Company Announcements

Chief Executive's review

Well-placed for long-term growth

A historic year

We have achieved much in 2019. We demonstrated clearly the value of our business mix and the quality of our diverse earnings against the backdrop of a challenging market.

In October, we demerged from our former parent Prudential plc and established ourselves as an independent business with a premium listing on the London Stock Exchange.

Our preparations for demerger required the establishment of new functions and new governance structures, including the appointment of the Board of Directors and the formation of its Committees.

We also created a new Executive Committee to implement M&G plc's strategy to meet the growing demand for active high-value savings and  investments solutions, both in the UK and internationally.

At the same time, we continued to serve our customers and clients to a high standard, while introducing a number of new propositions and upgrading the service experience for retail savers and their advisers in the UK.

In our UK Retail Savings business, in January 2019, we launched PruFolio, a family of risk-oriented investment strategies for the customers of Independent Financial Advisers, and upgraded the MyPru digital service in April. Fund launches in Retail Asset Management included an environmental, social and governance (ESG) version of the M&G Emerging Markets Corporate Bond Fund.

Simultaneously, we made good progress on our five-year business transformation programme to improve customer outcomes and to strengthen our position for future growth. We are on track to achieve annual run-rate shareholder cost savings of £145 million from transformation by full year 2022. Notable achievements in 2019 included the successful transfer in October of our most complex life assurance administration system to Diligenta, the UK subsidiary of Tata Consultancy Services.

Challenges during the year included the intended legal transfer of £12 billion of assets and liabilities behind part of the Prudential annuity book to Rothesay Life plc. This was not sanctioned by the High Court in 2019 and an appeal is expected to be heard in mid-2020. M&G plc had already secured the economic value of the transfer through a reinsurance agreement with Rothesay Life plc in 2018, and this remains in place.

In December, we temporarily suspended dealing in the M&G Property Portfolio Fund following a period of sustained redemptions. The suspension allows the fund's managers to protect the interests of our customers by raising cash to meet redemptions without disposing of assets at below market values.

We also paid a fine of £24 million to the Financial Conduct Authority for historical failings in our non-advised annuities business. We have largely completed the remediation on the relevant cases.

Positive financial performance in a challenging market

Financial performance in 2019 reflected the value of our unique business mix and the diversity of our earnings. IFRS profit after tax of £1,065 million and adjusted operating profit before tax of £1,149 million were in line with our expectations. Assets under management and administration (AUMA) are up 9% to £352 billion on the previous year.

Across Savings and Asset Management net client outflows were modest at £1.3 billion. Outflows of £7.5 billion in Asset Management were largely offset by £6.2 billion inflows into our UK Retail Savings propositions, including PruFund.

Savings and Asset Management contributed £474 million to adjusted operating profit. Heritage, home to our traditional with-profits policies and annuities which is closed to new customers, contributed £752 million to adjusted operating profit, including a £126 million longevity release.

Investment performance picked up over the second half of the year, with 59% of our mutual funds, weighted by assets under management, delivering above median returns over the three years to the end of 2019.

From a capital perspective, the business remains strong with a shareholder Solvency II coverage ratio of 176%, up from 170% last year.

Total capital generation over the year was £1,509 million. While this benefitted from strongly positive market impacts and management actions, we remain confident of meeting our three-year target of £2.2 billion capital generation by full year 2022.

Well positioned for growth

Our strategy at M&G plc is straightforward. It is to provide more of our active high-value investment solutions to more customers and clients, in more markets, through a wider range of structures.

Key to this is the continued development and diversification of our investment capabilities. In line with this, in 2019 we hired a team of Asia-Pacific fund managers and researchers to increase our capability in this important region.

We also strengthened our international asset origination teams to support the growth of our private assets business, placing private debt analysts in Asia. During the year, we committed to just under $1 billion of new private asset investments in Asia and the US.

Improving the customer experience is also an important driver of growth. Whether our UK customers choose to deal with us directly or through an adviser, we are harnessing digital technology to make their lives easier. For example, the new and improved Digital Account allows UK savers to keep up to date with some of their Prudential products any time they want through their smart phones.

In Institutional Asset Management, we expanded our partnerships with clients. This increased coverage helped us to win 67 new institutional mandates in the UK and 47 in Europe.

Responsible stewards

For more than 170 years, we have been responsible stewards of our customers' savings, first as The Prudential Assurance Company Limited and since 1931 as M&G Investments. Throughout that time, the challenge has been the same - to balance the saver's requirement for good financial returns against the wider needs of society and the economy.

Many of our customers and clients now expect us to give explicit consideration to ESG issues when we deploy their savings. That is why we are embedding ESG into M&G plc- from the way we manage assets to how we operate as a business.

In asset management, we put the emphasis on engagement over exclusion. We will continue to work with the companies in which we invest to create sustainable businesses. However, we will consider disinvestment from companies which fail to engage.

On climate, our goal is to reduce the carbon emissions on our total book of assets under management and administration to net zero by 2050, in line with the Paris Agreement and the UK Government's target.

As a major employer with almost 6,000 employees in 22 locations around the world, we have our own part to play in managing climate risk. We are committed to reducing our own carbon emissions to net zero by 2030. We will achieve this through a new approach to travel, energy efficient investment in our buildings and the adoption of new technology.

A great place to work

We want M&G plc to be an exceptional place to work, reflecting our corporate values of care and integrity. Central to that is creating a safe, inclusive and diverse working environment.

29% of the leadership team and their direct reports are female, while 11% come from ethnically diverse backgrounds. By 2025 or sooner, we aim to achieve 40% female representation among this group and 20% representation from ethnically diverse backgrounds.

For the communities we serve and the charities we support, we will continue to increase our donations and volunteering activity, year on year. Over the next three-years, we aim to help a million people to secure their financial futures through our work with community and charity groups to break down some of the social barriers to economic well-being.

Our success is built on our people. So, I want to take this opportunity to thank all of my colleagues at M&G plc for their hard work and commitment over 2019. With the merger of our two businesses and then demerger from Prudential plc, our business has undergone great change in the past two years. I am proud of how my colleagues have handled the challenge with professionalism and care.

Outlook

While the long-term outlook for savings and investments is positive because of the structural shifts in societies, the industry faces a number of challenges in the short-term.

Global markets continue to be unnerved by a series of factors, including most recently the spread of COVID-19 and the potential economic impacts of it. There remains significant uncertainty. We are monitoring the situation and have made preparations to ensure we are able to continue to operate effectively. Further market turbulence could have an impact on our capital strength. As at 6 March 2020, our shareholder Solvency II coverage ratio was estimated at 166%⁵, which remains firmly within our risk appetite.

Across the asset management industry, active managers continue to face pressure on profitability because of the popularity of passives and changes in the distribution landscape.

At M&G plc, we are rising to this challenge by reducing costs through restructuring and through concentrating our resources on areas where client demand is rising and profit margins are resilient.

We will achieve a significant shift in our cost base through our five-year transformation programme. As part of this programme, we have launched a voluntary redundancy scheme with the aim of reducing total staff costs by 10% in 2020.

On growth, we are focused on the provision of active high-value and innovative investment solutions for clients, both in the UK and internationally. Our ability to use our balance sheet to smooth investment returns for customers gives us a competitive advantage in this growing market.

In line with this, a priority in 2020 is to begin the distribution of a PruFund-like proposition through our partners in Europe. We are in advanced talks with a number of partners and we hope to see inflows commence during the second half of the year.

To support innovation in savings and investments solutions, we will continue to grow our private assets business. Our £60 billion of private assets play an important part in underpinning the reliability of returns from our diversified set of investment capabilities. More local origination of private assets in international markets is a priority for us.

The uniqueness of our business mix and the diversity of our earnings, which come through clearly in this set of results, position us well to grow in a changing market, and deliver attractive and sustainable total returns for shareholders.

⁵After an assumed recalculation of transitional measures on technical provisions.

 

Business and financial review

A positive set of financial results in a challenging market

A review of our business and financial performance in 2019

Our adjusted operating profit before tax of £1,149 million and total capital generation of £1,509 million for the year demonstrates the strength and resilience of the business and were in line with our expectation for 2019. Being an asset owner and asset manager enables us to produce consistent underlying returns even in tough market conditions.

Total AUMA grew over the year, primarily driven by strong investment returns. We experienced net client outflows driven by global political and macro-economic uncertainty, particularly across Europe.

2019 was a transitional year as we optimised the balance sheet for demerger. Total capital generation of £1,509 million reflected a strong underlying capital generation as well as benefitting from management actions, assumption changes and model improvements of £455 million and favourable market impacts of £538 million. In September, we announced a cumulative total capital generation target of £2.2 billion over the three-year period from 2020 to 2022. We believe this is a realistic and achievable, yet stretching, target.

Our shareholder Solvency II coverage ratio increased from 170% to 176% over the year, a comfortable level and well within our risk appetite.

Our With-Profits Fund has a strong Solvency II coverage ratio at 31 December 2019 of 267%, up from 231% as at 31 December 2018. We plan to pay out £1 billion of the excess surplus in the fund to our with-profits policyholders over the coming years. During 2020, we are reviewing the overall strategy of the fund recognising this strength and the opportunity to develop our broader proposition and ultimately drive strong long-term returns for our customers.

2019 was a significant year for us as a business. We continued to make progress on our five-year transformation programme, while completing the demerger from Prudential plc and listing on the London Stock Exchange. We are on track to deliver the £145 million of annual run-rate shareholder cost savings by end of 2022. The priorities of this programme are to improve customer outcomes, strengthen the control environment, improve the efficiency and structure of our cost base, and to create a platform for scalable growth.

Overview

Adjusted operating profit before tax

The following table shows a reconciliation of adjusted operating profit before tax to IFRS profit after tax from continuing operations:

£m	2019	2018
Asset Management fee based revenues​	1,033	1,113
Other fee based revenues​	254​	241​
Total fee based revenues​	1,287​	1,354​
Annuity margin	458	1,129
With-profit shareholder transfer net of hedging gains/(losses)	242	255
Adjusted operating income	1,987	2,738
Asset Management operating expenses​	(652)​	(640)​
Other operating expenses​	(311)​	(277)​
Adjusted operating expenses	(963)	(917)
Other shareholder profit/(loss)	110	(216)
Share of profit from joint ventures and associates	15	16
Adjusted operating profit before tax	1,149	1,621
Short-term fluctuations in investment returns	298	(3)
Profit/(loss) on disposal of business and corporate transactions	53	(508)
Restructuring and other costs(i)	(198)	(109)
IFRS profit attributable to non-controlling interests	3	2
IFRS profit before tax attributable to equity holders from continuing operations	1,305	1,003
Tax charge attributable to equity holders	(240)	(192)
IFRS profit after tax attributable to equity holders from continuing operations	1,065	811

 

(i) Restructuring costs excluded from adjusted operating profit relate to merger and transformation costs of £62 million (2018; £102 million), and rebranding and other change in control costs allocated to the shareholder. Additional restructuring costs are included in the analysis of administrative and other expenses in Note 4.

 

Fee based revenues were impacted by lower average AUMA of £267 billion (2018: £278 billion) in Asset Management and a lower average fee margin in Retail Asset Management.

Adjusted operating expenses were higher, reflecting increased Corporate Centre costs, required for the Group to operate as an independent publicly listed company, and increased staff costs predominantly relating to investment management teams. A focus on costs will remain a key priority. Our five-year transformation programme will deliver greater efficiency and an improved cost structure, enabling future scalable growth.

Other shareholder profit/(loss) primarily related to releases of insurance reserves as we complete the reviews of a number of legacy remediation programmes, and investment income on our seed capital investments. The prior year included the £56 million one-off cost relating to Poland, the cost of the reserves in respect of equalising guaranteed minimum pensions of £55 million, and a £34 million one-off shareholder contribution to the with-profits corporate pension business.

The following table shows adjusted operating profit before tax split by operating segment:

£m	2019	2018
Savings and Asset Management	474	468
Heritage	752	1,165
Corporate Centre	(77)	(12)
Adjusted operating profit before tax	1,149	1,621

Adjusted operating profit before tax was lower than the prior year, primarily reflecting a reduction in shareholder annuity margin compared to 2018, which benefited from a significant longevity assumption change of £441 million and a £166 million insurance recovery from our professional indemnity insurers in respect of the remediation costs arising from the Financial Conduct Authority's (FCA's) review of past annuity sales.

Savings and Asset Management adjusted operating profit before tax benefitted from the strong investment returns in the year on our seed capital investments. In 2018, there was a one-off business development cost of £56 million related to our business in Poland. Asset Management earnings were lower than 2018, driven by the net client outflows of our Retail Asset Management clients.

Corporate Centre included operating costs of £75 million, in line with the planned build-out of the head office, and finance costs of £29 million, relating to the subordinated debt transferred to M&G plc from Prudential plc in October 2019, immediately prior to demerger. These were partially offset by investment and other income of £27 million.

 

 

IFRS profit after tax

IFRS profit after tax attributable to equity holders from continuing operations increased to £1,065 million compared to £811 million for 2018 reflecting the fall in adjusted operating profit before tax, profit from non-recurring items of £153 million compared to a loss in 2018 of £620 million and an increase in the equity holders tax charge to £240 million from £192 million in 2018.

Profit from non-recurring items included short-term fluctuations in investment return and a rebate in relation to the reinsurance of the annuity portfolio to Rothesay Life plc offset by an increase in merger, transformation, re-branding and other change in control costs. In 2018 the loss from non-recurring items was predominantly due to the loss on the reinsurance transaction with Rothesay Life plc and merger and transformation costs.

Equity holders effective tax rate for 2019 was 18.4% compared to 19.1% for 2018. Excluding non-recurring items, the equity holders effective tax rate was 20.2% (2018: 20.2%). This was higher than the UK statutory rate of 19% (2018: 19%), primarily due to expenses that are non-deductible for UK corporation tax purposes. The Group's approach to tax is to act responsibly and transparently in all of our tax affairs. We understand the importance to governments and societies of paying the right amount of tax at the right time in the right place.  The Group complies with statutory obligations in all the jurisdictions in which we operate and seeks to have an open and effective relationship with tax authorities.

Assets under management and administration (AUMA)

The following table shows the analysis of AUMA:

£ bn	2019		2018
Retail Savings	63		51
Retail Asset Management	75		76
Institutional Asset Management	77		71
Other	1		-
Total Savings and Asset Management	216		198
Heritage	134		124
Corporate	2		-
Total AUMA	352		322

AUMA was up 9%, mainly a function of positive market developments, with the FTSE All-Share up 14% over the year, and the inclusion of reinsurance assets from Rothesay Life plc, which were previously held for sale and excluded from AUMA. These were offset by net client outflows during the year of £8.9 billion (2018: £8.7 billion net client outflows).

 

Capital generation

The following table shows an analysis of total capital generation:

£m	2019		2018
Savings and Asset Management underlying capital generation	442		389
Heritage underlying capital generation	459		523
Corporate Centre underlying capital generation	(80)		(12)
Underlying capital generation	821		900
Other operating capital generation	455		942
Operating capital generation	1,276		1,842
Market movements	538		12
Restructuring and other	(133)		814
Tax	(172)		(299)
Total capital generation	1,509		2,369

Total capital generation is the change in the Group's Solvency II surplus before dividend payments, capital movements and capital generation from discontinued operations. It is the keystone of our financial plans and underpins our dividend policy. We analyse total capital generation by the following components:

-         Underlying capital generation, which includes the expected surplus capital from the life insurance business, the adjusted operating profit before tax and associated capital movements from Asset Management, and other items including head office expenses and debt interest costs.

-         Operating capital generation, which is composed of underlying capital generation and other operating items, such as the impact of management actions, assumption changes and model improvements.

-         Total capital generation includes operating capital generation, the impact of market movements relative to those expected under long-term assumptions, other non-recurring items such as shareholder restructuring and other costs, and the impact of tax.

Total capital generation was strong in the year at £1,509 million (2018: £2,369 million). Underlying capital generation decreased to £821 million (2018: £900 million), primarily due to the costs associated with the planned build-out of the Corporate Centre and interest costs on debt transferred from Prudential plc in October 2019. Other operating capital generation was lower due to a series of substantial positive items within the 2018 results, such as longevity assumption changes and an insurance recovery in respect of the remediation costs arising from the FCA's review of past annuity sales. In 2019, however, there were still significant contributions, including £171 million from continued asset optimisation, £98 million from model improvements, and £214 million from assumption changes, including further updates to longevity. In addition there was a benefit arising from favourable market movements during 2019 of £538 million (2018: £12 million). The 2018 results included a one-off £923 million gain on the reinsurance of part of our annuity portfolio to Rothesay Life plc, included within 'Restructuring and other'.

Capital position

The Group's Solvency II surplus increased to £4.5 billion as at 31 December 2019 (2018: £4.0 billion), equivalent to a shareholder Solvency II coverage ratio of 176% (2018: 170%), reflecting the total capital generated of £1,509 million and capital generated from discontinued operations of £158 million, offset by £1,211 million of dividends and capital movements during the year.  The Group's shareholder Solvency II coverage ratio is the key metric we use to manage our capital.

Our With-Profits Fund is a key part of our proposition and our ongoing development. It delivers long term smoothed returns to our customers and is the foundation of the highly successful PruFund. The capitalisation of the fund has continued to strengthen, and as at 31 December 2019, the ring-fenced With-Profits Fund's Solvency II surplus was £7.6 billion (2018: £5.5 billion), equivalent to a Solvency II coverage ratio of 267% (2018: 231%).

The regulatory Solvency II coverage ratio of the Group as at 31 December 2019, which takes into account all Group exposures, including that of the With-Profits Fund, was 143% (2018: 141%).

Financing and liquidity

The following table shows key financing and liquidity information:

£m	At 31 December 2019	At 31 December 2018
Parent company cash and liquid assets	1,274​	18​
Nominal value of debt	3,227​	-
Leverage ratio	31%​	n/a​

The key metric we use to manage our debt is the  leverage ratio, defined as nominal value of debt as a percentage of total Group own funds. The increase in the nominal value of debt reflects the transfer of £3.2 billion of subordinated debt from Prudential plc to M&G plc in the period immediately before demerger. Our leverage ratio at 31 December 2019 was 31%.

The following table shows the movement in cash and liquid assets held by the parent company during the year:

£m	2019
Opening cash and liquid assets at 1 January	18
Cash remittances from subsidiaries	477
Special dividends from subsidiaries	1,177
Substitution of subordinated liabilities	3,241
Corporate costs	(37)
Interest paid on core structural borrowings	(22)
Cash dividends paid to equity holders	(543)
Final dividend paid to equity holders prior to demerger	(2,968)
Acquisition of subsidiaries	(86)
Other shareholder income	17
Closing cash and liquid assets at 31 December1	1,274

¹ Closing cash and liquid assets at 31 December 2019, included a £1,200 million inter-company loan asset with Prudential Capital plc, which acts as the Group's treasury function.

Cash received by the parent company included remittances of £477 million from our subsidiaries in the normal course of business and special dividends of £1,177 million, of which £1,083 million was received from The Prudential Assurance Company Limited. In addition a £3,241 million consideration was paid by Prudential plc to M&G plc in respect of the pre-demerger debt substitution. Cash received was used to meet head office costs, to acquire two subsidiaries from Prudential plc, and to pay dividends to Prudential plc during the year, including a pre-demerger dividend of £2,968 million.

 

Dividends

As announced at the time of demerger an Ordinary Dividend of 11.92 pence per share will be paid on 29 May 2020. Consistent with our dividend policy the expected 2019 Ordinary Dividend is broadly two-thirds of the amount that the Board would have anticipated paying in respect of the full year 2019 as a standalone business.

The Board has agreed to pay a one-off demerger-related Special Dividend of 3.85 pence per share. This is in recognition that for the majority of the 2019 financial year, the Company was operating without incurring certain costs, e.g. debt interest costs, which it would expect to bear in future and which have been allowed for in determining the initial level of ordinary dividend. This will also be paid on 29 May 2020.

Savings and Asset Management

In Savings and Asset Management, Retail Savings has continued to perform strongly, reflecting the continued success of our PruFund proposition. Institutional Asset Management has shown a resilient performance, with broadly neutral net client flows. The performance of Retail Asset Management was muted by the challenging environment, which is impacting the industry.

Assets under management and administration and net client flows

The following tables shows an analysis of AUMA and net client flows:

£ bn	At 31 December 2018	Net client flows		Market/Other movements	At 31 December 2019
Retail Savings	50.6	6.2		6.7	63.5
Retail Asset Management	76.4	(7.4)		5.9	74.9
Institutional Asset Management	70.5	(0.1)		6.4	76.8
Other	0.2	-		0.5	0.7
Total Savings and Asset Management	197.7	(1.3)		19.5	215.9

 

£ bn	At 31 December 2017		Net client flows		Market/Other movements		At 31 December 2018
Retail Savings	44.0		8.2		(1.6	)	50.6
Retail Asset Management	90.3		(7.5	)	(6.4	)	76.4
Institutional Asset Management	73.6		(2.4	)	(0.7	)	70.5
Other	0.2		-		-		0.2
Total Savings and Asset Management	208.1		(1.7	)	(8.7	)	197.7

 

Total Retail Savings net client flows were £6.2 billion (2018: £8.2 billion), mainly reflecting continued strong net client inflows into our PruFund proposition. Despite the contraction in the defined benefit pension transfers across the industry, net client inflows into our pension proposition were £4.1 billion (2018: £6.1 billion). Net client inflows into our Bond and ISA products were £1.4 billion (2018: £1.5 billion) and £0.9 billion (2018: £1.1 billion) respectively.

The strong net client inflows of £6.4 billion into PruFund combined with the strong investment performance of £4.4 billion increased PruFund AUMA by 25% from £43.0 billion to £53.8 billion as at 31 December 2019.

In the Retail Asset Management business AUMA decreased 2% to £74.9 billion over the year, with favourable market movements more than offset by net client outflows during the year. Average AUMA was 12% lower than 2018, including internally managed assets, impacting fee based revenues. The business saw net client outflows of £7.4 billion (2018: £7.5 billion outflow), driven by investor confidence, which was weakened by macro-economic and political uncertainty. Overall investment performance was strong, particularly over the medium-term. However, there were a small number of funds where performance was weaker than we would like. Improving investment performance is a management priority and we are implementing a series of actions, including independent fund assessment and capability build. We are also working on a number of initiatives in the Retail Asset Management business to diversify and increase client flows, including developing outcome focused investment solutions and continuing to expand our sub-advisory capability.

In the Institutional Asset Management business AUMA increased 9% to £76.8 billion over the year, reflecting favourable market movements. On average AUMA was 2% higher than 2018, including internally managed assets. Institutional Asset Management saw net client outflows of £0.1 billion, which included a large low margin outflow of £1.6 billion in the first half of the year. Net client flows in the second half of the year were positive.

An important component of our investment capability is our expertise in private assets, which range from real estate and private debt into infrastructure, and represent a resilient, high-margin source of revenues. Our private assets under management increased 7% to £60.3 billion of AUMA as at 31 December 2019.

 

Adjusted operating profit before tax

The main sources of adjusted operating profit before tax in the Savings and Asset Management segment are the earnings from Asset Management and the shareholders' share of the returns from the PruFund range.

The following table shows an analysis of adjusted operating profit before tax:

£m	2019		2018
Asset Management fee based revenues	1,033		1,113
Other fee based revenues​	158​		145​
Total fee based revenues​	1,191​		1,258​
With-profits shareholder transfer net of hedging gains/(losses)	55		54
Adjusted operating income	1,246		1,312
Asset Management adjusted operating expenses	(652)​		(640)​
Other adjusted operating expenses​	(165)​		(139)​
Adjusted operating expenses​	(817)​		(779)​
Other shareholder profit/(loss)	30		(81)
Share of profit from joint ventures and associates	15		16
Adjusted operating profit before tax	474		468

The with-profits shareholder transfer, which was driven by PruFund, increased by 9% to £73 million (2018: £67 million), before taking account of the fair value losses on the derivative instruments, used to mitigate the equity risk to the shareholder of £18 million (2018: £13 million loss). This strong growth reflects the rapid increase in the size of the book and the economics of with-profits business where the shareholder earns its return when customers access their savings and related returns.

Adjusted operating profit before tax from our Asset Management activities decreased to £381 million (2018: £473 million). The lower year-on-year average AUMA in Retail Asset Management resulted in lower Asset Management fees of £1,033 million (2018: £1,113 million). Adjusted operating expenses from Asset Management were £652 million (2018: £640 million), with the increase mainly resulting from higher staff costs, primarily related to our investment management activities, and increased premises costs, partly offset by a £35 million past service credit following changes to the M&G defined benefit pension scheme. Consequently the cost/income ratio in the Asset Management business was higher at 63% (2018: 59%). Higher other adjusted operating expenses were mainly a result of increased expenses in our financial advice business, Prudential Financial Planning, reflecting its strong growth in the year.

Other shareholder profit/(loss) in 2019 primarily related to investment income of £25 million (2018: £17 million loss) mainly in respect of our seed capital investments. Other shareholder profit/(loss) in 2018 also included a one-off cost of £56 million related to the development of our business in Poland.

The Asset Management fee margin was 2 basis points (bps) lower compared to the prior year at 38bps. This reflected the industry wide pressure on fees in Retail Asset Management because of the popularity of passives and changes in the distribution landscape. Revenue margins in the Institutional Asset Management business were higher than the prior year, reflecting our focus on the provision of high-value, innovative investment solutions for clients, which has changed our product mix, with net client flows out of our lower margin products and into these more specialised, higher margin solutions.

The following table shows adjusted operating profit before tax split by source of earnings:

​£m	2019		2018
Asset management	381		473
With-Profits	55		54
Other	38		(59)
Adjusted operating profit before tax​	474		468

 

 

Capital generation

The following table shows an analysis of operating capital generation:

£m	2019		2018
Asset Management underlying capital generation	379		397
With-profits underlying capital generation	-		(25)
of which: in-force	61		27
of which: new business	(61)		(52)
Other underlying capital generation	63		17
Underlying capital generation	442		389
Other operating capital generation	17		56
Operating capital generation	459		445

 

Underlying capital generation increased to £442 million (2018: £389 million). Underlying capital generated in the Asset Management business was broadly equivalent to adjusted operating profit before tax. The underlying capital generation from the with-profits in-force business of £61 million, which included a negative impact of £38 million due to the run-off of equity hedges, was offset by the capital strain from new business of £61 million. We enhanced the methodology for allocating the underlying capital generation between PruFund and traditional with-profits business to better reflect the drivers of expected return on this business. This methodology change has resulted in an increase in the underlying capital generation being recognised in Savings and Asset Management, with a corresponding reduction in Heritage underlying capital generation. The improvement in other underlying capital generation was driven by strong investment income on seed capital in the year.

Other operating capital generation included a £38 million positive impact from new hedges, corresponding with the negative impact of the run-off of equity hedges included in underlying capital generation.

Heritage

In the Heritage segment, the main sources of earnings are the shareholders' share of returns from traditional with-profits business and profit from shareholder annuities. Both of these books are closed to new customers, but have long run-off profiles and are expected to provide a stable and predictable source of earnings for a number of years in normal financial market conditions.

Assets under management and administration and net client flows

AUMA in the traditional Heritage with-profits business was broadly flat at £84.8 billion (2018: £84.6 billion), reflecting the strong investment performance of the With-Profits Fund, offset by net client outflows of £5.1 billion (2018: £5.3 billion net outflow) as customers accessed their savings and investments.

AUMA in the annuity book grew to £35.5 billion (2018: £24.9 billion), primarily reflecting the inclusion of the reinsurance assets from Rothesay Life plc. These assets were held for sale prior to the High Court's decision not to sanction the Part VII transfer of the policyholder liabilities to Rothesay Life plc, and so were excluded from AUMA in 2018. Net client outflows in the shareholder annuity business were £2.1 billion (2018: £1.3 billion net outflow).

Adjusted operating profit before tax

The following table shows an analysis of adjusted operating profit before tax:

£m	2019	2018
Fee based revenues	96	96
Annuity margin	458	1,129
With-profits shareholder transfer net of hedging gains/(losses)	187	201
Adjusted operating income	741	1,426
Adjusted operating expenses	(87)	(125)
Other shareholder profit/(loss)	98	(136)
Adjusted operating profit before tax	752	1,165

The earnings generated from the shareholder transfer remained broadly stable at £251 million (2018: £253 million), before taking account of the fair value losses on the derivative instruments used to mitigate the equity risk to shareholders of £64 million (2018: £52 million loss).

The following table provides further analysis of the annuity margin:

​£m	2019	2018
Return on excess assets and margin release	216	251
Asset trading and other optimisation	110	113​
Longevity assumption changes	126	441
Amounts related to the thematic review of annuity sales practices	(24)	166​
Other	30	158​
Annuity margin	458​	1,129​

Recurring sources of earnings from the annuity book, primarily the return on assets held to back capital requirements and the release of the margins in respect of credit risk, mortality and expenses, decreased by 14% to £216 million (2018: £251 million). The decrease was mainly due to lower excess assets of the annuity portfolio following special dividend from PAC and decreasing bond yields during the year.

The incremental contribution from management actions, assumption changes, and other impacts for this business was lower than 2018. In 2019 we delivered £110 million of adjusted operating profit before tax from annuity asset trading, and a £126 million positive impact from updating the longevity assumptions from CMI16 to CMI17. The 'Other' category included a beneficial impact due to the release of short-term credit default reserves during the year.

In September 2019, the Group was fined £24 million by the FCA in respect of the thematic review of annuity sales practices. This review is now largely complete. In 2018 we had a £166 million recovery from our insurers in relation to the thematic review.

Adjusted operating expenses included a £29 million one-off benefit resulting from agreed changes to the Scottish Amicable Staff defined benefit pension scheme. Other shareholder profit/(loss) in 2019 primarily related to insurance reserve releases, as we complete the reviews of a number of legacy remediation programmes. The prior year included the cost of the provision in respect of equalising guaranteed minimum pensions of £55 million, and £34 million in respect of a one-off shareholder contribution to the with-profits corporate pension business.

The following table shows adjusted operating profit before tax split by source of earnings:

£m	2019	2018
With-profits	187	201
Shareholder annuities	458	1,129
Other	107	(165)
Adjusted operating profit before tax	752	1,165

Capital generation

The following table shows an analysis of operating capital generation:

​£m	2019		2018
With-profits underlying capital generation	71		152
Shareholder annuity and other underlying capital generation	388		371
Underlying capital generation	459		523
Model improvements	142		207
Assumption changes	207		511
Management actions	167		330
Other incl experience variances	1		(153	)
Other operating capital generation	517		895
Operating capital generation	976		1,418

Heritage with-profits generated underlying capital of £71 million (2018: £152 million), driven by the expected growth under real world return assumptions. This amount included the negative impact from the run-off of the equity hedge of £42 million, which was offset by a capital benefit of the same amount from new equity hedges, included in other operating capital generation. Underlying capital generation also benefitted from the enhancement of the methodology for with-profits capital generation explained in the Savings and Asset Management section of this report.

Similarly, there continued to be significant capital generation from the shareholder annuity and other business, with underlying capital generation of £388 million (2018: £371 million). Underlying capital generation of annuities is driven by the expected returns on assets backing the capital requirements, and the release of credit reserves and Solvency Capital Requirements. These provide a stable source of capital generation as the business runs-off.

Other operating capital generation was lower at £517 million (2018: £895 million), mainly due to the impact of management actions and assumption changes, which were higher in 2018 than 2019. There were still significant benefits arising in 2019, including reserve releases emerging from longevity assumption changes of £105 million, expense assumption changes of £88 million, model improvements of £142 million, and annuity asset trading of £171 million. These benefits were offset by the £24 million fine from the FCA relating to its review of past annuity sales practices, and a £44 million increase in the Solvency Capital Requirement, due to increased equity exposures within the With-Profits Fund.

Supplementary information

Alternative performance measures

Overview of the Group's key performance measures

The Group measures its financial performance using a number of key performance measures ("KPM"). Two of these measures, referred to as alternative performance measures ("APM"), are derived from the financial statements prepared in accordance with the IFRS financial reporting framework or the Solvency II requirements, but are not defined under IFRS or Solvency II. The APMs are used to complement and not to substitute the disclosures prepared in accordance with IFRS and Solvency II, and provide additional information on the long-term performance of the Group.

All information included in this section is unaudited.

The Group's KPMs are summarised below, along with which of these measures are considered APMs by the Group. All of the measures in this section are presented on a continuing operations basis.

Key performance measure	Type	Definition
Adjusted operating profit before tax	APM, KPM	Adjusted operating profit before tax is the Group's non-GAAP alternative performance measure, which complements IFRS total profit before tax.   Certain adjustments that are considered to be non-recurring or strategic, or due to short-term movements not reflective of longer-term performance are made to IFRS profit before tax, including adjustments in respect of short-term fluctuations in investment returns, costs associated with fundamental one-off Group-wide restructuring and transformation, profits or losses arising on corporate transactions and profit/(loss) before tax from discontinued operations.   The adjusted operating profit methodology is described in the ''Adjusted operating profit'' section, along with a reconciliation of total IFRS profit before tax to adjusted operating profit before tax.
Net client flows	KPM	Net client flows represent gross inflows less gross outflows. Gross inflows are new funds from clients and customers. Gross outflows are money withdrawn by clients and customers during the period.
Assets under management and/or administration (AUMA)	KPM	Closing AUMA represents the total market value of all financial assets managed and/or administered on behalf of customers at the end of each financial period.
Shareholder Solvency II coverage ratio	APM, KPM	The regulatory Solvency II capital position considers the Group's overall own funds and Solvency Capital Requirements (''SCR'').   The shareholder Solvency II coverage ratio is the ratio of own funds to SCR, excluding the contribution to own funds and SCR from the Group's ring-fenced With-Profits Fund.   The shareholder Solvency II coverage ratio is described in the ''Solvency II capital position'' section.
Total capital generation	KPM	Surplus capital is the amount by which own funds exceed SCR under Solvency II. Total capital generation is the total change in Solvency II surplus capital before dividends and capital movements and capital generated from discontinued operations.
Operating capital generation	KPM	Operating capital generation is the total capital generation before tax, adjusted to exclude market movements relative to those expected under long-term assumptions and to remove other non-recurring items, including shareholder restructuring and other costs.

Adjusted operating profit before tax

Adjusted operating profit before tax is the Group's non-GAAP alternative performance measure. In determining the adjusted operating profit before tax of the Group, certain adjustments that are considered to be non-recurring or strategic, or due to short-term movements, are made to IFRS profit before tax. These include adjustments in respect of short-term fluctuations in investment returns, costs associated with fundamental one-off Group-wide restructuring and transformation, and profits or losses arising on corporate transactions and profit/(loss) before tax from discontinued operations. Adjusted operating profit before tax is used by the Group for key decision-making and the internal performance management of its operating segments. The Group considers adjusted operating profit before tax to be more representative of the long-term performance of the business, as it is less affected by one-time impacts. It therefore enhances comparability from period to period.

For the Group's fee based business, adjusted operating profit before tax includes fees received from customers and operating costs for the business including overheads, expenses incurred to meet regulatory requirements and regular business development and restructuring and other costs. Costs associated with fundamental one-off Group-wide restructuring and transformation are not included in adjusted operating profit before tax.

For the Group's business written in the With-Profits Fund, adjusted operating profit before tax includes the statutory transfer to shareholders gross of attributable shareholder tax. Derivative instruments are held to mitigate the risk to the shareholder of lower future shareholder transfers, and can be separated into two types:

i.          Cash flow hedges: those instruments that are held to mitigate volatility in the Group's IFRS results by being explicitly matched to the expected future shareholder transfers.

ii.        Capital hedges: instruments that hedge the economic present value of shareholder transfers on a Solvency II basis, to optimise the capital position, with no direct link to IFRS profits.

The realised gains or losses on the cash flow hedges are allocated to adjusted operating profit before tax in line with emergence of the corresponding shareholder transfer within IFRS profit. Any short-term temporary movements in the fair value of these instruments, not relating to the current year's shareholder transfer, are excluded from adjusted operating profit before tax. As the capital hedges do not explicitly hedge future IFRS profits, all movements in the fair value of these instruments are excluded from adjusted operating profit before tax.

For the Group's shareholder annuity products written by the Heritage segment, adjusted operating profit before tax excludes impacts that are the result of credit experience variance relative to assumptions, including the impact of credit risk provisioning for actual upgrades and downgrades during the period, and the impact of defaults and other similar experience such as asset exchanges arising from debt restructuring. Total realised and unrealised fair value movements on surplus assets backing the shareholder annuity capital are also excluded from the adjusted operating profit before tax.

Certain additional items are excluded from adjusted operating profit before tax where those items are considered to be non-recurring or strategic, or considered to be one-off, due to their size or nature, and therefore not indicative of the long-term operating performance of the Group, including profits or losses arising on corporate transactions and discontinued operations.

The key adjustments made to total profit before tax to derive adjusted operating profit before tax are shown below:

-         Short-term fluctuations in investment returns: the adjustment to remove short-term fluctuations in investment returns from adjusted operating profit before tax represents the:

i.          difference between the assumed long-term investment return used to determine adjusted operating profit before tax for  shareholder annuity and non-linked products and the short-term, unrealised market movements on these products; and

ii.        short-term, temporary movements in the fair value of instruments held to mitigate equity risk in the with-profits shareholder transfer.

-         Profit/loss on corporate transactions: the profit or loss arising on the purchase or sale of a subsidiary, joint venture, associate or significant line of business is excluded from adjusted operating profit.

-         Restructuring and other costs: these costs primarily reflect the shareholder allocation of costs associated with the merger, transformation, rebranding and other change in control costs representing fundamental one-off Group-wide restructuring and transformation and are therefore excluded from adjusted operating profit before tax.

-         Certain significant one-off items: items are excluded from adjusted operating profit before tax where those items are considered to be non-recurring or strategic, or considered to be one-off, due to their size or nature, and therefore not indicative of the long-term operating performance of the Group. Such items will be considered on a case-by-case basis.

-         Profit/(loss) before tax from discontinued operations: the profit and loss arising on those operations considered to be discontinued.

A reconciliation of IFRS total profit after tax to adjusted operating profit before tax is outlined in Section (iii).

(i) Adjusted operating profit before tax by segment

	For the year ended 31 December
	Savings and Asset Management				Heritage				Corporate Centre				Total
Adjusted operating profit before tax by segment	2019		2018		2019		2018		2019		2018		2019		2018
	£m		£m		£m		£m		£m		£m		£m		£m
Fee based revenue	1,191		1,258		96		96		-		-		1,287		1,354
Annuity margin	-		-		458		1,129		-		-		458		1,129
With-profits shareholder transfer net of hedging gains/(losses)	55		54		187		201		-		-		242		255
Total adjusted operating income	1,246		1,312		741		1,426		-		-		1,987		2,738
Adjusted operating expenses	(817	)	(779	)	(87	)	(125	)	(59	)	(13	)	(963	)	(917	)
Other shareholder gain/(loss)	30		(81	)	98		(136	)	(18	)	1		110		(216	)
Share of associates' and joint ventures' adjusted operating profit before tax1	15		16		-		-		-		-		15		16
Adjusted operating profit/(loss) before tax	474		468		752		1,165		(77	)	(12	)	1,149		1,621

¹ Excludes adjusted operating profit before tax from joint ventures in the With-Profits Fund.

 

Each reportable segment reports adjusted operating income as its measure of revenue. Fee based revenues and other income primarily represents asset management charges, transactional charges and annual management charges on unit-linked business. The annuity margin reflects the margin earned on annuity business and includes net earned premiums, claims and benefits paid, net investment return for assets backing the liabilities, net investment income for surplus assets backing the annuity capital, actuarial reserving changes, investment management expenses and administrative expenses. The with-profits shareholder transfer reflects the statutory transfer gross of attributable tax, net of hedging gains.

Adjusted operating expenses includes shareholders' operating expenses incurred outside the annuity and with-profits portfolios. Other net shareholder expenses include non-recurring costs, movements in provisions that are an expense to the shareholder and shareholder investment return earned outside the annuity portfolio.

Share of profit from joint ventures and associates represents the Group's share of the operating profits of Prudential Portfolio Managers South Africa (PTY) Limited, which is accounted for under the equity method.

 

(ii) Adjusted operating profit before tax by source	For the year ended 31 December
Adjusted operating profit before tax by source	2019		2018
	£m		£m
Savings and Asset Management:
Asset Management	381		473
With-profits	55		54
Other	38		(59	)
Total Savings and Asset Management	474		468
Heritage:
With-profits	187		201
Shareholder annuities	458		1,129
Other	107		(165	)
Total Heritage	752		1,165
Corporate Centre	(77	)	(12	)
Adjusted operating profit before tax	1,149		1,621

Adjusted operating profit before tax arising from shareholder annuities is further analysed in the table below.

	For the year ended 31 December
Breakdown of contribution from shareholder annuities to adjusted operating profit before tax	2019		2018
	£m		£m
Return on excess assets and margin release	216		251
Asset trading and other optimisation	110		113
Longevity assumption changes	126		441
Amounts relating to the thematic review of annuity sales practices	(24	)	166
Other (see table below for breakdown)	30		158
Shareholder annuities	458		1,129

 

	For the year ended 31 December
Breakdown of other contribution from shareholder annuities to adjusted operating profit before tax	2019		2018
	£m		£m
Mismatching profits/(losses)	55		(33	)
Other assumption and model improvements	32		164
Experience variances	4		6
Other provisions and reserves	(61	)	21
Other contribution	30		158

Mismatching profits/losses relates to short-term mismatches between the value of annuity liabilities and the long-term assets backing these liabilities due to the impact of market movements.

Other assumptions and model improvements include assumption changes other than those relating to longevity, the most significant of which are changes to the short-term credit allowance, the impact of expense assumption changes, and the impact of model improvements. In 2018 this item also includes an asset yield benefit from the retention of certain property assets following the reinsurance of part of the annuity portfolio to Rothesay Life plc.

	For the year ended 31 December
Breakdown of other Savings and Asset Management adjusted operating profit	2019		2018
	£m		£m
International business	42		(31	)
Investment income	25		(17	)
Other	(29	)	(11	)
Other Savings and Asset Management	38		(59	)

International business includes our share of profits from our asset management associate in South Africa and profits from our European savings businesses. 2018 includes a £56m one-off cost related to the development of our business in Poland in 2018.

Investment income includes income arising in Asset Management, primarily in respect of seed capital investments.

(iii) Reconciliation of adjusted operating profit before tax IFRS profit after tax from continuing operations

	For the year ended 31 December
	2019		2018
	£m		£m
Adjusted operating profit before tax	1,149		1,621
Short-term fluctuations in investment returns	298		(3	)
Profit/(loss) on disposal of business and corporate transactions	53		(508	)
Restructuring and other costs	(198	)	(109	)
IFRS profit attributable to non-controlling interests	3		2
IFRS profit before tax attributable to equity holders from continuing operations	1,305		1,003
Tax from continuing operations	(240	)	(192	)
IFRS profit after tax attributable to equity holders from continuing operations	1,065		811

 

 

(iv) Reconciliation of adjusted operating profit before tax by segment to adjusted operating profit before tax by source

	Savings and asset management						Heritage						Corporate Centre
For the year ended 31 December 2019	Asset Management		With-profits		Other		Annuities		With-profits		Other		Other
£m
Asset Management fee based revenues	1,033		-		-		-		-		-		-
Other fee based revenues	-		-		158		-		-		96		-
Fee based revenues	1,033		-		158		-		-		96		-
Annuity margin	-		-		-		458		-		-		-
With-profits shareholder transfer net of hedging gains/(losses)	-		55		-		-		187		-		-
Adjusted operating income	1,033		55		158		458		187		96		-
Asset Management operating expenses	(652	)	-		-		-		-		-		-
Other operating expenses	-		-		(165	)	-		-		(87	)	(59	)
Adjusted operating expenses	(652	)	-		(165	)	-		-		(87	)	(59	)
Other shareholder profit/(loss)	-		-		30		-		-		98		(18	)
Share of associates and joint ventures operating profit before tax	-		-		15		-		-		-		-
Adjusted operating profit before tax	381		55		38		458		187		107		(77	)

 

 

 

 

 

 

 

 

	Savings and asset management						Heritage						Corporate Centre
For the year ended 31 December 2018	Asset Management		With-profits		Other		Annuities		With-profits		Other		Other
£m
Asset Management fee based revenues	1,113		-		-		-		-		-		-
Other fee based revenues	-		-		145		-		-		96		-
Fee based revenues	1,113		-		145		-		-		96		-
Annuity margin	-		-		-		1,129		-		-		-
With-profits shareholder transfer net of hedging gains/(losses)	-		54		-		-		201		-		-
Adjusted operating income	1,113		54		145		1,129		201		96		-
Asset Management operating expenses	(640	)	-		-		-		-		-		-
Other operating expenses	-		-		(139	)	-		-		(125	)	(13	)
Adjusted operating expenses	(640	)	-		(139	)	-		-		(125	)	(13	)
Other shareholder profit/(loss)	-		-		(81	)	-		-		(136	)	1
Share of associates and joint ventures operating profit before tax	-		-		16		-		-		-		-
Adjusted operating profit before tax	473		54		(59	)	1,129		201		(165	)	(12	)

 

Assets under management and administration (AUMA) and net client flows

AUMA is a key indicator of the scale of the business and  demonstrates the potential earnings from investments return and fee income. Closing AUMA is representative of the total market value of all financial assets managed and/or administered on behalf of customers at the end of each financial period.

Net client flows is an indicator of the Group's growth and its ability to attract and retain customer investments to its products and funds.

(i) Detailed AUMA and net client flows

	For the year ended 31 December 2019
	At 31 December 2018		Gross inflows		Gross outflows		Net client flows		Market/Other movements		At 31 December 2019
	£bn		£bn		£bn		£bn		£bn		£bn
Institutional Asset Management	70.5		10.7		(10.8	)	(0.1	)	6.4		76.8
Retail Asset Management	76.4		21.2		(28.6	)	(7.4	)	5.9		74.9
Retail Savings	50.6		11.0		(4.8	)	6.2		6.7		63.5
of which: PruFund	43.0		10.2		(3.8	)	6.4		4.4		53.8
Other	0.2		-		-		-		0.5		0.7
Total Savings and Asset Management	197.7		42.9		(44.2	)	(1.3	)	19.5		215.9
Shareholder annuities	24.9		0.2		(2.3	)	(2.1	)	12.7		35.5
Traditional with-profits	84.6		0.6		(5.7	)	(5.1	)	5.3		84.8
Other	14.0		(0.2	)	(0.2	)	(0.4	)	0.1		13.7
Total Heritage	123.5		0.6		(8.2	)	(7.6	)	18.1		134.0
Corporate assets	-		-		-		-		1.6		1.6
Group total	321.2		43.5		(52.4	)	(8.9	)	39.2		351.5

 

 

 

 

 

 

 

 

 

	For the year ended 31 December 2018
	At 31 December 2017		Gross inflows		Gross outflows		Net client flows		Market/Other movements		At 31 December 2018
	£bn		£bn		£bn		£bn		£bn		£bn
Institutional Asset Management	73.6		11.2		(13.6	)	(2.4	)	(0.7	)	70.5
Retail Asset Management	90.3		26.3		(33.8	)	(7.5	)	(6.4	)	76.4
Retail Savings	44.0		12.3		(4.1	)	8.2		(1.6	)	50.6
of which: PruFund	35.9		12.0		(3.5	)	8.5		(1.4	)	43.0
Other	0.2		-		-		-		-		0.2
Total Savings and Asset Management	208.1		49.8		(51.5	)	(1.7	)	(8.7	)	197.7
Shareholder annuities	39.1		(0.7	)	(0.6	)	(1.3	)	(12.9	)	24.9
Traditional with-profits	91.4		0.5		(5.8	)	(5.3	)	(1.5	)	84.6
Other	12.1		(0.1	)	(0.3	)	(0.4	)	2.3		14.0
Total Heritage	142.6		(0.3	)	(6.7	)	(7.0	)	(12.1	)	123.5
Corporate assets	-		-		-		-		-		-
Group total	350.7		49.5		(58.2	)	(8.7	)	(20.8	)	321.2

(ii) AUMA by asset class

	For the year ended 31 December 2019
	On balance sheet AUMA										External AUMA						Total
	With-profits		Unit-linked		Shareholder-backed annuities and other long-term business		Corporate assets		Total on balance sheet AUMA		Retail		Institutional		Total external AUMA		Total AUMA
	£bn		£bn		£bn		£bn		£bn		£bn		£bn		£bn		£bn
Equities	56		11		-		-		67		32		2		34		101
Public fixed income	46		3		20		1		70		38		36		74		144
of which Government	8		1		6		1		16		18		15		33		49
of which Corporate	38		2		14		-		54		20		21		41		95
Private fixed income	5		-		3		-		8		1		19		20		28
Real estate	11		1		1		-		13		2		12		14		27
Alternatives	9		-		(1	)	-		8		-		3		3		11
Other	16		1		14		1		32		2		5		7		39
Other assets under administration	-		-		-		-		-		-		-		-		2
Total	143		16		37		2		198		75		77		152		352

 

	For the year ended 31 December 2018
	On balance sheet AUMA										External AUMA						Total
	With-profits		Unit-linked		Shareholder-backed annuities and other long-term business		Corporate assets		Total on balance sheet AUMA		Retail		Institutional		Total external AUMA		Total AUMA
	£bn		£bn		£bn		£bn		£bn		£bn		£bn		£bn		£bn
Equities	41		10		-		-		51		27		1		28		79
Public fixed income	48		7		21		-		76		44		45		89		165
of which Government	10		1		7		-		18		20		26		46		64
of which Corporate	38		6		14		-		58		24		19		43		101
Private fixed income	9		1		3		-		13		-		11		11		24
Real estate	16		-		2		-		18		2		9		11		29
Alternatives	8		-		-		-		8		-		2		2		10
Other	9		(1	)	-		-		8		3		3		6		14
Other assets under administration	-		-		-		-		-		-		-		-		-
Total	131		17		26		-		174		76		71		147		321

 

 (iii) AUMA by geography

	For the year ended 31 December
	2019		2018
	£bn		£bn
UK	288		261
Europe	49		49
Asia-Pacific	8		4
Middle East and Africa	6		6
Americas	1		1
Total AUMA	352		321

 

AUMA by geography is based on the country of the underlying client.

Solvency II capital position

Solvency II overview

The Group is supervised as an insurance group by the Prudential Regulation Authority. Individual insurance undertakings within the Group are also subject to the supervision of the Prudential Regulation Authority (or other EU competent authorities) on a solo basis under the Solvency II regime.

The Solvency II surplus represents the aggregated capital (own funds) held by the Group less the Solvency Capital Requirement (''SCR''). Own funds is the Solvency II measure of capital available to meet losses, and is based on the assets less liabilities of the Group, subject to certain restrictions and adjustments. The SCR is calculated using the Group's internal model, which calculates the SCR as the 99.5th percentile (or 1-in-200) worst outcome over the coming year, out of 100,000 equally likely scenarios, allowing for the dependency between the risks the business is exposed to.

Basis of preparation for comparative Solvency II information

As the Group was not a regulated insurance group prior to the demerger date, the capital position and accompanying information as at 31 December 2018 have been prepared on an illustrative basis, starting from the IFRS consolidated statement of financial position. In particular, merger accounting principles have been applied as described in Note 1.1 to the IFRS financial information. This means that Prudential Capital Holdings Limited and its subsidiaries, and 10FA India Private Limited (formerly known as Prudential Global Services Private Limited) have been presented as if the entities had been part of the Group from 1 January 2018. Prudential Vietnam Finance Company has also been included within the Solvency II results as at 31 December 2018. As the Hong Kong subsidiaries were disposed prior to the 31 December 2018, these subsidiaries are not included in the results.

Estimated and unaudited reconciliation of IFRS shareholders' equity to Group Solvency II own funds

	As at 31 December
	2019		2018
	£bn		£bn
IFRS shareholders' equity	5.1		8.9
Add back unallocated surplus of the With-Profits Fund	16.1		13.4
Deduct goodwill and intangible assets	(1.3	)	(1.3	)
Net impact of valuing policyholder liabilities and reinsurance assets on Solvency II basis	0.3		0.1
Impact of introducing Solvency II risk margin (net of transitional measures)	(1.5	)	(1.7	)
Fair value assets and liabilities not held at fair value under IFRS	(0.1	)	-
Other	0.1		-
Solvency II excess of assets over liabilities	18.7		19.4
Subordinated debt capital	3.8		-
Ring-fenced fund restrictions	(7.6	)	(5.5	)
Solvency II eligible own funds	14.9		13.9

The key items in the reconciliation are explained below:

-         Unallocated surplus of the With-Profits Fund: this amount is treated as a liability under IFRS, but considered surplus assets under Solvency II.

-         Goodwill and intangible assets: these assets are not recognised under Solvency II as they are not readily available to meet emerging losses.

-         Policyholder liability and reinsurance asset valuation differences: there are significant differences in the valuation of technical provisions between IFRS and Solvency II. The most material differences relate to the exclusion of prudent margins in longevity assumptions under Solvency II, and also the use of different discount rates, both in relation to the valuation of annuity liabilities.

-         Solvency II risk margin (net of transitional measures): the risk margin is a significant component of technical provisions required to be held under Solvency II. These additional requirements are partially mitigated by transitional measures which allow the impact to be gradually introduced over a period of 16 years from the introduction of Solvency II on 1 January 2016.

-         Subordinated debt capital: subordinated debt is treated as a liability in the IFRS financial statements and in determining the excess of assets over liabilities in the Solvency II balance sheet. However, for Solvency II own funds, the debt can be treated as capital.

-         Ring-fenced fund restrictions: any excess of the own funds over the solvency capital requirements from the With-Profits Fund is restricted as these amounts are not available to meet losses elsewhere in the Group.

Composition of own funds

The Group's total estimated and unaudited own funds are analysed by Tier as follows:	As at 31 December
	2019		2018
	£bn		£bn
Tier 1 (unrestricted)	11.1		13.9
Tier 1 (restricted)	-		-
Tier 2	3.8		-
Tier 3	-		-
Total own funds	14.9		13.9

The Group's Tier 2 capital consists of subordinated debt instruments. The terms of these instruments allow them to be treated as capital for the purposes of Solvency II. The instruments were originally issued by Prudential plc, and subsequently substituted to the parent company, as permitted under the terms and conditions of each applicable instrument, prior to demerger. The details of the Group's subordinated liabilities are shown in Note 11. The Solvency II value of the debt differs to the IFRS carrying value due to a different basis of measurement on the respective balance sheets.

Estimated and unaudited shareholder view of the Solvency II capital position

The Group focuses on a shareholder view of the Solvency II capital position, which is considered to provide a more relevant reflection of the capital strength of the Group.

The estimated and unaudited shareholder Solvency II capital position for the Group as at 31 December 2019 and 31 December 2018 is shown below:

	As at 31 December
	2019		2018
	£bn		£bn
Shareholder Solvency II own funds	10.3		9.7
Shareholder Solvency II SCR	(5.8)		(5.7)
Solvency II surplus	4.5		4.0
Shareholder Solvency II coverage ratio1	176	%	170	%

¹Shareholder Solvency II coverage ratio has been calculated using unrounded figures.

 

The Group's shareholder Solvency II capital position excludes the contribution to own funds and SCR from the ring-fenced With-Profits Fund. Further information on the ring-fenced With-Profits Fund's capital position is provided in the ''Estimated and unaudited With-Profits Fund view of the Solvency II capital position'' section.

In accordance with the Solvency II requirements, these results include:

-         A Solvency Capital Requirement which has been calculated using the Group's internal model. The Group received approval from the Prudential Regulation Authority prior to demerger to amend the existing internal model to apply at the level of the Group, rather than at the level of Prudential plc group.

-         Transitional measures, which have been recalculated using management's estimate of the impact of operating and market conditions at the valuation date. The recalculated transitional measures align to the regulatory position as at 31 December 2019 and will therefore be reflected in the formal regulatory Quantitative Reporting Templates and Group SFCR.

-         A matching adjustment for non-profit annuities, based on approval from the Prudential Regulation Authority and calibrations published by the European Insurance and Occupational Pensions Authority.

-         M&G Group Limited and other undertakings carrying out financial activities consolidated under local sectoral or notional sectoral capital requirements.

Breakdown of the shareholder Solvency II SCR by risk type	As at 31 December
	2019
Group shareholder undiversified risk capital	£bn
Equity	1.4
Property	0.9
Interest rate	0.4
Credit	3.8
Currency	0.8
Longevity	1.6
Lapse	0.2
Operational and expense	1.5
Sectoral1	0.5
Total undiversified	11.1
Diversification, deferred tax, and other	(5.3	)
Shareholder SCR	5.8

¹Includes entities included within the Group's Solvency II capital position on a sectoral or notional sectoral basis, the most material of which is M&G Group Limited.

Sensitivity analysis of the shareholder Solvency II coverage ratio

The estimated sensitivity of the Group's shareholder Solvency II coverage ratio to significant changes in market conditions are shown below. All sensitivities are presented after an assumed recalculation of transitional measures on technical provisions.

	As at 31 December
	2019
Base shareholder Solvency II coverage ratio	176	%
20% instantaneous fall in equity markets	170	%
50 bp reduction in interest rates	170	%
100 bp widening in credit spreads	172	%
20% credit asset downgrade1	170	%

¹Average impact of one full letter downgrade across 20% of assets exposed to credit risk.

 

Estimated and unaudited With-Profits Fund view of the Solvency II capital position

The With-Profits Fund view of the Solvency II capital position represents the standalone capital strength of the Group's ring-fenced With-Profits Fund. This view of Solvency II capital takes into account the assets, liabilities, and risk exposures within the ring-fenced With-Profits Fund, which includes the WPSF, SAIF and DCPSF.

The estimated and unaudited Solvency II capital position for the Group under the With-Profits Fund view as at 31 December 2019 and 31 December 2018 is shown below:

	As at 31 December
	2019		2018
	£bn		£bn
With-Profits Fund Solvency II own funds	12.2		9.7
With-Profits Fund Solvency II SCR	(4.6)		(4.2)
With-Profits Fund Solvency II surplus1	7.6		5.5
With-Profits Fund Solvency II coverage ratio	267	%	231	%

¹With-Profits Fund Solvency II coverage ratio has been calculated using unrounded figures.

 

 

 

 

 

 

 

The estimated and unaudited Solvency II capital position for the Group under the 'regulatory' view as at 31 December 2019 and 31 December 2018 is shown below:

	As at 31 December
	2019		2018
	£bn		£bn
Solvency II own funds	14.9		13.9
Solvency II SCR	(10.4)		(9.9)
Solvency II surplus	4.5		4.0
Solvency II coverage ratio1	143	%	141	%

¹Solvency II coverage ratio has been calculated using unrounded figures.

Capital generation (estimated and unaudited)

The level of surplus capital is an important financial consideration for the Group. Capital generation measures the change in surplus capital during the reporting period, and is therefore considered a key measure for the Group. It is integral to the running and monitoring of the business, capital allocation and investment decisions, and ultimately the Group's dividend policy.

The overall change in Solvency II surplus capital over the period is analysed as follows:

Total capital generation is the total change in Solvency II surplus capital before dividends and capital movements, and capital generated from discontinued operations.

Operating capital generation is the total capital generation before tax, adjusted to exclude market movements relative to those expected under long-term assumptions and to remove other non-recurring items, including shareholder restructuring and other costs as defined under adjusted operating profit before tax. It has two components:

a.         Underlying capital generation, which includes: the underlying expected surplus capital from the in-force life insurance business; the change in surplus capital as a result of writing new life insurance business; the adjusted operating profit before tax and associated capital movements from Asset Management; and other items including head office expenses and debt interest costs.

b.        Other operating capital generation, which includes non-market related experience variances, assumption changes, modelling changes and other movements.

The expected surplus capital from the in-force life insurance business is calculated on the assumption of real-world investment returns, which are determined by reference to the risk-free rate plus a risk premium based on the mix of assets held for the relevant business. For with-profits business, the assumed average return was 4.28% for the year ended 31 December 2019 and 4.25% for the year ended 31 December 2018. For annuity business, the assumed average return on assets backing capital was 2.44% for the year ended 31 December 2019 and 1.89% for the year ended 31 December 2018.

The Group's capital generation results in respect of the years ended 31 December 2019 and 31 December 2018 are shown below alongside a reconciliation of the total movement in the Group's Solvency II surplus. The reconciliation is presented showing the impact on the shareholder Solvency II own funds and SCR, which excludes the contribution to own funds and SCR from the Group's ring-fenced With-Profits Fund. The shareholder Solvency II capital position, and how this reconciles to the regulatory capital position, is described in detail in the previous section of this supplementary information.

The capital generation results and comparatives have adopted a basis of preparation consistent with the IFRS financial statements. In particular:

-         The reduction in the Group's own funds and SCR arising from the disposal of the Hong Kong subsidiaries has been included within capital generated from discontinued operations for the year ended 31 December 2018. This amount includes the loss of diversification with the remaining business.

-         The capital generated from the Prudential Vietnam Finance Company Limited for the year ended 31 December 2018, and the capital impact arising on disposal of this entity during 2019, have been reflected within capital generated from discontinued operations.

-         Merger accounting principles have been applied as described in Note 1.1, meaning that Prudential Capital Holdings Limited ("PruCap") and its subsidiaries, and 10FA India Private Limited (formerly known as Prudential Global Services Private Limited) have been included within the Group's capital generation results from 1 January 2018. The movements in capital attributable to the discontinued corporate treasury activity of PruCap has been included within capital generated from discontinued operations.

-         Total capital generation includes £923m of surplus capital generated from entering into a reinsurance arrangement with Rothesay Life plc in March 2018. This is included as a non-recurring item within ''Restructuring and other''. The impact was previously excluded from the capital generation results for the year ended 31 December 2018, as the business was classified as held for sale.

 

 

 

 

 

 

 

	For the year ended 31 December
	Savings and Asset Management				Heritage				Corporate Centre				Total
	2019		2018		2019		2018		2019		2018		2019		2018
	£m		£m		£m		£m		£m		£m		£m		£m
Underlying capital generation	442		389		459		523		(80	)	(12	)	821		900
Other operating capital generation	17		56		517		895		(79	)	(9	)	455		942
Operating capital generation	459		445		976		1,418		(159	)	(21	)	1,276		1,842
Market movements	n/a		n/a		n/a		n/a		n/a		n/a		538		12
Restructuring and other(i)	n/a		n/a		n/a		n/a		n/a		n/a		(133	)	814
Tax	n/a		n/a		n/a		n/a		n/a		n/a		(172	)	(299	)
Total capital generation	n/a		n/a		n/a		n/a		n/a		n/a		1,509		2,369

⁽ⁱ⁾Includes capital generation of £923m during 2018 in relation to the reinsurance transaction with Rothesay Life plc.

		For the year ended 31 December
		2019						2018
Reconciliation of movement in Group Solvency II surplus		Own funds(i)		SCR1		Surplus		Own funds1		SCR1		Surplus
		£m		£m		£m		£m		£m		£m
Underlying capital generation
Savings and Asset Management	Asset Management	381		(2	)	379		472		(75	)	397
	With-profits	130		(130	)	-		125		(150	)	(25	)
	-         of which: In-force	96		(35	)	61		50		(23	)	27
	-         of which: New business	34		(95	)	(61	)	75		(127	)	(52	)
	Other	65		(2	)	63		20		(3	)	17
	Savings  and Asset Management underlying capital generation	576		(134	)	442		617		(228	)	389
Heritage	With-profits	71		-		71		178		(26	)	152
	Shareholder annuity and other	255		133		388		220		151		371
	Heritage underlying capital generation	326		133		459		398		125		523
Corporate	Interest and head office cost2	(84	)	4		(80	)	(12	)	-		(12	)
Underlying capital generation		818		3		821		1,003		(103	)	900
Other operating capital generation
	Savings and Asset Management	1		16		17		(66	)	122		56
	Heritage	222		295		517		690		205		895
	Corporate Centre	17		(96	)	(79	)	(9	)	-		(9	)
Operating capital generation		1,058		218		1,276		1,618		224		1,842
	Market movements	983		(445	)	538		(391	)	403		12
	Restructuring and other3	(168	)	35		(133	)	(343	)	1,157		814
	Tax	(139	)	(33	)	(172	)	(225	)	(74	)	(299	)
Total capital generation		1,734		(225	)	1,509		659		1,710		2,369
Capital generation from discontinued operations		70		88		158		(4,882	)	1,044		(3,838	)
Total capital generation including discontinued operations		1,804		(137	)	1,667		(4,223	)	2,754		(1,469	)
Dividends and capital movements		(1,213	)	2		(1,211	)	(664	)	-		(664	)
Total increase/(decrease) in Solvency II surplus		591		(135	)	456		(4,887	)	2,754		(2,133	)

¹Own funds and SCR movements shown as per the shareholder Solvency II capital position, and do not include the own funds and SCR in respect of the ring-fenced With-Profits Fund.

²Underlying capital generated by the Corporate Centre is largely consistent with adjusted operating profit before tax with the exception of the valuation of financing costs resulting in a different impact on a Solvency II basis compared to IFRS.

³Includes capital generation of £923m during 2018 in relation to the reinsurance transaction with Rothesay Life plc.

 

Financial ratios (unaudited)

Included in this section are details of how some of the financial ratios used to help analyse the performance of the Savings and Asset Management business are calculated.

(i) Cost/income ratio for M&G Group Limited

Cost/income ratio is a measure of cost efficiency which analyses costs as a percentage of revenue.

	For the year ended 31 December
	2019		2018
	£m		£m
Total costs1	(652)		(640)
Total Revenue	1,031		1,086
Add:
Profit from associate	15		16
Performance fees and carried interest	27		15
Adjusted operating profit for M&G Group Limited	421		477
Cost/income ratio (%)	63	%	59%

¹ Costs exclude restructuring costs of £39m (2018:£52m).

Adjusted operating profit for M&G Group Limited is split as follows:

	For the year ended 31 December
	2019		2018
	£m		£m
Asset Management	380		473
Other	41		4
Adjusted operating profit for M&G Group Limited	421		477

(ii) Average fee margin

This represents the average fee revenue yield on fee business and demonstrates the margin being earned on the assets we manage or administer.

	For the year ended 31 December
	2019						2018
	Average AUMA1		Revenue		Revenue margin		Average AUMA1		Revenue		Revenue margin
	bn		£m		bps		bn		£m		bps
Retail Asset Management	102		584		57		116		695		60
Institutional Asset Management	165		429		26		162		404		25
Total Savings and Asset Management	267		1,013		38		278		1,099		40

¹ Average AUMA represents the average total market value of all financial assets managed and administered on behalf of customers during the financial period. Average AUMA is calculated using a 13-point average of monthly closing AUMA for full-year periods and seven-point average of monthly closing AUMA for half-year periods.