M&G Regulatory News (MNG)

M&G Plc NEWS RELEASE

9 March 2021

M&G plc full year 2020 results

Strong and resilient performance in a challenging environment, foundations laid for future growth, pivot to sustainable investing

John Foley, Chief Executive, said:

"In our first year as an independent company, we have delivered a strong and resilient performance in one of the most challenging operating environments ever.

"This demonstrates the value of our diversified and integrated business model, both to customers and clients, and to shareholders.

"We laid the foundations for M&G's return to growth, including actions to fix Retail Asset Management and the creation of M&G Wealth following the acquisition of Ascentric.

"As responsible stewards of £367.2 billion in Assets Under Management and Administration (AUMA), we are also pivoting the entire company to sustainable investing - a shift which we believe will benefit customers, clients and shareholders, as well as wider society and the planet.

"Our balance sheet has remained robust throughout the COVID-19 pandemic and capital generation was strong at £995 million for the year.

"We remain committed to our ambitious three-year £2.2 billion target for total capital generation to the end of 2022 and to our current policy of a stable or increasing dividend.

"I want to thank all my colleagues for their resolve and commitment in the face of the pandemic, as they continue to serve our customers and clients from the safety of their homes."

Financial highlights

- Adjusted operating profit before tax of £788 million, now reflecting the first full year of listed infrastructure costs

- IFRS profit after tax up to £1,142 million

- Total capital generation of £995 million

- Shareholder Solvency II coverage ratio strengthens to 182%, its highest level since independence

- Ordinary dividend of 12.23p per share, in line with our policy of a stable or increasing dividend

Operational highlights

- AUMA up to £367.2 billion, principally reflecting the acquisition of Ascentric in September

- Net outflows of £6.6 billion in Savings and Asset Management. Institutional Asset Management inflows of £5.1bn were offset by outflows in Retail Asset Management driven by weak investment performance

- Improvement in the investment performance of the retail fund range in the second half with 66%I of AUMA above median over six months

- Continued strong investment performance from the £143.2 billion With-Profits Fund at 6.6% p.a.ii over the past five years

- On track to achieve annual run-rate shareholder cost savings of £145 million through business transformation and modernisation in 2022

i As at December 2020

ii Based on the main life fund (OBMG) return for the 5 years to end of 2020. The return is net of 30bps p.a. approximate deduction for fees. Note that the actual return for the fund will be slightly different post hypothecation.

Outlook

- Strong balance sheet of the Heritage business underpins capital generation and dividend policy

- Launch of new sustainable private assets capability, opening up further opportunities for growth

- Strong pipeline of new propositions, including PruFund Planet, a sustainable version of market-leading PruFund

Enquiries:

Notes to Editors

1. The results in this preliminary announcement are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and are based on the consolidated financial statements of M&G plc.

2. All key performance measures relate to continuing operations iii

3. The shareholder view and regulatory view of the Solvency II coverage ratio as at 31 December 2020 assumes transitional measures on technical provisions which have been recalculated using management's estimate of the impact of operating and market conditions at the valuation date.

4. Total number of M&G plc shares in issue as at 31 December 2020 was 2,599,906,866.

5. A Q&A webcast will be hosted by John Foley (CEO) and Clare Bousfield (CFO) on Tuesday 9 March at 08:45 GMT. You can register for the Q&A and view the investor presentation here (the presentation will be available from 07:00 GMT):https://mngresults.connectid.cloud/register. Dial in: UK freephone 0800 640 6441/ All other locations +44 203 936 2999Participant code: 595189

6. Ordinary dividend to be paid in April 2021

7. About M&G plcM&G plc is a leading international savings and investments business, managing money for both individual savers and institutional investors in 28 markets. As at 31 December 2020, we have £367.2 billion of AUMA, around 5.3 million retail customers and more than 800 institutional clients. With a heritage dating back more than 170 years, M&G plc has a long history of innovation in savings and investments, combining asset management and insurance expertise to offer a wide range of solutions. We serve our savings and insurance customers under the Prudential brand in the UK and Europe and for asset management in South Africa, and under the M&G Investments brand for asset management clients globally.

8. Additional InformationM&G plc, a company incorporated in the United Kingdom, is the direct parent company of The Prudential Assurance Company Limited. The Prudential Assurance Company Limited is not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom.

9. Forward-Looking StatementsThis announcement may contain certain 'forward-looking statements' with respect to M&G plc and its affiliates (the "M&G Group"), its plans, its current goals and expectations relating to its future financial condition, performance, results, operating environment, strategy and objectives. Statements that are not historical facts, including statements about M&G plc's beliefs and expectations and including, without limitation, statements containing the words 'may', 'will', 'should', 'continue', 'aims', 'estimates', 'projects', 'believes', 'intends', 'expects', 'plans', 'seeks', 'outlook' and 'anticipates', and words of similar meaning, are forward-looking statements. These statements are based on plans, estimates and projections as at the time they are made, and therefore persons reading this announcement are cautioned against placing undue reliance on forward-looking statements.By their nature, all forward-looking statements involve inherent assumptions, risk and uncertainty, as they generally relate to future events and circumstances that may be beyond the M&G Group's control. A number of important factors could cause M&G plc's actual future financial condition or performance or other indicated results to differ materially from those indicated in any forward-looking statement.Such factors include, but are not limited to, UK domestic and global economic and business conditions (including the political, legal and economic effects of the UK's decision to leave the European Union); market-related conditions and risk, including fluctuations in interest rates and exchange rates, the potential for a sustained low-interest rate environment, corporate liquidity risk and the future trading value of the shares of M&G plc; investment portfolio-related risks, such as the performance of financial markets generally; the policies and actions of regulatory authorities, including, for example, new government initiatives; the impact of competition, economic uncertainty, inflation and deflation; the effect on M&G plc's business and results from, in particular, mortality and morbidity trends, longevity assumptions, lapse rates and policy renewal rates; the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; the impact of internal projects and other strategic actions, such as transformation programmes, failing to meet their objectives; the impact of operational risks, including risk associated with third party arrangements, reliance on third party distribution channels and disruption to the availability, confidentiality or integrity of M&G plc's IT systems (or those of its suppliers); the impact of changes in capital, solvency standards, accounting standards or relevant regulatory frameworks, and tax and other legislation and regulations in the jurisdictions in which the M&G Group operates; and the impact of legal and regulatory actions, investigations and disputes. These and other important factors may, for example, result in changes to assumptions used for determining results of operations or re-estimations of reserves for future policy benefits.Any forward-looking statements contained in this document speak only as of the date on which they are made. M&G plc expressly disclaims any obligation to update any of the forward-looking statements contained in this document or any other forward-looking statements it may make, whether as a result of future events, new information or otherwise except as required pursuant to the UK Prospectus Rules, the UK Listing Rules, the UK Disclosure and Transparency Rules, or other applicable laws and regulations. Nothing in this announcement shall be construed as a profit forecast, or an offer to sell or the solicitation of an offer to buy any securities.

iii Continuing operations in 2019 excluded our Asia insurance operations and treasury services provided to Prudential plc which are presented as discontinued operations.

LEI: 254900TWUJUQ44TQJY84 Classification: 1.1 Annual financial and audit reports

Chief Executive's review

A foundational year

In less than ideal conditions, we have achieved much in our first full year as an independent business, laying the foundations for our return to sustainable growth.

Throughout the COVID-19 pandemic, M&G continued to deliver on our commitments to customers, clients and shareholders, thanks to our diversified and integrated business model and the resolve of my colleagues.

We also laid the foundations for M&G's return to growth, including fixing Retail Asset Management and the acceleration of our expansion into UK wealth management.

Above all, we are pivoting the entire business to sustainable investing, so that as the stewards of the long-term savings of millions of people, we can make an even bigger difference to people and the planet.

A strong and resilient performance

In an extremely challenging operating environment, total AUMA ended the year 4% higher at £367.2 billion.

Adjusted operating profit before tax was £788 million, a good outcome given that, as an independent company, we incurred Head Office and debt interest costs for the first full year.

Our shareholder Solvency II coverage ratio strengthened to 182%, higher than its pre-crisis levels, higher even than its level at our market listing, and well above our risk tolerance.

Despite market volatility, total capital generation was £995 million for the year.

We remain committed to our policy of a stable or increasing dividend and to our ambitious three-year total capital generation target of £2.2 billion. However, the COVID-19 pandemic is not over yet and financial markets have continued to be relatively volatile, so we need to be mindful that markets can drive large changes in capital generation in a short period of time.

Strength through diversification

This strong and resilient financial performance owes much to our diversified and integrated business model.

As asset owner, our proactive management of the Heritage business underpinned our earnings and our dividend policy.

In Asset Management, our Institutional business grew attracting £5.1 billion of net client inflows in 2020, driven by strong investment performance and continued investment innovation.

Total AUMA on behalf of external institutional clients grew 11% to £85.5 billion. Revenue margins strengthened by two basis points during the year as clients moved more assets into higher-value strategies.

The success of the Institutional business helped to partially offset another difficult year in Retail Asset Management. Redemptions increased during the year due to weak investment performance of some of our larger funds.

In Retail Savings, net client inflows into PruFund, our market-leading smoothed solution for UK savers, remained positive at £400 million, but were down on the previous year mainly due to pandemic-related restrictions on face-to-face advice. Withdrawals were stable.

The £143.2 billion With-Profits Fund, which underpins PruFund, continued to generate strong financial outcomes. Over the five years to the end of 2020, the With-Profits Fund produced net investment returns of 6.6% p.a I.

I Based on the main life fund (OBMG) return for the 5 years to end of 2020. The return is net of 30bps p.a. approximate deduction for fees. Note that the actual return for the fund will be slightly different post hypothecation.

Our people

The passion and resolve of all colleagues has been critical to our operational resilience throughout the COVID-19 pandemic. I am extremely proud of how, together, we responded to the challenge.

The new vaccines give us hope for a return to some kind of normality. In the meantime, our priority remains the well-being and safety of colleagues while they continue to serve customers and clients.

As the pandemic spread around the globe, we responded swiftly and effectively. Within two weeks in March, almost all of our circa 6,000 staff were equipped to work safely from home, wherever in the world they are based.

We put no colleague on furlough and received no financial assistance from governments.

Flexible working patterns and allowances for equipment helped our colleagues to remain productive and safe while serving our customers and clients from their homes.

We encouraged colleagues to prioritise care for dependents and help for their local communities. M&G donated more than £1.3 million to charities and non-profit groups helping those worst affected by the COVID-19 pandemic.

The Group Executive Committee and I are profoundly grateful to colleagues for their passionate commitment to customers and clients and to our business during these difficult times.

Fixing Retail Asset Management

In August, we set out what we were doing to reinvigorate our retail funds business and we have made good progress.

We have begun the revamp of the product range, refreshing some funds and consolidating others.

Our new propositions like the Climate Solutions Fund launched in November, are aimed at the growing market for sustainable savings and investment strategies.

We also cut fees across our UK retail fund range to be more competitive, while passing on the benefit of economies of scale to European clients.

To improve fund performance, we have introduced institutional investment disciplines, moved to team-oriented management and bolstered data modelling.

Performance of our mutual fund range markedly improved in the second half of 2020, with 66% of funds, weighted by size, performing above median on a 6-month basis, and 78% on a 3-month basis (as at 31 December 2020).

Over time, we are confident that these measures will help us to retain assets and return to net inflows.

M&G Wealth

In September, we acquired the Ascentric adviser business from insurer Royal London, accelerating our expansion into the fast growing market for UK wealth management services.

Ascentric brought £15.5 billion of new AUMA, as well as 95,000 new customers and relationships with more than 4,000 advisers.

Critically, it gave us an important component for our integrated wealth business: an adviser platform on which their customers' long-term savings can be consolidated and administered.

In the autumn, we formally combined Ascentric with our two restricted advisory arms, Prudential Financial Planning and The Advice Partnership, as well as the reinvigorated M&G direct funds business.

Together, they form M&G Wealth. With £28 billion of AUMA, we see M&G Wealth as a powerful new force in UK wealth management.

Our aim is to put PruFund, our market-leading smoothed solution for UK customers, on to the M&G Wealth platform, opening up access to the proposition to a wider group of advisers and savers.

Sustainable investing

It is our belief that a sustainably-run and well-governed company will deliver better overall outcomes for customers and clients, and stronger, more resilient returns to shareholders.

We are embedding the principles of sustainability across our business, with ambitious corporate targets on net zero carbon emissions and on diversity and inclusion.

On our client investment portfolios, we are committed to achieving net zero carbon emissions by 2050, in line with the Paris Agreement.

We see the rapid growth in sustainable investing and environmental, social and governance (ESG) strategies as a permanent, structural change in the behaviour of customers and clients.

Only active investment managers are equipped to deliver the full benefits of sustainable investing, through exclusion and the active direction of capital for impact.

M&G has a long history as a responsible steward of savers' capital and we are well-placed to champion sustainable investing because of our combination as asset owner and asset manager.

It gives us a number of competitive advantages, including our ability as asset owner to direct capital to sustainable opportunities and its sponsorship of innovation in investment.

An example of this is the With-Profits Fund's allocation of £5 billion to a new innovative private assets strategy which aims to make a positive contribution to society and the environment.

To implement this strategy, we formed a new global team of private asset investors called Catalyst, whose job is to identify sustainable investment opportunities among new and emerging private companies.

Catalyst is one in a series of innovations in this field, which included the launch of the Climate Solutions Fund in November.

Later this year, we will launch a sustainable version of PruFund, our market-leading smoothed solution for UK retail savers.

Further modernisation

We continued with our five year digital transformation programme to strengthen the operations of the Heritage business, to improve outcomes for our 5.3 million retail customers, and to achieve business efficiencies.

We have now moved the accounts of more than 800,000 customers from a mix of legacy systems on to the administration platform of our strategic IT partner Diligenta, part of Tata Consultancy Services.

In addition, we increased the number of Prudential customers with online access to detailed and up-to-the-moment information on their accounts through the MyPru application, a real innovation in our digital service.

Across the IT estate, our goal is to simplify, and we remain on track to reduce the number of applications by c.50%.

Adoption of a digital-first approach to business was accelerated by the demands of the COVID-19 pandemic.

We introduced restricted financial advice via video calls to UK savers who cannot or do not wish to leave their homes. This raised the productivity of our advisers, while cutting our carbon emissions by 80% over the year.

The transformation programme remains on track to deliver annual run-rate shareholder cost savings of £145 million in 2022.

In 2020, we identified further savings from modernisation as we reshaped the business in the face of the pandemic.

In line with our priority of supporting colleague well-being during the crisis, we dropped our target for a 10% reduction in staff costs during the year.

Nonetheless, 250 colleagues took voluntary redundancy and we continue to seek to reduce costs.

Ready for growth

Our growth strategy is to leverage the asset owner and asset manager combination, while modernising our business, the targeted acquisition of new capabilities, and further innovation.

We are doing this while pivoting the entire business to the rapidly growing global market for sustainable investing.

As this report shows, we laid firm foundations for future growth by resetting parts of the business and strengthening others, while still meeting our commitments to customers, clients, colleagues and shareholders.

In Europe, we expanded our sub-advisory business. A PruFund-like proposition is operationally ready for European clients. We are working on the necessary approvals for its distribution.

International operations were strengthened with a new investment hub in Chicago and a new fixed income team. We also opened a European asset management desk to Brexit-proof our Asset Management business.

We agreed to take majority control of our South African operation, which has £12 billion of AUMA.

In Institutional, aside from winning £13 billion of new mandates, we began the repatriation of £25 billion of North American and Asian With-Profits Fund mandates from our former parent, Prudential plc.

Alongside this, we created a greater sense of One M&G among colleagues, built around shared values and collaboration.

I led a company-wide programme on culture and conduct to ensure our people live up to our values of care and integrity.

Positive outlook

The foundational work we have undertaken over the past 12 months means that we are well-positioned to seize the structural growth opportunities in our markets.

Demand for high-value savings and investment solutions will continue to be driven for many decades by ageing populations, the widening savings gap, low interest rates and the shift to sustainable investing.

In the UK, we will complete the revamp of our retail funds offering and continue to expand M&G Wealth by adding to the range of propositions and tax wrappers.

Internationally, we will deepen our relationships with our European partners to obtain a greater share of investment wallet, while growing our investment capabilities in Singapore and the US.

Above all, we will champion sustainable investing, with a series of innovations for customers and clients, including PruFund Planet, the sustainable version of our market-leading smoothed savings solution.

Our financial focus will remain on capital generation to create long-term value for shareholders and to underpin our policy of a stable or increasing dividend.

We will also continue with the work to improve the operational efficiency of our entire business through further modernisation, while balancing this against the need to invest for growth.

As ever, there will be headwinds. But the resilience of the M&G business model has been demonstrated by the demands of the COVID-19 pandemic and I am confident we are now in a much stronger position to return to growth.

Business and financial review

Despite financial markets operating in extremely volatile and adverse conditions, our financial performance benefitted from our strong balance sheet and diversified earnings resulting from the combination of being an asset manager and an asset owner.

Adjusted operating profit before tax of £788 million (2019: £1,149 million) demonstrates our ability to deliver strong returns even in a challenging environment. Total AUMA increased to £367.2 billion (2019: £351.5 billion). The completion of the acquisition of Ascentric in the third quarter, positive market movements and strong net inflows in our Institutional Asset Management business, together outweighed the impact of net client outflows in our Retail Asset Management business. The net client inflows in our Institutional Asset Management business reflect consistently strong investment performance and the attractive range of innovative client solutions, while Retail Asset Management net client flows were impacted by market volatility and the recent underperformance of some of our larger funds.

We remain committed to achieving £145 million of annual run-rate shareholder cost savings by full-year 2022 through our five year investment in digital transformation. Recognising the headwinds we are experiencing in our Retail Asset Management business, we will continue to drive operational efficiencies to enable us to counter the margin pressure the industry is experiencing. As we do this, we'll carefully balance savings potential with investment requirements and cost to achieve.

Throughout the year, we also demonstrated our proactive approach to capital management, with total capital generation of £995 million (2019: £1,509 million) as we coupled the stable and recurring nature of our underlying capital generation from our operating segments with management actions to protect our balance sheet. This strong performance led to an increase in our shareholder Solvency II coverage ratio to 182% (2019: 176%), after paying dividends of £562 million in the period. Whilst the economic outlook remains uncertain this result demonstrates our focus on proactively and efficiently managing our balance sheet, and our commitment to deliver our ambitious three-year cumulative total capital generation target of £2.2 billion to the end of 2022.

Parent Company liquidity remained at comfortable levels and has not been adversely affected by the global crisis, with cash and liquid assets of £1.0 billion at the end of 2020.

We paid dividends of £410 million on 29 May 2020, comprising an ordinary dividend of 11.92 pence per share and a special demerger dividend of 3.85 pence per share. In addition, we paid an interim ordinary dividend of £152 million equal to 6.00 pence per share, in line with our policy of paying one-third of the previous year total dividend, on 30 September 2020. A second interim dividend of £310 million equal to 12.23 pence per share will be paid on 28 April 2021.

The audit tender process was concluded in the last quarter and we announced our intention to appoint PwC as new external auditor effective for the period commencing 1 January 2022. This will allow them to review the prior year comparative data in advance of the first effective reporting period under IFRS 17 in 2023.

Overview

Adjusted operating profit before tax to IFRS profit after tax

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

i Restructuring costs excluded from adjusted operating profit relate to merger and transformation costs of £73 million for the year ended 31 December 2020 (2019 : £62m). In 2019 restructuring costs also included rebranding and other change in control costs allocated to the shareholders. Additional restructuring costs are included in the analysis of administrative and other expenses in Note 5 to the IFRS financial information.

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

Adjusted operating profit before tax was £788 million for the year ended 31 December 2020 (2019: £1,149 million).The results included the first full year of listed infrastructure costs, with £167 million of finance costs in relation to the subordinated debt, £101 million of head office costs and £15 million foreign exchange gain in respect of the US dollar subordinated debt. The 2019 result benefitted from changes made to the staff pension schemes of £64 million which were not repeated in 2020. The fall in fee-based revenue resulted from net client outflows in Retail Asset Management during 2020, particularly in the international wholesale channel, and industry-wide pressure on margins.

IFRS profit after tax

IFRS profit after tax attributable to equity holders from continuing operations increased to £1,142 million compared to £1,065 million for the year ended 31 December 2019. The fall in adjusted operating profit before tax was offset by the combined positive impact of a £380 million increase in short-term fluctuations in investment returns and a £125 million reduction in restructuring costs, less a £15 million increase in the equity holders tax charge. Short-term fluctuations primarily comprise gains on equity hedges of £235 million, a benefit of £118 million from interest rate swaps purchased to protect the Solvency II capital position and a £435 million increase from fair value movements on surplus annuity assets. These gains have been partially offset by the strengthening of the credit risk allowance for shareholder-backed annuities by £117 million, in anticipation of short-term deterioration in the number of company defaults and downgrades due to the current market conditions arising from the COVID-19 pandemic.

Equity holders' effective tax rate for the year ended 31 December 2020 was 18.3% compared to 18.4% for the year ended 31 December 2019. Excluding non-recurring items, the equity holders' effective tax rate was 18.8% (2019: 20.2%). The equity holders' effective tax rate of 18.3% was lower than the UK statutory rate of 19% (2019: 19%) primarily due to beneficial impacts arising from adjustments to prior periods tax charges and non-taxable income during the period, partially offset by the detrimental impact of non-deductible expenses. Our approach to tax is to act responsibly and transparently in all of our tax affairs. We understand the importance to governments and societies of paying the right amount of tax at the right time in the right place. The Group complies with statutory obligations in all the jurisdictions in which we operate and seeks to have an open and effective relationship with tax authorities.

Capital generation

The following table shows an analysis of total capital generation:

Total capital generation was £995 million for the year ended 31 December 2020 (2019: £1,509 million), reflecting improved operating capital generation but also the impact of negative market movements in the period, compared to the positive market movements experienced in 2019.

We analyse operating capital generation by considering both the contribution from underlying capital generation, which includes the expected surplus capital from the life insurance business, as well as the adjusted operating profit before tax and associated capital movements from other business and also the capital generated from other operating items.

Underlying capital generation fell to £577 million (2019: £782 million), primarily due to the expected impact of the first full year of listed infrastructure costs in the Corporate Centre, with the underlying result from our operating segments remaining broadly stable. This reduction, however, was offset by a larger benefit from other operating items of £735 million (2019: £494 million), resulting in an increase in operating capital generation to £1,312 million (2019: £1,276 million).

Other operating capital generation was driven by a £408 million (2019: £157 million) benefit from management actions, along with £167 million (2019: £214 million) due to assumption changes, which includes £242 million arising from longevity assumption releases. The impact from model changes, experience variances and other items was £160 million (2019: £123 million) which includes an increased contribution from the Corporate Centre of £88 million (2019: £68 million reduction), partially offset by a reduced impact within Heritage. The change in Corporate Centre primarily reflects the impact of updates to the measurement approach of the Group's leases under Solvency II, while the 2019 result allowed for the establishment of operational risk capital for the new Head Office function.

The adverse economic conditions experienced during 2020 reduced total capital generation by £118 million, whereas the 2019 result benefitted from £538 million of positive market movements. The 2020 market movements are net of a positive impact of £346 million from equity and interest rate hedges, which protect the Group's capital position.

Capital positionii

The Group's Solvency II surplus increased to £4.8 billion as at 31 December 2020 (2019: £4.5 billion), equivalent to a shareholder Solvency II coverage ratio of 182% (2019: 176%), driven by total capital generation of £995 million offset by reductions of £562 million for dividends paid to shareholders and £121 million from other capital movements.

Our With-Profits Fund continues to have a strong Solvency II coverage ratio of 242%. While this is lower than the 267% as at 31 December 2019, it reflects the increased cost of options and guarantees and the distribution of £1.0 billion of excess surplus in the fund to our with-profits policyholders announced in February 2020.

The regulatory Solvency II coverage ratio of the Group as at 31 December 2020 was 144% (2019: 143%). This view of solvency combines the shareholder position and the With-Profits Fund, but excludes all surplus within the With-Profits Fund.

ii The shareholder, With-Profits Fund, and regulatory views of the Solvency II position presented above assume transitional measures on technical provisions which have been recalculated using management's estimate of the impact of operating and market conditions as at the valuation date.

Financing and liquidity

The following table shows key financing and liquidity information:

The key metric we use to manage our debt is the leverage ratio, defined as the nominal value of debt as a percentage of the Group's shareholder Solvency II own funds. For further detail on Group's shareholder Solvency II own funds see the supplementary information. During 2020 our leverage ratio improved to 30% (2019: 31%).

The following table shows the movement in cash and liquid assets held by the Parent Company during the period:

iClosing cash and liquid assets at 31 December 2020 included a £1,001 million (2019; £1,200 million) inter-company loan asset with Prudential Capital plc, which acts as the Group's treasury function.

Movements in cash and liquid assets held by the Parent Company for the year ended 31 December 2020 represent the remittances and payments that will arise in the normal course of business. In comparison, the year ended 31 December 2019 included significant cash flows related to the Demerger. Total cash and liquid assets have remained stable with cash remittances of £737 million (2019: £477 million) received from our subsidiaries more than covering the cash dividend payments to equity holders of £562 million (2019: £543 million and interest paid on structural borrowings of £189 million (2019: £22 million).

Savings and Asset Management

Savings and Asset Management financial performance was impacted by net client outflows in Retail Asset Management and industry wide pressure on retail margins. Our Institutional business performed well with net client inflows following continued strong investment performance and highlighting the appeal of our range of innovative investment solutions.

Assets under management and administration and net client flows

i Included in total AUMA of £232.3 billion (2019: £215.9 billion) is £6.5 billion (2019: £6.4 billion) of assets under advice.

Retail Savings AUMA increased 29% to £81.8 billion over the year to 31 December 2020, primarily as a result of the acquisition of Ascentric, which increased AUMA by £16.1 billion. Net client inflows of £0.4 billion experienced by Retail Savings were lower than 2019 with economic uncertainty and market volatility impacting investor sentiment across the retail savings market in 2020. In addition, COVID-19 restrictions severely limited the extent to which advisers were able to interact face to face with customers during the year leading to a significant reduction in new business sales.

PruFund AUMA increased 3% as a result of positive investment returns and net client inflows of £0.4 billion.

Retail Asset Management AUMA decreased 14% to £64.2 billion over the year with net client flows impacted by the volatile global markets and ongoing underperformance in some of our established funds, particularly in our international wholesale channel. Overall net client outflows increased to £12.1 billion (2019: £7.4 billion) and were particularly high in the first quarter of 2020 at £5.6 billion but levelled off as investor sentiment improved in the last quarter with the approval of COVID-19 vaccines. Performance improved markedly in the final quarter with 78% of wholesale assets above peer group medians in the three months to December 2020. We continue to reinvigorate our Retail Asset Management proposition to improve investment performance, offer greater value for money and evolve our fund range in order to diversify and increase client flows. In December, we launched three sustainable multi-asset fund ranges, cautious, balanced and growth, which aim to deliver total return within explicit volatility limits while also making a positive contribution to solving some of the world's major social and environmental challenges.

Our further investment in building investment capabilities in Asia over the past year enabled us to win several new mandates from our With-Profits Fund, and to repatriate the management of those assets during the year. The most significant being a £9 billion mandate to manage Asian and Japanese equities, with a further £2 billion expected to transition by early 2021. Additionally, the M&G fixed income team was awarded a £12 billion US fixed income mandate from our With-Profits Fund in Q4, of which £11 billion has already transitioned with the remainder expected to complete in early 2021.

Institutional Asset Management AUMA increased 11% to £85.5 billion during the year, driven by strong net client inflows of £5.1 billion and is now the largest component of our Savings and Asset Management AUMA. Consistently strong investment performance has driven £3.3 billion of net client inflows into our public debt propositions. A further £0.7 billion of net client inflows was received into our infrastructure offering and £0.6 billion of net client inflows into our real estate propositions in 2020. We continued to broaden our investment capabilities offering bespoke investment solutions to our clients, which are less affected by market volatility and offer good margins. Leveraging our strong position in the UK we aim to expand our business capabilities internationally.

Our expertise in private assets, which offers private fixed income, alternatives, real estate and infrastructure equity offerings, is a key component of our institutional investment capability and represents a resilient, high-margin source of revenues. It also underpins our ability to launch Catalyst, a team formed to manage a £5 billion mandate from our With-Profits Fund aimed at delivering positive societal impact through innovation as well as investing on behalf of the external institutional investors seeking private credit exposure. Our private assets under management increased 11% to £67.2 billion of AUMA as at 31 December 2020 (2019: £60.3 billion).

Adjusted operating profit before tax

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

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

Adjusted operating profit before tax from our Asset Management activities decreased to £316 million in the year ended 31 December 2020 (2019: £381 million) driven by a 4% reduction in fee based revenues to £988 million (2019: £1,033 million). The reduction in average AUMA in Retail Asset Management, combined with the downward pressure on retail margins, resulted in lower fee based revenues of £466 million during the year (2019: £584 million). The lower pricing structure applied to our UK OEIC fund ranges in August 2019 contributed to a £19m reduction whilst the suspension of the M&G Property Portfolio Fund in December 2019 lead to a further £13 million reduction in fee based revenues in 2020. In contrast, revenue earned by Institutional Asset Management increased to £480 million (2019: £429 million) as a result of higher average AUMA and improved revenue margins. Asset Management adjusted operating expenses, excluding the £35 million one-off benefit resulting from changes to the Group's defined benefit pension schemes in 2019, reduced by £15 million over the year, driven by lower facilities costs and lower travel and entertainment costs.

The Asset Management average fee margin of 50 basis points (bps) was 7 bps lower at 31 December 2020 compared to 31 December 2019 reflecting the continued industry wide pressure on fees in Retail Asset Management. Average revenue margins in the Institutional Asset Management business were 2 bps higher at 28 bps, compared to 26 bps at 31 December 2019, reflecting our focus on the provision of high-margin, innovative investment solutions for clients. This focus has resulted in favourable changes to our product mix, with net client flows out of our lower margin products and into these more specialised, higher margin solutions.

The cost/income ratio for the Asset Management business was 71% (2019: 64%), with the increase largely driven by the reduction in Retail Asset Management revenue and also the non-recurrence in 2020 of the £35 million past service credit.

The with-profits shareholder transfer, driven by PruFund, decreased to £54 million (2019: £73 million) as a result of the downward unit price adjustment for the fall in financial markets at the start of 2020, which was not fully mitigated by later upward price adjustments in the fourth quarter. In addition there were fair value losses of £10 million (2019: £18 million loss) on the derivative instruments used to mitigate the equity risk to shareholders.

The other shareholder loss in the year to 31 December 2020 is driven by items impacted by the market volatility in 2020, including a £16 million reduction on investment return on seed capital investments and a £5 million reduction in share of profit from associate. In addition, 2020 includes an expected £4m loss on Ascentric business acquired in the year. We expect Ascentric to strengthen our investment proposition by increasing our tax wrapper offerings and distribution footprint in the platform market. As we integrate Ascentric, build scale, automate operations and improve efficiency we expect the short term impact on Savings and Assets Management earnings to be limited.

Capital generation

The following table shows an analysis of operating capital generation:

Underlying capital generation for the year ended 31 December 2020 was stable at £417 million (2019: £414 million). Whilst the contribution from our Asset Management business fell to £308 million (2019: £379 million) in line with the reduction in adjusted operating profit before tax, this was offset by higher underlying capital generated from with-profits in-force business and lower new business strain. The with-profits in-force business capital generation of £100 million (2019: £61 million) was driven by the expected growth in future shareholder transfers which was greater in 2020 on higher opening asset values, while new business strain fell to £12 million (2019: £61 million) mostly reflecting lower PruFund net client inflows, amongst other movements.

Other operating capital generation of £83 million (2019: £45 million) primarily reflected changes in the modelling and assumptions relating to underlying capital requirements in respect of PruFund business, and also a beneficial impact of £31 million from the extension of our equity hedging programme.

Heritage

Underlying performance of our Heritage business remained strong, continuing to provide a stable and sizeable underpin to our earnings.

The AUMA reduction of £0.3 billion to £133.7 billion at 31 December 2020 (2019: £134.0 billion) was driven by net client outflows, of £6.6 billion (2019: £7.6 billion net outflow), which were in line with expectations, offset by favourable market movements of £6.3 billion.

Adjusted operating profit before tax

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

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

The shareholder transfer relating to traditional with-profit business increased to £254 million (2019: £251 million), offset by £47 million (2019: £64 million) of fair value losses on the derivative instruments used to mitigate equity risk to shareholders.

Adjusted operating expenses decreased by £8m during the year, in line with expectations as the Heritage business runs off. Other shareholder profit primarily relates to insurance reserve releases as we complete the review of a number of legacy remediation programmes.

The following table provides further analysis of the annuity margin:

Longevity assumption changes resulted in a benefit of £217 million in the year ended 31 December 2020, primarily driven by updates to current mortality assumptions, along with a marginal impact from moving from the CMI 17 mortality improvements model to the CMI 18 model, adopted using the Group's own calibration. The 2019 result included a £126 million benefit in relation to changing from the CMI 16 to the CMI 17 model. We continue to monitor the impacts of COVID-19 on our longevity assumptions.

Recurring sources of earnings from the annuity book, primarily the return on assets held to back capital requirements and the release of the margins held in respect of credit risk, mortality and expenses, decreased by 13% to £188 million (2019: £216 million). This mainly reflects a lower level of excess assets on the annuity portfolio following the payment of dividends to the Parent Company and decreasing bond yields during the year.

During the year, we also earned £59 million from asset trading and portfolio management actions (2019: £110 million) which includes the loss arising on the sale of a property in 2020 due to the impact on the valuation of annuity liabilities.

The credit quality of fixed income assets in the annuity portfolio remain strong.

Over 98% of the debt securities held by the shareholder annuity portfolio are investment grade and only 15% are BBB. In addition 81% of the shareholder annuity portfolio is held in debt securities either categorised as risk-free or secured (including cash).

We experienced limited downgrades over the year with only c.4% of bonds in the shareholder annuity portfolio subject to a downgrade which changed the letter rating.

Capital generation

The following table shows an analysis of operating capital generation:

Traditional with-profits business generated underlying capital of £105 million during 2020 (2019: £71 million). Similar to Savings and Asset Management with-profits business, this was driven by the expected growth in future shareholder transfers which was greater in 2020 on higher opening asset values. There also continued to be significant underlying capital generation from the shareholder annuity and other business, contributing £341 million (2019: £388 million).

Other operating capital generation increased to £564 million (2019: £517 million). The 2020 result includes a significant benefit from a series of management actions taken to strengthen the balance sheet, which increased surplus by £374 million (2019: £167 million). This included a contribution of £272 million from asset trading and optimisation, as well as a £62 million capital release to reflect the reduced risk of legacy remediation programmes now coming to completion. However, the £142 million benefit from model improvements in 2019 was not repeated in the 2020 results.

The impact of assumption changes primarily relates to the positive impact of £242 million from the longevity assumption updates described in the adjusted operating profit before tax section, offset by a reduction from other assumptions of £57 million. The 2019 result included a benefit of £105 million from changes to longevity assumptions coupled with a positive impact from expense assumption changes of £88 million.

Consolidated income statement

For the year ended 31 December 2020

i This measure is the profit before tax measure under IFRS but it is not the result attributable to equity holders. This is principally because the corporate taxes of the Group include those on the income of consolidated with-profits and unit-linked funds that, through adjustments to benefits, are borne by policyholders. These amounts are required to be included in the tax charge of the company under IFRS. Consequently, profit before tax is not representative of pre-tax profits attributable to equity holders. Profit before tax is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of the With-Profits Fund after adjusting for taxes borne by policyholders.

Consolidated statement of comprehensive income

For the year ended 31 December 2020 

Consolidated statement of financial position

As at 31 December 2020

i Assets held for sale on the consolidated statement of financial position as at 31 December 2020 includes £18m (2019: £88m) of seed capital classified as held for sale as it is expected to be divested within 12 months and £24m of investment property classified as held for sale (2019: £17m). Additionally £96m (2019: £14m) of assets held for sale and £75m (2019: £nil) of liabilities of operations held for sale are in relation to the Group's consolidated infrastructure capital private equity vehicles.

Consolidated statement of changes in equity

For the year ended 31 December 2020

i There was a distribution in kind of £570m, which represents the difference between fair value of the subordinated notes at initial recognition and the actual cash transferred by Prudential plc in respect of the notes on substitution of the debt.

Consolidated statement of cash flows

For the year ended 31 December 2020

i Tax paid for the year ended 31 December 2020 includes £264m (2019: £228m) paid on profits taxable at policyholder rather than shareholder rates.

ii Cash flows in respect of other borrowings of the With-Profits Fund, which principally relate to consolidated investment funds, are included within cash flows from operating activities.

iii Investment in subsidiaries includes total cash consideration in respect of the acquisition of Ascentric of £86m, of which £49m represented a repayment of loan to Royal London. The remaining amounts represents further investment by the Group's consolidated infrastructure capital private equity vehicles.

iv Cash inflow from disposal of subsidiaries reflects the net cash flow from the disposal of Prudential Vietnam Finance Company Limited in 2019.

1 Basis of preparation and significant accounting policies

1.1 Basis of preparation

The consolidated results in this preliminary announcement have been taken from the M&G plc Group's 2020 Annual Report and Accounts which will be available on the Company's website on 24 March 2021.

The consolidated financial statements have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and in accordance with International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board (''IASB'') adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union ("EU"), with interpretations issued by the IFRS Interpretations Committee (''IFRICs''). The consolidated financial statements have been prepared under the historical cost basis except for investment property measured at fair value, certain financial assets and financial liabilities (including derivative instruments) that are measured at fair value through profit and loss ("FVTPL"), insurance contract liabilities that are measured in accordance with the requirements of IFRS 4: Insurance contracts, and defined benefit assets and liabilities, measured at the fair value of plan assets less the present value of the defined benefit obligations. Assets and disposal groups held for sale are stated at the lower of the previous carrying amount and fair value less costs to sell.

The basis of preparation and significant accounting policies applicable to the consolidated financial statements can be found in the basis of preparation and significant accounting policies section of the 2020 Annual Report and Accounts.

The preliminary announcement for the year ended 31 December 2020 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. The statutory results under IFRS for full-year 2020 and 2019 have been audited by KPMG LLP (''KPMG''). KPMG have reported on the 2020 consolidated financial statements and their audit report is unqualified and does not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

On 2 July 2018, Voyager Dallas Holding Company Limited, as the Company was known at the time, was incorporated and domiciled in the UK as a subsidiary of Prudential plc. The Company was set up to act as holding company for the UK and Europe savings and investments business of Prudential plc. On 3 July 2018, the Company changed its name to M&G Prudential Limited. On 23 November 2018 the Company issued share capital as consideration to Prudential plc for the acquisition of The Prudential Assurance Company Limited (''PAC''), M&G Group Limited, Prudential Financial Services Limited and Prudential Property Services Limited. On 24 July 2019, the Company was re-registered as a public limited company and changed its name to M&G Prudential plc. On 16 September 2019, the Company changed its name to M&G plc. On 20 September 2019, the Company acquired Prudential Capital Holdings Company Limited, and its subsidiaries, Prudential Capital plc ("PruCap") and Prudential Capital (Singapore) Pte. Limited, from Prudential plc. On 21 October 2019, the Company demerged from Prudential plc and listed on the London Stock Exchange.

All acquisition of entities under common control prior to demerger from Prudential plc have been accounted for under merger accounting principles. Under merger accounting, the results and statement of financial position for entities acquired prior to demerger are presented as if the entities had always been combined.

Unless otherwise noted, the consolidated financial statements are presented in million pounds sterling (£m), the Group's functional and presentation currency.

Going concern

The Directors have reasonable expectation that the Group as a whole has adequate resources to continue in operational existence over a period of at least twelve months from the date of approval of the consolidated financial statements.

To satisfy themselves of the appropriateness of the use of the going concern assumptions in relation to the consolidated financial statements, the Directors have considered the liquidity projections of the Group, including the impact of applying specific liquidity stresses. The Directors also considered the ability of the Group to access external funding sources and the management actions that could be used to manage liquidity.

In addition, the Directors also gave particular attention to the solvency projections of the Group under a base scenario and its sensitivity to various individual economic stresses and certain stressed scenarios, which included a pessimistic COVID-19 scenario and a severe Brexit scenario.

The results of the assessment demonstrated the ability of the Group to meet all obligations and future business requirements for the foreseeable future. In addition, the assessment demonstrated that the Group was able to remain above its regulatory solvency requirements in a stressed scenario.

For this reason, the Directors continue to adopt the going concern basis in preparing the consolidated financial statements.

Adjusted operating profit before tax

Adjusted operating profit before tax is the Group's non-GAAP alternative performance measure, which complements IFRS GAAP measures and is key to decision-making and the internal performance management of operating segments.

Adjusted operating profit before tax includes IFRS profit from continuing operations only.

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

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

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

II. Capital hedges: instruments that hedge the economic present value of shareholder transfers on a Solvency II basis, to optimise the capital position.

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

For the Group's shareholder annuity products written by the Heritage segment, adjusted operating profit before tax excludes the impact of short-term components of credit risk provisioning, the impact of credit risk experience variances over the period, and total fair value movement on surplus assets backing the shareholder annuity capital, that are not reflective of the longer-term performance of the business.

i These cash flow hedges do not constitute hedge accounting arrangements under IAS 39.

Certain adjustments that are considered to be non-recurring or strategic, or due to short-term movements not reflective of longer-term performance are made to IFRS profit before tax. Adjustments are in respect of short-term fluctuations in investment returns, costs associated with fundamental one-off Group-wide restructuring and transformation, profits or losses arising on corporate transactions and profit/(loss) before tax from discontinued operations.

1.2 New accounting pronouncements

1.2.1 New accounting pronouncements adopted by the Group

In preparing these consolidated financial statements the Group has adopted the following standards, interpretations and amendments that became effective during the year:

Effective from 1 January 2020:

- Amendments to IFRS 3: Definition of a Business

- Amendments to IFRS 7, IFRS 9 and IAS 39: Interest Rate Benchmark Reform

- Amendments to IAS 1 and IAS 8: Definition of Material

- Conceptual Framework for Financial Reporting issued on 29 March 2018

Effective from 1 June 2020:

- COVID-19-Related Rent Concessions - Amendments to IFRS 16

None of the above interpretations and amendments to standards are considered to have a material effect on these consolidated financial statements.

1.2.2 New accounting pronouncements not yet effective

The following standards, interpretations and amendments have been issued but are not yet effective for the Group. This is not intended to be a complete list as only those standards, interpretations and amendments that could have an impact upon the consolidated financial statements are discussed.

IFRS 9: Financial Instruments (endorsed by the EU)

In July 2014, the IASB published IFRS 9: Financial Instruments (IFRS 9) which is mandatorily effective for annual periods beginning on or after 1 January 2018, except as described below, with early application permitted.

IFRS 9 replaces the existing standard, IAS 39: Financial Instruments-Recognition and Measurement. The standard provides new principles for determining classification and measurement of financial instruments, introduces a new forward-looking impairment model based on expected losses (replacing the existing incurred loss model) and provides new guidance on application of hedge accounting.

In September 2016, the IASB published amendments to IFRS 4, "Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts" to address the temporary consequences of the different effective dates of IFRS 9 and IFRS 17: Insurance Contracts. The amendments include an optional temporary exemption from applying IFRS 9 and the associated amendments until IFRS 17 comes into effect. This temporary exemption is available to companies whose predominant activity is to issue insurance contracts based on meeting the eligibility criteria as at 31 December 2015 as set out in the amendments. In June 2020, the IASB amended IFRS 17 so that the revised effective date of the standard is for periods beginning on or after 1 January 2023. The IASB also confirmed through this amendment that IFRS 9 could be delayed for insurers to keep the effective dates of IFRS 9 and IFRS 17 aligned.

As the Group met the required eligibility criteria for temporary exemption, the adoption of IFRS 9 has been deferred to coincide with the adoption of IFRS 17.

The Group is assessing the impact of IFRS 9 and implementing this standard in conjunction with IFRS 17. The adoption of IFRS 9 may result in the reclassification of certain of the Group's financial assets, resulting in a change in measurement basis from amortised cost to fair value. Furthermore, a revised impairment approach based on expected credit losses will need to be developed for financial assets that will continue to be carried at amortised cost. The Group is currently assessing the scope of assets to which these requirements will apply.

The Group does not currently apply hedge accounting.

Presented below are disclosures required by the amendments to IFRS 4 for entities deferring the adoption of IFRS 9. These are provided to enable users to compare results with those entities that have adopted IFRS 9. As required by the amendment, the table shows the fair value of the Group's directly held financial assets at 31 December 2020, distinguishing those financial assets which have contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest ("SPPI") as defined by IFRS 9.

i Financial assets classified as held for trading or that are managed and whose performance is evaluated on a fair value basis do not require an SPPI test to be performed. These assets are reported in All other financial assets.

IFRS 17: Insurance Contracts (not yet endorsed by the EU)

In May 2017, the IASB issued IFRS 17: Insurance Contracts (''IFRS 17'') to replace the existing interim standard, IFRS 4: Insurance Contracts. The standard initially applied to annual periods beginning on or after 1 January 2021, subsequently, the IASB issued an exposure draft in June 2019 that proposed to delay the effective date to 1 January 2022. Thereafter, in March 2020, the IASB decided to delay the effective date further to 1 January 2023, which was duly affected through an amendment in the standard in June 2020. Early application is permitted; provided the entity also applies IFRS 9 and IFRS 15 on or before the date it first applies IFRS 17. The Group intends to adopt the new standard on its mandatory effective date, alongside the adoption of IFRS 9.

The Group has an ongoing project to implement IFRS 17 which is continuing to develop technical interpretations and the related operational capabilities to implement the standard by the revised adoption date of 1 January 2023. The impact from adoption of the standard cannot be quantified at this stage. However it will lead to significant changes to the presentation and disclosure in the consolidated financial statements.

Other

In addition to the above, the following new accounting pronouncements have also been issued and are not yet effective:

- Interest Rate Benchmark Reform - Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16), issued in August 2020 and effective from 1 January 2021

- Reference to the Conceptual Framework (Amendments to IFRS 3), issued in May 2020 and effective from 1 January 2022

- Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16), issued in May 2020 and effective from 1 January 2022

- Onerous Contracts - Costs of Fulfilling a Contract (Amendments to IAS 37), issued in March 2018 and effective from 1 January 2022

- Classification of Liabilities as Current or Non-current (Amendments to IFRS 1), issued in January 2020 and effective from 1 January 2023

- Sale or Contribution of Assets between an Investor and its Associate or Joint Venture - (Amendments to IFRS 10 and IAS 28), issued in December 2015 and effective date pending completion of the research project on equity method accounting

- The Disclosure Initiative: Accounting Policy Requirements (Amendments to IAS 1), issued in February 2021 and effective from 1 January 2023

- Definition of accounting estimates (Amendments to IAS 8), issued in February 2021 and effective from 1 January 2023

The Group is currently assessing the impact of these requirements on the consolidated financial statements.

2 Group structure and products

2.1 Transactions relating to corporate restructure

2.1.1 Transfer of ownership of The Prudential Assurance Company Limited and M&G Group Limited

As part of an internal restructure on 23 July 2020, ownership of M&G Group Limited ("MGG") and The Prudential Assurance Company Limited ("PAC"), was transferred from the Company to M&G Group Regulated Entity Holding Company Limited, a direct subsidiary of the Company. The transfer was at fair value in a share for share exchange. As this is an intra-group transaction, there is no impact on the consolidated financial statements.

2.1.2 Transfer of ownership of Prudential Capital Public Limited Company

On 31 August 2020, the Company acquired Prudential Capital Public Limited Company via an in specie dividend from Prudential Capital Holdings Company Limited, a direct subsidiary of the Company. As this is an intra-group transaction, there is no impact on the consolidated financial statements.

2.2 Corporate transactions

2.2.1 Proposed sale of annuity portfolio to Rothesay Life PLC

On 14 March 2018, Prudential plc announced the reinsurance of £12,149m (as at 31 December 2017) of PAC shareholder-backed annuity portfolio to Rothesay Life PLC by way of a collateralised reinsurance arrangement followed by an insurance business transfer scheme (the "Scheme") under Part VII of Financial Services and Markets Act 2000. The terms of the reinsurance arrangement transferred substantially all of the economic risk and capital requirements associated with the annuity portfolio to Rothesay Life PLC, subject to a residual counterparty credit risk attaching to reinsurance receivables.

On 17 May 2019, the independent expert who was appointed to report to the High Court concluded that the transfer would have no material adverse effect on the security of benefits or the reasonable benefit expectations of PAC's policyholders. However, on 16 August 2019, the High Court declined to sanction the Scheme. PAC and Rothesay Life PLC have successfully appealed that decision in the Court of Appeal. There will now need to be a further sanction hearing in the High Court to decide if the transfer should proceed. The date of the sanction hearing has not yet been set and the associated process has not been clarified. As such the assets and liabilities associated with the annuity portfolio have not been classified as held for sale in these consolidated financial statements. The High Court's judgment has no direct impact on the reinsurance with Rothesay Life PLC.

2.2.2 Ascentric Acquisition

On 27 May 2020, the Group announced an agreement with Royal London to acquire its digital wrap and wealth management platform, for UK independent financial advisers, which comprises Wrap IFA Services Limited (''Wrap IFA'') and all of its subsidiaries together referred to as Ascentric.

The acquisition of Ascentric completed on 1 September 2020 following change of control approval from the FCA. Following acquisition, Wrap IFA is a wholly-owned subsidiary of M&G Group Regulated Entity Holding Company Limited, a wholly-owned subsidiary of the Company.

As at the acquisition date, the consideration, net assets acquired and resulting goodwill and intangible assets from the acquisition were as follows:

i Intangible assets relate to the existing customer relationships in place at the date of acquisition.

As part of the transaction, an amount of £49m was paid to Royal London on behalf of one of the acquired subsidiaries to allow it to repay its existing loan to its previous parent. This does not form part of the purchase consideration.

The goodwill of £21m arising from the acquisition represents the benefits of the acquisition in complementing M&G's strategy to grow its business and expand its range of services for financial advisers and their clients. Ascentric's well-established digital wealth management presence will complement and strengthen M&G's position in the UK savings market where the company sees demand for advice and investment solutions continuing to grow. None of the goodwill recognised is expected to be deductible for income tax purposes.

The revenue and loss before tax included in the consolidated statement of comprehensive income since 1 September 2020 was £12m and £7m respectively. The revenue and loss before tax for the year ended 31 December 2020 for Ascentric was £34m and £15m respectively.

2.3 Insurance and investment products

2.3 Insurance and investment contracts written by the Group's insurance entities

A description of the main contract types written by the Group's insurance entities is provided below.

The Group's with-profits contracts are written in the With-Profits Fund in which policyholders share in the profit of the fund. There are three with-profits sub-funds: the With-Profits Sub-Fund ("WPSF"), the Defined Charge Participating Sub-Fund ("DCPSF") and the Scottish Amicable Insurance Fund ("SAIF").

Shareholder-backed business represents all insurance and investment contracts in the Group other than contracts written in the With-Profits Fund. The profit on these contracts accrues directly to the Group's shareholders.

2.3.1 With-profits contracts

With-profits contracts provide returns to policyholders through bonuses that are smoothed to reduce the impact of volatility of the investment performance of the assets in the fund.

2.3.1.1 Conventional and accumulating with-profits contracts written in WPSF and DCPSF

Conventional and accumulating with-profits policyholders receive their share of profit by way of regular and final bonuses.

Regular bonus rates are determined for each type of policy primarily by targeting the bonus level at a prudent proportion of the long-term expected future investment return on underlying assets, reduced as appropriate for each type of policy to allow for items such as expenses, charges, tax and shareholder transfers.

In normal investment conditions, the Group expects changes in regular bonus rates to be gradual over time. However, the Group retains the discretion whether or not to declare a regular bonus each year, and there is no limit on the amount by which regular bonus rates can change.

A final bonus which is normally declared annually, may be added when a claim is paid. The rates of final bonus usually vary by type of policy and by reference to the period, usually a year, in which the policy commences or each premium is paid. These rates are determined by reference to the asset shares of representative sample policies and are subject to smoothing.

Regular bonuses are typically declared once a year, and once credited are guaranteed in accordance with the terms of the particular product. Final bonus rates are guaranteed only until the next bonus declaration.

Contracts are predominantly written in the WPSF, where the shareholders are entitled to an amount up to one-ninth of the bonus declared, which is payable as a cash transfer from the With-Profits Fund.

For the business written in the DCPSF, the charges accrue to shareholders who also meet the corresponding expenses. Profits arising in the DCPSF are attributed wholly to DCPSF policyholders. The shareholders' profit arises as the difference between charges and expenses.

2.3.1.2 With-profits contracts with a PruFund investment option ("PruFund contracts")

These are a range of with-profits contracts offering policyholders a choice of investment profiles ("PruFund funds"). Unlike the with-profits contracts described above, no regular or final bonuses are declared. Instead, policyholders participate in profits by means of an increase in their investment, which grows in line with an Expected Growth Rate ("EGR"). The EGR is adjusted for significant market movements.

The EGR may be applied for each of the different PruFund funds within the range, varying depending on the individual asset mix of that fund. The applicable EGR, net of the relevant charges, is applied to calculate the 'smoothed unit value' of policyholder funds. The EGRs are reviewed and updated quarterly, with the smoothed unit value calculated daily. In normal investment conditions, the EGR is expected to reflect PAC's view of how the funds will perform over the longer term.

Policyholders are protected from some of the extreme short-term ups and downs of direct investments by using an established smoothing process. Prescribed adjustments are made to the smoothed unit value if it moves outside a specified range relative to the value of the underlying assets. 

PruFund contracts are predominantly written in the WPSF, where the shareholder is entitled to an amount up to one-ninth of the difference between the smoothed unit value on withdrawal and the initial investment. The DCPSF also contains PruFund contracts, and for these contracts the shareholders receive profits or losses arising from the difference between the charges and expenses on this business.

2.3.1.3 SAIF with-profits contracts

SAIF is a ring-fenced with-profits sub-fund. No new business is written in SAIF, although regular premiums and top-ups are still being collected on in-force policies. The fund is solely for the benefit of policyholders of SAIF. Shareholders have no entitlement to the profits of this fund. The process of determining policyholder bonuses of SAIF with-profits policies is similar to that for the with-profits policies of the WPSF. In addition, the surplus assets in SAIF are allocated to policies in an orderly and equitable distribution over time as enhancements to policyholder benefits.

The Group's main exposure to guaranteed annuity options arises through contracts in SAIF. More detail on the provisions held in respect of guaranteed annuity options is provided in Note 11.1.1.

2.3.2 Unit-linked contracts

Unit-linked contracts are contracts where the value of the policy is linked to the value of underlying investments (such as collective investment schemes, internal investment pools or other property) or fluctuations in the value of underlying investments or indices. Investment risk associated with the product is primarily borne by the policyholder. Some unit-linked contracts provide an element of insurance coverage, such as a benefit payable on death in excess of the value of the units, and these contracts are classified as insurance contracts and accounted for under IFRS 4 (see Note 11).

Charges are deducted from the unit-linked funds for investment and administration services, and for certain contracts, insurance coverage. Benefits payable will depend on the price of the units prevailing at the time of surrender, death or the maturity of the product.

2.3.3 Annuities

Annuities are contracts which offer policyholders a regular income over the policyholder's life, in exchange for an upfront premium, and may be immediate or deferred. For immediate annuities, the regular income starts immediately after the premium payment, but for deferred annuities, the regular income is delayed until a specified date in the future. There are various types of annuity contracts written across the Group: level, fixed increase, inflation-linked (referred to as 'non-profit annuities') and with-profits annuities. Some non-profit annuities have been written in the With-Profits Fund, and profits relating to this business accrue to the With-Profits Fund.

- Level annuities: provide a regular (for example, monthly) fixed annuity payment over the policyholder's life.

- Fixed increase annuities: provide for a regular annuity payment which incorporates automatic increases in annuity payments by fixed amounts over the policyholder's life.

- Inflation-linked annuities: provide for a regular annuity payment to which an additional amount is added periodically based on the increase in an inflation index.

- With-profits annuities: are written in the With-Profits Fund. These combine the income features of annuity contracts with the investment smoothing features of with-profits products and enable policyholders to obtain exposure to investment return on the With-Profits Fund.

3 Segmental analysis

The Group's operating segments are defined and presented in accordance with IFRS 8: Operating Segments on the basis of the Group's management reporting structure and its financial management information. The Group's primary reporting format is by customer type, with supplementary information being given by product type. The Chief Operating Decision Maker for the Group is the Group Executive Committee.

3.1 Operating segments

The Group's operating segments are:

Savings and Asset Management

The Group's Savings and Asset Management business provides a range of retirement, savings and investment management solutions to its retail and institutional customers and clients. The Group's retirement and savings products are distributed to retail customers through the wrap platform, intermediaries and advisors, and include the Retirement Account (a combined individual pension and income drawdown product), individual pensions, ISAs, collective investments and a range of on-shore and off-shore bonds.

All of the Group's products that give access to the PruFund investment proposition are included in the Savings and Asset Management segment. The PruFund investment proposition gives retail customers access to savings contracts with smoothed investment returns and a wide choice of investment profiles. Unlike the conventional and accumulating with-profits contracts in the Group's Heritage business, no regular or final bonuses are declared. Instead, policyholders participate in profits by means of an increase in their investment, which grows in line with an EGR.

The Group's investment management capability is offered to both retail customers and institutional clients. The Group's retail customers invest through either UK domiciled Open Ended Investment Companies ("OEICs") or Luxembourg domiciled Sociétés d'Investissement à Capital Variable ("SICAVs") and have access to a broad range of actively managed investment products, including Equities, Fixed Income, Multi-Asset and Real Estate. The Group serves these customers through its many business-to-business relationships both in the UK and overseas, which include independent financial advisers, high-street banks and wealth managers. The Group's institutional investors, include pension funds, insurance companies and banks from around the world, who invest through segregated mandates and pooled funds into a diverse range of Fixed Income and Real Estate investment products and services.

The Savings and Asset Management segment also earns investment management revenues from the significant proportion of Heritage assets it manages.

Heritage

The Group's Heritage business includes individual and corporate pensions, annuities, life, savings and investment products. The majority of the products in the Heritage business are closed to new customers but may accept further contributions from existing policyholders i. The annuity contracts include: level annuities, which provide a fixed annuity payment; fixed increase annuities, which incorporate a periodic automatic fixed increase in annuity payments; and inflation-linked annuities, which incorporate a periodic increase based on a defined inflation index. Some inflation-linked annuities have minimum and/or maximum increases relative to the corresponding inflation index.

The life products in Heritage are primarily whole of life assurance, endowment assurances, term assurance contracts, lifetime mortgages, income protection, and critical illness products. Investment products include unit-linked contracts and the Prudential bond offering, which mainly consists of single-premium-invested whole of life policies, where the customer has the option of taking ad-hoc withdrawals, regular income or the option of fully surrendering their bond.

Some of the Group's Heritage products written through conventional and accumulating with-profits contracts, in the With-Profits Sub-Fund, provide returns to policyholders through 'regular' and 'final' bonuses that reflect a smoothed investment return.

The Heritage business includes the closed Scottish Amicable Insurance Fund ("SAIF") with-profits sub-fund. This fund is solely for the benefit of policyholders of SAIF. Shareholders have no entitlement to the profits of this fund although they are entitled to asset management fees on it. It also includes the Defined Charge Participating sub-fund ("DCPSF"), which consists of two types of business:

(i) the Defined Charge Participating business, primarily business reinsured from Prudential International Assurance plc; and

(ii) the with-profits annuities transferred from Equitable Life Assurance Society on 31 December 2007.

i The Group accepts new members to existing Corporate Pensions schemes and writes a small number of new annuity policies with customers who have a pension issued by PAC.

The Groups other reportable segment is:

Corporate Centre

Corporate Centre includes central corporate costs incurred by the M&G Group functions and debt costs.

3.2 Adjusted operating profit before tax methodology

Adjusted operating profit before tax is the Group's non-GAAP alternative performance measure, which complements IFRS GAAP measures and is key to decision making and the internal performance management of operating segments.

Adjusted operating profit before tax includes IFRS profit from continuing operations only.

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

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

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

(ii) Capital hedges: instruments that hedge the economic present value of shareholder transfers on a Solvency II basis, to optimise the capital position.

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

For the Group's shareholder annuity products written by the Heritage segment, adjusted operating profit before tax excludes the impact of short-term components of credit risk provisioning, the impact of credit risk experience variances over the period, and total fair value movements on surplus assets backing the shareholder annuity capital, that are not reflective of the longer-term performance of the business.

Certain adjustments that are considered to be non-recurring or strategic, or due to short-term movements not reflective of longer-term performance are made to IFRS profit before tax. Adjustments are in respect of short-term fluctuations in investment returns, costs associated with fundamental one-off Group-wide restructuring and transformation, profits or losses arising on corporate transactions and profit/(loss) before tax from discontinued operations.

i These cash flow hedges do not constitute hedge accounting arrangements under IAS 39

The key adjusting items between IFRS profit before tax from continuing operations and adjusted operating profit before tax are:

Short-term fluctuations in investment returns

The adjustment for short-term fluctuations in investment returns represents:

(i) Short-term temporary movements in the fair value of instruments held to mitigate equity risk in the with-profits shareholder transfer, including both cash flow and capital hedges.

(ii) Total fair value movements on other capital hedges, which are held solely to optimise the Solvency II capital position.

(ii) Total fair value movements on surplus assets backing the shareholder annuity capital, and the impact of short term credit risk provisioning and experience variances over the period which are not reflective of the longer-term performance of the business, specifically:

- The impact of credit risk provisioning for short-term adverse credit risk experience;

- The impact of credit risk provisioning for actual upgrades and downgrades relative to best estimate assumptions. This is calculated by reference to current interest rates;

- Credit experience reflecting the impact of defaults and other similar experience, such as asset exchanges arising from debt restructuring;

- The impact of market movements on bond portfolio weightings and the subsequent impact on credit provisions.

Items relating to investment returns which are included in adjusted operating profit before tax are:

- The net impact of movements in the value of policyholder liabilities and fair value of the assets backing these liabilities, excluding the items included in short-term fluctuations above. The fair value movements of the assets backing the liabilities are closely correlated with the related change in liabilities;

- The unwind of the credit risk premium, which is the opening value of the assets multiplied by the credit risk premium assumption, with an adjustment for claims paid over the year. The credit risk premium assumption is the difference between the total long-term credit allowance and a best estimate credit allowance (both of which allow for the combination of defaults and downgrades);

- Actual income received in the year, such as coupon payments, redemption payments and rental income, on surplus assets backing the shareholder annuity capital, less an allowance for expenses;

- The net effect of changes to the valuation rate of interest due to asset trading and portfolio rebalancing;

- The impact of changes in the long-term component of credit provisioning.

Profit/(Loss) on disposal of businesses and corporate transactions

There were no adjusting items for the year ended 31 December 2020. In the year ended 31 December 2019 £53m resulted from the reinsurance of £12bn of annuities to Rothesay Life in anticipation of sale, which is considered to be non-recurring in nature and is therefore excluded from IFRS adjusted operating profit before tax. The gain on disposal of Prudential Vietnam Finance Company is not included in the reconciliation of adjusted operating profit to IFRS profit from continuing operations as it is presented in profit from discontinued operations in the consolidated income statement for the year ended 31 December 2019.

Restructuring and other costs

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

3.3 Analysis of Group adjusted operating profit before tax by segment