ForAsiainsuranceoperations,realisedgainsandlossesareprincipallyinterestrelated.Accordingly,allrealisedgainsandlossesto datefortheseoperationsareamortisedovertheperiodtothedatethosesecuritieswouldotherwisehavematured,withnoexplicitrisk marginreservecharge. ForUSinsuranceoperations,JacksonhasusedtheratingsbyNationallyRecognisedStatisticalRatingsOrganisations(NRSRO)or ratingsresultingfromtheregulatoryratingsdetailissuedbytheNationalAssociationofInsuranceCommissioners(NAIC)todetermine theaverageannualriskmarginreservetoapplytodebtsecuritiesheldtobackgeneralaccountbusiness.Debtsecuritiesheldtoback separateaccountandreinsurancefundswithheldarenotsubjecttoriskmarginreservecharge.Furtherdetailsoftheriskmarginreserve charge,aswellastheamortisationofinterest-relatedrealisedgainsandlosses,forJacksonareshowninnoteB1.2note(ii)(c). prudentialplc.com Prudential plc AnnualReport2019 223 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationB1 Analysis of performance by segment continued B1.3 Determining operating segments and performance measure of operating segments continued Equity-type securities Forequity-typesecurities,thelonger-termratesofreturnareestimatesofthelong-termtrendinvestmentreturnsforincomeandcapital havingregardtopastperformance,currenttrendsandfutureexpectations.Differentratesapplytodifferentcategoriesofequity-type securities. ForAsiainsuranceoperations,investmentsinequitysecuritiesheldfornon-linkedshareholder-backedbusinessamountedto $3,473millionasat31December2019(31December2018:$2,733million).Theratesofreturnappliedin2019rangedfrom5.0percent to17.6percent(2018:5.3percentto17.6percent)withtheratesappliedvaryingbybusinessunit.Theseratesarebroadlystablefrom yeartoyearbutmaybedifferentbetweenregions,reflecting,forexample,differingexpectationsofinflationineachlocalbusinessunit. Theassumptionsareforthereturnsexpectedtoapplyinequilibriumconditions.Theassumedratesofreturndonotreflectanycyclical variabilityineconomicperformanceandarenotsetbyreferencetoprevailingassetvaluations. Thelonger-terminvestmentreturnsfortheAsiainsurancejointventuresandassociateaccountedforusingtheequitymethodare determinedonasimilarbasisastheotherAsiainsuranceoperationsdescribedabove. ForUSinsuranceoperations,asat31December2019,theequity-typesecuritiesfornon-separateaccountoperationsamountedto $1,481million(31December2018:$1,731million).Fortheseoperations,thelonger-termratesofreturnforincomeandcapitalapplied intheyearsindicated,whichreflectthecombinationoftheaveragerisk-freeratesovertheyearandappropriateriskpremiumsare asfollows: Equity-typesecuritiessuchascommonandpreferredstockandportfolioholdingsinmutualfunds Otherequity-typesecuritiessuchasinvestmentsinlimitedpartnershipsandprivateequityfunds 5.5% to 6.7% 6.7%to7.2% 7.5% to 8.7% 8.7%to9.2% 2019 2018 Derivative value movements Generally,derivativevaluemovementsareexcludedfromadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns.The exceptioniswherethederivativevaluemovementsbroadlyoffsetchangesintheaccountingvalueofotherassetsandliabilitiesincluded inadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns.Theprincipalexampleofderivativeswhosevaluemovements areexcludedfromadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsarisesinJackson. Equity-basedderivativesheldbyJacksonareasdiscussedaboveinsection(c)above.Non-equitybasedderivativesheldbyJackson arepartofabroad-basedhedgingprogrammeforfeaturesofJackson’sbondportfolio(forwhichvaluemovementsarebookedinthe statementofothercomprehensiveincomeratherthantheincomestatement),productliabilities(forwhichUSGAAPaccountingas ‘grandfathered’underIFRS4doesnotfullyreflecttheeconomicfeaturesbeinghedged),andtheinterestrateexposureattachingto equity-basedproductoptions. (f) Fund management and other non-insurance businesses Forthesebusinesses,thedeterminationofadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsreflectsthe underlyingeconomicsubstanceofthearrangements.Generally,realisedgainsandlossesareincludedinadjustedIFRSoperatingprofit basedonlonger-terminvestmentreturnswithtemporaryunrealisedgainsandlossesbeingincludedinshort-termfluctuations.Insome instances,realisedgainsandlossesonderivativesandotherfinancialinstrumentsareamortisedtoadjustedIFRSoperatingprofitbased onlonger-terminvestmentreturnsoveratimeperiodthatreflectstheunderlyingeconomicsubstanceofthearrangements. 224 Prudential plc AnnualReport2019 prudentialplc.com B EARNINGS PERFORMANCE CONTINUEDB1.4 Segmental income statement Premiums for conventional with-profits policies and other protection type insurance policies are recognised as revenue when due. Premiums and annuity considerations for linked policies, unitised with-profits and other investment type policies are recognised as revenue when received or, in the case of unitised or unit-linked policies, when units are issued. These amounts exclude premium taxes and similar duties where Prudential collects and settles taxes borne by the policyholder. Policy fees charged on linked and unitised with-profits policies for mortality, asset management and policy administration are recognised as revenue when related services are provided. Claims paid include maturities, annuities, surrenders and deaths. Maturity claims are recorded as charges on the policy maturity date. Annuity claims are recorded when each annuity instalment becomes due for payment. Surrenders are charged to the income statement when paid and death claims are recorded when notified. 2019 $m Total segment 44,966 (1,575) 43,391 609 44,000 34 4,540 45,029 93,603 Asia US 23,757 (1,108) 22,649 548 23,197 – 1,569 13,406 38,172 21,209 (467) 20,742 61 20,803 34 2,971 31,623 55,431 (29,119) (5,157) – (54,734) (1,402) (20) (83,853) (6,559) (20) 265 – 265 Unallocated to a segment (central operations) note(vi) Group total continuing operations 98 (8) 90 91 181 (34) 67 (81) 133 (52) (724) (496) (407) 45,064 (1,583) 43,481 700 44,181 – 4,607 44,948 93,736 (83,905) (7,283) (516) (142) (34,011) (56,156) (90,167) (1,679) (91,846) 397 – 397 – 397 4,558 (365) (725) – 3,833 (365) (1,546) – 2,287 (365) 4,193 (725) 3,468 (1,546) 1,922 Grosspremiumsearned Outwardreinsurancepremiums Earnedpremiums,netofreinsurance Otherincome note (i) Totalexternalrevenuenotes (ii), (iii) Intra-grouprevenue Interestincome note (iv) Otherinvestmentreturnnote B1.5 Totalrevenue,netofreinsurance Benefitsandclaimsandmovementsinunallocatedsurplus ofwith-profitsfunds,netofreinsurance Acquisitioncostsandotheroperatingexpenditurenote B2, Interestoncorestructuralborrowings Gain(loss)ondisposalofbusinessesandcorporate transactionsnote D1.1 Totalcharges,netofreinsuranceandlossondisposal ofbusinesses Shareofprofitfromjointventuresandassociates, netofrelatedtax Profit(loss)beforetax(being tax attributable to shareholders’ and policyholders’ returns) note (v) Taxchargeattributabletopolicyholders’returns Profit (loss) before tax attributable to shareholders’ returns from continuing operations Analysis of profit (loss) before tax attributable to shareholders’ returns from continuing operations: AdjustedIFRSoperatingprofit(loss)basedonlonger-term investmentreturns 3,276 3,070 6,346 (1,036) 5,310 Short-termfluctuationsininvestmentreturnsonshareholder- backedbusiness Amortisationofacquisitionaccountingadjustments Profit(loss)ondisposalofbusinessesandcorporate transactionsnote D1.1        657 (5) (3,757) (38) (3,100) (43) 265 4,193 – (725) 265 3,468 (103) – (407) (1,546) (3,203) (43) (142) 1,922 prudentialplc.com Prudential plc AnnualReport2019 225 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationB1 Analysis of performance by segment continued B1.4 Segmental income statement continued Grosspremiumsearned note (vii) Outwardreinsurancepremiums Earnedpremiums,netofreinsurance Otherincome note (i) Totalexternalrevenuenotes (ii),(iii) Intra-grouprevenue Interestincome note (iv) Otherinvestmentreturnnote B1.5 Totalrevenue,netofreinsurance Benefitsandclaimsandmovementsinunallocatedsurplusof with-profitsfunds,netofreinsurance note (vii) Acquisitioncostsandotheroperatingexpenditurenote B2, note (vii) Interestoncorestructuralborrowings Lossondisposalofbusinessesandcorporatetransactionsnote D1.1 Totalcharges,netofreinsuranceandgainondisposal 2018 $m Total segment 45,562 (1,180) 44,382 479 44,861 123 4,142 (13,411) 35,715 (23,400) (7,935) (20) (66) Unallocated to a segment (central operations) note(vi) Group total continuing operations 52 (3) 49 52 101 (123) 68 84 130 (26) (592) (527) (41) 45,614 (1,183) 44,431 531 44,962 – 4,210 (13,327) 35,845 (23,426) (8,527) (547) (107) Asia US 21,989 (768) 21,221 412 21,633 56 1,450 (4,326) 18,813 (11,664) (5,162) – (15) 23,573 (412) 23,161 67 23,228 67 2,692 (9,085) 16,902 (11,736) (2,773) (20) (51) ofbusiness (16,841) (14,580) (31,421) (1,186) (32,607) Shareofprofitfromjointventuresandassociates, netofrelatedtax Profit(loss)beforetax(being tax attributable to shareholders’ and policyholders’ returns) note (v) Taxchargeattributabletopolicyholders’returns Profit (loss) before tax attributable to shareholders’ returns from continuing operations Analysis of profit (loss) before tax attributable to shareholders’ returns from continuing operations: AdjustedIFRSoperatingprofit(loss)basedonlonger-term 319 – 319 – 319 2,291 (107) 2,322 – 4,613 (107) (1,056) – 3,557 (107) 2,184 2,322 4,506 (1,056) 3,450 investmentreturns 2,888 2,563 5,451 (1,042) 4,409 Short-termfluctuationsininvestmentreturnsonshareholder- backedbusiness Amortisationofacquisitionaccountingadjustments Lossondisposalofbusinessesandcorporatetransactionsnote D1.1 (684) (5) (15) 2,184 (134) (56) (51) 2,322 (818) (61) (66) 27 – (41) (791) (61) (107) 4,506 (1,056) 3,450 Notes (i) (ii) IncludedwithinotherincomeisrevenuefromtheGroup’scontinuingassetmanagementbusinessof$453million(2018:$287million).Theremainingotherincomeconsists primarilyofpolicyfeeincomefromexternalcustomers.Otherincomealsoincludes$3million(2018:$7million)relatingtothefeeincomeonfinancialinstrumentsthatarenotheld atfairvaluethroughprofitorloss. InAsia,externalrevenuefromnooneindividualmarketexceeds10percentoftheGrouptotalexceptforHongKonginboth2019and2018andSingaporein2019.Totalexternal revenueofHongKongis$9,821million(2018:$10,307million)andSingaporeis$4,401million. Interestincomeincludes$4million(2018:$5million)accruedinrespectofimpairedsecurities. Thismeasureistheformalprofit(loss)beforetaxmeasureunderIFRSbutisnottheresultattributabletoshareholders. (iii) DuetothenatureofthebusinessoftheGroup,thereisnorelianceonanymajorcustomers. (iv) (v) (vi) Unallocatedtoasegmentincludescentraloperations(HeadOfficefunctionsandGroupborrowings),theGroup’streasuryfunctionandAfricaoperations. (vii) InOctober2018,Jacksonenteredintoa100percentreinsuranceagreementwithJohnHancockLifeInsuranceCompany(JohnHancockUSA)toacquireaclosedblockofgroup pay-outannuitybusiness.Thetransactionresultedinanadditiontogrosspremiumsearnedof$5.0billionandacorrespondingincreaseinbenefitsandclaimsof$5.5billionforthe increaseinpolicyholderliabilitiesandadecreaseinotheroperatingexpenditurefornegativecedingcommissionsof$0.5billionattheinceptionofthecontract.Therewasno materialimpactonadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsortotalprofitasaresultofthetransaction.  226 Prudential plc AnnualReport2019 prudentialplc.com B EARNINGS PERFORMANCE CONTINUEDB1.5 Other investment return Investment return included in the income statement principally comprises interest income, dividends, investment appreciation and depreciation (realised and unrealised gains and losses) on investments designated as fair value through profit or loss, and realised gains and losses (including impairment losses) on items held at amortised cost and Jackson’s debt securities designated as available-for-sale. Movements in unrealised appreciation or depreciation of debt securities designated as available-for-sale are recorded in other comprehensive income. Interest income is recognised as it accrues, taking into account the effective yield on investments. Dividends on equity securities are recognised on the ex-dividend date and rental income is recognised on an accrual basis. Realisedandunrealisedgains(losses)onsecuritiesatfairvaluethroughprofitorloss Realisedandunrealised(losses)gainsonderivativesatfairvaluethroughprofitorloss Realisedgainsonavailable-for-salesecurities,includingimpairmentpreviouslyrecognisedinother comprehensiveincome Realised(losses)onloans Dividends Otherinvestment(loss)income Otherinvestmentreturn 2019 $m 2018 $m 49,809 (5,825) (14,867) 705 185 (3) 1,000 (218) 15 (1) 740 81 44,948 (13,327) RealisedgainsandlossesontheGroup’sinvestmentsfor2019recognisedintheincomestatementamountedtoanetlossof$2.0billion (2018:anetgainof$2.5billion)fromcontinuingoperations. B1.6 Additional analysis of performance by segment components (a) Asia Earnedpremiums,netofreinsurance Otherincome Totalexternalrevenue Intra-grouprevenue Interestincome Otherinvestmentreturn Totalrevenue,netofreinsurance Benefitsandclaimsandmovementsinunallocatedsurplus ofwith-profitsfunds,netofreinsurance Acquisitioncostsandotherexpenditurenote B2 Gain(loss)ondisposalofbusinessesandcorporate transactionsnote D1.1 Totalcharges,netofreinsuranceandgain(loss)ondisposal 2019 $m Insurance Asset management Eliminations 22,649 143 22,792 – 1,564 13,407 37,763 (29,119) (4,925) 265 – 405 405 160 5 (1) 569 – (392) – – – – (160) – – (160) – 160 – 2018 $m Total 21,221 412 21,633 56 1,450 (4,326) 18,813 Total 22,649 548 23,197 – 1,569 13,406 38,172 (29,119) (5,157) (11,664) (5,162) 265 (15) ofbusinesses (33,779) (392) 160 (34,011) (16,841) Shareofprofitfromjointventuresandassociates, netofrelatedtax Profitbeforetax(being tax attributable to shareholders’ and policyholders’ returns) Taxchargeattributabletopolicyholders’returns Profitbeforetaxattributabletoshareholders’returns Analysis of profit before tax: AdjustedIFRSoperatingprofitbasedonlonger-term investmentreturns Short-termfluctuationsininvestmentreturnson shareholder-backedbusiness Amortisationofacquisitionaccountingadjustments Profit(loss)ondisposalofbusinessesandcorporate transactionsnote D1.1 291 4,275 (365) 3,910 106 283 – 283 2,993 283 657 (5) 265 3,910 – – – 283 – – – – – – – – – 397 319 4,558 (365) 4,193 2,291 (107) 2,184 3,276 2,888 657 (5) 265 4,193 (684) (5) (15) 2,184 prudentialplc.com Prudential plc AnnualReport2019 227 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationB1 Analysis of performance by segment continued B1.6 Additional analysis of performance by segment components continued (b) US Earnedpremiums,netofreinsurance* Otherincome Totalexternalrevenue Intra-grouprevenue Interestincome Otherinvestmentreturn Totalrevenue,netofreinsurance Benefitsandclaims* Acquisitioncostsandotheroperatingexpenditure* Interestoncorestructuralborrowings Lossondisposalofbusinessesandcorporate transactionsnote D1.1 Totalcharges,netofreinsuranceandlossondisposal ofbusinesses (Loss)profitbeforetax Analysis of (loss) profit before tax: AdjustedIFRSoperatingprofitbasedonlonger-term investmentreturns Short-termfluctuationsininvestmentreturnson shareholder-backedbusiness Amortisationofacquisitionaccountingadjustments (Loss)ondisposalofbusinessesandcorporate transactionsnote D1.1 2019 $m Insurance Asset management Eliminations 20,742 6 20,748 – 2,971 31,621 55,340 (54,734) (1,343) (20) – (56,097) (757) 3,038 (3,757) (38) – (757) – 55 55 127 – 2 184 – (152) – – (152) 32 32 – – – 32 – – – (93) – – (93) – 93 – – 93 – – – – – – 2018 $m Total 23,161 67 23,228 67 2,692 (9,085) 16,902 (11,736) (2,773) (20) Total 20,742 61 20,803 34 2,971 31,623 55,431 (54,734) (1,402) (20) – (51) (56,156) (14,580) (725) 2,322 3,070 2,563 (3,757) (38) – (725) (134) (56) (51) 2,322 *InOctober2018,JacksonenteredintoanagreementwithJohnHancockLifetoreinsure100percentofthegrouppay-outannuitybusiness.Thetransactionresultedinanadditionto grosspremiumsearnedof$5.0billionandacorrespondingincreaseinbenefitsandclaimsof$5.5billionfortheincreaseinpolicyholderliabilitiesandadecreaseinotheroperating expenditurefornegativecedingcommissionsof$0.5billionattheinceptionofthecontract.TherewasnomaterialimpactonadjustedIFRSoperatingprofitbasedonlonger-term investmentreturnsortotalprofitasaresultofthetransaction. 228 Prudential plc AnnualReport2019 prudentialplc.com B EARNINGS PERFORMANCE CONTINUEDB2 Acquisition costs and other expenditure Acquisitioncostsincurredforinsurancepolicies Acquisitioncostsdeferredlessamortisationofacquisitioncosts note (i) Administrationcostsandotherexpenditure* notes (ii),(iii) Movementsinamountsattributabletoexternalunitholdersofconsolidatedinvestmentfunds Totalacquisitioncostsandotherexpenditurefromcontinuingoperations 2019 $m 2018 $m (4,177) 2,116 (5,019) (203) (7,283) (4,313) 59 (3,877) (396) (8,527) *The2018administrationcostsandotherexpenditureincludedacreditof$0.5billionforthenegativecedingcommissionsarisingfromthegrouppayoutannuitybusinessreinsurance agreemententeredintobyJacksonwithJohnHancockin2018. Notes (i) Thecreditforacquisitioncostsdeferredlessamortisationofthosecostsof$2,116million(2018:$59million)arisesinAsiaoperationsof$358million(2018:$362million)andinUS operationsof$1,758million(2018:achargeof$(303)million)assetoutinnoteC5.2.Thecreditof$1,758millionforUSoperations(2018:achargeof$(303)million)comprises additionalcostsdeferredintheyearof$807million(2018:$759million)drivenbyhighernewbusinesssalesandacreditof$951million(2018:achargeof$(1,062)million)forDAC amortisation,drivenbythehedginglossesarisingin2019. (ii) Duringtheyear,theGrouppaid$182millionofupfrontfeestomodifythetermsandconditionoftwosubordinateddebtinstruments,whichareexpensedtotheincomestatement asdescribedinnoteC6.1.Allotherfeeexpensesrelatingtofinancialliabilitiesheldatamortisedcostin2019and2018arepartofthedeterminationoftheeffectiveinterestrateand areincludedin‘Administrationcostsandotherexpenditure’above. Totaldepreciationandamortisationexpenseisincludedin‘Acquisitioncostsincurredforinsurancepolicies‘,‘Administrationcostsandotherexpenditure’and‘Acquisitioncosts deferredlessamortisationofacquisitioncosts’andrelatesprimarilytoamortisationofdeferredacquisitioncostsofinsurancecontractsandassetmanagementcontracts.The segmentalanalysisofinterestexpense(otherthaninterestexpenseincorestructuralborrowings)anddepreciationandamortisationincludedwithintotalacquisitioncostsand otherexpenditurewasasfollows: (iii) Asiaoperations: Insurance Assetmanagement USoperations: Insurance Assetmanagement Totalsegment Unallocatedtoasegment(otheroperations) Totalcontinuingoperations Other interest expense Depreciation and amortisation 2019* $m 2018 $m 2019* $m 2018 $m (13) – (264) (2) (279) (27) (306) – – (212) – (212) (38) (250) (641) (14) 901 (4) 242 (30) 212 (482) (5) (1,110) (8) (1,605) (3) (1,608) *In2019,theseamountsalsoincludeinterestonleaseliabilitiesof$20millionanddepreciationonright-of-useassetsof$141millionrecognisedunderIFRS16. B2.1 Staff and employment costs TheaveragenumberofstaffemployedbytheGroup,forbothcontinuinganddiscontinuedoperations,duringtheyearsshownwas: Asiaoperations USoperations Otheroperations* Total continuing operations Discontinued UK and Europe operations† Total Group 2019 14,471 4,014 519 19,004 5,672 24,676 2018 16,798 4,285 676 21,759 6,447 28,206 *TheOtheroperations’staffnumbersincludestafffromcentraloperationsandAfricawhichareunallocatedtoasegment. †AveragestaffnumbersofthediscontinuedUKandEuropeoperationsarefortheperioduptothedemergerinOctober2019. Thecostsofemployment,forbothcontinuinganddiscontinuedoperations,were: Wagesandsalaries Socialsecuritycosts Definedbenefitschemes* Definedcontributionschemes Total Group† 2019 $m 2018 $m Continuing Discontinued Group total Continuing Discontinued Group total 1,435 53 (91) 69 1,466 573 68 (5) 41 677 2,008 121 (96) 110 2,143 1,517 71 7 77 1,672 694 84 (46) 50 782 2,211 155 (39) 127 2,454 *Thecharge(credit)incorporatedtheeffectofactuarialgainsandlosses.Post-demergeroftheUKandEuropeoperations,theGroup’sdefinedbenefitschemescostsareexpectedtobe negligible.SeenoteC9. †TotalcostsofemploymentinthetableaboveincludethecostsofemploymentofthediscontinuedUKandEuropeoperationsuptothedemergerinOctober2019. prudentialplc.com Prudential plc AnnualReport2019 229 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information B2 Acquisition costs and other expenditure continued B2.2 Share-based payment The Group offers discretionary share awards to certain key employees and all-employee share plans for all UK and a number of Asian locations. The compensation expense charged to the income statement is primarily based upon the fair value of the options granted, the vesting period and the vesting conditions. The Company has established trusts to facilitate the delivery of Prudential plc shares under these plans. The cost to the Company of acquiring these newly issued shares held in trusts is shown as a deduction from shareholders’ equity. (a) Description of the plans TheGroupoperatesanumberofshareawardplansthatprovidesPrudentialplcshares,orADRs,toparticipantsuponvesting.Theplans inoperationincludethePrudentialLongTermIncentivePlan(PLTIP),thePrudentialAnnualIncentivePlan(AIP),savings-relatedshare optionschemes,sharepurchaseplansanddeferredbonusplans.WhereExecutiveDirectorsparticipateintheseplans,detailsare providedintheDirectors’remunerationreport.Inaddition,thefollowinginformationisprovided. Share scheme Description Prudential Corporation Asia Long-Term Incentive Plan (PCA LTIP) ThePCALTIPprovideseligibleemployeeswithconditionalawards.Awardsarediscretionaryand vestafterthreeyearssubjecttotheemployeebeinginemployment.Vestingofawardsmayalsobe subjecttoperformanceconditions.AllawardsaregenerallymadeinPrudentialshares,orADRs.In countrieswhereshareawardsarenotfeasibleduetosecuritiesand/ortaxconsiderations,awardswill bereplacedbythecashvalueofthesharesthatwouldotherwisehavevested. Prudential Agency Long-Term Incentive Plan CertainagentsinAsiaareeligibletobegrantedawardsunderthePrudentialAgencyLong-Term IncentivePlan.TheseawardsarestructuredinasimilarwaytothePCALTIPdescribedabove. Restricted Share Plan (RSP) TheCompanyoperatestheRSPforcertainemployees.Awardsunderthisplanarediscretionary,and thevestingofawardsmaybesubjecttoperformanceconditions.AllawardsaremadeinPrudential sharesorADRs. Deferred bonus plans Savings-related share option schemes TheCompanyoperatesanumberofdeferredbonusplansincludingtheGroupDeferredBonusPlan (GDBP)andthePrudentialCorporationAsiaDeferredBonusPlan(PCADBP).Thereareno performanceconditionsattachedtodeferredshareawardsmadeunderthesearrangements. Employeesandeligibleagentsinanumberofgeographiesareeligibleforplanssimilartothe HMRC-approvedSaveAsYouEarn(SAYE)shareoptionschemeintheUK.Duringtheyearended 31December2019eligibleemployeesparticipatedintheInternationalSavings-RelatedShareOption SchemewhileeligibleagentsbasedincertainregionsofAsiacanparticipateintheInternational Savings-RelatedShareOptionSchemeforNon-Employees. Share purchase plans EligibleemployeesoutsidetheUKareinvitedtoparticipateinarrangementssimilartotheCompany’s HMRC-approvedUKSIP,whichallowsthepurchaseofPrudentialplcshares.StaffbasedinAsiaare eligibletoparticipateinthePrudentialCorporationAsiaAllEmployeeSharePurchasePlan.  230 Prudential plc AnnualReport2019 prudentialplc.com B EARNINGS PERFORMANCE CONTINUED(b) Outstanding options and awards ThefollowingtableshowsthemovementinoutstandingoptionsandawardsundertheGroup’sshare-basedcompensationplans: Options outstanding under SAYE schemes Awards outstanding under incentive plans 2019 2018 2019 2018 Number of options millions Weighted average exercise price £ Number of options millions Weighted average exercise price £ Number of awards millions Balanceatbeginningofyear: Granted Modification Exercised Forfeited Cancelled Lapsed/Expired M&Gplcawardsderecognisedondemerger Balanceatendofyear Optionsimmediatelyexercisableatendofyear 4.9 0.6 0.3 (1.7) – (0.1) (0.1) (0.1) 3.8 0.9 12.10 11.13 11.95 10.87 12.87 12.82 12.93 13.37 12.38 11.33 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 32.8 13.4 4.3 (9.8) (2.5) (0.7) (1.0) (3.5) 33.0 33.6 10.7 – (8.7) (2.6) – (0.2) – 32.8    OndemergeroftheM&GplcbusinessfromthePrudentialGroup,outstandingshare/ADRawardsforPrudentialplcparticipantswere adjustedtoreceivethedemergerdividendintheformofadditionalPrudentialplcshares/ADRs,tobereleasedonthesametimetable andtothesameextentastheiroriginalshareawards.InthecaseoftheInternationalSavings-RelatedShareOptionSchemeforNon- Employeestheadjustmentstooutstandingoptionswereconfirmedasbeingfairandreasonablebyanindependentfinancialadviserin accordancewiththerulesofthatplanandtheHongKongStockExchangeListingRules. EmployeesofM&GplcweregrantedreplacementawardsoverM&Gplcshares,inexchangeforexistingGroupawardsoutstanding underincentiveplans.Asdesignatedreplacementawardsweregranted,nocancellationwasrecognisedinrespectoftheoriginal awards.AsthereplacementawardsareanobligationofM&Gplc,theseawardswerederecognisedbytheGroupondemerger. M&GplcemployeeswithoutstandingSAYEoptionsondemergerweretreatedas‘goodleavers’,withboththevestingperiodand numberofoptionsexercisablecurtailedondemerger. TheweightedaveragesharepriceofPrudentialplcfor2019was£15.05(2018:£17.36). ThefollowingtableprovidesasummaryoftherangeofexercisepricesforPrudentialplcoptionsoutstandingat31December: Number outstanding (millions) Outstanding Weighted average remaining contractual life (years)* Exercisable Weighted average exercise prices £ Number exercisable (millions) Weighted average exercise prices £ Between£9and£10 Between£11and£12 Between£13and£14 Between£14and£15 Weightedaverage 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 – 2.4 0.3 1.1 3.8 0.3 3.0 0.3 1.3 4.9 – 2.0 3.2 2.0 2.1 0.4 1.6 4.1 2.6 2.1 – 11.19 13.94 14.55 12.38 9.01 11.19 13.94 14.55 12.10 – 0.9 – – 0.9 0.3 0.5 – – 0.8 – 11.33 – – 11.33 9.01 11.11 – – 10.37 *Theyearsshownaboveforweightedaverageremainingcontractuallifeincludethetimeperiodfromendofvestingperiodtoexpirationofcontract.  prudentialplc.com Prudential plc AnnualReport2019 231 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationB2 Acquisition costs and other expenditure continued B2.2 Share-based payment continued (c) Fair value of options and awards Thefairvalueamountsestimatedonthedateofgrantrelatingtoalloptionsandawardsweredeterminedbyusingthefollowing assumptions: 2019 SAYE options 2018 Prudential LTIP (TSR) Granted in October 2019 Granted in November 2019 Other awards Prudential LTIP (TSR) SAYE options Other awards Dividendyield(%) Expectedvolatility(%) Risk-freeinterestrate(%) Expectedoptionlife(years) Weightedaverageexerciseprice(£) Weightedaveragesharepriceatgrantdate(£) Weightedaveragefairvalueatgrantdate(£) – 22.14 0.97 – – 16.07 6.32 3.66 25.58 0.31 3.96 11.12 13.94 2.90 2.10 23.92 1.60 3.47 11.18 13.77 3.35 – – – – – – 15.39 – 24.03 1.19 – – 17.46 6.64 2.52 21.09 0.97 3.94 13.94 16.64 3.29 – – – – – – 17.04 Thecompensationcostsforallawardsandoptionsarerecognisedinnetincomeovertheplans’respectivevestingperiods.TheGroup usestheBlack-ScholesmodeltovaluealloptionsandawardsotherthanthosewhichhaveTSRperformanceconditionsattached(some PrudentialLTIPandRSPawards)forwhichtheGroupusesaMonteCarlomodelinordertoallowfortheimpactoftheseconditions. Thesemodelsareusedtocalculatefairvaluesforshareoptionsandawardsatthegrantdatebasedonthequotedmarketpriceofthe stockatthemeasurementdate,theamount,ifany,thattheemployeesarerequiredtopay,thedividendyield,expectedvolatility, risk-freeinterestratesandexerciseprices. Foralloptionsandawards,theexpectedvolatilityisbasedonthemarketimpliedvolatilitiesasquotedonBloomberg.ThePrudential specificat-the-moneyimpliedvolatilitiesareadjustedtoallowforthedifferenttermsanddiscountedexercisepriceonSAYEoptionsby usinginformationonthevolatilitysurfaceoftheFTSE100. Risk-freeinterestratesaretakenfromswapspotrateswithprojectionsfortwo-year,three-yearandfive-yeartermstomatch correspondingvestingperiods.For2019awardsissuedpriortodemerger,dividendyieldsaredeterminedastheaverageyieldovera periodof12monthsuptoandincludingthedateofgrant,anddataisbasedonsterlingriskfreerates.For2019awardsissuedafter demerger,dividendyieldsareestimatedbasedon£750milliontargetdividendincludedinthedemergerinvestorcircularanddatais basedonUSdollarriskfreerates.ForawardswithaTSRcondition,volatilitiesandcorrelationsbetweenPrudentialandabasketof12 competitorcompaniesisrequired.Forgrantsin2019,theaveragevolatilityforthebasketofcompetitorswas23.10percent(2018: 21.32percent).CorrelationsforthebasketarecalculatedforeachpairingfromthelogofdailyTSRreturnsforthethreeyearspriortothe valuationdate.MarketimpliedvolatilitiesareusedforbothPrudentialandthebasketofcompetitors.Changestothesubjectiveinput assumptionscouldmateriallyaffectthefairvalueestimate. (d) Share-based payment expense charged to the income statement Totalexpenserecognisedin2019intheconsolidatedfinancialstatementsrelatingtoshare-basedcompensationis$181million(2018: $191million),allaccountedforasequity-settled. TheGrouphasnoliabilitiesoutstandingattheyear-endrelatingtoawardsthataresettledincash. B2.3 Key management remuneration KeymanagementconstitutestheDirectorsofPrudentialplcastheyhaveauthorityandresponsibilityforplanning,directingand controllingtheactivitiesoftheGroupandfollowingreorganisationsduring2019,keymanagementalsoincludesothernon-director membersoftheGroupExecutiveCommitteefromAugust2019. Totalkeymanagementremunerationisanalysedinthefollowingtable: Salariesandshort-termbenefits Post-employmentbenefits Share-basedpayments 2019 $m 2018 $m 25.2 1.5 13.1 39.8 22.0 2.0 19.0 43.0 Theshare-basedpaymentschargecomprises$8.4million(2018:$13.0million),whichisdeterminedinaccordancewithIFRS2‘Share- basedPayment’(seenoteB2.2)and$4.8million(2018:$6.4million)ofdeferredshareawards. 232 Prudential plc AnnualReport2019 prudentialplc.com B EARNINGS PERFORMANCE CONTINUEDB2.4 Fees payable to the auditor FeespayabletotheCompany’sauditorfortheauditoftheCompany’sannualaccounts FeespayabletotheCompany’sauditoranditsassociatesforotherservices: Auditofsubsidiariespursuanttolegislation Audit-relatedassuranceservices* Otherassuranceservices Servicesrelatingtocorporatefinancetransactions Allotherservices Totalfeespaidtotheauditor Analysedinto: Feespayabletotheauditorattributabletothecontinuingoperations: Non-auditservicesassociatedwiththedemergeroftheUKandEuropeoperations† Otherauditandnon-auditservices FeespayabletotheauditorattributabletothediscontinuedUKandEuropeoperations 2019 $m 2018 $m 2.2 9.5 5.7 5.7 7.3 – 30.4 11.7 15.3 27.0 3.4 30.4 2.8 12.3 6.3 1.5 0.3 1.2 24.4 1.0 15.1 16.1 8.3 24.4 *Oftheaudit-relatedassuranceservicefeesof$5.7millionin2019(2018:$6.3million),$1.1millionrelatestoservicesthatarerequiredbylaw. †Ofthe$11.7millionone-offnon-auditservicesfeesin2019associatedwiththedemergeroftheUKandEuropeoperations,$4.4millionwasforotherassuranceservicesand$7.3million wasforservicesrelatingtocorporatefinancetransactions.In2018,the$1.0millionwasforallotherservicesassociatedwiththepreparationforthedemerger. Inaddition,therewerefeesincurredbypensionschemesof$0.1million(2018:$0.3million)forauditservices.Thesepensionschemes weretransferredtoUKandEuropeoperationsin2019aspartofthedemerger. B3 Effect of changes and other accounting matters on insurance assets and liabilities Thefollowingmattersarerelevanttothedeterminationofthe2019results: (a) Asia insurance operations In2019,theadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsforAsiainsuranceoperationsincludesanetcreditof $142million(2018:creditof$126million)representingasmallnumberofitemsthatarenotexpectedtoreoccur,includingtheimpactofa refinementtotherun-offoftheallowanceforprudencewithintechnicalprovisions. (b) US insurance operations Changesinthepolicyholderliabilitiesheldforvariableandfixedindexannuityguaranteesarereportedaspartofnon-operatingprofit andareasdescribedinnoteB1.2. B4 Tax charge from continuing operations Prudential is subject to tax in numerous jurisdictions and the calculation of the total tax charge inherently involves a degree of estimation and judgement. Current tax expense is charged or credited based upon amounts estimated to be payable or recoverable as a result of taxable amounts for the current year and adjustments made in relation to prior years. The positions taken in tax returns where applicable tax regulation is subject to interpretation are recognised in full in the determination of the tax charge in the financial statements if the Group considers that it is probable that the taxation authority will accept those positions. Otherwise, provisions are established based on management’s estimate and judgement of the likely amount of the liability, or recovery by providing for the single best estimate of the most likely outcome or the weighted average expected value where there are multiple outcomes. The total tax charge includes tax expense attributable to both policyholders and shareholders. The tax expense attributable to policyholders comprises the tax on the income of the consolidated with-profits and unit-linked funds. In certain jurisdictions, life insurance companies are taxed on both their shareholders’ profits and on their policyholders’ insurance and investment returns on certain insurance and investment products. Although both types of tax are included in the total tax charge in the Group’s consolidated income statement, they are presented separately in the consolidated income statement to provide the most relevant information about tax that the Group pays on its profits. Deferred taxes are provided under the liability method for all relevant temporary differences. IAS 12 ‘Income Taxes’ does not require all temporary differences to be provided for, in particular, the Group does not provide for deferred tax on undistributed earnings of subsidiaries where the Group is able to control the timing of the distribution and the temporary difference created is not expected to reverse in the foreseeable future. Deferred tax assets are only recognised when it is 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 apply to the period when the asset is realised or the liability settled, based on tax rates (and laws) that have been enacted or are substantively enacted at the end of the reporting period. prudentialplc.com Prudential plc AnnualReport2019 233 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationB4 Tax charge from continuing operations continued B4.1 Total tax charge by nature of expense Thetotaltaxchargeforcontinuingoperationsintheincomestatementisasfollows: Tax charge Attributabletoshareholders: Asiaoperations USoperations Otheroperations Tax(charge)creditattributabletoshareholders’returns Attributabletopolicyholders: Asiaoperations Total tax (charge) credit 2019 $m Current tax Deferred tax Total (306) (307) 182 (431) (130) (561) (162) 652 (28) 462 (235) 227 (468) 345 154 31 (365) (334) 2018 $m Total (369) (340) 140 (569) (107) (676) Theprincipalreasonforthedecreaseinthetaxchargeattributabletoshareholders’returnsfromcontinuingoperationsistheincreasein thetaxcreditonUSderivativelosseswhichlargelyoffsetthetaxchargeonAsiaprofitsin2019. ThereconciliationoftheexpectedtoactualtaxchargeattributabletoshareholdersisprovidedinB4.2below.Thetaxcharge attributabletopolicyholdersof$365millionaboveisequaltotheprofitbeforetaxattributabletopolicyholdersof$365million.Thisisthe resultofaccountingforpolicyholderincomeafterthedeductionofexpensesandmovementonunallocatedsurplusesonanafter-taxbasis. Thetotaltax(charge)creditcomprises: Currenttaxexpense: Corporationtax Adjustmentsinrespectofprioryears Totalcurrenttaxcharge  Deferredtaxarisingfrom: Originationandreversaloftemporarydifferences Impactofchangesinlocalstatutorytaxrates Creditinrespectofapreviouslyunrecognisedtaxloss,taxcreditortemporarydifference fromapriorperiod Totaldeferredtaxcredit(charge) Totaltaxcharge 2019 $m 2018 $m (589) 28 (561) 235 7 (15) 227 (334) (380) 15 (365) (331) 11 9 (311) (676) Thereductioninthedeferredtaxchargefrom$311millionin2018toacreditof$227millionin2019principallyrelatestotheincreasein thetaxcreditonUSderivativelosses,whicharetaxdeductibleoverathreeyearperiod. In2019,ataxchargeof$709million(2018:chargeof$387millionfromcontinuingoperations),principallyrelatingtoanincreaseinthe marketvalueonsecuritiesofUSinsuranceoperationsclassifiedasavailable-for-sale,hasbeentakenthroughothercomprehensive income. 234 Prudential plc AnnualReport2019 prudentialplc.com B EARNINGS PERFORMANCE CONTINUEDB4.2 Reconciliation of shareholder effective tax rate for continuing operations Inthereconciliationbelow,theexpectedtaxratesreflectthecorporationtaxratesthatareexpectedtoapplytothetaxableprofitorloss oftherelevantbusiness.Wherethereareprofitsorlossesofmorethanonejurisdiction,theexpectedtaxratesreflectthecorporationtax ratesweightedbyreferencetotheamountofprofitorlosscontributingtotheaggregatebusinessresult. 2019 2018 Asia operations $m US operations $m Other* operations $m Total attributable to share- holders $m Percentage impact on ETR % Total attributable to share- holders $m Percentage impact on ETR % AdjustedIFRSoperatingprofit(loss)basedon longer-terminvestmentreturns Non-operatingprofit(loss) Profit(loss)beforetax Expectedtaxrate: Taxattheexpectedrate Effectsofrecurringtaxreconciliationitems: Incomenottaxableortaxableat concessionaryrates Deductionsnotallowablefortaxpurposes Itemsrelatedtotaxationoflifeinsurance businesses note (i) Deferredtaxadjustments Unrecognisedtaxlosses note (ii) Effectofresultsofjointventuresand associates note (iii) Irrecoverablewithholdingtaxes note (iv) Other Total Effectsofnon-recurringtaxreconciliation items: Adjustmentstotaxchargeinrelationtoprior years Movementsinprovisionsforopen taxmatters note (v) Demergerrelatedactivities note (vi) Adjustmentsinrelationtobusinessdisposals Total Totalactualtaxcharge(credit) Analysedinto: TaxonadjustedIFRSoperatingprofit(loss) basedonlonger-terminvestmentreturns Taxonnon-operatingprofit(loss) Actualtaxrateon: AdjustedIFRSoperatingprofit(loss)basedon longer-terminvestmentreturns: Includingnon-recurringtaxreconciling items Excludingnon-recurringtaxreconciling items Totalprofit(loss) *Otheroperationsincluderestructuringcosts. 3,276 917 4,193 20% 839 3,070 (3,795) (725) 21% (152) (1,036) (510) (1,546) 19% (294) 5,310 (3,388) 1,922 20% 393 (94) 40 (192) (28) – (100) – 5 (369) (29) 10 (125) (1) – – – 5 (140) 4 (53) 17 – (23) (2) 468 – – – (53) (345) (3) 5 – (4) 46 – 59 3 106 (18) (18) 76 (6) 34 (154) 4,409 (959) 3,450 22% 759 (71) 69 (128) (55) – (83) 63 9 (196) 22.0% (2.1)% 2.0% (3.7)% (1.6)% – (2.4)% 1.8% 0.3% (5.7)% 20.4% (6.6)% 2.9% (16.5)% (1.7)% 2.4% (5.2)% 3.1% 0.7% (126) 55 (317) (33) 46 (100) 59 13 (403) (20.9)% (67) (3.5)% (4) (0.1)% (1) 76 (29) (21) (31) (0.0)% 4.1% (1.4)% (1.1)% (1.6)% 10 – – 6 0.3% – – 0.2% 569 16.5% 436 32 437 (782) (100) (54) 773 (804) 666 (97) 13% 13% 11% 14% 16% 48% 10% 10% 10% 15% 15% (2)% 15% 15% note (vii) 16% note (vii) prudentialplc.com Prudential plc AnnualReport2019 235 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationB4 Tax charge from continuing operations continued B4.2 Reconciliation of shareholder effective tax rate for continuing operations continued Notes (i) (ii) (iii) (iv) (v) The$125million(2018:$111million)reconcilingiteminUSoperationsreflectstheimpactofthedividendreceiveddeductiononthetaxationofprofitsfromvariableannuity business.TheprincipalreasonfortheincreaseintheAsiaoperationsreconcilingitemsfrom$17millionin2018to$192millionin2019reflectsanincreaseininvestmentgainsin HongKongwhicharenottaxableduetothetaxableprofitbeingcomputedas5percentofnetinsurancepremiums. The$46millionadversereconcilingiteminunrecognisedtaxlossesreflectslossesarisingafterthedemergeroftheGroup’sUKandEuropeoperationswhereitisunlikelythatrelief forthelosseswillbeavailableinfutureperiods. ProfitbeforetaxincludesPrudential’sshareofprofitaftertaxfromthejointventuresandassociates.Therefore,theactualtaxchargedoesnotincludetaxarisingfromprofitorloss ofjointventuresandassociatesandisreflectedasareconcilingitem. The$59million(2018:$63million)adversereconcilingitemsreflectslocalwithholdingtaxesondividendspaidbycertainnon-UKsubsidiaries,principallyIndonesia,totheUK. ThedividendsareexemptfromUKtaxandconsequentlythewithholdingtaxcannotbeoffsetagainstUKtaxpayments. Thecomplexityofthetaxlawsandregulationsthatrelatetoourbusinessesmeansthatfromtimetotimewemaydisagreewithtaxauthoritiesonthetechnicalinterpretationofa particularareaoftaxlaw.ThisuncertaintymeansthatinthenormalcourseofbusinesstheGroupwillhavematterswhere,uponultimateresolutionoftheuncertainty,theamount ofprofitsubjecttotaxmaybegreaterthantheamountsreflectedintheGroup’ssubmittedtaxreturns.Thestatementoffinancialpositioncontainsthefollowingprovisionsin relationtoopentaxmatters. Balanceatbeginningofyear Movementsinthecurrentyearincludedin: Taxchargeattributabletoshareholders Othermovements* Balanceatendofyear $m 190 (1) 9 198 *OthermovementsincludeinterestarisingonopentaxmattersandamountsincludedintheGroup’sshareofprofitsfromjointventuresandassociates,netofrelatedtax. (vi) The$76millionadversereconcilingitemsinDemergerrelatedactivitiesrelatestonon-taxdeductiblecostsincurredinpreparationfor,orasaresultof,thedemergeroftheGroup’s UKandEuropeoperations. (vii) 2018actualtaxrateoftherelevantbusinessoperationsareshownbelow: 2018 Asia operations US operations Other operations Total attributable to shareholders AdjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns Profitbeforetax 14% 17% 16% 15% 14% 13% 15% 16%  236 Prudential plc AnnualReport2019 prudentialplc.com B EARNINGS PERFORMANCE CONTINUED B5 Earnings per share Accounting principles Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders (after related tax and non-controlling interests) by the weighted average number of ordinary shares outstanding during the year, excluding those held in employee share trusts and consolidated investment funds, which are treated as cancelled. For diluted earnings per share, the weighted average number of shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The Group’s only class of potentially dilutive ordinary shares are those share options granted to employees where the exercise price is less than the average market price of the Company’s ordinary shares during the year. No adjustment is made if the impact is anti-dilutive overall. Before tax $m B1.1 Note Tax $m B4 2019 Non- controlling interests $m Net of tax and non- controlling interests $m Basic earnings per share cents Diluted earnings per share cents 5,310 (773) (9) 4,528 175.0¢ 175.0¢ (3,203) 772 (43) (142) 1,922 8 24 31 D2 – – – (2,431) (94.0)¢ (94.0)¢ (35) (1.3)¢ (1.3)¢ (118) (4.6)¢ (4.6)¢ (9) 1,944 75.1¢ 75.1¢ (1,161) (44.8)¢ (44.8)¢ 783 30.3¢ 30.3¢ Before tax $m B1.1 Note Tax $m B4 2018 Non- controlling interests $m Net of tax and non- controlling interests $m Basic earnings per share cents Diluted earnings per share cents 4,409 (666) (4) 3,739 145.2¢ 145.1¢ (791) (61) (107) 70 11 16 – – – (721) (28.0)¢ (28.0)¢ (50) (1.9)¢ (1.9)¢ (91) (3.6)¢ (3.5)¢ 3,450 (569) (4) 2,877 111.7¢ 111.7¢ D2 1,142 4,019 44.3¢ 44.3¢ 156.0¢ 156.0¢ BasedonadjustedIFRSoperatingprofitbasedon longer-terminvestmentreturns Short-termfluctuationsininvestmentreturnson shareholder-backedbusiness Amortisationofacquisitionaccounting adjustments Lossondisposalofbusinessesandcorporate transactions Basedonprofitfortheyearfromcontinuing operations Basedon(loss)fortheyearfromdiscontinued operations Basedonprofitfortheyear BasedonadjustedIFRSoperatingprofitbasedon longer-terminvestmentreturns Short-termfluctuationsininvestmentreturnson shareholder-backedbusiness Amortisationofacquisitionaccounting adjustments Lossondisposalofbusinessesandcorporate transactions Basedonprofitfortheyearfromcontinuing operations Basedonprofitfortheyearfromdiscontinued operations Basedonprofitfortheyear  Weighted average number of shares* for calculation of: Basicearningspershare Sharesunderoptionatendofyear Sharesthatwouldhavebeenissuedatfairvalueonassumedoptionprice Dilutedearningspershare *Excludingthoseheldinemployeesharetrustsandconsolidatedinvestmentfunds. Number of shares (in millions) 2019 2,587 4 (4) 2,587 2018 2,575 5 (4) 2,576 prudentialplc.com Prudential plc AnnualReport2019 237 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationB6 Dividends B6.1 Demerger dividend in specie of M&G plc On21October2019,followingapprovalbytheGroup’sshareholders,PrudentialplcdemergedM&GplcitsUKandEuropeoperations viaadividendinspecie.AsrequiredbyIFRIC17‘DistributionsofNon-cashAssetstoOwners’,thedividendhasbeenrecordedatthefair valueofM&Gplcbeing$7,379million. B6.2 Other dividends First and second interim dividends are recorded in the period in which they are paid. Final dividends (if applicable) are recorded in the period in which they are approved by shareholders. Dividendsrelatingtoreportingyear: Firstinterimordinarydividend Secondinterimordinarydividend Total Dividendspaidinreportingyear: Currentyearfirstinterimordinarydividend Secondinterimordinarydividendforprioryear Total 2019 2018 Centspershare $m Centspershare 20.29¢ 25.97¢ 46.26¢ 20.29¢ 42.89¢ 63.18¢ 528 675 1,203 526 1,108 1,634 20.55¢ 42.89¢ 63.44¢ 20.55¢ 43.79¢ 64.34¢ $m  530 1,108 1,638 530 1,132 1,662 Dividend per share The2019firstinterimordinarydividendof20.29centsperordinarysharewaspaidtoeligibleshareholderson26September2019. Thesecondinterimordinarydividendfortheyearended31December2019of25.97centsperordinarysharewillbepaidon15May 2020toshareholdersontheUKregisteron27March2020(RecordDate),andtoshareholdersontheHongKongregisterat4.30pm HongKongtimeontheRecordDate(HKShareholders).HoldersofUSAmericanDepositaryReceipts(USShareholders)willbepaid theirdividendson15May2020.Thesecondinterimordinarydividendwillbepaidonorabout22May2020toshareholderswithshares standingtothecreditoftheirsecuritiesaccountswithTheCentralDepository(Pte)Limited(CDP)at5.00pmSingaporetimeonthe RecordDate(SGShareholders). TheGroup’s2020dividendunderthenewprogressivedividendpolicywillbedeterminedfroma2019USdollarbaseof$958million (36.84centspershare),equivalenttothecirca£750millionpreviouslydisclosedintheCircular.Thisrepresentsthefirstinterimordinary dividendrelatingto2019of$528millionplusthesecondinterimordinarydividendof$675millionlessthecontributionofremittances fromthediscontinuedM&Gplcbusinesstothesecondinterimordinarydividendof$245million. PrudentialplcnowdeterminesanddeclaresitsdividendsinUSdollars,commencingwithdividendspaidin2020,includingthe2019 secondinterimdividend.ShareholdersholdingsharesontheUKorHongKongshareregisterswillcontinuetoreceivetheirdividend paymentsineitherpoundssterlingorHongKongdollarsrespectively,unlesstheyelectotherwise.Shareholdersholdingsharesonthe UKorHongKongregistersmayelecttoreceivedividendpaymentsinUSdollars.ElectionsmustbemadethroughtherelevantUKor HongKongshareregistraronorbefore23April2020.ThecorrespondingamountpershareinpoundssterlingandHongKongdollarsis expectedtobeannouncedonorabout30April2020.TheUSdollartopoundsterlingandHongKongdollarconversionrateswillbe determinedbytheactualratesachievedbyPrudentialbuyingthosecurrenciesduringthetwoworkingdaysprecedingthesubsequent announcement.HoldersofAmericanDepositaryReceipts(ADRs)willcontinuetoreceivetheirdividendpaymentsinUSdollars. ShareholdersholdinganinterestinPrudentialsharesthroughtheCentralDepository(Pte)Limited(CDP)inSingaporewillcontinueto receivetheirdividendpaymentsinSingaporedollarsatanexchangeratedeterminedbyCDP. ShareholdersontheUKregisterareeligibletoparticipateinaDividendReinvestmentPlan. 238 Prudential plc AnnualReport2019 prudentialplc.com B EARNINGS PERFORMANCE CONTINUED C Financial position notes C1 Analysis of Group statement of financial position by segment Toexplaintheassets,liabilitiesandcapitaloftheGroup’sbusinessesmorecomprehensively,itisappropriatetoprovideanalysesofthe Group’sstatementoffinancialpositionbyoperatingsegmentandtypeofbusiness. By operating segment Assets Goodwill Deferredacquisitioncostsandotherintangibleassets Reinsurers’shareofinsurancecontractliabilities Otherassets note (ii) Investmentproperties Investmentinjointventuresandassociatesaccountedforusing theequitymethod Financialinvestments note (v) Cashandcashequivalents note (iii) Total assets Equity Shareholders’equity Non-controllinginterests Total equity Liabilities Contractliabilities(includingamountsinrespectofcontracts classifiedasinvestmentcontractsunderIFRS4) Unallocatedsurplusofwith-profitsfunds Corestructuralborrowingsofshareholder-financedbusinesses Operationalborrowings Otherliabilities note (iv) Total liabilities Total equity and liabilities 31 Dec 2019 $m Unallo- cated to a segment (central opera- tions) note(i) Elimin- ation of intra- group debtors and creditors Group total 43 58 4 3,339 11 – 1,407 2,515 7,377 – – – (2,652) – 969 17,476 13,856 9,327 25 – – – 1,500 404,096 6,965 (2,652) 454,214 Note C5.1 C5.2 D7 Asia  C2.1 US  C2.2 926 5,154 5,458 3,208 7 – 12,264 8,394 5,432 7 1,500 131,499 2,490 – 271,190 1,960 150,242 299,247 10,866 155 11,021 8,929 – 8,929 (318) 37 (281) – – – 19,477 192 19,669 C4.1 C4.1 C6.1 C6.2 115,943 4,750 – 473 18,055 269,549 – 250 1,501 19,018 139,221 290,318 150,242 299,247 186 – 5,344 671 1,457 7,658 7,377 – – – – (2,652) 385,678 4,750 5,594 2,645 35,878 (2,652) 434,545 (2,652) 454,214 prudentialplc.com Prudential plc AnnualReport2019 239 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationC1 Analysis of Group statement of financial position by segment continued Before elimination of intra-group debtors and creditors 31 Dec 2018 $m By operating segment Assets Goodwill Deferredacquisitioncostsandother intangibleassets Reinsurers’shareofinsurance contractliabilities Otherassets note (ii) Investmentproperties Investmentinjointventuresand associatesaccountedforusing theequitymethod Financialinvestments note (v) Assetsheldforsale Cashandcashequivalents note (iii) Total assets Equity Shareholders’equity Non-controllinginterests Total equity Liabilities Contractliabilities(includingamounts inrespectofcontractsclassifiedas investmentcontractsunderIFRS4) Unallocatedsurplusof with-profitsfunds Corestructuralborrowingsof shareholder-financedbusinesses Operationalborrowings Otherliabilities note (iv) Liabilitiesheldforsale Total liabilities Note C5.1 C5.2 C4.1 C4.1 C6.1 C6.2 Unallo- cated to a segment (central opera- tions) note(i) Total continuing operations Discon- tinued UK and Europe operations Elimin- ation of intra- group debtors and creditors 634 1,731 14,936 249 – – 12,024 12,385 14 3,581 9,044 22,815 (1,412) (6,834) – Group Total 2,365 15,185 14,193 14,595 22,829 1,262 338,969 – 9,394 945 208,553 13,472 6,048 – – – – 2,207 547,522 13,472 15,442 389,618 266,438 (8,246) 647,810 Asia  C2.1 634 US  C2.2 – 3,741 11,140 3,537 4,987 6 8,485 4,569 8 1,262 103,016 – 2,789 – 232,955 – 3,827 119,972 260,984 – 55 2 2,829 – – 2,998 – 2,778 8,662 8,175 12 8,187 7,163 – 7,163 (4,450) 11 (4,439) 10,888 23 10,911 11,080 – 11,080 – – – 21,968 23 21,991 93,248 236,380 50 329,678 193,020 (1,412) 521,286 3,198 – 102 15,237 – – – 3,198 16,982 – 20,180 250 418 16,773 – 9,511 640 2,900 – 9,761 1,160 34,910 – – 5,129 26,768 13,459 – – (6,834) – 9,761 6,289 54,844 13,459 111,785 253,821 13,101 378,707 255,358 (8,246) 625,819 Total equity and liabilities 119,972 260,984 8,662 389,618 266,438 (8,246) 647,810 240 Prudential plc AnnualReport2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUEDNotes (i) (ii)  Unallocatedtoasegmentincludescentraloperations,theGroup’streasuryfunctionandAfricaoperationsaspernoteB1.3. ‘Otherassets’at31December2019includedproperty,plantandequipmentof$1,065millionrelatingtocontinuingoperations(31December2018:$1,795million,ofwhich $482millionrelatedtocontinuingoperations).On1January2019,$527millionofright-of-useassetswasrecognisedforcontinuingoperationsuponadoptionofIFRS16 (seenoteA3).Movementsintheright-of-useassetsin2019isprovidedinnoteC13.  $3,191million(31December2018:$7,834million)areexpectedtobesettledwithinoneyear.Thesearefurtheranalysedasfollows: Alsoincludedin‘Otherassets’areaccruedinvestmentincomeandotherdebtorsat31December2019of$3,695million(31December2018:$8,708million),ofwhich 31 Dec 2019 $m 31 Dec 2018 $m Interestreceivable Other Totalaccruedinvestmentincome Premiumsreceivableduefrom: Policyholders Intermediaries Reinsurers Otherreceivables Totalotherdebtors Total accrued investment income and other debtors Analysedas: Fromcontinuingoperations Fromdiscontinuedoperations 1,064 577 1,641 574 4 216 1,260 2,054 3,695 2,221 1,280 3,501 576 4 277 4,350 5,207 8,708 4,356 4,352 8,708 (iii) Cashandcashequivalents  Cashandcashequivalentsconsistofcashatbankandinhand,depositsheldatcallwithbanks,treasurybillsandothershort-termhighlyliquidinvestmentswithlessthan90days maturityfromthedateofacquisitionandareanalysedasfollows: 31 Dec 2019 $m 31 Dec 2018 $m Cash Cashequivalents Total cash and cash equivalents Analysedas: HeldcentrallyandavailableforgeneralusebytheGroup OtherfundsnotavailableforgeneralusebytheGroup,includingfundsheldforthebenefitofpolicyholders Total cash and cash equivalents Comprising: Cash and cash equivalents from continuing operations Cash and cash equivalents from discontinued operations 2,071 4,894 6,965 2,491 4,474 6,965 7,335 8,107 15,442 445 14,997 15,442 9,394 6,048 15,442  TheGroup’scashandcashequivalentsareheldinthefollowingcurrencies:USdollars52percent,poundssterling20percent,Euro1percentandothercurrencies27percent (2018:USdollars38percent,poundssterling32percent,Euro15percentandothercurrencies15percent). (iv) Accruals,deferredincomeandotherliabilitiesareanalysedasfollows(maturityanalysisisprovidedinnoteC3.4(a)): Accrualsanddeferredincome Othercreditors Creditorsarisingfromdirectinsuranceandreinsuranceoperations Interestpayable FundswithheldunderreinsuranceoftheREALICbusiness Otheritems Total accruals, deferred income and other liabilities Analysedas: Fromcontinuingoperations Fromdiscontinuedoperations 31 Dec 2019 $m 31 Dec 2018 $m 582 6,724 2,831 68 3,760 523 2,165 9,010 3,010 149 3,745 1,342 14,488 19,421 13,338 6,083 19,421 (v) Ofthetotalfinancialinvestmentsof$404,096millionasat31December2019(31December2018:$547,522million),$260,896million(2018:$304,843million)areduetobe recoveredwithinoneyear. prudentialplc.com Prudential plc AnnualReport2019 241 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationC2 Analysis of segment statement of financial position by business type Toshowthestatementoffinancialpositionbyreferencetothedifferingdegreesofpolicyholderandshareholdereconomicinterestofthe differenttypesofbusiness,theanalysisbelowisstructuredtoshowtheassetsandliabilitiesofeachsegmentbybusinesstype. C2.1 Asia 31 Dec 2019 $m Total insurance 31 Dec 2018 $m With- profits business* Unit- linked assets and liabilities Note Other business Total Asset manage- ment Elimin- ations Total Total Assets Goodwill Deferredacquisitioncostsandother intangibleassets Reinsurers’shareofinsurance contractliabilities Otherassets Investmentproperties Investmentinjointventuresand associatesaccountedforusingthe equitymethod Financialinvestments Cashandcashequivalents Total assets Total equity Liabilities Contractliabilities(includingamounts inrespectofcontractsclassifiedas investmentcontractsunderIFRS4) Unallocatedsurplusofwith-profitsfunds Operationalborrowings Otherliabilities Total liabilities 327 327 599 – 67 152 1,210 – – – 5,072 5,139 – 237 – 5,306 1,584 7 5,458 3,031 7 – 76,581 963 – 24,628 356 1,263 1,263 29,982 131,191 2,334 1,015 – – 926 634 5,154 3,741 – (35) – 5,458 3,208 7 3,537 4,987 6 – 1,500 – 131,499 2,490 – 1,262 103,016 2,789 15 – 212 – 237 308 156 78,973 25,221 44,556 148,750 – – 9,803 9,803 1,527 1,218 (35) 150,242 119,972 – 11,021 8,187 C4.2 C4.2 65,558 4,750 302 8,363 23,571 – 21 1,629 26,814 115,943 4,750 446 17,808 – 123 7,816 78,973 25,221 34,753 138,947 – – 27 282 309 – 115,943 4,750 – 473 – (35) 18,055 93,248 3,198 102 15,237 (35) 139,221 111,785 Total equity and liabilities 78,973 25,221 44,556 148,750 1,527 (35) 150,242 119,972 *Thestatementoffinancialpositionforwith-profitsbusinesscomprisesthewith-profitsassetsandliabilitiesoftheHongKong,MalaysiaandSingaporeoperations.‘Otherbusiness’ includesassetsandliabilitiesofotherparticipatingbusinessesandothernon-linkedshareholder-backedbusiness. 242 Prudential plc AnnualReport2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUEDC2.2 US Assets Goodwill Deferredacquisitioncostsandother intangibleassets Reinsurers’shareofinsurancecontractliabilities Otherassets Investmentproperties Financialinvestments Cashandcashequivalents Total assets Total equity Liabilities Contractliabilities(includingamountsinrespect ofcontractsclassifiedasinvestmentcontracts underIFRS4) Corestructuralborrowingsofshareholder-financed businesses Operationalborrowings Otherliabilities Total liabilities Total equity and liabilities 31 Dec 2019 $m 31 Dec 2018 $m Total insurance Variable annuity separate account assets and liabilities Fixed annuity, GICs and other business Note Asset manage- ment Total Elimin- ations Total Total – – – – – – – 195,070 – 12,264 8,394 5,293 7 12,264 8,394 5,293 7 76,106 271,176 1,912 1,912 195,070 103,976 299,046 – 8,923 8,923 C4.3 195,070 74,479 269,549 C6.1 – – – 250 1,460 18,864 250 1,460 18,864 195,070 95,053 290,123 195,070 103,976 299,046 – – – 228 – 14 48 290 6 – – 41 243 284 290 – – – 12,264 – 8,394 – 5,432 (89) 7 – – 271,190 1,960 – 11,140 8,485 4,569 8 232,955 3,827 (89) 299,247 260,984 – 8,929 7,163 – 269,549 236,380 – – 250 1,501 (89) 19,018 250 418 16,773 (89) 290,318 253,821 (89) 299,247 260,984 prudentialplc.com Prudential plc AnnualReport2019 243 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationC3 Assets and liabilities C3.1 Group assets and liabilities – measurement The Group holds financial investments in accordance with IAS 39, whereby subject to specific criteria, financial instruments are required to be accounted for under one of the following categories: — Financial assets and liabilities at fair value through profit or loss – this comprises assets and liabilities designated by management as fair value through profit or loss on inception and derivatives that are held for trading. This includes instruments that are managed and the performance evaluated on a fair value basis and includes liabilities related to net assets attributable to unit holders of consolidated investment funds and, in Asia, policyholder liabilities for investment contracts without discretionary participation features. All investments within this category are measured at fair value with all changes thereon being recognised in investment return in the income statement; — Financial investments on an available-for-sale basis – this comprises assets that are designated by management as available-for-sale and/or do not fall into any of the other categories. These assets are initially recognised at fair value plus attributable transaction costs. Available-for-sale assets are subsequently measured at fair value. Interest income is recognised on an effective interest basis in the income statement. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset. Except for foreign exchange gains and losses on debt securities, which are included in the income statement, unrealised gains and losses are recognised in other comprehensive income. Upon disposal or impairment, accumulated unrealised gains and losses are transferred from other comprehensive income to the income statement as realised gains or losses; and — Loans and receivables – except for those designated as at fair value through profit or loss or available-for-sale, these instruments comprise non-quoted investments that have fixed or determinable payments. These instruments include loans collateralised by mortgages, deposits, loans to policyholders and other unsecured loans and receivables. These investments are initially recognised at fair value plus transaction costs. Subsequently, these instruments are carried at amortised cost using the effective interest method. The Group uses the trade date method to account for regular purchases and sales of financial assets. (a) Fair value measurement hierarchy of Group assets and liabilities Assets and liabilities carried at fair value on the statement of financial position ThetablebelowshowstheassetsandliabilitiescarriedatfairvalueanalysedbyleveloftheIFRS13‘FairValueMeasurement’definedfair valuehierarchy.Thishierarchyisbasedontheinputstothefairvaluemeasurementandreflectsthelowestlevelinputthatissignificantto thatmeasurement. Allassetsandliabilitiesheldatfairvalueareclassifiedasfairvaluethroughprofitorloss,exceptfor$58,302million(31December 2018:$52,025million)ofdebtsecuritiesclassifiedasavailable-for-sale,principallyintheUSoperations.Allassetsandliabilitiesheld atfairvaluearemeasuredonarecurringbasis.Asof31December2019,theGroupdidnothaveanyfinancialinstrumentsthatare measuredatfairvalueonanon-recurringbasis. 244 Prudential plc AnnualReport2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUEDFinancial instruments at fair value Analysis of financial investments, net of derivative liabilities by business type from continuing operations With-profits Equitysecuritiesandholdingsincollectiveinvestmentschemes Debtsecurities Otherinvestments(includingderivativeassets) Derivativeliabilities Totalfinancialinvestments,netofderivativeliabilities Percentageoftotal(%) Unit-linked and variable annuity separate account Equitysecuritiesandholdingsincollectiveinvestmentschemes Debtsecurities Otherinvestments(includingderivativeassets) Derivativeliabilities Totalfinancialinvestments,netofderivativeliabilities Percentageoftotal(%) Non-linked shareholder-backed Loans Equitysecuritiesandholdingsincollectiveinvestmentschemes Debtsecurities Otherinvestments(includingderivativeassets) Derivativeliabilities Totalfinancialinvestments,netofderivativeliabilities Percentageoftotal(%) Group total analysis, including other financial liabilities held at fair value from continuing operations Loans Equitysecuritiesandholdingsincollectiveinvestmentschemes Debtsecurities Otherinvestments(includingderivativeassets) Derivativeliabilities Totalfinancialinvestments,netofderivativeliabilities Investmentcontractliabilitieswithoutdiscretionaryparticipationfeaturesheld atfairvalue Netassetvalueattributabletounitholdersofconsolidatedinvestmentfunds Otherfinancialliabilitiesheldatfairvalue Totalfinancialinstrumentsatfairvalue Percentageoftotal(%) 31 Dec 2019 $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 25,850 40,291 57 (137) 66,061 90% 213,797 4,036 6 (1) 217,838 99% – 3,638 23,600 7 (47) 27,198 29% – 243,285 67,927 70 (185) 311,097 – (5,973) – 305,124 81% 3,268 4,485 103 (94) 7,762 10% 365 1,117 4 – 1,486 1% – 87 61,035 1,569 (113) 62,578 66% – 3,720 66,637 1,676 (207) 71,826 (1,011) (23) – 70,792 19% 254 6 – – 260 0% – – – – – 0% 3,587 22 – 1,301 – 4,910 5% 3,587 276 6 1,301 – 5,170 – (2) (3,760) 1,408 0% Total 29,372 44,782 160 (231) 74,083 100% 214,162 5,153 10 (1) 219,324 100% 3,587 3,747 84,635 2,877 (160) 94,686 100% 3,587 247,281 134,570 3,047 (392) 388,093 (1,011) (5,998) (3,760) 377,324 100% prudentialplc.com Prudential plc AnnualReport2019 245 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationC3 Assets and liabilities continued C3.1 Group assets and liabilities – measurement continued Analysis of financial investments, net of derivative liabilities by business type With-profits Loans Equitysecuritiesandholdingsincollectiveinvestmentschemes Debtsecurities Otherinvestments(includingderivativeassets) Derivativeliabilities Totalfinancialinvestments,netofderivativeliabilities Percentageoftotal(%) Unit-linked and variable annuity separate account Equitysecuritiesandholdingsincollectiveinvestmentschemes Debtsecurities Otherinvestments(includingderivativeassets) Derivativeliabilities Totalfinancialinvestments,netofderivativeliabilities Percentageoftotal(%) Non-linked shareholder-backed Loans Equitysecuritiesandholdingsincollectiveinvestmentschemes Debtsecurities Otherinvestments(includingderivativeassets) Derivativeliabilities Totalfinancialinvestments,netofderivativeliabilities Percentageoftotal(%) Group total analysis, including other financial liabilities held at fair value Loans Equitysecuritiesandholdingsincollectiveinvestmentschemes Debtsecurities Otherinvestments(includingderivativeassets) Derivativeliabilities Totalfinancialinvestments,netofderivativeliabilities Investmentcontractliabilitieswithoutdiscretionaryparticipationfeatures heldatfairvalue Borrowingsattributabletowith-profitsbusinesses Netassetvalueattributabletounitholdersofconsolidatedinvestmentfunds Otherfinancialliabilitiesheldatfairvalue Totalfinancialinstrumentsatfairvalue Percentageoftotal(%) Analysedas: Totalfromcontinuingoperations With-profits Unit-linkedandvariableannuityseparateaccount Non-linkedshareholder-backed Percentageoftotalcontinuingoperations(%) TotalfromdiscontinuedUKandEuropeoperations Percentageoftotaldiscontinuedoperations(%) 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 – 66,636 39,750 183 (108) 106,461 57% 194,845 6,070 8 (3) 200,920 94% – 3,764 22,525 77 (2) 26,364 24% – 6,937 62,382 4,156 (1,568) 71,907 38% 643 12,388 4 (4) 13,031 6% – 3 78,713 1,602 (2,241) 78,077 71% 2,168 621 1,033 5,508 – 9,330 5% 11 – 8 – 19 0% 3,886 24 472 1,198 (539) 5,041 5% Total 2,168 74,194 103,165 9,847 (1,676) 187,698 100% 195,499 18,458 20 (7) 213,970 100% 3,886 3,791 101,710 2,877 (2,782) 109,482 100% – 265,245 68,345 268 (113) – 7,583 153,483 5,762 (3,813) 6,054 656 1,505 6,714 (539) 6,054 273,484 223,333 12,744 (4,465) 333,745 163,015 14,390 511,150 – – (8,727) – 325,018 70% 49,914 182,833 21,077 253,824 81% 71,194 46% (20,446) – (4,854) (3) 137,712 29% 5,003 (82) 55,972 60,893 19% 76,819 50% – (2,045) (1,258) (4,335) 6,752 1% (20,446) (2,045) (14,839) (4,338) 469,482 100% 203 – 339 542 0% 6,210 4% 55,120 182,751 77,388 315,259 100% 154,223 100% 246 Prudential plc AnnualReport2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUEDAssets and liabilities at amortised cost and their fair value Thetablebelowshowsthefinancialassetsandliabilitiescarriedatamortisedcostonthestatementoffinancialpositionandtheirfair value.Cashdeposits,accruedincome,otherdebtors,accruals,deferredincomeandotherliabilitiesareexcludedfromtheanalysis below,asthesearecarriedatamortisedcost,whichapproximatesfairvalue. 31 Dec 2019 $m 31 Dec 2018 $m Level 2 Valuation based on significant observable market inputs Level 3 Valuation based on significant unobserv- able market inputs Level 2 Valuation based on significant observable market inputs Level 3 Valuation based on significant unobserv- able market inputs Fair value Carrying value Fair value Carrying value 1,865 11,646 13,511 12,996 3,691 13,714 17,405 16,884 – (3,957) (3,957) (3,891) – (4,021) (4,021) (4,035) (6,227) (2,015) – – (6,227) (5,594) (9,994) – (9,994) (9,761) (2,015) (2,015) (3,857) (92) (3,949) (4,244) (48) (9,087) (9,135) (8,901) (1,602) (7,323) (8,925) (8,901) Assets Loans Liabilities Investmentcontractliabilitieswithout discretionaryparticipationfeatures Corestructuralborrowingsof shareholder-financedbusinesses Operationalborrowings(excluding leaseliabilities) Obligationsunderfunding,securities lendingandsaleandrepurchase agreements Totalfinancialinstrumentscarried atamortisedcost (6,425) (1,398) (7,823) (7,405) (11,762) 2,278 (9,484) (10,057) Analysedas: Totalfromcontinuingoperations TotalfromdiscontinuedUKand Europeoperations (10,240) (9,996) 756 (61) (9,484) (10,057) Thefairvalueoftheassetsandliabilitiesinthetableabove,withtheexceptionofthesubordinatedandseniordebtissuedbytheparent company,hasbeenestimatedfromthediscountedcashflowsexpectedtobereceivedorpaid.Whereappropriate,theobservable marketinterestratehasbeenusedandtheassetsandliabilitiesareclassifiedwithinlevel2.Otherwise,theyareincludedaslevel3assets orliabilities.Thefairvalueincludedforthesubordinatedandseniordebtissuedbytheparentcompanyisdeterminedusingquoted pricesfromindependentthirdparties.Thesearepresentedaslevel2liabilities. (b) 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.Prudentialseekstoobtainanumber ofquotesfromdifferentbrokerssoastoobtainthemostcomprehensiveinformationavailableontheirexecutability.Wherequotesare sourceddirectlyfrombrokers,thepriceusedinthevaluationisnormallyselectedfromoneofthequotesbasedonanumberoffactors, includingthetimelinessandregularityofthequotesandtheaccuracyofthequotesconsideringthespreadsprovided.Theselected quoteistheonewhichbestrepresentsanexecutablequoteforthesecurityatthemeasurementdate. Generally,noadjustmentismadetothepricesobtainedfromindependentthirdparties.Adjustmentismadeinonlylimited circumstances,whereitisdeterminedthatthethird-partyvaluationsobtaineddonotreflectfairvalue(egeitherbecausethevalueis staleand/orthevaluesareextremelydiverseinrange).Theseareusuallysecuritieswhicharedistressedorthatcouldbesubjecttoa debtrestructureorwherereliablemarketpricesarenolongeravailableduetoaninactivemarketormarketdislocation.Inthese instances,pricesarederivedusinginternalvaluationtechniquesincludingthoseasdescribedbelowinthisnotewiththeobjectiveof arrivingatafairvaluemeasurementthatreflectsthepriceatwhichanorderlytransactionwouldtakeplacebetweenmarketparticipants onthemeasurementdate.Thetechniquesusedrequireanumberofassumptionsrelatingtovariablessuchascreditriskandinterest rates.Examplesofsuchvariablesincludeanaveragecreditspreadbasedonthecorporatebonduniverseandtherelevantdurationof theassetbeingvalued.Prudentialdeterminestheinputassumptionsbasedonthebestavailableinformationatthemeasurementdates. Securitiesvaluedinsuchmannerareclassifiedaslevel3wherethesesignificantinputsarenotbasedonobservablemarketdata. Ofthetotallevel2debtsecuritiesof$66,637millionat31December2019(31December2018:$63,247millionfromcontinuing operations),$8,915millionarevaluedinternally(31December2018:$7,462millionfromcontinuingoperations).Themajorityofsuch securitiesarevaluedusingmatrixpricing,whichisbasedonassessingthecreditqualityoftheunderlyingborrowertoderiveasuitable discountraterelativetogovernmentsecuritiesofacomparableduration.Undermatrixpricing,thedebtsecuritiesarepricedtakingthe creditspreadsoncomparablequotedpublicdebtsecuritiesandapplyingthesetotheequivalentdebtinstrumentsfactoringinaspecified liquiditypremium.Themajorityoftheparametersusedinthisvaluationtechniquearereadilyobservableinthemarketand,therefore, arenotsubjecttointerpretation. prudentialplc.com Prudential plc AnnualReport2019 247 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationC3 Assets and liabilities continued C3.1 Group assets and liabilities – measurement continued (c) Fair value measurements for level 3 fair valued assets and liabilities Reconciliation of movements in level 3 assets and liabilities measured at fair value Thefollowingtablereconcilesthevalueoflevel3fairvaluedassetsandliabilitiesat1January2019tothatpresentedat31December2019. Totalinvestmentreturnrecordedintheincomestatementrepresentsinterestanddividendincome,realisedgainsandlosses, unrealisedgainsandlossesontheassetsclassifiedatfairvaluethroughprofitandlossandforeignexchangemovementsonanindividual entity’soverseasinvestments. Totalgainsandlossesrecordedinothercomprehensiveincomeincludesunrealisedgainsandlossesondebtsecuritiesheldas available-for-saleprincipallywithinJacksonandforeignexchangemovementsarisingfromtheretranslationoftheGroup’soverseas subsidiariesandbranches.  Reconciliation of movements in level 3 assets and liabilities measured at fair value Balanceat1January DemergerofUKand Europeoperations Totalgains(losses)in incomestatement* Totalgains(losses) recordedinother comprehensiveincome Purchases Sales Issues Settlements 2019 $m Equity securities and holdings in collective investment schemes Other investments (including derivative assets) Debt securities Borrowings attributable to with- profits businesses Derivative liabilities Net asset value attributable to unit holders of consolidated investment funds Other financial liabilities Total 656 1,505 6,714 (539) (2,045) (1,258) (4,335) 6,752 Loans 6,054 (2,509) (440) (1,498) (5,513) – 2,045 1,258 451 (6,206) 1 (11) – – – 275 (234) 3 69 (1) – – 6 – – (7) – – 6 30 539 (6) 269 (193) – – 1,301 – – – – – – 2018 $m – – – – – – – – (28) 537 – (2) – – – (2) (11) – – (143) 306 (14) 336 (201) 132 72 (3,760) 1,408 Balanceat31December 3,587 276 Balanceat1January Totalgains(losses)in incomestatement* Totalgains(losses) recordedinother comprehensiveincome Purchases Sales Issues Settlements Transfersintolevel3 Transfersoutoflevel3 6,543 (104) (162) 83 (238) 373 (441) – – Balanceat31December 6,054 502 51 (28) 167 (47) – – 11 – 656 885 5,985 (693) (2,553) (559) (4,100) 6,010 (9) 540 (85) 889 (175) – – – – 1,505 (331) 1,605 (1,085) – – – – 6,714 36 34 – – – – – 84 (31) 89 7 579 133 – – – 406 – – 111 – – (931) 76 – (44) 36 – – (642) 364 – – (292) 2,744 (1,545) (1,200) 405 11 40 (539) (2,045) (1,258) (4,335) 6,752 *Ofthetotalnetgainsand(losses)intheincomestatementof$537millionforcontinuingoperationsin2019,$19millionrelatestonetunrealisedgainsandlossesoffinancialinstruments stillheldattheendoftheyear(2018:$111millionofthe$579millionshownabovewasforcontinuingoperations,ofwhich$153millionrelatedtofinancialinstrumentsstillheldattheend oftheyear),whichcanbeanalysedasfollows: 2019 $m 2018 $m Equitysecuritiesandholdingsincollectiveinvestmentschemes Debtsecurities Otherinvestments Derivativeliabilities Netassetvalueattributabletounitholdersofconsolidatedinvestmentfunds Otherfinancialliabilities Total (11) – 34 – – (4) 19 (10) 3 133 36 (9) – 153 248 Prudential plc AnnualReport2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUEDValuation approach for level 3 fair valued assets and liabilities Investmentsvaluedusingvaluationtechniquesincludefinancialinvestmentswhichbytheirnaturedonothaveanexternallyquoted pricebasedonregulartrades,andfinancialinvestmentsforwhichmarketsarenolongeractiveasaresultofmarketconditions,egmarket illiquidity.Thevaluationtechniquesusedincludecomparisontorecentarm’slengthtransactions,referencetootherinstrumentsthatare substantiallythesame,discountedcashflowanalysis,option-adjustedspreadmodelsand,ifapplicable,enterprisevaluation. TheGroup’svaluationpolicies,proceduresandanalysesforinstrumentscategorisedaslevel3areoverseenbyBusinessUnit committeesaspartoftheGroup’swiderfinancialreportinggovernanceprocesses.Theproceduresundertakenincludeapprovalof valuationmethodologies,verificationprocesses,andresolutionofsignificantorcomplexvaluationissues.Inundertakingtheseactivities, theGroupmakesuseoftheextensiveexpertiseofitsassetmanagementfunctions.Inaddition,theGrouphasminimumstandardsfor independentpriceverificationtoensurevaluationaccuracyisregularlyindependentlyverified.Adherencetothispolicyismonitored acrossthebusinessunits. At31December2019,theGroupheld$1,408millionofnetfinancialinstrumentsatfairvaluewithinlevel3.Thisrepresentslessthan onepercentofthetotalfairvaluedfinancialassetsnetoffinancialliabilities. Includedwithinthesenetassetsandliabilitiesarepolicyloansof$3,587millionat31December2019measuredastheloan outstandingbalance,plusaccruedinvestmentincome,attachedtoacquiredREALICbusinessandheldtobacktheliabilitiesforfunds withheldunderreinsurancearrangements.Thefundswithheldliabilityof$3,760millionat31December2019isalsoclassifiedwithin level3.Thefairvalueoftheliabilitiesisequaltothefairvalueoftheunderlyingassetsheldascollateral,whichprimarilyconsistofpolicy loansanddebtsecurities.Theassetsandliabilitiesbroadlyoffsetandthereforetheirmovementshaveminimalimpactonshareholders’ profitandequity. ExcludingtheloansandfundswithheldliabilityunderREALIC’sreinsurancearrangementsasdescribedabove,whichamountedtoa netliabilityof$173million,thelevel3fairvaluedfinancialassetsnetoffinancialliabilitieswereanetassetof$1,581million,whichareall externallyvaluedandcomprisethefollowing: — Otherfinancialinvestmentsof$1,301millionconsistingprimarilyofprivateequitylimitedpartnershipsheldbyJackson,whichare externallyvaluedinaccordancewithInternationalPrivateEquityandVentureCapitalAssociationguidelinesusingmanagement informationavailablefortheseinvestments; — Equitysecuritiesandholdingsincollectiveinvestmentschemesof$276millionconsistingprimarilyofpropertyandinfrastructure fundsheldbytheAsiaparticipatingfunds,whichareexternallyvaluedusingthenetassetvalueoftheinvestedentities;and — Othersundryindividualfinancialinstrumentsofanetassetof$4million. Ofthenetassetof$1,581millionreferredtoabove: — Anetassetof$258millionisheldbytheGroup’sAsiaparticipatingfundsandthereforeshareholders’profitandequityarenot impactedbymovementsinthevaluationofthesefinancialinstruments;and — Anetassetof$1,323millionisheldtosupportnon-linkedshareholder-backedbusiness.Alloftheseinstrumentsareexternallyvalued andarethereforeinherentlylesssubjectivethaninternalvaluations.Theseinstrumentsconsistprimarilyofprivateequitylimited partnershipsheldbyJacksonasdescribedabove.IfthevalueofalltheseLevel3financialinstrumentsdecreasedby10percent,the changeinvaluationwouldbe$132million,whichwouldreduceshareholders’equitybythisamountbeforetax.Allofthisamount wouldpassthroughtheincomestatementsubstantiallyaspartofshort-termfluctuationsininvestmentreturnsoutsideofadjusted IFRSoperatingprofitbasedonlonger-terminvestmentreturns. (d) Transfers into and transfers out of levels TheGroup’spolicyistorecognisetransfersintoandtransfersoutoflevelsasoftheendofeachhalfyearreportingperiodexceptfor materialtransferswhicharerecognisedasofthedateoftheeventorchangeincircumstancesthatcausedthetransfer.Transfersare deemedtohaveoccurredwhenthereisamaterialchangeintheobservedvaluationinputsorachangeintheleveloftradingactivities ofthesecurities. During2019,thetransfersbetweenlevelswithintheGroup’sportfolio,excludingthoseheldbythediscontinuedUKandEurope operations,wereprimarilytransfersfromlevel1tolevel2of$678millionandtransfersfromlevel2tolevel1of$1,121million.These transferswhichrelatetoequitysecuritiesanddebtsecuritiesarosetoreflectthechangeintheobservedvaluationinputsandincertain cases,thechangeintheleveloftradingactivitiesofthesecurities.Therewerenotransfersexcludingthoserelatedtothediscontinued UKandEuropeoperations,intoandoutoflevel3intheyear. prudentialplc.com Prudential plc AnnualReport2019 249 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationC3 Assets and liabilities continued C3.2 Debt securities ThisnoteprovidesanalysisoftheGroup’sdebtsecurities,includingasset-backedsecuritiesandsovereigndebtsecurities. Withtheexceptionofcertaindebtsecuritiesclassifiedas‘available-for-sale’underIAS39asdisclosedinnotesC3.2(b)below, whichprimarilyrelatetoUSinsuranceoperations,theGroup’sdebtsecuritiesarecarriedatfairvaluethroughprofitorloss. (a) Credit rating Debtsecuritiesareanalysedbelowaccordingtoexternalcreditratingsissued,withequivalentratingsissuedbydifferentratings agenciesgroupedtogether.Standard&Poor’sratingshavebeenusedwhereavailable,ifthisisn’tthecaseMoody’sandthenFitchhave beenusedasalternatives.FortheUS,NAICratingshavealsobeenusedwhererelevant(asshownin‘Other’inthetablesbelow).Inthe tablebelow,AAAisthehighestpossiblerating.InvestmentgradefinancialassetsareclassifiedwithintherangeofAAAtoBBB-ratings. FinancialassetswhichfalloutsidethisrangeareclassifiedasbelowBBB-. Asia: With-profits Unit-linked Non-linkedshareholder- backed Assetmanagement US: Non-linkedshareholder- backed Otheroperations Totaldebtsecurities Asia: With-profits Unit-linked Non-linkedshareholder- backed Assetmanagement US: Non-linkedshareholder- backed Otheroperations Totalcontinuingoperations TotaldiscontinuedUKand Europeoperations Totaldebtsecurities AAA AA+ to AA- A+ to A- 31 Dec 2019 $m BBB+ to BBB- Below BBB- Other (including NAIC rated) 5,205 770 1,611 14 1,154 – 8,754 21,911 135 6,050 – 10,300 1,211 39,607 5,863 674 6,293 112 15,229 – 28,171 5,874 2,074 4,639 – 18,489 – 31,076 2,382 522 3,749 – 1,995 55 8,703 AAA AA+ to AA- A+ to A- 31 Dec 2018 $m BBB+ to BBB- Below BBB- Other (including NAIC rated) 3,659 1,040 1,317 14 864 788 7,682 13,931 21,613 15,766 127 4,524 – 9,403 1,387 31,207 23,185 54,392 5,275 627 4,734 76 13,100 193 24,005 23,746 47,751 4,788 1,822 3,738 – 18,667 52 29,067 25,126 54,193 2,225 542 2,805 – 1,820 62 7,454 14,445 113,860 4,387 11,841 19,098 33,543 109,473 223,333 Total 44,782 5,153 24,646 129 3,547 978 2,304 3 11,361 66 18,259 58,528 1,332 134,570 Total 34,647 5,070 18,573 90 52,974 2,506 2,934 912 1,455 – 9,120 24 Thecreditratings,informationordatacontainedinthisreportwhichareattributedandspecificallyprovidedbyStandard&Poor’s, Moody’sandFitchSolutionsandtheirrespectiveaffiliatesandsuppliers(‘ContentProviders’)isreferredtohereasthe‘Content’. ReproductionofanyContentinanyformisprohibitedexceptwiththepriorwrittenpermissionoftherelevantparty.TheContent Providersdonotguaranteetheaccuracy,adequacy,completeness,timelinessoravailabilityofanyContentandarenotresponsible foranyerrorsoromissions(negligentorotherwise),regardlessofthecause,orfortheresultsobtainedfromtheuseofsuchContent. TheContentProvidersexpresslydisclaimliabilityforanydamages,costs,expenses,legalfees,orlosses(includinglostincomeorlost profitandopportunitycosts)inconnectionwithanyuseoftheContent.Areferencetoaparticularinvestmentorsecurity,aratingor anyobservationconcerninganinvestmentthatispartoftheContentisnotarecommendationtobuy,sellorholdanysuchinvestment orsecurity,nordoesitaddressthesuitabilityofaninvestmentorsecurityandshouldnotbereliedonasinvestmentadvice. 250 Prudential plc AnnualReport2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUEDCredit ratings for securities classified as ‘Other’ Securitiesforcontinuingoperationswithcreditratingsclassifiedas‘Other’canbefurtheranalysedasfollowsforAsiaandUSnon-linked shareholder-backed. Asia Governmentbonds* Corporatebondsratedbylocalexternalratingagencies AAA AA+toAA- A+toA- BBB+toBBB- BelowBBB-andunrated Other(asset-backedsecurities)† TotalAsia *99.7percentareinvestmentgrade(2018:92percent). †Primarilyunrated. US ImplicitratingsbasedonNAICvaluations* NAIC1 NAIC2 NAIC3-6 TotalUS† 31 Dec 2019 $m 323 31 Dec 2018 $m 46 184 958 345 91 32 1,610 371 2,304 239 702 241 39 25 1,246 163 1,455 31 Dec 2018 $m Total Total 31 Dec 2019 $m Mortgage -backed securities Other securities 3,367 1 2 3,370 4,430 3,470 91 7,991 7,797 3,471 93 11,361 6,376 2,697 47 9,120 *TheSecuritiesValuationOfficeoftheNAICclassifiesdebtsecuritiesintosixqualitycategoriesrangingfromClass1(thehighest)toClass6(thelowest).Performingsecuritiesare designatedasClasses1to5andsecuritiesinorneardefaultaredesignatedClass6. †Mortgage-backedsecuritiestotalling$3,180millionat31December2019havecreditratingsissuedbyStandard&Poor’sofBBB-oraboveandhencearedesignatedasinvestmentgrade. Othersecuritiestotalling$7,900millionat31December2019withNAICratings1or2arealsodesignatedasinvestmentgrade. (b) Additional analysis of US insurance operations debt securities Corporateandgovernmentsecurityandcommercialloans: Government PubliclytradedandSECRule144Asecurities* Non-SECRule144Asecurities Asset-backedsecurities(see note (c)) TotalUSdebtsecurities† 31 Dec 2019 $m 31 Dec 2018 $m 7,890 34,781 9,842 6,015 58,528 6,960 33,363 8,061 4,590 52,974 *A1990SECrulethatfacilitatestheresaleofprivatelyplacedsecuritiesunderRule144AthatarewithoutSECregistrationtoqualifiedinstitutionalinvestors.Therulewasdesigned todevelopamoreliquidandefficientinstitutionalresalemarketforunregisteredsecurities. †DebtsecuritiesforUSoperationsincludedinthestatementoffinancialpositioncomprise: Available-for-sale Fairvaluethroughprofitandloss 31 Dec 2019 $m 31 Dec 2018 $m 57,091 1,437 58,528 52,025 949 52,974 prudentialplc.com Prudential plc AnnualReport2019 251 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationC3 Assets and liabilities continued C3.2 Debt securities continued Movements in unrealised gains and losses on Jackson available-for-sale securities Themovementinthestatementoffinancialpositionvaluefordebtsecuritiesclassifiedasavailable-for-salefromanetunrealisedloss of$527milliontoanetunrealisedgainof$3,496millionasanalysedinthetablebelow. Assetsfairvaluedatbelowbookvalue Bookvalue* Unrealisedgain(loss) Fairvalue(asincludedinstatementoffinancialposition) Assetsfairvaluedatorabovebookvalue Bookvalue* Unrealisedgain(loss) Fairvalue(asincludedinstatementoffinancialposition) Total Bookvalue* Netunrealisedgain(loss) Fairvalue(asincludedinthefootnoteaboveintheoverviewtable andthestatementoffinancialposition) *Bookvaluerepresentscostoramortisedcostofthedebtsecurities. 31 Dec 2019 $m Changes in unrealised appreciation reflected in other comprehensive income $m 31 Dec 2018 $m 3,121 (27) 3,094 50,474 3,523 53,997 53,595 3,496 57,091 1,151 2,872 4,023 32,260 (1,178) 31,082 20,292 651 20,943 52,552 (527) 52,025 Jackson debt securities classified as available-for-sale in an unrealised loss position (i) Fair value of securities as a percentage of book value Thefollowingtableshowsthefairvalueofthedebtsecuritiesinagrossunrealisedlosspositionforvariouspercentagesofbookvalue: Between90%and100% Between80%and90% Below80% Total (ii) Unrealised losses by maturity of security 1yearto5years 5yearsto10years Morethan10years Mortgage-backedandotherdebtsecurities Total 31 Dec 2019 $m 31 Dec 2018 $m Fair value 3,083 11 – 3,094 Unrealised loss Fair value Unrealised loss (25) (2) – (27) 30,136 900 46 31,082 (1,030) (132) (16) (1,178) 31 Dec 2019 $m 31 Dec 2018 $m (1) (12) (7) (7) (27) (92) (555) (474) (57) (1,178) 252 Prudential plc AnnualReport2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUED(iii) Age analysis of unrealised losses for the periods indicated Thefollowingtableshowstheageanalysisofalltheunrealisedlossesintheportfoliobyreferencetothelengthoftimethesecurities havebeeninanunrealisedlossposition: 31 Dec 2019 $m 31 Dec 2018 $m Age analysis Lessthan6months 6monthsto1year 1yearto2years 2yearsto3years Morethan3years Total Non- investment grade Investment grade* (1) (1) – – – (2) (20) (1) (1) (1) (2) (25) Total (21) (2) (1) (1) (2) (27) Non- investment grade Investment grade* (26) (28) (13) – (2) (69) (179) (560) (181) (157) (32) Total (205) (588) (194) (157) (34) (1,109) (1,178) *ForStandardandPoor’s,Moody’sandFitchrateddebtsecurities,thosewithratingsrangefromAAAtoBBB-aredesignatedasinvestmentgrade.ForNAICrateddebtsecurities, thosewithratings1or2aredesignatedasinvestmentgrade. Further,thefollowingtableshowstheageanalysisofthesecuritieswhosefairvalueswerebelow80percentofthebookvalue: Age analysis Lessthan3months 3monthsto6months Morethan6months Totalbelow80% 31 Dec 2019 $m 31 Dec 2018 $m Fair value Unrealised loss Fair value Unrealised loss – – – – – – – – 41 2 3 46 (13) (1) (2) (16) (c) Asset-backed securities TheGroup’sholdingsinasset-backedsecurities(ABS),whichcompriseresidentialmortgage-backedsecurities(RMBS),commercial mortgage-backedsecurities(CMBS),collateraliseddebtobligations(CDO)fundsandotherasset-backedsecurities,asat31December 2019areasfollows: Asiaoperations: note (i) Shareholder-backedbusiness With-profitsbusiness USoperations note (ii) Otheroperations Totalforcontinuingoperations TotalfordiscontinuedUKandEuropeoperations Grouptotal 31 Dec 2019 $m 31 Dec 2018 $m 189 369 6,015 – 6,573 – 6,573 154 299 4,590 566 5,609 8,503 14,112 Notes (i) OftheAsiaoperations’exposuretoasset-backedsecuritiesfortheshareholder-backedbusinessandwith-profitsbusinessat31December2019,100percent(31December2018: 99.8percent)areinvestmentgrade. (ii) USoperations’exposuretoasset-backedsecuritiescomprises: RMBS Sub-prime(31Dec2019:2%AAA,3%AA,3%A) Alt-A(31Dec2019:51%A) Primeincludingagency(2019:23%AAA,61%AA,10%A) CMBS(31Dec2019:76%AAA,16%AA,4%A) CDOfunds(31Dec2019:46%AAA,38%AA,16%A),including$nilexposuretosub-prime OtherABS(31Dec2019:16%AAA,11%AA,54%A),including$84millionexposuretosub-prime Total(31Dec2019:50%AAA,24%AA,17%A) 31 Dec 2019 $m 31 Dec 2018 $m 93 116 862 3,080 696 1,168 6,015 122 134 562 2,477 17 1,278 4,590 prudentialplc.com Prudential plc AnnualReport2019 253 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationC3 Assets and liabilities continued C3.2 Debt securities continued (d) Group sovereign debt and bank debt exposure TheGroupexposuresheldbytheshareholder-backedbusinessandwith-profitsfundsinsovereigndebtsandbankdebtsecuritiesare analysedbelow.Thetablesexcludeassetsheldtocoverlinkedliabilitiesandthoseoftheconsolidatedunittrustsandsimilarfunds.In addition,thetablesbelowexcludetheproportionateshareofsovereigndebtholdingsoftheGroup’sjointventureoperations. Exposure to sovereign debts Eurozone UnitedKingdom UnitedStates Indonesia Singapore Thailand Vietnam OtherAsia Other Total Analysedas: Totalfromcontinuingoperations TotalfromdiscontinuedUKandEuropeoperations 31 Dec 2019 $m 31 Dec 2018 $m Shareholder- backed business* With-profits funds Shareholder- backed business With-profits funds – 615 9,526 420 230 1,416 2,900 2,722 143 17,972 – – 20,338 – 3,514 – – 562 32 24,446 481 4,109 7,192 359 209 1,173 2,383 2,266 159 18,331 14,848 3,483 18,331 560 3,837 15,102 – 2,112 – – 1,103 282 22,996 16,740 6,256 22,996 *Includes$1.4billionofsovereigndebtheldbytheGroup’streasuryfunction,Africaoperationsandassetmanagementoperations. Exposure to bank debt securities Shareholder-backed business Eurozone UnitedKingdom UnitedStates Asia Other Total Analysedas: Totalfromcontinuingoperations TotalfromdiscontinuedUKandEurope operations With-profits funds Eurozone UnitedKingdom UnitedStates Asia Other Total Analysedas: Totalfromcontinuingoperations TotalfromdiscontinuedUKandEurope operations Senior debt Subordinated debt 31 Dec 2019 $m 31 Dec 2018 $m Total 310 568 3,084 439 516 4,917 29 41 30 307 73 480 Tier 1 Tier 2 – 17 7 165 – 189 – 3 1 479 – 483 27 138 43 389 131 728 102 111 3 344 211 771 Total 27 155 50 554 131 917 102 114 4 823 211 1,254 Total 337 723 3,134 993 647 5,834 131 155 34 1,130 284 1,734 Total 608 1,714 3,397 754 821 7,294 5,910 1,384 7,294 1,243 2,794 3,477 1,293 2,305 11,112 1,639 9,473 11,112 254 Prudential plc AnnualReport2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUED (e) Impairment of US available-for-sale debt securities and other financial assets InaccordancewiththeGroup’saccountingpolicysetoutinnoteA3.1,impairmentreviewswereperformedforavailable-for-sale securitiesandloansandreceivables. Duringtheyearended31December2019,achargeforrecoveriesnetofimpairmentof$17million(2018:creditof$19million) wasrecognisedforavailable-for-salesecuritiesloansandreceivablesheldbyJackson. Jackson,withthesupportofinternalcreditanalysts,regularlymonitorsandreportsonthecreditqualityofitsholdingsofdebtsecurities. Inaddition,thereisaperiodicreviewofitsinvestmentsonacase-by-casebasistodeterminewhetheranydeclineinfairvaluerepresents animpairment.Investmentsinstructuredsecuritiesaresubjecttoareviewoftheirfutureestimatedcashflows,includingexpectedand stresscasescenarios,toidentifypotentialshortfallsincontractualpayments(bothinterestandprincipal).Impairmentchargesare recordedonstructuredsecuritieswhentheCompanyforecastsacontractualpaymentshortfall.Situationswheresuchashortfallwould notleadtoarecognitionofalossarerare.Theimpairmentlossreflectsthedifferencebetweenthefairvalueandbookvalue. In2019,theGrouprealisedgrosslossesonsalesofavailable-for-salesecuritiesof$70million(2018:$55million)with51percent (2018:49percent)oftheselossesrelatedtothedisposaloffixedmaturitysecuritiesofthetop10individualissuers,whichweredisposed oftolimitfuturecreditlossexposure.Ofthe$70million(2018:$55million),$28million(2018:$6million)relatestolossesonsalesof impairedanddeterioratingsecurities. Theeffectofchangesinthekeyassumptionsthatunderpintheassessmentofwhetherimpairmenthastakenplacedependson thefactorsdescribedinnoteA3.1.Akeyindicatorofwhethersuchimpairmentmayariseinfuture,andthepotentialamountsatrisk, istheprofileofgrossunrealisedlossesforfixedmaturitysecuritiesaccountedforonanavailable-for-salebasisbyreferencetothetime periodsbywhichthesecuritieshavebeenheldcontinuouslyinanunrealisedlosspositionandbyreferencetothematuritydateofthe securitiesconcerned. For2019,theamountofgrossunrealisedlossesforfixedmaturitysecuritiesclassifiedasavailable-for-saleunderIFRSinanunrealised losspositionwas$27million(2018:$1,178million).NoteB1.2providesfurtherdetailsontheimpairmentchargesandunrealisedlossesof Jackson’savailable-for-salesecurities. C3.3 Loans portfolio (a) Overview of loans portfolio Loansareprincipallyaccountedforatamortisedcost,netofimpairmentexceptforcertainpolicyloansoftheUSinsuranceoperations thatareheldtobackliabilitiesforfundswithheldunderreinsurancearrangementsandarealsoaccountedonafairvaluebasis. Theamountsincludedinthestatementoffinancialpositionareanalysedasfollows: Asia With-profits Non-linkedshareholder-backed US Non-linkedshareholder-backed Otheroperations Totalcontinuingoperations TotaldiscontinuedUKandEurope operations TotalGroup 31 Dec 2019 $m 31 Dec 2018 $m Mortgage loans note(i) Policy loans note(ii) Other loans Total Mortgage loans note(i) Policy loans note(ii) Other loans Total – 165 9,904 – 10,069 1,089 316 4,707 9 6,121 374 19 – – 393 1,463 500 14,611 9 16,583 – 199 9,406 – 9,605 5,241 14,846 926 288 4,688 – 5,902 4 5,906 83 259 – – 342 1,844 2,186 1,009 746 14,094 – 15,849 7,089 22,938 Notes (i) (ii) Allmortgageloansaresecuredbyproperties. IntheUS,$3,587millionofpolicyloansheldat31December2019(31December2018:$3,544million)arebackingliabilitiesforfundswithheldunderreinsurancearrangements andareaccountedforatfairvaluethroughprofitorloss.Allotherpolicyloansareaccountedforatamortisedcost,lessanyimpairment. (b) Additional information on US mortgage loans IntheUS,mortgageloansareallcommercialmortgageloansthataresecuredbythefollowingpropertytypes:industrial,multi-family residential,suburbanoffice,retailorhotel.Theaverageloansizeis$19.3million(31December2018:$17.8million).Theportfoliohas acurrentestimatedaverageloantovalueof54percent(31December2018:53percent). Jacksonhadnomortgageloanswherethecontractualtermsoftheagreementshadbeenrestructuredforbothyearsshown. prudentialplc.com Prudential plc AnnualReport2019 255 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationC3 Assets and liabilities continued C3.4 Financial instruments – additional information (a) Financial risk Liquidity analysis Contractual maturities of financial liabilities on an undiscounted cash flow basis Thefollowingtablesetsoutthecontractualmaturitiesforapplicableclassesoffinancialliabilities,excludingderivativeliabilities andinvestmentcontractsthatareseparatelypresented.Thefinancialliabilitiesareincludedinthecolumnrelatingtothecontractual maturitiesoftheundiscountedcashflows(includingcontractualinterestpayments)duetobepaidassumingconditionsareconsistent withthoseofyearend. Financial liabilities Corestructuralborrowings ofshareholder-financed businesses C6.1 Leaseliabilitiesunder IFRS16 Otheroperational borrowings Obligationsunderfunding, securitieslendingand saleandrepurchase agreements Accruals,deferredincome andotherliabilities Netassetvalueattributable tounitholdersof consolidatedunittrusts andsimilarfunds 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 undis- counted cash flows 31 Dec 2019 $m 5,594 630 2,015 105 145 941 1,146 388 188 888 113 232 648 37 1,132 8,901 2,067 5,476 1,902 278 14,488 9,172 636 5,998 5,998 – 1 – – – – 18 2 – 248 – 268 – 1 – – – – 1 3,725 6,512 – – – 702 2,495 9,723 4,431 14,488 – 5,998 8,156 39,918 Total 37,626 18,428 7,834 3,136 2,095 Financial liabilities Corestructuralborrowings ofshareholder-financed businesses C6.1 Operationalborrowings Obligationsunderfunding, securitieslendingand saleandrepurchase agreements Accruals,deferredincome andotherliabilities Netassetvalueattributable tounitholdersof consolidatedunittrusts andsimilarfunds Total Analysedas: Continuingoperations DiscontinuedUKand Europeoperations Total 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 undis- counted cash flows 31 Dec 2018 $m 9,761 6,289 380 1,961 2,240 1,703 1,944 1,002 2,347 349 1,363 181 8,371 2,657 3,725 – 20,370 7,853 8,901 2,450 4,908 2,131 19,421 13,811 599 90 289 115 – 138 – – 9,778 448 4,503 19,704 14,839 59,211 14,839 33,441 – – – – – – 9,450 5,167 3,100 1,682 11,476 8,228 14,839 72,544 32,839 12,284 7,479 4,167 2,636 1,363 8,412 7,983 44,324 26,372 59,211 21,157 33,441 1,971 9,450 1,000 5,167 464 3,100 319 3,064 1,682 11,476 245 8,228 28,220 72,544 256 Prudential plc AnnualReport2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUEDMaturity analysis of derivatives Thefollowingtableshowsthegrossandnetderivativepositionstogetherwithamaturityprofileofthenetderivativeposition: Carrying value of net derivatives $m Maturity profile of net derivative position $m Derivative assets Derivative liabilities 1,745 4,450 (392) (4,465) Net derivative position 1,353 (15) 1 year or less 1,353 372 After 1 year to 3 years – (10) After 3 years to 5 years After 5 years Total undiscounted cash flows – (5) – 38 1,353 395 2019 2018 Themajorityofderivativeassetsandliabilitieshavebeenincludedatfairvaluewithintheoneyearorlesscolumn,representingthebasis onwhichtheyaremanaged(ietomanageprincipallyassetorliabilityvalueexposures).TheGrouphasnocashflowhedgesand,in general,contractualmaturitiesarenotconsideredessentialforanunderstandingofthetimingofthecashflowsfortheseinstruments. Theonlyexceptionisthatin2018certainidentifiedinterestrateswapswereexpectedtobehelduntilmaturityforthepurposesof matchingcashflowsonseparatelyheldassetsandliabilities.TheseswapswereclosedaspartofthepreparationforthedemergerofUK andEuropeoperations. Maturity analysis of investment contracts Thetablebelowshowsthematurityprofileforinvestmentcontractsbasedonundiscountedcashflowprojectionsofexpectedbenefit payments.Totalcarryingvalueofinvestmentcontractsat31December2019was$5,535millionasshowninthestatementoffinancial position(31December2018:$110,339million,ofwhich$5,142millionwasfromcontinuingoperations). 31 Dec 2019 31Dec2018 Maturity profile for investment contracts from continuing operations $m 1 year or less 1,557 1,409 After 1 year to 5 years 5,197 4,779 After 5 years to 10 years 3,866 3,352 After 10 years to 15 years 3,049 2,487 After 15 years to 20 years 3,196 2,830 Over 20 years 5,890 4,257 Total undiscounted cash flows 22,755 19,114 Mostinvestmentcontractshaveoptionstosurrenderearly,oftensubjecttosurrenderorotherpenalties.Therefore,mostcontractscan besaidtohaveacontractualmaturityoflessthanoneyear,buttheadditionalchargesandtermofthecontractsmeantheseareunlikely tobeexercisedinpracticeandthemoreusefulinformationistopresentinformationonexpectedpayment. ThevastmajorityoftheGroup’sfinancialassetsareheldtobacktheGroup’spolicyholderliabilities.Althoughasset/liabilitymatching isanimportantcomponentofmanagingpolicyholderliabilities(boththoseclassifiedasinsuranceandthoseclassifiedasinvestments), thisprofileismainlyrelevantformanagingmarketriskratherthanliquidityrisk.Withineachbusinessunit,thisasset/liabilitymatchingis performedonaportfolio-by-portfoliobasis. Intermsofliquidityrisk,alargeproportionofthepolicyholderliabilitiescontaindiscretionarysurrendervaluesorsurrendercharges, meaningthatmanyoftheGroup’sliabilitiesareexpectedtobeheldforthelongterm.MuchoftheGroup’sinvestmentportfoliosarein marketablesecurities,whichcanthereforebeconvertedquicklytoliquidassets. Forthereasonsprovidedabove,ananalysisoftheGroup’sassetsbycontractualmaturityisnotconsideredmeaningfultoevaluatethe natureandextentoftheGroup’sliquidityrisk. Credit risk TheGroup’smaximumexposuretocreditriskoffinancialinstrumentsbeforeanyallowanceforcollateralorallocationoflossesto policyholdersisrepresentedbythecarryingvalueoffinancialinstrumentsonthebalancesheetthathaveexposurestocreditrisk comprisingcashandcashequivalents,deposits,debtsecurities,loansandderivativeassets,accruedinvestmentincomeandother debtors,thecarryingvalueofwhicharedisclosedatthestartofthisnoteandnoteC3.4(b)belowforderivativeassets.Thecollateralin placeinrelationtoderivativesisdescribedinnoteC3.4(c)below.NoteC3.3describesthesecurityfortheloansheldbytheGroup.The Group’sexposuretocreditriskisfurtherdiscussedinnoteC7below. Ofthetotalloansandreceivablesheld,$7million(31December2018:$18millionfromcontinuingoperations)arepasttheirduedate butarenotimpaired.Ofthetotalpastduebutnotimpaired,$1millionarelessthanoneyearpasttheirduedate(31December2018: $11millionfromcontinuingoperations).TheGroupexpectsfullrecoveryoftheseloansandreceivables. Financialassetsthatwouldhavebeenpastdueorimpairedhadthetermsnotbeenrenegotiatedamountedtonil(31December2018: $29millionfromcontinuingoperations). Inaddition,during2019and2018,theGroupdidnottakepossessionofanyothercollateralheldassecurity. Furtherdetailsofcollateralinplaceinrelationtoderivatives,securitieslending,repurchaseagreementsandothertransactionsare providedinnoteC3.4(c)below. prudentialplc.com Prudential plc AnnualReport2019 257 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationC3 Assets and liabilities continued C3.4 Financial instruments – additional information continued Foreign exchange risk Asat31December2019,theGroupheld8percentofitsfinancialassetsand25percentofitsfinancialliabilitiesincurrencies,mainlyUS Dollar,otherthanthefunctionalcurrencyoftherelevantbusinessunitsorthecurrencytowhichthefunctionalcurrencyispegged (egfinancialassetsandliabilitiesofUSdollardenominatedbusinessinHongKong). Theexchangerisksinherentintheseexposuresaremitigatedthroughtheuseofderivatives,mainlyforwardcurrencycontracts (noteC3.4(b)below). Theamountofexchangelossrecognisedintheincomestatementin2019,exceptforthosearisingonfinancialinstrumentsmeasured atfairvaluethroughprofitorloss,is$72million(2018:$88milliongainfromcontinuingoperations). (b) Derivatives and hedging Accounting principles for derivatives and embedded derivatives Derivativefinancialinstrumentsareusedtoreduceormanageinvestment,interestrateandcurrencyexposures,tofacilitateefficient portfoliomanagementandforinvestmentpurposes. TheGroupdoesnotregularlyseektoapplyfairvalueorcashflowhedgingtreatmentunderIAS39.TheGrouphasnofairvalueand cashflowshedgesunderIAS39at31December2019and2018.Allderivativesthatarenotdesignatedashedginginstrumentsare carriedatfairvalue,withmovementsinfairvaluebeingrecordedintheincomestatement. Embeddedderivativesareembeddedwithinothernon-derivativehostfinancialinstrumentsandinsurancecontractstocreatehybrid instruments.EmbeddedderivativesmeetingthedefinitionofaninsurancecontractareaccountedforunderIFRS4.Whereeconomic characteristicsandrisksoftheembeddedderivativesarenotcloselyrelatedtotheeconomiccharacteristicsandrisksofthehost instrument,andwherethehybridinstrumentisnotmeasuredatfairvaluewiththechangesinfairvaluerecognisedintheincome statement,theembeddedderivativeisbifurcatedandcarriedatfairvalueasaderivativemeasuredinaccordancewithIAS39. Inaddition,theGroupappliestheoptionunderIFRS4tonotseparateandfairvaluesurrenderoptionsembeddedinhostcontracts andwith-profitsinvestmentcontractswhosestrikepriceiseitherafixedamountorafixedamountplusinterest. Derivatives held and their purpose TheGroupentersintoavarietyofexchangetradedandover-the-counterderivativefinancialinstruments,includingfutures,options, forwardcurrencycontractsandswapssuchasinterestrateswaps,cross-currencyswaps,swaptionsandcreditdefaultswaps. Allover-the-counterderivativetransactions,withtheexceptionoftransactionsinsomeAsiaoperations,areconductedunder standardisedISDA(InternationalSwapsandDerivativesAssociationInc)masteragreementsandtheGrouphascollateralagreements betweentheindividualGroupentitiesandrelevantcounterpartiesinplaceundereachofthesemarketmasteragreements. ThemajorityoftheGroup’sderivativesareheldbyJackson.Derivativesareusedforefficientportfoliomanagementtoobtaincost effectiveandmanagementofexposuretovariousmarketsinaccordancewiththeGroup’sinvestmentstrategiesandtomanageexposure tointerestrate,currency,creditandotherbusinessrisks.TheGroupalsousesinterestratederivativestoreduceexposuretointerestrate volatility.Inparticular: — USoperationsholdlargeamountsofinterest-ratesensitiveinvestmentsthatcontaincreditrisksonwhichacertainlevelofdefaultsis expected.Thesebusinesseshavepurchasedsomeswaptionstomanagethedefaultriskoncertainunderlyingassetsandhence reducetheamountofregulatorycapitalheldtosupporttheassets;and — Someproducts,especiallyintheUS,haveguaranteefeatureslinkedtoequityindices.Amismatchbetweenguaranteedproduct liabilitiesandtheperformanceoftheunderlyingassetsexposestheGrouptoequityindexrisk.Inordertomitigatethisrisk,the relevantbusinessunitspurchaseswaptions,equityoptionsandfuturestobettermatchassetperformancewithliabilitiesunder equity-indexedproducts. Additional information on Jackson derivative programme Jacksonentersintofinancialderivativetransactions,includingthosenotedbelow,toreduceandmanagebusinessrisks.These transactionsmanagetheriskofachangeinthevalue,yield,price,cashflowsorquantityof,oradegreeofexposure,withrespectto assets,liabilitiesorfuturecashflows,whichJacksonhasacquiredorincurred. Jacksonusesfree-standingderivativeinstrumentsforhedgingpurposes.Additionally,certainliabilities,primarilytrustinstruments supportedbyfundingagreements,fixedindexannuities,certainvariableannuityguaranteedbenefitfeaturesandreinsuredGuaranteed MinimumIncomeBenefitvariableannuityfeaturesaresimilartoderivatives.Jacksondoesnotaccountforsuchitemsaseitherfairvalueor cashflowhedgesasmightbepermittedifthespecifichedgedocumentationrequirementsofIAS39werefollowed.Financialderivatives arecarriedatfairvalue,includingderivativesembeddedincertainhostliabilitieswherethesearerequiredtobevaluedseparately. 258 Prudential plc AnnualReport2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUEDTheprincipaltypesofderivativesusedbyJacksonandtheirpurposeareasfollows: Derivative Purpose Interestrateswaps Swaptioncontracts Thesegenerallyinvolvetheexchangeoffixedandfloatingpaymentsovertheperiodforwhich Jacksonholdstheinstrumentwithoutanexchangeoftheunderlyingprincipalamount.These agreementsareusedtohedgeJackson’sexposuretomovementsininterestrates. Thesecontractsprovidethepurchaserwiththeright,butnottheobligation,torequirethewriter topaythepresentvalueofalong-durationinterestrateswapatfutureexercisedates.Jacksonboth purchasesandwritesswaptionsinordertohedgeagainstsignificantmovementsininterestrates. Treasuryfuturescontracts ThesederivativesareusedtohedgeJackson’sexposuretomovementsininterestrates. Equityindexfuturescontracts andequityindexoptions Thesederivatives(includingvariouscallandputoptionsandoptionscontingentoninterestrates andcurrencyexchangerates)areusedtohedgeJackson’sobligationsassociatedwithitsissuance ofcertainVAguarantees.Someoftheseannuitiesandguaranteescontainembeddedoptionsthat arefairvaluedforfinancialreportingpurposes. Cross-currencyswaps Creditdefaultswaps Cross-currencyswaps,whichembodyspotandforwardcurrencyswapsandadditionally,insome cases,interestrateswapsandequityindexswaps,areenteredintoforthepurposeofhedging Jackson’sforeigncurrencydenominatedfundingagreementssupportingtrustinstrumentobligations. Theseswapsrepresentagreementsunderwhichthebuyerhaspurchaseddefaultprotectionon certainunderlyingcorporatebondsheldinitsportfolio.ThesecontractsallowJacksontosellthe protectedbondsatparvaluetothecounterpartyifadefaulteventoccursinexchangeforperiodic paymentsmadebyJacksonforthelifeoftheagreement. Hedging TheGrouphasformallyassessedanddocumentedtheeffectivenessofthefollowingnetinvestmenthedgesunderIAS39.During2019, upto31December2019,theGrouphaddesignatedperpetualsubordinatedcapitalsecuritiestotalling$3.7billion(31December2018: $3.7billion)asanetinvestmenthedgetohedgethecurrencyrisksrelatedtothenetinvestmentinJackson.Accordingly,theforeign exchangelossof$150million(2018:lossof$266million)ontranslationofPrudentialplc’sborrowingstopoundssterling(thefunctional currencyofPrudentialplcuntil31December2019)isrecognisedinthetranslationreserveinshareholders’equityratherthantheincome statement.Thisnetinvestmenthedgewas100percenteffective. TheGrouphasnocashflowhedgesorfairvaluehedgesinplace. (c) Derecognition, collateral and offsetting Derecognition of financial assets and liabilities The Group’s policy is to derecognise financial assets when it is deemed that substantially all the risks and rewards of ownership have been transferred. The Group derecognises financial liabilities only when the obligation specified in the contract is discharged, cancelled or has expired. Reverse repurchase agreements The Group is party to various reverse repurchase agreements under which securities are purchased from third parties with an obligation to resell the securities. The securities are not recognised as investments in the statement of financial position but the right to receive the cash paid is recognised as deposits. At31December2019,theGrouphadenteredintoreverserepurchasetransactionsunderwhichitpurchasedsecuritiesandhadtakenon theobligationtoresellthesecurities.Thefairvalueofthecollateralheldinrespectofthesetransactions,whichisrepresentedbythe purchasedsecurities,was$1,011million(31December2018:$3,039millionfromcontinuingoperations). Securities lending and repurchase agreements TheGroupisalsopartytovarioussecuritieslendingagreements(includingrepurchaseagreements)underwhichsecuritiesareloanedto thirdpartiesonashort-termbasis.Theloanedsecuritiesarenotderecognised;rather,theycontinuetoberecognisedwithinthe appropriateinvestmentclassification.Totheextentcashcollateralisreceiveditisrecognisedonthestatementoffinancialposition.Other collateralisnotrecognised. At31December2019,theGrouphas$90million(31December2018:$107millionfromcontinuingoperations)oflentsecuritiesand assetssubjecttorepurchaseagreements.Thecashandsecuritiescollateralheldorpledgedundersuchagreementswere$95million (31December2018:$112millionfromcontinuingoperations). prudentialplc.com Prudential plc AnnualReport2019 259 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationC3 Assets and liabilities continued C3.4 Financial instruments – additional information continued Collateral and pledges under derivative transactions At31December2019,theGrouphadpledged$1,301million(31December2018:$2,896millionfromcontinuingoperations) forliabilitiesandheldcollateralof$1,883million(31December2018:$810millionfromcontinuingoperations)inrespectofover- the-counterderivativetransactions.Thesetransactionsareconductedundertermsthatareusualandcustomarytocollateralised transactionsincluding,whererelevant,standardsecuritieslendingandrepurchaseagreements. TheGrouphasenteredintocollateralarrangementsinrelationtoover-the-counterderivativetransactions,whichpermitsaleor re-pledgingofunderlyingcollateral.During2019,theGrouphasnotsoldanycollateralheld(2018:nil).Asof31December2019, thevalueofcollateralre-pledgedbytheGroupamountedto$nil(31December2018:$5millionfromcontinuingoperations).All over-the-counterderivativetransactions,withtheexceptionoftransactionsinsomeAsiaoperations,areconductedunderstandardised InternationalSwapsandDerivativesAssociation(ISDA)masteragreements.Thecollateralmanagementforthesetransactionsis conductedundertheusualandcustomarytermsandconditionssetoutintheCreditSupportAnnextotheISDAmasteragreement. Other collateral At31December2019,theGrouphadpledgedcollateralof$3,299million(31December2018:$3,053millionfromcontinuing operations)inrespectofothertransactions.ThisprincipallyarisesfromJackson’smembershipoftheFederalHomeLoanBankof Indianapolisprimarilyforthepurposeofparticipatinginthebank’scollateralisedloanadvanceprogrammewithshort-termandlong-term fundingfacilities. Offsetting assets and liabilities TheGroup’sderivativeinstruments,repurchaseagreementsandsecuritieslendingagreementsaresubjecttomasternetting arrangementsandcollateralarrangements.Amasternettingarrangementwithacounterpartycreatesarightofoffsetforamountsdue toandduefromthatsamecounterpartythatisenforceableintheeventofadefaultorbankruptcy.TheGrouprecognisesamounts subjecttomasternettingarrangementsonagrossbasiswithintheconsolidatedbalancesheets. ThefollowingtablespresentthegrossandnetinformationabouttheGroup’sfinancialinstrumentssubjecttomasternetting arrangements: Financialassets: Derivativeassets Reverserepurchaseagreements Totalfinancialassets Financialliabilities: Derivativeliabilities Securitieslendingandrepurchaseagreements Totalfinancialliabilities Gross amount included in the consolidated statement of financial position note(i) 1,708 953 2,661 (216) (48) (264) 31 Dec 2019 $m Related amounts not offset in the consolidated statement of financial position Financial instruments note(ii) Cash collateral Securities collateral note(iii) Net amount note(iv) (115) – (115) 115 – 115 (901) – (901) 86 48 134 (618) (953) (1,571) – – – 74 – 74 (15) – (15) 260 Prudential plc AnnualReport2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUEDFinancialassets: Derivativeassets Reverserepurchaseagreements Totalfinancialassets Financialliabilities: Derivativeliabilities Securitieslendingandrepurchaseagreements Totalfinancialliabilities Analysedas: Financialassetsfromcontinuingoperations FinancialassetsfromdiscontinuedUKand Europeoperations Totalfinancialassets Financialliabilitiesfromcontinuingoperations FinancialliabilitiesfromdiscontinuedUKand Europeoperations 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 note(iv) 4,112 14,771 18,883 (4,062) (1,602) (5,664) (1,606) – (1,606) 1,606 – 1,606 (2,149) – (2,149) (211) (14,782) (14,993) 905 43 948 1,346 1,535 2,881 3,709 (308) (435) (2,947) 15,174 18,883 (1,637) (4,027) (5,664) (1,298) (1,606) 308 1,298 1,606 (1,714) (2,149) (12,046) (14,993) 86 862 948 1,095 1,786 2,881 146 (11) 135 (205) (24) (229) 19 116 135 (148) (81) (229) Notes (i) (ii) (iii) (iv) TheGrouphasnotoffsetanyoftheamountsincludedintheconsolidatedstatementoffinancialposition. RepresentstheamountthatcouldbeoffsetundermasternettingorsimilararrangementswheretheGroupdoesnotsatisfythefullcriteriatooffsetontheconsolidatedstatement offinancialposition. Excludesinitialmarginamountsforexchange-tradedderivatives. Inthetablesabove,theamountsofassetsorliabilitiesincludedintheconsolidatedstatementoffinancialpositionwouldbeoffsetfirstbyfinancialinstrumentsthathavetherightof offsetundermasternettingorsimilararrangementswithanyremainingamountreducedbytheamountofcashandsecuritiescollateral.Theactualamountofcollateralmaybe greaterthanamountspresentedinthetables. prudentialplc.com Prudential plc AnnualReport2019 261 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationC4 Policyholder liabilities and unallocated surplus The note provides information of policyholder liabilities and unallocated surplus of with-profits funds held on the Group’s statement of financial position: C4.1 Group overview (i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds notes (a), (b) Balance at 1 January 2018 Comprising: – Policyholder liabilities on the consolidated statement of financial position note (c) (excludes $43 million classified as unallocated to a segment) – 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 (d) Reclassification of reinsured UK annuity contracts as held for sale Net flows: Premiums Surrenders Maturities/deaths Net flows Addition for closed block of group payout annuities in the US Shareholders’ transfers post-tax Investment-related items and other movements Foreign exchange translation differences Balance at 31 December 2018/1 January 2019 Comprising: – Policyholder liabilities on the consolidated statement of financial position note (c) (excludes $50 million classified as unallocated to a segment) – 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 (d) Demerger of UK and Europe operations Net flows: Premiums Surrenders Maturities/deaths Net flows Shareholders’ transfers post-tax Investment-related items and other movements Foreign exchange translation differences Balance at 31 December 2019 Comprising: Dis- continued UK and Europe operations $m Total $m Asia $m note C4.2 US $m note C4.3 99,890 244,483 244,946 589,319 85,089 244,483 226,715 556,287 4,700 10,101 – 17,607 (3,729) (2,641) 11,237 – (87) (3,718) (1,914) – – – 18,613 (16,211) (2,687) (285) 5,532 – (13,350) – 18,231 – (14,689) 18,707 (9,053) (9,074) 580 – (346) (7,318) (13,171) 22,931 10,101 (14,689) 54,927 (28,993) (14,402) 11,532 5,532 (433) (24,386) (15,085) 105,408 236,380 210,002 551,790 91,836 236,380 193,020 521,236 20,180 16,982 – – 10,374 – – (210,002) (210,002) 3,198 10,374 – 20,094 (4,156) (2,800) 13,138 (99) 12,824 1,299 20,976 (17,324) (3,387) 247 – 32,922 – 132,570 269,549 – – – – – – – – – – – 41,070 (21,498) (6,187) 13,385 (99) 45,746 1,299 402,119 385,492 4,750 11,877 – Policyholder liabilities on the consolidated statement of financial position (excludes $186 million classified as unallocated to a segment) 115,943 269,549 – 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 (d) Average policyholder liability balances note (e) 4,750 11,877 – – 2019 2018 115,015 252,965 n/a 367,980 98,698 239,049 213,492 551,239 262 Prudential plc Annual Report 2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUED Notes (a) (b) (c) (d) (e) The items above represent the amount attributable to changes in policyholder liabilities and unallocated surplus of with-profits funds as a result of each of the components listed. The policyholder liabilities shown include investment contracts without discretionary participation features (as defined in IFRS 4) and their full movement in the year but exclude liabilities that have not been allocated to a reporting segment. The items above are shown gross of external reinsurance. The analysis includes the impact of premiums, claims and investment movements on policyholders’ liabilities. The impact does not represent premiums, claims and investment movements as reported in the income statement. For example, premiums shown above exclude any deductions for fees/charges; claims (surrenders, maturities and deaths) shown above represent the policyholder liabilities provision released rather than the claims amount paid to the policyholder. The policyholder liabilities of the Asia insurance operations at 31 December 2018 of $91,836 million were after deducting the intra-group reinsurance liabilities ceded by the discontinued UK and Europe operations of $1,412 million to the Hong Kong with-profits business, which were recaptured in October 2019 upon demerger. Including this amount, total Asia policyholder liabilities at 31 December 2018 were $93,248 million. The Group’s investment in joint ventures and associate are accounted for on an equity method basis in the Group’s statement of financial position. The Group’s share of the policyholder liabilities as shown above relates to life businesses of the China JV, India and the Takaful business in Malaysia. Average policyholder liabilities have been based on opening and closing balances, adjusted for acquisitions, disposals and other corporate transactions arising in the year, and exclude unallocated surplus of with-profits funds. (ii) Analysis of movements in policyholder liabilities for shareholder-backed business Balance at 1 January 2018 Reclassification of reinsured UK annuity contracts as held for sale Net flows: Premiums Surrenders Maturities/deaths Net flows note Addition for closed block of group payout annuities in the US Investment-related items and other movements Foreign exchange translation differences Balance at 31 December 2018/1 January 2019 Comprising: – Policyholder liabilities on the consolidated statement of financial position (excludes $50 million classified as unallocated to a segment) – Group’s share of policyholder liabilities relating to joint ventures and associate Demerger of UK and Europe operations Net flows: Premiums Surrenders Maturities/deaths Net flows note Investment-related items and other movements Foreign exchange translation differences Balance at 31 December 2019 Comprising: – Policyholder liabilities on the consolidated statement of financial position (excludes $186 million classified as unallocated to a segment) – Group’s share of policyholder liabilities relating to joint ventures and associate Note Including net flows of the Group’s insurance joint ventures and associate. Dis- continued UK and Europe operations $m Total $m Asia $m US $m 50,598 – 244,483 – 76,254 (14,689) 371,335 (14,689) 9,015 (3,278) (1,396) 4,341 – (1,608) (1,626) 18,613 (16,211) (2,687) (285) 5,532 (13,350) – 1,984 (2,692) (2,996) (3,704) – (2,637) (3,313) 29,612 (22,181) (7,079) 352 5,532 (17,595) (4,939) 51,705 236,380 51,911 339,996 41,331 10,374 – 236,380 – – 51,911 – (51,911) 329,622 10,374 (51,911) 10,372 (3,610) (1,168) 20,976 (17,342) (3,387) 5,594 4,186 777 247 32,922 – 62,262 269,549 50,385 269,549 – 11,877 – – – – – – – – – 31,348 (20,952) (4,555) 5,841 37,108 777 331,811 319,934 11,877 prudentialplc.com Prudential plc Annual Report 2019 263 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information C4 Policyholder liabilities and unallocated surplus continued C4.1 Group overview continued (iii) Movement in insurance contract liabilities and unallocated surplus of with-profits funds Further analysis of the movement in the year of the Group’s gross contract liabilities, reinsurer’s share of insurance contract liabilities and unallocated surplus of with-profits funds (excluding those held by joint ventures and associate) is provided below: Balance at 1 January 2018 Income and expense included in the income statement note (c) – continuing operations – discontinued operations Other movements note (d) Foreign exchange translation differences Balance at 31 December 2018/1 January 2019 Demerger of UK and Europe operations note (e) Income and expense included in the income statement for continuing operations note (c) Other movements note (d) Foreign exchange translation differences Balance at 31 December 2019 Gross insurance contract liabilities $m Reinsurers’ share of insurance contract liabilities $m note (a) Unallocated surplus of with-profits funds $m Investment contracts $m note (b) (443,952) 13,086 (112,378) (22,931) 512 11,497 13,375 7,621 (410,947) 87,824 (55,579) – (1,441) 548 14,727 (13,375) (793) 14,193 (2,169) 1,795 – 37 (104) (5,249) 859 6,533 1,494 227 (51) 1,081 (110,339) 105,196 (20,180) 16,982 (311) (63) (18) (1,415) (112) (25) (4,750) (380,143) 13,856 (5,535) Notes (a) (b) (c) Includes reinsurers’ share of claims outstanding of $1,094 million (31 December 2018: $1,280 million). This comprises investment contracts with discretionary participation features of $633 million at 31 December 2019 (31 December 2018: $85,858 million) and investment contracts without discretionary participation features of $4,902 million at 31 December 2019 (31 December 2018: $24,481 million). The total charge for benefits and claims from continuing operations in 2019 shown in the income statement comprises the amounts shown as ‘income and expense included in the income statement’ in the table above of $(55,510) million (2018: $2,450 million) together with claims paid of $(29,585) million (2018: $(26,926) million), net of amounts attributable to reinsurers of $1,190 million (2018: $1,050 million). (d) Other movements for 2019 are for continuing operations only and include premiums received and claims paid on investment contracts without discretionary participating features, which are taken directly to the statement of financial position in accordance with IAS 39 and changes in the unallocated surplus of with-profits funds resulting from the recapture of the intra-group reinsurance agreement between the with-profits discontinued UK and Europe operations and Asia insurance operations prior to the demerger, which is eliminated in the income statement for the continuing operations of the Group. For 2018, in addition to premiums received and claims paid on investment contracts without discretionary participating features, other movements also included the reclassification of the reinsured UK annuity business as held for sale at 31 December 2018 and the changes in the unallocated surplus of with-profits funds resulting from actuarial gains and losses on the Group’s defined benefit pension schemes allocated to the with-profits funds of the discontinued UK and Europe operations, which were recognised directly in other comprehensive income. The balances of the discontinued UK and Europe operations are removed from the opening balances to show the underlying movement from continuing operations. The $2,169 million of reinsurer’s share of insurance contract liabilities in the table above excluded the intra-group reinsurance assets of $1,412 million for the with-profits business ceded to the Asia insurance operations. (e) (iv) Reinsurers’ share of insurance contract liabilities The measurement of reinsurance assets is consistent with the measurement of the underlying direct insurance contracts. The treatment of any gains or losses arising on the purchase of reinsurance contracts is dependent on the underlying accounting basis of the entity concerned. Insurance contract liabilities Claims outstanding Total Analysed as: From continuing operations From discontinued UK and Europe operations 31 Dec 2019 $m 31 Dec 2018 $m Asia note (a) 5,311 147 5,458 US note (b) 7,447 947 8,394 Unallocated to a segment Total Total 4 – 4 12,762 1,094 13,856 12,913 1,280 14,193 12,024 2,169 14,193 Notes (a) (b) The reinsurers’ share of insurance contract liabilities for Asia primarily relates to protection business written in Hong Kong. The reinsurer’s share of insurance contract liabilities for Jackson as shown in the table above primarily relates to certain fully collateralised former REALIC business retained by Swiss Re through 100 per cent reinsurance agreements. Apart from the reinsurance of REALIC business, the principal reinsurance ceded by Jackson outside the Group is on term-life insurance, direct and assumed accident and health business and GMIB variable annuity guarantees. 264 Prudential plc Annual Report 2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUEDThe Group cedes certain business to other insurance companies. Although the ceding of insurance does not relieve the Group from its liability to its policyholders, the Group participates in such agreements for the purpose of managing its loss exposure. The Group evaluates the financial condition of its reinsurers and monitors concentration of credit risk from similar geographic regions, activities or economic characteristics of the reinsurers to minimise its exposure from reinsurer insolvencies. Of the reinsurers’ share of insurance contract liabilities balance of $13,856 million at 31 December 2019 (31 December 2018: $12,024 million from continuing operations), 97 per cent (31 December 2018: 95 per cent from continuing operations) of the balance was from reinsurers with rating A- and above by Standard & Poor’s or other external rating agencies. Net commissions received on ceded business and claims incurred ceded to external reinsurers for Asia totalled $355 million and $552 million respectively during 2019 (2018: $294 million and $362 million, respectively). Net commissions received on ceded business and claims incurred ceded to external reinsurers for Jackson totalled $20 million and $630 million respectively during 2019 (2018: $9 million and $653 million, respectively). There were no deferred gains or losses on reinsurance contracts for Asia and Jackson in either 2019 or 2018. C4.2 Asia insurance operations (i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds Balance at 1 January 2018 Comprising: Shareholder-backed business With- profits business $m Unit-linked liabilities $m Other business $m Total $m 49,292 27,093 23,505 99,890 – Policyholder liabilities on the consolidated statement of financial position – Unallocated surplus of with-profits funds on the consolidated statement of financial 44,592 22,001 18,496 85,089 position – Group’s share of policyholder liabilities relating to joint ventures and associate note (a) Premiums New business In-force Surrenders note (b) Maturities/deaths Net flows Shareholders’ transfers post-tax Investment-related items and other movements note (c) Foreign exchange translation differences note (d) Balance at 31 December 2018/1 January 2019 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 (a) Premiums New business In-force Surrenders note (b) Maturities/deaths Net flows Shareholders’ transfers post-tax Investment-related items and other movements note (c) Foreign exchange translation differences note (d) Balance at 31 December 2019 Comprising: 4,700 – 1,542 7,050 8,592 (451) (1,245) 6,896 (87) (2,110) (288) – 5,092 1,904 2,359 4,263 (2,542) (187) 1,534 – (1,903) (1,020) – 5,009 1,449 3,303 4,752 (736) (1,209) 2,807 – 295 (606) 4,700 10,101 4,895 12,712 17,607 (3,729) (2,641) 11,237 (87) (3,718) (1,914) 53,703 25,704 26,001 105,408 50,505 20,846 20,485 91,836 3,198 – 1,611 8,111 9,722 (546) (1,632) 7,544 (99) 8,638 522 – 4,858 1,837 2,361 4,198 (2,929) (149) 1,120 – 1,663 363 – 5,516 2,419 3,755 6,174 (681) (1,019) 4,474 – 2,523 414 3,198 10,374 5,867 14,227 20,094 (4,156) (2,800) 13,138 (99) 12,824 1,299 70,308 28,850 33,412 132,570 – Policyholder liabilities on the consolidated statement of financial position – Unallocated surplus of with-profits funds on the consolidated statement of financial 65,558 23,571 26,814 115,943 position – Group’s share of policyholder liabilities relating to joint ventures and associate note (a) Average policyholder liability balances note (e) 2019 2018 4,750 – – 5,279 – 6,598 4,750 11,877 58,032 27,277 29,706 115,015 47,548 26,398 24,752 98,698 prudentialplc.com Prudential plc Annual Report 2019 265 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationC4 Policyholder liabilities and unallocated surplus continued C4.2 Asia insurance operations continued Notes (a) The Group’s investment in joint ventures and associate are accounted for on an equity method and the Group’s share of the policyholder liabilities as shown above relate to the life business of the China JV, India and the Takaful business in Malaysia. The rate of surrenders for shareholder-backed business (expressed as a percentage of opening policyholder liabilities) was 7.0 per cent in 2019 (2018: 6.6 per cent). Investment-related items and other movements in 2019 primarily represent equity market gains from the with-profits business and effects from lower interest rates. (b) (c) (d) Movements in the year have been translated at the average exchange rates for the year ended 31 December 2019. The closing balance has been translated at the closing spot rates (e) as at 31 December 2019. Differences upon retranslation are included in foreign exchange translation differences. Average policyholder liabilities have been based on opening and closing balances, adjusted for any acquisitions, disposals and other corporate transactions arising in the year, and exclude unallocated surplus of with-profits funds. (ii) Duration of policyholder liabilities The table below shows the carrying value of policyholder liabilities and the maturity profile of the cash flows on a discounted basis, taking account of expected future premiums and investment returns: Policyholder liabilities Expected maturity: 0 to 5 years 5 to 10 years 10 to 15 years 15 to 20 years 20 to 25 years Over 25 years 31 Dec 2019 $m 31 Dec 2018 $m 115,943 91,836 31 Dec 2019 % 31 Dec 2018 % 18 18 15 13 11 25 20 19 15 12 10 24 (iii) Summary policyholder liabilities (net of reinsurance) and unallocated surplus At 31 December 2019, the policyholder liabilities and unallocated surplus for Asia operations (excluding joint ventures and associate), net of external reinsurance of $5,458 million (31 December 2018: $3,537 million), comprised the following: Hong Kong Indonesia Malaysia Singapore Taiwan Other operations Total Asia operations 31 Dec 2019 $m 31 Dec 2018 $m 58,800 4,933 7,725 27,427 6,801 9,549 115,235 43,997 4,687 6,937 23,121 5,353 7,402 91,497 266 Prudential plc Annual Report 2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUED C4.3 US insurance operations (i) Analysis of movements in policyholder liabilities Balance at 1 January 2018 Premiums Surrenders Maturities/deaths Net flows Addition for closed block of group payout annuities in the US Transfers from general to separate account Investment-related items and other movements Balance at 31 December 2018/1 January 2019 Premiums Surrenders Maturities/deaths Net flows note (a) Transfers from general to separate account Investment-related items and other movements note (b) Balance at 31 December 2019 Average policyholder liability balances note (c) 2019 2018 Variable annuity separate account liabilities $m 176,578 14,646 (11,746) (1,449) 1,451 – 708 (15,436) 163,301 12,776 (12,767) (1,564) (1,555) 951 32,373 Fixed annuity, GICs and other business $m 67,905 3,967 (4,465) (1,238) (1,736) 5,532 (708) 2,086 73,079 8,200 (4,575) (1,823) 1,802 (951) 549 Total $m 244,483 18,613 (16,211) (2,687) (285) 5,532 – (13,350) 236,380 20,976 (17,342) (3,387) 247 – 32,922 195,070 74,479 269,549 179,186 169,940 73,779 69,109 252,965 239,049 Notes (a) (b) (c) Net inflows in 2019 are $247 million with new inflows into fixed annuity, fixed index annuity and the general account exceeding withdrawals and surrenders on this business, partially offset by net outflows from variable annuity business as the portfolio matures. Positive investment-related items and other movements largely represent positive separate account returns following the increase in the US equity market in the year and asset gains arising from declining bond yields. Average policyholder liabilities have been based on opening and closing balances, adjusted for any acquisitions, disposals and other corporate transactions arising in the year. (ii) Duration of policyholder liabilities The table below shows the carrying value of policyholder liabilities and maturity profile of the cash flows on a discounted basis at the balance sheet date: 31 Dec 2019 31 Dec 2018 Policyholder liabilities 195,070 74,479 269,549 Variable annuity separate account liabilities $m Fixed annuity, GICs and other business $m Total $m Variable annuity separate account liabilities $m 163,301 Fixed annuity, GICs and other business $m Total $m 73,079 236,380 Expected maturity: 0 to 5 years 5 to 10 years 10 to 15 years 15 to 20 years 20 to 25 years Over 25 years % 41 27 16 9 4 3 % 45 27 13 8 4 3 % 42 27 15 9 4 3 % 40 28 16 9 4 3 % 51 24 12 7 3 3 % 43 27 15 8 4 3 prudentialplc.com Prudential plc Annual Report 2019 267 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationC4 Policyholder liabilities and unallocated surplus continued C4.3 US insurance operations continued (iii) Aggregate account values The table below shows the distribution of account values for fixed annuities (fixed interest rate and fixed index), the fixed account portion of variable annuities, and interest-sensitive life business within the range of minimum guaranteed interest rates as described in note C4.4(b). As at 31 December 2019, approximately 87 per cent (31 December 2018: 87 per cent) of Jackson’s fixed annuities, variable annuity fixed account options and interest-sensitive life business account values correspond to crediting rates that are at the minimum guaranteed interest rates. Minimum guaranteed interest rate > 0% – 1.0% > 1.0% – 2.0% > 2.0% – 3.0% > 3.0% – 4.0% > 4.0% – 5.0% > 5.0% – 6.0% Total Fixed annuities and the fixed account portion of variable annuities Interest-sensitive life business 31 Dec 2019 $m 31 Dec 2018 $m 31 Dec 2019 $m 31 Dec 2018 $m 6,952 12,994 13,701 1,561 2,236 278 37,722 9,660 8,646 12,832 1,623 2,285 286 35,332 – – 270 3,018 2,597 2,031 7,916 – – 291 3,049 2,683 2,168 8,191 C4.4 Products and determining contract liabilities C4.4(a) Asia Contract type Description and material features Determination of liabilities With-profits and participating contracts Provides savings and/or protection where the basic sum assured can be enhanced by a profit share (or bonus) from the underlying fund as determined at the discretion of the Company. With-profits contracts are predominantly sold in Hong Kong, Malaysia and Singapore. The total value of the with-profits funds is driven by the underlying asset valuation with movements reflected principally in the accounting value of policyholder liabilities and unallocated surplus. Participating products often offer a guaranteed maturity or surrender value. Declared regular bonuses are guaranteed once vested. Future bonus rates and cash dividends are not guaranteed. Market value adjustments and surrender penalties are used for certain products where the law permits such adjustments. Guarantees are predominantly supported by segregated life funds and their estates. 268 Prudential plc Annual Report 2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUEDC4.4(a) Asia continued Contract type Description and material features Determination of liabilities Term, whole life and endowment assurance Non-participating savings and/or protection where the benefits are guaranteed, or determined by a set of defined market-related parameters. These products often offer a guaranteed maturity and surrender value. It is common in Asia for regulations or market-driven demand and competition to provide some form of capital value protection and minimum crediting interest rate guarantees. This is reflected within the guaranteed maturity and surrender values. Guarantees are borne by shareholders. Unit-linked Combines savings with protection, the cash value of the policy depends on the value of the underlying unitised funds. Health and protection Health and protection features are offered as supplements to the products listed above or sold as standalone products. Protection covers mortality or morbidity benefits including health, disability, critical illness and accident coverage. The approach to determining the contract liabilities is generally driven by the local solvency basis. A gross premium valuation method is used in those local businesses where a risk-based capital framework is adopted for local solvency. Under the gross premium valuation method, all cash flows are valued explicitly using best estimate assumptions with a suitable margin for prudence. This is achieved either through adding an explicit allowance for assumptions to deviate from best estimate or by applying an overlay constraint so that on day one no negative reserves (ie where future premium inflows are expected to exceed prudent future claims and outflows) are derived at an individual policyholder level, or a combination of both. In Vietnam, the Company uses an estimation basis aligned substantially to that used by the countries applying the gross premium valuation method. For India and Taiwan, US GAAP is applied for measuring insurance liabilities. For these businesses, the future policyholder benefit provisions for non-linked business are determined using the net level premium method, with an allowance for surrenders, maintenance and claims expenses. Rates of interest used in establishing the policyholder benefit provisions vary by operation depending on the circumstances attaching to each block of business. The Hong Kong business unit applies a net premium valuation method to determine the future policyholder benefit provisions. The attaching liabilities reflect the unit value obligation driven by the value of the investments of the unit fund. Additional technical provisions are held for guaranteed benefits beyond the unit fund value using a gross premium valuation method. These additional provisions are recognised as a component of other business liabilities. The determination of the liabilities of health and protection contracts are driven by the local solvency basis. A gross premium valuation method is used in those countries where a risk-based capital framework is adopted for local solvency. Under the gross premium valuation method, all cash flows are valued explicitly using best estimate assumptions with a suitable margin for prudence. This is achieved either through adding an explicit allowance for assumptions to deviate from best estimate or by applying an overlay constraint so that on day one no negative reserves (ie where future premium inflows are expected to exceed prudent future claims and outflows) are derived at an individual policyholder level, or a combination of both. The Hong Kong business unit applies a net premium valuation method to determine the future policyholder benefit provisions. prudentialplc.com Prudential plc Annual Report 2019 269 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information C4 Policyholder liabilities and unallocated surplus continued C4.4 Products and determining contract liabilities continued C4.4(b) US Contract type Description and material features Determination of liabilities Fixed interest rate annuities At 31 December 2019, fixed interest rate annuities accounted for 6 per cent (31 December 2018: 7 per cent) of Jackson’s policy and contract liabilities. Fixed interest rate annuities are primarily deferred annuity products that are used for asset accumulation in retirement planning and for providing income in retirement. As explained in note A4.1, all of Jackson’s insurance liabilities are based on US GAAP. An overview of the deferral and amortisation of acquisition costs for Jackson is provided in note C5.2(i)(b). With minor exceptions, the following is applied to most of Jackson’s contracts. Contracts are accounted for as investment contracts as defined for US GAAP purposes by applying a retrospective deposit method to determine the liability for policyholder benefits. This is then augmented by: — Any amounts that have been assessed to compensate the insurer for services to be performed over future periods (ie deferred income); — Any amounts previously assessed against policyholders that are refundable on termination of the contract; and — Any probable future loss on the contract (ie premium deficiency). Capitalised acquisition costs and deferred income for these contracts are amortised over the life of the book of contracts. See the variable annuity section below for further discussion. The interest guarantees are not explicitly valued but are reflected as they are earned in the current account liability value. The policyholder of a fixed interest rate annuity pays Jackson a premium, which is credited to the policyholder’s account. Periodically, interest is credited to the policyholder’s account and in some cases administrative charges are deducted from the policyholder’s account. Jackson makes benefit payments at a future date as specified in the policy based on the value of the policyholder’s account at that date. On more than 90 per cent (2018: 94 per cent) of in-force business, Jackson may reset the interest rate on each contract anniversary, subject to a guaranteed minimum, in line with state regulations. When the annuity matures, Jackson either pays the contract holder the account value or a series of payments in the form of an immediate annuity product. The policy provides that at Jackson’s discretion it may reset the interest rate, subject to a guaranteed minimum. Approximately 65 per cent (31 December 2018: 64 per cent) of the fixed interest rate annuities Jackson wrote in 2019 provide for a (positive or negative) market value adjustment (MVA) on surrender. This formula-based adjustment approximates the change in value that assets supporting the product would realise as interest rates move. Guaranteed minimum interest rate. At 31 December 2019, Jackson had fixed interest rate annuities totalling $15.9 billion (31 December 2018: $16.1 billion) in account value with minimum guaranteed rates ranging from 1.0 per cent to 5.5 per cent and a 2.88 per cent average guaranteed rate (31 December 2018: 1.0 per cent to 5.5 per cent and a 2.91 per cent average guaranteed rate), depending on the particular product, jurisdiction where issued and the date of issue. 270 Prudential plc Annual Report 2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUED C4.4(b) US continued Contract type Description and material features Determination of liabilities Fixed index annuities At 31 December 2019, fixed index annuities accounted for 5 per cent (31 December 2018: 5 per cent) of Jackson’s policy and contract liabilities. Fixed index annuities vary in structure but are generally deferred annuities that enable policyholders to obtain a portion of an equity-linked return (based on participation rates, caps and spreads), and provide a guaranteed minimum return. The liability for policyholder benefits that represent the guaranteed minimum return is determined similarly to the liabilities of the fixed interest annuity above. The equity-linked return option within the contract is treated as an embedded derivative liability under US GAAP and therefore this element of the liability is recognised at fair value. The liability for the lifetime income rider is determined each period end by estimating the expected value of benefits in excess of the projected account balance and recognising the excess on a prorated basis over the life of the contract based on total expected assessments. Most fixed index annuities are subject to early surrender charges for the first five to 12 years of the contract. During the surrender charge period, the contract holder may cancel the contract for the surrender value. Jackson offers a fully liquid fixed index annuity product that has no surrender charges. Jackson hedges the equity return risk on fixed index products using offsetting equity exposure in the variable annuity product. The cost of hedging is taken into account in setting the index participation rates, caps or spreads. Guaranteed minimum rates are generally set at 1.0 to 3.0 per cent. At 31 December 2019, Jackson had fixed index annuities allocated to indexed funds totalling $9.8 billion (31 December 2018: $7.6 billion) in account value with minimum guaranteed rates on index accounts ranging from 1.0 per cent to 3.0 per cent and a 1.46 per cent average guaranteed rate (31 December 2018: 1.0 per cent to 3.0 per cent and a 1.77 per cent average guarantee rate). Jackson offers an optional lifetime income rider, which can be elected for an additional fee. Jackson also offers fixed interest accounts on some fixed index annuity products. At 31 December 2019, fixed interest accounts of fixed index annuities totalled $4.3 billion (31 December 2018: $3.4 billion) in account value. Minimum guaranteed rates on fixed interest accounts range from 1.0 per cent to 3.0 per cent and a 2.75 per cent average guaranteed rate (31 December 2018: 1.0 per cent to 3.0 per cent and a 2.58 per cent average guaranteed rate). prudentialplc.com Prudential plc Annual Report 2019 271 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationC4 Policyholder liabilities and unallocated surplus continued C4.4 Products and determining contract liabilities continued C4.4(b) US continued Contract type Description and material features Determination of liabilities The liability for future benefits is determined under US GAAP methodology for limited-payment contracts, using assumptions as of the acquisition date as to mortality and expense plus provisions for adverse deviation. Group pay-out annuities At 31 December 2019, group pay-out annuities accounted for 2 per cent (31 December 2018: 2 per cent) of Jackson’s policy and contract liabilities. Group pay-out annuities consist of a block of defined benefit annuity plans assumed from John Hancock USA and John Hancock New York. A single premium payment from an employer (contract holder) funds the pension benefits for its employees (participants). The contracts are tailored to meet the requirements of the specific pension plan being covered. This is a closed block of business from two standpoints: (1) John Hancock USA and John Hancock New York are no longer selling new contracts, and (2) contract holders (companies) are no longer adding additional participants to these defined benefit pension plans. The contracts provide annuity payments that meet the requirements of the specific pension plan being covered. In some cases, the contracts have pre-retirement death and/or withdrawal benefits, pre-retirement surviving spouse benefits, and/or subsidised early retirement benefits. 272 Prudential plc Annual Report 2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUEDC4.4(b) US continued Contract type Description and material features Determination of liabilities Variable annuities At 31 December 2019, variable annuities accounted for 78 per cent (31 December 2018: 75 per cent) of Jackson’s policy and contract liabilities. The general principles for fixed annuity and fixed index annuity also apply to variable annuities. The impact of any fixed account interest guarantees is reflected as they are earned in the current account value. Jackson regularly evaluates estimates used and adjusts the benefit guarantee liability balances, with a related charge or credit to benefit expense if actual experience or other evidence suggests that earlier assumptions should be revised. The benefit guarantee types are further set out below: Benefits that are payable in the event of death (guaranteed minimum death benefit) The liability for Guaranteed Minimum Death Benefit (GMDB) is determined at each period end by estimating the expected value of benefits in excess of the projected account balance and recognising the excess rateably over the life of the contract based on total expected assessments. At 31 December 2019, these liabilities were valued using a series of stochastic investment performance scenarios, a mean investment return of 7.4 per cent (31 December 2018: 7.4 per cent) net of external fund management fees, and assumptions for policyholder behaviour, mortality and expense. Benefits that are payable upon the depletion of funds (guaranteed minimum withdrawal benefit) The liability for the Guaranteed Minimum Withdrawal Benefit (GMWB) ‘for life’ portion is determined similarly to GMDB above. Provisions for benefits under GMWB ‘not for life’ features are recognised at fair value under US GAAP. Non-performance risk is incorporated into the fair value calculation through the use of discount interest rates sourced from an AA corporate credit curve as a proxy for Jackson’s own credit risk. Other risk margins, particularly for policyholder behaviour and long-term volatility, are also incorporated into the model through the use of explicitly conservative assumptions. On a periodic basis, Jackson validates the resulting fair values based on comparisons to other models and market movements. The value of future fees to offset payments made under the guarantees are established so that on day one no gain arises. Variable annuities are deferred annuities that have the same tax advantages and pay-out options as fixed interest rate and fixed index annuities. They are also used for asset accumulation in retirement planning and to provide income in retirement. The rate of return depends upon the performance of the selected fund portfolio. Policyholders may allocate their investment to either the fixed account or a selection of variable accounts. Most variable annuities are subject to early surrender charges for the first three to nine years of the contract. During the surrender charge period, the contract holder may cancel the contract for the surrender value. Jackson offers some fully liquid variable annuity products that have no surrender charges. Subject to benefit guarantees, investment risk on the variable account is borne by the policyholder, while investment risk on the fixed account is borne by Jackson through guaranteed minimum fixed rates of interest. At 31 December 2019, 4 per cent (31 December 2018: 5 per cent) of variable annuity funds were in fixed accounts. Jackson had variable annuity funds in fixed accounts totalling $7.8 billion (31 December 2018: $8.1 billion) with minimum guaranteed rates ranging from 1.0 per cent to 3.0 per cent and a 2.19 per cent average guaranteed rate (31 December 2018: 1.0 per cent to 3.0 per cent and a 1.7 per cent average guaranteed rate). Jackson offers a choice of guaranteed benefit options within its variable annuity product portfolio, which can be elected for additional fees. These guaranteed benefits might be expressed as the return of either: (a) total deposits made to the contract adjusted for any partial withdrawals, (b) total deposits made to the contract adjusted for any partial withdrawals, plus a minimum return, or (c) the highest contract value on a specified anniversary date adjusted for any withdrawals following that contract anniversary. Jackson hedges these risks using derivative instruments as described in note C7.3. prudentialplc.com Prudential plc Annual Report 2019 273 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationC4 Policyholder liabilities and unallocated surplus continued C4.4 Products and determining contract liabilities continued C4.4(b) US continued Contract type Description and material features Determination of liabilities Variable annuities continued Benefits that are payable at annuitisation (guaranteed minimum income benefit) This feature is no longer offered and existing coverage is substantially reinsured, subject to deductibles and annual claim limits. The direct Guaranteed Minimum Income Benefit (GMIB) liability is determined by estimating the expected value of the annuitisation benefits in excess of the projected account balance at the date of annuitisation and recognising the excess rateably over the life of the contract based on total expected assessments. Guaranteed Minimum Income Benefits are reinsured, subject to a deductible and annual claim limits. Due to the net settlement provisions of the reinsurance agreement, under the ‘grandfathered’ US GAAP, it is recognised at fair value with the change in fair value included as a component of short-term fluctuations. Volatility and non-performance risk is considered as per GMWB above. Benefits that are payable at the end of a specified period (guaranteed minimum accumulation benefit) This feature is no longer offered. Provisions for Guaranteed Minimum Accumulation Benefit (GMAB) are recognised at fair value under US GAAP. Volatility and non-performance risk is considered as per GMWB above. Deferred acquisition costs (DAC) Capitalised acquisition costs and deferred income for these contracts are amortised over the life of the book of contracts. The majority of Jackson’s DAC relates to its variable annuities business. The present value of the estimated gross profit is computed using the rate of interest that accrues to policyholder balances (sometimes referred to as the contract rate). Estimated gross profits for the fixed interest rate annuities, fixed index annuities and variable annuities include estimates of the following, each of which will be determined based on the best estimate of amounts over the life of the book of contracts without provision for adverse deviation: — Amounts expected to be assessed against policyholder balances for mortality less benefit claims in excess of related policyholder balances; — Amounts expected to be assessed for contract administration less costs incurred for contract administration; — Amounts expected to be earned from the investment of policyholder balances less interest credited to policyholder balances; — Amounts expected to be assessed against policyholder balances upon termination of contracts (sometimes referred to as surrender charges); — Assumptions for the long-term investment return for the separate accounts and future hedge costs; and — Other expected assessments and credits. 274 Prudential plc Annual Report 2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUEDC4.4(b) US continued Contract type Description and material features Determination of liabilities For term and traditional life insurance contracts, provisions for future policy benefits are determined under US GAAP using the net level premium method and assumptions as of the issue or acquisition date as to mortality, interest, policy lapses and expenses plus provisions for adverse deviation for directly sold business and assumptions at purchase for acquired business. For universal life and variable universal life a retrospective deposit method is used to determine the liability for policyholder benefits. This is then augmented by additional liabilities to account for no-lapse guarantees, profits followed by losses, contract features such as persistency bonuses, and cost of interest rate guarantees. Institutional products are classified as investment contracts, and are accounted for as financial liabilities at amortised cost. The currency risk on contracts that represent currency obligations other than US dollars are hedged using cross- currency swaps. Life insurance At 31 December 2019, life insurance products accounted for 7 per cent (31 December 2018: 9 per cent) of Jackson’s policy and contract liabilities. Institutional products At 31 December 2019, institutional products accounted for 1 per cent (31 December 2018: 1 per cent) of Jackson’s policy and contract liabilities. Jackson discontinued new sales of life insurance products in 2012. Life products include term life, traditional life and interest-sensitive life (universal life and variable universal life). — Term life provides protection for a defined period and a benefit that is payable to a designated beneficiary upon death of the insured. — Traditional life provides protection for either a defined period or until a stated age and includes a predetermined cash value. — Universal life provides permanent individual life insurance for the life of the insured and includes a savings element. — Variable universal life is a type of life insurance policy that combines death benefit protection with the ability for the policyholder account to be invested in separate account funds. Excluding the business that is subject to the retrocession treaties at 31 December 2019, Jackson had interest-sensitive life business in force with total account value of $7.9 billion (31 December 2018: $8.2 billion), with minimum guaranteed interest rates ranging from 2.5 per cent to 6.0 per cent with a 4.68 per cent average guaranteed rate (31 December 2018: 2.5 per cent to 6.0 per cent with a 4.67 per cent average guaranteed rate). Institutional products are: guaranteed investment contracts (GICs), funding agreements (including agreements issued in conjunction with Jackson’s participation in the US Federal Home Loan Bank programme) and Medium Term Note funding agreements. GICs feature a lump sum policyholder deposit on which interest is paid at a rate fixed at inception. Market value adjustments are made to the value of any early withdrawals. Funding agreements feature either lump sum or periodic policyholder deposits. Interest is paid at a fixed or index linked rate. Funding agreements have a duration of between one and 30 years. In 2019 and 2018 there were no funding agreements terminable by the policyholder with less than 90 days’ notice. prudentialplc.com Prudential plc Annual Report 2019 275 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information C5 Intangible assets C5.1 Goodwill Business combination Business acquisitions are accounted for by applying the purchase method of accounting, which adjusts the net assets of the acquired company to fair value at the date of purchase. The excess of the acquisition consideration over the fair value of the assets and liabilities of the acquired business is recorded as goodwill. The Group chooses the full goodwill method or the partial goodwill method to calculate goodwill on an acquisition by acquisition basis. Expenses related to acquiring new subsidiaries are charged to the income statement in the period in which they are incurred and not included in goodwill. Income and expenses of acquired businesses are included in the income statement from the date of acquisition. Where the Group writes a put option over its non-controlling interests as part of its business acquisition, which if exercised triggers the purchase by the Group of the non-controlling interests, the put option is recognised as a financial liability at the acquisition date with a corresponding amount, deducted directly from shareholder’s equity due to the significant risks and rewards of ownership remaining with the non-controlling interests. Any subsequent changes to the carrying amount of the put liability are also recognised within equity. Goodwill Goodwill is capitalised and carried on the Group consolidated statement of financial position as an intangible asset at initial value less any accumulated impairment losses. Goodwill impairment testing is conducted annually and when there is an indication of impairment. Goodwill shown on the consolidated statement of financial position at 31 December 2019 is wholly attributable to shareholders and represents amounts allocated to businesses in Asia and Africa in respect of both acquired asset management and life businesses. Carrying value at beginning of year Demerger of UK and Europe operations Additions in the year Disposals/reclassifications to held for sale Exchange differences Carrying value at end of year 31 Dec 2019 $m 31 Dec 2018 $m 2,365 (1,731) 299 – 36 969 2,005 – 503 (13) (130) 2,365 Impairment testing Goodwill does not generate cash flows independently of other groups of assets and thus is assigned to cash-generating units for the purposes of impairment testing. These cash-generating units are based upon how management monitors the business and represent the lowest level to which goodwill can be allocated on a reasonable basis. Goodwill is tested for impairment by comparing the cash-generating unit’s carrying amount, including any goodwill, with its recoverable amount. The Group’s methodology of assessing whether goodwill may be impaired for acquired life and asset management operations is discussed below: For acquired life businesses, the Company routinely compares the aggregate of net asset value and acquired goodwill on an IFRS basis of the acquired life business with the value of the current in-force business as determined using the EEV methodology. Any excess of IFRS value over EEV carrying value is then compared with EEV basis value of current and projected future new business to determine whether there is any indication that the goodwill in the IFRS statement of financial position may be impaired. The methodology and assumptions underpinning the Group’s EEV basis of reporting are included in the EEV basis supplementary information in this Annual Report. The goodwill in respect of asset management businesses comprised mainly the goodwill arising from the acquisition of Thanachart Fund Management Co., Ltd. (TFUND) in 2019 and TMB Asset Management Co., Ltd. (TMBAM) in Thailand in 2018. At 31 December 2019, the recoverable amount of these businesses has been determined by calculating the value in use of each of these businesses (considered to be the cash-generating units) using a discounted cash flow valuation. For TMBAM, the discounted cash flow valuation is based on the latest three-year plan and cash flow projections for the later years. For TFUND, which was acquired in December 2019, the valuation is based on the 10-year cash flow projections used in assessing the acquisition. The value in use for these acquired asset management businesses is particularly sensitive to a number of key assumptions as follows: — The set of economic, market and business assumptions used to derive the cash flow projections for the businesses; — The assumed growth rate on forecast cash flows beyond the terminal year of the cash flow projections after considering expected future and past growth rates. At 31 December 2019, a growth rate of 2.25 per cent has been used to extrapolate beyond the projection period (2018: 2.25 per cent in respect of TMBAM); — The risk discount rate applied in accordance with the nature of the businesses. The pre-tax discount rate applied at 31 December 2019 was 9 per cent (2018: 9 per cent in respect of TMBAM); and — The continuation of asset management contracts on similar terms. Management believes that any reasonable change in the key assumptions would not cause the recoverable amount of the asset management businesses acquired to fall below its carrying amount. 276 Prudential plc Annual Report 2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUED C5.2 Deferred acquisition costs and other intangible assets Intangible assets acquired on the purchase of a subsidiary or portfolio of contracts are measured at fair value on acquisition. Deferred acquisition costs are accounted for as described in note A4.1(c). Other intangible assets, such as distribution rights and software, are valued initially at the price paid to acquire them and are subsequently carried at cost less amortisation and any accumulated impairment losses. For intangibles other than DAC, amortisation follows the pattern in which the future economic benefits are expected to be consumed. If the pattern cannot be determined reliably, a straight-line method is applied. For software, the amortisation generally represents the licence period of the software acquired. Amortisation of intangible assets is charged to the ‘acquisition costs and other expenditure’ line in the consolidated income statement. Impairment testing is conducted when there is an indication of impairment. Deferred acquisition costs and other intangible assets attributable to shareholders From continuing operations From discontinued operations Total note (i) Other intangible assets, including computer software, attributable to with-profits funds From continuing operations From discontinued operations Total 31 Dec 2019 $m 31 Dec 2018 $m 17,409 – 17,409 67 – 67 14,865 143 15,008 71 106 177 Total of deferred acquisition costs and other intangible assets 17,476 15,185 (i) Deferred acquisition costs and other intangible assets attributable to shareholders The deferred acquisition costs and other intangible assets attributable to shareholders comprise: Deferred acquisition costs related to insurance contracts as classified under IFRS 4 Deferred acquisition costs related to investment management contracts, including life assurance contracts classified as financial instruments and investment management contracts under IFRS 4 Deferred acquisition costs related to insurance and investment contracts note (ii) Present value of acquired in-force policies for insurance contracts as classified under IFRS 4 (PVIF) Distribution rights and other intangibles Present value of acquired in-force (PVIF) and other intangibles attributable to shareholders note (iii) Total of deferred acquisition costs and other intangible assets note (a) 31 Dec 2019 $m 31 Dec 2018 $m 14,206 12,758 33 99 14,239 12,857 38 3,132 3,170 43 2,108 2,151 17,409 15,008 prudentialplc.com Prudential plc Annual Report 2019 277 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationC5 Intangible assets continued C5.2 Deferred acquisition costs and other intangible assets continued Notes (a) Total deferred acquisition costs and other intangible assets attributable to shareholders can be further analysed by business operations as follows: 31 Dec 2019 $m 31 Dec 2018 $m Deferred acquisition costs Asia insurance 1,610 – 615 (257) – (257) – 31 US insurance* note (b) 11,113 – 807 (297) 1,248 951 – – – 1,999 (631) 12,240 Discontinued UK and Europe operations PVIF and other intangibles† Total Total 134 (134) – – – – – – – – 2,151 (9) 1,179 (238) (5) (243) (11) 103 15,008 (143) 2,601 (792) 1,243 451 (11) 134 14,700 – 1,666 (1,370) (156) (1,526) (19) (141) – 3,170 (631) 17,409 328 15,008 Balance at 1 January Demerger of UK and Europe operations Additions‡ Amortisation to the income statement: Adjusted IFRS operating profit based on longer-term investment returns Non-operating profit (loss) Disposals and transfers Exchange differences and other movements Amortisation of DAC related to net unrealised valuation movements on the US insurance operation’s available-for-sale securities recognised within other comprehensive income Balance at 31 December * Under the Group’s application of IFRS 4, US GAAP is used for measuring the insurance assets and liabilities of its US and certain Asia operations. Under US GAAP, most of the US insurance operation’s products are accounted for under Accounting Standard no. 97 of the Financial Accounting Standards Board (FAS 97) whereby deferred acquisition costs are amortised in line with the emergence of actual and expected gross profits which are determined using an assumption for long-term investment returns for the separate account of 7.4 per cent (2018: 7.4 per cent), gross of asset management fees and other charges to policyholders, but net of external fund management fees. The other assumption impacting expected gross profits include mortality assumptions, lapses, assumed unit costs and future hedge costs. The amounts included in the income statement and other comprehensive income affect the pattern of profit emergence and thus the DAC amortisation attaching. DAC amortisation is allocated to the operating and non-operating components of the Group’s supplementary analysis of profit and other comprehensive income by reference to the underlying items. † PVIF and other intangibles comprise present value of acquired in-force (PVIF), distribution rights and other intangibles such as software rights. Distribution rights relate to amounts that have been paid or have become unconditionally due for payment as a result of past events in respect of bancassurance partnership arrangements in Asia. These agreements allow for bank distribution of Prudential’s insurance products for a fixed period of time. Software rights include additions of $51 million, amortisation of $(33) million, disposals of $5 million, foreign exchange of $2 million and closing balance at 31 December 2019 of $85 million (31 December 2018: $70 million for continuing operations). ‡ In January 2019, the Group renewed its regional strategic bancassurance alliance with United Overseas Bank Limited (UOB). The new agreement extends the original alliance, which commenced in 2010, to 2034 and increases the geographical scope to include a fifth market, Vietnam, alongside the existing markets of Singapore, Malaysia, Thailand and Indonesia. As part of this transaction, Prudential has agreed to pay UOB an initial fee of $853 million (equivalent to SGD1,150 million) for distribution rights which are not dependent on future sales volumes. Of the $853 million, $301 million was paid in 2019, with another two instalments being payable in 2020 and 2021. After allowing for discounting, the amount included in additions in the table above is $834 million. (b) The DAC amount in respect of US arises in the insurance operations which comprises the following amounts: Variable annuity business Other business Cumulative shadow DAC (for unrealised gains/losses booked in other comprehensive income)* Total DAC for US operations 31 Dec 2019 $m 31 Dec 2018 $m 12,406 529 (695) 12,240 10,796 381 (64) 11,113 * A loss of $(631) million (2018: a gain of $328 million) for shadow DAC amortisation is booked within other comprehensive income to reflect the impact from the positive unrealised valuation movement of $4,023 million (2018: negative unrealised valuation movement of $(2,159) million). These adjustments reflect the movement from year to year, in the changes to the pattern of reported gross profit that would have happened if the assets reflected in the statement of financial position had been sold, crystallising the unrealised gains and losses, and the proceeds reinvested at the yields currently available in the market. At 31 December 2019, the cumulative shadow DAC balance as shown in the table above was negative $(695) million (31 December 2018: negative $(64) million). (c) Sensitivity of US DAC amortisation charge The amortisation charge to the income statement in respect of the US DAC asset is reflected in both adjusted IFRS operating profit based on longer-term investment returns and short-term fluctuations in investment returns. The amortisation charge to adjusted IFRS operating profit based on longer-term investment returns in a reporting period comprises: — A core amount that reflects a relatively stable proportion of underlying premiums or profit; and — An element of acceleration or deceleration arising from market movements differing from expectations. In periods where the cap and floor features of the mean reversion technique (which is used for moderating the effect of short-term volatility in investment returns) are not relevant, the technique operates to dampen the second element above. Nevertheless, extreme market movements can cause material acceleration or deceleration of amortisation in spite of this dampening effect. Furthermore, in those periods where the cap or floor is relevant, the mean reversion technique provides no further dampening and additional volatility may result. In 2019, the DAC amortisation charge for adjusted IFRS operating profit based on longer-term investment returns was determined after including a credit for decelerated amortisation of $280 million (2018: $259 million charge for acceleration). The deceleration arising in 2019 reflects a mechanical decrease in the projected separate account return for the next five years under the mean-reversion technique. Under this technique, the projected level of return for each of the next five years is adjusted so that, in combination with the actual rates of return for the preceding three years (including the current year), the assumed long-term annual separate account return of 7.4 per cent is realised on average over the entire eight-year period. The deceleration in DAC amortisation in 2019 is primarily driven by the actual separate account return in the year being higher than that assumed. The application of the mean reversion formula (described in note A4.1) has the effect of dampening the impact of equity market movements on DAC amortisation while the mean reversion assumption lies within the corridor. At 31 December 2019, it would take approximate movements in separate account values of more than either negative 26 per cent or positive 49 per cent for mean reversion assumption to move outside the corridor. 278 Prudential plc Annual Report 2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUED (ii) Deferred acquisition costs related to insurance and investment contracts The movements in deferred acquisition costs relating to insurance and investment contracts are as follows: 2019 $m 2018 $m Insurance contracts Investment contracts note Insurance contracts Investment contracts note Balance at 1 January Demerger of UK and Europe operations Additions Amortisation Exchange differences Change in shadow DAC related to movement in unrealised appreciation of debt securities classified as available-for-sale Balance at 31 December 12,758 (62) 1,411 699 31 (631) 14,206 99 (72) 11 (5) – – 33 12,406 – 1,324 (1,266) (34) 328 12,758 85 – 35 (16) (5) – 99 Note All of the additions of investment contracts are through internal development. The carrying amount of the DAC balance comprises the following gross and accumulated amortisation amounts: Gross amount Accumulated amortisation Carrying amount (iii) PVIF and other intangibles attributable to shareholders 31 Dec 2019 $m 31 Dec 2018 $m 34 (1) 33 231 (132) 99 Balance at 1 January Cost Accumulated amortisation Demerger of UK and Europe operations Additions Amortisation charge Disposals and transfers Exchange differences and other movements Balance at 31 December Comprising: Cost Accumulated amortisation 2019 $m 2018 $m PVIF note (a) Distribution rights note (b) Other intangibles (including software) Total PVIF note (a) Distribution rights note (b) Other intangibles (including software) 295 (252) 43 (1) – (5) – 1 38 175 (137) 38 2,546 (587) 1,959 – 1,110 (196) – 98 2,971 3,783 (812) 2,971 399 (250) 149 3,240 (1,089) 2,151 (8) 69 (42) (11) 4 161 (9) 1,179 (243) (11) 103 3,170 379 (218) 161 4,337 (1,167) 3,170 307 (258) 49 – – (5) – (1) 43 295 (252) 43 2,426 (423) 2,003 – 242 (190) – (96) 1,959 2,546 (587) 1,959 491 (334) 157 – 65 (49) (19) (5) 149 399 (250) 149 Total 3,224 (1,015) 2,209 – 307 (244) (19) (102) 2,151 3,240 (1,089) 2,151 Notes (a) All of the net PVIF balances relate to insurance contracts. The PVIF attaching to investment contracts have been fully amortised. Amortisation is charged over the period of provision of asset management services as those profits emerge. (b) Distribution rights relate to fees paid in relation to the bancassurance partnership arrangements for the bank distribution of Prudential’s insurance products for a fixed period of time. The distribution rights amounts are amortised on a basis to reflect the pattern in which the future economic benefits are expected to be consumed by reference to new business production levels. prudentialplc.com Prudential plc Annual Report 2019 279 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information C6 Borrowings C6.1 Core structural borrowings of shareholder-financed businesses Accounting principles Although initially recognised at fair value, net of transaction costs, borrowings, excluding liabilities of consolidated collateralised debt obligations, are 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 related issue costs) is amortised through the income statement to the date of maturity or for hybrid debt, over the expected life of the instrument. Central operations: Subordinated debt substituted to M&G plc in 2019: £600m 5.56% (30 Jun and 31 Dec 2018: 5.0%) Notes 2055 note (i) £700m 6.34% (30 Jun and 31 Dec 2018: 5.7%) Notes 2063 note (i) £750m 5.625% Notes 2051 £500m 6.25% Notes 2068 US$500m 6.5% Notes 2048 Total subordinated debt substituted to M&G plc in 2019 note (ii) Subordinated and other debt not substituted to M&G plc: US$250m 6.75% Notes note (iii) US$300m 6.5% Notes note (iii) Perpetual Subordinated Capital Securities US$700m 5.25% Notes US$1,000m 5.25% Notes US$725m 4.375% Notes US$750m 4.875% Notes 31 Dec 2019 $m 31 Dec 2018 $m – – – – – – 250 300 550 700 996 721 744 753 886 947 634 498 3,718 250 299 549 700 993 720 743 Perpetual Subordinated Capital Securities 3,161 3,156 ¤20m Medium Term Notes 2023 £435m 6.125% Notes 2031 £400m 11.375% Notes 2039 note (iv) Subordinated notes Subordinated debt total Senior debt: note (v) £300m 6.875% Bonds 2023 £250m 5.875% Bonds 2029 Bank loans note (vi) $350m Loan 2024 £275m Loan 2022 Total debt not substituted to M&G plc in 2019 Total central operations Jackson US$250m 8.15% Surplus Notes 2027 note (vii) Total core structural borrowings of shareholder-financed businesses note (viii) 22 571 – 593 4,304 392 298 350 – 5,344 5,344 250 5,594 23 549 508 1,080 4,785 375 283 – 350 5,793 9,511 250 9,761 Notes (i) (ii) (iii) (iv) (v) (vi) (vii) In 2019, the Group agreed with the holders of these two subordinated debt instruments that, in return for an increase in the coupon of the two instruments and upfront fees totalling $182 million for both instruments, they would permit the substitution of M&G plc as the issuer of the instruments, together with other modifications of terms to ensure the debt meet the requirements of Solvency II. In accordance with IAS 39, this has been accounted for as an extinguishment of the old debt and the issuance of new debt, recognised at fair value. The debt was substituted to M&G plc in October 2019. The $182 million of upfront fees have been paid by Prudential plc and have been treated as a non-operating expense from continuing operations. In 2019, Prudential plc transferred subordinated debt to M&G plc as part of the demerger. In addition to the subordinated debt held at 31 December 2018 as shown in the table above, the debt transferred included the further £300 million 3.875 per cent subordinated debt raised in July 2019 These borrowings can be converted, in whole or in part, at the Company’s option and subject to certain conditions, on any interest payment date, into one or more series of Prudential preference shares. In May 2019, the Company redeemed its £400 million 11.375 per cent Tier 2 subordinated notes. The senior debt ranks above subordinated debt in the event of liquidation. The bank loan of $350 million was drawn in November 2019 at a cost of LIBOR plus 0.2 per cent. The loan matures on 7 November 2024. The £275 million bank loan was repaid by the Group in October 2019. Jackson’s borrowings are unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims of Jackson. 280 Prudential plc Annual Report 2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUED(viii) The changes in the carrying value of the structural borrowings of shareholder-financed businesses for the Group (including both continuing and discontinued operations) are analysed below: 2019 2018 Cash movements $m Non-cash movements $m Balance at beginning of year 9,761 8,496 Issue of debt Redemption of debt Payment for change to terms of debt Foreign exchange movement Demerger of UK and Europe operations Other movements 367 2,079 (504) (553) (182) (44) 298 (232) (4,161) – 15 15 Balance at end of year 5,594 9,761 Ratings Prudential plc has debt ratings from Standard & Poor’s, Moody’s and Fitch. Prudential plc’s long-term senior debt is rated A2 by Moody’s, A by Standard & Poor’s and A- by Fitch. Prudential plc’s short-term debt is rated as P-1 by Moody’s, A-1 by Standard & Poor’s and F1 by Fitch. Jackson National Life Insurance Company’s financial strength is rated AA- by Standard & Poor’s and Fitch, A1 by Moody’s and A+ by A.M. Best. Prudential Assurance Co. Singapore (Pte) Ltd.’s (Prudential Singapore) financial strength is rated AA- by Standard & Poor’s. All the Group’s ratings are on a stable outlook. C6.2 Operational borrowings Borrowings in respect of short-term fixed income securities programmes – commercial paper Lease liabilities under IFRS 16 note (a) Non-recourse borrowings of consolidated investment funds note (b) Bank loans and overdrafts Finance lease liability under IAS 17 note (a) Other Other borrowings note (c) Operational borrowings attributable to shareholder-financed businesses Non-recourse borrowings of consolidated investment funds note (b) Lease liabilities under IFRS 16 note (a) Other borrowings Operational borrowings attributable to with-profits businesses note (d) Total operational borrowings Analysed as: Total from continuing operations Total from discontinued UK and Europe operations 31 Dec 2019 $m 31 Dec 2018 $m 520 371 1,045 29 – 377 406 2,342 – 259 44 303 601 – 448 115 25 82 222 1,271 2,153 – 2,865 5,018 2,645 6,289 1,160 5,129 6,289 Notes (a) The Group adopted IFRS 16 that replaces IAS 17 as at 1 January 2019, using the modified retrospective approach. Under this approach, comparative information is not restated (as described in note A3). The finance lease liabilities recognised under IAS 17 in the comparative was principally held by the discontinued UK and Europe operations. Further details on the Group’s IFRS 16 adoption and operating leases are provided in notes A3 and C13. In all instances, the holders of the debt instruments issued by consolidated investment funds do not have recourse beyond the assets of those funds. (b) (c) Other borrowings mainly include senior debt issued through the Federal Home Loan Bank of Indianapolis (FHLB), secured by collateral posted with the FHLB by Jackson. (d) Operational borrowings attributable to with-profits businesses at 31 December 2018 were mainly attributable to the discontinued UK and Europe operations ($4,994 million) held in consolidated investment funds. prudentialplc.com Prudential plc Annual Report 2019 281 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional 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 ‘Group Chief Risk and Compliance Officer’s Report on 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 Investments/derivatives Liabilities/unallocated surplus Other exposure Asia insurance operations (see also section C7.2) All business With-profits business Net neutral direct exposure (indirect exposure only) Unit-linked business Net neutral direct exposure (indirect exposure only) Non-participating business Asset/liability mismatch risk Credit 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 Currency risk Variable annuity business 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 Fixed index annuities, Fixed annuities and GIC business Derivative hedge programme to the extent not fully hedged against liability Credit risk and interest rate risk on investments Profit and loss and shareholders’ equity are volatile for the incidence of these risks on unrealised appreciation of fixed income securities classified as available-for-sale under IAS 39 Incidence of equity participation features and meeting contractual accumulation requirements Interest rate risk on liabilities (meeting guaranteed rates of accumulation on fixed annuity products) 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 Minimal lapse risk 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 282 Prudential plc Annual Report 2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUEDDetailed analyses of sensitivity of IFRS basis profit or loss and shareholders’ equity to key market and other risks by business unit are provided in notes C7.2, C7.3 and C7.4. The sensitivity analyses provided show 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, 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 hedge positions within Jackson, where equity risk is greatest, would be rebalanced. The equity risk sensitivity analysis provided assumes that all equity indices fall by the same percentage. The published sensitivities only allow for limited management actions such as changes to policyholder bonuses, where applicable. If the economic conditions set out in the sensitivities persisted, the financial impacts may differ to the instantaneous impacts. In this case management could also take additional actions to help mitigate the impact of these stresses, including (but not limited to) rebalancing investment portfolios, further market risk hedging, increased use of reinsurance, repricing of in-force benefits, changes to new business pricing and the mix of new business being sold. Following the adoption of US dollar as the Group’s presentation currency, the Group has no exposure to currency fluctuation from business units that operate in US dollars, or currencies pegged to the US dollar (such as Hong Kong dollars), and reduced exposure to currencies partially managed to the US dollar within a basket of currencies (such as Singapore dollars). Sensitivities to exchange rate movements in the Group’s key markets are therefore expected to be limited. 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 for both financial and non-financial risk factors; and — Correlation across risk factors for longevity risk, expenses, persistency and other risks. 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; and the lack of consideration of the inter-relation of interest rates, equity markets and foreign currency exchange rates. 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. Shareholder exposure to market risk on these products is muted given the shareholders share this risk with the policyholders through its joint participation in with-profits funds results or through fees that vary with the size of the unit-linked funds. Non- participating business is largely backed by debt securities or deposits, which means that value of its assets fluctuate with interest rates. Depending on the reserving basis in the business unit, this may be offset by a consequential change in insurance liabilities as discount rates change accordingly. The Group’s exposure to market risk arising from its Asia operations is therefore at modest levels. Asia also sells regular premium health and protection business (which may attach to a unit-linked or other savings products). This exposes Asia to persistency, mortality and morbidity risk. This is discussed further below. 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 offset by the impact of changing interest rates on the discount rate used to determine insurance liabilities. (i) Sensitivity to interest rate risk Excluding with-profits and unit-linked businesses, the results of the Asia business are sensitive to the movements in interest rates, as described above. 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 regions. At 31 December 2019, 10-year government bond rates vary from region to region and range from 0.7 per cent to 7.2 per cent (31 December 2018: 0.9 per cent to 8.1 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 (subject to a floor of zero). 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 after tax and shareholders’ equity 2019 $m 2018 $m Decrease of 1% Increase of 1% Decrease of 1% Increase of 1% (705) 3 (702) (744) 26 (718) 397 (19) 378 (430) 33 (397) prudentialplc.com Prudential plc Annual Report 2019 283 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationC7 Risk and sensitivity analysis continued C7.2 Asia insurance operations continued The pre-tax impacts, if they arose, would mostly be recorded within 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 year to year. This varies by local business unit. For example, for businesses 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. Further, the level of options and guarantees in the products written in the particular business unit will also affect the degree of sensitivity to interest rate movements. The direction of the sensitivity of the Asia operations as a whole in a given year can also be affected by a change in the geographical mix. In addition, the degree of sensitivity of the results is dependent on the interest rate level at that point of time. At 31 December 2018 the sensitivities were dominated by the impact of interest rate movements on the value of government and corporate bond investments, which are expected to increase in value as interest rates fall to a greater extent than the offsetting increase in liabilities (and vice versa if rates rise). This arises because the discount rate in some operations does not fluctuate in line with interest rate movements. This feature remains for most local business units at 31 December 2019 and is evident in the ‘increase of 1%’ sensitivity. The ‘decrease of 1%’ sensitivity at 31 December 2019 reflects that some local business units’ liabilities become more sensitive at lower interest rates and the fluctuations in liabilities begin to exceed asset gains. As noted above, the results only allow for limited management actions, and if such economic conditions persisted management could take additional actions to help mitigate the impact of these stresses, including (but not limited to) rebalancing investment portfolios, increased use of reinsurance, changes to new business pricing and the mix of new business being sold. (ii) Sensitivity to equity price risk The non-linked shareholder-backed business has limited exposure to equity and property investment (31 December 2019: $3,480 million; 31 December 2018: $2,740 million). The increase in 2019 reflects higher equity markets and business growth. Generally, changes in equity and property investment values are not directly offset by movements in non-linked policyholder liabilities. Movements in equities backing with-profits and unit-linked business have been excluded as they are generally matched by an equal movement in insurance liabilities (including unallocated surplus of with-profits funds). 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 short-term fluctuations in investment returns 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 after tax and shareholders’ equity 2019 $m 2018 $m Decrease of 20% Decrease of 10% Decrease of 20% Decrease of 10% (864) 48 (816) (432) 24 (408) (709) 21 (688) (355) 10 (345) A 10 or 20 per cent increase in equity and property values would have an approximately equal and opposite net effect on profit and shareholders’ equity to the sensitivities shown above. The impacts at 31 December 2019 are similar to those at 31 December 2018, and reflect the growth in the business. (iii) Sensitivity to insurance risk 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 local 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. The reserving basis in Asia is such that a change in lapse assumptions has an immaterial effect on immediate profitability. Many of the business units in Asia are exposed to mortality and morbidity risk and a provision is made within policyholder liabilities to cover the potential exposure. If all these assumptions were strengthened by 5 per cent then it is estimated that post-tax profit and shareholders’ equity would decrease by approximately $77 million (2018: $73 million). Weakening these assumptions by 5 per cent would have a similar equal and opposite impact. 284 Prudential plc Annual Report 2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUED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 and interest sensitive life 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 and interest sensitive life 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. A prolonged low interest rate environment may result in a lengthening of maturities of the fixed annuity and interest-sensitive life contract holder liabilities from initial estimates, primarily due to lower policy lapses. As interest rates remain at low levels, Jackson may also have to reinvest the cash it receives as interest or proceeds from investments that have matured or that have been sold at lower yields, reducing its investment margins. Moreover, borrowers may prepay or redeem the securities in their investment portfolios with greater frequency in order to borrow at lower market rates, which exacerbates this risk. The majority of Jackson’s fixed annuities, variable annuity fixed account options and life products were designed with contractual provisions that allow crediting rates to be re-set annually, subject to minimum crediting rate guarantees. Jackson’s derivative programme, which is described in note C3.4(b), is used to manage the economic 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). prudentialplc.com Prudential plc Annual Report 2019 285 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information C7 Risk and sensitivity analysis continued C7.3 US insurance operations 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 Dec 2019 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 Dec 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* Minimum return‡ % Account value $m Net amount at risk $m Weighted average attained age Years Period until expected annuitisation Years 0-6% 0% 0-5%‡ 0% 150,576 2,753 257 37 12,547 3,232 698 0-6% 0-6% 0-8%‡ 8,159 1,688 140,529 2,477 16 14 – 69 51 52 687 616 7,160 66.9 years 67.7 years 70.0 years 0.5 years Minimum return‡ % Account value $m Net amount at risk $m Weighted average attained age Years Period until expected annuitisation Years 0-6% 0% 0-5%‡ 0% 125,644 2,450 251 34 10,865 2,827 682 66.5 years 67.1 years 5,652 80 25 – 1,418 400 113 0-6% 0-6% 0-8%‡ 6,947 1,599 116,902 1,550 825 21,442 69.5 years 0.1 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). † The GMIB guarantees are substantially reinsured. ‡ 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 “Combination GMWB” category also includes benefits with a defined increase in the withdrawal percentage under pre-defined non-market conditions. 286 Prudential plc Annual Report 2019 prudentialplc.com C FINANCIAL POSITION NOTES 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 2019 $m 31 Dec 2018 $m 121,520 19,341 30,308 956 172,125 99,834 17,705 25,349 1,049 143,937 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. Jackson’s hedging programme is focused on managing the economic risks in the business and protecting statutory solvency in the circumstances of large market movements. The hedging programme does not aim to hedge IFRS accounting results, which can lead to volatility in the IFRS results in a period of significant market movements, as was seen in 2019. 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. Sensitivity to equity risk – Jackson 2019 $m 2018 $m Decrease Increase Decrease Increase of 20% of 10% of 20% of 10% of 20% of 10% of 20% of 10% Profit before tax (net of related changes in amortisation of DAC) Related deferred tax Net effect on profit after tax and shareholders’ equity* 964 (202) 256 (54) 1,848 (388) 770 (162) 1,347 (282) 544 (115) 74 (15) (159) 33 762 202 1,460 608 1,065 429 59 (126) * The table above has been prepared to exclude the impact of the instantaneous equity movements on the separate account fees. The sensitivity movements shown include those relating to the fixed index annuity and the reinsurance of GMIB guarantees. The above sensitivities assume instantaneous market movements 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 2019 and 2018 respectively. The impacts shown under a decrease in equity markets reflect the mismatch discussed in note B1.2(ii)(a), with the gains on equity derivatives exceeding the increase in IFRS liabilities given the measurement basis applied. Following the equity market gains during 2019, the equity call options held at 31 December 2019 act to limit losses on equity derivatives under equity market increases. If equity markets therefore increase the main effect is a reduction in liabilities as guarantees move further out-of-the-money. The sensitivities above reflect the actual hedging portfolio at 31 December 2019 and the nature of Jackson’s dynamic hedging programme means that the portfolio, and hence the results of these sensitivities, will change on an ongoing basis. prudentialplc.com Prudential plc Annual Report 2019 287 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information C7 Risk and sensitivity analysis continued C7.3 US insurance operations 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 IFRS measurement basis 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, as discount rates and fund earned rates will be updated on an ongoing basis. 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 (with no floor of zero applied) and increase in interest rates is as follows: 2019 $m 2018 $m Decrease Increase Decrease Increase of 2% of 1% of 2% of 1% of 2% of 1% of 2% of 1% Profit or loss: Profit before tax (net of related changes in amortisation of DAC) Related deferred tax Net effect on profit after tax Other comprehensive income: Direct effect on carrying value of debt securities (net of related changes in amortisation of DAC) Related deferred tax Net effect on other comprehensive (6,238) 1,310 (2,815) 591 (4,928) (2,224) 3,914 (822) 3,092 2,141 (450) 1,691 (4,502) 945 (3,557) (2,188) 460 (1,728) 2,815 (591) 2,224 1,530 (321) 1,209 5,342 (1,122) 2,840 (596) (5,342) 1,122 (2,840) 596 5,265 (1,105) 2,988 (628) (5,265) 1,105 (2,988) 628 income 4,220 2,244 (4,220) (2,244) 4,160 2,360 (4,160) (2,360) Total net effect on shareholders’ equity (708) 20 (1,128) (553) 603 632 (1,936) (1,151) These sensitivities above 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. The increase in the magnitude of the sensitivities at 31 December 2019 mainly reflects the lower interest rates at 31 December 2019 and the consequential reduction on assumed future separate account return, that is based on risk-free rates under grandfathered US GAAP. This has the effect of the IFRS liability reflecting a greater potential for policyholder payments under the variable annuity guarantees as interest rates fall. Jackson’s hedging programme is focused on managing the economic risks in the business and protecting statutory solvency under large market movements, and does not aim to hedge the IFRS accounting results. (iii) Sensitivity to insurance risk 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. Any changes in these assumptions are recorded within short-term fluctuations in investment returns in the Group’s supplementary analysis of profit (see 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. Note A4.1 describes the methodology applied by Jackson to amortise deferred acquisition costs. The amount of amortisation charged in any one period is sensitive to separate account investment returns. 288 Prudential plc Annual Report 2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUEDC7.4 Asset management and other operations (i) Asset management The profit for the year of asset management operations 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 years. The Group’s asset management operations do not hold significant financial investments. (ii) Other operations At 31 December 2019, the financial investments of the other operations are principally short-term treasury bills held by the Group’s treasury function for liquidity purposes and so there is limited sensitivity to credit risk and interest rate movements. C8 Tax assets and liabilities Accounting policies on deferred tax are included in note B4. C8.1 Current tax At 31 December 2019, of the $492 million (31 December 2018: $476 million from continuing operations) current tax recoverable, the majority is expected to be recovered more than twelve months after the reporting period. At 31 December 2019, the current tax liability of $396 million (31 December 2018: $411 million from continuing operations) includes $198 million (31 December 2018: $190 million from continuing operations) of provisions for uncertain tax matters. Further detail is provided in note B4. C8.2 Deferred tax The statement of financial position contains the following deferred tax assets and liabilities in relation to: 2019 $m Balance at 1 Jan Demerger of UK and Europe operations Movement in income statement Movement through other compre- hensive income and equity Other movements including foreign currency movements Balance at 31 Dec Deferred tax assets Unrealised losses or gains on investments Balances relating to investment and insurance contracts Short-term temporary differences Capital allowances Unused tax losses Total Deferred tax liabilities Unrealised losses or gains on investments Balances relating to investment and insurance contracts Short-term temporary differences Capital allowances Total – (16) 144 1 2,979 19 162 3,305 – (146) (14) – (160) (1,104) 1,053 (1,276) (2,671) (71) (5,122) – 233 65 1,351 60 1,069 (3) 8 1,118 (231) (246) (414) – (891) – – (15) – – (15) (713) – 19 – (694) (128) (29) 1 (1) (16) (173) 118 15 (14) – 119 – 32 3,888 1 154 4,075 (877) (1,507) (2,847) (6) (5,237) Of the short-term temporary differences of $3,888 million relating to deferred tax assets, $3,068 million relating to the US insurance operations is expected to be recovered in line with the run off of the in-force book, and the majority of the remaining balances are expected to be recovered within 5 years. prudentialplc.com Prudential plc Annual Report 2019 289 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationC8 Tax assets and liabilities continued C8.2 Deferred tax continued The deferred tax balances are further analysed as follows: Asia operations US operations Other operations Total continuing operations Discontinued UK and Europe operations Total Group Deferred tax assets Deferred tax liabilities 31 Dec 2019 $m 31 Dec 2018 $m 31 Dec 2019 $m 31 Dec 2018 $m 270 3,804 1 4,075 – 4,075 152 2,923 70 3,145 160 3,305 (2,146) (3,091) – (5,237) – (5,237) (1,601) (2,150) (20) (3,771) (1,351) (5,122) The taxation regimes applicable across the Group often apply separate rules to trading and capital profits and losses. The distinction between temporary differences that arise from items of either a trading or capital nature may affect the recognition of deferred tax assets. For the 2019 results and financial position at 31 December 2019, the following tax benefits and losses have not been recognised: 31 Dec 2019 $m 31 Dec 2018 $m Tax benefits Losses Tax benefits Losses Trading losses Capital losses 36 1 175 5 61 55 1 7 62 62 301 270 6 38 307 308 Continuing Discontinued Total group Continuing Discontinued Total group Of the benefit from unrecognised trading losses, $34 million will expire within the next ten years and the rest have no expiry date. Some of the Group’s businesses are located in jurisdictions in which a withholding tax charge is incurred upon the distribution of earnings. At 31 December 2019, deferred tax liabilities of $247 million (2018: $149 million from continuing operations) have not been recognised in respect of such withholding taxes as the Group is able to control the timing of the distributions and it is probable that the timing differences will not reverse in the foreseeable future. C9 Defined benefit pension schemes The Group has historically operated a number of defined benefit pension schemes in the UK, with all pension surplus and deficit attributable to subsidiaries of M&G plc except for 30 per cent of the surplus attaching to the Prudential Staff Pension Scheme (PSPS), which was allocated to Prudential plc. In preparation for the demerger of M&G plc, at 30 June 2019, the 30 per cent of surplus attaching to PSPS was formally reallocated to M&GPrudential Services Limited. All UK schemes left the Group upon the demerger of M&G plc and Prudential plc will incur no further costs in respect of these schemes. Outside of the UK, there are two small defined benefit schemes in Taiwan which have negligible deficits. C10 Share capital, share premium and own shares Shares are classified as equity when their terms do not create an obligation to transfer assets. Amounts recorded in share capital represent the nominal value of the shares issued. The difference between the proceeds received on issue of the shares, net of share issue costs, and the nominal value of the shares issued, is credited to share premium. Where the Company purchases shares for the purposes of employee incentive plans, the consideration paid, net of issue costs, is deducted from retained earnings. Upon issue or sale any consideration received is credited to retained earnings net of related costs. Issued shares of 5p each fully paid 2019 Number of ordinary shares Share capital $m Share premium $m Number of ordinary shares 2018 Share capital $m Balance at 1 January Shares issued under share-based schemes Impact of change in presentation currency 2,593,044,409 8,115,540 – Balance at 31 December 2,601,159,949 166 – 6 172 2,502 22 101 2,587,175,445 5,868,964 – 2,625 2,593,044,409 175 1 (10) 166 Share premium $m 2,635 22 (155) 2,502 290 Prudential plc Annual Report 2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUEDOptions outstanding under save as you earn schemes to subscribe for shares at each year end shown below are as follows: 31 Dec 2019 31 Dec 2018 Number of shares to subscribe for 3,805,447 4,885,804 Share price range from 1,104p 901p to Exercisable by year 1,455p 1,455p 2025 2024 Transactions by Prudential plc and its subsidiaries in Prudential plc shares The Group buys and sells Prudential plc shares (‘own shares’) either in relation to its employee share schemes or up until the demerger of its UK and Europe operations via transactions undertaken by authorised investment funds that the Group is deemed to control. The cost of own shares of $183 million at 31 December 2019 (31 December 2018: $217 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery of shares under employee incentive plans. At 31 December 2019, 8.4 million (31 December 2018: 9.6 million) Prudential plc shares with a market value of $161 million (31 December 2018: $172 million) were held in such trusts, all of which are for employee incentive plans. The maximum number of shares held during the year was 14.1 million which was in March 2019. Within the trusts, shares are notionally allocated by business unit reflecting the employees to which the awards were made. On demerger, shares allocated to M&G plc were transferred to a separate trust established by M&G plc. The Company purchased the following number of shares in respect of employee incentive plans. The shares purchased each month are as follows: January February March April May June July August September October November December Total Number of shares 75,165 71,044 68,497 2,638,429 73,417 217,800 60,514 72,671 73,284 178,359 75,904 68,573 3,673,657 2019 Share price Low £ 14.25 15.00 15.20 15.65 16.35 16.20 17.47 14.86 14.14 13.78 13.38 13.07 High £ 14.29 15.18 16.32 16.73 16.45 16.36 17.71 15.21 14.76 14.24 13.85 13.13 Cost* $ 1,384,926 1,390,865 1,385,182 54,052,710 1,550,109 4,484,773 1,321,427 1,318,593 1,318,767 3,148,811 1,309,146 1,178,206 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 73,843,515 2,560,605 2018 Share price 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* $ 1,378,409 1,402,089 1,432,155 40,997,710 1,636,433 4,432,511 1,308,608 1,404,285 1,829,814 3,223,238 1,382,514 1,323,949 61,751,715 * The cost in US dollars for the shares purchased each month shown has been calculated from the share prices in pounds sterling using the monthly average exchange rate. Prior to the demerger of UK and Europe operations in October 2019, the Group consolidated a number of authorised investment funds of M&G plc that hold shares in Prudential plc. In the prior year, at 31 December 2018, the total number of shares held by these funds was 3.0 million and the cost of acquiring these shares of $25 million was included in the cost of own shares. The market value of these shares as at 31 December 2018 was $53 million. These funds were deconsolidated upon the demerger. All share transactions were made on an exchange other than the Stock Exchange of Hong Kong. Other than set out above, the Group did not purchase, sell or redeem any Prudential plc listed securities during 2019 or 2018. prudentialplc.com Prudential plc Annual Report 2019 291 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information C11 Provisions Provision in respect of defined benefit pension schemes C9 Other provisions note Total provisions Analysed as: Continuing operations Discontinued UK and Europe operations Note Analysis of movement in other provisions: Balance at 1 January Demerger of UK and Europe operations Charged to income statement: Additional provisions Unused amounts released Utilisation during the year Exchange differences Balance at 31 December 31 Dec 2019 $m 31 Dec 2018 $m 1 465 466 2019 $m 1,151 (725) 188 (7) (154) 12 465 222 1,151 1,373 427 946 1,373 2018 $m 1,275 – 307 (24) (349) (58) 1,151 Other provisions for continuing operations comprise staff benefits provisions of $408 million (31 December 2018: $364 million) that are generally expected to be paid out within the next three years and other provisions of $57 million (31 December 2018: $63 million). C12 Capital C12.1 Group objectives, policies and processes for managing capital (i) Capital measure The Group manages its Group LCSM available capital as its measure of capital. At 31 December 2019 estimated Group shareholder LCSM available capital is $14.0 billion (31 December 2018: $13.5 billion). (ii) External capital requirements Following the demerger of the UK and Europe operations from Prudential plc, the Hong Kong Insurance Authority (IA) has assumed the role of the group-wide supervisor for the Prudential Group with the Group no longer subject to Solvency II capital requirements. Ultimately, Prudential plc will become subject to the Group Wide Supervision (GWS) framework which is currently under development by the Hong Kong IA and is expected to be finalised in the second half of 2020. Until Hong Kong’s GWS framework comes into force, Prudential will apply the local capital summation method (LCSM) that has been agreed with the Hong Kong IA to determine group regulatory capital requirements (both minimum and prescribed levels). The LCSM surplus represents the summation of available capital across local solvency regimes for regulated entities of the Group and IFRS net assets (with some adjustments) for non-regulated entities less the summation of local statutory capital requirements across the Group, with no allowance for diversification between business operations. (iii) Meeting of capital management objectives The Group minimum capital requirement has been met during 2019. Prior to the demerger of the UK and Europe operations, the Group capital requirement was met in accordance with the Solvency II regime. As well as holding sufficient capital to meet LCSM requirements at Group level, the Group also closely manages the cash it holds within its central holding companies so that it can: — Maintain flexibility, fund new opportunities and absorb shock events; — Fund dividends; and — Cover central costs and debt payments. More details on holding company cash flows and balances are given in section I(iii) of the Additional unaudited financial information. Reserve adequacy testing under a range of scenarios and dynamic solvency testing is carried out, including under certain scenarios mandated by the US and Asia regulators. 292 Prudential plc Annual Report 2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUED The Group manages its assets, liabilities and capital locally, in accordance with local regulatory requirements and reflecting the different types of liabilities in each business unit. As a result of the diversity of products offered by Prudential and the different regulatory regimes under which it operates, the Group employs differing methods of asset/liability and capital management, depending on the business concerned. The sensitivity of liabilities and other components of total capital vary depending upon the type of business concerned and this conditions the approach to asset/liability management. C12.2 Local capital regulations (i) Asia insurance operations The local valuation basis for the assets, liabilities and capital requirements of significant operations in Asia are: China JV A risk-based capital, risk management and governance framework, known as the China Risk Oriented Solvency System (C-ROSS), applies in China. Under C-ROSS, insurers are required to maintain a core solvency ratio (core capital over minimum capital) and a comprehensive solvency ratio (available capital over minimum capital) of not lower than 50 per cent and 100 per cent, respectively. The China Banking Insurance Regulatory Commission is in the process of reviewing the C-ROSS formulae and parameters. The exact timing of updates is uncertain. The actual capital is the difference between the admitted assets and admitted liabilities with trading and available-for-sale assets marked-to-market and other assets at book value. Policyholder liabilities are based on a gross premium valuation method using best estimate assumptions with a separate risk margin. Hong Kong The capital requirements set out in the regulations vary by underlying risk type and duration of liabilities, but are generally determined as a percentage of mathematical reserves and capital at risk. Mathematical reserves are based on a net premium valuation method using assumptions which include a suitable margin for prudence. The valuation interest rate used to calculate these reserves is subject to a maximum that reflects a blend between the risk-adjusted portfolio yield and the reinvestment yield. The approach used to determine the reinvestment yield for reserving allows for average yields thus the impact of movements in interest rates are reflected in the valuation interest rate over time. The available capital is based on assets that are marked-to-market. The Hong Kong IA is in the process of developing a risk-based capital framework, targeted to be introduced by 2024, and has performed several quantitative impact studies over the past few years. Indonesia Solvency capital is determined using a risk-based capital approach. The available capital is based on assets that are marked-to-market, with policyholder liabilities based on a gross premium valuation method using best estimate assumptions with a suitable margin for prudence. Liabilities are zeroised at a policy level (i.e. negative liabilities are not permitted at a policy level). For unit-linked policies an unearned premium reserve is established. Malaysia A risk-based capital framework applies in Malaysia. The local regulator, Bank Negara Malaysia (BNM), has set a Supervisory Target Capital Level of 130 per cent below which supervisory actions of increasing intensity will be taken. Each insurer is also required to set its own Individual Target Capital Level to reflect its own risk profile and this is expected to be higher than the Supervisory Target Capital Level. The available capital is based on assets that are marked-to-market, with policyholder liabilities based on a gross premium valuation method using best estimate assumptions with a suitable margin for prudence. Liabilities are zeroised at a fund level (i.e. negative liabilities are not permitted at a fund level). The BNM has initiated a review of its RBC framework. An exposure draft on valuation of liabilities was issued in December 2019 to gather industry feedback. The exact timing of implementation of potential revisions is uncertain. Market liberalisation measures were introduced by BNM in April 2009, which increases the limit from 49 per cent to 70 per cent on foreign equity ownership for insurance companies and Takaful operators in Malaysia. A higher foreign equity limit beyond 70 per cent for insurance companies will be considered by BNM on a case by case basis for companies who support expansion of insurance provision to the most vulnerable in Malaysian society. Singapore A risk-based capital framework applies in Singapore. The regulator also has the authority to direct that the insurer satisfies additional capital adequacy requirements in addition to those set forth under the Singapore Insurance Act if it considers such additional requirements appropriate. The available capital is based on assets that are marked-to-market, with policyholder liabilities based on a gross premium valuation method using best estimate assumptions with a suitable margin for prudence. Liabilities are zeroised at a policy level (i.e. negative liabilities are not permitted at a policy level). The updated risk-based capital framework (RBC2) will come into effect on 31 March 2020. prudentialplc.com Prudential plc Annual Report 2019 293 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationC12 Capital continued C12.2 Local capital regulations continued (ii) US insurance operations The regulatory framework for Jackson is governed by the requirements of the US NAIC-approved Risk-Based Capital standards. Under these requirements life insurance companies report using a formula-based capital standard, which includes components calculated by applying after-tax factors to various asset, premium and reserve items and a separate model-based component for market risk and interest rate risk associated primarily with variable annuity products. The 31 December 2019 Jackson local statutory results reflect early adoption of the NAIC regulatory framework reforms at the valuation date as agreed with the Department of Insurance Financial Services (DIFS), and Jackson’s decision not to renew its long-standing permitted practice with the DIFS, which allowed certain derivative instruments, taken out to protect Jackson against declines in long-term interest rates, to be included at book value in the local statutory returns. At 31 December 2019, these derivatives were held at fair value. (iii) Asset management operations – regulatory and other surplus Certain asset management subsidiaries of the Group are subject to local regulatory requirements. The movement in the year of the estimated surplus regulatory capital position of those subsidiaries, combined with the movement in the IFRS basis shareholders’ funds for unregulated asset management operations, is as follows: Regulatory and other surplus Balance at 1 January Demerger of UK and Europe operations Gains during the year Movement in capital requirement Capital injection Distributions made to the parent company Exchange and other movements Balance at 31 December Eastspring Investments 374 214 (32) 20 (173) (27) 376 2019 $m 2018 $m US 51 24 – (30) (40) 1 6 M&G 846 (846) – – – – – – Total asset management Total asset management 1,271 (846) 238 (32) (10) (213) (26) 382 1,185 – 701 (7) 135 (531) (212) 1,271 C12.3 Transferability of available capital For Asia, the amounts retained within the insurance companies are at levels that provide an appropriate level of capital strength in excess of the local regulatory minimum. The businesses in Asia may, in general, remit dividends to parent entities, provided the statutory insurance fund meets the local regulatory solvency requirements and there are sufficient statutory accounting profits. For with-profits funds, the excess of assets over liabilities is retained within the funds, with distribution to shareholders tied to the shareholders’ share of declared bonuses. For Jackson, capital retention is maintained at a level consistent with an appropriate rating by Standard & Poor’s (currently rated AA-). Jackson can pay dividends on its capital stock only out of earned surplus unless prior regulatory approval is obtained. Furthermore, dividends that exceed the greater of statutory net gain from operations less net realised investments losses for the prior year or 10 per cent of Jackson’s prior year end statutory surplus, excluding any increase arising from the application of permitted practices, require prior regulatory approval. Available capital of the non-insurance business units is transferable after taking account of an appropriate level of operating capital, based on local regulatory solvency requirements, where relevant. 294 Prudential plc Annual Report 2019 prudentialplc.com C FINANCIAL POSITION NOTES CONTINUEDC13 Property, plant and equipment Property, plant and equipment comprise Group occupied properties and tangible assets. Following the adoption of IFRS 16 on 1 January 2019 (as described in note A3), property, plant and equipment also includes right-of-use assets for operating leases of properties occupied by the Group and leases of equipment and other tangible assets. All property, plant and equipment, including the right-of-use assets under operating leases, are held at cost less cumulative depreciation calculated using the straight-line method. The Group does not have any right-of-use assets that would meet the definition of investment property. As at 31 December 2019, total right-of-use assets comprised $569 million of property and $24 million of non-property assets, of which $18 million are attributable to shareholders. Extension and termination options are included in a number of property and equipment leases across the Group. These are used to maximise operational flexibility in terms of managing the assets used in the Group’s operations. The majority of extension and termination options held are exercisable only by the Group and not by the respective lessor. The Group assesses at lease commencement whether it is reasonably certain to exercise the option. This assertion is revisited if there is a material change in circumstances. The undiscounted value of lease payments beyond the break period not recognised in the lease liabilities as at 31 December 2019 is $185 million. A reconciliation of the carrying amount of these items from the beginning of the year to the end of the year is as follows: 2019 $m 2018 $m Balance at 1 January Cost Accumulated depreciation Opening net book amount Demerger of UK and Europe operations† Recognition of right-of-use asset on initial application of IFRS 16 Arising on acquisitions of subsidiaries Additions Depreciation and impairment charge Disposals and transfers Effect of movements in exchange rates Balance at 31 December Representing: Cost Accumulated depreciation Closing net book amount Analysed as: Continuing operations Discontinued operations Group occupied property Tangible assets Right- of-use assets 525 (105) 420 (143) – 6 1 (9) – – 275 351 (76) 275 2,089 (714) 1,375 (1,170) – 13 63 (77) (11) 4 197 687 (490) 197 – – – – 527 1 196 (141) 1 9 593 734 (141) 593 Group occupied property Tangible assets 496 (97) 399 – – 6 47 (14) (11) (7) 1,408 (740) 668 – – 691 339 (170) (92) (61) Total 2,614 (819) 1,795 (1,313) 527 20 260 (227) (10) 13 Total 1,904 (837) 1,067 – – 697 386 (184) (103) (68) 1,065 420 1,375 1,795 1,772 (707) 1,065 525 (105) 420 277 143 420 2,089 (714) 1,375 205 1,170 1,375 2,614 (819) 1,795 482 1,313 1,795 The Group has non-cancellable property subleases which have been classified as operating leases in 2019 under IFRS 16. The sublease rental income received for the leases is $11 million in 2019. Tangible assets from continuing operations At 31 December 2019, of the $197 million (31 December 2018: $205 million) tangible assets, $83 million (31 December 2018: $94 million) were held by the Group’s with-profits businesses. Capital expenditure: property, plant and equipment by segment The capital expenditure in 2019 of $64 million (2018: $386 million of which $133 million related to continuing operations) arose as follows: $44 million (2018: $69 million) in Asia and $5 million (2018: $62 million) in US with the remaining balance of $15 million (2018: $2 million) arising from unallocated corporate expenditure. prudentialplc.com Prudential plc Annual Report 2019 295 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationD Other information D1 Gain (loss) on disposal of business and corporate transactions Income and expenses of entities sold during the period are included in the income statement up to the date of disposal. The gain or loss on disposal is calculated as the difference between sale proceeds net of selling costs, less the net assets of the entity at the date of disposal, adjusted for foreign exchange movements attaching to the sold entity that are required to be recycled to the income statement under IAS 21. D1.1 Gain (loss) on disposal of business Gain on disposals note (i) Other transactions note (ii) Total gain (loss) on disposal of business from continuing operations 2019 $m 2018 $m 265 (407) (142) – (107) (107) Notes (i) (ii) In 2019, the $265 million gain on disposals principally relates to profits arising from a reduction in the Group’s stake (from 26 per cent to 22 per cent) in its associate in India, ICICI Prudential Life Insurance Company, and the disposal of Prudential Vietnam Finance Company Limited, a wholly owned subsidiary that provides consumer finance. In 2019, the $(407) million other transactions reflects costs related to the demerger of M&G plc from Prudential plc. These include the following amounts: – $(78) million transaction related costs, principally fees to advisors; – $(182) million being the fee paid to the holders of two subordinated debt instruments as discussed in note C6.1(i); and – $(147) million for one-off costs arising from the separation of the M&G plc business from Prudential plc. In 2018, the $(107) million other transactions primarily related to exiting the NPH broker-dealer business in the US and costs related to the preparation for the demerger of M&G plc. D1.2 Other corporate transactions Acquisition of Thanachart Fund Management Co., Ltd. in Thailand On 27 December 2019, the Group completed its acquisition of 50.1 per cent of Thanachart Fund Management Co., Ltd. (TFUND) from Thanachart Bank Public Company Ltd. (TBANK) and Government Savings Bank, with TBANK holding the remaining 49.9 per cent stake of TFUND. The acquisition complements the Group’s purchase of 65 per cent of TMB Asset Management, now TMBAM Eastspring, in September 2018. The terms of the sale agreement include an option for the Group to increase its ownership to 100 per cent in the future. The Group has recognised, in line with IFRS, a financial liability and a reduction in shareholders’ equity of $130 million as of the acquisition date for the option, being the discounted expected consideration payable for the remaining 49.9 per cent. The fair value of the acquired assets, assumed liabilities and resulting goodwill are shown in the table below: Assets Other assets Cash and cash equivalents Total assets Other liabilities Non-controlling interests* Net assets acquired and liabilities assumed Goodwill arising on acquisition* Purchase consideration $m 28 2 30 (7) (141) (118) 260 142 * The goodwill on acquisition of $260 million is mainly attributable to the expected benefits from new customers and synergies. Refer to note C5.1 for changes to the carrying amount of goodwill during the year. The Group has chosen to apply the full goodwill method under IFRS 3, ‘Business Combinations’ for this acquisition, with non-controlling interests being measured at fair value on the acquisition date. 296 Prudential plc Annual Report 2019 prudentialplc.com D2 Discontinued UK and Europe operations On 21 October 2019, the Group completed the demerger of its UK and Europe operations (M&G plc) from the Group, resulting in two separately listed companies. The Group’s UK and Europe operations have been reclassified as discontinued operations in these consolidated financial statements in accordance with IFRS 5 ‘Non-current assets held for sale and discontinued operations’. The results and cash flows for the discontinued UK and Europe operations presented in the consolidated financial statements for the period of ownership up to the demerger in October 2019 are analysed below. Income statement Earned premiums, net of reinsurance Investment return and other income note (1) Total revenue, net of reinsurance Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance Acquisition costs and other expenditure Total charges, net of reinsurance Discontinued UK and Europe operations’ profit before tax Re-measurement of the UK and Europe operations on demerger note (2) Cumulative exchange loss recycled from other comprehensive income (Loss) profit before tax Tax (charge) credit note (3) 2019 $m 10,920 22,292 33,212 (26,975) (4,143) (31,118) 2,094 188 (2,668) (386) (775) 2018 $m (101) (2,386) (2,487) 6,645 (3,296) 3,349 862 – – 862 280 (Loss) profit for the year from discontinued operations (1,161) 1,142 Notes (1) (2) (3) Includes share of profits from joint ventures and associates, net of related tax. The re-measurement of the discontinued UK and Europe operations on demerger reflects the difference between the fair value of the UK and Europe operations and its net assets at the date of the demerger. The tax (charge) credit wholly relates to the tax on the ordinary profits of the discontinued UK and Europe operations. Other comprehensive income Cumulative exchange loss recycled through profit or loss Other items, net of related tax Other comprehensive income for the year from discontinued operations, net of related tax 2019 $m 2018 $m 2,668 203 2,871 – (605) (605) The profit and other comprehensive income for the period from the discontinued UK and Europe operations were wholly attributable to the equity holders of the Company. Cash flows Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities* Cash and cash equivalents divested on demerger Net cash flows in the year Net cash flows between discontinued and continuing operations* Cash and cash equivalents at beginning of year Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents on the consolidated statement of financial position at end of year 2019 $m 2018 $m 2,375 (454) – (7,611) (5,690) (436) 6,048 78 – 5 (478) (137) – (610) (842) 7,857 (357) 6,048 * The net cash flows between discontinued and continuing operations represents the net cash paid for dividend and other items from discontinued operations to continuing operations. In 2019, the net cash flows of $(436) million primarily include pre-demerger dividend of $(3,841) million, other dividends of $(684) million offset by payment for the transfer of debt to M&G plc from Prudential plc prior to the demerger of $4,161 million. prudentialplc.com Prudential plc Annual Report 2019 297 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationD3 Contingencies and related obligations Litigation and regulatory matters The Group is involved in various litigation and regulatory proceedings. These may from time to time include class actions involving Jackson. While the outcome of such litigation and regulatory issues cannot be predicted with certainty, the Company believes that their ultimate outcome will not have a material adverse effect on the Group’s financial condition, results of operations or cash flows. Guarantees Guarantee funds in the US provide for payments to be made to policyholders on behalf of insolvent life insurance companies and are financed by payments assessed on solvent insurance companies based on location, volume and type of business. The estimated reserve for future guarantee fund assessments is not significant. The directors believe that sufficient provision has been made on the balance sheet for all anticipated payments for known insolvencies. The Group has provided other guarantees and commitments to third-parties entered into in the normal course of business but the Group does not consider that the amounts involved are significant. Intra-group capital support arrangements Prudential has put in place intra-group arrangements to formalise undertakings by Prudential to the regulators of the Hong Kong subsidiaries regarding their solvency levels. D4 Post balance sheet events Dividends The 2019 second interim ordinary dividend approved by the Board of Directors after 31 December 2019 is as described in note B6. Coronavirus outbreak The novel coronavirus outbreak, with thousands of cases reported in 2020 to date and the virus spreading to countries across Asia and the world, has disrupted the activity in the markets in which the Group operates, in particular Hong Kong and mainland China, and adversely impacted the economic conditions in the year to date. Given these conditions, lower levels of new business activity in affected markets are to be expected. Further details on the Group capital position are set out in note I(i) of the Additional unaudited financial information. The Group continues to monitor closely the development of the coronavirus outbreak and its impact on market conditions. If current economic conditions persist, management could take additional actions to mitigate the impact. These actions include, but are not limited to, rebalancing investment portfolios, further market risk hedging, increased use of reinsurance, repricing of in-force benefits, changes to new business pricing and the mix of new business being sold. It is not practicable to quantify the potential financial effect of the outbreak on the Group at this stage. D5 Related party transactions Transactions between the Company and its subsidiaries are eliminated on consolidation. The Company has transactions and outstanding balances with certain unit trusts, Open-Ended Investment Companies (OEICs), collateralised debt obligations and similar entities that are not consolidated and where a Group company acts as manager, which are regarded as related parties for the purposes of IAS 24. The balances are included in the Group’s statement of financial position at fair value or amortised cost in accordance with IAS 39 classifications. The transactions are included in the income statement and include amounts paid on issue of shares or units, amounts received on cancellation of shares or units and amounts paid in respect of the periodic charge and administration fee. In addition, there are no material transactions between the Group’s joint ventures and associates, which are accounted for on an equity method basis, and other Group companies. Key management personnel of the Company, as described in note B2.3, may from time to time purchase insurance, asset management or annuity products marketed by Group companies in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with other persons. In 2019 and 2018, other transactions with key management personnel were not deemed to be significant both by virtue of their size and in the context of the individuals’ financial positions. All of these transactions were on terms broadly equivalent to those that prevailed in arm’s length transactions. Additional details on the Directors’ interests in shares, transactions or arrangements are given in the Directors’ remuneration report. Key management remuneration is disclosed in note B2.3. 298 Prudential plc Annual Report 2019 prudentialplc.com D OTHER INFORMATION CONTINUEDD6 Commitments The Group has provided, from time to time, certain guarantees and commitments to third parties. At 31 December 2019, Asia operations had unfunded commitments of $2,013 million (31 December 2018: $1,554 million) primarily related to investments in infrastructure funds and alternative investment funds. At 31 December 2019, Jackson had unfunded commitments of $889 million (31 December 2018: $846 million) related to investments in limited partnerships and $796 million (31 December 2018: $440 million) related to commercial mortgage loans and other fixed income securities. These commitments were entered into in the normal course of business and a material adverse impact on the operations is not expected to arise from them. D7 Investments in subsidiary undertakings, joint ventures and associates (a) Basis of consolidation The Group consolidates those investees it is deemed to control. The Group has control over an investee if all three of the following are met: (1) it has power over an investee; (2) it is exposed to, or has rights to, variable returns from its involvement with the investee; and (3) it has ability to use its power over the investee to affect its own returns. (i) Subsidiaries Subsidiaries are those investees that the Group controls. The majority of the Group’s subsidiaries are corporate entities, but the Group’s insurance operations also invest in a number of limited partnerships. The Group performs a re-assessment of consolidation whenever there is a change in the substance of the relationship between the Group and an investee. Where the Group is deemed to control an entity it is treated as a subsidiary and its results, assets and liabilities are consolidated. Where the Group holds a minority share in an entity, with no control over the entity, the investments are carried at fair value through profit or loss within financial investments in the consolidated statement of financial position. (ii) Joint ventures and associates Joint ventures are joint arrangements arising from a contractual agreement whereby the Group and other investors have joint control of the net assets of the arrangement. In a number of these arrangements, the Group’s share of the underlying net assets may be less than 50 per cent but the terms of the relevant agreement make it clear that control is jointly exercised between the Group and the third party. Associates are entities over which the Group has significant influence, but it does not control. Generally it is presumed that the Group has significant influence if it holds between 20 per cent and 50 per cent voting rights of the entity. With the exception of those referred to below, the Group accounts for its investments in joint ventures and associates by using the equity method of accounting. The Group’s share of profit or loss of its joint ventures and associates is recognised in the income statement and its share of movements in other comprehensive income is recognised in other comprehensive income. The equity method of accounting does not apply to investments in associates and joint ventures held by the Group’s insurance or investment funds. This includes venture capital business, mutual funds and unit trusts and which, as allowed by IAS 28, ‘Investments in Associates and Joint Ventures’, are carried at fair value through profit or loss. (iii) Structured entities Structured entities are those that have been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity. Voting rights relate to administrative tasks. Relevant activities are directed by means of contractual arrangements. The Group invests in structured entities such as: — Collective investment schemes; — Limited partnerships; — Variable interest entities; — Investment vehicles within separate accounts offered through variable annuities; — Collateralised debt obligations; — Mortgage-backed securities; and — Similar asset-backed securities. Collective investment schemes The Group invests in collective investment schemes, which invest mainly in equities, bonds, cash and cash equivalents, and properties. The Group’s percentage ownership in these entities can fluctuate on a daily basis according to the participation of the Group and other investors in them. — Where the entity is managed by a Group asset manager, and the Group’s ownership holding in the entity exceeds 50 per cent, the Group is judged to have control over the entity. — Where the entity is managed by a Group asset manager, and the Group’s ownership holding in the entity is between 20 per cent and 50 per cent, the facts and circumstances of the Group’s involvement in the entity are considered, including the rights to any fees earned by the asset manager from the entity, in forming a judgement as to whether the Group has control over the entity. — Where the entity is managed by a Group asset manager, and the Group’s ownership holding in the entity is less than 20 per cent, the Group is judged to not have control over the entity. — Where the entity is managed by an asset manager outside the Group, an assessment is made of whether the Group has existing rights that gives it the ability to direct the current activities of the entity and therefore control the entity. In assessing the Group’s ability to direct an entity, the Group considers its ability relative to other investors. The Group has a limited number of investment funds where it considers it has such ability. prudentialplc.com Prudential plc Annual Report 2019 299 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationD7 Investments in subsidiary undertakings, joint ventures and associates continued Where the Group is deemed to control these entities, they are treated as a subsidiary and are consolidated, with the interests of investors other than the Group being classified as liabilities, and appear as net asset value attributable to unit holders of consolidated investment funds. Where the Group does not control these entities (as it is deemed to be acting as an agent) and they do not meet the definition of associates, they are carried at fair value through profit or loss within financial investments in the consolidated statement of financial position. Where the Group’s asset manager sets up investment funds as part of asset management operations, the Group’s interest is limited to the administration fees charged to manage the assets of such entities. With no participation in these entities, the Group does not retain risks associated with investment funds. For these investment funds, the Group is not deemed to control the entities but to be acting as an agent. The Group generates returns and retains the ownership risks in investment vehicles commensurate to its participation and does not have any further exposure to the residual risks of these investment vehicles. Jackson’s separate account assets These are investment vehicles that invest contract holders’ premiums in equity, fixed income, bonds and money market mutual funds. The contract holder retains the underlying returns and the ownership risks related to the underlying investments. The shareholder’s economic interest in separate accounts is limited to the administrative fees charged. The separate accounts are set up as separate regulated entities governed by a Board of Governors or trustees for which the majority of the members are independent of Jackson or any affiliated entity. The independent members are responsible for any decision making that impacts contract holders’ interest and govern the operational activities of the entities’ advisers, including asset managers. Accordingly, the Group does not control these vehicles. These investments are carried at fair value through profit or loss within financial investments in the consolidated statement of financial position. Limited partnerships The Group’s insurance operations invest in a number of limited partnerships, either directly or through unit trusts, through a mix of capital and loans. These limited partnerships are managed by general partners, in which the Group holds equity. Such interest in general partners and limited partnerships provide the Group with voting and similar rights to participate in the governance framework of the relevant activities in which limited partnerships are engaged in. Accounting for the limited partnerships as subsidiaries, joint ventures, associates or other financial investments depends on the terms of each partnership agreement and the shareholdings in the general partners. Other structured entities The Group holds investments in mortgage-backed securities, collateralised debt obligations and similar asset-backed securities, the majority of which are actively traded in a liquid market. The Group consolidates the vehicles that hold the investments where the Group is deemed to control the vehicles. When assessing control over the vehicles, the factors considered include the purpose and design of the vehicle, the Group’s exposure to the variability of returns and the scope of the Group’s ability to direct the relevant activities of the vehicle including any kick-out or removal rights that are held by third parties. The outcome of the control assessment is dependent on the terms and conditions of the respective individual arrangements. The majority of such vehicles are not consolidated. In these cases the Group is not the sponsor of the vehicles in which it holds investments and has no administrative rights over the vehicles’ activities. The Group generates returns and retains the ownership risks commensurate to its holding and its exposure to the investments. Accordingly the Group does not have power over the relevant activities of such vehicles and all are carried at fair value through profit or loss within financial investments in the consolidated statement of financial position. The table below provides aggregate carrying amounts of the investments in unconsolidated structured entities reported in the Group’s statement of financial position: Statement of financial position line items Equity securities and holdings in collective investment schemes Debt securities Total 31 Dec 2019 $m 31 Dec 2018 $m Investment funds Separate account assets Other structured entities Investment funds Separate account assets Other structured entities 23,620 – 23,620 195,070 – 195,070 – 6,574 6,574 27,021 – 27,021 163,301 – 163,301 – 14,113 14,113 The Group generates returns and retains the ownership risks in these investments commensurate to its participation and does not have any further exposure to the residual risks or losses of the investments or the vehicles in which it holds investments. As at 31 December 2019, the Group does not have an agreement, contractual or otherwise, or intention to provide financial support to structured entities that could expose the Group to a loss. 300 Prudential plc Annual Report 2019 prudentialplc.com D OTHER INFORMATION CONTINUED(a) Dividend restrictions and minimum capital requirements Certain Group subsidiaries and joint ventures are subject to restrictions on the amount of funds they may transfer in the form of cash dividends or otherwise to the parent company. Under UK company law, UK companies can only declare dividends if they have sufficient distributable reserves. Jackson is subject to state laws that limit the dividends payable to its parent company based on statutory capital, surplus and prior year earnings. Dividends in excess of these limitations require prior regulatory approval. The Group’s subsidiaries, joint ventures and associates in Asia may remit dividends to the Group, in general, provided the statutory insurance fund meets the capital adequacy standard required under local statutory regulations and has sufficient distributable reserves. For further details on local capital regulations in Asia please refer to note C12.2. (b) Investments in joint ventures and associates The Group has shareholder-backed joint venture insurance and asset management businesses in China with CITIC Group and a joint venture asset management business in India with ICICI Bank. In addition, there is an asset management joint venture in Hong Kong with Bank of China International Holdings Limited (BOCI) and Takaful insurance joint venture in Malaysia. For the Group’s joint ventures that are accounted for by using the equity method, the net of tax results of these operations are included in the Group’s profit before tax. The Group’s associates, which are also accounted for under the equity method, include the Indian insurance entity (with the majority shareholder being ICICI Bank). In addition, the Group has investments in collective investment schemes, funds holding collateralised debt obligations, property funds where the Group has significant influence. As allowed under IAS 28, these investments are accounted for on a fair value through profit or loss basis. The aggregate fair value of associates accounted for at fair value through profit or loss, where there are published price quotations, is approximately $0.7 billion at 31 December 2019 (31 December 2018: $0.1 billion from continuing operations). For joint ventures and associates accounted for using the equity method, the 12 months financial information of these investments up to 31 December 2019 (covering the same period as that of the Group) has been used in these consolidated financial statements. The Group’s share of the profits (including short-term fluctuations in investment returns), net of related tax, and carrying amount of interest in joint ventures and associates, which are equity accounted as shown in the consolidated income statement at 31 December 2019 is $397 million (2018: $319 million) for shareholder-backed business and comprises the following: Share of profits from joint ventures and associates, net of related tax 2019 $m 2018 $m Asia insurance operations Asia asset management operations Total segment and Group total 291 106 397 238 81 319 There is no other comprehensive income in the joint ventures and associates. There has been no unrecognised share of losses of a joint venture or associate that the Group has stopped recognising in the total income. The Group’s interest in joint ventures gives rise to no contingent liabilities or capital commitments that are material to the Group. (c) Related undertakings In accordance with Section 409 of the Companies Act 2006 a list of Prudential Group’s subsidiaries, joint ventures, associates and significant holdings (being holdings of more than 20 per cent) along with the classes of shares held, the registered office address and the country of incorporation and the effective percentage of equity owned at 31 December 2019 is disclosed below. The definitions of a subsidiary undertaking, joint venture and associate in accordance with the Companies Act 2006 are different from the definition under IFRS. As a result, the related undertakings included within the list below may not be the same as the undertakings consolidated in the Group IFRS financial statements. The Group’s consolidation policy is described in note A3.1(b). The Group also operates through branches. At 31 December 2019, there is no significant branch outside the UK. Direct subsidiary undertakings of the parent company, Prudential plc (shares held directly or via nominees) Name of entity Prudential Corporation Asia Limited Classes of shares held Proportion held OS 100.00% Registered office address and country of incorporation 13th Floor, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong Prudential Group Holdings Limited OS 100.00% 1 Angel Court, London, EC2R 7AG, United Kingdom prudentialplc.com Prudential plc Annual Report 2019 301 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationD7 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: Name of entity 95th Avenue Retail Building, LLC Aberdeen Standard Cash Creation Fund Aberdeen Standard Singapore Equity Aberforth Standard Global Opportunities Fund Allied Life Brokerage Agency, Inc AMUNDI FTSE China A50 Index ETF BeGeneral Insurance S.A. BeLife Insurance S.A. Beneficial General Insurance S.A. Beneficial Life Insurance S.A. Beneficial Life Insurance S.A. BOCHK Aggressive Growth Fund BOCHK Asia Pacific Equity Fund BOCHK Balanced Growth Fund BOCHK China Equity Fund BOCHK Conservative Growth Fund BOCHK Hong Kong Equity Fund BOCHK US Dollar Money Market Fund BOCI-Prudential Asset Management Limited BOCI-Prudential Trustee Limited Brier Capital LLC Brooke (Holdco 1) Inc Brooke Life Insurance Company Centre Capital Non-Qualified Investors IV AIV Orion, LP Centre Capital Non-Qualified Investors IV AIV-RA, L.P. Centre Capital Non-Qualified Investors IV, L.P. Centre Capital Non-Qualified Investors V AIV-ELS LP Centre Capital Non-Qualified Investors V LP CEP IV-A Chicago AIV LP CEP IV-A CWV AIV LP CEP IV-A Davenport AIV LP CEP IV-A Indy AIV LP CEP IV-A NMR AIV LP CEP IV-A WBCT AIV LP CITIC-CP Asset Management Co., Ltd. CITIC-Prudential Fund Management Company Limited CITIC-Prudential Life Insurance Company Limited Classes of shares held Proportion held Registered office address and country of incorporation MI U U U LPI U OS OS OS OS OS U U U U U U U OS OS OS OS OS LPI LPI LPI LPI LPI LPI LPI LPI LPI LPI LPI MI MI MI 100.00% 901 S., Ste. 201, Second St., Springfield, IL, 62704-7909, USA 34.16% 28th Floor Bangkok City Tower, 179 South Sathorn Road, Thungmahamek, Sathorn, Bangkok 10120, Thailand 60.44% 20 Collyer Quay, #01-01, Singapore 049319 28.46% 100.00% 400 East Court Avenue, Des Moines, IA 50309, USA 38.67% 90, boulevard Pasteur, 75015 Paris - France Immeuble WOODIN Center 1st Floor, Avenue Nogues, Plateaux, Abidjan, Cote d’Ivoire 51.00% 50.93% 50.04% 1944 Blvd de la République, BP 2328, Douala, Cameroon 51.00% 50.99% 2963 Rue De La Chance Agbalepedogan, P.B. 1115, Lome, Togo 65.61% 27/F., Bank of China Tower, 1 Garden Road, Hong Kong 26.29% 55.31% 71.35% 55.24% 21.94% 34.85% 36.00% 36.00% 12/F & 25/F, Citicorp Centre, 18 Whitfield Road, Causeway Bay, Hong Kong 100.00% 1 Corporate Way, Lansing, MI 48951, USA 100.00% 1105 North Market Street, Suite 1300, Wilmington, DE 19801, USA 100.00% 1 Corporate Way, Lansing, MI 48951, USA 27.47% 2711 Centreville Road, Suite 400, Wilmington, DE 19808, USA 44.55% 27.16% 36.58% 37.66% 23.93% 615 South Dupont Highway, Dover, DE 19901, USA 23.97% 850 New Burton Road, Suite 201, Dover, DE 19904, USA 23.94% 615 South Dupont Highway, Dover, DE 19901, USA 23.94% 23.94% 23.94% 26.95% 49.00% 50.00% Room 101-2, No.128 North Zhangjiabang Road, Pudong District, Shanghai, China Level 9, HSBC Building, Shanghai IFC, 8 Century Avenue, Pudong, Shanghai, China 0507-0510, 1601-1616, East Tower, World Financial Centre, No.1 East Third Ring Middle Road, Chaoyang District, Beijing, 100020, China Clairvest Equity Partners IV-A LP LPI 23.90% 22 St Clair Avenue East, Suite 1700, Toronto, ON M4T 2S3, Canada 302 Prudential plc Annual Report 2019 prudentialplc.com D OTHER INFORMATION CONTINUEDEastspring Asset Management Korea Co. Ltd. OS 100.00% Key to share classes: LBG LPI MI MFS NSB OS PI PS U Limited by Guarantee Limited Partnership Interest Membership Interest Mutual Fund Shares Non-stock basis Ordinary Shares Partnership Interest Preference Shares Units Classes of shares held Proportion held Registered office address and country of incorporation 100.00% 1 Corporate Way, Lansing, MI 48951, USA Level 25, Menara Hong Leong, No. 6 Jalan Damanlela, Bukit Damansara, 50490 Kuala Lumpur, Malaysia 15th Floor, Shinhan Investment Tower, 70 Yoidae-ro, Yeungdeungpo-gu, Seoul 07325, Korea Goodmorning Shinhan Tower 15F Yeoido Dong 23-2, Yeungdeungpo-gu, Seoul 150-010, Korea 100.00% 100.00% 71.97% 99.46% OS OS OS U U PI U 90.00% PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands 99.99% 26, Boulevard Royal, L-2449, Luxembourg U OS 100.00% 100.00% Unit 306-308, 3/F Azia Center, 1233 Lujiazui Ring Road, China (Shanghai) Pilot Free Trade Zone, China U U U U U U U 73.57% 26, Boulevard Royal, L-2449, Luxembourg 98.72% 82.24% 36.63% 99.85% 61.01% 49.96% Name of entity Curian Capital, LLC Curian Clearing LLC (Michigan) Eastspring Al-Wara’ Investments Berhad Eastspring Global Smart Beta EMP Securities Investment Trust (H) Eastspring Global Smart Beta EMP Securities Investor Trust (USD) Eastspring Infrastructure Debt Fund L.P. Eastspring Investment Asia Real Estate Multi Asset Income Fund Eastspring Investment Asia Sustainable Bond Fund Eastspring Investment Management (Shanghai) Company Limited Eastspring Investments - Global Growth Equity Fund Eastspring Investments - Global Low Volatility Equity Fund Eastspring Investments - Global Technology Fund Eastspring Investments - India Discovery Fund Eastspring Investments- Japan Fundamental Value Fund Eastspring Investments - Pan European Fund Eastspring Investments - US High Yield Bond Fund Eastspring Investments (Hong Kong) Limited OS 100.00% 13th Floor, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong Eastspring Investments (Luxembourg) SA Eastspring Investments (Singapore) Limited Eastspring Investments Asia Oceania High Dividend Equity Fund Eastspring Investments Asia Oceania U&I Bond Fund Eastspring Investments Asia Pacific Equity Fund Eastspring Investments Asian Bond Fund Eastspring Investments Asian Dynamic Fund Eastspring Investments Asian Equity Fund Eastspring Investments Asian Equity Income Fund Eastspring Investments Asian High Yield Bond Fund Eastspring Investments Asian High Yield Bond MY Fund Eastspring Investments Asian Infrastructure Equity Fund Eastspring Investments Asian Investment Grade Bond Fund Eastspring Investments Asian Low Volatility Equity Fund Eastspring Investments Asian Multi Factor Equity Fund Eastspring Investments Asian Property Securities Fund Eastspring Investments Berhad OS OS U U U U U U U U U U U U U U 100.00% 26 Boulevard Royal, L-2449, Luxembourg 10 Marina Boulevard, #32-01, Marina Bay Financial Centre Tower 2, Singapore 018983 Eastspring Investments Limited, Marunouchi Park Bldg., 2-6-1 Marunochi, Chiyoda-ku, Tokyo, Japan 100-6905 100.00% 100.00% 99.93% 99.99% 26, Boulevard Royal, L-2449, Luxembourg 53.60% 92.59% 85.19% 78.33% 39.86% 86.36% Eastspring Investments Berhad, Level 22, Menara Prudential, Persiaran TRX Barat, 55188 Tun Razak Exchange, Kuala Lumpur, Malaysia 50.78% 26, Boulevard Royal, L-2449, Luxembourg 99.93% 97.27% 100.00% 97.72% OS 100.00% Level 25, Menara Hong Leong, No. 6 Jalan Damanlela, Bukit Damansara, 50490 Kuala Lumpur, Malaysia Eastspring Investments China A Shares Growth Fund Eastspring Investments Dragon Peacock Fund Eastspring Investments Emerging Markets Star Players U U U 100.00% 26, Boulevard Royal, L-2449, Luxembourg 53.18% 36.99% Eastspring Investments Limited, Marunouchi Park Bldg., 2-6-1 Marunochi, Chiyoda-ku, Tokyo, Japan 100-6905 prudentialplc.com Prudential plc Annual Report 2019 303 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationD7 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 Eastspring Investments Equity Income Fund Eastspring Investments European Inv Grade Bond Fund Eastspring Investments Fund Management Limited Liability Company Eastspring Investments Global Emerging Markets Bond Fund Eastspring Investments Global Equity Navigator Fund Eastspring Investments Global Market Navigator Fund Eastspring Investments Global Multi Asset Income Plus Growth Fund Eastspring Investments Greater China Equity Fund Eastspring Investments Hong Kong Equity Fund Eastspring Investments Incorporated Eastspring Investments India Consumer Equity Open Limited Eastspring Investments India Equity Fund Eastspring Investments India Equity Open (Asset Growth Type) Eastspring Investments India Equity Open Limited Eastspring Investments India Infrastructure Equity Open Limited Classes of shares held Proportion held Registered office address and country of incorporation U U MI U U U U U U OS OS U U OS OS 20.89% Eastspring Investments Berhad, Level 22, Menara Prudential, Persiaran TRX Barat, 55188 Tun Razak Exchange, Kuala Lumpur, Malaysia 99.28% 26, Boulevard Royal, L-2449, Luxembourg 100.00% 23rd Floor, Saigon Trade Center, 37 Ton Duc Thang Street, District 1, Ho Chi Minh City, Vietnam 97.03% 26, Boulevard Royal, L-2449, Luxembourg 100.00% 99.68% 99.99% 95.19% 93.10% 100.00% 874 Walker Road, Suite C, Dover, DE 19904, USA 100.00% 3rd Floor, 355 NEX, Rue du Savoir, Cybercity Ebene 72201, Mauritius 68.69% 26, Boulevard Royal, L-2449, Luxembourg 28.90% Eastspring Investments Limited, Marunouchi Park Bldg., 2-6-1 Marunochi, Chiyoda-ku, Tokyo, Japan 100-6905 100.00% 3rd Floor, 355 NEX, Rue du Savoir, Cybercity Ebene 72201, Mauritius 100.00% Eastspring Investments Japan Dynamic MY Fund U 27.65% Eastspring Investments Berhad, Level 22, Menara Prudential, Persiaran TRX Barat, 55188 Tun Razak Exchange, Kuala Lumpur, Malaysia Eastspring Investments Limited OS 100.00% Marunouchi Park Building, 6-1 Marunouchi 2-chome, Chiyoda-Ku, Tokyo, Japan Eastspring Investments MY Focus Fund Eastspring Investments North America Value Fund U U 21.40% Eastspring Investments Berhad, Level 22, Menara Prudential, Persiaran TRX Barat, 55188 Tun Razak Exchange, Kuala Lumpur, Malaysia 99.84% 26, Boulevard Royal, L-2449, Luxembourg Eastspring Investments Services Pte. Ltd. OS 100.00% 10 Marina Boulevard, #32-01, Marina Bay Financial Centre, Singapore 018983 Eastspring Investments SICAV-FIS – Alternative Investments Fund Eastspring Investments SICAV-FIS – Asia Pacific Loan Fund Eastspring Investments SICAV-FIS Universal USD Bond Fund Eastspring Investments SICAV-FIS Universal USD Bond II Fund Eastspring Investments Unit Trust – Dragon Peacock Fund Eastspring Investments US Bond Fund Eastspring Investments US Corporate Bond Fund Eastspring Investments US High Inv Grade Bond Fund Eastspring Investments US Investment Grade Bond Fund Eastspring Investments US Strategic Income Bond Fund Eastspring Investments US Total Return Bond Fund U U U U U U U U U U U 100.00% 26, Boulevard Royal, L-2449, Luxembourg 100.00% 100.00% 100.00% 97.59% 10 Marina Boulevard, #32-01, Marina Bay Financial Centre, Singapore 018983 27.84% 26, Boulevard Royal, L-2449, Luxembourg 70.82% 91.67% 45.41% 100.00% 100.00% 304 Prudential plc Annual Report 2019 prudentialplc.com D OTHER INFORMATION CONTINUEDKey to share classes: LBG LPI MI MFS NSB OS PI PS U Limited by Guarantee Limited Partnership Interest Membership Interest Mutual Fund Shares Non-stock basis Ordinary Shares Partnership Interest Preference Shares Units Registered office address and country of incorporation 10 Marina Boulevard, #32-01, Marina Bay Financial Centre, Singapore 018983 23rd Floor, Saigon Trade Center Building, 37 Ton Duc Thang Street, Ben Nghe Ward, District 1, Ho Chi Minh City, Vietnam Name of entity Eastspring Investments UT Singapore ASEAN Equity Fund Eastspring Investments UT Singapore Select Bond Fund Eastspring Investments Vietnam Navigator Fund Eastspring Investments World Value Equity Fund Classes of shares held Proportion held 99.76% 77.80% 71.42% U U U U 92.88% 26, Boulevard Royal, L-2449, Luxembourg Eastspring Overseas Investment Fund Management (Shanghai) Company Limited OS 100.00% Unit 306-308, 3/F., 1233 Lujiazui Ring Road, China (Shanghai) Pilot Free Trade Zone, China Eastspring Real Assets Partners Eastspring Securities Investment Trust Co., Ltd. First State China Focus Fund First State Global Property A Fubon China Currency Fund OS OS U U U 100.00% PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands 99.54% 4th Floor, No.1 Songzhi Road, Taipei 110, Taiwan 66.58% 70 Sir John Rogerson’s Quay, Dublin 2, D02 R296, Ireland 52.26% 38 Beach Road, #06-11 South Beach Tower, Singapore 189767 20.59% 8F, No. 108, Sec 1, Tun Hwa, South Road, Taipei, Taiwan Furnival Insurance Company PCC Limited OS 100.00% PO Box 34, St Martin’s House Le Bordage, St Peter Port Guernsey, GY1 4AU GS Twenty Two Limited Hermitage Management LLC Hyde Holdco 1 Limited ICICI Prudential Asset Management Company Limited ICICI Prudential Life Insurance Company Limited ICICI Prudential Pension Funds Management Company ICICI Prudential Trust Limited Invesco Fixed Maturity Selective Emerging Market Bonds 2024 Invesco Select 6 Year Maturity Global Bond Fund INVEST Financial Company Insurance Agency LLC of Illinois iShares Core MSCI Europe iShares Fallen Angels High Yield Corporate Bond UCITS ETF Wing iShares S&P 500 Financials Sector UCITS iShares S&P 500 Utilities Sector UCITS ETF OS OS OS OS OS OS OS U U 100.00% 1 Angel Court, London, EC2R 7AG, United Kingdom 100.00% 1 Corporate Way, Lansing, MI 48951, USA 100.00% 1 Angel Court, London, EC2R 7AG, United Kingdom 49.00% 22.11% 22.11% 49.00% 12th Floor, Narain Manzil, 23, Barakhamba Road, New Delhi 110001, India ICICI PruLife Towers, 1089 Appasaheb Marathe Marg, Prabhadevi, Mumbai 400025, India 12th Floor, Narain Manzil, 23, Barakhamba Road, New Delhi 110001, India 61.60% 8F, No 122, Tung Hua N. Rd. Taipei, Taiwan 68.28% OS 100.00% 208 South LaSalle Street, Chicago, IL 60604, USA U U U U 21.26% State Street Fund Services (Ireland) Limited, 78 Sir John Rogerson's Quay, Dublin 2, Ireland 47.36% 79 Sir John Rogerson's Quay, Dublin 2, D02 RK 57, Ireland 22.98% 53.39% Jackson Charitable Foundation Inc NSB 100.00% 1 Corporate Way, Lansing, MI 48951, USA Jackson Holdings LLC Jackson National Asset Management LLC Jackson National Life (Bermuda) Limited Jackson National Life Distributors LLC Jackson National Life Insurance Company Jackson National Life Insurance Company of New York Lasalle Property Securities SICAV-FIS M&G Asia Property Trust M&G Luxembourg European Strategic Value Fund OS OS OS OS OS OS U U U 100.00% 1105 North Market Street, Suite 1300, Wilmington, DE 19801, USA 100.00% 1 Corporate Way, Lansing, MI 48951, USA 100.00% Cedar House, Hamilton, Bermuda 100.00% 1209 Orange Street, Wilmington, DE 19801, USA 100.00% 1 Corporate Way, Lansing, MI 48951, USA 100.00% 2900 Westchester Avenue, Suite 305, Purchase, NY 10577, USA 99.97% 11-13 Boulevard de la Foire, L-1528 Luxembourg 99.97% 8 Marina Boulevard, 05-02 Marina Bay, Financial Centre Tower 1, Singapore, 018981 50.24% 49 Avenue J.F. Kennedy, L-1855, Luxembourg M&G Real Estate Asia Holding Company Pte. Ltd. OS 33.00% 10 Marina Boulevard, #31-03, Marina Bay, Financial Centre Tower 2, Singapore, 018983 prudentialplc.com Prudential plc Annual Report 2019 305 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationD7 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 Manulife Asia Pacific Bond Fund Manulife China Dim Sum High Yield Bond Fund Manulife China Offshore Bond Fund Manulife USD High Yield Bond Fund Mission Plans of America, Inc National Planning Holdings, LLC Nomura Six Years Fixed Maturity Asia Pacific Emerging Market Bond Fund Nomura Six Years Fixed Maturity Emerging Market Bond Fund Nomura Six Years Ladder Maturity Asia Pacific Emerging Market Bond Fund Classes of shares held Proportion held Registered office address and country of incorporation U U U U OS OS U U U 27.29% 9/F, No 89 Son Ren Road, Taipei, Taiwan 58.33% 39.57% 37.47% 100.00% 1999 Bryan Street, Suite 900, Dallas, TX 75201, USA 100.00% 1209 Orange Street, Wilmington, DE 19801, USA 33.30% 101 Tower, 30F, No. 7 Sec. 5, Xinyi Rd., Xinyi Dist., Taipei, Taiwan 42.14% 25.01% North Sathorn Holdings Company Limited OS 100.00% 3 Rajanakarn Building, 20th Floor, South Sathorn Road, Yannawa Subdistrict, Sathorn District, Bangkok, Thailand PCA IP Services Limited PCA Life Assurance Co. Ltd. PCA Reinsurance Co. Ltd. PGDS (US One) LLC PPM America Capital Partners III, LLC PPM America Capital Partners IV, LLC PPM America Capital Partners V, LLC PPM America Capital Partners VI, LLC PPM America Private Equity Fund III LP PPM America Private Equity Fund IV LP PPM America Private Equity Fund V LP PPM America Private Equity Fund VI LP PPM America Private Equity Fund VII LP PPM America, Inc PPM CLO 2 Ltd. PPM CLO 2, LLC PPM CLO 2018-1 Ltd. PPM CLO 3 Ltd. PPM CLO 3, LLC PPM CLO 4 Ltd. PPM Funds - PPM Core plus Fixed Income Fund PPM Funds - PPM Large Cap Value Fund PPM Funds - PPM Long Short Credit Fund PPM Funds - PPM Mid Cap Value Fund OS 100.00% 13th Floor, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong OS OS OS MI MI MI MI LPI LPI LPI LPI LPI OS OS PS PS 99.79% 8th Floor, No.1 Songzhi Road, Taipei, 11047, Taiwan 100.00% Unit Level 13(A), Main Office Tower, Financial Park Labuan, Jalan Merdeka, 87000 Federal Territory of Labuan, Malaysia 100.00% 1209 Orange Street, Wilmington, DE 19801, USA 60.50% 874 Walker Road, Suite C, Dover, DE 19904, USA 34.50% 34.00% 32.00% 50.06% 49.97% 49.97% 59.94% 54.00% 100.00% 100.00% PO Box 1093, Queensgate House, Grand Cayman KY1-1102, Cayman Islands 100.00% 4001 Kennet Pike, Suite 301, Wilmington, DE, 19807, USA 100.00% Queensgate House, South Church Street, George Town, Grand Cayman KY1-1102, Cayman Islands OS 100.00% PO Box 1093, Queensgate House, Grand Cayman KY1-1102, Cayman Islands PS PS MFS MFS MFS MFS 100.00% 4001 Kennet Pike, Suite 301, Wilmington, DE, 19807, USA 100.00% PO Box 1093, Queensgate House, Grand Cayman KY1-1102, Cayman Islands 100.00% 84 State Street, 6th Floor, Boston, MA 02109 99.96% 100.00% 99.57% 306 Prudential plc Annual Report 2019 prudentialplc.com D OTHER INFORMATION CONTINUEDKey to share classes: LBG LPI MI MFS NSB OS PI PS U Limited by Guarantee Limited Partnership Interest Membership Interest Mutual Fund Shares Non-stock basis Ordinary Shares Partnership Interest Preference Shares Units Classes of shares held Proportion held Registered office address and country of incorporation 100.00% 774 Walker Road, Suite C, Dover, DE 19904, USA Name of entity PPM Holdings, Inc PPM Loan Management Company LLC PPM Loan Management Holding Company LLC Prenetics Limited OS MI MI PS 100.00% 100.00% 14.27% Pru Life Insurance Corporation of U.K. OS 100.00% Pru Life UK Asset Management and Trust Corporation OS 100.00% 7th Floor, Prosperity Millennia Plaza, 663 King’s Road, North Point, Hong Kong 9th Floor, Uptown Place Tower 1, 1 East 11th Drive, Uptown Bonifacio, 1634 Taguig City, Metro Manila, Philippines 2/F., Uptown Parade 2, 36th Street, Uptown Bonifacio, 1634 Taguig City, Philippines Prudence Foundation LBG 100.00% 13th Floor, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong Prudential (Cambodia) Life Assurance Plc OS 100.00% 20th Floor, #445, Monivong Blvd, Boeung Prolit, 7 Makara, Phnom Penh Tower, Phnom Penh, Cambodia Prudential (US Holdco 1) Limited Prudential Africa Holdings Limited Prudential Africa Services Limited Prudential Assurance Company Singapore (Pte) Limited Prudential Assurance Malaysia Berhad* Prudential Assurance Uganda Limited Prudential BSN Takaful Berhad† Prudential Corporation Australasia Holdings Pty Limited (in liquidation) Prudential Corporation Holdings Limited Prudential Five Limited (in liquidation) Prudential General Insurance Hong Kong Limited Prudential Group Secretarial Services HK Limited Prudential Group Secretarial Services Limited Prudential Holdings Limited Prudential Hong Kong Limited Prudential International Staff Pensions Limited Prudential International Treasury Limited Prudential IP Services Limited Prudential Life Assurance (Lao) Company Limited Prudential Life Assurance (Thailand) Public Company Limited Prudential Life Assurance Kenya Limited Prudential Life Assurance Zambia Limited Prudential Life Insurance Ghana Limited Prudential Life Vault Limited Prudential Mauritius Holdings Limited Prudential Myanmar Life Insurance Limited Prudential Pensions Management Zambia Limited Prudential Services Asia Sdn. Bhd. OS OS OS OS OS OS OS 100.00% 1 Angel Court, London, EC2R 7AG, United Kingdom 100.00% 100.00% 5th Ngong Avenue, Nairobi, Kenya 100.00% 30 Cecil Street, #30-01 Prudential Tower, Singapore 049712 51.00% Level 20, Menara Prudential, Persiaran TRX Barat, 55188 Tun Razak Exchange, Kuala Lumpur, Malaysia 100.00% Kampala Road, Kampala, Uganda 49.00% Level 8A, Menara Prudential, No. 10 Jalan Sultan Ismail, 50250 Kuala Lumpur, Malaysia OS 100.00% 31 Highgate Circuit, Kellyville, NSW, 2155, Australia OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS PS 100.00% 1 Angel Court, London, EC2R 7AG, United Kingdom 100.00% c/o Mazars LLP, 45 Church Street, Birmingham, B3 2RT, United Kingdom 100.00% 59th Floor, One Island East, 18 Westlands Road, Quarry Bay, Hong Kong 100.00% 13th Floor, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong 100.00% 1 Angel Court, London, EC2R 7AG, United Kingdom 100.00% 4th Floor, Saltire Court, 20, Castle Terrace, Edinburgh, EH1 2EN, United Kingdom 100.00% 59th Floor, One Island East, 18 Westlands Road, Quarry Bay, Hong Kong 100.00% 1 Angel Court, London, EC2R 7AG, United Kingdom 100.00% 13th Floor, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong 100.00% 1 Angel Court, London, EC2R 7AG, United Kingdom 100.00% 5th Floor, Lao international Business and Tourist Center Project (Vientiane Center), Khouvieng Road, Nongchan Village, Sisattanak District, Vientiane Capital, Lao PDR 99.93% 9/9 Sathorn Building, 20th–27th Floor, South Sathorn Road, Yannawa, Sahtorn, Bangkok 10120, Thailand 100.00% 5th Ngong Avenue, Nairobi, Kenya 100.00% Prudential House, Thabo Mbeki Road, Lusaka, Zambia 100.00% 35 North Street, Accra, Ghana 100.00% 98 Awolowo Road, South-West Ikoyi, Lagos, Nigeria 100.00% 3rd Floor, 355 NEX, Rue du Savoir, Cybercity Ebene, 72201, Mauritius 100.00% #15-01, 15th Floor, Sule Square, 221 Sule Pagoda Road, Kyauktada Township, Yangon, Myanmar 49.00% Prudential House, Thabo Mbeki Road, Lusaka, Zambia 100.00% 100.00% Suite 1005, 10th Floor, Wisma Hamzah-Kwong Hing, No. 1 Leboh Ampang, 50100 Kuala Lumpur, Malaysia prudentialplc.com Prudential plc Annual Report 2019 307 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationD7 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 Prudential Services Limited Prudential Services Singapore Pte. Ltd. Prudential Singapore Holdings Pte. Limited Prudential Vietnam Assurance Private Limited Prudential Zenith Life Insurance Limited PT. Eastspring Investments Indonesia PT. Prudential Life Assurance PVFC Financial Limited Classes of shares held Proportion held Registered office address and country of incorporation OS OS OS OS OS OS OS OS 100.00% 1 Angel Court, London, EC2R 7AG, United Kingdom 100.00% 1 Wallich Street, #19-01 Guoco Tower, Singapore 078881 100.00% 30 Cecil Street, #30-01 Prudential Tower, Singapore 049712 100.00% 25th Floor, Saigon Trade Centre, 37 Ton Duc Thang Street, District 1, Ho Chi Minh City, Vietnam 51.00% 99.95% 13th Floor, Civic Towers, Ozumba Mbadiwe Avenue, Victoria Island, Lagos, Nigeria Prudential Tower, 23rd Floor, Jl. Jend. Sudirman Kav.79, Jakarta 12910, Indonesia 94.62% Prudential Tower, JI. Jend. Sudirman Kav. 79, Jakarta 12910, Indonesia 100.00% Suite 509, 5/F, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong REALIC of Jacksonville Plans, Inc OS 100.00% 1999 Bryan Street, Suite 900, Dallas, TX 75201, USA Reksa Dana Eastspring IDR Fixed Income Fund (NDEIFF) Reksa Dana Eastspring Investments Alpha Navigator Fund Reksa Dana Eastspring Investments Cash Reserve Reksa Dana Eastspring Investments IDR High Grade Reksa Dana Eastspring Investments Value Discovery Reksa Dana Syariah Eastspring Syariah Equity Islamic Asia Pacific USD Reksa Dana Syariah Eastspring Syariah Fixed Income Amanah Reksa Dana Syariah Eastspring Syariah Money Market Khazanah Reksa Dana Syariah Penyertaan Terbatas Bahana Syariah BUMN Fund Rhodium Investment Fund U U U U U U U U U U 99.91% 78.29% 100.00% 91.04% 91.94% 94.37% 65.65% 99.93% 99.01% 99.98% Prudential Tower, 23rd Floor, Jl. Jend. Sudirman Kav.79, Jakarta 12910, Indonesia Graha CIMB Niaga 21st Floor. Jl Jend Sudirman Kav 58, Jakarta - 12190, Indonesia. 10 Marina Boulevard, #32-01, Marina Bay Financial Centre Tower 2, Singapore 018983 ROP, Inc OS 100.00% 1209 Orange Street, Wilmington, DE 19801, USA SCB SET Banking Sector Index (Accumulation) Schroder Asian Investment Grade Credit Schroder Emerging Markets Fund Schroder Multi-Asset Revolution Schroder US Dollar Money Fund Scotts Spazio Pte. Ltd. SINOPAC China High Yield Fixed Income Fund Squire Capital I LLC Squire Capital II LLC Squire Reassurance Company II, Inc Squire Reassurance Company LLC Sri Han Suria Sdn. Bhd. Staple Limited U U U U U OS U MI OS OS OS OS 32.08% 7-8th Floor, SCB Park Plaza 1, 18 Ratchadapisek Road, Chatuchak, Bangkok 10900, Thailand 41.08% 138 Market Street, #23-01 CapitaGreen, Singapore 048946 58.49% 63.81% 37.19% HSBC Institutional Trust Service (Asia) Limited, 1 Queen's Road Central, Hong Kong. 45.00% 30 Cecil Street #23-02 Prudential Tower, Singapore, 049712 35.38% 9F No.39 Section 1, Chung Hua Road, Taipei, Taiwan 100.00% 1 Corporate Way, Lansing, MI 48951, USA 100.00% 100.00% 40600 Ann Arbor Road, East Suite 201, Plymouth, MI 48170, USA 100.00% 1 Corporate Way, Lansing, MI 48951, USA 51.00% Suite 1005, 10th Floor Wisma Hamzah-Kwong Hing, No. 1 Leboh Ampang, 50100 Kuala Lumpur, Malaysia OS 100.00% 3 Rajanakarn Building, 20th Floor, South Sathorn Road, Yannawa Subdistrict, Sathorn District, Bangkok, Thailand Taishin Emerging Markets Bond Fund U 28.78% 1F, No.9, Dehui St., Zhongshan Dist. Taipei, Taiwan 308 Prudential plc Annual Report 2019 prudentialplc.com D OTHER INFORMATION CONTINUEDKey to share classes: LBG LPI MI MFS NSB OS PI PS U Limited by Guarantee Limited Partnership Interest Membership Interest Mutual Fund Shares Non-stock basis Ordinary Shares Partnership Interest Preference Shares Units Name of entity Templeton Asian Growth Fund Thanachart Fund Management Co., Ltd. Thanachart Long Term Fixed Income Fund TMB Asset Management Co., Ltd. UOB Smart Global Healthcare UOB Smart Millennium Growth Fund VFL International Life Company SPC, Ltd. Wynnefield Private Equity Partners I, L.P. Classes of shares held Proportion held Registered office address and country of incorporation U OS U OS U U OS LPI 26.08% 8A, rue Albert Borschette, L-1246 Luxembourg 50.10% 27.79% 65.00% 35.44% 36.96% No. 231, MBK Life Building, 5th-7th Floor, Ratchadamri Road, Lumpini Sub-district, Pathumwan District, Bangkok, Thailand 32nd FL, Abdulrahim Place, 990 Rama IV Rd, Silom, Bangrak, Bangkok 10500, Thailand 23A, 25th Floor, Asia Centre Building, 173/27-30, 32-33 South Sathorn Road, Thungmahamek, Sathorn, Bangkok 10120, Thailand 100.00% 171 Elgin Avenue, Grand Cayman, Cayman Islands 99.00% 1105 North Market Street, Suite 1300, Wilmington, DE 19801, USA * Prudential Assurance Malaysia Berhad is consolidated at 100 per cent in the Group’s financial statements reflecting the economic interest to the Group. † Prudential BSN Takaful Berhad is a joint venture that is accounted for using the equity method, for which the Group has an economic interest of 70 per cent for all business sold up to 23 December 2016 and of 49 per cent for new business sold subsequent to this date. prudentialplc.com Prudential plc Annual Report 2019 309 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationStatement of financial position of the parent company 31 December Non-current assets Investments in subsidiary undertakings Amounts owed by 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 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 2019 $m 2018* $m 5 6 7 8 6 9 8 8 8 10 10 11 10,444 2,000 12,444 6,352 4 66 – – 54 6,476 (520) – (141) (14) – (78) (753) 5,723 18,167 (4,304) (690) – (4,994) 13,173 172 2,625 10,376 13,173 2019 $m 12,255 13,787 – 13,787 7,520 6 53 6 88 28 7,701 (601) (539) (1,192) (13) (15) (129) (2,489) 5,212 18,999 (8,503) (658) (350) (9,511) 9,488 166 2,502 6,820 9,488 2018 $m 1,390 * The 2018 comparative results have been re-presented from those previously published to reflect the change in the Company’s presentational currency from pounds sterling to US dollars (as described in note 2). The financial statements of the parent company on pages 310 to 318 were approved by the Board of Directors on 10 March 2020 and signed on its behalf. Paul Manduca Chairman Mike Wells Group Chief Executive Mark FitzPatrick Group Chief Financial Officer and Chief Operating Officer 310 Prudential plc Annual Report 2019 prudentialplc.com Statement of changes in equity of the parent company $m 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 Foreign exchange translation differences due to change in presentation currency* Total comprehensive income for the year Transactions with owners, recorded directly in equity New share capital subscribed Dividends Foreign exchange translation differences due to change in presentation currency* Total contributions by and distributions to owners Balance at 31 December 2018 Balance at 1 January 2019 Profit for the year Actuarial losses recognised in respect of the defined benefit pension scheme Foreign exchange translation differences due to change in presentation currency* Total comprehensive income for the year Transactions with owners, recorded directly in equity New share capital subscribed Share based payment transactions Dividend in specie of M&G plc Dividends Foreign exchange translation differences due to change in presentation currency* Total contributions by and distributions to owners Balance at 31 December 2019 Share capital 175 – – – – – 1 – (10) (9) 166 166 – – – – – – – – 6 6 Share premium Profit and loss account 2,635 – – – – – 22 – (155) (133) 2,502 2,502 – – – – 22 – – – 101 123 Total equity 10,321 (12) 1,390 21 (428) 983 23 (1,662) (165) (1,804) 9,488 7,511 (12) 1,390 21 (428) 983 – (1,662) – (1,662) 6,820 6,820 12,255 (75) 9,488 12,255 (75) 393 393 12,573 12,573 – (4) (7,379) (1,634) – (9,017) 10,376 22 (4) (7,379) (1,634) 107 (8,888) 13,173 172 2,625 * The 2018 comparative results have been re-presented from those previously published to reflect the change in the Company’s presentational currency from pounds sterling to US dollars (as described in note 2). prudentialplc.com Prudential plc Annual Report 2019 311 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional 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, Africa and, prior to the demerger of M&G plc in October 2019, the UK and Europe. The Group helps individuals to de-risk their lives and deal with their biggest financial concerns through life and health insurance, and retirement and asset management solutions. On 21 October 2019, the Company completed the demerger of M&G plc, its UK and Europe business, from Prudential plc resulting in two separately listed companies. The Directors of the Company distributed its investment in M&G plc to the Company’s shareholders in the form of a dividend in specie. 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; — The effects of new but not yet effective IFRSs; and — An additional balance sheet for the beginning of the earliest comparative period following the retrospective change in the accounting policy with respect to the presentation currency (as outlined further below). 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; — IFRS 15, ‘Revenue from Contracts with Customers’ in respect of revenue recognition; and — IAS 1, ‘Presentation of Financial Statements’ in respect of presenting comparative information on change in presentation currency. Following the disposal of M&G plc, the Company and Group will manage its central cash resources and remittances primarily in US dollars. At 31 December 2019, terms of the majority of loans payable to and receivable from subsidiary undertakings previously denominated in pounds sterling were amended to reflect US dollars. From 31 December 2019, dividend income and dividend declared by the Company will be denominated in US dollars. Accordingly, as at 31 December 2019, the primary currency of the Company’s financing and investment activities is US dollars and the functional currency of the Company changed from pounds sterling to US dollars prospectively from that date. The Company’s assets, liabilities and equity were redenominated into US dollars using the spot exchange rate at 31 December 2019. As a result of the change in functional currency, the Company has chosen to change its presentation currency to US dollars which is accounted for retrospectively. Prior periods have been restated into US dollars using closing rates at the relevant balance sheet date for assets, liabilities, share capital, share premium and other capital reserves. Items of total comprehensive income have been converted at the rate prevailing on the date of transaction, or at the average rate for the relevant year where this provides an equivalent measurement. The accounting policies set out in note 3 below have, unless otherwise stated, been applied consistently to both years presented in these financial statements. 312 Prudential plc Annual Report 2019 prudentialplc.com 3 Significant accounting policies Investments in subsidiary undertakings Investments in subsidiary undertakings are shown at cost less impairment. Investments are assessed for impairment by comparing the net assets of the subsidiary undertakings with the carrying value of the investment. Amounts owed by subsidiary undertakings Amounts owed by subsidiary undertakings are shown at cost, less provisions. Provisions are determined using the expected credit loss approach under IFRS 9. 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. Refer to Section 6.1 of the Group Chief Risk and Compliance Officer’s report for detail of the approach to market risk. Financial Instruments 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. The Company assesses impairment on its loans and receivables using the expected credit loss approach. 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). For loans recallable on demand 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. For loans with a fixed maturity date the expected credit loss has been determined with reference to the historic experience of loans with equivalent credit characteristics. 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. Where modifications to borrowings do result in a substantial difference to the terms of the instrument, the instrument is treated as if it had been extinguished and replaced by a new instrument which is initially recognised at fair value and subsequently accounted for on an amortised cost basis using the effective interest method. Any costs or fees arising from such a modification are recognised as an expense when incurred. 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 Transactions not denominated in the Company’s functional currency are initially recorded at the functional rate of currency prevailing on the date of the transaction. Monetary assets and liabilities not denominated in the Company’s functional currency, including borrowings that have been used to finance or provide a hedge against Group equity investments in overseas subsidiaries, are translated to the Company’s functional currency at year end exchange rates. The impact of these currency translations is recorded within the profit and loss account for the year. As discussed above, the Company’s functional currency changed from pounds sterling to US dollars on 31 December 2019. The Company has also changed its presentation currency from pounds sterling to US dollars. prudentialplc.com Prudential plc Annual Report 2019 313 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information3 Significant accounting policies continued 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, they can be carried back for one year or carried forward indefinitely to be offset, subject to restrictions based on future taxable profits, against profits arising from the same company or other companies in the same UK tax group. 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 losses may be offset against taxable profits arising in the same or future accounting periods for the purposes of determining current and deferred taxes. Pensions The Company historically assumed a portion of the pension surplus or deficit of the Group’s main pension scheme, the Prudential Staff Pension Scheme (‘PSPS’). The Company’s portion of the surplus was transferred to M&GPrudential Services Limited at 30 June 2019. Up until that date, the Company applied the requirements of IAS 19 ‘Employee Benefits’ (as revised in 2011) for the accounting of its interest in the PSPS surplus or deficit. The key items are highlighted below. 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. The loss on transfer of the pension surplus transferred to M&GPrudential Services Limited has been recognised in the profit or loss account. 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. Cash receipts from business units in respect of newly issued share schemes are treated as returns of capital within investments in subsidiaries. 314 Prudential plc Annual Report 2019 prudentialplc.com NOTES ON THE PARENT COMPANY FINANCIAL STATEMENTS CONTINUED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. 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 Accounting policy difference* Share in the IFRS net equity of the Group† Shareholders’ equity of the Group in accordance with IFRS 2019 $m 2018 $m 12,255 15 (11,487) 783 1,390 7 2,622 4,019 31 Dec 2019 $m 31 Dec 2018 $m 13,173 33 6,271 19,477 9,488 18 12,462 21,968 * 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 $9,599 million for the year ended 31 December 2019 (2018: $1,996 million). Dividends received in 2019 included dividends from M&G plc prior to demerger of $5,566m and dividends from US subsidiaries of $2,000m in the form of non-current debt instruments. 5 Investments in subsidiary undertakings At 1 January Capital injections and acquisitions Distribution of M&G plc – cost of investment Other disposals Amounts in respect of share based payments Other* At 31 December 2019 $m 2018 $m 13,787 72 (3,730) (13) (123) 451 10,444 14,608 117 – – (81) (857) 13,787 * Includes amounts relating to foreign translation differences arising on the retranslation of reserves due to the change in the Company’s presentation currency Prior to the demerger of M&G plc from the Group in October 2019, the following transactions and restructuring occurred: — On 20 September 2019, the Company disposed of its investment in Prudential Capital Holding Company Limited to M&G plc, for consideration of $85 million. A gain on disposal of $73 million is recognised in the income statement. — On 8 October 2019, the Company acquired Prudential Africa Holdings Limited from Prudential Group Holdings Limited, a subsidiary of the Company, in exchange for consideration of $49 million. On 15 October 2019, the Company subsequently transferred Prudential Africa Holdings Limited to Prudential Corporation Asia Limited under a share-for-share exchange. Additionally, in connection with this transaction, the Company increased its investment in Prudential Group Holdings Limited by $23 million. — Also on 15 October 2019, shares in Prudential (US Holdco 1) Limited were transferred to Prudential Corporation Asia Limited under a share-for-share exchange. There was no change to the Company’s total investment in subsidiary undertakings as a result of this transfer. prudentialplc.com Prudential plc Annual Report 2019 315 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information5 Investments in subsidiary undertakings continued On 21 October 2019 the Company distributed its equity shareholding in its subsidiary M&G plc as a dividend in-specie. In accordance with IFRIC 17 the value of dividend in-specie recognised as distribution within the statement of changes in equity was the fair value of M&G plc at the date of distribution. As also required by IFRIC 17, the difference between the fair value of M&G plc on distribution and the previous carrying value of the Company’s investment in M&G plc of $3,649 million is recognised as gain within profit for the year. Amounts in respect of share-based payments of $(123) million (2018: $(81) million) comprise of $5 million (2018: $7 million) in respect of share-based payments reflecting the value of payments settled by the Company for employees of its subsidiary undertakings, less $(128) million (2018: $(88) million) relating to cash received from subsidiaries in respect of share awards. Investments in subsidiaries held at 31 December 2019 have been assessed for impairment and no impairment was identified. Subsidiary undertakings of the Company at 31 December 2019 are listed in note D7 of the Group financial statements. 6 Derivative financial instruments Cross-currency swap Inflation-linked swap Total 31 Dec 2019 $m 31 Dec 2018 $m Fair value assets Fair value liabilities Fair value assets Fair value liabilities – – – – – – 6 – 6 – 539 539 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 (loss) before tax of $(77) million (2018: gain of $27 million). 7 Pension scheme financial position The majority of Prudential staff in the UK are members of the Group’s pension schemes. The largest scheme up to the demerger of M&G plc was the Prudential Staff Pension Scheme (the Scheme) which is primarily a closed defined benefit scheme. Historically, all pension surplus and deficit were attributable to subsidiaries of M&G plc in line with the Group’s allocation policy with the exception of 30 per cent of the surplus attaching PSPS, which was allocated to Prudential plc. In preparation for the demerger of M&G plc in 2019, at 30 June 2019, the 30 per cent of surplus attaching to PSPS of $20 million was formally reallocated to M&GPrudential Services Limited. After the demerger of M&G plc, the Company no longer has any interest in the defined benefit pension scheme recognised on its balance sheet. 316 Prudential plc Annual Report 2019 prudentialplc.com 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 Total borrowings Borrowings are repayable as follows: Within 1 year Between 1 and 5 years After 5 years Core structural borrowings Other borrowings Total 31 Dec 2019 $m 31 Dec 2018 $m 31 Dec 2019 $m 31 Dec 2018 $m 31 Dec 2019 $m 31 Dec 2018 $m 4,304 690 – 4,994 – 4,994 – 414 4,580 4,994 8,503 658 350 9,511 – 9,511 – 748 8,763 9,511 – – – – 520 520 520 – – 520 – – – – 601 601 601 – – 601 4,304 690 – 4,994 520 5,514 520 414 4,580 5,514 8,503 658 350 9,511 – 601 10,112 601 748 8,763 10,112 Notes (i) (ii) (iii) Further details on the core structural borrowings of the Company are provided in note C6.1 of the Group IFRS 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. During 2019, the Company redeemed its £400 million 11.375 per cent Tier 2 subordinated notes, and issued further subordinated debt for proceeds of $371 million, net of issue costs. In addition, during 2019, the Company agreed with the holders of two subordinated debt instruments to alter the terms and conditions of these instruments in exchange for an upfront fee and an increase in the coupon of the instruments. The upfront fee paid of $180 million has been recognised as an expense during the period within finance costs. The upfront fee and increase in coupon rates represent a significant change in the cash flows of each instrument and therefore, in accordance with IAS 39, has resulted in an extinguishment of the old debt and recognition of a new debt at fair value, resulting in a loss on revaluation of $208 million. On 18 October 2019, the Company transferred six subordinated debt instruments to M&G plc to implement a rebalancing of debt prior to demerger. The debt transferred included the two instruments revalued on alteration of terms discussed above. The Company recognised a gain of $208 million on the transfer, reversing the loss on revaluation of debt instruments discussed above. In October 2019 the Company repaid its £275 million bank loan due to Standard Chartered Bank. 9 Deferred tax liability Deferred tax liability Short-term temporary differences related to pension scheme Total 10 Share capital and share premium 2019 $m 2018 $m – – (15) (15) A summary of the ordinary shares in issue and the options outstanding to subscribe for the Company’s shares at 31 December 2019 is set out in note C10 of the Group financial statements. prudentialplc.com Prudential plc Annual Report 2019 317 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information11 Retained profit of the Company Retained profit at 31 December 2019 amounted to $10,376 million (31 December 2018: $6,820 million). The retained profit includes distributable reserves of $4,735 million and non-distributable reserves of $5,641 million. The amount of $5,641 million is not able to be regarded as part of the distributable reserves of the Company because the gains relate to intra-group transactions in which qualifying consideration was not received. 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 IFRS financial statements). The Group and its subsidiaries are subject to local regulatory minimum capital requirements, as set out in note C12 of the Group IFRS financial statements. A number of the principal risks set out in the ‘Report on 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 Group Chief Financial Officer and Chief Operating 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 key management remuneration is given in note B2.3 of the Group financial statements. Additional information on directors’ remuneration is given in the directors’ remuneration report section of this Annual Report. Information on transactions of the directors with the Group is given in note D5 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 (2018: $0.1 million) and for other services were $0.1 million (2018: $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 2019, which was approved by the Board of Directors after 31 December 2019, is described in note B6 of the Group financial statements. 318 Prudential plc Annual Report 2019 prudentialplc.com NOTES ON THE PARENT COMPANY FINANCIAL STATEMENTS CONTINUEDStatement of Directors’ responsibilities in respect of the Annual Report and the financial statements Thedirectorsareresponsiblefor preparingtheAnnualReportandthe Groupandparentcompanyfinancial statementsinaccordancewithapplicable lawandregulations. Companylawrequiresthedirectorsto prepareGroupandparentcompany financialstatementsforeachfinancialyear. Underthatlawtheyarerequiredto preparetheGroupfinancialstatements inaccordancewithInternationalFinancial ReportingStandardsasadoptedbythe EuropeanUnion(IFRSsasadoptedbythe EU)andapplicablelawandhaveelected topreparetheparentCompanyfinancial statementsinaccordancewithUK AccountingStandardsandapplicable law(UKGenerallyAcceptedAccounting Practice)includingFRS101Reduced DisclosureFramework. Undercompanylaw,thedirectorsmust notapprovethefinancialstatementsunless theyaresatisfiedthattheygiveatrueand fairviewofthestateofaffairsoftheGroup andparentCompanyandoftheirprofitor lossforthatperiod.Inpreparingeachofthe GroupandparentCompanyfinancial statements,thedirectorsarerequiredto: — selectsuitableaccountingpolicies andthenapplythemconsistently; — makejudgementsandestimatesthat arereasonableandprudent; — fortheGroupfinancialstatements, statewhethertheyhavebeenprepared inaccordancewithIFRSsasadopted bytheEU; — fortheparentcompanyfinancial statements,statewhetherapplicable UKaccountingstandardshavebeen followed,subjecttoanymaterial departuresdisclosedandexplained intheparentcompanyfinancial statements;and — preparethefinancialstatementson thegoingconcernbasisunlessitis inappropriatetopresumethatthe Groupandtheparentcompanywill continueinbusiness. Thedirectorsareresponsibleforkeeping adequateaccountingrecordsthatare sufficienttoshowandexplaintheparent Company’stransactionsanddisclosewith reasonableaccuracyatanytimethe financialpositionoftheparentCompany andenablethemtoensurethatitsfinancial statementscomplywiththeCompanies Act2006.Theyhavegeneralresponsibility fortakingsuchstepsasarereasonably opentothemtosafeguardtheassetsof theGroupandtopreventanddetectfraud andotherirregularities. Underapplicablelawandregulations, thedirectorsarealsoresponsiblefor preparingastrategicreport,directors’ report,directors’remunerationreport andcorporategovernancestatementthat complywiththatlawandthoseregulations. Thedirectorsareresponsibleforthe maintenanceandintegrityofthecorporate andfinancialinformationincludedon theCompany’swebsite.Legislationin theUKgoverningthepreparationand disseminationoffinancialstatementsmay differfromlegislationinotherjurisdictions. ThedirectorsofPrudentialplc,whose namesandpositionsaresetoutonpages 92to97confirmthattothebestoftheir knowledge: — thefinancialstatements,preparedin accordancewiththeapplicableset ofaccountingstandards,giveatrue andfairviewoftheassets,liabilities, financialpositionandprofitorlossof theCompanyandtheundertakings includedintheconsolidationtaken asawhole; — thestrategicreportincludesafairreview ofthedevelopmentandperformance ofthebusinessandthepositionofthe Groupandtheundertakingsincluded intheconsolidationtakenasawhole, togetherwithadescriptionofthe principalrisksanduncertaintiesthat theyface;and — theAnnualReportandfinancial statements,takenasawhole,isfair, balancedandunderstandableand providestheinformationnecessary forshareholderstoassessthe Group’spositionandperformance, businessmodelandstrategy. prudentialplc.com Prudential plc AnnualReport2019 319 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationIndependent auditor’s report to the members of Prudential plc 1 Our opinion is unmodified Wehaveauditedthefinancialstatements ofPrudentialplc(“thecompany”)forthe yearended31December2019which comprise; — theconsolidatedincomestatement, consolidatedstatementof comprehensiveincome,consolidated statementofchangesinequity, consolidatedstatementoffinancial positionandconsolidatedstatement ofcashflows,andtherelatednotes, includingaccountingpoliciesin noteA4;and — theparentcompanystatementsof financialpositionandofchangesin equity,andtherelatednotes,including thesignificantaccountingpoliciesin note3. Inouropinion: — Thefinancialstatementsgiveatrue andfairviewofthestateoftheGroup’s andoftheparentcompany’saffairs asat31December2019andofthe Group’sprofitfortheyearthenended; — TheGroupfinancialstatements havebeenproperlypreparedin accordancewithInternational FinancialReportingStandardsas adoptedbytheEuropeanUnion; — Theparentcompanyfinancial statementshavebeenproperly preparedinaccordancewithUK AccountingStandardsincluding FRS101ReducedDisclosure Framework;and — Thefinancialstatementshavebeen preparedinaccordancewiththe requirementsoftheCompaniesAct 2006and,asregardstheGroup financialstatements,Article4of theIASRegulation. Basis for opinion Weconductedourauditinaccordance withInternationalStandardsonAuditing (UK)(“ISAs(UK)”)andapplicablelaw. Ourresponsibilitiesaredescribedbelow. Webelievethattheauditevidence wehaveobtainedisasufficientand appropriatebasisforouropinion. Ourauditopinionisconsistentwith ourreporttotheauditcommittee. Wewereappointedasauditorbythe shareholdersinOctober1999.Theperiod oftotaluninterruptedengagementisfor the21financialyearsended31December 2019.Wehavefulfilledourethical responsibilitiesunder,andweremain independentoftheGroupinaccordance with,UKethicalrequirementsincluding theFinancialReportingCouncil(‘FRC’) EthicalStandardasappliedtolistedpublic interestentities.Nonon-auditservices prohibitedbythatstandardwereprovided. 2 Key audit matters: our assessment of risks of material misstatement Keyauditmattersarethosemattersthat,inourprofessionaljudgment,wereofmostsignificanceintheauditofthefinancialstatements andincludethemostsignificantassessedrisksofmaterialmisstatement(whetherornotduetofraud)identifiedbyus,includingthose whichhadthegreatesteffecton:theoverallauditstrategy;theallocationofresourcesintheaudit;anddirectingtheeffortsofthe engagementteam.Wesummarisebelowthekeyauditmatters,indecreasingorderofauditsignificance,inarrivingatourauditopinion above,togetherwithourkeyauditprocedurestoaddressthosemattersand,asrequiredforpublicinterestentities,ourresultsfromthose procedures.Thesematterswereaddressed,andourresultsarebasedonproceduresundertaken,inthecontextof,andsolelyforthe purposeof,ourauditofthefinancialstatementsasawhole,andinformingouropinionthereon,andconsequentlyareincidentaltothat opinion,andwedonotprovideaseparateopiniononthesematters. 320 Prudential plc AnnualReport2019 prudentialplc.com Valuation of insurance contract liabilities and investment contract liabilities with discretionary participation features (2019: $380,776 million, 2018: $496,805 million). The risk compared to the prior year is unchanged. Refer to page 118 (Audit Committee report), page 208 (accounting policy) and pages 262 to 275 (financial disclosures) The risk Our response TheGrouphassignificantinsurancecontractliabilities andinvestmentcontractliabilitieswithdiscretionary participationfeatures(policyholderliabilities)representing 88percentoftheGroup’stotalliabilities. Subjective valuation Thisisanareathatinvolvessignificantjudgementover uncertainfutureoutcomes,mainlytheultimatetotal settlementvalueoftheselongtermpolicyholderliabilities. Economicassumptions,includinginvestmentreturnand associateddiscountrates,andoperatingassumptions includingmortality,morbidity,expenses,utilisationof guaranteesandpersistency(includingconsiderationof policyholderbehaviour)arethekeyinputsusedtoestimate theselongtermliabilities,inadditiontotheappropriate designandcalibrationofcomplexreservingmodels. Thespecificapplicationofthesejudgementstoindividual segmentsisexplainedbelow. FortheUSinsurancesegment,thevaluationofthe guaranteesinthevariableannuity(‘VA’)businessiscomplex asitinvolvesexercisingsignificantjudgementrelatedto inputssuchasexpectedmarketratesofreturn,fund performance,anddiscountrates,aswellasassumptions suchasmortality,benefitutilisation,andpersistency. FortheAsiainsurancesegment,thevaluationofthe policyholderliabilitiesrequiressignificantjudgement overthesettingofmortality,morbidity,persistency andexpenseassumptions. Theeffectofthesemattersisthat,aspartofourrisk assessment,wedeterminedthatthevaluationof policyholderliabilitieshasahighdegreeofestimation uncertainty,withapotentialrangeofreasonableoutcomes greaterthanourmaterialityforthefinancialstatements asawholeandpossiblymanytimesthatamount. ThefinancialstatementsnotesC7.2andC7.3disclosethe sensitivitiesestimatedbytheGroup. Weusedourownactuarialspecialiststoassistusinperforming ourproceduresinthisarea. Ourproceduresincluded: Methodology choice Weassessedthemethodologyforselectingassumptionsandcalculating thepolicyholderliabilities.Thisincluded: — Assessingthemethodologyadoptedforselectingassumptionsby applyingourindustryknowledgeandexperienceandcomparingthe methodologyusedagainstindustrystandardactuarialpractice; — Assessingthemethodologyadoptedforcalculatingthepolicyholder liabilitiesbyreferencetotherequirementsoftheaccountingstandard andassessingtheimpactofcurrentyearchangesinmethodologyon thecalculationofpolicyholderliabilities; — Comparingchangesinmethodologytoourexpectationsderivedfrom marketexperience;and — Evaluatingtheanalysisofthemovementsinpolicyholderliabilities duringtheyear,includingconsiderationofwhetherthemovements wereinlinewiththemethodologyandassumptionsadopted. Control operation WeusedourownITspecialiststoassistusinperformingourprocedures inthisareawhichincludedtestingofthedesign,implementationand operatingeffectivenessofkeycontrolsoverthevaluationprocess. Controlstestinginrespectofthevaluationprocessincludedassessment andapprovalofthemethodsandassumptionsadoptedoverthe calculationofpolicyholderliabilitiesaswellasappropriateaccessand changemanagementcontrolsovertheactuarialmodels. Our procedures for the US insurance segment also included: Historical comparison — Assessingtheassumptionsrelatingtopolicyholderbehaviour(benefit utilisationandpersistency)bycomparingtorelevantcompanyand industryhistoricalexperiencedatainordertoassesswhetherthis supportedtheyear-endassumptionsadopted. Benchmarking assumptions and sector experience — Assessingtheassumptionsforinvestmentmixandprojected investmentreturnsbycomparingtocompanyspecificandindustry dataandforfuturegrowthratesbycomparingtomarkettrendsand marketvolatility. — Utilisingtheresultsofourindustrybenchmarkingofassumptionsand actuarialmarketpracticetoinformourchallengeofassumptionsin relationtopolicyholderbehaviour. Model evaluation — Assessingthecashflowprojectionsinthereservingmodelsby referencetotheinclusionofrelevantproductfeatures.Wehavealso assessedtheimpactofmodellingandassumptionchanges byinspectingpreandpostchangemodelrunsandcomparingthe outcomesofthechangestoourexpectations. — Independentlyrecalculatingtheliabilitiesforaselectionofindividual policiestoassesswhethertheselectedmodelcalibrationhadbeen appropriatelyimplemented. prudentialplc.com Prudential plc AnnualReport2019 321 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationValuation of insurance contract liabilities and investment contract liabilities with discretionary participation features (2019: $380,776 million, 2018: $496,805 million). The risk compared to the prior year is unchanged. Refer to page 118 (Audit Committee report), page 208 (accounting policy) and pages 262 to 275 (financial disclosures) The risk Our response Our procedures for the Asia insurance segment also included: Historical comparison — Evaluatingtheexperienceanalysisinrespectofthemortalityand morbidityassumptionsbyreferencetoactualexperienceinorder toassesswhetherthissupportedtheyear-endassumptionsadopted. Benchmarking assumptions and sector experience — Usingoursectorexperienceandmarketknowledgetoinform ourchallengeoftheassumptionsintheareasnotedabove. Model evaluation — Assessingthereservingmodelsbyconsideringtheaccuracyof thecashflowprojectionsincludingbyreferencetotheinclusion ofrelevantproductfeatures.Wehavealsoassessedtheimpact ofmodellingandassumptionchangesbyinspectingpreandpost changemodelrunsandcomparingtheoutcomesofthechanges toourexpectations. Assessing transparency Weassessedwhetherthedisclosuresinrelationtotheassumptionsused inthevaluationofpolicyholderliabilitiesarecompliantwiththerelevant accountingrequirements. Our result Wefoundthevaluationofpolicyholderliabilitiestobeacceptable (2018:acceptable). 322 Prudential plc AnnualReport2019 prudentialplc.com INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PRUDENTIAL PLC CONTINUEDValuation of certain level 2 and level 3 investments held at fair value (2019: $77,203 million, 2018: $181,757 million). The risk compared to the prior year is unchanged. Refer to page 118 (Audit Committee report), page 213 (accounting policy) and pages 244 to 261 (financial disclosures) The risk Our response TheGroup’sinvestmentsportfoliorepresents89percent (2018:88percent)oftheGroup’stotalassets. Weusedourownvaluationspecialistsinordertoassistusinperforming ourproceduresinthisarea. Subjective valuation Theareathatinvolvedsignificantauditeffortandjudgement in2019wasthevaluationofcertainlevel2andlevel3 positionswithintheportfoliooffinancialinvestmentsheld atfairvalue.Theseincludedunlisteddebtsecuritiesand unlistedfundsthatarevaluedbyreferencetotheirNet AssetValue(‘NAVfunds’).Forthesepositionsareliable thirdpartypricewasnotreadilyavailableandtherefore involvedtheapplicationofexpertjudgementinthe valuationsadopted. Thevaluationoftheportfolioinvolvesjudgement dependingontheobservabilityandsignificanceofthe inputsintothevaluationandtheconsequentimpactonthe classificationofthoseinvestments,andfurtherjudgement indeterminingtheappropriatevaluationmethodology whereexternalpricingsourcesareeithernotreadily availableorareunreliable. Ourproceduresincluded: Methodology choice Weassessedtheappropriatenessofthepricingmethodologieswith referencetorelevantaccountingstandardsaswellasindustrypractice. Control operation Wetestedthedesign,implementationandoperatingeffectivenessof keycontrolsoverthevaluationprocess,includingtheGroup’sreview andapprovaloftheestimatesandassumptionsusedforthevaluation includingkeyauthorisationanddatainputcontrols. Tests of details Forasampleofsecurities,weusedourvaluationspecialiststoassessthe Group’sclassificationofassetswithinLevel2orLevel3byevaluatingthe observabilityoftheinputsusedinvaluingthesesecurities. Forasampleofunlisteddebtsecuritieswecomparedthepriceadopted toourindependentlyderivedprice,usingourvaluationspecialists. Theeffectofthesemattersisthat,aspartofourrisk assessment,wedeterminedthatthevaluationofcertain level2and3investmentsheldatfairvaluehasahigh degreeofestimationuncertainty,withapotentialrange ofreasonableoutcomesgreaterthanourmaterialityfor thefinancialstatementsasawholeandpossiblymanytimes thatamount. WeagreedthevaluationsfortheNAVfundstothemostrecentNAV statements.Toassessreliabilityofthesestatementswecomparedto auditedfinancialstatementsofthefunds,whereavailable,orperformed aretrospectivetestovertheNAVvaluationsforeachfundtoassessifthe fundvaluationsreportedintheauditedfinancialstatementsintheprior yearweremateriallyconsistentwiththemostrecentNAVvaluation statementsavailableatthetime. ThefinancialstatementsnotesC7.2andC7.3disclosethe sensitivitiesestimatedbytheGroup. Assessing transparency Weassessedwhetherthedisclosuresinrelationtothevaluationoflevel2 and3investmentsheldatfairvaluearecompliantwiththerelevant accountingrequirements. Our result Wefoundthevaluationoflevel2and3investmentsheldatfairvalue tobeacceptable(2018:acceptable). prudentialplc.com Prudential plc AnnualReport2019 323 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationAmortisation of US deferred acquisition costs (‘DAC’) (2019: $12,240 million, 2018: $11,113 million). The risk compared to the prior year is unchanged. Refer to page 118 (Audit Committee report), page 211 (accounting policy) and pages 277 to 279 (financial disclosures) The risk Our response DACrepresents3percent(2018:2percent)oftheGroup’s totalassets.TheDACassociatedwiththeUScomponent, whichrepresents86percentofthetotalDAC,involvesthe greatestjudgementintermsofmeasurement. Weusedourownactuarialspecialiststoassistusinperformingouraudit proceduresinthisarea. Ourproceduresincluded: Subjective valuation USDACrelatedtoannuitiesisamortisedinproportion toestimatedgrossprofits.Keyassumptionsimpacting estimatedgrossprofitsincludeassumptionssuchas mortalityandpersistency,aswellastheassumptions aroundlong-terminvestmentreturnandfuturehedge costs.WeidentifiedtheamortisationofUSDACasakey auditmattergiventhejudgementsinvolvedinselecting theseassumptions. Theeffectofthesemattersisthat,aspartofourrisk assessment,wedeterminedthattheamortisationofUS DAChasahighdegreeofestimationuncertainty,witha potentialrangeofreasonableoutcomesgreaterthanour materialityforthefinancialstatementsasawhole.The financialstatementsnoteC7.3disclosesthesensitivities estimatedbytheGroup. Historical comparison Assumptionsrelatingtopersistencyandmortalityarealsorelevanttothe calculationoftheinsurancecontractliabilities.Seefurtherdetailinour responsetothatrisk. Wehavealsoassessedtheappropriatenessoftheassumptionsused indeterminingtheestimatedfutureprofitprofileandtheextentofthe associatedadjustmentnecessarytotheamortisationoftheUSDAC asset.Ourworkincludedcriticallyassessingthejudgementsthat determinethefutureprofitprofilesinthecontextofactualhistorical experienceaswellasbyreferencetomarkettrends. Our sector experience Wechallengedthereasonablenessoftheselectedassumptionsrelating toprojectedinvestmentreturnandfuturehedgecostsbasedonour understandingofdevelopmentsinthebusiness.Ourworkincluded comparingtheprojectedinvestmentreturnsagainsttheinvestment portfoliomixandmarketreturndata.Additionally,weevaluated management’sapproachforderivingtheassumptionforfuturehedge coststhroughcomparisontoactuarialmarketpractice,andcorroborating therationaleforanykeydifferences. Tests of details Weassessedtheaccuracyofthecalculationsperformedincluding theextentoftheamortisationadjustmentdeterminedbasedonan assessmentofthefutureprofitprofiles. Assessing transparency WeassessedwhetherthedisclosuresinrelationtotheamortisationofUS DACarecompliantwiththerelevantaccountingrequirements. Our result WefoundtheamortisationofUSDACtobeacceptable (2018:acceptable). 324 Prudential plc AnnualReport2019 prudentialplc.com INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PRUDENTIAL PLC CONTINUEDRecoverability of parent company’s investment in subsidiaries – (2019: $10,444 million, 2018: $13,787 million) The risk is new in the current year. The risk relates to the parent company financial statements. Refer to page 118 (Audit Committee report), Refer to page 313 (accounting policy) and pages 315 to 316 (financial disclosures) The risk Low risk, high value Thecarryingamountoftheparentcompany’sinvestments insubsidiariesrepresents55percent(2018:64percent)of thecompany’stotalassets.Theirrecoverabilityisnotata highriskofsignificantmisstatementorsubjecttosignificant judgement.However,duetotheirmaterialityinthecontext oftheparentcompanyfinancialstatements,thisis consideredtobetheareathathadthegreatesteffectonour overallparentcompanyaudit. Our response Ourproceduresincluded: Tests of details Comparingthecarryingamountof100%oftheinvestmentsinsubsidiaries withtherelevantsubsidiaries’draftbalancesheettoidentifywhethertheir netassets,beinganapproximationoftheirminimumrecoverableamount, wereinexcessoftheircarryingamountandassessingwhetherthose subsidiarieshavehistoricallybeenprofit-making. Assessing subsidiary audits Assessingtheworkperformedbythesubsidiaryauditteamsonallof thosesubsidiariesandconsideringtheresultsofthatworkonthose subsidiaries’profitsandnetassets. Our result WefoundtheGroup’sassessmentoftherecoverabilityoftheinvestment insubsidiariestobeacceptable(2018:acceptable). FollowingthedemergerofM&GplcfromtheGroupon21October2019,wenolongerconsiderthefollowingtobekeyauditmatters for2019: — Determinationofpensionasset(restrictedsurplus)inrespectofthedefinedbenefitpensionscheme.Asaresultofthedemergerand associatedtransferofcertainfinancialbalancesbyPrudentialplctothedemergedentity,thebalanceisnolongermaterial. — TheimpactofuncertaintiesduetotheUKexitingtheEuropeanUniononouraudit.Asaresultofthedemerger,theGroupnolonger hasanytradingoperationsintheUKorEurope.Assuch,thefactorsgivingrisetoakeyauditmatterrelatedtotheseuncertaintiesare nolongerrelevant. 3 Our application of materiality and an overview of the scope of our audit MaterialityfortheGroupfinancial statementsasawholewassetat $298million(2018:$446million) determinedwithreferencetoabenchmark ofIFRSshareholders’equity(ofwhich itrepresents1.5percent(2018: 2.0percent)).WeconsiderIFRS shareholders’equitytobethemost appropriatebenchmarkasitrepresents theresidualinterestthatcanbeascribed toshareholdersafterpolicyholderassets andcorrespondingliabilitieshavebeen accountedfor;weconsiderthatthisisthe mostappropriatemeasureforthesizeof thebusinessandthatitprovidesastable measureyearonyear.Wecompared ourmaterialityagainstotherrelevant benchmarks(totalassets,totalrevenue andprofitbeforetax)toensure thematerialityselectedwasappropriate forouraudit. Wesetoutbelowthematerialitythresholdsthatarekeytotheaudit. IFRS shareholders’ equity $19.48bn (2018:$21.97bn) Group materiality $298m(2018:$446m) $298m Wholefinancialstatementsmateriality (2018:$446m) $238m Rangeofmaterialityat14components ($40mto$238m)(2018:$70mto$146m) IFRSshareholders’equity Groupmateriality $15m Misstatementsreportedtothe auditcommittee(2018:$23m) prudentialplc.com Prudential plc AnnualReport2019 325 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationMaterialityfortheparentcompany financialstatementsasawholewasset at$40million(2018:$146million), determinedwithreferencetoabenchmark ofparentcompany’snetassets,ofwhich itrepresents0.3percent(2018: 1.5percent).Thecomponentmateriality, asdeterminedbytheGroupauditteam, appliedtotheauditoftheparentcompany financialstatementsasawholeislower thanthematerialitywewouldotherwise havedeterminedbyreferencetoitsnet assets. WeagreedtoreporttotheGroupaudit committeeanycorrectedoruncorrected identifiedmisstatementsexceeding $15million(2018:$23million)inaddition tootheridentifiedmisstatementsthat warrantreportingonqualitativegrounds. WesubjectedtheGroup’soperationsto auditsforgroupreportingpurposesas follows: Ofthe14(2018:16)reportingcomponents scopedinfortheGroupaudit,we subjected10(2018:10)tofullscopeaudits forgroupreportingpurposes,and4 (2018:5)toanauditofaccountbalances. Thecomponentsforwhichweperformed workotherthanfullscopeauditsforgroup reportingpurposeswerenotindividually significantbutwereincludedinthescope ofourgroupreportingworkastheydid presentspecificindividualauditrisks thatneededtobeaddressedorinorder toprovidefurthercoverageoverthe Group’sresults. Thecomponentssubjectedtofullscope auditsincludedtheparentcompany;the PrudentialAssuranceCompanyLimited intheUKandtheinsuranceoperationsin theUS,HongKong,Indonesia,Singapore, Malaysia,Vietnam,andChina;andthe fundmanagementoperationsofM&G. Thecomponentssubjectedtoanaudit ofaccountbalancesincludedPrudential PensionsLimited,theinsuranceoperations inThailandandTaiwan,andthefund managementoperationsofEastspring Singapore.Theaccountbalancesaudited forThailandwerepolicyholderliabilities, investments,deferredacquisitioncosts, premiumsandclaims;theaccountbalances auditedforTaiwanwerepolicyholder liabilities,investments,anddeferred acquisitioncosts;theaccountbalances auditedforEastspringSingaporewere otherincomeandexpenses;theaccount balancesauditedforPrudentialPensions Limitedweretotalinvestmentreturnand benefitsandclaims. Fortheremainingoperations,weperformedanalysisatanaggregatedGrouplevelto re-examineourassessmentthattherewerenosignificantrisksofmaterialmisstatement withintheseoperations. ThesecomponentsaccountedforthefollowingpercentagesoftheGroup’sresults: Group revenue Group profit before tax 97% (2018:96%) 92% (2018:97%) FullscopeforGroupauditpurposes2019 Auditofaccountbalances2019 FullscopeforGroupauditpurposes2018 Auditofaccountbalancesandspecified riskfocusedauditprocedures2018 Residualcomponents 93% 4% 93% 3% FullscopeforGroupauditpurposes2019 Auditofaccountbalances2019 FullscopeforGroupauditpurposes2018 Auditofaccountbalancesandspecified riskfocusedauditprocedures2018 Residualcomponents 74% 18% 91% 6% Group total assets Group shareholders’ equity 97% (2018:97%) 93% (2018:94%) FullscopeforGroupauditpurposes2019 Auditofaccountbalances2019 FullscopeforGroupauditpurposes2018 Auditofaccountbalancesandspecified riskfocusedauditprocedures2018 94% 3% 94% 3%  Residualcomponents FullscopeforGroupauditpurposes2019 Auditofaccountbalances2019 FullscopeforGroupauditpurposes2018 Auditofaccountbalancesandspecified riskfocusedauditprocedures2018 Residualcomponents 83% 10% 89% 5% 326 Prudential plc AnnualReport2019 prudentialplc.com INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PRUDENTIAL PLC CONTINUED4 We have nothing to report on going concern TheDirectorshavepreparedthefinancial statementsonthegoingconcernbasis astheydonotintendtoliquidatethe CompanyortheGrouportoceasetheir operations,andastheyhaveconcluded thattheCompany’sandtheGroup’s financialpositionmeansthatthisisrealistic. Theyhavealsoconcludedthatthereare nomaterialuncertaintiesthatcouldhave castsignificantdoubtovertheirability tocontinueasagoingconcernforatleast ayearfromthedateofapprovalofthe financialstatements(“thegoing concernperiod”). Ourresponsibilityistoconcludeon theappropriatenessoftheDirectors’ conclusionsand,hadtherebeenamaterial uncertaintyrelatedtogoingconcern,to makereferencetothatinthisauditreport. However,aswecannotpredictallfuture eventsorconditionsandassubsequent eventsmayresultinoutcomesthatare inconsistentwithjudgementsthatwere reasonableatthetimetheyweremade, theabsenceofreferencetoamaterial uncertaintyinthisauditor’sreportis notaguaranteethattheGroupandthe Companywillcontinueinoperation. InourevaluationoftheDirectors’ conclusions,weconsideredtheinherent riskstotheGroup’sandCompany’s businessmodelandanalysedhowthose risksmightaffecttheGroup’sand Company’sfinancialresourcesorability tocontinueoperationsoverthegoing concernperiod.Therisksthatwe consideredmostlikelytoadverselyaffect theGroup’sandCompany’savailable financialresourcesoverthisperiodwere: — Adverseimpactsarisingfrom fluctuationsornegativetrendsinthe economicenvironmentwhichaffectthe valuationsoftheGroup’sinvestments, widercreditspreadsanddefaultsand valuationofpolicyholderliabilitiesdue totheimpactofthesemarket movements;and — Severelyadversepolicyholderlapse orclaimsexperience. Asthesewererisksthatcouldpotentially castsignificantdoubtontheGroup’sand theCompany’sabilitytocontinueasa goingconcern,weconsideredsensitivities overthelevelofavailablefinancial resourcesindicatedbytheGroup’s financialforecaststakingaccountof reasonablypossible(butnotunrealistic) adverseeffectsthatcouldarisefromthese risksindividuallyandcollectivelyand evaluatedtheachievabilityoftheactions theDirectorsconsidertheywouldtaketo improvethepositionshouldtherisks materialise.Wealsoconsideredless predictablebutrealisticsecondorder impacts,suchasfailureofcounterparties whohavetransactionswiththeGroup (suchasbanksandreinsurers)tomeet commitmentsthatcouldgiverisetoa negativeimpactontheGroup’sfinancial positionandincreasedilliquiditywhichalso addstouncertaintyovertheaccessibilityof financialresourcesandmayreducecapital resourcesasvaluationsdeclinewhilst takingintoconsiderationdevelopmentsin thewidereconomicenvironmentreflecting factorssuchastheimpactofBrexitand othersuchmacroeconomicevents. Basedonthiswork,wearerequired toreporttoyouif: — Wehaveanythingmaterialtoaddor drawattentiontoinrelationtothe directors’statementinnoteA1tothe financialstatementsontheuseofthe goingconcernbasisofaccountingwith nomaterialuncertaintiesthatmaycast significantdoubtovertheGroupand Company’suseofthatbasisforaperiod ofatleastayearfromthedateof approvalofthefinancialstatements;or — TherelatedstatementundertheListing Rulessetoutonpage133ismaterially inconsistentwithourauditknowledge. Wehavenothingtoreportinthese respects,andwedidnotidentifygoing concernasakeyauditmatter. TheGroupauditteamheldaglobal planningconferencewithcomponent auditorstoidentifyauditrisksanddecide howeachcomponentteamshouldaddress theidentifiedauditrisks.TheGroupaudit teaminstructedcomponentauditors astothesignificantareastobecovered, includingtherelevantrisksdetailedabove andtheinformationtobereported. TheGroupauditteamapprovedthe componentmaterialities,whichranged from$40millionto$238million(2018: $70millionto$146million)acrossthe components,havingregardtothesize andriskprofileoftheGroupacrossthe components.Theworkon13components (2018:15components)wasperformed bycomponentauditorsandworkonthe remainingcomponent,whichwasthe parentcompany,wasperformedbythe Groupauditteam. TheGroupauditteamvisitedall componentauditorlocationsthat performedafull-scopeaudit.Videoand telephoneconferencemeetingswerealso heldwiththesecomponentauditorsand thosethatperformedanauditofaccount balances.Atthesevisitsandtelephone conferencemeetings,anassessmentwas madeofauditriskandstrategy,thefindings reportedtotheGroupauditteamwere discussedinmoredetail,keyworking paperswereinspectedandanyfurther workrequiredbytheGroupauditteamwas thenperformedbythecomponentauditor. TheGroupteamalsoroutinelyreviewsthe auditdocumentationofallcomponent audits.Thisyearforonecomponentin China,ajointventureoftheGroup,we visitedthecomponentteaminDecember andperformedapreliminaryfilereview. AstheCoronaviruspreventedentryto thecountrypostyear-end,andremote accesstoauditdocumentationis prohibited,weinsteadextendedour oversightofthatcomponentteam throughextendedtelephonediscussions andexpandedreporting. TheSeniorStatutoryAuditor,in conjunctionwithotherseniorstaffinthe Groupandcomponentauditteams,also regularlyattendedBusinessUnitaudit committeemeetings(thesewereheld ataregionallevelforAsia)andparticipated inmeetingswithlocalcomponentsto obtainadditionalunderstanding,firsthand, ofthekeyrisksandauditissuesata componentlevelwhichmayaffectthe Groupfinancialstatements. prudentialplc.com Prudential plc AnnualReport2019 327 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationCorporate governance disclosures Wearerequiredtoreporttoyouif: — wehaveidentifiedmaterial inconsistenciesbetweentheknowledge weacquiredduringourfinancial statementsauditandthedirectors’ statementthattheyconsiderthatthe annualreportandfinancialstatements takenasawholeisfair,balancedand understandableandprovidesthe informationnecessaryforshareholders toassesstheGroup’spositionand performance,businessmodeland strategy;or — thesectionoftheannualreport describingtheworkoftheAudit Committeedoesnotappropriately addressmatterscommunicated byustotheAuditCommittee. Wearerequiredtoreporttoyouifthe CorporateGovernanceStatementdoes notproperlydiscloseadeparturefrom theprovisionsoftheUKCorporate GovernanceCodespecifiedbythe ListingRulesforourreview. Wehavenothingtoreportinthese respects. 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; — inouropiniontheinformationgiven inthosereportsforthefinancialyear isconsistentwiththefinancial statements;and — inouropinionthosereportshave beenpreparedinaccordancewith theCompaniesAct2006. Directors’ remuneration report InouropinionthepartoftheDirectors’ RemunerationReporttobeauditedhas beenproperlypreparedinaccordance withtheCompaniesAct2006. Disclosures of emerging and principal risks and longer‑term viability Basedontheknowledgeweacquired duringourfinancialstatementsaudit,we havenothingmaterialtoaddordraw attentiontoinrelationto: — Thedirectors’confirmationwithinthe viabilitystatementonpage70,thatthey havecarriedoutarobustassessmentof theemergingandprincipalrisksfacing theGroup,includingthosethatwould threatenitsbusinessmodel,future performance,solvencyandliquidity; — Theprincipalrisksdisclosuresonpages 51to71describingtheserisksand explaininghowtheyarebeingmanaged andmitigated;and — Thedirectors’explanationinthe viabilitystatementofhowtheyhave assessedtheprospectsoftheGroup, overwhatperiodtheyhavedoneso andwhytheyconsideredthatperiod tobeappropriate,andtheirstatement astowhethertheyhaveareasonable expectationthattheGroupwillbeable tocontinueinoperationandmeetits liabilitiesastheyfalldueovertheperiod oftheirassessment,includingany relateddisclosuresdrawingattention toanynecessaryqualifications orassumptions. UndertheListingRuleswearerequiredto reviewtheviabilitystatement.Wehave nothingtoreportinthisrespect. Ourworkislimitedtoassessingthese mattersinthecontextofonlythe knowledgeacquiredduringourfinancial statementsaudit.Aswecannotpredict allfutureeventsorconditionsandas subsequenteventsmayresultinoutcomes thatareinconsistentwithjudgmentsthat werereasonableatthetimetheywere made,theabsenceofanythingtoreport onthesestatementsisnotaguarantee astotheGroup’sandCompany’slonger- termviability. 328 Prudential plc AnnualReport2019 prudentialplc.com INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PRUDENTIAL PLC CONTINUED6 We have nothing to report on the other matters on which we are required to report by exception UndertheCompaniesAct2006weare requiredtoreporttoyouif,inouropinion: — Adequateaccountingrecordshavenot beenkeptbytheparentcompany,or returnsadequateforouraudithavenot beenreceivedfrombranchesnotvisited byus;or — Theparentcompanyfinancial statementsandthepartofthe Directors’RemunerationReporttobe auditedarenotinagreementwiththe accountingrecordsandreturns;or — Certaindisclosuresofdirectors’ remunerationspecifiedbylaware notmade;or — Wehavenotreceivedallthe informationandexplanationswe requireforouraudit. Wehavenothingtoreportinthese respects. 7 Respective responsibilities Directors’ responsibilities Asexplainedmorefullyintheirstatement setoutonpage319,thedirectorsare responsibleforthepreparationofthe financialstatementsincludingbeing satisfiedthattheygiveatrueandfairview. Theyarealsoresponsiblefor:suchinternal controlastheydetermineisnecessaryto enablethepreparationoffinancial 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,orotherirregularities,(seebelow), orerror,andtoissueouropinioninan auditor’sreport.Reasonableassuranceisa highlevelofassurance,butdoesnot guaranteethatanauditconductedin accordancewithISAs(UK)willalways detectamaterialmisstatementwhenit exists.Misstatementscanarisefromfraud, otherirregularitiesorerrorandare consideredmaterialif,individuallyorin aggregate,theycouldreasonablybe expectedtoinfluencetheeconomic decisionsofuserstakenonthebasisofthe financialstatements. 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,theGroup issubjecttolawsandregulationsthat directlyaffectthefinancialstatements includingfinancialreportinglegislation (includingrelatedcompanieslegislation), distributableprofitslegislationandtaxation legislationandweassessedtheextentof compliancewiththeselawsandregulations aspartofourproceduresontherelated financialstatementitems. Secondly,theGroupissubjecttomany otherlawsandregulationswherethe consequencesofnon-compliancecould haveamaterialeffectonamountsor disclosuresinthefinancialstatements,for instancethroughtheimpositionoffinesor litigationorthelossoftheGroup’slicence tooperate.Weidentifiedtheareaof regulatorycapitalasthatmostlikelytohave suchaneffectrecognisingthefinancialand regulatednatureoftheGroup’sactivities. Auditingstandardslimittherequiredaudit procedurestoidentifynon-compliance withtheselawsandregulationstoenquiry ofthedirectorsandothermanagement andinspectionofregulatoryandlegal correspondence,ifany.Theselimited proceduresdidnotidentifyactualor suspectednon-compliance. Owingtotheinherentlimitationsofan audit,thereisanunavoidableriskthatwe maynothavedetectedsomematerial misstatementsinthefinancialstatements, eventhoughwehaveproperlyplanned andperformedourauditinaccordance withauditingstandards.Forexample, thefurtherremovednon-compliancewith lawsandregulations(irregularities)isfrom theeventsandtransactionsreflectedinthe financialstatements,thelesslikelythe inherentlylimitedproceduresrequiredby auditingstandardswouldidentifyit.In addition,aswithanyaudit,thereremained ahigherriskofnon-detectionof irregularities,asthesemayinvolve collusion,forgery,intentionalomissions, misrepresentations,ortheoverrideof internalcontrols.Wearenotresponsible forpreventingnon-complianceandcannot beexpectedtodetectnon-compliance withalllawsandregulations. 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 PublicInterestEntityAuditorrecognised inaccordancewiththeHongKong FinancialReportingCouncilOrdinance CharteredAccountants London 10March2020 prudentialplc.com Prudential plc AnnualReport2019 329 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information06 European Embedded Value (EEV) basis results 330 Prudential plc Annual Report 2019 prudentialplc.com 06 G r o u p o v e r v e w i i S t r a t e g c r e p o r t G o v e r n a n c e D i r e c t o r s ’ r e m u n e r a t i o n r e p o r t i F n a n c a i Index to EEV basis supplementary information Page 332 l s t a t e m e n t s E u r o p e a n E m b e d d e d V a u e ( E E V ) b a s i s r e s u l t s l A d d i t i o n a l i n f o r m a t i o n prudentialplc.com Prudential plc Annual Report 2019 331 Index to European Embedded Value (EEV) basis results Summarised consolidated income statement Movement in shareholders’ equity Summary statement of financial position Notes on the EEV basis results 1 2 3 Basis of preparation Results analysis by business area Analysis of new business contribution 4 Operating profit from long-term business in force 5 6 7 8 9 Short-term fluctuations in investment returns Effect of changes in economic assumptions Impact of NAIC reform, hedge modelling and other related changes in the US Net core structural borrowings of shareholder-financed businesses Gain (loss) attaching to corporate transactions 10 Analysis of movement in total net worth and value of in-force for long-term business 11 Analysis of movement in free surplus 12 Expected transfer of value of in-force business and required capital to free surplus 13 Sensitivity of results to alternative assumptions 14 Methodology and accounting presentation 15 Assumptions 16 Insurance new business Statement of Directors’ responsibilities Auditor’s report Page 333 334 335 336 337 338 339 339 340 340 341 342 342 344 346 347 349 354 357 358 359 Description of EEV basis reporting In broad terms, IFRS profit for long-term business reflects the aggregate of results on a traditional accounting basis. By contrast, EEV is a way of reporting the value of the life insurance business. The EEV basis results have been prepared in accordance with the EEV Principles issued by the European Insurance CFO Forum in 2016. The EEV Principles provide consistent definitions, a framework for setting actuarial assumptions and an approach to the underlying methodology and disclosures. All results are stated net of tax and converted using actual exchange rates (AER) unless otherwise stated. AER are actual historical exchange rates for the specific accounting period. 332 Prudential plc Annual Report 2019 prudentialplc.com European Embedded Value (EEV) basis results Summarised consolidated income statement Continuing operations: New business Business in force Long-term business Asset management Operating profit from long-term business and asset management Other income and expenditure note (i) Restructuring costs note (ii) Operating profit from continuing operations Short-term fluctuations in investment returns Effect of changes in economic assumptions Impact of NAIC reform, hedge modelling and other related changes in the US Mark-to-market value movements on core structural borrowings Loss attaching to corporate transactions Non-operating loss from continuing operations Profit for the year from continuing operations (Loss) profit for the year from discontinued operations (Loss) profit for the year Attributable to: Equity holders of the Company: From continuing operations From discontinued operations Non-controlling interests from continuing operations 2019 $m 2018 $m Note Asia US Group total Group total 3,522 2,366 5,888 250 6,138 883 874 1,757 25 1,782 3 4 5 6 7 8 9 4,405 3,240 7,645 275 7,920 (923) (92) 6,905 3,254 (1,868) (3,457) (466) (207) (2,744) 4,161 (4,797) (636) 4,707 3,975 8,682 216 8,898 (969) (63) 7,866 (3,335) 416 – 733 (100) (2,286) 5,580 546 6,126 4,152 (4,797) 9 (636) 5,576 546 4 6,126 2019 2018 266.6¢ 305.3¢ 160.5¢ (185.4)¢ (24.9)¢ 216.5¢ 21.2¢ 237.7¢ 2,587 2,575 EEV basis basic earnings per share Based on operating profit from continuing operations after non-controlling interests (in cents) Based on (loss) profit for the year attributable to equity holders of the Company (in cents) From continuing operations From discontinued operations Weighted average number of shares in the year (millions) Notes (i) (ii) EEV basis other income and expenditure represents the post-tax IFRS basis results for other operations (including interest costs on core structural borrowings, corporate expenditure for head office functions in London and Hong Kong, the Group’s treasury function and Africa operations) less the unwind of expected margins on the internal management of the assets of the covered business (as explained in note 14(i)(g)). Restructuring costs include group-wide costs incurred for IFRS 17 implementation in 2019 from continuing operations. prudentialplc.com Prudential plc Annual Report 2019 333 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information Movement in shareholders’ equity Continuing operations: Operating profit from long-term and asset management businesses Other income and expenditure Restructuring costs Operating profit (loss) from continuing operations Non-operating profit (loss) from continuing operations Profit (loss) for the year from continuing operations (Loss) profit for the year from discontinued operations note (iv) Profit (loss) for the year Non-controlling interests Foreign exchange movements on operations Intra-group dividends and investment in operations note (i) External dividends Mark-to-market value movements on Jackson assets backing surplus and required capital Other movements note (ii) Demerger dividend in specie of M&G plc Net increase (decrease) in shareholders’ equity Shareholders’ equity at beginning of year Shareholders’ equity at end of year Representing: Long-term business Asset management and other Goodwill note (v) Shareholders’ equity at end of year Shareholders’ equity per share at end of year note (iii) Long-term business Asset management and other Goodwill note (v) Shareholders’ equity at beginning of year Shareholders’ equity per share at beginning of year note (iii) 2019 $m 2018* $m Asia US Other Total continuing operations Discontinued UK and Europe operations Group total Group total 6,138 – (31) 1,782 – (5) – (923) (56) 7,920 (923) (92) 7,920 (923) (92) 8,898 (969) (63) 6,107 1,777 (979) 6,905 6,905 7,866 1,962 (3,802) (904) (2,744) (2,744) (2,286) 8,069 (2,025) (1,883) 4,161 4,161 5,580 – 8,069 (6) 409 – – – (4,797) (4,797) (2,025) – – (1,883) (3) 34 4,161 (9) 443 (4,797) 223 (636) (9) 666 (1,270) – (525) – 7,276 (1,634) 5,481 (1,634) (5,481) – – (1,634) – 25 – 206 (23) – – (40) – 206 (38) – – 133 (7,379) 206 95 (7,379) 546 6,126 (4) (1,574) – (1,662) (127) 176 – 7,227 32,008 39,235 (2,367) 18,709 16,342 37,843 596 796 39,235 1,508¢ 30,985 389 634 32,008 16,336 6 – 16,342 628¢ 18,658 51 – 18,709 3,750 (4,616) 8,610 46,101 (17,301) 17,301 (866) 54,711 – (892) 26 (866) 54,179 (290) 822 54,711 (33)¢ 2,103¢ – – – – – – – (4,616) – 49,643 (4,176) 634 (4,616) 46,101 14,531 1,302 1,468 17,301 (8,691) 63,402 54,711 2,935 60,467 63,402 54,179 (290) 822 54,711 2,103¢ 64,174 (2,874) 2,102 63,402 64,174 (2,874) 2,102 63,402 2,445¢ 62,116 (3,621) 1,972 60,467 1,234¢ 722¢ (178)¢ 1,778¢ 667¢ 2,445¢ 2,337¢ * The 2018 comparative results have been re-presented from those previously published to reflect the change in the Group’s presentation currency from pounds sterling to US dollars and the reclassification of the Group’s UK and Europe operations as discontinued operations in 2019 (see note 1). Notes (i) Intra-group dividends represent dividends that have been declared in the year. Dividends payable by the discontinued UK and Europe operations (M&G plc) to Prudential plc includes a $3,841 million pre-demerger dividend, cash dividends paid in the period of $684 million and restructuring impacts related to the demerger. Investment in operations reflects movements in share capital. The amounts included for these items in the analysis of movement in free surplus (note 11) for Asia are as per the holding company cash flow at transaction rates. The difference primarily relates to intra-group loans, foreign exchange and other non-cash items. (ii) Other movements include reserve movements in respect of the shareholders’ share of actuarial gains and losses on defined benefit pension schemes that were transferred to M&G plc at 30 June 2019, share capital subscribed, share-based payments, treasury shares and intra-group transfers between operations that have no overall effect on the Group’s shareholders’ equity. (iii) Based on the number of issued shares at the end of 2019 of 2,601 million shares (end of 2018/beginning of 2019: 2,593 million shares, beginning of 2018: 2,587 million shares). (iv) On 21 October 2019, the Group completed the demerger of its UK and Europe operations (M&G plc), resulting in two separately listed companies. The demerger dividend in specie of M&G plc has been recorded at the fair value of M&G plc at the date of the demerger. The difference between the fair value and its carrying value, together with profit earned up to the date of the demerger have been recorded as loss for the year from the discontinued UK and Europe operations. Representing goodwill attributable to shareholders. (v) 334 Prudential plc Annual Report 2019 prudentialplc.com EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS CONTINUEDSummary statement of financial position Assets less liabilities before deduction of insurance funds Less insurance funds:* Policyholder liabilities (net of reinsurers’ share) and unallocated surplus of with-profits funds Shareholders’ accrued interest in the long-term business Less non-controlling interests Total net assets attributable to equity holders of the Company Share capital Share premium IFRS basis shareholders’ reserves IFRS basis shareholders’ equity Shareholders’ accrued interest in the long-term business EEV basis shareholders’ equity Representing Continuing operations Discontinued UK and Europe operations EEV basis shareholders’ equity 31 Dec 2019 $m 31 Dec 2018 $m 396,241 549,264 (376,572) 35,234 (341,338) (192) (527,273) 41,434 (485,839) (23) 54,711 63,402 172 2,625 16,680 19,477 35,234 54,711 54,711 – 54,711 166 2,502 19,300 21,968 41,434 63,402 46,101 17,301 63,402 * Including liabilities in respect of insurance products classified as investment contracts under IFRS 4. The supplementary information on pages 333 to 357 was approved by the Board of Directors on 10 March 2020. Paul Manduca Chairman Mike Wells Group Chief Executive Mark FitzPatrick Group Chief Financial Officer and Chief Operating Officer prudentialplc.com Prudential plc Annual Report 2019 335 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationNotes on the EEV basis results 1 Basis of preparation The EEV basis results have been prepared in accordance with the EEV Principles issued by the European Insurance CFO Forum in 2016. The EEV Principles provide consistent definitions, a framework for setting actuarial assumptions and an approach to the underlying methodology and disclosures. Where appropriate, the EEV basis results include the effects of adoption of EU-endorsed IFRS. The Directors are responsible for the preparation of the supplementary information in accordance with the EEV Principles. The Group completed the demerger of its UK and Europe operations, M&G plc, from the Prudential plc Group on 21 October 2019. In line with the treatment of the results under IFRS, the EEV basis results for the Group’s UK and Europe operations have been reclassified as discontinued operations and removed from the Group’s key performance indicators (KPIs). In the subsequent notes, comparative amounts have been represented to show continuing operations only in order to present the results on a comparable basis. The Directors have also elected to change the Group’s presentation currency from pounds sterling to US dollars. The 2018 comparative results have been accordingly re-presented from those previously published for these changes (see note A1 of the Group IFRS financial statements for exchange rates used). Overview Results prepared under the EEV Principles represent the present value of the shareholders’ interest in the post-tax future profits (on a local statutory basis) expected to arise from the current book of long-term business, after sufficient allowance has been made for the aggregate risks in that business. The shareholders’ interest in the Group’s long-term business comprises: — The present value of expected future shareholder cash flows from the in-force covered business (value of in-force business), less explicit allowance for the cost of locked-in required capital and the time value of financial options and guarantees across a range of economic scenarios; — Locked-in required capital, based on the applicable local statutory regulations, including any amounts considered to be required above the local statutory minimum requirements to satisfy regulatory constraints (the application of this principle to each business unit is set out below); and — The shareholders’ total net worth in excess of required capital (free surplus). Free surplus is defined in note 11. Required capital For shareholder-backed business, the following capital requirements apply for long-term business: — Asia: the level of required capital has been set to an amount at least equal to local statutory notification requirements. For China JV life operations, the level of required capital follows the approach for embedded value reporting issued by the China Association of Actuaries (CAA) reflecting the China Risk Oriented Solvency System (C-ROSS) regime; and — US: the level of required capital has been set at 250 per cent of the risk-based capital (RBC) required by the National Association of Insurance Commissioners (NAIC) at the Company Action Level (CAL). Key assumptions The value of in-force business is determined by projecting post-tax future profits (on a local statutory basis) by product, using best estimate assumptions for operating factors such as persistency, mortality, morbidity and expenses. Explicit allowances are made for the cost of holding required capital under the applicable local statutory regimes and the time value of financial options and guarantees (TVOG). The TVOG is determined by weighting the probability of outcomes across a large number of different economic scenarios, and is less applicable to health and protection business that generally contain more limited financial options or guarantees. As well as best estimate assumptions for operating factors, the projected cash flows assume a level of future investment return and are discounted using a risk discount rate. Both the risk discount rate and investment return are updated at each valuation date in line with changes in the risk-free rates. During 2019, this has had an overall negative effect on new business and in-force profitability. Different products will be sensitive to different assumptions, for example, spread-based products or products with guarantees are likely to benefit from higher assumed investment returns. Risk discount rates are set equal to the risk-free rate at the valuation date plus a product-specific allowance for market and non-market risks, excluding risks explicitly captured elsewhere such as via the TVOG. Products such as participating and unit-linked business will have typically a higher allowance for market risk as compared to health and protection products due to a higher proportion of equity-type assets within the investment portfolio. Other product design and business features also affect the risks attached to the emergence of shareholder cash flows, for example, the construct of with-profits funds in some business units can reduce the sensitivity of both policyholder and shareholder cash flows for participating products. Risk discount rates in any one business unit will reflect a blend of the risks attaching to the products written in that business. 336 Prudential plc Annual Report 2019 prudentialplc.com The value of future new business is excluded from the embedded value. A description of the EEV methodology and accounting presentation is provided in note 14, including an explanation of the delineation of profit between operating profit based on longer-term investment returns and non-operating items. Further details of best estimate assumptions are provided in note 15. 2 Results analysis by business area The 2018 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases. The 2018 CER comparative results are translated at 2019 average exchange rates for US dollars following the change in the Group’s presentation currency. Annual premium equivalents (APE) from continuing operations note 16 Actual exchange rate Constant exchange rate 2019 $m 2018 $m Change % 2018 $m Change % Annual premium equivalent New business profit Annual premium equivalent New business profit Annual premium equivalent New business profit Annual premium equivalent New business profit Annual premium equivalent New business profit Asia US Group total 5,161 2,223 7,384 3,522 883 4,405 4,999 2,059 7,058 3,477 1,230 4,707 3% 8% 5% 1% (28)% (6)% 4,959 2,059 7,018 3,460 1,230 4,690 4% 8% 5% 2% (28)% (6)% Profit for the year Continuing operations: Asia Long-term business Asset management Total US Long-term business Asset management Total Operating profit from long-term business and asset management Other income and expenditure Restructuring costs Operating profit from continuing operations Short-term fluctuations in investment returns Effect of changes in economic assumptions Impact of NAIC reform, hedge modelling and other related changes in the US Mark-to-market value movements on core structural borrowings Loss attaching to corporate transactions Total non-operating loss from continuing operations Profit for the year from continuing operations (Loss) profit for the year from discontinued operations (Loss) profit for the year Actual exchange rate Constant exchange rate 2019 $m 2018 $m Change % 2018 $m Change % 5,888 250 6,138 1,757 25 1,782 7,920 (923) (92) 6,905 3,254 (1,868) (3,457) (466) (207) (2,744) 4,161 (4,797) (636) 5,858 212 6,070 2,824 4 2,828 8,898 (969) (63) 7,866 (3,335) 416 – 733 (100) (2,286) 5,580 546 6,126 1% 18% 1% (38)% 525% (37)% (11)% 5% (46)% (12)% (25)% (979)% (110)% 5,843 209 6,052 2,824 4 2,828 8,880 (936) (61) 7,883 (3,333) 417 – 702 (99) (2,313) 5,570 522 6,092 1% 20% 1% (38)% 525% (37)% (11)% 1% (51)% (12)% (25)% (1,019)% (110)% prudentialplc.com Prudential plc Annual Report 2019 337 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationNOTES ON THE EEV BASIS RESULTS CONTINUED 2 Results analysis by business area continued EEV basis basic earnings per share Based on operating profit from continuing operations after non-controlling interests (in cents) Based on (loss) profit for the year attributable to equity holders of the Company (in cents): From continuing operations From discontinued operations 3 Analysis of new business contribution Actual exchange rate Constant exchange rate 2019 2018 Change % 2018 Change % 266.6¢ 305.3¢ (13)% 306.1¢ (13)% 160.5¢ (185.4)¢ (24.9)¢ 216.5¢ 21.2¢ 237.7¢ (26)% (975)% (110)% 216.3¢ 20.3¢ 236.6¢ (26)% (1,013)% (111)% Annual premium equivalents (APE) $m note 16 5,161 2,223 7,384 Annual premium equivalents (APE) $m note 16 4,999 2,059 7,058 Present value of new business premiums (PVNBP) $m note 16 29,244 22,231 51,475 Present value of new business premiums (PVNBP) $m note 16 27,711 20,593 48,304 2019 New business contribution $m note (i) 3,522 883 4,405 2018 New business contribution $m note (i) 3,477 1,230 4,707 New business margin APE % 68% 40% 60% PVNBP % 12.0% 4.0% 8.6% New business margin APE % 70% 60% 67% PVNBP % 12.5% 6.0% 9.7% Asia note (ii) US Group total Asia note (ii) US Group total Notes (i) The movement in new business contribution from $4,707 million for 2018 to $4,405 million for 2019 from continuing operations is analysed as follows: 2018 new business contribution Foreign exchange movement Effect of changes in interest rates and other economic assumptions Impact of US EEV hedge modelling enhancements note 7 Sales volume, business and product mix and other items 2019 new business contribution (ii) Asia new business contribution is analysed as follows: China JV Hong Kong Indonesia Taiwan Other Total Asia US $m Group total $m Asia $m 3,477 (17) (35) – 97 3,522 1,230 – (155) (114) (78) 883 2019 $m 2018 $m 262 2,042 227 75 916 3,522 AER 199 2,309 163 61 745 3,477 4,707 (17) (190) (114) 19 4,405 CER 190 2,310 163 56 741 3,460 338 Prudential plc Annual Report 2019 prudentialplc.com 4 Operating profit from long-term business in force Unwind of discount and other expected returns note (i) Effect of changes in operating assumptions note (ii) Experience variances and other items note (iii) Total operating profit from long-term business in force 2019 $m 2018 $m Asia 1,542 539 285 2,366 US 728 1 145 874 Group total 2,270 540 430 Asia US 1,626 457 298 1,176 154 264 Group total 2,802 611 562 3,240 2,381 1,594 3,975 Notes (i) The movement in unwind of discount and other expected returns from $2,802 million for 2018 to $2,270 million for 2019 from continuing operations is analysed as follows: 2018 unwind of discount and other expected returns Foreign exchange movement Effect of changes in interest rates and other economic assumptions Impact of US EEV hedge modelling enhancements note 7 Growth in opening value of in-force business and other items 2019 unwind of discount and other expected returns Asia $m 1,626 (12) (234) – 162 1,542 US $m Group total $m 1,176 – (104) (210) (134) 728 2,802 (12) (338) (210) 28 2,270 (ii) (iii) The 2019 effect of changes in operating assumptions of $539 million in Asia principally reflects the outcome from the annual review of persistency, claims and expense experience, together with the benefit of medical repricing management actions and the beneficial effect on the effective tax rate for China JV from changes to tax legislation in the first half of 2019. In Asia, the 2019 effect of experience variances and other items of $285 million is driven overall by positive mortality and morbidity experience in a number of local business units, together with positive persistency variance from participating and health and protection products. In the US, the effect of experience variances and other items is analysed as follows: Spread experience variance Amortisation of interest-related realised gains and losses Other items Total US experience variances and other items 5 Short-term fluctuations in investment returns Asia Hong Kong Indonesia Malaysia Singapore Taiwan Thailand Other Total Asia note (i) US Investment return related experience on fixed income securities note (ii) Investment return related impact due to changed expectation of profits on in-force variable annuity business in future periods based on current period separate account return, net of related hedging activity and other items note (iii) Total US Other operations Group total 2019 $m 2018 $m 38 102 5 145 52 123 89 264 2019 $m 2018 $m 1,526 (14) (20) 338 147 319 155 2,451 (737) (103) (109) (311) (37) (61) (16) (1,374) (243) 80 1,119 876 (73) (2,057) (1,977) 16 3,254 (3,335) prudentialplc.com Prudential plc Annual Report 2019 339 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information NOTES ON THE EEV BASIS RESULTS CONTINUED 5 Short-term fluctuations in investment returns continued Notes (i) (ii) (iii) For 2019, the credit of $2,451 million mainly represents the increase in bond and equity values in Hong Kong and higher than expected investment returns in Singapore, Thailand and Taiwan. The small losses in Indonesia and Malaysia represent bond gains being more than offset by lower than expected equity returns. The net result relating to fixed income securities reflects a number of offsetting items as follows: – The impact on portfolio yields of changes in the asset portfolio in the year; – Credit experience versus the longer-term assumption (which in 2019 was positive); and – The difference between actual realised gains and losses and the amortisation of interest-related realised gains and losses that is recorded within operating profit. This item reflects the net impact of: – Changes in projected future fees and future benefit costs arising from the difference between the actual growth in separate account asset values of 24.1 per cent and that assumed of 4.8 per cent (geometric) (2018: actual growth of negative 5.4 per cent compared to assumed growth of positive 5.3 per cent (geometric)); and – Related hedging activity arising from realised and unrealised gains and losses on equity and interest rate derivatives compared to the updated expected long-term allowance for hedging costs recorded in operating profit, and other items. 6 Effect of changes in economic assumptions Asia Hong Kong Indonesia Malaysia Singapore Taiwan Thailand Other Total Asia note (i) US Variable annuity business note (ii) Fixed annuity and other general account business note (iii) Total US Group total 2019 $m 2018 $m (853) 141 127 18 (142) (220) 262 (667) (1,556) 355 (1,201) (1,868) 220 (126) (25) 93 (19) 37 (27) 153 487 (224) 263 416 Notes (i) (ii) (iii) In 2019, the negative effect of $(667) million largely arises from movements in long-term interest rates, resulting in lower assumed fund earned rates in Hong Kong, Thailand and Taiwan, partially offset by the positive effect of lower risk discount rates in Indonesia and Malaysia in valuing future profits for health and protection business and the effect of changes to the basis of setting economic assumptions as described in note 14(i)(h) and note 15(i). In 2019, the charge of $(1,556) million mainly reflects the effect of a decrease in the assumed separate account return, following the 80 basis points decrease in the US 10-year treasury yield over the year, partially offset by the increase in US equity risk premium as described in note 15(i), resulting in lower projected fee income and an increase in projected benefit costs for variable annuity business. For fixed annuity and other general account business, the impact of $355 million reflects the increase in the present value of future projected spread income from the combined decrease in interest rates and credit spreads in the year. 7 Impact of NAIC reform, hedge modelling and other related changes in the US Impact of NAIC reform adopted at 31 December 2019 note (i) Impact of hedge modelling changes and other NAIC reform related changes note (ii) Total EEV impact of NAIC reform, hedge modelling and other related changes in the US 2019 $m 37 (3,494) (3,457) Notes (i) The National Association of Insurance Commissioners (NAIC) has implemented changes to the US statutory reserve and capital framework for variable annuities, effective from 1 January 2020. Jackson has chosen to early adopt the changes at 31 December 2019 for US statutory reporting and the Group has updated EEV accordingly. The impact on Group EEV is a $37 million benefit, with the increase in the cost of capital from higher capital requirements more than offset by the timing benefit from releasing policyholder liabilities earlier than previously anticipated. The impact on the various components of EEV as at 31 December 2019 is shown below. As discussed in note 14(i)(e), the below is based on a capital requirement of 250 per cent of the risk-based capital company action level and so the impact on free surplus is not equal to the effect on Jackson’s US statutory position. Free surplus $m Required capital $m Total net worth $m Value of in-force business $m Total embedded value $m Impact of NAIC reform adopted at 31 December 2019 (64) 343 279 (242) 37 Given that the NAIC reform was adopted at 31 December 2019, with the exception of the amounts shown above there are no other impacts from this change recorded in the 2019 EEV consolidated income statement or in the analysis of movement in free surplus. If the changes had been adopted with effect from 1 January 2019, the Group’s 2019 EEV results would not be expected to be materially different. 340 Prudential plc Annual Report 2019 prudentialplc.com (ii) Following the implementation of the NAIC’s changes to the US statutory reserve and capital framework, enhancements were made to the model used to allow for hedging within US statutory reporting. As a consequence, the Group has chosen to utilise the enhanced model within EEV to update its allowance for the long-term cost of hedging under EEV economic assumptions. In common with established practice for such changes, the EEV income statement has been prepared on the basis that this change had been effected at the start of the year, at a cost of $(3,233) million, included in non-operating profit. The initial impact on EEV is shown as a reduction in the value of in-force business as at 1 January 2019, and so the unwind of those cash flows over the year reduces the expected transfer to net worth and hence operating free surplus generation by $(903) million. This leads to an equal and offsetting benefit in short-term fluctuations as the excess of the actual cost of hedging in 2019 over the expected cost falls accordingly. There is no impact on total free surplus generation for 2019. See note 11 for the US free surplus results. There were no changes to Jackson’s hedging philosophy during 2019, which continues to focus on the underlying economics of the products whilst managing the volatility in the statutory position. The revised allowance for the long-term cost of hedging is expected to give a more refined indication of the expected long-term cost of the dynamic hedging programme under EEV economic assumptions, albeit it is not intended to reflect the exact derivatives held at a given point in time. In common with other long-term assumptions, the allowance for the expected cost of hedging in EEV will be kept under review, particularly in light of future experience under the new variable annuity statutory capital regime. In addition to the enhancement to the cost of hedging described above, a number of other changes have been made to EEV reporting following the NAIC reform, coupled with the objective of bringing the EEV free surplus more in line with the US statutory basis of reporting. The total impact of these changes as recorded in EEV non-operating profit was $(261) million. A reconciliation of EEV free surplus to surplus under the Group’s LCSM capital measure at 31 December 2019 by segment is provided in note I(i) in the additional financial information. 8 Net core structural borrowings of shareholder-financed businesses Holding company cash and short-term investments note (i) Central borrowings: Subordinated debt held post demerger of M&G plc note (ii) Senior debt Bank loan Central funds before amounts substituted to M&G plc Subordinated debt substituted to M&G plc in 2019 note (iii) Total central borrowings Total net borrowings for central operations Jackson Surplus Notes Net core structural borrowings of shareholder-financed businesses note (iv) 31 Dec 2019 $m Mark-to- market value adjustment IFRS basis EEV basis at market value 31 Dec 2018 $m Mark-to- market value adjustment IFRS basis EEV basis at market value (2,207) – (2,207) (4,121) – (4,121) 4,304 690 350 5,344 – 5,344 3,137 250 3,387 327 221 – 548 – 548 548 85 633 4,631 911 350 5,892 – 5,892 3,685 335 4,785 658 350 5,793 3,718 9,511 5,390 250 4,020 5,640 (138) 222 – 84 82 166 166 67 233 4,647 880 35 5,877 3,800 9,677 5,556 317 5,873 Notes (i) (ii) (iii) (iv) Holding company includes central finance subsidiaries. In May 2019, the Company redeemed its £400 million 11.375 per cent subordinated notes. In October 2019, Prudential plc transferred subordinated debt to M&G plc as part of the demerger. In addition to the subordinated debt held at 31 December 2018 as shown in the table above, the debt transferred included the further £300 million 3.875 per cent subordinated debt raised in July 2019. The movement in the value of core structural borrowings includes foreign exchange effects for pounds sterling denominated debts, which are included in ‘Exchange movements on foreign operations’. The movement in the mark-to-market value adjustment can be analysed as follows: Mark-to-market value adjustment at beginning of year Mark-to-market value adjustment on subordinated debt substituted to M&G plc at fair value at beginning of year Charge (credit) in respect of mark-to-market movements included in the income statement* Effect of foreign exchange movements for pounds sterling denominated debts Mark-to-market value adjustment at end of year * Relates to continuing debt only. 2019 $m 2018 $m 233 (82) 466 16 633 1,005 – (733) (39) 233 prudentialplc.com Prudential plc Annual Report 2019 341 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information NOTES ON THE EEV BASIS RESULTS CONTINUED 9 Gain (loss) attaching to corporate transactions Gain on disposals note (i) Other corporate transactions note (ii) Total 2019 $m 2018 $m 178 (385) (207) – (100) (100) Notes (i) (ii) In 2019, the $178 million gain on disposals mainly relates to profits arising from a reduction in the Group’s stake (from 26 per cent to 22 per cent) in its associate in India, ICICI Prudential Life Insurance Company, and the disposal of Prudential Vietnam Finance Company Limited, a wholly owned subsidiary that provides consumer finance. In 2019, other corporate transactions undertaken by continuing operations resulted in an EEV loss of $(385) million (2018: $(100) million). This primarily reflects costs related to the demerger of M&G plc from Prudential plc. 10 Analysis of movement in total net worth and value of in-force for long-term business Group Shareholders’ equity at beginning of year Demerger of UK and Europe operations Shareholders’ equity at beginning of year from continuing operations note New business contribution note 3 Existing business – transfer to net worth Expected return on existing business note 4 Changes in operating assumptions and experience variances note 4 Restructuring costs Operating profit from continuing operations Non-operating profit (loss) from continuing operations Profit for the year from continuing operations Foreign exchange movements Intra-group dividends and investment in operations Other movements Shareholders’ equity at end of year note Asia Shareholders’ equity at beginning of year New business contribution note 3 Existing business – transfer to net worth Expected return on existing business note 4 Changes in operating assumptions and experience variances note 4 Operating profit based on longer-term investment returns Non-operating profit Profit for the year Foreign exchange movements Intra-group dividends and investment in operations Other movements Shareholders’ equity at end of year 2019 $m Free surplus Required capital Total net worth Value of in-force business Total embedded value 9,587 (4,676) 12,542 (6,513) 22,129 (11,189) 42,045 (3,342) 64,174 (14,531) 4,911 (1,158) 3,081 141 558 (5) 2,617 (568) 2,049 66 (1,633) 2 5,395 2,202 (619) 1,914 80 147 1,522 1,195 2,717 66 (1,108) (253) 3,624 6,029 899 (613) 159 103 – 548 262 810 52 – – 10,940 (259) 2,468 300 661 (5) 3,165 (306) 2,859 118 (1,633) 2 38,703 4,664 (2,468) 1,970 309 – 4,475 (1,534) 2,941 251 – (2) 49,643 4,405 – 2,270 970 (5) 7,640 (1,840) 5,800 369 (1,633) – 6,891 12,286 41,893 54,179 2,904 241 (320) 67 116 104 122 226 52 – – 3,182 5,106 (378) 1,594 147 25,879 3,900 (1,594) 1,395 30,985 3,522 – 1,542 263 561 824 1,626 1,317 2,943 118 (1,108) (253) 6,806 4,262 645 4,907 251 – – 5,888 1,962 7,850 369 (1,108) (253) 31,037 37,843 342 Prudential plc Annual Report 2019 prudentialplc.com US Shareholders’ equity at beginning of year New business contribution note 3 Existing business – transfer to net worth Expected return on existing business note 4 Changes in operating assumptions and experience variances note 4 Restructuring costs Operating profit based on longer-term investment returns Non-operating profit (loss) Profit (loss) for the year Intra-group dividends and investment in operations Other movements 2019 $m Free surplus Required capital Total net worth Value of in-force business Total embedded value 2,709 (539) 1,167 61 411 (5) 1,095 (1,763) (668) (525) 255 3,125 658 (293) 92 (13) – 444 140 584 – – 5,834 119 874 153 398 (5) 1,539 (1,623) (84) (525) 255 12,824 764 (874) 575 (252) – 213 (2,179) (1,966) – (2) 18,658 883 – 728 146 (5) 1,752 (3,802) (2,050) (525) 253 Shareholders’ equity at end of year 1,771 3,709 5,480 10,856 16,336 Note The net value of in-force business for continuing operations comprises the value of future margins from current in-force business less the cost of holding required capital for long-term business as shown below: Value of in-force business before deduction of cost of capital and time value of options and guarantees Cost of capital Time value of options and guarantees* Net value of in-force business Total net worth Total embedded value 31 Dec 2019 $m 31 Dec 2018 $m Asia US 32,396 (866) (493) 31,037 6,806 37,843 11,417 (370) (191) 10,856 5,480 16,336 Group total 43,813 (1,236) (684) 41,893 12,286 54,179 Asia US 27,849 (721) (1,249) 25,879 5,106 30,985 15,043 (377) (1,842) 12,824 5,834 18,658 Group total 42,892 (1,098) (3,091) 38,703 10,940 49,643 * The time value of options and guarantees (TVOG) arises from the variability of economic outcomes in the future and is, where appropriate, calculated as the difference between an average outcome across a range of economic scenarios, calibrated around a central scenario, and the outcome from one central economic scenario, as described in note 14(i)(d). The TVOG and the outcome from the central economic scenario are linked; as the central economic scenario is updated for market conditions and the outcome reflects more or less of the guaranteed benefit payouts and associated product charges, there will be consequential changes to the TVOG. prudentialplc.com Prudential plc Annual Report 2019 343 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationNOTES ON THE EEV BASIS RESULTS CONTINUED 11 Analysis of movement in free surplus For EEV covered business, free surplus is the excess of the regulatory basis net assets for EEV reporting purposes (total net worth) over the capital required to support the covered business. Where appropriate, adjustments are made to total net worth so that backing assets are included at fair value rather than at cost to comply with the EEV Principles. In the Group’s Asia and US operations, assets deemed to be inadmissible on a local regulatory basis are included in net worth where considered recognisable on an EEV basis, with the exception of deferred tax assets in the US that are inadmissible under the local regulatory basis, which have been included in the value of in-force business (VIF) within the Group’s EEV results. Free surplus for asset management and other operations (including assets and liabilities of the Group’s central operations, the Group’s treasury function and Africa operations) is taken to be IFRS basis post-tax earnings and shareholders’ equity, net of goodwill attributable to shareholders, with subordinated debt recorded as free surplus to the extent that it is classified as available capital under the Group’s capital regime. A reconciliation of EEV free surplus to the Group’s Local Capital Summation Method (LCSM) surplus over Group minimum capital requirements is set out in note I(i) in the additional financial information. Operating free surplus generated before impact of US EEV hedge modelling enhancements and restructuring costs Impact of US EEV hedge modelling enhancements note 7 Operating free surplus generated before restructuring costs Restructuring costs Operating free surplus generated Non-operating profit (loss) from continuing operations note (f) Free surplus generated from discontinued operations note (g) Free surplus generated in the year Net cash flows paid to parent company note (h) Demerger dividend in specie of M&G plc External dividends Foreign exchange movements on foreign operations, timing differences and other items note (i) Net movement in free surplus Balance at beginning of year Balance at end of year note (j) Representing: Free surplus excluding distribution rights and other intangibles Distribution rights and other intangibles 2019 $m Continuing operations Asia note (a) US note (b) Total insurance and asset management Discontinued UK and Europe operations Other note (e) 1,772 2,028 3,800 (923) – (903) (903) – 1,772 (31) 1,741 1,125 (5) 1,120 2,897 (36) 2,861 1,195 (1,763) (568) – 2,936 (950) – – (357) 1,629 2,591 4,220 3,624 596 4,220 – (643) (525) – – 185 (983) 2,760 1,777 1,753 24 1,777 – 2,293 (1,475) – – (172) 646 5,351 5,997 5,377 620 5,997 (923) (56) (979) (448) – (1,427) 2,159 – (1,634) 810 (92) 3,831 3,739 1,227 2,512 3,739 2,512 2,512 (684) (7,379) – (426) (5,977) 5,977 – – – – Group total 2,877 (903) 1,974 (92) 1,882 (1,016) 2,512 3,378 – (7,379) (1,634) 212 (5,423) 15,159 9,736 6,604 3,132 9,736 344 Prudential plc Annual Report 2019 prudentialplc.com Operating free surplus generated before restructuring costs Restructuring costs Operating free surplus generated Non-operating loss from continuing operations note (f) Free surplus generated from discontinued operations Free surplus generated in the year Net cash flows to parent company note (h) External dividends Foreign exchange movements, timing differences and other items note (i) Net movement in free surplus Balance at beginning of year Balance at end of year Representing: Free surplus excluding distribution rights and other intangibles Distribution rights and other intangibles 2018 $m Continuing operations Asia note (a) US note (b) Total insurance and asset management 1,563 (25) 1,538 1,895 (23) 1,872 3,458 (48) 3,410 (525) (1,124) (1,649) – 1,013 (916) – (847) (750) 3,341 2,591 2,050 541 2,591 – 748 (452) – (144) 152 2,608 2,760 2,733 27 2,760 – 1,761 (1,368) – (991) (598) 5,949 5,351 4,783 568 5,351 Other (969) (15) (984) (29) – (1,013) 2,259 (1,662) 1,847 1,431 2,400 3,831 2,300 1,531 3,831 Discontinued UK and Europe operations 2,624 2,624 (891) – (58) 1,675 4,302 5,977 5,968 9 5,977 Notes (a) Operating free surplus generated by Asia insurance and asset management operations before restructuring costs can be analysed as follows: Operating free surplus generated from in-force life business Investment in new business note (c) Long-term business Asset management Total Asia 2019 $m 2018 $m % change AER CER 2,003 (652) 1,351 212 1,563 2,004 (646) 1,358 209 1,567 AER 7% 5% 13% 18% 13% 2,141 (619) 1,522 250 1,772 (b) Operating free surplus generated by US insurance and asset management operations before restructuring costs can be analysed as follows: Operating free surplus generated from in-force life business before EEV hedge modelling enhancements note (d) Impact of EEV hedge modelling enhancements note 7 Operating free surplus generated from in-force life business Investment in new business note (c) Long-term business Asset management Total US 2019 $m 2018 $m % change 2,542 (903) 1,639 (539) 1,100 25 1,125 2,191 – 2,191 (300) 1,891 4 1,895 16% – (25)% (80)% (42)% 525% (41)% Group total 2,489 (63) 2,426 (1,678) 2,624 3,372 – (1,662) 798 2,508 12,651 15,159 13,051 2,108 15,159 CER 7% 4% 12% 20% 13% (c) (d) Free surplus invested in new business primarily represents acquisition costs and amounts set aside for required capital. The increase in the US in-force free surplus generation before the EEV hedge modelling enhancements described in note 7 includes a $355 million benefit from the release of incremental reserves following the integration of the recently acquired John Hancock business. (e) Other operating free surplus generated for “other business” includes $(145) million (2018: $(103) million) of interest costs (net of tax) on debt that was substituted to M&G plc (f) (g) in October 2019. Non-operating items include short-term fluctuations in investment returns, the effect of changes in economic assumptions for long-term business, the impact of NAIC reform, hedge modelling and other related changes in the US (as described in note 7) and the effect of corporate transactions (as described in note 9). In particular, for other business it includes $(383) million for demerger costs (post-tax). In addition, for 2018 this included the impact in the US of changes to RBC factors following the US tax reform, which were formally approved by the NAIC in June 2018. Free surplus generated from the discontinued UK and Europe operations in 2019 includes profit for the period of ownership up to the demerger in October 2019 and fair value adjustment at the date of the demerger. (h) Net cash flows to parent company for Asia operations reflect the flows as included in the holding company cash flow. prudentialplc.com Prudential plc Annual Report 2019 345 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information NOTES ON THE EEV BASIS RESULTS CONTINUED 11 Analysis of movement in free surplus continued (i) Foreign exchange movements, timing differences and other items represent: Foreign exchange movements Mark-to-market value movements on Jackson assets backing surplus and required capital Other items (including intra-group loans and other intra-group transfers between operations and other non-cash items)* 2019 $m Continuing operations Total insurance and asset management 99 206 (477) (172) US – 206 (21) 185 Asia 99 – (456) (357) * The Group total for other items in 2019 included the effect of the redemption of $0.5 billion of subordinated debt. Foreign exchange movements Mark-to-market value movements on Jackson assets backing surplus and required capital Other items (including intra-group loans and other intra-group transfers between operations and other non-cash items) * 2018 $m Continuing operations Total insurance and asset management (64) (127) (800) (991) US 3 (127) (20) (144) Asia (67) – (780) (847) Other 91 – 719 810 Other (170) – 2,017 1,847 * The Group total for other items in 2018 included the effect of the net issuance of $1.5 billion of subordinated debt. (j) Free surplus from continuing operations at 31 December 2019 represents: Long-term business Asset management and other Total 2019 $m Total insurance and asset management 5,395 602 5,997 US 1,771 6 1,777 Asia 3,624 596 4,220 Discontinued UK and Europe operations 77 – (503) (426) Discontinued UK and Europe operations (377) – 319 (58) Other – 3,739 3,739 Group total 267 206 (261) 212 Group total (611) (127) 1,536 798 Group total 5,395 4,341 9,736 12 Expected transfer of value of in-force business and required capital to free surplus The discounted value of in-force business and required capital for the Group’s continuing long-term business operations can be reconciled to the 2019 and 2018 total emergence of free surplus as follows: Required capital note 10 Value of in-force business (VIF) note 10 Other items* Total continuing long-term business operations 31 Dec 2019 $m 31 Dec 2018 $m 6,891 41,893 205 48,989 6,029 38,703 1,915 46,647 * ‘Other items’ represent the impact of the time value of options and guarantees and amounts incorporated into VIF where there is no definitive timeframe for when the payments will be made or receipts received. These items are excluded from the expected free surplus generation profile below. Cash flows are projected on a deterministic basis and are discounted at the appropriate risk discount rate. The modelled cash flows use the same methodology underpinning the Group’s EEV reporting and so are subject to the same assumptions and sensitivities. 346 Prudential plc Annual Report 2019 prudentialplc.com The table below shows how the VIF generated by the in-force business and the associated required capital for the Group’s continuing long-term business operations is modelled as emerging into free surplus over future years. Asia US Group total Asia US Group total 31 Dec 2019 $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 8,561 6,408 6,335 4,735 14,969 11,070 30% 23% 4,394 2,424 6,818 14% 3,398 825 4,223 9% 7,715 302 8,017 16% 3,892 – 3,892 8% Expected period of conversion of future post-tax distributable earnings and required capital flows to free surplus from continuing long-term operations 31 Dec 2018 $m 1-5 years 6-10 years 11-15 years 16-20 years 21-40 years 40+ years 7,993 8,824 16,817 36% 5,330 5,214 10,544 23% 3,518 2,256 5,774 12% 2,615 481 3,096 7% 6,876 157 7,033 15% 3,383 – 3,383 7% 2019 total as shown above 34,295 14,694 48,989 100% 2018 total as shown above 29,715 16,932 46,647 100% 13 Sensitivity of results to alternative assumptions (i) Sensitivity analysis – economic assumptions The tables below show the sensitivity of the embedded value as at 31 December 2019 and 31 December 2018 and the new business contribution for 2019 and 2018 for continuing long-term business to: — 1 per cent increase in the discount rates; — 1 per cent increase in interest rates, including consequential changes in assumed investment returns for all asset classes, market values of fixed interest assets and risk discount rates (but excluding changes in the allowance for market risk); — 0.5 per cent decrease in interest rates, including consequential changes in assumed investment returns for all asset classes, market values of fixed interest assets and risk discount rates (but excluding changes in the allowance for market risk); — 1 per cent rise in equity and property yields; — 10 per cent fall in market value of equity and property assets (embedded value only); and — The Group minimum capital requirements under the LCSM in contrast to EEV basis required capital (embedded value only). The sensitivities shown below are for the impact of instantaneous (and permanent) changes on the embedded value of long-term business operations and include the combined effect on the value of in-force business and net assets (including derivatives) held at the valuation dates indicated. The results only allow for limited management actions such as changes to future policyholder bonuses where applicable. If such economic conditions persisted, the financial impacts may differ to the instantaneous impacts shown below. In this case management could also take additional actions to help mitigate the impact of these stresses. No change in the assets held at the valuation date is assumed when calculating sensitivities. If the changes in assumptions shown in the sensitivities were to occur, the effect shown below would be recorded within two components of the profit analysis for the following year, namely the effect of changes in economic assumptions and short-term fluctuations in investment returns. In addition, for changes in interest rates, the effect shown below for the US (Jackson) would also be recorded within mark-to-market value movements on Jackson assets backing surplus and required capital, which are taken directly to shareholders’ equity. In addition to the sensitivity effects shown below, the other components of the profit for the following year would be calculated by reference to the altered assumptions, for example new business contribution and unwind of discount and other expected returns, together with the effect of other changes such as altered corporate bond spreads. prudentialplc.com Prudential plc Annual Report 2019 347 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information NOTES ON THE EEV BASIS RESULTS CONTINUED 13 Sensitivity of results to alternative assumptions continued (i) Sensitivity analysis – economic assumptions continued New business contribution from continuing long-term business New business contribution note 3 Discount rates – 1% increase Interest rates and consequential effects – 1% increase Interest rates and consequential effects – 0.5% decrease Equity/property yields – 1% rise Embedded value of continuing long-term business 2019 $m 2018 $m Asia 3,522 (715) (46) (121) 210 US 883 (22) 207 (123) 70 Group total 4,405 (737) 161 (244) 280 Asia 3,477 (733) (270) 77 174 US 1,230 (56) 126 (88) 154 Group total 4,707 (789) (144) (11) 328 31 Dec 2019 $m 31 Dec 2018 $m Asia US Group total Asia US Group total Shareholders’ equity note 10 37,843 16,336 54,179 30,985 18,658 49,643 Discount rates – 1% increase Interest rates and consequential effects – 1% increase Interest rates and consequential effects – 0.5% decrease Equity/property yields – 1% rise Equity/property market values – 10% fall Group minimum capital requirements (5,263) (1,408) (28) 1,758 (810) 175 (509) 798 (686) 556 (1,205) 221 (5,772) (610) (714) 2,314 (2,015) 396 (4,193) (1,992) 466 1,326 (602) 140 (653) 152 (348) 1,288 (634) 276 (4,846) (1,840) 118 2,614 (1,236) 416 The directional movements in the sensitivities from 31 December 2018 to 31 December 2019 reflect the generally lower government bond yields and higher equity markets at 31 December 2019, and the actual hedging portfolio in place at both valuation dates, which varies due to the nature of Jackson’s dynamic hedging programme. (ii) Sensitivity analysis – non-economic assumptions The tables below show the sensitivity of the embedded value as at 31 December 2019 and 31 December 2018 and the new business contribution for 2019 and 2018 for continuing long-term business operations to: — 10 per cent proportionate decrease in maintenance expenses (for example, a 10 per cent sensitivity on a base assumption of $10 per annum would represent an expense assumption of $9 per annum); — 10 per cent proportionate decrease in lapse rates (for example, a 10 per cent sensitivity on a base assumption of 5 per cent would represent a lapse rate of 4.5 per cent per annum); and — 5 per cent proportionate decrease in base mortality (ie increased longevity) and morbidity rates. New business contribution from continuing long-term business operations New business contribution note 3 Maintenance expenses – 10% decrease Lapse rates – 10% decrease Mortality and morbidity – 5% decrease 2019 $m 2018 $m Asia 3,522 67 211 116 US 883 15 24 (2) Group total 4,405 82 235 114 Asia 3,477 53 206 93 US 1,230 15 32 5 Group total 4,707 68 238 98 348 Prudential plc Annual Report 2019 prudentialplc.com Embedded value of continuing long-term business operations Shareholders’ equity note 10 Maintenance expenses – 10% decrease Lapse rates – 10% decrease Mortality and morbidity – 5% decrease Change representing effect on: Life business Annuities 31 Dec 2019 $m 31 Dec 2018 $m Asia US Group total Asia US Group total 37,843 16,336 54,179 30,985 18,658 49,643 411 1,459 1,323 1,323 – 200 624 94 168 (74) 611 2,083 1,417 1,491 (74) 323 1,238 1,063 1,063 – 227 788 180 250 (70) 550 2,026 1,243 1,313 (70) 14 Methodology and accounting presentation (i) Methodology (a) Covered business The EEV basis results for the Group are prepared for ‘covered business’ as defined by the EEV Principles. Covered business represents the Group’s long-term insurance business (including the Group’s investments in joint venture and associate insurance operations), for which the value of new and in-force contracts is attributable to shareholders. The EEV basis results for the Group’s covered business are then combined with the post-tax IFRS basis results of the Group’s asset management and other operations (including interest costs on core structural borrowings, corporate expenditure for head office functions in London and Hong Kong, the Group’s treasury function and Africa operations). Under the EEV Principles, the results for covered business incorporate the projected margins of attaching internal asset management, as described in note (g) below. The definition of long-term insurance business comprises those contracts falling under the definition for regulatory purposes together with, for US operations, contracts that are in substance the same as guaranteed investment contracts (GICs) but do not fall under the technical definition. (b) Valuation of in-force and new business The EEV basis results are prepared incorporating best estimate assumptions about all relevant factors including levels of future investment returns, persistency, mortality, morbidity and expenses, as described in note 15(iii). These assumptions are used to project future cash flows. The present value of the projected future cash flows is then calculated using a discount rate, as shown in note 15(i), which reflects both the time value of money and all other non-diversifiable risks associated with the cash flows that are not otherwise allowed for. New business In determining the EEV basis value of new business, premiums are included in projected cash flows on the same basis of distinguishing regular and single premium business as set out in the Group’s new business sales reporting. New business premiums reflect those premiums attaching to the covered business, including premiums for contracts classified as investment contracts under IFRS. New business premiums for regular premium products are shown on an annualised basis. New business contribution represents profit determined by applying operating and economic assumptions as at the end of the period. New business profitability is a key metric for the Group’s management of the development of the business. In addition, new business margins are shown by reference to annual premium equivalents (APE) and the present value of new business premiums (PVNBP). These margins are calculated as the percentage of the value of new business profit to APE and PVNBP. APE is calculated as the aggregate of regular premiums on new business written in the period and one-tenth of single premiums. PVNBP is calculated as the aggregate of single premiums and the present value of expected future premiums from regular premium new business, allowing for lapses and the other assumptions made in determining the EEV new business contribution. prudentialplc.com Prudential plc Annual Report 2019 349 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationNOTES ON THE EEV BASIS RESULTS CONTINUED 14 Methodology and accounting presentation continued Valuation movements on investments With the exception of debt securities held by Jackson, investment gains and losses during the year (to the extent that changes in capital values do not directly match changes in liabilities) are included directly in the profit for the year and shareholders’ equity as they arise. The results for any covered business conceptually reflect the aggregate of the post-tax IFRS basis results and the movements in the additional shareholders’ interest recognised on an EEV basis. Therefore, the start point for the calculation of the EEV basis results for Jackson, as for other businesses, reflects the market value movements recognised on an IFRS basis. In determining the movements in the additional shareholders’ interest, for Jackson’s debt securities backing liabilities, the aggregate EEV basis results reflect the fact that the value of in-force business incorporates the discounted value of expected future spread earnings. This value is generally not affected by short-term market movements in debt securities that, broadly speaking, are held for the longer term. Consequently, within EEV total net worth, Jackson’s debt securities backing liabilities are held on a statutory basis (largely at book value), while those backing surplus and required capital are accounted for at fair value. Consistent with the treatment applied under IFRS, for Jackson’s debt securities classified as available-for-sale, movements in unrealised appreciation and depreciation on these securities are accounted for directly in equity rather than in the income statement, as shown in ‘Mark-to-market value movements on Jackson assets backing surplus and required capital’ in the statement of movement in shareholders’ equity. (c) Cost of capital A charge is deducted from the embedded value for the cost of locked-in required capital supporting the Group’s long-term business. The cost is the difference between the nominal value of the capital held and the discounted value of the projected releases of this capital, allowing for post-tax investment earnings on the capital. The EEV results are affected by the movement in this cost from year to year, which comprises a charge against new business profit and generally a release in respect of the reduction in capital requirements for business in force as this runs off. Where required capital is held within a with-profits long-term fund, the value placed on surplus assets within the fund is already adjusted to reflect its expected release over time and so no further adjustment to the shareholder position is necessary. (d) Financial options and guarantees Nature of financial options and guarantees in Prudential’s long-term business Asia Participating products in Asia, principally written in Hong Kong, Singapore and Malaysia, have both guaranteed and non-guaranteed elements. These products provide returns to policyholders through bonuses that are smoothed. There are two types of bonuses: regular and final. Regular bonuses are declared once a year and, once credited, are guaranteed in accordance with the terms of the particular products. Final bonuses are guaranteed only until the next bonus declaration. There are also various non-participating long-term products with guarantees. The principal guarantees are those for whole-of-life contracts with floor levels of policyholder benefits that accrue at rates set at inception and do not vary subsequently with market conditions. US (Jackson) The principal financial options and guarantees in Jackson are associated with the variable annuity and fixed annuity lines of business. Jackson issues variable annuity contracts for which it contractually guarantees to the contract holder, subject to specific conditions, either: a) a return of no less than total deposits made to the contract, adjusted for any partial withdrawals; b) total deposits made to the contract, adjusted for any partial withdrawals plus a minimum return; or c) the highest contract value on a specified anniversary date, adjusted for any withdrawals following the specified contract anniversary. These guarantees include benefits that are payable upon depletion of funds (Guaranteed Minimum Withdrawal Benefits (GMWB)) or as death benefits (Guaranteed Minimum Death Benefits (GMDB)). These guarantees generally protect the policyholder’s contract value in the event of poor equity market performance. Jackson hedges the GMWB and GMDB guarantees through the use of equity options and futures contracts, with an expected long-term future hedging cost allowed for within the EEV value of in-force business to reflect the equity options and futures expected to be held based on the Group’s current dynamic hedging programme and consideration of past practice. This allowance was re-estimated in 2019 following the NAIC reform for variable annuity business, as described in note 7. Jackson also historically issued a small amount of income benefits (Guaranteed Minimum Income Benefits (GMIB)), which are now materially fully reinsured. Fixed annuities provide that at Jackson’s discretion it may reset the interest rate credited to policyholders’ accounts, subject to a guaranteed minimum return, depending on the particular product, jurisdiction where issued and the date of issue. Jackson also issues fixed index annuities that enable policyholders to obtain a portion of an equity-linked return while providing a guaranteed minimum return, which is of a similar nature to those for fixed annuities. 350 Prudential plc Annual Report 2019 prudentialplc.com Time value The value of financial options and guarantees comprises the intrinsic value (arising from a deterministic valuation on best estimate assumptions) and the time value (arising from the variability of economic outcomes in the future). Where appropriate, a full stochastic valuation has been undertaken to determine the time value of financial options and guarantees. The economic assumptions used for the stochastic calculations are consistent with those used for the deterministic calculations. Assumptions specific to the stochastic calculations reflect local market conditions and are based on a combination of actual market data, historic market data and an assessment of long-term economic conditions. Common principles have been adopted across the Group for the stochastic asset models, for example, separate modelling of individual asset classes with an allowance for correlations between various asset classes. Details of the key characteristics of each model are given in note 15(ii). In deriving the time value of financial options and guarantees, management actions in response to emerging investment and fund solvency conditions have been modelled. Management actions encompass, but are not confined to, investment allocation decisions, levels of regular and final bonuses and credited rates. Bonus rates are projected from current levels and varied in accordance with assumed management actions applying in the emerging investment and fund solvency conditions. In all instances, the modelled actions are in accordance with approved local practice and therefore reflect the options available to management. The time value of financial options and guarantees reflects how the market value of the assets (including derivatives) held to manage the liability portfolios are expected to vary across the range of economic scenarios considered. For instance, in some economic scenarios the derivative portfolio may project gains in excess of the cost of the underlying guarantees on an EEV basis. If the calculation of the time value of options and guarantees results in a positive outcome for a particular product (for example for variable annuity business in the US at 31 December 2019) then the figure is capped at zero, reflecting the strong interaction between the outcome of the central economic scenario and the time value of financial options and guarantees in these circumstances, and the reported value of in-force business before deduction of cost of capital and time value of options and guarantees will reflect the outcome from the full stochastic valuation. (e) Level of required capital In adopting the EEV Principles, Prudential has based required capital on the applicable local statutory regulations, including any amounts considered to be required above the local statutory minimum requirements to satisfy regulatory constraints. For shareholder-backed businesses, the following capital requirements for long-term business apply: — Asia: the level of required capital has been set to an amount at least equal to local statutory notification requirements. For China JV life operations, the level of required capital follows the approach for embedded value reporting issued by the China Association of Actuaries (CAA) reflecting the C-ROSS regime; and — US: the level of required capital has been set at 250 per cent of the risk-based capital (RBC) required by the National Association of Insurance Commissioners (NAIC) at the Company Action Level (CAL). (f) With-profits business and the treatment of the estate For the Group’s relevant Asia operations, the proportion of surplus allocated to shareholders from the with-profits funds has been based on the applicable profit distribution between shareholders and policyholders. The EEV methodology includes the value attributed to the shareholders’ interest in the residual estate of the in-force with-profits business. In any scenarios where the total assets of the life fund are insufficient to meet policyholder claims in full, the excess cost is fully attributed to shareholders. As required, adjustments are also made to reflect any capital requirements for with-profits business in Asia in excess of the available capital of the with-profits funds. (g) Internal asset management The in-force and new business results from long-term business include the projected future profit or loss from asset management and service companies that support the Group’s covered insurance businesses. The results of the Group’s asset management operations include the current period profit from the management of both internal and external funds. EEV basis shareholders’ other income and expenditure is adjusted to deduct the unwind of the expected margins on the internal management of the assets of the life funds for the period as included in ‘Other’ operations. The deduction is on a basis consistent with that used for projecting the results for covered insurance business. Accordingly, Group operating profit includes the variance between the actual and expected profit margin in respect of the management of the assets for the covered business. (h) Allowance for risk and risk discount rates Overview Under the EEV Principles, discount rates used to determine the present value of expected future cash flows are set by reference to risk-free rates plus a risk margin. The risk-free rates are based on local government bond yields at the valuation date and are generally assumed to remain constant throughout the projection. The risk margin reflects any non-diversifiable risk associated with the emergence of distributable earnings that is not allowed for elsewhere in the valuation. In order to better reflect differences in relative market risk volatility inherent in each product group, Prudential sets the risk discount rates to reflect the expected volatility associated with the expected future cash flows for each product group in the embedded value model, rather than at a Group level. Since financial options and guarantees are explicitly valued under the EEV methodology, risk discount rates exclude the effect of these product features. The risk margin represents the aggregate of the allowance for market risk, additional allowance for credit risk where appropriate, and allowance for non-diversifiable non-market risk. No allowance is required for non-market risks where these are assumed to be fully diversifiable. prudentialplc.com Prudential plc Annual Report 2019 351 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationNOTES ON THE EEV BASIS RESULTS CONTINUED 14 Methodology and accounting presentation continued Market risk allowance The allowance for market risk represents the beta multiplied by an equity risk premium. The beta of a portfolio or product measures its relative market risk. The risk discount rates reflect the market risk inherent in each product group and hence the volatility of product-specific cash flows. These are determined by considering how the profit from each product is affected by changes in expected returns on various asset classes. By converting this into a relative rate of return, it is possible to derive a product-specific beta. Product level betas reflect the product mix at the valuation date to produce appropriate betas and risk discount rates for each major product group. In 2019, the Group reconsidered the application of this methodology for certain Asia businesses to reflect a more granular assessment of the underlying market risks when determining the beta, alongside other refinements. These refinements resulted in the change in the risk discount rate for Vietnam shown in note 15(i)(a), and had an impact of $67 million via the effect of change in economic assumptions in note 6. There were small consequential effects on new business contribution and in-force operating profit, which were overall not material in the context of the Group’s results. Additional credit risk allowance The Group’s methodology allows for credit risk. The total allowance for credit risk is to cover expected long-term defaults, credit risk premium (to reflect the volatility in downgrade and default levels) and short-term downgrades and defaults. These allowances are initially reflected in determining best estimate returns and through the market risk allowance described above. However, for those businesses largely backed by holdings of debt securities, these allowances in the projected returns and market risk allowances may not be sufficient and an additional allowance may be appropriate. The practical application of the allowance for credit risk varies depending on the type of business as described below: Asia For Asia, the allowance for credit risk incorporated in the projected rates of return and the market risk allowance is considered to be sufficient. Accordingly, no additional allowance for credit risk is required. The projected rates of return for holdings of corporate bonds comprise the risk-free rate plus an assessment of long-term spread over the risk-free rate. US (Jackson) For Jackson, the allowance for long-term defaults of 0.17 per cent at 31 December 2019 (31 December 2018: 0.17 per cent) is reflected in the risk margin reserve charge that is deducted in determining the projected spread margin between the earned rate on the investments and the policyholder crediting rate. The risk discount rate incorporates an additional allowance for credit risk premium and short-term downgrades and defaults, as shown in note 15(i)(b). In determining this allowance, a number of factors have been considered, in particular including: — How much of the credit spread on debt securities represents an increased short-term credit risk not reflected in the risk margin reserve long-term default assumptions and how much is liquidity premium (which is the premium required by investors to compensate for the risk of longer-term investments that cannot be easily converted into cash at the fair market value). In assessing this effect, consideration has been given to a number of approaches to estimate the liquidity premium by considering recent statistical data; and — Policyholder benefits for Jackson fixed annuity business are not fixed. It is possible, in adverse economic scenarios, to pass on a component of credit losses to policyholders (subject to guarantee features), through lower investment returns credited to policyholders. Consequently, it is only necessary to allow for the balance of the credit risk in the risk discount rate. The level of the additional allowance is assessed at each reporting period to take account of prevailing credit conditions and as the business in force alters over time. The additional allowance for variable annuity business has been set at one-fifth of the non-variable annuity business to reflect the proportion of the allocated holdings of general account debt securities. Allowance for non-diversifiable non-market risks The majority of non-market and non-credit risks are considered to be diversifiable. An allowance for non-diversifiable non-market risks is estimated as set out below. A base level allowance of 50 basis points is applied to cover the non-diversifiable non-market risks associated with the Group’s covered business. For the Group’s businesses in less mature markets (such as the Philippines and Thailand), additional allowances are applied for emerging market risk ranging from 100 to 250 basis points. The level and application of these allowances are reviewed and updated based on an assessment of the Group’s exposure and experience in the markets. During 2019, the allowance for emerging market risk was removed for Indonesia, Taiwan and Vietnam reflecting the growth in the size of the businesses and increasing management exposure and experience in the local markets. For the Group’s business in more mature markets, no additional allowance is necessary. 352 Prudential plc Annual Report 2019 prudentialplc.com (i) Foreign currency translation Foreign currency profits and losses have been translated at average exchange rates for the year. Foreign currency transactions are translated at the spot rate prevailing at the date of the transactions. This includes external dividends paid to shareholders. Prudential will determine and declare its dividend in US dollars commencing with dividends paid in 2020, including the 2019 second interim dividend. Foreign currency assets and liabilities have been translated at closing exchange rates. The principal exchange rates are shown in note A1 of the Group IFRS financial statements. (j) Taxation In determining the post-tax profit for the year for covered business, the overall tax rate includes the impact of tax effects determined on a local regulatory basis. Tax payments and receipts included in the projected future cash flows to determine the value of in-force business are calculated using tax rates that have been announced and substantively enacted by the end of the reporting period. (ii) Accounting presentation (a) Analysis of post-tax profit To the extent applicable, the presentation of the EEV basis profit or loss for the year is consistent with the classification between operating and non-operating results that the Group applies for the analysis of IFRS basis results. Operating results are determined as described in note (b) below and incorporate the following: — New business contribution, as defined in note (i)(b) above; — Unwind of discount on the value of in-force business and other expected returns, as described in note (c) below; — The impact of routine changes of estimates relating to operating assumptions, as described in note (d) below; and — Operating experience variances, as described in note (e) below. In addition, operating results include the effect of changes in tax legislation, unless these changes are one-off and structural in nature or primarily affect the level of projected investment returns, in which case they are reflected as a non-operating result. Non-operating results comprise: — Short-term fluctuations in investment returns; — Mark-to-market value movements on core structural borrowings; — Effect of changes in economic assumptions; — Impact of NAIC reform, hedge modelling and other related changes in the US; and — The impact of corporate transactions undertaken in the year. Total profit or loss in the year attributable to shareholders and basic earnings per share include these items, together with actual investment returns. The Group believes that operating profit, as adjusted for these items, better reflects underlying performance. (b) Investment returns included in operating profit For the investment element of the assets covering the total net worth of long-term insurance business, investment returns are recognised in operating results at the expected long-term rates of return. These expected returns are calculated by reference to the asset mix of the portfolio. For the purpose of determining the long-term returns for debt securities of Jackson for fixed annuity and other general account business, a risk margin reserve charge is included, which reflects the expected long-term rate of default based on the credit quality of the portfolio. For Jackson, interest-related realised gains and losses are amortised to the operating results over the maturity period of the sold bonds; for equity-related investments, a long-term rate of return is assumed (as disclosed in note 15(i)(b)), which reflects the aggregation of risk-free rates and the equity risk premium at the end of the reporting period. For variable annuity separate account business, operating profit includes the unwind of discount on the opening value of in-force business adjusted to reflect projected rates of return at the end of the reporting period, with the excess or deficit of the actual return recognised within non-operating results, together with related hedging activity variances. (c) Unwind of discount and other expected returns The Group’s methodology in determining the unwind of discount and other expected returns is by reference to the value of in-force business at the beginning of the year (adjusted for the effect of changes in economic and operating assumptions in the current year) and required capital and surplus assets. (d) Effect of changes in operating assumptions Operating profit includes the effect of changes to non-economic assumptions on the value of in-force business at the end of the reporting period. For presentational purposes the effect of changes is delineated to show the effect on the opening value of in-force business as operating assumption changes, with the experience variances subsequently being determined by reference to the assumptions at the end of the reporting period, as discussed below. (e) Operating experience variances Operating profit includes the effect of experience variances on non-economic assumptions, such as persistency, mortality, morbidity, expenses and other factors, which are calculated with reference to the assumptions at the end of the reporting period. (f) Effect of changes in economic assumptions Movements in the value of in-force business at the beginning of the year caused by changes in economic assumptions, net of the related changes in the time value of financial options and guarantees, are recorded in non-operating results. prudentialplc.com Prudential plc Annual Report 2019 353 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationNOTES ON THE EEV BASIS RESULTS CONTINUED 15 Assumptions (i) Principal economic assumptions The EEV basis results for the Group’s covered business have been determined using economic assumptions where both the long-term expected rates of return on investments and risk discount rates are set by reference to risk-free rates of return at the end of the reporting period. The risk-free rates of return are based on local government bond yields, which are generally assumed to remain constant throughout the projection, and are shown below for each of the Group’s insurance operations. Expected returns on equity and property asset classes and corporate bonds are derived by adding a risk premium to the risk-free rate based on the Group’s long-term view. In the majority of business units, equity risk premiums were increased during 2019 by 25 basis points from those applied at 2018. The related expected return on equity assets and risk discount rates have been increased accordingly. As described in note 14(i)(h), the resulting risk discount rates incorporate allowances for market risk, additional credit risk and non-diversifiable non-market risks appropriate to the features and risks of the underlying products and markets, after considering risks allowed for explicitly elsewhere in the EEV basis, such as cost of capital and the time value of the cost of options and guarantees. The total profit that emerges over the lifetime of an individual contract as calculated under the EEV basis is the same as that calculated under the IFRS basis. Since the EEV basis reflects discounted future cash flows, under the EEV methodology the profit emergence is advanced, thus more closely aligning the timing of the recognition of profit with the efforts and risks of current management actions, particularly with regard to business sold during the year. (a) Asia notes(2)(3) China JV Hong Kong notes (2)(4) Indonesia Malaysia note (4) Philippines Singapore note (4) Taiwan Thailand Vietnam Total weighted average note (1) Risk discount rate % New business In-force business Government bond yield % Expected long-term inflation % 31 Dec 2019 31 Dec 2018 31 Dec 2019 31 Dec 2018 31 Dec 2019 31 Dec 2018 31 Dec 2019 31 Dec 2018 8.2 3.7 10.8 5.8 12.3 3.3 3.4 9.2 5.3 4.9 8.1 4.4 12.4 6.6 14.5 3.4 4.5 10.0 12.6 5.4 8.2 3.7 10.8 5.9 12.3 3.9 3.0 9.2 5.5 4.9 8.1 4.4 12.4 6.6 14.5 4.2 4.4 10.0 12.6 5.8 3.2 1.9 7.2 3.3 4.6 1.7 0.7 1.5 3.4 3.3 2.7 8.2 4.1 7.0 2.1 0.9 2.5 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 (1) (2) (3) (4) Total weighted average risk discount rates for Asia shown above have been determined by weighting each business’s risk discount rates by reference to the EEV basis new business contribution and the net closing value of in-force business. The changes in the risk discount rates for individual Asia businesses reflect the movements in the local government bond yields, changes in the equity risk premiums, changes in the allowance for market risk as described in note 14(i)(h) and changes in product mix. For Hong Kong, the assumptions shown are for US dollar denominated business. For other businesses, the assumptions shown are for local currency denominated business. Equity risk premiums (geometric) in Asia range from 2.9 per cent to 4.8 per cent (31 December 2018: 2.6 per cent to 4.5 per cent). The geometric equity return assumptions for the most significant equity holdings of the Asia businesses are: Hong Kong (US dollar denominated business) Malaysia Singapore 31 Dec 2019 % 31 Dec 2018 % 4.8 7.3 5.7 5.3 7.9 5.8 354 Prudential plc Annual Report 2019 prudentialplc.com (b) US Risk discount rate: Variable annuity: Risk discount rate Additional allowance for credit risk included in risk discount rate note 14(i)(h) Non-variable annuity: Risk discount rate Additional allowance for credit risk included in risk discount rate note 14(i)(h) Total weighted average: New business In-force business Allowance for long-term defaults included in projected spread note 14(i)(h) US 10-year treasury bond yield Equity risk premium (geometric) Pre-tax expected long-term nominal rate of return for US equities (geometric) Expected long-term rate of inflation S&P 500 equity return volatility note (ii)(b) Note Assumed new business spread margins are as follows: Fixed annuity business* Fixed index annuity business† Institutional business 31 Dec 2019 % 31 Dec 2018 % 6.5 0.2 3.7 1.0 6.1 6.2 0.17 1.9 2.9 4.8 2.9 17.5 7.1 0.2 4.4 1.0 6.9 6.8 0.17 2.7 2.6 5.3 2.9 17.5 2019 % 2018 % January to June issues July to December issues January to June issues July to December issues 1.50 0.50 0.50 0.85 0.50 0.50 1.75 2.00 0.50 1.75 2.00 0.50 * Including the proportion of variable annuity business invested in the general account. The assumed spread margin grades up linearly by 25 basis points to a long-term assumption over five years. † The assumed spread margin grades up linearly by 100 basis points over five years, increasing by a further 50 basis points to a long-term assumption at the end of the index option period (2018 issues: grades up linearly by 25 basis points to a long-term assumption over five years). (ii) Stochastic assumptions Details are given below of the key characteristics of the models used to determine the time value of financial options and guarantees as referred to in note 14(i)(d). (a) Asia — The stochastic cost of guarantees is primarily of significance for the Hong Kong, Malaysia, Singapore, Taiwan and Vietnam businesses; — The principal asset classes are government bonds, corporate bonds and equity; — Interest rates are projected using a stochastic interest rate model calibrated to the current market yields; — Equity returns are assumed to follow a log-normal distribution; — The corporate bond return is calculated based on a risk-free return plus a mean-reverting spread; — The volatility of equity returns ranges from 18 per cent to 35 per cent for both years; and — The volatility of government bond yields ranges from 1.1 per cent to 2.0 per cent for both years. (b) US (Jackson) — Interest rates and equity returns are projected using a log-normal generator reflecting historical market data; — Corporate bond returns are based on treasury yields plus a spread that reflects current market conditions; — The volatility of equity returns ranges from 17 per cent to 26 per cent for both years; and — The standard deviation of interest rates ranges from 3.1 per cent to 3.3 per cent (2018: from 3.4 per cent to 3.7 per cent). prudentialplc.com Prudential plc Annual Report 2019 355 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationNOTES ON THE EEV BASIS RESULTS CONTINUED 15 Assumptions continued (iii) Operating assumptions Best estimate assumptions are used for projecting future cash flows, where best estimate is defined as the mean of the distribution of future possible outcomes. The assumptions are reviewed actively and changes are made when evidence exists that material changes in future experience are reasonably certain. Assumptions required in the calculation of the time value of financial options and guarantees, for example relating to volatilities and correlations, or dynamic algorithms linking liabilities to assets, have been set equal to the best estimates and, wherever material and practical, reflect any dynamic relationships between the assumptions and the stochastic variables. Demographic assumptions Persistency, mortality and morbidity assumptions are based on an analysis of recent experience, and reflect expected future experience. Where relevant, when calculating the time value of financial options and guarantees, policyholder withdrawal rates vary in line with the emerging investment conditions according to management’s expectations. When projecting future cash flows for medical reimbursement business that is repriced annually, explicit allowance is made for expected future premium inflation and separately for future medical claims inflation. Expense assumptions Expense levels, including those of the service companies that support the Group’s long-term business, are based on internal expense analysis and are appropriately allocated to acquisition of new business and renewal of in-force business. For mature business, it is Prudential’s policy not to take credit for future cost reduction programmes until the actions to achieve the savings have been delivered. An allowance is made for short-term required expenses that are not representative of the longer-term expense loadings of the relevant businesses. At 31 December 2019 the allowance held for these costs across the Group was $313 million, mainly arising in Asia. Expense overruns are reported where these are expected to be short-lived, including businesses that are growing rapidly or are sub-scale. For Asia, expenses comprise costs borne directly and costs recharged from the Group head office function in Hong Kong that are attributable to the covered business. The assumed future expenses for these businesses also include projections of these future recharges. Development expenses are allocated to Asia covered business and are charged as incurred. Corporate expenditure, which is included in other income and expenditure, comprises expenditure of the Group head office function in Hong Kong that is not allocated to the covered business or asset management, primarily for corporate related activities that are charged as incurred, and expenditure of the Group head office function in London, together with restructuring costs incurred across the Group. Tax rates The assumed long-term effective tax rates for operations reflect the expected incidence of taxable profit and loss in the projected future cash flows as explained in note 14(i)(j). Except for the change in China JV effective tax rate as discussed in note 4, there has been no change in the effective tax rates applied for projecting future cash flows. 356 Prudential plc Annual Report 2019 prudentialplc.com 16 Insurance new business Continuing operations: 2019 $m 2018 $m 2019 $m 2018 $m 2019 $m 2018 $m 2019 $m 2018 $m Single premiums Regular premiums Annual premium equivalents (APE) Present value of new business premiums (PVNBP) Asia Cambodia Hong Kong Indonesia Malaysia Philippines Singapore Thailand Vietnam South-east Asia including Hong Kong China JV note (b) Taiwan India note (c) Total Asia US Variable annuities Elite Access (variable annuity) Fixed annuities Fixed index annuities Institutional Total US Group total note (d) – 387 292 209 51 1,217 192 22 2,370 710 544 155 3,779 – 458 274 112 57 1,242 290 27 2,460 138 389 105 3,092 12,692 2,002 1,194 3,821 2,522 14,433 2,245 454 335 3,126 22,231 20,593 24 1,977 361 333 153 539 140 215 3,742 518 278 245 4,783 – – – – – – 26 2,222 287 324 111 493 127 192 3,782 390 243 276 4,691 – – – – – – 26,010 23,685 4,783 4,691 24 2,016 390 355 158 660 159 217 3,979 590 332 260 5,161 1,270 200 119 382 252 2,223 7,384 26 2,266 315 335 117 617 156 195 4,027 403 282 287 4,999 1,443 225 46 33 312 2,059 7,058 111 12,815 1,668 2,090 561 4,711 763 1,342 24,061 2,586 1,418 1,179 119 13,619 1,215 1,765 395 4,821 813 946 23,693 1,753 1,052 1,213 29,244 27,711 12,692 2,002 1,194 3,821 2,522 14,434 2,244 454 335 3,126 22,231 20,593 51,475 48,304 Notes (a) The tables shown above are provided as an indicative volume measure of transactions undertaken in the reporting period that have the potential to generate profit for shareholders. The amounts shown are not, and not intended to be, reflective of premium income recorded in the Group IFRS income statement. (b) New business in China JV is included at Prudential’s 50 per cent interest in the joint venture. (c) (d) New business in India is included at Prudential’s interest in the associate (with effect from 27 March 2019: 22 per cent; 2018: 26 per cent). In 2019, the Africa business sold new business APE of $82 million (2018: $51 million on an actual exchange rate basis, $47 million on a constant exchange rate basis). Given the relative immaturity of the Africa business, it is incorporated into the Group’s EEV basis results on an IFRS basis and is excluded from new business sales and profit metrics. prudentialplc.com Prudential plc Annual Report 2019 357 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information 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 issued by the European Insurance CFO Forum in 2016 (‘the EEV Principles’) using the methodology and assumptions set out in the Notes on the EEV basis results. When compliance with the EEV Principles is stated, those principles require the directors to prepare supplementary information in accordance with the Embedded Value Methodology (EVM) contained in the EEV Principles and to disclose and explain any non-compliance with the EEV guidance included in the EEV Principles. In preparing the EEV supplementary information, the directors have: — Prepared the supplementary information in accordance with the EEV Principles; — Identified and described the business covered by the EVM; — Applied the EVM consistently to the covered business; — Determined assumptions on a realistic basis, having regard to past, current and expected future experience and to any relevant external data, and then applied them consistently; — Made estimates that are reasonable and consistent; and — Described the basis on which business that is not covered business has been included in the supplementary information, including any material departures from the accounting framework applicable to the Group’s financial statements. 358 Prudential plc Annual Report 2019 prudentialplc.com 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 We have audited the EEV basis supplementary information of Prudential plc (‘the Company’) for the year ended 31 December 2019 set out in the EEV basis results and Notes on the EEV basis results pages. The EEV basis supplementary information should be read in conjunction with the Group financial statements. In our opinion, the EEV basis supplementary information of the Company for the year ended 31 December 2019 has been properly prepared, in all material respects, in accordance with the European Embedded Value Principles issued by the European Insurance CFO Forum in 2016 (‘the EEV Principles’) using the methodology and assumptions set out in the Notes on the EEV basis results. The purpose of this report and restrictions on its use by persons other than the Company This report is made solely to the Company in accordance with the terms of our engagement. Our audit work has been undertaken so that we might state to the Company those matters we have been engaged to state in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our audit work, for this report, or for the opinions we have formed. Philip Smart for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants London 10 March 2020 Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 358, the directors have accepted responsibility for the preparation of the supplementary information on the EEV basis in accordance with the EEV Principles. Our responsibility is to audit, and express an opinion on, the supplementary information in accordance with the terms of our engagement and in accordance with International Standards on Auditing (UK). Those standards require us to comply with the Financial Reporting Council’s Ethical Standard. Scope of an audit of financial statements performed in accordance with ISAs (UK) A description of the scope of an audit of financial statements is provided on our website at www.kpmg.com/uk/ auditscopeukco2014a. This report is made subject to important explanations regarding our responsibilities, as published on that website, which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions. prudentialplc.com Prudential plc Annual Report 2019 359 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information 07 Additional information 360 Prudential plc Annual Report 2019 prudentialplc.com 07 G r o u p o v e r v e w i i S t r a t e g c r e p o r t G o v e r n a n c e D i r e c t o r s ’ r e m u n e r a t i o n r e p o r t i F n a n c a i Index to the additional unaudited financial information Risk factors Glossary Shareholder information How to contact us Page 362 388 396 400 403 l s t a t e m e n t s E u r o p e a n E m b e d d e d V a u e ( E E V ) b a s i s r e s u l t s l A d d i t i o n a l i n f o r m a t i o n prudentialplc.com Prudential plc Annual Report 2019 361 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information Index to the additional unaudited financial information I Additional financial information (i) Group capital position (ii) Funds under management (iii) Holding company cash flow (iv) Analysis of adjusted IFRS operating profit based on longer-term investment returns by driver from long-term insurance businesses (v) Asia operations – analysis of adjusted IFRS operating profit based on longer-term investment returns by business unit (vi) Reconciliation of expected transfer of value of in-force business and required capital to free surplus (vii) Option schemes (viii) Selected historical financial information II Calculation of alternative performance measures (i) Reconciliation of adjusted IFRS operating profit based on longer-term investment returns to profit before tax from continuing operations (ii) Calculation of IFRS gearing ratio (iii) Return on IFRS shareholders’ funds (iv) Calculation of IFRS shareholders’ funds per share (v) Calculation of asset management cost/income ratio (vi) Reconciliation of Asia renewal insurance premium to gross premiums earned (vii) Reconciliation of APE new business sales to gross premiums earned (viii) Reconciliation between IFRS and EEV shareholders’ equity (ix) Calculation of return on embedded value (x) Calculation of EEV shareholders’ funds per share (xi) Calculation of new business contribution/embedded value Page 363 367 368 369 372 374 378 380 382 382 382 384 384 384 385 385 386 387 387 362 Prudential plc Annual Report 2019 prudentialplc.com Additional unaudited financial information I Additional financial information I(i) Group capital position Following the demerger of M&G plc from Prudential plc, the Hong Kong Insurance Authority (IA) has assumed the role of the group-wide supervisor for the Prudential Group with the Group no longer subject to Solvency II capital requirements. Ultimately, Prudential plc will become subject to the Group Wide Supervision (GWS) framework which is currently under development by the Hong Kong IA for the industry and is expected to be finalised in the second half of 2020. Until Hong Kong’s GWS framework comes into force, Prudential will apply the local capital summation method (LCSM) that has been agreed with the Hong Kong IA to determine group regulatory capital requirements (both minimum and prescribed levels). Further detail on the LCSM is included in the basis of preparation section below. For regulated insurance entities, the available and required capital included in the LCSM measure for Hong Kong IA Group regulatory purposes are based on the local solvency regime applicable in each jurisdiction. At 31 December 2019 the Prudential Group’s total surplus of available capital over the regulatory Group Minimum Capital Requirement (GMCR), calculated using this LCSM was $23.6 billion before allowing for the payment of the 2019 second interim ordinary dividend. The Group holds material participating business in Hong Kong, Singapore and Malaysia. If the available capital and minimum capital requirement attributed to this policyholder business are excluded, then the Prudential Group shareholder LCSM surplus of available capital over the regulatory GMCR at 31 December 2019 was $9.5 billion before allowing for the payment of the 2019 second interim ordinary dividend. Estimated Group LCSM capital position based on Group Minimum Capital Requirement (GMCR) Available capital ($bn) Group Minimum Capital Requirement ($bn) LCSM surplus (over GMCR) ($bn) LCSM ratio (over GMCR) (%) 31 Dec 2019 Less policyholder (19.1) (5.0) (14.1) Total 33.1 9.5 23.6 348% Shareholder 14.0 4.5 9.5 309% 31 Dec 2018* Less policyholder (13.5) (3.8) (9.7) Total 27.0 7.6 19.4 355% Shareholder 13.5 3.8 9.7 356% * Excludes M&G plc and includes $3.7 billion of subordinated debt issued by Prudential plc that was transferred to M&G plc on 18 October 2019. The shareholder LCSM capital position by segment is presented below at 31 December 2019 and 31 December 2018 for comparison: Estimated Group shareholder LCSM capital position (based on GMCR) Available capital Group Minimum Capital Requirement LCSM surplus (over GMCR) Available capital Group Minimum Capital Requirement LCSM surplus (over GMCR) 31 Dec 2019 $bn Shareholder Total Asia Less policyholder 26.8 8.0 18.8 (19.1) (5.0) (14.1) Asia 7.7 3.0 4.7 Unallocated to a segment Group total 1.0 – 1.0 14.0 4.5 9.5 US 5.3 1.5 3.8 31 Dec 2018* $bn Shareholder Total Asia Less policyholder 19.6 6.3 13.3 (13.5) (3.8) (9.7) Asia 6.1 2.5 3.6 Unallocated to a segment Group total 1.7 – 1.7 13.5 3.8 9.7 US 5.7 1.3 4.4 *Excludes M&G plc and includes $3.7 billion of subordinated debt issued by Prudential plc that was transferred to M&G plc on 18 October 2019. The 31 December 2019 Jackson local statutory results reflect early adoption of the NAIC regulatory framework reforms at the valuation date as agreed with the Department of Insurance Financial Services (DIFS) and Jackson’s decision not to renew its long-standing permitted practice with the DIFS which allowed certain derivative instruments, taken out to protect Jackson against declines in long-term interest rates, to be included at book value in the local statutory returns. At 31 December 2019 these derivatives are held at fair value. prudentialplc.com Prudential plc Annual Report 2019 363 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information I Additional financial information continued I(i) Group capital position continued Sensitivity analysis The estimated sensitivity of the Group shareholder LCSM capital position (based on GMCR) to significant changes in market conditions is as follows: Impact of market sensitivities Base position Impact of: 20% instantaneous fall in equity markets 40% fall in equity markets note (1) 50 basis points reduction in interest rates 100 basis points increase in interest rates 100 basis points increase in credit spreads note (2) 31 Dec 2019 LCSM surplus $bn 9.5 1.5 (0.2) (0.2) (1.3) (1.6) LCSM ratio % 309% (9)% (39)% (17)% (19)% (36)% Notes (1) Where hedges are dynamic, rebalancing is allowed for by assuming an instantaneous 20 per cent fall followed by a further 20 per cent fall over a four-week period. (2) US RBC solvency position included using a stress of 10 times expected credit defaults. The sensitivity results above assume instantaneous market movements as at 31 December 2019, apart from the -40% equity sensitivity where for Jackson an instantaneous 20% market fall is assumed to be followed by a further market fall of 20% over a four-week period with dynamic hedges assumed to be rebalanced over the period. Aside from this assumed dynamic hedge rebalancing for Jackson in the -40% equity sensitivity, the sensitivity results only allow for limited management actions such as changes to future policyholder bonuses. If such economic conditions persisted, the financial impacts may differ to the instantaneous impacts shown above. In this case management could also take additional actions to help mitigate the impact of these stresses. These actions include, but are not limited to, rebalancing investment portfolios, further market risk hedging, increased use of reinsurance, repricing of in-force benefits, changes to new business pricing and the mix of new business being sold. Between 31 December 2019 and the end of February 2020, government bond yields and equity markets fell significantly in many countries. For example, US 10-year treasury yields fell by around 80 basis points and the US S&P 500 equity index fell by around 9% over the 2-month period. Based on economic conditions at the end of February 2020, the Group shareholder LCSM capital ratio (over GMCR) is estimated to be in the range of 270% - 280%, compared to 309% at 31 December 2019. This estimated capital ratio at the end of February is slightly higher than implied by the sensitivities above, mainly reflecting the benefit of management actions taken in the period which are not allowed for in the sensitivities. 364 Prudential plc Annual Report 2019 prudentialplc.com ADDITIONAL UNAUDITED FINANCIAL INFORMATION CONTINUEDAnalysis of movement in Group capital position A summary of the estimated movement in the Group shareholder LCSM surplus (based on GMCR) from $9.7 billion at 31 December 2018 to $9.5 billion at 31 December 2019 is set out in the table below. Balance at beginning of year Operating: Operating capital generation from the in-force business Investment in new business Operating capital generation Non-operating and other capital movements: Non-operating experience (including market movements) Adoption of NAIC regulatory reforms in the US Corporate activities (excluding demerger items) Demerger costs Subordinated debt redemption Demerger related impacts M&G plc remittances External dividends Net dividend impact Net movement in LCSM surplus Balance at end of year 2019 $bn 9.7 2.5 (0.6) 1.9 (0.6) 0.1 (0.8) (0.4) (0.5) 1.0 0.7 (1.6) (0.9) (0.2) 9.5 The estimated movement in the Group shareholder LCSM surplus over 2019 is driven by: — Operating capital generation of $1.9 billion: generated by expected return on in-force business net of strain on new business written in 2019. It includes the impact from the release of incremental reserves associated with the John Hancock acquisition in the US ($0.4 billion) and interest paid prior to demerger on subordinated debt transferred to M&G plc ($(0.2) billion); — Non-operating experience of $(0.6) billion: this includes the negative impact of higher equity markets on Jackson’s derivatives net of reserve movements partially offset by the positive impacts of market and exchange rate movements on Asia surplus over the year; — Corporate activities (excluding demerger items) of $(0.8) billion: this is the effect on LCSM surplus of corporate transactions in the period, principally arising from the extension of the UOB bancassurance distribution deal; — Demerger costs of $(0.4) billion: this includes transaction related costs and other one-off costs arising from the demerger; — Subordinated debt redemption of $(0.5) billion: a reduction in surplus from the impact of debt redeemed during 2019; — Demerger related impacts of $1.0 billion: includes $3.8 billion of pre-demerger dividend paid by M&G plc, $1.0 billion of restructuring impacts prior to demerger and $0.4 billion from debt raised by Prudential plc on behalf of M&G plc, partially offset by $(4.2) billion from the transfer of subordinated debt to M&G plc prior to demerger; and — Net dividend impact of $(0.9) billion: this includes external dividends of $(1.6) billion paid during 2019 largely based on the Group prior to demerger net of regular remittances paid by M&G plc during 2019 prior to the demerger of $0.7 billion. prudentialplc.com Prudential plc Annual Report 2019 365 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information I Additional financial information continued I(i) Group capital position continued Reconciliation of Group shareholder LCSM surplus to EEV free surplus (excluding intangibles) 31 Dec 2019 ($bn) Estimated Group shareholder LCSM surplus (over GMCR) Increase required capital for EEV free surplus note (i) Adjust surplus assets and core structural borrowings to market value note (ii) Add back inadmissible assets note (iii) Deductions applied to EEV free surplus note (iv) Other EEV free surplus excluding intangibles* Asia 4.7 (0.6) 0.3 0.1 (0.9) – 3.6 Unallocated to a segment US Group total 3.8 (2.2) 0.2 0.1 – (0.1) 1.8 1.0 – (0.2) – – 0.4 1.2 9.5 (2.8) 0.3 0.2 (0.9) 0.3 6.6 *As per the “Free surplus excluding distribution rights and other intangibles” from note 11 of the Group’s EEV basis results. Notes: (i) (ii) Required Capital under EEV is set at least equal to local statutory notification requirements for Asia (with China JV following the approach for embedded value reporting issued by the China Association of Actuaries (CAA) reflecting the C-ROSS regime) and at 250 per cent of the risk-based capital (RBC) required by the NAIC at the Company Action Level (CAL). This is higher than the solo legal entity statutory minimum capital requirements that are included in the LCSM surplus (over GMCR). The EEV Principles require surplus assets to be included at fair value and central core senior debt held at market value. Within LCSM surplus, some local regulatory regimes value certain assets at cost and core structural borrowings are held at amortised cost. LCSM restricts the valuation of certain sundry non-intangible assets. In most cases these assets are considered fully recognisable in free surplus. As an exception to this, both LCSM surplus and EEV free surplus restrict the deferred tax asset held by Jackson to the level allowed to be admitted by the local regulator in local statutory available capital. (iv) Deductions applied to EEV free surplus primarily include the impact of applying the embedded value reporting approach issued by the CAA within EEV free surplus as compared to the C-ROSS surplus reported for local regulatory purposes. The $(0.9) billion predominantly arises from the requirement under the CAA embedded value methodology to establish a deferred profit liability within EEV net worth. (iii) Reconciliation of Group IFRS shareholders’ equity to shareholder LCSM available capital position Group IFRS shareholders’ equity Remove DAC, goodwill and intangibles Add subordinated debt at IFRS book value Valuation differences Other Estimated Group shareholder LCSM available capital The key items of the reconciliation as at 31 December 2019 are: 31 Dec 2019 $bn 19.5 (18.2) 4.6 8.6 (0.5) 14.0 — $(18.2) billion due to the removal of DAC, goodwill and other intangibles from the IFRS statement of financial position; — $4.6 billion due to the addition of subordinated debt, which is treated as available capital under LCSM but as a liability under IFRS; and — $8.6 billion due to differences on the basis of valuing assets and liabilities between IFRS and local statutory valuation rules, including reductions for inadmissible assets. The most significant difference arises in Jackson where local statutory reserves are reduced by an expense allowance linked to surrender charges. IFRS makes no such allowance but instead defers acquisition costs on the balance sheet as a separate asset (which is not recognised on the statutory balance sheet). Basis of preparation In advance of the GWS framework coming into force, Prudential applies the local capital summation method (LCSM) that has been agreed with the Hong Kong IA to determine group regulatory capital requirements (both minimum and prescribed levels). The summation of local statutory capital requirements across the Group is used to determine group regulatory capital requirements, with no allowance for diversification between business operations. The Group available capital is determined by the summation of available capital across local solvency regimes for regulated entities and IFRS net assets (with adjustments described below) for non-regulated entities. The Hong Kong IA has yet to make any final decisions regarding the GWS framework for the industry and it continues to consider and consult on the proposed legislation and related guidelines. The results above should not therefore be interpreted as representing the results or requirements under the industry-wide GWS framework and are not intended to provide a forecast of the eventual position. 366 Prudential plc Annual Report 2019 prudentialplc.com ADDITIONAL UNAUDITED FINANCIAL INFORMATION CONTINUEDIn determining the LCSM available capital and required capital the following principles have been applied: — For regulated insurance entities, available and required capital are based on the local solvency regime applicable in each jurisdiction, with minimum required capital is set at the solo legal entity statutory minimum capital requirements. The treatment of participating funds is consistent with the local basis; — For the US insurance entities, available and required capital are based on the local US RBC framework set by the NAIC, with minimum required capital set at 100 per cent of the CAL RBC; — For asset management operations and other regulated entities, the shareholder capital position is derived based on the sectoral basis applicable in each jurisdiction, with minimum required capital based on the solo legal entity statutory minimum capital requirement; — For non-regulated entities, the available capital is based on IFRS net assets after deducting intangible assets. No required capital is held in respect of unregulated entities; — Investments in subsidiaries, joint ventures and associates (including, if any, loans that are recognised as capital on the receiving entity’s balance sheet) are eliminated from the relevant holding company to prevent the double counting of available capital; and — The Hong Kong IA has agreed that specific bonds (being those subordinated debt instruments held by Prudential plc at the date of demerger) can be included as part of the Group’s capital resources for the purposes of satisfying group minimum and prescribed capital requirements. Senior debt instruments held by Prudential plc have not been included as part of the Group capital resources and are treated as a liability in the LCSM results presented above (this is equivalent to a 15 per cent reduction in the Group shareholder LCSM coverage ratio (over GMCR)). Grandfathering provisions under the GWS framework remain subject to further consultation and the Hong Kong legislative process in due course. I(ii) Funds under management For Prudential’s asset management businesses, funds managed on behalf of third parties are not recorded on the statement of financial position. They are, however, a driver of profitability. Prudential therefore analyses the movement in the funds under management each period, focusing on those which are external to the Group and those primarily held by the Group’s insurance businesses. The table below analyses, by segment, the funds of the Group held in the statement of financial position and the external funds that are managed by Prudential’s asset management businesses. Asia operations: Internal funds Eastspring Investments external funds (as analysed note I(v)) Other† US operations – internal funds Other operations Total Group funds under management – continuing operations 31 Dec 2019 $bn 31 Dec 2018* $bn 141.9 124.7 – 266.6 273.4 3.9 543.9 112.5 77.8 22.2 212.5 237.0 5.8 455.3 * The 2018 comparatives have been adjusted from the previously published amounts to exclude the discontinued UK and Europe operations. Additionally, the comparatives have been adjusted to include cash and cash equivalents and to exclude assets held that are attributable to external unit holders of consolidated collective investment schemes to align to the current year’s presentation. † Other represents funds managed by Eastspring Investments on behalf of M&G plc, that were categorised as the internal funds of the UK and Europe operations prior to the demerger of M&G plc. Following the demerger, these funds have been reclassified to external funds under management of Eastspring Investments. Note Total Group funds under management from continuing operations comprise: Total investments and cash and cash equivalents held by the continuing operations on the consolidated statement of financial position External and M&G plc funds of Eastspring Investments Internally managed funds held in joint ventures and associate, excluding assets attributable to external unit holders of the consolidated collective investment schemes and other adjustments Total Group funds under management from continuing operations 31 Dec 2019 $bn 31 Dec 2018 $bn 412.6 124.7 6.6 543.9 349.6 100.0 5.7 455.3 prudentialplc.com Prudential plc Annual Report 2019 367 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationI Additional financial information continued I(iii) Holding company cash flow The holding company cash flow describes the movement in the cash and short-term investments of the centrally managed group holding companies and differs from the IFRS cash flow statement, which includes all cash flows in the year including those relating to both policyholder and shareholder funds. The holding company cash flow is therefore a more meaningful indication of the Group’s central liquidity. During both 2019 and 2018 the cash and short-term investments of the central holding companies were managed in sterling, in line with the management of the Group’s external dividends. Following the change to the Group’s presentational currency, the holding company cash flow statement below is shown in US dollars and prior period amounts have been restated accordingly. Cash movements in the year have been converted from sterling into US dollars by using the month-end sterling to US dollar exchange rate for the month in which the transaction occurred. Cash balances at the start and end of the year have been translated from sterling to US dollars using the spot rates at 1 January and 31 December respectively. As an exception to the above, external dividends paid for both 2019 and 2018 have been translated at the exchange rate relevant to the day they were paid to ensure consistency with the financial statements. At 31 December 2019, the Group changed its basis of managing central cash-holdings from sterling to US dollars to better reflect the inflows from the Group’s operations post the demerger of M&G plc and its decision to declare dividends in US dollars from 2020. Therefore, in future reporting the holding company cash flow will be prepared directly in US dollars. Net cash remitted by business units note (a): From continuing operations Asia note (b) US note (b) Other operations Total continuing operations From discontinued UK and Europe operations Net cash remittances by business units Net interest paid note (c) Tax received Corporate activities Total central outflows Holding company cash flow before dividends and other movements Dividends paid Operating holding company cash flow after dividends but before other movements Other movements Transactions to effect the demerger, including debt substitution note(d) Demerger costs Redemption of subordinated debt for continuing operations Early settlement of UK-inflation-linked derivative liability Other corporate activities relating to continuing operations note(e) Total other movements Total holding company cash flow Cash and short-term investments at beginning of year Foreign exchange movements Cash and short-term investments at end of year 2019 $m AER 2018 $m 950 509 6 1,465 684 2,149 (527) 265 (260) (522) 1,627 (1,634) (7) (146) (424) (504) (587) (338) (1,999) (2,006) 4,121 92 2,207 916 452 49 1,417 842 2,259 (488) 190 (274) (572) 1,687 (1,662) 25 2,071 (29) (553) – (336) 1,153 1,178 3,063 (120) 4,121 Notes (a) (b) (c) (d) Net cash remittances comprise dividends and other transfers from business units that are reflective of emerging earnings and capital generation. Significant cash remittances from business units were hedged into sterling using forward contracts during 2018 and 2019 and these contracts determine the amount of sterling recorded in the holding company cash flow for the relevant remittances. The implicit rates may therefore differ from that applied to present the holding company cash flow in US dollars. If local currency remittances in Asia had been translated directly into US dollars using the relevant month-end spot rate then the growth rate in Asia remittances year on year would have been 8 per cent (compared to 4 per cent shown in the table above). The dividend paid by Jackson in the US in US dollars in 2019 was $525 million (2018: $450 million). The net interest paid in 2019 includes amounts on debt substituted to M&G plc shortly prior to its demerger of $231 million. Transactions to effect the demerger includes the transfer of subsidiaries and settlement of intercompany loans totalling $(193) million issuance of substitutable debt for cash of $367 million, receipt of the pre-demerger dividend of $3,841 million, and the substitution of M&G plc as issuer of sub-ordinated debt in place of Prudential plc (as discussed further in note C6 of the IFRS financial statements), which reduced Cash and short-term investments by $(4,161) million. (e) Other corporate activities relating to continuing operations primarily relates to the first instalment payable following the renewal of bancassurance arrangement with UOB of $253 million, ongoing centrally funded payments of bancassurance distribution rights and other items. 368 Prudential plc Annual Report 2019 prudentialplc.com ADDITIONAL UNAUDITED FINANCIAL INFORMATION CONTINUEDI(iv) Analysis of adjusted IFRS operating profit based on longer-term investment returns by driver from long-term insurance businesses This schedule classifies the Group’s adjusted IFRS operating profit based on longer-term investment returns (adjusted operating profit) from continuing long-term insurance businesses into the underlying drivers using the following categories: — Spread income represents the difference between net investment income and amounts credited to certain policyholder accounts. It excludes the operating investment return on shareholder net assets, which has been separately disclosed as expected return on shareholder assets. — Fee income represents profit driven by net investment performance, being fees that vary with the size of the underlying policyholder funds, net of investment management expenses. — With-profits represents the pre-tax shareholders’ transfer from the with-profits business for the period. — Insurance margin primarily represents profit derived from the insurance risks of mortality and morbidity. — Margin on revenues primarily represents amounts deducted from premiums to cover acquisition costs and administration expenses (see below). — Acquisition costs and administration expenses represent expenses incurred in the period attributable to shareholders. These exclude items such as restructuring costs, which are not included in the segment profit, as well as items that are more appropriately included in other categories (eg investment expenses are netted against investment income as part of spread income or fee income as appropriate). — DAC adjustments comprise DAC amortisation for the period, excluding amounts related to short-term fluctuations in investment returns, net of costs deferred in respect of new business written in the period. (a) Margin analysis of long-term insurance business – continuing operations The following analysis expresses certain of the Group’s sources of adjusted IFRS operating profit based on longer-term investment returns as a margin of policyholder liabilities or other relevant drivers. Details on the calculation of the Group’s average policyholder liability balances are given in note (1). Spread income Fee income With-profits Insurance margin Margin on revenues Expenses: Acquisition costs note (3) Administration expenses DAC adjustments note (4) Expected return on shareholder assets Share of related tax charges from joint ventures and associate note (5) Adjusted IFRS operating profit based on longer-term investment returns long-term business Adjusted IFRS operating profit based on longer-term investment returns – asset management Total segment profit from continuing operations Average liability note (1) $m 86,887 208,217 58,032 Margin note (2) bps 111 172 18 7,384 303,204 (44)% (103) 2019 Group total $m 963 3,578 107 3,561 3,035 (3,230) (3,112) 940 220 6,062 (31) 6,031 315 6,346 US note (c) $m 642 3,292 – 1,317 – (1,074) (1,675) 510 26 3,038 – 3,038 32 3,070 Asia note (b) $m 321 286 107 2,244 3,035 (2,156) (1,437) 430 194 3,024 (31) 2,993 283 3,276 prudentialplc.com Prudential plc Annual Report 2019 369 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information I Additional financial information continued I(iv) Analysis of adjusted IFRS operating profit based on longer-term investment returns by driver from long-term insurance businesses continued 2018 AER notes (6),(7) Spread income Fee income With-profits Insurance margin Margin on revenues Expenses: Acquisition costs note (3) Administration expenses DAC adjustments note (4) Expected return on shareholder assets Share of related tax charges from joint ventures and associate note (5) Adjusted IFRS operating profit based on longer-term investment returns long-term business Adjusted IFRS operating profit based on longer-term investment returns – asset management Total segment profit from continuing operations Spread income Fee income With-profits Insurance margin Margin on revenues Expenses: Acquisition costs note (3) Administration expenses DAC adjustments note (4) Expected return on shareholder assets Share of related tax charges from joint ventures and associate note (5) Adjusted IFRS operating profit based on longer-term investment returns long-term business Adjusted IFRS operating profit based on longer-term investment returns – asset management Total segment profit from continuing operations Average liability note (1) $m 74,803 204,456 47,548 Margin note (2) bps 145 173 20 7,058 284,985 (43)% (105) Average liability note (1) $m 74,690 204,111 47,580 Margin note (2) bps 145 174 20 7,018 284,527 (43)% (104) Asia note (b) $m 310 280 95 1,978 2,810 (2,007) (1,374) 435 172 2,699 (53) 2,646 242 2,888 Asia note (b) $m 305 277 94 1,966 2,790 (1,991) (1,359) 430 172 2,684 (51) 2,633 239 2,872 US note (c) $m 778 3,265 – 1,267 – (1,013) (1,607) (152) 14 2,552 – 2,552 11 2,563 Group total $m 1,088 3,545 95 3,245 2,810 (3,020) (2,981) 283 186 5,251 (53) 5,198 253 5,451 2018 CER notes (6),(7) US note (c) $m 778 3,265 – 1,267 – (1,013) (1,607) (152) 14 2,552 – 2,552 11 2,563 Group total $m 1,083 3,542 94 3,233 2,790 (3,004) (2,966) 278 186 5,236 (51) 5,185 250 5,435 Notes to the tables throughout I(iv) (1) For Asia, opening and closing policyholder liabilities have been used to derive an average balance for the year, as a proxy for average balances throughout the year. The calculation of average liabilities for the US is generally derived from month-end balances throughout the year as opposed to opening and closing balances only. The average liabilities for fee income in the US have been calculated using daily balances instead of month-end balances in order to provide a more meaningful analysis of the fee income, which is charged on the daily account balance. Average liabilities for spread income are based on the general account liabilities to which spread income is attached. Average liabilities used to calculate the administration expenses margin exclude the REALIC liabilities reinsured to third parties prior to the acquisition by Jackson. The ratio of acquisition costs is calculated as a percentage of APE sales including with-profits sales. Acquisition costs include only those relating to shareholder-backed business. The DAC adjustments contain a credit of $72 million in respect of joint ventures and associate in 2019 (2018: AER credit of $73 million). (2) Margin represents the operating return earned in the year as a proportion of the relevant class of policyholder liabilities excluding unallocated surplus. (3) (4) (5) Under IFRS, the Group’s share of results from its investments in joint ventures and associate accounted for using the equity method is included in the Group’s profit before tax on a net of related tax basis. These tax charges are shown separately in the analysis of Asia operating profit drivers in order for the contribution from the joint ventures and associate to be included in the margin analysis on a consistent basis as the rest of the Asia’s operations. The 2018 comparative information has been presented at both AER and CER to eliminate the impact of exchange translation. CER results are calculated by translating prior year results using the current year foreign exchange rates. All CER profit figures have been translated at current year average rates for US dollars to reflect the change in the Group’s presentation currency in 2019. For Asia, CER average liabilities have been translated using current year opening and closing exchange rates. The 2018 comparative results exclude the contribution from the discontinued UK and Europe operations. (7) (6) 370 Prudential plc Annual Report 2019 prudentialplc.com ADDITIONAL UNAUDITED FINANCIAL INFORMATION CONTINUED(b) Margin analysis of long-term insurance business – Asia 2019 Average liability note (1) $m 29,706 27,277 58,032 Margin note (2) bps 108 105 18 Profit $m 321 286 107 2,244 3,035 (2,156) 5,161 (1,437) 56,984 (42)% (252) 430 194 3,024 (31) 2,993 283 3,276 Profit $m 310 280 95 1,978 2,810 (2,007) (1,374) 435 172 2,699 (53) 2,646 242 2,888 Spread income Fee income With-profits Insurance margin Margin on revenues Expenses: Acquisition costs note (3) Administration expenses DAC adjustments note (4) Expected return on shareholder assets Share of related tax charges from joint ventures and associate note (5) Adjusted IFRS operating profit based on longer-term investment returns – long-term business Adjusted IFRS operating profit based on longer-term investment returns – asset management (Eastspring Investments) Total Asia (c) Margin analysis of long-term insurance business – US 2018 AER 2018 CER notes (6),(7) Average liability note (1) $m 24,752 26,398 47,548 Margin note (2) bps 125 106 20 4,999 51,150 (40)% (269) Average liability note (1) $m 24,639 26,053 47,580 Margin note (2) bps 124 106 20 4,959 50,692 (40)% (268) Profit $m 305 277 94 1,966 2,790 (1,991) (1,359) 430 172 2,684 (51) 2,633 239 2,872 Spread income Fee income Insurance margin Expenses: Acquisition costs note (3) Administration expenses DAC adjustments Expected return on shareholder assets Adjusted IFRS operating profit based on longer-term investment returns – long-term business Adjusted IFRS operating profit based on longer-term investment returns – asset management Total US 2018 Average liability note (1) $m 50,051 178,058 Margin note (2) bps 155 183 2,059 233,835 (49)% (69) 2019 Average liability note (1) $m 57,181 180,940 Profit $m 642 3,292 1,317 Margin note (2) bps 112 182 (1,074) 2,223 (1,675) 246,220 (48)% (68) 510 26 3,038 32 3,070 Profit $m 778 3,265 1,267 (1,013) (1,607) (152) 14 2,552 11 2,563 prudentialplc.com Prudential plc Annual Report 2019 371 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information I Additional financial information continued I(iv) Analysis of adjusted IFRS operating profit based on longer-term investment returns by driver from long-term insurance businesses continued Analysis of adjusted IFRS operating profit based on longer-term investment returns for US insurance operations before and after acquisition costs and DAC adjustments Before acquisi- tion costs and DAC adjust- ments 3,602 2019 $m 2018 $m After acquisi- tion costs and DAC adjust- ments Before acquisi- tion costs and DAC adjust- ments Acquisition costs Incurred Deferred After acquisi- tion costs and DAC adjust- ments Acquisition costs Incurred Deferred (1,074) 807 3,602 (267) 3,717 (1,013) 760 3,717 (253) (577) 280 (577) 280 (653) (259) (653) (259) Total adjusted IFRS operating profit based on longer-term investment returns before acquisition costs and DAC adjustments Less new business strain Other DAC adjustments – amortisation of previously deferred acquisition costs: Normal Deceleration (acceleration) Total adjusted IFRS operating profit based on longer-term investment returns 3,602 (1,074) 510 3,038 3,717 (1,013) (152) 2,552 I(v) Asia operations – analysis of adjusted IFRS operating profit based on longer-term investment returns by business unit (a) Analysis of adjusted IFRS operating profit based on longer-term investment returns by business unit Adjusted operating profit based on longer-term investment returns for Asia operations are analysed below. The table below presents the 2018 results on both AER and CER bases to eliminate the impact of exchange translation. Hong Kong Indonesia Malaysia Philippines Singapore Thailand Vietnam South-east Asia operations including Hong Kong China JV Taiwan Other Non-recurrent items* Total insurance operations Share of related tax charges from joint ventures and associate Development expenses Total long-term business Asset management (Eastspring Investments) Total Asia 2019 $m 2018 $m 2019 vs 2018 % 734 540 276 73 493 170 237 2,523 219 74 70 142 3,028 (31) (4) 2,993 283 3,276 AER 591 555 259 57 439 151 199 2,251 191 68 68 126 2,704 (53) (5) 2,646 242 2,888 CER 591 559 252 58 433 157 197 2,247 182 67 69 124 2,689 (51) (5) 2,633 239 2,872 AER 24% (3)% 7% 28% 12% 13% 19% 12% 15% 9% 3% 13% 12% 42% 20% 13% 17% 13% CER 24% (3)% 10% 26% 14% 8% 20% 12% 20% 10% 1% 15% 13% 39% 20% 14% 18% 14% * In 2019, the adjusted IFRS operating profit based on longer-term investment returns for Asia insurance operations includes a net credit of $142 million (2018: $126 million on an AER basis) representing a small number of items that are not expected to reoccur, including the impact of a refinement to the run-off of the allowance for prudence within technical provisions. 372 Prudential plc Annual Report 2019 prudentialplc.com ADDITIONAL UNAUDITED FINANCIAL INFORMATION CONTINUED (b) Analysis of Eastspring Investments adjusted IFRS operating profit based on longer-term investment returns Operating income before performance-related fees note (1) Performance-related fees Operating income (net of commission) note (2) Operating expense note (2) Group’s share of tax on joint ventures’ operating profit Operating profit based on longer-term investment returns Average funds managed by Eastspring Investments Margin based on operating income* Cost/income ratio† 2019 $m 2018 $m 636 12 648 (329) (36) 283 566 23 589 (311) (36) 242 $214.0bn 30bps 52% $186.3bn 30bps 55% Notes (1) Operating income before performance-related fees for Eastspring Investments can be further analysed as follows: 2019 2018 Retail $m 392 336 Margin* bps Institutional‡ $m Margin* bps 52 50 244 230 18 18 Total $m 636 566 Margin* bps 30 30 * Margin represents operating income before performance-related fees as a proportion of the related funds under management. Monthly closing internal and external funds managed by Eastspring have been used to derive the average. Any funds held by the Group’s insurance operations that are managed by third parties outside the Prudential Group are excluded from these amounts. † Cost/income ratio represents cost as a percentage of operating income before performance-related fees. ‡ Institutional includes internal funds. (2) Operating income and expense include the Group’s share of contribution from joint ventures (but excludes any contribution from associates). In the consolidated income statement of the Group IFRS basis results, the net post-tax income of the joint ventures and associates is shown as a single line item. (c) Eastspring Investments total funds under management Eastspring Investments, the Group’s asset management business in Asia, manages funds from external parties and also funds for the Group’s insurance operations. The table below analyses the total funds managed and Eastspring Investments. External funds under management note (1): Retail Institutional* Money market funds (MMF) Internal funds under management* Total funds under management note (2) 31 Dec 2019 $bn 31 Dec 2018 $bn 73.7 37.7 13.3 124.7 116.4 241.1 55.3 7.7 14.8 77.8 114.9 192.7 * The 2018 comparative internal funds under management of $114.9 billion included $22.2 billion of funds managed on behalf of M&G plc. Following the demerger, these funds have been reclassified to external funds under management in 2019. Notes (1) External funds under management – analysis of movements At 1 January Market gross inflows Redemptions Market and other movements At 31 December 31 Dec 2019 $m 31 Dec 2018 $m 77,762 283,268 (276,215) 39,907 124,722 75,601 283,156 (283,271) 2,276 77,762 Note The analysis of movements above includes $13,337 million as at 31 December 2019 relating to Asia Money Market Funds (31 December 2018: $14,776 million). (2) Total funds under management – analysis by asset class Equity Fixed income Alternatives MMF Total funds under management 31 Dec 2019 31 Dec 2018 $bn 107.0 116.2 3.4 14.5 241.1 % of total 44% 48% 2% 6% 100% $bn 86.6 86.4 2.9 16.8 192.7 % of total 45% 45% 1% 9% 100% prudentialplc.com Prudential plc Annual Report 2019 373 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information I Additional financial information continued I(vi) Reconciliation of expected transfer of value of in-force business and required capital to free surplus The tables below show how the value of in-force business (VIF) generated by the in-force long-term business and the associated required capital is modelled as emerging into free surplus over the next 40 years. Although circa 7 per cent of the Group’s embedded value emerges after this date, analysis of cash flows emerging in the years shown in the tables is considered most meaningful. The modelled cash flows use the same methodology underpinning the Group’s embedded value reporting and so are subject to the same assumptions and sensitivities used to prepare our 2019 results. In addition to showing the amounts, both discounted and undiscounted, expected to be generated from all in-force business at 31 December 2019, the tables also present the expected future free surplus to be generated from the investment made in new business during 2019 over the same 40-year period for long-term business operations. Expected period of emergence 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040-2044 2045-2049 2050-2054 2055-2059 Undiscounted expected generation from all in-force business* Undiscounted expected generation from new business written* 31 Dec 2019 $m Asia 1,963 2,088 1,941 1,965 1,895 1,874 1,917 1,891 1,858 1,761 1,687 1,666 1,614 1,596 1,590 1,556 1,557 1,563 1,550 1,535 7,360 7,055 7,073 6,468 US 1,523 1,445 1,412 1,500 1,574 1,528 1,514 1,497 1,415 1,333 1,265 1,152 1,001 759 690 610 514 396 312 243 977 – – – Group total 3,486 3,533 3,353 3,465 3,469 3,402 3,431 3,388 3,273 3,094 2,952 2,818 2,615 2,355 2,280 2,166 2,071 1,959 1,862 1,778 8,337 7,055 7,073 6,468 Asia 291 244 225 207 223 202 223 217 209 223 188 184 171 169 190 170 170 170 169 177 869 887 987 958 US 325 45 101 120 119 26 9 143 173 148 122 109 94 80 87 71 57 46 35 70 140 – – – Group total 616 289 326 327 342 228 232 360 382 371 310 293 265 249 277 241 227 216 204 247 1,009 887 987 958 Total free surplus expected to emerge in the next 40 years 63,023 22,660 85,683 7,723 2,120 9,843 * The analysis excludes amounts incorporated into VIF at 31 December 2019 where there is no definitive time frame for when the payments will be made or receipts received. It also excludes any free surplus emerging after 2059. The discounted expected generation from new business written in 2019 can be reconciled to the new business profit for long-term business operations as follows: Undiscounted expected free surplus generation for years 2020 to 2059 Less: discount effect Discounted expected free surplus generation for years 2020 to 2059 Discounted expected free surplus generation for years after 2059 Discounted expected free surplus generation from new business written in 2019 Free surplus investment in new business Other items† EEV new business profit for long-term business operations Asia 7,723 (4,211) 3,512 771 4,283 (619) (142) 3,522 2019 $m US Group total 2,120 (721) 1,399 – 1,399 (539) 23 883 9,843 (4,932) 4,911 771 5,682 (1,158) (119) 4,405 † Other items represent the impact of the time value of options and guarantees on new business, foreign exchange effects and other non-modelled items. Foreign exchange effects arise as EEV new business profit amounts are translated at average exchange rates and the expected free surplus generation is translated at closing rates. 374 Prudential plc Annual Report 2019 prudentialplc.com ADDITIONAL UNAUDITED FINANCIAL INFORMATION CONTINUED The undiscounted expected free surplus generation from all in-force business at 31 December 2019 shown below can be reconciled to the amount that was expected to be generated as at 31 December 2018 as follows: Group 2018 expected free surplus 2019 $m 2020 $m 2021 $m 2022 $m 2023 $m 2024 $m Other $m Total $m generation for years 2019 to 2058 4,759 4,823 4,807 4,695 4,608 4,505 72,778 100,975 Demerger of UK and Europe operations Less: Amounts expected to be realised in the current year Add: Expected free surplus to be generated in year 2059* Foreign exchange differences New business Operating movements Non-operating and other movements† 2019 expected free surplus generation for years 2020 to 2059 Asia 2018 expected free surplus Less: Amounts expected to be realised in the current year Add: Expected free surplus to be generated in year 2059* Foreign exchange differences New business Operating movements Non-operating and other movements 2019 expected free surplus generation for years 2020 to 2059 US 2018 expected free surplus (755) (776) (753) (728) (707) (684) (10,316) (14,719) (4,004) – – – 25 289 28 – – 24 326 (104) – – 25 327 (59) – – 23 342 (90) – (4,004) 1,205 467 7,943 (3,700) 1,205 590 9,843 (8,207) – 26 616 (113) (1,090) (863) (860) (729) (627) 3,486 3,533 3,353 3,465 3,469 68,377 85,683 2019 $m 2020 $m 2021 $m 2022 $m 2023 $m 2024 $m Other $m Total $m (1,987) – – – 25 244 63 (86) – – 24 225 (69) (74) – – 25 207 (12) (86) – – 23 223 (47) (50) – (1,987) 1,205 467 6,533 (4,445) 1,205 590 7,723 (5,075) – 26 291 (133) (136) 1,963 2,088 1,941 1,965 1,895 53,171 63,023 2019 $m 2020 $m 2021 $m 2022 $m 2023 $m 2024 $m Other $m Total $m – – – – – – – – – – – – generation for years 2019 to 2058 1,987 1,915 1,842 1,835 1,831 1,746 49,411 60,567 generation for years 2019 to 2058 2,017 2,132 2,212 2,132 2,070 2,075 13,051 25,689 Less: Amounts expected to be realised in the current year New business Operating movements Non-operating and other movements† 2019 expected free surplus generation for years 2020 to 2059 (2,017) – – – 325 20 – 45 (35) – 101 (35) – 120 (47) – 119 (43) – 1,410 745 (2,017) 2,120 (3,132) – – (954) (777) (786) (643) (577) 1,523 1,445 1,412 1,500 1,574 15,206 22,660 * Excluding 2019 new business. † Including impact of US EEV hedge modelling enhancements as described in note 7 of the EEV financial statements. At 31 December 2019, the total free surplus expected to be generated from continuing operations over the next five years (2020 to 2024 inclusive), using the same assumptions and methodology as those underpinning our 2019 embedded value reporting, was $17.3 billion (31 December 2018: $19.8 billion). prudentialplc.com Prudential plc Annual Report 2019 375 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationI Additional financial information continued I(vi) Reconciliation of expected transfer of value of in-force business (VIF) and required capital to free surplus continued At 31 December 2019, the total free surplus expected to be generated on an undiscounted basis in the next 40 years is $85.7 billion, $(0.6) billion lower than the $86.3 billion expected at the end of 2018 from continuing operations, with the $2.4 billion increase in Asia being more than offset by the $(3.0) billion decrease in the US. In Asia the increase from new business of $7.7 billion, together with favourable foreign exchange gains and operating assumption updates following the annual review of experience, more than offset the effect of generally lower interest rates across the region decreasing projected returns. At 31 December 2019 expected free surplus generation in Asia for the next 40 years is $63.0 billion (31 December 2018: $60.6 billion). In the US new business contributed $2.1 billion to expected free surplus generation. Operating, non-operating and other movements were $(3.1) billion, principally driven by the impact of lower interest rates and the effect of the NAIC reform, hedge modelling and other related changes described in note 7 of the EEV financial statements. At 31 December 2019 expected free surplus generation in the US for the next 40 years is $22.7 billion (31 December 2018: $25.7 billion). Actual underlying free surplus generated in 2019 from life business in force at the end of 2018, before the impact of US EEV hedge modelling enhancements and restructuring costs, was $4.7 billion including $0.6 billion of changes in operating assumptions and experience variances. This compares with the expected 2019 realisation at the end of 2018 of $4.0 billion. This can be analysed further as follows: Transfer to free surplus in 2019 before impact of US EEV hedge modelling enhancements Expected return on free assets Changes in operating assumptions and experience variances 2019 $m Asia 1,914 80 147 US Group total 2,070 61 411 3,984 141 558 Underlying free surplus generated from in-force life business before impact of US EEV hedge modelling enhancements and restructuring costs* 2,141 2,542 4,683 2019 free surplus expected to be generated at 31 December 2018 1,987 2,017 4,004 * Underlying free surplus generated from in-force life business before restructuring costs in 2019 in the US was $1,639 million (Group total $3,780 million), after reflecting the $(903) million impact of US EEV hedge modelling enhancements described in note 7 of the EEV financial statements. 376 Prudential plc Annual Report 2019 prudentialplc.com ADDITIONAL UNAUDITED FINANCIAL INFORMATION CONTINUED The equivalent discounted amounts of the undiscounted expected transfers from in-force business and required capital into free surplus shown previously are as follows: Expected period of emergence 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040-2044 2045-2049 2050-2054 2055-2059 Discounted expected generation from all in-force business Discounted expected generation from new business written 31 Dec 2019 $m Asia 1,890 1,910 1,674 1,608 1,479 1,397 1,363 1,281 1,206 1,088 991 938 863 819 783 737 709 682 651 619 2,631 2,060 1,730 1,294 US Group total 1,468 1,313 1,212 1,212 1,203 1,105 1,034 966 865 765 690 595 496 345 298 256 210 151 118 90 302 – – – 3,358 3,223 2,886 2,820 2,682 2,502 2,397 2,247 2,071 1,853 1,681 1,533 1,359 1,164 1,081 993 919 833 769 709 2,933 2,060 1,730 1,294 Asia 279 218 189 165 169 147 158 147 134 137 109 99 88 82 86 76 73 70 66 67 292 244 232 185 US Group total 320 42 92 102 100 22 7 98 114 90 70 59 48 39 39 30 23 18 13 24 49 – – – 599 260 281 267 269 169 165 245 248 227 179 158 136 121 125 106 96 88 79 91 341 244 232 185 Total discounted free surplus expected to emerge in the next 40 years 30,403 14,694 45,097 3,512 1,399 4,911 The discounted expected generation from all in-force business can be reconciled to the total embedded value for long-term business operations as follows: Discounted expected generation from all in-force business for years 2020 to 2059 Discounted expected generation from all in-force business for years after 2059 Discounted expected generation from all in-force business at 31 December 2019 Free surplus of life operations held at 31 December 2019 Other items* Total EEV for long-term business operations * Other items represent the impact of the time value of options and guarantees and other non-modelled items. 31 Dec 2019 $m 45,097 3,892 48,989 5,395 (205) 54,179 prudentialplc.com Prudential plc Annual Report 2019 377 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationI Additional financial information continued I(vii) Option schemes The Group presently grants share options through three schemes and exercises of the options are satisfied by the issue of new shares. Executive directors and eligible employees based in the UK may participate in the Prudential Savings-Related Share Option Scheme. Executives and eligible employees based in Asia as well as, prior to the demerger of M&G plc from the Prudential Group, eligible employees of M&G plc based in Europe can participate in the Prudential International Savings-Related Share Option Scheme, while agents based in certain regions of Asia can participate in the Prudential International Savings-Related Share Option Scheme for Non-Employees. Further details of the schemes and accounting policies are detailed in note B2.2 of the IFRS basis consolidated financial statements. All options were granted at nil consideration. No options have been granted to substantial shareholders, suppliers of goods or services (excluding options granted to agents under the Prudential International Savings-Related Share Option Scheme for Non-Employees) or in excess of the individual limit for the relevant scheme. The maximum share entitlement of each participant under the relevant scheme for each option granted is limited to the total savings and any bonus or interest accumulated under that participant’s savings contract, divided by the exercise price. At 31 December 2019, the maximum number of shares issued or issuable under the schemes, which were approved by shareholders, to all participants would not exceed 1 per cent of the issued share capital of the Company in the preceding 12-month period. The option schemes will terminate as follows, unless the directors resolve to terminate the plans at an earlier date: — Prudential Savings-Related Share Option Scheme: 16 May 2023; — Prudential International Savings-Related Share Option Scheme: 19 May 2021; and — Prudential International Savings-Related Share Option Scheme for Non-Employees 2012: 12 May 2022. The weighted average share price of Prudential plc for the year ended 31 December 2019 was £15.05 (2018: £17.36). Particulars of options granted to directors are included in the Directors’ remuneration report on page 160. The closing prices of the shares immediately before the date on which the options were granted during the year were £14.00 for the Prudential Savings-Related Share Option Scheme and £14.57 for the Prudential International Savings-Related Share Option Scheme for Non-Employees. The following analyses show the movement in options for each of the option schemes for the year ended 31 December 2019. Prudential Savings-Related Share Option Scheme Exercise period Number of options Date of grant Exercise price £ 20 Sep 13 23 Sep 14 22 Sep 15 22 Sep 15 21 Sep 16 21 Sep 16 21 Sep 17 21 Sep 17 29 Nov 19 29 Nov 19 9.01 11.55 11.11 11.11 11.04 11.04 14.55 14.55 11.18 11.18 Beginning 01 Dec 18 01 Dec 19 01 Dec 18 01 Dec 20 01 Dec 19 01 Dec 21 01 Dec 20 01 Dec 22 01 Jan 23 01 Jan 25 End 31 May 19 31 May 20 31 May 19 31 May 21 31 May 20 31 May 22 31 May 21 31 May 23 30 Jun 23 30 Jun 25 Beginning of year 27,732 303,716 256,744 180,526 538,927 121,105 668,276 115,347 – – Granted Exercised Cancelled Forfeited Lapsed – (26,068) – (153,721) – (253,273) – (52,592) – (269,207) (19,769) – (20,814) – (2,791) – – 93,145 – 21,464 – (3,145) – (6,291) (12,855) (5,676) (62,176) (6,573) (322) – (1,664) (2,097) (1,458) (540) (10,376) (1,086) (20,565) (1,030) – – – (8,790) (2,013) (17,963) (20,687) (17,330) (62,585) (12,013) – – End of year – 135,963 – 103,140 225,802 77,244 502,136 92,940 92,823 21,464 2,212,373 114,609 (798,235) (97,038) (38,816) (141,381) 1,251,512 The total number of securities available for issue under the scheme is 1,251,512 which represents 0.048 per cent of the issued share capital at 31 December 2019. M&G plc employees with outstanding options on demerger were treated as ‘good leavers’, with both the vesting period and number of options exercisable curtailed on demerger. The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £14.69. The weighted average fair value of options granted under the plan in the period was £3.35. 378 Prudential plc Annual Report 2019 prudentialplc.com ADDITIONAL UNAUDITED FINANCIAL INFORMATION CONTINUEDPrudential International Savings-Related Share Option Scheme Exercise period Number of options Date of grant Exercise price £ 20 Sep 13 23 Sep 14 22 Sep 15 22 Sep 15 21 Sep 16 21 Sep 17 21 Sep 17 18 Sep 18 18 Sep 18 9.01 11.55 11.11 11.11 11.04 14.55 14.55 13.94 13.94 Beginning 01 Dec 18 01 Dec 19 01 Dec 18 01 Dec 20 01 Dec 19 01 Dec 20 01 Dec 22 01 Dec 21 01 Dec 23 End Beginning of year Granted Exercised Cancelled Forfeited Lapsed 31 May 19 31 May 20 31 May 19 31 May 21 31 May 20 31 May 21 31 May 23 31 May 22 31 May 24 18,378 4,413 4,860 2,700 10,776 9,820 3,298 22,005 1,076 77,326 – – – – – – – – – – (18,377) – (4,860) – – – – – – (1) (4,413) – (2,700) (9,472) (9,573) (3,298) (20,714) (1,076) – – – – (1,304) (247) – (1,291) – (23,237) (51,247) (2,842) – – – – – – – – – – End of year – – – – – – – – – – There are no securities available for issue under the scheme at 31 December 2019. At the time of the demerger, the only participants with outstanding options in this plan were M&G plc employees. The outstanding options over Prudential plc shares did not vest at demerger. Instead, they have been exchanged for an equivalent grant in M&G plc shares. The M&G plc participants have been treated as ‘good leavers’. The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £15.83. There were no options granted under the plan during the current period. Prudential International Savings-Related Share Option Scheme for Non-Employees Exercise period Number of options Date of grant Exercise price* £ 9.01 20 Sep 13 23 Sep 14 10.00 9.62 22 Sep 15 9.62 22 Sep 15 9.56 21 Sep 16 9.56 21 Sep 16 12.59 21 Sep 17 12.59 21 Sep 17 12.07 18 Sep 18 12.07 18 Sep 18 9.62 02 Oct 19 9.62 02 Oct 19 Beginning 01 Dec 18 01 Dec 19 01 Dec 18 01 Dec 20 01 Dec 19 01 Dec 21 01 Dec 20 01 Dec 22 01 Dec 21 01 Dec 23 01 Dec 22 01 Dec 24 End Beginning of year Granted Modifi- cation* Exercised Cancelled Forfeited Lapsed 31 May 19 31 May 20 31 May 19 31 May 21 31 May 20 31 May 22 31 May 21 31 May 23 31 May 22 31 May 24 31 May 23 31 May 25 235,987 459,165 261,478 376,672 326,596 197,057 263,827 172,291 184,780 118,243 – – – – – – – – – – – 307,835 – 202,788 – (235,987) 64,539 (153,463) 935 (260,499) 38,333 – 40,201 (207,203) – 21,236 – 26,538 – 22,025 – 14,379 – 11,939 – 47,441 – 31,271 – (5,192) (979) (6,750) – – – – – – – – – (1,298) – – (250) – – – – – – – – – – – – – – – – – – – End of year – 363,751 935 408,255 159,344 218,293 290,365 194,316 199,159 130,182 355,276 234,059 2,596,096 510,623 318,837 (857,152) (12,921) (1,548) – 2,553,935 * As a result of the demerger of M&G plc, the exercise price of the outstanding share options at 18 October 2019 and the total number of shares have been adjusted with effect from 21 October 2019. These adjustments do not change the overall fair value of the options and were confirmed as being fair and reasonable by an independent financial adviser in accordance with the rules of that plan and the Hong Kong Stock Exchange Listing Rules. The total number of securities available for issue under the scheme is 2,553,935 which represents 0.098 per cent of the issued share capital at 31 December 2019. The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £15.06. The weighted average fair value of options granted under the plan in the period was £2.90. prudentialplc.com Prudential plc Annual Report 2019 379 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information I Additional financial information continued I(viii) Selected historical financial information of Prudential The following table sets forth Prudential’s selected consolidated financial data for the periods indicated. Certain data is derived from Prudential’s audited consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and as adopted by the European Union (EU) and European Embedded Value (EEV). This table is only a summary and should be read in conjunction with Prudential’s consolidated financial statements and the related notes included elsewhere in this document. Income statement IFRS basis results Continuing operations: Gross premiums earned Outward reinsurance premiums Earned premiums, net of reinsurance Investment return Other income Total revenue, net of reinsurance 2019 $m 2018 $m note (v) 2017 $m note (v) 2016 $m note (v) 2015 $m note (v) 45,064 (1,583) 43,481 49,555 700 93,736 45,614 (1,183) 44,431 (9,117) 531 35,845 39,800 (1,304) 38,496 35,574 1,319 75,389 38,865 (1,375) 37,490 13,839 1,387 52,716 42,335 (1,045) 41,290 (1,648) 1,366 41,008 Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance Acquisition costs and other expenditure Finance costs: interest on core structural borrowings of shareholder-financed businesses (Loss) gain on disposal of businesses and corporate transactions (83,905) (7,283) (23,426) (8,527) (63,808) (8,649) (42,881) (7,846) (29,912) (8,166) (516) (142) (547) (107) (548) 292 (488) (322) (477) (70) Total charges, net of reinsurance (91,846) (32,607) (72,713) (51,537) (38,625) Share of profits from joint ventures and associates, net of related tax Profit before tax (being tax attributable to shareholders’ and policyholders’ returns) note (i) Tax (charges) attributable to policyholders’ returns Profit before tax attributable to shareholders’ returns Tax credit (charges) attributable to shareholders’ returns Profit from continuing operations (Loss) profit from discontinued operations Profit for the year Based on profit from continuing operations for the year attributable to the equity holders of the Company : Basic earnings per share (in cents) Diluted earnings per share (in cents) Dividend per share declared and paid in reporting period Interim ordinary dividend/final ordinary dividend Special dividend 397 319 233 200 261 2,287 (365) 1,922 31 1,953 (1,161) 792 75.1¢ 75.1¢ 2019 63.18¢ 63.18¢ 3,557 (107) 3,450 (569) 2,881 1,142 4,023 111.7¢ 111.7¢ 2018 64.34¢ 64.34¢ 2,909 (321) 2,588 (840) 1,748 1,333 3,081 68.0¢ 67.9¢ 2017 59.32¢ 59.32¢ 1,379 (210) 1,169 (119) 1,050 1,552 2,602 41.0¢ 40.9¢ 2016 69.72¢ 55.20¢ 14.52¢ 2,644 (105) 2,539 (439) 2,100 1,841 3,941 82.3¢ 82.2¢ 2015 59.01¢ 59.01¢ 380 Prudential plc Annual Report 2019 prudentialplc.com ADDITIONAL UNAUDITED FINANCIAL INFORMATION CONTINUED Supplementary IFRS income statement – continuing operations Adjusted operating profit based on longer-term investment returns note (ii) Non-operating items Profit before tax attributable to shareholders Operating earnings per share after tax and non-controlling 2019 $m 2018 $m note (v) 2017 $m note (v) 2016 $m note (v) 2015 $m note (v) 5,310 (3,388) 1,922 4,409 (959) 3,450 4,378 (1,790) 2,588 4,131 (2,962) 1,169 3,610 (1,070) 2,540 interest (in cents) 175.0¢ 145.2¢ 134.6¢ 126.5¢ 114.3¢ Supplementary EEV financial information EEV income statement – continuing operations Operating profit based on longer-term investment returns note (ii) Non-operating items Profit attributable to shareholders from continuing operations Operating earnings per share (in cents) 2019 $m 6,905 (2,744) 4,161 266.6¢ 2018 $m note (v) 7,866 (2,286) 5,580 305.3¢ 2017 $m note (v) 6,753 1,808 8,561 263.0¢ 2016 $m note (v) 6,137 (2,278) 3,859 239.7¢ 2015 $m note (v) 5,636 (1,270) 4,366 220.8¢ 2019 $bn 2018 $bn 2017 $bn 2016 $bn 2015 $bn EEV shareholders’ equity, excluding non-controlling interests 54.7 63.4 60.5 48.2 47.8 New business contribution – continuing operations Annual premium equivalent (APE) sales EEV new business profit (NBP) (post-tax) NBP margin (% of APE) Statement of financial position at 31 December 2019 $m 7,384 4,405 60% 2018 $m note (v) 2017 $m note (v) 2016 $m note (v) 2015 $m note (v) 7,058 4,707 67% 7,046 4,220 60% 6,989 3,820 55% 6,787 3,501 52% Total assets Total policyholder liabilities and unallocated surplus of with-profits funds Core structural borrowings of shareholder-financed businesses Total liabilities Total equity 2019 $m 2018 $m 2017 $m 2016 $m 2015 $m 454,214 647,810 668,203 581,394 570,377 390,428 5,594 434,545 19,669 541,466 9,761 625,819 21,991 579,261 8,496 646,432 21,771 498,374 8,400 563,270 18,124 494,661 7,386 551,281 19,096 Other financial information at 31 December Funds under management note (iii) Group shareholder LCSM surplus note (iv) 2019 $bn 2018 $bn 2017 $bn 2016 $bn 2015 $bn 543.9 9.5 455.3 9.7 452.0 374.8 348.7 Notes (i) (ii) (iii) (iv) (v) This measure is the formal profit (loss) before tax measure under IFRS. It is not the result attributable to shareholders. Adjusted operating profit is determined on the basis of including longer-term investment returns. EEV and IFRS operating profits are stated after excluding the effect of short-term fluctuations in investment returns on shareholder-backed business gain or loss on corporate transactions and costs connected to the demerger of M&G plc from Prudential plc. Separately, for IFRS basis results, operating profit also excludes amortisation of acquisition accounting adjustments arising on the purchase of business. For EEV basis results, operating profit excludes the effect of changes in economic assumptions and the mark-to-market value movements on core structural borrowings for shareholder-financed operations. Funds under management comprise funds of the Group held in the statement of financial position and external funds that are managed by the Group’s asset management operations. The comparative results from 2015 to 2018 have been re-presented from those previously published to exclude the discontinued UK and Europe operations and for other adjustments as described in note I(ii). The 2019 surplus is estimated under the LCSM regime, adopted by the Group following the demerger of its UK and Europe operations in October 2019, as discussed in note I(i), with 2018 comparative information re-presented on this basis. Prior to the demerger, the Group was subject to the Solvency II capital requirements. The comparative results from 2015 to 2018 have been re-presented from those previously published for the demerger of the Group’s UK and Europe operations, M&G plc, in October 2019 which is reclassified as discontinued operations. prudentialplc.com Prudential plc Annual Report 2019 381 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information II Calculation of alternative performance measures The annual report uses alternative performance measures (APMs) to provide more relevant explanations of the Group’s financial position and performance. This section sets out explanations for each APM and reconciliations to relevant IFRS balances. II(i) Reconciliation of adjusted IFRS operating profit based on longer-term investment returns to profit before tax from continuing operations Adjusted IFRS operating profit attributable to shareholders based on longer-term investment returns from continuing operations (operating profit) presents the operating performance of the business. This measurement basis adjusts for the following items within total IFRS profit before tax: — Short-term fluctuations in investment returns on shareholder-backed business; — Amortisation of acquisition accounting adjustments arising on the purchase of business; and — Gain or loss on corporate transactions, such as disposals undertaken in the year and costs connected to the demerger of M&G plc from Prudential plc. More details on how adjusted IFRS operating profit based on longer-term investment returns is determined are included in note B1.3 of the Group IFRS basis results. A full reconciliation to profit after tax is given in note B1.1. II(ii) Calculation of IFRS gearing ratio IFRS gearing ratio is calculated as net core structural borrowings of shareholder-financed businesses divided by closing IFRS shareholders’ equity plus net core structural borrowings. Core structural borrowings of shareholder-financed businesses Less holding company cash and short-term investments Net core structural borrowings of shareholder-financed businesses Closing shareholders’ equity Closing shareholders’ equity plus net core structural borrowings IFRS gearing ratio 31 Dec 2019 $m 31 Dec 2018 $m 5,594 (2,207) 3,387 19,477 22,864 15% 9,761 (4,121) 5,640 21,968 27,608 20% II(iii) Return on IFRS shareholders’ funds Operating return on IFRS shareholders’ funds is calculated as adjusted operating profit net of tax and non-controlling interests divided by closing shareholders’ equity. Total comprehensive return on shareholders’ funds is calculated as IFRS total comprehensive income for the period net of tax and non-controlling interests divided by closing shareholders’ equity. Following the demerger of the UK and Europe operations in October 2019 and their treatment as discontinued, it is more meaningful to derive the 2019 return using profit from continuing operations and closing shareholders’ equity. The Group will be introducing a new return on equity performance measure for the Group’s 2020 Prudential Long-Term Incentive Plan (PLTIP) awards alongside other metrics. This measure is to be calculated as adjusted operating profit after tax and net of non-controlling interests, divided by average shareholders’ equity. Accordingly, the calculation of the return on IFRS shareholders’ funds going forward will be aligned to be based on average shareholders’ equity. Detailed reconciliation of adjusted operating profit based on longer-term investment returns to IFRS profit before tax for the Group’s continuing operations is shown in note B1.1 to the Group IFRS basis results. 382 Prudential plc Annual Report 2019 prudentialplc.com ADDITIONAL UNAUDITED FINANCIAL INFORMATION CONTINUEDContinuing operations Asia US 2019 $m Unallocated to a segment (central operations) Add back demerger- related items* Adjusted Group (excluding demerger- related items*) 179 (34) – 5,489 (807) (9) Group 5,310 (773) (9) 3,276 (436) (6) 3,070 (437) – (1,036) 100 (3) Adjusted operating profit based on longer-term investment returns Tax on operating profit Profit attributable to non-controlling interests Adjusted operating profit based on longer-term investment returns, net of tax and non-controlling interests Non-operating profit (loss), net of tax IFRS profit for the year net of tax and non-controlling interests Other comprehensive income, net of tax and non-controlling interests IFRS total comprehensive income Closing shareholders’ funds Operating return on shareholders’ funds (%) Total comprehensive return on shareholders’ funds (%) 2,834 885 2,633 (3,013) (939) (456) 4,528 (2,584) 3,719 (380) (1,395) 1,944 192 3,911 10,866 26% 36% 2,679 2,299 8,929 29% 26% (146) (1,541) (318) n/a n/a 2,725 4,669 19,477 23% 24% 145 383 528 – 528 – – – 4,673 (2,201) 2,472 2,725 5,197 19,477 24% 27% * Demerger-related items comprise interest on the subordinated debt that was substituted to M&G plc prior to the demerger ($179 million pre-tax) and one-off costs of the demerger ($407 million pre-tax). Adjusted operating profit based on longer-term investment returns Tax on operating profit Profit attributable to non-controlling interests Adjusted operating profit based on longer-term investment returns, net of tax and non- controlling interests Non-operating profit (loss), net of tax IFRS profit for the year, net of tax and non- controlling interests Other comprehensive income, net of tax and non-controlling interests IFRS total comprehensive income Closing shareholders’ funds Operating return on shareholders’ funds (%) Total comprehensive return on shareholders’ funds (%) 2018 $m Asia US 2,888 (411) (1) 2,563 (402) – 2,476 (662) 2,161 (179) 1,814 1,982 (206) (1,446) 1,608 8,175 30% 20% 536 7,163 30% 7% * Given the significant changes of Group shareholders’ funds as a result of the demerger of the UK and Europe operations in October 2019, it is not meaningful to compare the 2019 and 2018 returns on shareholders’ funds at a Group level. The 2018 comparatives have therefore excluded the presentation of a Group return on shareholders’ funds. Additionally, the 2018 comparatives for Asia and US operations have been re-presented from those previously published to reflect the use of closing rather than opening shareholders’ funds to be on a comparable basis with the 2019 calculation. prudentialplc.com Prudential plc Annual Report 2019 383 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationII Calculation of alternative performance measures continued II(iv) Calculation of IFRS shareholders’ funds per share IFRS shareholders’ funds per share is calculated as closing IFRS shareholders’ equity divided by the number of issued shares at 31 December 2019 of 2,601 million (31 December 2018: 2,593 million). The demerger alters the size of the Group’s shareholders’ equity and the nature of its operations, rendering a comparison with the prior year return on shareholders’ funds value unrepresentative. Closing IFRS shareholders’ equity ($ million) Shareholders’ funds per share (cents) 2019 Asia 10,866 418¢ US 8,929 343¢ Other (318) (12)¢ Group total 19,477 749¢ II(v) Calculation of asset management cost/income ratio The asset management cost/income ratio is calculated as asset management operating expenses, adjusted for commission and joint venture contribution, divided by asset management total IFRS revenue adjusted for commission, joint venture contribution, performance-related fees and non-operating items. Operating income before performance-related fees note Share of joint venture revenue Commission Performance-related fees IFRS revenue Operating expense Share of joint venture expense Commission IFRS charges Cost/income ratio: operating expense/operating income before performance-related fees Eastspring Investments 2019 $m 2018 $m 636 (244) 165 12 569 329 (102) 165 392 52% 566 (250) 156 23 495 311 (133) 156 334 55% Note Operating income and expense include the Group’s share of contribution from joint ventures (but excludes any contribution from associates). In the consolidated income statement of the Group IFRS basis results, the net post-tax income of the joint ventures and associates is shown as a single line item. II(vi) Reconciliation of Asia renewal insurance premium to gross premiums earned Reconciliation of Asia renewal insurance premium to gross earned premiums and calculation of Asia Life weighted premium income. Asia renewal insurance premium Add: General insurance premium Add: IFRS gross earned premium from new regular and single premium business Less: Renewal premiums from joint ventures Asia segment IFRS gross premiums earned Asia renewal insurance premium (as above) Asia APE (see Note II(vi)) Asia life weighted premium income 2019 $m 2018 $m 19,007 135 6,386 (1,771) 23,757 19,007 5,161 24,168 AER 17,165 120 6,421 (1,717) 21,989 17,165 4,999 22,164 CER 17,046 122 6,402 (1,657) 21,913 17,046 4,959 22,005 384 Prudential plc Annual Report 2019 prudentialplc.com ADDITIONAL UNAUDITED FINANCIAL INFORMATION CONTINUEDII(vii) Reconciliation of APE new business sales to gross premiums earned The Group reports APE new business sales as a measure of the new policies sold in the period. This differs from the IFRS measure of gross premiums earned as shown below: Annual premium equivalents (APE) from continuing operations Adjustment to include 100% of single premiums on new business sold in the year note (a) Premiums from in-force business and other adjustments note (b) Gross premiums earned from continuing operations 2019 $m 7,384 23,409 14,271 45,064 2018 $m 7,058 21,318 17,238 45,614 Notes (a) (b) Other adjustments principally include amounts in respect of the following: APE new business sales only include one tenth of single premiums, recorded on policies sold in the year. Gross premiums earned include 100 per cent of such premiums. – – – – – Gross premiums earned include premiums from existing in-force business as well as new business. The most significant amount is recorded in Asia, where a significant portion of regular premium business is written. Asia in-force premiums form the vast majority of the other adjustment amount; In October 2018, Jackson entered into a 100 per cent reinsurance agreement with John Hancock Life Insurance Company to acquire a closed block of group payout annuity business. The transaction resulted in an addition to gross premiums earned of $5.0 billion in 2018. No amounts were included in APE new business sales. APE includes new policies written in the year which are classified as investment contracts without discretionary participation features under IFRS 4, arising mainly in Jackson for guaranteed investment contracts and in M&G plc for certain unit-linked savings and similar contracts. These are excluded from gross premiums earned and recorded as deposits; APE new business sales are annualised while gross premiums earned are recorded only when revenues are due; and For the purpose of reporting APE new business sales, the Group’s share of amounts sold by the Group’s insurance joint ventures and associates are included. Under IFRS, joint ventures and associates are equity accounted and so no amounts are included within gross premiums earned. II(viii) Reconciliation between IFRS and EEV shareholders’ equity The table below shows the reconciliation of EEV shareholders’ equity and IFRS shareholders’ equity at the end of the year: EEV shareholders’ equity Less: Value of in-force business of long-term business note (a) Deferred acquisition costs assigned zero value for EEV purposes Other note (b) IFRS shareholders’ equity 31 Dec 2019 $m 31 Dec 2018 $m 54,711 (41,893) 14,239 (7,580) 19,477 63,402 (42,045) 12,834 (12,223) 21,968 Notes (a) The EEV shareholders’ equity comprises the present value of the shareholders’ interest in the value of in-force business, total net worth of long-term business operations and IFRS shareholders’ equity of asset management and other operations. The value of in-force business reflects the present value of expected future shareholder cash flows from long-term in-force business which are not captured as shareholders’ interest on an IFRS basis. Total net worth represents the net assets for EEV reporting that reflect the regulatory basis position, with adjustments to achieve consistency with the IFRS treatment of certain items as appropriate. (b) Other adjustments represent asset and liability valuation differences between IFRS and the local regulatory reporting basis used to value total net worth for long-term insurance operations. These also include the mark-to-market value movements of the Group’s core structural borrowings which are fair valued under EEV but are held at amortised cost under IFRS. The most significant valuation differences relate to changes in the valuation of insurance liabilities. For example, in Jackson, IFRS liabilities are higher than the local regulatory basis as they are principally based on policyholder account balances (with a deferred acquisition costs recognised as an asset), whereas the local regulatory basis used for EEV reporting is based on expected future cash flows due to the policyholder on a prudent basis, with the consideration of an expense allowance, as applicable, but with no separate deferred acquisition cost asset. prudentialplc.com Prudential plc Annual Report 2019 385 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information II Calculation of alternative performance measures continued II(ix) Calculation of return on embedded value Return on embedded value is calculated as the total post-tax EEV profit for the year as a percentage of closing EEV basis shareholders’ equity. 2019 Asia US Central operations Group total Adjusted Group total (excluding demerger related items*) Demerger related items* EEV basis profit (loss) for the year from continuing operations, net of tax and non-controlling interests ($ million) Closing EEV basis shareholders’ equity ($ million) Total return on shareholders’ funds (%) 8,063 39,235 21% (2,025) 16,342 (12)% (1,886) (866) n/a 4,152 54,711 8% (528) (528) n/a 4,680 55,239 8% EEV basis profit for the year, net of tax and non-controlling interests ($ million) Closing EEV basis shareholders’ equity ($ million) Total return on shareholders’ funds (%) 2018† Asia US 4,808 32,008 15% 1,052 18,709 6% * Demerger-related items comprise interest on the subordinated debt that was substituted to M&G plc prior to the demerger and one-off costs of the demerger. † Given the significant changes of Group shareholders’ funds as a result of the demerger of the UK and Europe operations in October 2019, it is not meaningful to compare the 2019 and 2018 returns on shareholders’ funds at a Group level. The 2018 comparatives have therefore excluded the presentation of a Group return on shareholders’ funds. Additionally, the 2018 comparatives for Asia and US operations have been re-presented from those previously published to reflect the use of closing rather than opening shareholders’ funds to be on a comparable basis with the 2019 calculation. Operating return on embedded value is calculated as the post-tax EEV operating profit for the year as a percentage of closing EEV basis shareholders’ equity. EEV basis operating profit for the year from continuing operations, net of tax ($ million) Closing EEV basis shareholders’ equity ($ million) Operating return on shareholders’ funds (%) 2019 2018 Asia US Asia US 6,138 39,235 16% 1,782 16,342 11% 6,070 32,008 19% 2,828 18,709 15% 386 Prudential plc Annual Report 2019 prudentialplc.com ADDITIONAL UNAUDITED FINANCIAL INFORMATION CONTINUEDII(x) Calculation of EEV shareholders’ funds per share EEV shareholders’ funds per share is calculated as closing EEV shareholders’ equity divided by the number of issued shares at 31 December 2019 of 2,601 million (31 December 2018: 2,593 million). EEV shareholders’ funds per share excluding goodwill attributable to shareholders is calculated in the same manner, except goodwill attributable to shareholders is deducted from closing EEV shareholders’ equity. 2018 comparatives have been restated to show amounts attributable to continuing operations on a comparable basis. Closing EEV shareholders’ equity ($ million) Less: Goodwill attributable to shareholders ($ million) Closing EEV shareholders’ equity excluding goodwill attributable to shareholders ($ million) Shareholders’ funds per share (in cents) Shareholders’ funds per share excluding goodwill attributable to shareholders (in cents) Closing EEV shareholders’ equity ($ million) Less: Goodwill attributable to shareholders ($ million) Closing EEV shareholders’ equity excluding goodwill attributable to shareholders ($ million) Shareholders’ funds per share (in cents) Shareholders’ funds per share excluding goodwill attributable to shareholders (in cents) 31 Dec 2019 US 16,342 – 16,342 628¢ Other (866) (26) Group total 54,711 (822) (892) (33)¢ 53,889 2,103¢ 628¢ (34)¢ 2,072¢ 31 Dec 2018 US 18,709 – 18,709 722¢ Other (4,616) – (4,616) (178)¢ Group total 46,101 (634) 45,467 1,778¢ 722¢ (178)¢ 1,753¢ Asia 39,235 (796) 38,439 1,508¢ 1,478¢ Asia 32,008 (634) 31,374 1,234¢ 1,209¢ II (xi) Calculation of new business contribution/embedded value New business contribution/embedded value is calculated as the post-tax EEV new business contribution for the year as a percentage of closing EEV basis shareholders’ equity. New business contribution ($ million) Closing EEV basis shareholders’ equity ($ million) 2019 2018 Asia 3,522 39,235 9% US 883 16,342 5% Asia 3,477 32,008 11% US 1,230 18,709 7% prudentialplc.com Prudential plc Annual Report 2019 387 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional information Risk factors A number of risk factors affect Prudential’s operating results and financial condition and, accordingly, the trading price of its shares. The risk factors mentioned below should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties. The information given is as of the date of this document, and any forward-looking statements are made subject to the reservations specified under ‘Forward-looking statements’. Prudential’s approaches to managing risks are explained in the section of this document headed ‘Group Chief Risk and Compliance Officer’s Report on the risks facing our business and how these are managed’. Risks relating to Prudential’s financial situation Prudential’s businesses are inherently subject to market fluctuations and general economic conditions Uncertainty, fluctuations or negative trends in international economic and investment climates could have a material adverse effect on Prudential’s business and profitability. Prudential operates in a macroeconomic and global financial market environment that presents significant uncertainties and potential challenges. For example, interest rates in the US and some Asian countries in which Prudential operates remain low relative to historical levels, and the transition to a lower carbon economy may impact on long-term asset valuations. Global financial markets are subject to uncertainty and volatility created by a variety of factors. These factors include monetary policy in China, the US and other jurisdictions together with their impact on the valuation of all asset classes and effect on interest rates and inflation expectations, concerns over sovereign debt, a general slowing in world growth. Other factors include the increased level of geopolitical risk and policy-related uncertainty (including the broader market impacts resulting from the trade negotiations between the US and China), and socio-political, climate-driven and pandemic events and other outbreaks such as the recent coronavirus. The extent of financial market and economic impact of these factors may be influenced by the actions, including the effectiveness of mitigating measures, of governments, policymakers and the public. The adverse effects of such factors could be felt principally through the following items: — Lower interest rates and reduced investment returns arising on the Group’s portfolios including impairment of debt securities and loans, which could reduce Prudential’s capital and impair its ability to write significant volumes of new business, increase the potential adverse impact of product guarantees included in Jackson’s variable annuities and non unit-linked investment products in Asia, and/or have a negative impact on its assets under management and profit. — A reduction in the financial strength and flexibility of corporate entities which may result in a deterioration of the credit rating profile and valuation of the Group’s invested credit portfolio, as well as higher credit defaults and wider credit and liquidity spreads resulting in realised and unrealised credit losses. — Failure of counterparties who have transactions with Prudential (e.g. banks and reinsurers) to meet commitments that could give rise to a negative impact on Prudential’s financial position and on the accessibility or recoverability of amounts due or, for derivative transactions, adequate collateral not being in place. — Estimates of the value of financial instruments becoming more difficult because in certain illiquid or closed markets, determining the value at which financial instruments can be realised is highly subjective. Processes to ascertain such values require substantial elements of judgement, assumptions and estimates (which may change over time). — Increased illiquidity, which also adds to uncertainty over the accessibility of financial resources and may reduce capital resources as valuations decline. This could occur where external capital is unavailable at sustainable cost, increased liquid assets are required to be held as collateral under derivative transactions or redemption restrictions are placed on Prudential’s investments in illiquid funds. In addition, significant redemption requests could also be made on Prudential’s issued funds and while this may not have a direct impact on the Group’s liquidity, it could result in reputational damage to Prudential. The potential impact of increased illiquidity is more uncertain than for other risks such as interest rate or credit risk. In general, upheavals in the financial markets may affect general levels of economic activity, employment and customer behaviour. As a result, insurers may experience an elevated incidence of claims, lapses, or surrenders of policies, and some policyholders may choose to defer or stop paying insurance premiums. The demand for insurance products may also be adversely affected. In addition, there may be a higher incidence of counterparty failures. If sustained, this environment is likely to have a negative impact on the insurance sector over time and may consequently have a negative impact on Prudential’s business and its balance sheet and profitability. For example, this could occur if the recoverable value of intangible assets for bancassurance agreements and deferred acquisition costs are reduced. New challenges related to market fluctuations and general economic conditions may continue to emerge. For some non-unit-linked investment products, in particular those written in some of the Group’s Asia operations, it may not be possible to hold assets which will provide cash flows to match those relating to policyholder liabilities. This is particularly true in those countries where bond markets are not developed and in certain markets where regulated premium and claim values are set with reference to the interest rate environment prevailing at the time of policy issue. This results in a mismatch due to the duration and uncertainty of the liability cash flows and the lack of sufficient assets of a suitable duration. While this residual asset/liability mismatch risk can be managed, it cannot be eliminated. Where interest rates in these markets remain lower than those used to calculate premium and claim values over a sustained period, this could have a material adverse effect on Prudential’s reported profit and the solvency of its business units. In addition, part of the profit from the Group’s Asia operations is related to bonuses for policyholders declared on with-profits products, which are impacted by the difference between actual investment returns of the with-profits fund (which are broadly based on historical and current rates of return on equity, real estate and fixed income securities) and minimum guarantee rates offered to policyholders. This profit could be lower in particular in a sustained low interest rate environment. 388 Prudential plc Annual Report 2019 prudentialplc.com Jackson writes a significant amount of variable annuities that offer capital or income protection guarantees. The value of these guarantees is affected by market factors (such as interest rates, equity values, bond spreads and realised volatility) and policyholder behaviour. Jackson uses a derivative hedging programme to reduce its exposure to market risks arising on these guarantees. There could be market circumstances where the derivatives that Jackson enters into to hedge its market risks may not cover its exposures under the guarantees. The cost of the guarantees that remain unhedged will also affect Prudential’s results. In addition, Jackson hedges the guarantees on its variable annuity book on an economic basis (with consideration of the local regulatory position) and, thus, accepts variability in its accounting results in the short term in order to achieve the appropriate result on these bases. In particular, for Prudential’s Group IFRS reporting, the measurement of the Jackson variable annuity guarantees is typically less sensitive to market movements than for the corresponding hedging derivatives, which are held at market value. However, depending on the level of hedging conducted regarding a particular risk type, certain market movements can drive volatility in the economic or local regulatory results that may be less significant under IFRS reporting. Also, Jackson has a significant spread based business with a significant proportion of its assets invested in fixed-income securities and its results are therefore affected by fluctuations in prevailing interest rates. In particular, fixed annuities and stable value products written by Jackson expose Prudential to the risk that changes in interest rates, which are not fully reflected in the interest rates credited to customers, will reduce spread. The spread is the difference between the rate of return Jackson is able to earn on the assets backing the policyholders’ liabilities and the amounts that are credited to policyholders in the form of benefit increases, subject to minimum crediting rates. Declines in spread from these products or other spread businesses that Jackson conducts, and increases in surrender levels arising from interest rate rises, could have a material impact on its businesses or results of operations. As a holding company, Prudential is dependent upon its subsidiaries to cover operating expenses and dividend payments The Group’s insurance and investment management operations are generally conducted through direct and indirect subsidiaries, which are subject to the risks discussed elsewhere in this ‘Risk Factors’ section. As a holding company, Prudential’s principal sources of funds are remittances from subsidiaries, shareholder-backed funds, the shareholder transfer from long-term funds and any amounts that may be raised through the issuance of equity, debt and commercial paper. Certain of Prudential’s subsidiaries are subject to applicable insurance, foreign exchange and tax laws, rules and regulations (including in relation to distributable profits) that can limit their ability to make remittances. In some circumstances, including changes to general market conditions, this could limit Prudential’s ability to pay dividends to shareholders or to make available funds held in certain subsidiaries to cover operating expenses of other members of the Group. (Geo)political risks and political uncertainty may adversely impact economic conditions, increase market volatility, cause operational disruption to the Group and impact its strategic plans, which could have adverse effects on Prudential’s business and its profitability The Group is exposed to (geo)political risks and political uncertainty in the markets in which it operates. Recent shifts in the focus of some national governments toward more protectionist or restrictive economic and trade policies, and international trade disputes, could impact on the macroeconomic outlook and the environment for global financial markets. This could take effect, for example, through increased friction in cross-border trade, such as implementation of trade tariffs or the withdrawal from existing trading blocs or agreements, and the exercise of executive powers to restrict overseas trade and/or financial transactions. The degree and nature of regulatory changes and Prudential’s competitive position in some geographic markets may also be impacted, for example, through measures favouring local enterprises, such as changes to the maximum level of non-domestic ownership by foreign companies. (Geo)political risks and political uncertainty may also adversely impact the Group’s operations and its operational resilience. Increased (geo)political tensions may increase cross-border cyber activity and therefore increase cyber security risks. (Geo)political tensions may also lead to civil unrest and/or acts of civil disobedience. This includes the unrest in Hong Kong, where mass anti-government demonstrations have given rise to increased disruption throughout the region. Such events could impact operational resilience by disrupting Prudential’s systems, operations, new business sales and renewals, distribution channels and services to customers, which may result in a reduction in contributions from business units to the central cash balances and profit of the Group, decreased profitability, financial loss, adverse customer impacts and reputational damage. Prudential is subject to the risk of potential sovereign debt credit deterioration owing to the amounts of sovereign debt obligations held in its investment portfolio Investing in sovereign debt creates exposure to the direct or indirect consequences of political, social or economic changes (including changes in governments, heads of state or monarchs) in the countries in which the issuers of such debt are located and to the creditworthiness of the sovereign. Investment in sovereign debt obligations involves risks not present in debt obligations of corporate issuers. In addition, the issuer of the debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or pay interest when due in accordance with the terms of such debt, and Prudential may have limited recourse to compel payment in the event of a default. A sovereign debtor’s willingness or ability to repay principal and to pay interest in a timely manner may be affected by, among other factors, its cash flow situation, its relations with its central bank, the extent of its foreign currency reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor’s policy toward local and international lenders, and the political constraints to which the sovereign debtor may be subject. prudentialplc.com Prudential plc Annual Report 2019 389 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationRISK FACTORS CONTINUED Moreover, governments may use a variety of techniques, such as intervention by their central banks or imposition of regulatory controls or taxes, to devalue their currencies’ exchange rates, or may adopt monetary and other policies (including to manage their debt burdens) that have a similar effect, all of which could adversely impact the value of an investment in sovereign debt even in the absence of a technical default. Periods of economic uncertainty may affect the volatility of market prices of sovereign debt to a greater extent than the volatility inherent in debt obligations of other types of issuers. In addition, if a sovereign default or other such events described above were to occur as has happened on occasion in the past, other financial institutions may also suffer losses or experience solvency or other concerns, which may result in Prudential facing additional risks relating to investments in such financial institutions that are held in the Group’s investment portfolio. There is also risk that public perceptions about the stability and creditworthiness of financial institutions and the financial sector generally might be adversely affected, as might counterparty relationships between financial institutions. If a sovereign were to default on its obligations, or adopt policies that devalued or otherwise altered the currencies in which its obligations were denominated this could have a material adverse effect on Prudential’s financial condition and results of operations. Downgrades in Prudential’s financial strength and credit ratings could significantly impact its competitive position and damage its relationships with creditors or trading counterparties Prudential’s financial strength and credit ratings, which are used by the market to measure its ability to meet policyholder obligations, are an important factor affecting public confidence in Prudential’s products, and as a result its competitiveness. Downgrades in Prudential’s ratings as a result of, for example, decreased profitability, increased costs, increased indebtedness or other concerns could have an adverse effect on its ability to market products, retain current policyholders, and on the Group’s financial flexibility. In addition, the interest rates at which Prudential is able to borrow funds are affected by its credit ratings, which are in place to measure the Group’s ability to meet its contractual obligations. Prudential plc’s long-term senior debt is rated as A2 by Moody’s, A by Standard & Poor’s and A- by Fitch. Prudential plc’s short-term debt is rated as P-1 by Moody’s, A-1 by Standard & Poor’s and F1 by Fitch. Jackson’s financial strength is rated AA- by Standard & Poor’s and Fitch, A1 by Moody’s and A+ by A.M. Best. Prudential Assurance Co. Singapore (Pte) Ltd’s financial strength is rated AA- by Standard & Poor’s. All ratings above are on a stable outlook and are stated as at the date of this document. In addition, changes in methodologies and criteria used by rating agencies could result in downgrades that do not reflect changes in the general economic conditions or Prudential’s financial condition. Prudential is subject to the risk of exchange rate fluctuations owing to the geographical diversity of its businesses Due to the geographical diversity of Prudential’s businesses, Prudential is subject to the risk of exchange rate fluctuations. Prudential’s operations generally write policies and invest in assets denominated in local currencies. Although this practice limits the effect of exchange rate fluctuations on local operating results, it can lead to fluctuations in Prudential’s consolidated financial statements upon the translation of results into the Group’s presentation currency. This exposure is not currently separately managed. The Group now presents its consolidated financial statements in US dollars, which is the currency in which a large proportion of the Group’s earnings and assets and liabilities are denominated or linked to (such as the Hong Kong dollar, that is pegged to the US dollar). There remains some entities that are not denominated in or linked to the US dollar and transactions which are conducted in non-US dollar currencies. Prudential is subject to the risk of exchange rate fluctuations from the translation of the results of these entities and transactions and the risks from the maintenance of the Hong Kong dollar peg to the US dollar. Risks relating to Prudential’s business activities and industry The implementation of large scale transformation, including complex strategic initiatives, gives rise to significant execution risks, may affect Prudential’s operational capacity, and may adversely impact the Group if these initiatives fail to meet their objectives As part of the implementation of its business strategies and to maintain market competitiveness, Prudential undertakes large scale transformation across the Group. Many of these change initiatives, which currently focus on digitalisation, outsourcing initiatives and industry and regulatory-driven change, are complex, interconnected and/or of large scale. There may be adverse financial and non-financial (including operational, regulatory, conduct and reputational) implications for the Group if these initiatives are subject to implementation delays, or fail, in whole or in part, to meet their objectives. Additionally, these initiatives inherently give rise to design and execution risks, and may increase existing business risks, such as placing additional strain on the operational capacity, or weakening the control environment, of the Group. Implementing further initiatives related to significant regulatory changes, such as IFRS 17, and the transition to a legislative framework in Hong Kong for the group- wide supervision of insurance groups (GWS Framework), may amplify these risks. Risks related to the GWS Framework are explained in the ‘Regulatory risks’ risk factor. Adverse experience in the operational risks inherent in Prudential’s business, and those of its material outsourcing partners, could disrupt its business functions and have a negative impact on its results of operations Operational risks are present in all of Prudential’s businesses, including the risk of direct or indirect loss resulting from inadequate or failed internal and external processes, systems or human error, fraud, the effects of natural or man-made catastrophic events (such as natural disasters, pandemics, cyber-attacks, acts of terrorism, civil unrest and other catastrophes) or from other external events. These risks may also adversely impact Prudential through its partners which provide bancassurance, outsourcing, external technology, data hosting and other services. 390 Prudential plc Annual Report 2019 prudentialplc.com Exposure to such events could impact Prudential’s operational resilience and ability to perform necessary business functions by disrupting its systems, operations, new business sales and renewals, distribution channels and services to customers, or result in the loss of confidential or proprietary data. Such events, as well as any weaknesses in administration systems (such as those relating to policyholder records) or actuarial reserving processes, may also result in increased expenses, as well as legal and regulatory sanctions, decreased profitability, financial loss, customer conduct risk impacts and damage Prudential’s reputation and relationship with its customers and business partners. The recent social unrest and coronavirus outbreak, and measures to contain it, have slowed economic and social activity in Hong Kong and mainland China, and in the case of the coronavirus is having a broader global economic impact. While these conditions persist, the level of sales activity in affected markets are expected to be adversely impacted through a reduction in travel and agency and bancassurance activity. Extended travel restrictions in particular may also adversely impact product persistency in the Group’s Hong Kong business. Disruption to Prudential’s operations may also result where Prudential’s employees, or those of its service partners, are affected by travel restrictions; office closures and other measures impacting on working practices, such as the imposition of remote working arrangements; quarantine requirements under local laws and/or other psychosocial impacts. Prudential’s business is dependent on processing a large number of transactions for numerous and diverse products. It also employs a large number of complex and interconnected information technology (IT) and finance systems and models, and user developed applications in its processes. The long-term nature of much of the Group’s business also means that accurate records have to be maintained securely for significant time periods. Further, Prudential operates in an extensive and evolving legal and regulatory environment (including in relation to tax) which adds to the complexity of the governance and operation of its business processes and controls. The performance of the Group’s core business activities and the uninterrupted availability of services to customers rely significantly on, and require significant investment in, IT infrastructure and security, system development, data governance and management, compliance and other operational systems, personnel, controls and processes. During times of significant change, the resilience and operational effectiveness of these systems and processes at Prudential and/or its third party providers may be adversely impacted. In particular Prudential and its business partners are making increasing use of emerging technological tools and digital services, or forming strategic partnerships with third parties to provide these capabilities. Automated distribution channels to customers increase the criticality of providing uninterrupted services. A failure to implement appropriate governance and management of the incremental operational risks from emerging technologies may adversely impact on Prudential’s reputation and brand, the results of its operations, its ability to attract and retain customers, its ability to deliver on its long-term strategy and therefore its competitiveness and long- term financial success. Although Prudential’s IT, compliance and other operational systems, models and processes incorporate governance and controls designed to manage and mitigate the operational and model risks associated with its activities, there can be no assurance as to the resilience of these systems and processes to disruption or that governance and controls will always be effective. Due to human error, among other reasons, operational and model risk incidents do occur from time to time and no system or process can entirely prevent them, although Prudential has not, to date, identified any such incidents that have had a material impact. Prudential’s legacy and other IT systems, data and processes, as with operational systems and processes generally, may also be susceptible to failure or security/data breaches. In addition, Prudential relies on the performance and operations of a number of bancassurance, outsourcing (including external technology and data hosting), and service partners. These include back office support functions, such as those relating to IT infrastructure, development and support, and customer facing operations and services, such as product distribution and services (including through digital channels) and investment operations. This creates reliance upon the resilient operational performance of these partners, and failure to adequately oversee the partner, or the failure of a partner (or of its IT and operational systems and processes) could result in significant disruption to business operations and customers and may have adverse financial, reputational or conduct risk implications. Attempts to access or disrupt Prudential’s IT systems, and loss or misuse of personal data, could result in loss of trust from Prudential’s customers and employees, reputational damage and financial loss Prudential and its business partners are increasingly exposed to the risk that individuals or groups may attempt to disrupt the availability, confidentiality and integrity of its IT systems, which could result in disruption to key operations, make it difficult to recover critical services, damage assets and compromise the integrity and security of data (both corporate and customer). This could result in loss of trust from Prudential’s customers and employees, reputational damage and direct or indirect financial loss. The cyber-security threat continues to evolve globally in sophistication and potential significance. Prudential’s increasing profile in its current markets and those in which it is entering, growing customer interest in interacting with their insurance providers and asset managers through the internet and social media, improved brand awareness and the 2016 designation of Prudential as a Global Systemically Important Insurer (G-SII) could also increase the likelihood of Prudential being considered a target by cyber criminals. Further, there have been changes to the threat landscape and the risk from untargeted but sophisticated and automated attacks has increased. There is an increasing requirement and expectation on Prudential and its business partners, to not only hold customer, shareholder and employee data securely, but use it in a transparent and appropriate way. The risk of not securely handling or misusing data may be increased by the use of emerging technological tools which could increase the volume of data that Prudential collects and processes. Developments in data protection worldwide (such as the implementation of EU General Data Protection Regulation that came into force in 2018 and the California Consumer Protection Act that came into force on 1 January 2020) may also increase the financial and reputational implications for Prudential following a significant breach of its (or its third-party suppliers’) IT systems. New and currently unforeseeable prudentialplc.com Prudential plc Annual Report 2019 391 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationRISK FACTORS CONTINUED regulatory issues may also arise from the increased use of emerging technology, data and digital services. Although Prudential has experienced or has been affected by cyber and data breaches, to date, it has not identified a failure or breach, or an incident of data misuse in relation to its legacy and other IT systems and processes which has had a material impact. However, Prudential has been, and likely will continue to be, subject to potential damage from computer viruses, unauthorised access and cyber-security attacks such as ‘denial of service’ attacks (which, for example, can cause temporary disruption to websites and IT networks), phishing and disruptive software campaigns. Prudential is continually enhancing its IT environment to remain secure against emerging threats, together with increasing its ability to detect system compromise and recover should such an incident occur. However, there can be no assurance that such events will not take place which may have material adverse consequential effects on Prudential’s business and financial position. Prudential operates in a number of markets through joint ventures and other arrangements with third parties, involving certain risks that Prudential does not face with respect to its consolidated subsidiaries Prudential operates, and in certain markets is required by local regulation to operate, through joint ventures and other similar arrangements. For such Group operations, management control is exercised in conjunction with other participants. The level of control exercisable by the Group depends on the terms of the contractual agreements, in particular, those terms providing for the allocation of control among, and continued cooperation between, the participants. In addition, the level of control exercisable by the Group could be subject to changes in the maximum level of non-domestic ownership imposed on foreign companies in certain jurisdictions. Prudential may face financial, reputational and other exposure (including regulatory censure) in the event that any of its partners fails or is unable to meet its obligations under the arrangements, encounters financial difficulty, or fails to comply with local or international regulation and standards such as those pertaining to the prevention of financial crime. In addition, a significant proportion of the Group’s product distribution is carried out through arrangements with third parties not controlled by Prudential such as bancassurance and agency arrangements and is therefore dependent upon continuation of these relationships. A temporary or permanent disruption to these distribution arrangements, such as through significant deterioration in the reputation, financial position or other circumstances of the third party or material failure in controls (such as those pertaining to the third-party system failure or the prevention of financial crime) could adversely affect Prudential’s results of operations. Adverse experience relative to the assumptions used in pricing products and reporting business results could significantly affect Prudential’s results of operations In common with other life insurers, the profitability of the Group’s businesses depends on a mix of factors including mortality and morbidity levels and trends, policy surrenders and take-up rates on guarantee features of products, investment performance and impairments, unit cost of administration and new business acquisition expenses. The Group’s businesses are subject to inflation risk. In particular, the Group’s medical insurance businesses in Asia are also exposed to medical inflation risk. Prudential needs to make assumptions about a number of factors in determining the pricing of its products, for setting reserves, and for reporting its capital levels and the results of its long-term business operations. Assumptions about future expected levels of mortality are of relevance to the Guaranteed Minimum Withdrawal Benefit (GMWB) of Jackson’s variable annuity business. A further factor is the assumption that Prudential makes about future expected levels of the rates of early termination of products by its customers (known as persistency). This is relevant to a number of lines of business in the Group, especially for Jackson’s portfolio of variable annuities and, in Asia markets, the health and protection products in Hong Kong, Singapore, Indonesia and Malaysia. Prudential’s persistency assumptions reflect a combination of recent past experience for each relevant line of business and expert judgement, especially where a lack of relevant and credible experience data exists. Any expected change in future persistency is also reflected in the assumption. If actual levels of future persistency are significantly different than assumed, the Group’s results of operations could be adversely affected. Furthermore, Jackson’s variable annuity products are sensitive to other types of policyholder behaviour, such as the take-up of its GMWB product features. In addition, Prudential’s business may be adversely affected by epidemics, pandemics and other effects that give rise to a large number of deaths or additional sickness claims, as well as increases to the cost of medical claims. Pandemics, significant influenza and other epidemics and outbreaks such as the recent coronavirus have occurred a number of times historically but the likelihood, timing, or the severity of future events cannot be predicted. The effectiveness of external parties, including governmental and non-governmental organisations, in combating the spread and severity of any epidemics could have a material impact on the Group’s loss experience. Prudential’s businesses are conducted in highly competitive environments with developing demographic trends and continued profitability depends upon management’s ability to respond to these pressures and trends The markets for financial services in the US and Asia are highly competitive, with several factors affecting Prudential’s ability to sell its products and continued profitability, including price and yields offered, financial strength and ratings, range of product lines and product quality, brand strength and name recognition, investment management performance and fund management trends, historical bonus levels, the ability to respond to developing demographic trends, customer appetite for certain savings products and technological advances. In some of its markets, Prudential faces competitors that are larger, have greater financial resources or a greater market share, offer a broader range of products or have higher bonus rates. Further, heightened competition for talented and skilled employees and agents with local experience, particularly in Asia, may limit Prudential’s potential to grow its business as quickly as planned. Technological advances may result in increased competition to the Group (including from outside the insurance industry) and a failure to be able to attract sufficient numbers of skilled staff. 392 Prudential plc Annual Report 2019 prudentialplc.com In Asia, the Group’s principal competitors include global life insurers together with regional insurers and multinational asset managers. In most markets, there are also local companies that have a material market presence. Jackson’s competitors in the US include major stock and mutual insurance companies, mutual fund organisations, banks and other financial services companies. Prudential believes that competition will intensify across all regions in response to consumer demand, digital and other technological advances, the need for economies of scale and the consequential impact of consolidation, regulatory actions and other factors. Prudential’s ability to generate an appropriate return depends significantly upon its capacity to anticipate and respond appropriately to these competitive pressures. Prudential is exposed to ongoing risks as a result of the demerger of M&G plc On 21 October 2019, Prudential completed the demerger of M&G plc and, in connection with the demerger, Prudential entered into a demerger agreement with M&G plc. Among other provisions, the demerger agreement contains a customary indemnity under which Prudential has agreed to indemnify M&G plc against liabilities incurred by the M&G group that relate to the business of the Group. Although it is not anticipated that Prudential will be required to pay any substantial amount pursuant to such indemnity obligations, if any amount payable thereunder is substantial this could have a material adverse effect on Prudential’s financial condition and/or results of operations. Legal and regulatory risk Prudential conducts its businesses subject to regulation and associated regulatory risks, including a change to the basis in the regulatory supervision of the Group, the effects of changes in the laws, regulations, policies and interpretations and any accounting standards in the markets in which it operates Changes in government policy and legislation (including in relation to tax), capital control measures on companies and individuals, regulation or regulatory interpretation applying to companies in the financial services and insurance industries in any of the markets in which Prudential operates (including those related to the conduct of business by Prudential or its third party distributors), or decisions taken by regulators in connection with their supervision of members of the Group, which in some circumstances may be applied retrospectively, may adversely affect Prudential. The impact from any regulatory changes may affect Prudential, for example changes may be required to its product range, distribution channels, handling and usage of data, competitiveness, profitability, capital requirements, risk management approaches, corporate or governance structure and, consequently, reported results and financing requirements. Also, regulators in jurisdictions in which Prudential operates may impose requirements affecting the allocation of capital and liquidity between different business units in the Group, whether on a geographic, legal entity, product line or other basis. Regulators may also change the level of capital required to be held by individual businesses, the regulation of selling practices, solvency requirements and could introduce changes that impact products sold or that may be sold. Furthermore, as a result of interventions by governments in light of financial and global economic conditions, there may continue to be changes in government regulation and supervision of the financial services industry, including the possibility of higher capital requirements, restrictions on certain types of transactions and enhancement of supervisory powers. With effect from 21 October 2019, the group-wide supervisor of Prudential plc changed to the Hong Kong Insurance Authority (HKIA). Prior to the introduction of the proposed GWS Framework, the Group is being supervised on an interim basis in line with principles agreed with the HKIA. Until the GWS Framework is finalised the Group cannot be certain of the nature and extent of differences between the interim principles agreed with the HKIA and the specific regulatory requirements of the GWS Framework. With the agreement of the HKIA, Prudential is applying the Local Capital Summation Method (LCSM) to determine Group regulatory capital requirements. Any differences between these interim supervisory requirements and those that will be adopted under the GWS Framework may lead to changes to the way in which capital requirements are calculated and to the eligibility of the capital instruments issued by Prudential to satisfy such capital requirements. The Group’s existing processes and resources may also need to change to comply with the final GWS Framework legislation or any other requirements of the HKIA. The need to adapt to any such changes or to respond to any such requirements may lead to increased costs or otherwise impact the business, financial condition, results, profitability and/or prospects of the Group. While the HKIA has agreed that the subordinated debt instruments Prudential has in issue can be included as part of the Group’s capital resources for the purposes of satisfying the capital requirements imposed under the LCSM under the interim principles agreed with the HKIA, the grandfathering provisions under the GWS Framework remain subject to the Hong Kong legislative process. If Prudential is ultimately not able to include the subordinated debt instruments it holds as part of the Group’s capital resources for the purposes of satisfying the capital requirements imposed under the GWS Framework it may need to raise additional capital, which may in turn lead to increased costs for the Group. Currently there are also a number of other global regulatory developments which could impact Prudential’s businesses in its many jurisdictions. These include the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and its subsequent amendments in the US which provided for a comprehensive overhaul of the financial services industry within the US including reforms to financial services entities, products and markets, the work of the Financial Stability Board (FSB) in the area of systemic risk including the reassessment of the designation of Global Systemically Important Insurers (G-SIIs), and the Insurance Capital Standard (ICS) being developed by the International Association of Insurance Supervisors (IAIS). In addition, regulators in a number of jurisdictions in which the Group operates are further developing their local capital regimes. Across Asia this includes China, Hong Kong, Singapore, Thailand and India. There remains a high degree of uncertainty over the potential impact of such changes on the Group. In November 2019 the FSB has endorsed a new Holistic Framework (HF), intended for the assessment and mitigation of systemic risk in the insurance sector, for implementation by the IAIS in 2020 and has suspended G-SII designations until completion of a review to be undertaken in 2022. Many of the previous G-SII measures have already been adopted into the Insurance Core Principles (ICPs) and prudentialplc.com Prudential plc Annual Report 2019 393 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationRISK FACTORS CONTINUED ComFrame – the common framework for the supervision of Internationally Active Insurance Groups (IAIGs). Prudential is expected to satisfy the criteria to be an IAIG and would therefore be subject to these measures. The HF also includes a monitoring element for the identification of a build-up of systemic risk and to enable supervisors to take action where appropriate. The IAIS has already consulted on an application paper on the liquidity risk elements introduced into the ICPs and ComFrame with a further consultation focused on macroeconomic elements expected to follow in 2021. The IAIS continues to develop the ICS as part of ComFrame. The implementation of ICS will be conducted in two phases – a five-year monitoring phase followed by an implementation phase. ComFrame will more generally establish a set of common principles and standards designed to assist supervisors in addressing risks that arise from insurance groups with operations in multiple jurisdictions. The ComFrame proposals, including ICS, could result in enhanced capital and regulatory measures for IAIGs. In July 2014, the FSB announced widespread reforms to address the integrity and reliability of inter-bank offer rates (IBORs). The discontinuation of IBORs in their current form and their replacement with alternative risk-free reference rates such as the Sterling Overnight Index Average benchmark (SONIA) in the UK and the Secured Overnight Financing Rate (SOFR) in the US could, among other things, impact the Group through an adverse effect on the value of Prudential’s assets and liabilities which are linked to or which reference IBORs, a reduction in market liquidity during any period of transition and increased legal and conduct risks to the Group arising from changes required to documentation and its related obligations to its stakeholders. Various jurisdictions in which Prudential operates have created investor compensation schemes that require mandatory contributions from market participants in some instances in the event of a failure of a market participant. As a major participant in the majority of its chosen markets, circumstances could arise in which Prudential, along with other companies, may be required to make such contributions. The Group’s accounts are prepared in accordance with current IFRS applicable to the insurance industry. The International Accounting Standards Board (IASB) introduced a framework that it described as Phase I which, under its standard IFRS 4 permitted insurers to continue to use the statutory basis of accounting for insurance assets and liabilities that existed in their jurisdictions prior to January 2005. In May 2017, the IASB published its replacement standard on insurance accounting (IFRS 17, ‘Insurance Contracts’), which will have the effect of introducing fundamental changes to the statutory reporting of insurance entities that prepare accounts according to IFRS from 2021. In June 2019, the IASB published an exposure draft proposing a number of targeted amendments to this new standard including the deferral of the effective date by one year from 2021 to 2022. As a result of comments on this exposure draft, the IASB plans to redeliberate on a number of areas of IFRS 17, with an amended standard expected to be issued in mid-2020. The EU will apply its usual process for assessing whether the standard meets the necessary criteria for endorsement. The Group is reviewing the complex requirements of this standard and considering its potential impact. The effect of changes required to the Group’s accounting policies as a result of implementing the new standard is currently uncertain, but these changes can be expected to, amongst other things, alter the timing of IFRS profit recognition. Given the implementation of this standard is likely to require significant enhancements to IT, actuarial and finance systems of the Group, it will also have an impact on the Group’s expenses. Any changes or modification of IFRS accounting policies may require a change in the way in which future results will be determined and/or a retrospective adjustment of reported results to ensure consistency. The resolution of several issues affecting the financial services industry could have a negative impact on Prudential’s reported results or on its relations with current and potential customers Prudential is, and in the future may continue to be, subject to legal and regulatory actions in the ordinary course of its business on matters relevant to the delivery of customer outcomes. Such actions relate, and could in the future relate, to the application of current regulations or the failure to implement new regulations (including those relating to the conduct of business), regulatory reviews of broader industry practices and products sold (including in relation to lines of business already closed) in the past under acceptable industry or market practices at the time and changes to the tax regime affecting products. Regulators may also focus on the approach that product providers use to select third-party distributors and to monitor the appropriateness of sales made by them. In some cases, product providers can be held responsible for the deficiencies of third-party distributors. In the US, there has been significant attention on the different regulatory standards applied to investment advice delivered to retail customers by different sectors of the industry. As a result of reports relating to perceptions of industry abuses, there have been numerous regulatory inquiries and proposals for legislative and regulatory reforms. This includes focus on the suitability of sales of certain products, alternative investments and the widening of the circumstances under which a person or entity providing investment advice with respect to certain employee benefit and pension plans would be considered a fiduciary subjecting the person or entity to certain regulatory requirements. There is a risk that new regulations introduced may have a material adverse effect on the sales of the products by Prudential and increase Prudential’s exposure to legal risks. Litigation, disputes and regulatory investigations may adversely affect Prudential’s profitability and financial condition Prudential is, and may in the future be, subject to legal actions, disputes and regulatory investigations in various contexts, including in the ordinary course of its insurance, investment management and other business operations. These legal actions, disputes and investigations may relate to aspects of Prudential’s businesses and operations that are specific to Prudential, or that are common to companies that operate in Prudential’s markets. Legal actions and disputes may arise under contracts, regulations (including tax) or from a course of conduct taken by Prudential, and may be class actions. Although Prudential believes that it has adequately provided in all material respects for the costs of litigation and regulatory matters, no assurance can be provided that such provisions are sufficient. Given the large or indeterminate amounts of damages sometimes sought, other sanctions that might be imposed and the inherent unpredictability of litigation 394 Prudential plc Annual Report 2019 prudentialplc.com as population urbanisation and ageing) may affect customer lifestyles and therefore may impact claims against the Group’s insurance product offerings. As a provider of insurance and investment services, Prudential has access to extensive amounts of customer personal data, including data related to personal health, and is therefore exposed to the regulatory and reputational risks associated with customer data misuse or security breaches. These risks are explained in the ‘Information security and loss or misuse of data’ risk factor. The potential for reputational risks extends to the Group’s supply chains, which may be adversely impacted by factors such as poor labour standards and abuses of human rights by third parties. As an employer, the Group is also exposed to the risk of being unable to attract, retain and develop highly-skilled staff, which can be increased where Prudential does not have responsible working practices. A failure to maintain high standards of corporate governance may adversely impact the Group and its customers, staff and employees, through poor decision- making and a lack of oversight of its key risks. Poor governance may arise where key governance committees have insufficient independence, a lack of diversity, skills or experience in their members, or unclear (or insufficient) oversight responsibilities and mandates. Inadequate oversight over remuneration increases the risk of poor senior management behaviours. Prudential operates across multiple jurisdictions and has a group and subsidiary governance structure which may add further complexity to these considerations. Participation in joint ventures or partnerships where Prudential does not have direct overall control increases the potential for reputational risks arising from poor governance. and disputes, it is possible that an adverse outcome could have an adverse effect on Prudential’s reputation, results of operations or cash flows. from customers to institutional investors, employees, suppliers and regulators, all of whom have expectations in this area, which may differ. Changes in tax legislation may result in adverse tax consequences Tax rules, including those relating to the insurance industry, and their interpretation may change, possibly with retrospective effect, in any of the jurisdictions in which Prudential operates. Significant tax disputes with tax authorities, and any change in the tax status of any member of the Group or in taxation legislation or its scope or interpretation could affect Prudential’s financial condition and results of operations. Prudential’s Articles of Association contain an exclusive jurisdiction provision Under Prudential’s Articles of Association, certain legal proceedings may only be brought in the courts of England and Wales. This applies to legal proceedings by a shareholder (in its capacity as such) against Prudential and/or its directors and/or its professional service providers. It also applies to legal proceedings between Prudential and its directors and/ or Prudential and Prudential’s professional service providers that arise in connection with legal proceedings between the shareholder and such professional service providers. This provision could make it difficult for US and other non-UK shareholders to enforce their shareholder rights. Environmental, social and governance risks The failure to understand and respond effectively to the risks associated with environmental, social or governance (ESG) factors could adversely affect Prudential’s achievement of its long-term strategy The business environment in which Prudential operates is continually changing. A failure to manage those material risks associated with the ESG themes detailed below may adversely impact on the reputation and brand of the Group, the results of its operations, its ability to attract and retain customers and staff, its ability to deliver on its long-term strategy and therefore its long-term financial success. Ensuring high levels of transparency and responsiveness to stakeholders is a key aspect of this. ESG-related issues may also directly or indirectly impact key stakeholders, ranging The environmental risks associated with climate change is one ESG area that poses significant risks to Prudential and its customers. These risks include transition risks and physical risks. The global transition to a lower carbon economy could have an adverse impact on investment valuations as the financial assets of carbon-intensive companies re-price and could result in some asset sectors facing significantly higher costs and a disorderly adjustment to their asset values. The speed of this transition will be influenced by factors such as public policy, technology and changes in market or investor sentiment. This may adversely impact the valuation of investments held by the Group. The potential broader economic impact from this may adversely affect customer demand for the Group’s products. The physical impacts of climate change, driven by both specific short-term climate-related events such as natural disasters and longer-term changes to the natural environment, will increasingly influence the longevity, mortality and morbidity risk assessments of the Group’s underwriting product offerings. Climate-driven changes in countries in which Prudential, or its key third parties, operate could impact on its operational resilience and could change its claims profile. There is an increasing expectation from stakeholders for Prudential to understand, manage and provide increased transparency of its exposure to climate-related risks. Given that Prudential’s investment horizons are long term, it is potentially more exposed to the long-term impact of climate change risks. Additionally, Prudential’s stakeholders increasingly expect an approach to responsible investment that demonstrates how ESG considerations are effectively integrated into investment and engagement decisions, and fiduciary and stewardship duties. Social risks that could impact Prudential may arise from a failure to consider the rights, diversity, well-being, and interests of people and communities in which the Group, or its third parties, operates. These risks are increased as Prudential operates in multiple jurisdictions with distinct local cultures and considerations. Emerging population risks associated with public health trends (such as an increase in obesity) and demographic changes (such prudentialplc.com Prudential plc Annual Report 2019 395 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationGlossary A Acquisition expenses Acquisition expenses include the initial expenses and commissions incurred in writing new business less deferred costs. 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. Administration expenses Administration expenses are expenses and renewal commissions incurred in managing existing business. Alternative performance measures (APMs) Alternative performance measures (APMs) are non-GAAP measures used by the Prudential Group within its annual reports to supplement disclosures prepared in accordance with widely accepted guideline and principles established by accounting standard setters, such as International Financial Reporting Standards (IFRS). These measures provide useful information to enhance the understanding of the Group’s financial performance. A reconciliation of these APMs to IFRS metrics is provided in additional financial information section of the annual report. Annual premium equivalent (APE) A measure of new business sales activity that is calculated as the aggregate of annualised regular premiums from new business plus one-tenth 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. Assets under management (AUM) Assets under management represent all assets managed or administered by or on behalf of the Group, including those assets managed by third parties. Assets under management include managed assets that are included within the Group’s statement of financial position and those assets belonging to external clients outside the Prudential Group, which are therefore not included in the Group’s statement of financial position. These are also referred to as ‘funds under management (FUM)’. 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. 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 Bancassurance An agreement with a bank to offer insurance and investment 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. These include regular bonus and final bonus and the rates may vary from period to period. C Cash remittances Amounts paid by our business units to the Group comprising dividends and other transfers net of capital injections, which are reflective of emerging earnings and capital generation. 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. Collective investment schemes (CIS) CIS is an open-ended investment fund of pooled assets in which an investor can buy and sell units that are issued in the form of shares. Constant exchange rates (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. 396 Prudential plc Annual Report 2019 prudentialplc.com 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 in 2016. Embedded value is a way of measuring the current value to shareholders of the future profits from life business written based on a set of assumptions. 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. 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) See ‘assets under management (AUM)’ above. 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 and other 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. Group pay-out annuities These are a closed block of defined benefit annuity plans assumed from John Hancock USA and John Hancock New York in October 2018, in which a single premium payment from an employer (contract holder) funds the pension benefits for its employees (participants). Group-wide Supervision (GWS) Framework Regulatory framework which is currently under development by the Hong Kong Insurance Authority for the industry and is expected to be finalised in the second half of 2020. Guaranteed annuities Policies that pay out a fixed amount of benefit for a defined period. Guaranteed investment contracts (GICs) (US) Investment contracts between an insurance company and an institutional investor, which provide 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. 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. Hong Kong Insurance Authority (Hong Kong IA or HKIA) The HKIA is an insurance regulatory body responsible for the regulation and supervision of the Hong Kong insurance industry. I In-force An insurance policy or contract reflected on records that has not expired, matured or otherwise been surrendered or terminated. 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. prudentialplc.com Prudential plc Annual Report 2019 397 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationGLOSSARY CONTINUED Investment grade Investments rated BBB- or above for S&P and 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. K Key performance indicators (KPIs) These are measures by which the development, performance or position of the business can be measured effectively. The Group Board reviews the KPIs annually and updates them where appropriate. 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. Local Capital Summation Method (LCSM) LCSM is the methodology used for the calculation of the Group’s regulatory capital requirements (both minimum and prescribed levels) together with related governance requirements. M 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 National Association of Insurance Commissioners (NAIC) The NAIC is the US standard setting and regulatory support organisation created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five US territories. 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. Examples include pure risk policies (eg fixed annuities, term insurance, critical illness) and unit-linked insurance contracts. O Operational borrowings Borrowings which arise in the normal course of the business. From 1 January 2019, these also include all lease liabilities under IFRS 16. 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 for business written in 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. 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 the aggregate of single premiums and the present value of expected future premiums from regular premium new business, allowing for lapses and other assumptions made in determining the EEV new business contribution. 398 Prudential plc Annual Report 2019 prudentialplc.com 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. S 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. T Takaful Insurance that is compliant with Islamic principles. Term life contracts These contracts provide protection for a defined period and a benefit that is payable to a designated beneficiary upon death of the insured. 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. 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. 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 life contracts 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. With-profits contracts For Prudential, the most significant with-profits contracts are written in Hong Kong, Malaysia and Singapore. See ‘participating policies or participating business’ above. Y Yield A measure of the rate of return received from an investment in percentage terms by comparing annual income (and any change in capital) to the price paid for the investment. prudentialplc.com Prudential plc Annual Report 2019 399 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional 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.prudentialplc.com Shareholder Meetings The 2020 Annual General Meeting (AGM) will be held in the Churchill Auditorium at the QEII Centre, Broad Sanctuary, Westminster, London SW1P 3EE on 14 May 2020 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 2019 AGM and of the General Meeting held in October 2019, including the major items discussed at those meetings 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). Any change to the Articles must be approved by special resolution of the shareholders. There were no changes to the constitutional documents during 2019. 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 2019 consisted of 2,601,159,949 (2018: 2,593,044,409) 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 2019, there were 46,847 (2018: 47,260) accounts on the register. Further information can be found in note C10 on page 290. 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. Analysis of shareholder accounts as at 31 December 2019 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 305 149 532 1,453 1,554 10,162 32,692 46,847 0.65 0.32 1.14 3.10 3.32 21.69 69.78 2,284,969,122 106,232,809 124,456,844 43,978,798 10,778,080 22,114,945 8,629,351 100 2,601,159,949 87.84 4.08 4.79 1.70 0.41 0.85 0.33 100 400 Prudential plc Annual Report 2019 prudentialplc.com Major shareholders The table below shows the holdings of major shareholders in the Company’s issued ordinary share capital, as at 31 December 2019, as notified and disclosed to the Company in accordance with the Disclosure Guidance and Transparency Rules. As at 31 December 2019 BlackRock, Inc Capital Group Companies, Inc. Norges Bank % of total voting rights 5.08 4.9336 3.99 On 11 February 2020, Norges Bank notified that its holding had decreased to 2.998 per cent of the Company’s issued share capital. 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 they may do so at their discretion provided Dividend information 2019 second interim dividend Ex-dividend date Record date Payment date 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 10 March 2020, Trustees held 0.30 per cent of the issued share capital under the various plans in operation. Rights to dividends under the various schemes are set out in the Directors’ remuneration report on pages 136 to 195. 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 in 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 14 May 2020. Details of shares issued during 2019 and 2018 are given in note C10 on page 290. 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 buy-back 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 2019. 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 14 May 2020. Shareholders registered on the UK register and Hong Kong branch register 26 March 2020 Holders of US American Depositary Receipts Shareholders with ordinary shares standing to the credit of their CDP securities accounts – 26 March 2020 27 March 2020 27 March 2020 27 March 2020 15 May 2020 15 May 2020 On or about 22 May 2020 A number of dividend waivers are in place in respect of 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. The dividends waived represent less than one per cent of the value of dividends paid during the year. prudentialplc.com Prudential plc Annual Report 2019 401 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationSHAREHOLDER INFORMATION CONTINUED Shareholder enquiries For enquiries about shareholdings, including dividends and lost share certificates, please contact the Company’s registrars: By post By telephone Register UK register Hong Kong register Singapore register ADRs Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA, UK. 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 11 North Buona Vista Drive, #01-19/20 The Metropolis Tower 2, Singapore 138589. 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. 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. 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.prudentialplc.com/investors/ shareholder-information/forms Shareholders on the UK or Hong Kong registers have the option to elect to receive their dividend in US dollars instead of pounds sterling or Hong Kong dollars respectively. More information may be found on our website www.prudentialplc. com/investors/shareholder-information/ dividend/dividend-currency-election 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 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 +852 2862 8555 Tel +65 6535 7511 Tel +1 800 990 1135, or from outside the USA +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 5.30pm, 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.prudentialplc.com/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 402 Prudential plc Annual Report 2019 prudentialplc.com How to contact us Prudential plc 1 Angel Court London EC2R 7AG Tel +44 (0)20 7220 7588 www.prudentialplc.com Board Paul Manduca Chairman Non-executive Directors Philip Remnant Senior Independent Director Jeremy Anderson Howard Davies David Law Kai Nargolwala Anthony Nightingale Alice Schroeder Tom Watjen Fields Wicker-Miurin Amy Yip Media enquiries Tel +44 (0)20 3977 9760 Email: media.relations@prudentialplc.com Group Executive Committee Mike Wells Group Chief Executive Mark FitzPatrick Group Chief Financial Officer and Chief Operating Officer James Turner Group Chief Risk and Compliance Officer Jolene Chen Group Human Resources Director Michael Falcon Chief Executive Officer, Jackson Holdings LLC Nic Nicandrou Chief Executive, Prudential Corporation Asia Al-Noor Ramji Group Chief Digital Officer Business units Prudential Corporation Asia 13th Floor One International Finance Centre 1 Harbour View Street Central Hong Kong Tel +852 2918 6300 www.prudentialcorporation-asia.com Nic Nicandrou Chief Executive, Prudential Corporation Asia Jackson Holdings LLC 1 Corporate Way Lansing Michigan 48951 USA Tel +1 517 381 5500 www.jackson.com Michael Falcon Chief Executive Officer, Jackson Holdings LLC Shareholder contacts Tel +44 (0)20 3977 9720 Email: investor.relations@prudentialplc.com UK Register private shareholder enquiries Tel 0371 384 2035 International shareholders Tel +44 (0)121 415 7026 Hong Kong Branch Register private shareholder enquiries Tel +852 2862 8555 US American Depositary Receipts holder enquiries Tel +1 651 453 2128 The Central Depository (Pte) Limited shareholder enquiries Tel +65 6535 7511 prudentialplc.com Prudential plc Annual Report 2019 403 Group overviewStrategic reportGovernanceDirectors’ remuneration reportFinancial statementsEuropean Embedded Value (EEV) basis resultsAdditional informationPrudential’s office at Ludgate Hill, London; from The Building News, 1863. 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 20 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. From the beginning the figure of Prudence was adopted as the symbol to be used on the Company seal to represent the values of the business. To this day she still carries her arrow (signifying strength of purpose), serpent (the ancient symbol of wisdom) and mirror (representing self awareness). 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. 404 Prudential plc Annual Report 2019 prudentialplc.com FORWARD-LOOKING STATEMENTS This document may contain ‘forward-looking statements’ with respect to certain of Prudential’s plans and its goals and expectations relating to its future financial condition, performance, results, 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, future market conditions, including fluctuations in interest rates and exchange rates, the continuance of a sustained low-interest rate environment, and the impact of economic uncertainty, asset valuation impacts from the transition to a lower carbon economy, inflation and deflation and the performance of financial markets generally; global political uncertainties; the policies and actions of regulatory authorities, including, in particular, the policies and actions of the Hong Kong Insurance Authority, as Prudential’s new Group-wide supervisor, as well as new government initiatives generally; the impact of continuing application of Global Systemically Important Insurer or ‘G-SII’ policy measures on Prudential; the impact on Prudential of systemic risk policy measures adopted by the International Association of Insurance Supervisors; the impact of competition and fast-paced technological change; the effect on Prudential’s business and results from, in particular, mortality and morbidity trends, lapse rates and policy renewal rates; the physical impacts of climate change and global health crises on Prudential’s business and operations; the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; the impact of internal transformation projects and other strategic actions failing to meet their objectives; the risk that Prudential’s operational resilience (or that of its suppliers and partners) may prove to be inadequate, including in relation to operational disruption due to external events; disruption to the availability, confidentiality or integrity of Prudential’s IT, digital systems and data (or those of its suppliers and partners); any ongoing impact on Prudential of the demerger of M&G plc; the impact of changes in capital, solvency standards, accounting standards or relevant regulatory frameworks, and tax and other legislation and regulations in the jurisdictions in which Prudential and its affiliates operate; the impact of legal and regulatory actions, investigations and disputes; and the impact of not adequately responding to environmental, social and governance issues. These and other important factors may, for example, result in changes to assumptions used for determining results of operations or re-estimations of reserves for future policy benefits. Further discussion of these and other important factors that could cause Prudential’s actual future financial condition or performance or other indicated results to differ, possibly materially, from those anticipated in Prudential’s forward-looking statements can be found under the ‘Risk factors’ heading of this document. Any forward-looking statements contained in this document speak only as of the date on which they are made. Prudential expressly disclaims any obligation to update any of the forward-looking statements contained in this document or any other forward- looking statements it may make, whether as a result of future events, new information or otherwise except as required pursuant to the UK Prospectus Rules, the UK Listing Rules, the UK Disclosure and Transparency Rules, the Hong Kong Listing Rules, the SGX-ST listing rules or other applicable laws and regulations. 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. 1923 Prudential’s first overseas life branch is established in India, with the first policy being sold to a tea planter in Assam. 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. 2010 Prudential plc is listed on stock exchanges in Hong Kong and Singapore. 1879 Prudential moves into Holborn Bars, a purpose-built office complex designed by Alfred Waterhouse. The building becomes a London landmark. 1912 Following the National Insurance Act, Prudential works with the government to run Approved Societies, providing sickness and unemployment benefits to five million people. 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. 1999 Prudential acquires M&G, pioneer of unit trusts in the UK and a leading provider of investment products. 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. 2014 Prudential acquires businesses in Ghana and Kenya, marking its entry into the fast-growing African life insurance industry. 2019 Prudential demerges its UK and Europe business, M&G plc, in order to focus on its international business. Principal place of business in Hong Kong 13th Floor One International Finance Centre 1 Harbour View Street Central Hong Kong Prudential public limited company Incorporated and registered in England and Wales Registered office 1 Angel Court London EC2R 7AG Registered number 1397169 www.prudentialplc.com Prudential plc is a holding company, some of whose subsidiaries are authorised and regulated, as applicable, by the Hong Kong Insurance Authority and other regulatory authorities. P r u d e n t i a l p l c A n n u a l R e p o r t 2 0 1 9 Printed on Revive 100 Silk, a paper made from fibre derived from 100 per cent recycled pre- and post- consumer waste; and Revive 100 Offset, which is made from 100 per cent recycled post-consumer waste. All material used in this report has been independently certified according to the rules of the Forest Stewardship Council (FSC). All pulps used are elemental chlorine free, and the inks used are vegetable oil based. The manufacturing mills and the printer are registered to the Environmental Management System ISO 14001 and are FSC chain-of-custody certified. Designed by FleishmanHillard Fishburn Printed in the UK by CPI Colour Prudential plc is not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America, or with the Prudential Assurance Company, a subsidiary of M&G plc, a company incorporated in the United Kingdom. 

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