a2273i
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 August, 2021
PRUDENTIAL PUBLIC LIMITED COMPANY
(Translation of registrant's name into English)
1 Angel Court, London,
England, EC2R 7AG
(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-
NEWS RELEASE
11 August 2021
PRUDENTIAL PLC HALF YEAR 2021 RESULTS
PRUDENTIAL DELIVERS RESILIENT PERFORMANCE AND MOVES FORWARD WITH
STRATEGIC TRANSFORMATION
Performance highlights on a constant (and actual) exchange rate
basis
● APE sales4 in
Asia and Africa up 17 per cent (21 per cent) to $2,083 million, new
business profit12 up
by 25 per cent (29 per cent) to $1,176 million
● Adjusted operating profit2 from
continuing operations1 up
19 per cent (22 per cent) to $1,571 million
● Completion of strategic transformation through
proposed demerger of Jackson, planned to complete in September
2021
● Prudential plc continues to consider raising
equity of around $2.5-3.0 billion through global offering to
institutions and Hong Kong retail investors, after the proposed
Jackson demerger
Mike Wells, Prudential plc's Group Chief Executive, said: "We have
delivered a resilient performance in the first half of 2021,
against a backdrop of continuing economic and social challenges due
to Covid-19 and the resulting volatility in consumer activity.
Despite the constraints of the environment, our hard-working and
dedicated staff and agents have continued to serve our customers
and build value for our shareholders, while moving forward with our
strategic transformation.
"Our operational performance in Asia and Africa reflects the
strength of our strategy and our execution. In the first half of
2021, APE sales4 from
Asia and Africa increased by 17 per
cent11,
while new business profit12 was
up by 25 per cent11.
This was delivered through our platform of around 560,000
agents16 and
our access to more than 28,000 bank branches15.
"Our agency and bank channels were supported by our digital
transformation during the period. We are developing the capability
to become a digitally enabled organisation with the capacity to
serve 50 million customers by 2025. We are focused on digitalising
many of our products, services and experiences so that they can be
delivered by Pulse, our digital platform and ecosystem. Since its
launch in 2019 to 5 August 20216 Pulse
had been downloaded around 30 million times. APE
sales4,10 involving
Pulse were $158 million in the first half of 2021. Our aspiration
is that Pulse facilitates customer acquisition at scale, provides
an enhanced customer experience, and acts as a platform for the
business with scope for delivering future operational
efficiency.
"We are continuing to move toward the proposed demerger of Jackson,
the Group's US business, which we plan to complete in September
2021, subject to shareholder approval. The proposed demerger will
complete our strategic transformation to focus exclusively on our
higher-growth and higher risk-adjusted return businesses in Asia
and Africa.
"In order to enhance financial flexibility and de-lever the balance
sheet, we continue to consider raising new equity of around
$2.5-3.0 billion following the completion of the proposed Jackson
demerger. Our preferred route is a fully marketed global offering
to institutional investors concurrent with a public offering in
Hong Kong to retail investors. As an Asia-focused company, we
believe there are clear benefits from increasing both our Asian
shareholder base and the liquidity of our shares in Hong Kong. The
allocation of any offering will take into account a number of
criteria including the interests of existing shareholders and the
strategic benefits of enhancing our shareholder base and liquidity
in Hong Kong.
"We have been included as a designated insurance holding company
under the Hong Kong Insurance Authority's (IA) Insurance Ordinance,
meaning that we are now subject to the Hong Kong IA's Group-wide
Supervision (GWS) Framework. The Hong Kong IA has confirmed the
grandfathering of our $6.0 billion17 of
subordinated debt and senior debt as capital. Our GWS capital
position is strong, with shareholder surplus8,9 (excluding
Jackson) at 30 June 2021 estimated at $10.1 billion, representing a
coverage ratio of 383 per cent7.
This compares with a corresponding surplus at 31 December 2020 of
$9.4 billion5.
"We expect the vaccination programmes being rolled out during 2021
and 2022 to facilitate a gradual return to more normal economic
patterns, although the pace of these programmes and their effect
are likely to vary substantially, and give a degree of uncertainty
over the economic outlook and therefore the performance of the
business in the short term. Significant Covid-19 restrictions
continue in many markets including Indonesia, Malaysia, Thailand
and the Philippines, while more stringent limitations on movement
have recently been introduced in India, Singapore and Vietnam, the
impacts of which are likely to extend at least into the fourth
quarter of 2021. There is also continuing uncertainty over the
extent and the timing of the re-opening of the border between Hong
Kong and China and we now expect that it will remain closed at
least for the rest of this year. However, we are confident that the
demand for our products will continue to grow in line with the
structural growth in our chosen markets, and that our expanded
offering and increasingly digitalised distribution platforms are
well placed to meet this demand."
Summary financials
|
Half year 2021 $m
|
Half year 2020 $m
|
Change on
AER basis3
|
Change on
CER basis3
|
Life new business profit from continuing
operations1,12
|
1,176
|
912
|
29%
|
25%
|
Operating free surplus generated from continuing
operations1,13
|
1,112
|
983
|
13%
|
9%
|
Adjusted operating profit from continuing
operations1,2
|
1,571
|
1,286
|
22%
|
19%
|
IFRS profit after tax from continuing operations1,14
|
1,070
|
622
|
72%
|
64%
|
IFRS (loss) profit for the period after write-down of Jackson to
fair value*
|
(4,637)
|
534
|
n/a
|
n/a
|
|
|
|
|
|
|
30 Jun 2021
|
31 Dec 2020
|
|
Total
|
Per share
|
Total
|
Per share
|
EEV shareholders' equity (including Jackson)*
|
$45.8bn
|
1,752¢
|
$54.0bn
|
2,070¢
|
IFRS shareholders' equity (including Jackson)*
|
$15.7bn
|
601¢
|
$20.9bn
|
800¢
|
*
The IFRS loss for the period includes a loss after tax of $(7.5)
billion for the required write-down of Jackson to estimated fair
value following the Board's decision to demerge Jackson announced
in the first half of 2021. This revaluation, together with
Jackson's IFRS profit after tax for the period of $1.8 billion,
after adjusting for amounts taken directly to other comprehensive
income and non-controlling interests, reduces IFRS shareholders'
equity by $(5.8) billion at 30 June 2021. The equivalent reduction
in EEV shareholders' equity is $(9.4) billion at the same
date.
Notes
1
Continuing operations represents the Asia, Africa and head office
functions of the Group following the reclassification of Jackson as
held for distribution in the first half of 2021.
2
In this press release 'adjusted operating profit' refers to
adjusted IFRS operating profit based on longer-term investment
returns from continuing operations. This alternative performance
measure is reconciled to IFRS profit for the period in note B1.1 of
the IFRS financial statements.
3
Further information on actual and constant exchange rate bases is
set out in note A1 of the IFRS financial statements.
4
APE sales is a measure of new business activity that comprises the
aggregate of annualised regular premiums and one-tenth of single
premiums on new business written during the year for all insurance
products, including premiums for contracts designated as investment
contracts under IFRS 4. It is not representative of premium income
recorded in the IFRS financial statements. See note II of the
Additional financial information for further
explanation.
5 Before
allowing for the 2020 second interim ordinary dividend. The 2020
surplus has been restated so it is on a consistent basis as the
position stated at 30 June 2021, which applies the GWS
Framework. Under the GWS Framework, all debt
instruments (senior and subordinated) issued by Prudential plc at
the date of designation meet the transitional conditions set by the
Hong Kong IA and are included as eligible Group capital resources.
This has increased eligible capital resources by $1.6 billion
compared to the LCSM basis. Other increases in the first half of
2021 largely reflect $0.8 billion of operating capital generation
from the in-force business.
6
As at close on 5 August 2021.
7
GWS coverage ratio of capital resources over Group minimum capital
requirement attributable to shareholder business. Shareholder
business excludes the capital resources and minimum capital
requirement of participating business in Hong Kong, Singapore and
Malaysia. Under the GWS Framework, all central debt instruments
(senior and subordinated) held at 14 May 2021, meet the
transitional conditions set by the Hong Kong IA and are included as
capital resources.
8
Estimated Group shareholder excluding Jackson GWS capital position
at 30 June 2021 before allowing for the impact of the 2021 first
interim dividend.
9
The Group shareholder excluding Jackson GWS capital position is
presented before including the value of the proposed retained 19.7
per cent non-controlling economic interest in US operations. This
retained interest is expected to be included in the Group GWS
capital resources valued at 60 per cent of the market
value.
10
APE sales involving Pulse are sales completed by agents on leads
from digital campaigns captured within the Pulse customer
management system or on leads from Pulse registrations, together
with a small number of policies purchased via Pulse
online.
11
On a constant exchange rate basis.
12
New business profit, on a post-tax basis, on business sold in the
period, calculated in accordance with EEV Principles.
13
Operating free surplus generated from insurance and asset
management operations before restructuring costs. For insurance
operations, operating free surplus generated represents amounts
maturing from the in-force business during the period less
investment in new business and excludes non-operating items. For
asset management businesses, it equates to post-tax operating
profit for the period. Further information is set out in 'movement
in Group free surplus' of the EEV basis results.
14
IFRS profit after tax from continuing operations reflects the
combined effects of operating results determined on the basis of
longer-term investment returns, together with short-term investment
variances, which for the first half of 2021 were driven largely by
the movements in interest rates and equity markets in Asia, and
other corporate transactions.
15
Number of branches as at 30 June 2021.
16
Number of agents as at 30 June 2021 and includes
India.
17
Debt not denominated in USD is translated using exchange rates as
at 31 December 2020 for the purposes of
grandfathering.
Contact:
Media
|
|
Investors/analysts
|
|
Tom Willetts
|
+44 (0)20 3977 9760
|
Patrick Bowes
|
+44 (0)20 3977 9702
|
Addy Frederick
|
+44 (0)20 3977 9399
|
William Elderkin
|
+44 (0)20 3977 9215
|
Tan Ping Ping
|
+65 9654 8954
|
|
|
Notes to editors:
a. The
results in this announcement are prepared on two bases:
International Financial Reporting Standards (IFRS) and European
Embedded Value (EEV). The results prepared under IFRS form the
basis of the Group's statutory financial statements. The
supplementary EEV basis results have been prepared in accordance
with the amended European Embedded Value Principles issued by the
European Insurance CFO Forum in 2016. The Group's EEV basis results
are stated on a post-tax basis and include the post-tax IFRS basis
results of the Group's asset management and other operations. The
IFRS and EEV results are presented in US dollars and the basis of
translation is discussed in note A1 of the IFRS financial
statements. Period-on-period percentage increases are stated on a
constant exchange rate basis unless otherwise stated. Constant
exchange rates are calculated by translating prior period results
using the current period foreign exchange rate ie current period
average rates for the income statement and current period closing
rates for the balance sheet.
b. EEV
and adjusted IFRS operating profit for continuing operations is
based on longer-term investment returns and is stated after
excluding the effect of short-term fluctuations in investment
returns against long-term assumptions, which for IFRS in half year
2021 were driven largely by the movements in interest rates and
equity markets in Asia, and other corporate transactions.
Furthermore, for EEV basis results, operating profit based on
longer-term investment returns excludes the effect of changes in
economic assumptions and the mark-to-market value movement on core
borrowings. Separately on the IFRS basis, adjusted operating profit
also excludes amortisation of acquisition accounting
adjustments.
c. Total
number of Prudential plc shares in issue as at 30 June 2021 was
2,615,611,541.
d. We
expect to announce our 2021 Half Year Results to the London Stock
Exchange at 9.30am UK time
- 4.30pm HKT - 4.30am EST on Wednesday, 11 August
2021.
A pre-recorded presentation for
analysts and investors will be available on-demand
from 9.30am UK time
- 4.30pm HKT - 4.30am EST using the following
link: https://www.investis-live.com/prudential/60f55d0380fc9310005f3034/2021hy
A copy of the script used in the recorded video will also be
available from 9.30am UK time
- 4.30pm HKT - 4.30am EST on 11 August 2021 on the Prudential plc's
website.
A Q&A call for analysts and investors will be
held on the same day at 11.30am UK time - 6.30pm HKT -
6.30am EST.
Registration to a "listen in" only and online question
facility
To register to listen into the
conference call and submit questions online, please do so via the
following link: https://www.investis-live.com/prudential/60f55d142527a9160063c654/21hyqa The
call will be available to replay afterwards using the same
link.
Dial-in details
A
dial-in facility will be available to listen to the call and ask
questions: please allow 15 minutes ahead of the start time to join
the call (lines open half an hour before the call is due to start,
ie from 11.00am UK time - 6.00pm HKT - 6.00am EST).
Dial-in: +44 (0) 20 3936 2999 (UK and
international) / 580 33 413 (HK) / 010 5387 5828 (China), Toll
free: 0800 640 6441 (UK) / 800 908 350 (HK), Participant access
code: 143518. Once participants have entered this code their
name and company details will be taken.
Transcript
Following
the call a transcript will be published on the results centre page
of Prudential plc's website on 13 August 2021.
Playback facility
Please use the following for a playback facility:
+44 (0) 20 3936 3001 (UK and international), replay
code 259667. This will be available from approximately 3.00pm
UK time - 10.00pm HKT - 10.00am EST on 11 August until 11.59 pm UK
time - 6.59pm EST on 25 August 2021 / 06.59am HKT on 26 August
2021.
e. 2021 First interim ordinary
dividend
|
Ex-dividend date
|
19 August 2021 (UK, Hong Kong and Singapore)
|
|
Record date
|
20
August 2021
|
|
Payment of dividend
|
28 September 2021 (UK, Hong Kong and ADR holders)
On or around 5 October 2021 (Singapore)
|
f. About Prudential
plc
Prudential
plc provides life and health insurance and asset management, with a
focus on Asia and Africa. The business helps people get the most
out of life, by making healthcare affordable and accessible and by
promoting financial inclusion. Prudential protects people's wealth,
helps them grow their assets, and empowers them to save for their
goals. The business has more than 17 million life customers in Asia
and Africa and is listed on stock exchanges in London, Hong Kong,
Singapore and New York. Prudential is not affiliated in any manner
with Prudential Financial, Inc. a company whose principal place of
business is in the United States of America, nor with The
Prudential Assurance Company Limited, a subsidiary of M&G plc,
a company incorporated in the United Kingdom.
g. Discontinued
operations
Throughout
this results announcement 'discontinued operations' refers to the
US operations (referred to as Jackson). All amounts presented refer
to continuing operations unless otherwise stated, which reflect the
Group following the proposed demerger of Jackson.
h. Forward-Looking Statements
This
announcement may contain 'forward-looking statements' with respect
to certain of Prudential's plans and its goals and expectations
relating to its and Jackson's future financial condition,
performance, results, strategy and objectives. Statements that are
not historical facts, including statements about Prudential's
beliefs and expectations and including, without limitation,
statements containing the words 'may', 'will', 'should',
'continue', 'aims', 'estimates', 'projects', 'believes', 'intends',
'expects', 'plans', 'seeks' and 'anticipates', and words of similar
meaning, are forward-looking statements. These statements are based
on plans, estimates and projections as at the time they are made,
and therefore undue reliance should not be placed on them. By their
nature, all forward-looking statements involve risk and
uncertainty.
A number of important factors could cause
Prudential's and Jackson's actual future financial condition or
performance or other indicated results of the entity referred to in
any forward-looking statement to differ materially from those
indicated in such forward-looking statement. Such factors include,
but are not limited to, the ability to complete the proposed
demerger of Jackson Financial Inc. on the anticipated timeframe or
at all; the realisation of anticipated benefits of the proposed
demerger of Jackson; the ability of the management of Jackson
Financial Inc. and its group to deliver on its business plan
post-separation; the impact of the current Covid-19 pandemic,
including adverse financial market and liquidity impacts, responses
and actions taken by governments, regulators and supervisors, the
impact to sales, claims and assumptions and increased product
lapses, disruption to Prudential's operations (and those of its
suppliers and partners), risks associated with new sales processes
and information security risks; future market conditions, including
fluctuations in interest rates and exchange rates, the potential
for a sustained low-interest rate environment, and the impact of
economic uncertainty, asset valuation impacts from the transition
to a lower carbon economy, derivative instruments not effectively
hedging exposures arising from product guarantees, inflation,
including interest rate rises as a response, and deflation and the
performance of financial markets generally; global political
uncertainties, including the potential for increased friction in
cross-border trade and the exercise of executive powers to restrict
trade, financial transactions, capital movements and/or investment;
the policies and actions of regulatory authorities, including, in
particular, the policies and actions of the Hong Kong Insurance
Authority, as Prudential's Group-wide supervisor, as well as new
government initiatives generally; given its designation as an
Internationally Active Insurance Group ("IAIG"), the impact on
Prudential of systemic risk and other group supervision policy
standards adopted by the International Association of Insurance
Supervisors; the impact of competition and fast-paced technological
change; the effect on Prudential's business and results from, in
particular, mortality and morbidity trends, lapse rates and policy
renewal rates; the physical, social and financial impacts of
climate change and global health crises on Prudential's business
and operations; the timing, impact and other uncertainties of
future acquisitions or combinations within relevant industries; the
impact of internal transformation projects and other strategic
actions failing to meet their objectives; the effectiveness of
reinsurance for Prudential's businesses; the risk that Prudential's
operational resilience (or that of its suppliers and partners) may
prove to be inadequate, including in relation to operational
disruption due to external events; disruption to the availability,
confidentiality or integrity of Prudential's information
technology, digital systems and data (or those of its suppliers and
partners); any ongoing impact on Prudential of the demerger of
M&G plc and, if and when completed, the demerger of Jackson
Financial Inc.; the impact of changes in capital, solvency
standards, accounting standards or relevant regulatory frameworks,
and tax and other legislation and regulations in the jurisdictions
in which Prudential and its affiliates operate; the impact of legal
and regulatory actions, investigations and disputes; and the impact
of not adequately responding to environmental, social and
governance issues. These and other important factors may, for
example, result in changes to assumptions used for determining
results of operations or re-estimations of reserves for future
policy benefits. Further discussion of these and other important
factors that could cause Prudential's actual future financial
condition or performance or other indicated results of the entity
referred to in any forward-looking statements to differ, possibly
materially, from those anticipated in Prudential's forward-looking
statements can be found under the 'Risk Factors' heading of this
document.
Any forward-looking statements contained in
this announcement speak only as of the date on
which they are made. Prudential expressly disclaims any obligation
to update any of the forward-looking statements contained in
this announcement or any other forward-looking
statements it may make, whether as a result of future events, new
information or otherwise except as required pursuant to the UK
Prospectus Rules, the UK Listing Rules, the UK Disclosure and
Transparency Rules, the Hong Kong Listing Rules, the SGX-ST listing
rules or other applicable laws and regulations.
i. Cautionary Statements
This
announcement does not constitute or form part of any offer or
invitation to purchase, acquire, subscribe for, sell, dispose of or
issue, or any solicitation of any offer to purchase, acquire,
subscribe for, sell or dispose of, any securities in any
jurisdiction nor shall it (or any part of it) or the fact of its
distribution, form the basis of, or be relied on in connection
with, any contract therefor.
Group Chief Executive's report
We have delivered a resilient performance in the first half of 2021
against a backdrop of continuing economic and social challenges due
to Covid-19 and the resulting continuing volatility in consumer
activity. Despite the constraints of this environment, our
hard-working and dedicated staff and agents have continued to
deliver on our purpose of
helping our
customers get the most out
of life by enabling them to become healthier and
wealthier, as well as building
long-term value for our shareholders and other
stakeholders.
Our proposed demerger of Jackson will complete Prudential's
strategic transformation and will enable the post-demerger Group to
focus exclusively on our higher-growth and higher risk-adjusted
return businesses in Asia and Africa, making us one of the largest
Asia and Africa-focused life insurance and asset management
businesses.
In order to enhance financial flexibility and de-lever the balance
sheet, as announced in January 2021 Prudential continues to
consider raising new equity of around $2.5-3.0 billion following
the completion of the proposed Jackson demerger. Our preferred
route is a fully marketed global offering to institutional
investors concurrent with a public offering in Hong Kong to retail
investors. Prudential has held discussions with shareholders, and
the allocation of any offering will take into account a number of
criteria including the interests of existing shareholders and the
strategic benefits of enhancing its shareholder base and liquidity
in Hong Kong. As part of this potential equity raise, Prudential
will also consider a possible preferential offering to Hong
Kong-resident eligible employees and agents.
We have significant investment appetite in Asia and Africa that is
based on the absolute size and demographic characteristics of each
economy and our ability to build competitive advantage, leveraging
our scale and expertise. The Group continues to invest in its people and
systems to ensure it has the resources to deliver on its long-term
growth strategy and to develop the capacity to serve 50 million
customers by 2025. This
will be achieved by:
-
Delivering profitable growth in a socially responsible
way;
-
Digitalising our products, services and experiences;
and
-
Humanising our Company and advice channels.
Our expectation is that if we execute our Asia and
Africa-focused strategy successfully, this will result in the
long-term delivery of future shareholder returns through value
appreciation, with a focus on achieving long-term double-digit
growth in embedded value per share. This will in turn be supported
by the growth rates of new business profit, which are expected to
substantially exceed GDP growth rates in the markets in which the
post-demerger Prudential Group will operate.
Supporting our stakeholders in the face of Covid-19
The health and wellbeing of our customers, distributors and
colleagues is a high priority for us, and we are continuing to take
action to protect our stakeholders against the impact of the
Covid-19 pandemic, as well as supporting the communities in which
we operate through this challenging time. We continue to offer
Covid-19 protection for low-income groups in several of our
lower-income markets, and we are assisting health ministries in
supporting roll-outs of vaccination and providing information on
Covid-19 management. We have paid out over 55,000 claims related to
Covid-19 since the start of the pandemic. We have taken steps
throughout the pandemic to support our agents to deal with
customers remotely, and we are continuing to ensure that our staff
work remotely where and when appropriate. Sadly, since the start of
the pandemic 47 of our agents or staff24 have
passed away due to Covid-19, and we have extended our sincerest
condolences to their families, along with financial
support.
Financial performance
Following the Board's decision in the first half of 2021 to demerge
Jackson, Jackson has been classified as held for distribution and
treated as discontinued in this report. Accordingly, we have
written down our interest in Jackson to fair value for both IFRS
and EEV purposes. This revaluation, together with the results of
Jackson, reduced IFRS shareholders' equity by $(5.8) billion at 30
June 2021 and EEV shareholders' equity by $(9.4) billion at the
same date. Further discussion on Jackson is included in the Chief
Financial Officer and Chief Operating Officer's report, and we
focus below on the major segments of our continuing
business.
Our financial performance over the first half of 2021 reflects the
quality of our execution in our chosen markets, despite the
challenges created by Covid-19.
Life insurance new business sales (APE sales10)
in Asia and Africa increased by 17 per cent6,
on a constant exchange rate basis, to $2,083 million and related
new business profit9 increased
by 25 per cent6.
Outside Hong Kong, overall APE sales were 31 per
cent6 higher
and new business profit increased by 48 per cent6.
Our APE sales remain high quality, with health and protection
business representing 28 per cent of APE sales and nine
markets13 achieving
double-digit growth in health and protection
sales.
This growth in APE sales was the largest driver of the 25 per
cent6 increase
in new business profit to $1,176 million in the period. This growth
in new business profit principally reflects underlying volume
growth and favourable changes in product mix, as well as a marginal
benefit from higher interest rates. Overall, nine Asia markets
delivered double-digit growth, with the China JV, Singapore and
Malaysia the major contributors to new business profit growth in
the period.
Our adjusted IFRS operating profit based on longer-term
investment returns (adjusted operating profit1)
from continuing operations is up by 19 per
cent6 to
$1,571 million and our Group EEV (excluding Jackson) is up 22 per
cent7 since
30 June 2020 to $43.2 billion. Insurance margin continues to be a
significant contributor to our adjusted operating profit, and we
continue to generate strong operational returns, with annualised
operating return14 on
average IFRS shareholders' equity from continuing operations and
annualised operating return25 on
average EEV shareholders' equity from continuing operations of 21
per cent and 8 per cent respectively. IFRS profit after tax from
continuing operations was $1,070 million, compared with $653
million6 in
the first half of 2020.
As expected, Prudential has now been included as a designated
insurance holding company under the Hong Kong Insurance Authority's
(IA) Insurance Ordinance, meaning that we are now subject to the
Hong Kong IA's Group-wide Supervision (GWS) Framework. The Hong
Kong IA has confirmed the grandfathering of our $6.0
billion11 of
subordinated debt and senior debt as capital. Our GWS capital
position remains strong, with shareholder
surplus2,3 (excluding
Jackson) at 30 June 2021 estimated at $10.1 billion, representing a
coverage ratio of 383 per cent4.
This compares with a corresponding surplus at 31 December 2020 of
$9.4 billion12,
which represented a coverage ratio of 370 per
cent4,12.
In line with our policy which applies a formulaic approach to first
interim dividends, the Board has approved a 2021 first interim
dividend of 5.37 cents per share (2020 first interim dividend: 5.37
cents per share).
Segmental APE sales and new business profit
development
Our China JV benefited from robust growth in APE sales of 29 per
cent6 supported
by both our diversified agency and multi-partner bancassurance
platform. We saw particularly strong growth in our agency channel,
which had been impacted by Covid-19-related disruption in the prior
period, as well as benefiting from seasonal sales and product
campaigns that were focused on the first quarter of this year. The
marked increase in new business profit was driven principally by
the growth in agency sales and prioritisation of higher-margin
products, as well as reflecting the benefit of higher interest
rates at the end of the period.
In Hong Kong, new cross-border sales to Mainland China customers
continue to be severely restricted by the ongoing border closure
implemented in late January 2020. On the other hand, the domestic
segment has demonstrated resilience, as lower APE sales were more
than offset by our pivot to health and protection products,
resulting in double-digit growth in new business profit from this
segment. Overall APE sales were (35) per cent6 lower
but new business profit was only (13) per cent6 below
the prior period. The development of new business profit reflects
the impact of lower APE sales partly offset by net favourable
product mix.
In Indonesia, overall APE sales fell by (6) per
cent6 reflecting
the continuing Covid-19 disruption. Despite the fall in absolute
sales amounts, we have seen a higher number of our lower case sized
protection policies being sold in the period in turn driving total
new policies 67 per cent higher. Our strength in the Sharia segment
also added resilience to the business, as strong growth in smaller
sized standalone protection policies led to a 2 per cent increase
in new business profit for this segment. We continue to execute our
strategy in difficult market conditions through our customer
segmentation and product innovation, as well as increasing digital
capability to mitigate the restrictions of Covid-19 on face-to-face
agency sales. Overall new business profit was (17) per
cent6 lower,
reflecting lower volumes and the diversification of our product
suite.
In Malaysia APE sales increased by 66 per cent6,
driven by growth in agency production, which more than doubled
compared with the prior period. The Takaful business continued its
strong performance, with APE sales also more than doubling. New
business profit was 59 per cent6 higher,
driven by higher volumes but partly offset by tax changes and the
effect of higher interest rates in the period.
In Singapore APE sales were 58 per cent6 higher,
supported by robust growth across our agency and bancassurance
distribution platforms. New business profit increased by 65 per
cent6,
reflecting higher volumes and the benefit of improved interest
rates and other economic assumptions since 30 June
2020.
Our growth markets and other segment combines our high-potential
businesses in Asia and Africa. Overall, these delivered 22 per
cent6 growth
in APE sales in the period, with a strong performance from a number
of our larger businesses, including Vietnam up 16 per
cent6,
India up 33 per cent6,
the Philippines up 55 per cent6 and
our Africa businesses up 29 per cent6.
In Thailand, APE sales were up 8 per cent6,
driven by our enhanced distribution agreement with TMB Bank from
the start of the year, particularly in the first quarter. Renewed
Covid-19-related disruption beginning in April led to lower
performance in the second quarter than in the first. New business
profit for the entire segment was 44 per cent6 higher
than the prior period, driven largely by higher sales and
favourable country and product mix, as well as, albeit small in
size, the first-time recognition of Africa new business profit in
the period.
Eastspring delivered a 3 per cent7 increase
in total funds under management compared with the end of 2020 to
$254.0 billion on an actual exchange rate basis, based on net
inflows from our internal Asia life funds, net positive market and
currency movements. There were net outflows on external funds, with
the change in the resulting mix of funds contributing to an
increase in fee margin.
Focus on growth opportunities in Asia and Africa
Our strategy in our Asia and Africa businesses is aligned with the
supportive structural trends in those regions. Despite the rapid
rise in prosperity in Asia, people in Asia still have low levels of
insurance cover, with 40 per cent of health and protection spend
still paid out of pocket20,
and an estimated 80 per cent of the population of Asia still
without insurance cover5.
Combined with rising prosperity and ageing populations, this
creates a large and growing health and protection gap that has been
estimated at $1.8 trillion17.
Even larger is the estimated $83 trillion mortality
gap18,
representing the income that families forgo if they lose their
breadwinner. In Africa, where the population is expected to double
to more than 2 billion people by 205019,
less than 50 per cent of people have access to modern health
facilities21.
These long-term trends underpin rising demand for savings and
protection across both Asia and Africa, and create significant
opportunity for growth and value creation. We have trusted brands,
digitally enhanced multi-channel distribution and capabilities to
differentiate our insurance and asset management products and
services. By tailoring these products and services to specific
consumer segments and markets, we are well positioned to meet the
growing health, protection and long-term savings needs of our
customers in these geographies.
We have significant investment appetite that is based on the
absolute size and demographic characteristics of each economy and
our ability to build competitive advantage, leveraging our scale
and expertise. We will continue to build on our leading positions
in Hong Kong and South-east Asia, and we see the greatest growth
opportunities in the largest economies of China, India, Indonesia
and Thailand.
In Mainland China we have a substantial opportunity to deepen our
presence across our nationwide footprint of 20 branches and 99
cities, which spans more than 80 per cent of China's economy and
life insurance market23,
leveraging our multi-channel distribution capabilities. China
continues to have very low levels of insurance penetration, and
recent regulatory developments and consumer demand support further
growth both in health and protection and pension products and
services. We have a particular focus on areas with the greatest
economic growth potential, a strategy aligned with the Chinese
government's 'City Cluster Model', centred on Beijing, Shanghai and
the Greater Bay Area, a region which, if it were a separate
country, would be one of the 10 largest economies in the world. We
intend to continue to focus on building a professional,
high-quality health and protection-capable agency force. Over time,
as our agency force matures and builds experience, we expect this
to result in substantially enhanced productivity, providing
additional support to our growth trajectory. We will also continue
to build-out our bancassurance distribution network with multiple
partners throughout China, and to broaden our product offering to
address opportunities in wealth management, pensions and in meeting
the insurance needs of small to medium-sized enterprises
(SMEs).
Mainland China customers are an important customer segment for our
Hong Kong business, although new sales have been severely curtailed
following the closure of the border between Mainland China and Hong
Kong implemented in late January 2020. Based on our own and
third-party surveys, we believe there is latent demand from
Mainland China customers for our Hong Kong product suite. As a
result, we expect to see the return of this important source of new
business when the border between Mainland China and Hong Kong
reopens and visitor arrivals normalise. Additionally, supportive
regulatory developments such as Wealth and Insurance Connect
between the Greater Bay Area and Hong Kong will further enhance our
Hong Kong business's ability to serve Mainland China
customers.
In Indonesia, we will continue to execute our strategy of upgrading
our agency force and building our bancassurance presence, while
broadening our product set from its unit-linked core. We see great
potential in broadening our customer base, notably in further
developing our leadership in the Sharia market, and leveraging our
digital capabilities based on the Pulse app to address the
substantial needs of the mass market and SME customer
segments.
In Singapore, we see significant prospects in expanding the
servicing of the high net worth and SME markets, alongside
supporting a fast-ageing population to address under-covered
retirement and health needs. We have launched Pulse Wealth in
Singapore as we expand our customer offering and we plan a similar
roll-out in high-income markets across the Group.
Our growth market and other segment incorporates our businesses in
India and Thailand, as well as Vietnam, the Philippines,
Cambodia, Laos, Taiwan and Myanmar and our businesses in
Africa.
In India, we own 22 per cent of our life insurance JV, ICICI
Prudential, and 49 per cent of our asset management JV, ICICI
Prudential Asset Management. As the businesses grow, both in terms
of scale and profitability, we see opportunity to increase our
presence in this important market. ICICI Prudential has indicated
its intent to double its 2019 new business profit over four years,
and further increase its weight of health and protection business.
This would be driven by deepening its penetration of under-served
customer segments, enhancing its distribution footprint and
increasing its focus on pension and annuity business. Its strategy
of growing protection business is aligned with the Indian
government's ambition to increase insurance penetration, with
growth supported by increasing online term business and exploring
partnerships with loan providers. The business will continue to
focus on enhancing persistency by encouraging long-term customer
behaviour and improving productivity by leveraging its scale and
digital platform.
In Thailand, we are focused on delivering the strategic benefits of
recent investments and intend to upscale our position
significantly. We see a very substantial value opportunity from our
enhanced TMB and UOB bank partnerships and acquisition of TMBAM and
TFund, which established Prudential as a top-five player in the
mutual fund market. We intend to increase our share of the high net
worth and affluent bancassurance segment by delivering integrated
wealth, health and retirement solutions. We also plan on increasing
our share of the health and protection bancassurance market by
aligning our distribution and simplifying our product proposition
supported by a specialist health and protection-focused wholesaling
unit. In addition, we see a very significant opportunity to
leverage our Pulse digital capabilities, in conjunction with
digital partners, to increase our health and protection penetration
of the mass market.
In Africa we have built a rapidly growing multi-product business
since 2014, with operations now in eight countries across
the
continent. Our business is well-positioned to expand and accelerate
growth, building on the strong foundations established over the
last seven years as we seek to meet the growing health and savings
needs of a rapidly growing working-age population and middle-class
consumers. Our expansion has been underpinned by a range of
approaches tailored to local market opportunities and includes
joint ventures and building on established
partnerships. Regional leadership has been consolidated from
London into Nairobi, our East Africa base, and two-way sharing of
best practice and innovation is taking place with the rest of the
Group's operations in Asia.
Our pan-Asia asset manager, Eastspring, is one of the largest
pan-Asia asset managers managing $254.0 billion in assets across 11
markets in Asia and is a top-10 asset manager in seven of those
markets. We continue to diversify the product set and intend to
accelerate Eastspring's development as a leader in Asia by
broadening its investment strategies and making wealth services
more accessible at lower levels of individual
contributions.
To support its ambition, Eastspring's strategic objectives include
developing its distribution, product range and investment advisory
capability, while continuing to enhance support for the asset
management needs of Prudential's life insurance business. In
developing its capabilities, Eastspring will further integrate its
offerings with those of the Group's life business, to enable the
Group to offer services seamlessly across the full spectrum of
life, health and wealth products. Eastspring will leverage the
Group's established distribution channels as well as continue to
build its third-party mandates from international asset
allocators.
Distribution strategy
The Group believes in a multi-channel and integrated distribution
strategy for the Group's business which can adapt and respond
flexibly depending on local market conditions. The Group's
distribution network covers agency, bancassurance and
non-traditional partnerships, including digital. In the first half
of 2021, new business profit split by channel was: 67 per cent
agency, 31 per cent bancassurance and 2 per cent others. We
continue to support the sales process becoming more virtual across
our markets and products, and in the first half of 2021 virtual
sales represented 39 per cent of new cases sold through agency and
30 per cent of bancassurance new cases.
Our distribution network covers agency, bancassurance, brokers and
non-traditional partnerships. We have around 560,000 licensed tied
agents across our life insurance markets15 and
agent recruits of over 60,000 in the first half of 2021. Our agency
channel is a core component of our success given the high
proportion of high margin protection products sold. Across all
channels, such products comprised 55 per cent of our new business
profit in the first half of 2021.
We are developing the capability to become a digitally-enabled
organisation, in order to facilitate customer acquisition at scale.
We are focused on digitalising many of our products, services and
experiences so that they can be delivered by Pulse, our digital
platform and ecosystem which builds on our existing distribution
channels and trusted brand.
Pulse
Pulse is a free-to-download digital mobile application that offers
artificial intelligence (AI)-powered self-help tools and
information to serve users at any time.
Pulse is aimed at attracting a new, younger generation of customers
from the middle and lower-income segments, in addition to serving
customers within our current demographic and income groups. The
majority of Pulse users22 are
in the 18 to 35 age group, compared with the average age of an
existing Prudential policyholder of around 40. By 5 August, Pulse
had been downloaded around 30 million times since its introduction
in 2019, and has now been launched in 11 different languages across
17 markets in Asia and Africa, with varying levels of development.
The proof of this execution and innovation is demonstrated in the
$158 million of APE sales8 involving
Pulse in the first half of 2021, representing 10 per cent of our
APE sales in markets where Pulse is available.
Our aspiration is for Pulse to act both as a complementary tool for
sourcing and managing new business to enhance customer experience
and as a future platform for the business, with scope for
delivering future operational efficiency.
Pulse is designed with the intention to provide a single digital
means of delivering frictionless customer experience, and enables
people to engage with a range of health and wellness services. We
believe that this will provide significantly enhanced customer
fulfilment, online servicing and an advanced claims experience. We
work with multiple partners to provide Pulse's products and
services, and to date we have entered into 47 key digital
partnerships.
As a platform for the business, Pulse can provide end-to-end
processing and partnership integration, better positioning us to
achieve both scale and efficiency and enhancing our operating
model. Agents have the ability to sell Prudential products
virtually within the Pulse platform in the Philippines, Malaysia
and Indonesia, while e-claims are available in Indonesia, Malaysia,
Cambodia, the Philippines and Myanmar.
Al-Noor Ramji, who has been with the Group since 2016, has
indicated that after a long career in technology he wishes to
retire at the end of 2021. Al-Noor has responsibility for
developing and executing the Group's integrated long-term digital
strategy. He has also built and led a strong operational and
management team to support the successful launch of Pulse across
many of our markets. Boon Huat Lee, currently a senior member of
the Pulse management team and based in Singapore, has been
appointed PCA Chief Digital Officer and will continue to take
forward our digital strategy. We thank Al-Noor for his very
significant contribution.
Decarbonising our
portfolio16
As a significant asset manager and asset owner in regions forecast
to be severely impacted by global warming, Prudential has a
distinctive role to play in the transition to a low-carbon economy.
We are decarbonising our investment portfolio and have announced
our intention that the assets we hold on behalf of our insurance
companies will become 'net zero' by 2050. To deliver on this, we
will divest from all investments in businesses that derive more
than 30 per cent of their income from coal, with equities to be
fully divested by the end of 2021, and fixed-income assets by the
end of 2022. We will also make a 25 per cent reduction in the
carbon emissions of all shareholder and policyholder assets by
2025, and we will engage directly on this subject with companies
responsible for 65 per cent of the emissions in our
portfolio.
Outlook
Throughout the Covid-19 crisis that dominated 2020 and has
continued to dominate 2021, Prudential demonstrated its ability to
adapt at pace to meet existing and new customer needs, and maintain
resilient IFRS operating earnings, driven by the compounding nature
of regular-premium income and the focus on health and
protection-led insurance margin income.
We expect the vaccination programmes being rolled out during 2021
and 2022 to facilitate a gradual return to more normal economic
patterns, although the pace of these programmes and their
effect are likely to vary substantially and give a degree of
uncertainty over the economic outlook and therefore the performance
of the business in the short term. Significant Covid-19
restrictions continue in many markets including, Indonesia,
Malaysia, Thailand and the Philippines, while more stringent
limitations on movement have recently been introduced in India,
Singapore and Vietnam, the impacts of which are likely to
extend at least into the fourth quarter of 2021. There is also
continuing uncertainty over the extent and timing of the
reopening of the border between Hong Kong and China and we now
expect that it will remain closed at least for the rest of this
year.
In our operational planning, we are working on the basis that the
effects of Covid-19 will continue to disrupt economies around the
world for some time to come. We are managing our operations tightly
so that we can deal with any such extended disruption by focusing
on agility in distribution, innovation in product development and
high-touch engagement to maintain customer retention. Our strengths
in customer contact and service position us well in maintaining the
resilience of our business. In those large and high-potential
markets where we are currently relatively smaller players, we
remain confident that our business will continue to strengthen,
given the underlying long-term growth trends.
We are confident that the demand for our products will continue to
grow in line with the structural growth in our chosen markets, and
that our expanded offering and increasingly digitalised
distribution platforms are well placed to meet this demand. We
believe that the proposed demerger of Jackson will give the
post-demerger Prudential Group the opportunity to increase the
growth trajectory of our Asia and Africa businesses.
Notes
1 'Adjusted
operating profit' refers to adjusted IFRS operating profit based on
longer-term investment returns from continuing operations. This
alternative performance measure is reconciled to IFRS profit for
the period in note B1.1 of the IFRS financial
statements.
2 Estimated
Group shareholder excluding Jackson GWS position at 30 June 2021
before allowing for the impact of the 2021 first interim
dividend.
3 The
Group shareholder excluding Jackson GWS position is stated before
including the value of the proposed retained 19.7 per cent
non-controlling economic interest in US operations. This retained
interest is expected to be included in the Group GWS capital
resources valued at 60 per cent of the market value.
4 GWS
coverage ratio of capital resources over Group minimum capital
requirement attributable to shareholder business. Shareholder
business excludes the capital resources and minimum capital
requirement of participating business in Hong Kong, Singapore and
Malaysia. Under the GWS Framework, all central debt instruments
(senior and subordinated) held at 14 May 2021, meet the
transitional conditions set by the Hong Kong IA and are included as
capital resources.
5 Prudential
estimate based on number of in-force policies over total
population.
6 On
a constant exchange rate basis.
7 On
an actual exchange rate basis.
8 APE
sales involving Pulse are sales completed by agents on leads from
digital campaigns captured within the Pulse customer management
system or on leads from Pulse registrations, together with a small
number of policies purchased via Pulse online.
9 New
business profit, on a post-tax basis, on business sold in the
period, calculated in accordance with EEV Principles.
10 APE
sales is a measure of new business activity that comprises the
aggregate of annualised regular premiums and one-tenth of single
premiums on new business written during the year for all insurance
products, including premiums for contracts designated as investment
contracts under IFRS 4. It is not representative of premium income
recorded in the IFRS financial statements. See note II of the
Additional financial information for further
explanation.
11 Debt
not denominated in USD is translated using exchange rates as at 31
December 2020 for the purposes of grandfathering.
12 Before
allowing for the 2020 second interim ordinary dividend. The 2020
surplus has been restated so it is on a consistent basis as the
position stated at 30 June 2021, which applies the GWS Framework.
Under the GWS Framework, all debt instruments (senior and
subordinated) issued by Prudential plc at the date of designation
meet the transitional conditions set by the Hong Kong IA and are
included as eligible Group capital resources. This has increased
eligible capital resources by $1.6 billion compared to the LCSM
basis. Other increases in the first half of 2021 largely reflect
$0.8 billion of operating capital generation from the in-force
business.
13 Includes
eight Asia markets plus Africa.
14 Annualised
profits have been calculated by multiplying half year profits by
two. Further information can be found in note II of the Additional
financial information.
15 Number
of agents as at 30 June 2021 and includes India.
16 The
portfolio, with a value of $128 billion as at 31 December 2020,
excludes unit-linked funds and assets held by joint venture
businesses. Following the announcement of the intent to demerge
Jackson Financial Inc (Jackson), the Jackson business and all
assets it holds are also excluded from these commitments. In
addition, this policy cannot be applied to certain
externally-managed collective investment scheme
balances.
17 Source:
Swiss Re Institute: The health protection gap in Asia, October
2018.
18 Source:
Swiss Re Institute: Closing Asia's mortality protection gap, July
2020.
19 Source:
The Economist, Special report, Mar 28th 2020 edition.
20 Source:
World Health Organisation: Global Health Observatory data
repository (2018). Out of pocket expenditure as percentage of
current health expenditure.
21 Source:
Health and Diseases in Africa, October 2017 (nih.gov).
22 A
majority of Pulse users who submitted demographic data aggregated
across Pulse markets.
23 Based
on 2020 data. Source: China National Bureau of
Statistics.
24 Excluding
joint ventures and associates.
25 Annualised
profits have been calculated by multiplying half year profits by
two. Further information can be found in note B of the Additional
EEV financial information.
Group Chief Financial Officer and Chief Operating Officer's report
on the 2021 first half financial performance
Our financial performance over the first half of 2021 reflects the
continued successful execution of our Asia and Africa strategy.
This is built on leading positions in markets that offer the
largest structural growth potential, and our focus on the provision
of recurring premium health, protection and savings products, and
driven by a diversified, agile and digitally-enabled distribution
platform. Despite ongoing Covid-19-related disruption in several
markets, I am pleased to report that our business delivered a
robust performance across our financial metrics, which are
discussed further below.
In the first half of the year, we continued to work on the
separation of Jackson and plan to complete the proposed demerger,
subject to shareholder approval, in September 2021. For this half
year, Jackson is treated as a discontinued operation for financial
reporting purposes and excluded from our key KPIs which focus on
the continuing parts of our business. The value of our interest in
Jackson was written down to fair value in our balance sheet as of
30 June 2021, and following the demerger the 19.7 per cent
non-controlling economic interest (19.9 per cent voting interest)
which we propose to hold will be marked to market.
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 periods of currency
movement, unless otherwise noted.
The total IFRS loss after tax for the first half of 2021 was
$(4,637) million (2020: $565 million1 profit
after tax), which comprised a $1,070 million profit after tax from
continuing operations and a $(5,707) million loss after tax from
discontinued operations. This loss from discontinued operations is
due to the write-down of Jackson to its estimated fair value
following its classification as held for distribution in the first
half of 2021. The Jackson business generated a profit after tax of
$1,800 million in the period, of which the Group's share was $1,600
million. Further discussion on Jackson is included in the section
headed Loss from discontinued operations - Jackson which appears
later in this report. As a consequence of the write-down of
Jackson, IFRS shareholders' equity fell from $20.9 billion at the
end of 2020 to $15.7 billion at 30 June 2021. The remainder of this
summary will focus on the Group's continuing
operations.
The addition of profitable new life insurance business is the key
operational driver of the development of the Group's (excluding
Jackson) EEV shareholders' equity. New business profit grew by 25
per cent1 to
$1,176 million in the period. In addition to the generation of new
business profit, the main components of our embedded value
operating return are the expected return on in-force business, the
effect of operating variances and assumptions changes, if any, and
the contribution of asset management profit from Eastspring. The
in-force expected return increased by 15 per
cent1 reflecting
growth in the in-force balance since the first half of 2020 and
rising interest rates.
In combination, these developments, alongside lower central and
restructuring costs, supported an EEV operating profit from
continuing operations of $1,749 million, equivalent to an
annualised return13 on
the Group's (excluding Jackson) EEV shareholders' equity of 8 per
cent. After allowing for the effect of higher interest rates and
other market movements in the period, as required by our active
basis EEV methodology, Group (excluding Jackson) EEV shareholders'
equity was $43.2 billion at 30 June 2021 (31 December 2020: $41.9
billion).
This performance is also reflected in the positive development of
our cash metric, operating free surplus generation. This increased
9 per cent1 for
our continuing life insurance and asset management operations
before restructuring costs, driven by the combination of a 14 per
cent1 increase
in expected in-force free surplus generation and increased asset
management profit, offset by higher investment in profitable new
business. Over the first half of 2021, our new business profit of
$1,176 million (2020: $939 million1)
was nearly four times greater than the amount invested in new
business ($(319) million, 2020: $(303) million1).
Overall, Asia and Africa adjusted IFRS operating profit based on
longer-term investment returns (adjusted operating
profit2)
from life insurance increased by 11 per cent1,
driven by higher insurance margin given the growth of health and
protection business over recent years and higher fee income as
equity markets continued to rise. This growth was partially offset
by claims on medical reimbursement business beginning to return to
more usual levels, following the Covid-19-related fall in 2020, and
higher Covid-19 claims in Indonesia and India. We expect this trend
to continue into the fourth quarter for those markets with a high
number of Covid-19 cases. Eight Asia life markets and Africa
delivered double-digit growth. Asset management profit increased by
10 per cent1 to
$162 million driven by higher average funds under management and
improved revenue margins. After allowing for central costs, the
Group's total adjusted operating profit from continuing operations
increased by 19 per cent1 to
$1,571 million.
The Group's regulatory capital position excluding the discontinued
Jackson business remains robust. Following the Group's designation
under the Group-wide Supervision (GWS) Framework on 14 May 2021,
the Group's GWS coverage ratio on a shareholder basis excluding
Jackson was 383 per cent23 compared
with 370 per cent on an equivalent basis22 at
31 December 2020, largely due to organic capital
generation.
Equity and credit markets
The first half of 2021 saw constructive equity market development,
higher risk-free rates and narrowing corporate bond spreads. In the
US, the S&P 500 index increased by 14 per cent and in Asia the
MSCI Asia ex Japan index was up 6 per cent. Government bond yields
generally increased over the period, for example the US 10-year
government bond yield ended the period at 1.5 per cent (31 December
2020: 0.9 per cent). Corporate bond spreads narrowed in the period,
for example spreads on US dollar denominated A-rated corporate
bonds fell by 12 basis points in the first half of
2021.
IFRS profit
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2021 $m
|
Half year
2020 $m
|
Change %
|
|
Half year
2020 $m
|
Change %
|
Adjusted operating profit based on longer-term investment returns
before tax from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China JV
|
139
|
101
|
38
|
|
109
|
28
|
Hong Kong
|
460
|
412
|
12
|
|
412
|
12
|
Indonesia
|
225
|
249
|
(10)
|
|
255
|
(12)
|
Malaysia
|
184
|
158
|
16
|
|
164
|
12
|
Singapore
|
320
|
262
|
22
|
|
276
|
16
|
Growth markets and other12
|
479
|
404
|
19
|
|
418
|
15
|
Long-term business adjusted operating profit
|
1,807
|
1,586
|
14
|
|
1,634
|
11
|
Asset management
|
162
|
143
|
13
|
|
147
|
10
|
Total segment profit from continuing operations
|
1,969
|
1,729
|
14
|
|
1,781
|
11
|
Investment return and other income
|
-
|
8
|
n/a
|
|
8
|
n/a
|
Interest payable on core structural borrowings
|
(164)
|
(153)
|
(7)
|
|
(153)
|
(7)
|
Corporate expenditure
|
(157)
|
(201)
|
22
|
|
(212)
|
26
|
Other income and expenditure
|
(321)
|
(346)
|
7
|
|
(357)
|
10
|
Total adjusted operating profit before tax and restructuring
and IFRS 17 implementation costs
|
1,648
|
1,383
|
19
|
|
1,424
|
16
|
Restructuring and IFRS 17 implementation costs
|
(77)
|
(97)
|
21
|
|
(99)
|
22
|
Total adjusted operating profit before tax
|
1,571
|
1,286
|
22
|
|
1,325
|
19
|
Non-operating items:
|
|
|
|
|
|
|
Short-term fluctuations in investment returns on shareholder-backed
business
|
(212)
|
(418)
|
49
|
|
(421)
|
50
|
Amortisation of acquisition accounting adjustments
|
(2)
|
(2)
|
-
|
|
(2)
|
-
|
Loss attaching to corporate transactions
|
(94)
|
-
|
n/a
|
|
-
|
n/a
|
Profit from continuing operations before tax attributable to
shareholders
|
1,263
|
866
|
46
|
|
902
|
40
|
Tax charge attributable to shareholders' returns
|
(193)
|
(244)
|
21
|
|
(249)
|
22
|
Profit from continuing operations for the period
|
1,070
|
622
|
72
|
|
653
|
64
|
Loss from discontinued operations for the period, net of related
tax
|
(5,707)
|
(88)
|
n/a
|
|
(88)
|
n/a
|
(Loss) profit for the period
|
(4,637)
|
534
|
n/a
|
|
565
|
n/a
|
|
|
|
|
|
|
|
IFRS earnings per share
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2021 cents
|
Half year
2020 cents
|
Change %
|
|
Half year
2020 cents
|
Change %
|
Basic earnings per share based on adjusted operating profit after
tax from continuing operations
|
51.6
|
38.1
|
35
|
|
39.4
|
31
|
|
|
|
|
|
|
|
Basic earnings per share based on:
|
|
|
|
|
|
|
Total
profit after tax from continuing operations
|
40.9
|
23.1
|
77
|
|
24.3
|
68
|
Total
profit after tax from discontinued operations
|
(195.1)
|
(3.4)
|
n/a
|
|
(3.4)
|
n/a
|
|
|
|
|
|
|
|
|
|
Growth in adjusted operating profit remains broad based and at
scale. Segment profit from continuing long-term and asset
management business increased by 11 per cent1 to
$1,969 million. All our major segments, other than Indonesia,
delivered growth, with the biggest increase seen in the China JV.
Two markets generated adjusted operating profit of $250 million or
above, and a further five markets, including our asset management
business, were above $100 million in the first half of the
year.
In the China JV, adjusted operating profit increased by 28 per
cent1 following
strong growth in the size of the business over recent
years.
In Hong Kong, our focus on regular-premium health and protection
business, combined with our strong persistency experience,
increased renewal premiums for our shareholder-backed business.
This, together with the compounding benefit to adjusted operating
profit from our flagship critical illness products due to the
accumulating nature of asset shares, led to an increase in adjusted
operating profit of 12 per cent1.
Renewal premiums declined in aggregate as some policies within the
with-profits funds reached the end of the premium-paying term. We
continue to earn profits on these policies in-line with bonus
declarations.
In Singapore, growth of 16 per cent1 was
supported by the continued growth of our in-force business, with an
increase in insurance margin in the period reflecting higher
renewal premiums.
In Malaysia, growth of 12 per cent1 was
supported by the growth of our in-force protection business, with
shareholder-backed renewal premiums25 increasing
by 12 per cent1.
Additionally, higher average unit-linked liabilities saw an
increase in fee income in the period and claims levels were lower
than expected.
In Indonesia, adjusted operating profit reduced by (12) per
cent1 reflecting
lower new sales over recent years as well as adverse
Covid-19-related claims experience in the current period compared
with that in the first half of 2020. We expect this trend to
continue into the fourth quarter.
The businesses comprising our Growth markets and other segment
generated a strong performance in the first half with adjusted
operating profit 15 per cent1 higher,
again reflective of in-force growth. Vietnam, the Philippines,
Thailand and Taiwan all reported robust double-digit growth, while
adjusted operating profit in India declined reflecting higher
Covid-19-related claims. The second half performance of this
segment will be subject to the level of claims-related impacts as
the Covid-19 pandemic unfolds.
The Group's total adjusted operating profit from continuing
operations after restructuring and IFRS 17 costs increased by 19
per cent1 to
$1,571 million. This reflects the benefit of the higher Asia and
Africa adjusted operating profit and lower central
expenses.
Long-term insurance business adjusted operating profit
drivers
Profit margin analysis of long-term
insurance continuing operations15
|
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year 2021
|
Half year 2020
|
|
Half year 2020
|
|
|
Margin
|
|
Margin
|
|
|
Margin
|
|
$m
|
bps
|
$m
|
bps
|
|
$m
|
bps
|
Spread income
|
153
|
67
|
146
|
79
|
|
152
|
80
|
Fee income
|
169
|
103
|
135
|
102
|
|
140
|
102
|
With-profits
|
62
|
15
|
58
|
17
|
|
59
|
17
|
Insurance margin
|
1,467
|
|
1,287
|
|
|
1,326
|
|
Other income
|
1,533
|
|
1,473
|
|
|
1,516
|
|
Total life income
|
3,384
|
|
3,099
|
|
|
3,193
|
|
Expenses:
|
|
|
|
|
|
|
|
Acquisition
costs
|
(990)
|
(48)%
|
(875)
|
(51)%
|
|
(904)
|
(51)%
|
Administration
expenses
|
(804)
|
(203)
|
(737)
|
(231)
|
|
(758)
|
(232)
|
DAC
adjustments
|
238
|
|
117
|
|
|
123
|
|
Share of related tax charges from joint ventures and
associates
|
(21)
|
|
(18)
|
|
|
(20)
|
|
Long-term insurance business pre-tax adjusted operating
profit
|
1,807
|
|
1,586
|
|
|
1,634
|
|
Our adjusted operating profit continues to be based on
high-quality drivers. The overall 11 per cent1 growth
in Asia and Africa life insurance adjusted operating profit to
$1,807 million (2020: $1,634 million1)
was driven principally by 11 per cent1 growth
in insurance margin-related revenues and reflects our ongoing focus
on recurring premium health and protection products and the
associated continued growth of our in-force business, partially
offset by a more normalised claims experience following the lower
level of claims seen in 2020 and higher Covid-19 claims in
Indonesia and India.
Fee income increased by 21 per cent1,
reflecting the impact of stronger equity markets and premium
contributions while spread income was broadly in line with the
prior period, with a small fall in margin due to country
mix.
With-profits earnings relate principally to the shareholders' share
in bonuses declared to policyholders. As these bonuses are
typically weighted to the end of a contract, under IFRS,
with-profit earnings consequently emerge only gradually over time.
The 5 per cent1 growth
in with-profits earnings reflects the ongoing growth in these
portfolios.
Other income primarily represents amounts deducted from premiums to
cover acquisition costs and administration expenses. The 1 per
cent1 increase
from half year 2020 largely reflects higher premiums on
shareholder-backed business offset by changes in product
mix.
Acquisition costs increased in the period, largely due to higher
APE sales in the first half of 2021 as compared with the prior
year. This increase in acquisition costs has led to an increase in
the costs deferred and therefore higher DAC adjustments in the
period.
Administration expenses, including renewal commissions, increased
by 6 per cent1 reflecting
in-force business growth and increased investment in the Pulse
ecosystem.
Asset management
|
Actual exchange rate
|
|
Half year
2021 $m
|
Half year
2020 $m
|
Change %
|
Total external net
flows*,16
|
(509)
|
(8,362)
|
n/a
|
|
|
|
|
External funds under management* ($bn)
|
96.1
|
82.4
|
17
|
Funds managed on behalf of M&G plc ($bn)
|
16.1
|
15.7
|
3
|
Internal funds under management ($bn)
|
141.8
|
121.6
|
17
|
Total funds under management ($bn)
|
254.0
|
219.7
|
16
|
|
|
|
|
Analysis of adjusted operating profit
|
|
|
|
Retail operating income
|
225
|
188
|
20
|
Institutional operating income
|
149
|
125
|
19
|
Operating income before performance-related fees
|
374
|
313
|
19
|
Performance-related fees
|
6
|
2
|
200
|
Operating income (net of commission)
|
380
|
315
|
21
|
Operating expense
|
(196)
|
(157)
|
(25)
|
Group's share of tax on joint ventures' adjusted operating
profit
|
(22)
|
(15)
|
(47)
|
Adjusted operating profit
|
162
|
143
|
13
|
Adjusted operating profit after tax
|
147
|
126
|
17
|
|
|
|
|
Average funds managed by Eastspring
|
$247.6bn
|
$224.1bn
|
10
|
Fee margin based on operating income
|
30bps
|
28bps
|
+2bps
|
Cost/income ratio10
|
52%
|
50%
|
+2ppts
|
*
Excluding funds managed on behalf of M&G plc.
Eastspring's total funds under management were $254.0 billion at 30
June 2021 (30 June 2020: $219.7 billion4),
reflecting favourable internal net flows and higher equity markets.
Compared with 2020, Eastspring's average funds under management
increased by 10 per cent4 (6
per cent20 on
a constant exchange rate basis).
Investment performance improved in the current year driven by the
particularly strong relative performance of our value-style equity
teams. In addition, our quantitative equity team delivered strong
relative performance and our fixed income team continued to
generate "alpha" and deliver significant excess returns. Meaningful
excess returns were also attained on funds managed on behalf of the
Group's insurance business, supported by asset allocation
decisions.
Eastspring continues to benefit from positive net flows from
internal insurance funds, recording $4.5 billion (2020: $2.9
billion). As market volatility subsided compared with the first
half of 2020, third-party flows related to external funds under
management were negative $(0.5) billion, compared with $(8.4)
billion for the first half of 2020. During the first half of 2021,
institutional net inflows into our equity strategies were more than
offset by retail net outflows from our fixed income strategies,
with the change in the resulting mix of funds contributing to an
increase in fee margin. Positive investment performance saw funds
managed on behalf of M&G plc increase by $0.4 billion from
$15.7 billion at the end of 2020 to $16.1 billion at the end of
June 2021. There were marginal net inflows in the period. Around
$(5.1) billion of outflows of funds managed on behalf of M&G
plc are expected in the second half of the year.
Eastspring's adjusted operating profit of $162 million was up 10
per cent1 compared
with the prior period on a constant exchange rate basis (up 13 per
cent4 on
an actual exchange rate basis). Operating income (net of
commission) increased by 21 per cent4 driven
by higher average funds under management and improved asset mix
which saw the average fee margin increase to 30 basis points (2020:
28 basis points4).
There was an increase in the cost/income ratio10 to
52 per cent (2020: 50 per cent) due to investments made in
strengthening the capabilities of the business across dimensions
including footprint, distribution, investment strategies and
customer experience.
Other income and expenditure
Central corporate expenditure was 26 per cent1 lower
than the prior period reflecting the delivery of the $180
million5,6 of
right-sizing of our head office costs alongside the evolving
footprint of the business. Annual head office costs are targeted to
reduce further by around $70 million from the start of
2023.
Interest costs on core structural borrowings net of other central
income were up 13 per cent1 compared
with the prior period, reflecting the full impact in this
accounting period of interest paid on debt issued in April 2020 and
lower central income in the first half of 2021 reflecting lower
foreign exchange movements on non-US dollar central
items.
Restructuring costs of $(77) million (2020: $(97)
million4)
reflect the Group's substantial and ongoing IFRS 17 project, and
one-off costs associated with cost savings initiatives in our
business. These are expected to remain elevated through the
demerger period and until IFRS 17 is fully
implemented.
IFRS basis non-operating items from continuing
operations
Non-operating items from continuing operations in the first half of
2021 consist mainly of short-term fluctuations in investment
returns on shareholder-backed business of negative
$(212) million, largely arising in Asia, (2020: negative
$(418) million4),
and $(94) million of costs associated with corporate transactions
(2020: nil).
Short-term fluctuations reflect the net impact from an increase in
interest rates in most Asia markets on bond asset values and on the
valuation interest rates (VIRs) used to determine policyholder
liabilities.
Costs associated with corporate transactions of $(94) million
(2020: nil) largely reflect the cost incurred by Prudential plc in
connection with the separation of Jackson including key management
changes. Remaining costs to complete the demerger in the second
half of 2021 are anticipated to be minimal. See note D1.1 in the
IFRS financial statements for further information.
IFRS effective tax rates for continuing operations
In the first half of 2021, the effective tax rate on adjusted
operating profit based on longer-term investment returns from
continuing operations was 14 per cent (2020: 21 per cent). The
lower rate reflects reductions in corporate income tax rates in
Indonesia and the Philippines; higher levels of non-taxable
investment income in a number of Asia jurisdictions, and the
resolution of some historic tax issues at lower amounts than
originally provided for. Following the proposed demerger, and
taking into account the planned reduction in head office costs, the
effective tax rate on adjusted operating profit for the Prudential
Group is expected to be around 18 per cent.
The effective tax rate on total IFRS profit from continuing
operations in the first half of 2021 was 15 per cent (2020: 28 per
cent), reflecting a combination of the matters referred to above
which reduced the adjusted operating profit tax rate together with
a decrease from 2020 in non-taxable investment-related
marked-to-market losses arising in Asia.
We are monitoring the ongoing discussions regarding reforming the
international tax system to reflect a more digitalised global
economy. While the insurance industry is not a target of these
reforms, it is possible that changes to the international tax
system (such as introducing a global minimum corporate tax rate of
at least 15 per cent) could increase Prudential's effective tax
rate.
Loss from discontinued operations - Jackson
In January 2021, the Board announced that it had decided to pursue
the separation of its US operations (Jackson) from the Group
through a demerger. Prudential published a shareholder circular on
6 August 2021, which contains details of the proposed demerger and
the general meeting for shareholders to approve it on 27 August
2021. The proposed demerger is planned to complete in September
2021 and accordingly Jackson has been classified as held for
distribution and presented as discontinued within these half year
2021 financial statements.
The total loss from discontinued operations after tax was $(5,707)
million, as included in the IFRS profit table above. This comprises
the following amounts:
|
Half year
2021 $m
|
Half year
2020 $m
|
Profit (loss) before tax
|
2,170
|
(203)
|
Tax (charge) credit
|
(370)
|
115
|
Profit (loss) after tax
|
1,800
|
(88)
|
Loss on write-down to fair value
|
(7,507)
|
-
|
Loss for the period
|
(5,707)
|
(88)
|
Loss for the period attributable to shareholders*
|
(5,073)
|
(88)
|
*
Relates to the Group's 88.9 per cent economic interest in
Jackson.
In accordance with IFRS 5, following its classification as held for
distribution, Jackson has been written down to its estimated fair
value, estimated at $3.0 billion. This fair value has been
determined by considering publicly available information on listed
equities of similar profile to Jackson in the US market. It may
therefore differ from the fair value that is determined following
initial trading of the Jackson shares post the demerger. Using this
fair value has resulted in a loss on remeasurement, after tax, of
$(7,507) million.
The improvement in Jackson's profit (loss) before tax in the first
half of 2021 as compared with the first half of 2020 arises from
the following:
● An increase in fee income from variable annuity
products, reflecting higher average separate account balances over
the first half of 2021 compared with the same period in the prior
year together with a deceleration in DAC amortisation of $102
million compared with an acceleration of $(32) million in the prior
period, reflecting the increase in equity markets since the start
of the year. This was offset to some degree by lower spread income
and higher expenses as a result of higher asset-based commission
expenses.
● An improvement in the level of net gains/losses
arising from short-term investment fluctuations (net of associated
DAC) from a loss of $(2,288) million in the prior year to a gain of
$592 million in the first half of 2021. The gain in the current
period largely reflects the impact of increases in interest rates
since the start of the year on the value of Jackson's product
guarantees, which more than offset the losses on derivatives
arising from the rise in interest rates and equity markets over the
period.
● Offsetting these positives was the
non-reoccurrence of the $846 million pre-tax gain that arose as a
result of the Athene reinsurance transaction undertaken in June
2020.
The effective tax rate on Jackson's profit before tax was 17 per
cent (2020: 57 per cent).
Further information on Jackson's performance in the first half of
2021 is given at the end of this Chief Financial Officer and Chief
Operating Officer's report.
Shareholders' equity
Group IFRS shareholders' equity
|
|
|
|
|
Half year
2021 $m
|
Half year
2020 $m
|
Full year
2020 $m
|
Adjusted operating profit after tax attributable to shareholders
from continuing operations
|
1,342
|
990
|
2,250
|
|
|
|
|
(Loss) profit after tax for the period
|
(4,637)
|
534
|
2,185
|
Less non-controlling interest
|
627
|
(22)
|
(67)
|
(Loss) profit after tax for the period attributable to
shareholders
|
(4,010)
|
512
|
2,118
|
Exchange movements, net of related tax
|
(158)
|
(200)
|
239
|
Unrealised gains and losses on US fixed income securities
classified as available-for-sale
|
(771)
|
(22)
|
300
|
Sale of 11.1 per cent stake in Jackson to Athene
|
-
|
-
|
(514)
|
External dividends
|
(283)
|
(674)
|
(814)
|
Other
|
57
|
17
|
72
|
Net (decrease) increase in shareholders' equity
|
(5,165)
|
(367)
|
1,401
|
Shareholders' equity at beginning of the period
|
20,878
|
19,477
|
19,477
|
Shareholders' equity at end of the period
|
15,713
|
19,110
|
20,878
|
Shareholders' value per
share10
|
601¢
|
732¢
|
800¢
|
Group IFRS shareholders' equity in the six months to 30 June 2021
decreased by (25) per cent4 to
$15.7 billion (30 June 2020: $19.1 billion4,
31 December 2020: $20.9 billion4),
largely reflecting the loss after tax from discontinued operations
for the period (as described above).
Excluding the $2,667 million attributable to Jackson, IFRS
shareholders' equity for continuing operations was $13.0 billion as
at 30 June 2021, up 5 per cent4 from
31 December 2020. This increase reflects profit after tax for the
period, partly offset by unfavourable exchange movements in the
period and the payment of the 2020 second interim ordinary
dividend.
New business performance
Life EEV new business profit and APE new business sales (APE
sales)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2021 $m
|
Half year
2020 $m
|
Change %
|
|
Half year
2020 $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
|
China JV
|
448
|
228
|
319
|
127
|
40
|
80
|
|
347
|
138
|
29
|
65
|
Hong Kong
|
253
|
306
|
388
|
353
|
(35)
|
(13)
|
|
388
|
353
|
(35)
|
(13)
|
Indonesia
|
117
|
57
|
123
|
68
|
(5)
|
(16)
|
|
125
|
69
|
(6)
|
(17)
|
Malaysia
|
211
|
113
|
123
|
69
|
72
|
64
|
|
127
|
71
|
66
|
59
|
Singapore
|
379
|
215
|
229
|
123
|
66
|
75
|
|
240
|
130
|
58
|
65
|
Growth markets and other*
|
675
|
257
|
537
|
172
|
26
|
49
|
|
553
|
178
|
22
|
44
|
Total*
|
2,083
|
1,176
|
1,719
|
912
|
21
|
29
|
|
1,780
|
939
|
17
|
25
|
Total new business margin
|
|
56%
|
|
53%
|
|
|
|
|
53%
|
|
|
*
The half year 2020 new business profit results exclude
contributions from Africa.
Life insurance APE sales increased by 17 per
cent1 to
$2,083 million and related new business profit increased by 25 per
cent1.
Outside Hong Kong, overall APE sales were 31 per
cent1 higher
and new business profit increased by 48 per cent1.
Over the first half of 2021 we continued to benefit from our
diverse and digitally enabled business platform. Despite ongoing
Covid-19-related disruption in a number of our markets, all markets
other than Hong Kong and Indonesia increased APE sales compared
with the prior period, with 10 markets21 delivering
double-digit growth. All distribution channels delivered
double-digit growth, with agency up 17 per cent1.
APE sales24 in
the period involving Pulse accounted for 10 per cent of APE sales
in markets where Pulse is available, reflecting the ongoing build
out of our digital ecosystem.
The China JV saw APE sales up 29 per cent1 to
$448 million and was our largest market by volume in the period.
APE sales in Malaysia were up by 66 per cent1 and
Singapore up by 58 per cent1.
Hong Kong domestic business APE sales were 10 per
cent1 lower.
Following the border closure in late January 2020, sales to
Mainland China customers in Hong Kong remained severely curtailed.
Our growth markets and other segment saw APE sales up 22 per
cent1 driven
by strong growth in India, the Philippines, Vietnam and
Africa.
New business profit increased by 25 per cent1 to
$1,176 million driven principally by the increase in APE sales and
the effect of favourable channel and product mix changes. Across
the portfolio, the effect of interest rate movements under our
active basis EEV methodology was marginally positive. New business
profit related to our Africa businesses is also incorporated into
the current period for the first time. Excluding Hong Kong, new
business profit was 48 per cent1 higher,
driven by strong growth across all reporting segments other than
Indonesia, with nine markets achieving double-digit expansion. This
growth reflects our improved ability to trade in the current
environment as a result of investment made in the last few years to
broaden our product offering, expand our routes to market and
implement new digital tools.
EEV basis results
EEV basis results from continuing operations
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2021 $m
|
Half year
2020 $m
|
Change %
|
|
Half year
2020 $m
|
Change %
|
New business profit
|
1,176
|
912
|
29
|
|
939
|
25
|
Profit from in-force business
|
857
|
993
|
(14)
|
|
1,012
|
(15)
|
Operating profit from long-term business
|
2,033
|
1,905
|
7
|
|
1,951
|
4
|
Asset management
|
147
|
126
|
17
|
|
130
|
13
|
Other income and expenditure26
|
(431)
|
(491)
|
12
|
|
(503)
|
14
|
Operating profit for the period from continuing
operations
|
1,749
|
1,540
|
14
|
|
1,578
|
11
|
Non-operating profit
|
158
|
(3,090)
|
105
|
|
(3,119)
|
105
|
Profit (loss) for the period from continuing
operations
|
1,907
|
(1,550)
|
223
|
|
(1,541)
|
224
|
Dividends paid
|
(283)
|
(674)
|
|
|
|
|
Other movements
|
(388)
|
(746)
|
|
|
|
|
Net increase (decrease) in EEV shareholders' equity from continuing
operations
|
1,236
|
(2,970)
|
|
|
|
|
EEV shareholders' equity from continuing operations at 1
Jan
|
41,926
|
38,369
|
|
|
|
|
EEV shareholders' equity from continuing operations at 30
Jun
|
43,162
|
35,399
|
|
|
|
|
% Annualised new business profit13/average
EEV shareholders' equity for insurance and asset management
business operations
|
5%
|
5%
|
|
|
|
|
% Annualised operating profit13/average
EEV shareholders' equity for continuing
operations
|
8%
|
8%
|
|
|
|
|
EEV shareholders' equity
|
30 Jun 2021 $m
|
31 Dec 2020 $m
|
Represented by:
|
|
|
China
JV
|
3,049
|
2,798
|
Hong
Kong
|
20,951
|
20,156
|
Indonesia
|
2,350
|
2,630
|
Malaysia
|
3,814
|
4,142
|
Singapore
|
7,917
|
8,160
|
Growth
markets and other
|
5,601
|
4,975
|
Embedded value from long-term business excluding
goodwill
|
43,682
|
42,861
|
Asset management and other excluding goodwill
|
(1,308)
|
(1,756)
|
Goodwill attributable to equity holders
|
788
|
821
|
EEV shareholders' equity from continuing operations
|
43,162
|
41,926
|
EEV shareholders' equity from discontinued operations
|
2,667
|
12,081
|
Group EEV shareholders' equity
|
45,829
|
54,007
|
EEV shareholders' equity per share from continuing
operations
|
1,650¢
|
1,607¢
|
Group EEV shareholders' equity per share
|
1,752¢
|
2,070¢
|
The results of the continuing operations of the Group on an EEV
basis consist of the results of profits on an EEV basis from
long-term and asset management business together with corporate
costs and dividends paid.
EEV operating profit from longer-term business increased by 4 per
cent1 compared
with the prior period to $2,033 million (2020: $1,951
million1),
driven by increased new business profit, which was partly offset by
a lower profit from in-force business.
The profit from in-force business is driven by the expected return
and effects of operating assumption changes, if any, and operating
experience variances. The expected return increased by 15 per
cent1 above
the prior period reflecting the combined effects of underlying
business growth and the impact of higher period end interest rates
increasing the risk discount rate under our active basis European
Embedded Value methodology. However, operating assumption and
experience variances were negative $(27) million on a net basis
reflecting a number of factors including higher levels of
investment in our digital ecosystems and short-term persistency
impacts linked to Covid-19 effects. While we have continued to see
better than expected claims experience on our medical reimbursement
business, this is lower than in prior periods and is offset by
higher Covid-19-related claims in the period in Indonesia and
India. The small overall level of assumption changes and variances
in such an unprecedented environment is demonstration of the
discipline with which we manage our in-force
portfolio.
EEV asset management segment operating profit after tax was up 13
per cent1 on
the prior period at $147 million (2020: $130
million1),
as discussed within our IFRS results section
above.
After allowing for lower central expenditure (including IFRS 17 and
restructuring costs) EEV operating profit for continuing operations
was up 11 per cent1 to
$1,749 million.
The non-operating profit of $158 million (2020: $(3,090)
million4)
is driven principally by the effect of changes in economic
assumptions, partly offset by negative investment return variances
given reduced bond valuations reflecting the increase in interest
rates in the period.
Overall, EEV shareholders' equity from continuing operations
increased by 3 per cent4 since
31 December 2020 to $43.2 billion (31 December 2020: $41.9
billion4).
Of this, $43.7 billion (31 December 2020: $42.9
billion4)
relates to the value of the long-term business and includes our
share of our India associate valued using embedded value principles
which is significantly lower than its market capitalisation. The
remainder represents Asia asset management, other operations
(including central Group debt) and goodwill attributable to
shareholders which are carried at IFRS net asset value within the
Group's EEV. EEV shareholders' equity from continuing operations,
excluding the proposed 19.7 per cent non-controlling economic
interest to be held in Jackson post the proposed demerger, on a per
share basis at 30 June 2021 was 1,650 cents (31 December 2020:
1,607 cents4).
Our US business has been written down to fair value within total
Group EEV shareholders' equity. After allowing for this change in
valuation, total Group EEV fell (15) per cent4 from
$54,007 million4 at
31 December 2020 to $45,829 million at 30 June
2021.
Group free surplus generation from
continuing operations11
Operating free surplus generation is the financial metric we use to
measure the internal cash generation of our business operations and
is generally based (with adjustments) on the capital regimes that
apply locally in the various jurisdictions in which the Group
operates. For life insurance operations, it represents amounts
emerging from the in-force business during the period, net of
amounts reinvested in writing new business. For asset management
businesses, it equates to post-tax adjusted operating profit for
the period.
For asset management and other non-insurance operations (including
the Group's central operations), free surplus is taken to be IFRS
basis shareholders' equity, net of goodwill attributable to
shareholders, with central Group debt recorded as free surplus to
the extent that it is classified as capital resources under the
Group's capital regime. Following the application of the GWS
Framework, both subordinated and senior debt are treated as capital
for the purposes of free surplus at 30 June 2021.
Analysis of movement in Group free
surplus9
|
|
Actual exchange rate
|
|
Constant exchange rate
|
|
Half year
2021 $m
|
Half year
2020 $m
|
Change %
|
|
Half year
2020 $m
|
Change %
|
Expected transfer from in-force business and return on existing
free surplus
|
1,249
|
1,061
|
18
|
|
1,095
|
14
|
Changes in operating assumptions and experience
variances
|
35
|
94
|
(63)
|
|
95
|
(63)
|
Operating free surplus generated from in-force life business before
restructuring costs
|
1,284
|
1,155
|
11
|
|
1,190
|
8
|
Investment in new business
|
(319)
|
(298)
|
(7)
|
|
(303)
|
(5)
|
Operating free surplus generated from life business before
restructuring costs
|
965
|
857
|
13
|
|
887
|
9
|
Asset management
|
147
|
126
|
17
|
|
130
|
13
|
Operating free surplus generated from life business and asset
management before restructuring costs
|
1,112
|
983
|
13
|
|
1,017
|
9
|
Central costs and eliminations (net of tax):
|
|
|
|
|
|
|
Net
interest paid on core structural borrowings
|
(164)
|
(144)
|
(14)
|
|
(144)
|
(14)
|
Corporate
expenditure
|
(149)
|
(201)
|
26
|
|
(212)
|
30
|
Other
items and eliminations
|
(46)
|
(53)
|
13
|
|
(53)
|
13
|
Net operating free surplus generated before restructuring and IFRS
17 implementation costs
|
753
|
585
|
29
|
|
608
|
24
|
Restructuring and IFRS 17 implementation costs (net of
tax)
|
(70)
|
(93)
|
25
|
|
(94)
|
26
|
Net Group operating free surplus generated for continuing
operations
|
683
|
492
|
39
|
|
514
|
33
|
External dividends
|
(283)
|
(674)
|
|
|
|
|
Non-operating and other movements
|
138
|
(744)
|
|
|
|
|
Treatment of grandfathered debt instruments under the GWS
Framework
|
1,995
|
-
|
|
|
|
|
Foreign exchange movements
|
(29)
|
(126)
|
|
|
|
|
Increase (decrease) in Group free surplus from continuing
operations*
|
2,504
|
(1,052)
|
|
|
|
|
Change in amounts attributable to non-controlling
interests
|
(13)
|
(22)
|
|
|
|
|
Free surplus at 1 Jan from continuing operations
|
8,344
|
7,959
|
|
|
|
|
Free surplus at 30 Jun from continuing operations
|
10,835
|
6,885
|
|
|
|
|
Comprising:
|
|
|
|
|
|
|
Free
surplus of life insurance and asset management
operations
|
6,203
|
4,355
|
|
|
|
|
Central
operations
|
4,632
|
2,530
|
|
|
|
|
*
Before amounts attributable to non-controlling
interests.
The free surplus generation from in-force life business increased
by 8 per cent1 in
the period, reflecting underlying growth in the in-force business
among other factors. Asset management earnings increased by 13 per
cent1 on
an after tax basis (discussed in the commentary on IFRS above),
while operating assumption and experience variance effects remained
positive, though lower than the prior year.
Investment in profitable new business increased by 5 per
cent1,
supporting the 25 per cent1 increase
in new business profit discussed above, equating to a ratio of
value creation as meaured by new business profit, of nearly four
times capital invested.
Net of investment in new business, operating free surplus
generation by our life and asset management business increased by 9
per cent1 in
the period. Combined with a reduction in central costs of 12 per
cent1,
total Group operating free surplus generation before restructuring
costs from continuing operations was 24 per cent1 higher
at $753 million, and $683 million after restructuring
costs.
Free surplus from continuing operations at 30 June 2021 was $10.8
billion, after allowing for free surplus generation in the period
and a $2.0 billion uplift following the recognition of senior debt
under the GWS Framework. This uplift differs from the $1.6 billion
recognised in the Group's capital resources as, prior to the
adoption of GWS, senior debt was deducted from free surplus at
market value rather than at cost.
Greater China presence
Prudential has a significant footprint in the Greater China region.
Its 100 per cent owned life insurance business in Hong Kong has
grown to be one of the largest since it was first established 57
years ago. In addition, in 2010, Prudential achieved dual primary
listed status by becoming listed in Hong Kong and in 2019,
following the demerger of M&G plc, the Group's regulator
shifted from the UK's Prudential Regulation Authority to the Hong
Kong Insurance Authority (IA). The Group is joint-headquartered in
London and Hong Kong. The Group, and the location of its employees,
including key executives, has shifted further towards Hong Kong
over the years, with over 60 per cent of head office staff now
located in Hong Kong.
Alongside its presence in Hong Kong, Prudential has a life
insurance subsidiary in Taiwan and a 50/50 joint venture with
CITIC, a leading Chinese state-owned conglomerate, in Mainland
China. The table below demonstrates the significant proportion of
the Group's financial measures that were contributed by our Hong
Kong, China JV and Taiwan businesses.
|
Gross premiums earned**
|
New business profit***
|
|
Half year
|
Full year
|
Half year
|
Full year
|
|
2021 $m
|
2020 $m
|
2020 $m
|
2019 $m
|
2021 $m
|
2020 $m
|
2020 $m
|
2019 $m
|
Total Greater China*
|
6,677
|
6,975
|
14,179
|
13,572
|
575
|
516
|
1,145
|
2,379
|
Total Group* (continuing operations)
|
13,587
|
12,578
|
26,728
|
27,002
|
1,176
|
912
|
2,201
|
3,522
|
|
|
|
|
|
|
|
|
|
Percentage of total
|
49%
|
55%
|
53%
|
50%
|
49%
|
57%
|
52%
|
68%
|
*
Total Greater China represents the amount contributed by the life
business in Hong Kong, Taiwan and the Group's share of the amounts
earned by the China JV. The Group total includes the Group's share
of the amounts earned by all life associates and JVs.
**
The gross earned premium amount shown above differs from that shown
in the income statement as it includes the Group's share of amounts
earned by associates and JVs. A reconciliation to the amount
included in the income statements is included in note II of the
Additional financial information.
***
New business profit results for half year 2020, full year 2020 and
full year 2019 exclude contributions from Africa.
Dividend
Reflecting the Group's capital allocation priorities, a portion of
capital generation will be retained for reinvestment in the
business, and dividends will be determined primarily based on
Asia's operating capital generation after allowing for the capital
strain of writing new business and recurring central costs.
Dividends are expected to grow broadly in line with the growth in
Asia operating free surplus generation net of right-sized central
costs, and will be set taking into account financial prospects,
investment opportunities and market conditions.
The Prudential Board paid a 2020 second interim ordinary dividend
of 10.73 cents per share. Combined with the first interim ordinary
dividend of 5.37 cents per share, Prudential's total 2020 dividend
was 16.10 cents per share.
The Board applies a formulaic approach to first interim dividends,
calculated as one-third of the previous year's full-year ordinary
dividend. The Board has approved a 2021 first interim ordinary
dividend of 5.37 cents per share.
Group capital position
Prudential applies the Insurance (Group Capital) Rules set out in
the GWS Framework issued by the Hong Kong IA to determine group
regulatory capital requirements. The GWS Framework became effective
for Prudential upon designation by the Hong Kong IA on 14 May 2021
and replaced the local capital summation method (LCSM) which was
used for determination of the 31 December 2020 Group capital
position as agreed with the Hong Kong IA. The Hong Kong IA has
confirmed the grandfathering of our $6.0 billion19 of
subordinated debt and senior debt as capital. This is consistent
with our expectations and we expect to refinance our debt
instruments in the normal course. More information is set out
in note I(i) of the Additional financial
information.
In the analysis below we have restated the 31 December 2020 LCSM
position to reflect the treatment of debt instruments under the GWS
Framework. This has increased eligible capital resources by $1.6
billion compared to the LCSM basis.
The formal GWS regulatory position of the Group is stated after
including all the Asia with-profit funds and the discontinued
Jackson business. At 30 June 2021 the estimated coverage
ratio22 of
capital resources over Group Minimum Capital Requirement on this
basis was 351 per cent, including Jackson (31 December
202022:
343 per cent on a consistent basis).
The Group shareholder excluding Jackson GWS coverage ratio of
capital resources over Group Minimum Capital Requirement at 30 June
2021 was 383 per cent (31 December 202022:
370 per cent).
Overall, GWS shareholder surplus over Group Minimum Capital
Requirement22 excluding
Jackson increased by $0.7 billion since 31 December 2020 to $10.1
billion at the end of June. GWS shareholder in-force operating
capital generation in the period was $0.8 billion after allowing
for central costs, which supported $(0.1) billion of investment in
new business.
The Group's GWS position is resilient to external macro movements
as demonstrated by the sensitivity disclosure contained in note
I(i) of the Additional financial information, alongside further
information on the basis of calculation of the GWS
measure.
Estimated Group excluding Jackson GWS capital position based on
Group Minimum Capital Requirement (GMCR)
|
|
30 Jun 2021
|
31 Dec 2020
|
Amounts attributable to Prudential
plc22,23
|
Total
|
Less policyholder
|
Shareholder
|
Total
|
Less policyholder
|
Shareholder
|
Capital resources ($bn)
|
37.2
|
(23.6)
|
13.6
|
34.9
|
(22.1)
|
12.8
|
Group Minimum Capital Requirement ($bn)
|
10.6
|
(7.1)
|
3.5
|
10.1
|
(6.7)
|
3.4
|
GWS capital surplus (over GMCR) ($bn)
|
26.6
|
(16.5)
|
10.1
|
24.8
|
(15.4)
|
9.4
|
GWS coverage ratio (over GMCR) (%)
|
349%
|
|
383%
|
344%
|
|
370%
|
Financing and liquidity
Net core structural borrowings of shareholder-financed
businesses
|
|
30 Jun 2021 $m
|
|
30 Jun 2020 $m
|
|
31 Dec 2020 $m
|
|
IFRS
basis
|
Mark-to-market value
|
EEV
basis
|
|
IFRS
basis
|
Mark-to-market value
|
EEV
basis
|
|
IFRS
basis
|
Mark-to-market value
|
EEV
basis
|
Borrowings of shareholder-financed businesses from continuing
operations
|
6,404
|
625
|
7,029
|
|
6,249
|
479
|
6,728
|
|
6,383
|
795
|
7,178
|
Discontinued operations - Jackson Surplus Notes
|
-
|
-
|
-
|
|
250
|
109
|
359
|
|
250
|
90
|
340
|
Total borrowings of shareholder-financed businesses
|
6,404
|
625
|
7,029
|
|
6,499
|
588
|
7,087
|
|
6,633
|
885
|
7,518
|
Less: holding company cash and short-term investments
|
(1,393)
|
-
|
(1,393)
|
|
(1,907)
|
-
|
(1,907)
|
|
(1,463)
|
-
|
(1,463)
|
Net core structural borrowings of shareholder-financed
businesses
|
5,011
|
625
|
5,636
|
|
4,592
|
588
|
5,180
|
|
5,170
|
885
|
6,055
|
Net gearing ratio*
|
28%
|
|
|
|
30%
|
|
|
|
28%
|
|
|
*
Net core structural borrowings from continuing operations as
proportion of IFRS shareholders' equity from continuing operations
plus net core structural borrowings from continuing operations, as
set out in note II of the Additional financial
information.
The total borrowings of the shareholder-financed businesses from
continuing operations were $6.4 billion at 30 June 2021 (31
December 2020: $6.4 billion). The Group had central cash resources
of $1.4 billion at 30 June 2021 (31 December 2020: $1.5 billion),
resulting in net core structural borrowings of the
shareholder-financed businesses of $5.0 billion at end of June 2021
(31 December 2020: $4.9 billion for continuing operations). We have
not breached any of the requirements of our core structural
borrowings nor modified any of their terms during the first half of
2021.
In addition to its net core structural borrowings of
shareholder-financed businesses set out above, the Group is able to
access funding via the medium-term note programme, the US shelf
programme (the platform for issuance of SEC registered bonds in the
US market), a commercial paper programme and committed revolving
credit facilities. All of these are available for general corporate
purposes.
Prudential plc has maintained a consistent presence as an issuer in
the commercial paper market for the past decade and had $500
million in issue at the end of the first half of 2021 (31 December
2020: $501 million).
As at 30 June 2021, the Group had a total of $2.6 billion of
undrawn committed facilities, expiring in 2026. Apart from small
drawdowns to test the process, these facilities have never been
drawn, and there were no amounts outstanding at 30 June
2021.
At 30 June 2021, the Group's net gearing ratio as defined in the
table above, which for the current period excludes Jackson and does
not reflect any value for the 19.7 per cent non-controlling
economic interest retained in the business post the proposed
demerger, was 28 per cent, in line with guidance provided at full
year 2020 on the effect of excluding Jackson. On a Moody's basis,
which is the basis management intend to use going forward to manage
leverage and which differs to the above by taking into account
gross debt, including commercial paper, and also allows for a
proportion of the surplus within the Group's with-profits funds,
the equivalent ratio (excluding Jackson and not reflecting any
value for the 19.7 per cent non-controlling economic interest
retained in the business post-demerger) is 31 per
cent.
The Prudential Group seeks to maintain its financial strength
rating with applicable credit rating agencies which derives, in
part, from its high level of financial flexibility to issue debt
and equity instruments, which is intended to be maintained and
enhanced in the future.
Following the proposed demerger of Jackson, as a pure-play Asia and
Africa business, Prudential will target a Moody's debt-leverage
ratio of around 20 to 25 per cent over the medium
term18.
Prudential may operate outside this range temporarily to take
advantage of growth opportunities with attractive risk-adjusted
returns as they arise, while still preserving its strong credit
ratings. As indicated in the Group Chief Executive's report, the
Group is currently considering an equity raise of around $2.5-3.0
billion in order to enhance financial flexibility and de-lever the
balance sheet.
Cash remittances
Holding company cash
flow8
|
|
|
|
|
Actual exchange rate
|
|
Half year
2021 $m
|
Half year
2020 $m
|
Change %
|
From continuing operations
|
|
|
|
Insurance and asset management business
|
1,035
|
446
|
132
|
Other operations
|
-
|
32
|
(100)
|
Net cash remitted by business units
|
1,035
|
478
|
117
|
Net interest paid
|
(163)
|
(147)
|
(11)
|
Tax received
|
-
|
94
|
(100)
|
Corporate activities14
|
(216)
|
(194)
|
(11)
|
Centrally funded recurring bancassurance fees17
|
(176)
|
(176)
|
-
|
Total central outflows
|
(555)
|
(423)
|
(31)
|
Holding company cash flow before dividends and other
movements
|
480
|
55
|
|
Dividends paid
|
(283)
|
(674)
|
|
Operating holding company cash flow after dividends but before
other movements
|
197
|
(619)
|
|
Issuance and redemption of debt for continuing
operations
|
-
|
983
|
|
Other corporate activities relating to continuing
operations17
|
(256)
|
(558)
|
|
UK and Europe demerger costs
|
-
|
(17)
|
|
US demerger costs
|
(28)
|
-
|
|
Total other movements
|
(284)
|
408
|
|
Total holding company cash flow
|
(87)
|
(211)
|
|
Cash and short-term investments at the beginning of the
period
|
1,463
|
2,207
|
|
Foreign exchange and other movements
|
17
|
(89)
|
|
Cash and short-term investments at the end of the
period
|
1,393
|
1,907
|
|
Remittances from our continuing Asia and Africa businesses were
$1,035 million (2020: $446 million). The value of cash received in
the period reflects the timing of remittances from individual
businesses and is not expected to recur at the same level in the
second half of the year. In order to support the proposed
separation process, there were no remittances from Jackson during
the period.
From 2021, to align more closely to our 'one head office, two
locations' operating model, the Group has revised its presentation
of business unit remittances to reflect amounts before costs
attributable to the head office functions based in Hong Kong, and
to present all head office costs together within the central
outflows section of the holding company cash flow. Accordingly, the
2020 half year and full year comparatives have been re-presented
from those previously published to reflect the change.
Cash remittances for the first half of 2021 were used to meet
central outflows of $(555) million (2020: $(423) million) and to
pay dividends of $(283) million. Central outflows include corporate
activities of $(216) million (2020: $(194) million), centrally
funded recurring bancassurance fees of $(176) million (2020: $(176)
million), and net interest paid of $(163) million (2020: $(147)
million).
Other corporate activities relating to continuing operations of
$(256) million (2020: $(558) million) include central contributions
to the funding of Asia and Africa strategic growth initiatives,
principally non-recurring payments for bancassurance distribution
agreements including UOB and MSB. Further information is contained
in note I(v) of the Additional financial information.
Cash and short-term investments totalled $1.4 billion at 30 June
2021 (31 December 2020: $1.5 billion; 30 June 2020: $1.9
billion).
After the proposed demerger of Jackson, a lower level of holding
company cash will be held centrally, commensurate with the reduced
size of the Group post-demerger. The Group will continue to seek to
manage its financial condition such that it has sufficient
resources available to provide a buffer to support the retained
businesses in stress scenarios and to provide liquidity to service
central outflows.
Discontinued operations: Jackson
New business APE performance
Overall new business APE sales for Jackson for the six months ended
30 June 2021 were $958 million (2020: $979 million), comprising
$950 million of variable annuities and $8 million of other
products. Trends in APE sales have been in line with those seen in
the second half of 2020 and the first three months of 2021. For the
six months ended 30 June 2021, APE sales of variable annuities were
up 30 per cent compared with sales of variable annuities in the
first six months of 2020. For the six months ended 30 June 2021,
sales of fixed index annuities and fixed annuities remained at
historically low levels following pricing actions taken in early
2020, and there were no sales of institutional
products.
Jackson National Life Capital Position
Jackson National Life's RBC ratio3 was
347 per cent at 31 December 2020. This ratio can be highly
sensitive to market movements, including changes in interest rates
and equity markets. During the six months ended 30 June 2021, both
long-term interest rates and US equity markets increased
significantly from year-end 2020 levels. As in prior periods of
strong market growth where there are low levels of statutory
reserves in excess of the cash surrender value minimum statutory
reserves, Jackson incurred hedging losses with limited release of
statutory reserves and limited deferred tax admissibility, which
reduced Jackson National Life's total adjusted
capital7 by
a significant amount. These same market movements also reduced
Jackson National Life's required capital level by a similarly
significant degree.
Taking these changes into account and after giving effect to the
$2,350 million of debt expected to be drawn down prior to the
proposed demerger from the Term Facilities entered into in February
2021 and extended in July 2021 and the contribution of the majority
of the proceeds therefrom to Jackson National Life, it is expected
that, subject to market conditions, Jackson National Life's RBC
will be at or near its target range at the point of proposed
demerger. Jackson management have set the target adjusted RBC range
to be between 500 - 525 per cent, under normal market conditions,
which reflects the capital and capital requirements of Jackson
National Life and its subsidiaries, adjusted to include cash and
investments at Jackson Financial Inc. in excess of the target
minimum cash and cash equivalents at JFI (which Jackson management
currently expect to be approximately $250 million).
Jackson Capital Management
Consistent with Jackson's goals to manage risk and capital and
optimise its financial leverage, Jackson generally intends to
target return of capital to its stockholders, which may take the
form of cash dividends and/or stock repurchases, on an annual basis
of approximately 40-60 per cent of the annual change in its excess
capital (defined for the purposes of this analysis as total
adjusted capital less 400 per cent of company action level required
capital, aligned with the VM-21 calibration)7 adjusted
for any contributions and distributions, subject to market
conditions and approval by the Jackson Board. Jackson expects to be
in a position to distribute capital of between $325 million and
$425 million to its stockholders in the first 12 months following
the completion of the proposed demerger, through cash dividends
and/or stock repurchases, depending on market conditions and
subject to approval by the Jackson Board. Any declaration of cash
dividends or stock repurchases by Jackson will be at the discretion
of the Jackson Board and will depend on Jackson's financial
condition, earnings, liquidity and capital requirements, regulatory
constraints, level of indebtedness, contractual restrictions with
respect to paying cash dividends or repurchasing stock,
restrictions imposed by Delaware law, general business conditions
and any other factors that the Jackson Board deems relevant in
making any such determination. Therefore, there can be no assurance
that Jackson will pay any cash dividends to holders of Jackson
shares or approve any stock repurchase programme, or as to the
amount of any such cash dividends or stock repurchases. Further
detail on Jackson's dividend policy is contained in the Form 10
filed with the SEC by Jackson.
Notes
1
On a constant exchange rate basis.
2
Adjusted IFRS operating profit based on longer-term investment
returns is management's primary measure of profitability and
provides an underlying operating result based on longer-term
investment returns and excludes non-operating items. Further
information on its definition and reconciliation to profit for the
period is set out in note B1.1 of the IFRS financial
statements.
3
RBC ratio represents the RBC of Jackson National Life that reflects
the capital and capital requirements of Jackson National Life and
its subsidiaries.
4
On an actual exchange rate basis.
5
As compared with head office expenditure of $(490) million in 2018
and before a planned $10 million increase in Africa costs as
business grows.
6
Approximately half of the corporate expenditure is incurred in
sterling and our assumptions forecast an exchange rate of
£1=$1.2599.
7
Consistent with statutory accounting requirements, 'total adjusted
capital' is defined as Jackson National Life's statutory capital
and surplus, plus asset valuation reserve and 50 per cent of
policyholder dividends of Jackson National Life and its
subsidiaries. 'Company action level required capital' is the
minimum amount of capital necessary for Jackson National Life to
avoid submitting a corrective action plan to its
regulator.
8
Net cash amounts remitted by business units are included in the
holding company cash flow, which is disclosed in detail in note
I(v) of the Additional financial information. This comprises
dividends and other transfers from business units that are
reflective of earnings and capital generation.
9
Excluding profit for the period attributable to non-controlling
interests.
10
See note II of the Additional financial information for definition
and reconciliation to IFRS balances.
11
Operating free surplus generated from insurance and asset
management operations. For insurance operations, operating free
surplus generated represents amounts maturing from the in-force
business during the period less investment in new business and
excludes non-operating items. For asset management businesses, it
equates to post-tax operating profit for the period. Further
information is set out in 'Movement in Group free surplus' of the
EEV basis results.
12
For growth markets and other, adjusted operating profit includes
other items of $167 million (2020: $104 million) which primarily
comprises of taxes for life joint ventures and associates and other
non-recurring items.
13
Annualised profits have been calculated by multiplying half year
profits by two. Further information can be found in note B of the
Additional EEV financial information.
14
Including IFRS 17 implementation and restructuring costs paid in
the period. On 1 January 2021, the Group changed its basis of
presenting business unit remittances to reflect cash remittances
before costs attributable to the head office functions based in
Hong Kong, and to present all head office costs together within
'Corporate activities'. Accordingly, the half year and full year
2020 amounts have been re-presented from those previously published
to reflect the change.
15
For discussion on the basis of preparation of the sources of
earnings in the table see note I(ii) of the Additional financial
information.
16
Excludes Money Market Funds.
17
Other movements include non-recurring payments for bancassurance
arrangements including those with UOB, TMB and MSB banks. Central
payments for existing bancassurance distribution agreements are
within the central outflows section of the holding company cash
flow, reflecting the recurring nature of these
amounts.
18
Calculated on a Moody's total leverage basis.
19
Debt not denominated in USD is translated using exchange rates as
at 31 December 2020 for the purposes of
grandfathering.
20
On a constant exchange rate basis Eastspring average funds under
management over the half year to 30 June 2020 were $233.7 billion
(actual exchange rate basis: $224.1 billion). Average funds under
management over the period to 30 June 2021 were $247.6
billion.
21
Includes nine Asia markets plus Africa.
22
The results presented reflect the Insurance (Group Capital) Rules
as set out in the GWS Framework. In particular, the 31 December
2020 results have been restated from those previously disclosed on
a LCSM basis to reflect the treatment of grandfathered debt
instruments under the GWS Framework, this increased eligible Group
capital resources by $1.6 billion compared to the LCSM
basis.
23
The Group excluding Jackson GWS capital positions are presented
before including the value of the proposed retained 19.7 per cent
non-controlling economic interest in US operations. This retained
interest is expected to be included in the Group GWS capital
resources valued at 60 per cent of the market value.
24 APE
sales involving Pulse are sales completed by agents on leads from
digital campaigns captured within the Pulse customer management
system or on leads from Pulse registrations, together with a small
number of policies purchased via Pulse online.
25
Excludes UK-style with-profits funds in Malaysia.
26
Other income and expenditure includes restructuring and IFRS 17
implementation costs.
Group Chief Risk and Compliance Officer's report on the risks
facing our business and how these are managed
Enabling decisions to be taken with confidence
Prudential's Group Risk Framework and risk appetite have allowed
the business to control its risk exposure throughout the first half
of 2021. Its governance, processes and controls enable the Group to
deal with uncertainty effectively, which is critical to the
achievement of its strategy of capturing long-term structural
opportunities and helping customers achieve their long-term
financial goals.
This section explains the main risks inherent in the business and
how Prudential manages those risks, with the aim of ensuring an
appropriate risk profile is maintained. Although Jackson is
preparing to be a fully independent business, until the proposed
demerger is effected Jackson's risks (as with those of the Group's
other businesses) will continue to be managed within the Group Risk
Framework and this report reflects this position.
1. Introduction
The Group
During 2020, the world demonstrated a collective focus on
containment measures to limit the spread of the Covid-19 pandemic
within national borders. The first half of 2021 has seen a number
of developed nations struggling to contain new and repeated surges
of infection, with current vaccine strategies at risk by the
virulence and increased transmissibility of new variants.
Meanwhile, developing nations have had varied success in accessing
meaningful volumes of vaccines supplies. Differences in the ability
to access vaccines and develop vaccine strategies effective against
emerging variants of the coronavirus will drive a divergence in the
pace of recovery across markets which will have implications for
the Group's post-pandemic operating environment. Prudential
continues to navigate the ongoing risks from the coronavirus
variants on multiple fronts, and to focus on ensuring a strong
transition out of the pandemic for the Group and its stakeholders
across the markets in which it operates. This includes building on
the innovation and enhancements made during the most acute phases
of the pandemic which enabled uninterrupted delivery of services
for the Group's policyholders, and continuing Prudential's
commitment to doing the right thing for both its customers and
people, as it has done throughout the crisis.
During these ongoing extraordinary circumstances, the Risk,
Compliance and Security (RCS) function has provided risk opinions,
guidance and assurance on critical activity, including the
announced plan to demerge Jackson from the Group. At the same time,
the function retains its focus on managing the risks of the ongoing
business, performing its defined role in providing risk management
and compliance support and oversight, as well as objective
challenge to ensure the Group remained within its risk appetite.
The Group's mature and well-embedded risk framework will enable
decisions to be taken with confidence as the business seeks to
capture the opportunities in the growth markets in which it is now
focused while continuing to operate prudently with discipline. On
14 May 2021, the Group-wide Supervision (GWS) Framework became
effective for the Group following designation by the Hong Kong
Insurance Authority (IA) subject to agreed transitional
arrangements. The Group will continue to engage constructively with
the Hong Kong IA as its Group-wide supervisor under the new
supervisory framework.
The world economy
Many economies have started to emerge from the Covid-19 pandemic in
2021 against the backdrop of substantial and near universal
monetary accommodation, although a divergence in both the degree of
fiscal support and success at containing coronavirus variants is
emerging across markets. Variations in the speed of economic
recovery between markets, and the subsequent impact on their
respective interest rates, inflation expectations and the relative
strength of their currencies (and the associated impact on their
foreign currency debt obligations), may drive broad long-term
economic and financial uncertainty for the markets in which the
Group operates. The US's economic recovery has accelerated in 2021,
led by an increase in domestic demand which has driven inflation
indicators higher. One view is that this surge in inflation will be
transitory, driven primarily by base effects and supply chain
issues that are expected to be resolved as economies reopen. In
Asia, exports have proved resilient during the pandemic, supported
by continuing strong external demand for manufactured goods
although a broader economic recovery in the region will require a
recovery in local demand and the services sector. Stringent
government restrictions, resurgences in Covid-19 cases, including
the proliferation of new variants of the coronavirus, and
vaccination delays have been inhibiting both domestic and external
rebounds. Given the slow pick-up in local demand and the relatively
persistent slack in the labour market, core price inflation
pressure in Asia is unlikely to be as concerning as in the US,
despite risks to headline inflation from rising food prices and
energy costs across many Asian markets. Long-term growth prospects
cannot necessarily be extrapolated from the robust global GDP
growth rates projected for 2021. Concerns over the global recovery
are linked to uncertainty around the supply and effectiveness of
vaccines against emerging variants of the coronavirus and the high
level of debt that economies have taken on in an attempt to
minimise the impact of Covid-19, with many country debt burdens now
larger relative to GDP.
Financial markets
The financial markets in H1 2021 have reflected economic trends,
pricing in the spikes in growth and surges in near-term inflation.
Coinciding with an increase in inflationary concerns, the 10-year
US Treasury yield has increased since the end of 2020, reaching
174bps by end-March 2021 before consolidating in Q2. Equity prices
have continued to rise in 2021, supported by highly accommodative
financial conditions, albeit with some short episodes of volatility
as the markets react to expectations on monetary policy and digest
inflections in economic data. Increasing inflation pressure in the
US and the resulting increased interest rates may have implications
for Asian markets in terms of higher funding costs, which will be a
potential concern for highly leveraged companies and countries, and
an increased risk of capital outflows. It seems likely, however,
that the impact of the tightening conditions in the US should be
more limited when compared to the previous chapter of tightening in
2013 given that Asian economies now have stronger external balance
sheets.
Geopolitical landscape
Governmental responses to the pandemic have involved a necessary
balancing of the impacts to people's health and lives, their
individual rights and liberties, and economic growth. These
considerations, and how they have been balanced, have been a
potential source of polarisation and popular discontent within
nations. Into 2021, variability of access to vaccines that are
effective against current and emerging variants of the coronavirus
is contributing to the uneven impact of, and recovery from, the
Covid-19 pandemic between countries. This is likely to widen
existing national and international structural inequalities, with
the potential to exacerbate existing, and create new, geopolitical
tensions as the stakes of falling behind in the global race to
economic recovery become increasingly high. Whether there is a
return to popular protests against long-standing social issues and
inequalities which, aided by social media, have been characterised
by the speed and frequency at which they gather momentum and their
evolving forms of leadership, remains to be seen. The experience of
the pandemic and the civil unrest seen in recent times has shown
that the stability of governments and the resilience of businesses
will, in future, be tested in unforeseen and unexpected ways. As a
global organisation, the Group has well-established local and
global plans to mitigate the business risks from disruption. These
have operated well when deployed across the Group during the
Covid-19 pandemic and also locally during outbreaks of unrest in
markets where the Group operates. Operational resilience will
continue to be critically evaluated and enhanced as the longer-term
lessons from the pandemic response become clearer.
Dealing with impacts of the pandemic is the latest example of the
challenge faced by governments in reconciling the
inter-connectedness of the global economy with pressure to
prioritise national self-interests. The experience of the pandemic
may provide a further impetus to regionalisation or fragmentation
of global trade, investment and standards, and risks undermining
efforts in international cooperation and coordination. The US-China
relationship, and its wider impact on international relations,
looks likely to continue being a source of geopolitical tensions.
It remains to be seen whether Hong Kong's perceived level of
autonomy will continue to be of significance in these tensions.
Responses by the US, UK and other governments to constitutional or
legislative changes in Hong Kong continue to develop and may
adversely impact its economy. As the territory is a key market
which also hosts regional and head office functions, this could
have an adverse impact on sales, operational and product
distribution of the post-demerger Prudential Group. For
internationally active groups such as Prudential, operating across
multiple jurisdictions increases the complexity of legal and
regulatory compliance. Compliance with Prudential's legal or
regulatory obligations, including in respect of international
sanctions, in one jurisdiction may conflict with the law or policy
objectives of another jurisdiction, or may be seen as supporting
the law or policy objectives of that jurisdiction over another,
creating additional legal, regulatory compliance and reputational
risks for the Prudential Group. These risks may be increased where
the scope of regulatory requirements and obligations are uncertain,
and where specific cases applicable to the Prudential Group are
complex.
Regulations
Prudential operates in highly regulated markets, and the nature and
focus of regulation and laws continues to evolve. A number of
national and international regulatory developments are in progress,
with a continuing focus on solvency and capital standards, conduct
of business, systemic risk regulation, corporate governance and
senior management accountability, and macro prudential policy. Some
of these changes will have a significant impact on the way that the
Group operates, conducts business and manages its risks. With
geopolitical tensions elevated, the complexity of sanctions
compliance continues to increase and represents a challenge for
international businesses. Regulatory developments are monitored at
a national and global level and form part of Prudential's
engagement with government policy teams and
regulators.
The regulatory and supervisory responses to the Covid-19 pandemic
have been broad and have included increased scrutiny of the
operational resilience, operational risk practices, liquidity and
capital strength (including the impact of making dividend payments)
of financial services companies, as well as the changes that have
helped the Group to continue to support its customers through
non-face-to-face contact. The financial burden in addressing the
pandemic is likely to influence changes in governmental fiscal
policies, laws or regulations aimed at increasing financial
stability, and this may include measures on businesses or specific
industries to contribute to, lessen or otherwise support, the
financial cost to governments of treating patients and meeting the
logistical challenges of providing vaccines. It is possible that
requirements are imposed on private insurance companies and
healthcare providers to cover costs associated with the treatment
and prevention of Covid-19 beyond contractual or policy
terms.
Against this evolving regulatory backdrop, the Hong Kong IA's GWS
Framework became effective for Prudential following designation by
the Hong Kong IA on 14 May 2021, subject to agreed transitional
arrangements. The framework adopts a principle-based and
outcome-focused approach, and allows the Hong Kong IA to exercise
direct regulatory powers over the holding companies of
multinational insurance groups, reinforcing Hong Kong's position as
a preferred base for large insurance groups in Asia Pacific and a
global insurance hub. During H1 2021, the Hong Kong IA continued to
engage with the Group and other relevant stakeholders in the
finalisation of the GWS Framework, which is anchored on the
requirements for three pillars: capital, risk and governance, and
disclosure.
Societal developments
The Group has been actively managing the impact of the Covid-19
crisis as it has developed, and has prioritised assisting affected
policyholders and staff in meeting their resulting needs.
Prudential continues to monitor and manage the potential impact of
other emerging trends on its customers and products. The impact of
the pandemic, and the availability and uptake of effective
vaccines, has highlighted structural inequalities within and across
jurisdictions and are prompting organisations to evaluate their
role and contribution to the societies in which they operate and
the manner in which to best serve their customers. The experience
of the pandemic underlines the potential for evolving, and often
interlinked, demographic, geographical and environmental factors,
including those related to climate change, to alter the nature,
likelihood and impact of extreme events. These factors can also
drive public health trends such as increasing obesity or the spread
of zoonotic diseases, with consequential potential impacts to
Prudential's customers, underwriting assumptions and product
design. While insights can be gleaned from the current pandemic,
the unique set of variables associated with extreme events means
that their impact on the functioning of society, and the disruption
to customers, staff, business operations and sales, cannot be
predicted or fully mitigated.
Understanding and managing the broad range of environmental, social
and governance (ESG) impacts and requirements of its
business and adopting responsible business practices are
fundamental to Prudential's brand, reputation and ultimately its
long-term success, and ensuring high levels of transparency and
responsiveness to customers and stakeholders is a key aspect of
this. Prudential's ESG Strategic Framework is designed to deliver
on its purpose of 'helping people get the most out of life'. It
includes a focus on inclusivity: inclusivity of access to quality
healthcare, protection and savings for its customers; inclusivity
of the working environment for its people; and inclusivity in the
Group's support of the transition to low carbon in the economies,
markets and communities in which it operates. Recognising the
importance of managing both its vulnerability to, and impact on,
climate change, the Group has made commitments to reduce the carbon
footprint of its operations and the portfolio of assets held on
behalf of its insurance companies, as well as becoming a member of
the Net Zero Asset Owner Alliance, with a focus on supporting a
just and inclusive transition to a lower carbon economy. In its
annual reporting for 2021 Prudential intends to enhance its ESG
disclosures, addressing the increased reporting obligations of
regulatory authorities. The Group plans to reference and map its
disclosures against the standards which are most widely used by
shareholders for comparing companies within its sector and which
are most appropriate for the nature and location of the Group's
operations.
To meet evolving customer needs and in support of increased ease of
access and social inclusion, the Group is increasing its use of
digital services, technologies and distribution methods for the
products and services that it offers. The Covid-19 pandemic has
accelerated these developments, with the Group's businesses having
implemented virtual face-to-face sales of select ranges of products
in many of its markets, and adoption of Prudential's Pulse
application has continued to increase. Changes to the Group's use
of technology and distribution models have broad implications,
touching on Prudential's conduct of business, increasing the risks
of technology and data being compromised or misused and potentially
resulting in new and unforeseen regulatory implications. These
wide-ranging risks are actively monitored and managed as part of
Prudential's risk management framework.
2. Key internal,
regulatory, economic and geopolitical events over the past 12
months
Q3 2020
|
Q4 2020
|
Q1 2021
|
Q2 2021
|
In August 2020, the Group announces its intention to fully separate
Jackson from the Group. This is followed by a further announcement
in January 2021 confirming that the separation will be facilitated
by way of demerger.
The US Federal Reserve adopts a new flexible average inflation
targeting strategy and introduces new forward guidance on interest
rates that delays future increases until the economy reaches
maximum employment and inflation rises to 2 per cent and is on
track to moderately exceed this level for some time.
US GDP increases by $1.6 trillion over Q3, partially offsetting the
decrease of $2.0 trillion in Q2, as consumer spending rebounds
strongly. Meanwhile, China's GDP growth improves from 3.2 per cent
year-on-year in Q2 to 4.9 per cent in Q3. Growth in all major
investment activities returns to positive levels, with real growth
rising from -1.1 per cent year-on-year in August to 2.4 per cent in
September.
Volatility in the financial markets remains elevated. Equity
markets briefly fall in September, accompanied by a sell-off in US
treasuries, although this is short-lived and avoids a collapse of
similar levels as seen in March. As credit market conditions
stabilise, central banks, including the US Federal Reserve and
European Central Bank (ECB), lower the pace of their asset
purchases.
A new national security law for Hong Kong is implemented on 30 June
2020. The US response includes enactment of the Hong Kong Autonomy
Act which introduces potential sanctions on financial institutions
doing significant business with Chinese officials materially
contributing to the alleged erosion of Hong Kong's autonomy. Over
Q3 and Q4 the US introduces sanctions on a range of individuals and
entities in connection to a number of issues.
|
Covid-19 cases surge in Q4 across the US and Europe. Towards the
end of 2020, major European economies start to reintroduce
restrictions on movement and business to various degrees. Amid this
increase in infection rates, vaccine approvals and roll-outs begin
to take place in the UK and other countries.
Against the backdrop of the US election and positive Covid-19
vaccine news, equity markets continue to rally in November and
volatility reaches new post-March lows. Central banks of major
economies keep interest rate levels on hold. In Europe, the
Pandemic Emergency Purchase Programme resolves to continue bond
purchases until June 2021. In the US, a second stimulus package
worth $900 billion passes in December.
On 15 November, at the annual Association of Southeast Asian
Nations (ASEAN) Leaders' Summit, 15 countries formally sign the
Regional Comprehensive Economic Partnership (RCEP) trade deal,
making it the world's largest trading bloc. Signatories aim to work
through ratification of the deal in 2021. The RCEP comprises all 10
ASEAN economies, plus China, Japan, South Korea, Australia and New
Zealand.
Moves to ban an opposition party in 2019 trigger anti-establishment
protests in Thailand in early 2020. Protest activity peaks in
mid-October and spikes again mid-November, with protest leaders
threatening to resume demonstrations with increased intensity in
early 2021.
In the run-up to the Uganda presidential elections on 14 January
2021, violence breaks out in Kampala with dozens killed in the
first few weeks of electoral campaigning.
In early October, Nigeria is rocked by the outbreak of nationwide
demonstrations against police brutality that leaves a reported 56
people dead.
On 23 October, the China's Central Bank, the People's Bank of
China, publishes a draft banking law recognising, and providing a
regulatory framework for, its planned central bank digital
currency, the digital yuan.
On 11 November 2020, China's National People's Congress Standing
Committee determines that members of the Legislative Council of
Hong Kong (LegCo) can be disqualified on various grounds including
endangering national security, with four members being immediately
disqualified. In protest, the remaining 15-member pro-democracy
bloc resign en masse.
On 30 December 2020, the EU and China reach an agreement in
principle on the Comprehensive Agreement on Investment, which
covers market access. Both sides commit to finalising detailed
negotiations on the investment protections covered by the
Agreement, which will require ratification, within two
years.
|
On 28 January 2021, Prudential announces it is considering a new
equity raise of around $2.5-3.0 billion to follow the completion of
Jackson demerger in order to increase financial flexibility and
take advantage of Asia growth opportunities. The preferred route is
a global offering to institutional investors concurrent with a
public offering in Hong Kong to retail investors.
Prudential's 2020 Group ESG report is published on 15 March,
announcing the Group's new ESG Strategic Framework. The Framework
is focused on the pillars of making health and financial security
accessible; stewarding the human impacts of climate change; and
building social capital.
On 8 March, the IAIS releases for consultation a Draft Application
Paper on Macroprudential Supervision, relating to ICP 24 on macro
prudential supervision and to changes introduced as part of the
Holistic Framework (HF), and indicates an intention to adopt
changes in August 2021.
On the Aggregation Method comparability assessment, the IAIS also
concludes their public consultation on the draft definition of
comparable outcomes and high-level principles in Q1 2021. Further
work is under way to define the assessment criteria, scheduled for
further consultation in Q4 2021.
In January further arrests are made in Hong Kong under the national
security law, with the US responding with further rounds of
sanctions targeting Chinese and Hong Kong officials alongside an
increasing number of commercial sanctions and
restrictions.
Economic data in Q1 starts to show signs of recovery, particularly
in the US, with employment and consumer spending increasing.
Positive economic activity data is a driver for the global equity
markets which continue to rally, reaching multiple record highs.
Yield levels recover to pre-pandemic levels with inflation risk
premia rising sharply.
The US elections take place in November 2020 amid a surge in
Covid-19 case numbers across the country, with subsequent legal
challenges from President Trump denied by the courts. Following the
storming of the US Capitol buildings by protestors on 6 January
2021, Joe Biden is inaugurated as the 46th US president on 20
January, with the Democratic Party taking control of both houses of
Congress.
Following the Myanmar military takeover of the government on 1
February 2021, anti-military protests sweep across the country.
Strikes among medical staff significantly disrupt the government's
Covid-19 pandemic response. The security forces respond with force
and by May 2021 protest activities considerably reduce. The US and
other western nations respond with sanctions against military
leaders.
In response to the Covid-19 pandemic, on 12 January, a state of
emergency is declared in Malaysia to run until 1 August 2021,
allowing the suspension of the country's parliament and political
activity while granting the state enhanced powers including the
ability to take over private hospitals and deploy additional
military and police. The government requests the use of
private hospitals in treating Covid-19 patients, with costs to be
covered by patient insurance policies.
In March, China introduces election reforms related to the Hong
Kong LegCo, with an expansion of members from 70 to 90 and with
increased vetting procedures for candidate members based on their
level of patriotism. Following the announcement of their
postponement in July 2020, plans are announced to hold LegCo
elections in December 2021. The LegCo reforms are passed into law
in May 2021.
|
The Group announces its commitment to decarbonising its portfolio
of assets held on behalf its insurance companies with a goal of
becoming 'net zero' by 2050, confirmed at its 2021 Annual General
Meeting on 13 May 2021.
Following the coming into effect of the enabling primary
legislation on 29 March 2021, the Group-wide Supervision (GWS)
Framework becomes effective for the Group on 14 May 2021, following
designation by the Hong Kong Insurance Authority (IA), subject to
agreed transitional arrangements.
On 13 May 2021, Prudential updates the market on plans for the
proposed demerger of its US business, Jackson, which is expected to
complete in the second half of 2021.
In May 2021, IAIS publishes an application paper on the
supervision of climate-related risks in the insurance sector
and the International Energy Agency (IEA) releases its report
'Net Zero by 2050' (NZE2050), detailing a roadmap and key
milestones for the transition to a net zero energy system by 2050.
Climate-related regulatory consultations across key regulators
continue to gather momentum in advance of COP 26.
In June 2021, G7 finance ministers agree to a set of high level
principles to progress the OECD's 'Base Erosion and Profit-Shifting
2.0' project to modernise the global tax system, which includes a
proposal for a global minimum tax rate of at least 15 per cent. The
OECD's proposals are endorsed G20 finance ministers in July
2021.
In June 2021, the International Monetary Fund (IMF) releases a
Financial System Stability Assessment for Hong Kong.
Recommendations include strengthening of the macro prudential
framework and a more proactive cross-sectoral approach, with
climate risk becoming part of the systemic risk
analysis.
The global economic recovery continues. Key inflation indices in Q2
show broad-based increases and raise some concerns about the impact
of inflation. The US Federal Reserve takes its first hawkish turn
at its June FOMC meeting, signalling slower asset purchases and
indicating two possible rate rises in 2023. Equity prices continue
to rise over Q2 although at a slower pace than in Q1.
While major western economies make progress on vaccination
roll-outs, during H1 2021 Covid-19 cases surge across Asia, in
particular in Indonesia, Myanmar and Thailand over Q1 and in
Cambodia, Taiwan, Malaysia and India over Q2. As variants of the
virus with differing levels of vaccine resistance continue to
emerge, the surge in India, driven by the Delta variant, peaks at
more than c.400,000 daily cases.
China passes a law on 10 June 2021 which provides a legal basis to
enforce measures against individuals or entities giving effect to
foreign sanctions against the country. Such individuals or entities
could be placed on an anti-sanctions list which could result in
their China assets seized or frozen as well as being restricted
from doing business with entities or people within China. On the
same date, China also passes a new data security law. Effective
from 1 September 2021, the transfer of data concerning national and
economic security outside of China's borders without prior
authorisation from Beijing will be sanctionable with a potential
suspension of business operations.
|
3. Managing the risks in
implementing our strategy
This section provides an overview of the Group's strategy, the
significant risks arising from the delivery of this strategy and
current risk management focus. The risks outlined below, which are
not exhaustive, are discussed in more detail in section
5.
Our strategy
|
Significant risks to, and arising from, the delivery of the
strategy
|
Risk management focus
|
|
|
|
Group-wide
We create shareholder value by focusing on the opportunities
available to the Group's high-growth businesses in Asia and
Africa
|
● Extent of change and transformation risks around
key change programmes, including those related to the Group's
digital strategy
|
● Continuing development of the transformation risk
framework, including risk appetite, and focus on, and ensuring
consistency in, transformation risk management across the Group's
business units.
● Provision of independent risk assurance, challenge
and advice on first-line programme risk identification and
assessments.
● Focus on the financial and non-financial stability
of Jackson as a standalone business.
|
● Group-wide regulatory and compliance
risks
|
● Compliance with regulations and management of
changing regulatory developments across lines of business,
including Pulse, as the Group expands its product and service
offerings.
● Engagement with stakeholders, including national
governments, regulators and industry groups, on macro prudential
and systemic risk-related regulatory initiatives, international
capital standards, and other initiatives with Group-wide
impacts.
● Ensuring ongoing compliance with the Group-wide
Supervision Framework, which became effective for Prudential upon
designation by the Hong Kong IA on 14 May 2021, subject to agreed
transitional arrangements.
|
● Information security and data privacy
risks
|
● Operationalisation of the Group-wide governance
model and strategy for cyber security management focusing on
digital enablement, security transformation, automation and
continuous improvement.
● Continued focus on compliance with applicable
privacy laws across the Group and the appropriate and ethical use
of customer data.
|
● Business disruption, including third-party
risks
|
● Continued application of the Group's global
business continuity management framework, with an enhanced focus on
operational resilience as it relates to business disruption
tolerance levels and customer impacts. Embedding of insights from
the Covid-19 pandemic.
● Applying the distinct oversight and risk
management required over the Group's third parties, including its
strategic partnerships for product distribution, non-traditional
services and processing activities.
|
● Conduct risk
|
● Ensuring the Group meets its commitments to
customers, as set out in its customer conduct standards, through
application of the Group-wide customer conduct risk management
framework and policy across business lines, distribution channels
and the digital ecosystem.
● Increasing responsiveness to customer needs
through monitoring of customer metrics, aligned with Prudential's
ESG Strategic Framework.
|
● Model and data risks
|
● Application of the Group's Model and User
Developed Application framework and policy, aligned to wider
business objectives, to increase visibility of model risks and risk
assess and manage tools used.
● Focus on requirements for data and AI and complex
tooling ethics principles and framework. Ongoing development of
management information.
|
● People and culture
|
● Focus on Group Culture as a key mechanism to
support the RCS function and the oversight of sound risk management
behaviours, practices and awareness in the
business.
● Embedding responses and insights from Group-wide
employee engagement surveys.
|
|
● ESG risks
|
● Embedding climate risk as a cross-cutting risk in
the Group Risk Framework and supporting the implementation of the
Group's carbon reduction related commitments.
● Supporting the Group ESG Committee in its
responsibility to deliver the Group's ESG Strategic Framework and
further enhance its disclosures.
● Focus on inclusive products and services,
underserved segments and diversity of product offerings reflective
of the Group's customer base.
|
Our strategy
|
Significant risks to, and arising from, the delivery of the
strategy
|
Risk management focus
|
|
|
|
Asia
In Asia, there is a growing demand for savings and protection
across the region, as markets are challenged by low life insurance
penetration and a large pension funding gap.
|
● Financial risks
|
● Maintaining, and enhancing where necessary, risk
limits and implementing business initiatives to manage financial
risks, including appropriate product design, asset allocation,
bonus revisions, product repricing and reinsurance where
required.
|
● Persistency risk
|
● Implementation of business initiatives to manage
persistency risk, including: additional customer payment methods;
enhancements to sales quality, customer experience, product
disclosures and product collaterals; revisions to product design
and incentive structures; mitigations for conduct risk; and
customer retention initiatives. Ongoing experience
monitoring.
|
● Morbidity risk
|
● Implementation of business initiatives to manage
morbidity risk, including those related to product design and
underwriting. Application of prudent assumptions, reinsurance and
product repricing where appropriate. Management of medical costs
and medical networks. Ongoing experience and trend
monitoring.
|
|
|
|
Africa
In Africa, we are building businesses in some of the world's most
under-penetrated markets, with the population expected to double to
more than two billion people by 2050.
|
As its presence in Africa expands and grows in materiality, the
Group will continue to increase its focus on Prudential Africa's
most significant risks. A number of significant Group-wide risks
detailed above are considered material in the region, and these
include:
● Financial crime and security risks, where the
focus is on implementation of Group policies and
standards;
● Transformation risks, where the focus is on
overseeing and managing parallel initiatives while developing local
capabilities to meet the demands of a fast-paced transformation
agenda; and
● Regulatory risks, where the focus is on active
monitoring of the local regulatory landscape and adoption of Group
processes in order to meet international regulatory
standards.
|
|
|
|
Discontinued operations
|
|
|
|
|
|
United States
In the US, we intend to demerge Jackson to enable the Group to
focus exclusively on its high-growth Asia and Africa
businesses.
|
● Financial risks
|
● Maintaining, and enhancing where necessary, risk
limits, hedging strategies (including mitigating measures against
basis risk), modelling tools and risk oversight appropriate to
Jackson's product mix with a view to demerge from the Prudential
Group.
|
● Policyholder behaviour risk
|
● Continued monitoring of policyholder behaviour
experience and review of assumptions.
|
4. Risk
governance
a System of governance
Prudential has in place a system of governance that promotes and
embeds a clear ownership of risk, processes that link risk
management to business objectives and a proactive Board and senior
management providing oversight of risks. Mechanisms and
methodologies to review, discuss and communicate risks are in place
together with risk policies and standards to enable risks to the
Group to be identified, measured and assessed, managed and
controlled, monitored and reported.
Material risks are retained selectively when it is considered that
there is value in doing so, and where it is consistent with the
Group's risk appetite and philosophy towards risk-taking. The Group
Risk Framework, which is owned by the Board, details Prudential's
risk governance, risk management processes and risk appetite. The
Group's risk governance arrangements are based on the three lines
model:
● First-line roles, most directly focused on
providing product and services, are responsible for taking and
managing risk.
● Second-line roles provide additional challenge,
expertise, oversight, and scrutiny. In this capacity the Risk,
Compliance and Security (RCS) function exercises oversight through
the execution of core processes and activities as part of the risk
management cycle and ongoing engagement with other functions and
dedicated specialist advisors.
● The role of the third line is to provide objective
assurance on the design, effectiveness and implementation of the
overall system of internal control. The Group-wide Internal Audit
Function, being independent from management and the
responsibilities of management, performs this
role.
The aggregate Group exposure to its key risk drivers is monitored
and managed by the RCS function, which is responsible for
reviewing, assessing, providing oversight and reporting on the
Group's risk exposure and solvency position from the Group
economic, regulatory and ratings perspectives.
During 2021, the Group has continued to review and update its
policies and processes for alignment with the requirements of its
Group-wide supervisor. The Group has also focused on development of
its Group-wide customer conduct risk framework and policy; its AI
ethics principles; and enhancements to its operational
resilience.
The following section provides more detail on our risk governance,
risk culture and risk management process.
b Group Risk Framework
i. Risk governance and
culture
Prudential's
risk governance comprises the Board organisational structures,
reporting relationships, delegation of authority, roles and
responsibilities, and risk policies that have been established to
make decisions and control activities on risk-related
matters.
The
risk governance structure is led by the Group Risk Committee,
supported by independent Non-executive Directors on risk committees
of the Group's main subsidiaries. The Group Risk Committee reviews
and approves changes made to the Group Risk Framework and to
relevant policies. It also reviews and approves new risk policies
and recommends to the Board any material policies which require
Board approval. A number of core risk policies and standards
support the Framework to enable risks to the Group to be
identified, measured and assessed, managed and controlled,
monitored and reported.
The
risk governance arrangements for the Group's major businesses were
recently delayered and strengthened, with the implementation of
direct lines of communication, reporting and oversight of the risk
committees of these businesses by the Group Committee. To support
the enactment of these arrangements, the terms of reference for the
major business risk committees were aligned and approved locally,
and include a standing invitation for the Group Chief Risk and
Compliance Officer (CRCO) and the requirement for risk escalations
to the Committee. As its adoption across Asia and Africa and
materiality to the Group increases, the application of the Group's
governance framework and policies to the Pulse business is being
increased. This includes the setting up of a Pulse Audit & Risk
Committee for Pulse Ecosystems Limited, the holding company for
Pulse, which met for the first time in H1 2021.
Culture
is a strategic priority of the Board, which recognises its
importance in the way that the Group does business. A Group-wide
culture framework is currently being implemented to unify the Group
towards its shared purpose of helping people get the most out of
life. Components of the framework include principles and values
that define how the Group expects business to be conducted in order
to achieve its strategic objectives, inform expectations of
leadership and guide ESG activities. The culture framework
components are intended to be supportive of sound risk management
practices in the business by requiring a focus on longer-term goals
and sustainability, the avoidance of excessive risk taking and
highlighting acceptable and unacceptable behaviours. It also helps
provide a framework for supporting the RCS function itself in the
performance of its oversight role. The framework is supported
through inclusion of risk considerations in performance management
for key individuals; the building of appropriate skills and
capabilities in risk management; and by ensuring that employees
understand and care about their role in managing risk through open
discussions. The Group Risk Committee has a key role in providing
advice to the Remuneration Committee on risk management
considerations to be applied in respect of executive
remuneration.
Prudential's
Group Code of Business Conduct and Group Governance Manual include
a series of guiding principles that govern the day-to-day conduct
of all its people and any organisations acting on its behalf. This
is supported by specific risk-related policies which require that
the Group act in a responsible manner. These include, but are not
limited to, policies related to financial crime covering anti-money
laundering, sanctions, anti-bribery and corruption. The Group's
third-party supply policy requires that human rights and modern
slavery considerations are embedded across all of its supplier and
supply chain arrangements. Embedded procedures to allow individuals
to speak out safely and anonymously against unethical behaviour and
conduct are also in place.
ESG
is overseen by the Board, which is responsible for determining
strategy and prioritisation of key focus areas. The Board has
established a Responsibility & Sustainability Working Group to
oversee the embedding of the Group's ESG strategic framework and
progress on diversity and inclusion initiatives. The Working
Group's mandate includes recommending long-term governance
arrangements in respect of responsibility and sustainability
matters. Senior executive involvement and holistic oversight of ESG
matters material to the Group is provided by the ESG Committee,
chaired by the Group Chief Financial Officer and Chief Operating
Officer in his role as ESG sponsor, and supported by senior
functional leaders and representatives from the Group's business
units, including the chief investment officers of the Group's asset
managers. The policies and procedures to support how the Group
operates in relation to certain ESG topics are included in the
Group Governance Manual, which establishes standards for managing
ESG issues across the Group and sets out the policies and
procedures to support how Prudential operates. Further details on
the Group's ESG governance arrangements, including the
establishment of the Board Responsibility & Sustainability
Working Group, are included in the Group's 2020 ESG
Report.
ii. The
risk management cycle
Risk identification
In
accordance with provision 28 of the UK Corporate Governance Code
and the GWS guidelines issued by the Hong Kong IA, a process is in
place to support Group-wide identification of the Company's
emerging and principal risks and this combines both top-down and
bottom-up views of risks at the level of the Group and its business
units. The Board performs a robust assessment and analysis of these
principal and emerging risks facing the Company through the risk
identification process, the Group Own Risk and Solvency
Assessment (ORSA) report and the risk assessments undertaken
as part of the business planning review, including how they are
managed and mitigated, which supports decision-making.
The
ORSA is the ongoing process of identifying, measuring and
assessing, managing and controlling, monitoring and reporting the
risks to which the business is exposed. It includes an assessment
of capital adequacy to ensure that the Group's solvency needs are
met at all times. Stress and scenario testing, which includes
reverse stress testing requiring the Group to ascertain the point
of business model failure, is another tool that helps to identify
the key risks and scenarios that may have a material impact on the
Group. The risk profile assessment is a key output from the risk
identification and risk measurement processes and is used as a
basis for setting Group-wide limits, management information,
assessment of solvency needs, and determining appropriate stress
and scenario testing. The Group's annual set of principal risks is
given enhanced management and reporting focus.
Risk measurement and assessment
All
identified risks are assessed based on an appropriate methodology
for that risk. All quantifiable risks, which are material and
mitigated by holding capital, are modelled in the Group's internal
model, which is used to determine economic capital requirements and
is subject to independent validation and processes and controls
around model changes and limitations.
Risk management and control
The
Group's control procedures and systems focus on aligning the levels
of risk-taking with the Group's strategy and can only provide
reasonable, and not absolute, assurance against material
misstatement or loss. Risk management and control requirements are
set out in the Group's risk policies and define the Group's risk
appetite in respect of material risks and the framework under which
the Group's exposure to those risks is limited. The processes to
enable Group senior management to effect the measurement and
management of the Group material risk profile in a consistent and
coherent way, which include the flows of management information
required, are also set out in the Group's risk policies. The
methods and risk management tools that the Group employs to
mitigate each of its major categories of risks are detailed in
section 5 below.
Risk monitoring and reporting
The
identification of the Group's principal risks informs the
management information received by the Group Risk Committee and the
Board. Risk reporting of key exposures against appetite is also
included, as well as ongoing developments in the Group's principal
and emerging risks.
iii. Risk appetite, limits and triggers
As
a provider of financial services, including insurance, the Group
recognises the interests of the broad spectrum of its stakeholders
(including customers, investors, employees, communities and key
business partners) and that a managed acceptance of risk lies at
the heart of the business. Effective risk management capabilities
therefore represent a key source of competitive advantage for the
Group. The Group seeks to generate customer and shareholder value
by selectively taking exposure to risks where these are an outcome
of its chosen business activities and strategy. These risks will be
reduced to the extent it is cost-effective to do so. There are
certain financial and non-financial risks for which the Group has
no tolerance, and these are actively avoided. The Group's systems,
procedures and controls are designed to manage risk appropriately,
and its approach to resilience and recovery aims to maintain the
Group's ability and flexibility to respond in times of
stress.
Qualitative
and quantitative expressions of risk appetite are defined and
operationalised through risk limits, triggers and indicators. The
RCS function reviews the scope and operation of these measures at
least annually. The Board approves changes to the Group's aggregate
risk appetite and the Group Risk Committee has delegated authority
to approve changes to the system of limits, triggers and
indicators.
Group risk appetite is defined and monitored in
aggregate by the setting of objectives for its liquidity, capital
requirements and non-financial risk exposure, covering risks to
shareholders, including those from participating and third-party
business. Group limits operate within these expressions of risk
appetite to constrain material risks, while triggers and indicators
provide additional defined points for escalation. The Group
Risk Committee is responsible for reviewing the risks inherent in
the Group's business plan and for providing the Board with input on
the risk/reward trade-offs implicit therein. This review is
supported by the RCS function, which uses submissions from local
business units to calculate the Group's aggregated position
relative to Group risk appetite and limits.
i. Capital
requirements. Limits on
capital requirements aim to ensure that in business-as-usual and
stressed conditions the Group maintains sufficient capital in
excess of internal economic capital requirements, achieves its
desired target rating to meet its business objectives, and
supervisory intervention is avoided. The two measures currently in
use at the Group level are the GWS group capital requirements
(both minimum and prescribed levels) and internal economic capital
requirements, determined by the Group Internal Economic Capital
Assessment (GIECA).
ii. Liquidity. The objective of the Group's liquidity risk
appetite is to ensure that sufficient cash resources are available
to meet financial obligations as they fall due in business-as-usual
and stressed scenarios. This is measured using a liquidity coverage
ratio (LCR) which considers the sources of liquidity against
liquidity requirements under stress scenarios.
Non-financial
risks. The Group accepts a
degree of non-financial risk exposure as an outcome of its chosen
business activities and strategy. It aims to manage these risks
effectively to maintain its operational resilience and its
commitments to customers and avoid material adverse impact on its
reputation.
5. The Group's principal
risks
Broadly, the risks assumed across the Group can be categorised as
those relating to its financial situation; its business and
industry; regulatory and legal compliance; and those relating to
ESG. Principal risks, whether materialising within the Group or at
third parties on which the Group relies, may have a financial
impact and could also impact the performance of products or
services provided to customers and distributors and the ability to
fulfil commitments to customers, giving rise to potential risks to
Prudential's brand and reputation. These risks, which are not
exhaustive, are detailed below. The materiality of these risks,
whether material at the level of the Group or its business units,
is also indicated. The Group's disclosures covering risk factors
are aligned to the same categories and can be found at the end of
this document.
In reading the sections below, it is useful to understand that
there are some risks that Prudential's policyholders assume by
virtue of the nature of their products, and some risks that the
Group and its shareholders assume. Examples of the latter include
those risks arising from assets held directly by and for the Group
or the risk that policyholder funds are exhausted. This report is
focused mainly on risks to the shareholder but will include those
which arise indirectly through policyholder exposures.
Covid-19 risks, responses and forward-looking areas of
focus
The Group responded in a number of ways in 2020 to the risks
arising from the Covid-19 pandemic as it developed; some responses
were part of existing risk management processes and procedures,
while others were initiated specifically in response to the
pandemic, in particular during the acute phases experienced in H1
2020.
The Group Critical Incident Procedure (GCIP) defines specific
governance to be invoked in the event of a critical incident, such
as a significant market, liquidity or credit-related event. This
includes, where necessary, the convening of a Critical Incident
Group (CIG) to oversee, coordinate, and where appropriate, direct
any activity during a critical incident. In response to the
immediate economic and financial market shocks triggered by the
Covid-19 pandemic in 2020, the Group CRCO invoked the GCIP and
convened a series of CIG meetings to provide high-cadence
monitoring and management of potential threats to the capital or
liquidity position of the Group. Local Incident Management teams
were also activated to monitor and manage the tailored response
required to support the operations, customers and employees of the
Group's businesses.
As the pandemic and the global response to it evolves in 2021, the
Group's businesses are starting to shift their focus to the
longer-term risks. The risks arising from Covid-19, the Group's
immediate responses to them and these forward-looking areas of
focus in 2021 are summarised below, with further information
provided, where relevant, within the descriptions of the Group's
principal risks.
Risk areas
|
Immediate responses
|
Forward-looking areas of focus
|
Staff safety and wellbeing
|
Move to, and maintenance of, working from home arrangements across
jurisdictions proportionate to infection rates and in line with
government guidance. Local Incident Management team risk
assessments and provision of regular staff communications and
support.
|
Assessment of safe procedures and processes for return to office
working in line with government policy and guidance. Local Incident
Management team monitoring of country-specific
developments.
Focus on staff wellness and support for new ways of
working.
|
Customer outcomes are not met, increasing conduct risk
|
Pandemic-related initiatives and campaigns rolled out across
markets, including customer cash benefits, goodwill payments, and
extended grace periods for premium payments. Active management of
policyholders' reasonable expectations.
|
Monitoring of customer impacts where initiatives and campaigns and
grace periods expire.
Risk-based monitoring under the Group Customer Conduct Risk
Policy.
|
Disruption to the operations of the Group, and its key
partners
|
Application of the Group and local business continuity plans. Local
Incident Management teams activated to monitor, manage and lead a
tailored response to ensure continuity of service to existing
customers.
|
Assessment of future continuity plan requirements, including the
requirements for dedicated alternate sites given the increase in
staff remote working capability.
|
Financial market and liquidity impacts, including to Group and
business unit solvency
|
Invocation of the GCIP and convening of a CIG to monitor and manage
threats to the Group's solvency or liquidity position.
|
Close monitoring of interest rate risk and adjustments to existing
risk limits where required.
Focus on corporate credit sectors and sovereign debt with slower
potential for recovery than others.
Assessments of inflation expectations, implications for the
business and any required actions.
|
Heightened risk of phishing and ransomware attacks
|
Group-wide phishing and targeted awareness campaigns. Heightened
monitoring of threats and cyber hygiene controls such as end-point
detection and responses. Active management of connections to the
Group network.
|
Continuation of the Group's phishing campaign aligned with threat
intelligence feeds, and continued enhancement of cyber
hygiene.
|
Sales impacts
|
Roll-out of virtual face-to-face sales processes in most of the
Group's markets with appropriate regulatory engagement, digital
product offerings, oversight of incremental conduct and operational
risks.
|
Continued monitoring of deployment of virtual face-to-face sales
processes against customer conduct, regulatory, operational and
commercial risks. Where virtual face-to-face sales processes are
expected to sustain even after the Covid-19 pandemic, ensuring
subsequent developments are in line with evolving regulations and
regulatory expectations, and that the relevant risks are
appropriately managed.
|
Insurance risks
|
Close monitoring by the Group's businesses and targeted management
actions where necessary. Covid-19-related claims have not been
material to date, but are being closely monitored. Initiatives and
campaigns rolled out across markets, including customer cash
benefits, goodwill payments, and extended grace periods for premium
payments.
|
Monitoring of the potential longer-term impacts of the pandemic
such as:
● Lapses
and surrenders from the broader economic
effects;
● Increased
and/or delayed morbidity claims resulting from the deferral of
medical treatment by policyholders during the pandemic;
and
● Latent
morbidity impacts from the deferral of medical treatment by
policyholders.
|
Risks to the Group's financial situation (including those from the
external macroeconomic and geopolitical environment)
The global economic and geopolitical environment may impact on the
Group directly by affecting trends in financial markets and asset
values, as well as driving short-term volatility.
Risks in this category include the market risks to our investments
and the credit quality of our investment portfolio as well as
liquidity risk.
|
Global economic and geopolitical conditions
Changes in global economic conditions can impact Prudential
directly; for example, by leading to reduced investment returns and
fund performance and liquidity, and increasing the cost of promises
(guarantees) that have been made to the Group's customers. Changes
in economic conditions, such as the abrupt and uncertain
longer-term impacts resulting from the Covid-19 crisis, can also
have an indirect impact on the Group; for example, leading to a
decrease in the propensity for people to save and buy Prudential's
products, as well as changing prevailing political attitudes
towards regulation. As the global economy begins to show signs
of recovery from the effects of the pandemic, variations in the
speed of economic recovery between markets, and the subsequent
impact on their respective interest rates, inflation expectations
and the relative strength of their currencies (and the associated
impact on their foreign currency debt obligations), may drive
broader long-term economic and financial uncertainty for the
markets in which the Group operates.
The geopolitical environment can also impact the Group in a wide
range of ways, both directly and indirectly. Financial markets and
economic sentiment have been highly susceptible to geopolitical
developments in recent years, with implications for the Group's
financial situation. Geopolitical tensions can result in the
imposition of protectionist or restrictive regulatory and trading
requirements by governments and regimes and the Covid-19 pandemic
has further prompted governments to rethink the current globalised
nature of supply chains. These factors may have geopolitical
and trading implications, the full extent of which may not be clear
for a while. Various governments have effected, or may effect, the
postponement of elections and other constitutional or legislative
processes in response to the pandemic, and the longer-term impact
from this increase in constitutional and political uncertainty
remains to be seen. The pandemic has had a negative impact on all
economies, with increased fiscal burdens, higher levels of
borrowing and reduced revenues. These pressures will impact on the
business operating environments, for example, through changes to
taxation, and are likely to contribute to political pressures for
governments. Variability of access to vaccines is contributing
to the uneven impact of, and speed of economic recovery from, the
Covid-19 pandemic between countries, with the potential to
exacerbate existing, and create new, geopolitical
tensions.
Responses by the US, UK and other governments to constitutional or
legislative changes in Hong Kong continue to develop and may
adversely impact its economy. As the territory is a key market
which also hosts regional and head office functions, this could
have an adverse impact on sales, operational and product
distribution of the post-demerger Prudential Group. For
internationally active groups such as Prudential, operating across
multiple jurisdictions increases the complexity of legal and
regulatory compliance. Compliance with Prudential's legal or
regulatory obligations, including in respect of international
sanctions, in one jurisdiction may conflict with the law or policy
objectives of another jurisdiction, or may be seen as supporting
the law or policy objectives of that jurisdiction over another,
creating additional legal, regulatory compliance and reputational
risks for the Prudential Group. These risks may be increased where
the scope of regulatory requirements and obligations are uncertain,
and where specific cases applicable to the Prudential Group are
complex. All these factors can increase
the operational, business disruption, regulatory and financial
market risks to the Group and can directly impact its sales and
distribution networks. Developments in the region and the
continuing impacts of the pandemic are being closely monitored by
the Group and plans have been enacted to manage the disruption to
the business, its employees and its customers within existing
business resilience processes. Further information on the Group's
business disruption risks is included below.
Macroeconomic and geopolitical risks are considered material at the
level of the Group.
Market risks to our investments
This is the potential for reduced value of Prudential's investments
resulting from the volatility of asset prices, driven by
fluctuations in equity prices, interest rates, foreign exchange
rates and property prices. A persistent low interest rate
environment may pose challenges to both the capital position of
life insurers as well as to new business
profitability.
The Group has appetite for market risk where it arises from
profit-generating insurance activities to the extent that it
remains part of a balanced portfolio of sources of income for
shareholders and is compatible with a robust solvency
position.
The Group's market risks are managed and mitigated by the
following:
-
The Group market risk policy;
-
The Group Asset Liability Committee - a first-line risk management
advisory committee to the Group Chief Executive Officer which
supports the identification, assessment and management of key
financial risks significant to the achievement of the Group's
business objectives;
-
Risk appetite statements, limits and triggers;
-
Asset and liability management activities which include management
actions such as asset allocation, bonus revisions, repricing and
the use of reinsurance where appropriate;
-
Hedging derivatives, including currency forwards, interest rate
futures and swaps, and equity futures;
-
The monitoring and oversight of market risks through the regular
reporting of management information; and
-
Regular deep dive assessments.
As noted above, in response to the economic and financial market
shocks triggered by the Covid-19 pandemic, the Group CRCO invoked
the GCIP and convened a series of CIG meetings to provide
high-cadence monitoring and management of any potential threats to
the capital or liquidity position of the Group.
●
Equity and property investment risk. Across Asia, the shareholder exposure to
equity price movements arises from various sources, including from
unit-linked products, where fee income is linked to the market
value of the funds under management. Further exposure arises from
with-profits businesses through potential fluctuations in the value
of future shareholders' profits and where bonuses declared are
based broadly on historical and current rates of return from the
Asia business's investment portfolios, which include equities. The
Group has limited acceptance for exposures to equity risk but
accepts the equity exposure that arises on future fees (including
shareholder transfers from the with-profits business). It will
limit the exposure to policyholder guarantees by the use of hedging
where it is considered economically optimal to do
so.
The
material exposures to equity risk in the Group's Asia businesses
include the following. The China joint venture business is exposed
to equity risk through its investments in equity assets for most of
its products, including participating and non-participating savings
products, protection and investment-linked products. The Hong Kong
business and, to a lesser extent, the Singapore business contribute
to the Group's equity risk exposure due to the equity assets
backing participating products. The Indonesia business is exposed
to equity risk through its unit-linked products.
In
Jackson, investment risk arises from the assets backing customer
policies. Equity risk is driven by the variable annuity business,
where the assets are invested in both equities and bonds and the
main risk to the shareholder comes from providing the guaranteed
benefits offered. The exposure to this is primarily controlled by
using a derivative hedging programme, as well as through the use of
reinsurance to pass on the risk to third-party
reinsurers.
Basis
risk is the inherent risk associated with imperfect hedging and is
caused by variables or characteristics that drive differences
between the value of an underlying position and the hedge
instruments used to offset changes in its value. Within Jackson's
variable annuity business, basis risk can arise from differences
between the performance of the Separate Account funds in which
policyholders choose to invest and that of the instruments used to
replicate these funds for hedging and liability modelling purposes,
which are primarily linked to the S&P 500 index. This risk
exposure is proportionate to the magnitude of liability risk/hedge
position which fluctuates with equity and interest rate levels.
Jackson continues to actively evaluate the costs and benefits of
ways to further mitigate basis risk.
●
Interest rate risk. This
is driven by the valuation of Prudential's assets (particularly the
bonds that it invests in) and liabilities, which are dependent on
market interest rates and expose the Group to the risk of those
moving in a way that is detrimental. Some products that Prudential
offers are sensitive to movements in interest rates. Prudential's
appetite for interest rate risk requires that assets and
liabilities of the Group should be tightly matched for exposures
where assets or derivatives exist that can cover these exposures.
Interest rate risk is accepted where this cannot be hedged,
provided that this arises from profitable products and to the
extent that interest rate risk exposure remains part of a balanced
exposure to risks and is compatible with a robust solvency
position.
In
Asia, our exposure to interest rate risk arises from the guarantees
of some non-unit-linked products with a savings component,
including the Hong Kong and Singapore with-profits and non-profit
businesses. This exposure exists because of the potential for an
asset and liability mismatch, where long-dated liabilities and
guarantees are backed by short-dated assets, which cannot be
eliminated but is monitored and managed through local risk and
asset liability management committees and Group risk limits set to
be consistent with the Group's appetite for interest rate risk.
Unit-linked based businesses, such as Indonesia and Malaysia, are
also exposed to interest rate risk resulting from the impact to the
present value of future fees from such products.
In
Jackson, interest rate risk results from the cost of guarantees in
the variable annuity and fixed index annuity business, which may
increase when interest rates fall. The level of sales of variable
annuity products with guaranteed living benefits is actively
monitored, and the risk limits we have in place help to ensure we
are comfortable with the level of interest rate and market risks
incurred as a result. Derivatives are also used to provide some
protection. Jackson is also affected by interest rate movements to
its fixed annuity book where the assets are primarily invested in
bonds and shareholder exposure comes from the mismatch between
these assets and the guaranteed rates that are offered to
policyholders. As at 1 June 2020, this risk has been
substantially transferred as part of the reinsurance transaction
with Athene, leaving only a limited exposure from residual policies
including those from the blocks acquired externally (ie from the
REALIC and John Hancock businesses).
As
part of the ongoing management of this risk, a number of mitigating
actions for the in-force business have been taken, as well as
repricing and restructuring new business offerings in response to
recent relatively low interest rates. Nevertheless, some
sensitivity to interest rate movements is still retained. The
impact of lower interest rates may also manifest through reduced
solvency levels in some of the Group's businesses, impairing their
ability to make remittances, as well as reduced new business
profitability.
●
Foreign exchange risk. The
geographical diversity of Prudential's businesses means that it has
some exposure to the risk of foreign exchange rate fluctuations.
Some entities within the Group that write policies, invest in
assets or enter into other transactions in local currencies or
currencies not linked to the US dollar. Although this limits the
effect of exchange rate movements on local operating results, it
can lead to fluctuations in the Group financial statements when
results are reported in US dollars. This risk is accepted within
our appetite for foreign exchange risk.
In
cases where a non-US dollar denominated surplus arises in an
operation which is to be used to support Group capital, or where a
significant cash payment is due from a subsidiary to the Group,
this currency exposure may be hedged where it is believed to be
economically favourable to do so. Further, the Group generally does
not have appetite for significant direct shareholder exposure to
foreign exchange risks in currencies outside the countries in which
it operates, but it does have some appetite for this on fee income
and on equity investments within the with-profits fund. Where
foreign exchange risk arises outside appetite, currency swaps and
other derivatives are used to manage the exposure.
Liquidity risk
Prudential's liquidity risk arises from the need to have sufficient
liquid assets to meet policyholder and third-party payments as they
fall due, and the Group considers this under both normal and
stressed conditions. It includes the risk arising from funds
composed of illiquid assets and results from a mismatch between the
liquidity profile of assets and liabilities. Liquidity risk may
impact on market conditions and valuation of assets in a more
uncertain way than for other risks like interest rate or credit
risk. It may arise, for example, where external capital is
unavailable at sustainable cost, increased liquid assets are
required to be held as collateral under derivative transactions or
where redemption requests are made against Prudential's external
funds. Liquidity risk is considered material at the level of the
Group.
Prudential has no appetite for any business to have insufficient
resources to cover its outgoing cash flows, or for the Group as a
whole to not meet cash flow requirements from its debt obligations
under any plausible scenario.
The Group has significant internal sources of liquidity, which are
sufficient to meet all of our expected cash requirements for at
least 12 months from the date the financial statements are
approved, without having to resort to external sources of funding.
The Group has a total of $2.6 billion of undrawn committed
facilities that can be made use of, expiring in 2026. Access to
further liquidity is available through the debt capital markets and
an extensive commercial paper programme is in place, and Prudential
has maintained a consistent presence as an issuer in the market for
the past decade.
A number of risk management tools are used to manage and mitigate
this liquidity risk, including the following:
-
The Group's liquidity risk policy;
-
Risk appetite statements, limits and triggers;
-
Regular assessment by the Group and business units of LCRs which
are calculated under both base case and stressed scenarios and are
reported to committees and the Board;
-
The Group's Liquidity Risk Management Plan, which includes details
of the Group Liquidity Risk Framework as well as analysis of Group
and business units liquidity risks and the adequacy of available
liquidity resources under normal and stressed
conditions;
-
Regular stress testing;
-
Our contingency plans and identified sources of
liquidity;
-
The Group's ability to access the money and debt capital
markets;
-
Regular deep dive assessments; and
-
The Group's access to external committed credit
facilities.
Credit risk
Credit risk is the potential for a reduction in the value of
investments which results from the perceived level of risk of an
investment issuer being unable to meet its obligations
(defaulting). Counterparty risk is a type of credit risk and
relates to the risk of the counterparty to any contract we enter
into being unable to meet their obligations causing the Group to
suffer a loss.
Prudential invests in bonds that provide a regular, fixed amount of
interest income (fixed income assets) in order to match the
payments needed to policyholders. It also enters into reinsurance
and derivative contracts with third parties to mitigate various
types of risk, as well as holding cash deposits at certain banks.
As a result, it is exposed to credit risk and counterparty risk
across its business. The assets backing the Jackson general account
portfolio and the Asia shareholder business means credit risk is
considered a material risk for the Group's business
units.
In Asia, the Group's holdings across its life portfolios are mostly
in local currency and with a largely domestic investor base, which
provides support to these positions. The portfolio is positioned
towards high quality names and generally to those with either
government or considerable parent company balance sheet support.
The degree of government support for state owned entities in Asia
is currently something the Group is actively monitoring, given
recent defaults observed by such entities in China and Thailand.
The Group's portfolio is generally well diversified in relation to
individual counterparties, although counterparty concentration is
monitored, in particular in local markets where depth (and
consequently the liquidity of such investments) may be low.
Prudential maintains active reviews on its investment portfolio to
improve the robustness and resilience of the solvency position.
Further detail in the breakdown of the Group's debt portfolio is
provided below.
The Group has some appetite to take credit risk to the extent that
it remains part of a balanced portfolio of sources of income for
shareholders and is compatible with a robust solvency
position.
A number of risk management tools are used to manage and mitigate
this credit risk, including the following:
-
A credit risk policy and dealing and controls policy;
-
Risk appetite statements and portfolio-level limits that have been
defined on issuers, and counterparties;
-
Collateral arrangements for derivative, secured lending reverse
repurchase and reinsurance transactions which aim to provide a high
level of credit protection;
-
The Group Credit Risk Committee's oversight of credit and
counterparty credit risk and sector and/or name-specific
reviews;
-
Regular assessments; and
-
Close monitoring or restrictions on investments that may be of
concern.
The total debt securities at 30 June 2021 for the Group's
continuing operations were $92.7 billion (30 June 2020: $82.4
billion; 31 December 2020: $89.8 billion), comprising the
shareholder, with-profit and unit-linked funds in the Group's Asia
and Africa businesses. The majority (70 per cent) of the portfolio
is in unit-linked and with-profits funds. The remaining 30 per cent
of the debt portfolio is held to back the shareholder
business.
●
Group sovereign debt. Prudential invests in bonds issued by
national governments. This sovereign debt holding of the Group's
continuing operations represented 46 per cent or $13.0
billion1 of
the shareholder debt portfolio of the Group's continuing operations
as at 30 June 2021 (30 June 2020: 48 per cent or $11.7 billion of
the shareholder debt portfolio for the Group's continuing
operations; 31 December 2020: 45 per cent or $12.8 billion of the
shareholder debt portfolio for the Group's continuing operations).
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 30 June 2021 are given in
note C1 of the Group's IFRS financial statements.
●
Corporate debt portfolio. In the Asia shareholder business, corporate
debt exposures totalled $13.9 billion of which $12.1 billion or 87
per cent were investment grade rated.
●
Bank debt exposure and counterparty credit risk. The banking sector represents a material
concentration in the Group's corporate debt portfolio which largely
reflects the composition of the fixed income markets across the
regions in which Prudential is invested. As such, Prudential's
exposure to banks is a key part of its core investment business, as
well as being important for the hedging and other activities
undertaken to manage its various financial risks. Given the
importance of its relationship with its banks, exposure to the
sector is considered a material risk for the Group. The exposure to
derivative counterparty and reinsurance counterparty credit risk is
managed using an array of risk management tools, including a
comprehensive system of limits. Where appropriate, Prudential
reduces its exposure, buys credit protection or uses additional
collateral arrangements to manage its levels of counterparty credit
risk.
At 30 June 2021:
- For
continuing operations, 87 per cent of the Group's shareholder
portfolio (excluding all government and government-related debt) is
investment grade rated2.
In particular, 52 per cent of the portfolio is
rated2 A-
and above (or equivalent); and
- The Group's
shareholder portfolio for continuing operations is well
diversified: no individual sector3 makes
up more than 10 per cent of the total portfolio (excluding the
financial and sovereign sectors). The exposures held by the
shareholder-backed business and with-profits funds in bank debt
securities at 30 June 2021 are given in note C1 of the Group's IFRS
financial statements.
Risks from the nature of our business and our industry
These include the Group's non-financial risks (including
operational and financial crime risk), transformation risks from
significant change activity and the insurance risks assumed by the
Group in providing its products.
|
Transformation risk
Prudential has a number of significant change programmes under way
to deliver the Group's strategy for growth, improve customer
experiences, strengthen its operational resilience and control
environment, and meet regulatory and industry requirements. If the
Group does not deliver these programmes to defined timelines, scope
and cost, this may negatively impact on its operational capability;
control environment; reputation; and ability to deliver its
strategy and maintain market competitiveness.
Transformation risk remains a material risk for Prudential. The
Group's transformation and change programmes inherently give rise
to design and execution risks, and may introduce new, or increase
existing, business risks and dependencies. Implementing further
strategic transformation initiatives may amplify these risks. In
order to manage these risks, the Group's Transformation Risk
Framework aims to ensure that, for both transformation and
strategic initiatives, strong programme governance is in place with
embedded risk expertise to achieve ongoing and nimble risk
oversight, and regular risk monitoring and reporting to risk
committees is delivered.
Prudential's current portfolio of transformation and significant
change programmes include the proposed demerger of Jackson
from the Group; the expansion of the Group's digital capabilities
and use of technology, platforms and analytics; and improvement of
business efficiencies through operating model changes. Programmes
related to regulatory/industry change such as the development of
the Group Internal Economic Capital Assessment (GIECA) model under
the GWS Framework, changes required to effect the discontinuation
of inter-bank offered rates (IBORs) in their current form and the
implementation of IFRS 17 are also ongoing. See below for further
detail on these regulatory changes. The Group is cognisant that the
speed of technological change in the business could outpace its
ability to anticipate all the unintended consequences that may
arise. While the adoption of innovative technologies such as
artificial intelligence has opened up new product opportunities and
channels, it also exposes Prudential to potential information
security, operational, ethical and conduct risks which, if not
managed effectively, could result in customer detriment and
reputational damage. The Transformation Risk Framework therefore
operates alongside the Group's existing risk policies and
frameworks in these areas to ensure appropriate controls and
governance are in place to mitigate these risks.
Non-financial risks
In the course of doing business, the Group is exposed to
non-financial risks. A combination of the complexity of the Group,
its activities and the extent of transformation in progress creates
a challenging operating environment. The Group's risk appetite
framework for non-financial risks considers risks across a broad
range of non-financial risk categories which are outlined below.
These risks are considered to be material at the level of the
Group.
●
Operational risk. Prudential defines operational risk as the
risk of loss (or unintended gain or profit) arising from inadequate
or failed internal processes, personnel or systems, or from
external events. This may arise from employee error, model error,
system failures, fraud or other events which disrupt business
processes or has a detrimental impact to customers. Activities
across the scope of our business, including operational activity,
regulatory compliance, and those supporting ESG activities more
broadly can expose us to operational risks. A large volume of
complex transactions is processed by the Group across a number of
diverse products and is subject to a high number of varying legal,
regulatory and tax regimes. Prudential has no appetite for material
losses (direct or indirect) suffered as a result of failing to
develop, implement or monitor appropriate controls to manage
operational risks.
●
Outsourcing and third-party risks. The Group's outsourcing and third-party
relationships require distinct oversight and risk management
processes. A number of important third-party relationships exist
which provide the distribution and processing of Prudential's
products, both as market counterparties and as outsourcing
partners, including new IT, technology and ecosystem partners. In
Asia, the Group continues to expand its strategic partnerships and
renew bancassurance arrangements, and in Africa Prudential is
continuing its expansion through acquisitions. These third-party
arrangements support Prudential in providing a high level and
cost-effective service to our customers, but they also make us
reliant on the operational resilience and performance of our
outsourcing and business partners.
The
Group's requirements for the management of material outsourcing
arrangements, which are in accordance with relevant applicable
regulations and are being aligned to the requirements of the Hong
Kong IA's GWS Framework, are included through its well-established
Group-wide third-party supply policy. Third-party management is
also included and embedded in the Group-wide framework and risk
management for operational risk (see below).
● Business
disruption risk. Events in
2020 and 2021 have shown how material business disruption risk is
to effective business operations and delivery of business services
to policyholders, and the potential impact to our customers and the
market more broadly. The Group continuously seeks to develop
greater business resilience through planning, preparation, testing
and adaption. Business continuity management (BCM) is one of a
number of activities undertaken by the Group Security function that
helps the Group to protect its key stakeholders and its systems,
and business resilience is at the core of the Group's embedded BCM
programme. The BCM programme and framework are appropriately linked
to all business activities, and include business impact analyses,
risk assessments, incident management plans, disaster recovery
plans, and the exercising and execution of these plans. Based on
industry standards, the BCM programme is designed to provide
business continuity that matches the Group's evolving business
needs and is appropriate to the size, complexity and nature of the
Group's operations. Prudential is also taking a broader,
multi-functional approach to building greater business resilience,
working with our external third-party providers and our service
delivery teams to improve our ability to withstand, absorb and
recover from disruption to our business services, while minimising
the impact on our customers. The Group continuously reviews and
develops its contingency plans and its ability to respond
effectively when disruptive incidents occur, such as those
resulting from the Covid-19 pandemic and civil unrest. Business
disruption risks are closely monitored by the Group Security
function, with key operational effectiveness metrics and updates on
specific activities being reported to the Group Risk Committee and
discussed by cross-functional working groups.
● Information
security risk and data privacy. Information security and data privacy risks
remain significant considerations for Prudential. This includes the
risk of malicious attack on its systems, network disruption and
risks relating to data security, integrity, privacy and misuse. The
cyber security threat and criminal capability in this area
continues to evolve globally in sophistication and potential
significance with an increased level of understanding of complex
financial transactions which increases the risks to the financial
services industry. The systemic risk of sophisticated but
untargeted attacks remains elevated, particularly during times of
heightened geopolitical tensions and during the current disruption
caused by the Covid-19 pandemic. The scale of the Group's IT
infrastructure and network (and the services required to monitor
and manage it), stakeholder expectations and high-profile cyber
security and data misuse incidents across industries mean that
these risks are considered material at the level of the
Group.
Prudential
and the insurance industry are making increasing use of emerging
technological tools and digital services, or forming partnerships
with third parties that provide these capabilities. While this
provides new opportunities, opening up markets, improving insights
and increasing scalability, it also comes with additional risks
which are managed within the Group's existing governance and risk
management processes, including additional operational risks and
increased risks around data security and misuse. Automated digital
distribution channels increase the criticality of system and
process resilience in order to deliver uninterrupted service to
customers.
Ransomware
(malicious software designed to block access to a computer system
until a sum of money is paid) campaigns remain a consistent threat
to the financial services sector, with recent highly-publicised
attacks on institutions. A number of defences are in place for
Prudential to protect its systems from this type of attack,
including but not limited to, antivirus endpoint software, 24/7
Security Operations Centre monitoring, network-based intrusion
detection, and awareness campaigns to all employees to help prevent
and report attacks utilising email phishing techniques. Cyber
insurance coverage is in place to mitigate the financial loss and
the Group is testing preventive and back-up restorative controls
for ransomware attacks across its businesses.
Developments
in data protection requirements continue to evolve worldwide. This
increases financial and reputational implications for Prudential in
the event of a breach of its (or third-party suppliers') IT
systems. As well as protecting data, stakeholders expect companies
and organisations to use personal information transparently and
appropriately. New and currently unforeseeable regulatory issues
may also arise from the increased use of emerging technology, data
and digital services. This includes the international transfer of
data which, as a global organisation, increases regulatory risks
for Prudential. Given this, both information security and data
privacy are key risks for the Group. As well as having preventative
risk management in place, it is fundamental that the Group has
robust critical recovery systems in place in the event of a
successful attack on its infrastructure, a breach of its
information security or a failure of its systems in order to retain
its customer relationships and trusted reputation.
During
2021 the focus has been ensuring consistent global coverage of
security controls, following work to operationalise the revised
organisational structure and governance model for cyber security
management which resulted in a centralised Group-wide Information
Security and Privacy function, leveraging skills, tools and
resources across the business under a 'centre of excellence' model.
This global function is led by the Group Chief Information Security
Officer (CISO) and falls within the scope of the responsibilities
of the Group Chief Digital Officer, working closely with the Group
Risk and Compliance Function and Group CRCO to ensure appropriate
second line oversight. Cyber risk management is also conducted
locally within business units with input from business information
security officers and with oversight from local risk committees.
The Prudential plc Board is briefed at least twice annually on
cyber security by the Group CISO and executive training is provided
to ensure that members understand the latest regulatory
expectations and the threats facing the Group and that they have
the means to enable appropriate oversight in this
area.
An
updated Group-wide information security policy has been introduced
that aligns to over 20 international standards such as ISO 27001/2,
MAS, and NIST Cyber Security Framework to ensure full coverage and
adoption of best practices. Local standards are also aligned to
relevant local regulation or law. Our Group-wide privacy policy was
developed in collaboration with industry experts to support a
pragmatic approach to the evolving regulatory environment globally
and ensure compliance with all applicable laws and regulations.
This approach ensures that all our stakeholders have confidence in
our approach to information security and risk
management.
These
developments have allowed the Group to progress on its cyber
security strategy, which for 2021 has four key
objectives:
1. Automation
and Optimisation - to increase the speed and scale of the program's
deployment and reduce human interactions, automation initiatives
are being deployed across cyber security and privacy disciplines to
improve the agility of controls. Optimisation of tools and
processes;
2. Improvement
of cyber hygiene - improve cyber hygiene in order to prevent
vulnerabilities due to misconfigurations and lack of critical
patches;
3. Cyber
fusion and business enablement - establish a Group-wide function
centre of excellence to unify previously disparate security
disciplines under a common framework that is focused on automation
and preventive controls, rather than relying on manual human
intervention to detect attacks that have already occurred. This
provides the combined capability for detecting, managing and
responding to threats in an integrated and collaborative manner.
Re-skilling of staff and support for digital initiatives would be
required by the Privacy team; and
4. Continuous
improvement - given the rapid rate of threats, the Security and
Privacy disciplines aim to be in a continuous improvement state
across people, process and technology. This includes optimisation
of technology solutions scaling in order to support
growth.
● Model
and user developed application (UDA) risk. There is a risk of adverse consequences
arising from erroneous or misinterpreted tools used in core
business activities, decision-making and reporting. The Group
utilises various tools to perform a range of operational functions
including the calculation of regulatory or internal capital
requirements, the valuation of assets and liabilities, determining
hedging requirements, and in acquiring new business using
artificial intelligence and digital applications. Many of these
tools are an integral part of the information and decision-making
framework of Prudential and errors or limitations in these tools,
or inappropriate usage, may lead to regulatory breaches,
inappropriate decision-making, financial loss, or reputational
damage.
The
Group has no appetite for model and UDA risk arising as a result of
failing to develop, implement and monitor appropriate risk
mitigation measures. Prudential's model and UDA risk framework and
policy applies a risk-based approach in order to ensure appropriate
and proportionate risk management is applied to all models and UDAs
used across the business, depending on the materiality and nature
of the data used in these tools, as well as their
complexity.
Prudential's
model and UDA risk is managed and mitigated using the
following:
-
The Group's Model and UDA Risk Policy and relevant
Guidelines;
-
Annual risk assessment of all tools used for core business
activities, decision-making and reporting;
-
Maintenance of appropriate documentation for tools
used;
-
Implementation of controls to ensure tools are accurate and
appropriately used;
-
Tools are subject to rigorous and independent model validation;
and
-
Regular reporting to the RCS function and risk committees to
support the measurement and management of the risk.
● Financial
crime risk. As with all
financial services firms, Prudential is exposed to risks relating
to money laundering (the risk that the products or services of the
Group are used by customers or other third parties to transfer or
conceal the proceeds of crime); fraud (the risk that fraudulent
claims or transactions, or procurement of services, are made
against or through the business); sanctions compliance (the risk
that the Group undertakes business with individuals and entities on
the lists of the main sanctions regimes); and bribery and
corruption (the risk that employees or associated persons seek to
influence the behaviour of others to obtain an unfair advantage or
receive benefits from others for the same
purpose).
Prudential
operates in some high-risk countries where, for example, the
acceptance of cash premiums from customers may be common practice,
large-scale agency networks may be in operation where sales are
incentivised by commission and fees, where there is a higher
concentration of exposure to politically-exposed persons, or which
otherwise have higher geopolitical risk exposure.
The
Group-wide policies we have in place on anti-money laundering,
fraud, sanctions and anti-bribery and corruption reflect the
values, behaviours and standards that are expected across the
business. Screening and transaction monitoring systems are in place
and a series of improvements and upgrades are being implemented,
while a programme of compliance control monitoring reviews is being
undertaken. Risk assessments are performed annually at higher risk
locations. Due diligence reviews and assessments against
Prudential's financial crime policies are performed as part of the
Group's business acquisition process. The Group continues to
undertake strategic activity to monitor and evaluate the evolving
fraud risk landscape, mitigate the likelihood of fraud occurring
and increase the rate of detection.
The
Group has in place a mature confidential reporting system through
which staff and other stakeholders can report concerns relating to
potential misconduct. The process and results of this are overseen
by the Group Audit Committee.
Group-wide framework and risk management for operational and other
non-financial risks
The risks detailed above form key elements of the Group's
operational risk profile. A Group-wide operational risk framework
is in place to identify, measure and assess, manage and control,
monitor and report effectively on all material operational risks
across the business. The key components of the framework
are:
-
Application of a risk and control self-assessment (RCSA) process,
where operational risk exposures are identified and assessed as
part of a periodical cycle. The RCSA process considers a range of
internal and external factors, including an assessment of the
control environment, to determine the business's most significant
risk exposures on a prospective basis;
-
An internal incident management process, which identifies,
quantifies and monitors remediation conducted through root cause
analysis and application of action plans for risk events that have
occurred across the business;
-
A scenario analysis process for the quantification of extreme, yet
plausible manifestations of key operational risks across the
business on a forward-looking basis. This is carried out at least
annually and supports external and internal capital requirements as
well as informing risk oversight activity across the business;
and
-
A risk appetite framework for non-financial risks that articulates
the level of risk exposure the business is willing to tolerate,
covering all operational risk categories, and sets out escalation
processes for breaches of appetite.
Outputs from these processes and activities performed by individual
business units are monitored by the RCS function, which provides an
aggregated view of the risk profile across the business to the
Group Risk Committee and Board.
These core framework components are embedded across the Group via
the Group Operational Risk Policy and Standards documents, which
set out the key principles and minimum standards for the management
of operational risk across the Group. The Group Operational Risk
Policy, standards and operational risk appetite framework sit
alongside other risk policies and standards that individually
engage with key operational risks, including outsourcing and
third-party supply, business continuity, financial crime,
technology and data, operations processes and extent of
transformation. These policies and standards include subject matter
expert-led processes that are designed to identify, assess, manage
and control operational risks, including:
-
A transformation risk framework that assesses, manages and reports
on the end-to-end transformation life cycle, project prioritisation
and the risks, interdependencies and possible conflicts arising
from a large portfolio of transformation activities;
-
Internal and external review of cyber security capability and
defences;
-
Regular updating and testing of elements of disaster-recovery plans
and the Critical Incident Procedure process;
-
Group and business unit-level compliance oversight and risk-based
testing in respect of adherence with in-force
regulations;
-
Regulatory change teams in place to assist the business in
proactively adapting and complying with regulatory
developments;
-
On financial crime risk, screening and transaction monitoring
systems are in place and a programme of compliance control
monitoring reviews is undertaken, as well as regular risk
assessments;
-
A framework is in place for emerging risk identification and
analysis in order to capture, monitor and allow us to prepare for
operational risks that may crystallise beyond the short-term
horizon;
-
Corporate insurance programmes to limit the financial impact of
operational risks; and
-
Reviews of key operational risks and challenges within Group and
business unit business plans.
These activities are fundamental in maintaining an effective system
of internal control, and as such outputs from these also inform
core RCSA, incident management and scenario analysis processes and
reporting on operational risk. Furthermore, they also ensure that
operational risk considerations are embedded in key business
decision-making, including material business approvals and in
setting and challenging the Group's strategy.
Insurance risks
Insurance risk makes up a significant proportion of Prudential's
overall risk exposure. The profitability of its businesses depends
on a mix of factors, including levels of, and trends in, mortality
(policyholders dying), morbidity (policyholders becoming ill or
suffering an accident) 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
(claim inflation).
The principal drivers of the Group's insurance risk vary across its
business units. In Asia, where a significant volume of health and
protection business is written, the most significant insurance
risks across the Group's key markets in Hong Kong, Singapore,
Indonesia and Malaysia are persistency risk, morbidity risk and
medical claims inflation risk. In Jackson, policyholder behaviour
risk is particularly material, especially in the take up of options
and guarantees on variable annuity business which impacts
profitability and is influenced by market performance and the value
of policy guarantees.
The Group has appetite for retaining insurance risks in the areas
where it believes it has expertise and operational controls to
manage the risk and where it judges it to be more value-creating to
do so rather than transferring the risk, and only to the extent
that these risks remain part of a balanced portfolio of sources of
income for shareholders and is compatible with a robust solvency
position.
The impact of the Covid-19 pandemic to economic activity and
employment levels across the Group's markets has the potential to
elevate the incidence of claims, lapses, or surrenders of policies,
and some policyholders may choose to defer or stop paying insurance
premiums or reduce deposits into retirement plans. In particular
extended restrictions on movement could affect product persistency
in the Group's Asia business. The pandemic may also result in
elevated claims and policy lapses or surrenders in a less direct
way, and with some delay in time before being felt by the Group,
due to factors such as policyholders deferring medical treatment
during the pandemic, or policyholders lapsing or surrendering their
policies on the expiry of grace periods for premium payments
provided by the Group's businesses. While these impacts to the
business have not been material to date, they are being closely
monitored by the Group's businesses with targeted management
actions being implemented where necessary, which includes
additional Incurred But Not Reported (IBNR) claims reserves in some
markets where deferrals in non-acute medical treatments due to
movement restrictions have been observed.
The Group's persistency assumptions reflect similarly a combination
of recent past experience for each relevant line of business and
expert judgement, especially where a lack of relevant and credible
experience data exists. Any expected change in future persistency
is also reflected in the assumptions. Persistency risk is managed
by having in place appropriate controls across the product life
cycle. This includes review and revisions to product design and
incentive structures where required, ensuring appropriate training
and sales processes, including those ensuring active customer
engagement and high service quality, appropriate customer
disclosures and product collaterals, use of customer
retention initiatives as well as post-sale management through
regular experience monitoring. The application of strong
mitigations over conduct risk and the identification of common
characteristics of business with high lapse rates is also crucial.
Where appropriate, allowance is made for the relationship (either
assumed or observed historically) between persistency and
investment returns and any additional risk is accounted for.
Modelling this dynamic policyholder behaviour is particularly
important when assessing the likely take-up rate of options
embedded within certain products. The effect of persistency on the
Group's financial results can vary but is influenced by product
design and lapse experience relative to assumptions.
In Asia, Prudential writes significant volumes of health and
protection business and so a key assumption is the rate of medical
claims inflation, which is often in excess of general price
inflation. There is a risk that the cost of medical treatment
increases more than expected, so the medical claims cost passed on
to Prudential is higher than anticipated. Medical claims inflation
risk is best mitigated by retaining the right to reprice products
and by having suitable overall claims limits within policies,
either limits per type of medical treatment or in total across a
policy, annually and/or over the policy lifetime. Prudential's
morbidity risk is mitigated by appropriate underwriting when
policies are issued and eligibility assessments carried out when
claims are received, and for certain products, the right to reprice
where appropriate. Prudential's morbidity assumptions reflect its
recent experience and expectation of future trends for each
relevant line of business.
Prudential's insurance risks are managed and mitigated using the
following:
-
The Group's insurance, product and underwriting risk
policies;
-
In product design and appropriate
processes related to the management of policyholder reasonable
expectations;
-
The risk appetite statements, limits and triggers;
-
Using persistency, morbidity and longevity assumptions that reflect
recent experience and expectation of future trends, and industry
data and expert judgement where appropriate;
-
Using reinsurance to mitigate mortality and morbidity
risks;
-
Ensuring appropriate medical underwriting when policies are issued
and appropriate claims management practices when claims are
received in order to mitigate morbidity risk;
-
Maintaining the quality of sales processes, training and using
initiatives to increase customer retention in order to mitigate
persistency risk;
-
Using product repricing and other claims management initiatives in
order to mitigate morbidity and medical expense inflation risk;
and
-
Regular deep dive assessments.
Conduct risk
Prudential's conduct of business, especially in the design and
distribution of its products, is crucial in ensuring that the
Group's commitment to meeting customers' needs and expectations are
met. The Group's conduct risk framework, owned by the Group Chief
Executive, reflects management's focus on customer
outcomes.
Factors that may increase conduct risks can be found throughout the
product life cycle, from the complexity of the Group's products to
its diverse distribution channels, which include its agency
workforce, virtual face-to-face sales and sales via online digital
platforms. In alignment with the Group's purpose of helping people
get the most out of life, Prudential strives towards making health
and protection coverage affordable and accessible to all. Through
the Pulse by Prudential app, there is increased focus on making
insurance more inclusive to underserved segments of society through
bite-size low-cost digital products and services. Prudential has
developed a Group Customer Conduct Risk Policy which sets out five
customer conduct standards that the business is expected to meet,
being:
● Treat customers fairly, honestly and with
integrity;
● Provide and promote products and services that
meet customer needs, are clearly explained and that deliver real
value;
● Maintain the confidentiality of customer
information;
● Provide and promote high standards of customer
service; and
● Act fairly and timely to address customer
complaints and any errors found.
While the embedding of policy requirements is ongoing, Prudential
manages conduct risk via a range of controls that are identified
and assessed through the Group's conduct risk assessment framework,
reviewed within its monitoring programmes, and overseen within
reporting to its Boards and Committees.
Management of Prudential's conduct risk is key to the Group's
strategy. Prudential's conduct risks are managed and mitigated
using the following:
● The Group's code of business conduct and conduct
standards, product underwriting and other related risk policies,
and supporting controls including the Group's fraud risk control
programme;
● A culture that supports the fair treatment of the
customer, incentivises the right behaviour through proper
remuneration, and provides a safe environment to report conduct
risk related issues via Speak Out;
● Distribution controls, including monitoring
programmes relevant to the type of business (insurance or asset
management), distribution channel (agency, bancassurance, or
digital) and ecosystem, to ensure sales are conducted in a manner
that considers the fair treatment of customers within digital
environments;
● Quality of sales processes and training, and using
other initiatives such as special requirements for vulnerable
customers, to improve customer outcomes;
● Appropriate claims management and complaint
handling practices; and
● Regular deep dive assessments on, and monitoring
of, conduct risks and periodic conduct risk
assessments.
Risks related to regulatory and legal compliance
These include risks associated with prospective regulatory and
legal changes and compliance with existing regulations and laws -
including their retrospective application - with which the Group
must comply in the conduct of its business.
|
Prudential operates under the ever-evolving requirements set out by
diverse regulatory, legal and tax regimes which may impact
Prudential's business or the way in which it is conducted. This
covers a broad range of risks including changes in government
policy and legislation, capital control measures, and new
regulations at either national or international level. In addition
to the risks arising from regulatory change, the breadth of local
and Group-wide regulatory arrangements presents the risk that
regulatory requirements are not fully met, resulting in specific
regulator interventions or actions including retrospective
interpretation of standards by regulators which may result in
regulatory censure or significant additional costs to the business.
Furthermore, as the industry's use of emerging technological tools
and digital services increases, this is likely to lead to new and
unforeseen regulatory issues and the Group is monitoring the
regulatory developments and standards emerging around the
governance and ethical use of technology and data.
In certain jurisdictions in which Prudential operates there are
also a number of ongoing policy initiatives and regulatory
developments that are having, and will continue to have, an impact
on the way Prudential is supervised. Decisions taken by regulators,
including those related to solvency requirements, corporate or
governance structures, capital allocation, financial reporting and
risk management may have an impact on our business. The focus of
some governments toward more protectionist or restrictive economic
and trade policies could impact on the degree and nature of
regulatory changes and Prudential's competitive position in some
geographic markets. This could take effect, for example, through
increased friction in cross-border trade, capital controls or
measures favouring local enterprises such as changes to the maximum
level of non-domestic ownership by foreign companies. These
developments continue to be monitored by the Group at a national
and global level and these considerations form part of the Group's
ongoing engagement with government policy teams and
regulators.
Further information on specific areas of regulatory and supervisory
requirements and changes are included below.
● Group-wide
supervision. From 21
October 2019, Prudential's Group-wide supervisor changed to the
Hong Kong IA. The primary enabling legislation for the Hong Kong
IA's GWS Framework was enacted in July 2020 and came into operation
on 29 March 2021. The relevant subsidiary legislation, including
the Insurance (Group Capital) Rules, also came into operation on 29
March 2021. This is supported by guidance material from the Hong
Kong IA. The GWS Framework became effective for the Group on 14 May
2021 following designation by the Hong Kong IA, subject to
transitional arrangements allowed in legislation which have been
agreed with the Hong Kong IA. These transitional arrangements allow
all debt instruments, both senior and subordinated, issued by
Prudential to be included as eligible Group capital
resources.
● Global
regulatory developments and systemic risk
regulation. Efforts to
curb systemic risk and promote financial stability are also under
way. At the international level, the Financial Stability Board
(FSB) continues to develop recommendations for the asset management
and insurance sectors, including ongoing assessment of systemic
risk measures. The International Association of Insurance
Supervisors (IAIS) has continued its focus on the following key
developments.
In
November 2019 the IAIS adopted the Common Framework (ComFrame)
which establishes supervisory standards and guidance focusing on
the effective group-wide supervision of Internationally Active
Insurance Groups (IAIGs). Prudential was included in the first
register of IAIGs released by the IAIS on 1 July 2020 and was
designated an IAIG by the Hong Kong IA following an assessment
against the established criteria in ComFrame.
The
IAIS has also been developing the Insurance Capital Standard (ICS)
as part of ComFrame. The implementation of ICS will be conducted in
two phases: a five-year monitoring phase followed by an
implementation phase. The Aggregation Method is one of the
alternatives being considered to the default approach undertaken
for the ICS during the monitoring period and the related proposals
are being led by the National Association of Insurance
Commissioners (NAIC).
The
FSB has suspended Global Systemically Important Insurers (G-SII)
designations until completion of a review to be undertaken in 2022.
Concurrently, the FSB endorsed a new Holistic Framework (HF),
intended for the assessment and mitigation of systemic risk in the
insurance sector which was implemented by the IAIS. As part of the
HF, many of the previous G-SII measures have already been adopted
into the Insurance Core Principles (ICPs) and ComFrame. As an IAIG,
Prudential is expected to be subject to these measures. The HF also
includes a monitoring element for the identification of a build-up
of systemic risk and to enable supervisors to take action where
appropriate. There continues to be material change in the
regulatory guidance in this area, including several areas still in
development as part of the IAIS' HF implementation and any new or
changing regulations could have a further impact on Prudential.
Recent developments in this area include:
● The IAIS is proposing to introduce
liquidity metrics to be used as ancillary indicators, with a second
consultation set to follow the phase 1 consultation which was
completed in February 2021.
● A consultation on an application paper on
macroprudential supervision was also launched by the IAIS in March
2021.
● The FSB published its 2020 Resolution Report in
November 2020, highlighting intra-group connectedness and funding
in resolution as key areas of attention for its work on resolution
planning. Resolution regimes will continue to be a near term focus
in the FSB's financial stability work, potentially being a key tool
in informing decisions around the reformed G-SII designation in
2022. The IMF released a Financial System Stability Assessment
for Hong Kong in June 2021. One of the conclusions of the report
was that there is room to further strengthen the macroprudential
framework by enhancing systemic risk assessment and
communication.
In
the US, various initiatives are under way to introduce fiduciary
obligations for distributors of investment products, which may
reshape the distribution of retirement products. Jackson has
introduced fee-based variable annuity products in response to the
potential introduction of such rules, and we anticipate that the
business's strong relationships with distributors, history of
product innovation and efficient operations should further mitigate
any impacts.
In
Asia, regulatory regimes are developing at different speeds, driven
by a combination of global factors and local considerations. New
local capital rules and requirements could be introduced in these
and other regulatory regimes that challenge legal or ownership
structures, or current sales practices, or could be applied to
sales made prior to their introduction retrospectively, which have
a negative impact on Prudential's business and reported results.
Notable regulatory changes currently in development in the region
are outlined below.
In
the Group's key Asia markets, reforms to insurance regulatory
regimes are in progress, with some uncertainty on the full impact
to Prudential:
● In Hong Kong, the Hong Kong IA is seeking to align
the territory's insurance regime with international standards and
has been developing a risk-based capital (RBC) framework. The RBC
framework will comprise three pillars: quantitative requirements,
including assessment of capital adequacy and valuation; qualitative
requirements, including corporate governance, Enterprise Risk
Management as well as Own Risk and Solvency Assessment; and public
disclosures and transparency of information. The rules with respect
to the first pillar are expected to be finalised in 2021. The Hong
Kong IA is also currently developing plans to enable early adoption
of the framework.
● In Malaysia, Bank Negara Malaysia (BNM), the
central bank of Malaysia, has initiated a multi-phase review of its
current RBC frameworks for insurers and Takaful operators which has
been conducted since 2018. The review aims to ensure that the
frameworks remain effective under changing market
conditions, facilitate consistent and comparable capital
adequacy measurement across the insurance and Takaful industry,
where appropriate, and achieve greater alignment with key
elements of the global capital standards such as ICS, where
appropriate. A discussion paper on proposals was issued on 30 June
2021 with responses due by 30 September 2021. The timing of the
effective date of the updated rules currently remains
uncertain.
● In China, the China Banking and Insurance
Regulatory Commission (CBIRC) announced plans for its China Risk
Oriented Solvency System (C-ROSS) Phase II in 2017. Three
quantitative impact studies have been performed in March, August
and October 2020. The CBIRC has also released a draft C-ROSS Phase
II technical specification in January 2021 for industry
consultation. Implementation is expected in 2021 or 2022, although
an official effective date has yet to be
communicated.
The
protection of customers is an increasing regulatory theme in
the Asia region, including the following notable examples of
proposals for regulatory change in this area.
● The Financial Services Authority of Indonesia, the
Otoritas Jasa Keuangan (OJK), has been revising investment linked
products (ILP) regulations with the aim of increasing insurance
penetration and better protecting customer interests and improving
market conduct. The final regulations are expected to be issued in
Q3 2021 and this will have implications for the product strategies
and insurance and compliance risks for
insurers.
● In Malaysia, BNM issued a circular letter in Q1
2021 specifying requirements for the design and
disclosure of ILPs which provide extension of coverage beyond the
initial coverage term. These changes aim to improve the
appropriateness of product design and the customer disclosures
provided on ILP policy documents. The proposed effective date of
the new requirements is currently 22 September 2021
and these are expected to materially impact insurer
systems, disclosures, customer communications, sales conduct and
post-sales calls processes.
The
pace and volume of climate-related regulatory changes both
internationally and locally across Asia markets is
increasing.
● The IAIS published an application paper on the
supervision of climate-related risks in the insurance sector in May
2021, which aims to provide insurance supervisors with the tools,
recommendations and examples of good practice in order to
strengthen the assessment and management of climate-related
risks.
● In Asia, regulators including the Hong Kong
Monetary Authority, the Monetary Authority of Singapore, BNM in
Malaysia and the Financial Supervisory Commission in Taiwan are in
the process of developing supervisory and disclosure requirements
or guidelines related to the environment and climate
change. It is expected that other regulators in the region
will develop similar requirements.
The
Group is actively monitoring and engaging with supervisory
authorities on these changes, among others. These
changes may give rise to compliance, operational and
disclosure risks requiring Prudential to coordinate across multiple
jurisdictions in order to apply a consistent risk management
approach.
● IFRS
17. In May 2017, the
International Accounting Standards Board (IASB) published its
replacement standard on insurance accounting IFRS 17, 'Insurance
Contracts'. Some targeted amendments to this standard, including to
the effective date, were issued in June 2020. IFRS 17, 'Insurance
Contracts', as amended, will introduce fundamental changes to the
IFRS-based reporting of insurance entities that prepare accounts
according to IFRS from 2023. IFRS 17 is expected to, among other
things, include altering the timing of IFRS profit recognition, and
the implementation of the standard is likely to require changes to
the Group's IT, actuarial and finance systems. The Group is
reviewing the complex requirements of this standard and considering
its potential impact.
● Inter-bank
offered rate reforms. In
July 2014, the Financial Stability Board (FSB) announced widespread
reforms to address the integrity and reliability of IBORs. The
discontinuation of IBORs in their current form and their
replacement with alternative risk-free reference rates such as the
Sterling Overnight Index Average (SONIA) benchmark in the UK and
the Secured Overnight Financing Rate (SOFR) in the US could, among
other things, impact the Group through an adverse effect on the
value of Prudential's assets and liabilities which are linked to,
or which reference IBORs, a reduction in market liquidity during
any period of transition and increased legal and conduct risks to
the Group arising from changes required to documentation and its
related obligations to its stakeholders.
Risk management and mitigation of regulatory risk at Prudential
includes the following:
-
Risk assessment of the Business Plan which includes consideration
of current strategies;
-
Close monitoring and assessment of our business environment and
strategic risks;
-
The consideration of risk themes in strategic
decisions;
-
Ongoing engagement with national regulators, government policy
teams and international standard setters; and
-
Compliance oversight to ensure adherence with in-force regulations
and management of new regulatory developments.
The Group's ESG-related risks
These include environmental risks associated with climate change
(including physical and transition risks), social risks arising
from diverse stakeholder commitments and expectations and
governance-related risks.
|
The purpose of a business
and the way in which it operates in achieving its objectives,
including in relation to ESG-related matters, are an increasingly
material consideration for key stakeholders in achieving their own
objectives and aims. Material risks associated with key ESG themes
may adversely impact the reputation and brand of the Group, its
ability to attract and retain customers and staff, its ability to
deliver on its long-term strategy and therefore the results of its
operations and long-term financial
success.
The Prudential ESG Strategic Framework, developed in 2020, focuses
on giving people greater access to good health and financial
security, responsible stewardship in managing the human impact of
climate change and building human and social capital with its broad
range of stakeholders. Prudential seeks to manage ESG-related risks
to its strategy and their negative implications to stakeholders
through a transparent and consistent implementation of this
strategy in its key markets and across operational, underwriting
and investment activities. The strategy is enabled by strong
internal governance, sound business practices and a responsible
investment approach, both as an asset owner and asset
manager.
a Environmental
risks
Prudential's
strategic ESG focus on stewarding the human impacts of climate
change recognises that environmental concerns, notably those
associated with climate change, may pose significant risks to
Prudential, its customers and other stakeholders. Prudential's
investment horizons are long term and it is therefore exposed to
the potential long-term impact of climate change risks, which
include the financial and non-financial impact of transition,
physical and litigation risks.
The global transition to a lower carbon economy
may have an adverse impact on investment valuations as the
financial assets of carbon-intensive companies re-price, and this
could result in some asset sectors facing significantly higher
costs and a reduction in demand for their products and services.
The speed of this transition, and the extent to which it is orderly
and managed, will be influenced by factors such as public policy,
technology and changes in market or investor sentiment. This
climate-related transition risk may adversely impact the valuation
of investments held by the Group, and the potential broader
economic impact may affect customer demand for the Group's
products. Prudential's stakeholders increasingly expect and/or rely
on the Group to support an orderly, inclusive and sustainable
transition based on an understanding of relevant country and
company-level plans and which takes into consideration the impact
on the economies, businesses and customers in the markets in which
it operates and invests. The pace and volume of new climate-related
regulation and reporting standards emerging across the markets in
which the Group operates and the demand for externally assured
reporting may give rise to compliance, operational and disclosure
risks which may be increased by the multi-jurisdictional
coordination required in adopting a consistent risk management
approach. Understanding and appropriately reacting to transition
risk requires sufficient and reliable data on carbon exposure and
transition plans for the assets in which the Group
invests. The direct physical impacts of climate change,
driven by both specific short-term climate-related events such as
natural disasters and longer-term changes to climate and the
natural environment, will increasingly influence the longevity,
mortality and morbidity risk assessments for the Group's life
insurance product underwriting and offerings and their associated
claims profiles. Climate-driven events in countries in which
Prudential or its key third parties operate could impact the
Group's operational resilience and its customers. More
information about the activities the Group is undertaking to
increase its understanding and risk management of these
climate-related risks can be found in the Prudential plc ESG Report
2020.
A
failure to understand, manage and provide greater transparency of
its exposure to these climate-related risks may have increasing
adverse implications for Prudential and its
stakeholders.
b Social
risks
Social
risks that could impact Prudential may arise from a failure to
consider the rights, diversity, wellbeing, and interests of people
and communities in which the Group or its third parties operate.
These risks are increased as Prudential operates in multiple
jurisdictions with distinct local cultures and considerations. As
an employer, the Group aims to attract, retain and develop
highly-skilled staff, which relies on having in place responsible
working practices and recognising the benefits of diversity and
promoting a culture of inclusion. The Group's reputation extends to
its supply chains and its investee companies, which may be exposed
to factors such as poor labour standards and abuses of human rights
by third parties. Emerging population risks associated with public
health trends (such as an increase in obesity) and demographic
changes (such as population urbanisation and ageing) may affect
customer lifestyles and therefore may impact claims against the
Group's insurance product offerings. As a provider of insurance and
investment services the Group is committed to playing a greater
role in preventing and postponing illness in order to protect its
customers as well as making health and financial security
accessible through an increased focus on digital innovation,
technologies and distribution methods for a broadening range of
products and services. As a result, Prudential has access to
customer personal data, including data related to personal health,
and an increasing ability to analyse and interpret this data
through the use of complex tools, machine learning and artificial
intelligence technologies. The Group therefore actively manages the
regulatory, ethical and reputational risks associated with actual
or perceived customer data misuse or security breaches. These risks
are explained above. The increasing digitalisation of products,
services and processes may also result in new and unforeseen
regulatory requirements and stakeholder expectations which
Prudential monitors for, as well as ensuring support for its
customers through this transformation.
c Governance
risks
Maintaining
high standards of corporate governance is crucial for the Group and
its customers, staff and employees, reducing the risk of poor
decision-making and a lack of oversight of its key risks. Poor
governance may arise where key governance committees have
insufficient independence, a lack of diversity, skills or
experience in their members, or unclear (or insufficient) oversight
responsibilities and mandates. Inadequate oversight over
remuneration increases the risk of poor senior management
behaviours. Prudential operates across multiple jurisdictions and
has a group and subsidiary governance structure which may add
further complexity to these considerations. Participation in joint
ventures or partnerships where Prudential does not have direct
overall control and the use of third-party suppliers increases the
potential for reputational risks arising from poor
governance.
ESG-related risks may directly or indirectly impact Prudential's
business and the achievement of its strategy and consequently those
of its key stakeholders, which range from customers, institutional
investors, employees and suppliers, to policymakers, regulators,
industry organisations and local communities, all of whom have
expectations, concerns and aims which may differ, both within and
across the markets in which the Group operates. The Group's ESG
ambitions include commitments, targets and restrictions, which may
be complex to implement and meet and subject to data limitations
and a high level of focus by certain stakeholders. In its
investment activities, Prudential's stakeholders increasingly place
reliance on an approach to responsible investment that demonstrates
how ESG considerations are effectively integrated into investment
decisions and the performance of fiduciary and stewardship duties,
including voting and active engagement decisions with respect to
investee companies, as both an asset owner and an asset
manager.
Risk management and mitigation of ESG risks at Prudential include
the following:
● The Group's ESG Strategic Framework focused on
strategic differentiators and enablers;
● The Group Code of Business Conduct and Group
Governance Manual including ESG linked
policies;
● ESG risk identification including through emerging
risk processes;
● Deep dives into ESG themes including
climate-related risks;
● Integrating ESG considerations into investment
processes; and
● Participation in networks to further develop
understanding and support collaborative action in relation to ESG
risks such as climate change.
Further information on the Group's ESG governance is included in
section 4 above, and further detail on the Group's ESG Strategic
Framework and the management of material risks associated with ESG
themes are included in the Group's ESG Report 2020.
Notes
1
Excluding assets held to cover linked liabilities and those of the
consolidated investment funds.
2
Based on middle rating from Standard & Poor's, Moody's and
Fitch. If unavailable, NAIC and other external ratings and then
internal ratings have been used.
3
Source of segmentation: Bloomberg Sector, Bloomberg Group and
Merrill Lynch. Anything that cannot be identified from the three
sources noted is classified as other.
Corporate governance
The Directors confirm that the Company has complied with all the
provisions of the Corporate Governance Code issued by the Hong Kong
Stock Exchange Limited (HK Code) throughout the accounting period,
except as described below.
The Company does not comply with provision B.1.2(d) of the HK Code
which requires companies, on a comply or explain basis, to have a
remuneration committee which makes recommendations to the board on
the remuneration of non-executive directors. This provision is not
compatible with provision 34 of the UK Corporate Governance Code
which recommends the board determines the remuneration of
non-executive directors. Prudential has chosen to adopt a practice
in line with the recommendations of the UK Corporate Governance
Code.
Given the circumstances of the pandemic and government guidance,
which did not allow large public gatherings as at the date of the
2021 Annual General Meeting (AGM), the Board decided, with regret,
that shareholders, external advisers (including the auditor) and
the majority of Directors would not be able to attend the AGM in
person (and thus provisions A.6.7 of the HK Code could not be fully
complied with). The AGM was broadcast from Prudential's offices and
shareholders were able to participate via a live webcast, which
enabled them to submit questions, both in advance and during the
Meeting, and to cast their votes during the Meeting. Advance voting
via proxies was also available to shareholders in all
jurisdictions. The AGM was attended in person by the Chair, the
Senior Independent Director, the Group Chief Financial Officer and
Chief Operating Officer, and the Company Secretary. The Chairs of
the Board's principal committees and the Group Chief Executive
attended the meeting via weblink and were available to shareholders
for questions. The auditor also attended via weblink. A recording
of the AGM is available on the Company's website. Prudential
continued to keep shareholders informed through its website and
released results and other presentations during the
period.
Notwithstanding the ongoing restrictions in place to deal with the
pandemic during the first half of the year, the Board continued to
receive regular updates on shareholder engagement activities. The
Directors also confirm that the financial results contained in this
document have been reviewed by the Group Audit
Committee.
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: 11 August 2021
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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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Group
Chief Financial Officer and Chief Operating Officer
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