AKG Financial Strength Assessment Report · 2020-02-13 · This involved the transfer of 2,500 people, including 650 employees from Prudential. Image & Strategy Rating Prudential's

ISSUED 21 JANUARY 2020

PROVIDER SECTOR Prudential

FINANCIAL

STRENGTH

ASSESSMENT

Prudential P R O V I D E R S E C T O R

© AKG Financial Analytics Ltd 2 21 January 2020

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ABOUT THIS FINANCIAL STRENGTH ASSESSMENT

This AKG report and the analysis and ratings contained within it provide assessment of financial strength and associated considerations. Financial Strength is focused on the ability of a company to deliver ongoing operational capability in the interest of its customers and in line with their fairly held expectations. AKG’s perspective in the assessment of financial

strength is wholly that of a customer of a product or service. From that foundation, this analysis is specifically designed to inform financial advisers and assist in their required understanding of a company’s operational financial strength.

Given the underlying customer perspective, the financial strength of companies needs to be focused at an operational

level (i.e. the elements and functions of an organisation which operate to specifically deliver and manage a proposition or service to the customer), specifically on the company that is effecting the product or service that a customer is selecting. This is important, because from the customer’s perspective it is that company that needs to survive in a form that maintains the requisite operational characteristics to meet their fairly held requirements. And it is thus at this level that the selection

needs of the customers’ advisers must be met. This contrasts to credit rating, which will be undertaken at group or parent company level where investment or debt placement etc. is made.

Further details on how analysis is undertaken is provided at the end of this report and may also be obtained from AKG.

TABLE OF CONTENTS

Rating & Assessment Commentary ........................................................................................................................................................................... 3

Ratings .................................................................................................................................................................................................................................................................... 3

Summary ............................................................................................................................................................................................................................................................... 3

Commentary ...................................................................................................................................................................................................................................................... 3

Group & Parental Context............................................................................................................................................................................................ 6

Background ......................................................................................................................................................................................................................................................... 6

Group Structure (simplified) ................................................................................................................................................................................................................... 7

Company Analysis: Prudential Assurance Company Ltd .................................................................................................................................. 8

Basic Information ............................................................................................................................................................................................................................................. 8

Operations .......................................................................................................................................................................................................................................................... 9

Strategy ............................................................................................................................................................................................................................................................... 11

Key Company Financial Data ............................................................................................................................................................................................................... 13

Company Analysis: Prudential Pensions Ltd........................................................................................................................................................ 18

Basic Information .......................................................................................................................................................................................................................................... 18

Operations ....................................................................................................................................................................................................................................................... 18

Strategy ............................................................................................................................................................................................................................................................... 19

Key Company Financial Data ............................................................................................................................................................................................................... 20

Guide ................................................................................................................................................................................................................................... 24

Introduction ..................................................................................................................................................................................................................................................... 24

Rating Definitions ......................................................................................................................................................................................................................................... 24

About AKG ...................................................................................................................................................................................................................................................... 27

CONTACT INFORMATION

AKG Financial Analytics Ltd, Anderton House, 92 South Street, Dorking, Surrey, RH4 2EW Tel: +44 (0) 1306 876439 Email: [email protected] Web: www.akg.co.uk



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Rating & Assessment Commentary

RATINGS

Overall Financial Strength

A

PROVIDER SECTOR SUPERIOR

PRUDENTIAL ASSURANCE COMPANY LTD

A

PROVIDER SECTOR SUPERIOR

PRUDENTIAL PENSIONS LTD

Additional Financial Strength and Supporting Ratings

Non Profit

Financial

Strength

Unit Linked

Financial

Strength

With Profits

Financial

Strength

Service Image &

Strategy

Business

Performance

Prudential Assurance Company

Ltd ��

Prudential Pensions Ltd � ��

SUMMARY

M&G plc (M&G) was formed, initially as M&G Prudential, in 2017 through the merger of Prudential plc’s UK and Europe savings and insurance operation and M&G Investments, its wholly-owned international investment manager

In October 2019, M&G completed its demerger from Prudential plc and was listed on the London Stock Exchange

M&G's estimated shareholder Solvency II surplus at 30 June 2019 was £3.9bn, assuming that the proposed

demerger of M&G from Prudential plc had been completed then (equivalent to a coverage ratio of 169%)

Whilst the corporate change in terms of de-merger from the wider group but merger with the asset management

arm has been significant, the affect on proposition and touch within the UK has been much less

With profits focus is a unique selling point, Prudential Assurance Company Ltd (PAC) has the largest with profits

portfolio in the UK and a market leading with profits proposition

Prudential Retirement Account was launched in September 2016 in response to the introduction of Pension

Freedoms, with further enhancements in 2019

1 January 2019 saw Prudential consolidate all of its long-term business written in Europe (excluding the UK) into Prudential International Assurance plc (PIA)

COMMENTARY

Financial Strength Ratings

Prudential Assurance Company Ltd

As one of the UK's largest and strongest life companies, Prudential Assurance Company Ltd (PAC) continues to show significant resilience in the wake of challenging economic, legislative and regulatory conditions. It has retained focus and increased its market share, whilst continuing to demonstrate its appetite for key segments of the UK market, specifically

the Pre- and Post-Retirement space.



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There have been two recent transactions which have impacted solvency as at 31 December 2018 as follows:

The transfer of the Hong Kong Subsidiaries has led to Own Funds decreasing by £6.9bn and the SCR by £2.7bn

The reinsurance of annuities to Rothesay Life also led to a decrease in Own Funds and SCR of around £0.2bn and £1.1bn respectively There would be a further reduction in the SCR of £0.1bn should the Part VII transfer be

completed

PAC's SCR coverage ratio was not significantly impacted by the transfer of the business to PIA.

Additionally, and of most significance, is the demerger which, whilst not significantly impacting upon solvency, positions the

company as a more important component, albeit in a smaller but more focused group. Prudential's strategy has evolved and, whilst resisted for some time, the demerger was logical in view of the respective different levels of maturity of the businesses.

PAC is one of a handful of companies that remain highly committed to with profits and it is dominant in this market in the

UK. It has the largest with profits portfolio in the UK, and it continues to write new UK with profits business in volumes that dwarf all others in the market. The inherent strength of its with profits fund remains apparent. PAC's estimated with profits funds' Solvency II surplus as at 31 December 2018 was £5.5bn [2017: £4.8bn], leading to a coverage ratio of 231%

[2017: 201%].

Prudential Pensions Ltd Whilst smaller in size than its immediate parent, PAC, Prudential Pensions Ltd (PPL) is an important component of the UK operation.

AKG would expect the company to receive full parental support should this prove necessary. However, following the absorption of the 4 other UK life subsidiaries into PAC in recent years, there must be a strong possibility that the business of PPL will also be transferred into PAC in the near future.

Service Rating 2008 saw the largest life and pensions outsourcing deal ever signed in the UK. Under the deal Capita provided customer

servicing, policy administration, new business processing, claims activity and related IT support services to Prudential, the main service areas being based in Craigforth, Reading, Dublin and Mumbai.

Alongside this, Prudential has implemented a process to continually improve the service provided to advisers and clients.

It makes use of 6 Sigma process architects amongst other resources and techniques in driving this. As a result independent research provided to PAC indicated that service satisfaction, had been trending up to a good position.

However, serious administrative pressures and issues arose with the introduction of the Prudential Retirement Account, serviced in-house, which saw higher volumes than anticipated. These issues were resolved in 2018.

The period saw redress paid to advisers and a degree of negative press coverage, as well as a distraction from the business whilst it endeavoured to remedy and improve its infrastructure failings, have been inevitable results.

In January 2018, the Company announced a new partnership with Tata Consultancy Services (TCS) to enhance its service

for UK savings and investment customers. Over 5.8 million life and pensions contracts have moved to Diligenta, the FCA-regulated subsidiary of TCS. This involved the transfer of 2,500 people, including 650 employees from Prudential.

Image & Strategy Rating Prudential's strategy is highly focused in terms of specifically identified target product sectors for its UK operation. This had been a part of a worldwide operation, but has transitioned to a narrower positioning post the proposed demerger,

which is now concentrated on the UK and Europe. In the UK, Prudential's operations are structured to meet the needs of retail life and pensions customers. The group now believes that it can deliver an acceleration of current UK initiatives in specific opportunity sets, through this structurally narrowed focus. In Europe the priority is to leverage existing local presence and relationships with global banks to extend distribution reach, in particular, to distribute PruFund outside the

UK.



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The emphasis is on higher margin products. In the retail life and pensions market the group had concentrated on annuities. Post the introduction of Solvency II, however, and the introduction of Pension Freedoms, Prudential has withdrawn from the annuity market and, in line with its intention to become a lower cost digital organisation, has further developed its

offering with a significant investment in technology/digital enablement to deliver more at-retirement options, including low risk multi-asset products, which utilise the group's experience in asset allocation. There has been a renewed emphasis on with profits in recent years and this strategy has been successful in delivering a profitable differentiated market position

and new business flow.

Prudential's UK life operation remains well placed for future growth in its chosen segments, based on its financial strength, its brand and its diversified and balanced distribution model. However, in the short to medium term, it has required

adjustment to a new landscape as presented by the changes created by flexibility in annuitisation, the loss of at least a large element of very profitable internal vesting annuities, and new product/advice and guidance solutions.

In September 2019, the FCA announced a fine for Prudential of £23.9m for failures relating to non-advised sales, arising

from the Thematic Review of Annuities Sales Practices (TRASP), which affected around 35,000 customers, who are now being compensated. With this redress being potentially in excess of £200m.

Business Performance Rating PAC's total operating profit of £1,089m was 37% higher in 2018 [2017: £797m]. The increase was primarily due to an increase of £391m in relation to TRASP. A charge of £225m was made in 2017 in relation to TRASP, whereas income of £166m in relation to insurance recoveries has been recognised for 2018. Changes in the longevity assumption basis

contributed £441m to operating profit, an increase of £237m on 2018. This was partially offset by a £187m decrease in other management actions to improve solvency and a £75m decrease on shareholder business primarily due to the partial sale of the annuity portfolio which means there is a smaller portfolio remaining on which profits may be earned. £55m

was included within the long-term business provision to cover the expected costs of GMP equalisation.

PPL saw pre-tax profits increase by 10.9% from £6.9bn to £7.6bn.

In 2018 PruFund's assets under management (AuM) increased by 19% to £43bn [2017: £36bn]. This included the

Prudential Retirement Account, whose AuM increased to £12bn [2017: £7.2bn].

At M&G level there was an operating profit of £1.6bn in 2018, up 19% [2017: £1.4bn]. This included £0.5bn [2017: £0.6bn] from its core with profits and annuity business, with the with profits contribution up 11% to £0.3bn, offset by lower annuities earnings following the reinsurance to Rothesay Life. Other operating profits included the benefit of updated

longevity assumptions and an insurance recovery on the costs of reviewing internally vesting annuity sales. Total assets under management amounted to £321bn.

In its 2019 half year results, M&G reported an operating profit, before restructuring costs, down by 8% to £716m in H1

2019. Life insurance operating profit increased by 2% to £496m [2018: £487m]. Within this total, the contribution from core with profits and in-force annuity business was £345m [2018: £255m], including higher annuity income (mainly driven by higher asset related gains) and an increased transfer to shareholders from the with profits funds of £161m [2018:

£157m]. These transfers included a 20% increase in the contribution from the PruFund business of £30m [2018: £25m].

M&G's total funds under management grew by 6% in the period to £341.1bn, including PruFund positive net flows of £3.5bn, leading to total PruFund assets under management of £49.6bn as at 30 June 2019. M&G's external assets under

management were up 4% in the first half of 2019 to £153.0bn, with market impacts more than offsetting net outflows in the period. The slowdown in industry-defined benefit pension transfers, compared with the higher volumes in the prior year, contributed to reductions in APE sales of 8% and new business profit of 15% in the period.

M&G reported that it remained on track to deliver annual cost savings of around £145m by 2022 for an investment of around £250m. Restructuring costs of £29m [2018: £42m] include investment spend of £26m in relation to its merger and transformation programme and bring the cumulative cost to £169m, on an IFRS basis, since the project began.



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Group & Parental Context

BACKGROUND

Prudential plc was an international financial services group with significant operations in Asia, the US and the UK, operating through three main business units: Prudential Corporation Asia, Jackson National Life Insurance Co and M&G (renamed from M&G Prudential). M&G was formed in August 2017 following the combination of Prudential UK (life and pensions

in the UK and across Europe) and M&G Investments (the group’s UK and European fund manager, acquired in 1999).

Prudential plc had come under regular speculative pressure in the UK to consider a break-up, particularly given that the bulk of its new business is written overseas, and in March 2018, Prudential announced its intention to demerge M&G from Prudential plc, resulting in two separately-listed companies, both headquartered and listed in London. In order to formalise

the restructuring M&G was formed in July 2018, with M&G Prudential (Holdings) Ltd established as a subsidiary in September 2018. In November 2018, M&G acquired M&G Group Ltd, PAC, Prudential Financial Services Ltd and Prudential Property Services Ltd. In December 2018, PAC sold its Hong Kong subsidiaries to a direct subsidiary of

Prudential plc. December 2018 also saw M&G Prudential (Holdings) Ltd acquire Prudential Portfolio Management Group Ltd.

The demerger completed in October 2019:

M&G plc is now an independent UK & Europe savings and investment provider

Prudential plc is an international insurance group focused on high-growth opportunities in Asia, the US and Africa

M&G has two main businesses:

M&G Investments - a global asset manager

Prudential - a life and pensions provider

In March 2018, Prudential also announced the sale of £12bn of its UK annuity portfolio to Rothesay Life, initially by

reassurance, a transaction which was estimated to give rise to a pre-tax loss of £513m in 2018 and was expected to complete in 2019. However, in August 2019 this transfer was rejected by the High Court, but an appeal has been lodged.

In January 2018, Prudential announced that the administration of over 4 million life and pensions contracts (since extended

to 5.8 million) will move from Capita (its business partner of the past 10 years) to Diligenta, a subsidiary of Tata Consultancy Services Ltd (TCS). TCS will also assume responsibility for the operation of some of Prudential's internal IT infrastructure.

Offshore business is marketed through the Dublin subsidiary PIA delivering niche proposition variants to specific markets,

including the UK, based on the fundamental strength of the wider organisation and its PruFund capability and USP.

In order to allow more efficient operation and to simplify the management of its long-term business across Europe, on 1 January 2019, Prudential consolidated all of its long-term business written in Europe (excluding the UK) into PIA. Although

not a primary motivation, the transfer has been structured to ensure that PAC’s policies written through establishments in Europe (excluding the UK) can continue lawfully to be administered and serviced post-Brexit. This saw a number of relatively small transfers of business from European countries, including the Polish business as well as establishment work

to ensure continued provision of offshore bond business for UK customers.



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GROUP STRUCTURE (SIMPLIFIED)

Prudential Assurance Company Ltd P R O V I D E R S E C T O R


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Company Analysis: Prudential Assurance Company Ltd

BASIC INFORMATION

Company Type Composite Insurer

Ownership & Control M&G plc

Year Established 1848

Country of Registration UK

Head Office

10 Fenchurch Avenue, London, EC3M 5AG

Contact www.pru.co.uk

Key Personnel

Role Name

Chair, M&G M J Evans

Chief Executive Officer, M&G (& PAC) J W Foley

Chief Finance Officer, M&G (& CEO PPL) C J Bousfield

Chief Finance Officer P D Cooper

Chief Risk Officer K Davies

Chief Operations Officer R A J Thomson

Chief Customer and Distribution Officer D Macmillan

Chief Actuary J R Hughes

With Profits Actuary P D Needleman (Willlis Towers Watson)

Company Background Prudential began life in 1848 as the Prudential Mutual Assurance Investment and Loan Association. It became the Prudential

Assurance Company Ltd (PAC) in 1867, and for many years it was the UK’s largest life company.

Originally a composite office with a large home service operation, the company stopped writing IB business in 1995, and in 2001 closed its direct sales force and exited from general business in the UK by selling its book to Churchill (a small

run-off liability still exists). At the same time, it dropped the Scottish Amicable brand (it had acquired Scottish Amicable in 1997) and all remaining Scottish Amicable business was transferred into Prudential at the end of 2002. In 2008, the company decided not to proceed with a reattribution of its Inherited Estate.

The Hong Kong branch was transferred to two new locally incorporated Hong Kong subsidiary companies on 1 January 2014, one life and one general. In preparation for the demerger, ownership of these companies was transferred to Prudential Corporation Asia Ltd in December 2018.

All long-term business from four previous UK life subsidiaries has now been transferred into PAC: PruHolborn and Pru (AN) (2010), Prudential Annuities Ltd (2014), and Prudential Retirement Income Ltd (PRIL) (October 2016).



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PAC also has a subsidiary in Ireland, PIA, which was identified by the group as having a key part to play in facilitating changes required to branch and subsidiary structures needed for managing existing business and further new business developments within Europe, under potential new arrangements. Consequently, on 1 January 2019, all of the long-term

business of PAC written in Poland, France and Malta together with policies written in Germany and Ireland that were transferred to PAC from the Equitable Life Assurance Society (ELAS) in 2007 were transferred to PIA. The total policyholder liabilities transferred amounted to around £74m, as at 31 December 2017, excluding the negative liabilities

for Poland. With the exception of the PAC Poland business all of the transferred blocks of business are now closed to new business. A Polish branch of PIA was established in August 2018 in anticipation of the transfer and to provide a new business capability with effect from 1 January 2019.

OPERATIONS

Governance System and Structure

Following the demerger, and now as part of the M&G Group, PAC is subject to the Group's internal control and risk management processes as detailed in the Group Governance Manual and Group Risk Framework. The control procedures and systems established within the Group are designed to manage rather than eliminate the risk of failure to meet business

objectives. As such, they provide strong but not absolute assurance against material misstatement or loss, and focus on optimising the levels of risk and reward with the aim of achieving the business objectives.

PAC's Board responsibilities include: strategy, budget and business plans; structure and capital; financial reporting and dividends; internal controls and risk management; board and other appointments; governance; delegation of authorities;

with profits and investment strategy.

The Company's governance structures are kept under constant review to ensure they suit the needs of the business and stakeholders.

During 2016, the constitution of the PAC Board was changed with the appointment of an independent non-executive chairman and 4 other independent non-executive directors.

In 2018 PAC became a wholly owned subsidiary of M&G plc. Changes were made to the internal structure of the company,

as well as the delegation of responsibilities, reporting lines and allocation of functions to meet requirements of the ongoing demerger and transformation activity.

The company's Fit and Proper Policy was updated to align with the introduction of the Senior Managers and Certification

Regime (SMCR) in December 2018.

Risk Management The Group Risk Framework requires all business units and functions within the Group, including the company, to establish processes for identifying, evaluating and managing key risks, The risk management framework for the company is approved

by its Board and operates on the three lines of defence model: risk taking and management, risk control & oversight and independent assurance.

Investment risk management sits at the heart of the organisation and is subject to continuous investment, with the roll out

of the Aladdin Risk Tool across the group from Q2 2017 being a key recent example of this.

Administration 2008 saw the largest life and pensions outsourcing deal ever signed in the UK. Under the deal Capita provided customer servicing, policy administration, new business processing, claims activity and related IT support services to Prudential, the

main service areas being based in Craigforth, Reading, Dublin and Mumbai.

Alongside this, the group has implemented a process to continually improve the service provided to advisers and clients. It makes use of 6 Sigma process architects amongst other resources and techniques in driving this. As a result independent

research provided to the company indicates that service satisfaction, which has been trending up, remains very high.



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The group’s adviser extranet has been designed to make it easy for Financial Advisers to conduct business online, including: pre-sale illustrations; submission of business; access to policy valuations and transaction history; and the ability to switch the investments within a tax wrapper.

The group also supports the major portals and offers data pre-population and/or real time transactions via Origo Standard XML messaging. Significant investment in the company's platform capability has also been made, facilitating its Retirement Account.

In January 2018, M&G announced 'a major investment programme in the new combined business's infrastructure to improve customer service, accelerate product development, and widen customer choice. A substantial investment will be made over the next five years in transforming the business's operations, including building the digital distribution capability'.

The MyPru online servicing portal, which allows customers to 'enjoy ease and convenience of accessing policies online, and dramatically reducing the time it takes to withdraw money from bonds are just two of the ways that a digitisation of the business is making customers’ lives easier'.

Administration of over 5.8 million life and pensions contracts is moving from Capital (Prudential's business partner of the past 10 years) to Diligenta, a subsidiary of TCS, in a 10 year partnership. This involved the transfer of 2,500 people, including 650 Prudential employees. TCS will also assume responsibility for the operation of some of Prudential's internal IT infrastructure.

Benchmarks Prudential has been awarded 5 Stars by Defaqto for its Flexible Retirement Plan (SIPP category), Retirement Account (Drawdown category) and for both its Prudential Investment Plan and its Onshore Portfolio Bond (Onshore Bond

category).

In the 2018 Investment, Life & Pensions Moneyfacts Awards it also won the Best Investment Bond Provider for the eighth year running and Best Income Drawdown Provider in 2017 & 2018.

The group has worked hard to achieve greater recognition and its service and perception had improved in recent years.

In the 2011 Financial Adviser Service Awards it regained a 5 star rating in Life and Pensions, retaining it since then, with a 5 star rating for Investment Service held since 2009. Prudential was named Company of the Year in the 2015 Financial Adviser Service Awards. It received the Outstanding Achievement award in 2018.

In the 2017 FT Adviser Online Innovation and Service Awards, Prudential was recognised for Consistent Service Excellence and Innovation in Life & Pensions. It was also named as a 5 star Investment Provider and Packager.

Outsourcing Prudential uses outsource and third party supply providers to allow it to focus on its core business strengths, reduce costs

and manages its delivery risks.

Over recent years Prudential has increasingly adopted an outsourcing model for its business, including a growing amount of offshoring (to India) and this approach and its operation is now relatively mature. The company now has material

external and intra-group outsource providers.

The external providers supply customer servicing, policy administration, new business processing, claims activity and related IT support services located in the UK and India, and back office administration for pension schemes and annuities located

in the UK. Significantly, it entered into what was then the UK’s largest life and pensions outsourcing deal with a 15 year deal with Capita worth £722m (involving the transfer of some 3,000 of its staff) to the outsourcer. The service, which covers around 7 million contracts, commenced on 1 April 2008. It also included a transformation programme which had

an investment of £159m from Prudential. It is the company’s stated belief that the effect of this major outsourcing development, and the approach in general, is to deliver a better and more effective customer experience. All adviser calls are now handled in the UK, however, following the re-onshoring of all voice activity.

Prudential’s other external outsourcing arrangements include RR Donnelly, who now manage its UK Document Management infrastructure, Capita Life & Pensions, who also have responsibility for administration of its offshore business out of Dublin, and Hazell Carr, who administer the majority of its Defined Benefits pension scheme business.



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The intra-group outsourcers provide IT infrastructure support services and investment strategy and portfolio management services located in the UK.

In January 2018, PAC announced a 10-year partnership with Tata Consultancy Services (TCS). This includes, the

administration of over 5.8m life and pensions contracts being moved from Capita to Diligenta, the FCA-regulated subsidiary of TCS, on 1 August 2018, with a contractual commitment of full transfer by 2022.

About 1,100 Capita roles across a number of UK sites are expected to be transferred under the TUPE arrangements to

Diligenta. A further 700 roles in India are also expected to move from Capita to TCS.

TCS will also assume responsibility for the operation of some of Prudential's internal IT infrastructure with the aim of enabling the IT operations function to deliver greater flexibility in the provision of services to the businesses within the

Prudential Group and enabling Prudential to focus efficiently on its digital transformation. Further services related to the PAC’s annuities business, transferred from the PAC to Diligenta on 1 October 2018. Responsibility for the operation of some of the PAC’s IT infrastructure transferred from Prudential to Diligenta on 1 May 2018.

About 180 full-time roles in London, Reading and Craigforth will also transfer under the TUPE arrangements from M&G Prudential to TCS.

STRATEGY

Market Positioning M&G as a standalone group will continue to 'drive its transformation into a more capital-efficient customer-focused business, targeting growing customer demand for comprehensive financial solutions in the retirement and savings markets'.

PAC is focused on 'maintaining the growth momentum created by the structural changes to retirement provision in the UK and on delivering a growth strategy underpinned by investment in product, service and distribution capabilities to meet the evolving needs of customers'.

Prudential distributes life products through 4 UK channels: Intermediaries (financial advisers, with telephony and sales support via 65 regional sales units), Business to Business (corporate pensions business primarily with consulting actuaries and benefit consultants), Partnerships (arrangements with banks, insurers and other distributors), and Direct to Customer,

where there is a growing F2F advice capability, Prudential Financial Planning Ltd. This latter, direct business, currently further evolving with a mix of employed and self-employed advisers (within a current total of 350) and greater use of digital technology.

Intermediaries are seen as a key component in the distribution strategy. The post RDR environment had seen a contraction in the overall intermediated market with reduced sales of Prudential with profits bonds. However developments that enable the investment proposition in terms of its delivery via external technology (platforms in particular) and wrappers

means that it is envisaged that the with profits offering can be extended to more customers and now features in the advice solutions of more advisory firms. The company is also seeing greater penetration in terms of multiple product take-up within intermediary firms.

PAC’s product and distribution profile has evolved by increasing the range of product options to mirror the flexibilities of

the pensions freedom era. There has been a shift away from a reliance on annuity business to a focus on more flexible bond, ISA, pension and income drawdown products across a range of tax efficient solutions.

PAC launched the Prudential Retirement Account in 2016, an online account based plan, that provides customers with

the flexibility to save for their retirement, benefit from an income in retirement and facilitate access to their fund as they save. The Retirement Account allows customers to invest in PruFund, a proposition managed by M&G's Treasury & Investment Office (T&IO), M&G's multi-asset management team.

Enhancements to the Retirement Account were made in 2019, to be followed by ISA changes to bring a more digital customer experience.



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PAC continues to focus on deepening its relationships with independent financial advisers. An important part of its service offering is the ongoing hands-on support from its regional sales units, technical helpline and business development and consultancy team.

M&G as a standalone group is continuing to drive its transformation into a more capital-efficient and customer-focused business, targeting growing customer demand for comprehensive financial solutions in the retirement and savings markets.

As part of M&G, PAC has the opportunity to offer its customers a wider set of solutions as their needs evolve.

Prudential's roll out of business in Poland, which has now been transferred to PIA, continued in 2018, with sales increasing by 20% [2017: 82%] in local currency terms. Prudential Poland now has 843 ties agents operating from 22 branches. PAC's core business in Poland is a life insurance product, Premiopolisa, an individual protected product offering guarantees with

growth potential at maturity. Pure protection products are also offered.

Proposition In the UK, PAC offers a range of retail financial products and services, including long term insurance and asset accumulation and retirement income products, retail investments and unit trust products, for use in a post pension freedoms era.

Prudential now concentrates on savings and investment type products, onshore and offshore bonds, and pensions. A ‘new-style’, more transparent, with profits product was introduced in 2004, the PruFund Investment Plan. PruFund was extended to some other product types during 2008, along with the introduction of the PruSelect range of funds, and further

extended in 2015 through an ISA wrapper and through a drawdown product.

September 2016 saw the launch of the Prudential Retirement Account, an online account based plan that provides customers with the flexibility to save for their retirement, provide an income in retirement and with a choice of funds and

assets. At its core is PruFund, which consists of 5 risk-rated funds and 25 different asset classes together with a Growth and a Cautious Fund and also offers smoothing.

Development work to broaden out the investment proposition with new multi-asset funds, to complement PruFund was completed at the start of 2019. There are 3 ranges of 5 risk rated funds (passives, actives & PruFunds).

The group's investment proposition offers a range of investment options. At the heart of the Prudential approach to Multi-Asset Funds is T&IO, which has replaced Prudential Portfolio Management Group Ltd, and which provides multi-asset class solutions across a wide range of products by leveraging group-wide investment management and risk management

expertise. T&IO's core services include strategic asset allocation recommendations between asset classes, tactical overlay and acting as a 'manager of managers'. T&IO managed around £175bn as at 30 June 2019 across a range of multi-asset investment solutions, unit linked funds and annuities on behalf of Prudential UK and Europe.

A wide market choice of funds is available through the Retirement Account.

The group withdrew from the lifetime mortgage/equity release market in November 2009, and, following the introduction of Solvency II, the bulk annuity market in 2016, and thereafter the annuity market entirely.

Prudential states that it continues to support its customers in the Pension Freedoms era by increasing its range of product options offered to mirror the new flexibilities. The focus is on its flexible bond, ISA, pension and income drawdown products.

The largest with profits portfolio in the UK resides in three sub-funds, the With Profits Subfund (WPSF), the Scottish Amicable Insurance Fund (SAIF) and the Defined Charge Participating Subfund (DCPSF), which includes the with profits annuities transferred from Equitable in 2007. Prudential is differentiated amongst large offices by its continued active support of with profits. This includes its highly successful PruFund range of with profits options and use in an increased

number of product wrappers. Total assets under management for the PruFund range increased by 19% in 2018 to £43bn [2017: £36bn].

The pre-tax investment return on the WPSF was negative 2.8% in 2018 [2017: 10.3%, positive].



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KEY COMPANY FINANCIAL DATA

Last 3 reporting periods up to 31 December 2018

Assets

Dec 16

£m

Dec 17

£m

Dec 18

£m

Fixed interest 82,379 83,322 71,573

Equities 30,259 36,791 30,994

Collectives 18,112 21,130 22,589

Property 8,849 9,058 9,240

Linked 8,968 9,022 7,765

Derivatives 2,877 2,912 2,503

Loans and mortgages 11,862 11,017 11,038

Reinsurance recoverables 6,585 6,842 18,644

Cash 1,402 1,892 1,305

Other 12,252 14,266 8,415

Total Assets 183,544 196,252 184,066

Liabilities

Dec 16

£m

Dec 17

£m

Dec 18

£m

Technical provisions - non-

life 149 143 142

Technical provisions - health (similar to life)

(34) (21) (15)

Technical provisions - life 136,089 145,200 143,068

Technical provisions - linked 14,303 14,449 12,851

Other 10,852 10,759 9,562

Total Liabilities 161,360 170,529 165,607

Excess of assets over liabilities

22,185 25,723 18,459

Total assets reduced by 6% in 2018. Fixed interest assets reduced by £11.7bn whereas reinsurance recoverables increased by £11.8bn both impacted by the £12.1bn reinsurance premium paid to Rothesay. As at 31 December 2018, PAC's annuity portfolio was valued at £33bn, of which £11bn was reinsured to Rothesay Life.

PAC held a provision at 31 December 2018 for review of past annuity sales after utilisation during the year of £324m [2017: £369m]. PAC has agreed with the FCA to review annuities sold without advice after 1 July 2008 to its contract-based defined contribution pension customers. A gross provision of £400m, before costs incurred, was established at 31

December 2017 to cover the costs of undertaking the review and any related redress and following a reassessment, no change has been made to the amount provided, although £45m has been utilised in 2018. Additionally, in 2018, PAC agreed with its professional indemnity insurers that they will meet £166m of claims costs, which will be paid as PAC incurs

costs/redress.



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Life & Health SLT Technical Provisions

Dec 16

£m

Dec 17

£m

Dec 18

£m

Insurance with profit

participation 84,591 93,935 94,502

Linked insurance 14,303 14,449 12,851

Other life insurance 46,267 45,201 42,238

Annuities - from non-life health

0 0 0

Annuities - from non-life

non-health 0 0 0

Health insurance (34) (21) (15)

Health reinsurance 0 0 0

Life reinsurance 5,231 6,064 6,328

Total life and health SLT

technical provisions 150,358 159,627 155,904

Life Expenses

Dec 16

£m

Dec 17

£m

Dec 18

£m

Health insurance (3) (1) 1


participation 664 718 805

Linked insurance 147 175 178

Other life insurance 445 459 235


health 0 0 0


non-health 0 0 0


Life reinsurance (2) 0 0

Other expenses 26 38 49

Total life expenses 1,277 1,390 1,267

With profits business accounted for 61% [2017: 59%] of technical provisions, reflecting PAC's commitment to this line.

Net operating expenses consist of acquisition costs £183m [2017: £218m] and administration expenditure £766m [2017: £793m].

Investment expenses and charges are comprised of investment management expenses £330m [2017: £389m] plus interest on bank borrowings of £13m [2017: £19m].

Acquisition expenses decreased mainly due to lower project costs in 2018.

Administration expenditure decreased by £27m in 2018. Although there were no TRASP expenses in 2018 [2017:

£225m], there were several increases in other expense categories including restructuring costs attributable to both shareholders and policyholders of £140m (caused by higher transformation costs), pension costs £26m and a number of other smaller items.

The decrease in investment management expenses was caused by lower investment fees in line with the decrease in the value of the investments. There was also lower interest on bank borrowings reflecting partial repayments of Vitality contingent loans.



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Solvency Capital Requirement (SCR)

Dec 16

£m

Dec 17

£m

Dec 18

£m

Market risk 13,028 14,050 7,514

Counterparty default risk 314 305 343

Life underwriting risk 4,069 5,033 3,251

Health underwriting risk 0 0 0

Non-life underwriting risk 4 4 0

Diversification (3,577) (5,275) (2,186)

Intangible asset risk 0 0 0

Operational risk 1,228 1,474 1,466

Capital add-ons already set 0 0 (1,078)

Other items (1,859) (1,195) 0

Solvency capital

requirement 13,208 14,397 9,309

Own Funds

Dec 16

£m

Dec 17

£m

Dec 18

£m

Tier 1 unrestricted 18,305 20,512 13,001

Tier 1 restricted 0 0 0

Tier 2 1 0 0

Tier 3 0 0 0

Eligible own funds 18,306 20,512 13,001

Excess of own funds over

SCR 5,097 6,115 3,691

SCR coverage ratio (%) 138.6 142.0 140.0

PAC has been granted approval by the PRA to calculate its solvency capital requirement (SCR) based on its internal model.

At 31 December 2018, the SCR was £9,309m [2017: £14,397m]. The minimum capital requirement (MCR) is currently

25% [2017: 25%] of the SCR, £2,327m at 31 December 2018 [2017: £3,599m].

PAC's SCR and MCR have been met at all times throughout 2018. At 31 December 2018, PAC’s Solvency II surplus was £3,691m [2017: £6,115m]. The majority of the reduction in surplus is as a result of the transfer of the Hong Kong

subsidiaries to PCAL, which accounted for a movement of £4.2bn.

The reinsurance annuities to Rothesay Life resulted in a £1.1bn decrease in SCR and £0.2bn decrease in own funds.

A number of other management actions were taken in 2018 to improve the Solvency II position of the UK insurance operations and further mitigate market risk, which have generated a combined surplus of £237m [2017: £401m].

PAC employs the transitional measure for technical provisions, the volatility adjustment and the matching adjustment. If these are excluded, own funds reduce to £9.7bn, whilst the solvency capital requirement increases to £12.7bn.

PAC also reports its Solvency II position on a 'shareholder' basis. PAC estimates that its shareholder Solvency II capital

surplus was £3.7bn [2017: £6.1bn], equivalent to a coverage ratio of 172% [2017: 178%]. There was a £4.1bn reduction in surplus due to the transfer of the Hong Kong subsidiaries. If this is excluded, the estimated Shareholder solvency surplus increased by £1.7bn.

Own Funds decreased by £7.5bn in 2018, principally due to transfer of the Hong Kong Subsidiaries (reduction of £6.9bn), underlying operating experience (increase of £1.4bn) and non-operating experience, including market movement (reduction of £1.9bn).

Restrictions on ring-fenced funds increased slightly to £5.5bn [2017: £5.2bn].



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Gross Life Premiums Written By Line of

Business

Dec 16

£m

Dec 17

£m

Dec 18

£m

Health insurance 23 20 18

Insurance with profit participation

8,304 11,557 11,453




health 0 0 0

Annuities - from non-life non-health

0 0 0


Life reinsurance 23,824 807 885

Total gross life premiums

written 33,093 13,439 13,378

Gross Life Premiums Written By Country

Dec 16

£m

Dec 17

£m

Dec 18

£m

Home country 33,094 13,439 13,378

Country 1 0 0 0

Country 2 0 0 0

Country 3 0 0 0

Country 4 0 0 0

Country 5 0 0 0

Other countries 0 0 0

Total gross life premiums written

33,094 13,439 13,378

Gross premiums, which had decreased by 59% in 2017, reduced marginally in 2018, 86% [2017: 86%] of which related to with profits. 2016 had been inflated by a one off premium in respect of the increase in the quota share reinsurance with PRIL from 20% to 100%, which took place on 1 January 2016.

Total sales on an APE basis increased by 2% [2017: 29%] from £1,473m to £1,500m. In total across all products, PruFund

APE sales increased by 3% to £1,221m. The Prudential Retirement Accounts generated £238m [2017: £185m] of PruFund APE within Income Drawdown, an increase of 29% and £508m [2017: £487m] of PruFund within Individual Pensions an increase of 4%.

Income drawdown sales increased by 15% from £222m to £256m due to increased demand for the company's wider range of investment propositions post pension reforms.

Offshore bond APE increased by 10% to £86m [2017: £78m] and onshore bond APE decrease by 1% to £255m [2017:

£258m]. There was an 11% reduction in corporate pensions APE to £124m [2017: £140m].



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Profit

Dec 16

£m

Dec 17

£m

Dec 18

£m

Profit (loss) before taxation 363 2,592 1,352

Taxation (249) (166) (123)

Profit (loss) after taxation 114 2,426 1,229

Other comprehensive income

3,359 0 0

Dividends (343) (438) (9,963)

Retained profit (loss) 3,130 1,988 (8,734)

Life Business Flows

Dec 16

£m

Dec 17

£m

Dec 18

£m

Net life premiums earned 32,458 12,054 (81)

Net life claims incurred (10,012) (10,932) (10,854)

Net flow of business 22,445 1,121 (10,936)

PAC's total operating profit of £1,089m was 37% higher in 2018 [2017: £797m]. The increase was primarily due to an increase of £391m in relation to TRASP. A charge of £225m was made in 2017 in relation to TRASP, whereas income of £166m in relation to insurance recoveries has been recognised for 2018. Changes in longevity assumption basis

contributed £441m to operating profit, an increase of £237m on 2018. This was partially offset by a £187m decrease in other management actions to improve solvency and a £75m decrease on shareholder business primarily due to the partial sale of the annuity portfolio which means there is a smaller portfolio remaining on which profits may be earned. £55m was included within the long term business provision to cover the expected costs of GMP equalisation.

Non-operating profit decreased by £1,532million to £263m [2017: £1,795m], primarily due to revaluation on the Hong Kong subsidiaries which decreased by £987million. In 2018 there was a gain of £599m prior to the transfer, which represents the estimated fair value of the business at the date of transfer of £9,450m less the opening amount at 1 January

2018 of £8,851m. In 2017 the Hong Kong subsidiaries contributed a revaluation gain of £1,586m. The Rothesay transaction also contributed a non-operating loss of £508m.

Overall pre-tax profits reduced to £1,352m [2017: £2,592m].

Total dividends of £9,963m were paid [2017: £438m]. Interim dividends of £282m, £231m and £33m were paid in May, November and December, respectively. In addition, the difference between the fair value of the Hong Kong subsidiaries at the date of sale of £9,450m and the dividend of £33m paid in December represents a deemed distribution. £9,417m

is therefore included within dividends.

Shareholders' funds reduced to reduced to £6,877m [2017: £15,611m]. The decrease of £8,734m consist of post-tax profits of £1,229m offset by dividends of £9,963m, including £9,483m relating to the sale of the Hong Kong subsidiaries.

Other comprehensive income of £3.4bn shown above in 2016 relates to a movement in retained earnings following the Part VII transfer from PRIL.

Prudential Pensions Ltd P R O V I D E R S E C T O R


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Company Analysis: Prudential Pensions Ltd

BASIC INFORMATION

Company Type Life Insurer

Ownership & Control The company is a wholly owned subsidiary of PAC, which, in turn, is a wholly owned subsidiary of M&G plc

Year Established 1970

Country of Registration UK

Head Office

10 Fenchurch Avenue, London, EC3M 5AG

Contact www.pru.co.uk

Key Personnel

Role Name

See Prudential Assurance Company Ltd

Company Background

Prudential Pensions Ltd (PPL) was established as a subsidiary of PAC in 1970. Its original purpose was to maintain the unit linked funds for PAC's corporate pension customers.

Upon Scottish Amicable’s demutualisation and acquisition by Prudential at the end of 1999, the whole of the business of Scottish Amicable Pensions Investments Ltd was transferred into the company.

Nowadays, PPL accepts reinsurance of unit linked corporate pensions business from PAC (reserves of around £3.1bn as at 31 December 2018) and from external parties (reserves of £1.7bn). In addition it sells direct investment-only unit linked business to money purchase group pension schemes (reserves of £6.4bn).

A small block of non-profit pensions annuity business (around £56m) is reinsured to PAC.

OPERATIONS

Governance System and Structure As part of the M&G Group, the company is subject to the Group's internal control and risk management processes as detailed in the Group Governance Manual and Group Risk Framework. The control procedures and systems established

within the Group are designed to manage rather than eliminate the risk of failure to meet business objectives. As such, they provide strong but not absolute assurance against material misstatement or loss, and focus on optimising the levels of risk and reward with the aim of achieving the business objectives.

PPL's Board responsibilities include: strategy and business plan; internal control and risk management; and solvency and finance.



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During 2016, the constitution of the PPL Board was changed to have an independent non-executive director as Chairman.

Risk Management The Group Risk Framework requires all business units and functions within the Group, including the company, to establish

processes for identifying, evaluating and managing key risks, The risk management framework for the company is approved by its Board and operates on the three lines of defence model: risk management, risk oversight and independent assurance.

Administration See PAC

Benchmarks See PAC

Outsourcing See PAC

STRATEGY

Market Positioning

The company continues to benefit from the group's Corporate Pension sales and continues to focus on securing new members and incremental business from its current portfolio of customers and on AVC plans within the public sector, where it states that it is the market leader providing schemes for 73 of the 101 UK public sector authorities.

Proposition The company's products are mostly unit linked, with some pension annuities.

PPL accepts reinsurance of unit linked corporate pensions business from PAC and from external parties. In addition it sells direct investment-only unit linked business to money purchase group pension schemes.

A small block of non-profit pensions annuity business within the company is reinsured to PAC.



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KEY COMPANY FINANCIAL DATA

Last 3 reporting periods up to 31 December 2018

Assets

Dec 16

£m

Dec 17

£m

Dec 18

£m

Fixed interest 25 24 24

Equities 0 0 0

Collectives 0 0 0

Property 0 0 0

Linked 9,670 10,168 9,474

Derivatives 0 0 0

Loans and mortgages 56 63 68

Reinsurance recoverables 1,813 2,084 1,806

Cash 2 10 10

Other 9 4 3

Total Assets 11,575 12,354 11,385

Liabilities

Dec 16

£m

Dec 17

£m

Dec 18

£m

Technical provisions - non-

life 0 0 0

Technical provisions - health

(similar to life) 0 0 0

Technical provisions - life 72 64 56

Technical provisions - linked 11,410 12,178 11,213

Other 23 28 26

Total Liabilities 11,505 12,271 11,295

Excess of assets over liabilities

70 83 90

Assets reduced by 7% in 2018, from £12.4bn to £11.4bn impacted by negative overall investment performance and a net outflow.

The majority of assets and liabilities relate to unit linked business, in line with PPL's business profile. Reinsurance recoverables relate primarily to externally reinsured unit linked business.

Approximately two thirds of the company's unit linked assets relates to business written directly with defined benefit trustees. The remainder of these assets are due to reassurance of defined contribution corporate pension customers from PAC. The majority of the unit linked corporate pension business written by PAC is reassured to the Company.

PPL has a small amount of non profit annuity business, the best estimate liability for which is £56.0m [2017: £62.7m] (gross of reinsurance and 0.5% of technical provisions at 31 December 2018). These annuities are fully reassured to PAC and PPL is closed to new pension annuity business.



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Life & Health SLT Technical Provisions

Dec 16

£m

Dec 17

£m

Dec 18

£m


participation 0 0 0

Linked insurance 6,587 6,978 6,353


Annuities - from non-life health

0 0 0


non-health 0 0 0



Life reinsurance 4,823 5,200 4,860

Total life and health SLT

technical provisions 11,482 12,243 11,269

Life Expenses

Dec 16

£m

Dec 17

£m

Dec 18

£m



participation 0 0 0




health 0 0 0


non-health 0 0 0


Life reinsurance 0 0 0

Other expenses 0 0 0

Total life expenses 10 11 17

Provisions are almost entirely unit linked.

Life reinsurance relates to unit linked reinsurance accepted.

Solvency Capital Requirement (SCR)

Dec 16

£m

Dec 17

£m

Dec 18

£m

Market risk 25 27 27

Counterparty default risk 3 4 0

Life underwriting risk 22 30 21

Health underwriting risk 0 0 0

Non-life underwriting risk 0 0 0

Diversification (8) (19) (8)

Intangible asset risk 0 0 0

Operational risk 32 19 17

Capital add-ons already set 0 0 0

Other items (16) (8) (7)

Solvency capital requirement

58 54 50

Own Funds

Dec 16

£m

Dec 17

£m

Dec 18

£m

Tier 1 unrestricted 70 83 90

Tier 1 restricted 0 0 0

Tier 2 0 0 0

Tier 3 0 0 0

Eligible own funds 70 83 90

Excess of own funds over SCR

12 29 40

SCR coverage ratio (%) 121.6 153.5 179.2

PPL employs an Internal Model for Solvency II purposes. PPL is managed with a relatively low level of surplus, reflecting its relatively low risk profile.

PPL's performance has contributed to an increase in Solvency II own funds. Own funds have increased from £82.9m at 31 December 2017 to £90.0m at 31 December 2018. In addition to the changes noted above, there has been an increase in the its risk margin. This has increased from £17.9m at 31 December 2017 to £19.6m at 31 December 2018.

PPL employs transitional measures on technical provisions, which increased its Solvency II surplus by £3.9m as at 31 December 2018 [2017: £4.2m].



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At 31 December 2018, PPL's SCR was £50.3m [2017: £54.0m]. The MCR is currently 45% [2017: 45%] of the SCR, £22.6m at 31 December 2018 [2017: £24.3m]. The Company's SCR and MCR have been met at all times throughout 2018 and 2017. At 31 December 2018, PPL's Solvency II surplus was £39.8m [2017: £28.9m]. The increase in Solvency II

surplus is primarily due to the increase in own funds.

The PPL SCR reduced by £3.7m in the year to 31 December 2018 driven primarily by the expected run-off of in-force business over the year, and also persistency variance, new business written and economic impacts.

Gross Life Premiums Written By Line of

Business

Dec 16

£m

Dec 17

£m

Dec 18

£m



participation 0 0 0

Linked insurance 0 1,175 494



health 0 0 0


non-health 0 0 0


Life reinsurance 0 354 341

Total gross life premiums

written 0 1,529 836

Gross Life Premiums Written By Country

Dec 16

£m

Dec 17

£m

Dec 18

£m

Home country 0 1,529 836

Country 1 0 0 0

Country 2 0 0 0

Country 3 0 0 0

Country 4 0 0 0

Country 5 0 0 0

Other countries 0 0 0

Total gross life premiums written

0 1,529 836

Premiums and claims were not reported in PPL's SFCR in 2016.

New business, all single premium unit linked, which had increased by 99% in 2017, reduced by 45% in 2018, from £1,528.5m to £835.7m. Within this, direct written business reduced by 61% from £1,134.2m to £444.3m. External reinsurance accepted increased by 24% from £40.2m to £50.0m, whilst intragroup reinsurance accepted was down by 4%

from £354.1m to £341.5m.



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Profit

Dec 16

£m

Dec 17

£m

Dec 18

£m

Profit (loss) before taxation 11 7 8

Taxation (2) (1) (1)

Profit (loss) after taxation 9 6 6

Other comprehensive income

0 0 0

Dividends 0 0 0

Retained profit (loss) 9 6 6

Life Business Flows

Dec 16

£m

Dec 17

£m

Dec 18

£m

Net life premiums earned 0 1,317 836

Net life claims incurred 0 (1,585) (1,381)

Net flow of business 0 (268) (545)

PPL's total operating profit in 2018 increased by 11% to £7.6m [2017: £6.9m]. This increase is primarily due to a decrease in the expense base in 2018. Its total non-operating result reduced by £0.3m to a loss of £0.4m, driven by a reduction in the value of the non-linked investments. PPL holds non-linked UK gilts, which have reduced in value over the year due to

an increase in interest rates.

As previously mentioned, premiums/claims are not shown in this table for 2016. PPL wrote £835.9m [2017: £1,528.7m] of net premiums in 2018 and paid net claims of £1,381.4m [2017: £1,778.0m] on unit linked products. Additionally, annuity payments of £4.9m [2017: £5.3m] were paid to policyholders, but this was fully recovered from PAC as part of a

reassurance agreement.



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Guide

INTRODUCTION

For over 20 years AKG has particularly focused on the financial strength requirements of financial advisers, who when acting on behalf of their clients, need to ascertain a company's ability to deliver sustained provision.

From this customer perspective, the financial strength of companies needs to be focused at an operational level, specifically

on the company that is effecting the product or service that a customer is selecting. This is important, because from the customer’s perspective it is that company (not some higher corporate entity) that needs to survive in a form that maintains the requisite operational characteristics to meet their fairly held requirements. And it is thus at this level that the selection needs of the customers’ advisers must be met.

It is also important to understand the sector approach (comparative peer groups) that is adopted in financial strength assessment and rating process.

At AKG, this is again driven by the end customer perspective and the fact that assessment is designed solely for this

purpose, i.e. as a component in helping customers’ advisers to select between comparable companies competing to deliver relevant products or services.

AKG’s focus and approach has remained consistent over the years since it commenced assessment and rating support for

the market. However, coverage, format and presentation has rightly evolved over this period, in line with the needs and expectations of assessment and rating users in the market. And AKG considers further changes on a continual basis.

Further details including an explanation of what is included in the assessment reports and coverage can be found online

at https://www.akg.co.uk/information/reports/provider.

AKG’s process for assessment and rating is to use a balanced scorecard of measures and comparative information, relevant to the companies contained within each peer group. This is gathered via Public Information only for non-participatory

assessments and public information plus company interactions with companies for participatory assessments. Further details on AKG’s process can be found at https://www.akg.co.uk/information/reports.

This includes further information on the different participatory and non-participatory basis and for companies wishing to learn more about participatory assessment AKG is pleased to outline this and welcomes contact.

This is a participatory assessment.

RATING DEFINIT IONS

Overall Financial Strength Rating The objective is to provide a simple indication of the general financial strength of a company from the perspective of those financial advisers who when acting on behalf of their clients need to ascertain a company's ability to deliver sustained

operational provision of products or services.

The overall rating inherently reflects the mix of business within the company, since different types of customer or policyholder have different requirements and expectations, and the company may have particular strengths and

weaknesses in respect of its key product or service areas. However, it also takes account of comparison across the sector in which it is assessed.

The rating takes into account those of the following criteria which are relevant (depending upon the company's mix of

business in-force): capital and asset position, expense position and profitability, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), operational capability, management



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strength and capability, strategic position and rationale, brand and image, typical fund performance achievements or product / service features, its operating environment and ability to withstand external forces.

Rating Scale A B+ B B- C D �

Superior Very Strong Strong Satisfactory Weak Very Weak Not applicable

With Profits Financial Strength Rating

The objective is to provide a simple indication of the with profits financial strength of a company, where it currently offers with profits business or has existing with profits business within it.

This is from the perspective of those financial advisers who when acting on behalf of their clients, for this product type, need to ascertain a company's ability to deliver sustained operational provision of with profits funds, products or

propositions. Its comparison is with other companies within the assessment sector that offer or have with profits business.

The main criteria taken into account are: capital and asset position, expense position and profitability, the amount of with profits business in-force, parental strength (and likely attitude towards supporting the company), and image and strategy.

NOTE: More detailed analysis of with profits companies is included in AKG’s UK Life Office With Profits Reports.

Rating Scale ��

Excellent Very Good Good Adequate Poor Not Rated

Unit Linked Financial Strength Rating The objective is to provide a simple indication of the unit linked financial strength of a company, where it currently offers unit linked business or has existing unit linked business within it. This is from the perspective of those financial advisers

who when acting on behalf of their clients, for this product type, need to ascertain a company's ability to deliver sustained operational provision of unit linked products or propositions. Its comparison is with other companies within the assessment sector that offer or have unit linked business.

The main criteria taken into account are: capital and asset position, expense position and profitability, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), operational capability, management strength and capability, strategic position and rationale, brand and image, typical fund performance

achievements or product / service features, its operating environment and ability to withstand external forces.

Rating Scale ��


Non Profit Financial Strength Rating The objective is to provide a simple indication of the non profit financial strength of a company, where it currently offers or has existing products and propositions such as term assurance and annuities. This focuses on the company’s ability to

deliver sustained operational provision of such non profit products or propositions. Its comparison is with other companies within the assessment sector that offer or have non profit business.

The main criteria taken into account are: capital and asset position, expense position and profitability, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), operational capability,

management strength and capability, strategic position and rationale, brand and image, product / service features, its operating environment and ability to withstand external forces.



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Rating Scale ��


Service Rating The objective is to assess the quality of the organisation's service to the intermediary market in respect of the brand concerned.

Criteria taken into account include: performance in surveys, awards and benchmarking exercises (external and internal), the organisation's philosophy, service charters, the extent of investments designed to improve service, and feedback from intermediaries.

Rating Scale ��


Image & Strategy Rating

The objective is to assess the effectiveness of the means by which the organisation currently positions itself to distribute its products for the brand concerned and the plans it has to maintain and/or develop its position.

Criteria taken into account include: overall trends in the company’s market share position, brand visibility and reputation, feedback from intermediaries and industry commentators, and AKG’s view of the company’s general strategy.

Rating Scale ��


Business Performance Rating This review is an assessment of how the company and the brand has fared against its peers, and how it is perceived externally. Effectively this is how it has performed recently in the market. Whilst it will include performance indicators from the most recent available statutory reporting (report and accounts and SFCRs in the case of insurance companies,

for example) it will also draw on other recent key performance elements before and after such disclosure, up to the point at which the assessment is undertaken.

Criteria taken into account include: increase/decrease in market shares, expense containment, publicity good or bad, press

or market commentary, regulatory fines, and competitive position.

Rating Scale ��




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ABOUT AKG

AKG is an independent organisation. Originally established as an actuarial consultancy AKG has, for over 20 years, specialised in the provision of assessment, ratings, information and market assistance to the financial services industry.

As the market has evolved over this period, the range of entities considered by AKG has expanded. Consequently, AKG

has brought additional skill sets into its operations. This has meant the inclusion of accounting, corporate finance, IT and market intelligence experience, alongside actuarial resources, to deliver an expanded professional capability.

Today AKG’s core purpose is in the provision of financial analysis and review services to support the wider financial services

sector and its customers.

© AKG Financial Analytics Ltd (AKG) 2020

This report is issued as at a certain date, and it remains AKG's current assessment with current ratings until it is superseded by a subsequently issued

report or subsequently issued ratings (at which point the newly issued report or ratings should be used), or until AKG ceases to make such a report

or ratings available.

The report contains assessment based on available information at the date as shown on the report’s cover and in its page footer. This includes prior

regulatory data which may have an earlier date associated with it, but the report also takes into account all relevant events and information, available

to and considered by AKG, which have occurred prior to this stated cover and footer date. Events and information subsequent to this date are not

covered within it, but AKG continually monitors and reviews such events and information and where individually or in aggregate such events or

information give rise to rating revision an updated report under an updated date is issued as soon as possible.

All rights reserved. This report is protected by copyright. This report and the data/information contained herein is provided on a single site multi

user basis. It may therefore be utilised by a number of individuals within a location. If provided in paper form this may be as part of a physical library

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copying or installation onto more than one computer is prohibited under copyright. Printing from electronic form is permitted for own (single

location) use only and multiple printing for onward distribution is prohibited under copyright. Further distribution and uses of the report, either in its

entirety or part thereof, may be permitted by separate agreement, under licence. Please contact AKG in this regard or with any questions:

[email protected], Tel +44 (0) 1306 876439. AKG has made every effort to ensure the accuracy of the content of this report and to ensure that the

information contained is as current as possible at the date of issue, but AKG (inclusive of its directors, officers, staff and shareholders and any affiliated

third parties) cannot accept any liability to any party in respect of, or resulting from, errors or omissions. AKG information, comments and opinion,

as expressed in the form of its analysis and ratings, do not establish or seek to establish suitability in any individual regard and AKG does not provide,

explicitly or implicitly, through this report and its content, or any other assessment, rating or commentary, any form of investment advice or fiduciary

service.

AKG Financial Analytics Ltd Anderton House, 92 South Street, Dorking, Surrey RH4 2EW Tel: +44 (0) 1306 876439 Email: [email protected] Web: www.akg.co.uk © AKG Financial Analytics Ltd 2020

Documents

AKG Financial Strength Assessment Report · 2020-02-13 · This involved the transfer of 2,500 people, including 650 employees from Prudential. Image & Strategy Rating Prudential's