NEWS RELEASE
20 March 2024
PRUDENTIAL PLC FULL YEAR 2023 RESULTS: CONTINUING STRONG
PERFORMANCE
Prudential plc ("Prudential"; HKEX:
2378; LSE: PRU) today announced its financial results for the year
ended 31 December 2023.
Performance highlights on a constant (and actual) exchange
rate basis
- New business profit up 45 per cent (43 per cent) to $3,125
million. Excluding the effect of interest rate and other economic
movements, new business profit up 47 per cent (45 per
cent)
- Operating free surplus generated from in-force insurance and
asset management business of $2,740 million (2022: $2,725 million
($2,760 million))
- Adjusted operating profit up 8 per cent (6 per cent) to $2,893
million
- EEV shareholders' equity is up 7 per cent to $45.3 billion,
equivalent to 1,643 cents per share, on an AER basis.
- GWS shareholder capital surplus over GPCR of $16.1 billion,
equivalent to a cover ratio of 295 per cent (31 December 2022: 307
per cent)
- Second interim dividend of 14.21 cents per share, 20.47 cents
per share for the full year, up 9 per cent
Commenting on the Results, CEO Anil Wadhwani,
said: "These are a very strong set
of results while operating in a challenging macro environment, with
new business profit up 45 per cent driven by a relentless focus on
execution in our markets in Asia and Africa. It is also an
illustration of the strength of both our agency and bancassurance
distribution channels as well as an affirmation of our leadership
position in many key markets.
"It has been six months since the
launch of our new strategy and it's highly encouraging to see the
early progress on our strategic objectives of improving our
customer experience, driving technology powered distribution and
transforming our business model in Health. We have on-boarded
senior leadership talent in Health, Technology and added to our
talent in our key markets as we continue to strengthen our
capabilities in line with our strategic priorities.
"We delivered an excellent financial
and operational performance in 2023 and deployed increased levels
of capital in new business, enhancing core capabilities and
expanding distribution. Sales growth has continued in the first two
months of 2024. Given the relentless execution focus in
implementing our strategy, we are increasingly confident in
achieving our 2027 financial and strategic objectives and in
accelerating value creation for our shareholders."
Summary financials
|
2023 $m
|
2022
$m
|
Change
on
AER
basis
|
Change
on
CER
basis
|
New business profit
|
3,125
|
2,184
|
43%
|
45%
|
Operating free surplus
generated
|
2,007
|
2,193
|
(8)%
|
(8)%
|
Operating free surplus generated
from in-force insurance and asset management business
|
2,740
|
2,760
|
(1)%
|
1%
|
Adjusted operating profit
|
2,893
|
2,722
|
6%
|
8%
|
IFRS profit (loss) after
tax
|
1,712
|
(997)
|
n/a
|
n/a
|
|
|
|
|
|
|
31 Dec 2023
|
31 Dec
2022
|
|
Total
|
Per share
|
Total
|
Per
share
|
EEV shareholders' equity
|
$45.3bn
|
1,643¢
|
$42.2bn
|
1,534¢
|
IFRS shareholders' equity
|
$17.8bn
|
647¢
|
$16.7bn
|
608¢
|
Adjusted IFRS shareholders
equity
|
$37.3bn
|
1,356¢
|
$35.2bn
|
1,280¢
|
Notes
The summary financials presented
above are the key financial metrics Prudential's management use to
assess and manage the performance and position of the business. In
addition to the metrics prepared in accordance with IFRS standards
- IFRS profit after tax and IFRS shareholders' equity - additional
metrics are prepared on alternative bases. The presentation of
these key metrics is not intended to be considered as a substitute
for, or superior to, financial information prepared and presented
in accordance with IFRS Standards. The definitions of the key
metrics we use to discuss our performance in this press release are
set out in the "Definition of performance metrics" section later in
this document, including, where relevant, references to where these
metrics are reconciled to the most directly comparable IFRS
measure.
Further information on actual and
constant exchange rate bases is set out in note A1 of the IFRS
financial statement. All results are presented in US
dollars.
IFRS Comparatives for 2022 have been
restated to reflect the retrospective application of IFRS 17. See
note A2.1 to the financial statements for further information and
reconciliation.
Contact:
Media
|
|
Investors/analysts
|
|
Simon Kutner
|
+44 (0)7581 023260
|
Patrick Bowes
|
+852 2918 5468
|
Sonia Tsang
|
+852 5580 7525
|
William Elderkin
|
+44 (0)20 3977 9215
|
Sophie Sophaon
|
+852 6286 0229
|
Darwin Lam
|
+852 2918 6348
|
We expect to announce our Full Year
2023 Results to the Hong Kong Stock Exchange and to the UK
Financial Media at 12.00pm HKT - 4.00am UKT -
12.00am ET on Wednesday, 20 March 2024.
The announcement will be released on
the London Stock Exchange at 3.00pm HKT - 7.00am UKT -
3.00am ET on Wednesday, 20 March.
A pre-recorded presentation for
analysts and investors will be available on-demand from 12.00pm HKT
- 4.00am UKT - 12.00am ET on Wednesday, 20 March 2024 using the
following link:
https://www.investis-live.com/prudential/65d35e48da722d0c002fb172/hsrt
. A copy of the script used in the recorded video will also be
available from 12.00pm HKT - 4.00am UKT - 12.00am ET on Wednesday,
20 March 2024 on Prudential plc's website.
A Q&A event for analysts
and investors will be held at 4.30pm HKT - 8.30am UKT - 4.30am ET
on Wednesday, 20 March 2024. We
offer the option to join us in person or virtually.
Registration to join the
Q&A event in person, in the Four Seasons Hong Kong, 8 Finance
Street, Central, Hong Kong
To register to attend the event in
person, please respond to this message.
Registration to view the
Q&A event online
To register to watch the event and
submit questions online, please do so via the following link:
https://www.investis-live.com/prudential/65d362b6d0d520120026534a/taer
The webcast will be available to watch afterwards using the same
link.
Dial-in
details
A dial-in facility will be available
to listen to the event 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 4.00pm HKT - 8.00am UKT
- 4.00am ET).
Dial-in: +44 (0) 20 3936 2999 (UK
and international) / 0800 358 1035 (Freephone UK), Participant
access code: 131313. Once participants have
entered this code their name and company details will be
taken.
Playback
facility
Please use the following for a
playback facility: +44 (0) 20 3936 3001 (UK and international),
replay code 703056. This will be available from approximately
10.00pm HKT - 2.00pm UKT - 10.00am ET on Wednesday, 20 March until
6.59am HKT on Thursday, 4 April - 11.59pm UKT - 6.59pm ET on
Wednesday, 3 April 2024.
Transcript
Following the call a transcript will
be published on the results centre page of the Prudential plc's
website on Monday, 25 March.
About
Prudential plc
Prudential plc provides life and
health insurance and asset management in 24 markets across Asia and
Africa. Prudential's mission is to be the most trusted partner and
protector for this generation and generations to come, by providing
simple and accessible financial and health solutions. The business
has dual primary listings on the Stock Exchange of Hong Kong (2378)
and the London Stock Exchange (PRU). It also has a secondary
listing on the Singapore Stock Exchange (K6S) and a listing on the
New York Stock Exchange (PUK) in the form of American Depositary
Receipts. It is a constituent of the Hang Seng Composite Index and
is also included for trading in the Shenzhen-Hong Kong Stock
Connect programme and the Shanghai-Hong Kong Stock Connect
programme.
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.
https://www.prudentialplc.com/.
Strategic and operating review
Well positioned for future opportunities
Prudential has been operating in
global life markets for 175 years. We are a household
name1 in markets that place great value on brand. Today,
we deliver our life insurance solutions to over 18 million
customers in large and fast-growing markets across Asia and Africa.
'Large' because the combined population of the markets we operate
in stands at approximately four billion2; 'Fast-growing'
as it is estimated that our markets will collectively generate
incremental annual gross written premiums of almost US$1
trillion3 in 2033 compared with 2022.
We hold the top three positions in
10 out of the 14 Asian life markets4 in which we have a
presence. We are in the top five in six of our eight African
markets4. Our multi-channel agency and bancassurance
distribution platform of scale has around 68,000 average monthly
active agents. We are the number one independent insurer in Asia
bancassurance5, and our Asia-based in-house investment
arm, Eastspring, has over US$ 237 billion in assets under
management and is ranked in the top 10 in six of its
markets6.
In 2023, we grew new business profit
by 45 per cent to $3,125 million, in excess of the 37 per cent
increase in APE sales. Sales growth has continued in the first two
months of 2024.
In August we set out our renewed
purpose and strategy for the next five years to 2027, together with
the key metrics we will use to measure our success.
Our purpose - For Every Life, For
Every Future - defines why we are in this business and what we seek
to achieve as custodians of stakeholder value for the long
term.
Our strategy sets out our priorities
and objectives over the next five years to realise our purpose and
how we will create value for all our stakeholders: our customers,
our employees, our shareholders and our communities.
The components of our strategy
are:
- our multi-market growth engines;
- our strategic pillars;
- our group-wide enablers; and
- our organisational model design.
We believe carrying out the actions
to deliver the strategy will transform the business and enable us
to take greater advantage of the opportunities open to
us.
We have commenced executing the
steps outlined in our updated strategy announced in August. This
includes changes in the strategic areas of customer, distribution
and health and in our operational model. We have complimented the
existing leadership teams with key hires. 2024 will be a pivotal
year as we deepen our execution capabilities in the areas most
important to us.
We are seeing early signs of
progress across our strategic pillars;
- in customer, four business units9 in 2023 are
ranked in the top quartile for customer relationship Net Promoter
Score (NPS), compared to three in 2022, out of the ten business
units9 that have a standardised approach for measuring
customer advocacy. Four further business units9 improved
their rankings by at least a quartile;
- in agency distribution, we grew average new business profit
per active agent by 59 per cent contributing to a 75 per cent
increase in Agency new business profit;
- in bancassurance, we continued to expand our bancassurance
partner network and increased the proportion of APE sales from
health and protection business in this channel from 6 per cent in
2022 to over 7 per cent in 2023; and
- in health, new business profit grew 20 per cent to $330
million.
Further detail on our initial
progress on the key strategic pillars and enablers is set out later
in this report.
To demonstrate our commitment to
delivering shareholder value through the new strategy, we
introduced two new financial objectives7:
- to grow new business profit to 2027 at a rate of 15-20 per
cent compound annual growth from the level achieved in 2022;
and
- for the same period to deliver double digit compound annual
growth in operating free surplus generated from in-force insurance
and asset management business.
Alongside our early successes in
delivering against our strategy we have seen a strong financial
performance in 2023 as discussed below.
As in previous years, we discuss our
performance in this report on a constant currency
basis8, unless stated otherwise. We discuss our
financial position on an actual exchange rates basis, unless
otherwise noted. The definitions of the key metrics we use to
discuss our performance are set out in the "Definition of
performance metrics" section later in this document.
New
business profit
|
Full Year
2022
Actual
exchange rate
|
Full Year
2023
|
Objective
20277
Implied
amount
|
Amount
|
$2.2
billion
|
$3.1
billion
|
$4.4 - $5.4
billion
|
Our business generated new business
profit of $3,125 million for the year, demonstrating substantial
progress towards our 2027 objective.
Operating free surplus generated from in-force insurance and
asset management business
|
Full Year
2022
Actual
exchange rate
|
Full Year
2023
|
Objective
20277
Implied
amount
|
Amount
|
$2.8
billion
|
$2.7
billion
|
>$4.4
billion
|
The $2,740 million of operating free
surplus that we generated from in-force insurance and asset
management business for the year is broadly flat when compared with
the prior year, as we continue to invest as planned in our
strategic pillars and new business over the next couple of years.
The gradual compounding of the new business contribution and
improving operating variances will support progress towards our
2027 financial objective.
Our performance reflects the breadth
and broad based nature of our markets, with new business profit
growing in 17 of our 22 life markets and an increased market share
in seven of our Asian life markets4.
Our agency channel delivered new
business profit of $2,096 million, an increase of 75 per cent. This
reflects both APE sales growth of 67 per cent and favourable
business mix effects along with a 37 per cent increase in new
business profit from health and protection products. Agency sales
accounted for 48 per cent of total APE sales and circa two-thirds
of the Group's new business profits.
Bancassurance new business profit
fell 8 per cent to $793 million in 2023 primarily due to
challenging market conditions in the Chinese Mainland and Vietnam.
Excluding these two markets, new business profit increased by 23
per cent with 11 markets delivering double-digit growth. APE sales
through the bancassurance channel increased 3 per cent compared
with 2022, supported by growth in Hong Kong and Taiwan, offset by
significant reductions in sales volumes in the Chinese Mainland and
Vietnam.
Hong Kong was a significant
contributor to growth accounting for 45 per cent of new business
profits in the period both its new business profit and APE
sales grew by over three times the prior year level. This growth
was diversified across distribution channels and products. We see
an opportunity for sustained growth in Hong Kong as the drivers of
demand from domestic and Chinese Mainland visitors remain
intact.
Eastspring's funds under management
and advice increased by 7 per cent (on an actual exchange rates
basis) to $237.1 billion, reflecting positive market movements and
inflows from external clients and our life business. These positive
movements were offset by expected outflows of funds managed on
behalf of M&G plc.
During 2023 the Group adopted IFRS
17, a new accounting standard for insurance that significantly
altered the Group's IFRS reporting. More details on the change and
its impact are set out in the Financial Review. On the IFRS 17
metric, Group adjusted IFRS operating profit for the year was
$2,893 million, 8 per cent higher than 2022 calculated on a
consistent basis and using constant exchange rates. IFRS profit
after tax for 2023 was $1,712 million (2022: loss after tax of
$(1,005) million on a constant exchange rate basis, loss after tax
of $(997) on an actual exchange rate basis).
The substantial increase in new
business reported above led to materially higher investment in new
business of $(733) million (2022: $(552) million). This resulted in
lower group operating free surplus, despite reduced central costs
including interest expense and restructuring costs. The Group's
capital position remains strong, with an estimated shareholder
surplus above the Group's Prescribed Capital Requirement of $16.1
billion at 31 December 2023 (31 December 2022: $15.6 billion on an
actual exchange rate basis) and a cover ratio of 295 per cent (31
December 2022: 302 per cent after allowing for the debt redemption
in January 2023).
Reflecting the Group's strong
capital position and in line with its policy the Directors have
approved a second interim dividend per share of 14.21 cents per
share (2022: 13.04 cent per share), for a total 2023 divided of
20.47 cents per share (2022: 18.78 cents per share), an increase of
9 per cent over the prior year.
Focus on our three strategic pillars
1. Enhancing customer experiences - we
are committed to putting customer advocacy at the heart of our
business and becoming their trusted partner. We have the following
priorities:
- to support customer acquisition by personalised
targeting - allowing us to more
easily identify engagement opportunities;
- to curate comprehensive customer-led differentiated
proposition offerings with
segmentation by
life stages; and
- to offer seamless end-to-end customer experiences
through simple tech-enabled journeys combining technology with human care and
understanding.
By focusing on these priorities we
believe we will drive new customer acquisition and existing
customer retention.
We have standardised our approach to
measuring and analysing customer advocacy across ten business
units9. Our approach is centred around net promoter
scores, which measure how likely customers are to recommend
Prudential. We have seen initial traction in 2023 with four of our
business units9 in the top quartile (up from three in
2022). Eight out of ten business units9 moved up at
least one quartile or remained in 1st quartile in the latest
relationship net promoter scores results. The improvement seen has
been led by leadership initiatives that prioritise the voice of
customers in our business. These include the launch of a monthly
CEO customer experience forum in our markets, together with a
proactive approach to following up with customers who report
unsatisfactory experiences. We empowered employees to listen to the
voices of our customers through the introduction of service
huddles. These meetings bring together employees across a range of
functions to discuss recent customer feedback and collectively
identify solutions for customer pain points. We will continue this
journey in 2024 and beyond with more customer advocacy initiatives
and actions.
To achieve our ambition of having
ten business units9 in the top quartile relationship NPS
in their respective markets by 2027, we will further strengthen our
efforts around customer advocacy. We will do this by investing in
common platforms and frameworks, institutionalising best practices,
deploying digital and data capabilities in customer acquisition,
servicing and engagement. We will deliver these capabilities at
pace and scale across all markets with a unified customer
organisation structure, which will give us a strong foundation to
support the achievement of our ambitions. We plan to drive customer
advocacy by; setting high service standards, continuously listening
to customer feedback and acting on it, re-designing our customer
journey and using robust portfolio management to engage new
customers, increase repeated sales and improve loyalty.
We measure our success using
relationship net promoter scores across the organisation. We aim to
be top quartile for ten business units9 by 2027. For our
customer retention rate we have an ambition of achieving between 90
per cent and 95 per cent by 2027. During 2023 we saw a slight
decline in the customer retention rate to 86 per cent (2022: 89 per
cent) which was affected by an industry-wide fall in consumer
sentiment in Vietnam. We see customer base growth and improving net
promoter scores for each transactional touchpoint as the building
blocks of our overall relationship net promoter score.
2. Technology-powered distribution - empowering our agency force with
best-in-class technologies and solutions, deepening our bank
partner base through segmented propositions and creating
omnichannel customer journeys will enable us to reach more
customers and strengthen relationships with existing
ones.
Agency
We have around 68,000 average
monthly active agents and, over 9,000 who qualify for Million
Dollar Round Table (MDRT) status. Prudential has one of the leading
agency forces in Asia.
We have the ambition to increase
agency new business profit by 2.5 to 3 times from the 2022 level by
2027, through significantly increasing the number of active monthly
agents and more than doubling new business profit per agent over
the same period.
In 2023, the number of average
active agents per month increased by three per cent and average
monthly new business profit per active agent increased by 59 per
cent to over $2,800.
We continue to focus on quality
recruitment through tailored and strategic talent
sourcing. Our signature career
switcher programme for existing professionals is active in seven
markets and recruited over 4,500 advisors. On average these
advisors were six times more productive in their first year than
other typical agent recruits. In Hong Kong, we introduced a Top
Talent Professional recruitment programme tapping into over 100
high profile talent immigrants sponsored by government. In
Singapore, we inaugurated Prudential Financial Advisers to attract
professional financial planners who are committed to offering
holistic advice on both insurance and investment
solutions.
We continue to upskill our agency
force by enhancing the career path
and learning journey for our agents. This equips them with the
necessary knowledge, skills and tools to be a trusted advisor
to our customers. We integrated our activity and
leads management engine with customer campaigns to scale up and
enhance the productivity of our agents. 115,000 agents used
PruForce, our technology-driven distribution platform, which we
believe enhances agent effectiveness. Over four million leads were
generated and distributed to the agency force using PruLeads, our
digital leads platform in PruForce, across our markets in 2023.
Assisted by this technology, our agents converted 8 per cent of
these leads into new sales to meet customers' needs and financial
goals.
We are upskilling the next
generation of highly productive agents via our on-demand
learning and
development platform, which offers
personalised curriculums to assist agents in engaging, nurturing
and converting prospects. Agency leaders are being trained to
become the next generation of professional team-builders through
structured leadership development programmes.
Bancassurance
Bancassurance provides incremental
access to large numbers of customers in multiple locations using
third-party infrastructure. It is a significant source of new
business for the Group. Our 200 bank partners include 10 key
strategic partners, including two joint venture and associate
partners.
The penetration rate in our seven
strategic bank partners (excluding our joint venture and associate
partners and our partner in Cambodia and Laos) in the year was 7.8
per cent (2022: circa 7.6 per cent).
We are building on the performance
seen in 2023 by delivering against our strategic
priorities.
We are broadening our customer
proposition to offer attractive
health and protection propositions and by penetrating the high net
worth and premium segments. Overall, we sold around 1 million new
policies in 2023, with regular premium policies contributing to
more than 90 per cent of APE sales. APE sales of health and
protection products through bancassurance partners increased 26 per
cent in the year, representing over half of the policies sold
through the channel and over 7 per cent of total APE sales in 2023
(2022: 6 per cent). We see increasing the contribution of health
and protection products to our bancassurance channel as a key step
in achieving our bancassurance new business profit growth
ambition.
We are developing
omni-channel
customer journeys backed by analytics to engage with our customers. For example in Thailand, we innovated
with a new simple in-branch digital referral model with a key
strategic partner, which enables us to reach potentially over 7,000
customers and will help them achieve their medium term saving and
protection goals.
To expand bank penetration further,
we will deploy integrated data-led marketing to target customers more effectively. In early 2024 we
launched a structured customer engagement program with UOB, powered
by analytics. The programme supports sales staff in recommending
suitable insurance offerings during their interactions with
customers.
We reward our bank partners for
outcomes that deliver for the customer and create
value. We have introduced new reward
mechanisms with our strategic partners to deliver win-win solutions
for customers, partners and shareholders.
We also aim to offer our bank
partners' staff learning and
development via integrated modern
and digital learning platforms that can provide modular, on-demand,
training.
We continue to expand our
bancassurance network. In Thailand, our new 10-year partnership
with CIMB became effective at the end of 2023. In the first two
months of partnership, its APE sales had already accounted for 6
per cent of Thailand bancassurance APE sales.
In Vietnam, we extended our
partnership with VIB until 2036. Our agreement with VIB
incorporates a first-in-market approach to strengthen the control
of business quality, demonstrating our joint commitment to serve
customers better.
Our key strategic partner, UOB,
successfully integrated the ex-Citi franchise across four of our
markets, giving us access to an additional 2.4 million bank
customers.
We have established an
operating
cadence with our strategic partners
and we will continue to drive aligned strategic direction and
execution through partnership steering committees both at Group and
local levels to ensure we deliver on all our priorities.
By focusing on these priorities we
believe we will meet our ambition to increase new business profit
from bancassurance by 2027 to be 1.5 to 2 times that seen in
2022.
3. Transforming the health business model - we believe there are substantial opportunities to further
grow our health business by becoming a trusted partner to our
customers and playing a much-needed coordinating role across their
healthcare journeys. We are focusing on the following
priorities:
- Upgrading our core health
insurance proposition - we are
accelerating development of more advanced, segment-specific and
sustainable products. This includes incorporating risk-based
pricing and value-added services, such as enhancing the in-network
benefits of existing as-charged products to cater to our customers'
evolving healthcare needs. We are also adopting practices that are
utilised elsewhere in the Group to assist with managing customer
affordability and continuity of coverage - for example, in
Indonesia and Malaysia, we are introducing regular repricing of
health products. In addition, we are supporting our agents' efforts
to distribute health products through enhanced recognition, reward
and training initiatives. We are also strengthening our health
branding campaigns to highlight Prudential's aim to become a
trusted partner for its health customers. Operational excellence is being
further enhanced by straight-through-processing and AI-enabled
digitalisation of underwriting and claims journeys. We believe
increased automation and enhanced analytics will deliver better
customer experience as well as further protect us against claims
fraud and abuse, for example, by implementing AI-driven detection
models.
- Expanding our role through
connecting health-care journeys using an asset-light
approach - we will implement guided
care pathways and case management to help customers better navigate
through their healthcare journey. By leveraging our streamlined
preferred medical provider partners, we will ensure high-quality
and cost-effective care. Examples include scoring and tiering of
network hospitals based on outcome and cost in Indonesia and
Malaysia, regional arrangements for breast cancer treatment in
Thailand by a leading hospital group, and developing case
management and concierge capabilities in Indonesia, Singapore and
Hong Kong.
We have developed an operational
plan across our major health markets of Malaysia, Indonesia, Hong
Kong and Singapore with clear accountabilities, performance
metrics, timelines and deliverables. In early 2024, we appointed
Arjan Toor as Health CEO, who will be based in Singapore and has
joined us from Cigna. We are allocating dedicated resources and
will be recruiting further key talent at both local and Group
levels to manage health insurance as a line of business in order to
drive business performance and accelerate growth. We are exploring
health opportunities in India.
In 2023, our health business across
the Group contributed $330 million to new business profit, an
increase of 20 per cent. By focusing on the priorities above we are
committed to achieving our ambitions to deliver a top-quartile
health insurance Net Promoter Score by 2027, growing our customer
base and profitability, and doubling our health new business profit
from 2022 to 2027.
Focus on our three strategic enablers
To capture the growth opportunities
that we have identified in each of the strategic pillars above, we
have three enablers:
Enabler#1: Open-architecture
technology platform
Our long-term programme is changing
our technology operating model. By
delivering superior customer and distribution experiences,
our new model will support our three strategic
pillars - Customer, Distribution and Health. Data privacy and
customer information security are critical focus areas for this
function and we are investing substantial amounts in
infrastructure, systems and culture to support this.
In respect of our wholly owned
operations technology driven core competencies that are consistent
across these markets will be housed on an open architecture platform. Our
strategy focuses on i.) creating new, common capabilities with
greater collaboration between central centres of
excellence and local market teams;
ii.) improving resiliency; iii.) efficiency; and iv) using
AI and data
analytics throughout our whole
organisation.
We intend to move our applications
in different markets to a common platform, to help provide a
uniform user experience, improve our efficiency, increase
operational reliability and create new global capabilities as we
switch to modular and standardised applications. We aim to cut the
number of our applications by more than half by 2027. We have begun
this journey with the introduction of our PruServices 2.0 Web in
Malaysia in January 2024. PruServices 2.0 Web offers an improved
and simplified customer experience with immediate customer feedback
and as we roll it out across our markets, we will be able to retire
15 customer service applications. Similarly, PruForce, the
technology-driven distribution platform for our agents, will offer
a consistent set of features for our agents across our markets,
enabling us to retire 26 agency-related applications.
Improving the reliability of our
technology infrastructure is key. We have added a service
integration and management layer to oversee our outsourced
technology infrastructure and operations services. This is to
ensure the performance and dependability of our systems. We also
invested in tooling capabilities to improve the efficiency of
infrastructure monitoring, spot high risk or vulnerable areas that
need more support and upgrades, to enhance our overall system
availability. As a result, we lowered the number of monthly
incidents by 60 per cent, and improved recovery times by 40 per
cent in 2023.
We have also finalised our
technology organisation operating model, which brings together our
technology talent pool across the business into a single integrated
team. This new operating model will leverage the experience and
skills of our talent pool in specific markets for the benefit of
the whole business. It also captures efficiencies by removing
duplication of functions and skills. As part of the new operating
model, we are also building teams centred around global technology
products for our customer and agency pillars. We plan to deploy
similar teams for other business areas and group functions by the
end of 2024.
In addition, we have developed
advanced platforms that store the key data of our operations in our
main markets. This enables us to deploy advanced analytics and AI
for high value purposes. For example, using GenAI to help our call
centre agents shorten customer enquiry times. In a test run in one
market, product enquiry times were cut from more than four minutes
to less than 30 seconds. We are now testing this on real-time
customer enquiries as well as in two other markets. We are also
working on utilising analytics and AI more across our strategic
pillars and those group functions that use the open architecture
platform. We continue to invest in our machine learning operations
capabilities to build AI and machine learning models of scale. Our
aim is to embed analytics and AI within the culture of our
organisation. In line with this, we are looking to design and
develop tailored training for all our employees across all levels,
locations and functions, along with adoption programmes to help our
employees make use of analytics and AI in their daily work life. To
facilitate these programmes, we are setting up an AI lab to foster
innovation and creativity internally, while also attracting
external talent and ideas. The lab will help us try out new
capabilities that we can then grow and use at scale across the
organisation. Through these initiatives, we plan to deliver at
least two high-value analytics and AI use cases per strategic
pillar this year for use in our markets.
Innovation in AI is also being
undertaken at our Joint Ventures. For example, by utilising AI
technology, CPL has shortened the underwriting of non-standard
cases from three days to one and a half hours. Meanwhile, the
claims payment turnaround has shortened from 1.29 days in 2022 to
0.45 days in 2023.
Enabler#2: Engaged people and
high-performance culture
An engaged workforce is critical to
the delivery of our strategy and we are working with our people to
create a culture that is customer led and
performance-driven.
We aim to create an environment that
allows our people to thrive, connect, grow, and succeed. We will
focus on the following priorities to deliver this:
- Promote values-based
leadership and aligned
reward structure to help build a culture that is
customer-led and performance-driven;
- Build strategic
capabilities through targeted talent acquisition and
internal talent development, particularly within the areas of
customer, distribution, health and technology;
- Develop a robust internal
talent pipeline through succession planning, facilitating
mobility and focused
development plans, in tandem with efforts to accelerate development
of female leaders; and
- Standardise, simplify, and digitalise end-to-end people
processes to enhance the employee experience.
By focusing on these priorities, we
aim to create a better workplace experience as we make the required
shifts across the organisation to achieve our strategy.
The PruWay (our values) was
co-created with our employees and launched in September 2023
following the launch of our Strategy and Purpose. Progress has been
made in activating the PruWay and engaging the organisation on our
values and desired behaviours. By engaging with the Group's senior
leaders in a series of workshops and with the wider workforce
through the Group Executive Committee (GEC), we have started the
process of internalising and translating a set of value statements
into day-to-day actions. We call these PruSteps. The Group's senior
leaders will be involved in embedding the PruWay deeper into the
organisation through workshops that will touch all employees in
2024.
To drive a high-performance culture,
a refreshed performance and pay model will be implemented in 2024.
The emphasis will be to align personal and team goals to our
strategy and the PruWay. This is to ensure we establish an
environment where highly engaged employees consistently demonstrate
behaviour and practice our values. To do this, we will communicate
the value proposition on what a high-performance culture means and
build our capability to uplift the strength of our workforce
through meaningful and effective development
conversations.
To build a robust talent pipeline we
are in the process of implementing a consistent succession planning
and talent development process to enhance the robustness and
sustainability of our leadership bench strength.
Through these measures we seek to
improve the engagement of all our employees with an ambition to
have top-quartile employee engagement by 2027.
Enabler#3: Wealth and investments
capabilities
Wealth and Investment is a key
enabler to help us deliver on our purpose.
We plan to enhance our wealth and
investment capabilities by leveraging Eastspring and our investment
office as well as providing distribution
support to our top agents to better
serve our wealth customers.
We are committed to
product
innovation to enable us to offer a
wide variety of customised wealth solutions that meet our
customers' needs for wealth appreciation, wealth protection, wealth
succession and retirement, and to provide our distribution teams
with the tools and training they need to serve our wealth customers
better.
The cornerstone of helping customers
meet their financial goals is the delivery of positive investment
performance and the creation of appropriate delivery mechanisms to
achieve this. Consideration of asset allocations, mandates and
selection of investment managers for Prudential insurance policies
sits with the life companies, overseen by the Group Investment
Officer. Eastspring's specific investment skills and track record
in certain asset classes along with its investment wrapper design
capabilities are being harnessed alongside third-party
capabilities.
We are formulating a series of
wealth management products that can be used by advisors to create
investment outcomes that can adapt and meet their customer needs
overtime. These may include a combination of passive and active
investment strategies. The packaging of these strategies into
discretionary fund management options provides the client with the
potential to invest in a spectrum of asset management styles over
their lifetimes and as their financial circumstances
change.
Eastspring has focused on developing
its human resources both in terms of human capital and internal
performance benchmarking. A CIO has been appointed in February
2024, who will be responsible for the day to day management of the
investment teams. A new head of distribution was also appointed in
February 2024.
Eastspring is supporting the
training and development needs of our Prudential Financial Advisers
(PFA) distribution force, a force of over 500 financial advisors
who offer a more holistic suite of products outside of our core
Prudential insurance offerings. Already, products from seven
general insurance and two life firms are included in the range,
broadening the suite of products for legacy planning for
high-net-worth individuals and retirement plans to meet the needs
of a rapidly ageing population. The range is expected to expand
further in 2024 and a thousand additional advisors are planned to
be added to PFA in due course.
We continue to strengthen our wealth
team and are enhancing our go-to-market investment updates for
customers and distribution teams. We see opportunities to better
meet our customers needs for wealth accumulation, wealth
protection, wealth succession and retirement. Through
high-performance investment teams we will seek to drive continual
improvement in customer outcomes across the wealth
life-cycle.
Implementing our Organisational Model
Changes to our organisational model
are being made to enable us to deliver consistent performance
across the Group and to prioritise value creation when deploying
capital across our markets.
These changes include the
complementing of existing teams and structures with additional
skills and capabilities through the sourcing of selected new
talent, reskilling existing talent and changing reporting and
responsibilities across teams.
We believe our new organisational
model, together with our commitment to invest in building out our
capabilities further, will harness economies of scale and generate
value for all our stakeholders.
By implementing changes to our
organisational model and by combining the technology platform
changes we are making, including the roll-out of best practices
across our markets, we are confident we can deliver a consistently
high level of service to our customers and our partners over the
long term.
Outlook
We delivered an excellent financial
and operational performance in 2023 and deployed increased levels
of capital in new business, enhancing core capabilities and
expanding distribution. Sales growth has continued in the first two
months of 2024. Given the relentless execution focus in
implementing our strategy, we are increasingly confident in
achieving our 2027 financial and strategic objectives and in
accelerating value creation for our shareholders.
Notes
1.
Source: Kantar survey.
2.
Source: United Nations, Department of Economic and Social Affairs,
Population Division, World Population Prospects 2022.
3.
Source: Swiss Re forecast (July 2023).
4. As
reported at full year 2023 unless otherwise specified. Sources
include formal (eg competitors results release, local regulators
and insurance association) and informal (industry exchange) market
share. Ranking based on new business (APE sales, weighted new
business premium, full year premium or weighted first year premium)
or Gross Written Premium depending on availability of data.
Rankings in the case of Chinese Mainland, Taiwan and Myanmar are
among foreign insurers, and for India is among private companies.
Countries based on nine months ended September 2023: Philippines,
Ghana (Africa) and Kenya (Africa) and full year 2022: Laos, Zambia
(Africa) and Togo (Africa) and full year 2020: Nigeria
(Africa).
5.
Source: Based on FY2022 data from local regulators, industry
associations and Prudential' internal data. Estimates are based on
market intelligence, if data is not publicly available.
6.
Source: As reported at full year 2023. Sources include local
regulators, asset management association, investment data providers
and research companies (e.g. Morningstar, Lipper). Rankings are
based on total funds under management (including discretionary
funds, where available) of onshore domiciled funds or public mutual
funds of the respective markets.
7. The
objectives assume exchange rates at December 2022 and economic
assumptions made by Prudential in calculating the EEV basis
supplementary information for the year ended 31 December 2022, and
are based on regulatory and solvency regimes applicable across the
Group at the time the objectives were set. The objectives assume
that existing EEV and Free Surplus methodology at December 2022
will be applicable over the period.
8. See
note A1 to the IFRS financial statements for more detail on our
exchange rate presentation.
9.
Business units equate to legal entities.
Financial review
Strong and diversified financial performance
Prudential delivered a strong 2023
financial performance. This highlights the value of our
diversification across geography and by distribution channel. We
introduced two new financial objectives as an integral part of the
Group's strategy update. In 2023 we made good progress towards our
2027 new business profit objective and are on track with our
related 2027 objective for operating free surplus generated from
in-force insurance and asset management business. 2023 also saw
higher EEV operating profit and shareholders' equity, as well as
higher Group adjusted operating profit following CSM
growth.
2023 saw an improvement in economic
performance of the countries in which we operate. There was still
volatility although this reduced over the course of the year.
Government bond yields in many of our Asian markets reduced while
the US 10-year yield closed the year relatively stable at 3.9 per
cent. Equity market performance varied considerably, with the
S&P 500 index increasing by 24 per cent, the MSCI Asia
excluding Japan equity index by 4 per cent, while the Hang Seng
index fell by 14 per cent.
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. We discuss
our financial position on an actual exchange rates basis, unless
otherwise noted. The definitions of the key metrics we use to
discuss our performance in this report are set out in the
'Definition of performance metrics' section later in this
document.
New business profit was up 45 per
cent to $3,125 million, led by Hong Kong, with a double-digit
growth in 12 of our 22 markets following the removal of all
pandemic-related restrictions, in particular the reopening of the
border between Hong Kong and the Chinese Mainland and consequential
rebound of APE sales. Further, we saw a 34 per cent increase in the
new business profit for health and protection products contributing
to 40 per cent of our new business profit, while the new business
profit for savings product grew by 54 per cent. This was
underpinned by a 37 per cent growth in APE sales, which, in
absolute terms, exceeded the pre-pandemic level of 2019. Excluding
the effects of interest rates and other economic changes, given our
active EEV reporting basis, new business profit increased by 47 per
cent.
Group EEV operating profit increased
by 17 per cent to $4,546 million, largely due to higher new
business profits from insurance business, an increase in the profit
from Eastspring, our asset management business, and a reduction in
central costs. The operating return on embedded value was 10 per
cent compared with 9 per cent in 2022. After allowing for the
payment of the external dividend and economic effects, such as
changes in interest rates, and currency movements, the Group's
embedded value at 31 December 2023 was $45.3 billion (31 December
2022: $42.2 billion on an actual exchange rate basis), equivalent
to 1,643 cents per share (31 December 2022: 1,534 cents per share
on an actual exchange rate basis). The operating free surplus
generated from in-force insurance and asset management business
during the period was $2,740 million, broadly flat when compared to
prior year. Investment in new business of $(733) million (2022:
$(552) million) reflected higher APE sales and business mix
effects. As a result total operating free surplus generated from
life and asset management business reduced to $2,007 million (2022:
$2,173 million).
The Group implemented IFRS 17, the
new accounting standard for insurance contracts in 2023 with
comparatives restated accordingly. In line with the preliminary
guidance provided with the Group's 2022 results (on an actual
exchange rates basis), the Group shareholders' equity at 1 January
2022, the date of transition, increased by $1.8 billion to $18.9
billion and 2022 full year adjusted operating profit fell by $653
million to $2,722 million. The full year 2022 saw a loss after tax
of $(997) million on an IFRS 17 basis. While IFRS 17 is an
important accounting change, resulting in changes to the timing of
profit recognition compared with the previous IFRS 4 approach, it
does not change the total level of profit generated. As a result,
it does not change the underlying economics of our business. Our
embedded value framework, which is linked to the Group's regulatory
position and consequently future capital generation, is in our view
more representative of shareholder value. The Group also
implemented IFRS 9 Financial Instruments from 1 January 2023, with
no material impact on the Group's financial statements. Further
details on the transition to IFRS 17 and IFRS 9 are included in the
IFRS financial results.
Group IFRS adjusted operating profit
was $2,893 million, up 8 per cent in 2023, largely as a result of
lower central costs and higher profits from Eastspring, our asset
management business. The Group's total IFRS profit after tax for
the period was $1,712 million, an improvement on the 2022 loss
after tax of $(1,005) million on a constant exchange rate basis
(loss of $(997) million on an actual exchange rate basis). The
swing in result largely reflects changes in short-term fluctuations
in interest rates. There was a modest decrease in interest rates in
2023 compared with interest rates increasing significantly in
2022.
Adjusted shareholders' equity
increased to $37.3 billion (31 December 2022: $35.2 billion on an
actual exchange rate basis), equivalent to 1,356 cents per share
(31 December 2022: 1,280 cents per share on an actual exchange rate
basis), driven by an increase in IFRS shareholders' equity (up 7
per cent) and an increase in the Contractual Service Margin (CSM)
(up 5 per cent). The CSM benefited from the contribution from new
business and unwind. Using a longer-term normalised return for
Variable Fee Approach (VFA) business, the unwind and new business
contribution would have exceeded the release in the period by $1.7
billion, equivalent to a net increase of 9 per cent in the CSM
compared with the start of year position.
Our Group's regulatory capital
position, free surplus and central liquidity positions remain
robust. The Group's leverage remains near the bottom of our target
range at 20 per cent, estimated on a Moody's basis.
The Group capital adequacy
requirements are aligned with the established EEV and free surplus
framework by comparing the total eligible Group capital resources
with the Group's Prescribed Capital Requirement (GPCR). At 31
December 2023, the estimated shareholder surplus above the GPCR was
$16.1 billion (31 December 2022: $15.6 billion on an actual
exchange rates basis) and cover ratio 295 per cent (31 December
2022: 307 per cent before allowing for the debt redemption in
January 2023 and 302 per cent after the redemption).
Supported by a clear and disciplined
capital allocation policy, the Group is well positioned, with
considerable financial flexibility including leverage capacity, to
take advantage of the growth opportunities ahead. In 2023, we have
allocated capital to investing in higher new business at attractive
rates of return, in developing our customer, distribution, health
and technology capabilities and we intend to deploy $1billion as
part of our updated strategy. In line with our capital allocation
priorities (as set out in the Capital Management section below)
excess capital, if and when it emerges, would be returned to
shareholders.
The Group's dividend policy is
unchanged and described later in this report. Recognising the
strong conviction we have in the Group's strategy, when determining
the annual dividend we look through the investments in new business
and investments in capabilities. The Board has approved a second
interim dividend of 14.21cents per share (2022: 13.04 cents per
share up 9 per cent). When this is combined with the first interim
dividend the Group's total 2023 dividend is 20.47 cents per share
(2022: 18.78 cents per share), an increase of 9 per cent. The Board
intends to maintain this approach, and continues to expect the 2024
annual dividend to grow in the range 7 - 9 per cent.
The Group is carrying out a number
of actions to support the development of liquidity in the trading
of its shares on the Hong Kong Stock Exchange, following its
capital raise in 2021. In 2024, the Group is actively exploring the
use of scrip dividends, including issuance only on the Hong Kong
line and the dilutive effect being neutralised by a share buy back
on the London line.
The Group executed a $41 million
share repurchase programme in January 2024 to neutralise the 2023
Employee and agent share scheme issuance. It intends to make
further repurchases in the future to offset the expected dilution
from the vesting of awards under employee and agent share
schemes.
We believe that the Group's
performance during the year positions us well, as we implement the
new strategy, to meet our financial objectives to grow new business
profit and consequently in-force insurance and asset management
operating free surplus generated, as detailed in the strategic and
operating review.
IFRS profit
|
|
|
|
|
|
|
|
Actual
exchange rate
|
|
Constant
exchange rate
|
|
2023 $m
|
2022
$m
|
Change
%
|
|
2022
$m
|
Change
%
|
|
|
|
|
|
|
|
CPL
|
368
|
271
|
36
|
|
258
|
43
|
Hong Kong
|
1,013
|
1,162
|
(13)
|
|
1,162
|
(13)
|
Indonesia
|
221
|
205
|
8
|
|
200
|
11
|
Malaysia
|
305
|
340
|
(10)
|
|
329
|
(7)
|
Singapore
|
584
|
570
|
2
|
|
585
|
-
|
Growth markets and other
|
746
|
728
|
2
|
|
715
|
4
|
Insurance business
|
3,237
|
3,276
|
(1)
|
|
3,249
|
-
|
Asset management
|
280
|
260
|
8
|
|
255
|
10
|
Total segment profit
|
3,517
|
3,536
|
(1)
|
|
3,504
|
-
|
Other income and expenditure:
|
|
|
|
|
|
|
Investment return and other
items
|
(21)
|
(44)
|
52
|
|
(44)
|
52
|
Interest payable on core structural
borrowings
|
(172)
|
(200)
|
14
|
|
(200)
|
14
|
Corporate expenditure
|
(230)
|
(276)
|
17
|
|
(277)
|
17
|
Other income and expenditure
|
(423)
|
(520)
|
19
|
|
(521)
|
19
|
Restructuring and IFRS 17
implementation costs
|
(201)
|
(294)
|
32
|
|
(293)
|
31
|
Adjusted operating profit
|
2,893
|
2,722
|
6
|
|
2,690
|
8
|
Non-operating items:
|
|
|
|
|
|
|
Short-term fluctuations in
investment returns
|
(774)
|
(3,420)
|
77
|
|
(3,404)
|
77
|
(Loss) gain attaching to corporate
transactions
|
(22)
|
55
|
n/a
|
|
55
|
n/a
|
Profit (loss) before tax attributable to
shareholders
|
2,097
|
(643)
|
n/a
|
|
(659)
|
n/a
|
Tax charge attributable to
shareholders' returns
|
(385)
|
(354)
|
(9)
|
|
(346)
|
(11)
|
Profit (loss) for the year
|
1,712
|
(997)
|
n/a
|
|
(1,005)
|
n/a
|
IFRS earnings per share
|
|
|
|
|
|
|
|
Actual
exchange rate
|
|
Constant
exchange rate
|
|
2023 cents
|
2022
cents
|
Change
%
|
|
2022
cents
|
Change
%
|
Based on adjusted operating profit,
net of tax and non-controlling interest
|
89.0¢
|
79.4¢
|
12
|
|
78.5¢
|
13
|
Based on profit (loss) for the
year, net of non-controlling interest
|
62.1¢
|
(36.8¢)
|
n/a
|
|
(37.0¢)
|
n/a
|
Adjusted operating profit reflects
that the assets and liabilities of our insurance businesses are
held for the longer term and the Group believes that the trends in
underlying performance are better understood if the effects of
short-term fluctuations in market conditions, such as changes in
interest rates or equity markets, are excluded.
Group IFRS adjusted operating profit
was $2,893 million, up by 8 per cent, largely reflecting a 10 per
cent increase in profit generated by Eastspring, our asset
management business, and lower central costs. Adjusted operating
profit for insurance business was at similar levels of 2022, with
economic movements in 2022 reducing the level of longer-term net
investment result (which is based on opening asset values), largely
offset by a higher insurance service result.
Detailed discussion of IFRS
financial performance by segment, including the detailed analysis
of asset management business is presented in the section on
'Performance by market'.
Insurance business analysis of operating profit
drivers
The table below sets out the key
drivers of the Group's adjusted operating profit for the insurance
business as described in note B1.3 of the IFRS financial
results.
|
Actual
exchange rate
|
|
Constant
exchange rate
|
|
2023 $m
|
2022
$m
|
Change
%
|
|
2022
$m
|
Change
%
|
Adjusted release of CSM
1
|
2,205
|
2,265
|
(3)
|
|
2,242
|
(2)
|
Release of risk
adjustment
|
218
|
179
|
22
|
|
178
|
22
|
Experience variances
|
(118)
|
(66)
|
(79)
|
|
(62)
|
(90)
|
Other insurance service
result
|
(109)
|
(204)
|
47
|
|
(195)
|
44
|
Adjusted insurance service result
|
2,196
|
2,174
|
1
|
|
2,163
|
2
|
Net investment result on longer-term
basis
|
1,241
|
1,290
|
(4)
|
|
1,271
|
(2)
|
Other insurance income and
expenditure
|
(122)
|
(98)
|
(24)
|
|
(100)
|
(22)
|
Share of related tax charges from
joint ventures and associates
|
(78)
|
(90)
|
13
|
|
(85)
|
8
|
Insurance business
|
3,237
|
3,276
|
(1)
|
|
3,249
|
-
|
The release of CSM is the principal
source of our IFRS 17 insurance business adjusted operating profit.
The adjusted CSM release1 in FY2023 of $2,205 million
(2022: $2,242 million) equates to an annualised release rate of
circa 9.5 per cent, broadly similar to the release rate seen in
2022 and broadly consistent with the 2023 release expected as at
the end of 2022.
The release of the risk adjustment
of $218 million (2022: $178 million) represents the expiry of
non-market risk in the period. As expected, this release is a
relatively stable proportion of the opening balance as compared
with the corresponding rate in the prior year.
Experience variances of $(118)
million (2022: $(62) million) comprise largely of claims and
expense variances (those impacting past or current service rather
than future service which is reflected in CSM). A small element of
the elevated expenses reflects the investment in our strategic
pillars consistent with our Strategy.
The other insurance service result
of $(109) million (2022: $(195) million) largely reflects losses on
contracts that are described under IFRS 17 as 'onerous', either at
inception or because changes in the period result in the CSM being
exhausted. It does not mean these contracts are not profitable
overall as the CSM does not allow for real-world returns, which are
earned over time. The losses in 2022 were largely as a result of
adverse economic conditions which have stabilised in
2023.
The net investment result of $1,241
million (2022: $1,271 million) largely reflects the long-term
return on assets backing equity and capital and long-term spreads
on business not accounted for under the variable fee approach. The
long-term rates are applied to the opening value of assets and so
falls in asset values over 2022, following the adverse market
movements in 2022 saw this source of income reduce in 2023. Growth
in the General Measurement Model asset base from new business in
recent periods and renewal premiums offset some of this
reduction.
Other income and expenditure of
$(122) million (2022: $(100) million) mainly relates to expenses
that are not directly related to an insurance contract as defined
under IFRS 17.
Movement in Contractual Service Margin
The CSM balance represents a
discounted stock of unearned profit which will be released over
time as services are provided. This balance increases due to
additions from profitable new business contracts sold in the period
and the unwind of the in-force book. It is also updated for any
changes in expected future profitability, where applicable,
including the effect of short-term market fluctuations for business
measured using variable fee approach. The release of the CSM, which
is the main driver of adjusted operating profit, is then calculated
after allowing for these movements.
In a normalised market environment,
if the contribution from new business and the unwind of the CSM
balance is greater than the rate at which services are provided,
then the CSM balance will increase. The new business added to the
CSM will therefore be an important factor in building the CSM and
we expect the compounding effect from the new business added to the
CSM over time to support growth in IFRS 17 adjusted operating
profit in the future. The objectives announced in August for EEV
new business profit growth will act to support such CSM growth. As
we grow new business profit, in line with our recently announced
financial objectives, we would expect this to generate growth of
the CSM and hence lead to adjusted operating profit growth over
time.
The table below sets out the
movement of CSM over the period.
Contractual Service Margin Net of
reinsurance
|
2023 $m
|
Net Opening Balance at 1 Jan
|
19,989
|
New contracts in the year
|
2,348
|
Unwind*
|
1,563
|
Balance before variances, effect of foreign exchange and CSM
release
|
23,900
|
Economic and other
variances
|
(619)
|
CSM balance before release
|
23,281
|
Release of CSM to income
statement
|
(2,208)
|
Effect of movements in exchange
rates
|
(61)
|
Net balance at the end of the period
|
21,012
|
*The unwind of CSM presented in
this table reflects the accretion of interest on general
measurement model contracts, as presented in note C3.2 to the IFRS
financial results, together with the unwind of the CSM related to
variable fee approach contracts on a long-term normalised basis.
This differs from the presentation in note C3.2 to the IFRS
financial results by reallocating $1,303 million from economic and
other variances to unwind.
Profitable new business in 2023 grew
the CSM by $2,348 million which combined with the unwind of the CSM
balance shown in the table above of $1,563 million, increased the
CSM by $3,911 million. This increase exceeded the release of the
CSM to the income statement in the period of $(2,208) million,
demonstrating the strength of our franchise and its ability to
deliver future growth in CSM and ultimately adjusted operating
profit.
Other movements in the CSM reflect
economic and other variances to update the CSM for changes in
expected future profitability including the impact of short term
market effects of business accounted for under the variable fee
approach. In 2023 'economic and other variances' includes $117
million for new riders added to existing base savings contracts.
The incremental value from such sales is not included within the
new business contribution to CSM because our IFRS17 approach considers insurance contracts as a whole. In
contrast, EEV will include this amount as new business. The
remainder of the variance includes the effects of the operating
variances and assumption changes on future profits and the impact
of a reduction in interest rates and changes in equity indices.
Movements in exchange rates had a negative impact of $(61) million
on the closing CSM. Overall the CSM grew by 5 per cent, or 9 per cent excluding the effect of economic and other
variances and exchange rates.
Other income and expenditure
Central costs (before restructuring
and IFRS 17 implementation costs) were 19 per cent lower in 2023 as
compared to the prior year, reflecting the benefit of the targeted
reduction of head office costs and the redemption of a senior debt
instrument in January 2023. Interest payable on core structural
borrowings reduced by $28 million in 2023 compared with the prior
year. Total head office expenditure was $(230) million (2022:
($277) million). Net investment return and other items improved by
$23 million from increased investment returns on Group Treasury
following the increase in interest rates.
Restructuring costs of $(201)
million (2022: $(293) million) reflect the Group's project to
implement and embed IFRS 17, and one-off costs associated with
regulatory and other initiatives in our business. IFRS 17 costs are
expected to decrease but in 2024 will be replaced by investment to
enhance Eastspring's operating model and improve our back office
efficiency and scalability. From the end of 2024, restructuring
costs are expected to revert over time to the lower levels
typically incurred historically.
IFRS basis non-operating items
Non-operating items in the year
consist of negative short-term fluctuations in investment returns
of $(774) million (2022: $(3,404) million) and $(22) million of
costs associated with corporate transactions (2022: gain of $55
million).
These short-term fluctuations
principally arise from our business in the Chinese Mainland
reflecting negative equity returns as well as the impact from lower
interest rates on the discount rate for General Measurement Model
(GMM) best estimate insurance liabilities.
IFRS effective tax rates
In 2023, the effective tax rate on
adjusted operating profit was 15 per cent (2022: 20 per cent). The
decrease from the 2022 effective tax rate primarily reflects the
recognition of a deferred tax asset in relation to historical tax
losses, due to an increase in forecast taxable profit in the UK tax
group, together with a reduction from 2022 to 2023 in head office
costs for which no tax credit is recognised.
The effective tax rate on total IFRS
profit in 2023 was 18 per cent (2022: negative 55 per cent),
reflecting a reduction in the level of investment losses on which
no tax credit is recognised.
During 2023, jurisdictions around
the world, including some relevant to Prudential, commenced
implementation of the OECD global minimum tax rules. For those
jurisdictions where the rules will apply to Prudential for the 2024
financial period, management's assessment is that the new tax rules
(which involve comparing a jurisdiction's effective tax rate to the
global minimum effective tax rate of 15 per cent) are not expected
to have a material impact on the IFRS tax charge for 2024. From
2025 onwards, the new tax rules are expected to be effective in
Hong Kong (where Prudential plc is now tax resident), at which
point the new rules will apply to the whole Prudential group.
Management continues to assess the likely impact on the 2025 and
subsequent financial periods and guidance on the potential impact
will be provided in due course.
Total tax contributions
The Group continues to make
significant tax contributions in the jurisdictions in which it
operates, with $969 million remitted to tax authorities in 2023,
slightly lower than the equivalent amount of $1,009 million
remitted in 2022 (on an actual exchange rate
basis).
Tax
strategy
The Group publishes its tax strategy
annually which, in addition to complying with the mandatory UK
(Finance Act 2016) requirements, also includes a number of
additional disclosures which provide insight into the Group's tax
contributions. An updated version of the tax strategy, including
2023 data, will be available on the Group's website before 31 May
2024.
Shareholders' equity
Group IFRS shareholders' equity
|
|
|
|
2023 $m
|
2022
$m
|
Profit /(loss) for the
year
|
1,712
|
(997)
|
Less non-controlling
interest
|
11
|
10
|
Profit (loss) after tax for the year attributable to
shareholders
|
1,701
|
(1,007)
|
Exchange movements, net of related
tax
|
(124)
|
(603)
|
External dividends
|
(533)
|
(474)
|
Other movements
|
48
|
(121)
|
Net increase/(decrease) in shareholders'
equity
|
1,092
|
(2,205)
|
Shareholders' equity at beginning of the
year
|
|
-
|
As previously reported
|
16,731
|
17,088
|
Effect of initial application of
IFRS 17 & IFRS 9, net of tax
|
-
|
1,848
|
Shareholders' equity at end of the year
|
17,823
|
16,731
|
Shareholders' value per share 3
|
647¢
|
608¢
|
|
|
|
Adjusted shareholders equity 3
|
37,346
|
35,211
|
Group IFRS shareholders' equity
increased from $16.7 billion at the start of 2023 (after allowing
for the effects of IFRS 17 and IFRS 9) to $17.8 billion at 31
December 2023. This largely reflects profit generated during the
period, offset by dividend payments of $(0.5) billion, and exchange
movements of $(0.1) billion.
In 2023, the Group completed the
disposal of its remaining interest in Jackson, the Group's former
US business, for cash of $273 million. This gave rise to a gain of
$8 million compared to the carrying value of this interest at 31
December 2022 that is included in other movements. Following the
adoption of IFRS 9, the income statement is unaffected by this
transaction.
The IFRS adjusted shareholders'
equity represents the sum of Group IFRS shareholders' equity and
CSM, net of tax. Group's IFRS adjusted equity increased to $37.3
billion at 31 December 2023 (31 December 2022: $35.2 billion)
reflecting increases in IFRS shareholders' equity and the CSM. A
full reconciliation to shareholders' equity is included in note
C3.1 of the IFRS financial results.
EEV basis results
EEV
financial results
|
|
Actual
exchange rate
|
|
Constant
exchange rate
|
|
2023 $m
|
2022
$m
|
Change
%
|
|
2022
$m
|
Change
%
|
New business profit
|
3,125
|
2,184
|
43
|
|
2,149
|
45
|
Profit from in-force
business
|
1,779
|
2,358
|
(25)
|
|
2,345
|
(24)
|
Operating profit from insurance business
|
4,904
|
4,542
|
8
|
|
4,494
|
9
|
Asset management
|
254
|
234
|
9
|
|
230
|
10
|
Other income and
expenditure
|
(612)
|
(824)
|
26
|
|
(823)
|
26
|
Operating profit for the year
|
4,546
|
3,952
|
15
|
|
3,901
|
17
|
Non-operating results
|
(834)
|
(7,523)
|
89
|
|
(7,530)
|
89
|
Profit (loss) for the year
|
3,712
|
(3,571)
|
n/a
|
|
(3,629)
|
n/a
|
External dividends
|
(533)
|
(474)
|
|
|
|
|
Foreign exchange
movements
|
(134)
|
(1,195)
|
|
|
|
|
Other movements
|
21
|
(160)
|
|
|
|
|
Net increase (decrease) in EEV shareholders'
equity
|
3,066
|
(5,400)
|
|
|
|
|
EEV shareholders' equity at 1 Jan
after effect of HKRBC
|
42,184
|
47,584
|
|
|
|
|
EEV shareholders' equity at end of
year
|
45,250
|
42,184
|
|
|
|
|
% New business profit/average EEV
shareholders' equity for insurance business operations*
|
8%
|
5%
|
|
|
|
|
% Operating profit/average EEV
shareholders' equity
|
10%
|
9%
|
|
|
|
|
* Excluding goodwill attributable
to equity holders
EEV
shareholders' equity
|
31 Dec
2023 $m
|
31 Dec
2022 $m
|
Represented by:
|
|
|
CPL
|
3,038
|
3,259
|
Hong Kong
|
17,702
|
16,576
|
Indonesia
|
1,509
|
1,833
|
Malaysia
|
3,709
|
3,695
|
Singapore
|
7,896
|
6,806
|
Growth markets and other
|
7,674
|
6,688
|
Embedded value from insurance business excluding
goodwill
|
41,528
|
38,857
|
Asset management and other excluding
goodwill
|
2,955
|
2,565
|
Goodwill attributable to equity
holders
|
767
|
762
|
Group EEV shareholders' equity
|
45,250
|
42,184
|
EEV shareholders' equity per
share
|
1,643¢
|
1,534¢
|
APE new business sales (APE sales) and EEV new business
profit
|
Actual
exchange rate
|
Constant
exchange rate
|
|
2023 $m
|
2022
$m
|
Change
%
|
2022
$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
|
CPL
|
534
|
222
|
884
|
387
|
(40)
|
(43)
|
840
|
368
|
(36)
|
(40)
|
Hong Kong
|
1,966
|
1,411
|
522
|
384
|
277
|
267
|
523
|
384
|
276
|
267
|
Indonesia
|
277
|
142
|
247
|
125
|
12
|
14
|
240
|
122
|
15
|
16
|
Malaysia
|
384
|
167
|
359
|
159
|
7
|
5
|
347
|
154
|
11
|
8
|
Singapore
|
787
|
484
|
770
|
499
|
2
|
(3)
|
791
|
512
|
(1)
|
(5)
|
Growth markets and other
|
1,928
|
699
|
1,611
|
630
|
20
|
11
|
1,546
|
609
|
25
|
15
|
Total
|
5,876
|
3,125
|
4,393
|
2,184
|
34
|
43
|
4,287
|
2,149
|
37
|
45
|
Total new business
margin
|
|
53%
|
|
50%
|
|
|
|
50%
|
|
|
Group EEV operating profit
increased by 17 per cent to $4,546 million, reflecting a 9 per cent
increase in the operating profit for the insurance business,
largely reflecting higher new business profit, a 10 per cent
increase in the operating profit for the asset management business
and an improvement in central costs. The operating return on
average embedded value was 10 per cent (2022: 9 per
cent).
The operating profit from the
insurance business increased to $4,904 million, largely reflecting
a 45 per cent increase in new business profit to $3,125 million
following growth in APE sales, partly offset by a (24) per cent
fall in profit from in-force business to $1,779 million. The profit
from in-force business is driven by the expected return and the
effects of operating assumption changes and experience variances.
The expected return was lower at $2,122 million (2022: $2,531
million), reflecting a lower opening balance to which the expected
return is applied, as a result of economic movements in 2022.
Operating assumption changes and experience variances were negative
$(343) million on a net basis compared with $(186) million in 2022.
This reflects short-term industry-wide increases in lapses in
Vietnam, following negative consumer sentiment in the wider
industry, along with unfavourable morbidity experience on some
medical reimbursement products following the removal of Covid-19
restrictions. We have also continued to invest in our strategic
capabilities.
The non-operating loss of $(834)
million (2022: loss of $(7,530) million) is largely driven by the
combined impact of negative equity returns in Chinese Mainland and
Hong Kong, with interest rate falls and narrowing credit spreads in
many of our markets in the year. These effects were more muted than
in the prior year.
Overall, EEV shareholders' equity
increased to $45.3 billion at 31 December 2023 (31 December 2022:
$42.2 billion). Of this, $41.5 billion (31 December 2022: $38.9
billion) relates to the insurance business operations, excluding
goodwill attributable to equity shareholders. This amount includes
our share of our India associate valued using embedded value
principles. The market capitalisation of this associate at 31
December 2023 was circa $9.3 billion, which compares with a
publicly reported embedded value of circa $4.6 billion at 30
September 2023.
EEV shareholders' equity on a per
share basis at 31 December 2023 was 1,643 cents (31 December 2022:
1,534 cents).
Greater China presence
Prudential has a significant
footprint in the Greater China region, with businesses in the
Chinese Mainland (through its holding CPL), Hong Kong (together
with its branch in Macau) and Taiwan.
The table below demonstrates the
proportion of the Group's financial measures that were contributed
by the Greater China region:
|
Gross
premiums earned*
|
New
business profit
|
|
2023 $m
|
2022
$m
|
2023
$m
|
2022
$m
|
Total Greater
China†
|
12,859
|
13,103
|
1,870
|
912
|
Total Group†
|
26,221
|
27,783
|
3,125
|
2,184
|
|
|
|
|
|
Percentage of total
|
49%
|
47%
|
60%
|
42%
|
Comparatives stated on a AER
basis
* The
gross earned premium includes the Group's share of amounts earned
from joint ventures and associates as disclosed in note II (vi) of
the Additional financial information.
† Total
Greater China represents the amount contributed by the insurance
businesses in Hong Kong, Taiwan and the Group's share of the
amounts earned by CPL. The Group total includes the Group's share
of the amounts earned by all insurance business joint ventures and
associates.
Capital management
We aim to invest capital to write
new business that generates three times the amount invested, at
internal rates of return above 25 per cent with less than four-year
payback periods. Our ability to invest at attractive returns will
drive our capital allocation priorities which are as
follows:
- We will continue to target resilient capital buffers such that
the Group shareholder coverage ratio is above 150 per cent of the
shareholder Group Prescribed Capital Requirement to ensure the
Group can withstand volatility in markets and operational
experience;
- Otherwise, our priority for allocating capital will be
re-investing in new business. Our resilient capital position allows
us to prioritise investment in new business with an aim to write
quality new business while managing the initial capital strain and
capturing the economic value at attractive returns;
- Our next priority is investing around $1 billion in core
capabilities, primarily in the areas of Customer, Distribution,
Health and Technology;
- Our dividend policy remains linked to net operating free
surplus generation which is calculated after investment in new
business and capability investment;
- We will invest in inorganic opportunities where there is good
strategic fit; and
- All investment decisions will be made against the alternative
of returning surplus capital to shareholders but given the
abundance of organic and inorganic opportunities ahead of us, we
are confident that in the near-term we will be reinvesting capital
at attractive returns.
To generate capital to allocate to
these priorities we will also prioritise managing our in-force
embedded value to ensure maximum conversion into free surplus over
time. Based on the economic and other assumptions and methodology
that underpinned our EEV reporting at the end of 2023, we expect to
transfer over $9 billion by end of 2027 from VIF and required
capital to operating free surplus generated from our in-force
insurance business at the end of 2023. This is before allowing for
the incremental effect of new business and any return on the
underlying assets backing that surplus. We will drive improved
emergence of free surplus by managing claims, expense and
persistency in each market. This additional free surplus will
enable our continued investment in profitable new business at
attractive returns, as well as in our strategic capabilities, and
support payments of returns to shareholders including
dividends.
Group free surplus generation
Free surplus is the metric we use to
measure the internal cash generation of our business operations and
broadly reflects the amount of money available to our operational
businesses for investing in new business, strengthening our
capacity and capabilities to grow the business, and potentially
paying returns to the Group. For our insurance businesses it
largely represents the Group's available regulatory capital
resources after allowing for the prescribed required regulatory
capital held to support the policies in issue, with a number of
adjustments so that the free surplus better reflects resources
potentially available for distribution to the Group. For our asset
management businesses, Group holding companies and other
non-insurance companies, the measure is based on IFRS net assets
with certain adjustments, including to exclude accounting goodwill
and to align the treatment of capital with our regulatory
basis.
Operating free surplus generation
represents amounts emerging from the in-force business during the
year, net of amounts reinvested in writing new business. For asset
management businesses, it equates to post-tax adjusted operating
profit for the year. Further information is contained in the EEV
financial results.
Analysis of movement in Group free surplus
|
|
Actual
exchange rate
|
|
Constant
exchange rate
|
|
2023 $m
|
2022
$m
|
Change
%
|
|
2022
$m
|
Change
%
|
Expected transfer from in-force
business and return on existing free surplus
|
2,869
|
2,753
|
4
|
|
2,711
|
6
|
Changes in operating assumptions and
experience variances
|
(383)
|
(227)
|
(69)
|
|
(216)
|
(77)
|
Operating free surplus generated from in-force insurance
business
|
2,486
|
2,526
|
(2)
|
|
2,495
|
-
|
Asset management
|
254
|
234
|
9
|
|
230
|
10
|
Operating free surplus generated from in-force insurance and
asset management business
|
2,740
|
2,760
|
(1)
|
|
2,725
|
1
|
Investment in new
business
|
(733)
|
(567)
|
(29)
|
|
(552)
|
(33)
|
Operating free surplus generated from insurance and asset
management business
|
2,007
|
2,193
|
(8)
|
|
2,173
|
(8)
|
Central costs and eliminations (net
of tax):
|
|
|
|
|
|
|
Net interest paid on core
structural borrowings
|
(172)
|
(200)
|
14
|
|
(200)
|
14
|
Corporate expenditure
|
(230)
|
(276)
|
17
|
|
(277)
|
17
|
Other items and
eliminations
|
(18)
|
(66)
|
73
|
|
(66)
|
73
|
Restructuring and IFRS 17
implementation costs (net of tax)
|
(192)
|
(277)
|
31
|
|
(275)
|
30
|
Net Group operating free surplus generated
|
1,395
|
1,374
|
2
|
|
1,355
|
3
|
Non-operating and other movements,
including foreign exchange
|
(206)
|
(2,371)
|
|
|
|
|
External cash dividends
|
(533)
|
(474)
|
|
|
|
|
Increase (decrease) in Group free surplus before net
subordinated debt redemption
|
656
|
(1,471)
|
|
|
|
|
Net subordinated debt
redemption
|
(421)
|
(1,699)
|
|
|
|
|
Increase (decrease) in Group free surplus before amounts
attributable to non-controlling interests
|
235
|
(3,170)
|
|
|
|
|
Change in amounts attributable to
non-controlling interests
|
(9)
|
(10)
|
|
|
|
|
Free surplus at beginning of
year
|
12,229
|
15,409
|
|
|
|
|
Free surplus at end of
year
|
12,455
|
12,229
|
|
|
|
|
Free surplus at end of year excluding distribution rights and
other intangibles
|
8,518
|
8,390
|
|
|
|
|
Operating free surplus generated
from in-force insurance and asset management business was broadly
flat at $2,740 million when compared with the prior year. The cost
of investment in new business increased by 33 per cent to $(733)
million largely reflecting the increase in APE sales of 37 per
cent. As a consequence, the Group generated an operating free
surplus from insurance and asset management operations before
restructuring costs of $2,007 million, down (8) per cent compared
to 2022.
After allowing for lower central
costs and restructuring and IFRS 17 costs, total Group free surplus
generation was up 3 per cent to $1,395 million.
After allowing for short-term market
and currency losses, the redemption of debt (which is treated as
capital for free surplus purposes), and the external dividend
payment, free surplus at 31 December 2023 was $12.5 billion as
compared to $12.2 billion at the start of the year. Excluding
distribution rights and other intangibles, free surplus was $8.5
billion (31 December 2022: $8.4 billion).
Dividend
Reflecting the Group's capital
allocation priorities, a portion of capital generation will be
retained for reinvestment in organic growth opportunities and for
investment in capabilities, and dividends will be determined
primarily based on the Group'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 the Group's operating free surplus
generation, and will be set taking into account financial
prospects, investment opportunities and market
conditions.
Recognising the strong conviction we
have in the Group's new strategy, the Board indicated alongside the
strategy update in August 2023, that when determining the annual
dividend, it intended to look through the investments in new
business and investments in capabilities, and expected the annual
dividend to grow in the range 7 - 9 per cent per annum over 2023
and 2024.
The Board has applied this approach
to determining the 2023 second interim cash dividend, and has
approved a 2023 second interim cash dividend of 14.21 cents per
share (2022: 13.04 cents per share). Combined with the first
interim cash dividend of 6.26 cents per share (2022: 5.74 cents per
share), the Group's total 2023 cash dividend is 20.47 cents per
share (2022: 18.78 cents per share), an increase of 9 per
cent.
The Board intends to maintain this
approach, and continues to expect the 2024 annual dividend to grow
in the range 7 - 9 per cent.
Group capital position
The Prudential Group applies the
Insurance (Group Capital) Rules set out in the GWS Framework issued
by the Hong Kong Insurance Authority ('HKIA') to determine Group
regulatory capital requirements (both minimum and prescribed
levels). The GWS Group capital adequacy requirements require that
total eligible Group capital resources are not less than the GPCR
and that GWS Tier 1 group capital resources are not less than the
GMCR. More information is set out in note I(i) of the Additional
financial information.
The Group holds material
participating business in Hong Kong, Singapore and Malaysia.
Alongside the regulatory GWS capital basis, a shareholder GWS
capital basis is also presented which excludes the contribution to
the Group GWS eligible Group capital resources, the GMCR and the
GPCR from these participating funds.
|
31 Dec 2023
|
31 Dec
2022
|
|
Shareholder
|
Policyholder*
|
Total†
|
Shareholder
|
Policyholder*
|
Total†
|
Group capital resources
($bn)
|
24.3
|
14.3
|
38.6
|
23.2
|
12.6
|
35.8
|
of which: Tier 1 capital resources
($bn)
|
17.1
|
1.2
|
18.3
|
15.9
|
1.5
|
17.4
|
|
|
|
|
|
|
|
Group Minimum Capital Requirement
($bn)
|
4.8
|
1.1
|
5.9
|
4.4
|
0.9
|
5.3
|
Group Prescribed Capital Requirement
($bn)
|
8.2
|
11.4
|
19.6
|
7.6
|
10.1
|
17.7
|
|
|
|
|
|
|
|
GWS
capital surplus over GPCR ($bn)
|
16.1
|
2.9
|
19.0
|
15.6
|
2.5
|
18.1
|
GWS
coverage ratio over GPCR (%)
|
295%
|
|
197%
|
307%
|
|
202%
|
|
|
|
|
|
|
|
GWS
Tier 1 surplus over GMCR ($bn)
|
|
|
12.4
|
|
|
12.1
|
GWS
Tier 1 coverage ratio over GMCR (%)
|
|
|
313%
|
|
|
328%
|
*
This allows for any associated diversification impacts between the
shareholder and policyholder positions reflected in total company
results where relevant.
† The total
company GWS coverage ratio over GPCR presented above represents the
eligible group capital resources coverage ratio as set out in the
GWS framework while the total company GWS tier 1 coverage ratio
over GMCR represents the tier 1 capital coverage ratio.
As at 31 December 2023, the
estimated shareholder GWS capital surplus over the GPCR is $16.1
billion (31 December 2022: $15.6 billion), representing a coverage
ratio of 295 per cent (31 December 2022: 307 per cent) and the
estimated total GWS capital surplus over the GPCR is $19.0 billion
(31 December 2022: $18.1 billion) representing a coverage ratio of
197 per cent (31 December 2022: 202 per cent). During January 2023
the Group redeemed $0.4 billion of senior debt equivalent to a
reduction of 5 percentage points to the shareholders' GWS coverage
ratio over GPCR measured at 31 December 2022 and a 2 percentage
points reduction to total GWS coverage ratio over GPCR measured at
the same date.
Operating capital generation in 2023
was $1.4 billion after allowing for central costs and the
investment in new business. This was offset by the payment of
external dividends of $(0.5) billion.
The Group's GWS position is
resilient to external macroeconomic movements as demonstrated by
the sensitivity disclosure contained in note I(i) of the Additional
financial information, alongside further information about the GWS
measure.
Financing and liquidity
The Group manages its leverage on a
Moody's total leverage basis, which takes into account gross debt,
including commercial paper, and also allows for a proportion of the
surplus within the Group's with-profits funds. The Group's leverage
target is to be between 20 and 25 per cent on a Moody's total
leverage basis over the medium term. Moody's have not finalised how
they will calculate leverage under IFRS 17 but are consulting on a
proposal to consider up to 50 per cent of any company's CSM as
equity. This has yet to be incorporated into Moody's formal
methodology and hence has not been incorporated into the Group's
target above. At 31 December 2023, we estimate that our Moody's
total leverage was 20 per cent2 (31 December 2022: 21
per cent2, before allowing for the £300 million senior
bonds redeemed in January 2023). This would reduce to circa 14 per
cent (31 December 2022: 15 per cent, before allowing for the £300
million senior bonds redeemed in January 2023) if a 50 per cent
equity credit for the CSM was provided.
Prudential 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 in the future.
Net
core structural borrowings of shareholder-financed
businesses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 Dec 2023
$m
|
|
31 Dec
2022 $m
|
|
IFRS
basis
|
Mark-to-market
value
|
EEV
basis
|
|
IFRS
basis
|
Mark-to-market value
|
EEV
basis
|
Borrowings of shareholder-financed
businesses
|
3,933
|
(274)
|
3,659
|
|
4,261
|
(427)
|
3,834
|
Less: holding company cash and
short-term investments
|
(3,516)
|
-
|
(3,516)
|
|
(3,057)
|
-
|
(3,057)
|
Net core structural borrowings of
shareholder-financed businesses
|
417
|
(274)
|
143
|
|
1,204
|
(427)
|
777
|
Moody's total leverage
|
20%
|
|
|
|
21%
|
|
|
The total borrowings of the
shareholder-financed businesses were $3.9 billion at
31 December 2023 (31 December 2022: $4.3 billion). The Group
had central cash resources of $(3.5) billion at 31 December
2023 (31 December 2022: $(3.1) billion), resulting in net core
structural borrowings of the shareholder-financed businesses of
$0.4 billion at end of 31 December 2023 (31 December 2022:
$1.2 billion). We have not breached any of the requirements of our
core structural borrowings nor modified any of their terms during
2023.
On 20 January 2023 the Group
redeemed £300 million ($371 million) senior bonds as they reached
their maturity, and on 10 July 2023 the Group redeemed a €20m ($22
million) medium-term note as it fell due on 10 July 2023. In
addition, the Group has a $750 million perpetual note that reached
its first call date in January 2023 at which time the Group's
management elected not to call it. We retain the right to call this
security at par on a quarterly basis hereafter. The Group's
remaining securities have contractual maturities that fall between
2029 and 2033. Further analysis of the maturity profile of the
borrowings is presented in note C5.1 to the IFRS financial
results.
On 2 March 2023 the Group's parent
company, Prudential plc, transferred all of its borrowings to a
wholly-owned indirect subsidiary, Prudential Funding (Asia) plc.
Prudential plc has provided a guarantee to holders of the debt
instruments in the event of default by Prudential Funding (Asia)
plc. Other terms of the borrowings, and the value recognised by the
Group, were unchanged by this transfer.
In addition to its net core
structural borrowings of shareholder-financed businesses set out
above, the Group has structures in place to enable access to
funding via the medium-term note programme, the US shelf programme
(the platform for issuance of SEC registered bonds in the US
market), a commercial paper programme and committed revolving
credit facilities. All of these are available for general corporate
purposes. Proceeds from the Group's commercial paper programme are
not included in the holding company cash and short-term investment
balance.
Prudential plc has maintained a
consistent presence as an issuer in the commercial paper market for
the past decade and had $699 million in issue at 31 December 2023
(31 December 2022: $501 million).
As at 31 December 2023, 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 31 December 2023. The Group has reviewed its
requirements for committed facilities and after the balance sheet
date on15 February 2024, the Group renewed its undrawn committed
facilities for a total of $1.6 billion expiring 2029.
Cash remittances
The definition of holding company
cash and short-term investments was updated, with effect from 31
December 2022, following the combination of the Group's London
office and Asia regional office into a single Group Head Office in
2022. The inclusion of amounts previously managed on a regional
basis increased the holding company cash and short-term investment
by $0.9 billion at 31 December 2022.
Holding company cash flow
|
|
|
|
|
Actual
exchange rate
|
|
2023 $m
|
2022
$m
|
Change
%
|
Net cash remitted by businesses units
|
1,611
|
1,304
|
24
|
Net interest paid
|
(51)
|
(204)
|
75
|
Corporate expenditure
|
(271)
|
(232)
|
(17)
|
Centrally funded recurring
bancassurance fees
|
(182)
|
(220)
|
17
|
Total central outflows
|
(504)
|
(656)
|
23
|
Holding company cash flow before dividends and other
movements
|
1,107
|
648
|
71
|
Dividends paid
|
(533)
|
(474)
|
(12)
|
Operating holding company cash flow after dividends but before
other movements
|
574
|
174
|
230
|
Other movements
|
|
|
|
Issuance and redemption of
debt
|
(393)
|
(1,729)
|
77
|
Other corporate
activities
|
226
|
248
|
(9)
|
Total other movements
|
(167)
|
(1,481)
|
89
|
Net movement in holding company cash flow
|
407
|
(1,307)
|
n/a
|
Cash and short-term investments at
the beginning of the year
|
3,057
|
3,572
|
|
Foreign exchange and other
movements
|
52
|
(113)
|
|
Inclusion of amounts at 31 Dec from
additional centrally managed entities
|
-
|
905
|
|
Cash and short-term investments at the end of the
year
|
3,516
|
3,057
|
|
Remittances from our businesses
were $1,611 million (2022: $1,304 million).The remittances are net
of cash advanced to CPL, our joint venture business in the Chinese
Mainland, of $176 million in anticipation of a future capital
injection, as previously announced in December 2023. Remittances
were used to meet central outflows of $(504) million (2022: $(656)
million) and to pay dividends of $(533) million (2022: $(474)
million).
Central outflows include net
interest paid of $(51) million (2022: $(204) million), which is net
of interest and similar income earned on central cash balances in
2023, largely on balances brought into the updated definition of
holding company cash and short-term investments at the end of 2022.
In addition, lower interest payments were made on core structural
borrowings in 2023 as compared with the prior year.
Cash outflows for corporate
expenditure of $(271) million (2022: $(232) million) include cash
outflows for restructuring costs.
Other cash flow movements included
net receipts from other corporate activities of $226 million (2022:
$248 million) comprising largely of proceeds received from the sale
of our remaining shares in Jackson Financial Inc. as well as
dividend receipts. In 2023, the Group redeemed senior bonds as they
reached their maturity at a cost of $393 million.
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.
Notes
(1) Adjusted release of CSM
reflects an adjustment to the release of CSM figure as shown in
note C3.2 of the IFRS financial results of $(3) million (2022: $23
million) for the treatment adopted for adjusted operating purposes
of combining losses on onerous contracts and gains on profitable
contracts that can be shared across more than one annual cohort.
See note B1.3 to the IFRS financial results for more
information.
(2) Calculated with no
adjustment for the value of contractual service margin in equity
and with 50 per cent of the with-profits estate treated as
equity.
(3) See note II of the
Additional unaudited financial information for definition and
reconciliation to IFRS balances.
Segment Discussion
Delivering through our multi-market growth
engines
The following commentary provides an
overview of each of the Group's segments, together with a
discussion of their 2023 financial performance.
As in previous years, we discuss our
performance on a constant currency basis, unless stated otherwise.
The definitions of the key metrics we use to discuss our
performance in this report are set out in the 'Definition of
performance metrics' section later in this document, including,
where relevant, references to where these metrics are reconciled to
the most directly comparable IFRS measure.
Chinese Mainland - CITIC Prudential Life
(CPL)
|
Actual
exchange rate
|
|
Constant
exchange rate
|
|
2023
|
2022
|
Change
|
|
2022
|
Change
|
APE sales ($m)
|
534
|
884
|
(40)%
|
|
840
|
(36)%
|
New business profit ($m)
|
222
|
387
|
(43)%
|
|
368
|
(40)%
|
New business margin (%)
|
42
|
44
|
(2)ppts
|
|
44
|
(2)ppts
|
Adjusted operating profit
($m)
|
368
|
271
|
36%
|
|
258
|
43%
|
IFRS (loss) after tax
($m)
|
(577)
|
(345)
|
(67)%
|
|
(328)
|
(76)%
|
Amounts included in the table above
represents the Group's 50 per cent share.
Prudential's life business in the
Chinese Mainland, CPL, is a 50/50 joint venture with CITIC, a
leading Chinese state-owned conglomerate. CPL benefits from the
strong brands of both shareholders with a truly multi-distribution
platform offering a diverse set of products to meet customers'
needs.
CPL is an established franchise with
an extensive footprint across 23 branches covering 102 cities. CPL
is focused on the affluent and advanced affluent segments of the
market where personal income levels from these segments have more
economic resilience and which are still significantly under
penetrated. CPL has a high quality agency force and an extensive
network of 62 bancassurance partners with access to over 5,600
branches across the Chinese Mainland.
During December 2023 Prudential
announced that it was providing additional growth capital to CPL of
RMB1.25 billion (US$176 million) in cash, with CITIC, its joint
venture partner providing an equal amount. The additional capital
supports new business growth and improves CPL's regulatory
capitalisation. The business will be focused on margin maintenance,
strong risk management through a rebalanced product mix and seeking
quality growth in its agency channel through targeted agent
recruitment and improved productivity and from improved penetration
of its customer bases of its bank partners.
Financial performance
During 2023 CPL pro-actively
diversified its products with a pivot towards whole-life products
and higher margin annuity and longer-premium payment term products.
The re-pricing approach was ratified by the regulator in the second
half of 2023 with further regulatory guidance on expense control
for the bancassurance channel, and was implemented well ahead of
the industry.
Consequently, 2023 saw new business
profit in CPL fall by (40) per cent reflecting both lower volumes
and adverse economic impacts. Bancassurance channel sales declined
driven by the regulatory reform on expense control of the channel
mentioned above, which was partially offset by growth in the
agency channel. Excluding the effects of interest rates and other
economic movements, new business margin grew by six percentage
points as a result of actions to rebalance the product proposition.
Including the effects of economics the new business margin declined
by two percentage points.
CPL has grown long term protection
APE sales by 27 per cent with strong whole life protection
propositions and enhanced critical illness features targeting
elderly and infants.
CPL's agency business saw an
increase in APE sales and new business profit reflecting an
increase in the productivity of our agents and a high agent
activation rate. We have seen an increase in agent productivity in
the year, both in terms of policies sold per agent (up 11 per cent)
and new business profit per agent (up 26 per cent). The agents
provisionally qualified for the Million Dollar Round Table (MDRT)
in 2023 increased by 19 per cent to more than 1,000 along with an
increase in new agents by 6 per cent.
As previously noted, during 2023 CPL
proactively rebalanced its bancassurance sales mix between
whole-life products and higher margin annuity and longer-premium
payment term products. CPL's bancassurance business was further
affected by expense regulatory reforms during the second half of
the year. As a result APE sales through the bancassurance channel
fell materially. We see the recent regulatory driven
transformations as conducive to the long-term development of the
insurance industry particularly on health and protection and
retirement. We believe these transformations and other actions in
2023, leave CPL well positioned to grow in the future.
The adjusted operating profit for
our business in the Chinese Mainland, CPL, increased by 43 per cent
to $368 million, reflecting an increased longer-term net investment
result given a higher asset base from increased sales of savings
products in recent years and a reduction in the losses from the
contracts classified as onerous under IFRS 17. The IFRS loss after tax for the year was $(577) million
compared to $(328) million in the prior year, reflecting lower than
expected equity returns and the net impact of falling interest
rates on insurance assets and liabilities.
Hong
Kong
|
Actual
exchange rate
|
|
Constant
exchange rate
|
|
2023
|
2022
|
Change
|
|
2022
|
Change
|
APE sales ($m)
|
1,966
|
522
|
277%
|
|
523
|
276%
|
New business profit ($m)
|
1,411
|
384
|
267%
|
|
384
|
267%
|
New business margin (%)
|
72
|
74
|
(2)ppts
|
|
73
|
(1)ppts
|
Adjusted operating profit
($m)
|
1,013
|
1,162
|
(13)%
|
|
1,162
|
(13)%
|
IFRS profit/ (loss) after tax
($m)
|
976
|
(742)
|
n/a
|
|
(742)
|
n/a
|
In Hong Kong, Prudential is a
trusted household brand, with a premium agency force and is among
the top three life insurers1.
In 2023, we significantly
outperformed the market increasing our market share, resulting in a
number one ranking for the offshore business1. Our
premier agency force and strong partnership with Standard Chartered
Bank position us well to address the unique needs of the customers
across different life stages, including comprehensive health and
protection solutions and long-term savings and retirement solutions
to address the wealth accumulation, retirement and legacy planning
needs. We are well positioned to serve the needs of Chinese
Mainland customers, which include diversification of currency and
asset class, professional financial advice across a broad product
spectrum and access to high-quality medical care available in Hong
Kong. Our surveys of potential Chinese Mainland customers report
consistent demand for long term savings and health and protection
products. With our newly opened Macau branch, we are present in all
11 cities2 in the Greater Bay Area, with a population of
over 85 million people3.
Financial performance
New business profit increased by 267
per cent to $1,411 million, largely reflecting the increase in APE
sales.
APE sales for our business in Hong
Kong increased by 276 per cent to $1,966 million in 2023,
reflecting the strong demand from both Domestic customers and
Chinese Mainland visitors as borders reopened in early 2023, with
growth across all distribution channels. The Hong Kong economy
continued to recover year-on-year led by inbound tourism and
domestic demand, with over 26 million people from the Chinese
Mainland visiting Hong Kong in 2023. Visitor numbers in the year
were circa 60 per cent of that in 2019, before the Covid-19
pandemic, while APE sales to Chinese Mainland visitors in the same
period were circa 1.1 times of that in 2019, but marginally still
below the levels of 2018, prior to any Covid-19 related disruption.
In addition, we also saw growth of 36 per cent in our domestic
segment supported by new product launches and customer
campaigns.
While savings products contribute
the majority of APE sales, due to large case sizes, on a policy
count basis, health and protection sales represented 58 per cent of
new policy issuances, reflecting the growth in both agency and
bancassurance channels.
We increased APE sales in our health
business by 22 per cent and generated a new business profit for
health business of $86 million, covering more than 550,000
customers.
Our agency channel contributed to 70
per cent of APE sales, with robust growth of 352 per cent supported
by domestic and Chinese Mainland customers. We have reached our
recruitment target of hiring 4,000 agents in 2023, the vast
majority of which have already had regulatory approval. Our active
agents increased by 72 per cent with an increase in monthly new
business profit per active agent by 128 per cent, contributing to
an increase in agency channel new business profit of 294 per
cent.
Our bancassurance channel also saw
significant growth with APE sales up 52 per cent. The proportion of
APE sales comprising health and protection products increased from
5 per cent in 2022 to 13 per cent in 2023, which, together with the
growth in APE sales, contributed to an increase in new business
profit of 93 per cent. Of the overall bancassurance APE sales,
around 68 per cent were from 'new to insurance' customers compared
to 50 per cent in 2022, reflecting strong demand for our products.
In advance of the reopening of border with the Chinese Mainland, we
reactivated our broker network which delivered significant increase
in APE sales increasing our market share and ranking in broker
channel.
Overall the new business margin for
Hong Kong was broadly stable at 72 per cent (2022: 73 per cent),
reflecting a favourable shift in channel mix to the growing agency
business, offset by the impact of product mix shifts reflecting
higher case sizes of relatively lower margin savings products sold
to Chinese Mainland customers. Economic impacts only marginally
decreased the margin. Normalisation of savings product case sizes,
combined with an increase in the proportion of health and
protection sales, led to favourable product mix shifts and margins
increasing in the second half of the year.
In Hong Kong, adjusted operating
profit was $1,013 million, down (13) per cent mainly due to reduced
net investment return associated with lower opening asset balances
following adverse market movements in 2022 and a lower level of
positive claims and expense variance as a result of our continued
investment in our strategic pillars.
The IFRS profit after tax for our
Hong Kong business was $976 million compared to a loss after tax of
$(742) million in 2022. The loss in 2022 largely reflected
investment losses given the large increase in interest rates in
that period. This compares to a more stable interest rate
environment in 2023.
Indonesia
|
Actual
exchange rate
|
|
Constant
exchange rate
|
|
2023
|
2022
|
Change
|
|
2022
|
Change
|
APE sales ($m)
|
277
|
247
|
12%
|
|
240
|
15%
|
New business profit ($m)
|
142
|
125
|
14%
|
|
122
|
16%
|
New business margin (%)
|
51
|
51
|
-ppts
|
|
51
|
-ppts
|
Adjusted operating profit
($m)
|
221
|
205
|
8%
|
|
200
|
11%
|
IFRS profit after tax
($m)
|
156
|
108
|
44%
|
|
104
|
50%
|
In Indonesia, we are among the top
three life insurers in both the conventional and Syariah
markets1. We continue to offer innovative products,
through a diversified distribution network. We have a leading
premier agency force with a 29 per cent agency market
share1, contributing around 80 per cent of overall APE
sales. Through our dedicated Syariah life insurance entity, we are
well positioned to meet the growing demands for Syariah solutions
and support the growth of the Syariah community and
economy.
Financial performance
Overall new business profit grew by
16 per cent to $142 million, marginally above the growth in APE
sales. In the second half of 2023, new business profit grew slower
than in the first half but was still a double-digit percentage
increase supported by a strategic pivot from individual linked
products to traditional life products and a favourable shift in
channel mix towards agency business. We have revamped our
unit-linked product propositions with enhanced benefits in response
to new regulations governing the design, sale and management of
unit-linked products (commonly known as PAYDI in the market). APE
sales for our business in Indonesia grew by 15 per cent to $277
million. Health and protection APE sales grew by 18 per cent in
2023 assisted by repricing actions and medical riders
upgrades.
Our diversified distribution network
comprises our high quality agency force, a long-standing
partnership with Standard Chartered Bank and UOB, other bank
partnerships and direct marketing.
APE sales for the agency channel
increased by 18 per cent. The growth in agency channel sales was
achieved amidst a wider industry slowdown and we saw monthly new
business profit per active agent increase by 7 per cent. This was
supported by our transformation programme that commenced in 2022,
where we accelerated agency channel growth by revamping our sales
management model, upgrading our training programme and redesigning
our compensation scheme to incentivise quality sales and
productivity growth as well as successful repricing. We have over
1,100 agents provisionally qualified for the Million Dollar Round
Table (MDRT) in 2023, an increase of over 40 per cent from the
prior year.
In the bancassurance channel, our
strategic partnerships provide us an opportunity to provide
solutions across a wide spectrum of customer segments. We saw a
marginal increase in APE sales from our bancassurance channel. We
continue to drive high margin health and protection business, with
over 38 per cent of APE sales in the bancassurance channel from
health and protection products. The integration of Citi Bank with
UOB, which commenced in the fourth quarter of 2023, is now
completed and we will be able to offer comprehensive solutions to
the expanded customer base. We see long-term growth opportunities
given our existing partnerships and potential for new
partnerships.
The adjusted operating profit for
Indonesia increased by $21 million to $221 million in 2023,
following the non-repeat of losses that arose on a small portfolio
of contracts that were classified as onerous under the IFRS 17
methodology in 2022.
The IFRS profit after tax for our
business in Indonesia increased from $104 million to $156 million,
reflecting the benefits described above along with reduced negative
short-term investment variances in 2023 following the drop in
interest rates during the year compared to higher interest rates in
2022.
Malaysia
|
Actual
exchange rate
|
|
Constant
exchange rate
|
|
2023
|
2022
|
Change
|
|
2022
|
Change
|
APE sales ($m)
|
384
|
359
|
7%
|
|
347
|
11%
|
New business profit ($m)
|
167
|
159
|
5%
|
|
154
|
8%
|
New business margin (%)
|
43
|
44
|
(1)ppts
|
|
44
|
(1)ppts
|
Adjusted operating profit
($m)
|
305
|
340
|
(10)%
|
|
329
|
(7)%
|
IFRS profit after tax
($m)
|
257
|
178
|
44%
|
|
173
|
49%
|
In Malaysia, we are a leading life
insurer and the largest Takaful operator1 with 18 per
cent and 22 per cent market share respectively. In the young
segment, we continue to provide comprehensive investment linked
propositions along with various health and protection riders, while
in the case of the family segment, we provide core investment
linked propositions, affordable health solution and savings
solutions.
In Malaysia, our diversified
distribution network is complemented by a premier agency force and
our bank partnerships with Standard Chartered Bank, UOB and Bank
Simpanan Nasional.
Our conventional and Takaful
business in Malaysia featured among the top five in Life insurance
customer satisfaction survey conducted by 'Bank Negara
Malaysia'.
The metrics in the segment table
above reflect the Group's 100 per cent economic interest in the
Malaysian conventional Life business (Prudential Assurance Malaysia
Berhad or PAMB) and the Group's interest in the Takaful joint
venture.
Prudential currently owns 51 per
cent of the ordinary shares of the holding company of PAMB and a 49
per cent share in the Takaful joint venture.
Market liberalisation measures were
introduced by BNM, the Malaysian insurance regulator, in April
2009, which increased the limit to 70 per cent on foreign equity
ownership for insurance companies and Takaful operators in
Malaysia. A higher foreign equity limit beyond 70 per cent for
insurance companies will be considered by BNM on a case by case
basis, for example for companies who financially support expansion
of providing insurance coverage to the most vulnerable in Malaysian
society through the National B40 Protection Trust Fund.
We are focused on further
strengthening our franchise in Malaysia through enhancing
recruitment and activation of the agency force, increasing customer
penetration and breadth of our bank partners as well as actively
managing our health portfolio and we will deploy capital as needed
to support growth.
Financial performance
New business profit for our
businesses in Malaysia grew 8 per cent to $167 million. This growth
reflects an increase in APE sales of 11 per cent to $384 million,
primarily driven by growth in the bancassurance channel, due to
marketing campaigns and supported by the merger of UOB and Citibank
that has widened the number of accessible customers. The growth in
APE sales from the bancassurance channel was offset in part by a
marginal decline in the agency channel.
We recruited more than 6,800
agents in 2023, and more than 550 agents provisionally qualified
for Million Dollar Round Table (MDRT). Following these initiatives,
we saw an increase in monthly new business profit per active agent
resulting in an 8 per cent increase in new business profit, despite
a marginal decline in APE sales. We continue to take actions to
improve productivity by developing programs to support both new and
established agents which have seen productivity increase
consistently each quarter since the start of 2023.
We maintained the market leadership
position in the conventional bancassurance channel, demonstrating
the strength of our strategic bank partnerships. We continue to
provide comprehensive propositions for the diverse needs of
customers in each of the high net worth, affluent and mass market
segments and we seek to increase the penetration into our bank
partners' customer base. Overall we saw a 36 per cent increase in
the APE sales through the bancassurance channel leading to double
digit growth in new business profit.
The adjusted operating profit for
our business in Malaysia declined by (7) per cent to $305 million,
primarily driven by a normalisation of claims experience as the
number of medical reimbursement cases returned to pre-pandemic
levels.
The IFRS profit after tax for our
business in Malaysia increased from $173 million to $257 million,
primarily reflecting the positive impacts from the decline in
interest rates in Malaysia, compared to increasing interest rates
in 2022.
Singapore
|
Actual
exchange rate
|
|
Constant
exchange rate
|
|
2023
|
2022
|
Change
|
|
2022
|
Change
|
APE sales ($m)
|
787
|
770
|
2%
|
|
791
|
(1)%
|
New business profit ($m)
|
484
|
499
|
(3)%
|
|
512
|
(5)%
|
New business margin (%)
|
61
|
65
|
(4)ppts
|
|
65
|
(4)ppts
|
Adjusted operating profit
($m)
|
584
|
570
|
2%
|
|
585
|
-%
|
IFRS profit/ (loss) after tax
($m)
|
512
|
(7)
|
n/a
|
|
(7)
|
n/a
|
In Singapore, we are one of the
market leaders in protection, savings and investment-linked
plans1. We have been serving the financial needs of
Singapore residents for more than 90 years, delivering a suite of
product offerings and professional advice through our network of
agents and financial advisors and our bank partners. Through our
two strategic partners, UOB and Standard Chartered Bank, we gain
access to the retail, commercial banking, and high net worth
customer base of two established banks in Singapore.
We remain focused on our customers
and seek to address their needs across the life stages. In the
affluent segment, we offer comprehensive health and retirement
solutions. We are one of the key players in the integrated Shield
market (private insurance coverage that integrates with the
national MediShield Life scheme), and continue to explore
innovative partnerships with healthcare and technology providers to
enhance our offerings. For the younger generation, we continually
improve our investment-linked propositions and expand options for
ESG - themed investments for customers. Finally, we serve the small
and medium enterprise (SME) segment for the employee benefit
business.
We received external recognition by
winning No.1 Insurer The Straits Times Singapore's Best Customer
Service 2023/24 survey.
Financial performance
2023 saw a challenging operating
environment for the life insurance industry in Singapore due to
higher interest rates, particularly in the first part of the year.
New business profit declined by (5) per cent to $484 million,
reflecting a smaller proportion of relatively high margin single
premium participating products, alongside lower APE
sales.
In this context, APE sales declined
by (1) per cent to $787 million. Regular premium sales have seen
steady growth across 2023, with higher new business volume observed
in each quarter compared with the same period in the prior year,
and overall achieving double-digit growth in the year. However,
sales of single premium participating products through the
bancassurance channel were particularly affected by movements in
interest rates in the period, contrasting with the elevated level
of sales in the comparative period particularly in the first half
when interest rates were favourable. In contrast overall APE sales
momentum was positive in the second half of the year, with APE
sales in the third quarter and fourth quarter increasing on the
prior quarter driven by the expansion in regular premium
business.
While individual health and
protection business have remained at a stable level in our product
mix, we saw a shift in customer interest and new business sales
towards investment-linked policies. While new business profit
margin for the year declined overall, we saw sequential improvement
across quarters during the year with growing momentum in sales of
higher margin individual protection and investment-linked
business.
Our enterprise benefit business
delivered good growth with APE sales increasing by 9 per cent,
covering around 3,000 small-to-medium enterprises and over 200,000
employees. Our Shield APE grew 9 per cent over last year as we
increase the provision of value-added and wellness related services
to customers.
Overall new business profit from the
Agency channel improved by 4 per cent in the year, reflecting
positive product mix effects from a growth in the proportion of
sales from Shield and higher margin individual protection products.
APE sales for the agency channel decreased by (4) per cent in the
year. Regular premium APE sales in our agency channel grew 4 per
cent compared with the prior year.
At the end of 2023 our total
financial consultant force, of agents and financial advisors
increased by 3 per cent when compared with 2022. Our number of
eligible Agency MDRT members remained stable at over 1,280 agents
in 2023.
We launched Prudential Financial
Advisor channel in April 2023, which is the first financial
advisory firm in the Prudential Group. PFA will offer a wide range
of products and services including general insurance and wealth
solutions, in addition to Prudential's core solutions in whole and
term life, health & protection, savings, retirement and
employee benefits. With this, we aim to cater to the growing and
diverse needs of various customer segments in Singapore, as well as
boost financial representative recruitment.
Reflecting the decline in high
margin single premium products, bancassurance new business profit
declined by (24) per cent in the year. However, bancassurance APE
sales increased 2 per cent compared with the prior year. Pivoting
to customer needs in this environment we have launched regular
premium investment linked products and sales of these products
gathered momentum in the second half of 2023. The level of regular
premium business in bancassurance channel stands at 81 per cent
overall in 2023, 41 percentage points higher than 2022.
Our adjusted operating profit for
our business in Singapore remained at similar level at $584
million, with the higher release of CSM and risk adjustment offset
by a lower net investment return, following the adverse market
movements in 2022 lowering the opening investment
balances.
The IFRS profit after tax for our
Singapore business was $512 million compared with a loss after tax
of $(7) million in 2022. This largely reflected higher investment
losses in 2022 following the significant increase in interest rates
in that year.
Growth markets and other
|
Actual
exchange rate
|
|
Constant
exchange rate
|
|
2023
|
2022
|
Change
|
|
2022
|
Change
|
APE sales ($m)
|
1,928
|
1,611
|
20%
|
|
1,546
|
25%
|
New business profit ($m)
|
699
|
630
|
11%
|
|
609
|
15%
|
New business margin (%)
|
36
|
39
|
(3)ppts
|
|
39
|
(3)ppts
|
Adjusted operating profit
($m)
|
746
|
728
|
2%
|
|
715
|
4%
|
IFRS profit after tax
($m)
|
775
|
314
|
147%
|
|
304
|
155%
|
Our growth markets and other segment
incorporates our life businesses Thailand, Vietnam, the
Philippines, Cambodia, Laos and Myanmar in the ASEAN region, as
well as those in India, Taiwan, and Africa.
Life new business profits grew by 15
per cent to $699 million, the second largest segment in the Group,
and APE sales grew 25 per cent to $1,928 million.
There was a small fall in overall
new business margin as a result of country mix following a fall in
consumer sentiment and hence lower sales in Vietnam.
The adjusted operating profit was
$746 million, up 4 per cent. This reflects an increase in the
release of CSM and net investment return aided by recent new
business growth. These effects are partially offset by the elevated
expenses supporting the continued investment in our strategic
pillars together with less favourable claims experience.
The IFRS profit after tax and
adjusted operating profit for Growth market and others also
includes the tax charge on the profits for joint venture life
business in Chinese Mainland and Malaysia. The IFRS profit after
tax in the Growth market and other segment increased from $304
million to $775 million, largely reflecting significant investment
losses in 2022 from higher interest rates in most of our
markets.
A detailed discussion of new
business performance by key businesses in presented
below.
Thailand
In Thailand we are focused on our
bancassurance channel supported by alternative distribution methods
including digital, agency, direct marketing and brokerage. New
business profit declined by 6 per cent, largely as a result of
interest rate changes. APE sales grew by 4 per cent following a
high base in 2022, benefiting from double-digit growth from our UOB
bank partnership and an increase in the contribution of Group
employee benefit (EB) solutions.
Our distribution partnerships have
benefited in the year through the integration of the Citi and UOB
organisations in Thailand. We also revamped our online application
platform ('PRUPlus') to improve reliability and enhance the seller
and customer experience. At the end of 2023 we invested in a new
bancassurance partnership with CIMB, becoming the exclusive life
insurance partner of CIMB Thai. Prudential Thailand seeks to
accelerate its growth plans building on the fact that it is already
the third largest bancassurance player in the
market1.
Vietnam
Prudential is the leading life
insurance company in Vietnam, which has the third-largest
population in ASEAN, and operates with a diversified distribution
mix.
New business profit for our business
in Vietnam declined materially, albeit there was an improvement in
new business margins, particularly from the bancassurance business
and interest rate effects. APE sales declined by 33 per cent,
against an overall market decline of 41 per cent, reflecting an
industry-wide fall in consumer sentiment. However, the business's
focus on customers and the strength of its agency force has seen it
outperform the market, increase its market share and retain the
number one position in the market.
We continue to expand our
geographical footprint in urban areas through technology-powered
agency and bancassurance channels. Our diversified distribution
includes our established agency force, which includes more than
1,500 agents provisionally qualified for Million Dollar Round Table
(MDRT), and seven exclusive bank partnerships.
We extended our exclusive
bancassurance partnership with Vietnam International bank until
2036, developing new industry-leading quality standards and
contributing to the healthy and sustainable development of
bancassurance in Vietnam. We continue to focus on improving sales
quality and strengthening our relationships with our bank partners
to widen our reach to customers through their combined 800 branches
in Vietnam.
The
Philippines
We are the market leader in the
Philippines with 17 per cent market share1 by weighted
new business premium, based on the latest available market data
reflecting the core strength of our leading agency force. With our
young and digitally empowered agency force, we have one of the
largest agency forces in the country. Competition for quality
agents is strong and we have taken steps to retain talent. We
continue to offer a wide range of products to meet our customers'
savings and protection needs. New business profit in 2023 delivered
double-digit growth, despite a marginal (2) per cent decline in APE
sales reflecting a favourable impact from product mix and economic
tailwinds. We will continue to strengthen our distribution network
through onboarding and nurturing high-quality agents, equipped by
digital capabilities, as well as continue to enhance customer
experiences through offering comprehensive solutions and seamless
customer experiences.
India
Our associate business in India,
ICICI Prudential Life, successfully accomplished its objective to
double its 2019 new business profit by 2023 through its '4P'
strategic framework for Premium growth, Protection focus,
Persistency improvement and Productivity enhancement.
New business profit was up 2 per
cent with the uplift from APE sales growth being offset by adverse
economics and a greater proportion of savings products being sold
in the year.
APE sales for ICICI Prudential Life
grew by 10 per cent, with a well-diversified distribution network
enabling the company to reach a wider cross-section of customers to
drive growth. The diverse distribution network comprises more than
200,000 agents including the addition of 40,000 new agents in 2023
and 42 bank partnerships with access to more than 20,000 bank
branches.
To enhance distribution
capabilities, ICICI Prudential has introduced 'ICICI Pru Stack' a
set of platform capabilities encompassing digital tools and
analytical abilities. This provides distribution partners with
greater information on customers and their needs, and has enabled
simplification of the buying journey, with approximately 40 per
cent of long-term savings policies now issued on the same day as
the purchase process starts.
ICICI Prudential Life, of which we
hold 22 per cent, is amongst the top-four private life insurance
companies in India and is listed on the National Stock Exchange
(NSE) and Bombay Stock Exchange (BSE) in India.
Taiwan
Taiwan is the fifth-largest life
insurance market in Asia4, with a population of 24
million. Prudential is a leading insurance company in Taiwan among
foreign players with an overall APE market share of 8 per cent in
2023, 3 percentage points higher than 2022. It also delivered the
highest year-on-year growth rate in the industry during
2023.
Our business in Taiwan provides
solutions for long-term savings and protection to our target market
segments. Families remains a key customer segment for Prudential
Taiwan with 31,000 new customers acquired from this segment (an
increase in the year of 104 per cent).
In Taiwan we saw 86 per cent APE
sales growth in 2023, supported by a diversified channel mix in
bancassurance and brokerage channels, with strong local bank
partners performance as supported by key products campaign and
initiatives. Our newly nurtured bank partners delivered over
double-digit APE sales growth compared to last year, and
contributed to 34 per cent of APE sales in 2023. The sales
performance was attributable to our offering of tailored solutions
to fulfil specific customer needs across saving, protection and
medical needs in different life stages with different currencies.
New business profit rose, driven by this increase in APE sales as
well as favourable product mix changes. The business is focused on
further improving margins.
Africa
Despite macro-economic uncertainties
and in particular higher inflation, APE sales for Africa grew by 26
per cent in 2023, with double-digit growth in both agency and
bancassurance sales. Six out of the eight markets delivered
double-digit growth in the new business profit in the year. This
resulted from an improved channel and product mix, alongside the
growth in APE sales, which led to 33 per cent increase in new
business profit.
In Africa, Prudential has an
established agency force with over 300 agents who qualified for
Million Dollar Round Table membership. In addition, Prudential
Africa has added 13 additional bank partners in the year, given us
access to over 1,700 bank branches in total.
We will continue to focus our
investment and capital on those markets which are large and in
which we see the long-term attractive returns.
Eastspring
|
Actual
exchange rate
|
|
Constant
exchange rate
|
|
2023
|
2022
|
Change
|
|
2022
|
Change
|
Total funds under management
($bn)
|
237.1
|
221.4
|
7%
|
|
222.2
|
7%
|
Adjusted operating profit
($m)
|
280
|
260
|
8%
|
|
255
|
10%
|
Fee margin based on operating income
(bps)
|
31
|
29
|
2bps
|
|
28
|
3bps
|
Cost/income ratio (%)
|
53
|
55
|
2ppts
|
|
55
|
2ppts
|
IFRS profit after tax
($m)
|
254
|
234
|
9%
|
|
230
|
10%
|
Eastspring is the asset management
arm of the Group. Its funds under management or advice (referred collectively as funds under
management or FUM) of $237.1 billion
includes $38.5 billion that represents our
49 per cent share in funds managed by ICICI
Prudential Asset Management Company (IPAMC) in India and
$9.7 billion that represents our 49 per cent share in funds managed
by CITIC-Prudential Fund Management Company Limited (CPFMC) in
China. Eastspring has $141.0 billion of funds under management on
behalf of the Prudential Group.
Investment performance
Eastspring's investment performance
saw 44 per cent of FUM outperforming their benchmarks over the past
year (2022: 59 per cent) and 50 per cent of FUM outperforming their
benchmarks over the past three years (2022:
39 per cent). Whilst, there was a decline in one-year
outperformance when compared to 2022 mainly driven by
underperformance in three multi-asset portfolios, the
Singapore-based Value Equity teams continued their substantial
outperformance. Both the Growth Equities
and Active Quantitative strategies also posted positive aggregate
returns across one and three years. The Singapore-based Fixed
Income team was also able to turnaround the underperformance
experienced in 2022, with 90 per cent of FUM
outperforming their benchmarks in 2023. We continued to upgrade our
investment and risk management platform for multi-asset strategies
and investment performance improved in the fourth quarter of 2023
compared to the prior quarter.
Eastspring also continued to develop
its investment platform and capabilities through a series of
strategic hires, notably in portfolio risk management and fixed
income, and through investment process enhancements across the
various teams. Further work was progressed in integrating
Eastspring's investment performance for wholly-owned businesses and
aligning common investment practices, including
research.
Eastspring continued to be
recognised for its achievements, being named Best Emerging Markets
Equity Manager by Citywire Asia Asset Management Awards for the
second consecutive year and Best Value Investing Manager regionally
by Asia Asset Management.
Broadening distribution capabilities
Eastspring's strategy is anchored on
understanding its clients and delivering strong capabilities and
products for their bespoke needs. In 2023, Eastspring continued to
extend and deepen its relationships with third-party clients and
Prudential Life Companies which has generated positive net
inflows.
Eastspring continued to build retail
partnerships with distributors and banks. Notably in Japan, the
firm expanded its partnerships to more than 120 retail distributors
and converged 22,800 attendees through 274 workshops and client
seminars.
Across the institutional
business, the firm has seen success in its
international markets of the Americas, Europe, Taiwan and
Thailand.
Accelerating responsible investing
Eastspring's commitment to
responsible investing is embedded across its business.
Across its markets, Eastspring is
focused on driving sustainable solutions on three fronts. First,
Eastspring extended its engagement programme beyond climate change
to include themes of palm oil, unsustainable timber, and modern
slavery. Second, the firm enhanced its ESG data analytics to
support investment activities via the creation of a proprietary ESG
assessment visualiser and enhanced client reporting tools for
climate risk, UN Sustainable Development Goal alignment and Scope 3
carbon emissions. Third, the firm published its first Responsible
Investment Report and improved its United Nations Principles for
Responsible Investment (UNPRI) assessment.
Open-architecture technology platform
Eastspring has embarked on a
multi-year firm-wide transformation journey to
modernise its business. This includes upgrading its
operating model for robustness and scalability, as well as
enhancing its control environment.
Through HERA, Eastspring's
proprietary cloud-native Data & AI platform,
Eastspring is making good progress in its ambition
to become a data-driven organisation. Eastspring is already seeing
benefits from its early efforts in the form of an automated Finance
'data-mart' for end to end reporting, optimising insights across
markets, and building robust data for monitoring and regulatory
purposes. The platform has also powered climate insights for our
portfolio and strengthened real-time risk management through its
investment risk insights.
Joint venture growth initiatives
In India, IPAMC strengthened its
distribution capabilities, servicing a direct client base spread
across 300 cities in India. This resulted a 17 per cent increase in
IPAMC's client base to over 9 million; of which around 33 per cent
were direct clients. In addition, IPAMC broadened its product suite
into the alternatives segment focused on private equity and private
credit, and raised $324 million (100 per cent shareholding basis).
Reflecting net inflows coupled with a favourable equity market
performance, FUM for IPAMC grew by 28 per cent (on actual exchange
rate basis).
In China, CPFMC is looking to
broaden its product suite with new fixed income and quantitative
products. CPFMC also strengthened its distribution capabilities
with 14 new partnerships, comprising of 10 bank wealth management
companies and 4 securities firms. The depth of our partnership,
including the e-commerce platforms has generated strong net
inflows, primarily from money market funds supporting a 8 per cent
increase (on actual exchange rate basis) in FUM for CPFMC, despite
the challenging economic environment.
Financial performance
|
Actual
exchange rate
|
Constant
exchange rate
|
|
2023
|
2022
|
Change
|
2022
|
Change
|
|
$m*
|
$m*
|
%
|
$m*
|
%
|
External funds under management
($bn)
|
94.2
|
81.9
|
15
|
81.3
|
16
|
Funds managed on behalf of M&G
plc ($bn)
|
1.9
|
9.3
|
(80)
|
9.4
|
(80)
|
External funds under management ($bn)
|
96.1
|
91.2
|
5
|
90.7
|
6
|
|
|
|
|
|
|
Internal funds under management
($bn)
|
110.0
|
104.1
|
6
|
104.9
|
5
|
Internal funds under advice
($bn)
|
31.0
|
26.1
|
19
|
26.6
|
17
|
Total internal funds under management or advice
($bn)
|
141.0
|
130.2
|
8
|
131.5
|
7
|
|
|
|
|
|
|
Total funds under management or advice ($bn)
|
237.1
|
221.4
|
7
|
222.2
|
7
|
|
|
|
|
|
|
Total external net flows†
|
4,054
|
(1,586)
|
n/a
|
(1,538)
|
n/a
|
|
|
|
|
|
|
Analysis of adjusted operating profit
|
|
|
|
|
|
Retail operating
income‡
|
353
|
319
|
11
|
311
|
14
|
Institutional operating
income‡
|
347
|
341
|
2
|
342
|
1
|
Operating income before
performance-related fees
|
700
|
660
|
6
|
653
|
7
|
Performance-related fees
|
(2)
|
1
|
n/a
|
1
|
n/a
|
Operating income (net of commission)
|
698
|
661
|
6
|
654
|
7
|
Operating expense
|
(372)
|
(360)
|
(3)
|
(359)
|
(4)
|
Group's share of tax on joint
ventures' adjusted operating profit
|
(46)
|
(41)
|
(12)
|
(40)
|
(15)
|
Adjusted operating profit
|
280
|
260
|
8
|
255
|
10
|
Adjusted operating profit after
tax
|
254
|
234
|
9
|
230
|
10
|
|
|
|
|
|
|
Average funds managed by Eastspring
|
225.9
|
229.4
|
(2)
|
229.9
|
(2)
|
Fee margin based on operating
income
|
31bps
|
29bps
|
2bps
|
28bps
|
3bps
|
Cost/income ratio
|
53%
|
55%
|
2ppts
|
55%
|
2ppts
|
*
Unless otherwise stated.
† Excluding
funds managed on behalf of M&G plc.
‡ During
the year Eastspring has reclassified its funds under management,
and associated income, between retail and institutional categories.
Amounts are now classified as retail or institutional based on
whether the owner of the holding is a retail or institutional
investor. Under the previous basis amounts were classified based on
the nature of the investment vehicle in which the amounts were
invested. The revised classification presents the funds held by
each client type on a more consistent basis, which aligns with
typical differences in fee rate basis for each client type. Prior
period figures are restated accordingly.
Eastspring's total funds under
management and advice (FUM) increased by 7 per cent to $237.1
billion (31 December 2022: $221.4 billion on actual exchange rate),
reflecting favourable market movements, and net inflows from third
parties (excluding M&G plc) and the Group's life business. In
2023, there was a shift in overall asset mix from bonds to equity
and multi-assets funds, while the overall assets remain well
diversified across both clients and asset classes.
Third party net inflows (excluding
money market funds and funds managed on behalf of M&G plc) were
$4.1 billion (2022: net outflows of $(1.5) billion) reflecting
inflows into higher margin retail funds. This was more than offset
by net outflows of $(7.6) billion (2022: $(0.8) billion) from the
expected redemption of funds managed on behalf of M&G plc, with
further net outflows of about $(0.6) billion expected in 2024. In
addition, net inflows from Prudential's life business were $2.3
billion (2022: $8.0 billion).
The average FUM decreased by (2) per
cent compared to 7 per cent increase in closing FUM, largely
reflecting the adverse market movements in 2022. Eastspring's
adjusted operating profit increased by 10 per cent to $280 million,
reflecting a circa $20 million net investment gain, reported within
operating income before performance-related fees (as compared with
a net investment loss of circa $10 million in the prior year)
on shareholders' investments including seed capital. Excluding the
gains and losses on shareholders' investments from both periods,
operating profit was (2) per cent lower, consistent with the
decline in average FUM. There was an improvement in the fee margin
and cost/income ratio, reflecting the higher mix from retail equity
funds and the investment gains as noted above.
Notes
(1) As reported at full year
2023 unless otherwise specified. Sources include formal (eg
competitors results release, local regulators and insurance
association) and informal (industry exchange) market share. Ranking
based on new business (APE sales, weighted new business premium,
full year premium or weighted first year premium) or Gross Written
Premium depending on availability of data. Rankings in the case of
Chinese Mainland, Taiwan and Myanmar are among foreign insurers,
and for India is among private companies. Countries based on nine
months ended September 2023: Hong Kong, Philippines, Ghana (Africa)
and Kenya (Africa) and full year 2022: Laos, Zambia (Africa) and
Togo (Africa) and full year 2020: Nigeria (Africa).
(2) Across Hong Kong, Macau
and the Chinese Mainland.
(3) Source: The
Guangdong-Hong Kong-Macao Greater Bay Area Development
Office.
(4) Source: Swiss Re
Institute.
Risk review
Thoughtful risk management through advocating the interests of
our people, customers, regulators and
shareholders
1
Introduction
Prudential's Group Risk Framework,
risk appetite and robust governance have enabled the business to
manage and control its risk exposure throughout market volatility
and uncertainty in 2023 to support the Group's strategy of
delivering sustainable value for all our stakeholders. As
Prudential focuses on executing its new strategy across Asia and
Africa, the Group-wide Risk, Compliance and Security (RCS) function
has continued to provide risk advice, recommendations and
assurance, as well as engage with Prudential's Group-wide
supervisor, the Hong Kong Insurance Authority (IA), on critical
activities, while overseeing the risks and implications to the
ongoing business with the goal of ensuring that the Group remains
within its approved risk appetite. The Group effectively leverages
its risk management, compliance and security experience in more
mature markets, applying it to its growth markets as appropriate to
their respective risks and the extent of their challenges under the
complex operating environment, and reflective of opportunities,
customer issues and needs, and local customs. Prudential will
continue to take a holistic and coordinated approach in managing
the increasingly dynamic, multifaceted and often interconnected
risks facing its businesses.
Below we explain how we manage
risk, including through our risk governance framework and
processes. We then describe the principal risks the Group faces,
including how each principal risk is managed and mitigated,
followed by a detailed description of the specific risk factors
that may affect our business, the Group and our stakeholders.
2 Risk
governance
a System of
governance
Prudential has in place a system of
governance that embeds a clear ownership of risk, together with
risk policies and standards to enable risks to be identified,
measured and assessed, managed and controlled, monitored and
reported. The Group Risk Framework, 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. The 'first line' is responsible for taking and
managing risk within the risk appetite, while the 'second line'
provides additional independent challenge, expertise and oversight
to support risk and compliance management. The role of the 'third
line', assumed by the independent Group-wide Internal Audit
function, is to provide objective assurance on the design,
effectiveness and implementation of the overall system of internal
control. The Group-wide RCS function reviews, assesses, oversees
and reports on the Group's aggregate risk exposure and solvency
position from an economic, regulatory and credit ratings
perspective.
In 2023, continuous efforts have
been made to ensure the appropriateness of the level of Group
governance that promotes individual accountability in
decision-making and supports the overall corporate governance
framework to provide sound and prudent management and oversight of
the Group's business. The Group also regularly reviews the Group
Risk Framework and supporting policies, including to ensure
sustainability considerations, which form an integral part of the
wider Group governance, are appropriately reflected in policies and
processes and embedded within all business functions.
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 and compliance policies that have been established to
enable business decision-making with respect to control activities
and risk-related matters. The Group Risk Committee (GRC) leads the
risk governance structure, supported by independent Non-executive
Directors on the risk committees of the Group's major businesses.
The GRC approves changes to the Group Risk Framework and the core
risk and compliance policies that support it, and has direct lines
of communication, reporting and oversight of the risk committees of
the Group's major businesses. The chief risk and compliance
officers of the Group's major businesses and the managing directors
of the Group's Strategic Business Groups are also invited to the
Group Executive Risk Committee, the advisory committee to the Group
Chief Risk and Compliance Officer. The chief risk and compliance
officers of the Group's major businesses also attend GRC meetings
on a rotational basis.
Risk culture is a strategic priority
of the Board, which recognises its importance in the way the Group
conducts business. A revised set of fundamental values was rolled
out across the Group in 2023, referred to as 'The PruWay', that
serves as the Group's guiding principles to ethical and authentic
conduct. These values apply equally to all members of Prudential
and its affiliates. The Responsibility & Sustainability Working
Group (RSWG) supports its responsibilities in relation to
implementation of sound culture considerations in the ways we
operate, as well as embedding the Group's Sustainability Strategy
and overseeing progress on customer, culture, people and community
matters. The PruWay defines how Prudential expects business to be
conducted to achieve its strategic objectives, to build a culture
of trust and transparency that allows our people to thrive, and to
deliver sustainable value for all our stakeholders: customers,
employees, shareholders and the communities in which we
operate.
The Group Risk Framework and
underlying policies support sound risk management practices by
requiring a focus on customers, longer-term goals and
sustainability, the avoidance of excessive risk taking, and
highlighting acceptable and unacceptable behaviours. This is
supported by: the inclusion of risk and sustainability
considerations in performance management and remuneration for key
executives; the building of appropriate skills and capabilities in
risk management; and ensuring that employees understand and care
about their role in managing risk through open discussions,
collaboration and engagement. The GRC 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 Conduct
and Group Governance Manual, supported by the Group's risk-related
policies, are reviewed regularly. A revised Group Code of Conduct
(the Code) was launched in November 2023 to further enhance risk
culture and awareness underpinning operational and financial
discipline. The Code lays down the principles and guidelines that
outline the ethical standards and responsibilities of the
organisation and our people. Supporting policies include those
related to financial crime, covering anti-money laundering,
sanctions, anti-bribery and corruption, conduct, conflicts of
interest, confidential and proprietary information and securities
dealing. The Group's Third-Party Supply and Outsourcing Policy
requires that human rights and modern slavery considerations are
embedded in material supplier arrangements. Procedures to allow
individuals to speak out safely and anonymously against unethical
behaviours and conduct violations are also in place.
Further details on the Group's
sustainability governance arrangements and strategic framework are
included in the Group's 2023 Sustainability Report.
ii. The risk management
cycle
The Group Own Risk and Solvency
Assessment (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, as well as stress and scenario testing
that also includes climate scenarios.
Risk identification
The Group identifies principal risks
in accordance with provision 28 of the UK Corporate Governance Code
and the Group-wide Supervision (GWS) guidelines issued by the HKIA.
The Group performs a robust assessment and analysis of principal
and emerging risk themes through the risk identification process,
the Group 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. Top-down and bottom-up
processes are in place to support Group-wide identification of
principal risks. The Group's principal risks, which are reported
and managed by the Group with enhanced focus, are reviewed and
updated on a regular basis.
An emerging risk identification
framework also exists to support the Group's preparations in
managing financial and non-financial risks expected to crystallise
beyond the short-term horizon. The Group's emerging risk
identification process recognises the dynamic materiality of
emerging risk themes, whereby the topics and the associated risks
that are important to the Group and its respective key stakeholders
can change over time, often very quickly. This is often seen for
sustainability (including environmental, social and governance
(ESG) and climate-related) risks, which impact the Group's
reputation given evolving stakeholder expectations.
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 and assessment
of management actions which could be taken to conserve and aid
stakeholder value creation.
Risk measurement and assessment
All identified risks are assessed
based on an appropriate methodology for that risk. Quantifiable
risks which are material and mitigated by holding capital are
modelled in the Group's internal model, which is used to determine
the Group Internal Economic Capital Assessment (GIECA) with robust
processes and controls on model changes. The GIECA model and
results are subject to independent validation.
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, not absolute,
assurance against material misstatement or loss. The Group's risk
policies define the Group's appetite for material risks and set out
the risk management and control requirements to limit exposure.
These policies also set out the processes to enable the measurement
and management of these risks in a consistent and coherent way,
including the flows of management information required. Stress and
scenario testing is also in place to assess the robustness of
capital adequacy and liquidity and the appropriateness of risk
limits, as well as to support recovery planning. This includes
reverse stress testing which requires the Group to ascertain the
point of business model failure and is another tool that helps to
identify the key risks and scenarios that may have a material
impact on the Group. The methods and risk management tools employed
to mitigate each of the Group's principal risks are detailed in
section 3 below.
Risk monitoring and reporting
The Group's principal risks are
highlighted in the management information received by the GRC and
the Board, which also includes key exposures against appetite and
developments in the Group's principal and emerging
risks.
iii. Risk appetite, limits and
triggers
The Group aims to balance the
interests of the broad spectrum of its stakeholders (including
customers, investors, employees, communities and key business
partners) and understands that a well-managed acceptance of risk
lies at the heart of its business. The Group generates stakeholder
value by selectively taking exposure to risks, mitigated to the
extent it is cost-effective to do so, and where these are an
outcome of its chosen business activities and strategy. Those risks
for which the Group has no tolerance 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 appropriateness of these measures at least annually.
The Board approves changes to the Group's aggregate risk appetite
and the GRC 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 capital
requirements, liquidity and non-financial risk exposure, covering
risks to stakeholders, including those from participating and
third-party businesses. Group limits operate within these
expressions of risk appetite to constrain material risks, while
triggers and indicators provide additional defined points for
escalation. The GRC, supported by the RCS function, is responsible
for reviewing the risks inherent in the Group's business plan and
for providing the Board with a view on the risk/reward trade-offs
and the resulting impact to the Group's aggregated position
relative to Group risk appetite and limits, including non-financial
risk considerations.
1. Capital
requirements: Limits on capital
requirements aim to ensure that, in both business-as-usual and
stressed conditions, the Group maintains adequate capital in excess
of internal economic capital requirements and regulatory capital
requirements, achieves its desired target credit rating to meet its
business objectives, and the need for supervisory intervention is
avoided. The two measures in use at the Group level are the GWS and
GIECA capital requirements.
2. Liquidity:
The objective of the Group's liquidity risk
appetite is to help ensure that appropriate cash resources are
available to meet financial obligations as they fall due in both
business-as-usual and stressed scenarios. This is measured using a
liquidity coverage ratio which considers the sources of liquidity
against liquidity requirements under stress scenarios.
3. Non-financial risks: The
Non-Financial Risk Appetite Framework is in place to identify,
measure and assess, manage and control, monitor and report
effectively on material non-financial risks across the business.
The non-financial risk appetite is framed around the perspectives
of its varied stakeholders, accounts for current and expected
changes in the external environment, and provides limit and trigger
appetite thresholds for non-financial risk categories across the
Group's locations. The Group accepts a degree of non-financial risk
exposure as an outcome of its chosen business activities and
strategy, and aims to manage these risks effectively to maintain
its operational resilience and its commitments to customers and all
stakeholders and avoid material adverse financial loss or impact to
its reputation.
3 The Group's principal risks
The delivery of the Group's strategy
in building long-term value for all our stakeholders inevitably
requires the acceptance of certain risks. The materialisation of
any of these risks within the Group or in its joint ventures,
associates or key third-party partners may have a financial impact
and may affect the performance of products or services or the
fulfillment of commitments to customers and other stakeholders,
with an adverse impact on Prudential's brand and
reputation.
This section provides a high-level
overview of the principal risks faced by the Group including the
key tools used to manage and mitigate each risk. A detailed
description of these and other risks is presented under the heading
'Risk factors', below.
The Group's 2023 Sustainability
Report includes further detail on the sustainability (including ESG
and climate-related) risks which contribute to the materiality of
the Group's principal risks detailed below.
Risks to the Group's financial position (including those from
the external macroeconomic
and
geopolitical environment)
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The global economic and
geopolitical environment may impact 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.
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Global economic and geopolitical conditions
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Prudential operates in a
macroeconomic and global financial market environment that
continues to present significant uncertainties and potential
challenges. For example, while headline inflation has moved down in
2023, core inflation has remained well above central bank targets
and central banks may need to maintain tight monetary policies to
rein in inflation, which could exert downward pressures on growth.
In the major emerging markets, inflation has generally been less
severe and monetary policies have been less restrictive. However,
this environment of relatively high global interest rates presents
a meaningful recession risk and is putting pressure on banks'
balance sheets and margins. This could result in a pullback in both
credit supply and credit demand and lead to a sharper tightening in
global credit conditions. Challenges in the US and EU banking
sector increased risk in the US commercial real estate sector. The
weak growth and concerns around the Chinese Mainland property
sector not only put a toll on the Chinese Mainland economy and
place downward pressure on China interest rate, but could also
weigh on the broader Asian region and the global economy's vitality
going forward. A number of issuers within the Chinese Mainland
property sector and the US commercial real estate sector
experienced a reduction in financial strength and flexibility of
corporate entities in 2023, although the overall impact to the
Group's invested credit portfolio was immaterial due to our
diversified investment strategy. The serviceability of sovereign
debt also posed some concerns in certain economies (particularly
the high indebtedness across countries in Africa, such as the
sovereign debt restructuring in Ghana).
Geopolitical tensions between Russia
and Ukraine, Israel and Gaza, as well as the Chinese Mainland and
countries such as the United States and India, continued to
contribute to the slow and/or negative global or regional economic
growth in 2023. These conflicts may lead to further realignment
among blocs or global polarisation and decoupling.
Macroeconomic and geopolitical
developments are considered material to the Group and can
potentially increase operational and business disruption (including
sanctions) and regulatory and financial market risks, and have the
potential to directly impact Prudential's sales and distribution
networks, as well as its reputation. The potential impacts to the
Group are included in sections 1.1 and 1.2 of the Risk
factors.
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Risk description
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Risk management
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Market risks to our investments
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The value of Prudential's direct
investments is impacted by fluctuations in equity prices, interest
rates, credit spreads, foreign exchange rates and property prices.
There is also potentially indirect impact through the value of the
net equity of its joint ventures and associates. Although inflation
remains at decades-level highs in certain global markets, the
Group's direct exposure to inflation remains modest. Exposure
mainly arises through an increase in medical claims obligations,
driven by rising medical prices as well as potential impact on
customers from an affordability perspective. Medical inflation risk
as well as challenges for insurers linked to affordability and
existing challenges in persistency are detailed in the Insurance
risks section below.
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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 Capital and Asset Liability Management (ALM)
Committee and Group ALM Policy;
- Changes in asset allocation, bonus revisions, repricing and
the use of reinsurance where appropriate;
- The Group Investment Committee and Group Investment
Policy;
- Hedging using derivatives, including currency forwards and
swaps, bond forwards/futures, interest rate futures and swaps, and
equity futures;
- The monitoring and oversight of market risks through the
regular reporting of management information;
- Regular deep dive assessments; and
- The Group Critical Incident Procedure (GCIP), which 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 activities during a critical incident.
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Interest rate risk, including asset liability management
(ALM)
Interest rate risk is driven by the
impact of the valuation of Prudential's assets (particularly
government and corporate bonds) and liabilities, which are
dependent on market interest rates.
High interest rates, driven by
sustained inflationary pressures, may impact the valuation of fixed
income investments and reduce fee income. The Group's risk exposure
to rising interest rates also arises from the potential impact to
the present value of future fees for unit-linked businesses, such
as in Indonesia and Malaysia, as well as the impact to the present
value of the future profits for accident and health products, such
as in Hong Kong. Exposure to higher interest rates also arises from
the potential impact to the value of fixed income assets in the
shareholder funds.
The Group's risk exposure to
lower/decreased interest rates arises from the guarantees of some
non-unit-linked products with a savings component, including the
Hong Kong, Singapore and CPL's participating and non-participating
businesses. This exposure results from the potential for an asset
and liability mismatch, where long-dated liabilities and guarantees
are backed by short-dated assets.
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The Group Capital and ALM Committee
is a management committee supporting the identification, assessment
and management of key financial risks to the achievement of the
Group's business objectives. The Committee also oversees ALM,
solvency and liquidity risks of the local businesses as well as the
declaration and management of non-guaranteed benefits for
participating and universal life lines of business. Local business
units are responsible for the management of their own asset and
liability positions, with appropriate governance in place. The
objective of the local business unit ALM process is to meet
policyholder liabilities with the returns generated from the
investment assets held, while maintaining the financial strength of
capital and solvency positions. The ALM strategy adopted by the
local business units considers the liability profile and related
assumptions of in-force business and new products to appropriately
manage investment risk within ALM risk appetite, under different
scenarios in accordance with policyholders' reasonable
expectations, and economic and local regulatory requirements.
Factors such as the availability of matching assets,
diversification, currency and duration are considered as
appropriate. The assumptions and methodology used in the
measurement of assets and liabilities for ALM purposes conform with
local solvency regulations. Assessments are carried out on an
economic basis which conforms to the Group's internal economic
capital methodology.
The Group's appetite for interest
rate risk requires that assets and liabilities 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 such interest rate risk exposure
remains part of a balanced exposure to risks and is compatible with
a robust solvency position. When asset and liability duration
mismatch is not eliminated, it is monitored and managed through
local risk and asset liability management committees and Group risk
limits consistent with the Group's appetite for interest rate
risk.
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Risk description
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Risk management
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Market risks to our investments continued
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Equity and property investment risk
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 funds under management. Exposure also arises from participating
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 businesses'
investment portfolios, which include equities.
The material exposures to equity
risk in the Group's businesses include CPL's exposure to equity
risk through investments in equity assets for most of its products,
including participating and non-participating savings products and
protection and unit-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 and Malaysia businesses are exposed to
equity risk through their unit-linked products and, in the case of
Malaysia, exposure also arises from participating and unit-linked
business.
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The Group has limited acceptance
for exposures to equity risk from non-participating products if it
is not rewarded for taking the equity risk. The Group accepts
equity exposure that arises from future fees (including shareholder
transfers from the participating businesses) but limits its
exposure to policyholder guarantees by hedging against equity
movements and guarantees where it is considered economically
optimal to do so.
Where equity risk is accepted, it
is explicitly defined by the strategic asset allocation, as well as
monitored and managed through local risk and ALM committees.
Overall exposure to equity risk from the participating businesses
is also managed through Group risk limits consistent with the
Group's appetite for equity risk.
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Foreign exchange risk
The geographical diversity of
Prudential's businesses means that it is exposed to the risk of
foreign exchange rate fluctuations. Some entities within the Group
write policies, invest in assets or enter into other transactions
in local currencies or currencies not linked to the Group's
reporting/functional currency, the US dollar. Although this limits
the effect of exchange rate movements on local operating results,
it can lead to fluctuations in the Group's US dollar-reported
financial statements. This risk is further detailed in section 1.6
of the Risk factors.
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The Group accepts the currency risk
that emerges from profits retained locally to support the growth of
the Group's business and the translation risks from capital being
held in the local currency of the business to meet local regulatory
and market requirements. However, in cases where a surplus arising
in an overseas operation supports Group capital or shareholders'
interest (ie remittances), this exposure is hedged if it is
economically optimal to do so. The Group does not accept
significant shareholder exposures to foreign exchange risks in
currencies outside the local territory.
Foreign exchange risk is managed by
the Group Capital and ALM Committee through the implementation of
asset allocation on funds which captures the exposure to
non-local-denominated assets.
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Liquidity risk
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Prudential's liquidity risk arises
from the need to have sufficient liquid assets to meet policyholder
and third-party payments as they fall due, considered under both
business-as-usual 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 market conditions and valuation of assets
in a more uncertain way than other risks like interest rate or
credit risk. It may arise, for example, where external capital is
unavailable at sustainable cost, where derivatives transactions
require a sudden significant need of liquid assets or cash to post
as collateral to meet derivatives margin requirements, or where
redemption requests are made against funds managed for external
clients (both retail and institutional). Liquidity risk is
considered material at the level of the Group.
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The Group 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
sufficient to meet its 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 $1.6 billion of undrawn committed facilities that can be
made use of, expiring in 2029. Access to further liquidity is
available through the debt capital markets and the Group's
extensive commercial paper programme. 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 liquidity risk, including the
following:
- The Group's Liquidity Risk Policy;
- Regular assessment and reporting by the Group and business
units of liquidity coverage ratios, which are calculated under both
base case and stressed scenarios;
- The Group's Liquidity Risk Management Plan;
- The Group's Collateral Management Framework;
- The Group's contingency plans and identified sources of
liquidity;
- The Group's ability to access the money and debt capital
markets; and
- The Group's access to external committed credit
facilities.
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Risk Description
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Risk management
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Credit risk
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Credit risk is the potential for
loss resulting from a borrower's failure to meet its contractual
debt obligation(s). Counterparty risk, a type of credit risk, is
the probability that a counterparty defaults on its contractual
obligation(s) causing the other counterparty to suffer a loss.
These risks arise from the Group's investments in bonds,
reinsurance arrangements, derivative contracts with third parties,
and its cash deposits with banks. Credit spread risk, another type
of credit risk, arises when the interest rate/return on a loan or
bond is disproportionately low compared with another investment
with a lower risk of default. Invested credit and counterparty
risks are considered a material risk for the Group's business
units.
The total debt securities at 31
December 2023 held by the Group's operations were $83.1 billion (31
December 2022: $77.0 billion). The majority (83 per cent, 31
December 2022: 84 per cent) of the portfolio are investments either
held in unit-linked funds or that support insurance products where
policyholders participate in the returns of a specified pool of
investments1. The gains or losses on these investments
will largely be offset by movements in policyholder
liabilities2. The remaining 17 per cent (31 December
2022: 16 per cent) of the debt portfolio (the 'shareholder debt
portfolio') are investments where gains and losses broadly impact
the income statement, albeit short-term market fluctuations are
recorded outside of adjusted operating profit.
- Group sovereign
debt: Prudential invests in bonds
issued by national governments. This sovereign debt holding within
the shareholder debt portfolio represented 55 per cent or $7.8
billion3 of the total shareholder debt portfolio as at
31 December 2023 (31 December 2022: 41 per cent or $4.9 billion).
The particular risks associated with holding sovereign debt are
detailed further in the disclosures in the Risk factors. The total
exposures held by the Group in sovereign debt securities at 31
December 2023 are given in note C1 of the Group's IFRS financial
statements.
- Corporate debt
portfolio: In the shareholder debt
portfolio, corporate debt exposures totalled $5.8 billion of which
$5.4 billion or 94 per cent were investment grade rated (31
December 2022: $6.6 billion of which $6.1 billion or 93 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, exposure to banks is a key part of its core
investments, considered to be a material risk for the Group, as
well as being important for the hedging and other activities
undertaken to manage its various financial risks.
At 31 December 2023:
- 94 per cent of the Group's shareholder portfolio (excluding
all government and government-related debt) is investment grade
rated4. In particular, 59 per cent of the portfolio is
rated4 A- and above (or equivalent); and
- The Group's shareholder portfolio is well diversified: no
individual sector5 makes up more than 13 per cent of the
total portfolio (excluding the financial and sovereign
sectors).
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The Group's holdings across its
life portfolios are mostly in local currency and with a largely
domestic investor base. These portfolios are generally positioned
towards high-quality names, including those with either government
or considerable parent company balance sheet support. Areas which
the Group is actively monitoring include ongoing developments in
the global banking sector, effects of the global economic slowdown
on the invested assets, the impacts of the tightening of monetary
policy in the Group's key markets, higher refinancing costs,
heightened geopolitical tension and protectionism, the ongoing
downsizing of the Chinese Mainland property sector and more widely
across the Chinese Mainland economy, as well as high indebtedness
in African countries. The impacts of these closely monitored trends
include potential for deterioration in the credit quality of the
Group's invested credit exposures, particularly due to rising
funding costs and overall credit risks, and the extent of downward
pressure on the fair value of the Group's portfolios. The Group's
portfolio is generally well diversified in relation to individual
counterparties, although counterparty concentration is monitored,
particularly in local markets where depth (and therefore the
liquidity of such investments) may be low. The Group has appetite
to accept 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. This risk is further
detailed in sections 1.4 and 1.5 of the Risk factors.
The Group actively reviews its
investment portfolio to improve the robustness and resilience of
the solvency position. A number of risk management tools are used
to manage and mitigate credit and counterparty credit risk,
including the following:
- The Group Credit Risk Policy and the Group Dealing Controls
Policy;
- The Global Counterparty Limit Framework and concentration
limits on large names;
- Collateral arrangements for derivative, secured lending
reverse repurchase and reinsurance transactions which aim to
provide a high level of credit protection; and
- The Group Executive Risk Committee and Group Investment
Committee's oversight of credit and counterparty credit risk and
sector and/or name-specific reviews.
Exposure to the banking sector is
considered a material risk for the Group. Derivative and
reinsurance counterparty credit risk exposure is managed using an
array of risk management tools, including a comprehensive system of
limits. Prudential manages the level of its counterparty credit
risk by reducing its exposure or using additional collateral
arrangements where appropriate.
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Risk description
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Risk management
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The Group's sustainability (including ESG and climate-related)
risks
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These include sustainability risks
associated with environmental considerations such as climate change
(including physical and transition risks), societal risks arising
from diverse stakeholder commitments and expectations and
governance-related risks.
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Material and emerging risks
associated with key sustainability themes may undermine the
long-term success of a business by adversely impacting its
reputation and brand, and ability to attract and retain customers,
investors, employees and distribution and other business partners,
and therefore the results of its operations and delivery of its
strategy and long-term financial success. The Group's
sustainability strategy is centered on three key pillars (providing
simple and accessible health and financial protection, investing
responsibly and creating a sustainable business), each of which
increases the expectations of the Group's stakeholders with regards
to the Group's potential external environmental and social impact.
Sustainability risks arise from the activities that support
implementation of the Group's strategy, which include developing
sustainable and inclusive offerings, continuing to decarbonise the
Group's investment portfolio in a science-informed approach to
facilitate becoming a net zero asset owner by 2050 whilst financing
a just and inclusive transition, and advancing the diversity,
equity and inclusion and belonging strategy to empower existing
employees.
Potential regulatory compliance and
litigation risks exist globally and across Asia, as
sustainability-related topics remain high on the agenda of both
local regulators and international supervisory bodies, including
the International Association of Insurance Supervisors (IAIS) and
the International Sustainability Standards Board (ISSB), which
published its inaugural sustainability and climate-related
disclosure requirements in June 2023. Delivery of the Group's
Sustainability Strategy, including the decarbonisation commitments
and the development of sustainable and inclusive offerings,
heightens the risk of accusations of misleading or unsubstantiated
representations to the extent of the environmental or societal
impact of the Group's activities and the sustainability features of
new products (eg greenwashing), which subsequently increases the
risk of potential litigation or reputational damage. Further
details of the Group's sustainability-related risks and regulations
are included in sections 2.1 and 4.1 of the Risk
factors.
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As custodians of stakeholder value
for the long term, the Group seeks to manage sustainability risks
and their potential impact on its business and stakeholders through
transparent and consistent implementation of its strategy in its
markets and across operational, underwriting and investment
activities. It is enabled by strong internal governance, sound
business practices and a responsible investment approach, with
sustainability-related considerations integrated into investment
processes and decisions and the performance of fiduciary and
stewardship duties, including via voting and active engagement
decisions with respect to investee companies, as both an asset
owner and an asset manager. Climate risk, the Group's reporting
against the recommendations of the Task Force on Climate-Related
Financial Disclosures (TCFD), and progress on the Group's external
climate-related commitments, remain a priority focus for the GRC
for 2024. Further information on the Group's sustainability
governance and strategy, as well as the management of material
sustainability themes, is included in the Group's 2023
Sustainability Report.
The Group participates in networks,
industry forums and working groups, such as the Net Zero Asset
Owner Alliance (NZAOA), Principles for Responsible Investment (PRI)
and CRO Forum, to further develop understanding and support
collaborative action in relation to sustainability risks and
promoting a just and inclusive transition. The Group also actively
engages with, and responds to, discussions, consultations and
information-gathering exercises with local regulators,
international supervisory bodies and global industry standard
setters.
The Group Risk Framework continues
to be critically evaluated and updated where required to ensure
both sustainability-related considerations and risks to the Group,
including those arising from stakeholder expectations of the
external impact of the Group's activities, are appropriately
captured. Risk management and mitigation of sustainability risks
are embedded within the Group Risk Framework and risk processes,
including:
- Consideration within the emerging risk identification and
evaluation processes that emerging sustainability themes and the
associated risks can potentially quickly change from immaterial to
material (dynamic-materiality);
- Reflection in the risk taxonomy that the Group can be both
impacted by sustainability issues as well as having an impact on
these in the external world ('double materiality');
- The addition of 'social and environmental responsibility' as a
strategic risk within the risk taxonomy to consider the potential
risks arising from the external impact of the Group's
activities;
- Workshops and function-wide training on specific risk themes,
including sustainability risk principles, greenwashing risk and the
risks associated with delivery of the Group's external responsible
investment commitments;
- Definition of appropriate (and longer) time horizons with
respect to climate risk management, and the requirement to consider
time horizons where required in risk-based decision-making;
and
- Deep dives into emerging and increasingly material
sustainability themes, including climate-related risks, and
development of Board-level and broader Group-wide
training.
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Risk description
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Risk management
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Risks from the nature of our business and our
industry
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These include the Group's
non-financial risks including operations processes, change
management, information security, IT infrastructure and data
privacy, as well as customer conduct, legal and regulatory
compliance risks. Insurance risks and business concentration risks
are also assumed by the Group in providing its products.
Furthermore, there are risks associated with the oversight of the
Group's joint ventures and associates stemming from our operation
in certain markets.
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Non-financial risks
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The complexity of Prudential, its
activities and the extent of transformation in progress creates a
challenging operating environment and exposure to a variety of
non-financial risks which are considered to be material at a Group
level.
The Group's non-financial risks,
which are not exhaustive and discussed further in section 3 of the
Risk factors, are outlined below.
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Alongside the Non-Financial Risk
Appetite Framework, other risk policies and standards are in place
that individually engage with specific non-financial risks,
including operations processes, change management, third-party and
outsourcing management, business continuity, fraud, financial crime
as well as information security, IT infrastructure and data
privacy. These policies and standards include subject matter
expert-led processes that are designed to identify, assess, manage
and control non-financial risks, including:
- Reviews of key non-financial risks and challenges within Group
and business units' business plans during the annual planning
cycle, to support business decisions;
- Corporate insurance programmes to limit the financial impact
of operational risks;
- Oversight of risk management during the transformation life
cycle, project prioritisation and the risks, interdependencies and
possible conflicts arising from a large portfolio of transformation
activities;
- Screening and transaction monitoring systems for financial
crime and a programme of compliance control monitoring reviews and
regular risk assessments;
- Internal and external review of cyber security capability and
defences;
- Regular updating and risk-based testing of disaster recovery
plans and the Critical Incident Procedure process;
- Established processes to deliver the highest quality of
service to fulfil customers' needs and expectations; and
- Active engagement in and monitoring of regulatory
developments.
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Operations processes risk
Operations processes risk is the
risk of failure to adequately or accurately process different types
of operational transactions, including customer servicing and asset
and investment management operations. Due to human error, among
other reasons, operations and process control incidents do occur
from time to time and no system or process can entirely prevent
occurrence.
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The Group aims to manage the risk
effectively by maintaining operational resilience and honouring
commitments to customers and stakeholders, whilst avoiding material
adverse financial loss or impact on its reputation. Further detail
on the risks to the Group arising from system issues or control
gaps is included in sections 3.1 and 3.3 in the Risk
factors.
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Change management risk
Change management risk remains a
material risk for Prudential, with a number of significant change
programmes under way which, if not delivered and executed
effectively with adequate and capable resources to defined
timelines, scope and cost, may negatively impact its operational
capability, control environment, employees, reputation and ability
to deliver its strategy and maintain market competitiveness. The
current portfolio of transformation and significant change
programmes includes (i) the implementation and embedding of
large-scale regulatory/industry changes; (ii) the expansion of the
Group's digital capabilities and use of technology, platforms and
analytics; and (iii) improvement of business efficiencies through
operating model changes, including those relating to the Group's
central, asset management and investment oversight functions.
Further detail on the risks to the Group associated with
large-scale transformation and complex strategic initiatives is
included in section 3.1 of the Risk factors.
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The Group 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, with regular risk monitoring and
reporting to risk committees. The Group's Transformation Risk
Framework is in place alongside the Group's existing risk policies
and frameworks with the aim to ensure appropriate governance and
controls are in place to mitigate these risks. The Group also
enhanced its governance framework in 2023 to better oversee the
implementation and risk management of digital platforms. This
includes the establishment of digital governance forums that
oversee digital transformation from various dimensions such as
customer-centricity, strategic, financial, operational and risk
management. In addition, Prudential is continuously enhancing
strategic capabilities through internal talent development and
talent acquisition. Developing an engaged workforce that
provides adequate resources for our people to manage change,
connect, grow and succeed is one of the priorities for the
company.
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Risk description
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Risk management
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Non-financial risks continued
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Third-party and outsourcing management risk
The Group's outsourcing and
third-party relationships require distinct oversight and risk
management processes. The Group has a number of important
third-party relationships, with both market counterparties and
outsourcing partners, including distribution, technology and
ecosystem providers. The Group maintains material strategic
partnerships and bancassurance arrangements, which create a
reliance on the operational resilience and performance of
outsourcing and business partners. This risk is explored in more
depth in section 3.3 of the Risk factors.
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The Group's requirements for the
management of material outsourcing arrangements have been
incorporated in its Group Third-Party Supply and Outsourcing
Policy, aligned to the requirements of the HKIA's GWS Framework,
and which outlines the governance in place in respect of material
outsourcing and third-party arrangements and the Group's monitoring
and risk assessment framework. This aims to ensure that appropriate
contract performance and risk mitigation measures are in place over
these arrangements. In addition, the Group Third-Party Risk
Oversight Framework is in place to set out the Group's third-party
risk management and oversight standards that guide the Group senior
management and RCS function to oversee, challenge and manage the
Group's third-party risk profile in a consistent and coherent
way.
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Model risk
Model risk is the risk of adverse
financial, regulatory, operational, or reputational impact, or
misinformed business and strategic decision-making resulting from
reliance on a model or user-developed application (UDA) that is
inaccurate, incorrect or misused. The Group utilises various tools
and they form an integral part of operational functions including
the calculation of regulatory or internal capital requirements, the
valuation of assets and liabilities, determining hedging
requirements, assessing projects and strategic transactions, and
acquiring new business via digital platforms.
Technological developments, in
particular in the field of artificial intelligence (AI) and the
increased use of generative AI, pose new considerations on model
risk oversight provided under the Group Risk Framework.
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The Group has no appetite for model
or UDA related incidents leading to regulatory breaches. There is
limited appetite for failures to develop, implement and monitor
appropriate risk mitigation measures to manage model and UDA risk.
The Group's model and UDA risk is managed and mitigated via the
Model and UDA Risk Framework which applies a risk-based approach to
tools (including those under development) with the aim to ensure a
proportionate level of risk management. The framework requirements
include:
- Set of risk oversight, management and governance
requirements;
- Regular risk assessment requirements of all tools taking into
account potential impact on various stakeholders, including
policyholders; and
- Regular independent validation (including limitations, known
errors and approximations) of all Group critical tools.
An oversight forum for the use of
AI and ensuring compliance with the key ethical principles is also
in place and adopted by the Group with the aim to ensure the safe
use of AI.
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Fraud risk
Prudential is exposed to fraud
risk, including fraudulent insurance claims, transactions, or
procurement of services, that are made against or through the
business.
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The Group's Counter Fraud Policy
and analytics-led tooling are in place to set out
the required standards to enhance fraud detection,
prevention and investigation activities with the objective
to protect resources to support sustainable business growth. The
policy also sets out the framework to tackle fraud with the goals
of safeguarding customers, protecting local businesses and the
Group's reputation, and providing assurance that fraud risk is
managed within appetite.
The Group undertakes strategic
activities to monitor and evaluate the evolving fraud risk
landscape, mitigate the likelihood of fraud occurring and increase
the rate of detection. The Group has a mature confidential
reporting system in place, through which employees
and other stakeholders can report concerns
relating to potential misconduct. The process and results of this
system are overseen by the Group Audit Committee.
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Risk description
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Risk management
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Non-financial risks continued
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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); sanctions compliance breaches (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
improper benefits). Further detail on the risks to the Group
associated with operating in high-risk markets is included in
section 3.6 of the Risk factors.
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The Group-wide policies on
anti-money laundering, sanctions and anti-bribery and corruption
risks reflect the requirements applicable to all staff in all
offices and businesses. Screening and transaction monitoring
systems are in place across the Group.
The Group has continued to
strengthen and enhance its financial crime risk management
capability through investment in advanced analytics and AI tools.
Proactive detective capabilities are being implemented across the
Group and delivered through a centralised monitoring hub to further
strengthen oversight of financial crime risks in the areas of
procurement and third-party management. Risk assessments are
performed annually for businesses and offices across all locations.
Due diligence reviews and assessments against the Group's financial
crime policies are performed as part of the Group's business
acquisition process.
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Information security, IT infrastructure and data privacy
risks
Risks related to malicious attacks
on Prudential systems, service disruption, exfiltration of data,
loss of data integrity and the impact on the privacy of our
customer data remain prevalent, particularly as the accessibility
of attacking tools available to potential adversaries increases.
Regulatory developments in cyber security and data protection are
progressing worldwide and may increase the complexity of
requirements and obligations required for companies. Further detail
on the risks to the Group associated with operating in high-risk
markets is included in sections 3.4 and 3.5 of the Risk
factors.
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The Group adheres to data
minimisation and 'privacy-by-design' principles, where data is only
collected and used for its intended purpose and is not retained
longer than necessary. The handling of customers' data is governed
by specific policies and frameworks, such as the Group Information
Security Policy, the Group Privacy Policy and the Group Data
Policy, to ensure compliance with all applicable laws and
regulations, and the ethical use of customer data.
Despite the rise in ransomware
activity due to the availability of ransomware exploit toolkits and
Ransomware-as-a-Service (RaaS) for threat actors, the Group has a
number of defences in place to protect its systems from cyber
security attacks. Prudential has adopted a holistic risk
management approach which is designed to prevent and disrupt
potential attacks against the Group as well as third-party partner
systems and to manage the recovery process should an attack take
place. Other defences include, but are not limited to: (i)
distributed denial of services (DDoS) protection for the Group's
websites via web application firewall services; (ii) AI-based
endpoint security software; (iii) continuous security monitoring;
(iv) network-based intrusion detection; and (v) employee training
and awareness campaigns to raise understanding of attacks utilising
email phishing techniques. Cyber insurance coverage is in place to
provide some protection against potential financial losses, and the
cyber attack simulation exercises have been carried out to enhance
preparedness. The Group has also established various processes to
ensure the effectiveness of information security and privacy
mechanisms deployed, which include setting up a dedicated ethical
hacking team to perform testing on the Group's systems to identify
potential vulnerabilities, engaging external consultants to perform
penetration testing on our systems, and engaging external
consultants to perform independent assessments on both security
operations centre and the information and privacy function as a
whole to further improve the efficiency of the functions. A private
Bug Bounty Programme has also been established to provide a
mechanism for invited external security practitioners to report
security issues and vulnerabilities. This is further supported by a
Vulnerability Disclosure Programme that allows independent security
researchers to report security issues and vulnerabilities via the
Prudential websites.
The Group has subscribed to
services from independent security consultants to continuously
monitor our external security posture. As the Group continues to
develop and expand digital services and emerging products, its
reliance on third-party service providers and business partners who
specialise in niche capabilities is also increasing. In 2023, among
many companies around the world, the Group's businesses in Malaysia
were affected by the global MOVEit data-theft attack, where a
zero-day vulnerability was exploited at MOVEit, a software solution
providing secured file transfer services, with infringements to
data security, integrity and privacy. As a result, this incident
directly impacted the Group's reputation and compliance
with
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Risk description
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Risk management
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Non-financial risks continued
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Information security, IT infrastructure and data privacy risks
continued
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regulatory and data privacy
requirements. Following the threats, various actions have been
taken, including isolating the affected server, a thorough
investigation, and customer and authority notifications. Potential
enhancements have been identified from the review and specific
actions have been implemented to address these. Apart from this
event, the Group did not experience any cyber security and data
breaches with a material impact on its business strategy,
operations or financial condition in 2023.
In addition, the Group is
proactively monitoring possible advanced social engineering attacks
related to corporate activities, for example, deepfakes, the use of
AI-generated synthetic medium to imitate senior executives to
conduct fraudulent activities. The Group is taking steps to
mitigate such attacks, pragmatic measures include raising regular
cyber security awareness, implementing robust preventative and
detective controls, and having a well-defined incident response
plan as part of a wider cyber resilience strategy.
The Group Infrastructure Policy was
revamped in 2023 to ensure comprehensive governance and assurance
of our technology components. A new enterprise operating model was
designed based on an innovation-led technology operations
structure, mature internal capabilities, and an aligned outsourcing
model. Furthermore, businesses remained focused on digital
ecosystems for strategic growth in 2023. A resiliency enhancement
programme has been put in place to enhance capabilities in managing
disruptions or failures on system platforms serving our customers.
This includes implementing robust measures such as identifying and
removing single-points-of-failure (SPOF) infrastructure, disaster
recovery plans, and backup systems.
Alongside continuous technology
development, the Group's Technology Risk Management function is
primarily responsible for technology risk identification,
assessment, mitigation, monitoring and reporting across different
technology domains to provide advisory, assurance and operations
support for holistic technology risk management including
information security and privacy. Specifically, key risk indicators
have been enhanced to cover key technology risk areas, annual risk
assessment is conducted to identify specific risks, priorities and
focus areas, and deep-dive reviews are conducted on different
technology domains to provide assurance of controls to manage
technology risks. In addition, the Group Technology Risk Committee
is a sub-committee of the Group Executive Risk Committee, which
oversees the effectiveness of technology risk management including
information security and privacy across the Group. Work was
undertaken in 2023 to further enhance the maturity of the
technology risk operating model which includes organisational
structure improvements, policy enhancements and enriched key risk
indicators to provide a quantifiable overlay to overseeing and
managing technology risks. The Group's internal audits also
regularly include cyber security as part of its audit coverage.
Cyber and privacy risks are reported regularly to the GRC by the
Group Chief Technology Risk Officer. In addition, the GRC and Group
Audit Committee receive more detailed briefings at least twice
annually from the Group Chief Technology Officer. Both the Group
Chief Technology Risk Officer and Group Chief Technology Officer
are experienced professionals with more than 20 years of experience
in information technology and cyber security. Further, the Group
Executive Committee (GEC) participates in annual cyber tabletop
exercises and risk workshops to ensure members are well equipped to
respond to a cyber or information security incident and fully
understand the latest threats and regulatory
expectations.
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Risk description
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Risk management
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Non-financial risks continued
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Customer conduct risk
Prudential's conduct of business,
especially in the design and distribution of its products and the
servicing of customers, is crucial in ensuring that the Group's
commitment to meeting its customers' needs and expectations is met.
The Group's Customer Conduct Risk Framework reflects management's
focus on customer outcomes.
Factors that may increase conduct
risk can be found throughout the product life cycle, from the
complexity of the Group's products and services to its diverse
distribution channels, which include its agency workforce, virtual
face-to-face sales, and sales via online digital
platforms.
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The Group 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;
- Manage customer information appropriately, and maintain the
confidentiality of customer information;
- Provide and promote high standards of customer service;
and
- Act fairly and promptly to address customer complaints and any
errors found.
Conduct risk is managed via a range
of controls that are 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 the Group's conduct
risk is key to the Group's strategy. Prudential's conduct risks are
managed and mitigated using the following, among other
tools:
- The Group's Code of 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
structures, and provides a safe environment to report conduct
risk-related issues via the Group's internal processes and the
Speak Out programme;
- Distribution controls, including monitoring programmes
relevant to the type of business (insurance or asset management),
distribution channel (agency, bancassurance or digital) and
ecosystem, to help ensure sales are conducted in a manner that
considers the fair treatment of customers within digital
environments;
- Quality of sales processes, services and training, and use of
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.
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Legal and regulatory compliance risk
Prudential operates in highly
regulated markets and under the ever-evolving requirements and
expectations of diverse and dynamic regulatory, legal and tax
regimes which may impact its business or the way the business is
conducted. The complexity of legal and regulatory (including
sanctions) compliance continues to evolve and increase,
representing a challenge for international businesses. Compliance
with the Group'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 one jurisdiction over
another, creating additional legal, regulatory compliance and reputational risks. These risks may be
increased where the scope of regulatory requirements and
obligations are uncertain, and where specific cases applicable to
the Group are complex. In certain jurisdictions in which Prudential
operates there are several ongoing policy initiatives and
regulatory developments which will impact the way
Prudential is supervised. Further
information on specific areas of regulatory and supervisory
focus and changes are included in section 4 of the Risk
factors.
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Regulatory developments are
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, industry groups and regulators.
Risk management and mitigation of
regulatory risk at Prudential includes a comprehensive set of
compliance and financial crime operating arrangements, such as
policies, procedures, reporting protocols, risk management
measures, disclosures and training, to ensure ongoing compliance
with regulatory and legal obligations. Appropriate controls or
tools have been systematically integrated into the daily operations
of Prudential:
- Close monitoring and assessment of our business controls and
regulatory landscape, with explicit compliance consideration of
risk themes in strategic decisions and cross-border activities
including payments;
- Ongoing engagement with national regulators, government policy
teams and international standard setters; and
- Compliance oversight to ensure adherence to new regulatory
developments, including those associated with greenwashing
risk.
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Risk description
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Risk management
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Insurance risks
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Insurance risks make up a
significant proportion of Prudential's overall risk exposure. The
profitability of the Group's 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/surrendering of policies), and increases in the costs of
claims over time (claim inflation). The risks associated with
adverse experience relative to assumptions associated with product
performance and customer behavior are detailed in section 3.7 of
the Risk factors. 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 are compatible
with a robust solvency position.
Inflationary and other economic
pressures have also impacted morbidity experience in several
markets. Elevated interest rates may lead customers to lapse in
preference for alternate saving options that offer higher levels of
guarantees. A high-inflation environment, and the broader economic
effects of recessionary concerns, may also increase lapses,
surrenders and fraud, as well as heighten premium affordability
challenges.
The principal drivers of the
Group's insurance risk vary across its business units. In Hong
Kong, Singapore, Indonesia and Malaysia, a significant volume of
health and protection business is written, and the most significant
insurance risks are medical claims inflation risk, morbidity risk
and persistency risk.
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Insurance risks are managed and
mitigated using the following, among other methods:
- The Group's Insurance Policy;
- The Group's Product and Underwriting Risk Policy, which sets
out the required standards for effective product and underwriting
risk management and approvals for new, or changes to existing,
products (including the role of the Group), and the processes to
enable the measurement of underwriting risk. The policy also
describes how the Group's Customer Conduct Risk Policy is met in
relation to new product approvals and current and legacy
products;
- The Group's Counter Fraud Policy (see the 'Fraud risk' section
above);
- Using persistency, morbidity and longevity assumptions that
reflect recent experience and expectation of future trends, and the
use of 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 and training, and
using initiatives to increase customer retention in order to
mitigate persistency risk;
- The use of mystery shopping to identify opportunities for
improvement in sales processes and training; and
- Using product repricing and other claims management
initiatives in order to mitigate morbidity and medical claims
inflation risk.
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Medical claims inflation risk
A key assumption in these markets
is the rate of medical claims inflation, which is often in excess
of general price inflation. The cost of medical treatment could
increase more than expected, resulting in higher than anticipated
medical claims cost passed on to Prudential.
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This risk is best managed by
retaining the right to reprice products and appropriate overall
claims limits within policies, either per type of medical treatment
or in total across a policy, annually and/or over the policy
lifetime. Medical reimbursement downgrade experience (where the
policyholder reduces the level of the coverage/protection in order
to reduce premium payments) following any repricing is also
monitored by the Group's businesses.
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Morbidity risk
Morbidity risk is the risk of
deviations in the future frequency and magnitude of non-fatal
accident and sickness claims relative to initial assumptions that
are adverse to shareholder value. It can be
influenced by a range of factors including: inflationary,
economic and other pressures on the cost of medical treatment;
medical advances which can reduce the incidence and improve
recovery rates of serious health conditions but can also increase
diagnosis rates and/or increase treatment costs of certain
conditions; government and regulatory policies; opportunistic
activities (including fraud); and natural events (including
pandemics). Morbidity risk can also result from: product design
features that incentivise adverse policyholder behaviour;
inappropriate or insufficiently informed initial assumptions; claims volatility due to random fluctuation or a
large-scale systemic event; insufficient
recognition of an individual's medical; financial and/or and other
relevant circumstances during the policy
application assessment process; and/or ineffective claims
assessments leading to payment of claims that are
inconsistent with the insurance product's contract and/or best
practice.
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Morbidity risk is managed through
prudent product design, underwriting and claims management, 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.
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Risk description
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Risk management
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Insurance risks continued
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Persistency risk
Persistency risk results from
adverse changes in policy surrenders, paid-ups and other policy discontinuances. In general, lower
persistency experience results in deterioration of profits and
shareholder value and can be an indicator of inadequate sales
quality controls, and can elevate conduct, reputational and
regulatory risks. Persistency risk generally
stems from misalignment between customer needs and purchased
product as a result of insufficient product collaterals and/or
sales process, insufficient post-sale communication and engagement
with the customer leading to a deterioration of appreciation of the
value of their policy, operational barriers to
premium renewal payment, and/or changes in
policyholder circumstances resulting from external
drivers.
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Persistency risk is managed by
appropriate controls across the product life cycle. These include:
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; and post-sale management through regular experience monitoring. Strong risk management
and mitigation of 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. Modelling
this dynamic policyholder behaviour is particularly important when
assessing the likely take-up rate of options embedded within
certain products.
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Business concentration risk
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Prudential operates in markets in
both Asia and Africa via various channels and product mix; although
largely diversified at the Group level, several of these markets
are exposed to certain levels of concentration risk. From a channel
concentration perspective, some of the
Group's key markets rely on agency and some markets rely on
bancassurance. From a product concentration perspective, some of the Group's markets focus heavily on
specific product types, depending on the target customer
segments. Geographically, the Greater China (Hong Kong, the Chinese
Mainland and Taiwan) region contributes materially
to the Group's top and bottom lines. Uncertainties in macroeconomic
and geopolitical conditions as well as regulatory changes may
elevate business concentration risk including any potential
slowdown in business from Mainland Chinese visitors and in the
Chinese Mainland, and adversely impact the Group's business and
financial condition.
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To improve business resilience, the
Group continues to look for opportunities to enhance business
diversification by building multi-market growth engines as part of
its strategy.
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Risks associated with the oversight of the Group's joint
ventures and associates
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Prudential operates, and in certain
markets is required by local regulation to operate, through joint
ventures and other joint ownership or associates. For such
operations, the level of control exercisable by the Group depends
on the terms of the contractual agreements between participants.
Whilst the joint ventures and associates are run as separate
entities, the Group's interests are best safeguarded by our ability
to effectively oversee and influence these joint venture and
associates in a way that is proportionate to our ownership level
and control. Further information on the risks to the Group
associated with its joint ventures and other shareholders and third
parties are included in section 3.6 of the Risk factors.
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The Group exercises primary
oversight and control over joint ventures and associates through
our nominated directors and other representatives on the Board and
Board Committees, whose appointments are subject to regular review.
The Group has effective access to management information on these
businesses via the Board and Board Committees, the businesses'
public disclosures, and established regular touchpoints with key
business functions of these organisations (eg audit). Key updates
on joint ventures and associates are provided to the Group's
governance such as the Risk Committee and the Audit
Committee.
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Notes
(1) Reflecting products that
are classified as Variable Fee Approach only.
(2) With the exception of
investments backing the shareholders' 10 per cent share of the
estate within the Hong Kong participating fund
(3) Excluding assets held to
cover linked liabilities and those of the consolidated investment
funds.
(4) Based on middle ranking
from Standard & Poor's, Moody's and Fitch. If unavailable, NAIC
and other external ratings and then internal ratings have been
used.
(5) Source of segmentation:
Bloomberg Sector, Bloomberg Group and Merrill Lynch. Anything that
cannot be identified from the three sources noted is classified as
other.
Risk factors
A number of risk factors may affect
the financial condition, results of operations and/or prospects of
Prudential and its wholly and jointly owned businesses, as a whole,
and, accordingly, the trading price of Prudential's shares. The
risk factors mentioned below should not be regarded as a complete,
exhaustive and comprehensive statement of all potential risks and
uncertainties. The information given is as of the date of this
document, and any forward-looking statements are made subject to
the factors specified under 'Forward-looking
statements'.
1. Risks relating to Prudential's financial
situation
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1.1
Prudential's businesses are inherently subject to market
fluctuations and general economic conditions, each of which may
adversely affect the Group's business, financial condition, results
of operations and prospects.
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Uncertainty, fluctuations or
negative trends in global and national macroeconomic conditions and
investment climates could have a material adverse effect on
Prudential's business, financial condition and results of
operations, including as a result of increased strategic, business,
insurance, product and customer conduct risks.
Global financial markets are subject
to uncertainty and volatility created by a variety of factors.
Examples of these factors include: actual or expected changes in
both monetary and regulatory policies in the Chinese Mainland, the
US and other jurisdictions together with their impact on base
interest rates and the valuation of all asset classes and inflation
expectations; slowdowns or reversals in world or regional economic
growth from geopolitical conflicts and/or global issues such as
pandemics, etc.; and sector-specific, for examples in banking, real
estate, etc., slowdowns or deteriorations which have the potential
to have contagion impacts. Other factors include fluctuations in
global commodity and energy prices, concerns over the
serviceability of sovereign debt in certain economies, the
increased level of geopolitical and political risk and
policy-related uncertainty, socio-political and climate-driven
events, etc. The transition to a lower carbon economy, the timing
and speed of which is uncertain and will vary by country, may also
result in greater uncertainty, fluctuations or negative trends in
asset valuations and reduced liquidity, particularly for
carbon-intensive sectors, and may have a bearing on inflation
levels. The extent of the financial market and economic impact of
these factors may be highly uncertain and unpredictable and
influenced by the actions, including the duration and effectiveness
of mitigating measures by governments, policymakers and the
public.
The adverse effects of such factors
could be felt principally through the following items:
- Changes to interest rates could reduce Prudential's capital
strength and impair its ability to write significant volumes of new
business. Increases in interest rates could adversely impact the
financial condition of the Group through changes in the present
value of future fees for unit-linked businesses and/or the present
value of future profits for accident and health products; and/or
reduce the value of the Group's assets and/or have a negative
impact on its assets under management and profit. Decreases in
interest rates could: increase the potential adverse impact of
product guarantees included in non-unit-linked products with a
savings component; reduce investment returns on the Group's
portfolios; impact the valuation of debt securities; and/or
increase reinvestment risk for some of the Group's investments from
accelerated prepayments and increased redemptions.
- A reduction in the financial strength and flexibility of
corporate entities may result in a deterioration of the credit
rating profile and valuation of the Group's invested credit
portfolio (which may lead to an increase in regulatory capital
requirements for the Group or its businesses), increased credit
defaults and debt restructurings and wider credit and liquidity
spreads, resulting in realised and unrealised credit losses.
Regulations imposing or increasing restrictions on the amount of
company debt financing, such as those placing limits on debt or
liability ratios, may also reduce the financial flexibility of
corporate entities. Similarly, securitised assets in the Group's
investment portfolio are subject to default risk and may be
adversely impacted by delays or failures of borrowers to make
payments of principal and interest when due. Where a widespread
deterioration in the financial strength of corporate entities
occurs, any assumptions on the ability and willingness of
governments to provide financial support may need to be
revised.
- Failure of Prudential's counterparties (such as banks,
reinsurers and counterparties to cash management and risk transfer
or hedging transactions) to meet commitments, or legal, regulatory
or reputational restrictions on the Group's ability to deal with
these counterparties, could give rise to a negative impact on
Prudential's financial position and on the accessibility or
recoverability of amounts due or the adequacy of collateral.
Geographic or sector concentrations of counterparty credit risk
could exacerbate the impact of these events where they
materialise.
- Estimates of the value of financial instruments becoming more
difficult because in certain illiquid, volatile or closed markets,
determining the value at which financial instruments can be
realised is highly subjective. Processes to ascertain such values
require substantial elements of judgement, assumptions and
estimates (which may change over time). Where the Group is required
to sell its investments within a defined time frame, such market
conditions may result in the sale of these investments at below
expected or recorded prices.
- Illiquidity of the Group's investments. The Group holds
certain investments that may, by their nature, lack liquidity or
have the potential to lose liquidity rapidly, such as investment
funds (including money market funds), privately placed fixed
maturity securities, mortgage loans, complex structured securities
and alternative investments. If these investments were required to
be liquidated on short notice, the Group could experience
difficulty in doing so and could be forced to sell them at a lower
price than it otherwise would have been able to realise.
- A reduction in revenue from the Group's products where fee
income is linked to account values or the market value of the funds
under management. Sustained inflationary pressures which may drive
higher interest rates may also impact the valuation of fixed income
investments and reduce fee income.
- Increased illiquidity, which includes the risk that expected
cash inflows from investments and operations will not be adequate
to meet the Group's anticipated short-term and long-term
policyholder benefits and expense payment obligations. Increased
illiquidity also adds to the uncertainty over the accessibility of
financial resources which in extreme conditions could impact the
functioning of markets and reduce capital resources as valuations
decline. This could occur if external capital is unavailable at
sustainable cost, increased liquid assets are required to be held
as collateral under derivative transactions or redemption
restrictions are placed on Prudential's investments in illiquid
funds. In addition, significant redemption requests could also be
made on Prudential's issued funds and while this may not have a
direct impact on the Group's liquidity, it could result in
reputational damage to Prudential. The potential impact of
increased illiquidity is more uncertain than for other risks such
as interest rate or credit risk.
For some non-unit-linked products
with a savings component it may not be possible to hold assets
which will provide cash flows to match those relating to
policyholder liabilities. This may particularly be the case in
those markets where bond markets are less developed or where the
duration of policyholder liabilities is longer than the duration of
bonds issued and available in the market, and in certain markets
where regulated premium and claim values are set with reference to
the interest rate environment prevailing at the time of policy
issue. This results in a mismatch due to the duration and
uncertainty of the liability cash flows and the lack of sufficient
assets of a suitable duration. While this residual asset/liability
mismatch risk can be managed, it cannot be eliminated. If interest
rates in these markets are lower than those used to calculate
premium and claim values over a sustained period, this could have a
material adverse effect on Prudential's reported profit and the
solvency of its business units. In addition, part of the profit
from the Group's operations is related to bonuses for policyholders
declared on participating products, which are impacted by the
difference between actual investment returns of the participating
fund (which are broadly based on historical and current rates of
return on equity, real estate and fixed income securities) and
minimum guarantee rates offered to policyholders. This profit could
be lower in particular in a sustained low interest rate
environment.
In general, upheavals in the
financial markets may affect general levels of economic activity,
employment and customer behaviour. As a result, insurers may
experience an elevated incidence of claims, frauds, lapses, partial
withdrawals or surrenders of policies, and some policyholders may
choose to defer or stop paying insurance premiums or reduce
deposits into retirement plans. Uncertainty over livelihoods,
elevated cost of living and challenges in affordability may
adversely impact the demand for insurance products and increase
regulatory risk in meeting regulatory definitions and expectations
with respect to vulnerable customers (see risk factor 3.7). In
addition, there may be a higher incidence of counterparty failures.
If sustained, this environment is likely to have a negative impact
on the insurance sector over time and may consequently have a
negative impact on Prudential's business, balance sheet and
profitability. For example, this could occur if the recoverable
value of intangible assets for bancassurance agreements is reduced.
New challenges related to market fluctuations and general economic
conditions may continue to emerge. For example, sustained
inflationary pressures driving interest rates to even higher levels
may lead to increased lapses for some guaranteed savings products
where higher levels of guarantees are offered by products of the
Group's competitors, reflecting consumer demand for returns at the
level of, or exceeding, inflation. High inflation, combined with an
economic downturn or recession, may also result in affordability
challenges, adversely impacting the ability of consumers to
purchase insurance products. Rising inflation, via medical claims
inflation (with rising medical import prices a factor under current
market conditions), may adversely impact the profitability of the
Group's businesses.
Any of the foregoing factors and
events, individually or together, could have a material adverse
effect on Prudential's business, financial condition, results of
operations and prospects.
1.2 Geopolitical and political risks and uncertainty may
adversely impact economic conditions, increase market volatility
and regulatory compliance risks, cause operational disruption to
the Group and impact the implementation of its strategic plans,
which could have adverse effects on Prudential's business,
financial condition, results of operations and
prospects.
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The Group is exposed to geopolitical
and political risks and uncertainty in the diverse markets in which
it operates. Such risks may include:
- The application of government regulations, executive powers,
sanctions, protectionist or restrictive economic and trade policies
or measures adopted by businesses or industries which increase
trade barriers or restrict trade, sales, financial transactions, or
the transfer of capital, investment, data or other intellectual
property, with respect to specific territories, markets, companies
or individuals;
- An increase in the volume and pace of domestic regulatory
changes, including those applying to specific sectors;
- The increased adoption or implementation of laws and
regulations which may purport to have extra-territorial
application;
- An increase in military tensions, regional hostilities or new
conflicts which may disrupt business operations, investments and
growth;
- Withdrawals or expulsions from existing trading blocs or
agreements or financial transaction systems, or fragmentation of
systems, including those which facilitate cross-border
payments;
- The implementation of measures favouring local enterprises
including changes to the maximum level of non-domestic ownership by
foreign companies, differing treatment of foreign-owned businesses
under regulations and tax rules, or international trade disputes
affecting foreign companies;
- Increased costs due to government mandates or regulations
imposing a financial contribution to the government as a condition
for doing business; and
- Measures which require businesses of overseas companies to
operate through locally incorporated entities or with requirements
on minimum local representation on executive or management
committees.
The above risks may have an adverse
impact on Prudential through their effects on the macroeconomic
outlook and the environment for global, regional and national
financial markets. Prudential may also face heightened sanction
risks driven by geopolitical conflicts as well as increased
reputational risks. The above risks may also adversely impact the
economic, business, legal and regulatory environment in specific
markets or territories in which the Group, its joint ventures or
jointly owned businesses, sales and distribution networks, or
third-party service providers have operations. For internationally
active groups such as Prudential, operating across multiple
jurisdictions, such measures may also add to the complexity of
legal and regulatory compliance and increase the risk of conflicts
between the requirements of one jurisdiction and another. See risk
factor 4.1 below.
Geopolitical and political risks and
uncertainty may also adversely impact the Group's operations and
its operational resilience. Increasing geopolitical and political
tensions may lead to conflict, civil unrest and/or disobedience as
well as increases in domestic and cross-border cyber intrusion
activity. Such events could impact operational resilience by
disrupting Prudential's systems, operations, new business sales and
renewals, distribution channels and services to customers, which
may result in a reduction in contributions from business units to
the central cash balances and profit of the Group, decreased
profitability, financial loss, adverse customer impacts and
reputational damage and may impact Prudential's business, financial
condition, results of operations and prospects.
Legislative or regulatory changes
and geopolitical or political risks which adversely impact Hong
Kong's international trading and economic relationships may result
in adverse sales, operational and product distribution impacts to
the Group due to the territory being a key market which also hosts
Group head office functions.
1.3 As a holding company, Prudential is dependent upon its
subsidiaries to cover operating expenses and dividend
payments.
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The Group's insurance and asset
management operations are generally conducted through direct and
indirect subsidiaries, which are subject to the risks discussed
elsewhere in this 'Risk factors' section.
As a holding company, Prudential's
principal sources of funds are remittances from subsidiaries,
shareholder-backed funds, the shareholder transfer from long-term
funds and any amounts that may be raised through the issuance of
equity, debt and commercial paper.
Certain of Prudential's subsidiaries
are subjected to insurance, asset management, foreign exchange and
tax laws, rules and regulations (including in relation to
distributable profits that can limit their ability to make
remittances). In some circumstances, including where there are
changes to general market conditions, this could limit Prudential's
ability to pay dividends to shareholders or to make available funds
held in certain subsidiaries to cover the operating expenses of
other members of the Group.
A material change in the financial
condition of any of Prudential's subsidiaries may have a material
effect on its business, financial condition, results of operations
and prospects.
1.4 Prudential's investment portfolio is subject to the risk
of potential sovereign debt credit deterioration.
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Investing in sovereign debt creates
exposure to the direct or indirect consequences of geopolitical or
political, social or economic changes (including changes in
governments, heads of state or monarchs), military conflicts,
pandemics and associated disruption, and other events affecting the
markets in which the issuers of such debt are located and the
creditworthiness of the sovereign. Investment in sovereign debt
obligations involves risks that are different to investment in the
debt obligations of corporate issuers. In addition, the issuer of
the debt or the governmental authorities that control the repayment
of the debt may be unable or unwilling to repay principal or pay
interest when due (or in their agreed currency) in accordance with
the terms of such debt, and Prudential may have limited recourse to
compel payment in the event of a default. A sovereign debtor's
willingness or ability to repay principal and to pay interest in a
timely manner may be affected by, among other factors, its
financial position, the extent and availability of its foreign
currency reserves, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of the debt service
burden to the economy as a whole, the sovereign debtor's policy
toward local and international lenders, geopolitical tensions and
conflicts and the political constraints to which the sovereign
debtor may be subject.
Moreover, governments may use a
variety of techniques, such as intervention by their central banks
or imposition of regulatory controls or taxes, to devalue their
currencies' exchange rates, or may adopt monetary, fiscal and other
policies (including to manage their debt burdens) that have a
similar effect, all of which could adversely impact the value of an
investment in sovereign debt even in the absence of a technical
default. Periods of economic uncertainty may affect the volatility
of market prices of sovereign debt to a greater extent than the
volatility inherent in debt obligations of other types of
issuers.
In addition, if a sovereign default
or other such events described above were to occur, as has happened
on certain occasions in the past, other financial institutions may
also suffer losses or experience solvency or other concerns, which
may result in Prudential facing additional risks relating to
investments in such financial institutions that are held in the
Group's investment portfolio. There is also risk that public
perceptions about the stability and creditworthiness of financial
institutions and the financial sector generally might be adversely
affected, as might counterparty relationships between financial
institutions.
If a sovereign were to default on or
restructure its obligations, or adopt policies that devalued or
otherwise altered the currencies in which its obligations were
denominated, this could have a material adverse effect on
Prudential's business, financial condition, results of operations
and prospects.
1.5 Downgrades in Prudential's financial strength and credit
ratings could significantly impact its competitive position and
damage its relationships with creditors or trading
counterparties.
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Prudential's financial strength and
credit ratings, which are used by the market to measure its ability
to meet policyholder obligations, are important factors affecting
public confidence in Prudential's products, and as a result its
competitiveness. Downgrades in Prudential's ratings as a result of,
for example, decreased profitability, increased costs, increased
indebtedness or other concerns could have an adverse effect on its
ability to market products, retain current policyholders and
attract new policyholders, as well as the Group's ability to
compete for acquisition and strategic opportunities. Downgrades
could have an adverse effect on the Group's financial flexibility,
including its ability to issue commercial paper at acceptable
levels and pricing, requirements to post collateral under or in
connection with transactions, and ability to manage market risk
exposures. The interest rates at which Prudential is able to borrow
funds are affected by its credit ratings, which are in place to
measure the Group's ability to meet its contractual
obligations.
In addition, changes in
methodologies and criteria used by rating agencies could result in
downgrades that do not reflect changes in the general economic
conditions or Prudential's financial condition.
In addition, any such downgrades
could have a material adverse effect on Prudential's business,
financial condition, results of operations and prospects.
Prudential cannot predict what actions rating agencies may take, or
what actions Prudential may take in response to any such actions,
which could adversely affect its business.
1.6 Prudential is subject to the risk of exchange rate
fluctuations owing to the geographical diversity of its
businesses.
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Due to the geographical diversity
of Prudential's businesses, Prudential is subject to the risk of
exchange rate fluctuations. Prudential's operations generally write
policies and invest in assets denominated in local currencies, but
in some markets, Prudential also writes policies and invests in
assets denominated in non-local currencies, primarily in the US
dollar. Although this practice limits the effect of exchange rate
fluctuations on local operating results, it can lead to
fluctuations in Prudential's consolidated financial statements upon
the translation of results into the Group's presentation currency.
This exposure is not currently separately managed. The Group
presents its consolidated financial statements in US dollars. The
results of some entities within the Group are not denominated in or
linked to the US dollar and some enter into transactions which are
conducted in non-US dollar currencies. Prudential is subject to the
risk of exchange rate fluctuations from the translation of the
results of these entities and non-US dollar transactions and the
risks from the maintenance of the HK dollar peg to the US dollar.
In cases where a non-US dollar denominated surplus arises in an
operation which is to be used to support Group capital or
shareholders' interest (ie remittances), this currency exposure may
be hedged where considered economically favourable. Prudential is
also subject to the residual risks arising from currency swaps and
other derivatives that are used to manage the currency
exposure.
2.
Risks relating to sustainability (including environmental, social
and governance (ESG) and climate-related) matters
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2.1
The failure to understand and respond effectively to the risks
associated with sustainability factors could adversely affect
Prudential's achievement of its long-term
strategy.
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A failure to manage the material
risks associated with key sustainability themes, including those
detailed below, may inhibit the Group's ability to meet its
sustainability-related commitments and undermine its sustainability
credentials by adversely impacting the Group's reputation and
brand, and its ability to attract and retain customers and
employees, and therefore the results of its operations and delivery
of its strategy and long-term financial success.
a Environmental
risks
Environmental concerns, notably
those associated with climate change and its social and economic
impacts, but also including those associated with biodiversity and
nature degradation, present long-term risks to the sustainability
of Prudential and may impact its customers and other
stakeholders.
Prudential's investment horizons are
long term, and it is therefore exposed to the long-term impact of
climate change risks, which include the financial and non-financial
impact of the transition to a lower carbon economy, physical,
reputational and shareholder, customer or third-party litigation
risks. The global transition to a lower carbon economy may have an
adverse impact on investment valuations and liquidity as the
financial assets of carbon-intensive companies in some asset
sectors re-price as a result of increased operating 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
versus disorderly and reactive, will be influenced by factors such
as changes in public policy, technology and market or investor
sentiment. The potential impact of these factors on the valuation
of investments may also have a broader economic impact that may
adversely affect customers and their demand for the Group's
products. Direct physical risks associated with the impacts of
climate change combined with the potential economic impacts of the
transition to a lower carbon economy have the potential to
disproportionately impact the Asia and Africa markets in which
Prudential operates and invests. The Group's stakeholders
increasingly expect and/or rely on the Group to support an orderly,
inclusive and sustainable transition based on an understanding of
relevant market and company-level transition plans with
consideration given to the impact on the economies, businesses,
communities and customers in these markets.
The Group's ability to sufficiently
understand and appropriately respond to transition risk and its
ability to deliver on its external carbon reduction commitments and
the implementation of sustainability considerations in existing or
new sustainability or climate-orientated investment strategies and
products may be limited by insufficient or unreliable data on
carbon exposure, transition plans of the investee company assets in
which it invests, or inability to divest as planned. The direct
physical impacts of climate change, including shorter-term
event-driven (acute) physical risks such as increasingly frequent
and severe hurricanes and wildfires, and those associated with
longer-term shifts in climate patterns such as elevated
temperatures and prolonged drought (chronic physical risks), are
likely to become increasingly significant factors in the mortality
and morbidity risk assessments for the Group's insurance product
underwriting and offerings and their associated claims profiles.
Similarly, nature-related physical risks can impact life and health
liabilities where, for example, pollution, poor water quality,
waste contamination and overexploitation of the natural environment
can all contribute to biodiversity degradation, which in turn can
potentially pose threats to human health. Such short-term and
long-term environmental changes in markets where Prudential or its
key third parties operate could adversely impact the Group's
operational resilience and its customers, which may potentially
occur through migration or displacement both within and across
borders.
The pace and volume of global
standards and sustainability, environmental and climate-related
regulations emerging across the markets in which the Group
operates, the need to deliver on existing and new exclusions or
restrictions on investments in certain sectors, engagement and
reporting commitments and the demand for externally assured
reporting may give rise to compliance, operational, disclosure and
litigation risks which may be increased by the multi-jurisdictional
coordination required in adopting a consistent risk management
approach. The launch of sustainability-focused funds or products,
or the (method of) incorporation of sustainability considerations
within the investment process for existing products, may increase
the risks related to the perceived fulfilment of fiduciary duties
to customers and investors by the Group's appointed asset managers,
and may subsequently increase regulatory compliance, customer
conduct, product disclosure and litigation risks. Prudential's
voluntary memberships of, or participation within, industry
organisations and groups or their initiatives may increase
stakeholder expectations of the Group's acquiescence or compliance
with their publicised positions or aims. The reputational and
litigation risks of the Group may subsequently increase where the
stated positions or aims of such industry organisations or their
initiatives continue to evolve, or where jurisdictions interpret
their objectives as adversely impacting on markets or consumers,
including for example, perceived conflicts with anti-trust laws.
See risk factor 4.1 for details of sustainability including ESG and
climate-related regulatory and supervisory developments with
potential impacts for the Group.
A failure to understand, manage and
provide greater transparency of its exposure to these
climate-related risks may have increasingly 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, changing needs, human rights and interests of
its customers and employees and the communities in which the Group
or its third parties operate. Perceived or actual inequity and
income disparities (both within developed markets and within the
Group's markets), intensified by the recent pandemic, have the
potential to further erode social cohesion across the Group's
markets which may increase operational and disruption risks for
Prudential and impact the delivery of the Group's strategy on
developing affordable and accessible products to meet the needs of
people across these markets. Direct physical impacts of climate
change and deterioration of the natural environment, together with
the actions that support the global transition to a lower carbon
economy, may disproportionately impact the stability of livelihoods
and health of lower socioeconomic groups within the markets in
which the Group operates. These risks are heightened as Prudential
operates in multiple jurisdictions that are particularly vulnerable
to climate change and biodiversity degradation, with distinct local
cultures and considerations.
Evolving social norms and emerging
population risks associated with public health trends (such as an
increase in obesity and mental health deterioration) and
demographic changes (such as population urbanisation and ageing),
as well as potential migration due to factors including
climate-related developments, may affect customer lifestyles and
therefore may impact the level of claims under the Group's
insurance product offerings.
As a provider of insurance and
investment services, the Group is increasingly focused on making
its products more accessible through the use of digital services,
technologies and distribution methods to customers. As a result,
Prudential has access to extensive amounts of 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 (AI)
technologies. The Group is therefore exposed to an increase in
technology risk, including potential unintended consequences from
algorithmic bias, as well as regulatory, ethical and reputational
risks associated with customer data misuse or security breaches.
These risks are explained in risk factors 3.4 and 3.5 below. The
increasing digitalisation of products, services and processes may
also result in new and unforeseen regulatory requirements and
stakeholder expectations, including those relating to how the Group
supports its customers through this transformation.
Failure to foster an inclusive,
diverse and open environment for the Group's employees in
accordance with the principles of the Universal Declaration of
Human Rights and the International Labour Organisation's core
labour standards could impact the ability to attract and/or retain
employees and increase potential reputational risk. The business
practices within the Group's third-party supply chain and investee
companies with regards to topics including labour standards,
respect of human rights and modern slavery also expose the Group to
potential reputational risk.
c Governance
A failure to maintain high standards
of corporate governance may adversely impact the Group and its
customers and employees and increase the risk of poor
decision-making and a lack of oversight and management 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 also 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
service providers increase the potential for reputational risks
arising from inadequate governance.
Sustainability risks may directly or
indirectly impact Prudential's business and the achievement of its
strategic focus on providing greater and more accessible health and
financial protection, responsible stewardship and investment within
the Group's market to support a just and inclusive transition,
developing a sustainable business that delivers a positive impact
on its broad range of stakeholders, which range from customers,
institutional investors, employees and suppliers, to policymakers,
regulators, industry organisations and local communities. A failure
to transparently and consistently implement the Group's
Sustainability Strategy across its local businesses and
operational, underwriting and investment activities, as well as a
failure to implement and uphold responsible business practices, may
adversely impact the financial condition and reputation of the
Group. This may also negatively impact the Group's stakeholders,
who all have expectations, concerns and aims related to
sustainability matters, which may differ, both within and across
stakeholder groups and the markets in which the Group operates. In
its investment activities, Prudential's stakeholders increasingly
have expectations of, and place reliance on, an approach to
responsible investment that demonstrates how sustainability
considerations are effectively integrated into investment
decisions, responsible supply chain management and the performance
of fiduciary and stewardship duties. These duties include effective
implementation of exclusions, voting and active engagement
decisions with respect to investee companies, as both an asset
owner and an asset manager, in line with internally defined
procedures and external commitments. The increased demands and
expectations of stakeholders for transparency and disclosure of the
activities that support these duties further heightens disclosure
risks for the Group, including those associated with potentially
overstating or misstating the positive environmental or societal
impacts of the Group's activities, products and services (eg
greenwashing).
3.
Risks relating to Prudential's business activities and
industry
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3.1
The implementation of large-scale transformation, including complex
strategic initiatives, gives rise to significant design and
execution risks and may affect Prudential's operational capability
and capacity. Failure of these initiatives to meet their objectives
may adversely impact the Group and the delivery of its
strategy.
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Where required in order to
implement its business strategies for growth, meet customer needs,
improve customer experiences, strengthen operational resilience,
meet regulatory and industry requirements, and maintain market
competitiveness, Prudential from time to time undertakes corporate
restructuring, transformation programmes and acquisitions/disposals
across its business. Many such change initiatives are complex,
inter-connected and/or of large scale, and include improvement of
business efficiencies through operating model changes, advancing
the Group's digital capability, expanding strategic partnerships,
and industry and regulatory-driven change. There may be a material
adverse effect on Prudential's business, employees, customers,
financial condition, results of operations and prospects if these
initiatives incur unplanned costs, are subject to implementation
delays, or fail to fully meet their objectives. Leadership changes
and changes to the business and operational model of the Group
increase uncertainty for its employees, which may affect
operational capacity and the ability of the Group to deliver its
strategy. There may also be adverse implications for the Group in
undertaking transformation initiatives such as placing additional
strain on employees or operational capacity, and weakening the
control environment. Implementing initiatives related to the
revised strategy for the Group, control environment transformation,
significant accounting standard changes, such as IFRS 17, and other
regulatory changes in major businesses of the Group, such as those
related to the agency transformation at the Indonesia businesses,
may amplify these risks. Risks relating to these regulatory changes
are explained in risk factor 4.1 below.
The speed of technological change in
the business could outpace the Group's ability to anticipate all
the unintended consequences that may arise from such change.
Innovative technologies, such as AI, expose Prudential to potential
additional regulatory, information security, privacy, operational,
ethical and conduct risks. Specifically, the increasing use
of AI could lead to increased scrutiny from regulators, potential
bias in decision-making processes, and unforeseen vulnerabilities
in information security. The ethical implications of AI use, such
as data privacy and transparency in automated decisions, are also
potential areas of concern. If inadequately managed, these risks
could result in customer detriment and reputational
damage.
3.2 Prudential's businesses are conducted in highly
competitive environments with rapidly developing demographic
trends. The profitability of the Group's businesses depends on
management's ability to respond to these pressures and
trends.
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The markets for financial services
are highly competitive, with a number of factors affecting
Prudential's ability to sell its products and its profitability,
including price and yields offered, financial strength and ratings,
range of product lines and product quality, ability to implement
and comply with regulatory changes, the imposition of regulatory
sanctions, brand strength and name recognition, investment
management performance and fund management trends, historical bonus
levels, the ability to respond to developing demographic trends,
customer appetite for certain savings products (which may be
impacted by broader economic pressures), and technological
advances. In some of its markets, Prudential faces competitors that
are larger, have greater financial resources or a greater market
share, offer a broader range of products or have higher bonus
rates. Further, heightened competition for talented and skilled
employees, agents and independent financial advisers may limit
Prudential's potential to grow its business as quickly as planned
or otherwise implement its strategy. Technological advances,
including those enabling increased capability for gathering large
volumes of customer health data and developments in capabilities
and tools for analysing and interpreting such data (such as AI and
machine learning), may result in increased competition to the
Group, both from within and outside the insurance industry, and may
increase the competition risks resulting from a failure to be able
to attract or retain talent.
The Group's principal competitors
include global life insurers, regional insurers and multinational
asset managers. In most markets, there are also local companies
that have a material market presence.
Prudential believes that competition
will intensify across all regions in response to consumer demand,
digital and other technological advances (including the use of AI
to improve operational efficiency and enhance customer
experiences), the need for economies of scale and the consequential
impact of consolidation, regulatory actions and other factors.
Prudential's ability to generate an appropriate return depends
significantly upon its capacity to anticipate and respond
appropriately to these competitive pressures. This includes
managing the potential adverse impacts to the commercial value of
the Group's existing sale and distribution arrangements, such as
bancassurance arrangements, in markets where new distribution
channels develop.
Failure to do so may adversely
impact Prudential's ability to attract and retain customers and,
importantly, may limit Prudential's ability to take advantage of
new business arising in the markets in which it operates, which may
have an adverse impact on the Group's business, financial
condition, results of operations and growth prospects.
3.3 Adverse experience in the operational risks inherent in
Prudential's business, and those of its material outsourcing
partners, could disrupt its business functions and have a negative
impact on its business, financial condition, results of operations
and prospects.
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Operational risks are present in all
of Prudential's businesses, including the risk of loss arising from
inadequate or failed internal processes, systems or human error,
misconduct, fraud, the effects of natural or man-made catastrophic
events (such as natural disasters, pandemics, cyber attacks, acts
of terrorism, civil unrest and other catastrophes) or other
external events. These risks may also adversely impact Prudential
through its partners. Prudential relies on the performance and
operations of a number of bancassurance, product distribution,
outsourcing (including but not limited to external technology, data
hosting and payments), and service partners. These include back
office support functions, such as those relating to technology
infrastructure, development and support, and customer-facing
operations and services, such as product distribution and services
(including through digital channels), and investment operations.
This creates reliance upon the resilient operational performance of
these partners and exposes Prudential to the risk that the
operations and services provided by these partners are disrupted or
fail. Further, Prudential operates in extensive and evolving legal
and regulatory environments which adds to the complexity of the
governance and operation of its business processes and
controls.
Exposure to such risks could impact
Prudential's operational resilience and ability to perform
necessary business functions if there are disruptions to its
systems, operations, new business sales and renewals, distribution
channels and services to customers, or could result in the loss of
confidential or proprietary data. Such risks, as well as any
weaknesses in administration systems (such as those relating to
policyholder records) or actuarial reserving processes, may also
result in increased expenses, as well as legal and regulatory
sanctions, decreased profitability, financial loss and customer
conduct risk impacts. This could damage Prudential's reputation and
relationship with its customers and business partners. A failure to
adequately oversee service partners (or their technology and
operational systems and processes) could result in significant
service degradation or disruption to Prudential's business
operations and services to its customers, which may have
reputational or conduct risk implications and could have a material
adverse effect on the Group's business, financial condition,
results of operations and prospects.
Prudential's business requires the
processing of a large number of transactions for a diverse range of
products. It also employs complex and inter-connected technology
and finance systems, models and user-centric applications in its
processes to perform a range of operational functions. These
functions include the calculation of regulatory or internal capital
requirements, the valuation of assets and liabilities, and the
acquisition of new business using AI and digital applications. Many
of these tools form an integral part of the information and
decision-making frameworks used by Prudential and the risk of
adverse consequences arising from erroneous or misinterpreted tools
used in core business activities, decision-making and reporting
exists. Errors or limitations in these tools, or their
inappropriate usage, may lead to regulatory breaches, inappropriate
decision-making, financial loss, customer detriment, inaccurate
external reporting or reputational damage. The long-term nature of
much of the Group's business also means that accurate records are
to be maintained securely for significant time periods.
The performance of the Group's core
business activities and the uninterrupted availability of services
to customers rely significantly on, and require significant
investment in, resilient IT applications, infrastructure and
security architectural design, data governance and management and
other operational systems, personnel, controls, and mature
processes. During large-scale disruptive events or times of
significant change, or due to other factors impacting operational
performance including adequacy of skilled/experienced personnel,
the resilience and operational effectiveness of these systems and
processes at Prudential and/or its third-party service providers
may be adversely impacted. In particular, Prudential and its
business partners are making increasing use of emerging
technological tools and digital services, or forming strategic
partnerships with third parties to provide these capabilities.
Automated distribution channels and services to customers increase
the criticality of providing uninterrupted services. A failure to
implement appropriate governance and management of the incremental
operational risks from emerging technologies may adversely impact
Prudential's reputation and brand, the results of its operations,
its ability to attract and retain customers and its ability to
deliver on its long-term strategy and therefore its competitiveness
and long-term financial success.
Although Prudential's technology,
compliance and other operational systems, models and processes
incorporate strong governance and controls designed to manage and
mitigate the operational and model risks associated with its
activities, there can be no complete assurance as to the resilience
of these systems and processes to disruption or that governance and
controls will always be effective. Due to human error, among other
reasons, operational and model risk incidents do occur from time to
time and no system or process can entirely prevent them.
Prudential's legacy and other technology systems, data and
processes, as with operational systems and processes generally, may
also be susceptible to failure or security/data
breaches.
3.4 Cyber security risks, including attempts to access or
disrupt Prudential's technology systems, and loss or misuse of
personal data, could have potential adverse financial impacts on
the Group and could result in loss of trust from Prudential's
customers and employees and reputational damage, which in turn
could have material adverse effects on the Group's business,
financial condition, results of operations and
prospects.
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Prudential and its business partners
are increasingly exposed to the risk that individuals (which
includes connected persons such as employees, contractors or
representatives of Prudential or its third-party service providers,
and unconnected persons) or groups may intentionally or
unintentionally disrupt the availability, confidentiality and
integrity of its technology systems or compromise the integrity and
security of data (both corporate and customer), including
disruption from ransomware (malicious software designed to restrict
Prudential's access to data until the payment of a sum of money and
to exfiltrate data with a threat to publicly expose Prudential data
if a ransom payment is not paid), and targeted and untargeted but
sophisticated attacks. Where these risks materialise, this could
result in disruption to key operations, make it difficult to
recover critical data or services or damage assets, any of which
could result in loss of trust from Prudential's customers and
employees, reputational damage and direct or indirect financial
loss.
The vast amount of personal and
financial data held by financial services companies makes them
attractive targets for cyber crime groups. The ease and
accessibility of ransomware exploit toolkits and
Ransomware-as-a-Service (RaaS) for threat actors contribute to the
increase in ransomware activity. At the same time, cyber security
threats continue to evolve globally in sophistication and potential
significance. Prudential's increasing profile in its current
markets and those in which it is entering, growing customer
interest in interacting with their insurance providers and asset
managers through the internet and social media, improved brand
awareness, and increasing adoption of the Group's digital platforms
could also increase the likelihood of Prudential being considered a
target by cyber criminals.
There is an increasing requirement
and expectation on Prudential and its business partners not only to
hold the data of customers, shareholders and employees securely,
but also to ensure its ongoing accuracy and that it is being used
in a transparent, appropriate and ethical way, including in
decision-making where automated processes are employed. As
Prudential and its business partners increasingly adopt digital
technology in business operations, the data the Group generates
creates an opportunity to enhance customer engagement while
maintaining a responsibility to keep customers' personal data safe.
Various policies and frameworks are in place to govern the handling
of customers' data. A failure to adhere to these polices may result
in regulatory scrutiny and sanctions and detriment to customers and
third-party partners, and may adversely impact the reputation and
brand of the Group, its ability to attract and retain customers,
and deliver on its long-term strategy, and therefore the results of
its operations.
The risk to the Group of not meeting
these requirements and expectations may be increased by the
development of cloud-based infrastructure and the usage of digital
distribution and service channels, which can collect a broader
range of personal and health-related data from individuals at
increased scale and speed, and the use of complex tools, machine
learning and AI technologies to process, analyse and interpret this
data.
New and currently unforeseeable
regulatory, reputational and operational issues may also arise from
the increased use of emerging technology such as generative AI
which requires careful consideration and guardrails established to
enable its safe use. Regulatory developments in cyber security and
data protection continue to progress worldwide. In 2023, the
momentum in focus on data privacy continued to increase, with
regulators in Asia introducing new data privacy laws or enhancing
existing ones (eg new data protection laws in Vietnam in June 2023
and extensive amendments to the Korean data privacy law). Such
developments may increase the complexity of requirements and
obligations in this area, in particular where they include national
security restrictions or impose differing and/or conflicting
requirements compared with those of other jurisdictions. These
risks may also increase the financial and reputational implications
for Prudential of regulatory non-compliance or a significant breach
of IT systems or data, including at its joint ventures or
third-party service providers. The international transfer of data
may, as a global organisation, increase regulatory risks for the
Group.
Prudential has been, and likely will
continue to be, subject to potential damage from computer viruses,
unauthorised access and cyber security attacks such as 'denial of
service' attacks, phishing and disruptive software campaigns.
Despite the multi-layered security defences in place, there can be
no assurance that such events will not take place and they may have
material adverse consequential effects on Prudential's business,
financial condition, results of operations and
prospects.
3.5
Prudential's digital platforms may heighten existing business risks
to the Group or introduce new risks as the markets in which it
operates, and its partnerships and product offerings
evolve.
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Prudential's digital platforms are
subject to a number of risks. In particular, these include risks
related to: legal and regulatory compliance and the conduct of
business; the execution of complex change initiatives; information
security and data privacy; the use of models (including those using
artificial intelligence) and the handling of personal data; the
resilience and integrity of IT infrastructure and operations; and
those relating to the management of third parties. These existing
risks for the Group may be increased due to a number of
factors:
- The number of current and planned markets in which
Prudential's digital platforms operate, each with their own laws
and regulations, regulatory and supervisory authorities, the scope
of application of which may be uncertain or change at pace, may
increase regulatory compliance risks;
- The implementation of planned digital platforms and services,
which may require the delivery of complex, inter-connected change
initiatives across current and planned markets. This may give rise
to design and execution risks, which could be amplified where these
change initiatives are delivered concurrently;
- The increased volume, breadth and sensitivity of data on which
the digital platforms are dependent and to which the Group has
access, holds, analyses and processes through its models, increases
data security, privacy and usage risks. Furthermore, the use of
complex models, including where AI is used for critical
decision-making, in an application's features and offerings may
give rise to ethical, operational, conduct, litigation and
reputational risks if they do not function as intended;
- Reliance on and/or collaboration with a number of third-party
partners and providers, which may vary according to the market.
This may increase operational disruption risks to the uninterrupted
provision of services to customers, regulatory compliance and
conduct risks, and the potential for reputational risks;
and
- Support for, and development of, the platform being provided
outside some of the individual markets in which the platform
operates, which may increase the complexity of local legal and
regulatory compliance.
New product offerings and
functionality may be developed and provided through the digital
platforms, which may introduce new regulatory, operational, conduct
and strategic risks for the Group. Regulations may be introduced,
which limit the permitted scope of online or digitally distributed
insurance and asset management services and may restrict current or
planned offerings provided by the platform.
A failure to implement appropriate
governance and management of the incremental and new risks detailed
above may adversely impact Prudential's reputation and brand, its
ability to attract and retain customers, its competitiveness, its
ability to deliver on its long-term strategy and the financial
position of the Group.
3.6 Prudential operates in certain markets with joint venture
partners and other shareholders and third parties. These businesses
face the same risks as the rest of the Group and also give rise to
certain risks to Prudential that the Group does not face with
respect to its wholly-owned subsidiaries.
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Prudential operates, and in certain
markets is required by local regulation to operate, through joint
ventures and other joint ownership or third-party arrangements
(including associates). The financial condition, operations and
reputation of the Group may be adversely impacted, or the Group may
face regulatory censure, in the event that any of its partners
fails or is unable to meet its obligations under the arrangements,
encounters financial difficulty, or fails to comply with local or
international regulation and standards such as those pertaining to
the prevention of financial crime and sustainability (including
climate-related) risks (see risk factor 2 above). Reputational
risks to the Group are amplified where any joint ventures or
jointly owned businesses carry the Prudential name.
A material proportion of the Group's
business comes from its joint venture and associate businesses in
the Chinese Mainland and India, respectively. For such operations
the level of control exercisable by the Group depends on the terms
of the contractual agreements as well as local regulatory
constraints applicable to the joint venture and associate
businesses, such as listing requirements; and in particular those
terms providing for the allocation of control among, and continued
cooperation between, the participants. As a result, the level of
oversight, control and access to management information the Group
is able to exercise at these operations may be lower compared to
the Group's wholly-owned businesses. This may increase the
uncertainty for the Group over the financial condition of these
operations, including the valuation of their investment portfolios
and the extent of their invested credit and counterparty credit
risk exposure, resulting in heightened risks to the Group as a
whole. This may particularly be the case where the geographies in
which these operations are located experience market or
sector-specific slowdowns, disruption, volatility or deterioration
(such as the negative developments in the Chinese Mainland property
sector and more widely across the Chinese Mainland economy). In
addition, the level of control exercisable by the Group could be
affected by changes in the maximum level of foreign ownership
imposed on foreign companies in certain jurisdictions. The exposure
of the Group to the risks detailed in risk factor 3.1 above may
also increase should the Group's strategic initiatives include the
expansion of the Group's operations through joint ventures or
jointly owned businesses.
In addition, a significant
proportion of the Group's product distribution is carried out
through agency arrangements and contractual arrangements with
third-party service providers not controlled by Prudential, such as
bancassurance arrangements, and the Group is therefore dependent
upon the continuation of these relationships. The effectiveness of
these arrangements, or temporary or permanent disruption to them,
such as through significant deterioration in the reputation,
financial position or other circumstances of the third-party
service providers, material failure in controls (such as those
pertaining to the third-party service providers' systems failure or
the prevention of financial crime), regulatory changes affecting
their governance or operation, or their failure to meet any
regulatory requirements could adversely affect Prudential's
reputation and its business, financial condition, results of
operations and prospects.
3.7 Adverse experience relative to the assumptions used in
pricing products and reporting business results could significantly
affect Prudential's business, financial condition, results of
operations and prospects.
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In common with other life insurers,
the profitability of the Group's businesses depends on a mix of
factors including mortality and morbidity levels and trends, policy
surrenders and take-up rates on guarantee features of products,
investment performance and impairments, unit cost of administration
and new business acquisition expenses.
The Group's businesses are subject
to inflation risk. In particular, the Group's medical insurance
businesses are also exposed to medical inflation risk. The
potential adverse impacts to the profitability of the Group's
businesses from the upheavals in financial markets and levels of
economic activity on customer behaviours are described in risk
factor 1.1 above. While the Group has the ability to reprice some
of its products, the frequency of repricing may need to be
increased. Such repricing is dependent on the availability of
operational and resource capacity to do so, as well as the Group's
ability to implement such repricing in light of the increased
regulatory and societal expectations reflecting the affordability
of insurance products and the protection of vulnerable customers,
as well as the commercial considerations of the markets the Group
operates in. The profitability of the Group's businesses also may
be adversely impacted by the medical reimbursement downgrade
experience following any repricing.
Prudential, like other insurers,
needs to make assumptions about a number of factors in determining
the pricing of its products, for setting reserves, and for
reporting its capital levels and the results of its long-term
business operations. A further factor is the assumptions that
Prudential makes about future expected levels of the rates of early
termination of products by its customers (known as persistency).
This is relevant to a number of lines of business in the Group.
Prudential's persistency assumptions reflect a combination of
recent past experience for each relevant line of business and
expert judgement, especially where a lack of relevant and credible
experience data exists. Any expected change in future persistency
is also reflected in the assumptions. If actual levels of
persistency are significantly different than assumed, the Group's
results of operations could be adversely affected.
In addition, Prudential's business
may be adversely affected by epidemics, pandemics and other effects
that give rise to a large number of deaths or additional sickness
claims, as well as increases to the cost of medical claims.
Pandemics, significant influenza and other epidemics have occurred
a number of times historically, but the likelihood, timing or
severity of future events cannot be predicted. The effectiveness of
external parties, including governmental and non-governmental
organisations, in combating the spread and severity of any
epidemics, as well as pharmaceutical treatments and vaccines (and
their roll-outs) and non-pharmaceutical interventions, could have a
material impact on the Group's claims experience.
Prudential uses reinsurance to
selectively transfer mortality, morbidity and other risks. This
exposes the Group to: the counterparty risk of a reinsurer being
unable to pay reinsurance claims or otherwise meet their
commitments; the risk that a reinsurer changes reinsurance terms
and conditions of coverage, or increases the price of reinsurance
which Prudential is unable to pass on to its customers; the risk of
ambiguity in the reinsurance terms and conditions leading to
uncertainty whether an event is covered under a reinsurance
contract; and the risk of being unable to replace an existing
reinsurer, or find a new reinsurer, for the risk transfer being
sought.
Any of the foregoing, individually
or together, could have a material adverse effect on Prudential's
business, financial condition, results of operations and
prospects.
4.
Risks relating to legal and regulatory
requirements
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4.1
Prudential conducts its businesses subject to regulation and
associated regulatory risks, including a change to the basis of the
regulatory supervision or intervention of the Group, the level of
regulatory scrutiny arising from the Group's reported events, the
effects and pace of changes in the laws, regulations, policies and
their interpretations and any industry/accounting standards in the
markets in which it operates.
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Any non-compliance with government
policy and legislation, financial control measures on companies and
individuals, regulation or regulatory interpretation applying to
companies in the financial services and insurance industries in any
of the markets in which Prudential operates (including those
related to the business conduct of Prudential or its distributors),
or decisions taken by regulators in connection with their
supervision of members of the Group, which in some circumstances
may be applied retrospectively, may adversely affect Prudential.
Further, the impact from regulatory changes may be material to
Prudential, for instance, changes may be required to its product
range, distribution channels, sales and servicing practices,
handling of data, competitiveness, profitability, capital
requirements, risk management approaches, corporate or governance
structure, financial and non-financial disclosures and reported
results and financing requirements. Other changes in
capital-related regulations have the potential to change the extent
of sensitivity of capital to market factors, regulators in
jurisdictions in which Prudential operates may impose requirements
affecting the allocation of capital and liquidity between different
business units in the Group, whether on a geographic, legal entity,
product line or other basis. Regulators may also change solvency
requirements, methodologies for determining components of the
regulatory or statutory balance sheet, including the reserves and
the level of capital required to be held by individual businesses
(with implications to the Group capital position). Furthermore, as
a result of interventions by governments in light of financial and
global economic conditions, there may continue to be changes in
government regulation and supervision of the financial services
industry, potentially resulting in tightened customer protection,
higher capital requirements, restrictions on transactions and
enhancement of supervisory powers.
In the markets in which Prudential
operates, it is subject to regulatory requirements for ongoing
operations as well as obligations with respect to financial crime,
including anti-money laundering, and sanctions compliance, which
may either impose obligations on the Group to act in a certain
manner or restrict the way that it can act in respect of specified
individuals, organisations, businesses and/or governments. A
failure to do so may adversely impact the reputation of Prudential
and/or result in the imposition of legal or regulatory sanctions or
restrictions on the Group. For internationally active groups such
as Prudential, operating across multiple jurisdictions including
cross-border activities increases the complexity and volume of
legal and regulatory compliance challenges. Compliance with
Prudential's legal or regulatory obligations, including those 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 Group. Geopolitical and
global tensions may also lead to realignment among blocs or global
polarisation and decoupling, which may lead to an increase in the
volume and complexity of international sanctions. These risks may
be increased where uncertainty exists on the scope of regulatory
requirements and obligations, and where the complexity of specific
cases applicable to the Group is high.
Further information on specific
areas of regulatory and supervisory requirements or changes are
included below.
a Group-wide Supervision
(GWS)
The Hong Kong Insurance Authority
(Hong Kong IA) is the Group-wide supervisor for Prudential. The
Hong Kong IA's Group-wide Supervision (GWS) Framework applies on a
principles-based and outcome-focused approach, which allows the
Hong Kong IA to exercise direct regulatory powers over the
designated holding companies of multinational insurance groups.
Prudential has in place various monitoring mechanisms and controls
to ensure ongoing sustainable compliance and to promote
constructive engagement with the Hong Kong IA as its Group-wide
supervisor.
b Global regulatory developments and
systemic risk regulation
There are a number of ongoing global
regulatory developments which could potentially impact Prudential's
businesses in the many jurisdictions in which they operate.
Mandated by the Financial Stability Board (FSB), this work includes
standard setting and guidance in the areas of systemic risk
(including climate-related risks) and the Insurance Capital
Standard (ICS).
For the insurance sector, the
International Association of Insurance Supervisors (IAIS) continues
to monitor and assess systemic risk through the Holistic Framework
(HF) which effectively replaced the Global Systemically Important
Insurer (G-SII) designations in 2019. The FSB continues to receive
an annual update on the outcomes of the IAIS's global monitoring
exercise which will include IAIS's assessment of systemic risk. The
FSB reserves the right to publicly express its views on whether an
individual insurer is systemically important in the global context
and the application of any necessary HF supervisory policy measures
to address such systemic importance. In November 2025, the FSB will
review the process for assessing and mitigating systemic risk under
the HF. Following this review the FSB will, as necessary, adjust
its process which could include reinstating an updated G-SII
identification process. Many of the prior G-SII measures have been
adopted into IAIS's Insurance Core Principles (ICPs) and Common
Framework (ComFrame), described below, as well as under the Hong
Kong IA's GWS Framework. As an Internationally Active Insurance
Group (IAIG), Prudential is subject to these measures.
The IAIS's ComFrame establishes
quantitative and qualitative supervisory standards and guidance
focusing on the effective Group-wide supervision of IAIGs. The ICS
is the quantitative element of ComFrame and a consolidated capital
standard in the final phase of development, coming into effect in
2025. Prudential has been designated an IAIG by the Hong Kong IA
following an assessment against the established qualitative
criteria in ComFrame, and will be required to either adopt ICS or
demonstrate its current Group capital supervisory framework to be
outcome-equivalent with ICS.
The development of ICS has been
conducted in two phases: a five-year monitoring phase, which
commenced at the beginning of 2020, followed by an implementation
phase. An alternative to the ICS called the 'Aggregation Method'
has also been developed in the US by the National Association of
Insurance Commissioners; the IAIS is in the process of evaluating
whether it produces comparable outcomes to the ICS.
There is a risk attached to the
manner in which regulators from member jurisdictions may choose to
implement the HF and ICS which could lead to additional burdens or
adverse impacts to the Group. As a result, there remains a degree
of uncertainty over the potential impact of such changes on the
Group.
c Regional regulatory regime
developments
In 2023, regulators in the markets
in which we operate continued to focus on the financial resilience
of the insurance industry (including to address issues of solvency
and rising interest rates), the protection of customers in relation
to product and service performances and operational soundness with
appropriate governance and controls. New regulations and guidelines
were issued in several markets whereby the industry is required to
assess, monitor and manage non-financial and financial risks,
including insurance risk, capital and solvency. Business conduct
and consumer protection remain the key priorities for regulators in
Asia, with emphases on product design, remuneration structure,
marketing literature, sales and servicing practices, and various
operational processes including specifically for investment
management and oversight of third parties and technology
vendors.
Major regulatory changes and reforms
are in progress in some of the Group's key markets, with some
uncertainty on the full impact to Prudential:
- In the Chinese Mainland, regulatory developments across a
number of industries including the financial sector have continued,
potentially increasing compliance risk to the Group. Key regulatory
developments in the Chinese Mainland include the
following:
- As part of the regulatory reform, the Chinese government has
consolidated oversight of the financial industry directly under the
State Council and announced a new national financial regulator, the
National Financial Regulatory Administration (NFRA) to replace the
China Banking and Insurance Regulatory Commission (CBIRC) on 18 May
2023. The NFRA is authorised to overall supervise and regulate the
Chinese Mainland banking and insurance markets to ensure financial
institutions operate in a stable manner in compliance with the law
and meet their obligations to customers. Key changes implemented by
the NFRA include: reductions in statutory valuation interest rates
for life insurance products, which are expected to lower pricing
interest rate, effective from July 2023; and solvency relief
measures through the China Risk Oriented Solvency System Phase II
(C-ROSS II), effective from September 2023. In early 2024, further
regulatory changes have been issued including: reductions in
crediting rates for universal life products; requirements on
consistency between reported and incurred bancassurance commissions
and expenses; and new measures for setting requirements for
insurance sales conduct, product design, marketing and
disclosures.
- The amendment of the Insurance Law of the People's Republic of
China is in progress with emphasis on corporate governance
including appointment of directors, fiduciary duties, and
supervision of participating and investment-linked product (ILP)
policies. The implementation timeline is yet to be
announced.
- In Indonesia, regulatory and supervisory focus on the
insurance industry remains high. In 2023, the Otoritas Jasa
Keuangan (OJK) issued a five-year industry roadmap with plans to
establish an insurance industry that upholds high integrity,
strengthens consumer and public protection, and supports national
economic growth. The roadmap covers areas to enhance policyholder
protection as well as other aspects on licensing, data, capital,
products, actuarial, risk and controls. Implementation of this
roadmap is in three phases from 2023 to 2027, including foundation
strengthening, consolidation and momentum creation, and alignment
and growth.
- In Malaysia, Bank Negara Malaysia (BNM) has initiated a
multi-phase review of its current risk-based capital (RBC)
frameworks for insurers and Takaful operators since 2019, which
includes quantitative impact studies carried out in 2022, the
issuance of exposure drafts and a parallel run in 2023, prior to
the potential full implementation targeting by the end of 2024 at
the earliest. BNM also revised its policy on Management of Customer
Information and Permitted Disclosures in April 2023, which sets out
requirements regarding controls in collection, storage, use,
transmission, sharing, disclosure and disposal of customer
information. Furthermore, a new regulation on professionalism of
agents came into effect on 1 January 2024, requiring additional
'fit and proper' and due diligence procedures as enhanced agent
onboarding and screening requirements.
- In Hong Kong, the revised Guideline GL3 on anti-money
laundering (AML) and counter-terrorism financing (CTF) was
published with an effective date of 1 June 2023. The Hong Kong
Government also proposed to establish a Policy Holders' Protection
Scheme in December 2022 as a safety net for policyholders in the
event of an insurer's insolvency. Public views were sought in 2023
and the legislation process is expected to commence in the second
half of 2024 at the earliest.
- In Singapore, the Monetary Authority of Singapore (MAS) has
designated the Group's Singapore business as a domestic
systemically important insurer. Furthermore, in order to mitigate
money laundering risk in the financial sector as a whole, the MAS
has been soliciting feedback from industry stakeholders to improve
anti-money laundering standards. Further regulatory developments
are expected.
- In Thailand, the Office of Insurance Commission presented
draft amendments to the life and non-life insurance laws in
December 2023, aimed at elevating governance standards within the
insurance industry. The amendments are currently under
review.
- In Vietnam, the amended Insurance Law took effect on 1 January
2023. The new law contains provisions on RBC, with a five-year
grace period, effective from 1 January 2028. The Vietnamese
Government also issued a decree for personal data privacy guidance
with an effective date of 1 July 2023, which provides definitions
of personal data with examples of sensitive personal data, the
rights of data subjects, and notification and data transfer
requirements pertaining to the use of data. Another implementing
circular of the Insurance Law issued in November 2023 also requires
mandatory voice recording for sales, agency remuneration limits,
and a cooling-off period for lending customers.
- In the Philippines, financial product and customer service
requirements were issued by the Insurance Commission in March 2023
with an 18-month transition period for adoption. The new
requirements include product and service disclosures, a systematic
approach to customer assistance and conduct risk management, as
well as additional complaints filing.
- In India, the Insurance Regulatory and Development Authority
of India (IRDAI) continues to focus on industry reform. Its
'Insurance for All by 2047' proposal aims to ensure that every
citizen and enterprise in India has adequate life, health and
property insurance cover. The IRDAI is promoting the use of
technology, such as big data, AI and machine learning, to transform
the insurance landscape in the country, in order to become the
sixth-largest insurance market by 2032. A new income tax rule took
effect from 1 April 2023, which makes maturity proceeds of
insurance policies taxable for policies issued from this date which
have annual premiums exceeding INR 500,000. Another IRDAI
regulation issued in March 2023 removed commission payment limits
for insurers, with the aim of giving more operational flexibility
to insurers and enhancing insurance penetration.
The increasing use of emerging
technological tools and digital services across the industry is
likely to lead to new and unforeseen regulatory requirements and
issues, including expectations regarding the governance, ethical
and responsible use of technology, AI and data. Distribution and
product suitability linked to innovation continues to set the pace
of conduct regulatory change in Asia. Prudential falls within the
scope of these conduct regulations, requiring that regulatory
changes are appropriately implemented.
The pace and volume of
sustainability-related regulatory changes including ESG and
climate-related changes are also increasing. Regulators including
the Hong Kong IA, the Monetary Authority of Singapore, the BNM in
Malaysia and the Financial Supervisory Commission in Taiwan are in
the process of developing supervisory and disclosure requirements
or guidelines related to environmental and climate change risk
management. Other regulators are expected to develop or are at
different stages of developing similar requirements. While the Hong
Kong IA has yet to propose any insurance-specific regulations on
sustainability and climate, it has regularly emphasised its
increasing focus in this area in order to support Hong Kong's
position as a regional green finance hub. In 2023, the Hong Kong IA
invited Hong Kong authorised insurers to participate in a survey
regarding their implementation of climate risk management
practices. The purpose of the survey was for the Hong Kong IA to
understand any gaps and challenges faced by the insurance sector in
managing climate-related financial risks and to develop appropriate
guidance for insurers. International regulatory and supervisory
bodies, such as the International Sustainability Standards Board
(ISSB) and Taskforce on Nature-related Disclosures, are progressing
on global sustainability and climate-related disclosure
requirements. Recent high-profile examples of government and
regulatory enforcement and civil actions against companies for
misleading investors on sustainability and ESG-related information
demonstrate that disclosure, reputational and litigation risks
remain high and may increase, in particular as companies increase
their disclosures or product offerings in this area. International
and local regulatory and industry bodies are beginning to establish
principles and standards with regards to the use of sustainability
and ESG nomenclature in the labelling of investment products. These
changes and developments may give rise to regulatory compliance,
customer conduct, operational, reputational and disclosure risks
requiring Prudential to coordinate across multiple jurisdictions in
order to apply a consistent risk management approach.
A rapid pace and high volume of
regulatory changes and interventions, and the swiftness of their
application, including those driven by the financial services
industry, have been observed in recent years across many of the
Group's markets. The transformation and regulatory changes have the
potential to introduce new, or increase existing, regulatory risks
and supervisory interest while increasing the complexity of
ensuring concurrent regulatory compliance across markets driven by
the potential for increased intra-Group connectivity and
dependencies. In jurisdictions with ongoing policy initiatives and
regulatory developments which will impact the way Prudential is
supervised, these developments are monitored at market and group
level and inform the Group's risk framework and engagement with
government policymakers, industry groups and regulators.
d IFRS 17
IFRS 17 became effective from 1
January 2023 and the first external reporting under this basis was
in half year 2023. The new standard requires a fundamental change
to accounting, presentation and disclosures for insurance contracts
as well as the application of significant judgement and new
estimation techniques. These changes mean that investors, rating
agencies and other stakeholders may take time to gain familiarity
with the new standard and to interpret the Group's business
performance and dynamics. In addition, comparison with previous
financial reporting periods will be more challenging in the short
term. New systems, processes and controls have been developed to
align with the new IFRS 17 basis and are expected to mature over
time. In the short term there may be increased operational risk
associated with these new systems and processes.
Apart from IFRS 17, any other
changes or modification to IFRS accounting policies may also
require a change in the way in which future results will be
determined and/or a retrospective adjustment of reported results to
ensure consistency.
e Investor contribution
schemes
Various jurisdictions in which
Prudential operates have created investor compensation schemes that
require mandatory contributions from market participants in some
instances in the event of a failure of a market participant. As a
major participant in the majority of its chosen markets,
circumstances could arise in which Prudential, along with other
companies, may be required to make such contributions.
4.2
The conduct of business in a way that adversely impacts the fair
treatment of customers could have a negative impact on Prudential's
business, financial condition, results of operations and prospects
or on its relations with current and potential
customers.
|
In the course of its operations and
at any stage of the customer and product life cycle, the Group or
its intermediaries may conduct business in a way that adversely
impacts customer outcomes and the fair treatment of customers
('conduct risk'). This may arise through a failure to design,
provide and promote suitable products and services to customers
that meet their needs, are clearly explained or deliver real value,
provide and promote a high standard of customer service,
appropriately and responsibly manage customer information, or
appropriately handle and assess complaints. A failure to identify
or implement appropriate governance and management of conduct risk
may result in harm to customers and regulatory sanctions and
restrictions, and may adversely impact Prudential's reputation and
brand, its ability to attract and retain customers, its
competitiveness, and its ability to deliver on its long-term
strategy. There is an increased focus by regulators and supervisors
on customer protection, suitability and inclusion across the
markets in which the Group operates, thereby increasing regulatory
compliance and reputational risks to the Group in the event the
Group is unable to effectively implement the regulatory changes and
reforms stated in risk factor 4.1 above.
Prudential is, and in the future may
continue to be, subject to legal and regulatory actions in the
ordinary course of its business on matters relevant to the delivery
of customer outcomes. Such actions relate, and could in the future
relate, to the application of current regulations or the failure to
implement new regulations, regulatory reviews of broader industry
practices and products sold (including in relation to lines of
business that are no longer active) in the past under acceptable
industry or market practices at the time and changes to the tax
regime affecting products. Regulators may also focus on the
approach that product providers use to select third-party
distributors and to monitor the appropriateness of sales made by
them and the responsibility of product providers for the
deficiencies of third-party distributors.
There is a risk that new regulations
introduced may have a material adverse effect on the sales of the
products by Prudential and increase Prudential's exposure to legal
risks. Any regulatory action arising out of the Group's position as
a product provider could have an adverse impact on the Group's
business, financial condition, results of operations and prospects,
or otherwise harm its reputation.
4.3 Litigation, disputes and regulatory investigations may
adversely affect Prudential's business, financial condition, cash
flows, results of operations and prospects.
|
Prudential is, and may in the
future be, subject to legal actions, disputes and regulatory
investigations in various contexts, including in the ordinary
course of its insurance, asset management and other business
operations. These legal actions, disputes and investigations may
relate to aspects of Prudential's businesses and operations that
are specific to Prudential, or that are common to companies that
operate in Prudential's markets. Legal actions and disputes may
arise under contracts, regulations or from a course of conduct
taken by Prudential, including class action litigation. Although
Prudential believes that it has adequately provided in all material
respects for the costs of litigation and regulatory matters, no
assurance can be provided that such provisions are sufficient.
Given the large or indeterminate amounts of damages sometimes
sought, other sanctions that might be imposed and the inherent
unpredictability of litigation and disputes, it is possible that an
adverse outcome could have an adverse effect on Prudential's
business, financial condition, cash flows, results of operations
and prospects.
4.4 Changes in tax legislation may result in adverse tax
consequences for the Group's business, financial condition, results
of operations and prospects.
|
Tax rules, including those relating
to the insurance industry, and their interpretation may change,
possibly with retrospective effect, in any of the jurisdictions in
which Prudential operates. Significant tax disputes with tax
authorities, and any change in the tax status of any member of the
Group or in taxation legislation or its scope or interpretation
could affect Prudential's business, financial condition, results of
operations and prospects.
The Organisation for Economic
Co-operation and Development (OECD) is currently undertaking a
project intended to modernise the global international tax system,
commonly referred to as Base Erosion and Profit-Shifting 2.0. The
project has two pillars. The first pillar is focused on the
allocation of taxing rights between jurisdictions for in-scope
multinational enterprises that sell cross-border goods and services
into countries with little or no local physical presence. The
second pillar is focused on developing a global minimum tax rate of
15 per cent applicable to in-scope multinational
enterprises.
On 8 October 2021 the OECD issued a
statement setting out the high-level principles which have been
agreed by over 130 jurisdictions involved in the project. Based on
the 8 October 2021 OECD statement, Prudential does not expect to be
affected by proposals under the first pillar given they include an
exemption for regulated financial services companies.
On 20 December 2021 the OECD
published detailed model rules for the second pillar, with
implementation of the rules initially envisaged by 2023. Due to the
complexity of the rules, the implementation date was subsequently
postponed to commence no earlier than 2024 to provide multinational
enterprises and tax authorities sufficient time to prepare. These
rules will apply to the Group when implemented into the national
law of jurisdictions where it has entities within the scope of the
rules. On 14 March 2022 the OECD issued detailed guidance to assist
with interpreting the model rules. As part of the OECD's
development of the implementation framework, the OECD published
guidance on transitional safe harbours on 20 December 2022, and
additional administrative guidance on 2 February 2023, 17 July 2023
and 18 December 2023 providing further updates and clarifications
on how to interpret the model rules. The OECD is expected to
publish further new guidance in 2024 which will affect the
interpretation of already implemented legislation.
A number of jurisdictions in which
the Group has operations - Japan, Korea, Luxembourg, Vietnam and
the UK - have implemented either a global minimum tax or a domestic
minimum tax at a rate of 15 per cent, in line with the OECD
proposals, effective for 2024 onwards. Malaysia has implemented
both the global minimum tax and domestic minimum tax effective for
2025 onwards. Other jurisdictions where Prudential has a taxable
presence, including Hong Kong, Singapore and Thailand, intend to
implement the proposals for 2025 onwards.
For those jurisdictions where either
a global minimum tax or a domestic minimum tax or both have been
implemented with effect for 2024, no material impact to the Group's
IFRS tax charge for the 2024 financial year is expected. The
implementation of a global minimum tax and a domestic minimum tax
in Malaysia effective for 2025 is not expected to have a material
impact for the Group's IFRS tax charge for the 2025 financial year.
These assessments consider a number of factors including whether
the transitional safe harbour is expected to apply based on the
most recent filings of tax returns, country-by-country reporting
and financial statements of the relevant entities. In some
jurisdictions a global minimum tax but not a domestic minimum tax
regime has been implemented and the Group's operations in that
jurisdiction will not be subject to the rules as they are wholly
domestic operations.
For those jurisdictions, such as
Hong Kong and Singapore, where the proposals are expected to be
implemented with effect from 2025 onwards, work is ongoing to
assess the potential impact and guidance will be provided in due
course. As a result, the full extent of the long-term impact on the
Group's business, tax liabilities and profits remains
uncertain.
In addition to the global minimum
tax and domestic minimum tax rules, both Korea and Luxembourg have
also implemented an undertaxed profits rule effective for 2025
onwards. The undertaxed profits rule is intended as a backstop
provision to deal with jurisdictions in case of any delay or not
implementing the global minimum tax or domestic minimum tax rules.
As the rules in Hong Kong (where Prudential plc has been
tax-resident since 3 March 2023) are expected to be in force and
would apply to Prudential plc from 2025, the undertaxed profits
rules implemented in Korea and Luxembourg are not expected to have
any practical application to the Group.
Definitions of Performance Metrics
Adjusted operating profit
Adjusted IFRS operating profit based
on longer-term investment returns. This alternative performance
measure is reconciled to IFRS profit for the year in note B1.1 of
the IFRS financial results and a fuller definition given in note
B.1.2.
Adjusted shareholder equity
Adjusted shareholders' equity
represents the sum of Group IFRS shareholders' equity and CSM, net
of reinsurance (unless attaching wholly to policyholders) and
tax.
See note C 3.1 (B) and II(ii) of the
additional information for reconciliation to IFRS shareholders'
equity.
Agency new business profit
New business profit generated from
the agency channel.
Annual premium equivalent (APE) sales
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.
See note II(vi) of the additional
information for further explanation.
Average monthly active agents
An active agent is defined as agents
that sell at least one case with a Prudential life insurance entity
in the month. Average active agents per month is expressed for each
reporting period as the sum of active agents in each month divided
by the number of months in the period.
Bancassurance new business profit
New business profit generated from
the bancassurance channel.
Customer numbers
A customer is defined as a unique
individual or entity who holds one or more policies, that has
premiums paid, with a Prudential life insurance entity, including
100 per cent of customers of the Group's joint ventures and
associate. Group business is a single customer for the purpose of
this definition.
Customer relationship net promoter score
(NPS)
Net Promoter Score on overall
strength of customer relationship, based on customers' survey
responses to how likely they would be to recommend Prudential. It
measures the response on a scale of 0 - 10 where 9 or 10 are
Promoters, 7 or 8 are Passives and 0 - 6 are Detractors. The score
equates to the percentage of promoters less percentage of
detractors.
Customer retention rate
Calculated as the number of
customers at the beginning of the period minus exits during the
year (net of reinstatement) over the number of customers at the
beginning of the period.
Eastspring total funds under management or
advice
Total funds under management or
advice including external funds under management, money market
funds, funds managed on behalf of M&G plc and internal funds
under management or advice.
Eastspring investment performance - percentage of funds under
management outperforming benchmarks
This measure represents funds under
management at the balance sheet date held in funds
which outperform their performance benchmark as a percentage
of total funds under management over the time period stated (1 or 3
years). Total funds under management exclude funds with no
performance benchmark.
Eastspring cost/income
ratio
The cost/income ratio is calculated
as operating expenses, adjusted for commissions and share of
contribution from joint ventures and associates, divided by
operating income, adjusted for commission, share of contribution
from joint ventures and associates and performance related fees.
See note II(v) to the additional information for
calculation.
EEV
shareholders' equity
Shareholders' equity prepared in
accordance with the EEV Principles issued by the European Insurance
CFO Forum in 2016.
See note II(viii) of the additional
information for reconciliation to IFRS shareholders'
equity.
EEV
Shareholders' value per share
EEV shareholders' equity per share
is calculated as closing EEV shareholders' equity divided by the
number of issued shares at the end of the period. See EEV basis
results for calculation.
GWS
capital surplus over GPCR
Estimated GWS capital resources in
excess of the GPCR attributable to the shareholder business, before
allowing for the 2023 second cash interim dividend. Prescribed
capital requirements are set at the level at which the local
regulator of a given entity can impose penalties, sanctions or
intervention measures. The estimated GWS group capital adequacy
requirements require that total eligible Group capital resources
are not less than the GPCR.
GWS
coverage ratio
Estimated GWS coverage ratio of
capital resources over GPCR attributable to the shareholder
business, before allowing for the 2023 second cash interim
dividend.
Health new business profit
New business profit from
health products, which typically are annually renewable and would
involve diagnosis and treatment from licensed physicians/medical
facilities. Critical illness products paying lump sum benefits are
not in scope.
IFRS Shareholders' value per share
IFRS shareholders' equity per share
is calculated as closing IFRS shareholders' equity divided by the
number of issued shares at the end of the period. See note II(iv)
to the additional information for calculation
Moody's total leverage basis
Leverage measure calculated as the
Group gross debt, including commercial paper as a proportion of the
sum of IFRS shareholders' equity, 50 per cent of the surplus in the
Group's with-profit funds and the Groups gross debt including
commercial paper. Calculated with no adjustment for the value of
contractual service margin in equity.
Net
cash remitted by business units
Net cash amounts remitted by
businesses are included in the holding company cash flow, which is
disclosed in detail in note I(iv) of the Additional financial
information. This comprises dividends and other transfers from
businesses, net of capital injections, that are reflective of
earnings and capital generation.
Net
zero
A state in which greenhouse gas
emissions from activities in the value chain of an organisation are
reduced as close to zero as possible, with any residual emissions
balanced by removals from the atmosphere, in a time frame
consistent with the Paris Agreement. Our ambition is that the
assets we hold on behalf of our insurance companies will be net
zero by 2050, as part of Prudential's signatory requirements to the
UN-Convened Net Zero Asset Owner Alliance (NZAOA).
New
business profit
Presented on a post-tax basis, on
business sold in the year, calculated in accordance with EEV
principles.
New business profit is reconciled to
IFRS new business CSM in note II(vii) to the additional
information.
New
Business Profit on embedded value (New business profit/average EEV
shareholders' equity for insurance business
operations)
Calculated as new business profit
divided by the average EEV shareholders' equity for insurance
business operations, excluding goodwill attributable to equity
holders. See note II(ix) of the additional for
calculation.
Net
Group operating free surplus generated
Operating Free Surplus Generated
(see definition below) less Central costs, eliminations,
restructuring costs and IFRS 17 costs, net of tax.
New
Business Profit per active agent
Average monthly agency new business
profit divided by the active agents per month. Includes 100 per
cent of new business profit and active agents in Joint Ventures and
Associates.
Operating Free Surplus Generated from insurance and asset
management business
Operating free surplus generated:
For insurance operations free surplus generated represents amounts
emerging from the in-force business net of amounts reinvested in
writing new business and excludes non-operating items. For asset
management business it equates to post-tax operating profit for the
period. Restructuring costs are excluded.
Operating free surplus generated from in-force insurance and
asset management business
Operating free surplus generated
from in-force insurance and asset management business: Operating
free surplus generated from in-force insurance business which
represents amounts emerging from the in-force business during the
year before deducting amounts reinvested in writing new business
and excludes non-operating items. For asset management businesses,
it equates to post-tax operating profit for the year. Restructuring
costs are presented separately from the business unit
amount.
Further information is set out in
"movement in Group free surplus" of the EEV basis
results.
Operating return on embedded value (Operating profit/average
EEV shareholders' equity)
Calculated as EEV operating profit
divided by the average EEV shareholders' equity for continuing
operations. See note II(ix) of the additional for
calculation.
Penetration rate of strategic bank customer
base
Number of Prudential customers as
percentage of total bank customers. The measure and target pertains
to seven strategic bank partners (excluding partners of joint
ventures and associates and partnerships in, Cambodia and
Laos).
Tier 1 capital resources
Tier 1 capital in accordance with
the classification of tiering capital under the GWS framework which
reflects the different local regulatory regimes along with guidance
issued by the Hong Kong IA.
Weighted Average Carbon Intensity (WACI)
Reflects a portfolio's exposure to
carbon-intensive companies, expressed in tCO2e/$m revenue. The WACI
is currently the market standard for measuring the carbon footprint
of an investment portfolio, as described by global disclosure
frameworks such as the Taskforce for Climate-related Financial
Disclosures (TCFD).
Basis for Strategic Objectives
New
business profit growth objective
Our new business growth objective
assumes average exchange rates of 2022 and economic assumptions
made by Prudential in calculating the EEV basis supplementary
information for the year ended 31 December 2022, and are based on
regulatory and solvency regimes applicable across the Group at the
time the objectives were set. Assume that the existing EEV and Free
Surplus methodology at December 2022 will be applicable over the
period.
Operating free surplus generated from in-force insurance and
asset management business growth objective
Our Operating free surplus generated
from in-force insurance and asset management business growth
objective assumes average exchange rates of 2022 and economic
assumptions made by Prudential in calculating the EEV basis
supplementary information for the year ended 31 December 2022, and
are based on regulatory and solvency regimes applicable across the
Group at the time the objectives were set. Assume that the existing
EEV and Free Surplus methodology at December 2022 will be
applicable over the period.
Shareholder Information
Forward-Looking Statements
This document contains
'forward-looking statements' with respect to certain of
Prudential's (and its wholly and jointly owned businesses') plans
and its goals and expectations relating to future financial
condition, performance, results, strategy and objectives.
Statements that are not historical facts, including statements
about Prudential's (and its wholly and jointly owned businesses')
beliefs and expectations and including, without limitation,
commitments, ambitions and targets, including those related to
sustainability (including ESG and climate-related) matters, and
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 actual future financial condition or performance or other
indicated results to differ
materially from those indicated in
any forward-looking statement. Such factors include, but are not
limited to:
- current and future market conditions, including fluctuations
in interest rates and exchange rates, inflation (including
resulting interest rate rises), sustained high or low interest rate
environments, the performance of financial and credit markets
generally and the impact of economic uncertainty, slowdown or
contraction (including as a result of the Russia-Ukraine conflict,
conflict in the Middle East, and related or other geopolitical
tensions and conflicts), which may also impact policyholder
behaviour and reduce product affordability;
- asset valuation impacts from the transition to a lower carbon
economy;
- derivative instruments not effectively mitigating any
exposures;
- global political uncertainties, including the potential for
increased friction in cross-border trade and the exercise of laws,
regulations and executive powers to restrict trade, financial
transactions, capital movements and/or investment;
- the longer-term impacts of Covid-19, including macro-economic
impacts on financial market volatility and global economic activity
and impacts on sales, claims (including related to treatments
deferred during the pandemic), assumptions and increased product
lapses;
- 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 the
degree and pace of regulatory changes and new government
initiatives generally;
- the impact on Prudential of systemic risk and other group
supervision policy standards adopted by the International
Association of Insurance Supervisors, given Prudential's
designation as an Internationally Active Insurance
Group;
- the physical, social, morbidity/health and financial impacts
of climate change and global health crises, which may impact
Prudential's business, investments, operations and its duties owed
to customers;
- legal, policy and regulatory developments in response to
climate change and broader sustainability-related issues, including
the development of regulations and standards and interpretations
such as those relating to sustainability (including ESG and
climate-related) reporting, disclosures and product labelling and
their interpretations (which may conflict and create
misrepresentation risks);
- the collective ability of governments, policymakers, the
Group, industry and other stakeholders to implement and adhere to
commitments on mitigation of climate change and broader
sustainability-related issues effectively (including not
appropriately considering the interests of all Prudential's
stakeholders or failing to maintain high standards of corporate
governance and responsible business practices);
- the impact of competition and fast-paced technological
change;
- the effect on Prudential's business and results from mortality
and morbidity trends, lapse rates and policy renewal
rates;
- the timing, impact and other uncertainties of future
acquisitions or combinations within relevant industries;
- the impact of internal transformation projects and other
strategic actions failing to meet their objectives or adversely
impacting the Group's operations or employees;
- the availability and 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) including the Pulse
platform;
- the increased non-financial and financial risks and
uncertainties associated with operating joint ventures with
independent partners, particularly where joint ventures are not
controlled by Prudential;
- the impact of changes in capital, solvency standards,
accounting standards or relevant regulatory frameworks, and tax and
other legislation and regulations in the jurisdictions in which
Prudential and its affiliates operate; and
- the impact of legal and regulatory actions, investigations and
dispute
These factors are not exhaustive.
Prudential operates in a continually changing business environment
with new risks emerging
from time to time that it may be
unable to predict or that it currently does not expect to have a
material adverse effect on its
business. In addition, 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 actual future
financial condition or performance to differ, possibly materially,
from those anticipated in Prudential's
forward-looking statements can be
found under the 'Risk Factors' heading of this document.
Any forward-looking statements
contained in this document speak only as of the date on which they
are made. Prudential expressly
disclaim any obligation to update
any of the forward-looking statements contained in this document or
any other forward-looking
statements it may make, whether as a
result of future events, new information or otherwise except as
required pursuant to the UK
Prospectus Rules, the UK Listing
Rules, the UK Disclosure Guidance and Transparency Rules, the Hong
Kong Listing Rules, the
SGX-ST Listing Rules or other
applicable laws and regulations.
Prudential may also make or disclose
written and/or oral forward-looking statements in reports filed
with or furnished to the US
Securities and Exchange Commission,
the UK Financial Conduct Authority, the Hong Kong Stock Exchange
and other regulatory
authorities, as well as in its
annual report and accounts to shareholders, periodic financial
reports to shareholders, proxy
statements, offering circulars,
registration statements, prospectuses, prospectus supplements,
press releases and other written
materials and in oral statements
made by directors, officers or employees of Prudential to third
parties, including financial analysts.
All such forward-looking statements
are qualified in their entirety by reference to the factors
discussed under the 'Risk Factors' heading of this
document.
Cautionary Statements
This document 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.
2023 Second interim
dividend
Ex-dividend date
|
28 March 2024 (UK and Hong
Kong)
|
|
1 April 2024 (Singapore)
|
Record date
|
2 April 2024
|
Payment date
|
16 May 2024 (UK, Hong Kong and ADR
holders)
On or around 23 May 2024
(Singapore)
|
The total number of Prudential plc
shares in issue as at 31 December 2023 was 2,753,520,756. Each
ordinary share carries the right to one vote on a poll at general
meetings of Prudential plc. If votes are cast on a show of hands,
each shareholder present in person or by proxy, or in the case of a
corporation, each of its duly authorised corporate representatives,
has one vote.
Corporate Governance
Corporate governance codes - statement of
compliance
The Company has dual primary
listings in Hong Kong (main board listing) and London (premium
listing) and has adopted a governance structure based on the Hong
Kong and UK Corporate Governance Codes (the HK and UK
Codes).
The Board confirms that, for the
year under review, the Company has applied the principles and
complied with the provisions of the UK Code. The Company has also
complied with the provisions of the HK Code, other than provision
E.1.2(d), which requires companies, on a comply or explain basis,
to have a remuneration committee which makes recommendations to a
main board on the remuneration of non-executive directors. This
provision is not compatible with provision 34 of the UK Code, which
recommends that the remuneration of non-executive directors be
determined in accordance with the Articles of Association or,
alternatively, by the Board. Prudential has chosen to adopt a
practice in line with the recommendations of the UK
Code.
> The HK Code is available from
www.hkex.com.hk
> The UK Code is available from
www.frc.org.uk