REG - Prudential PLC - Prudential plc – HY17 Results – Business Review
30/08/2023 07:00
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RNS Number : 7233K Prudential PLC 30 August 2023
NEWS RELEASE
30 August 2023
PRUDENTIAL PLC HALF YEAR 2023 RESULTS: DELIVERING A STRONG PERFORMANCE AND
STRATEGIC UPDATE
Prudential plc ("Prudential"; HKEX: 2378; LSE: PRU) today announced its
financial results for the six months ended 30 June 2023 along with a strategic
update.
Performance highlights on a constant (and actual) exchange rate basis(1)
· New business profit(2) up 39 per cent (36 per cent) to $1,489
million, with 17 of our life markets delivering growth(3), 16 of which by
double digits. Excluding the effect of interest rate and other economic
movements, new business profit was up 52 per cent (48 per cent)
· APE sales(4) up 42 per cent (37 per cent) to $3,027 million
· Adjusted operating profit(5) up 6 per cent (4 per cent) to $1,462
million
· Operating free surplus generated from in-force insurance and asset
management business(6) down (2) per cent ((4) per cent) to $1,438 million
· EEV operating profit(7) up 22 per cent (19 per cent) to $2,155
million. EEV shareholders equity is $43.7 billion, equivalent to 1,588 cents
per share
· GWS shareholder capital surplus over GPCR of $15.5 billion(8),
equivalent to a cover ratio of 295 per cent(8) (31 December 2022: 307 per
cent)
· Adjusted IFRS equity(9) of $36.4 billion, up 4 per cent(10) from 31
December 2022, equivalent to 1,324 cents per share. Annualised Contractual
Service Margin(11) growth of 8 per cent.
· First interim dividend of 6.26 cents per share, up 9 per cent(10)
with guidance for 2023 and 2024 of expected annual growth between 7-9 per cent
Strategic update
Alongside interim results, CEO Anil Wadhwani announced a new purpose and
strategy following the completion of his strategic and operational review.
Prudential's new purpose statement - For Every Life, For Every Future -
reflects its mission to be the most trusted partner and protector for this
generation and generations to come, by providing simple and accessible
financial and health solutions.
Prudential's new strategy will build a sustainable growth platform, through
targeted investment in structural growth markets across Asia and Africa by:
· Enhancing customer experiences to drive higher acquisition and
loyalty for lifetime value creation;
· Technology-powered distribution with a focus on agency and
bancassurance productivity and activation;
· Unlocking the health opportunity by disciplined implementation of
best practices across all our markets;
· More consistent execution across each of our markets, driven
through changes in our organisational model and technology platform; and
· Prioritising value creation, focusing on the generation of free
surplus that can be used to invest in new business at attractive returns, core
capabilities and strategic opportunities, as well as return capital to
shareholders via dividends.
We believe our new strategy will accelerate value creation for all our
stakeholders through operational and financial discipline, with two key
financial objectives:
· Growing New Business Profit at 15-20 per cent compound annual
growth between 2022 and 2027(12);
· Achieving double-digit compound annual growth in operating free
surplus generated from in-force insurance and asset management business
between 2022 and 2027(12).
Summary financials Half year Half year Change on Change on
2023 $m 2022 $m AER basis(1) CER basis(1)
New business profit(2) 1,489 1,098 36% 39%
Operating free surplus generated(13) 1,024 1,224 (16)% (15)%
Operating free surplus generated from in-force insurance and 1,438 1,503 (4)% (2)%
asset management business(6)
Adjusted operating profit(5) 1,462 1,411 4% 6%
IFRS profit (loss) after tax 947 (1,505) n/a n/a
30 Jun 2023 31 Dec 2022
Total Per share Total Per share
EEV shareholders' equity $43.7bn 1,588¢ $42.2bn 1,534¢
IFRS shareholders' equity $17.2bn 623¢ $16.7bn 608¢
Adjusted IFRS shareholders' equity(9) $36.4bn 1,324¢ $35.2bn 1,280¢
Commenting on his first Interim results and strategic update, CEO Anil
Wadhwani, said: "The interim results demonstrate the power of our
multi-engine, multi-channel business model across Asia and Africa. The
business performed strongly in the first half of 2023, with new business
profit up 39 per cent(14). (up 52 per cent(14) on an ex-economics basis - i.e.
excluding the effect of interest rates). APE sales were up 42 per cent(14) to
$3,027 million and this sales momentum continues into the current third
quarter.
"Our agency channel has rebounded strongly in all segments as Covid
restrictions ended, reporting 89 per cent(14) growth in new business profit on
an ex-economics basis. The bancassurance channel maintained margins (on an
ex-economics basis) despite lower sales in Singapore, Vietnam and the Chinese
Mainland.
"13 of 22 life markets(3) recorded positive Health & Protection new
business profit growth. We continue to see increased agency adoption of
digital tools. In 2022 agents using PRULeads, our activity and leads
management engine, were 30 per cent more productive(15).
"Prudential has a great franchise with 175 years of history, top three
positions(16) in 12 of our 14 Asia life markets and 4 of our 8 Africa life
markets, scale in both agency and bancassurance, and more importantly the
trust of our 18 million customers. We also have in-house investment
capabilities with Eastspring managing over $220 billion of assets.
"We have today announced that we will do things differently in the way we run
Prudential. With a clear strategy, operational and capital allocation
priorities, we are focused on delivering sustainable value for all our
stakeholders: employees, customers, shareholders and our communities.
"We are excited to write the next chapter of growth at Prudential."
Market overview and outlook
In the first half of 2023, in Hong Kong, both domestic and Chinese Mainland
Visitor segments performed particularly well. APE sales from the Domestic
segment grew 68 per cent and the Chinese Mainland Visitor segment has seen a
significant increase in sales following the opening of the border with the
mainland in February 2023. Prudential increased market share across segments
and achieved the number one position in both the offshore business and in the
agency channel(17). Demand for savings products across the Hong Kong business
continues to be strong with volumes reflecting increased savings case sizes
compared to 2019. Product mix in terms of new policy count has started to
normalise. Customer experience improvements in digital onboarding and
underwriting and enhanced multi-currency options have improved both health and
protection and savings offerings. In Macau, the recruitment of agents has
commenced, following the opening of the branch. The new licence completes
Prudential's footprint in all 11 cities in the Greater Bay Area, which has a
population of over 85 million(18).
In the Chinese Mainland, the company's focus in the first half of 2023 was
taking decisive steps to drive a more balanced product mix. At the start of
the second quarter we actively withdrew certain guaranteed savings product
from both agency and bancassurance channels. As a consequence, both agency and
bancassurance channels reduced the proportion of short-term pay
non-participating products sold in favour of higher quality and higher margin
annuity and longer premium payment term products, particularly affecting
volumes in the bancassurance channel in the second quarter. Agency still
performed very strongly with APE sales up 25 per cent(14) and productivity(18)
up 53 per cent. Overall, new business profit was marginally down by (3)
percentage points(14) on an ex-economics basis. Margins for both agency and
bancassurance improved, and in aggregate rose by 7 percentage points, on an
ex-economics basis. In Taiwan, APE sales grew by 28 per cent(14) and new
business profit increased with good performances from both existing and new
bank partners. Participating products and tailored customer segmentation led
to the business significantly outperforming the market.
Our businesses in ASEAN reflect our leading positions and the strength of our
diversified multi-channel distribution franchise in this region.
· Malaysia grew APE sales by 12 per cent(14) and new business
profit by 11 per cent(14) and had a leading net promoter score in both
conventional and Takaful business.
· Indonesia APE sales grew 42 per cent(14) and new business profit
grew 22 per cent(14) - with agency APE up particularly strongly at 51 per
cent(14) and with new business profit per active agent in the period up 77 per
cent. Customer medical benefits were upgraded contributing to margins reducing
by 6 percentage points.
· The Philippines delivered 13 per cent(14) growth in new APE
sales, with strong growth in active agents and new business profit. In Q1
2023, it was the number one player by sales in the market(19).
· Singapore showed a resilient performance with APE sales down (3)
per cent(14) and new business profit down (20) per cent(14) as we maintained
market positioning, despite challenging operating conditions.
· In Vietnam, industry sales fell 31 per cent largely due to
weakness in the bancassurance channel(20). We outperformed the market,
reporting APE sales down (18) per cent(14), with agency APE sales up 34 per
cent(14). New business profit was down overall.
In India, there was continued strong momentum and high quality growth: new
business profit was up in the first half, reflecting APE sales growth of 15
per cent(14) and an improvement of margin. Agency APE Sales grew 29 per
cent(14), with over 17,000 new agent recruits and over 100 new distribution
partners secured.
In Africa, we delivered a strong performance with new business profit up
reflecting broad based growth across all channels and all eight African
markets recorded double digit(13) APE sales growth. Overall Africa saw 31 per
cent(14) APE sales growth and an 18 per cent increase in the number of active
agents since the equivalent period in the prior year. It had over 220 members
qualifying for 'million dollar round table' status in 2022.
At Eastspring, funds under management increased to $228 billion, reflecting
net inflows of $3.3 billion (excluding money market funds and net redemptions
from funds managed on behalf of M&G plc) and positive market movements.
Operating profits were up 14 per cent(14) to $146 million.
Consumers in Asia remain resilient despite the challenging environment. While
the outlook for Asian markets is mixed, our momentum in the first half has
continued into the third quarter. This underscores the strength of our
multi-market growth engine backed by our diversified channel mix, which is key
to driving sustainable value in the long term.
Notes
1 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.
2 New business profit, on a post-tax basis, on business sold in the
period, calculated in accordance with EEV Principles. See the basis of
preparation to the EEV basis results for further explanation.
3 Of our 14 Asia life markets and 8 Africa life markets
4 APE sales is a measure of new business activity that comprises the
aggregate of annualised regular premiums and one-tenth of single premiums on
new business written during the year for all insurance products, including
premiums for contracts designated as investment contracts under IFRS. It is
not representative of premium income recorded in the IFRS financial
statements. See note II of the Additional financial information for further
explanation.
5 'Adjusted IFRS operating profit' refers to adjusted IFRS operating
profit based on longer-term investment returns from continuing operations and
is stated after excluding the effect of short-term fluctuations in investment
returns against long-term assumptions and other corporate transactions. This
alternative performance measure is reconciled to IFRS profit for the period of
$947 million (2022: $(1,505)million) in note B1.1 of the IFRS financial
results.
6 Operating free surplus generated from in-force insurance business
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.
7 EEV operating profit is based on longer-term investment returns and is
stated after excluding the effect of short-term fluctuations in investment
returns and other corporate transactions, and excludes the effect of changes
in economic assumptions and the mark-to-market value movement on core
borrowings.
8 Estimated GWS capital position reflects eligible Group capital
resources in excess of the Group prescribed capital requirements (GPCR)
attributable to the shareholder business, before allowing for the 2023 first
cash interim dividend. Further detail on the estimated GWS capital position,
including the basis of preparation, is included in note I(i) of the Additional
financial information.
9 IFRS shareholders equity plus contractual service margin net of
reinsurance and related tax adjustments. See note C3.1 in the IFRS financial
results for further information.
10 On an actual exchange rate basis.
11 Net of reinsurance.
12 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 the existing EEV and Free Surplus
methodology at December 2022 will be applicable over the period.
13 Operating free surplus generated from insurance and asset management
operations after investment in new business but before restructuring costs.
Definition and further information is set out in 'Movement in Group free
surplus' of the EEV basis results.
14 On a constant exchange rate basis.
15 Measured by cases per agent
16 As reported at full year 2022 unless specified. Sources include formal
(e.g. competitors results release, local regulators and insurance association)
and informal (industry exchange) market share. Ranking based on new business
(APE sales, weighted full year premium or full year premium depending on
availability of data) or total weighted revenue premiums, except for Hong Kong
based on in-force premiums. Ranking for FY2020 for Cameroon.
17 Source: HKMA Q1 2023 market statistics.
18 Source: The Guangdong-Hong Kong-Macao Greater Bay Area Development
Office.
19 Q1-2023 based on Weighted First Year Premium, Philippines Insurance
Commission.
20 H1 2023 Vietnam Actuarial Network.
Contact:
Media Investors/analysts
Simon Kutner +44 (0)7581 023260 Patrick Bowes +852 9611 2981
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 Half Year 2023 Results to the Hong Kong Stock
Exchange and to the Financial Media at 12.00pm HKT - 5.00am UKT - 12.00am ET
on Wednesday, 30 August 2023.
The announcement will be released on the London Stock Exchange at 2.00pm HKT -
7.00am UKT - 2.00am EST on Wednesday, 30 August.
A pre-recorded presentation for analysts and investors will be available
on-demand from 12pm HKT - 5.00am UKT - 12.00am ET on Wednesday, 30 August 2023
using the following link:
https://www.investis-live.com/prudential/64d25bbb0120c60d00e4d387/yelll.
A copy of the script used in the pre-recorded video will also be available on
Prudential plc's website from 12pm HKT - 5.00am UKT - 12.00am ET on Wednesday,
30 August 2023.
A Q&A event for analysts and investors will be held at 4.30pm HKT - 9.30am
UKT - 4.30am ET on Wednesday, 30 August. We offer the option to join us in
person or virtually.
Registration to join the Q&A event in person, at the Four Seasons Hong
Kong, 8 Finance Street, Central, Hong Kong
To register to attend the event in person, please contact:
investor.relations@prudentialplc.com.
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/64d25e0c2be9e41300d405cd/twbbb.
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, i.e. from 4.00pm HKT - 9.00am
UKT - 4.00am ET).
Dial-in: +44 (0) 20 3936 2999 (UK and international) / 0800 358 1035
(Freephone UK), Participant access code: 759398. Once participants have
entered this code their name and company details will be taken.
Transcript
A transcript of the Q&A event will be published on the results centre page
of Prudential plc's website on Monday, 4 September.
Playback facility
Please use the following for a playback facility: +44 (0) 20 3936 3001 (UK and
international), replay code 949060. This will be available from approximately
9.00pm HKT - 2.00pm UKT - 9.00am ET on Wednesday, 30 August until 6.59am HKT
on Thursday, 7 September - 11.59pm UKT - 6.59pm ET on Wednesday, 6 September.
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/ (https://www.prudentialplc.com/)
Strategic and operating review
Prudential has a broad footprint across Asia and Africa that provides access
to a total market that is estimated will generate almost $1 trillion(1) of
incremental annual gross written premium in 2033 compared with 2022. We are a
well-established brand name(2), having operated for 175 years globally and 100
years in Asia. We have top-3 positions in 12 of our 14 Asian life markets(3)
and 4 of our 8 African markets. Overall, 18 million(4) customers have had the
confidence to choose Prudential. We are the only large Asian focused insurer
to have scale in both agency and bancassurance, as well as in-house investment
capabilities with Eastspring managing over $220 billion of assets.
In February 2023 Anil Wadhwani joined as Group CEO. In his first six months he
undertook a thorough strategic and operational review of the Group, meeting
our customers, people, distributors, partners, regulators, investors and other
capital providers. Following these discussions, Prudential is setting out,
alongside the 2023 Interim Results, our revised purpose and strategy for the
Group, reflecting strategic, operational and capital allocation priorities for
the next five years to 2027.
Throughout Prudential's 175 years in operation, we have a long history of
evolving to meet the ever-changing needs of the markets in which we operate
and the customers we serve. Today we are announcing that we will do things
differently in the way we run Prudential based on clear strategic, operational
and capital allocation priorities.
Our Purpose
Our purpose is our platform to say who we are, what we do and where we are
going as an organisation. We have revised it to make it clearer and
differentiate Prudential from others in the market. It defines 'why' we are in
this business and what it is we try to achieve as custodians of stakeholder
value for the long term.
Our new purpose is: For Every Life, For Every Future.
Our 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.
"For Every Life" speaks to our ambition to meet the huge under-served needs of
potentially four billion people(5) across our markets in Asia and Africa. With
the collective wisdom of our talented people, we will partner with customers
to improve their health and financial understanding so that they can build the
life they want.
"For Every Future" speaks to our ambition to add value to the wider community,
for a more sustainable and inclusive future. We are here to protect this
generation, just as we have previous generations, and those we are yet to
meet.
Our Strategy
Our strategy sets out how we will deliver on our purpose over the next five
years to 2027.
We believe consistent delivery of our strategy will create value for all our
stakeholders: employees, customers, shareholders and the communities in which
we operate. Our strategy will be implemented to build a sustainable growth
platform, through targeted investment in structural growth markets across Asia
and Africa.
The implementation of our strategy will prioritise:
· Enhancing customer experiences to drive higher acquisition and
loyalty for lifetime value creation.
· Technology-powered distribution with a focus on agency and
bancassurance productivity and activation.
· Unlocking the health opportunity by disciplined implementation of
best practices across all our markets.
· More consistent execution across each of our markets, driven
through changes in our organisational model and technology platform.
· Prioritising value creation, focusing on the generation of free
surplus that can be used to invest in new business at attractive returns, core
capabilities and strategic opportunities as well as return capital to
shareholders via dividends.
Our strategy comprises the following components:
a) Organisational model. A change in our organisational model will be
key to the delivery of our strategy. Today we have 24 life insurance and asset
management local market operations that are largely fragmented with different
processes on key customer journeys, different standards for measuring
distribution performance and inconsistent execution of our brand. We will
implement changes to this model that we believe will help support the drive
for quality sales and improve the economic value we can generate from our
business.
b) Multi-market growth engines. The strength of our capital gives us the
opportunity to invest in the multiple growth engines across Greater China, our
markets within the Association of Southeast Asian Nations (ASEAN), India and
Africa. Our approach to these markets is further discussed below.
c) Strategic pillars. Three initiatives that will drive our growth:
1. Enhancing customer experiences;
2. Technology-powered distribution; and
3. Transforming our health business model.
d) Group-wide enablers:
1. Open-architecture technology platform
2. Engaged people and high-performance culture; and
3. Wealth and investments capabilities.
e) Financial value creation. Our financial model means we are a natural
growth compounder, with new business growing our embedded value that converts
into free surplus available for reinvestment and distribution. We believe our
strategy will accelerate value creation for our stakeholders through
operational & financial discipline.
a) Organisational model
We have an opportunity to drive more operating leverage by replicating best
practice at pace and scale across all our markets. This organisational model
will be designed using the following key principles:
· Designed to have the customer at the heart of what we do;
· Continued empowerment of local market CEOs and leaders of the
businesses to deliver customer solutions and focus on what matters most in
each market;
· The establishment of centres of excellence and shared services
across many of the functional groups - for example health, technology and data
analytics - to deliver economies of skill and scale;
· Collaboration between the local markets and the centre with roles
and responsibilities clearly defined; and
· Setting values that will help define the ways of working. The
'how' alongside the 'what' will therefore be an important part of our Group
reward mechanism.
To deliver on our strategy, we will need to build capabilities, particularly
across our three strategic pillars of customer, distribution and health, with
technology and data being common to all three.
We believe these changes in our organisational model will help us drive
greater consistency of experience, as well as economies of scale, providing
value for both our customers and our shareholders.
b) Multi-market growth engines
A key differentiator for our business is the breadth of our access to the
world's fastest-growing markets. Our markets are expected to more than double
in size creating an almost $1 trillion growth opportunity(1). Growing twice as
fast as the rest of the world(6), the rapidly rising middle-class population
in Asia is expected to increase the awareness of, and demand for, protection
and wealth management solutions.
Asia still has low levels of life insurance penetration relative to more
mature markets like the UK(7), demonstrating our runway for growth. State
provision of pensions and social security is limited, leading to vast health,
protection and mortality gaps. In Asia, penetration is in the low single
digits(7) with protection out of pocket spend four times larger than the
US(8), creating a large and growing unmet need.
Our strategic planning has taken into account how growth will be delivered
across the following four regions within our geographical footprint:
· Greater China
o Throughout this geography we seek to sustain quality growth.
o In the Chinese Mainland, we have an established partner, CITIC, which
gives us access to over 80 per cent of GDP and licenses to operate in 100
cities. We are one of the top three international players(9) there with a
distinctive multi-channel platform. We have an opportunity to make our agency
channel larger and more productive, complementing our multiple bancassurance
partnerships.
o In Hong Kong, we have revitalised our business, not only through the
traction seen in the Chinese Mainland visitor segment but also by ensuring we
continue to grow our domestic business. With our recently opened Macau branch,
we are present in all 11 cities in the Greater Bay Area(10) that has an
extended population of over 85 million people(11).
o In Taiwan we are the number one foreign player(12) having developed a
sustainable bancassurance channel with good margins.
· ASEAN
o ASEAN includes a diversified range of markets. Collectively, these markets
have a combined population of more than 600 million people(13) which can
provide a crucial counterbalance that ensures we are not over-dependent on one
single geography.
o We have the largest multi-channel distribution franchise in this region
with more than 40,000 active agents(24), or 60 per cent of the Group's total
active agents. We have established bank partners including Standard Chartered,
UOB and VIB.
o We have a prominent brand and reputation across the region, and are among
the leading franchises across Singapore(14), Malaysia(15) and Indonesia(16)
(including the number one position in Sharia across both Malaysia(15) and
Indonesia(16)) plus top 2 positions in the fast-developing markets of the
Philippines(17), Vietnam(18), Cambodia(19) and Laos(20).
o In Thailand, we continue to grow through our bancassurance business.
o Our strategy will seek to leverage this leading platform across these
markets.
· India
o In India we will seek to grow our franchises, which will be important to
our scale in Asia. With over 1.4 billion people and where the share of health
expenses paid out-of-pocket are as high as 50 per cent(22), India is a
compelling opportunity. We are exploring options to address the health
opportunity in India.
o We have a successful partner in ICICI Bank and continue to work closely
with them on both life and asset management.
· Africa
o Though making a relatively small contribution to our overall new business
profit today, Africa's high growth rates present a longer-term opportunity.
o We are focusing on the highest value markets where we have the strongest
competitive advantage.
c) Strategic pillars
1. Enhancing customer experiences
In order to succeed in its broader new business profit objective, Prudential
is committed to evolving from being organised around products and channels to
become the most trusted partner to our customers.
The priorities are:
· Acquisition by personalised targeting: We will focus our data and
technology resources to drive up the quality of leads from social media and
our ecosystem of partners so that agents can more easily identify
opportunities for engagement;
· Segmentation by life stage: To develop impactful propositions for
our customers we will build an understanding of what our customers need based
on life stages;
· Differentiated propositions: To meet customer demand for
comprehensive solutions we will develop comprehensive solutions integrating
products with health, well-being and wealth services as a one stop proposition
for our target segments; and
· Simple tech-enabled journeys: To build competitive advantage in
acquiring and retaining customers over their lifetimes, we will seek to curate
a seamless end-to-end journey via a unified, scalable technology platform.
With PruServices, we are increasingly able to offer self-service for simple
enquiries, service and claims anytime, anywhere.
Our customer-centric strategy aims to deliver top quartile relationship net
promotor scores by 2027 which will support greater retention and acquisition
of customers. With a retention ratio already close to 90 per cent(23), we will
focus on expanding our share of wallet with existing customers over their
lifetime.
2. Technology-powered distribution
As a leading Asia focused insurer with scale in both agency and bancassurance
channels, we are very well-placed for customer access. These channels will be
complemented by our new digital customer interactions and continuous training
and development of our agency force and bancassurance partners.
Agency
Prudential has one of the leading agency forces in Asia, with a total of over
70,000 active agents(24) and 7,000 agents qualifying for Million Dollar Round
Table (MDRT) status(38). Our businesses in the Chinese Mainland, Hong Kong,
Malaysia, Philippines, Singapore, Thailand and Vietnam in particular show
higher active agent rates than the average across the Group. The future
success of our agency channel will be driven by continuous improvements in
productivity and the number of active agents. To drive this, the following
five priorities to boost productivity for agency have been identified:
· Upskilling the agency force: Conversion of part-time into
full-time career agents;
· Refocusing agents from being solely focused on sales to being a
trusted adviser;
· Quality recruitment: We will focus our recruitment approach into
one centred on tailored and strategic talent sourcing;
· Training and development: That seeks to ensure we are developing
the next generation of highly productive agents; and
· Enhancing customer servicing and embedding technology: We will
embed digital tools that allow agents to spend more productive time with their
customers.
These changes will support our ambition to increase agency new business profit
by 2.5 to 3 times by 2027 through significantly increasing the number of
active monthly agents and more than doubling new business profit per agent.
Bancassurance
Bancassurance provides us with significant scale and is an important source of
new business. It allows us access to large numbers of customers in multiple
locations using third party infrastructure. Prudential currently has more than
200 bank partners of which 10 are strategic. We have succeeded in improving
bancassurance margins over time and believe there remains significant growth
runway to increase the penetration of insurance products into this customer
base.
For us to drive a successful bank partnership model, it is essential for us
to:
· Broaden our proposition to multiple customer segments;
· Engage with our customers when and how they want with hybrid,
omni-channel platforms;
· Utilise effective, targeted marketing supported by data
analytics;
· Reward our bank partners for outcomes that deliver for the
customer and create value; and
· Establish an operating cadence with our bank partners that
ensures we deliver all of the above.
Implementing these changes will help drive our ambition by 2027 to increase
new business profit from bancassurance by 1.5 to 2 times. This will be driven
by increasing the penetration of our two major strategic partners from circa 8
per cent in 2022 to circa 9-11 per cent by 2027 and by supporting our margin
by increasing the contribution of health and protection products.
3. Transforming our health business model
There is a major health insurance opportunity in Asia. Across Asia,
individuals are reliant on private healthcare providers and have high out of
pocket spend of around 40 per cent(7).
For many years Prudential has had substantial health and protection businesses
in Malaysia, Indonesia, Hong Kong and Singapore. In 2022, the Group generated
over $2 billion in gross earned premiums from health insurance.
There are substantial opportunities to grow the Group's footprint across other
markets and we believe we can build value in extending beyond reimbursement.
We want to become a trusted partner to our customers, playing a much-needed
coordinating role across their healthcare journeys.
This ambition will require:
· Upgraded core health insurance capabilities. We will equip our
distribution force with the knowledge and tools to offer more advanced
products and value-added services. We will drive technical and operational
efficiency through data-led risk-based pricing and straight-through-processing
in underwriting and claims. Claims will be further managed by partnering with
panels of preferred medical providers and using Artificial Intelligence (AI)
and data analytics to detect and reduce fraud; and
· Expanding our role from payer to partner by connecting health
care journeys, such as disease prevention, diagnosis, rehabilitation or
chronic illness management. Our strategy is an asset-light approach focusing
on digital integration with preferred partners along the health care
continuum.
Delivering this efficiently across our markets will require enhanced
capabilities with best practice replicated across all our markets.
We believe these actions will support our ambition for our health insurance
Net Promotor Score to be top quartile by 2027, driving retention of existing
customers and attracting new ones, and for our health new business profit to
more than double from 2022 to 2027.
d) Group wide enablers
To support the execution of our strategy we will have three groupwide
enablers. We believe this will both support our ambition for growth and
management of our in-force business.
1. Open-architecture technology platform
A strong technology platform is important for all three strategic pillars in
delivering superior customer and distribution experiences. It is more
significant today given the pace of change with developments in AI. Pulse will
remain our customer engagement application, but we will transform the
underlying technology platform using the following design principles.
· Open-architecture design that ensures we can quickly adopt new
market innovations and engage with partners' ecosystems in a seamless manner;
· A data platform to which we can apply generative AI and data
analytics to create actions and insights;
· Refreshed operating model where there is greater collaboration
between the central technology team and local markets; and
· Appropriate governance and protections for our customer data and
business integrity.
2. Engaged people and high-performance culture
An engaged workforce is critical to deliver our strategy.
We aim to create an environment that allows our people to thrive, recognised
through a top-quartile employee net promoter score for our people. We will
focus on the following principles to create this:
· Upgraded talent capabilities, particularly within the areas of
customer, distribution, health and technology;
· Development of a robust internal talent pipeline, facilitate
mobility and acquire capabilities in the market where they do not exist
internally; and
· Values-based leadership and aligned reward structured to help
build a culture that is customer-led and performance-driven.
3. Wealth and investments capabilities
Asia's household wealth stood at over $150 trillion in 2021(25), broadly in
line with North America and considerably more than Europe. By 2030 Asia and
Africa will represent three-quarters of the global working age population. We
believe there is scope for increasing participation in wealth management
propositions across our markets, including differentiated propositions for
affluent customers. Our wealth capabilities are currently focused in Singapore
and Hong Kong, while our investment capabilities in Eastspring span 11 markets
and manage over $220 billion of assets.
We believe that we can further leverage our internal proprietary capabilities
by focusing on the following priorities:
· Providing distribution support to our top agents with a more
holistic suite of tools to identify the needs of our affluent customers;
· Customising investment solutions at a much faster speed-to-market
than is possible using a third party; and
· Improving consistency of investment performance through
high-performance investment teams.
As an asset manager, it is our ambition to deliver outperformance relative to
benchmarks. As a responsible asset owner we are supporting a just and
inclusive transition to net-zero and we are targeting a 55 per cent reduction
in our weighted average carbon intensity (WACI) by 2030(26).
e) Financial value creation
Delivery of our new strategy will accelerate value creation through
operational and financial discipline, underpinned by improving customer,
agency and bank partner propositions, as well as capturing economies of scale
through our organisational model and technology platform.
We are able 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. Over the last 10 years, new business
contributed $27 billion of growth to our embedded value, and EEV related to
our life and asset management business almost tripled.
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 requirements 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. Over the next five years, based on the economic and other
assumptions and methodology that underpinned our EEV reporting at the end of
2022, we expect to transfer over $11 billion from VIF and required capital to
operating free surplus generated from our in-force insurance business at the
end of 2022. 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. As set out above, 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
dividends.
To support our ambition for growth, we have the following overarching
objectives:
· Over the next five years to 2027 we will look to grow new
business profits(27) across all our markets more consistently, with an
objective of 15-20 per cent compound annual growth from the level of new
business profits achieved in 2022*.
· Also over the next five years to 2027, we will aim for
double-digit compound annual growth in Operating free surplus generated from
in-force insurance and asset management business(34), from the level achieved
in 2022*.
Objectives Summary*
New business profit Full Year 2022 Objective 2027
Amount $2.2 billion $4.4 - $5.4 billion
change % (compound annual rate) 15-20%
Operating free surplus generated from in-force insurance and asset management Full Year 2022 Objective 2027
business(34)
Amount $2.8 billion >$4.4 billion
change % (compound annual rate) Double digit
*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 the existing EEV and Free Surplus
methodology at December 2022 will be applicable over the period.
Financial performance for the first half of 2023
New business profit(27) from the Group increased 39 per cent(28), with 16 of
our life markets(21) delivering double digit growth(28), led by Hong Kong.
This reflects increased APE sales(29) (up 42 per cent(28) to $3,027 million)
partially off-set by interest rate and other economic movements reflected
under the active basis of our EEV methodology. Excluding these effects new
business profit was up 52 per cent(28).
Our agency channel generated new business profit of $1,002 million up 74 per
cent(28) (2022: $575 million(28)), reflecting an increase in APE sales of 96
per cent(28) to $1,507 million (2022: $768 million(28)) as sales recovered
following the border reopening between Hong Kong and the Chinese Mainland.
Reflecting this, our agency channel contributed 67 per cent of the Group's new
business profit (2022: 54 per cent) and 50 per cent of the Group's APE sales
(2022: 36 per cent). Excluding the effects of interest rate and other economic
movements reflected under the active basis of our EEV methodology, new
business profit from agency business was up 89 per cent(28).
New business profit from our bancassurance channel declined to $401 million
(2022: $449 million(28)), as a result of lower APE sales of $1,098 million
(2022: $1,125 million(28)), and adverse economic impacts in many markets along
with proactive actions taken by our business in the Chinese Mainland, CITIC
Prudential Life (CPL). These actions sought to diversify sales in order to
achieve both a more balanced product mix and improved margins. Excluding the
effects of interest rate and other economic movements, the bancassurance new
business margin was broadly consistent with the prior year, with the positive
product mix effects in CPL being offset by product mix in Singapore as the
market reacted to increased interest rates.
Eastspring's funds under management and advice increased by 3 per cent(30) to
$227.7 billion at 30 June 2023, from $221.4 billion at 31 December 2022,
reflecting inflows from both external clients(35) and our life business as
well as positive market movements.
From 1 January 2023, the Group has adopted the revised international
accounting standard for insurance business, IFRS 17. Group adjusted IFRS
operating profit based on longer-term investment returns (adjusted operating
profit) for the first half of 2023 was $1,462 million, 6 per cent(28) higher
than the first half of 2022 calculated on the new IFRS 17 basis. This reflects
a 14 per cent(28) increase from our asset management business and a decline in
central expenses of 11 per cent(28), reflecting both lower interest costs and
corporate expenses. IFRS profit after tax for the first half of 2023 was $947
million (2022: loss of $(1,511) million(33) on a constant exchange rate basis,
loss of $(1,505) million(33) on an actual exchange rate basis) with markets
movements more muted than in the prior year.
Additional commentary on the performance in the first half of 2023 is included
in the operational performance by market section and the financial review
below.
Outlook
We believe a new strategy focused on operational and financial discipline
provides an opportunity to accelerate value creation for all our stakeholders
and to build a sustainable growth platform, through targeted investment in
structural growth markets across Asia and Africa.
We will deliver this through:
· Enhancing customer experiences to drive growth and lifetime
value;
· Upgrading the technology of our distribution forces with a focus
on improving productivity and activation rates;
· Seeking to unlock the opportunity in health by disciplined
implementation of best practices at scale across all our markets; and
· Driving more consistent performance across each of our markets.
Consumers in Asia remain resilient despite the challenging environment. While
the outlook for Asian markets is mixed, our momentum in the first half has
continued into the third quarter. This underscores the strength of our
multi-market growth engine backed by our diversified channel mix, which is key
to driving sustainable value in the long term. Prudential is focused on
delivering this for all our stakeholders: employees, customers, shareholders
and the communities in which we operate.
New business performance by market
The following commentary provides an update on the new business performance
for each of the Group's segments. Discussion of the financial performance of
the Group and its segments, including adjusted operating profit, is contained
separately in the Financial review section of this report.
Chinese Mainland - CITIC Prudential Life (CPL)
Actual exchange rate Constant exchange rate
Half year 2023 Half year 2022 Change Half year 2022 Change
APE sales ($m) 394 507 (22)% 474 (17)%
New business profit ($m) 171 217 (21)% 203 (16)%
New business margin (%) 43 43 - 43 -
Amounts included in the table above represent 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 was our
second largest contributor to the Group's APE sales in the first half of 2023
which were delivered through a balanced mix of agency and bancassurance sales.
CPL saw APE sales(29) decrease by (17) per cent(28) to $394 million largely
driven by lower volumes sold through the bancassurance channel partly offset
by double digit APE sales growth in the agency channel and higher overall
health and protection APE sales compared with the same period in 2022.
The new business profit(27) for CPL declined (16) per cent(28) in the first
half of 2023, compared with the same period in 2022. This was driven by lower
sales volumes and adverse economics. Excluding the effects of interest rate
and other economic movements new business margin improved by seven percentage
points, compared with remaining flat after the effects of economics.
Delivering customer-led solutions
During the first half of 2023, CPL continued to develop customised products
addressing customers' needs at different life stages. Whole life protection
products were specifically developed to meet the needs of customers and sales
doubled versus last year. CPL have expanded the retirement and planning
concierge village network to cover 22 institutions in seven cities.
Multi-channel distribution
CPL continues to focus on building a professional, high-quality agency force,
with a strong understanding of our health, protection and retirement planning
products. Following the removal of Covid-19 restrictions, APE sales through
the agency channel grew 25 per cent(28) compared with the same period in 2022.
A significant improvement in agent productivity was achieved with the APE
sales per active agent(24) increased by more than 50 per cent(28). CPL had
over 800 agents with production levels that qualify for the Million Dollar
Round Table (MDRT) in the first half of 2023.
CPL's bancassurance APE sales were impacted by our proactive actions to
diversify in order to achieve both a more balanced product mix and improved
margins. While we saw an increasing level of demand from the market for high
interest-rate guarantee products, CPL has chosen to rebalance its sales
between whole-life products and higher margin annuity and longer-premium
payment term products. This rebalancing is expected to contribute to both
increased new business margin and better alignment with the retirement regime
promoted by the national agenda. CPL further continues to build its
bancassurance distribution network, adding six new bancassurance partners over
the past 12 months, and the number of bank branches increasing by more than 7
per cent to over 6,600 branches across the Chinese Mainland.
Hong Kong
Actual exchange rate Constant exchange rate
Half year 2023 Half year 2022 Change Half year 2022 Change
APE sales ($m) 1,027 227 352% 227 352%
New business profit ($m) 670 211 218% 211 218%
New business margin (%) 65 93 (28)ppts 93 (28)ppts
Our business in Hong Kong increased APE sales(29) more than four times(28) to
$1,027 million in the first half of 2023, with growth across all distribution
channels, following the re-opening of the border with the Chinese Mainland and
subsequent increase in cross-border traffic. We also saw strong growth of 68
per cent(28) in our domestic segment supported by new product launches and
customer campaigns. We significantly outperformed the market and increased our
market share, based on latest available market information(31). As a result,
we ranked number one in the offshore business and number one in the agency
channel(31). New customer acquisitions accounted for some 54 per cent of APE
sales in the period(36). This performance is indicative of the continued
demand and value of Hong Kong life products for Chinese Mainland customers,
providing them access to international investment opportunities with
diversification in terms of currency and asset class, and access to
sophisticated healthcare products. Our strong multi-channel distribution
capabilities have meant that we are well-positioned to capture the full
breadth of customer demand following the re-opening of the border between Hong
Kong and the Chinese Mainland.
New business profit(27) more than tripled(28) to $670 million, largely driven
by the increase in APE sales and a favourable shift in channel mix given the
strong growth in agency. This was partly offset by a shift in product mix with
a higher proportion of savings products from the Mainland Chinese business and
the impact of higher interest rates under the active basis we adopt for our
EEV methodology. Excluding the effects of interest rate and other economic
movements new business margin would have been 10 percentage points higher.
Delivering customer-led solutions
Our business continues to develop its health and protection business. In the
first half of 2023, we launched a new comprehensive multiple critical illness
product which addresses customers family protection needs at different life
stages. Our multi-currency savings product launched in 2022 has attracted
strong demand from both the domestic and Chinese Mainland customers in the
first half of 2023. Customer segmentation has increased our ability to
identify and address specific customer needs, including across the family
segment, the golden-age segment - with peace-of-mind retirement solutions -
and the young adult segment. Cutting across these segments we also enhanced
our wealth solutions for high-net-worth customers by prioritising service,
flexibility and liquidity and saw these customers generating around 70 per
cent of Hong Kong's new business profit. We recently opened our Macau branch,
further strengthening our footprint in the Greater Bay Area, a region with a
population of over 85 million(11).
Multi-channel distribution
Our agency APE sales increased by more than six times(28) in the first half of
2023 from the low levels seen in 2022, contributing more than 72 per cent of
APE sales in the first half of 2023. APE sales to both Chinese Mainland and
domestic customers grew substantially in the period. Agency APE sales for
domestic customers more than doubled in the first half of 2023 while business
levels for customers from the Chinese mainland recovered to pre-Covid-19
levels during the second quarter. We recruited nearly 1,200 agents in the
first half of 2023 and are on track to recruit 4,000 agents by end of 2023.
Our active agents(24) increased by 75 per cent with an improvement in agent
productivity (measured by APE per active agent) by 2.8 times. We are the
leader in the agency channel with a 33 per cent market share based on the
latest available market statistics at the end of the first quarter.
We are a leading major insurer in the bancassurance channel, excluding bank
owned operations, and achieved a substantial growth in both APE sales and new
business profit through the bancassurance channel during the first half of
2023, underpinned by initiatives to deepen customer penetration. Our broker
channel also delivered significant growth in APE sales following the
reactivation of our broker network and return of Chinese Mainland business.
Indonesia
Actual exchange rate Constant exchange rate
Half year 2023 Half year 2022 Change Half year 2022 Change
APE sales ($m) 150 110 36% 106 42%
New business profit ($m) 61 52 17% 50 22%
New business margin (%) 41 47 (6)ppt 47 (6)ppts
APE sales(29) for our business in Indonesia grew by 42 per cent(28) to $150
million in the first half of 2023, supported by double-digit(28) growth across
both agency and bancassurance channels. Product innovations helped deliver
growth, with APE sales for health and protection business increasing by 44 per
cent(28), and growth in unit-linked APE sales of 37 per cent(28). Growth in
health and protection APE sales were assisted by repricing actions and medical
riders upgrades.
Overall new business profit(27) grew by 22 per cent(28) to $61 million,
supported by strong growth in APE sales, offset in part by the impact of the
medical rider upgrades which resulted in lower margins.
Delivering customer-led solutions
Our customer-first approach in designing and delivering solutions contributed
to double-digit(28) growth in APE sales for our unit-linked product compared
with a decline in the market for this product segment. We have revamped our
unit-linked product propositions with enhanced benefits along with an upgrade
to our sales and operational processes in response to new regulations
governing the design, sale, and management of unit-linked products (commonly
known as PAYDI in the market). Further, we upgraded our flagship medical
reimbursement riders with increased limits and enhanced benefits including the
introduction of telehealth benefits and traditional medicine treatments which
were well received by our customers.
Multi-channel distribution
As part of our transformation programme initiated in 2022, 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. These initiatives contributed to a 51
per cent(28) increase in agency APE sales alongside a significant improvement
in agency productivity.
In the bancassurance channel, we delivered APE sales growth of 15 per cent(28)
in the first half of 2023. Sales momentum was particularly pronounced in
higher income customer tiers. New business profit from the bancassurance
channel increased by 14 per cent(28), reflecting greater APE sales volume
including from Privilege Banking customers. Over the longer term we see
significant opportunities for growth in all customer segments given low
insurance penetration in the broader market, our existing partnerships and the
added potential for new partnerships.
Malaysia
Actual exchange rate Constant exchange rate
Half year 2023 Half year 2022 Change Half year 2022 Change
APE sales ($m) 185 172 8% 165 12%
New business profit ($m) 73 70 4% 66 11%
New business margin (%) 39 41 (2)ppts 40 (1)ppts
Overall APE sales(29) increased by 12 per cent(28) to $185 million in the
first half of 2023, as sales momentum in our life businesses improved during
the period.
New business profit(27) increased by 11 per cent(28), supported by the growth
in APE sales and a favourable product mix, with a slight margin dilution
reflecting a greater proportion of sales coming from bancassurance.
Delivering customer-led solutions
We continue to develop new and innovative products to address the evolving
needs of our customers. For instance, we strengthened our health and
protection offerings within the Takaful segment, by introducing a medical
solution (PruBSN Damai) that provides coverages for mental illnesses,
preventative care, and treatments based on advance medical technologies. We
also enhanced our unit-linked offerings by launching a Syariah compliant
socially responsible fund (Takafulink Dana ESG Global).
For our mature affluent customers looking for a strong savings proposition to
either maximise potential returns or offer diversification through a diverse
range of local and global funds, we launched an investment-linked savings
product (PruElite Plus). For our young family segment, we launched a pre-natal
care plan (PruMY Child Plus) for parents who are seeking protection for both
mother and infant at one of most important life stages for the family. The
product's innovative features include early protection for pregnancy from 13
weeks onwards, coverage for pregnancy complications, all structural congenital
conditions (first in the market), emergency c-section for early delivery
(first in the market) and child development disorders.
We also launched a new marketplace with more than 1,000 healthcare services
from our notable healthcare service providers in over 200 locations
nationwide, from medical check-up, diagnostic test, vaccination, and even
subscription program to improve customer health and promote healthy habits.
Multi-channel distribution
We continued to drive sustainable growth of our agency through quality
recruits, new agent activations, intensive training, leadership development
and digital enhancement. We have a structured program of support and training
for agents and leaders at each stage of their careers. We also focus on
training our agents to provide quality advice to our customers. Following
these initiatives, our agency channel has delivered double-digit(28) new
business profit growth in the first half of 2023 compared to the same period
last year, despite a marginal decrease in APE sales.
Our bancassurance channel delivered strong growth in the first half of 2023 as
we continued to collaborate with our bank partners, including Standard
Chartered, UOB and BSN, to strengthen our distribution platforms and offer
product solutions to each bank partner's customer segments. Product launches
for bancassurance included a hassle-free protection solution for Citibank
customers covering 15 types of infectious diseases and new credit shield
solution that enabled a successful transition of more than 90,000 credit card
customers. We are well positioned to capture the opportunities from the merger
of UOB and Citibank's consumer business in Malaysia, which has provided
potential access to an incremental 600,000 customers.
Singapore
Actual exchange rate Constant exchange rate
Half year 2023 Half year 2022 Change Half year 2022 Change
APE sales ($m) 386 390 (1)% 398 (3)%
New business profit ($m) 198 244 (19)% 249 (20)%
New business margin (%) 51 63 (12)ppts 63 (12)ppts
Overall APE sales(29) for our business in Singapore declined by (3) per
cent(28) to $386 million, with higher interest rates providing a challenging
operating environment especially in the first part of the period. Sales of
single premium participating products through the bancassurance channel were
particularly affected by movements in interest rates in the period, compared
with an elevated level of sales in the comparative period. APE sales from
health and protection products grew by 11 per cent(28) in the first half of
2023 compared with the first half of 2022.
New business profit(27) declined by (20) per cent(28) to $198 million,
reflecting the lower mix of higher margin single premium participating
products, alongside lower APE sales and adverse economics. We saw an
improvement in product mix in the second quarter as compared with the first,
with a higher proportion of individual health and protection business. This
had a beneficial impact on margins in the second quarter, a trend which
continued into July.
Delivering customer-led solutions
In 2023, we continue to drive our segment-led customer strategy in each of the
high-net-worth, affluent, mass-market and enterprise segments. We enhanced our
product offerings in the first half of 2023 to meet the health and wealth
needs of our customers. We rolled out a suite of product offerings and
professional advice through our network of financial consultants, financial
advisers and our bank partners.
Within the affluent segment, we relaunched our flagship wealth accumulation
products taking into account the voice of customers and improving its overall
competitiveness. For younger mass market segments, we are offering affordable
plans that guarantees stable income should customers be affected by
disability. Our enterprise benefit business also delivered good growth with
APE sales increasing by 17 per cent(28), covering around 3,000 small-to-medium
enterprises and over 200,000 employees.
We continue to improve our customer experience, leveraging digital and
technology in our day-to-day operations. Over 75 per cent of policies went
through instant underwriting engines, which improve productivity and
turnaround time. We have eGIRO in place with all banks; this allows customers
to set up direct debit to pay their premiums within minutes. The quality of
our customer service is reflected by a high customer retention ratio of over
95 per cent and improvement in net promoter score across purchasing, servicing
and claims touchpoints.
Multi-channel distribution
APE sales for the agency channel increased by 2 per cent(28) in the first half
of 2023 compared with the same period last year. Sales momentum has
accelerated in the period, with APE sales in the second quarter being 7 per
cent(28) higher than the first. Individual health and protection APE sales
grew 24 per cent(28) in the second quarter of 2023 compared with the first
quarter, demonstrating our agents' continued focus on medical reimbursement
and critical illness products.
Bancassurance APE sales declined by (10) per cent(28) in the first half of
2023. Increases in interest rates significantly reduced single premium
participating business, which accounted for a large proportion of sales in the
first half of 2022. We have re-activated the sales of investment-linked plans,
which now make up over 23 per cent of APE sales for the channel. We further
widened our regular premium investment-linked proposition and witnessed strong
response for our new product offerings, improving the resilience of the
business and providing flexibility to our customers over the long term.
Demonstrating the benefit of our multi-channel distribution capabilities and
balanced product mix, APE sales from regular premium product grew by 49 per
cent(28) and contributed over 86 per cent of APE sales in the first half of
2023.
We also entered the fast-growing Financial Adviser (FA) channel in April, with
over 100 FAs in place. Prudential Financial Adviser is the first financial
advisory firm in the Group, and its official start of operations marks an
important milestone for our business. Prudential Financial Adviser will offer
a wide range of products and services including general insurance and wealth
solutions, in addition to Prudential's core solutions.
Growth markets and other
Actual exchange rate Constant exchange rate
Half year 2023 Half year 2022 Change Half year 2022 Change
APE sales ($m) 885 807 10% 762 16%
New business profit ($m) 316 304 4% 290 9%
New business margin (%) 36 38 (2)ppt 38 (2)ppt
The Growth markets and other segment includes our businesses in India,
Thailand, Vietnam, the Philippines, Taiwan, Cambodia, Laos, Myanmar, and
Africa. Our APE sales(29) increased by 16 per cent(28) to $885 million in the
first half of 2023, with strong double-digit growth(28) in India, Thailand,
the Philippines, Taiwan and Africa offset in part by decline in the APE sales
for Vietnam. New business profit(27) was up 9 per cent(28) to $316 million,
largely reflecting the increase in APE sales, offset in part by shift in
country mix due to lower sales in Vietnam.
India
Our business in India, ICICI Prudential Life, is an associate in which we hold
22 per cent voting rights. ICICI Prudential Life is listed on the National
Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). APE sales for India
grew by 15 per cent(28), with a well-diversified distribution network enabling
the company to reach a wider cross-section of customers to drive growth. New
business profit grew in the first six months of 2023 compared with the same
period in the prior year, reflecting APE sales growth and an improvement in
new business margin.
ICICI Prudential Life has continued to grow its distribution channels by
recruiting over 17,000 new agents in the first half of 2023. Further, ICICI
Prudential Life entered into over 100 new partnerships during the period, with
the total number of partnerships reaching more than 990 including 39 banks.
ICICI Prudential Life has a comprehensive product suite to address varied
customer needs through different life stages. In the first half of 2023, ICICI
Prudential Life launched an innovative long-term savings product (ICICI Pru
Gold) designed to enable customers meet their diverse income requirements, and
a first of its kind debt fund in the life insurance market (ICICI Pru Constant
Maturity Fund) in view of the prevailing interest rates trend.
Thailand
In Thailand, our APE sales grew by 20 per cent(28) in the first half of 2023,
reflecting double-digit(28) growth in bancassurance through our partnerships
with TTB and UOB, and a substantial increase in the contribution from employee
benefit (EB) solutions. We continue to be one of the top three life insurance
companies operating in the bancassurance channel(37). New business profit
increased driven by higher APE sales, while the new business margin declined
due to lower interest rates in Thailand and growth in lower-margin EB
business.
The integration of Citibank's operations with UOB supported a 14 per cent(28)
increase in APE sales for the bancassurance channel in the first half of 2023.
Our EB solutions also experienced significant growth, adding over 75,000 new
lives assured over the period.
We continue to refresh our customer propositions to address the evolving
health, wealth and protection needs of the Thai population. Our innovative new
health propositions, including family cover, have been well received by
customers. An ongoing focus on excellent customer experience through digital
transformation of our on boarding, servicing and claims processes has lifted
our already market-leading net promoter score higher.
Vietnam
The overall life insurance sector was significantly impacted by a fall in
consumer confidence and this resulted in the industry reporting a (31) per
cent sales decline in the first half of 2023. However, our business in Vietnam
outperformed the market with a (18) per cent(28) decline in APE sales in the
first half of 2023. The decline in APE sales from the bancassurance channel
was partially offset by strong growth in our agency business with an
improvement in agent productivity. Agents that are qualifying for the MDRT
have more than tripled in the first half of 2023. New business profit
declined, reflecting lower APE sales, offset in part by an improvement in new
business margin from a more favourable channel mix and economic conditions.
In Vietnam, around 83 per cent of our new business policies are processed by
smart underwriting engines, providing our customers a quick and seamless
onboarding journey, while three out of four claims were processed with the
assistance of automated solutions to reduce waiting time.
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.
The Philippines
In the Philippines, overall APE sales grew by 13 per cent(28) in the first
half of 2023, driven by growth in our agency channel. We continue to grow our
agency channel in the Philippines with a 32 per cent growth in new recruits in
the first half of 2023. New business profit increased, largely reflecting
growth in APE sales.
Taiwan
In Taiwan, APE sales grew 28 per cent(28) in the first half of 2023,
reflecting growth across both bancassurance and broker channels. We have
outperformed the market which reported a contraction of (1.3) per cent in the
first half of 2023. New business profit increased, supported by an increase in
APE sales, offset in part by a lower proportion of health and protection
sales.
An innovative comprehensive participating product, with protection benefits or
long-term care benefits was introduced to meet diversified needs of customers,
especially the young working population. In addition to a whole suite of
customer-centric products, we also launched a new value-added service covering
eye-care and medical transportation service for elderly customers.
Africa
Despite higher inflation leading to macro-economic uncertainties, APE sales
for Africa grew by 31 per cent(28) in the first half of 2023, reflecting a
strong performance across all distribution channels with all eight markets
achieving double-digit(28) growth in APE sales(5). In Africa, Prudential has
an established agency force and saw an 18 per cent increase in the number of
active agents since the equivalent period in the prior year. In addition,
Prudential Africa has access to over 1,000 bank branches, digital,
telecommunication and intermediary partnerships. Our ongoing investment in
digital innovation and robust systems to digitise processes will allow us to
grow at scale and provide seamless experience to better service our customer
needs. Our businesses in Kenya, Zambia, and Nigeria all launched digital
self-service portals to assist in improving customer service. Improved product
mix, alongside the growth in APE sales, led to an increase in new business
profit.
Eastspring
Actual exchange rate Constant exchange rate Actual exchange rate
Half year 2023 Half year 2022 Change Half year 2022 Change Full year 2022 Change
Total funds under management or advice ($bn) 227.7 222.3 2% 222.7 2% 221.4 3%
Adjusted operating profit ($m) 146 131 11% 128 14% 260 n/a
Fee margin based on operating income (bps) 31bps 28bps 3bps 27bps 4bps 29bps 2bps
Cost/income ratio (%) 53% 55% (2)ppts 56% (3)ppts 55% (2)ppts
IFRS profit after tax ($m) 132 117 13% 114 16% 234 n/a
Eastspring has a presence in 11 Asian markets as well as distribution offices
in North America and Europe. We are a top-10 asset manager in six of these
markets managing or advising $227.7 billion in assets. The firm is well placed
to address the saving and investment needs of customers across the region
through a team of 300 investment professionals with local market expertise.
Eastspring's total funds under management and advice (referred collectively as
funds under management below) increased by 3 per cent(30) to $227.7 billion at
30 June 2023 (31 December 2022: $221.4 billion on an actual exchange rate
basis), reflecting favourable net flows from external clients (excluding
M&G plc) and our life insurance business as well as positive market
movements. The overall asset mix has remained stable and diversified across
both clients and asset classes.
With favourable market conditions at the start of the year, client interest
and sales momentum were positive. The overall net inflows from third parties
(excluding money market funds and funds managed on behalf of M&G plc) were
$1.9 billion during the first half of 2023. Further, there was a net inflow of
$1.4 billion from our life insurance business. However, this was more than
offset by net outflows of $(7.1) billion following the redemption of the funds
managed on behalf of M&G plc. A further fund transfer out of Eastspring by
M&G plc of $1.1 billion is anticipated in the second half of the year.
Leveraging our integrated investment platform and rigorous investment
framework, Eastspring's longer-term investment performance has improved
significantly, with 59 per cent of funds under management outperforming their
benchmarks(32) on a three-year basis (June 2022: 41 percent, December 2022: 39
per cent). This reflects the strong relative and absolute returns generated by
the suite of strategies managed by in-country teams and equity strategies
managed by our regional team in Singapore. On a one-year basis 35 per cent of
funds under management outperformed their benchmarks(32) (June 2022: 58
percent, December 2022: 59 per cent), with this measure impacted by the
relative performance of some of our larger multi-asset portfolio solutions.
The absolute returns achieved by our multi-asset portfolio solutions remained
positive, and we have observed improved performance, in both relative and
absolute terms, on a year-to-date basis as new measures to enhance performance
in a sustainable manner take effect.
Notes
1 Source: Swiss Re forecast (July 2023).
2 Source: Kantar survey.
3 As reported at full year 2022 unless specified. Sources include
formal (e.g. competitors results release, local regulators and insurance
association) and informal (industry exchange) market share. Ranking based on
new business (APE sales, weighted full year premium or full year premium
depending on availability of data) or total weighted revenue premiums, except
for Hong Kong based on in-force premiums. Ranking for FY2020 for Cameroon.
4 A life customer is defined as an individual or entity who holds
one or more policies 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.
5 Source: United Nations, Department of Economic and Social Affairs,
Population Division , World Population Prospects 2022.
6 Source: Brookings Institution: The unprecedented expansion of the
global middle class (2017).
7 Source: Swiss Re No 3/2023: World insurance: stirred, and not
shaken - Insurance as percentage of GDP.
8 World Health Organisation. Out of pocket as % of Total Health
Expenditure. Asia calculated as the average of the out-of-pocket percentages.
9 Ranking among foreign insurers. Source: CBIRC and company
disclosures as at FY22.
10 Across Hong Kong, Macau and the Chinese Mainland
11 Source: The Guangdong-Hong Kong-Macao Greater Bay Area Development
Office
12 Source: Taiwan Life Insurance Association FY22
13 Source: Economist Intelligence Unit 2023
14 Source: Life Insurance Association of Singapore (LIA). Q1 2023
15 Source: Life Insurance Association of Malaysia for conventional
business and Insurance Services Malaysia (ISM) for Takaful business. Q1 2023
16 Source: AAJI Q1 2023
17 Source: Philippines Insurance Commission. Q1 23
18 Source: Vietnam Actuarial Network data sharing. Q1 23
19 Source: Insurance Association of Cambodia (IAC). Q1 23
20 Gross written premiums for 2021 (sourced from Axco Insurance
Report)
21 Of our 14 Asia life markets and 8 Africa life markets
22 Source: Swiss Re: The Health protection gap in Asia (2018)
23 FY22 Excluding India, Africa, Myanmar and Laos
24 Active agents as of 30 June 2023 and represents agents who have at
least sold one new policy.
25 Source: Credit Suisse - Global Wealth Report 2022
26 Our investment portfolio includes both listed equities and
corporate bonds, where the assets are managed on our main portfolio management
system and emissions data is available from our external data provider. Other
asset classes were excluded from the calculation in absence of data or
industry standard. This also excludes assets held by joint venture and
associate businesses, and assets in unit-linked funds as we do not have full
authority to change the investment strategies of these. The full scope and
basis can be found at
https://www.prudentialplc.com/~/media/Files/P/Prudential-V13/esg-report/assurance-statement-2022.pdf
27 New business profit, on a post-tax basis, on business sold in the
period, calculated in accordance with EEV Principles.
28 On a constant exchange rate basis
29 APE sales is a measure of new business activity that comprises the
aggregate of annualised regular premiums and one-tenth of single premiums on
new business written during the year for all insurance products. See note II
of the Additional unaudited financial information for further explanation.
30 On an actual exchange rate basis
31 Source: HKIA Q1 2023 market statistics
32 The value of assets under management at 30 June 2023 in funds which
outperform their performance benchmark as a percentage of total assets under
management at 30 June 2023, excluding assets in funds with no performance
benchmark.
33 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.
34 Operating free surplus generated from in-force insurance business
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.
35 Excluding funds managed on behalf of M&G plc
36 Individual business only
37 Source: Thailand Life Assurance Association Q2 2023
38 As at FY2022
Financial review
During the first half of 2023, we delivered growth across many of our key
value measures, with broad-based growth in new business profit(2) driving
higher EEV operating profit and EEV. Within IFRS, adjusted shareholders'
equity(3) also increased reflecting the profit for the period and a higher
contractual service margin (CSM). The first half of 2023 saw a reduction in
the macroeconomic volatility with small reductions in government bond yields
in many of our Asian markets and with the US 10-year yield falling by 8 basis
points to 3.81 per cent. A mixed performance was seen in respect of equity
index levels, with the S&P 500 index increasing by 16 per cent and the
MSCI Asia excluding Japan equity index by 2 per cent, while the Hang Seng
index fell by 4 per cent. Overall 2023 market movements had a relatively muted
impact on EEV and adjusted shareholders' equity(3), when compared with 2022.
As in previous years, we comment on our performance in local currency terms
(expressed on a constant exchange rate basis) to show the underlying business
trends in periods of currency movement, unless otherwise noted.
The removal of all Covid-related restrictions, in particular the reopening of
the border between Hong Kong and the Chinese Mainland and the rebound of APE
sales(1), led to new business profit increasing 39 per cent(4) to $1,489
million. This was underpinned by a 42 per cent(4) growth in APE sales in the
first half of 2023, which in absolute terms, exceeded the pre-pandemic levels
of 2019. Excluding the effects of interest rates and other economic changes,
given our active EEV reporting basis, new business profit increased by 52 per
cent(4).
Group EEV operating profit increased by 22 per cent(4) to $2,155 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(5) was 10
per cent compared with 8 per cent in the first half of 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 30
June 2023 was $43.7 billion (31 December 2022: 42.2 billion(6)), equivalent to
1,588 cents per share (31 December 2022: 1,534 cents per share(6)). The
operating free surplus generated from in-force insurance and asset management
business(7) during the period was $1,438 million, down (2) per cent(4). Higher
investment in new business of $(414) million (2022: $(268) million(4)) from
higher APE sales and business mix effects, led to total operating free surplus
generated from life and asset management business(7) reducing to $1,024
million (2022: $1,200 million(4)).
The Group implemented IFRS 17, the new accounting standard for insurance
contracts in the first half of 2023 with comparatives restated accordingly. In
line with the preliminary guidance provided with the group's 2022 results, 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(8) 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 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(8) was $1,462 million, up 6 per cent(4)
in the first half of 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 $947 million, an improvement on
the 2022 loss after tax of $(1,511) million on a constant exchange rate basis
($(1,505) million on an actual exchange rate basis) which largely reflected
significant negative short-term fluctuations from higher interest rates in the
first half of 2022. This compared with a relatively smaller decrease in
interest rates in 2023. Adjusted shareholders' equity increased to $36.4
billion (31 December 2022: $35.2 billion(6)) driven by an increase in IFRS
shareholders' equity (up 3 per cent(6)) and an increase in the Contractual
Service Margin (CSM) (up 4 per cent(6)). The CSM benefited from both positive
economic and other effects as well as 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.
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(9). As a result,
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.
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 30 June
2023, the estimated shareholder surplus above the GPCR was $15.5 billion(10)
(31 December 2022: $15.6 billion(6)) and cover ratio 295 per cent(11) (31
December 2022: 307 per cent before allowing for the debt redemption in January
2023).
Our capital priorities have been set out alongside our new strategy. These
confirm the focus on managing the in-force portfolio to support investment in
quality new business as well as investing in core capabilities. We expect to
invest around $1 billion in enhancing our core capabilities across our three
strategic pillars of Customer, Distribution and Health. This investment will
be mostly weighted between 2023 and 2025. We have maintained our dividend
policy, as described later in this report, and in line with that policy the
directors have approved a dividend of 6.26 cents per share (2022: 5.74 cents
per share(6)). Recognising the strong conviction we have in the Group's
revised strategy, when determining the annual dividend we intend to look
through the investments in new business and investments in capabilities and
expect the annual dividend to grow in the range 7 - 9 per cent per annum over
2023 and 2024.
We believe that the Group's performance in the first half of 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 Actual exchange rate
Half year 2023 $m Half year 2022 $m Change % Half year 2022 $m Change % Full Year 2022 $m
Adjusted operating profit based on longer-term investment returns before tax
CPL 164 132 24 124 32 271
Hong Kong 554 598 (7) 597 (7) 1,162
Indonesia 109 118 (8) 113 (4) 205
Malaysia 165 193 (15) 184 (10) 340
Singapore 270 313 (14) 320 (16) 570
Growth markets and other 374 337 11 323 16 728
Insurance business 1,636 1,691 (3) 1,661 (2) 3,276
Asset management 146 131 11 128 14 260
Total segment profit 1,782 1,822 (2) 1,789 - 3,536
Other income and expenditure:
Net investment income and other items (28) (4) n/a (4) n/a (44)
Interest payable on core structural borrowings (85) (103) 17 (103) 17 (200)
Corporate expenditure (115) (150) 23 (150) 23 (276)
Total other income and expenditure (228) (257) 11 (257) 11 (520)
Restructuring and IFRS 17 implementation costs (92) (154) 40 (152) 39 (294)
Adjusted operating profit 1,462 1,411 4 1,380 6 2,722
Short-term fluctuations in investment returns (287) (2,820) 90 (2,806) 90 (3,420)
Gains attaching to corporate transactions - 62 n/a 62 n/a 55
Profit (loss) before tax attributable to shareholders 1,175 (1,347) n/a (1,364) n/a (643)
Tax charge attributable to shareholders' returns (228) (158) (44) (147) (55) (354)
Profit (loss) for the period 947 (1,505) n/a (1,511) n/a (997)
IFRS earnings per share Actual exchange rate Constant exchange rate Actual exchange rate
Half year 2023 cents Half year 2022 cents Change % Half year 2022 cents Change % Full year 2022 cents
Based on adjusted operating profit, net of tax and non-controlling interest 45.2 40.6 11 39.9 13 79.4
Based on profit (loss) for the period, net of non-controlling interest 34.5 (55.1) n/a (55.4) n/a (36.8)
Adjusted operating profit(8) reflects that the assets and liabilities of our
insurance businesses are held for the longer term and the Group's belief 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 $1,462 million, up by 6 per cent(4)
largely reflecting a 14 per cent increase in profit generated by Eastspring,
our asset management business and lower central costs. Adjusted operating
profit for insurance business was marginally lower (down (2) per cent(4)) with
economic movements in 2022 reducing the level of longer-term net investment
result (which is based on opening asset values) and experience variances being
higher than in the prior year as discussed further below.
Our business in the Chinese Mainland, CPL, delivered 32 per cent(4) growth in
adjusted operating profit to $164 million, primarily driven by an increase in
longer-term net investment result, as it has a higher investment base
following increased sales of savings products in recent periods. There was
also a benefit from improved claims experience in the period. During the first
half of the year CPL has taken actions to diversify its sales in order to
achieve a more balanced product mix, with a higher proportion of annuity and
longer premium payment term products.
In Hong Kong, adjusted operating profit was $554 million, down (7) per
cent(4). A higher release of CSM, aided by increased new business sales, was
more than offset by both a reduction in favourable claims experience in HY23,
as all Covid restrictions were removed, and a reduced net investment return,
reflecting a lower opening asset balance following adverse market movements in
2022.
In Indonesia, adjusted operating profit was (4) per cent(4) lower at $109
million, reflecting unfavourable morbidity experience on medical reimbursement
products following the removal of Covid-19 restrictions and a reduction in the
release of CSM reflecting the maturity of the business given lower sales
levels in prior periods.
In Malaysia adjusted operating profit declined by (10) per cent(4) to $165
million, primarily driven by a normalisation of claims experience as the
number of medical reimbursement cases returned to pre-pandemic levels.
In Singapore, adjusted operating profit decreased by (16) per cent(4) to $270
million, reflecting the impact of adverse market movements in 2022 which
suppressed both the opening CSM and investments balances, resulting in a lower
CSM release and a reduced net investment return. The business saw increased
expenses as it continued to invest in distribution capabilities and
technology.
The businesses comprising our Growth markets and other segment generated
adjusted operating profit of $374 million, up 16 per cent(4). This reflects an
increase in the CSM release aided by new business growth and recent product
mix changes and the effect of a one off sales tax provision established in
HY22.These effects are partially offset by higher adverse experience variances
as we continue to invest in distribution and other capabilities.
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 Actual exchange rate
Half year 2023 $m Half year 2022 $m Change % Half year 2022 $m Change % Full year 2022 $m
Adjusted Release of CSM(15) 1,178 1,212 (3) 1,189 (1) 2,265
Release of risk adjustment 107 98 9 96 11 179
Experience variances (92) (19) n/a (13) n/a (66)
Other insurance service result (85) (134) 37 (128) 34 (204)
Adjusted insurance service result 1,108 1,157 (4) 1,144 (3) 2,174
Net investment result on long-term basis 612 653 (6) 632 (3) 1,290
Other insurance income and expenditure (45) (83) 46 (80) 44 (98)
Share of related tax charges from joint ventures and associates (39) (36) (8) (35) (11) (90)
Insurance business (adjusted operating profit) 1,636 1,691 (3) 1,661 (2) 3,276
The release of CSM is the principle source of our IFRS 17 insurance business
adjusted operating profit. The adjusted CSM release(15) in HY23 of $1,178
million (2022: $1,189 million(4)) equates to an annualised release rate of
circa 11 per cent, broadly similar to the circa 10 per cent release rate seen
in 2022 and consistent with the 2023 release expected as at the end of FY22.
As we grow new business profit, in line with our recently announced objective,
we would expect this to compound the growth of the CSM and hence lead to
adjusted operating profit growth over time.
The release of the risk adjustment of $107 million (2022: $96 million(4))
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 $(92) million (2022: (13) million(4)) comprise largely
of claims and expense variances (those impacting past or current service
rather than future service which is reflected in CSM). Claims variances
reflect unfavourable morbidity experience on some medical reimbursement
products following the removal of Covid-19 restrictions. Expenses variances
reflect higher spend to support our continued investment in enhancing our
multi-channel distribution capabilities and in embedding technology to enhance
the customer experience.
The other insurance service result of $(85) million (2022: $(128) million(4))
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 net investment result of $612 million (2022: $632 million(4)) 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 saw this income reduce in the first half of
2023. This effect was moderated by growth in the General Measurement Model
asset base from new business in recent periods and renewal premiums.
Other income and expenditure of $(45) million (2022: $(80) million(4)) mainly
relates to expenses that are not directly related to an insurance contract as
defined under IFRS 17. In the first half of 2022 these expenses included a
charge for the establishment of a sales tax provision that has not been
repeated in the current period.
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
recently announced objectives for EEV new business profit growth will act to
support such CSM growth.
The table below sets out the movement of CSM over the period.
Contractual Service Margin - Net of Reinsurance
Half year 2023
$m
Net opening balance at 1 Jan 19,989
New contracts in the period 1,196
Unwind* 760
Balance before variances, effect of foreign exchange and CSM release 21,945
Economic and other variances 289
CSM balance before release 22,234
Release of CSM to income statement (1,177)
Effect of movements in exchange rates (237)
Net balance at the end of period 20,820
*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 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 $630 million from economic
and other variances to unwind.
Profitable new business in the first half of 2023 grew the CSM by $1,196
million which combined with the unwind of the CSM balance shown in the table
above of $760 million, increased the CSM by $1,956 million. This increase
exceeded the release of the CSM to the income statement in the period of
$(1,177) million, demonstrating the strength of our franchise and its ability
to deliver future growth in CSM and ultimately adjusted new business 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 the first half of 2023 'economic and other variances' includes $52 million
for new riders added to existing base savings contracts. The incremental value
from such sales in 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
positive variance includes the effects of the small reductions in bond yields
in many of our markets. Movements in exchange rates had a negative impact of
$(237) million impact on the closing CSM. Overall the CSM grew by an
annualised growth rate of 8 per cent.
Asset management
Actual exchange rate Constant exchange rate Actual exchange rate
Half year Half year Change % Half year Change % Full year Change %
2023 $m* 2022 $m* 2022 $m* 2022 $m*
External funds under management* ($bn) 88.7 81.5 9 79.2 12 81.9 8
Funds managed on behalf of M&G plc ($bn) 2.4 9.3 (74) 9.6 (75) 9.3 (74)
External funds under management ($bn) 91.1 90.8 - 88.8 3 91.2 -
Internal funds under management ($bn) 107.8 105.4 2 107.0 1 104.1 4
Internal funds under advice ($bn) 28.8 26.1 10 26.9 7 26.1 10
Total internal funds under management or advice ($bn) 136.6 131.5 4 133.9 2 130.2 5
Total funds under management and advice ($bn) 227.7 222.3 2 222.7 2 221.4 3
Total external net flows**(,) 1,857 (1,786) n/a (1,681) n/a (1,586) n/a
Analysis of adjusted operating profit
Retail operating income 210 196 7 187 12 392 n/a
Institutional operating income 141 136 4 137 3 268 n/a
Operating income before performance-related fees 351 332 6 324 8 660 n/a
Performance-related fees 2 4 (50) 4 (50) 1 n/a
Operating income (net of commission) 353 336 5 328 8 661 -
Operating expense (185) (184) (1) (181) (2) (360) n/a
Group's share of tax on joint ventures' adjusted operating profit (22) (21) (5) (19) (16) (41) n/a
Adjusted operating profit 146 131 11 128 14 260 n/a
Adjusted operating profit after tax 132 117 13 114 16 234 n/a
Average funds under management or advice by Eastspring $228.8bn $241.8bn (5) $239.7bn (5) $229.4bn n/a
Fee margin based on operating income 31bps 28bps 3bps 27bps 4bps 29bps 2bps
Cost/income ratio(17) 53% 55% 2ppts 56% 3ppts 55% 2 ppts
* Unless otherwise stated
** Excluding funds managed on behalf of M&G plc and money market funds
in case of net flows.
Eastspring, the Group's asset management business, had total funds under
management and advice(12) (FUM) of $227.7 billion at 30 June 2023 up $6.3
billion from 31 December 2022 (on an actual exchange rate basis) reflecting
positive market movements and inflows from third parties (excluding M&G
plc) and the Group's life businesses.
Third-party net inflows (excluding money market funds and funds managed on
behalf of M&G plc) in the first half of 2023 were $1.9 billion (2022: net
outflows of $(1.8) billion(6)), reflecting strong net flows into retail funds.
This was more than offset by the net outflows of $(7.1) billion in the first
half of 2023 (2022: $(0.7) billion(6)) from the expected redemption of funds
managed on behalf of M&G plc.
Despite the increase in closing FUM discussed above, average FUM decreased by
(5) per cent(4) compared with the same period in 2022 to $228.8 billion as a
result of market movements in the prior year. Eastspring's adjusted operating
profit increased by 14 per cent(4) to $146 million in the first half of 2023,
reflecting a net investment gain (as compared with a net investment loss in
the prior year) on shareholders' investments including seed capital. Excluding
the gains and losses on shareholders' investments from both periods, operating
profit was (5) per cent(4) lower, consistent with the decline in average FUM
and the cost/income ratio was marginally higher. Favourable mix effects from
higher retail sales and the investment gains noted above contributed to a
higher fee margin of 31 bps (2022: 27bps).
Other income and expenditure
Central costs (before restructuring and IFRS 17 implementation costs) were 11
per cent(4) lower in the first half of 2023 as compared to prior period,
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 $18 million in the first half of 2023
compared with the prior period. Total head office expenditure was $(115)
million (2022: ($150) million(4)).
Restructuring costs of $(92) million (2022: $152 million(4)) reflect the
Group's substantial and ongoing IFRS 17 project, and one-off costs associated
with regulatory and other initiatives in our business. IFRS 17 costs are
expected to decrease from 2024 leading to restructuring costs reverting over
time to the lower levels typically incurred historically.
IFRS basis non-operating items
Non-operating items from continuing operations in the period consist of
negative short-term fluctuations in investment returns of $(287) million
(2022: $(2,806) million(4)). These short-term fluctuations principally arise
from the impact of falling interest rates on both the actual investment
return, with the divergence from the longer term return included in short-term
fluctuations, and the General Measurement Model (GMM) discount rates, which,
amongst other effects, increases the best estimate policyholder liabilities.
IFRS effective tax rates
In the first half of 2023, the effective tax rate on adjusted operating profit
was 15 per cent (2022: 21 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. Excluding the impact of this credit, the effective tax rate in the
first half of 2023 would be 18 per cent.
The effective tax rate on total IFRS profit in the first half of 2023 was 19
per cent (2022: negative 12 per cent), reflecting a reduction in the level of
investment losses on which no tax credit is recognised.
Work is ongoing to assess the potential impact from the Organisation for
Economic Co-operation and Development (OECD) proposals to implement a global
minimum tax rate of 15 per cent. Some jurisdictions where Prudential has
taxable presence, including the UK, either have implemented the proposals or
intend to implement the proposals effective for 2024 onwards. Other
jurisdictions where Prudential has taxable presence, including Hong Kong,
intend to implement the proposals for 2025 onwards.
Shareholders' equity
Group IFRS shareholders' equity
Half year 2023 $m Half year 2022 $m Full year 2022 $m
Profit/(loss) for the period 947 (1,505) (997)
Less non-controlling interest (3) (3) 10
Profit after tax for the period attributable to shareholders 944 (1,508) (1,007)
Exchange movements, net of related tax (185) (529) (603)
Other external dividends (361) (320) (474)
Other movements 30 (252) (121)
Net increase (decrease) in shareholders' equity 428 (2,609) (2,205)
Shareholders' equity at beginning of the period
As previously reported 16,731 17,088 17,088
Effect of initial application of IFRS 17 & IFRS 9, net of tax - 1,848 1,848
Shareholders' equity at end of the period 17,159 16,327 16,731
Shareholders' value per share(16) 623¢ 594¢ 608¢
Adjusted shareholders' equity(16) 36,445 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 $17.2 billion
at 30 June 2023. This largely reflects profit generated during the period,
offset by dividend payments of $(0.4) billion, and exchange movements of
$(0.2) billion.
In the first half of 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 $36.4 billion at 30 June 2023 (31 December 2022: $35.2
billion(6)) 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 basis results
Actual exchange rate Constant exchange rate
Half year 2023 $m Half year 2022 $m Change % Half year 2022 $m Change %
New business profit 1,489 1,098 36 1,069 39
Profit from in-force business 844 1,001 (16) 985 (14)
Operating profit from insurance business 2,333 2,099 11 2,054 14
Asset management 132 117 13 114 16
Other income and expenditure (310) (410) 24 (407) 24
Operating profit for the period 2,155 1,806 19 1,761 22
Non-operating profit (loss) 182 (5,314) n/a (5,307) n/a
Profit (Loss) for the period 2,337 (3,508) n/a (3,546) n/a
Dividends paid (361) (320)
Foreign exchange movements (475) (1,198)
Other movements 19 (258)
Net increase (decrease) in EEV shareholders' equity 1,520 (5,284)
EEV shareholders' equity at 1 Jan 42,184 47,355
Effect of HK RBC - 229
EEV shareholders' equity at end of period 43,704 42,300
% New business profit/average EEV shareholders' equity for insurance business 8% 5%
operations(*)
% Operating profit/average EEV shareholders' equity 10% 8%
* Excluding goodwill attributable to equity holders
Actual exchange rate
EEV shareholders' equity 30 Jun 2023 $m 31 Dec 2022 $m
Represented by:
CPL 3,131 3,259
Hong Kong 17,496 16,576
Indonesia 1,763 1,833
Malaysia 3,557 3,695
Singapore 7,060 6,806
Growth markets and other 7,172 6,688
Embedded value from insurance business excluding goodwill 40,179 38,857
Asset management and other excluding goodwill 2,772 2,565
Goodwill attributable to equity holders 753 762
Group EEV shareholders' equity 43,704 42,184
EEV shareholders' equity per share 1,588¢ 1,534¢
EEV new business profit and APE sales
Actual exchange rate Constant exchange rate
Half year 2023 $m Half year 2022 $m Change % Half year 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 394 171 507 217 (22) (21) 474 203 (17) (16)
Hong Kong 1,027 670 227 211 352 218 227 211 352 218
Indonesia 150 61 110 52 36 17 106 50 42 22
Malaysia 185 73 172 70 8 4 165 66 12 11
Singapore 386 198 390 244 (1) (19) 398 249 (3) (20)
Growth markets and other 885 316 807 304 10 4 762 290 16 9
Total 3,027 1,489 2,213 1,098 37 36 2,132 1,069 42 39
Total new business margin 49% 50% 50%
EEV operating profit increased by 22 per cent(4) to $2,155 million, reflecting
a 14 per cent(4) increase in the operating profit for the insurance business,
largely reflecting higher new business profit, a 16 per cent(4) increase in
the operating profit for the asset management business and an improvement in
central costs. The operating return on embedded value(5) was 10 per cent
(2022: 8 per cent(6)).
The operating profit from the insurance business increased 14 per cent(4) to
$2,333 million, largely reflecting a 39 per cent(4) increase in new business
profit to $1,489 million following a strong growth in APE sales, partly offset
by a (14) per cent(4) lower profit from in-force business of $844 million. The
profit from in-force business is driven by the expected return and effects of
operating assumption changes and experience variances. The expected return was
marginally lower at $1,117 million (2022: $1,161 million(4)), 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 $(273) million on a net basis compared with $(176)
million(4) in 2022. This reflects the elevated expenses supporting the
continued investment in enhancing our multi-channel distribution capabilities
and in embedding technology to enhance the customer experience together with
unfavourable morbidity experience on some medical reimbursement products
following the removal of Covid-19 restrictions.
Detailed discussion of new business performance by segment is presented in the
Strategic and Operating review.
The non-operating profit of $182 million (2022: loss of $(5,307) million(4))
is largely driven by lower interest rates and increasing equity markets over
the period leading to increased asset values with a consequential favourable
impact on future profits.
Overall, EEV shareholders' equity increased to $43.7 billion at 30 June 2023
(31 December 2022: $42.2 billion(6)). Of this, $40.2 billion (31 December
2022: $38.9 billion(6)) relates to the insurance business operations,
excluding goodwill attributable to equity holders. This amount includes our
share of our India associate valued using embedded value principles. The
market capitalisation of this associate at 30 June 2023 was circa $10.0
billion, which compares with a publicly reported embedded value of circa $4.3
billion at 31 March 2023.
EEV shareholders' equity on a per share basis at 30 June 2023 was 1,588 cents
(31 December 2022: 1,534 cents(6)).
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
Half year 2023 $m Half year 2022 $m Change % Half year 2022 $m Change %
Expected transfer from in-force business and return on existing free surplus 1,529 1,446 6 1,410 8
Changes in operating assumptions and experience variances (223) (60) (272) (56) (298)
Operating free surplus generated from in force business 1,306 1,386 (6) 1,354 (4)
Asset management 132 117 13 114 16
Operating free surplus generated from in-force insurance and asset management 1,438 1,503 (4) 1,468 (2)
business
Investment in new business (414) (279) (48) (268) (54)
Operating free surplus generated from insurance and asset management business 1,024 1,224 (16) 1,200 (15)
before restructuring costs
Central costs and eliminations (net of tax):
Net interest paid on core structural borrowings (85) (103) 17 (103) 17
Corporate expenditure (115) (150) 23 (150) 23
Other items and eliminations (21) (10) (110) (10) (110)
Restructuring and IFRS 17 implementation costs (net of tax) (88) (146) 40 (144) 39
Net Group operating free surplus generated 715 815 (12) 793 (10)
Non-operating and other movements, including foreign exchange (125) (1,805)
External cash dividends (361) (320)
Increase (decrease) in Group free surplus before net subordinated debt 229 (1,310)
redemption
Net subordinated debt redemption (397) (1,699)
Increase (decrease) in Group free surplus before amounts attributable to (168) (3,009)
non-controlling interests
Change in amounts attributable to non-controlling interests (5) (5)
Free surplus at 1 Jan 12,229 14,049
Effect of HK RBC - 1,360
Free surplus at end of period 12,056 12,395
Free surplus at end of period excluding distribution rights and other 8,409 8,589
intangibles
Our Group generated an operating free surplus from insurance and asset
management operations before restructuring costs(13) of $1,024 million, down
(15) per cent(4). Operating free surplus generated from in-force insurance and
asset management business(7) was down (2) per cent(4) to $1,438 million as a
result of elevated operating variances, reflecting on-going investment in the
Group's multi-channel distribution capabilities and unfavourable morbidity
experience on some medical reimbursement products following the removal of
Covid-19 restrictions. The cost of investment in new business increased by 54
per cent(4) to $(414) million reflecting the increase in APE sales of 42 per
cent(4) and changes in business mix. After allowing for lower central costs
and restructuring and IFRS 17 costs, total Group free surplus generation was
down (10) per cent(4) to $715 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 30 June 2023 was $12.1 billion in line with
the opening balance. Excluding distribution rights and other intangibles, free
surplus was $8.4 billion (31 December 2022: $8.4 billion(6); 30 June 2022:
$8.6 billion(6)).
Greater China presence
Prudential has a significant footprint in the Greater China region, with
businesses in the Chinese Mainland (through its holding in CPL), Hong Kong
(together with its branch in Macau) and Taiwan.
The table below demonstrates the significant proportion of the Group's
financial measures that were contributed by the Greater China region:
Gross premiums earned* New business profit
Half year Full year Half year Full year
2023 $m 2022 $m 2022 $m 2023 $m 2022 $m 2022 $m
Total Greater China** 6,478 6,983 13,103 922 503 912
Total Group** 13,051 14,609 27,783 1,489 1,098 2,184
Percentage of total 50% 48% 47% 62% 46% 42%
* 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.
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.
The Board applies a formulaic approach to first interim dividends, calculated
as one-third of the previous year's full-year ordinary dividend. Accordingly,
the Board has approved a 2023 first interim cash dividend of 6.26 cents per
share (2022: 5.74 cents per share(8)).
Recognising the strong conviction we have in the Group's revised strategy,
when determining the annual dividend we intend to look through the investments
in new business and investments in capabilities and expect the annual dividend
to grow in the range 7 - 9 per cent per annum over 2023 and 2024.
Group capital position
Prudential 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.
30 Jun 2023 31 Dec 2022(24)
Shareholder Policyholder* Total** Shareholder Policyholder* Total**
Group capital resources ($bn) 23.4 14.0 37.4 23.2 12.6 35.8
of which: Tier 1 capital resources(14) ($bn) 16.4 1.7 18.1 15.9 1.5 17.4
Group Minimum Capital Requirement ($bn) 4.6 1.0 5.6 4.4 0.9 5.3
Group Prescribed Capital Requirement ($bn) 7.9 11.3 19.2 7.6 10.1 17.7
GWS capital surplus over GPCR ($bn) 15.5 2.7 18.2 15.6 2.5 18.1
GWS coverage ratio over GPCR (%) 295% 194% 307% 202%
GWS Tier 1 surplus over GMCR ($bn) 12.5 12.1
GWS Tier 1 coverage ratio over GMCR (%) 323% 328%
* This allows for any associated diversification impacts between the
shareholder and policyholder positions reflected in the 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 group capital coverage ratio.
As at 30 June 2023, the estimated shareholder GWS capital surplus over the
GPCR is $15.5 billion(10) (31 December 2022: $15.6 billion(8)), representing a
coverage ratio of 295 per cent(11) (31 December 2022: 307 per cent(6)) and the
estimated total GWS capital surplus over the GPCR is $18.2 billion (31
December 2022: $18.1 billion(6)) representing a coverage ratio of 194 per cent
(31 December 2022: 202 per cent(6)).
Operating capital generation in the first half of 2023 was $0.7 billion after
allowing for central costs and the investment in new business. This was offset
by the payment of external dividends of $(0.4) billion to reflect payment of
the 2022 second interim dividend and other capital movements of $(0.4)
billion, largely reflecting the redemption of a senior debt instrument in
January 2023.
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(9) 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(9) basis over the medium term. Moody's have not stated how they will
calculate leverage under IFRS 17 but have indicated that they might 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 30 June 2023 , we estimate that
our Moody's total leverage was 20 per cent (31 December 2022: 21 per cent(6),
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(6),
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
30 Jun 2023 $m 30 Jun 2022 $m 31 Dec 2022 $m
IFRS Mark-to-market value EEV IFRS Mark-to-market value EEV IFRS Mark-to-market value EEV
basis basis basis basis basis basis
Borrowings of shareholder-financed businesses 3,949 (389) 3,560 4,266 (193) 4,073 4,261 (427) 3,834
Less holding company cash and short-term investments (3,314) - (3,314) (2,143) - (2,143) (3,057) - (3,057)
Net core structural borrowings of shareholder-finance businesses 635 (389) 246 2,123 (193) 1,930 1,204 (427) 777
Moody's total leverage(9) 20% 21%
The total borrowings of the shareholder-financed businesses from continuing
operations were $3.9 billion(17) at 30 June 2023. After the balance sheet
date, the Group redeemed a €20 million medium-term note as it fell due on 10
July 2023
On 20 January 2023 the Group redeemed £300 million ($371 million) senior
bonds as they reached their maturity. 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 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 $529 million in issue at
30 June 2023 (31 December 2022: $501 million(6)).
As at 30 June 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 30 June 2023.
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 holding company cash and short term investments by $0.9 billion at
31 December 2022.
Holding company cash flow
Actual exchange rate
Half year 2023 $m Half year 2022 $m Change %
Net cash remitted by business units(18) 1,024 1,009 1
Net interest paid (40) (117) 66
Corporate expenditure (155) (124) (25)
Centrally funded recurring bancassurance fees (160) (220) 27
Total central outflows (355) (461) 23
Holding company cash flow before dividends and other movements 669 548 22
Dividends paid (361) (320) (13)
Operating holding company cash flow after dividends but before other movements 308 228 35
Issuance and redemption of debt (371) (1,729) 79
Other corporate activities 282 159 77
Total other movements (89) (1,570) 94
Total holding company cash flow 219 (1,342) 116
Cash and short-term investments at the beginning of the year 3,057 3,572 (14)
Foreign exchange and other movements 38 (87) 144
Cash and short-term investments at the end of the period 3,314 2,143 55
Remittances from our businesses were $1,024 million (2022: $1,009 million(6)).
Remittances were used to meet central outflows of $(355) million (2022: $(461)
million(6)) and to pay dividends of $(361) million.
Central outflows include net interest paid of $(40) million (2022: $(117)
million(6)), which is net of interest and similar income earned on central
cash balances in the first half of 2023, largely on balances brought into the
updated definition of holding company cash and short-term investments. In
addition, lower interest payments were made on core structural borrowings in
the first half of 2023 as compared with the same period in the prior year.
Cash outflows for corporate expenditure of $(155) million (2022: $(124)
million(6)) include cash outflows for restructuring costs.
Other cash flow movements included net receipts from other corporate
activities of $282 million (2022: $159 million(6) net payments) comprising
largely of proceeds received from the sale of our remaining shares in Jackson
Financial Inc. as well as dividends receipts. In January 2023 the Group
redeemed senior bonds as they reached their maturity at a cost of $371
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 APE sales is a measure of new business activity that
comprises the aggregate of annualised regular premiums and one-tenth of single
premiums on new business written during the year for all insurance products.
See note II of the Additional unaudited financial information for further
explanation.
2 New business profit, on a post-tax basis, on
business sold in the period, calculated in accordance with EEV Principles.
3 IFRS shareholders equity plus contractual service
margin net of reinsurance and related tax adjustments. See note C3.1 in the
IFRS financial results for further information.
4 On a constant exchange rate basis.
5 Operating return calculated as operating profit
(annualised by multiplying by two) divided by the average EEV shareholders'
equity for continuing operations. See note II(x) of the Additional unaudited
financial information for definition and calculation.
6 On an actual exchange rate basis.
7 Operating free surplus generated from in-force
insurance business 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.
8 'Adjusted operating profit' refers to adjusted IFRS
operating profit based on longer-term investment returns. This alternative
performance measure is reconciled to IFRS profit for the period in note B1.1
of the IFRS financial results.
9 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.
10 Estimated GWS capital resources in excess of the GPCR
attributable to the shareholder business, before allowing for the 2023 first
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.
11 Estimated GWS coverage ratio of capital resources over
GPCR attributable to the shareholder business, before allowing for the 2023
first cash interim dividend.
12 30 June 2023 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.
13 For insurance operations operating free surplus
generated represents amounts emerging from the in-force business during the
period 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 presented separately
from the business unit amount. Further information is set out in 'movement in
Group free surplus' in the EEV basis results.
14 The classification of tiering of capital under the GWS
framework reflects the different local regulatory regimes along with guidance
issued by the HKIA.
15 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
$1 million (Half year 2022: $11 million, Full year 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.
16 See note II of the Additional financial information for
definition and reconciliation to IFRS balances.
17 See note C5 of the IFRS financial results for further
details on the Group's borrowings.
18 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.
Risk review
Enabling effective risk-based decision-making in a complex world
In the face of significant market volatility and uncertainty, Prudential's
Group Risk Framework, risk appetite, and robust governance have continued to
enable the business to manage and control its risk exposure dynamically and
effectively throughout the first half of 2023, in order to support the Group's
strategy of delivering sustainable value for all our stakeholders: employees,
customers, shareholders and the communities in which we operate. This section
explains the main risks inherent in the business and how Prudential manages
those risks, with the aim of ensuring an appropriate risk profile is
maintained.
1 Introduction
The Group
Prudential has continued to focus on executing its strategy across Asia and
Africa, underpinned by its structural growth markets, breadth of distribution
channels and strong capital base. Going forward, Prudential will be focused on
driving more consistent performance and accelerating value creation by
changing our organisation model, building multi-market growth engines,
investing in our three strategic pillars of customer, distribution and health,
which are supported by our three enablers of technology, people and culture,
and wealth and investments capabilities.
The Group Risk, Compliance and Security (RCS) function continues to provide
risk opinions, guidance, assurance and engagement 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 in order
to ensure the Group remains within its approved risk appetite, at all times,
against the backdrop of increased complexity of the macroeconomic,
geopolitical and regulatory environments.
The first half of 2023 was characterised by declining though still elevated
inflation, high interest rates and economic uncertainties, set against
reconfigured national alliances and competition for energy and natural
resources. The ongoing impacts to the Group are multifaceted and may be
pronounced. These include increased strategic and business risks, as well as
increasing insurance, product and customer conduct risks. For the Group's
customers, these wider geopolitical, macroeconomic and climate change related
circumstances may increase uncertainty over livelihoods, elevate costs of
living, and cause challenges in affordability for essential needs and
services, including insurance products - perhaps at times when they may be
most needed. The complexity of meeting regulatory expectations on these
issues, as governments increasingly focus on them, is expected to increase.
Prudential will need to meet these challenges for its business and those of
its customers in a fair and equitable way. At the same time, the Group will be
expected to navigate the volatile financial environment to ensure it remains
robustly capitalised and its liquidity position is resilient to sustainably
deliver for the needs of its customers and the societies in which it operates.
These are the key themes underpinning this report.
Against this backdrop, the Group continues to effectively leverage 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 in this changed world, and reflective of
opportunities, customer issues and needs, and local customs. Prudential will
continue to apply this holistic and coordinated approach in managing the
increasingly dynamic, multifaceted and often interconnected risks facing its
businesses.
Macroeconomic and market environment
The global economy has remained resilient but continues to face various
challenges. Headline inflation has moved down since mid-2022 on the back of
declining food and energy prices, but core inflation has remained above
central bank targets after the full reopening following the Covid-19 pandemic,
reflecting the strong demand for services as well as the tight labour markets
fuelling wage gains, particularly in the US and the UK. The improved yet
elevated inflation environment has led central banks to continue raising
rates. Further interest rate increases are expected to be implemented to
attempt to rein in inflation, but tighter monetary conditions could exert
downward pressures on growth. In emerging markets, inflation has been less
severe and monetary tightening is broadly expected to have reached its peak.
While inflation, after having reached decades-high levels in 2022, may have
peaked in most markets where the Group operates, there are structural risks to
inflation persistence, concerns of a wage-price spiral, constraining real
incomes and growth to an extent capable of triggering a global recession.
Following the lifting of all pandemic-related restrictions, economic growth in
the Chinese Mainland has not been as strong as the government's original
plans, which has led to the loosening of both monetary and fiscal policies to
improve the momentum of its economic recovery. For example, the Chinese
Mainland has initiated new policy stimulus with another round of policy easing
to boost consumption and private sector investment, including targeted
liquidity injections into the property market, which remains lacklustre.
Moreover, as the Chinese Mainland is a key driver for the global economy, its
weak growth as well as unpredictable regulatory risk could weigh on the
broader Asia region and the global economy's vitality going forward.
Nevertheless, the Group has benefited from the reopening of the Chinese
Mainland's border with Hong Kong, as evidenced by large increases in sales.
This environment of higher global interest rates and meaningful recession risk
is putting pressure on banks' balance sheets and margins, which has also
contributed to the demise of three significant regional banks in the US and
raised concerns of a repeat of the Global Financial Crisis. The larger banks
also have material unrealised losses on bonds due to the sharp increase in
rates, and while they are well capitalised, the risk of a run on deposits due
to social media and digital banking is heightened. This could result in
uncertainties in the credit market with a pullback in both credit supply and
credit demand and lead to a sharper tightening in global credit conditions.
This would be broadly associated with weaker global growth, as well as
country-level recessions that are deeper and longer than would otherwise be
the case. With interest rates rising, Africa has seen an increase in external
debt servicing costs. The rising debt servicing burden could lead to a
trade-off for governments in the region between paying down debt obligations
and funding longer-term social projects. The domestic debt exchange programme
in Ghana is an illustration of the impact of tighter financial conditions.
Similarly, weaker exchange rates in emerging markets where the Group operates
may have adverse impact on Prudential's consolidated financial statements upon
the translation of results into the US dollar, the Group's reporting currency.
While the impact for the Group is immaterial, the devaluation in mid-June 2023
of the Nigerian naira is notable.
The macroeconomic landscape and financial markets are expected to remain
challenging and highly uncertain. Ad-hoc events can disrupt market conditions
unexpectedly. For example, the polarised political landscape in the US raised
the prospect that the federal government could be forced into a technical
default on its debt if an agreement could not be reached to raise the debt
ceiling in May 2023, which temporarily led to heightened volatility in the
markets. The capital and liquidity position of the Group and its local
businesses continues to be actively monitored by Prudential as concerns remain
from policymakers and regulators around liquidity and solvency of the
financial system. Challenging macroeconomic conditions could also negatively
impact the Group's new business growth, investment performance, in-force
surplus generation plans and expense management.
Geopolitical landscape
The US-Chinese Mainland relationship continues to be a key focus of
geopolitical tension in 2023, which resulted in risk-off sentiment towards the
Chinese Mainland, leading to different degrees of decoupling affecting world
supply chains and creating tougher business conditions. In turn, this has
exerted pressure on policymakers in other geographies, including the Asian
markets in which the Group operates.
The Chinese Mainland diplomacy has become more active following the Party
Congress in March 2023, reflecting the importance it has placed on trying to
stabilise its external environment while managing domestic economic pressures.
President Xi's visit to Russia highlighted the continuing importance of
Russia's relationship with the Chinese Mainland, and saw no progress to
resolve the conflict in Ukraine. The Chinese Mainland and Russia are
considering expanding the use of local currencies for trade settlements to
reduce reliance on the US dollar. The Chinese Mainland also hosted a number of
political meetings with leaders from Asia, Europe and Latin America, with
visits by European leaders in April 2023 and US cabinet members in June and
July 2023. Tensions over Taiwan remain elevated, in particular after Taiwan's
President Tsai met with US House Speaker McCarthy in California in April 2023.
Bilateral relationships between India and the Chinese Mainland are expected to
remain tense, largely due to long-standing border disputes. India continues to
impose severe curbs on Chinese investments and has put material constraints on
remittances back to the Chinese Mainland. India and the US have agreed to
enhance their defence and trade relationships with an eye on the Chinese
Mainland's perceived growing assertiveness in the Indo-Pacific region.
The Russia-Ukraine conflict has been protracted and remains uncertain and
complex. The direct implications for the Group are immaterial, and have been
regularly monitored and considered in the Group's broader scenario analysis
and planning. However, challenges to supply chains, technologies and access to
raw materials and energy will remain where national security concerns are
heightened. Over the longer-term, the conflict, and the diplomatic and
economic reactions to it, could contribute to an acceleration towards
'de-risking' specific policy areas such as technology or the divergence of
markets into more distinct trading blocs, limiting the scope for flows of
people, capital and data between blocs, increasing the potential operational
and reputational risks for companies continuing to trade and operate between
these blocs.
Geopolitical developments may trigger important legislative or regulatory
changes that adversely impact Hong Kong's economy or its international trading
and economic relationships, and 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.
Societal developments
Global economic uncertainties with the rise in interest rates and elevated
inflation, on top of the ongoing challenges of the uneven rebound from the
pandemic, are increasingly putting pressure on household affordability and may
exacerbate existing structural inequalities within societies. Government and
supervisory attention is being increasingly focused on the cost of living
crisis taking shape across many of the Group's markets and the contribution of
the corporate sector to government tax revenues. These developments have
implications for Prudential in terms of how it engages with its customers, who
will, in some markets, experience real challenges in affording or maintaining
insurance products at their current level of coverage. This may happen at
times when that protection is needed most, and when such customers
increasingly represent the vulnerable in society. In Asia, there is an
increasing expectation from governments for private companies to help with
affordability issues, for example, by introducing moratoria on price
increases, to extend the regulatory definitions of 'vulnerable' customers to
explicitly include those in need due to the current economic pressures, and to
continue to promote financial inclusion in a difficult economic environment.
Prudential will continue to carefully balance affordability and the impact on
customers with the need to reprice products where necessary.
A high inflation environment, combined with recessionary concerns, and
societal and regulatory expectations of support, may also heighten existing
challenges in persistency for insurers. As has always been the case,
Prudential will continue to engage with governments, regulators and
supervisors on these issues. As a matter of course, the Group regularly
assesses the suitability and affordability of its products, and aims to reduce
their perceived complexity whilst increasing the transparency of their costs
and benefits. These aims, as well as the Group's increasing focus on the
sustainable digital distribution of its health and protection products via its
digital platform, help to expand the financial inclusion of Prudential's
products and improve customer outcomes.
The Group looks to retain the positive changes that Covid-19 accelerated,
including those related to changes in traditional working practices and the
use of digital services, technologies and distribution methods to customers,
while monitoring and mitigating the potential increase in technology, data
security or misuse and regulatory risks that these may bring. Prudential is
exploring new ways of working and, as a responsible employer, is reflecting
thematic trends through a coordinated suite of activities related to the
upskilling of its workforce, and increasing flexibility, inclusivity and
psychological safety in the workplace. The Group continues to monitor emerging
social trends, including those linked to environmental change and the impacts
to developing market societies associated with the transition to a
lower-carbon global economy. A just and inclusive transition is central to the
Group's strategy and Prudential recognises the interests from a wide range of
stakeholders in the way it manages ESG and climate-related risks. The Group
continues to recognise the importance of financial inclusion and the ways in
which the Group's products and services meet the changing needs of affected
societies. Its risk management framework is regularly reviewed to ensure the
Group is best positioned to manage the changing nature of these wide-ranging
risks, including activities to promote a transparent culture, and active
encouragement of open discussion and learnings from mistakes.
Regulations
Prudential operates in highly regulated markets, and as the nature and focus
of regulations and laws evolve, the complexity of regulatory compliance
(including with respect to economic sanctions, anti-money laundering and
anti-corruption) continues to increase and represents a challenge for
international businesses. Geopolitical tensions have increased uncertainties
and the long-term complexity of legal and regulatory compliance for
Prudential's businesses operating across multiple jurisdictions. Whilst the
complexity of sanctions driven by the geopolitical conflicts is elevated, the
Group is experienced in managing this and has in place risk tolerance
frameworks to deal with complex and conflicting risk trade-offs to guide
executive decisions.
The rapid pace and high volume of regulatory changes and interventions, and
swiftness of their application including those driven by the financial
services industry, have the potential to increase strategic and regulatory
risks for the Group's businesses. There has been an increased regulatory focus
by the HKIA, Prudential's Group-wide supervisor, in particular on capital and
solvency, customer experience, investment management, governance and
sustainability and climate-related topics. In the Chinese Mainland, a new
regulator, the National Administration of Financial Regulation (NAFR),
officially replaced the China Banking and Insurance Regulatory Commission on
18 May 2023 to centralise the oversight of the financial industry with the aim
to strengthen and improve its financial supervision through deepening the
financial regulatory sector reform, enhancing the quality and effectiveness of
financial regulation, and promoting full coverage of financial regulation in
the sector. Customer protection is also centrally supervised by the NAFR.
Regulatory focus on the financial services industry remains broad and often
concurrent, and includes areas such as customer conduct and protection,
information security and data privacy and residency, third-party management,
systemic risk regulation, corporate governance and senior management
accountability. Sustainability and climate-related regulatory and reporting
developments continue to develop at pace, both globally and in Asia.
Developments in domestic and international capital standards continue to move
forward, for example, the International Insurance Capital Standard (ICS) is
being developed by the International Association of Insurance Supervisors
(IAIS) due for adoption in 2025. Changes in regulations related to capital
have the potential to change the extent of capital sensitivity to risk
factors. The new accounting standard IFRS 17, effective from 1 January 2023,
is mandatory for the Group given its UK domicile and its dual primary
listings. Prudential's portfolio of transformation and regulatory change
programmes 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 potential
for increased intra-Group connectivity and dependencies.
In jurisdictions where Prudential operates with ongoing policy initiatives and
regulatory developments which impact the way Prudential is supervised
including demanding corresponding controls and maintaining the capabilities of
fulfilling the existing or new regulations. These developments continue to be
monitored by the Group at a market and global level and these considerations
form part of the Group Risk Framework and ongoing engagement with government
policymakers, industry groups and regulators.
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, while the 'second line' provides
additional challenge, expertise, oversight and scrutiny. 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 continuously reviews the Group Risk Framework to ensure ESG
considerations, which form an integral part of the wider Group governance,
including climate risk considerations 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 policies that have been established to make decisions and control
activities on risk-related matters. The risk governance structure is led by
the Group Risk Committee, supported by independent Non-executive Directors on
the risk committees of the Group's major businesses. The Group Risk Committee
approves changes to the Group Risk Framework and the core risk policies that
support it. The Committee 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 Group Risk Committee meetings on a rotational
participating basis.
Risk culture is a strategic priority of the Board, which recognises its
importance in the way that the Group conducts business. A Group-wide culture
framework is under review to support the revised purpose and strategy for the
Group. The Responsibility and Sustainability Working Group supports its
responsibilities in relation to implementation of the culture framework, as
well as embedding the culture aspects of the Group's ESG strategic framework
and overseeing progress on diversity and inclusion initiatives. The culture
framework provides principles and values that are embedded in the ways of
working across the Group's functions and locations and defines how Prudential
expects business to be conducted to achieve its strategic objectives, informs
expectations of leadership and supports the resilience and sustainability of
the Group. The components of the culture framework 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 through the
inclusion of risk and sustainability considerations in performance management
for key executives; the building of appropriate skills and capabilities in
risk management; and by ensuring that employees understand and care about
their role in managing risk through open discussions, collaboration and
engagement. The Group Risk Committee has a key role in providing advice to the
Remuneration Committee on risk management considerations to be applied in
respect of executive remuneration.
Prudential's Group Code of Business Conduct and Group Governance Manual,
supported by the Group's risk-related policies, are regularly reviewed and
include guiding principles on the day-to-day conduct of all its people and any
organisations acting on its behalf. Supporting policies include those related
to financial crime, covering anti-money laundering, sanctions, anti-bribery
and corruption and conduct. The Group's third-party and outsourcing policy
requires that human rights and modern slavery considerations are embedded
across all of its supplier and supply chain arrangements. Procedures to allow
individuals to speak out safely and anonymously against unethical behaviour
and conduct are also in place.
Further details on the Group's ESG governance arrangements and strategic
framework are included in the Group's 2022 ESG report.
ii. The risk management cycle
Risk identification
In accordance with provision 28 of the UK Corporate Governance Code and the
GWS guidelines issued by the HKIA, top-down and bottom-up processes are in
place to support Group-wide identification of principal risks. 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 performs a robust assessment and analysis of
these principal and emerging risk themes through the risk identification
process, the Group Own Risk and Solvency Assessment (ORSA) report and the risk
assessments undertaken as part of the business planning review, including how
they are managed and mitigated, which supports decision-making.
The Group's emerging risk identification process recognises the dynamic
materiality of emerging risk themes, for example, the recent antitrust
concerns raised within the Net Zero Insurance Alliance leading to member
withdrawals. Such concerns have not spread to the Net Zero Asset Owner
Alliance, of which Prudential is a member. The concept of dynamic materiality
is also considered relevant in the context of the Group's monitoring of
emerging themes relevant to ESG and climate-related risks, including
reputation risk.
The ORSA is the ongoing process of identifying, measuring and assessing,
managing and controlling, monitoring and reporting the risks to which the
business is exposed. It includes an assessment of capital adequacy to ensure
that the Group's solvency needs are met at all times, as well as stress and
scenario testing, which includes climate scenarios and reverse stress testing.
The latter 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 risk profile assessment is a key
output from the risk identification and risk measurement processes and is used
as a basis for setting Group-wide limits, management information, assessment
of solvency needs, and determining appropriate stress and scenario testing.
The Group's principal risks, which are reported and managed by the Group with
enhanced focus, are reviewed and updated on a regular basis.
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) and is subject to
independent validation and processes and controls around model changes and
limitations.
Risk management and control
The Group's control procedures and systems focus on aligning the levels of
risk-taking with the Group's strategy and can only provide reasonable, and not
absolute, assurance against material misstatement or loss. The Group's risk
policies define the Group's appetite to material risks and set out the risk
management and control requirements to limit exposure to these risks. 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. 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 Group Risk Committee 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 is cognisant of the interests of the broad spectrum of its
stakeholders (including customers, investors, employees, communities and key
business partners) and that a managed acceptance of risk lies at the heart of
its business. The Group seeks to generate 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 Group Risk
Committee has delegated authority to approve changes to the system of limits,
triggers and indicators.
Group risk appetite is defined and monitored in aggregate by the setting of
objectives for its 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 Group Risk Committee,
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.
a. 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, achieves
its desired target credit rating to meet its business objectives, and
supervisory intervention is avoided. The two measures in use at the Group
level are the GWS group capital requirements and internal economic capital
requirements, determined by the Group Internal Economic Capital Assessment
(GIECA).
b. 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.
c. 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, takes into account 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, focusing on high-growth business in Asia and Africa, exposes
Prudential to risks. The materialisation 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
fulfilment of commitments to customers and other stakeholders, with an adverse
impact on Prudential's brand and reputation. This report is focused mainly on
risks to the shareholder but includes those which arise indirectly through
policyholder exposures and third-party business. The Group's principal risks,
which are not exhaustive, are detailed below. The Group's risk management
cycle (detailed above) includes within its scope the processes for
prioritising and determining the relative significance of ESG and
climate-related risks, as well as those associated with implementing the
Group's externally communicated commitments. The Group's 2022 ESG report
includes further detail on the ESG and climate-related risks which contribute
to the materiality of the Group's principal risks detailed below, including
those related to the Group's operational and financial resilience, data
privacy requirements and expectations, the regulatory landscape and the
implementation of the Group's strategy. Further details on specific risks
faced by the Group are set out in the section headed 'Risk factors'.
Risks to the Group's financial situation (including those from the external
macroeconomic and geopolitical environment)
The global economic and geopolitical environment may impact on the Group
directly by affecting trends in financial markets and asset values, as well as
driving short-term volatility.
Risks in this category include the market risks to our investments and the
credit quality of our investment portfolio as well as liquidity risk.
Global economic and geopolitical conditions
With geopolitical tensions high as national alliances and blocs evolve, the
jostling of the current world order and the increasing prioritisation of
national security (widely defined) have become key determinants of
macroeconomic policy, with geopolitical and macroeconomic uncertainties being
intertwined. Geopolitical developments and tensions, macroeconomic conditions,
and broad policy-driven regulatory developments (see below), at times
interconnected in the speed and manner in which they evolve, drive the
operating environment and risk landscape for the Group and the level of its
exposure to the principal risks outlined below.
Macroeconomic and geopolitical developments are considered material to the
Group and can potentially increase operational and business disruption,
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 the disclosures
on Risk factors.
Market risks to our investments
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 are 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. This
exposure can be effectively managed by the business' well-established practice
and ability to reprice products. Challenges for insurers linked to
affordability and existing challenges in persistency are detailed in the
Insurance Risks section below.
The Group has appetite for market risk where it arises from profit-generating
insurance activities to the extent that it remains part of a balanced
portfolio of sources of income for shareholders and is compatible with a
robust solvency position. The Group's market risks are managed and mitigated
by the following:
- The Group market risk policy;
- Risk appetite statements, limits and triggers;
- The Group's capital and asset liability
management committees and the Group's asset and liability management policy;
- Asset and liability management activities, which
include management actions such as 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, 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.
· 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. Prudential'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.
Sustained inflationary pressures have driven interest rates higher, these have
the potential to increase further in the near-to-medium term, and 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 based 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 and Singapore 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. When this 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.
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.
· 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 business's investment portfolios, which include equities. The Group
has limited acceptance for exposures to equity risk, but accepts the equity
exposure that arises on future fees (including shareholder transfers from the
participating business).
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.
· Foreign exchange risk. The geographical diversity of Prudential's
businesses means that it has some exposure to the risk of foreign exchange
rate fluctuations. Some entities within the Group 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 accepted within the Group's appetite for foreign
exchange risk. In cases where a non-US dollar denominated surplus arises in an
operation which is to be used to support Group capital or shareholders'
interest (ie, remittances), this currency exposure may be hedged where
considered economically favourable. Further, the Group generally does not have
appetite for significant direct shareholder exposure to foreign exchange risks
in currencies outside the markets in which it operates, but it does have some
appetite for this on fee income and on equity investments within participating
funds. Where foreign exchange risk arises outside appetite, currency swaps and
other derivatives are used to manage the exposure.
Liquidity risk
Prudential's liquidity risk arises from the need to have sufficient liquid
assets to meet policyholder and third-party payments as they fall due,
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 for 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. Prudential has no appetite for any business to have insufficient
resources to cover its outgoing cash flows, or for the Group as a whole to not
meet cash flow requirements from its debt obligations under any plausible
scenario. The Group has significant internal sources of liquidity 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 $2.6 billion of undrawn committed
facilities that can be made use of, expiring in 2026. Access to further
liquidity is available through the debt capital markets and 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;
- Risk appetite statements, limits and triggers;
- 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,
which includes details of the Group Liquidity Risk Framework as well as
analysis of Group and business units liquidity risks and the adequacy of
available liquidity resources under business-as-usual and stressed conditions;
- The Group's Collateral Management Framework,
which sets out the approach to ensuring business units using derivatives have
sufficient liquid assets or ability to raise liquidity to meet derivatives
margins;
- 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.
Credit risk
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 to a transaction 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 Group's holdings across its life portfolios are mostly in local currency
and with a largely domestic investor base, which provides support to these
positions. 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 negative 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, negative developments in
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 trends, which are being closely monitored, 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 in
particular in local markets where depth (and therefore the liquidity of such
investments) may be low. Prudential actively reviews its investment portfolio
to improve the robustness and resilience of the solvency position. The Group
has appetite to take credit risk to the extent that it remains part of a
balanced portfolio of sources of income for shareholders and is compatible
with a robust solvency position. Further detail on the Group's debt portfolio
is provided below.
A number of risk management tools are used to manage and mitigate credit and
counterparty credit risk, including the following:
- A credit risk policy and dealing and controls
policy;
- Risk appetite statements and portfolio-level
limits;
- Counterparty limits 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;
- The Group Executive Risk Committee and Group
Investment Committee's oversight of credit and counterparty credit risk and
sector and/or name-specific reviews;
- Regular assessments and deep dives, including of
individual and sector exposures subject to elevated credit risks; and
- Close monitoring or restrictions on investments
that may be of concern.
The total debt securities at 30 June 2023 held by the Group's operations were
$80.4 billion (31 December 2022: $77.0 billion). The majority (84 per cent, 31
December 2022: 84 per cent) of the portfolio are investments either held in
unit linked funds or support insurance products where policyholders
participate in the returns of a specified pool of investments(1). The gains or
losses on these investments will largely be offset by movements in
policyholder liabilities(2). The remaining 16 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 51 per cent or $6.7 billion(3) of the total shareholder
debt portfolio as at 30 June 2023 (31 December 2022: 41 per cent or $4.9
billion of the shareholder debt portfolio). The particular risks associated
with holding sovereign debt are detailed further in the disclosures on Risk
factors.
The total exposures held by the Group in sovereign debt securities at 30 June
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 $5.5 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, as well as being important for the
hedging and other activities undertaken to manage its various financial risks.
Exposure to the 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.
At 30 June 2023:
- 94 per cent of the Group's shareholder portfolio (excluding all
government and government-related debt) is investment grade rated(4). In
particular, 60 per cent of the portfolio is rated(4) A- and above (or
equivalent); and
- The Group's shareholder portfolio is well diversified: no
individual sector(5) makes up more than 15 per cent of the total portfolio
(excluding the financial and sovereign sectors).
The Group's sustainability and ESG-related risks
These include sustainability risks associated with environmental
considerations such as climate change (including physical and transition
risks), social risks arising from diverse stakeholder commitments and
expectations and governance-related risks.
Material and emerging risks associated with key ESG themes may undermine the
sustainability of a business by adversely impacting its reputation and brand,
ability to attract and retain customers, investors, employees and distribution
and other business partners, and increasing regulatory compliance and
litigation risks, and therefore the results of its operations and delivery of
its strategy and long-term financial success. As custodians of stakeholder
value for the long term, Prudential seeks to manage sustainability risks and
their potential impact on its business and stakeholders through a focus on the
Group's revised purpose, and transparent and consistent implementation of its
strategy in its markets and across operational, underwriting and investment
activities. The Group also supports a just and inclusive transition to a
lower-carbon global economy that places the societies of developing markets at
the forefront of considerations, as well as provides greater and more
inclusive access to good health and financial security that meets the changing
needs of societies, promotes responsible stewardship in managing the human
impact of climate change and building human and social capital with its broad
range of stakeholders. It is enabled by strong internal governance, sound
business practices and a responsible investment approach, with ESG
considerations integrated into investment processes and decisions and the
performance of fiduciary and stewardship duties, including voting and active
engagement decisions with respect to investee companies, as both an asset
owner and an asset manager. 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 is a
priority focus for the Group Risk Committee for 2023.
Regulatory interest and developments continue to increase globally and in
Asia, and sustainability and ESG-related risks are high on the agenda of both
local regulators and international supervisory bodies such as the
International Association of Insurance Supervisors (IAIS) and the
International Sustainability Standards Board (ISSB), which published its
inaugural sustainability and ESG-related disclosure requirements in June 2023.
The Group continues to actively engage with, and respond to, discussions,
consultations and supervisory information-gathering exercises. Details of the
Group's sustainability and ESG-related risks are included in the disclosure on
Risk factors.
As local regulatory requirements on climate risk management and disclosures
develop, the Group continues to leverage and share its Group-wide experience
and knowledge with its local businesses on their ESG policies and approaches,
both to provide support and to help drive consistency in their continuing
embedment across Prudential's businesses. The Group Risk Framework continues
to be critically evaluated and updated where required to ensure both
sustainability and ESG-related considerations and risks to the Group, and the
external impact from the Group's activities, are appropriately captured.
Risk management and mitigation of sustainability and ESG risks at Prudential
include the following:
- A focus on enhancing access to good health and financial
security, and in connection with our stakeholders, ensuring responsible
stewardship of ESG and climate-related issues; clear governance arrangements,
both in the definition of the roles and responsibilities of the Board and
management committees for aspects of sustainability and ESG risks and through
the Group Governance Manual, which include ESG and responsible business
practice-linked policies, and the Group Code of Business Conduct;
- The continued embedding of sustainability and ESG risk within
the Group Risk Framework and risk processes, including:
o Consideration of the potential for dynamically-changing materiality in
emerging environmental, social and governance themes and risks through
emerging risk identification and evaluation processes;
o 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;
o Reflection in the risk taxonomy that the Group can be both impacted by
sustainability and ESG issues as well as having an impact on these in the
external world ('double materiality');
o The applicability of the Group's Model Risk and UDA Risk Policy to the
tools used for the aggregation of the Group's carbon intensity metrics across
its investment portfolios; and
o Deep dives into emerging and increasingly material ESG themes, including
climate-related risks, and development of Board-level and broader training.
- Integrating ESG considerations into investment processes and
responsible supply chain management; and
- Participation in networks and 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 and ESG risks such as
climate change and promoting a just and inclusive transition.
Further information on the Group's ESG governance and ESG strategic framework,
as well as the management of material ESG themes, are included in the Group's
2022 ESG report.
Risks from the nature of our business and our industry
These include the Group's non-financial risks including operational and
transformation risks from significant change activity, information security
and data privacy risk, risks associated with the Group's joint ventures and
associates, and risks related to regulatory compliance, as well as insurance
risks and customer conduct risks assumed by the Group in providing its
products.
Non-financial risks
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. Prudential accepts a degree of non-financial risk exposure as an
outcome of its chosen business activities and strategy.
Alongside the non-financial risk appetite framework, other risk policies and
standards that individually engage with specific non-financial risks,
including outsourcing and third-party management, business continuity, fraud,
financial crime, technology and data, operations processes and extent of
transformation are in place. These policies and standards include subject
matter expert-led processes that are designed to identify, assess, manage and
control non-financial risks, detailed below. These activities are fundamental
in maintaining an effective system of internal control, and aim to ensure that
non-financial risk considerations are embedded in key business
decision-making, including material business approvals and in setting and
challenging the Group's strategy. These activities include:
- Reviews of key non-financial risks and
challenges within Group and business unit 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; and
- Regular updating and risk-based testing of
disaster recovery plans and the Critical Incident Procedure process.
The Group's non-financial risks, which are not exhaustive, are detailed below:
· Operations and process controls risk. This is the risk of failure
to adequately or accurately process different types of operational
transactions, including customer servicing, and asset and investment
management operations. The risk of operational processing errors can arise
from human error, system issues or control gaps, and may occur across
different types of operational tasks or activities. These errors can also lead
to suboptimal customer experience and lower operational efficiency. Apart from
the direct financial impacts of inaccurate processing, indirect costs may
include regulatory penalties, reputational damage and resources spent to amend
the errors. 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.
· Transformation risk. Transformation risk remains a material risk
for Prudential, with a number of significant change programmes under way
which, if not delivered and executed effectively to defined timelines, scope
and cost, may negatively impact its operational capability, control
environment, reputation, and ability to deliver its strategy and maintain
market competitiveness. This risk may be further elevated as Prudential
implements the revised strategy for the Group. Prudential's current portfolio
of transformation and significant change programmes include (i) the
implementation and embedding of large scale regulatory/industry changes such
as the implementation of IFRS 17; (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 the disclosures on Risk factors.
The Group therefore 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 with the Group's existing risk policies and
frameworks with the aim to ensure appropriate governance and controls are in
place to mitigate these risks.
· Outsourcing and third-party risks. 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, both
with market counterparties and outsourcing partners, including distribution,
technology and ecosystem providers. In Asia, the Group maintains material
strategic partnerships and bancassurance arrangements. These arrangements
support the delivery of high level and cost-effective services to customers,
but also create a reliance on the operational resilience and performance of
outsourcing and business partners. 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.
· Model and user developed application (UDA) risk. Erroneous or
misinterpreted tools used in core business activities, decision-making and
reporting could impact Prudential negatively. 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.
The Group has no appetite for model and UDA risk arising from failures to
develop, implement and monitor appropriate risk mitigation measures.
Prudential's model and UDA risk framework applies a risk-based approach to
tools (including those under development) which considers a broad range of
stakeholders, including policyholders, with the aim to ensure a proportionate
level of risk management.
Prudential's model and UDA risk is managed and mitigated using the following:
- The Group's Model and UDA Risk Policy and relevant guidelines;
- Annual risk assessment (including model limitations, known
errors and approximations) of all tools used for core business activities,
decision-making and reporting;
- Maintenance of appropriate documentation for tools used;
- Implementation of controls with the aim to ensure tools are
accurate and appropriately used;
- Tools are subject to rigorous and independent model validation;
and
- Regular reporting to the RCS function and relevant risk and
Board committees to support the measurement and management of the risk.
Technological developments, in particular in the field of artificial
intelligence (AI) and the increased use of generative AI, pose new
considerations on risk oversight provided under the Group Risk Framework. An
oversight forum for the use of AI and key ethical principles are in place and
adopted by the Group with the aim to ensure the safe use of AI.
· 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. The Group's counter fraud policy is
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 continues to undertake
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.
· 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 benefits from others for the same
purpose).
Prudential operates in some high-risk markets where, for example, the
acceptance of cash premiums from customers may be common practice, large-scale
agency networks may be in operation where sales are incentivised by commission
and fees, and concentration of exposure to politically-exposed persons may
give rise to higher geopolitical risk exposure.
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. These policies are also aligned with the Group's
values and behaviours that are expected across the business. Screening and
transaction monitoring systems are in place with ongoing improvements and
upgrades being implemented where required, and a programme of compliance
control monitoring reviews is 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 Prudential's
financial crime policies are performed as part of the Group's business
acquisition process.
· Information security and data privacy risk. 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 continue to be prevalent, particularly as the accessibility of attacking
tools available to potential adversaries increases. The frequency and
sophistication of attacks, particularly in relation to ransomware, continues
to grow globally. With a rapidly transforming technological landscape,
continued expansion of Cloud services, including the adoption of a hybrid
multi-cloud strategy partnering with third-party service providers, and the
increased scrutiny from regulators against a backdrop of tightening data
privacy regulations across Asia, security and privacy risks are material at
the Group level. To mitigate the risk, the Group has adopted a holistic risk
management approach, which was designed not only to prevent and disrupt
potential attacks against Prudential systems but to also manage the recovery
process should an attack take place successfully. It is also well understood
that some attacks may still be successful despite the layered security control
defence-in-depth methodology that Prudential and other mature organisations
assume, and so it is essential that the Group's security strategy encompasses
a cyber resilience theme focusing on its ability to respond and recover from
an attack in order to maintain its reputation and customer trust.
Globally, ransomware and distributed denial of services (DDoS) attacks have
increased markedly since early 2022, in part driven by the Russia-Ukraine
conflict. The Group has responded swiftly by leveraging threat intelligence
information to configure security systems to mitigate any potential attacks,
whether targeted or collateral, from these events. Prudential also has a
number of defences in place to protect its systems from these types of
attacks, including but not limited to: (i) 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 Group conducts simulation exercises for ransomware
attacks to assess and develop the effectiveness of incident responses across
its businesses. Cyber-attack simulation exercises have been carried out to
enhance preparedness.
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 the first half of
2023, among many companies around the world, the Group's businesses in
Malaysia have been affected by the global MOVEit, a vendor providing secured
file transfer services, data-theft attack where a zero-day vulnerability was
exploited with infringements to data security, integrity and privacy, which as
a result directly impacted the Group's reputation and compliance with
regulation and privacy requirements. Following the threats, various actions
have been taken, including isolating the affected server, a thorough
investigation, and customer and authority notifications. Lesson learnt and
potential enhancements have been identified from the review and action plans
have been formulated to address these. The Group has also continued to enhance
its third-party management framework including the enhanced security due
diligence process when onboarding new business partners and the ongoing
monitoring of key business partners.
The key material risks can be summarised into three threat areas: (i)
ransomware attacks, (ii) supply chain compromise and (iii) service disruption
caused by cyber threats. In order for the Group to manage these risks
effectively, the security strategy encompasses the ongoing maturity and
development of protective and detective controls, while further expanding and
uplifting its ability to react to and recover from successful attacks on both
the Group's system as well as third-party partner systems.
The Group's Information Security and Privacy strategy is structured with three
key pillars:
- Defending the nation - To expand coverage and maturity of
protective and detective security controls in response to both the changing
technology landscape, such as the adoption of new Cloud services, as well as
the heightened threat actor risks. Within this pillar, continued focus on
Africa business units remains in order to help ensure the same maturity level
as Asia-based business units is achieved.
- Cyber resilience - To build on a number of existing security
processes and formalise the development of an integrated cross-functional
incident management framework that is regularly tried and tested. This
includes further aligning Group incident management plans, business unit
incident management plans and cyber security incident management plans along
with executing a number of drills and tabletop exercises. The drills and
exercises will be conducted at all levels including executive committee
members and within the business units while bringing in critical key business
partners such as cyber insurance providers and forensic investigation
partners.
- Enabling the digital journey - To focus on introducing and
building out key security controls within the digital ecosystem to ensure
continued enablement of the organisation's digital strategy while improving
customer experience and data security within the digital ecosystem.
With the aim to ensure the effectiveness of the Group's Information Security
and Privacy controls, the Group has established different processes to review
and validate the Information Security and Privacy mechanisms deployed, which
include setting up a dedicated ethical hacking team to perform testing on the
systems to identify potential vulnerabilities, engaging with external
consultants to perform penetration testing on our systems and engaging
external consultants to perform independent assessments on both our Security
Operations Centre and the Information and Privacy function as a whole to
further improve the efficiency of the functions. A Bug Bounty programme has
been established to provide a secured and official channel for external
security practitioners to report potential issues or vulnerabilities in our
system. In addition, the Group has subscribed to services from the independent
security consultants to continuously monitor our external security posture.
The centralised Technology Risk Management team leverages skills, tools and
resources across different technology domains to provide advisory, assurance
and operations support for holistic technology risk management including
information security and privacy. Based on risk assessments, risk deep dives
are performed on an ongoing basis on different technology domains to provide
assurance of controls to manage technology risks. The Group Technology Risk
Committee provides Group-wide oversight of technology risks, including
information security and privacy. Technology risk management is also performed
locally within business units, with inputs from subject matter experts and
with oversight from local risk committees. Work continues to be undertaken in
2023 to further enhance the maturity of the hub and spoke 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 cybersecurity as part of its audit coverage. The
Board is briefed at least twice annually on cyber security and privacy by the
Group Chief Information Security Officer (CISO) and is being engaged more
closely on cyber resilience with executive-level cyber tabletop exercises and
risk workshops conducted in 2022 and continuing in 2023 to ensure that members
have the means to enable appropriate oversight and understand the latest
threats and regulatory expectations. The Group Information Security, Privacy
and Data policies were developed with the aim to ensure compliance with all
applicable laws and regulations, and the ethical use of customer data. In
addition, these policies consider the requirements of a range of supervisory
guidelines including the international standards on information security (ISO
27001/27002) and the US National Institute of Standards and Technology's Cyber
Security Framework. Localised regulations or legal requirements are addressed
by local policies or standards.
Risks associated with the Group's joint ventures and associates
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). A material proportion of the Group's
business comes from its joint venture and associate 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 between
participants. As such, the level of oversight, control and access to
management information the Group is able to exercise over the extent of the
exposure to material risks at these operations may be lower compared with the
Group's wholly-owned businesses. Further information on the risks to the Group
associated with its joint ventures and other shareholders and third parties
are included in the disclosures on Risk factors.
Insurance risks
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 behaviour are detailed in the disclosures on
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.
Whilst Covid-19 has evolved into an endemic disease, the impact of
policyholders having deferred medical treatment during the pandemic (latent
morbidity impacts) continues to be experienced in a number of markets. The
implications from other factors such as long-term post-Covid-19 symptoms
(although there is currently no consensus on the longer-term impact on
morbidity) is being monitored. Inflationary pressures driving higher interest
rates 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. 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:
· 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. Where the cost of medical treatment increases more than
expected, resulting in higher than anticipated medical claims cost passed on
to Prudential, is a key risk. This risk is best mitigated 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. The risks to the
Group's ability to reprice are included in the disclosures on Risk factors.
· Morbidity risk: Prudential's 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.
· Persistency risk: The Group's persistency assumptions reflect
recent experience and expert judgement, especially where a lack of experience
data exists, as well as any expected change in future persistency. Persistency
risk is managed by appropriate controls across the product life cycle. This
includes review and revisions to product design and incentive structures where
required, ensuring appropriate training and sales processes, including those
ensuring active customer engagement and high service quality, appropriate
customer disclosures and product collaterals, use of customer retention
initiatives 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.
Prudential's insurance risks are managed and mitigated using the following:
- The Group's insurance policy, which sets out the Group's
insurance risk appetite and required standards for effective insurance risk
management by head office and local businesses, including processes to enable
the measurement of the Group's insurance risk profile, management information
flows and escalation mechanisms;
- 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);
- In product design and appropriate processes related to the
management of policyholders' reasonable expectations;
- The risk appetite statements, limits and triggers;
- Using persistency, morbidity and longevity assumptions that
reflect recent experience and expectation of future trends, and 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, 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;
- Using product repricing and other claims management initiatives
in order to mitigate morbidity and medical claims inflation risk; and
- Regular deep dive assessments.
Business Concentration risk
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 level of concentration risks. From a
channel concentration perspective, some of the Group's key markets continue to
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, Greater China (Hong Kong, the Chinese Mainland and Taiwan)
region contributes materially to the Group's top and bottom lines. 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.
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 are met.
The Group's customer conduct risk framework, owned by the Chief Executive
Officer, reflects management's focus on customer outcomes.
Factors that may increase conduct risks can be found throughout the product
life cycle, from the complexity of the Group's products and services to its
diverse distribution channels, which include its agency workforce, virtual
face-to-face sales and sales via online digital platforms. Prudential has
developed a Group Customer Conduct Risk Policy which sets out five customer
conduct standards that the business is expected to meet, being:
1. Treat customers fairly, honestly and with integrity;
2. Provide and promote products and services that meet customer needs,
are clearly explained and that deliver real value;
3. Manage customer information appropriately, and maintain the
confidentiality of customer information;
4. Provide and promote high standards of customer service; and
5. Act fairly and timely to address customer complaints and any errors
found.
Prudential manages conduct risk 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 Prudential's conduct risk is key to the Group's strategy.
Prudential's conduct risks are managed and mitigated using the following:
· The Group's code of business conduct and conduct standards,
product underwriting and other related risk policies, and supporting controls
including the Group's fraud risk control programme;
· A culture that supports the fair treatment of the customer,
incentivises the right behaviour through proper remuneration structures, and
provides a safe environment to report conduct risk-related issues via the
Group's internal processes and the Speak Out program;
· 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 using
other initiatives such as special requirements for vulnerable customers, to
improve customer outcomes;
· Appropriate claims management and complaint handling practices;
and
· Regular deep dive assessments on, and monitoring of, conduct
risks and periodic conduct risk assessments.
Risks related to regulatory and legal compliance
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 it 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.
Regulatory risks cover a broad range of risks including changes in government
policy and legislation, capital control measures, and new regulations at
either a national or international level. The breadth of local and Group-wide
regulatory arrangements presents the risk that requirements are not fully met,
resulting in specific regulator interventions or actions including
retrospective interpretation of standards by regulators. As the industry's use
of emerging technological tools and digital services increases, this is likely
to lead to new and unforeseen regulatory issues and the Group is monitoring
emerging regulatory developments and standards on the governance and ethical
and responsible use of technology and data. In certain jurisdictions in which
Prudential operates there are a number of ongoing policy initiatives and
regulatory developments which will impact the way Prudential is supervised.
These developments continue to be monitored by the Group at a national and
global level and these considerations form part of the Group's ongoing
engagement with government policy teams, industry groups and regulators.
Further information on specific areas of regulatory and supervisory focus and
changes are included in the disclosures on Risk factors.
Risk management and mitigation of regulatory risk at Prudential includes:
- Proactively adapting and complying with the latest regulatory
developments;
- Group and business unit-level compliance oversight and
risk-based testing in respect of adherence with regulations;
- Close monitoring and assessment of our business and regulatory
environment and strategic risks;
- The explicit consideration of risk themes in strategic
decisions;
- Ongoing engagement with national regulators, government policy
teams and international standard setters; and
- Compliance oversight to ensure adherence with in-force
regulations and management of new regulatory developments, including those
associated with greenwashing risk arising from exaggerated, misleading or
unsubstantiated sustainability-related claims.
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 rating 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.
Hong Kong listing obligations
The Directors confirm that the Company has complied with all the code
provisions of the Corporate Governance Code (HK Code) issued by The Stock
Exchange of Hong Kong Limited (the Hong Kong Stock Exchange) set out in
Appendix 14 to the Rules Governing the Listing of Securities on The Stock
Exchange of Hong Kong Limited (Hong Kong Listing Rules) throughout the
accounting period, except as described below.
The Company does not comply with provision E.1.2(d) of the HK Code which
requires companies, on a comply or explain basis, to have a remuneration
committee which makes recommendations to the board on the remuneration of
non-executive directors. This provision is not compatible with provision 34 of
the UK Corporate Governance Code issued by the Financial Reporting Council
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 Corporate Governance Code.
Prudential has adopted securities dealing rules relating to transactions by
Directors on terms no less exacting than required by Appendix 10 to the Hong
Kong Listing Rules and by relevant UK regulations. Having made specific
enquiry of all Directors, the Directors have complied with these rules
throughout the period.
The Directors confirm that the financial results contained in this document
have been reviewed by the Audit Committee.
2023 first interim dividend
Ex-dividend date 7 September 2023 (Hong Kong, UK and Singapore)
Record date 8 September 2023
Payment date 19 October 2023 (Hong Kong, UK and ADR holders)
On or around 26 October 2023 (Singapore)
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 ESG 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 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 ESG
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, in
particular, mortality and morbidity trends, lapse rates and policy renewal
rates;
· the timing, impact and other uncertainties of future acquisitions
or combinations within relevant industries;
· the impact of internal transformation projects and other
strategic actions failing to meet their objectives or adversely impacting the
Group's 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
disputes.
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, as
well as under the 'Risk Factors' heading of Prudential's 2022 Annual Report.
Prudential's 2022 Annual Report is available on its website at
www.prudentialplc.com.
Any forward-looking statements contained in this document speak only as of the
date on which they are made. Prudential expressly disclaims any obligation to
update any of the forward-looking statements contained in this document or any
other forward-looking statements it may make, whether as a result of future
events, new information or otherwise except as required pursuant to the UK
Prospectus Rules, the UK Listing Rules, the UK Disclosure 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, as well as under the 'Risk Factors'
heading of Prudential's 2022 Annual Report.
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.
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