We held our 2020 Annual General Meeting on 14 May 2020. In light of the UK government’s measures to limit the spread of Covid-19 and to protect the health of Prudential’s shareholders and employees, the Board decided, with regret, that shareholders could not attend the AGM in person.

The Board regards the AGM as an important opportunity to engage with shareholders and therefore encouraged them to submit questions before the AGM. Those questions, and our responses, edited for length and clarity, can be found below.

We want to be transparent and open with all our stakeholders during this period. If you would like to find out more about our progress and our outlook, please see the transcript of our conference call for investors for our Business Update, held on 14 May 2020. You can listen again to the audio of the call here and watch a video from our Group Chief Executive Mike Wells here.

AGM questions and answers

Question: I was very disappointed with pages 34 and 35 of the Annual Report, where the CFO had to explain that hedges are accounted for differently in IFRS compared with the way the management regard the business. I was astonished to see on page 220 an analysis of this, whereby in Jackson the impact was a staggering $5.3bn.  Can I please ask:

  1. Is the analysis on pages 219/220 covered by the audit report, i.e. do the auditors agree that adjusted IFRS operating profit is $5.3bn (compared with $4.4bn in 2018)?
  2. Given the magnitude of the numbers, how can shareholders get assurance that the hedges are doing their job and protecting shareholder value?  How can we be sure this money has not actually been lost?
  3. When will the IFRS reported losses reverse, i.e. when do the hedges crystallise?

Answer: The analysis of performance by segment in note B1 forms part of the audited financial statements and KPMG issued an unmodified audit report on those financial statements. This can be found on pages 320 to 329 of the Annual Report.

Jackson’s hedging programme is focused on managing the economic risks in the business and protecting statutory solvency in the circumstance of large market movements. The hedging programme does not aim to hedge IFRS accounting results and this can lead to volatility in the IFRS results in periods of significant market movements, as was seen in 2019. In particular, while higher equity markets are expected to deliver ultimately increased profitability to Jackson through higher future fee income, this benefit is not fully recognised in the IFRS results in the short term. This contrasts with the impact on the derivatives within the hedging programme, designed to provide protection when markets fall, where rises in equity markets lead to short term losses in the IFRS results.

The Group choses to present adjusted operating profit in addition to IFRS profit as defined by the International Accounting Standards Board. This is because the Group’s business involves entering into long-term contracts with customers, and hence the Group manages its associated assets and liabilities over a longer-term time horizon. This enables the Group to manage a degree of short-term market volatility. Therefore, adjusted operating profit based on longer-term investment returns gives a more relevant measure of the performance of the business.

 

Question: If Jackson accounts are prepared under IFRS and so are distorted by these reported losses, how can the IPO proceed at an appropriate value?

Answer: The Group remains focused on its strategic priorities, including to enable our investors to benefit to the fullest extent from the opportunity presented by our business in Asia.  As previously disclosed, we continue to prepare for a Jackson minority IPO alongside active evaluation of other options with respect to creating an independent Jackson. As a result of these preparations, we are in an SEC-mandated quiet period, and we cannot provide comment beyond what is in the business update for the 2020 Annual General Meeting. We will provide an update on our progress at the Group’s Half Year 2020 Results in August.

 

Question: I note on page 333 the EEV results are heavily distorted by “Impact on NAIC reform, hedge modelling and other related changes in the US”.  How does this impact the value of the Jackson IPO?  

Answer: During 2019, following the implementation of the NAIC’s changes to the US statutory reserve and capital framework, enhancements were made to the model used to allow for hedging within US statutory reporting. As a consequence, the Group chose to utilise the model for its EEV reporting to update its allowance for the long-term cost of hedging, resulting in a $(3,233) million reduction in Jackson’s EEV at the start of the year. This is a one-off impact. It should be noted that EEV is dependent on the economic and other assumptions used to determine that EEV amount and so the absolute value of EEV will vary period to period as those economic assumptions are updated.  Sensitivities to economic assumptions are set out in note 13 to the EEV financial statements.

As a result of the IPO preparations, we are in an SEC-mandated quiet period, and we cannot comment beyond what is in the business update for the 2020 Annual General Meeting. We will provide an update on our progress at the Group’s Half Year 2020 Results in August.

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