PRUDENTIAL PLC annual report, Q4 FY2019

Business context and reporting period

Prudential plc’s Form 20-F, filed 20 March 2020, covers the fiscal year ended 31 December 2019; it is an annual report, not a standalone fourth-quarter filing. Following the 21 October 2019 demerger of M&G plc, Prudential focuses on Asia, the United States and a growing Africa business. Financial statements use US dollars, with comparatives retrospectively restated for the currency change and UK and Europe operations presented as discontinued operations. Comparative balance sheets were not restated for the demerger.

Key financial metrics

Unless stated otherwise, amounts are US dollars. Insurance-sector revenue and investment-return movements can be volatile and are not direct measures of shareholder operating performance.

Business performance

• Asia adjusted operating profit was $3.276bn, up 14% constant currency; renewal premiums increased 12%. Eastspring’s assets under management reached $241.1bn, up 25%, with $8.9bn of external net inflows.
• US adjusted operating profit was $3.070bn, up 20%, but Jackson recorded a $380m after-tax IFRS loss. The company attributed this mainly to market-related hedge and guarantee accounting mismatches.
• Asia life new business premiums rose 10% to $8.562bn. US total new business premiums rose to $22.231bn from $20.593bn, with growth in fixed and fixed-index annuities alongside lower variable annuity sales.
• Total assets were $454.214bn versus $647.810bn at year-end 2018; the comparison is materially affected by the demerger and discontinued operations.

Material changes versus the prior period

• The M&G demerger reshaped the Group, reduced reported equity and assets, and generated $407m of demerger costs within continuing operations. The discontinued-operations result was a $1.161bn loss, comprising pre-demerger profit, remeasurement and the currency translation loss.
• Adjusted operating profit grew despite a sharp decline in IFRS continuing profit. Short-term investment fluctuations were a $3.203bn loss in 2019 versus a $791m loss in 2018, mainly due to Jackson; Asia recorded positive $657m fluctuations.
• Jackson’s statutory capital ratio was 366% with $3.795bn surplus after early adoption of revised NAIC variable-annuity rules and termination of a permitted practice. The 2018 ratio of 458% used the previous framework, so it is not directly comparable.
• The Group changed its presentation currency from sterling to US dollars and adopted IFRS 16, recognising $895m of right-of-use assets and $955m of lease liabilities at transition.

Outlook, commentary, risks and unusual items

• Management said long-term growth opportunities in Asia and US retirement remain attractive, supported by recurring-premium business, protection products, digital investment and geographic diversification. It described lower interest rates, volatile markets and COVID-19 as near-term headwinds to new-business profit and fee-based and spread earnings.
• COVID-19 had slowed activity and dampened sales momentum in Hong Kong and China by the filing date. Management expected lower new sales in affected markets, said existing policies and premium collections remained resilient, and stated that the financial impact could not then be practicably quantified.
• Prudential began preparations for a minority IPO of Jackson as its preferred means of bringing third-party capital to support Jackson’s diversification, subject to market conditions. An update was planned for the August 2020 half-year results.
• The Board approved a 2019 second interim dividend of 25.97 cents per share and adopted a progressive dividend policy. The stated 2019 US-dollar dividend base for the 2020 policy was $958m, or 36.84 cents per share.
• Capital: shareholder LCSM sensitivities included a 40% equity fall reducing surplus by $0.2bn and a 100bp credit-spread widening reducing it by $1.6bn. At end-February 2020, management estimated the shareholder LCSM ratio at 270%–280%, below 309% at year-end, reflecting market movements.
• Risks include persistently low rates, market and credit losses, policyholder lapses and guarantee utilisation, mortality and morbidity, COVID-19 and other disruption, cyber and data risks, third-party dependencies, regulatory change including the Hong Kong group-supervision framework, and IFRS 17 implementation.
• The filing reports no litigation outcome expected to have a material adverse effect, but notes ongoing litigation and regulatory proceedings and unlimited-duration, cross-indemnity obligations under the M&G demerger agreement. It also reports $3.698bn of investment purchase commitments, principally in Asia and US investments.

Most important facts for investors to verify

• Separate underlying adjusted operating profit growth from IFRS earnings volatility, especially Jackson’s hedge-related losses and their sensitivity to markets and accounting assumptions.
• Confirm the post-demerger basis and comparability of capital, equity, assets, cash flow and prior-year figures; also distinguish Jackson’s revised NAIC capital ratio from the prior framework ratio.
• Track COVID-19 effects on sales, persistency, claims, markets and capital, and any resulting changes to management’s outlook or actions.
• Monitor progress, timing and terms of a potential Jackson minority IPO, including capital needs, remittances and implications for Prudential shareholders.
• Assess dividend coverage from remittances, holding-company liquidity and the planned use of capital, including the impact of new and existing strategic partnership commitments.
• Review the forthcoming Hong Kong GWS framework, IFRS 17 and IFRS 9 implementation, and related capital, systems, expense and profit-recognition effects.

KPMG issued an unqualified audit opinion and reported effective internal control over financial reporting as of 31 December 2019.