Group Chief Executive’s report

The adjusted IFRS operating profit based on longer-term investment returns (adjusted operating profit²) for 2019 from our continuing operations increased by 20 per cent on both a constant and actual exchange rate basis, reflecting the continued growth and resilience of our Asian businesses and the beneficial impact of strong 2019 capital returns on deferred acquisition cost amortisation in the US. The IFRS profit after tax from continuing operations was $1,953 million in 2019 (2018: $2,881 million on an actual exchange rate basis). This is after a $(380) million post-tax loss in Jackson, where accounting volatility continues to be expected given the economic nature of our hedging programme and the related accounting mismatches that exist.

Alongside our financial performance we have made significant investments, funded regionally and centrally. During 2019, this included the renewal of our regional strategic bancassurance alliance with United Overseas Bank Limited for an initial fee of $853 million, ($301 million of which was paid in 2019), entering into an exclusive bancassurance partnership with SeABank, our acquisition of 50.1 per cent of Thanachart Fund Management Co., Ltd for $142 million³ and a total investment of $619 million of free surplus in writing profitable new business in Asia, along with an investment of $539 million in free surplus in US new business.

Our Asian operations continued to drive our performance. The fast-growing markets of Asia offer long-term structural opportunities for us, with the region’s growing population having a clear and increasing need for the products we deliver. Insurance penetration in Asia is only 2.7 per cent of GDP, compared with 7.5 per cent in the UK⁴, while mutual fund penetration is just 12 per cent in Asia, compared with 96 per cent in the US⁵.

We have demonstrated the strength of our portfolio of businesses in the region by delivering double-digit growth in APE⁶ sales in six markets and in new business profit⁷ in eight, reinforcing the value of our diverse portfolio and demonstrating the breadth of earnings streams and new business spread in Asia.

Outside Hong Kong, we delivered a 17 per cent⁸ increase in APE⁶ sales and a 29 per cent⁸ rise in new business profit⁷. Within Hong Kong, our domestic business was resilient despite the effect of social unrest, with APE⁶ sales growing by 8 per cent⁸. Our domestic Hong Kong business has continued to expand and invest, driven by new health, protection and retirement solutions and supported by focused sales initiatives. Fewer visitors from mainland China caused a fall in total Hong Kong APE⁶ sales by 11 per cent⁸ and a fall in new business profit⁷ of 12 per cent⁸.

We have continued to accelerate our joint venture business in China, where APE⁶ sales over the year were 53 per cent⁸ higher, driving new business profit⁷ growth of 38 per cent⁸. We recently established a new branch in Shaanxi, our 20th in the country, and added seven cities and 14 sales and servicing offices. We are developing rapidly in a number of our other markets in the region, including Vietnam and the Philippines, where APE⁶ sales grew by 12 per cent⁸ and 34 per cent⁸ respectively and we are making good progress in Indonesia, where our sales grew by 23 per cent⁸ in the year including 41 per cent⁸ in the second half. Overall our Asia life businesses delivered 4 per cent⁸ growth in overall APE⁶ sales and a 2 per cent⁸ growth in overall new business profit⁷.

The benefits of our long held focus on writing high quality, recurring premium business, contributing to resilient and broad-based in-force growth are evident in the 12 per cent⁸ increase in renewal insurance premium⁹ and 14 per cent⁸ increase in adjusted operating profit², with double-digit growth⁸ in eight insurance markets including 24 per cent adjusted operating profit growth in Hong Kong and 20 per cent⁸ growth in mainland China.

At the same time, our Asian asset manager, Eastspring, has continued to grow well. Average assets under management were up by 15 per cent (on an actual exchange rate basis), while earnings were up by 18 per cent⁸ and net external inflows totalled $8.9 billion¹⁰. Eastspring is continuing to expand its footprint in the region, and in Dec acquired a controlling stake in one of Thailand’s leading asset managers, Thanachart Fund Management Co., Ltd, with the option to acquire the remaining equity in this business in due course.

We have broad and efficient channels in Asia, through both our agency force and our bank partners. During 2019, we continued to strengthen our network of bank partnerships, renewing and expanding our successful strategic alliance with United Overseas Bank in five markets across the region and signing two new partnership agreements in Vietnam.

We are continuing to deliver digital innovation to support our successful agency and bank channels. We are diversifying into new areas, including employee benefits insurance for both large and small employers in the region, and at the same time we are building new value-added services such as Pulse by Prudential, our new end-to-end digital health app.

We are continuing to make good progress in our newer markets in Africa. In 2019 we enhanced our growing scale in the region by acquiring a majority stake in a leading life insurer operating in Cameroon, Côte d’Ivoire and Togo, which have a combined population of more than 65 million. We now operate in eight markets in Africa with a total population of almost 400 million. In 2019, the Africa business delivered a 76 per cent⁸ increase in APE⁶ sales to $82 million (2018: $47 million).

In the US, our product innovation and distribution leave us well positioned to provide an ageing population with financial strategies for stable retirements. The US is the world’s largest retirement savings market¹¹, with approximately four million Americans reaching retirement age every year¹². This transition continues to trigger the unprecedented shift of trillions of dollars from savings accumulation to retirement income generation¹³.

We provide products that offer Americans the retirement strategies they need, including variable, fixed and fixed index annuities. Our diversified product approach has enabled us to deliver APE⁶ sales up 8 per cent, with increases in both fixed index and fixed annuity products. New business profit⁷ declined by 28 per cent, reflecting lower interest rates and changes in product mix.

In the US, we have one of the leading distribution teams¹⁴. We are agile and successful in launching well designed, customer-centric products, have successful risk management and hedge programmes, are investing in technology platforms and have award-winning customer service. We are continuing to work towards further diversification and growth, within a highly competitive industry.

Our US business has taken important steps in the delivery of its diversification strategy, announced with our half year results in August 2019, and has maintained a cautious approach to managing risk through its dynamic hedging programme. The financial results of the US business reflect the execution of this strategy. While adjusted operating profit² increased by 20 per cent to $3,070 million, the effects of strong US equity market performance and lower interest rates in the period led to a post-tax IFRS loss in the US of $(380) million. We continue to accept a degree of volatility in our IFRS results since our hedging programme is based on managing the economic risks in the business and protecting statutory solvency in the circumstances of large market movements. Further detail is provided in the Group Chief Financial Officer and Chief Operating Officer’s report.

We continue to monitor closely the development of the coronavirus outbreak. Our priority is the health and wellbeing for our customers and staff during this challenging time.

While the coronavirus outbreak has slowed down economic activity in the year to date and dampened our sales momentum in Hong Kong and China, we remain confident in the medium to long-term prospects of these economies and their respective insurance sectors. Our broad geographic spread across the region and the strength of our recurring premium business model lends considerable resilience to our earnings.

Given the impact of the coronavirus outbreak on travel and activity in the markets in which we operate, lower levels of new sales activity in those affected markets are to be expected. Our book of existing business is proving resilient and we are taking measures to manage the effect of lower activity while maintaining our investment in products, distribution and technology. Existing customers in both Hong Kong and mainland China continue to contribute to their policies, with premiums being paid through a broad range of remote payment facilities.

The longer-term structural drivers of growth in our Asia markets remain unchanged and compelling. The resilient and high quality nature of the IFRS operating earnings growth of our Asia business remains supported by the compounding nature of a highly enduring regular-premium income base and focus on health and protection products. These drivers, combined with the diversity of the Asia platform and quality of its execution, are expected to outweigh the effects of any one period’s new sales.

In the US, we have commenced preparations for a minority IPO of Jackson as our preferred route to introduce third party finance into Jackson. As previously announced, from 2020 Jackson’s remittances are expected to be more evenly spread over the calendar year than in prior periods.

The Group’s strategy remains focused on structural growth opportunities. The Group will prioritise the considerable attractive investment opportunities available when considering the deployment of capital and applying its progressive dividend policy.

Interest rates have declined materially in 2019 and are trending lower in 2020. Equity markets have been volatile and have declined in the current year to date from their peaks in Q4 2019. These market conditions, as well as the coronavirus outbreak, create headwinds in respect of near-term new business profit and IFRS fee-based and spread earnings. However, our performance in 2019 demonstrates that the opportunities we have identified are clear and long term and that we are addressing these opportunities well. We are continuing to deliver growth based on the strength of those opportunities, the diversification of our business and the resilience of our earnings. I am confident that, with our clear focus on our structural growth markets and our continuing operational improvements, we will continue to deliver profitable growth for our investors and benefits for our stakeholders over the medium and long term.