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Table of Contents

Executive Summary 1

Products, Services and Financial Instruments

Products/Services 2
Financial Instruments – Assets 3
Financial Instrument – Liabilities 4

Financial Ratios
Prudential PLC 5
Competitive Comparison 6

Products, Services and Instruments Development Factors

Ageing Population 7
Government and Regulation Changes 7
i) Retail Distribution Review (RDR) 8
ii) Association of British Insurers (ABI) 8
iii) UK Government 9
iv) Solvency II Regime 9

Low Economic Growth 10

Opportunities & Threats

Brexit 11
Interest Rate Risk 11
Technology 12

References 13
Executive Summary

The main purpose of this report is to provide an analysis and measurement of Prudential UK

performance. The method of analysis include identify and examine the development of the

products, services and the present financial instruments, evaluate company’s financial

condition and understand how competitors perform, as well as analyse company’s future

opportunities and threats.

Company is relentlessly focusing on with-profits and retirement businesses, enhance

customer service level, and invest in technology to improve internal processes are owing to:

 continuing ageing British population and change in customer’s retirement perspective

 low economic growth which resulted low interest rate and low investment return

 Government and regulations changes such as:

o Retail Distribution Review that require a higher commission transparency and

improve professionalism of advisers
o New code of conducts on retirement choices imposed by Association of British
Insurers to help customers understand their options at retirement
o Pension freedom, which given greater flexibility to use their pot of money
o European regulatory - Solvency II, required a higher capital requirement,
detailed reporting and disclosure, and effective risk assessment system

Based on financial ratio with competitors, company would need to improve its debt to equity

as company seems to finance its growth aggressively compare to others and have to improve

its operating margin by reviewing and reducing those unnecessary operating and general


Brexit issues and the low economic growth have rendered as threat to the company as

uncertainty might hold back businesses expansion and yield a lower investment returns.

Nevertheless, these issues can be an opportunity to the company too. And company need to

make use of digital technologies to bridge the interaction gap with customer to gain their loyalty.

Products, Services and Financial Instruments


Following are the existing products and services that offered by Prudential UK and are

classified into four broad categories as per table below:

Categories Products/Services
Pensions & Retirement Pension:
- Prudential Retirement Account
- Flexible Retirement Plan
- Self-Invested Personal Pensions
- Additional Voluntary Contributions
- Group Personal Pension
- Money Purchase Plan
- Prudential Retirement Account
- Guaranteed Pension Annuity
- Single Cash Lump Sum
- Pension Choices Plan
- Flexi-Access Drawdown Option

Investments - Prudential ISA

- Open-ended Investments Company Fund
- Prudential Investments Plan
- Prudential Onshore Portfolio Bond
- Prudential International Investment

Funds - With Profits Fund

- Unit-Linked Funds

Insurance - Car Insurance

- Home Insurance
- Travel Insurance
(Prudential, 2016a)

The principal activity of the company is managing long term insurance business in the UK.

And the company is relentlessly focusing on savings products and retirement income solutions

to the ageing population as well as young generation.

Financial Instruments - Assets

Financial instrument listed in assets are:

Financial Investments
Loans - Mortgage loans (collateralised by properties, the
types are industrial, multi-family residential,
suburban office, retail and hotel)
- Policy
- Loans
- Other loans (commercial loans and comprise mainly
syndicated loans)

Equity securities and portfolio - Equities, bonds, cash and cash equivalents and
holdings in unit trusts properties

Debt securities - Asset-backed securities [which comprise Residential

Mortgage-Backed Securities (RMBS), Commercial
Mortgage-Backed Securities (CMBS), Collateralised
Debt Obligations (CDO) funds and other asset-
backed securities(ABS)]
- Sovereign debt and bank debt securities (in
Eurozone, the US, the UK and predominantly Asia)

Other investments - Derivative assets and partnerships in investment

pools and other (i.e.: investments in limited
partnerships and in property funds).

Deposits - Deposits held at call with banks (offers prompt

access to funds and permits unlimited withdrawals
and deposits)

Investment properties - Investments in leasehold and freehold properties

including properties under development for future
use as investment properties
(Prudential, 2016b)

Most financial assets are generally held to back policyholder’s liabilities and are in marketable

securities which offer higher liquidity and can quickly convert into cash to meet the obligation.

Financial Instrument - Liabilities

Financial instrument listed in liabilities are:

Financial Liabilities
Operational borrowings - Commercial Papers
attributable to shareholder- - Medium Term Notes (MTN)
financed operations - Bank loans and overdraft
- Obligations under finance leases
- Other borrowing (include amounts whose repayment
to the lender and senior debt issued)

Borrowings attributable to - Non-recourse borrowings of consolidated investment

with-profits funds funds
- Undated subordinated guaranteed bonds
- Other borrowing (predominantly obligation under
finance leases: leases of investment property,
investment in leasehold and freehold properties)

Other non-insurance liabilities - Obligations under funding

- Securities lending
- Sale and repurchase agreements
- Net asset value attributable to unit holders of
consolidated unit trusts and similar funds

Derivative liabilities - Futures, options, forward currency contracts and

swaps such as interest rate swaps, cross-currency
swaps, swaptions and credit default swaps

Policyholder liabilities & - The excess of assets over policyholder liabilities for
unallocated surplus of with- the company with-profits funds
profits funds

(Prudential, 2016b)

Financial Ratios

Prudential PLC

Following key ratios were applied to measure Prudential groups’ past five years performance

and its financial condition such as its profitability and efficiency.

(GuruFocus, 2004a)

 ROE - The average ROE in the past five years is 19.16%. ROE of 15% to 20% are

generally considered decent (Investopedia.com, 2003).

 ROA - The group is using lesser investment to make more money which is a good sign.

 Operating Margin - Although only 8.04% left to cover the non-operating expenses, but

the figures is improving over the past five years and it is expanding. It could be a good

sign of more stable during industry slowdown as it has less financial risk. It is a very

important indicator of whether the group is facing problems.

 Net Margin - Revenue was decline in 2015 due to realised and unrealised losses and

gains on securities, derivatives and loans. Investment return was not great as

compared to past few years (Prudential, 2016b).

 Debt to Equity - The ratio was maintained in between 0.64 to 0.65 in the past two year.

There were high ratio in year 2011 and year 2013 which may indicate that the group

was borrowing aggressively and can’t make enough cash to satisfy its debt obligations.

 Free Cash Flow - The free cash flow is improving over the years, the group can use

this cash for further expansion or development, dividends pay-outs, lessening debts or

for other purposes.

In short, the group is performing well.

Competitive Comparison

(As of 24 Nov 2016)

(GuruFocus, 2004)

Based on the comparison data, Prudential PLC has the highest Debt to Equity ratio, it can

mean that the group has been aggressively in financing its growth with debt, and more

financial risk has been taken on as compare with competitors. The group may want to improve

its operating margin as it is quite low percentage left to cover the non-operating expenses,

and it is earning less per dollar of sales as compared to competitors. Lift up sales revenue and

review in operation cost might help to achieve a better operating margin percentage.

Products, Services and Instruments Development Factors

Ageing Population

The UK market has an ageing population and it is anticipated to continue ageing.

(Population, 2012)

Owing to these ageing population, Prudential UK is primarily focuses on the needs of these

“baby boomers” and the younger generation by offering them the annuities, pensions, savings

and investments as a retirement income solutions as well as the savings gap (Prudential,

2016d). The company is relentless focus on its core strength, which is on with-profit and

retirement businesses.

Government and Regulation Changes

(Prudential UK and Europe, 2016)

There were a structural market change over the past few years in the UK owing to the

regulatory change and customers’ lifestyle change. For instance, in 2011, Prudential UK has

relaunched of direct advice service (Prudential Financial Planning - PFP) which was withdrew

in 2001, and this PFP is primarily aims to provide financial advice to the existing customers

(Prudential, 2012). This implementation is also meant to pad the advice gap and enhance their

direct to customer’s distribution business model, as the implementation of Retail Distribution

Review in 2012 might lead to fewer financial advisers (Lobo, 2012).

i) Retail Distribution Review (RDR)

The implementation of RDR has come effect on 31 Dec 2012 with the aims of transparency

on the commission aspect and to reinforce the professionalism level in financial advice market.

This has led to some short-term disruption in 2013 as distribution landscape has transformed,

distributor, adviser, customers and insurers were adapting and adjusting to this new setting

(Prudential, 2013).

ii) Association of British Insurers (ABI)

In Mar 2013, ABI has imposed a new code of conduct on retirement choice on major pension

and annuity providers. The aims are to help customers to have their retirement choices,

encourage customers to shop around for a more competitive products before committing into

one, and help customers to select the suitable products as per their conditions (Prudential,

2014). In order to meet the changes, company has developed innovative products, with more

optional and comparative choices as well as enhancing their service level such as providing

advice to customers in their home, through telephone and internet in order to grab the

opportunity to increase their market shares.

iii) UK Government

The UK government announced “pension freedom” in 2014 budget to kick start in April 2015 has

given the opportunity to all pension and annuities providers, as customers who reached age 55 can

choose to cash out all his money. This has become an indication to the say providers that

customers can choose to invest or save in a greater amount than before (Prudential, 2015). The

need for retirement fund and savings still remains unchanged and with the “pension freedom”, it

has eventually provide a new significant opportunity to the say providers by introducing more

competitive and innovative products (introducing income drawdown business, manipulate with-

profits products which is making PruFund available through ISA wrapper and through drawdown

products) to meet the rising demand from “pension freedom” world customers (Prudential, 2016b).

iv) Solvency II Regime

The new European regulatory framework, Solvency II has come into effect on 1 Jan 2016 with

the aims of enhancing consumer protection level, modernised the present framework, improve

companies risk management towards financial shocks, and increase the international

competitiveness (Swain and Swallow, 2015). Under this new regime, all insurance company

is require to reserve a higher capital requirement and further disclosures of risk such as assess

company assets and liabilities in more depth than before. This create a substantial impact on

the company’s annuity business as increase in capital intensity as well as longevity risk. Owing

to these reason, company tends to minimize their craving for the annuity business post

Solvency II and going forward the primary earnings generated are from the core annuities in-

force and with-profit business (Prudential, 2016c). And to meet the new regime requirements,

the company is paying a great attention on regulatory developments and will continue to

repositioning the fixed income asset portfolio. Based on year 2015 financial report, the

company does has a strong Solvency II capital position owing to their nature of operating

capital generation approach. And the company does believes that “The best firms are looking

at using it to improve their returns. If you only look at it from the compliance angle, you won’t

get the benefits.” (Ralph, 2016)

Low Economic Growth

The company is constantly searching for alternative sources of income owing to the low yield

and low interest rate environment as it has make company struggle to gain a healthy and

stable return on investment. And the recent regulatory changes has also make it a significant

challenge to the business to be able to staying on top of the portfolio while managing cost

effectively. Company has announced to invest in technology - Black Rock’s Aladdin platform

which can help to streamline the reporting process, enhance innovation, to meet various

regulatory regimes requirements, as well as helping assets managers to manage their

investment portfolios more effectively (Prudential, 2016d).

Opportunities & Threats


The share price of the company was experiencing volatility due to the uncertainty arise from

the post Brexit referendum. Whole industry do not know how exactly it will take to exit from

the EU, questions arise are, will UK insurers still able to access to the single market and their

capacity to trade in the EU. If the company lose its single market access, the company

basically need to shift their operational platform to Europe, because under the existing rule

the UK base asset manager cannot sell the funds to European investor (Insurance Business,

2016). If this is going to happen, a significant amount of time, resource and cost are

inescapable. Uncertainty just making everyone in the market don’t know what to do next, plans

might hold back, causing both investment and economic growth slow down.

Despite the fact that Brexit may causes chaos, but this as well can be an opportunity to the

company too. For example, a flourishing and financial stable country like Switzerland, which

is not part of the EU member but still able to access to the single market and yet the

Switzerland’s insurers need not to comply with any EU regulations especially the new regime,

Solvency II (Oliver James Associates, n.d.). This will allow Prudential UK to escaping from the

demanding capital requirements, and can lessen those unnecessary costs provided the Brexit

terms has been negotiated properly and UK still can access to the single market.

Interest Rate Risk

2008 financial crisis has resulted a long term impact on the global economy, the whole

economy especially developed economies country seems like still trying hard to recover fully

from this waves (Ralph, 2016b). And low interest rates is one of the consequences of the low

economic growth. Owing to the low interest rate environment, this could impact company’s

profit and company may not be able to make a good yield return which is mainly from its fixed

income securities portfolio. Company also has to continuous evaluate the obligations values

and keep on adjusting the balance sheet and their investment strategy to cope with the bigger

liabilities size and especially now under Solvency II regime which required even more capital

to be reserved.

Although low interest rate environment might adversely affect the company especially with the

with-profits products, but this does not make the company’s sales falls. Instead of sales falling,

variable annuities and fixed index annuities (pegged to market index) sales have gone up

(Prudential, 2016b). In order to minimize the interest rate risk exposure, company has the risk

management and mitigation action in place which is apply derivative programs and at the

same time to manage the asset and liability matching.


Social media, mobile apps, digital marketing and other digital related facility have become part

of peoples’ life nowadays. Many peoples’ behaviour has changed due to the use of technology.

And many companies out there are following this new trend to interact with their customers,

to advertise, to reach out to the public and to create brand awareness. Therefore, Prudential

may also need to look into this trend such as to improve their existing apps with the function

of prompting customer when the premium is due, able to check on their policy values, to

prompt customers when there is a new products or service available, etc. The apps can be

functioning similar to mobile banking too, such as allowing customers to transfer or withdraw

their excess profits at one click with certain products. Be innovative and follow the trend will

help the company to form a better relationship with the customers and perhaps loyalty can be

gain a little by this too.


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