Risk and capital management
The events of 2008 have put the balance sheets and capital
positions of all insurance companies under close scrutiny.
Few anticipated the depth of the banking crisis or the speed of
onset of recession in the western economies. But at Prudential
we entered 2008 in a generally defensive mode in expectation
of a general downturn in the economic outlook – and this
certainly stood us in good stead as events unfolded.
Despite the downturn, the capital position of the Group
remained strong in 2008, in the face of a testing combination
of highly volatile and declining equity markets, falling interest
rates, widening spreads on corporate bonds, and rapidly
deteriorating credit conditions. Our defensive stance on
credit exposure in particular served us well – as did the
comprehensive equity hedging strategies that we had put
in place in the US to protect against product guarantees.
Given the crisis in the global banking industry in 2008, it is
worth restating the fundamental differences between life
insurers and banks – a distinction that extends to the two
industries’ business models, capital ratios and regulatory
needs. Insurers do not borrow short and lend long, do not
give out credit, are structurally long in terms of liquidity, and
are much better able to hold assets to maturity without risk
of forced selling at depressed prices.
Equally important, at Prudential effective capital and risk
management are central to our approach to managing the
Group. We took to heart the lessons from the last downturn
in 2002 and 2003, and responded by improving our skills base,
reducing concentration levels, and managing our exposures
prudently, but proactively. These measures paid off in 2008.
During the year we also took the decision not to proceed with
the reattribution of the inherited estate in the UK With-Profits
Sub-Fund of Prudential Assurance Company. This decision
was taken after an exhaustive review of the potential benefits
and disadvantages of such a move for policyholders and
shareholders, the conclusion from which was that it would be
in their best long-term interests to maintain the strength and
stability inherent in the status quo. This cautious approach on
behalf of policyholders and investors was supported at the
time by most market commentators, and has been amply
vindicated by subsequent events.
We also remain comfortable with the Group’s liquidity position
at both holding and subsidiary company level. The holding
company has significant internal sources of liquidity. As well
as cash and near-cash assets of £1.2 billion – more than
sufficient to meet all our requirements for the foreseeable
future – the Group also has in place £2.1 billion of undrawn
committed banking facilities.
One result of our consistently cautious capital and cash
management strategy is our ability to maintain our conservative
dividend policy, as reflected in the dividend announced with
these results. Going forward, our Board will continue to focus
on delivering a growing dividend, the size of which will of
course continue to reflect the Board’s view at the time of the
Group’s financial position and needs, including available
opportunities for profitable investment. The Board believes
that, in the medium term, a dividend cover of around two times
is appropriate to maintain a progressive, though conservative,