Blueprint
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of March, 2018
PRUDENTIAL PUBLIC LIMITED COMPANY
(Translation of registrant's name into English)
LAURENCE POUNTNEY HILL,
LONDON, EC4R 0HH, ENGLAND
(Address
of principal executive offices)
Indicate
by check mark whether the registrant files or will file annual
reports
under
cover Form 20-F or Form 40-F.
Form
20-F X
Form 40-F
Indicate
by check mark whether the registrant by furnishing the
information
contained
in this Form is also thereby furnishing the information to
the
Commission
pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes
No X
If
"Yes" is marked, indicate below the file number assigned to the
registrant
in connection with Rule 12g3-2(b): 82-
14
March 2018
PRUDENTIAL PLC FULL YEAR 2017 RESULTS
2017 FINANCIAL OBJECTIVES DELIVERED AND SUSTAINED GROWTH IN PROFIT
AND CASH
Performance highlights on a constant (and actual) exchange rate
basis
●
Group IFRS operating profit4 of £4,699
million, up 6 per cent1 (up 10 per
cent2)
●
Asia double-digit broad-based growth in
new business profit3, up 12 per
cent1,
IFRS operating profit4, up 15 per
cent1 and
underlying free surplus generated5, up 19 per
cent1
●
US separate account net
inflows6
of £3.5 billion contributing to separate account assets 19 per
cent1
higher at £130.5 billion
●
M&G Prudential assets under
management7 up 13 per cent to
£351 billion, driven by record net inflows into M&G and
PruFund
●
Full year 2017 ordinary dividend
increased by 8 per cent to 47 pence per share
●
Group Solvency II surplus8,9 estimated at
£13.3 billion, equivalent to a cover ratio of 202 per
cent
Mike
Wells, Group Chief Executive, said: 'Our clear, consistent
strategy, high-quality products and constantly improving
capabilities have enabled us to deliver excellent progress across
the Group, led by double-digit growth in our Asia business. We have
also achieved all of our 2017 objectives10, which we set in
December 2013. This represents the third set of objectives
successfully achieved within the last 10 years.
'The
performance of our Asia business is testament to the strength,
scale and diversity of our platform in the region, our focus on
recurring-premium health and protection business and the quality of
our execution. Our Asia life businesses delivered a 15 per
cent1
increase in IFRS operating profit4 and a 12 per
cent1
increase in new business profit over the year, while assets under
management at Eastspring increased by 18 per cent2. We continue to
develop our capabilities in Asia, building scale and enhancing
quality.
'In the
US our life business, Jackson, remains focused on meeting the
retirement income needs of the growing numbers of baby boomer
retirees and extending our products and reach to improve access to
the large asset pools of the fee-based advisory market. Jackson
delivered positive separate account net inflows6 of £3.5
billion, with separate account assets increasing by 19 per
cent1.
'During
2017 we announced that we were combining our asset manager,
M&G, and Prudential UK & Europe to form M&G Prudential,
a leading savings and investment business in the UK and Europe well
positioned to target growing customer demand for comprehensive
financial solutions. M&G Prudential has delivered record levels
of external asset management net inflows of £17.3 billion,
contributing to total assets under management7 of £351
billion.
'Our
strategy is aligned to structural trends: the savings and
protection needs of the fast-growing middle class in Asia, the
retirement income needs of the baby boomers in the US and the
increasing demand for managed savings solutions among the ageing
populations of the UK and Europe. The Group's performance
demonstrates that we are highly effective in accessing the
opportunities arising from these trends, and that we are meeting
the needs of our customers better than ever before. I am confident
that, given the extent of our opportunities and our proven ability
to execute and innovate, we are well positioned to continue to grow
profitably.'
|
Summary financials
|
2017
£m
|
2016
£m
|
Change on
AER basis
|
Change on
CER basis
|
|
|
|
|
|
|
|
IFRS operating profit based on longer-
term investment returns
|
4,699
|
4,256
|
10%
|
6%
|
|
Underlying free surplus generated5,11
|
3,640
|
3,566
|
2%
|
(1)%
|
|
Life new business profit3
|
3,616
|
3,088
|
17%
|
12%
|
|
IFRS profit after tax12
|
2,390
|
1,921
|
24%
|
21%
|
|
Net cash remittances from business units
|
1,788
|
1,718
|
4%
|
-
|
|
|
|
|
|
|
|
|
2017
£bn
|
2016
£bn
|
Change on
AER basis
|
|
|
|
|
|
|
|
|
IFRS
shareholders' funds
|
16.1
|
14.7
|
10%
|
|
|
EEV
shareholders' funds
|
44.7
|
39.0
|
15%
|
|
|
Group
Solvency II capital surplus8,9
|
13.3
|
12.5
|
6%
|
|
Notes
1
Year-on-year percentage increases are stated on a constant exchange
rate basis unless otherwise stated.
2
Growth rate on an actual exchange rate basis.
3
New business profit on business sold in the year, calculated in
accordance with EEV principles.
4
Based on longer-term investment returns.
5
Underlying free surplus generated comprises underlying free surplus
generated from the Group's long-term business (net of investment in
new business) and that generated from asset management operations.
Further information is set out in note 11 of the EEV basis
results.
6
Variable annuity separate account inflows.
7
Represents M&G Prudential asset management external funds under
management and internal funds included on the M&G Prudential
long-term insurance business balance sheet.
8
The Group shareholder capital position excludes the contribution to
Own Funds and the Solvency Capital Requirement from ring-fenced
with-profits funds and staff pension schemes in surplus. The
estimated solvency position includes management's calculation of UK
transitional measures reflecting operating and market conditions at
each valuation date. An application to recalculate the transitional
measures as at 31 December 2017 has been approved by the Prudential
Regulation Authority.
9
Before allowing for second interim ordinary dividend.
10
The 2017 financial objectives were for Asia to deliver a compound
annual growth rate for IFRS operating profit based on longer-term
investment returns of at least 15 per cent between 2013 and 2017
and underlying free surplus generation of £0.9 billion to
£1.1 billion in the year to 31 December 2017 and for the Group
to deliver cumulative underlying free surplus generation of at
least £10 billion between 1 January 2014 and 31 December
2017.
11
The 2016 comparative results have been re-presented from those
previously published following reassessment of the Group's
operating segments as described in note B1.3 of the IFRS financial
statements. On re-presentation, Prudential Capital is excluded from
underlying free surplus generated.
12
IFRS profit after tax reflects the combined effects of operating
results determined on the basis of longer-term investment returns,
together with negative short-term investment variances, which in
2017 largely arose within Jackson, profit (loss) on disposal of
businesses, amortisation of acquisition accounting adjustments and
the total tax charge for the year.
Contact:
|
Media
|
|
Investors/Analysts
|
|
|
Jonathan
Oliver
|
+44
(0)20 7548 3537
|
Chantal
Waight
|
+44
(0)20 7548 3039
|
|
Jonathan
Miller
|
+44
(0)20 7548 2776
|
Richard
Gradidge
|
+44
(0)20 7548 3860
|
|
|
|
William
Elderkin
|
+44
(0)20 3480 5590
|
Notes to Editors:
1. The results
in this announcement are prepared on two bases: International
Financial Reporting Standards (IFRS) and European Embedded Value
(EEV). The results prepared under IFRS form the basis of the
Group's statutory financial statements. The supplementary EEV basis
results have been prepared in accordance with the amended European
Embedded Value principles dated April 2016 formulated by the CFO
Forum of European Insurance Companies. The Group's EEV basis
results are stated on a post-tax basis and, where appropriate,
include the effects of IFRS. Year-on-year percentage increases are
presented on a constant exchange rate basis unless otherwise
stated. Constant exchange rates results are calculated by
translating prior year results using the current year foreign
exchange rate ie current year average rates for the income
statement and current year closing rates for the balance
sheet.
2. Annual
Premium Equivalent (APE) sales comprise regular premium sales plus
one-tenth of single premium insurance sales.
3. Operating
profit is determined on the basis of including longer-term
investment returns. EEV and IFRS operating profit is stated after
excluding the effect of short-term fluctuations in investment
returns against long-term assumptions, which for IFRS in 2017
principally arose within Jackson, and profits and losses arising on
the disposal of businesses. Furthermore, for EEV basis results,
operating profit based on longer-term investment returns excludes
the effect of changes in economic assumptions and the mark to
market value movement on core borrowings. Separately on the IFRS
basis, operating profit also excludes amortisation of accounting
adjustments arising principally on the acquisition of REALIC
completed in 2012.
4. Total number
of Prudential plc shares in issue as at 31 December 2017 was
2,587,175,445.
5.
A presentation for analysts and
investors will be held today at 11.30am (UK time) / 7.30pm (Hong
Kong time) in the conference suite at Nomura, 1 Angel Lane, London
EC4R 3AB. The presentation will be webcast live and available to
replay afterwards using the following link http://www.investis-live.com/prudential/5a6f2d8725d9c011009ed48f/lzqo
To
register attendance in person please send an email to
investor.relations@prudential.co.uk
Alternatively, a
dial-in facility will be available to listen to the presentation:
please allow time ahead of the presentation to join the call (lines
open half an hour before the presentation is due to start, ie from
11.00am (UK time) / 7.00pm (Hong Kong time). Dial-in: 020 3936 2999
(UK Local Call) / +44 20 3936 2999 (International) / 0800 640 6441
(Freephone UK), Participant access code: 378321 - Once participants
have entered this code their name and company details will be
taken. Playback: +44 (0) 20 3936 3001 (UK and international
excluding US) / + 1 845 709 8569 (US only) (Replay code: 043060).
This will be available from approximately 3.00pm (UK time) /
11.00pm (Hong Kong time) on 14 March 2018 until 11.59pm (UK time)
on 28 March 2018 / 6.59am (Hong Kong time) on 29 March
2018.
6.
2017 Second interim ordinary dividend
|
|
Ex-dividend
date
|
29
March 2018 (UK, Ireland, Hong Kong and Singapore)
|
|
|
Record
date
|
3 April
2018
|
|
|
Payment
of dividend
|
18
May 2018 (UK, Ireland and Hong
Kong)
On or
about 25 May 2018 (Singapore
and ADR holders)
|
7.
About Prudential plc
Prudential plc and
its affiliated companies constitute one of the world's leading
financial services groups, serving over 26 million customers and it
has £669 billion of assets under management (as at 31 December
2017). Prudential plc is incorporated in England and Wales and is
listed on the stock exchanges in London, Hong Kong, Singapore and
New York. Prudential plc is not affiliated in any manner with
Prudential Financial, Inc., a company whose principal place of
business is in the United States of America.
8. 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, the
timing, costs and successful implementation of the demerger
described herein; the future trading value of the shares of
Prudential plc and the trading value and liquidity of the shares of
the to-be-listed M&G Prudential business following such
demerger; future market conditions, including fluctuations in
interest rates and exchange rates, the potential for a sustained
low-interest rate environment, and the performance of financial
markets generally; the policies and actions of regulatory
authorities, including, for example, new government initiatives;
the political, legal and economic effects of the UK's decision to
leave the European Union; the impact of continuing designation as a
Global Systemically Important Insurer or 'G-SII'; the impact of
competition, economic uncertainty, inflation and deflation; the
effect on Prudential's business and results from, in particular,
mortality and morbidity trends, lapse rates and policy renewal
rates; the timing, impact and other uncertainties of future
acquisitions or combinations within relevant industries; the impact
of internal projects and other strategic actions failing to meet
their objectives; disruption to the availability, confidentiality
or integrity of Prudential's IT systems (or those of its
suppliers); the impact of changes in capital, solvency standards,
accounting standards or relevant regulatory frameworks, and tax and
other legislation and regulations in the jurisdictions in which
Prudential and its affiliates operate; and the impact of legal and
regulatory actions, investigations and disputes. These and other
important factors may, for example, result in changes to
assumptions used for determining results of operations or
re-estimations of reserves for future policy benefits. Further discussion of these and other important
factors that could cause Prudential's actual future financial
condition or performance or other indicated results to differ,
possibly materially, from those anticipated in Prudential's
forward-looking statements can be found under the 'Risk Factors'
heading in 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.
Summary 2017 financial performance
Financial highlights
|
Life APE new business sales (APE
sales)1
|
|
|
Actual Exchange Rate
|
|
Constant Exchange Rate
|
|
|
2017 £m
|
2016 £m
|
Change %
|
|
2016 £m
|
Change %
|
|
Asia
|
3,805
|
3,599
|
6
|
|
3,773
|
1
|
|
US
|
1,662
|
1,561
|
6
|
|
1,641
|
1
|
|
UK and Europe
|
1,491
|
1,160
|
29
|
|
1,160
|
29
|
|
Total Group
|
6,958
|
6,320
|
10
|
|
6,574
|
6
|
|
Life EEV new business profit and investment in new
business
|
|
|
Actual Exchange Rate
|
|
Constant Exchange Rate
|
|
|
2017 £m
|
|
2016 £m
|
|
Change %
|
|
2016 £m
|
|
Change %
|
|
|
New
Business
Profit
|
|
Free
surplus
invested
in new
business
|
|
New
Business
Profit
|
|
Free
surplus
invested
in new
business
|
|
New
Business
Profit
|
|
Free
surplus
invested
in new
business
|
|
New
Business
Profit
|
|
Free
surplus
invested
in new
business
|
|
New
Business
Profit
|
|
Free
surplus
invested
in new
business
|
|
Asia
|
2,368
|
|
484
|
|
2,030
|
|
476
|
|
17
|
|
2
|
|
2,123
|
|
500
|
|
12
|
|
(3)
|
|
US
|
906
|
|
254
|
|
790
|
|
298
|
|
15
|
|
(15)
|
|
830
|
|
313
|
|
9
|
|
(19)
|
|
UK and Europe
|
342
|
|
175
|
|
268
|
|
129
|
|
28
|
|
36
|
|
268
|
|
129
|
|
28
|
|
36
|
|
Total Group
|
3,616
|
|
913
|
|
3,088
|
|
903
|
|
17
|
|
1
|
|
3,221
|
|
942
|
|
12
|
|
(3)
|
|
IFRS Profit2,3
|
|
|
|
|
|
|
|
|
|
Actual Exchange Rate
|
|
Constant Exchange Rate
|
|
|
|
2017 £m
|
2016 £m
|
Change %
|
|
2016 £m
|
Change %
|
|
Operating profit before tax based on longer-term investment
returns
|
|
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
|
Long-term business
|
1,799
|
1,503
|
20
|
|
1,571
|
15
|
|
Asset management
|
176
|
141
|
25
|
|
149
|
18
|
|
Total
|
1,975
|
1,644
|
20
|
|
1,720
|
15
|
|
|
|
|
|
|
|
|
|
|
US
|
|
|
|
|
|
|
|
Long-term business
|
2,214
|
2,052
|
8
|
|
2,156
|
3
|
|
Asset management
|
10
|
(4)
|
350
|
|
(4)
|
350
|
|
Total
|
2,224
|
2,048
|
9
|
|
2,152
|
3
|
|
|
|
|
|
|
|
|
|
|
UK and
Europe
|
|
|
|
|
|
|
|
Long-term business
|
861
|
799
|
8
|
|
799
|
8
|
|
General insurance commission
|
17
|
29
|
(41)
|
|
29
|
(41)
|
|
Total insurance operations
|
878
|
828
|
6
|
|
828
|
6
|
|
Asset management
|
500
|
425
|
18
|
|
425
|
18
|
|
Total
|
1,378
|
1,253
|
10
|
|
1,253
|
10
|
|
|
|
|
|
|
|
|
|
|
Other income and expenditure
|
(775)
|
(694)
|
(12)
|
|
(700)
|
(11)
|
|
Total operating profit based on longer-term investment returns
before
tax, restructuring costs and interest received from tax
settlement
|
4,802
|
4,251
|
13
|
|
4,425
|
9
|
|
Restructuring costs4
|
(103)
|
(38)
|
(171)
|
|
(39)
|
(164)
|
|
Interest received from tax settlement
|
-
|
43
|
n/a
|
|
43
|
n/a
|
|
Total operating profit based on longer-term
investment returns before tax
|
4,699
|
4,256
|
10
|
|
4,429
|
6
|
|
Non-operating items:
|
|
|
|
|
|
|
|
|
Short-term fluctuations in investment returns on
shareholder-backed business
|
(1,563)
|
(1,678)
|
7
|
|
(1,764)
|
11
|
|
|
Amortisation of acquisition accounting adjustments
|
(63)
|
(76)
|
17
|
|
(79)
|
20
|
|
|
Profit (loss) attaching to disposal of businesses
|
223
|
(227)
|
n/a
|
|
(244)
|
n/a
|
|
Profit before tax
|
3,296
|
2,275
|
45
|
|
2,342
|
41
|
|
Tax charge attributable to shareholders' returns
|
(906)
|
(354)
|
(156)
|
|
(360)
|
(152)
|
|
Profit for the year
|
2,390
|
1,921
|
24
|
|
1,982
|
21
|
|
Post-tax profit -
EEV3,5
|
|
|
|
|
|
|
|
|
|
Actual Exchange Rate
|
|
Constant Exchange Rate
|
|
|
|
2017 £m
|
2016 £m
|
Change %
|
|
2016 £m
|
Change %
|
|
Post-tax operating profit based on longer-term investment
returns
|
|
|
|
|
|
|
|
Asia
operations
|
|
|
|
|
|
|
|
Long-term business
|
3,705
|
3,074
|
21
|
|
3,220
|
15
|
|
Asset management
|
155
|
125
|
24
|
|
132
|
17
|
|
Total
|
3,860
|
3,199
|
21
|
|
3,352
|
15
|
|
|
|
|
|
|
|
|
|
|
US
operations
|
|
|
|
|
|
|
|
Long-term business
|
2,143
|
1,971
|
9
|
|
2,071
|
3
|
|
Asset management
|
7
|
(3)
|
333
|
|
(4)
|
275
|
|
Total
|
2,150
|
1,968
|
9
|
|
2,067
|
4
|
|
|
|
|
|
|
|
|
|
|
UK and Europe
operations
|
|
|
|
|
|
|
|
Long-term business
|
1,015
|
643
|
58
|
|
643
|
58
|
|
General insurance commission
|
13
|
23
|
(43)
|
|
23
|
(43)
|
|
Total insurance operations
|
1,028
|
666
|
54
|
|
666
|
54
|
|
Asset management
|
403
|
341
|
18
|
|
341
|
18
|
|
Total
|
1,431
|
1,007
|
42
|
|
1,007
|
42
|
|
|
|
|
|
|
|
|
|
|
Other income and expenditure
|
(746)
|
(682)
|
(9)
|
|
(688)
|
(8)
|
|
Post-tax operating profit based on longer-term investment returns
before restructuring costs and interest received from tax
settlement
|
6,695
|
5,492
|
22
|
|
5,738
|
17
|
|
Restructuring costs4
|
(97)
|
(32)
|
(203)
|
|
(32)
|
(203)
|
|
Interest received from tax settlement
|
-
|
37
|
n/a
|
|
37
|
n/a
|
|
Post-tax operating profit based on longer-term
investment returns
|
6,598
|
5,497
|
20
|
|
5,743
|
15
|
|
Non-operating items:
|
|
|
|
|
|
|
|
|
Short-term fluctuations in investment returns
|
2,111
|
(507)
|
516
|
|
(567)
|
472
|
|
|
Effect of changes in economic assumptions
|
(102)
|
(60)
|
(70)
|
|
(54)
|
(89)
|
|
|
Mark to market value on core structural borrowings
|
(326)
|
(4)
|
(8,050)
|
|
(4)
|
(8,050)
|
|
|
Impact of US tax reform
|
390
|
-
|
n/a
|
|
-
|
n/a
|
|
|
Profit (loss) attaching to disposal of businesses
|
80
|
(410)
|
n/a
|
|
(445)
|
n/a
|
|
Post-tax profit for the year
|
8,751
|
4,516
|
94
|
|
4,673
|
87
|
|
Basic earnings per share - based on operating profit after
tax
|
|
|
Actual Exchange Rate
|
|
Constant Exchange Rate
|
|
|
2017 pence
|
2016 pence
|
Change %
|
|
2016 pence
|
Change %
|
|
IFRS
|
145.2
|
131.3
|
11
|
|
136.8
|
6
|
|
EEV
|
257.0
|
214.7
|
20
|
|
224.3
|
15
|
|
Underlying free surplus
generated 3,6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Exchange Rate
|
|
Constant Exchange Rate
|
|
|
|
2017 £m
|
|
2016 £m
|
|
Change %
|
|
2016 £m
|
Change %
|
|
|
|
Long-
term
|
Total
|
|
Long-
term
|
Total
|
|
Long-
term
|
Total
|
|
Long-
term
|
Total
|
Long-
term
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia
|
923
|
1,078
|
|
734
|
859
|
|
26
|
25
|
|
773
|
905
|
19
|
19
|
|
US
|
1,321
|
1,328
|
|
1,568
|
1,565
|
|
(16)
|
(15)
|
|
1,648
|
1,644
|
(20)
|
(19)
|
|
UK and Europe
|
895
|
1,311
|
|
794
|
1,158
|
|
13
|
13
|
|
794
|
1,158
|
13
|
13
|
|
Total Group before restructuring costs
|
3,139
|
3,717
|
|
3,096
|
3,582
|
|
1
|
4
|
|
3,215
|
3,707
|
(2)
|
-
|
|
Restructuring costs4
|
(38)
|
(77)
|
|
(16)
|
(16)
|
|
(138)
|
(381)
|
|
(16)
|
(16)
|
(138)
|
(381)
|
|
Total Group
|
3,101
|
3,640
|
|
3,080
|
3,566
|
|
1
|
2
|
|
3,199
|
3,691
|
(3)
|
(1)
|
|
Cash remitted by the business units to
the Group3,7
|
|
|
2017 £m
|
2016 £m
|
Change %
|
|
Asia
|
645
|
516
|
25
|
|
US
|
475
|
420
|
13
|
|
UK and Europe
|
643
|
590
|
9
|
|
Other UK (including Prudential Capital)
|
25
|
192
|
(87)
|
|
Total Group
|
1,788
|
1,718
|
4
|
|
Cash and capital
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
Change %
|
|
Dividend per share relating to the reporting year
|
47.0p
|
43.5p
|
8
|
|
Holding company cash and short-term investments
|
£2,264m
|
£2,626m
|
(14)
|
|
Group Solvency II capital surplus8,9
|
£13.3bn
|
£12.5bn
|
6
|
|
Group Solvency II capital ratio8,9
|
202%
|
201%
|
+1pp
|
|
|
|
|
|
|
Group shareholders' funds (including goodwill attributable to
shareholders)
|
|
|
|
|
|
|
|
2017
|
2016
|
Change %
|
|
IFRS
|
£16.1bn
|
£14.7bn
|
10
|
|
EEV
|
£44.7bn
|
£39.0bn
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 %
|
2016 %
|
|
|
Return on IFRS shareholders' funds10
|
25
|
26
|
|
|
Return on embedded value10
|
17
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
Change %
|
|
EEV shareholders' funds11
per share (including goodwill
attributable to shareholders)
|
1,728p
|
1,510p
|
14
|
|
EEV shareholders' funds12
per share (excluding goodwill
attributable to shareholders)
|
1,671p
|
1,453p
|
15
|
2017 Financial objectives13
|
Asia Objectives
|
2012
£m
|
|
2017
£m
|
|
CAGR13
(since 2012)
%
|
|
Objectives
201713
|
|
Asia life and asset management IFRS operating profit
|
|
|
|
|
|
|
|
|
|
Full year
|
|
|
|
|
|
|
|
|
|
|
Actuals
|
909
|
|
1,975
|
|
|
|
>£1,826 million
|
|
|
|
Constant exchange rate14
|
884
|
|
1,855
|
|
16
|
|
>15% CAGR
|
|
|
|
|
|
|
|
|
|
|
Asia Underlying Free Surplus Generation
|
|
|
|
|
|
|
|
|
|
Full year
|
|
|
|
|
|
|
|
|
|
|
Actuals
|
468
|
|
1,078
|
|
|
|
£0.9 - £1.1 billion
|
|
|
|
Constant exchange rate14
|
454
|
|
1,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group Objective for cumulative period 1 January 2014 to 31 December
2017
|
|
|
|
|
Actual
|
|
Objective
|
|
|
|
|
|
|
1 Jan 2014 to
31 Dec 2017
|
|
1 Jan 2014 to
31 Dec 2017
|
|
Cumulative Group Underlying Free Surplus
Generation6,15
from 2014 onwards
|
|
|
|
|
£12.8 billion
|
|
> £10 billion
|
Notes
1
APE sales is a measure of new business
activity that is calculated as the sum of annualised regular
premiums from new business plus 10 per cent of single premiums on
new business written during the period for all insurance products,
including premiums for contracts designated as investment contracts
under IFRS 4. It is not representative of premium income recorded
in the IFRS financial statements. Further explanation of the
differences is included in note E of the Additional EEV financial
information.
2
IFRS 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. Further information on its definition
and reconciliation to profit for the period is set out in note B1
of the IFRS financial statements.
3
The 2016 comparative results have been re-presented from those
previously published following reassessment of the Group's
operating segments as described in note B1.3 of the IFRS financial
statements. On re-presentation, Prudential Capital is excluded from
total segment profit and underlying free surplus
generated.
4
Restructuring costs include business
transformation and integration costs.
5
Embedded value reporting provides
investors with a measure of the future profit streams of the Group.
The EEV basis results have been prepared in accordance with EEV
principles discussed in note 1 of the EEV basis results. A
reconciliation between IFRS and the EEV shareholder funds is
included in note D of the Additional EEV financial
information.
6
Underlying free surplus generated
comprises underlying free surplus generated from the Group's
long-term business (net of investment in new business) and that
generated from asset management operations. Further information is
set out in note 11 of the EEV basis results.
7
Cash remitted to the Group form part
of the net cash flows of the holding company. A full holding
company cash flow is set out in note II (a) of the Additional
unaudited IFRS financial information. This differs from the IFRS
Consolidated Statement of Cash Flows which includes all cash flows
relating to both policyholders and shareholders' fund. The holding
company cash flow is therefore a more meaningful indicator of the
Group's central liquidity.
8
The Group shareholder capital position
excludes the contribution to Own Funds and the Solvency Capital
Requirement from ring-fenced with-profits funds and staff pension schemes in surplus. The
estimated solvency position includes management's calculation of UK
transitional measures reflecting operating and market conditions at
each valuation date. An application to recalculate the transitional
measures as at 31 December 2017 has been approved by the Prudential
Regulation Authority.
9
Estimated before allowing for second
interim ordinary dividend.
10
Operating profit after tax and
non-controlling interests, as a percentage of opening shareholders'
funds, as set out in note II(c) of the Additional unaudited IFRS
financial information and note F of the Additional EEV financial
information.
11
Closing EEV shareholders' funds
divided by issued shares, as set out in note G of the Additional
EEV financial information.
12
Closing EEV shareholders' funds less
goodwill attributable to shareholders divided by issued shares, as
set out in note G of the Additional EEV financial
information.
13
The current year and all comparative
amounts for the Asia objectives exclude contributions from the
Korea life business which was sold in 2017. The 2017 Asia IFRS
operating profit objective was adjusted accordingly. 2012
comparative amounts include the one-off gain on sale of the stake
in China Life of Taiwan of £51 million.
14
Constant exchange rates results
translated using exchange rates at December
2013.
15
For the purpose of the Group
Objective, cumulative underlying free surplus generation includes
the free surplus relating to Prudential
Capital.
Group Chief Executive's report
I am
pleased to report that over 2017 our clear, consistent strategy,
high-quality products and improving capabilities have enabled us to
meet the needs of customers around the world better than ever
before.
Our
purpose is to help remove uncertainty from life's big events.
Whether that's starting a family, saving for a child's education or
planning for retirement, we provide our customers with financial
peace of mind, enabling them to face the future with greater
confidence. We also invest our customers' money actively in the
real economy, helping not only to improve the lives of individuals
and families, but also to build stronger communities and drive the
cycle of growth.
Our
strategy is aligned to structural trends: the savings and
protection needs of the fast-growing middle class in Asia, the
retirement income needs of the approximately 75 million baby
boomers in the United States1 and the growing
demand for managed savings solutions among the ageing populations
of the United Kingdom and Europe. These trends are sustained, and
we remain focused on the opportunities they present.
We have
continued to develop our products and our capabilities in order to
improve the way we meet customers' needs. We are creating new,
better and more personalised products, and we have a flexible,
collaborative approach to incorporating the best digital
technologies into our operations, while also leveraging our global
scale to share new insights across our businesses at pace. The
result is constant improvement in the way we serve our customers,
providing value both to them and to our shareholders.
In
March 2018 the Group announced its intention to demerge its UK and
Europe businesses ('M&G Prudential') from Prudential plc,
resulting in two separately-listed companies, with different
investment characteristics and opportunities. Our businesses share
common heritage, values and purpose. Looking forward, we believe we
will be better able to focus on meeting our customers' rapidly
evolving needs and to deliver long-term value to investors as two
separate businesses. On completion of the demerger, shareholders
will hold interests in both Prudential plc and M&G
Prudential.
In line
with its strategy to transition towards a more capital efficient,
de-risked business model, M&G Prudential agreed in March 2018
to the sale of £12.0 billion20 of its shareholder
annuity portfolio to Rothesay Life. Under the terms of the
agreement, M&G Prudential has reinsured £12.0
billion20
of liabilities to Rothesay Life, which is expected to be followed
by a Part VII transfer of the portfolio by the end of 2019. The
capital benefit of this transaction will be retained within the
Group to support the UK demerger process.
In
preparation for the UK demerger process, and to align the ownership
of the Group's businesses with their operating structures,
Prudential plc intends to transfer the legal ownership of its Hong
Kong insurance subsidiaries from The Prudential Assurance Company
Limited (M&G Prudential's UK regulated insurance entity) to
Prudential Corporation Asia Limited, which is expected to complete
by the end of 2019.
Our financial performance
We have
built on our good start to 2017 through disciplined execution of
our strategy, again led by our businesses in Asia.
We
announce today the achievement of our remaining 2017 objectives,
which were set in December 2013. During the first half of 2017, we
exceeded the Group objective of underlying free surplus generation
of at least £10 billion from the beginning of 2014 to the end
of 2017. By the end of 2017 we had generated £12.8 billion
over this four year period. Our Asia businesses delivered growth in
IFRS operating profit based on longer-term investment
returns2
('IFRS operating profit') at a compound average rate of 16 per
cent3 over
the period 2012 to 2017, and underlying free surplus generation of
£1,078 million3 for the full year
2017. This is testament to the strength, scale and diversity of our
Asia platform, validates our focus on recurring premium health and
protection business and demonstrates the strength of our
operational execution. It also marks the third set of objectives
that we have successfully achieved within the last 10
years.
During
2017 we combined our UK and European life and asset management
businesses to form M&G Prudential, which delivered record
levels of external asset management net inflows of £17.3
billion in 2017. This contributed to combined assets under
management4 of £351 billion
at 31 December 2017.
As in
previous years, we comment on our performance in local currency
terms (expressed on a constant exchange rate basis) to show the
underlying business trends in a period of currency
movement.
Group
IFRS operating profit was 6 per cent5 higher at
£4,699 million (up 10 per cent on an actual exchange rate
basis). IFRS operating profit from our Asia life insurance and
asset management businesses grew by 15 per cent5, reflecting
continued broad-based business momentum across the region, with
double-digit5 growth in eight out
of 12 life insurance markets. In the US, Jackson's total IFRS
operating profit increased by 3 per cent5, due mainly to
growth in fee income on higher asset balances, which outweighed the
anticipated reduction in spread earnings. In the UK and Europe,
M&G Prudential's total IFRS operating profit was 10 per cent
higher than the prior year, reflecting 6 per cent growth in the
IFRS operating profit generated from insurance business and 18 per
cent growth in that generated from asset management.
The
Group's capital generation is underpinned by our large and growing
in-force business portfolio, and focus on profitable, short-payback
business. Overall underlying free surplus generation6 decreased by 1 per
cent5 to
£3,640 million, with higher contributions in Asia and the UK
and Europe, offset by higher restructuring costs and a lower
contribution from our US business. 2016 benefited from the impact
of a US transaction to enhance local capital efficiency that was
not repeated in 2017. Cash remittances to the Group increased to
£1,788 million, with Asia the largest contributor7 at £645
million. The Group's overall performance supported an 8 per cent
increase in the 2017 full year ordinary dividend to 47 pence per
share.
The
Group remains robustly capitalised, with a 2017 year-end Solvency
II cover ratio8,9 of 202 per cent.
Over the period, IFRS shareholders' funds increased by 10 per cent
to £16.1 billion, reflecting profit after tax of £2,390
million (2016: £1,921 million on an actual exchange rate
basis) net of other movements that included dividend payments to
shareholders of £1,159 million and adverse foreign exchange
movements of £470 million. EEV shareholders' funds increased
by 15 per cent to £44.7 billion, equivalent to 1,728 pence per
share10,11.
New
business profit11 increased by 12 per
cent5 to
£3,616 million (up 17 per cent on an actual exchange rate
basis), driven by improved business mix in Asia, higher UK volumes
and the favourable effect of tax reform in the US.
In
Asia, we continue to develop our capabilities and reach, which
build scale and enhance quality. Our strategic emphasis on
increasing sales from health and protection business has
contributed to a 12 per cent5 increase in new
business profit in Asia. Our asset management business, Eastspring
Investments, has again seen growth, with its total assets under
management up 18 per cent12 to £138.9
billion and IFRS operating profit also up 18 per cent5 to £176
million.
In the
US we remain focused on meeting the retirement income needs of the
growing generation of baby boomer retirees and expanding our
operations into the large asset pools of the fee-based advisory
market. Although the evolving regulatory environment continues to
cause industry sales disruption, in 2017 Jackson delivered positive
separate account net inflows of £3.5 billion, with separate
account assets reaching £130.5 billion, an increase of 19 per
cent5. In
December 2017 the US enacted a major tax reform package, including
a reduction in the corporate income tax rate from 35 per cent to 21
per cent effective from 1 January 2018. While this led to a
£445 million charge in the income statement from re-measuring
deferred tax balances on the IFRS balance sheet, we expect the tax
changes to be positive in the long term. The US effective tax rate
is expected to fall from the current rate of circa 28 per cent to
circa 18 per cent in the future.
In the
UK, both our UK life and asset management businesses performed well
in 2017. PruFund new business APE sales increased 36 per cent to
£1.2 billion, while M&G saw record net inflows of
£17.3 billion from external clients. Overall M&G
Prudential assets under management4 reached £351
billion, up from £311 billion at 31 December
2016.
Our
financial KPIs continue to reflect the outcome of the Group's
strategy. Our Asia life businesses are driven by growth in our
recurring premium base and focus on health and protection business,
and elsewhere we are benefiting from our prioritisation of
fee-generating products across our Asia asset management, US
variable annuity and UK and European asset management
activities.
A successful strategy
Our
performance is based on our clear, consistent and successful
strategy, which is focused on long-term opportunities arising from
structural trends in our markets around the world.
In
Asia, the growth of the middle class is creating significant and
long-term demand for the products we offer. The working-age
population in the region is growing by a million people a month,
and by 2030 is expected to reach 2.5 billion13, while 65 per cent
of Asian private financial wealth is held in cash14 and at the same
time, that wealth is growing by US$4 trillion a year14.
The
growing and increasingly wealthy middle classes of the region are
under-protected. In Asia, out-of-pocket healthcare spend makes up
42 per cent of total health expenditure15, compared with just
12 per cent in the US and 9 per cent in the UK. While in a more
developed market such as the UK insurance penetration is equivalent
to 7.5 per cent16 of GDP, in Asia
that figure is just 2.4 per cent16, giving an idea of
the scale of the growth opportunity that remains in our Asian
markets. The gap between the insurance cover of people in the
region and what they need in order to maintain the living standards
of their families has been estimated at circa £35
trillion17. We help to bridge
that gap with a broad range of solutions across 14 markets in the
region. We are in the top three in nine of our markets in
Asia18,
and we have 15 million life customers, with access to total markets
of more than 3.3 billion people.
The
United States is the world's largest retirement market, with
approximately 40 million Americans reaching retirement age over the
next decade alone, and these consumers have a need for investment
options through which they can grow their savings while at the same
time protecting their income. This is creating demand for our
variable annuity products, which are designed to help this cohort
of Americans avoid running out of money and provide them with a
reliable cushion against volatile markets. In the US, over US$15
trillion is invested in adviser-distributed financial assets net of
existing annuities, while penetration of variable annuity sales
into the retirement market remains low, demonstrating the scale of
the opportunity for us.
In the
UK and Europe there is growing demand among customers for managed
solutions, savings products that provide better long-term returns
than cash, while smoothing out the ups and downs of the market. We
meet that need through our PruFund propositions and our
comprehensive range of actively managed funds. M&G Prudential
is well positioned to target this growing customer demand for
comprehensive financial solutions and the demerger will enable this
business to play an even greater role in these
markets.
Doing more for our customers
We
deliver on our clear strategy and our long-term opportunities by
paying close attention to the needs of our customers, by responding
to those needs with products that fit their changing requirements,
and by improving our capabilities continually in order to deliver
the best products in the most effective way.
In
Asia, our broad-based portfolio of businesses continues to drive
the growth of the Group. We are constantly improving the range and
quality of the products we offer in the region, developing our
multi-channel distribution platform to ensure that those products
reach as many customers as possible and improving our capabilities
throughout our operations, not least by accessing new innovations
in digital technology.
We
develop products that meet the needs of our customers, whether that
is for more personalised features or products aimed at new areas of
the market and in 2017 we launched a number of new health and
protection products in Indonesia, Vietnam, Singapore, Malaysia and
Hong Kong. We are also continuing to improve both our agency
platform and our bancassurance partnerships in Asia to ensure that
we reach as many customers as possible. Nowhere is this clearer
than in China, where, through our joint venture CITIC-Prudential,
we now have a presence in 77 cities, with access to 940 million
people, or about 70 per cent of the population of the world's most
populous country. We have over 44,000 agents in China and access to
more than 4,000 bank branches. Across the region during 2017 we
increased our total agents to over 600,000 and we ended the year
with over 15 million life insurance customers. Recent announcements
of new agreements in the Philippines, Thailand, Indonesia and
Vietnam have also increased the reach of our bancassurance
partnerships.
Continuous
improvement of our capabilities is also a key part of our approach,
and in Asia we introduced a number of digital initiatives that will
benefit both our customers and our shareholders, including apps and
chatbots, that, among other services, can provide rapid claims
payment, constant customer support, answer queries, help schedule
appointments and transfer feedback from customers to our
businesses. Building on its success in Hong Kong, our myDNA
service, which provides diet and exercise advice based on genetic
profiles, has been launched in Vietnam, Malaysia and Singapore. In
Singapore we also launched PRU Fintegrate, a new initiative
enabling us to collaborate with fintech startups to co-develop
digital solutions for customers.
Eastspring
is well placed for the anticipated growth in Asia's retail mutual
fund market. To prepare further, we have strengthened our in-house
investment teams, entered into new strategic partnerships and made
significant progress in systems and operating model upgrades. In
addition, Eastspring recognises that environmental, social and
governance (ESG) factors can be material to investment returns,
particularly in the long term, and has become a signatory to the
United Nations-supported Principles for Responsible Investment
(PRI), joining M&G Prudential asset management.
In the
United States, we are continuing to develop our business to ensure
we capture the opportunity presented by the millions of Americans
moving into retirement now and over the coming years. Regulatory
and industry changes are creating new areas of growth potential and
we are adapting our offering to meet those opportunities. During
2017, in response to evolving conditions in the hybrid adviser
segment of the market, Jackson launched Perspective Advisory II, an
advisory version of our flagship product, Perspective II. We also
announced the formation in November of our Private Wealth &
Trust group, a specialised team focused on complex planning,
investment management and tax mitigation strategies for
high-net-worth clients. At the same time, we are improving
communication for customers, and our initiatives in this area last
year included the launch of a new website, the Financial Freedom
Studio, where consumers can learn about financial planning for
retirement, aimed at simplifying the language and focusing on
planning for lifetime income.
In the
UK and Europe, the combination of our life and asset management
businesses into M&G Prudential has enabled us to meet the needs
of our customers better than ever before. The business manages
£351 billion of assets4 for more than seven
million customers, both in the UK and internationally, and we are
leveraging our scale, financial strength and complementary product
and distribution capabilities to enhance the development of
capital-efficient, customer-focused solutions. Bringing these
businesses together has given us the opportunity to deliver better
collaboration across business segments and more innovative and
differentiated propositions. It also provides better access to
customers and channels, merger cost synergies and transformation
benefits, including the chance to invest to create a digital,
data-led business with low marginal cost of growth. M&G
Prudential is in the top five in UK retail funds19, with an active
management offering, and provides a range of consumer-focused
retirement and savings wrappers. The performance of its products
continues to make them very popular among customers. The flagship
PruFund Growth Life Fund, for example, has grown by 36 per cent
since the start of 2013, compared with benchmark growth of 30 per
cent, and this performance has driven growth in PruFund assets
under management from £7.5 billion in 2012 to £35.9
billion at the end of 2017. To improve the offering to customers,
in 2017 the business rolled out myM&G, its direct-to-consumer
platform.
We took
another step forward in our Africa business in 2017 when we entered
Nigeria, Africa's largest economy and our fifth market in the
region. Following the launch of our businesses in Ghana, Kenya,
Uganda and Zambia, this further demonstrates our commitment to
Africa and our determination to bring the benefits of our products
to customers across the region.
We
continue to invest in our capabilities and our people across the
organisation. In July we welcomed Mark FitzPatrick to our executive
team as Chief Financial Officer, succeeding Nic Nicandrou, who took
over from Tony Wilkey as Chief Executive of Prudential Corporation
Asia. Mark brings with him significant experience and knowledge of
the sector, and I am confident that Nic will lead our Asian
business to further success. In March 2018 James Turner was
appointed Group Chief Risk Officer, bringing fresh perspective and
additional leadership capacity to our executive team.
A positive outlook
With
our clear strategy focused on long-term trends around the world and
continued improvements in our execution capabilities, we are
delivering value to our customers, our shareholders and the
communities in which we operate. This is supported by our ongoing
focus on risk management and the strength of our balance sheet. We
believe the demerger of M&G Prudential from the international
group will leave both businesses better able to focus on meeting
our customers' rapidly evolving needs and to deliver long-term
value to investors as two separate companies. I have no doubt that
the strength of our underlying opportunities and our proven ability
to innovate and improve the way we do things, will ensure that both
businesses are well positioned to continue to serve our customers
well and grow profitably into the future.
Notes
1
Source: US Census Bureau, Population Division, 2017 estimate of
population.
2
IFRS 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.
Further information on its definition and reconciliation to profit
for the period is set out in note B1 of the IFRS financial
statements.
3
The current year and all comparative amounts for the Asia
objectives exclude contributions from the Korea life business which
was sold in 2017. The 2017 Asia IFRS operating profit objective was
adjusted accordingly. 2012 comparative amounts include the one-off
gain on sale of the stake in China Life of Taiwan of £51
million.
4
Represents M&G Prudential asset management external funds under
management and internal funds included on the M&G Prudential
long-term insurance business balance sheet.
5
Year-on-year percentage increases are stated on a constant exchange
rate basis unless otherwise stated.
6
Underlying free surplus generated comprises underlying free surplus
generated from the Group's long-term business (net of investment in
new business) and that generated from asset management operations.
Further information is set out in note 11 of the EEV basis
results.
7
Based on the 2017 operating segments.
8
The Group shareholder capital position excludes the contribution to
Own Funds and the Solvency Capital Requirement from ring-fenced
with-profits funds and staff pension schemes in surplus. The
estimated solvency position includes management's calculation of UK
transitional measures reflecting operating and market conditions at
each valuation date. An application to recalculate the transitional
measures as at 31 December 2017 has been approved by the Prudential
Regulation Authority.
9
Estimated before allowing for second interim dividend.
10
Closing EEV shareholders' funds divided by issued shares, as set
out in note G of the Additional EEV financial
information.
11
Embedded value reporting provides investors with a measure of the
future profit streams of the Group. The EEV basis results have been
prepared in accordance with EEV principles discussed in note 1 of
EEV basis results. A reconciliation between IFRS and the EEV
shareholder funds is included in note D of the Additional EEV
financial information.
12 Growth rate on
an actual exchange rate basis.
13
Working age population 15 - 64 years. Source: United Nations,
Department of Economic and Social Affairs, Population Division
(2015). World Population Prospects: The 2015 Revision, DVD
Edition.
14
Source: BCG Global Wealth 2016. Navigating the New Client
Landscape.
15 Source: World
health Organisation - Global Health
Observatory data repository (2013). Out of pocket as percentage of
total health expenditure.
16
Source: Swiss Re Sigma 2015. Insurance penetration calculated as
premiums as percentage of GDP. Asia penetration calculated on a
weighted population basis.
17
Source: Swiss Re, Mortality Protection Gap: Asia-Pacific,
2015.
18
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).
19
Source: The Investment Association, September 2017.
20
Relates to £12.0 billion of IFRS shareholder annuity
liabilities, valued as at 31 December 2017.
Chief Financial Officer's report on the 2017 financial
performance
I am
pleased to report that Prudential's financial performance in 2017
has resulted in all of our 2017 financial objectives being met. Our
progress across our KPIs reflects the benefits of our focus on
driving growth in high-quality, recurring health and protection and
fee business across our geographies, products and distribution
channels.
Performance
was broad-based across our business units led by our Asia
businesses which delivered double digit growth in new business
profit (up 12 per cent1), IFRS operating
profit based on longer-term investment returns ('IFRS operating
profit') (up 15 per cent1) and underlying free
surplus generation3 (up 19 per
cent1).
Asia achieved its 2017 financial objectives, demonstrating
successful execution of its strategy, focusing on diversified
recurring premium business, at scale. In the US, we saw good growth
in fee income, driven by positive net inflows and favourable equity
market conditions, which outweighed the expected reduction in the
contribution from spread income.
During
2017 we combined M&G and our UK and Europe life business to
form M&G Prudential. I am pleased to report that M&G
Prudential asset management delivered record external net inflows
of £17.3 billion, with overall assets under
management4 at a new high of
£351 billion at the end of 2017. We are making good progress
in delivering our merger and transformation programme, and remain
on track to deliver our previously announced savings by the end of
2022.
Sterling
continued to strengthen against most of the currencies in our major
international markets over 2017. However, on an average basis,
sterling exchange rates remain lower than 2016, contributing to a
positive effect on the translation of results from our non-sterling
operations in 2017. If sterling exchange rates remain at or above
end 2017 levels over the remainder of 2018, this will act to
depress our results on translation of our non-sterling operations
in 2018 compared with 2017. To aid comparison of underlying
progress, we continue to express and comment on the performance
trends in our Asia and US operations on a constant currency
basis.
Our
performance in 2017 was also supported by favourable equity
markets, which lifted average investment balances on which we earn
fees. During the year the S&P 500
index increased 19 per cent, the FTSE 100 index 8 per cent and the
MSCI Asia excluding Japan index 39 per cent. Long-term yields
showed little movement in 2017 and therefore have had no material
impact on 2017 performance versus 2016.
The key
financial highlights in 2017 were as follows:
●
New business
profit was 12 per cent higher
at £3,616 million (17 per cent on an actual exchange rate
basis), underpinned by higher volumes with APE sales up 6 per cent (10 per cent on an actual exchange
rate basis). In Asia, new business profit increased 12 per cent
primarily as a result of prioritisation of health and protection
products and positive pricing actions. Jackson's new business
profit increased by 9 per cent, including the benefit of US tax
reform. UK life new business profit grew by 28 per cent, driven by
a 29 per cent increase in APE sales, supported by consumer demand
for products offering access to our PruFund investment
option.
●
Asset management
net inflows reached record
levels, with M&G Prudential asset management reporting external
net inflows of £17.3 billion (2016: net outflows of £8.1
billion) reflecting growth across its wholesale/direct and
institutional businesses, and Eastspring delivering external net
inflows of £3.1 billion (excluding money market funds) (2016:
£1.8 billion on an actual exchange rate
basis).
●
IFRS operating
profit based on longer-term investment returns
was 6 per cent higher at £4,699
million (10 per cent higher on an actual exchange rate basis). IFRS
operating profit from our Asia business grew by 15 per cent to
£1,975 million, reflecting continued business momentum. In the
US, IFRS operating profit increased by 3 per cent, reflecting
mainly growth in fee income on higher asset balances, which
outweighed the anticipated reduction in spread earnings. In the UK,
M&G Prudential's total IFRS operating profit was 10 per cent
higher than the prior year reflecting 6 per cent growth in the
insurance business, with core5
life operating profit stable at
£597 million, and record asset management profit of £500
million resulting from the positive impact on earnings of net fund
inflows, supportive markets and higher performance
fees.
●
Total IFRS post-tax
profit was up 21 per cent at
£2,390 million (24 per cent on an actual exchange rate basis)
and total EEV after-tax profit was 87 per cent higher at
£8,751 million (94 per cent on an actual exchange rate basis).
Total profit includes the impact of short-term fluctuations in
financial assets held to back the commitments that we have made to
our customers, and the related liabilities, and are reported
outside the operating result which is based on longer-term
investment return assumptions. In 2017 these principally arose
within Jackson as discussed later in my report. Total profit after
tax includes the impact of the US tax reform, which generated an
IFRS charge of £445 million from the re-measurement of US net
deferred tax balances following the reduction in the corporate
income tax rate and an EEV gain of £390 million which
additionally includes the benefit of future profits being taxed at
a lower rate. Reflecting this post-tax profit, Group IFRS shareholders'
equity was 10 per cent higher
at £16.1 billion. Similarly, EEV basis shareholders' equity
was up 15 per cent at £44.7 billion.
●
Underlying free
surplus generation2,3,
our preferred measure of cash generation, from our life and asset
management businesses, decreased by 1 per cent to £3,640
million (up 2 per cent on an actual exchange rate basis), after
financing new business growth. Increased contributions from our
Asia and UK businesses were balanced by a lower contribution from
our US business primarily as a result of non-recurrence of a
transaction undertaken in 2016 to enhance local capital efficiency.
We continue to focus on high-return new business with fast payback
periods.
●
Group shareholders'
Solvency II capital surplus6
was estimated at £13.3 billion at
31 December 2017, equivalent to a cover ratio of 202 per
cent7
(1 January 2017: £12.5 billion,
201 per cent). The improvement in the period reflects the
continuing strength of the Group's operating capital generation in
excess of growing dividend payments to
shareholders.
●
Full year ordinary
dividend increased by 8 per
cent to 47 pence per share, reflecting our 2017 performance and our
confidence in the future prospects of our
Group.
|
IFRS
Profit2
|
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
|
2017 £m
|
2016 £m
|
Change %
|
|
2016 £m
|
Change %
|
|
Operating profit before tax based on longer-term investment
returns
|
|
|
|
|
|
|
|
Asia
|
|
|
|
|
|
|
|
Long-term business
|
1,799
|
1,503
|
20
|
|
1,571
|
15
|
|
Asset management
|
176
|
141
|
25
|
|
149
|
18
|
|
Total
|
1,975
|
1,644
|
20
|
|
1,720
|
15
|
|
|
|
|
|
|
|
|
|
|
US
|
|
|
|
|
|
|
|
Long-term business
|
2,214
|
2,052
|
8
|
|
2,156
|
3
|
|
Asset management
|
10
|
(4)
|
350
|
|
(4)
|
350
|
|
Total
|
2,224
|
2,048
|
9
|
|
2,152
|
3
|
|
|
|
|
|
|
|
|
|
|
UK and
Europe
|
|
|
|
|
|
|
|
Long-term business
|
861
|
799
|
8
|
|
799
|
8
|
|
General insurance commission
|
17
|
29
|
(41)
|
|
29
|
(41)
|
|
Total insurance operations
|
878
|
828
|
6
|
|
828
|
6
|
|
Asset management
|
500
|
425
|
18
|
|
425
|
18
|
|
Total
|
1,378
|
1,253
|
10
|
|
1,253
|
10
|
|
|
|
|
|
|
|
|
|
|
Other income and expenditure8
|
(775)
|
(694)
|
(12)
|
|
(700)
|
(11)
|
|
Total operating profit based on longer-term investment returns
before
tax, restructuring costs and interest received from tax
settlement
|
4,802
|
4,251
|
13
|
|
4,425
|
9
|
|
Restructuring costs
|
(103)
|
(38)
|
(171)
|
|
(39)
|
(164)
|
|
Interest received from tax settlement
|
-
|
43
|
n/a
|
|
43
|
n/a
|
|
Total operating profit based on longer-term
investment returns before tax
|
4,699
|
4,256
|
10
|
|
4,429
|
6
|
|
Non-operating items:
|
|
|
|
|
|
|
|
|
Short-term fluctuations in investment returns on
shareholder-backed business
|
(1,563)
|
(1,678)
|
7
|
|
(1,764)
|
11
|
|
|
Amortisation of acquisition accounting adjustments
|
(63)
|
(76)
|
17
|
|
(79)
|
20
|
|
|
Profit (loss) attaching to disposal of businesses
|
223
|
(227)
|
n/a
|
|
(244)
|
n/a
|
|
Profit before tax
|
3,296
|
2,275
|
45
|
|
2,342
|
41
|
|
Tax charge attributable to shareholders' returns
|
(906)
|
(354)
|
(156)
|
|
(360)
|
(152)
|
|
Profit for the year
|
2,390
|
1,921
|
24
|
|
1,982
|
21
|
|
|
|
|
|
|
|
|
|
|
IFRS earnings per share
|
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
|
2017
pence
|
2016
pence
|
Change %
|
|
2016
pence
|
Change %
|
|
Basic earnings per share based on operating profit after
tax
|
145.2
|
131.3
|
11
|
|
136.8
|
6
|
|
Basic earnings per share based on total profit after
tax
|
93.1
|
75.0
|
24
|
|
77.4
|
20
|
IFRS operating profit based on longer-term investment
returns
2017
total IFRS operating profit increased by 6 per cent (10 per cent on
an actual exchange rate basis) to £4,699 million, with
increased contributions from all of our core business
units.
Asia total operating profit of
£1,975 million was 15 per cent higher than the previous year
(20 per cent on an actual exchange rate
basis). IFRS operating
profit from life insurance operations increased 15 per cent to
£1,799 million (20 per cent on an actual exchange rate basis),
reflecting the continued growth of our in-force book of recurring
premium business, with renewal insurance
premiums9
reaching £11.6 billion (2016:
£9.5 billion on a constant exchange rate basis). Insurance
margin was up 21 per cent, reflecting our continued focus on health
and protection business. At a country level, we have seen
improvement in all of our markets, with double-digit growth in IFRS
operating profit in eight out of 12, led by Hong Kong and China
(both increasing 38 per cent). Including money market funds and the
assets managed for internal life operations, Eastspring's total
assets under management increased to £138.9 billion (2016:
£117.9 billion on an actual exchange rate basis), while the
cost-income ratio was stable at 56 per cent (2016: 56 per cent),
driving an 18 per cent increase in IFRS operating profit to
£176 million (2016: £149 million).
US total operating profit at £2,224 million increased
by 3 per cent (9 per cent increase on an actual exchange rate
basis), reflecting increased profit from our variable annuity
business. US equity markets have continued to rise in 2017, which
together with separate account net asset inflows of £3.5
billion, has led to separate account balances that were on average
17 per cent higher than the prior period. As a result, fee income
increased 15 per cent to £2,343 million. Spread-based income
decreased 10 per cent, as anticipated, reflecting the impact of
lower yields on our fixed annuity portfolio and a reduced
contribution from asset duration swaps. We expect these effects to
continue to compress spread margins, although continued upwards
movements in US yields may help to reduce the speed of the
decline.
UK and Europe total operating profit was 10 per
cent2
higher at £1,378 million. Life
insurance IFRS operating profit increased by 8 per cent to
£861 million (2016: £799 million). Within this total, the
contribution from our core5
with-profits and in-force annuity
business was £597 million (2016: £601 million), including
an increased transfer to shareholders from the with-profits funds
of £288 million (2016: £269 million) of which 15 per cent
was from PruFund business (2016: 10 per cent). The balance of the
life insurance result reflects the contribution from other
activities which are not expected to recur to the same extent going
forward. This includes, as anticipated, lower IFRS operating
profit from the sale of annuities of £9 million (2016:
£41 million) and a number of other items discussed below.
Asset management IFRS operating profit increased 18 per cent to
£500 million, driven by higher average assets under management
and improved performance fees, together with a lower cost-income
ratio of 58 per cent (2016: 59 per cent).
We took
a number of actions during the year to optimise our asset
portfolios and capital position, which generated profit of
£276 million (2016: £332 million). Of this amount
£31 million related to profit from longevity risk transactions
(2016: £197 million) and £245 million from the effect of
repositioning the fixed income asset portfolio (2016: £135
million). Favourable longevity assumption changes, reflecting
updated actuarial mortality tables, contributed a further £204
million. This was offset partly by an increase of £225 million
(2016: £175 million) in the provision related to the potential
costs and related potential redress of reviewing internally vesting
annuities sold without advice after 1 July 2008. The provision does
not include potential insurance recoveries of up to £175
million.
Life insurance profit drivers
The
increase in our IFRS operating profit levels reflects the growth in
the scale of our operations, driven primarily by positive business
flows. We track the progress that we make in growing our life
insurance business by reference to the scale of our obligations to
our customers, which are referred to in the financial statements as
policyholder liabilities. Each year these increase as we write new
business and collect regular premiums from existing customers and
decrease as we pay claims and policies mature. The overall scale of
these policyholder liabilities is relevant in the evaluation of our
profit potential in that it reflects, for example, our ability to
earn fees on the unit-linked element and indicates the scale of the
insurance element, another key source of profitability for the
Group.
|
Shareholder-backed
policyholder liabilities and net liability flows10
|
|
|
2017 £m
|
|
2016 £m
|
|
|
Actual exchange rate
|
|
Actual exchange rate
|
|
|
At 1 January
|
Net liability
flows11
|
Market and
other
movements
|
At 31 December
|
|
At 1 January
|
Net liability
flows11
|
Market and
other
movements
|
At 31 December
|
|
Asia
|
32,851
|
2,301
|
2,250
|
37,402
|
|
25,032
|
2,086
|
5,733
|
32,851
|
|
US
|
177,626
|
3,137
|
(39)
|
180,724
|
|
138,913
|
5,198
|
33,515
|
177,626
|
|
UK and Europe
|
56,158
|
(2,721)
|
2,930
|
56,367
|
|
52,824
|
(3,646)
|
6,980
|
56,158
|
|
Total Group
|
266,635
|
2,717
|
5,141
|
274,493
|
|
216,769
|
3,638
|
46,228
|
266,635
|
Focusing
on business supported by shareholder capital, which generates the
majority of the life profit, in 2017 net flows into our businesses
were overall positive at £2.7 billion driven by our US and
Asian operations, as we continue to focus on both retaining our
existing customers and attracting new business to drive long-term
value creation. In the UK our shareholder liabilities includes the
run-off of the in-force annuity portfolio following our effective
withdrawal from selling new annuity business. This has been more
than offset by inflows into the with-profits funds of £3.5
billion. Positive investment markets, offset partly by currency
effects as sterling has strengthened over the period, increased
liabilities by £5.1 billion. In total, business flows and
market movements have increased shareholder-backed policyholder
liabilities from £266.6 billion to £274.5
billion.
|
Policyholder
liabilities and net liability flows in with-profits
business10,12
|
|
|
2017 £m
|
|
2016 £m
|
|
|
Actual exchange rate
|
|
Actual exchange rate
|
|
|
At 1 January
|
Net liability
flows11
|
Market and
other
movements
|
At 31 December
|
|
At 1 January
|
Net liability
flows11
|
Market and
other
movements
|
At 31 December
|
|
Asia
|
29,933
|
4,574
|
1,930
|
36,437
|
|
20,934
|
3,696
|
5,303
|
29,933
|
|
UK and Europe
|
113,146
|
3,457
|
8,096
|
124,699
|
|
100,069
|
1,119
|
11,958
|
113,146
|
|
Total Group
|
143,079
|
8,031
|
10,026
|
161,136
|
|
121,003
|
4,815
|
17,261
|
143,079
|
Policyholder
liabilities in our with-profits business have increased by 13 per
cent to £161.1 billion reflecting the growing popularity of
our participating funds in Asia and PruFund in the UK, as consumers
seek protection from some of the short-term ups and downs of direct
stock market investments by using an established smoothing process.
Across our Asia and UK operations, net liability flows increased to
£8.0 billion. As returns from these funds are smoothed and
shared with customers, the emergence of shareholder profit is more
gradual. This business, nevertheless, remains an important source
of future shareholder value.
|
Analysis of long-term insurance business pre-tax IFRS operating
profit based on longer-term investment returns by
driver
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
|
2017 £m
|
2016 £m
|
|
2016 £m
|
|
|
|
Operating
profit
|
Average
liability
|
Margin
bps
|
Operating
profit
|
Average
liability
|
Margin
bps
|
|
Operating
profit
|
Average
liability
|
Margin
bps
|
|
|
Spread income
|
1,108
|
88,908
|
125
|
1,171
|
83,054
|
141
|
|
1,215
|
85,266
|
142
|
|
|
Fee income
|
2,603
|
166,839
|
156
|
2,175
|
139,451
|
156
|
|
2,280
|
145,826
|
156
|
|
|
With-profits
|
347
|
136,474
|
25
|
317
|
118,334
|
27
|
|
319
|
119,170
|
27
|
|
|
Insurance margin
|
2,271
|
|
|
1,991
|
|
|
|
2,083
|
|
|
|
|
Margin on revenues
|
2,286
|
|
|
2,126
|
|
|
|
2,211
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs
|
(2,433)
|
6,958
|
(35)%
|
(2,251)
|
6,320
|
(36)%
|
|
(2,353)
|
6,574
|
(36)%
|
|
|
|
Administration expenses*
|
(2,297)
|
261,114
|
(88)
|
(1,943)
|
229,477
|
(85)
|
|
(2,025)
|
238,392
|
(85)
|
|
|
|
DAC adjustments
|
505
|
|
|
390
|
|
|
|
411
|
|
|
|
|
Expected return on shareholder assets
|
229
|
|
|
221
|
|
|
|
227
|
|
|
|
|
|
4,619
|
|
|
4,197
|
|
|
|
4,368
|
|
|
|
|
Longevity reinsurance and other management actions to improve
solvency
|
276
|
|
|
332
|
|
|
|
332
|
|
|
|
|
Changes in longevity assumption basis
|
204
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Provision for review of past annuity sales
|
(225)
|
|
|
(175)
|
|
|
|
(175)
|
|
|
|
|
Operating profit based on longer-term investment
returns
|
4,874
|
|
|
4,354
|
|
|
|
4,525
|
|
|
|
*
The ratio of acquisition costs is calculated as a percentage of APE
sales including with-profits sales. The acquisition costs include
only those relating to shareholders backed business.
We
continue to maintain our preference for high-quality sources of
income such as insurance margin from life and health and protection
business, and fee income. We favour insurance margin because it is
relatively insensitive to the equity and interest rate cycle and
prefer fee income to spread income because it is more
capital-efficient. In line with this approach, on a constant
exchange rate basis, insurance margin has increased by 9 per cent
(up 14 per cent on an actual exchange rate basis) and fee income by
14 per cent (up 20 per cent on an actual exchange rate basis),
while spread income decreased by 9 per cent (down 5 per cent on an
actual exchange rate basis). Administration expenses increased to
£2,297 million (2016: £2,025 million) as the business
continues to expand. The expense margin has grown from 85 basis
points to 88 basis points reflecting the continued increase in US
producers selecting asset-based commissions which are treated as an
administrative expense in this analysis.
Asset management profit drivers
Movements
in asset management operating profit are also influenced primarily
by changes in the scale of these businesses, as measured by funds
managed on behalf of external
institutional and retail customers and our internal life insurance
operations.
|
Asset management
external funds under management13,14
|
|
|
|
2017 £m
|
|
2016 £m
|
|
|
|
Actual exchange rate
|
|
Actual exchange rate
|
|
|
|
At 1 January
|
Net flows
|
Market and other movements
|
At 31 December
|
|
At 1 January
|
Net flows
|
Market and other movements
|
At 31 December
|
|
UK and Europe
|
136,763
|
17,337
|
9,755
|
163,855
|
|
126,405
|
(8,090)
|
18,448
|
136,763
|
|
Asia15
|
38,042
|
3,141
|
5,385
|
46,568
|
|
30,281
|
1,835
|
5,926
|
38,042
|
|
Total asset management
|
174,805
|
20,478
|
15,140
|
210,423
|
|
156,686
|
(6,255)
|
24,374
|
174,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset management
(including MMF)
|
182,519
|
21,973
|
15,248
|
219,740
|
|
162,692
|
(5,852)
|
25,679
|
182,519
|
In
2017, average assets under management in our asset management
businesses in the UK and Asia benefited from positive net inflows
of assets and favourable markets, driving higher fee revenues.
Reflecting this, IFRS operating profit derived from asset
management activities in M&G Prudential increased by 18 per
cent to £500 million and in Eastspring by 18 per cent (up 25
per cent on an actual exchange rate basis) to £176
million.
M&G
Prudential's external assets under management have benefited from a
record level of net inflows, reflecting improvement in investment
performance and supportive markets. External asset management net
inflows totalled £17.3 billion (2016: net outflows of
£8.1 billion), with significant contributions from European
investors in the Optimal Income Fund, Global Floating Rate High
Yield Fund and multi-asset range, and from institutional clients,
notably within our public debt, illiquid credit strategies and
infrastructure equity funds. External assets under management
increased 20 per cent to £163.9 billion during the year.
Internal assets benefiting from PruFund sales and favourable
markets increased 7 per cent, taking total M&G Prudential
assets under management to £350.7 billion (2016: £310.8
billion).
Eastspring
also attracted good levels of external net inflows during the year
across its equity, fixed income and balanced fund range, totalling
£3.1 billion, excluding money market funds (2016: £1.8
billion on an actual exchange rate basis). Overall external assets
under management increased by 22 per cent to £46.6 billion.
Combined with higher internal assets under management and money
market funds lifted Eastspring's total assets under management to
£138.9 billion.
Other income and expenditure and restructuring costs8
Higher
interest costs following the debt issued in 2016 and 2017, and
restructuring costs of £103 million, as the business invests
for the future, including UK and Europe infrastructure, contributed
to an increase in net central expenditure of £139 million to
£878 million (2016: £732 million on an actual exchange
rate basis).
IFRS non-operating items8
IFRS
non-operating items consist of short-term fluctuations in
investment returns on shareholder-backed business of negative
£1,563 million (2016: negative £1,764 million), the
results attaching to disposal of businesses of £223 million
(2016: negative £244 million), and the amortisation of
acquisition accounting adjustments of negative £63 million
(2016: negative £79 million) arising mainly from the REALIC
business acquired by Jackson in 2012. The profit attributable to
disposal of businesses relates to amounts in respect of the Korea
life business sold in 2017 and the disposal of the US broker-dealer
network in August 2017.
Short-term
fluctuations in investment returns on shareholder-backed business
represent the most significant component of non-operating items and
are discussed further below.
IFRS short-term fluctuations in investment returns on
shareholder-backed business
IFRS
operating profit is based on longer-term investment return
assumptions. The difference between actual investment returns
recorded in the income statement and the assumed longer-term
returns is reported within short-term fluctuations in investment
returns. In 2017, the total short-term fluctuations in investment
returns on shareholder-backed business were negative £1,563
million and comprised negative £1 million for Asia, negative
£1,568 million in the US, negative £14 million in the UK
and positive £20 million in other operations.
In the
US, Jackson provides certain guarantees on its annuity products,
the value of which would rise typically when equity markets fall
and long-term interest rates decline. Jackson includes the expected
cost of hedging when pricing its products and charges fees for
these guarantees which are used, as necessary, to purchase downside
protection in the form of options and futures to mitigate the
effect of equity market falls, and swaps and swaptions to cushion
the impact of declines in long-term interest rates. 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 capital and
economics of the business from large movements in investment
markets and accepts the variability in accounting results. The
negative short-term fluctuations in investment returns on
shareholder-backed business of £1,568 million in the year are
attributable mainly to the net value movement in the period of the
hedge instruments held to manage market exposures and reflect the
positive equity market performance in the US during the
period.
IFRS effective tax rates
In
2017, the effective tax rate on IFRS operating profit based on
longer-term investment returns was 21 per cent, which is unchanged
from 2016 (21 per cent).
The
2017 effective tax rate on the total IFRS profit was 27 per cent
(2016: 16 per cent), reflecting the inclusion of a £445
million one-off charge on the re-measurement of US deferred tax
balances using a rate of 21 per cent (previously 35 per cent)
following the enactment in December 2017 of a comprehensive US tax
reform package. Excluding this one-off charge, the 2017 effective
tax rate would have been 14 per cent.
In
addition to the impact on the IFRS profit, the re-measurement of US
deferred tax balances also resulted in a separate benefit of
£134 million recognised in other comprehensive income, in
relation to changes to deferred tax on cumulative unrealised gains
(net of DAC) on bonds which are taken directly through other
comprehensive income.
The
main driver of the Group's effective tax rate is the relative mix
of the profits between jurisdictions with higher tax rates (such as
Indonesia and Malaysia), jurisdictions with lower tax rates (such
as Hong Kong and Singapore), and jurisdictions with rates in
between (such as the UK, and now from 2018, the US).
Once
the US tax changes are fully reflected, we would expect a
favourable impact on the Group's effective tax rate. The US
operating profit effective tax rate is expected to be circa 18 per
cent (previously 28 per cent), and the overall Group operating
profit effective tax rate is likely to settle in the range of 16
per cent to 18 per cent.
Total tax contribution
The
Group continues to make significant tax contributions in the
jurisdictions in which it operates, with £2,903 million
remitted to tax authorities in 2017. This was similar to the
equivalent amount of £2,887 million in 2016.
Tax strategy
In May
2017 the Group published its tax strategy, which in addition to
complying with the mandatory UK (Finance Act 2016) requirements,
also included a number of additional disclosures, including a
breakdown of revenues, profits and taxes for all jurisdictions
where more than £5 million tax was paid. This disclosure was
included as a way of demonstrating that our tax footprint (ie where
we pay taxes) is consistent with our business footprint. An updated
version of the tax strategy, including 2017 data, will be available
on the Group's website before 31 May 2018.
New business performance
|
Life EEV new business profit and APE new business sales (APE
sales)
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
2017 £m
|
2016 £m
|
Change %
|
|
2016 £m
|
Change %
|
|
|
APE sales
|
New business profit
|
APE sales
|
New business profit
|
APE sales
|
New business profit
|
|
APE sales
|
New business profit
|
APE sales
|
New business profit
|
|
Asia
|
3,805
|
2,368
|
3,599
|
2,030
|
6
|
17
|
|
3,773
|
2,123
|
1
|
12
|
|
US
|
1,662
|
906
|
1,561
|
790
|
6
|
15
|
|
1,641
|
830
|
1
|
9
|
|
UK and Europe
|
1,491
|
342
|
1,160
|
268
|
29
|
28
|
|
1,160
|
268
|
29
|
28
|
|
Total Group
|
6,958
|
3,616
|
6,320
|
3,088
|
10
|
17
|
|
6,574
|
3,221
|
6
|
12
|
Life insurance new business profit was up 12 per cent (17
per cent on an actual exchange rate basis) to £3,616 million,
and Life insurance
new business APE sales
increased by 6 per cent (10 per cent on an actual exchange rate
basis) to £6,958 million.
In
Asia, new business profit
was 12 per cent higher at £2,368 million (17 per cent on an
actual exchange rate basis), primarily reflecting the beneficial
impact of our strategic emphasis on increasing sales from health
and protection business and pricing actions.
Our
focus on quality is undiminished with regular premium contracts
accounting for 94 per cent of APE sales and supporting a 26 per
cent increase in health and protection new business profit. This
favourable mix provides a high level of recurring income and an
earnings profile that is significantly less correlated to
investment markets.
In Hong
Kong new business profit has increased by 8 per cent as we continue
to focus on driving growth in health and protection business. This
targeted shift to higher margin but lower case size protection
business, aligned with the de-emphasis of broker sales and the
expected moderation in the level of sales from Mainland China has,
as we reported previously, resulted in a 14 per cent reduction in
Hong Kong APE sales.
Outside
Hong Kong, new business profit increased by 20 per cent, in line
with APE sales which were up 17 per cent. Our performance remains
broad-based, with double digit growth in new business profit across
both agency and bancassurance channels. In China, new business
profit more than doubled, driven by higher sales and a significant
uplift in regular premium health and protection business from our
increased scale and productivity in the agency channel, together
with a positive contribution from our bancassurance partners. In
Singapore, new business profit increased by 22 per cent supported
by APE sales growth of 21 per cent, reflecting growth across both
agency and bancassurance channels. Indonesia's APE sales grew 2 per
cent while new business profit declined 5 per cent due to product
mix.
In
the US, new business profit
increased by 9 per cent to £906 million (up 15 per cent on an
actual exchange rate basis) reflecting a modest increase in APE
sales, up 1 per cent (6 per cent on an actual exchange rate basis)
and the positive impact on future profit from a reduction in
corporate income tax rates. Uncertainty regarding the application
and implementation of the US Department of Labor Fiduciary Duty
Rule has led to continued pressure on industry sales in 2017 which
were down 11 per cent over the first nine months of the year.
Despite this, Jackson's variable annuity sales increased by 1 per
cent, with the economics on new business in variable annuities
remaining extremely attractive, with high internal rates of return
and short payback periods. Net inflows into Jackson's separate
account asset balances, which drive fee-based earnings on variable
annuity business, remained positive at £3.5 billion. More
favourable market conditions relating to the institutional product
market also provided Jackson with the opportunity to write APE
sales of £232 million (2016: £193 million).
In our
UK life business, our
strategy of extending customer access to PruFund's with-profits investment option via
additional product wrappers continues to drive growth in new
business profit, which increased to £342 million, up 28 per
cent. APE sales increased 29 per cent to £1,491 million. We
have seen notable success with the build out of PruFund, which has
contributed significantly towards an APE sales increase in
individual pensions (up 110 per cent), income drawdown (up 35 per
cent) and ISAs (up 7 per cent). Reflecting this performance, total
PruFund assets under management of £35.9 billion as at 31
December 2017 were 46 per cent higher than at the start of the
year.
|
Free surplus
generation2,3
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
|
2017 £m
|
2016 £m
|
Change %
|
|
2016 £m
|
Change %
|
|
Free surplus generation
|
|
|
|
|
|
|
|
Asia
|
1,562
|
1,335
|
17
|
|
1,405
|
11
|
|
US
|
1,582
|
1,863
|
(15)
|
|
1,957
|
(19)
|
|
UK and Europe
|
1,486
|
1,287
|
15
|
|
1,287
|
15
|
|
Underlying free surplus generated from in-force life
business and asset management before restructuring
costs
|
4,630
|
4,485
|
3
|
|
4,649
|
-
|
|
Restructuring costs
|
(77)
|
(16)
|
(381)
|
|
(16)
|
(381)
|
|
Underlying free surplus generated from in-force life
business and asset management
|
4,553
|
4,469
|
2
|
|
4,633
|
(2)
|
|
Investment in new business
|
(913)
|
(903)
|
(1)
|
|
(942)
|
3
|
|
Underlying free surplus generated
|
3,640
|
3,566
|
2
|
|
3,691
|
(1)
|
|
Market related movements, timing differences
and other non-operating movements
|
(1,012)
|
(432)
|
|
|
|
|
|
Profit (loss) attaching to disposal of businesses
|
172
|
(86)
|
|
|
|
|
|
Net cash remitted by business units
|
(1,788)
|
(1,718)
|
|
|
|
|
|
Total movement in free surplus
|
1,012
|
1,330
|
|
|
|
|
|
Free surplus at end of year
|
7,578
|
6,566
|
|
|
|
|
Free surplus generation is the financial metric we use to measure
the internal cash generation of our business operations and is
based on the capital regimes which apply locally in the various
jurisdictions in which our life businesses operate. For life
insurance operations it represents amounts maturing from the
in-force business during the year, net of amounts reinvested in
writing new business. For asset management it equates to post-tax
IFRS operating profit for the period.
We drive free surplus generation by targeting markets and products
that have low capital strain, high-return and fast payback profiles
and by delivering both good service and value to improve customer
retention. Our ability to generate both growth and cash is a
distinctive feature of Prudential.
In
2017, underlying free surplus generation from our life insurance
and asset management business decreased by 1 per cent to
£3,640 million (increased 2 per cent on an actual exchange
rate basis), reflecting increased contributions from our Asia and
UK businesses, a non-recurrence of a one-off prior year gain from
our US business, and higher restructuring costs. In Asia, growth in
the in-force life portfolio, combined with post-tax asset
management profit from Eastspring, contributed to free surplus
generation of £1,562 million, up 11 per cent. In the US,
in-force free surplus generation decreased by 19 per cent
reflecting the non-recurrence of a £247 million benefit from
contingent financing actions taken in 2016, together with lower
favourable experience variances. In the UK, in-force free surplus
generation increased by 15 per cent to £1,486 million,
attributable to growth in asset management earnings, the adoption
of the CMI 2015 assumption basis and portfolio and capital
management actions including longevity reinsurance to improve the
solvency position of our UK life business of £400 million
(2016: £351 million). The result includes an increase in the
provision for the costs of the UK review of past non-advised
annuity sales practices and related potential redress, which has a
post-tax impact of £187 million in 2017 (2016: £145
million).
Although
new business profit increased by 12 per cent, the amount of free
surplus invested in writing new life business in the period was
lower at £913 million (2016: £942 million) reflecting a
greater proportion of sales in Asia and the UK where strain is
lower, and a higher proportion of variable annuity premium being
allocated to the separate account in the US.
After
funding cash remittances from the business units to the Group,
recognition of the profit attaching to the disposal of businesses,
and other movements, which includes adverse currency effects and
the impact of US tax reform, the closing value of free surplus in
our life and asset management operations was £7.6 billion at
31 December 2017.
We continue to manage cash flows across the Group with a view to
achieving a balance between ensuring sufficient remittances are
made to service central requirements (including paying the external
dividend) and maximising value to shareholders through retention
and reinvestment of capital in business opportunities.
|
Business unit
remittance2,16
|
|
|
|
|
|
Actual exchange rate
|
|
|
|
2017 £m
|
2016 £m
|
|
Net cash remitted by business units:
|
|
|
|
|
Asia
|
645
|
516
|
|
|
US
|
475
|
420
|
|
|
UK and Europe
|
643
|
590
|
|
|
Other UK (including Prudential Capital)
|
25
|
192
|
|
Net cash remitted by business units
|
1,788
|
1,718
|
|
Holding company cash at 31 December
|
2,264
|
2,626
|
Cash
remitted to the corporate centre in
2017 amounted to £1,788 million, driven by higher remittances
from Asia. For the first time, our Asia business unit is the
largest contributor17
to cash in the Group, demonstrating
the quality and scale of its growth. Jackson made sizeable
remittances of £475 million. The remittance from M&G
Prudential of £643 million was 9 per cent higher than the
combined remittance in 2016. Prudential Capital contributed a
further £25 million.
Cash
remitted to the Group in 2017 was used to meet central costs of
£470 million (2016: £416 million) and pay the 2016 second
interim and 2017 first interim dividends respectively. These
movements and other corporate cash flows, including a net reduction
in core structural borrowings and the impact of currency movements,
led to holding company cash decreasing from £2,626 million to
£2,264 million over 2017.
|
Post-tax
profit - EEV2
|
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
|
2017 £m
|
2016 £m
|
Change %
|
|
2016 £m
|
Change %
|
|
Post-tax operating profit based on longer-term investment
returns
|
|
|
|
|
|
|
|
Asia
operations
|
|
|
|
|
|
|
|
Long-term business
|
3,705
|
3,074
|
21
|
|
3,220
|
15
|
|
Asset management
|
155
|
125
|
24
|
|
132
|
17
|
|
Total
|
3,860
|
3,199
|
21
|
|
3,352
|
15
|
|
|
|
|
|
|
|
|
|
|
US
operations
|
|
|
|
|
|
|
|
Long-term business
|
2,143
|
1,971
|
9
|
|
2,071
|
3
|
|
Asset management
|
7
|
(3)
|
333
|
|
(4)
|
275
|
|
Total
|
2,150
|
1,968
|
9
|
|
2,067
|
4
|
|
|
|
|
|
|
|
|
|
|
UK and Europe
operations
|
|
|
|
|
|
|
|
Long-term business
|
1,015
|
643
|
58
|
|
643
|
58
|
|
General insurance commission
|
13
|
23
|
(43)
|
|
23
|
(43)
|
|
Total insurance operations
|
1,028
|
666
|
54
|
|
666
|
54
|
|
Asset management
|
403
|
341
|
18
|
|
341
|
18
|
|
Total
|
1,431
|
1,007
|
42
|
|
1,007
|
42
|
|
|
|
|
|
|
|
|
|
|
Other income and expenditure18
|
(746)
|
(682)
|
(9)
|
|
(688)
|
(8)
|
|
Post-tax operating profit based on longer-term investment
returns
before restructuring costs and interest received from tax
settlement
|
6,695
|
5,492
|
22
|
|
5,738
|
17
|
|
Restructuring costs18
|
(97)
|
(32)
|
(203)
|
|
(32)
|
(203)
|
|
Interest received from tax settlement
|
-
|
37
|
n/a
|
|
37
|
n/a
|
|
Post-tax operating profit based on longer-term investment
returns
|
6,598
|
5,497
|
20
|
|
5,743
|
15
|
|
Non-operating items:
|
|
|
|
|
|
|
|
|
Short-term fluctuations on investment returns
|
2,111
|
(507)
|
516
|
|
(567)
|
472
|
|
|
Effect of changes in economic assumptions
|
(102)
|
(60)
|
(70)
|
|
(54)
|
(89)
|
|
|
Mark to market value movements on core structural
borrowings
|
(326)
|
(4)
|
(8,050)
|
|
(4)
|
(8,050)
|
|
|
Impact of US tax reform
|
390
|
-
|
n/a
|
|
-
|
n/a
|
|
|
Profit (loss) attaching to disposal of businesses
|
80
|
(410)
|
120
|
|
(445)
|
118
|
|
Post-tax profit for the year
|
8,751
|
4,516
|
94
|
|
4,673
|
87
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
|
2017 pence
|
2016 pence
|
Change %
|
|
2016 pence
|
Change %
|
|
|
|
|
|
|
|
|
|
Basic earnings per share based on post-tax operating
profit
|
257.0
|
214.7
|
20
|
|
224.3
|
15
|
|
Basic earnings per share based on post-tax total
profit
|
340.9
|
176.4
|
93
|
|
182.5
|
87
|
EEV operating profit
On an EEV basis, Group post-tax operating profit based on
longer-term investment return increased by 15 per cent (up 20 per
cent on an actual exchange rate basis) to £6,598 million in
2017.
EEV operating profit includes new business profit from the Group's
life business, which increased by 12 per cent (up 17 per cent on an
actual exchange rate basis) to £3,616 million. It also
includes in-force life business profit of £3,247 million,
which was 20 per cent higher than prior year (up 25 per cent on an
actual exchange rate basis), primarily reflecting the growth in our
in-force business. This is most evident in the profit from the
unwind of the in-force business, which was 10 per cent higher at
£2,166 million (2016: £1,962 million). Experience
and assumption changes were positive at £1,081 million (2016:
£751 million), reflecting our ongoing focus on managing the
in-force book for value.
In
Asia, EEV life operating
profit was up 15 per cent to £3,705 million, reflecting growth
in new business profit of 12 per cent at £2,368 million.
In-force profit was 22 per cent higher at £1,337 million
reflecting the increased value of in-force business and positive
assumption changes and experience as the business continues to grow
with discipline.
Jackson's EEV life operating profit was up 3 per cent to
£2,143 million, reflecting a 9 per cent increase in new
business profit to £906 million and a stable contribution from
in-force profit of £1,237 million, which included favourable
operating assumption changes and experience variances of £543
million (2016: £628 million), related largely to persistency
and mortality effects. The increase in our US EEV new business
profit reflects the positive impact on future profits from lower
tax rates.
In the
UK and Europe, EEV life
operating profit increased by 58 per cent to £1,015 million
(2016: £643 million). The increase was driven by a 28 per cent
increase in new business profit, and higher in-force profit
including a £195 million benefit from revisions to longevity
assumptions following adoption of updated actuarial mortality
projections under CMI 201519. Profits arising
from actions undertaken to improve solvency were more than offset
by an increase in the provision related to the potential costs and
related potential redress of reviewing internally vesting annuities
sold without advice after 1 July 2008.
Capital position, financing and liquidity
Capital position
|
Analysis of
movement in Group shareholder Solvency II
surplus20
|
|
|
|
|
|
2017 £bn
|
2016 £bn
|
|
Solvency II surplus at 1 January
|
12.5
|
9.7
|
|
Operating experience
|
3.6
|
2.7
|
|
Non-operating experience (including market movements)*
|
(0.6)
|
(1.1)
|
|
Other capital movements:
|
|
|
|
|
Subordinated debt (redemption) / issuance
|
(0.2)
|
1.2
|
|
|
Foreign currency translation impacts
|
(0.7)
|
1.6
|
|
|
Dividends paid
|
(1.2)
|
(1.3)
|
|
Model changes
|
(0.1)
|
(0.3)
|
|
Estimated Solvency II surplus at 31 December
|
13.3
|
12.5
|
*
2017 includes a £(0.6) billion reduction in deferred tax
assets following US tax reform.
The
high quality and recurring nature of our operating capital
generation and our disciplined approach to managing balance sheet
risk has resulted in an increase in the Group's shareholders'
Solvency II capital surplus which is estimated at £13.3
billion6,7
at 31 December 2017 (equivalent to a solvency ratio of 202 per
cent), compared with £12.5 billion (201 per cent) at 31
December 2016. In 2017 we generated £3.6 billion of operating
capital. This was offset by dividends to shareholders, net
repayment of subordinated debt, adverse foreign currency effects
and the £0.6 billion reduction in statutory deferred tax
assets following US tax reform.
Prudential
has been designated as a Global Systemically Important Insurer
(G-SII) and is monitoring and engaging with the PRA on the
development and potential impact of the policy measures associated
with such a designation.
Local statutory capital
All of
our subsidiaries continue to hold appropriate capital levels on a
local regulatory basis. In the UK, at 31 December 2017 The
Prudential Assurance Company Limited and its
subsidiaries21 had an estimated
Solvency II shareholder surplus22 of £6.1
billion (equivalent to a cover ratio of 178 per cent) and a
with-profits surplus23 of £4.8
billion (equivalent to a cover ratio of 201 per cent). In the US,
following the enactment in December 2017 of a comprehensive reform
package, a £628 million reduction in the level of the
statutory net admitted deferred tax asset more than offset
operational capital formation, resulting in a risk based capital
ratio of 409 per cent (2016: 485 per cent).
Debt portfolio
The
Group continues to maintain a high-quality defensively positioned
debt portfolio. Shareholders' exposure to credit is concentrated in
the UK annuity portfolio and the US
general account, mainly attributable to Jackson's fixed annuity
portfolio. The credit exposure is well diversified and 98 per cent
of our UK portfolio and 97 per cent of our US portfolio are
investment grade29.
During 2017, default losses were minimal and reported impairments
across the UK and US portfolios were £2 million (2016:
£35 million).
Financing and liquidity
|
Shareholders' net core structural borrowings and
ratings
|
|
|
|
|
|
|
|
|
|
2017 £m
|
|
2016 £m
|
|
|
IFRS
basis
|
Mark to
market
value
|
EEV
basis
|
|
IFRS
basis
|
Mark to
market
value
|
EEV
basis
|
|
Total borrowings of shareholder-financed operations
|
6,280
|
743
|
7,023
|
|
6,798
|
422
|
7,220
|
|
Less: Holding company cash and short-term investments
|
(2,264)
|
-
|
(2,264)
|
|
(2,626)
|
-
|
(2,626)
|
|
Net core structural borrowings of shareholder-financed
operations
|
4,016
|
743
|
4,759
|
|
4,172
|
422
|
4,594
|
|
Gearing ratio*
|
20%
|
|
|
|
22%
|
|
|
*Net
core structural borrowings as proportion of IFRS shareholders'
funds plus net debt, as set out in note II(d) of the Additional
unaudited IFRS financial information.
The
Group had central cash resources of £2.3 billion at 31
December 2017 (31 December 2016: £2.6 billion). Total core
structural borrowings reduced by £0.5 billion, from £6.8
billion to £6.3 billion, with the issue of US$750 million
(£547 million at 31 December 2017) 4.875 per cent tier 2
perpetual subordinated debt in October 2017 being more than offset
by the redemption of US$1 billion (£741 million at 31 December
2017) 6.5 per cent tier 2 perpetual subordinated debt in December
2017.
In
addition to its net core structural borrowings of
shareholder-financed operations set out above, the Group also has
access to funding via the money markets and has in place an
unlimited global commercial paper programme. As at 31 December
2017, we had issued commercial paper under this
programme totalling US$650 million, to finance non-core
borrowings.
Prudential's
holding company currently has access to £2.6 billion of
syndicated and bilateral committed revolving credit facilities
provided by 19 major international banks, expiring in 2022. Apart
from small drawdowns to test the process, these facilities have
never been drawn, and there were no amounts outstanding at 31
December 2017. The medium-term note programme, the US shelf
programme (platform for issuance of SEC registered public bonds in
the US market), the commercial paper programme and the committed
revolving credit facilities are all available for general corporate
purposes and to support the liquidity needs of Prudential's holding
company and are intended to maintain a flexible funding
capacity.
|
Shareholders' funds
|
|
|
|
|
|
|
|
IFRS
|
|
EEV
|
|
|
2017 £m
|
2016 £m
|
|
2017 £m
|
2016 £m
|
|
Profit after tax for the
year24
|
2,389
|
1,921
|
|
8,750
|
4,516
|
|
Exchange movements, net of related tax
|
(409)
|
1,161
|
|
(2,045)
|
4,211
|
|
Cumulative exchange gain of Korea life business
recycled to profit and loss account
|
(61)
|
-
|
|
-
|
-
|
|
Unrealised gains and losses on Jackson fixed income
securities classified as available for sale25
|
486
|
31
|
|
-
|
-
|
|
Dividends
|
(1,159)
|
(1,267)
|
|
(1,159)
|
(1,267)
|
|
Market to market value movements on Jackson
assets backing surplus and required capital
|
-
|
-
|
|
40
|
(11)
|
|
Other
|
175
|
(135)
|
|
144
|
(367)
|
|
Net increase in shareholders' funds
|
1,421
|
1,711
|
|
5,730
|
7,082
|
|
Shareholders' funds at 1 January
|
14,666
|
12,955
|
|
38,968
|
31,886
|
|
Shareholders' funds at 31 December
|
16,087
|
14,666
|
|
44,698
|
38,968
|
|
Shareholders' value per share
26
|
622p
|
568p
|
|
1,728p
|
1,510p
|
|
Return on shareholders'
funds27
|
25%
|
26%
|
|
17%
|
17%
|
Group IFRS shareholders' funds at 31 December 2017 increased by 10
per cent to £16.1 billion (31 December 2016: £14.7
billion on an actual exchange rate basis), driven by the strength
of the operating result, offset by dividend payments of £1,159
million. During the period, UK sterling has strengthened relative
to the US dollar and various Asian currencies. With approximately
50 per cent of the Group's IFRS net assets (71 per cent of
the Group's EEV net assets) denominated in non-sterling currencies, this
generated a negative exchange rate movement on the net assets in
the period. In addition, the moderate decline in US long-term
interest rates between the start and the end of the reporting
period produced unrealised gains on fixed income securities held by
Jackson accounted through other comprehensive
income.
The Group's EEV basis shareholders' funds also increased by 15 per
cent to £44.7 billion (31 December 2016: £39.0 billion on
an actual exchange rate basis), On a per share basis the Group's
embedded value at 31 December 2017 equated to 1,728 pence, up from
1,510 pence at 31 December 2016.
Corporate transactions
Intention to demerge the Group's UK businesses and sale of
£12.0 billion30
UK annuity
portfolio
In
March 2018, the Group announced its intention to demerge its UK and
Europe businesses ('M&G Prudential') from Prudential plc,
resulting in two separately-listed companies. On completion of the
demerger, shareholders will hold interests in both Prudential plc
and M&G Prudential.
In
preparation for the UK demerger process, and to align the ownership
of the Group's businesses with their operating structures,
Prudential plc intends to transfer the legal ownership of its Hong
Kong insurance subsidiaries from The Prudential Assurance Company
Limited (M&G Prudential's UK regulated insurance entity) to
Prudential Corporation Asia Limited, which is expected to complete
by the end of 2019.
M&G
Prudential agreed in March 2018 to the sale of £12.0
billion30
of its shareholder annuity portfolio to Rothesay Life. Under the
terms of the agreement, M&G Prudential has reinsured £12.0
billion30
of liabilities to Rothesay Life, which is expected to be followed
by a Part VII transfer of the portfolio by the end of 2019. The
capital benefit of this transaction will be retained within the
Group to support the demerger process.
The
IFRS liabilities relating to M&G Prudential's total UK
shareholder annuity portfolio as at 31 December 2017 were
£32.6 billion. The UK annuity business being sold contributed
around £140 million towards UK life insurance core5 IFRS operating
profit before tax of £597 million in 2017. Total M&G
Prudential IFRS operating profit before tax was £1,378 million
in 2017.
Based
on asset and liability values as at 31 December 2017, the
transaction is estimated to give rise to a pre-tax IFRS loss of
around £500 million in the first half of 2018, alongside the
de-risking being achieved.
Prudential
plc's Hong Kong subsidiaries which are subject to legal transfer
from The Prudential Assurance Company Limited to Prudential
Corporation Asia Limited comprise its life business, Prudential
Hong Kong Limited, and its general insurance business, Prudential
General Insurance Hong Kong Limited. Hong Kong will continue to be
included in the segmental reporting of Asia's IFRS and embedded
value results. The transfers will be subject to regulatory
approval.
The
sale of the UK annuity portfolio and the transfer of Prudential
plc's Hong Kong subsidiaries to Asia are expected to complete by
the end of 2019. Assuming that these actions had both been
completed as at 31 December 2017, the Group's embedded value of
£44.7 billion is estimated to reduce by approximately
£300 million, reflecting the loss of future profits on the
portion of annuity liabilities being sold.
The
estimated pro-forma impact on the Group shareholder Solvency II
capital position, assuming that these actions had both been
completed as at 31 December 2017, is an increase in surplus of
£0.3 billion and an increase in the shareholder solvency ratio
of 6 percentage points.
Pro-forma estimated Group shareholder Solvency II capital
position
|
|
Own Funds
|
Solvency Capital Requirement
|
Surplus
|
Ratio
|
|
|
£bn
|
£bn
|
£bn
|
%
|
|
31 December 2016 as reported
|
24.8
|
12.3
|
12.5
|
201
|
|
31 December 2017 as reported
|
26.4
|
13.1
|
13.3
|
202
|
|
31 December 2017 pro-forma estimate*
|
26.2
|
12.6
|
13.6
|
208
|
*
The pro-forma estimate assumes that the partial sale of the UK
annuity portfolio and the transfer of Prudential plc's Hong Kong
subsidiaries to Asia had both been completed as at 31 December
2017.
On the
same basis, the estimated pro-forma impact on the shareholder
Solvency II capital position of the UK regulated insurance entity,
The Prudential Assurance Company Limited, is provided in the table
below. This pro-forma solvency position reflects the reduced risk
exposures in the UK insurance entity after the partial annuity sale
and Hong Kong transfer.
Pro-forma estimated The Prudential Assurance Company Limited
shareholder Solvency II capital position
|
|
Own Funds
|
Solvency Capital Requirement
|
Surplus
|
Ratio
|
|
|
£bn
|
£bn
|
£bn
|
%
|
|
31 December 2016 as reported
|
12.0
|
7.4
|
4.6
|
163
|
|
31 December 2017 as reported
|
14.0
|
7.9
|
6.1
|
178
|
|
31 December 2017 pro-forma estimate*
|
8.5
|
5.7
|
2.8
|
150
|
*
The pro-forma estimate assumes that the partial sale of the UK
annuity portfolio and the transfer of Prudential plc's Hong Kong
subsidiaries to Asia had both been completed as at 31 December
2017. In relation to the sale of the UK annuity portfolio, this
estimate includes a £1.3 billion reduction in the Solvency
Capital Requirement (SCR) and a £0.2 billion decrease in Own
Funds, resulting in an increase in capital surplus of £1.1
billion, of which £0.6 billion is expected to be recognised in
the UK capital position as at 30 June 2018 under the reinsurance
agreement. In relation to the Hong Kong transfer, the impact on the
SCR allows for the release of the Hong Kong business standalone SCR
of £2.0 billion, partially offset by the removal of
diversification benefits between UK and Hong Kong of £1.1
billion.
Entrance into Nigeria
In July
2017 the Group acquired a majority stake in Zenith Life of Nigeria
and formed exclusive bancassurance partnerships with Zenith Bank in
Nigeria and Ghana. The acquisition and bancassurance partnerships
will see Prudential enter the market in Nigeria, Africa's largest
economy, with a population of over 180 million. This expands
Prudential's regional platform in Africa following the launch of
businesses in Ghana and Kenya in 2014, in Uganda in 2015 and Zambia
in 2016.
Disposal of Korea life
In May
2017, the Group completed the sale of the Group's life insurance
subsidiary in Korea, PCA Life Insurance Co. Ltd to Mirae Asset Life
Insurance Co. Ltd. for KRW170 billion (equivalent to £117
million at 17 May 2017 closing rate).
Disposal of broker-dealer network in the US
In
August 2017, the Group, through its subsidiary National Planning
Holdings, Inc. ('NPH') sold its US independent broker-dealer
network to LPL Financial LLC for an initial purchase price of
US$325 million (equivalent to £252 million at 15 August
2017).
Dividend
The
Board has decided to increase the full-year ordinary dividend by 8
per cent to 47 pence per share, reflecting our 2017 financial
performance and our confidence in the future prospects of the
Group. In line with this, the directors have approved a second
interim ordinary dividend of 32.5 pence per share (2016: 30.57
pence per share).
The
Group's dividend policy remains unchanged. The Board will maintain
focus on delivering a growing ordinary dividend. In line with this
policy, Prudential aims to grow the ordinary dividend by 5 per cent
per annum. The potential for additional distributions will continue
to be determined after taking into account the Group's financial
flexibility across a broad range of financial metrics and an
assessment of opportunities to generate attractive returns by
investing in specific areas of the business28.
Notes
1
Increase stated on a constant exchange rate basis.
2
The 2016 comparative results have been re-presented from those
published previously, following reassessment of the Group's
operating segments as described in note B1.3 of the IFRS financial
statements.
3
Underlying free surplus generated
comprises underlying free surplus generated from the Group's
long-term business (net of investment in new business) and that
generated from asset management operations. Further information is
set out in notes 11 of the EEV basis results. Free surplus
represents 'underlying free surplus' based on operating movements
and excludes market movements, foreign exchange, capital movements,
shareholders' other income and expenditure and restructuring and
Solvency II implementation costs arising centrally.
4
Represents M&G Prudential asset management external funds under
management and internal funds included on the M&G Prudential
long-term insurance business balance sheet.
5
Core refers to the underlying profit of the UK and Europe insurance
business excluding the effect of, for example, management actions
to improve solvency and material assumption changes. Details of
these are set out in note I(d) of the Additional unaudited IFRS
financial information.
6
The Group shareholder capital position excludes the contribution to
Own Funds and the Solvency Capital Requirement from ring-fenced
with-profits funds and staff pension schemes in surplus. The
estimated solvency position includes management's calculation of UK
transitional measures reflecting operating and market conditions at
each valuation date. An application to recalculate the transitional
measures as at 31 December 2017 has been approved by the Prudential
Regulation Authority.
7
Before allowing for second interim ordinary dividend.
8
Refer to note B1.1 in IFRS financial statements for the breakdown
of other income and expenditure and other non-operating
items.
9
Gross earned premiums for contracts in second and subsequent years,
comprising Asia segment IFRS gross earned premium of £15.7
billion less gross earned premiums relating to new regular and
single premiums of £5.7 billion, plus renewal premiums from
joint ventures of £1.6 billion, and excluding any amounts
relating to the sold Korea life business.
10
Includes Group's proportionate share of the liabilities and
associated flows of the insurance joint ventures and associates in
Asia.
11
Defined as movements in shareholder-backed policyholder liabilities
arising from premiums (net of charges), surrenders/withdrawals,
maturities and deaths.
12
Includes Unallocated surplus of with-profits business.
13
Includes Group's proportionate share in PPM South Africa and the
Asia asset management joint ventures.
14
For our asset management business the level of funds managed on
behalf of third parties, which are not therefore recorded on the
balance sheet, is a driver of profitability. We therefore analyse
the movement in the funds under management each period, focusing
between those which are external to the Group and those held by the
insurance business and included on the Group balance sheet. This is
analysed in note II(b) of the Additional unaudited IFRS financial
information.
15
Net inflows exclude Asia Money Market Fund (MMF) inflows of
£1,495 million (2016: net inflows £403 million). External
funds under management exclude Asia MMF balances of £9,317
million (2016: £7,714 million).
16
Net cash remitted by business units are included in the Holding
company cash flow, which is disclosed in detail in note II(a) of
the Additional unaudited IFRS financial information.
17
Based on the 2017 operating segments.
18
Refer to the EEV basis supplementary information - Post-tax
operating profit based on longer-term investment returns and
Post-tax summarised consolidated income statement, for further
detail on other income and restructuring costs.
19
Continuous Mortality Investigation 2015 mortality improvements
model.
20
The methodology and assumptions used in calculating the Solvency II
capital results are set out in note II(f) of the Additional
unaudited IFRS financial information.
21
The insurance subsidiaries of The Prudential Assurance Company
Limited are Prudential General Insurance Hong Kong Limited,
Prudential Hong Kong Limited, Prudential International Assurance
plc and Prudential Pensions Limited.
22
The UK shareholder capital position excludes the contribution to
Own Funds and the Solvency Capital Requirement from ring-fenced
with-profits funds and staff pension schemes in surplus. The
estimated solvency position includes management's calculation of UK
transitional measures reflecting operating and market conditions at
each valuation date. An application to recalculate the transitional
measures as at 31 December 2017 has been approved by the Prudential
Regulation Authority.
23
The estimated solvency position includes management's calculation
of UK transitional measures reflecting operating and market
conditions at each valuation date. An application to recalculate
the transitional measures as at 31 December 2017 has been approved
by the Prudential Regulation Authority.
24
Excluding profit for the year attributable to non-controlling
interests.
25
Net of related charges to deferred acquisition costs and
tax.
26
Closing IFRS shareholders' funds divided by issued shares, as set
out in note II(e) of the Additional unaudited IFRS financial
information. Closing EEV shareholders'
funds divided by issued shares, as set out in note G of the
Additional EEV financial information.
27
Operating profit after tax and non-controlling interests as
percentage of opening shareholders' funds, as set out in note II(c)
of the Additional unaudited IFRS financial information and note F
of the Additional EEV financial information.
28
Refer to note 11 on the parent company financial statements for
further detail on the distributable profits of Prudential
plc.
29
Based on hierarchy of Standard and Poor's Moody's and Fitch, where
available and if unavailable, internal ratings have been
used.
30
Relates to £12.0 billion of IFRS shareholder annuity
liabilities, valued as at 31 December 2017.
Report of the risks facing our business and how these are
managed
1. Introduction
2017
was, in many respects, a year of global geopolitical transition.
Popular discontent was one of the driving factors, shifting the
political landscape in many countries, in particular in the US and
across Western Europe. The nature of technology risks evolved
during the year, with high profile and untargeted attacks affecting
companies around the world. Despite all this, financial markets
appeared largely unperturbed during 2017 with low volatility and
steady and broad global economic growth, and the first steps were
taken toward monetary policy tightening in key
economies.
As in
previous years, we continue to maintain a sustained focus on
managing prevailing market conditions and macroeconomic uncertainty
arising from the global environment. Looking internally, in August
2017 we announced our intention to combine M&G and our UK life
business to form M&G Prudential, allowing us better to leverage
our scale and capabilities. Change inherently carries risk, but we
will manage and minimise this appropriately in order to provide
better outcomes for our customers.
Our
results show that, even in times of unpredictability, we can
generate value for our shareholders by taking selective exposure to
risks that are rewarded commensurately and that can be quantified
appropriately and managed. We retain risks within a clearly defined
risk appetite, where we believe doing so contributes to value
creation and the Group is able to withstand the impact of an
adverse outcome. For our retained risks, we ensure that we have the
necessary capabilities, expertise, processes and controls to manage
the exposure appropriately.
Our
Group Risk Framework and risk appetite have allowed us to control
our risk exposure successfully throughout the year. Our governance,
processes and controls enable us to deal with the uncertainty ahead
in order to continue helping our customers achieve their long-term
financial goals.
This
section explains the main risks inherent in our business and how we
manage those risks, with the aim of ensuring we maintain an
appropriate risk profile.
2. Risk governance,
culture and our risk management cycle
Prudential defines
'risk' as the uncertainty that we face in implementing our
strategies and objectives successfully. This includes all internal
or external events, acts or omissions that have the potential to
threaten the success and survival of the Group. Accordingly,
material risks will be retained selectively when we think there is
value to do so, and where it is consistent with the Group's risk
appetite and philosophy towards risk-taking.
The
following section provides more detail on our risk governance, risk
culture and risk management process.
a. Risk governance
Our
risk governance comprises the Board, organisational structures,
reporting relationships, delegation of authority, roles and
responsibilities, and risk policies that the Group Head Office and
our business units establish to make decisions and control their
activities on risk-related matters. This encompasses individuals,
Group-wide functions and committees involved in overseeing and
managing risk.
i. Risk committees and governance
structure
Our
risk governance structure is led by the Group Risk Committee,
supported by independent non-executives on risk committees of major
subsidiaries. These committees monitor the development of the Group
Risk Framework, which includes risk appetite, limits, and policies,
as well as risk culture.
In
addition to our risk committees, there are various executive risk
forums to ensure risk issues are shared and considered across the
Group. These are led by the Group Executive Risk Committee, an
advisory committee to the Group Chief Risk Officer which is
supported by a number of sub-committees, including security and
information security where specialist skills and knowledge are
required.
ii. Group Risk Framework
The
Group Risk Framework has been developed to monitor and manage the
risks to our business and is owned by the Board. The aggregate
Group exposure to our key risk drivers is monitored and managed by
the Group Risk function which is responsible for reviewing,
assessing and reporting on the Group's risk exposure and solvency
position from the Group economic, regulatory and ratings
perspectives.
The
Framework requires all our businesses and functions to establish
processes for identifying, evaluating, managing and reporting of
the key risks faced by the Group - the 'Risk Management Cycle' (see
below) is based on the concept of the 'three lines of defence',
comprising risk taking and management, risk control and oversight,
and independent assurance.
A major
part of the Risk Management Cycle is the annual assessment of the
Group's most material risks. These risks range from those
associated with the economic, market, political and regulatory
environment; those that we assume when writing our insurance
products and by virtue of the investments we hold; and those that
are inherent in our business model and its operations. This is used
to inform risk reporting to the risk committees and the Board for
the year.
The
Group Risk Committee reviews the Group Risk Framework and
recommends changes to our Board to ensure that it remains effective
in identifying and managing the risks faced by the Group. A number
of core risk policies and standards support the Framework to ensure
that risks to the Group are identified, assessed, managed and
reported.
During
2017 we made a number of enhancements to our policies and
processes. These included changes to our processes around new
product approvals, management of our critical outsourcing
arrangements and increased oversight of model risk across the
Group. A new framework was developed to support the monitoring and
reporting of risks associated with material transformation
programmes, and work continued over the year on the Group's risk
culture.
iii. Risk appetite, limits and
triggers
The
extent to which we are willing to take risk in the pursuit of our
business strategy and objective to create shareholder value is
defined by a number of qualitative and quantitative expressions of
risk appetite, operationalised through measures such as limits,
triggers, thresholds and indicators. The Group Risk function is
responsible for reviewing the scope and operation of these risk
appetite measures at least annually to determine that they remain
relevant. The Board approves all changes made to the Group's
aggregate risk appetite, and has delegated authority to the Group
Risk Committee to approve changes to the system of limits, triggers
and indicators.
Group
risk appetite is set with reference to economic and regulatory
capital, liquidity and earnings volatility, as well as for our
major risks, and is aimed at ensuring that we take an appropriate
level of aggregate risk. It covers risks to shareholders, including
those from participating and third-party business.
We have
some appetite to take market and credit risk where it arises from
profit-generating insurance activities, to the extent that it
remains part of a balanced portfolio of sources of income for
shareholders and is compatible with a robust solvency position. We
also have some appetite for retaining insurance risks in areas
where we believe we have expertise and operational controls, and
where we judge it to create more value to retain rather than
transfer the risk. The extent of insurance risk that we are willing
to hold is conditional on a balanced portfolio of income to
shareholders and compatibility with a robust solvency
position.
We have
no appetite for material losses (direct or indirect) suffered as a
result of failing to develop, implement or monitor appropriate
controls to manage operational risks. Similarly, we have no
appetite for liquidity risk, ie for any business to have
insufficient resources to cover its outgoing cash flows, or for the
Group as a whole to not meet cash flow requirements from its debt
obligations under any plausible scenario.
Group
limits operate within these expressions of risk appetite to
constrain material risks, while triggers and indicators provide
further constraint and ensure escalation. The Group Chief Risk
Officer determines the action to be taken upon all breaches of
Group limits which may include escalation to the Group Risk
Committee or Board. Any decision on action taken by the Group Chief
Risk Officer is reviewed at the subsequent Group Risk Committee
meeting.
Earnings
volatility:
The
objectives of the aggregate risk limits seek to ensure
that:
●
The
volatility of earnings is consistent with the expectations of
stakeholders;
●
The
Group has adequate earnings (and cash flows) to service debt,
expected dividends and to withstand unexpected shocks;
and
●
Earnings (and cash flows) are managed properly
across geographies and are consistent with funding
strategies.
The two
measures used to monitor the volatility of earnings are IFRS
operating profit and EEV operating profit, although IFRS and EEV
total profits are also considered.
Liquidity:
The
objective is to ensure that the Group is able to generate
sufficient cash resources to meet financial obligations as they
fall due in business as usual and stressed scenarios. Risk appetite
with respect to liquidity risk is measured using a Liquidity
Coverage Ratio which considers the sources of liquidity against
liquidity requirements under stress scenarios.
Capital
requirements:
The
limits aim to ensure that:
●
The
Group meets its internal economic capital
requirements;
●
The
Group achieves its desired target rating to meet its business
objectives; and
●
Supervisory intervention is
avoided.
The two
measures used at the Group level are Solvency II capital
requirements and internal economic capital (ECap) requirements. In
addition, capital requirements are monitored on local statutory
bases.
The
Group Risk Committee is responsible for reviewing the risks
inherent in the Group's business plan and for providing the Board
with input on the risk/reward trade-offs implicit therein. This
review is supported by the Group Risk function, which uses
submissions from our local business units to calculate the Group's
aggregated position (allowing for diversification effects between
local business units) relative to the aggregate risk
limits.
iv. Risk policies
These
set out the specific requirements which cover the fundamental
principles for risk management within the Group Risk Framework.
Policies are designed to give some flexibility so that business
users can determine how best to comply with policies based on their
local expertise.
There
are core risk policies for credit, market, insurance, liquidity and
operational risks and a number of internal control policies
covering internal model risk, underwriting, dealing controls and
tax risk management. They form part of the Group Governance Manual,
which was developed to make a key contribution to the sound system
of internal control that we maintain in line with the UK Corporate
Governance Code and the Hong Kong Code on Corporate Governance
Practices. Group Head Office and business units must confirm on an
annual basis that they have implemented the necessary controls to
evidence compliance with the Group Governance Manual.
v. Risk standards
The
Group-wide Operating Standards provide supporting detail to the
higher level risk policies. In many cases they define the minimum
requirements for compliance with Solvency II regulations which in
some areas are highly prescriptive. The standards are more detailed
than policies.
b. Our risk culture
Culture
is a strategic priority of the Board who recognise the importance
of good culture in the way that we do business. Risk culture is a
subset of broader organisational culture, which shapes the
organisation-wide values that we use to prioritise risk management
behaviours and practices.
An
evaluation of risk culture forms part of the Group Risk Framework
and in particular seeks to identify evidence that:
●
Senior management in business units articulate the
need for good risk management as a way to realise long-term value
and continuously support this through their
actions;
●
Employees understand and care about their role in
managing risk - they are aware of and discuss risk openly as part
of the way they perform their role; and
●
Employees invite open discussion on the approach
to the management of risk.
During
2017 a risk culture assessment was performed across the Group. The
assessment allowed us to compare the Group's risk culture against
best practice behaviours, identify any areas which need improvement
and provide high-level industry benchmarking and peer comparison.
The Group Risk Committee also has a key role in providing advice to
the Remuneration Committee on risk management considerations to be
applied in respect of executive remuneration.
Our
Code of Conduct and our Group Governance Manual include a series of
guiding principles that govern the day-to-day conduct of all our
people and any organisations acting on our behalf. This is
supported by specific risk policies which require that we act in a
responsible manner. This includes, but is not limited to, policies
on anti-money laundering, financial crime and anti-bribery and
corruption. Our Group outsourcing and third-party supply policy
ensures that human rights and modern slavery considerations are
embedded within all of our supplier and supply chain arrangements.
We also have embedded procedures to allow individuals to speak out
safely and anonymously against unethical behaviour and
conduct.
c. The risk management cycle
The
risk management cycle comprises processes to identify, measure and
assess, manage and control, and monitor and report on our
risks.
i. Risk identification
Group-wide risk
identification takes place throughout the year and includes
processes such as our Own Risk and Solvency Assessment (ORSA) and
the horizon-scanning performed as part of our emerging risk
management process.
On an
annual basis, a top-down identification of the Group's key risks is
performed, which considers those risks that have the greatest
potential to impact the Group's operating results and financial
condition. A bottom-up process of risk identification is performed
by the business units who identify, assess and document risks, with
appropriate coordination and challenge from the risk
functions.
The
Group ORSA report pulls together the analysis performed by a number
of risk and capital management processes, which are embedded across
the Group, and provides quantitative and qualitative assessments of
the Group's risk profile, risk management and solvency needs on a
forward-looking basis. The scope of the report covers the full
known risk universe of the Group.
In
accordance with provision C.2.1 of the UK Code, the Directors
perform a robust assessment of the principal risks facing the
Company through the Group-wide risk identification process, Group
ORSA report, and the risk assessments done as part of the business
planning review, including how they are managed and
mitigated.
Reverse
stress testing, which requires us to ascertain the point of
business model failure, is another tool that helps us to identify
the key risks and scenarios that may have a material impact on the
Group.
Our
emerging risk management process identifies potentially material
risks which have a high degree of uncertainty around timing,
magnitude and propensity to evolve. In 2017 we enhanced our
Emerging Risk Framework to bring it closer to the Group's risk
management activity. This included a redefinition of the
relationship between emerging and emerged risks, enabling a
consistent framework for evaluating and escalating sufficiently
developed emerging risks for risk management activity. The Group
holds emerging risk sessions over the year to identify emerging
risks which includes input from local subject matter and industry
experts. We maintain contacts with thought leaders and peers to
benchmark and refine our process.
The
risk profile is a key output from the risk identification and risk
measurement processes, and is used as a basis for setting
Group-wide limits, management information, assessment of solvency
needs, and determining appropriate stress and scenario testing. The
risk identification processes support the creation of our annual
set of key risks, which are then given enhanced management and
reporting focus.
ii. Risk measurement and
assessment
All
identified risks are assessed based on an appropriate methodology
for that risk. All quantifiable risks which are material and
mitigated by holding capital are modelled in the Group's internal
model, which is used to determine capital requirements under
Solvency II and our own economic capital basis. Governance
arrangements are in place to support the internal model, including
independent validation and process and controls around model
changes and limitations.
iii. Risk management and control
The
control procedures and systems established within the Group are
designed to manage the risk of failing to meet business objectives
reasonably and are detailed in the Group risk policies. This can
only provide reasonable and not absolute assurance against material
misstatement or loss. They focus on aligning the levels of
risk-taking with the achievement of business
objectives.
The
management and control of risks are set out in the Group risk
policies, and form part of the holistic risk management approach
under the Group's ORSA. These risk policies define:
●
The
Group's risk appetite in respect of material risks, and the
framework under which the Group's exposure to those risks is
limited;
●
The
processes to enable Group senior management to effect the
measurement and management of the Group material risk profile in a
consistent and coherent way; and
●
The
flows of management information required to support the measurement
and management of the Group material risk profile and to meet the
needs of external stakeholders.
The
methods and risk management tools we employ to mitigate each of our
major categories of risks are detailed in section 4
below.
iv. Risk monitoring and reporting
The
identification of the Group's key risks informs the management
information received by the Group risk committees and the Board.
Risk reporting of key exposures against appetite is also included,
as well as ongoing developments in other key and emerging
risks.
|
3.
Summary risks
The
components of our business model give rise to risks of varying
nature across the Group which can broadly be categorised as those
which arise as a result of our business operations; those risks
arising from our investments; those which arise from the nature of
our products; and those broad risks which apply to us because of
the global environment in which we operate. These risks, where they
materialise, may have a financial impact on the Group, and could
also impact on the performance of our products or the services we
provide our customers and distributors, which gives rise to
potential risks to our brand, reputation and have conduct risk
implications. These risks are summarised below. We have indicated
whether these risks are considered material at the level of the
Group or our business units. Our disclosures covering risk factors
can be found at the end of this document.
|
'Macro'
- risks
Some of
the risks that we are exposed to are necessarily broad given the
external influences which may impact on the Group. These risks
include:
●
Global economic
conditions. Changes in global economic conditions can impact
us directly; for example by leading to poor returns on our
investments and increasing the cost of promises (guarantees) we
have made to our customers. Our fund investment performance may
also be impacted, which is a fundamental part of our business in
providing appropriate returns for our customers and shareholders.
Changes in economic conditions can also have an indirect impact on
us; for example economic pressures could lead to decreased savings,
reducing the propensity for people to buy our products. Global
economic conditions may also impact on regulatory risk for the
Group by changing prevailing political attitudes towards
regulation. We consider this to be a risk which is material at the
level of the Group.
●
Geopolitical
risk. The geopolitical environment has produced varying
levels of volatility in recent years as seen by political
developments in the UK, the US and the Eurozone. Uncertainty in
these regions, combined with conflict in the Middle East and
elevated tensions in east Asia and the Korean peninsula underline
that geopolitical risks are truly global and their potential
impacts are wide-ranging; for example through increased regulatory
and operational risks. The geopolitical and economic environments
are increasingly closely linked, and changes in the political arena
may have direct or indirect impacts on our Group.
●
Digital
disruption. The emergence of advanced technologies such as
artificial intelligence and block chain is providing an impetus for
companies to rethink their existing operating models and how they
interact with their customers. We consider digital disruption from
both an external and internal view. The external view considers the
rise of new technologies and how this may impact on our industry
and our competitiveness within it, while the internal view
considers the risks associated with our own internal developments
in meeting digital change challenges and opportunities. While we
are embracing such opportunities, we are also closely monitoring
any risks which arise.
|
Risks
from our investments
|
Risks
from our products
|
Risks
from our business operations
|
|
Credit
risk
Is the
potential for reduced value of our investments due to the
uncertainty around investment returns arising from the potential
for defaults of our investment counterparties. Invested credit risk
arises from our asset portfolio. We increase sector focus where
necessary.
The
assets backing the M&G Prudential and Jackson annuity
businesses means credit risk is considered a material risk for
these business units in particular.
Market
risk
Is the
potential for reduced value of our investments resulting from the
volatility of asset prices as driven by fluctuations in equity
prices, interest rates, foreign exchange rates and property prices.
Certain market risks are considered more material for specific
business units.
In our
Asia business, our main market risks arise from the value of fees
from our fee-earning products. In the US, Jackson's fixed and
variable annuity books are exposed to a variety of market risks due
to the assets backing these policies.
In the
UK, exposure arises from the valuation of the proportion of the
with-profits fund's future profits which is transferred to the
shareholders (future transfers), which is dependent on equity,
property and bond values.
M&G
Prudential invests in a broad range of asset classes and its income
is subject to the price volatility of global financial and currency
markets.
Liquidity
risk
Is the
risk of not having sufficient liquid assets to meet our obligations
as they fall due, and incorporates the risk arising from funds
composed of illiquid assets. It results from a mismatch between the
liquidity profile of assets and liabilities. We consider this a
risk which is material at the level of the Group.
|
Insurance
risks
The
nature of the products offered by the Group exposes it to insurance
risks, which we consider to form a significant part of our overall
Group risk profile.
The
insurance risks that we are exposed to by virtue of our products
include longevity risk
(policyholders living longer than expected); mortality risk (policyholders with life
protection dying); morbidity
risk (policyholders with health protection becoming ill) and
persistency risk (customers
lapsing their policies, and a type of policyholder behaviour
risk).
From
our health protection products, increases in the costs of claims
(including the level of medical expenses) increasing over and above
price inflation (claim inflation) is another risk.
The
processes that determine the price of our products and reporting
the results of our long-term business operations require us to make
a number of assumptions. Where experience deviates from these
assumptions our profitability may be impacted.
Across
our business units, some insurance risks are more material than
others.
Persistency and
morbidity risks are among the most material insurance risks for our
Asia business given our focus on health protection products in the
region.
For
M&G Prudential the most material insurance risk is longevity
risk driven by legacy annuity business.
At
Jackson, the most material insurance risk is policyholder behaviour
risk, including persistency. This impacts the profitability of the
variable annuity business and influenced by market performance and
the value of policy guarantees.
|
Operational
risks
The
complexity of our Group and activities means we face a challenging
operating environment. This results from the high volume of
transactions we process; product and investment portfolios; our
people, processes and IT systems; and the extensive regulations
under which we operate.
We also
face operational risks through business transformation; introducing
new products; new technologies; engaging in third party
relationships; and entering into new markets and geographies.
Implementing our business strategy requires interconnected change
initiatives across the Group. The pace of change further adds to
the complexity of our operational risk profile.
Without
an effective operational risk framework, such risks could cause
significant disruption our systems and operations, resulting in
financial loss and/or reputational damage. We consider operational
risk to be material at the level of the Group.
Information security risk is a
significant consideration within operational risk, including both
the continuously evolving risk of malicious attack on our systems
as well as risks relating to data security and integrity and
network disruption. The size of Prudential's IT infrastructure and
network, our move toward digitalisation and the increasing number
of high profile cyber security incidents across industries means
that this risk will continue to be an area of high focus and is one
considered to be material to the Group.
Regulatory
risk
We also
operate under the ever-evolving requirements set out by diverse
regulatory and legal and tax regimes, as well as utilising a
significant number of third parties to distribute products and to
support business operations; all of which adds to the complexity of
our operations.
The
number of regulatory changes under way across Asia, in particular
those focusing on consumer protection means that regulatory change
in the region is considered a key risk.
Both
Jackson and M&G Prudential operate in highly regulated markets.
Regulatory reforms can have a material impact on our businesses,
and regulatory focus continues to be high.
|
4. Further risk
information
In
reading the sections below, it is useful to understand that there
are some risks that our policyholders assume by virtue of the
nature of their products, and some risks that the Company and its
shareholders assume. Examples of the latter include those risks
arising from assets held directly by and for the Company or the
risk that policyholder funds are exhausted. This report is focused
mainly on risks to the shareholder, but will include those which
arise indirectly through our policyholder exposures.
4.1 Risks from our
investments
a. Market risk
The
main drivers of market risk in the Group are:
● Investment risk (including equity and property
risk);
● Interest rate risk; and
● Given the geographical diversity of our business,
foreign exchange risk.
With
respect to investment risk, equity and property risk arises from
our holdings of equity and property investments, the prices of
which can change depending on market conditions.
The
valuation of our assets (particularly the bonds that we invest in)
and liabilities are also dependent on market interest rates and
exposes us to the risk of those moving in a way that is detrimental
for us.
Given
our global business, we earn our profits and have assets and
liabilities in various currencies. The translation of those into
our reporting currency exposes us to movements in foreign exchange
rates.
Our
main investment risk exposure arises from the portion of the
profits from the M&G Prudential with-profits fund to which we
are entitled to receive; the value of the future fees from our
fee-earning products in our Asia business; and from the asset
returns backing Jackson's variable annuities business.
Our
interest rate risk is driven in the UK business by our need to
match the duration of our assets and liabilities; from the
guarantees of some non unit-linked investment products in Asia; and
the cost of guarantees in Jackson's fixed, fixed index and variable
annuity business.
The
methods that we use to manage and mitigate our market risks include
the following:
● Our market risk policy;
● Risk appetite statements, limits and triggers that
we have in place;
● The monitoring and oversight of market risks
through the regular reporting of management
information;
● Our asset and liability management
programmes;
● Use of derivative programmes, including, for
example, interest rate swaps, options and hybrid options for
interest rate risk;
● Regular deep dive assessments;
and
● Use of currency hedging.
Investment risk
In the
UK business, our main investment risk arises from the assets held
in the with-profits funds. Although this is mainly held by our
policyholders, a proportion of the funds' declared bonuses and
policyholder net investment gains is shared with shareholders and
so our investment exposure relates to the future performance of
that proportion (future transfers).
This
investment risk is driven mainly by equities in the funds, although
there is some risk associated with other investments such as
property and bonds. Some hedging to protect against a reduction in
the value of these future transfers against falls in equity prices
is performed outside the funds using derivatives. The with-profits
funds' large Solvency II own funds - estimated at £9.6 billion
as at 31 December 2017 (31 December 2016: £8.4 billion) -
helps to protect against market fluctuations and helps the funds to maintain
appropriate solvency levels. The with-profits funds' Solvency II
own funds are protected partially against falls in equity markets
through an active hedging programme within the
fund.
In
Asia, our shareholder exposure to equity price movements results
from unit-linked products, where our fee income is linked to the
market value of the funds under management. Further exposure arises
from with-profits businesses where bonuses declared are based
broadly on historical and current rates of return from our
investment portfolios which include equities.
In
Jackson, investment risk arises from the assets backing customer
policies. In the case of spread-based business, including fixed
annuities, these assets are generally bonds, and shareholder
exposure comes from the minimum returns needed to meet the
guaranteed rates that we offer to policyholders. For our variable
annuity business, these assets include both equities and bonds. In
this case, the main risk to the shareholder comes from the
guaranteed benefits that can be included as part of these products.
Our exposure to this is reduced by using a derivative hedging
programme, as well as through the use of reinsurance to pass on the
risk to third-party reinsurers.
Interest rate risk
While
long-term interest rates in advanced economies have increased
broadly since mid-2016 and indications are for further gradual
tightening of monetary policy and the start of balance sheet
normalisation by central banks, they remain close to historical
lows. Some products that we offer are sensitive to movements in
interest rates. We have already taken a number of actions to reduce
the risk to the in-force business, as well as re-pricing and
restructuring new business offerings in response to these
historically low interest rates. Nevertheless, we still retain some
sensitivity to interest rate movements.
Interest rate risk
arises in M&G Prudential's insurance business from the need to
match cash payments to meet annuity obligations with the cash we
receive from our investments. To minimise the impact on our profit,
we aim to match the duration (a measure of interest rate
sensitivity) of assets and liabilities as closely as possible and
the position is monitored regularly. Under the Solvency II
regulatory regime, additional interest rate risk results from the
way the balance sheet is constructed, such as the requirement for
us to include a risk margin. The UK business assesses on a
continual basis the need for any derivatives in managing its
interest rate sensitivity. The with-profits business is exposed to
interest rate risk because of underlying guarantees in some of its
products. Such risk is borne largely by the with-profits fund
itself but shareholder support may be required in extreme
circumstances where the fund has insufficient resources to support
the risk.
In
Asia, our exposure to interest rate risk arises from the guarantees
of some non unit-linked investment products. This exposure exists
because it may not be possible to hold assets which will provide
cash payments to us which match exactly those payments we in turn
need to make to policyholders - this is known as an asset and
liability mismatch and although it is small and managed
appropriately, it cannot be eliminated.
Jackson
is exposed to interest rate risk in its fixed, fixed index and
variable annuity books. Movements in interest rates can impact on
the cost of guarantees in these products; in particular the cost of
guarantees to us may increase when interest rates fall. We monitor
the level of sales of variable annuity products with guaranteed
living benefits actively, and together with the risk limits we have
in place this helps us to ensure that we are comfortable with the
interest rate and market risks we incur as a result. The Jackson
hedging programme includes hybrid derivatives to provide some
protection from a combined fall in interest rates and equity
markets since Jackson is exposed to the combination of these market
movements.
Foreign exchange risk
The
geographical diversity of our businesses means that we have some
exposure to the risk of exchange rate fluctuations. Our operations
in the US and Asia, which represent a large proportion of our
operating profit and shareholders' funds, generally write policies
and invest in assets in local currencies. Although this limits the
effect of exchange rate movements on local operating results, it
can lead to fluctuations in our Group financial statements when
results are reported in UK sterling.
We
retain revenues locally to support the growth of our business and
capital is held in the local currency of the business to meet local
regulatory and market requirements. We accept the foreign exchange
risk this can produce when reporting our Group balance sheet and
income statement. In cases where a surplus arises in an overseas
operation which is to be used to support Group capital, or where a
significant cash payment is due from an overseas subsidiary to the
Group, this foreign exchange exposure is hedged where we believe it
is favourable economically to do so. Generally, we do not have
appetite for significant direct shareholder exposure to foreign
exchange risks in currencies outside of the countries in which we
operate, but we do have some appetite for this on fee income and on
non-sterling investments within the with-profits fund. Where
foreign exchange risk arises outside our appetite, currency
borrowings, swaps and other derivatives are used to manage our
exposure.
b. Credit risk
We
invest in bonds that provide a regular, fixed amount of interest
income (fixed income assets) in order to match the payments we need
to make to policyholders. We also enter into reinsurance and
derivative contracts with third parties to mitigate various types
of risk, as well as holding cash deposits at certain banks. As a
result, we are exposed to credit risk and counterparty risk across
our business.
Credit
risk is the potential for reduction in the value of our investments
which results from the perceived level of risk of an investment
issuer being unable to meet its obligations (defaulting).
Counterparty risk is a type of credit risk and relates to the risk
that the counterparty to any contract we enter into being unable to
meet their obligations causing us to suffer loss.
We use
a number of risk management tools to manage and mitigate this
credit risk, including the following:
● Our credit risk policy;
● Risk appetite statements and limits that we have
defined on issuers, and counterparties;
● Collateral arrangements we have in place for
derivative, secured lending reverse repo and reinsurance
transactions;
● The Group Credit Risk Committee's oversight of
credit and counterparty credit risk and sector and/or name-specific
reviews. In 2017 it has conducted sector reviews in the Asia
sovereign sector, the UK banking sector, the US retail property
sector, and continues to review the developments around central
clearing;
● Regular deep dive assessments;
and
● Close monitoring or restrictions on investments
that may be of concern.
Debt and loan portfolio
Our UK
business is exposed mainly to credit risk on fixed income assets in
the shareholder-backed portfolio. At 31 December 2017, this
portfolio contained fixed income assets worth £35.3 billion.
Credit risk arising from a further £57.4 billion of fixed
income assets is borne largely by the with-profits fund, to which
the shareholder is not exposed directly although under extreme
circumstances shareholder support may be required if the fund is
unable to meet payments as they fall due.
Credit
risk also arises from the debt portfolio in our Asia business, the
value of which was £41.0 billion at 31 December 2017. The
majority (68 per cent) of the portfolio is in unit-linked and
with-profits funds and so exposure of the shareholder to this
component is minimal. The remaining 32 per cent of the debt
portfolio is held to back the shareholder business.
Credit
risk also arises in the general account of the Jackson business,
where £35.4 billion of fixed income assets are held to support
shareholder liabilities including those from our fixed annuities,
fixed index annuities and life insurance products.
The
shareholder-owned debt and loan portfolio of the Group's other
operations was £2.3 billion as at 31 December
2017.
Further
details of the composition and quality of our debt portfolio, and
exposure to loans, can be found in the IFRS financial
statements.
Group sovereign debt
We also
invest in bonds issued by national governments. This sovereign debt
represented 19 per cent or £16.5 billion of the shareholder
debt portfolio as at 31 December 2017 (31 December 2016: 19 per
cent or £17.1 billion). 5 per cent of this was rated AAA and
90 per cent was considered investment grade (31 December 2016: 92
per cent investment grade).
The
particular risks associated with holding sovereign debt are
detailed further in our disclosures on risk factors.
The
exposures held by the shareholder-backed business and with-profits
funds in sovereign debt securities at 31 December 2017 are given in
Note C3.2(f) of the Group's IFRS financial statements.
Bank debt exposure and counterparty credit risk
Our
exposure to banks is a key part of our core investment business, as
well as being important for the hedging and other activities we
undertake to manage our various financial risks. Given the
importance of our relationship with our banks, exposure to the
sector is considered a material risk for the Group with an
appropriate level of management information provided to the Group's
risk committees and the Board.
The
exposures held by the shareholder-backed business and with-profits
funds in bank debt securities at 31 December 2017 are given in Note
C3.2(f) of the Group's IFRS financial statements.
Our
exposure to derivative counterparty and reinsurance counterparty
credit risk is managed using an array of risk management tools,
including a comprehensive system of limits.
Where
appropriate, we reduce our exposure, buy credit protection or use
additional collateral arrangements to manage our levels of
counterparty credit risk.
At 31
December 2017, shareholder exposures by rating1 and sector are shown
below:
● 95 per cent of the shareholder
portfolio is investment grade rated. In particular, 69 per cent of
the portfolio is rated A and above; and
● The Group's shareholder portfolio is well
diversified: no individual sector makes up more than 10 per cent of
the total portfolio (excluding the financial and sovereign
sectors).
c. Liquidity risk
Our
liquidity risk arises from the need to have sufficient liquid
assets to meet policyholder and third-party payments as they fall
due. This incorporates the risk arising from funds composed of
illiquid assets and results from a mismatch between the liquidity
profile of assets and liabilities. Liquidity risk may impact on
market conditions and valuation of assets in a more uncertain way
than for other risks like interest rate or credit risk. It may
arise, for example, where external capital is unavailable at
sustainable cost, increased liquid assets are required to be held
as collateral under derivative transactions or redemption requests
are made against Prudential external funds.
We have
significant internal sources of liquidity, which are sufficient to
meet all of our expected cash requirements for at least 12 months
from the date the financial statements are approved, without having
to resort to external sources of funding. In total, the Group has
£2.6 billion of undrawn committed facilities that we can make
use of, expiring in 2022. We have access to further liquidity by
way of the debt capital markets, and also have in place an
extensive commercial paper programme and have maintained a
consistent presence as an issuer in this market for the last
decade.
Liquidity uses and
sources are assessed at a Group and business unit level under both
base case and stressed assumptions. We calculate a Liquidity
Coverage Ratio (LCR) under stress scenarios as one measure of our
liquidity risk, and this ratio and the liquidity resources
available to us are monitored regularly and are assessed to be
sufficient.
Our
risk management and mitigation of liquidity risk
include:
● Our liquidity risk policy;
● The risk appetite statements, limits and triggers
that we have in place;
● The monitoring of liquidity risk we perform
through regular management information to committees and the
Board;
● Our Liquidity Risk Management Plan, which includes
details of the Group Liquidity Risk Framework as well as gap
analysis of our liquidity risks and the adequacy of our available
liquidity resources under normal and stressed
conditions;
● Regular stress testing;
● Our established contingency plans and identified
sources of liquidity;
● Our ability to access the money and debt capital
markets;
● Regular deep dive assessments;
and
● The access we have to external sources of finance
through committed credit facilities.
4.2 Risks from our
products
a. Insurance risk
Insurance risk
makes up a significant proportion of our overall risk exposure. The
profitability of our businesses depends on a mix of factors
including levels of, and trends in, mortality (policyholders
dying), morbidity (policyholders becoming ill) and policyholder
behaviour (variability in how customers interact with their
policies, including utilisation of withdrawals, take-up of options
and guarantees and persistency, ie lapsing of policies), and
increases in the costs of claims, including the level of medical
expenses increases over and above price inflation (claim
inflation).
The
principal drivers of the Group's insurance risks are persistency
and morbidity risk in the Asia business; longevity risk in the UK
legacy business of M&G Prudential; and policyholder behaviour
risks in Jackson.
We
manage and mitigate our insurance risk using the
following:
● Our insurance and underwriting risk
policies;
● The risk appetite statements, limits and triggers
we have in place;
● Using longevity, morbidity and persistency
assumptions that reflect recent experience and expectation of
future trends, and industry data and expert judgement where
appropriate;
● Using reinsurance to mitigate longevity and
morbidity risks;
● Ensuring appropriate medical underwriting when
policies are issued and appropriate claims management practices
when claims are received in order to mitigate morbidity
risk;
● Maintaining the quality of our sales processes and
using initiatives to increase customer retention in order to
mitigate persistency risk;
● Using product re-pricing and other claims
management initiatives in order to mitigate medical expense
inflation risk; and
● Regular deep dive assessments.
Longevity risk is
an important element of our insurance risks for which we need to
hold a large amount of capital under Solvency II regulations.
Longevity reinsurance is a key tool for us in managing our risk.
The enhanced pensions freedoms introduced in the UK during 2015
reduced the demand for retail annuities greatly and further
liberalisation is anticipated. Although we have withdrawn from
selling new annuity business, given our significant annuity
portfolio the assumptions we make about future rates of improvement
in mortality rates remain key to the measurement of our insurance
liabilities and to our assessment of any reinsurance
transactions.
We
continue to conduct research into longevity risk using both
experience from our annuity portfolio and industry data. Although
the general consensus in recent years is that people are living
longer, there is considerable volatility in year-on-year longevity
experience, which is why we need expert judgement in setting our
longevity basis.
Our
morbidity risk is mitigated by appropriate underwriting when
policies are issued and claims are received. Our morbidity
assumptions reflect our recent experience and expectation of future
trends for each relevant line of business.
In
Asia, we write significant volumes of health protection business,
and so a key assumption for us is the rate of medical inflation,
which is often in excess of general price inflation. There is a
risk that the expenses of medical treatment increase more than we
expect, so the medical claim cost passed on to us is higher than
anticipated. Medical expense inflation risk is best mitigated by
retaining the right to re-price our products each year and by
having suitable overall claim limits within our policies, either
limits per type of claim or in total across a policy.
Our
persistency assumptions reflect similarly a combination of recent
past experience for each relevant line of business and expert
judgement, especially where a lack of relevant and credible
experience data exists. Any expected change in future persistency
is also reflected in the assumption. Persistency risk is mitigated
by appropriate training and sales processes and managed locally
post-sale through regular experience monitoring and the
identification of common characteristics of business with high
lapse rates. Where appropriate, we make allowance for the
relationship (either assumed or observed historically) between
persistency and investment returns and account for the resulting
additional risk. Modelling this dynamic policyholder behaviour is
particularly important when assessing the likely take-up rate of
options embedded within certain products. The effect of persistency
on our financial results can vary but depends mostly on the value
of the product features and market conditions.
4.3 Risks from our business
operations
a. Non-financial risks
In the
course of doing business, the Group is exposed to non-financial
risks arising from our operations, the business environment
and our strategy. Our main risks across these areas are
detailed below.
We
define operational risk as the risk of loss (or unintended gain or
profit) arising from inadequate or failed internal processes,
personnel or systems, or from external events. This includes
employee error, model error, system failures, fraud or some other
event which disrupts business processes. Processes are established
for activities across the scope of our business, including
operational activity, regulatory compliance, and those supporting
environmental, social and governance (ESG) activities among others,
any of which can expose us to operational risks.
We
process a large volume of complex transactions across a number of
diverse products, and are subject to a high number of varying
legal, regulatory and tax regimes. We also have a number of
important third-party relationships that provide the distribution
and processing of our products, both as market counterparties
and as outsourcing partners. M&G Prudential outsources several
operations, including a significant part of its back office,
customer-facing functions and a number of IT functions. These third
party arrangements help us to provide a high level and
cost-effective service to our customers, but they also make us
reliant on the operational performance of our outsourcing
partners.
The
performance of our core business activities places reliance on the
IT infrastructure that supports day-to-day transaction processing.
Our IT environment must also be secure and we address an increasing
cyber risk threat as our digital footprint increases - see separate
Cyber risk section below. The risk that our IT infrastructure does
not meet these requirements is a key area of focus for us,
particularly the risk that legacy infrastructure supporting core
activities/processes affects business continuity or impacts on
business growth.
Operational
challenges also exist in keeping pace with regulatory changes. This
requires implementing processes to ensure we are, and remain,
compliant on an ongoing basis, including regular monitoring and
reporting. The high rate of global regulatory change, in an already
complex regulatory landscape, increases the risk of non-compliance
due to a failure to identify, interpret correctly, implement and/or
monitor regulatory compliance. See Global regulatory and political
risk section below. Legislative developments over recent years,
together with enhanced regulatory oversight and increased
capability to issue sanctions, have resulted in a complex
regulatory environment that may lead to breaches of varying
magnitude if the Group's business-as-usual operations are not
compliant. As well as prudential regulation, we focus on conduct
regulation, including those related to sales practice and
anti-money laundering, bribery and corruption. We have a particular
focus on regulations related to the latter in newer/emerging
markets.
The
business environment we operate in has become increasingly complex
over the years. The political, environmental, societal, legal and
economic landscape is highly dynamic and uncertain. Changes and
developments on the horizon may result in emerging risks to us
which are monitored under our Emerging Risk Framework.
The
Group maintains active engagement with our shareholders,
governments, policymakers and regulators in our key markets, as
well as with international institutions. This introduces
expectations for the Group to act and respond to environmental,
social and governance (ESG) matters in a certain manner. The
perception that our key stakeholders have of us and our businesses
is crucial in forming and maintaining a robust brand and
reputation. As such, the Group's operational risk framework
explicitly incorporates ESG as a component of our social and
environmental responsibility, brand management and external
communications within our framework. This is further strengthened
by factoring considerations for reputational impacts when the
materiality of operational risks are assessed.
The
climate risk landscape continues to evolve and is moving up the
agenda of many regulators, governments, non-governmental
organisations and investors. Examples of this include the US
Department of Labor's decision to change its guidance to pension
fund fiduciaries to allow them to factor ESG issues into investment
decisions; Hong Kong Stock Exchange listing rules requiring listed
companies to provide a high-level discussion of ESG approaches and
activities in external disclosures, and the Financial Stability
Board (FSB's) Task Force for Climate-related Financial
Disclosures.
The
increased regulatory focus on environmental issues not only
reflects existing commitments, for example in the UK under the 2008
Climate Change Act, but also a heightened societal awareness of
climate change as a pressing global concern. Regulatory and
stakeholder interest in environmental matters is expected to
increase as climate change moves higher up governmental agendas.
This increase in focus creates a number of potential near term
risks. These include:
● Investment risk in the form of 'transition risk'.
This is the risk that an abrupt, unexpected tightening of carbon
emission policies lead to a disorderly re-pricing of
carbon-intensive assets;
● Liability risk, if the Group is unable to
demonstrate sufficiently that we have acted to mitigate our
exposure to climate change risk; and
● Reputational risks, where the Group's actions
could affect external perceptions of our brand and corporate
citizenship.
The
Group has established a Group-wide Responsible Investment Advisory
Committee with designated responsibility to oversee Prudential's
responsible investment activities as both asset owners and asset
managers.
Physical impacts of
climate change could also arise, driven by specific climate-related
events such as natural disasters. These impacts are mitigated
through our crisis management and disaster recovery
plans.
Strategic risk
requires a forward-looking approach to risk management. A key part
of our approach are the risk assessments performed as part of the
Group's annual strategic planning process, which supports the
identification of potential future threats and the initiatives
needed to address them, as well as competitive opportunities. We
also assess the impact on the Group's businesses and our risk
profile to ensure that strategic initiatives are within the Group's
overall risk appetite.
Implementation of
the Group's strategy and the need to comply with emerging
regulation has resulted in a significant portfolio of
transformation and change initiatives, which may further increase
in the future. In particular the intention to demerge the UK and
Europe business from the rest of the Group will result in a
substantial change programme which will need to be managed at the
same time that other material transformation programmes are being
delivered. The scale and the complexity of the transformation programmes could
impact business operations and customers, and has the potential for
reputational damage if these programmes fail to deliver their
objectives. Implementing further strategic initiatives may amplify
these risks.
Other
significant change initiatives are occurring across the Group. The
volume, scale and complexity of these programmes increases the
likelihood and potential impact of risks associated
with:
● Dependencies between multiple
projects;
● The organisational ability to absorb change being
exceeded;
● Unrealised business objectives/benefits;
and
● Failures in project design and
execution.
The
risks detailed above form key elements of the Group's operational
risk profile. In order to effectively identify, assess, manage,
control and report on all operational risks across the business, a
Group-wide operational risk framework is in place. The key
components of the framework are:
●
Application of a risk and control assessment (RCA)
process, where operational risk exposures are identified and
assessed as part of a periodical cycle. The RCA process takes into
account a range of internal and external factors, including an
assessment of the control environment, to determine the business's
most significant risk exposures on a prospective
basis;
●
An internal incident capture process, which
identifies, quantifies and monitors remediation conducted through
application of action plans for risk events that have occurred
across the business;
●
A scenario analysis process for the quantification of
extreme, yet plausible manifestations of key operational risks
across the business on a forward looking basis. This is carried out
at least annually and supports external and internal capital
requirements as well as informing risk activity across the
business; and
●
An operational risk appetite framework that
articulates the level of operational risk exposure the business is
willing to tolerate and sets out escalation processes for breaches
of appetite.
Outputs
from these processes and activities performed individual business
units are monitored by the Group Risk function, who provide an
aggregated view of risk profile across the business to the Group
Risk Committee and Board.
These
core framework components are embedded across the Group via the
Group Operational Risk Policy and Standards documents, which sets
out the key principles and minimum standards for the management of
operational risk across the Group.
The
Group operational risk policy, standards and operational risk
appetite framework sit alongside other risk policies and standards
that individually engage with key operational risks, including
outsourcing and third-party supply, business continuity, technology
and data, and operations processes.
These
policies and standards include subject matter expert-led processes
that are designed to identify, assess, manage and control
operational risks, including the application of:
●
A transformation risk framework that assesses,
manages and reports on the end-to-end transformation lifecycle,
project prioritisation and the risks, interdependencies and
possible conflicts arising from a large portfolio of transformation
activities;
●
Internal and external review of cyber security
capability;
●
Regular updating and testing of elements of
disaster-recovery plans and the Critical Incident Procedure
process;
●
Group and business unit-level compliance oversight
and testing in respect of adherence with in-force
regulations;
●
Regulatory change teams in place assist the business
in proactively adapting and complying with regulatory
developments;
●
A framework in place for emerging risk identification
and analysis in order to capture, monitor and allow us to prepare
for operational risks that may crystallise beyond the short-term
horizon;
●
Corporate insurance programmes to limit the financial
impact of operational risks; and
●
Reviews of key operational risks and challenges
within Group and business unit business plans.
These
activities are fundamental in maintaining an effective system of
internal control, and as such outputs from these also inform core
RCA, incident capture and scenario analysis processes and reporting
on operational risk. Furthermore, they also ensure that operational
risk considerations are embedded in key business decision-making,
including material business approvals and in setting and
challenging the Group's strategy.
b. Global regulatory and political
risk
Our
risk management and mitigation of regulatory and political risk
includes the following:
● Risk Assessment of the Business Plan which
includes consideration of current strategies;
● Close monitoring and assessment of our business
environment and strategic risks;
● The consideration of risk themes in strategic
decisions; and
● Ongoing engagement with national regulators,
government policy teams and international standard
setters.
Recent
shifts in the focus of some governments toward more protectionist
or restrictive economic and trade policies could impact on the
degree and nature of regulatory changes and Prudential's
competitive position in some geographic markets. This could take
effect, for example, through increased friction in cross-border
trade, capital controls or measures favouring local enterprises
such as changes to the maximum level of non-domestic ownership by
foreign companies. We continue to monitor these developments at a
national and global level and these considerations form part of our
ongoing engagement with government policy teams and
regulators.
On 29
March 2017 the UK submitted formal notification of its intention to
withdraw from the EU. In December 2017, agreement was reached
between the UK and EU to progress negotiations onto transitional
arrangements and the future trading relationship. The outcome of
negotiations remains highly uncertain. If no formal withdrawal
agreement is reached then it is expected the UK's membership of the
EU will terminate automatically two years after the submission of
the notification.
The
ongoing uncertainty during the remainder of the negotiation period
and the potential for a disorderly exit from the EU by the UK
without a negotiated agreement may increase volatility in the
markets where we operate, creating the potential for a general
downturn in economic activity and for falls in interest rates in
some jurisdictions due to easing of monetary policy and investor
sentiment.
As a
Group, our diversification by geography, currency, product and
distribution should reduce some of the potential impact. We have
UK-domiciled operations including M&G Prudential, and due to
the geographical location of both its businesses and its customers,
its insurance and the fund management operations have most
potential to be affected by the UK's exit. The extent of the impact
will depend in part on the nature of the arrangements that are put
in place between the UK and the EU. Contingency plans were
developed ahead of the referendum by business units and operations
that may be impacted immediately by a vote to withdraw the UK from
the EU, and these plans have been enacted since the referendum
result. We have since also undertaken significant work to ensure
that our business, and in particular our customer base, is not
unduly affected by the decision of the UK to exit from the
EU.
The
UK's decision to leave the EU has introduced uncertainty to the
extent of future applicability of the Solvency II regime in the UK.
In October 2017, the Treasury Committee published its report on the
Solvency II Directive and the UK Insurance Industry, which
highlighted the need for a strategy, post-UK exit, to foster
innovation, competition and competitiveness for the benefit of UK
consumers. In late 2016 the European Commission began a review of
some aspects of the Solvency II legislation, with a particular
focus on the Solvency Capital Requirement calculated using the
standard formula, which is expected to run until 2021.
National and
regional efforts to curb systemic risk and promote financial
stability are also underway in certain jurisdictions in which
Prudential operates, including the Dodd-Frank Wall Street Reform
and Consumer Protection Act in the US, the work of the Financial
Stability Board (FSB) on Global Systemically Important Insurers
(G-SIIs) and the Insurance Capital Standard being developed by the
International Association of Insurance Supervisors
(IAIS). There are also a number of ongoing policy initiatives
and regulatory developments that are having, and will continue to
have, an impact on the way Prudential is supervised. These include
addressing Financial Conduct Authority (FCA) reviews, ongoing
engagement with the Prudential Regulation Authority (PRA), and the
work of the Financial Stability Board (FSB) and standard-setting
institutions such as the IAIS. Decisions taken by regulators,
including those related to solvency requirements, corporate or
governance structures, capital allocation and risk management may
have an impact on our business.
The
IAIS's G-SII regime forms additional compliance considerations for
us. Groups designated as G-SIIs are subject to additional
regulatory requirements, including enhanced group-wide supervision,
effective resolution planning, development of a Systemic Risk
Management Plan, a Recovery Plan and a Liquidity Risk Management
Plan. The FSB did not publish a new list of G-SIIs in 2017, however
the policy measures set out in the FSB's 2016 communication on
G-SIIs continue to apply to the Group. Prudential is monitoring the
development and potential impact of the policy measures and is
continuing to engage with the PRA on the implications of such
measures and Prudential's designation as a G-SII. The IAIS has
launched a public interim consultation on an activities-based
approach to systemic risk. Following the feedback from this, a
second consultation with proposals for policy measures is due to be
launched in 2018. Any changes to the designation methodology are
expected to be implemented in 2019.
We
continue to engage with the IAIS on developments in capital
requirements for groups with G-SII designation. The regime introduces capital requirements in the
form of a Higher Loss Absorption (HLA) requirement. This
requirement was initially intended to come into force in 2019 but
has been postponed until 2022. The HLA is also now intended to be
based on the Insurance Capital Standard, which is being developed
by the IAIS as the capital requirements under its Common
Framework (ComFrame). This framework is focused on the supervision
of Internationally Active Insurance Groups (IAIGs) and will
establish a set of common principles and standards designed to
assist regulators in addressing risks that arise from insurance
groups with operations in multiple jurisdictions. As part of this,
work is underway to develop a global Insurance Capital Standard
(ICS) that is intended to apply to Internationally Active Insurance
Groups.
The
IAIS has announced that the implementation of ICS will be conducted
in two phases - a five-year monitoring phase followed by an
implementation phase. During the monitoring phase, IAIGs will be
required to report on ICS to the group-wide supervisor on a
confidential basis, although these results will not be used as a
basis to trigger supervisory action.
The
IAIS's Insurance Core Principles, which provide a globally-accepted
framework for the supervision of the insurance sector and ComFrame
evolution, are expected to create continued development in both
prudential and conduct regulations over the next two to three
years.
In the
US, some parts of the Department of Labor (DoL) rule introducing
fiduciary obligations for distributors of investment products,
which may reshape dramatically the distribution of retirement
products, became effective on 9 June 2017. This included those
provisions on impartial conduct standards, although other
provisions of the rule have now been delayed until 1 July 2019.
Jackson has introduced fee-based variable annuity products in
response to the introduction of the rule, and we anticipate that
the business's strong relationships with distributors, history of
product innovation and efficient operations should further mitigate
any impacts.
The US
National Association of Insurance Commissioners (NAIC) is
continuing its industry consultation with the aim of reducing the
non-economic volatility in the variable annuity statutory balance
sheet and risk management. Following two industry quantitative
impact studies, proposed changes to the current framework have been
released by the NAIC for comment from industry and other interested
parties. Jackson continues to be engaged in the consultation and
testing process. The proposed changes are expected to be effective
from 2019 at the earliest. In December 2017, the Tax Cuts and Jobs
Act was signed into law in the US. Some uncertainty exists on the
implications of the tax reforms on the NAIC's
proposals.
A
degree of uncertainty as to the timing, status and final scope of
these key US reforms exists. Our preparations to manage the impact
of these reforms will continue while we await further
clarification.
In May
2017, the International Accounting Standards Board (IASB) published
IFRS 17 which will introduce fundamental changes to the statutory
reporting of insurance entities that prepare accounts according to
IFRS from 2021. The Group is reviewing the complex requirements of
the standard and is considering its potential impact. This is
expected to, among other things, include altering the timing of
IFRS profit recognition, and the implementation of the standard is
likely to require changes to the Group's IT, actuarial and finance
systems.
In
Asia, regulatory regimes are developing at different speeds, driven
by a combination of global factors and local considerations. New
local capital rules and requirements could be introduced in these
and other regulatory regimes that challenge legal or ownership
structures, current sales practices, or could be applied to sales
made prior to their introduction retrospectively, which could have
a negative impact on Prudential's business or reported
results.
c. Cyber risk
Cyber
risk remains an area of heightened focus after a number of recent
high profile attacks and data losses. The growing maturity and
industrialisation of cyber-criminal capability, together with an
increasing level of understanding of complex financial transactions
by criminal groups, are two reasons why risks to the financial
services industry are increasing. Disruption to the availability,
confidentiality and integrity of our IT systems could make it
difficult to recover critical services, result in damage to assets
and compromise the integrity and security of data. This could
result in significant impacts to business continuity, our customer
relationship and our brand reputation. Developments in data
protection worldwide (such as the EU General Data Protection
Regulation that comes into force in May 2018) may increase the
financial and reputational implications for Prudential of a breach
of its (or third-party suppliers') IT systems.
Given
this, cyber security is seen as a key risk for the Group and is an
area of increased scrutiny by global regulators. The threat
landscape is continuously evolving, and our assessment is that the
systemic risk from untargeted but sophisticated and automated
attacks has increased. Cyber risks are also increasingly stemming
from geopolitical tensions.
The
core objectives of our Cyber Risk Management Strategy are: to
develop a comprehensive situational awareness of our business in
cyberspace; to pro-actively engage cyber attackers to minimise harm
to our business; and to enable the business to grow and safely in
cyberspace confidently.
Our
Cyber Defence Plan consists of a number of work-streams, including
developing our ability to deal with incidents; alignment with our
digital transformation strategy; and increasing cyber oversight and
assurance to the Board. We have made progress in all of these
across 2017. Protecting our customers remains core to our business,
and the successful delivery of the Cyber Defence Plan will
reinforce our capabilities to continue doing so in cyberspace as we
transition to a digital business.
The
Board receives periodic updates on cyber risk management throughout
the year, which includes assessments against the core objectives
under our Group-wide Cyber Risk Management Strategy and progress
updates on the associated Group-wide Coordinated Cyber Defence
Plan.
Group
functions work with each of the business units to address cyber
risks locally within the national and regional context of each
business, following the strategic direction laid out in the Cyber
Risk Management Strategy and managed through the execution of the
Cyber Defence Plan.
The
Group Information Security Committee, which consists of senior
executives from each of the businesses and meets on a regular
basis, governs the execution of the Cyber Defence Plan and reports
on delivery and cyber risks to the Group Executive Risk Committee.
Both committees also receive regular operational management
information on the performance of controls.
Note
1
Based on hierarchy of Standard and Poor's Moody's and Fitch, where
available and if unavailable, internal ratings have been
used.
Corporate
governance
The
Board confirms that it has complied with all the principles and
provisions set out in the Hong Kong Code on Corporate Governance
Practices (the HK Code) throughout the accounting period with the
following exception. With respect to Code Provision B.1.2(d) of the
HK Code, the responsibilities of the Remuneration
Committee do not include making recommendations to the
Board on the remuneration of non-executive directors. In
line with the principles of the UK Code, fees for Non-executive
Directors are determined by the Board.
The
directors also confirm that the financial results contained in this
document have been reviewed by the Group Audit
Committee.
The
company confirms that it has adopted a code of conduct regarding
securities transactions by directors on terms no less exacting than
required by the Hong Kong Listing Rules and that the directors of
the Company have complied with this code of conduct throughout the
year.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: 14
March 2018
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PRUDENTIAL
PUBLIC LIMITED COMPANY
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By: /s/ Mark
FitzPatrick
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Mark FitzPatrick
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Chief Financial Officer
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