PRUDENTIAL PLC annual report, Q4 FY2020

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Prudential plc — 2020 Form 20-F

Reporting period: Fiscal year ended 31 December 2020; filed 15 March 2021. The filing reports annual results, not a standalone fourth quarter. Financial statements are prepared under IFRS as issued by the IASB; amounts below are in US dollars unless noted.

Business context and reporting period

Prudential operated life insurance and asset management businesses in Asia, the US and Africa, with central functions in London and Hong Kong. Comparatives reflect the 2019 demerger of M&G plc. In January 2021, Prudential announced plans to separate its US business, Jackson, by demerger, subject to approvals.

Financial performance and position

  • Profit: IFRS profit from continuing operations was $2.185 billion, up 12% from $1.953 billion in 2019. Profit for the year was also $2.185 billion, versus $792 million in 2019, which included a $1.161 billion loss from discontinued UK and Europe operations. Basic EPS from continuing operations was 81.6 cents, compared with 75.1 cents.
  • Adjusted operating profit: $5.507 billion, up 4% at actual and constant exchange rates. Asia contributed $3.667 billion, up 12% at actual rates; US contributed $2.796 billion, down 9%; central and other items included $208 million of restructuring and IFRS 17 implementation costs.
  • Revenue and premiums: IFRS revenue, net of reinsurance, was $55.973 billion versus $93.736 billion. Gross premiums earned fell to $42.521 billion from $45.064 billion, while outward reinsurance premiums rose sharply to $32.209 billion from $1.583 billion, largely reflecting Jackson’s Athene reinsurance transaction. These effects make reported revenue and premiums less directly comparable year over year.
  • New business: Asia APE sales fell 28% to $3.696 billion, mainly because Hong Kong sales fell 63% amid border restrictions; excluding Hong Kong, Asia APE sales declined 6%. US APE sales decreased 13% to $1.923 billion. Group single-premium sales were $22.911 billion and new regular-premium sales were $3.328 billion.
  • Cash flow: Continuing-operations net cash inflow was $983 million, comprising $1.966 billion from operating activities, $1.195 billion of investing outflows and $212 million from financing activities. Cash and cash equivalents were $8.018 billion at year end, versus $6.965 billion.
  • Liquidity and debt: Holding-company cash and short-term investments were $1.463 billion, down from $2.207 billion. Shareholder-financed core borrowings were $6.633 billion; net core structural borrowings were $5.170 billion and net gearing was 20%, versus 15%. The Group had $2.6 billion of undrawn committed facilities and $501 million of commercial paper outstanding.
  • Capital: Estimated Group shareholder LCSM coverage was 328% at year end, with $11.0 billion surplus over Group minimum capital requirements, compared with 309% and $9.5 billion in 2019. Jackson National Life’s RBC ratio was 347%, down from 366%.
  • Balance sheet: Total assets were $516.097 billion, total liabilities $493.978 billion and total equity $22.119 billion, compared with $454.214 billion, $434.545 billion and $19.669 billion respectively in 2019. Policyholder liabilities and with-profits surplus totaled $446.463 billion.
  • Dividend: The Board approved a 2020 second interim dividend of 10.73 cents per share; together with the first interim dividend of 5.37 cents, the 2020 full-year dividend was 16.10 cents per share. The 2019 full-year dividend was 46.26 cents. From the 2021 first interim dividend, the Board intends to use a formula of one-third of the previous year’s full-year ordinary dividend.

Material changes versus the prior comparable period

  • Continuing-operations profit increased $232 million, supported by higher Asia adjusted operating profit and lower central costs; Asia’s IFRS profit after tax nevertheless fell to $3.382 billion from $3.725 billion, mainly because non-operating gains were lower.
  • US adjusted operating profit fell $274 million to $2.796 billion. Lower spread earnings after the Athene reinsurance and DAC effects were partly offset by higher fee income. Jackson reported a $247 million post-tax loss, improving from a $380 million loss.
  • Non-operating items included $4.841 billion of adverse short-term investment fluctuations, versus $3.203 billion adverse in 2019, partly offset by $1.521 billion of gains from corporate transactions, versus a $142 million loss. Jackson’s equity-hedging accounting mismatch and market volatility were significant contributors to losses.
  • The Athene reinsurance of substantially all Jackson’s in-force fixed and fixed-index annuities generated an $804 million IFRS pre-tax gain and improved Jackson’s year-end RBC ratio by 67 percentage points. After tax and the reduction in unrealised gains recorded in other comprehensive income, the transaction reduced IFRS shareholders’ equity by $1.2 billion.
  • Athene also invested $500 million in the US business for an 11.1% economic interest and 9.9% voting interest. Asia APE sales were disrupted by Covid-19, while higher renewal premiums, customer retention and lower expenses supported operating resilience.

Outlook, commentary and risks

  • Management described the business as resilient through Covid-19, with sequential recovery in Asia sales during the second half. The pace of recovery remained uncertain and dependent on restrictions, vaccination progress and local government responses. Hong Kong cross-border sales were expected to remain constrained until border reopening, which management said was unlikely before the third quarter of 2021.
  • The planned Jackson demerger was expected in the second quarter of 2021, subject to shareholder and regulatory approvals. Prudential planned to retain a 19.9% voting interest (19.7% economic interest) at separation and intended, subject to market conditions, to reduce its ownership below 10% within 12 months.
  • Prudential was considering raising approximately $2.5–$3.0 billion of new equity after the Jackson separation to support deleveraging and investment flexibility. This was a potential transaction, not a completed financing.
  • After separation, management’s strategic focus was Asia and Africa, with an aim of sustained double-digit embedded value per-share growth and new-business-profit growth exceeding the GDP growth rates of its markets. The Group targeted a Moody’s debt-leverage ratio of around 20%–25% over the medium term.
  • Key risks include prolonged low interest rates, market and credit volatility, Covid-19-related sales disruption and possible claims or lapses, Jackson’s variable-annuity guarantees and hedging mismatch, the execution and approvals required for the demerger, regulatory change under Hong Kong’s GWS framework, cyber and operational disruption, litigation, and climate-related investment and insurance risks.
  • The filing states that the directors considered the Group to have adequate resources for at least 12 months from approval of the financial statements. KPMG gave unqualified audit opinions on the financial statements and internal control over financial reporting. Critical audit matters included insurance liabilities, fair value of certain Level 2 and Level 3 investments, and assumptions used to calculate US deferred acquisition costs.

Important facts for investors to verify

  • Progress, approvals, timing and final terms of the Jackson demerger, including the retained stake and any later disposal.
  • Whether the proposed $2.5–$3.0 billion equity offering proceeds, its dilution and use of proceeds, and the resulting leverage position.
  • Jackson’s capital position following the hedge-modelling revision, including the 347% RBC ratio at year end and management’s separation target above 450%.
  • The sustainability of Asia new-business recovery, particularly Hong Kong cross-border sales, and the effect of Covid-19 on persistency, claims and remittances.
  • The composition and quality of investment assets, sensitivity to interest rates and equities, and the financial impact of the Athene reinsurance and related accounting effects.
  • Dividend capacity after the policy shift toward reinvestment, considering subsidiary distribution restrictions, capital requirements and the planned corporate separation.