Blueprint
 
SECURITIES AND EXCHANGE COMMISSION 
 
 
Washington, D.C. 20549 
 
 
FORM 6-K 
 
REPORT OF FOREIGN PRIVATE ISSUER 
 
 
Pursuant to Rule 13a-16 or 15d-16 of
 
the Securities Exchange Act of 1934 
 
 
 
For the month of August, 2016 
 
 
 
PRUDENTIAL PUBLIC LIMITED COMPANY 
 
 
 
(Translation of registrant's name into English) 
 
 
 
LAURENCE POUNTNEY HILL,
 
LONDON, EC4R 0HH, ENGLAND
 
(Address of principal executive offices)
 
 
Indicate by check mark whether the registrant files or will file annual reports
 
under cover Form 20-F or Form 40-F.
 
Form 20-F X           Form 40-F
Indicate by check mark whether the registrant by furnishing the information
 
contained in this Form is also thereby furnishing the information to the
 
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
 
 
 
Yes              No X
 
If "Yes" is marked, indicate below the file number assigned to the registrant
 
in connection with Rule 12g3-2(b): 82-  
 
 
 
 
 
 
IFRS Disclosure and Additional Financial Information
Prudential plc Half Year 2016 results
 
International Financial Reporting Standards (IFRS) Basis Results
 
CONDENSED CONSOLIDATED INCOME STATEMENT
 
 
 
 
2016 £m
 
2015 £m
 
 
Note
Half year
 
Half year
Full year
Earned premiums, net of reinsurance
 
17,394
 
17,884
35,506
Investment return
 
17,062
 
6,110
3,304
Other income
 
1,085
 
1,285
2,495
Total revenue, net of reinsurance
 
35,541
 
25,279
41,305
Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance
 
(30,939)
 
(18,618)
(29,656)
Acquisition costs and other expenditure
B3
(3,563)
 
(4,505)
(8,208)
Finance costs: interest on core structural borrowings of shareholder-financed operations
 
(169)
 
(148)
(312)
Disposal of Japan life business: Cumulative exchange loss recycled from other comprehensive income
 
-
 
(46)
(46)
Total charges, net of reinsurance
 
(34,671)
 
(23,317)
(38,222)
Share of profits from joint ventures and associates, net of related tax
 
86
 
122
238
Profit before tax (being tax attributable to shareholders’ and policyholders’ returns)*
 
956
 
2,084
3,321
Less tax charge attributable to policyholders' returns
 
(292)
 
(202)
(173)
Profit before tax attributable to shareholders
B1.1
664
 
1,882
3,148
Total tax charge attributable to policyholders and shareholders
B5
(269)
 
(646)
(742)
Adjustment to remove tax charge attributable to policyholders' returns
 
292
 
202
173
Tax credit (charge) attributable to shareholders' returns
B5
23
 
(444)
(569)
Profit for the period attributable to equity holders of the Company
 
687
 
1,438
2,579
 
 
 
 
2016
 
2015
Earnings per share (in pence)
 
Half year
 
Half year
Full year
Based on profit attributable to the equity holders of the Company:
B6
 
 
 
 
 
Basic
 
26.9p
 
56.3p
101.0p
 
Diluted
 
26.8p
 
56.2p
100.9p
 
 
 
 
 
 
 
 
 
 
 
2016
 
2015
Dividends per share (in pence)
Note
Half year
 
Half year
Full year
Dividends relating to reporting period:
B7
 
 
 
 
 
First interim dividend / Interim dividend for prior year
 
12.93p
 
12.31p
12.31p
 
Second interim dividend
 
-
 
-
26.47p
 
Special dividend
 
-
 
-
10.00p
Total
 
12.93p
 
12.31p
48.78p
Dividends declared and paid in reporting period:
B7
 
 
 
 
 
Current year interim dividend
 
-
 
-
12.31p
 
Second interim dividend / Final dividend for prior year
 
26.47p
 
25.74p
25.74p
 
Special dividend
 
10.00p
 
-
-
Total
 
36.47p
 
25.74p
38.05p
* This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders.
This is 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 IAS 12. Consequently, the profit before all taxes measure (which is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of the PAC with-profits fund after adjusting for taxes borne by policyholders) is not representative of pre-tax profits attributable to shareholders.
 
 
International Financial Reporting Standards (IFRS) Basis Results
 
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
 
 
 
2016 £m
 
2015 £m
 
 
Note
Half year
 
Half year
Full year
 
 
 
 
 
 
 
Profit for the period
 
687
 
1,438
2,579
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
Items that may be reclassified subsequently to profit or loss
 
 
 
 
 
Exchange movements on foreign operations and net investment hedges:
 
 
 
 
 
 
Exchange movements arising during the period
 
798
 
(165)
68
 
Cumulative exchange loss of Japan life business recycled through
profit or loss
 
-
 
46
46
 
Related tax
 
8
 
(1)
4
 
 
 
806
 
(120)
118
 
 
 
 
 
 
 
Net unrealised valuation movements on securities of US insurance operations classified as available-for-sale:
 
 
 
 
 
 
Net unrealised holding gains (losses) arising during the period
 
2,023
 
(661)
(1,256)
 
Add back net losses / deduct net gains included in the income statement on disposal and impairment
 
95
 
(101)
(49)
 
Total
C3.3(b)
2,118
 
(762)
(1,305)
 
Related change in amortisation of deferred acquisition costs
C5.1(b)
(435)
 
165
337
 
Related tax
 
(589)
 
209
339
 
 
 
1,094
 
(388)
(629)
 
 
 
 
 
 
 
Total
 
1,900
 
(508)
(511)
 
 
 
 
 
 
 
Items that will not be reclassified to profit or loss
 
 
 
 
 
Shareholders' share of actuarial gains and losses on defined benefit pension schemes:
 
 
 
 
 
 
Gross
 
11
 
(21)
27
 
Related tax
 
(2)
 
4
(5)
 
 
 
9
 
(17)
22
 
 
 
 
 
 
 
Other comprehensive income (loss) for the period, net of related tax
 
1,909
 
(525)
(489)
 
 
 
 
 
 
 
Total comprehensive income for the period attributable to the equity
holders of the Company
 
2,596
 
913
2,090
 
 
 
 
 
 
 
 
 
International Financial Reporting Standards (IFRS) Basis Results
 
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
 
 
 
 
 
 Period ended 30 June 2016 £m
 
 
Share
 capital
Share
premium
Retained
  earnings
 Translation
reserve
Available
-for-sale
 securities
reserves
Shareholders'
equity 
 
Non-
 controlling
  interests
 
Total
 equity
 
 
Note
note C9
note C9
 
 
 
 
 
 
 
 
Reserves
 
 
 
 
 
 
 
 
 
 
 
Profit for the period
 
-
-
687
-
-
687
 
-
 
687
Other comprehensive income
 
-
-
9
806
1,094
1,909
 
-
 
1,909
Total comprehensive income for the period
 
-
-
696
806
1,094
2,596
 
-
 
2,596
 
 
 
 
 
 
 
 
 
 
 
 
Dividends
B7
-
-
(935)
-
-
(935)
 
-
 
(935)
Reserve movements in respect of share-based payments
 
-
-
(54)
-
-
(54)
 
-
 
(54)
New share capital subscribed
C9
-
6
-
-
-
6
 
-
 
6
Movement in own shares in respect of share-based payment plans
 
-
-
22
-
-
22
 
-
 
22
Movement in own shares purchased by funds consolidated under IFRS
 
-
-
15
-
-
15
 
-
 
15
Net increase (decrease) in equity
 
-
6
(256)
806
1,094
1,650
 
-
 
1,650
At beginning of period
 
128
1,915
10,436
149
327
12,955
 
1
 
12,956
At end of period
 
128
1,921
10,180
955
1,421
14,605
 
1
 
14,606
 
 
International Financial Reporting Standards (IFRS) Basis Results
 
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Continued)
 
 
 
 
 Period ended 30 June 2015 £m
 
 
Share
 capital
Share
premium
Retained
  earnings
 Translation
reserve
Available
-for-sale
 securities
reserves
Shareholders'
equity 
 
Non-
 controlling
  interests
 
Total
 equity
 
 
Note
note C9
note C9
 
 
 
 
 
 
 
 
Reserves
 
 
 
 
 
 
 
 
 
 
 
Profit for the period
 
-
-
1,438
-
-
1,438
 
-
 
1,438
Other comprehensive loss
 
-
-
(17)
(120)
(388)
(525)
 
-
 
(525)
Total comprehensive income (loss) for the period
 
-
-
1,421
(120)
(388)
913
 
-
 
913
 
 
 
 
 
 
 
 
 
 
 
 
Dividends
B7
-
-
(659)
-
-
(659)
 
-
 
(659)
Reserve movements in respect of share-based payments
 
-
-
66
-
-
66
 
-
 
66
 
 
 
 
 
 
 
 
 
 
 
 
 
Share capital and share premium
 
 
 
 
 
 
 
 
 
 
 
New share capital subscribed
C9
-
2
-
-
-
2
 
-
 
2
 
 
 
 
 
 
 
 
 
 
 
 
 
Treasury shares
 
 
 
 
 
 
 
 
 
 
 
Movement in own shares in respect of share-based payment plans
 
-
-
(40)
-
-
(40)
 
-
 
(40)
Movement in own shares purchased by funds consolidated under IFRS
 
-
-
11
-
-
11
 
-
 
11
Net increase (decrease) in equity
 
-
2
799
(120)
(388)
293
 
-
 
293
At beginning of period
 
128
1,908
8,788
31
956
11,811
 
1
 
11,812
At end of period
 
128
1,910
9,587
(89)
568
12,104
 
1
 
12,105
 
 
International Financial Reporting Standards (IFRS) Basis Results
 
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Continued)
 
 
 
 
 
 Year ended 31 December 2015 £m
 
 
Share
 capital 
Share
premium
Retained
  earnings
 Translation
reserve
Available
-for-sale
 securities
reserves
 Shareholders'
equity
 
Non-
 controlling
  interests
 
Total
 equity
 
 
Note
note C9
note C9
 
 
 
 
 
 
 
 
Reserves
 
 
 
 
 
 
 
 
 
 
 
Profit for the year
 
-
-
2,579
-
-
2,579
 
-
 
2,579
Other comprehensive income (loss)
 
-
-
22
118
(629)
(489)
 
-
 
(489)
Total comprehensive income (loss) for the year
 
-
-
2,601
118
(629)
2,090
 
-
 
2,090
 
 
 
 
 
 
 
 
 
 
 
 
Dividends
B7
-
-
(974)
-
-
(974)
 
-
 
(974)
Reserve movements in respect of share-based payments
 
-
-
39
-
-
39
 
-
 
39
 
 
 
 
 
 
 
 
 
 
 
 
 
Share capital and share premium
 
 
 
 
 
 
 
 
 
 
 
New share capital subscribed
C9
-
7
-
-
-
7
 
-
 
7
 
 
 
 
 
 
 
 
 
 
 
 
 
Treasury shares
 
 
 
 
 
 
 
 
 
 
 
Movement in own shares in respect of share-based payment plans
 
-
-
(38)
-
-
(38)
 
-
 
(38)
Movement in own shares purchased by funds consolidated under IFRS
 
-
-
20
-
-
20
 
-
 
20
Net increase (decrease) in equity
 
-
7
1,648
118
(629)
1,144
 
-
 
1,144
At beginning of year
 
128
1,908
8,788
31
956
11,811
 
1
 
11,812
At end of year
 
128
1,915
10,436
149
327
12,955
 
1
 
12,956
 
 
International Financial Reporting Standards (IFRS) Basis Results
 
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
 
 
 
 
 
 
2016 £m
 
2015 £m
 
 
 
 
Note
30 Jun
 
30 Jun
31 Dec
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets attributable to shareholders:
 
 
 
 
 
 
Goodwill
C5.1(a)
1,488
 
1,461
1,463
 
Deferred acquisition costs and other intangible assets
C5.1(b)
9,549
 
7,310
8,422
 
Total
 
11,037
 
8,771
9,885
 
 
 
 
 
 
Intangible assets attributable to with-profits funds:
 
 
 
 
 
 
Goodwill in respect of acquired subsidiaries for venture fund and other
investment purposes
 
189
 
184
185
 
Deferred acquisition costs and other intangible assets
 
45
 
49
50
 
Total
 
234
 
233
235
Total intangible assets
 
11,271
 
9,004
10,120
 
 
 
 
 
 
Other non-investment and non-cash assets:
 
 
 
 
 
 
Property, plant and equipment
C1.1
1,214
 
984
1,197
 
Reinsurers' share of insurance contract liabilities
 
9,470
 
7,259
7,903
 
Deferred tax assets
C7
3,771
 
2,820
2,819
 
Current tax recoverable
 
554
 
220
477
 
Accrued investment income
 
2,764
 
2,575
2,751
 
Other debtors
 
3,505
 
3,626
1,955
 
Total
 
21,278
 
17,484
17,102
 
 
 
 
 
 
Investments of long-term business and other operations:
 
 
 
 
 
 
Investment properties
 
13,940
 
13,259
13,422
 
Investment in joint ventures and associates accounted for using the equity method
 
1,135
 
962
1,034
 
Financial investments*:
 
 
 
 
 
 
 
Loans
C3.4
14,215
 
12,578
12,958
 
 
Equity securities and portfolio holdings in unit trusts
 
176,037
 
155,253
157,453
 
 
Debt securities
C3.3
168,367
 
142,307
147,671
 
 
Other investments
 
10,340
 
7,713
7,353
 
 
Deposits
 
14,181
 
11,043
12,088
 
Total
 
398,215
 
343,115
351,979
 
 
 
 
 
 
 
 
 
Assets held for sale
 
30
 
-
2
Cash and cash equivalents
 
8,530
 
8,298
7,782
Total assets
C1,C3.1
439,324
 
377,901
386,985
* Included within financial investments are £8,162 million of lent securities as at 30 June 2016 (30 June 2015: £3,599 million; 31 December 2015: £5,995 million).
 
 
International Financial Reporting Standards (IFRS) Basis Results
 
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
 
 
 
 
2016 £m
 
2015 £m
 
 
Note
30 Jun
 
30 Jun
31 Dec
Equity and liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
Shareholders' equity
 
14,605
 
12,104
12,955
Non-controlling interests
 
1
 
1
1
Total equity
 
14,606
 
12,105
12,956
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
Policyholder liabilities and unallocated surplus of with-profits funds:
 
 
 
 
 
 
Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4)
 
362,510
 
313,620
322,518
 
Unallocated surplus of with-profits funds
 
13,597
 
12,768
13,096
 
Total
C4.1(a)
376,107
 
326,388
335,614
 
 
 
 
 
 
 
Core structural borrowings of shareholder-financed operations:
 
 
 
 
 
 
Subordinated debt
 
4,956
 
3,897
4,018
 
Other
 
1,010
 
983
993
 
Total
C6.1
5,966
 
4,880
5,011
 
 
 
 
 
 
 
Other borrowings:
 
 
 
 
 
 
Operational borrowings attributable to shareholder-financed operations
C6.2(a)
2,798
 
2,504
1,960
 
Borrowings attributable to with-profits operations
C6.2(b)
1,427
 
1,089
1,332
 
 
 
 
 
 
 
Other non-insurance liabilities:
 
 
 
 
 
 
Obligations under funding, securities lending and sale and repurchase agreements
 
4,963
 
3,296
3,765
 
Net asset value attributable to unit holders of consolidated unit trusts and similar funds
 
8,770
 
10,007
7,873
 
Deferred tax liabilities
C7
5,397
 
4,325
4,010
 
Current tax liabilities
 
566
 
393
325
 
Accruals and deferred income
 
912
 
750
952
 
Other creditors
 
6,520
 
5,515
4,876
 
Provisions
 
467
 
546
604
 
Derivative liabilities
 
5,342
 
1,758
3,119
 
Other liabilities
 
5,483
 
4,345
4,588
 
Total
 
38,420
 
30,935
30,112
Total liabilities
C1,C3.1
424,718
 
365,796
374,029
Total equity and liabilities
 
439,324
 
377,901
386,985
 
 
International Financial Reporting Standards (IFRS) Basis Results
 
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 
 
 
 
 
2016 £m
 
2015 £m
 
 
 
Note
Half year
 
Half year
Full year
 
 
 
 
 
 
 
 
Cash flows from operating activities
 
 
 
 
 
Profit before tax (being tax attributable to shareholders' and policyholders' returns)note (i)
 
956
 
2,084
3,321
Non-cash movements in operating assets and liabilities reflected in profit
before taxnote (ii)
 
(556)
 
704
(49)
Other itemsnote (iii)
 
403
 
(389)
(739)
Net cash flows from operating activities
 
803
 
2,399
2,533
Cash flows from investing activities
 
 
 
 
 
Net cash outflows from purchases and disposals of property, plant and equipment
 
(32)
 
(90)
(226)
Net cash (outflows) inflows from corporate transactionsnote (iv)
 
(302)
 
34
(243)
Net cash flows from investing activities
 
(334)
 
(56)
(469)
Cash flows from financing activities
 
 
 
 
 
Structural borrowings of the Group:
 
 
 
 
 
 
Shareholder-financed operations:note (v)
C6.1
 
 
 
 
 
 
Issue of subordinated debt, net of costs
 
681
 
590
590
 
 
Interest paid
 
(160)
 
(144)
(288)
 
With-profits operations:note (vi)
C6.2
 
 
 
 
 
 
Interest paid
 
(4)
 
(4)
(9)
Equity capital:
 
 
 
 
 
 
Issues of ordinary share capital
 
6
 
2
7
 
Dividends paid
 
(935)
 
(659)
(974)
Net cash flows from financing activities
 
(412)
 
(215)
(674)
Net increase in cash and cash equivalents
 
57
 
2,128
1,390
Cash and cash equivalents at beginning of period
 
7,782
 
6,409
6,409
Effect of exchange rate changes on cash and cash equivalents
 
691
 
(239)
(17)
Cash and cash equivalents at end of period
 
8,530
 
8,298
7,782
 
Notes
(i) This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders.
(ii) The adjusting items to profit before tax included within non-cash movements in operating assets and liabilities reflected in profit before tax are as follows:
 
 
2016 £m
 
2015 £m
 
Half year
 
Half year
Full year
Other non-investment and non-cash assets
(2,660)
 
(2,004)
(1,063)
Investments
(21,280)
 
(8,431)
(6,814)
Policyholder liabilities (including unallocated surplus)
19,548
 
6,795
6,067
Other liabilities (including operational borrowings)
3,836
 
4,344
1,761
Non-cash movements in operating assets and liabilities reflected in profit before tax
(556)
 
704
(49)
 
(iii) The adjusting items to profit before tax included within other items are adjustments in respect of non-cash items together with operational interest receipts and payments, dividend receipts and tax paid.
(iv) Net cash flows for corporate transactions are for distribution rights and the acquisition and disposal of businesses.
(v) Structural borrowings of shareholder-financed operations exclude borrowings to support short-term fixed income securities programmes, non-recourse borrowings of investment subsidiaries of shareholder-financed operations and other borrowings of shareholder-financed operations. Cash flows in respect of these borrowings are included within cash flows from operating activities.
(vi) Interest paid on structural borrowings of with-profits operations relate solely to the £100 million 8.5 per cent undated subordinated guaranteed bonds, which contribute to the solvency base of the Scottish Amicable Insurance Fund (SAIF), a ring-fenced sub-fund of the PAC with-profits fund. Cash flows in respect of other borrowings of with-profits funds, which principally relate to consolidated investment funds, are included within cash flows from operating activities.
 
 
 
International Financial Reporting Standards (IFRS) Basis Results
 
NOTES
 
A BACKGROUND
A1 
Basis of preparation, audit status and exchange rates
 
These condensed consolidated interim financial statements for the six months ended 30 June 2016 have been prepared in accordance with IAS 34 ‘Interim Financial Reporting’ as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU). The Group’s policy for preparing this interim financial information is to use the accounting policies adopted by the Group in its last consolidated financial statements, as updated by any changes in accounting policies it intends to make in its next consolidated financial statements as a result of new or amended IFRS that are applicable or available for early adoption for the next annual financial statements and other policy improvements. EU-endorsed IFRS may differ from IFRSs issued by the IASB if, at any point in time, new or amended IFRS have not been endorsed by the EU. At 30 June 2016, there were no unendorsed standards effective for the period ended 30 June 2016 affecting the condensed consolidated financial statements of the Group, and there were no differences between IFRS endorsed by the EU and IFRS issued by the IASB in terms of their application to the Group.
 
The IFRS basis results for the 2016 and 2015 half years are unaudited. The 2015 full year IFRS basis results have been derived from the 2015 statutory accounts. The auditors have reported on the 2015 statutory accounts which have been delivered to the Registrar of Companies. The auditors’ report was: (i) unqualified; (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report; and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.
 
The exchange rates applied for balances and transactions in currencies other than the presentational currency of the Group, pounds sterling (GBP), were:
 
 
Closing
rate at
 30 Jun 2016
Average
for the
6 months to
30 Jun 2016
Closing
rate at
 30 Jun 2015
Average
for the
6 months to
30 Jun 2015
Closing
rate at
 31 Dec 2015
Average for
12 months to
31 Dec 2015
Local currency: £
 
 
 
 
 
 
Hong Kong
10.37
11.13
12.19
11.81
11.42
11.85
Indonesia
17,662.47
19,222.95
20,968.02
19,760.02
20,317.71
20,476.93
Malaysia
5.39
5.87
5.93
5.55
6.33
5.97
Singapore
1.80
1.98
2.12
2.06
2.09
2.1
China
8.88
9.37
9.75
9.48
9.57
9.61
India
90.23
96.30
100.15
95.76
97.51
98.08
Vietnam
29,815.99
31,996.45
34,345.42
32,832.81
33,140.64
33,509.21
Thailand
46.98
50.81
53.12
50.21
53.04
52.38
US
1.34
1.43
1.57
1.52
1.47
1.53
 
Certain notes to the financial statements present half year 2015 comparative information at Constant Exchange Rates (CER), in addition to the reporting at Actual Exchange Rates (AER) used throughout the condensed consolidated financial statements. AER are actual historical exchange rates for the specific accounting period, being the average rates over the period for the income statement and the closing rates at the balance sheet date for the balance sheet. CER results are calculated by translating prior period results using the current period foreign exchange rate ie current period average rates for the income statement and current period closing rates for the balance sheet.
 
The accounting policies applied by the Group in determining the IFRS basis results in this report are the same as those previously applied in the Group’s consolidated financial statements for the year ended 31 December 2015, except for the adoption of the new and amended accounting pronouncements for Group IFRS reporting as described below.
 
A2            Adoption of new accounting pronouncements in 2016
 
The Group has adopted the following new accounting pronouncements which were effective in 2016:
 
–   Annual improvements to IFRSs 2012 – 2014 cycle;
–   Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38) and;
–   Disclosure Initiative (Amendments to IAS 1).
 
The adoption of these pronouncements has had no impact on these financial statements.
 
B            EARNINGS PERFORMANCE
 
B1          Analysis of performance by segment
 
B1.1 
Segment results – profit before tax
 
 
 
 
2016 £m
 
2015 £m
 
%
 
2015 £m
 
 
Note
Half year
 
AER
Half year
CER
Half year
 
Half year 2016 vs
half year 2015
AER
Half year 2016 vs
half year 2015
CER
 
AER
Full year
 
 
 
 
 
note (iv)
note (iv)
 
note (iv)
note (iv)
 
 
Asia operations
 
 
 
 
 
 
 
 
 
 
Asia insurance operations
B4(a)
682
 
574
584
 
19%
17%
 
1,209
Eastspring Investments
 
61
 
58
60
 
5%
2%
 
115
Total Asia operations
 
743
 
632
644
 
18%
15%
 
1,324
 
 
 
 
 
 
 
 
 
 
 
 
US operations
 
 
 
 
 
 
 
 
 
 
Jackson (US insurance operations)
 
888
 
834
887
 
6%
0%
 
1,691
Broker-dealer and asset management
 
(12)
 
12
12
 
(200)%
(200)%
 
11
Total US operations
 
876
 
846
899
 
4%
(3)%
 
1,702
 
 
 
 
 
 
 
 
 
 
 
 
UK operations
 
 
 
 
 
 
 
 
 
 
UK insurance operations:
B4(b)
 
 
 
 
 
 
 
 
 
 
Long-term business
 
473
 
436
436
 
8%
8%
 
1,167
 
General insurance commission note (i)
 
19
 
17
17
 
12%
12%
 
28
Total UK insurance operations
 
492
 
453
453
 
9%
9%
 
1,195
M&G
 
225
 
251
251
 
(10)%
(10)%
 
442
Prudential Capital
 
13
 
7
7
 
86%
86%
 
19
Total UK operations
 
730
 
711
711
 
3%
3%
 
1,656
 
 
 
 
 
 
 
 
 
 
 
 
Total segment profit
 
2,349
 
2,189
2,254
 
7%
4%
 
4,682
 
 
 
 
 
 
 
 
 
 
 
 
Other income and expenditure
 
 
 
 
 
 
 
 
 
 
Investment return and other income
 
6
 
11
11
 
(45)%
(45)%
 
14
Interest payable on core structural borrowings
 
(165)
 
(148)
(148)
 
(11)%
(11)%
 
(312)
Corporate expenditurenote (ii)
 
(156)
 
(146)
(146)
 
(7)%
(7)%
 
(319)
Total
 
(315)
 
(283)
(283)
 
(11)%
(11)%
 
(617)
Solvency II implementation costs
 
(11)
 
(17)
(17)
 
35%
35%
 
(43)
Restructuring costs note (iii)
 
(7)
 
(8)
(8)
 
13%
13%
 
(15)
Interest received from tax settlement
 
43
 
-
-
 
n/a
n/a
 
-
Operating profit based on longer-term
investment returns
 
2,059
 
1,881
1,946
 
9%
6%
 
4,007
 
 
 
 
 
 
 
 
 
 
 
 
Short-term fluctuations in investment returns on shareholder-backed business
B1.2
(1,360)
 
86
97
 
(1,681)%
(1,502)%
 
(737)
Amortisation of acquisition accounting
adjustmentsnote (v)
 
(35)
 
(39)
(42)
 
10%
17%
 
(76)
Cumulative exchange loss on the sold Japan life business recycled from other comprehensive incomenote (vi)
 
-
 
(46)
(54)
 
n/a
n/a
 
(46)
Profit before tax attributable to shareholders
 
664
 
1,882
1,947
 
(65)%
(66)%
 
3,148
Tax charge attributable to shareholders' returns
 
23
 
(444)
(461)
 
105%
105%
 
(569)
Profit for the period attributable to shareholders
 
687
 
1,438
1,486
 
(52)%
(54)%
 
2,579
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016
 
2015
 
%
 
2015
 
 
 
Half year
 
AER
Half year
CER
Half year
 
Half year 2016 vs
half year 2015
AER
Half year 2016 vs
half year 2015
CER
 
AER
Full year
Basic earnings per share (in pence)
B6
 
 
note (iv)
note (iv)
 
note (iv)
note (iv)
 
 
Based on operating profit based on longer-term investment returns
 
61.8p
 
57.0p
59.0p
 
8%
5%
 
125.8p
Based on profit for the period
 
26.9p
 
56.3p
58.2p
 
(52)%
(54)%
 
101.0p
 
 
 
 
 
 
 
 
 
 
 
 
Notes
(i) The Group’s UK insurance operations transferred its general insurance business to Churchill in 2002. General insurance commission represents the commission receivable net of expenses for Prudential-branded general insurance products as part of this arrangement which terminates at the end of 2016.
(ii) Corporate expenditure as shown above is for Group Head Office and Asia Regional Head Office.
(iii) Restructuring costs are incurred in the UK and represent one-off business development expenses.
(iv) For definitions of AER and CER refer to note A1.
(v) Amortisation of acquisition accounting adjustments principally relate to the REALIC business of Jackson.
(vi) On 5 February 2015, the Group completed the sale of its closed book life insurance business in Japan.
 
 
B1.2 
Short-term fluctuations in investment returns on shareholder-backed business
 
 
 
2016 £m
 
2015 £m
 
 
Half year
 
Half year
Full year
Insurance operations:
 
 
 
 
 
Asia note (i)
26
 
(57)
(119)
 
US note (ii)
(1,440)
 
228
(424)
 
UK note (iii)
246
 
(96)
(120)
Other operationsnote (iv)
(192)
 
11
(74)
Total
(1,360)
 
86
(737)
 
Notes
(i) Asia insurance operations
In Asia, the positive short-term fluctuations of £26 million principally reflect net value movements on shareholders’ assets and related liabilities following falls in bond yields across the region during the period (half year 2015: negative £(57) million; full year 2015: negative £(119) million).
(ii) US insurance operations
The short-term fluctuations in investment returns for US insurance operations are reported net of related credit for amortisation of deferred acquisition costs, of £616 million as shown in note C5.1(b) (half year 2015: charge of £188 million; full year 2015: credit of £93 million) and comprise amounts in respect of the following items:
 
 
 
 
2016 £m 
 
2015 £m
 
 
 
Half year
 
Half year
Full year
 
Net equity hedge resultnote (a)
(1,692)
 
214
(504)
 
Other than equity-related derivativesnote (b)
335
 
(71)
29
 
Debt securities note (c)
(105)
 
66
1
 
Equity-type investments: actual less longer-term return
13
 
7
19
 
Other items
9
 
12
31
 
Total
(1,440)
 
228
(424)
 
Notes
(a)   Net equity hedge result
 
The purpose of the inclusion of this item in short-term fluctuations in investment returns is to segregate the amount included in pre-tax profit that relates to the accounting effect of market movements on both the measured value of guarantees in Jackson’s variable annuity and fixed index annuity products and on the related derivatives used to manage the exposures inherent in these guarantees. As the Group applies US GAAP for the measured value of the product guarantees this item also includes asymmetric impacts where the measurement bases of the liabilities and associated derivatives used to manage the Jackson annuity business differ as described below.
 
The result comprises the net effect of:
 
–   The accounting value movements on the variable and fixed index annuity guarantee liabilities;
–   Adjustments in respect of fee assessments and claim payments;
–   Fair value movements on free standing equity derivatives; and
–   Related changes to DAC amortisation in accordance with the policy that DAC is amortised in line with emergence of margins.
 
Movements in the accounting values of the variable annuity guarantee liabilities include those for:
 
–    The Guaranteed Minimum Death Benefit (GMDB), and the ‘for life’ portion of Guaranteed Minimum Withdrawal Benefit (GMWB) guarantees which are measured under the US GAAP basis applied for IFRS in a way that is substantially insensitive to the effect of current period equity market and interest rate changes.
–    The ‘not for life’ portion of GMWB embedded derivative liabilities which are required to be measured under IAS 39 using a basis under which the projected future growth rate of the account balance is based on current swap rates (rather than expected rates of return) with only a portion of the expected future guarantee fees included. Reserve value movements on these liabilities are sensitive to changes to levels of equity markets, implied volatility and interest rates.
             
 
The free-standing equity derivatives are held to manage equity exposures of the variable annuity guarantees and fixed index annuity embedded options.
 
The net equity hedge result therefore includes significant accounting mismatches and other factors that detract from the presentation of an economic result. These other factors include: 
 
–   The variable annuity guarantees and fixed index annuity embedded options being only partially fair valued under ‘grandfathered’ GAAP;
–   The interest rate exposure being managed through the other than equity-related derivative programme explained in note (b) below; and
–   Jackson’s management of its economic exposures for a number of other factors that are treated differently in the accounting frameworks such as future fees and assumed volatility levels.

(b)   Other than equity-related derivatives
 
The fluctuations for this item comprise the net effect of:
 
–   Fair value movements on free-standing, other than equity-related derivatives;
–   Accounting effects of the Guaranteed Minimum Income Benefit (GMIB) reinsurance; and
–   Related amortisation of DAC.
 
The free-standing, other than equity-related derivatives are held to manage interest rate exposures and durations within the general account and the variable annuity guarantees and fixed index annuity embedded options described in note (a) above.
The direct GMIB liability is valued using the US GAAP measurement basis applied for IFRS reporting in a way that substantially does not recognise the effects of market movements. Reinsurance arrangements are in place so as to essentially fully insulate Jackson from the GMIB exposure. Notwithstanding that the liability is essentially fully reinsured, as the reinsurance asset is net settled, it is deemed a derivative under IAS 39 which requires fair valuation.
 
The fluctuations for this item therefore include significant accounting mismatches caused by: 
 
–    Fair value movements on free-standing, other than equity-related derivatives;
–   Accounting effects of the Guaranteed Minimum Income Benefit (GMIB) reinsurance; and
–   Related amortisation of DAC.
 
(c)  Short-term fluctuations related to debt securities
 
 
 
2016 £m 
 
2015 £m
 
 
Half year 
 
Half year
Full year
Short-term fluctuations relating to debt securities
 
 
 
 
(Charges) credits in the period:
 
 
 
 
 
Losses on sales of impaired and deteriorating bonds
(87)
 
(13)
(54)
 
Defaults
(6)
 
-
-
 
Bond write downs
(32)
 
(3)
(37)
 
Recoveries/reversals
4
 
15
18
 
Total credits (charges) in the period
(121)
 
(1)
(73)
Less: Risk margin allowance deducted from operating profit based on longer-term investment returns
42
 
41
83
 
 
(79)
 
40
10
Interest-related realised gains:
 
 
 
 
 
Arising in the period
20
 
95
102
 
Less: Amortisation of gains and losses arising in current and prior periods to operating profit based on longer-term investment returns
(59)
 
(61)
(108)
 
 
(39)
 
34
(6)
Related amortisation of deferred acquisition costs
13
 
(8)
(3)
Total short-term fluctuations related to debt securities
(105)
 
66
1
 
The debt securities of Jackson are held in the general account of the business. Realised gains and losses are recorded in the income statement with normalised returns included in operating profit and variations from year to year are included in the short-term fluctuations category. The risk margin reserve charge for longer-term credit-related losses included in operating profit based on longer-term investment returns of Jackson for half year 2016 is based on an average annual risk margin reserve of 21 basis points (half year 2015: 23 basis points; full year 2015: 23 basis points) on average book values of US$56.4 billion (half year 2015: US$54.3 billion; full year 2015: US$54.6 billion) as shown below:
 
 
Half year 2016
 
Half year 2015
 
Full year 2015
Moody’s rating category
(or equivalent under
NAIC ratings of
mortgage-backed
securities)
 Average
 book
 value
 
RMR
 
Annual expected loss
 
 Average
 book
 value
 
RMR
 
Annual expected loss
 
 Average
 book
 value
 
RMR
 
Annual expected loss
 
US$m
 
%
 
US$m
£m
 
US$m
 
%
 
US$m
£m
 
US$m
 
%
 
US$m
£m
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
A3 or higher
29,172
 
0.12
 
(36)
(25)
 
28,211
 
0.13
 
(37)
(24)
 
28,185
 
0.13
 
(37)
(24)
Baa1, 2 or 3
25,771
 
0.24
 
(63)
(44)
 
24,317
 
0.25
 
(60)
(40)
 
24,768
 
0.25
 
(62)
(40)
Ba1, 2 or 3
1,065
 
1.08
 
(11)
(8)
 
1,333
 
1.18
 
(16)
(10)
 
1,257
 
1.17
 
(15)
(10)
B1, 2 or 3
319
 
3.02
 
(10)
(7)
 
396
 
3.07
 
(12)
(8)
 
388
 
3.08
 
(12)
(8)
Below B3
41
 
3.81
 
(2)
(1)
 
43
 
3.69
 
(2)
(1)
 
35
 
3.70
 
(1)
(1)
Total
56,368
 
0.21
 
(122)
(85)
 
54,300
 
0.23
 
(127)
(83)
 
54,633
 
0.23
 
(127)
(83)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Related amortisation of deferred acquisition costs (see below)
 
22
15
 
 
 
 
 
24
16
 
 
 
 
 
24
16
Risk margin reserve charge to operating profit for longer-term credit-related losses
 
(100)
(70)
 
 
 
 
 
(103)
(67)
 
 
 
 
 
(103)
(67)
 
Consistent with the basis of measurement of insurance assets and liabilities for Jackson’s IFRS results, the charges and credits to operating profits based on longer-term investment returns are partially offset by related amortisation of deferred acquisition costs.
 
In addition to the accounting for realised gains and losses described above for Jackson general account debt securities, included within the statement of other comprehensive income is a pre-tax credit for net unrealised gains on debt securities classified as available-for-sale net of related amortisation of deferred acquisition costs of £1,683 million (half year 2015: charge for net unrealised loss of £(597) million; full year 2015: charge for net unrealised loss of £(968) million). Temporary market value movements do not reflect defaults or impairments. Additional details of the movement in the value of the Jackson portfolio are included in note C3.3(b).
 
(iii) 
 UK insurance operations
The positive short-term fluctuations in investment returns for UK insurance operations of £246 million (half year 2015: negative £(96) million; full year 2015: negative £(120) million) include net unrealised movements on fixed income assets supporting the capital of the shareholder-backed annuity business.
(iv) 
 Other
The negative short-term fluctuations in investment returns for other operations of £(192) million (half year 2015: positive £11 million; full year 2015: negative £(74) million) include unrealised value movements on financial instruments and foreign exchange items.
(v)   Default losses
The Group incurred default losses of £6 million on its shareholder-backed debt securities portfolio for half year 2016 wholly in respect of Jackson’s portfolio (half year 2015 and full year 2015: £nil).
 
 
B1.3            Determining operating segments and performance measure of operating segments
 
Operating segments
The Group’s operating segments, determined in accordance with IFRS 8 ‘Operating Segments’, are as follows:
 
Insurance operations:
Asset management operations:
–     Asia
–     Eastspring Investments
–     US (Jackson)
–     US broker-dealer and asset management
–     UK
–     M&G
 
–     Prudential Capital
 
The Group’s operating segments are also its reportable segments for the purposes of internal management reporting.
 
Performance measure
The performance measure of operating segments utilised by the Company is IFRS operating profit attributable to shareholders based on longer-term investment returns. This measurement basis distinguishes operating profit based on longer-term investment returns from other constituents of the total profit as follows:
 
–     Short-term fluctuations in investment returns on shareholder-backed business;
–     Amortisation of acquisition accounting adjustments arising on the purchase of business. This comprises principally the charge for the adjustments arising on the purchase of REALIC in 2012;
–     The recycling of the cumulative exchange translation loss on the sold Japan life business from other comprehensive income to the income statement in 2015.
 
Segment results that are reported to the Group Executive Committee include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items are mainly in relation to the Group Head Office and the Asia Regional Head Office.
 
The determination of operating profit based on longer-term investment returns for investment and liability movements is as described in note B1.3 of the Group’s consolidated financial statements for the year ended 31 December 2015.
 
For Group debt securities at 30 June 2016, the level of unamortised interest-related realised gains and losses related to previously sold bonds and have yet to be amortised to operating profit was a net gain of £605 million (30 June 2015: net gain of £478 million; 31 December 2015: net gain of £567 million).
 
For equity-type securities, the longer-term rates of return applied by the non-linked shareholder-financed insurance operations of Asia and the US to determine the amount of investment return included in operating profit are as follows:
 
–     For Asia insurance operations, investments in equity securities held for non-linked shareholder-financed operations amounted to £1,035 million as at 30 June 2016 (30 June 2015: £831 million; 31 December 2015: £840 million). The rates of return applied for 2016 ranged from 3.2 per cent to 13.0 per cent (30 June 2015: 3.8 per cent to 13.0 percent, 31 December 2015: 3.5 percent to 13.0 per cent) with the rates applied varying by territory.
–     For US insurance operations, at 30 June 2016, the equity-type securities for non-separate account operations amounted to £1,115 million. (30 June 2015: £1,087 million; 31 December 2015: £1,004 million). The longer-term rates of return for income and capital applied in 2016 and 2015, which reflect the combination of the average risk-free rates over the period and appropriate risk premiums, are as follows:
 
 
2016
 
2015
 
Half year
 
Half year
Full year
 
 
 
 
 
Equity-type securities such as common and preferred stock and portfolio holdings in mutual funds
5.5% to 5.9%
 
5.7% to 6.4%
5.7% to 6.4%
Other equity-type securities such as investments in limited partnerships and private equity funds
                                             7.5% to 7.9%
 
                                               7.7% to 8.4%
                                      7.7% to 8.4%
 
B1.4            Additional segmental analysis of revenue
 
The additional segmental analyses of revenue from external customers excluding investment return and net of outward reinsurance premiums are as follows:
 
 
 
Half year 2016 £m
 
 
Asia 
US 
UK 
Intra-group 
Total 
Revenue from external customers:
 
 
 
 
 
 
Insurance operations
5,747
6,817
4,985
-
17,549
 
Asset management
179
369
561
(246)
863
 
Unallocated corporate
-
-
67
-
67
 
Intra-group revenue eliminated on consolidation
(95)
(47)
(104)
246
-
Total revenue from external customers
5,831
7,139
5,509
-
18,479
 
 
 
Half year 2015 £m
 
 
Asia 
US 
UK 
Intra-group 
Total 
Revenue from external customers:
 
 
 
 
 
 
Insurance operations
5,154
8,426
4,518
-
18,098
 
Asset management
179
451
641
(241)
1,030
 
Unallocated corporate
-
-
41
-
41
 
Intra-group revenue eliminated on consolidation
(94)
(45)
(102)
241
-
Total revenue from external customers
5,239
8,832
5,098
-
19,169
 
 
 
Full year 2015 £m
 
 
Asia 
US 
UK 
Intra-group 
Total 
Revenue from external customers:
 
 
 
 
 
 
Insurance operations
10,514
16,567
8,863
-
35,944
 
Asset management
349
850
1,246
(487)
1,958
 
Unallocated corporate
-
-
99
-
99
 
Intra-group revenue eliminated on consolidation
(178)
(90)
(219)
487
-
Total revenue from external customers
10,685
17,327
9,989
-
38,001
 
Revenue from external customers comprises:
 
 
2016 £m
 
2015 £m
 
Half year
 
Half year
Full year
 
 
 
 
 
Earned premiums, net of reinsurance
17,394
 
17,884
35,506
Fee income and investment contract business and asset management (presented as
'Other income')
1,085
 
1,285
2,495
Total revenue from external customers
18,479
 
19,169
38,001
 
The asset management operations of M&G, Prudential Capital, Eastspring Investments and the US asset management businesses provide services to the Group insurance operations. Intra-group fees included within asset management revenue were earned by the following asset management segments:
 
 
 
2016 £m
 
2015 £m
 
 
Half year
 
Half year
Full year
Intra-group revenue generated by:
 
 
 
 
 
M&G
88
 
93
194
 
Prudential Capital
16
 
9
25
 
Eastspring Investments
95
 
94
178
 
US broker-dealer and asset management
47
 
45
90
Total intra-group fees included within asset management segment
246
 
241
487
 
Revenue from external customers of Asia, US and UK insurance operations shown above are net of outwards reinsurance premiums of £401 million, £162 million and £381 million respectively (half year 2015: £228 million, £142 million and £152 million respectively; full year 2015: £364 million, £320 million and £473 million respectively).
 
Gross premiums earned in Asia including those attributable to joint ventures (that are accounted for on an equity method) were £6,814 million (half year 2015: £6,086 million; full year 2015: £12,136 million).
 
 
B2            Profit before tax – asset management operations
 
The profit included in the income statement in respect of asset management operations for the year is as follows:
 
 
 
 
 
 
2016 £m
 
 
2015 £m
 
 
M&G 
Prudential
Capital
US 
Eastspring
Investments
Half year
Total
 
Half year
Total
 
Full year
Total
Revenue (excluding NPH broker-dealer fees)
557
(13)
109
181
834
 
1,029
 
1,964
NPH broker-dealer feesnote (i)
-
-
259
-
259
 
272
 
522
Gross revenue
557
(13)
368
181
1,093
 
1,301
 
2,486
Charges (excluding NPH broker-dealer fees)
(339)
(48)
(121)
(141)
(649)
 
(734)
 
(1,497)
NPH broker-dealer feesnote (i)
-
-
(259)
-
(259)
 
(272)
 
(522)
Gross charges
(339)
(48)
(380)
(141)
(908)
 
(1,006)
 
(2,019)
Share of profits from joint ventures and associates, net of related tax
5
-
-
21
26
 
27
 
55
Profit before tax
223
(61)
(12)
61
211
 
322
 
522
Comprising:
 
 
 
 
 
 
 
 
 
 
Operating profit based on longer-term investment returnsnote (ii)
225
13
(12)
61
287
 
328
 
587
 
Short-term fluctuations in investment returns
(2)
(74)
-
-
(76)
 
(6)
 
(65)
Profit before tax
223
(61)
(12)
61
211
 
322
 
522
 
Notes
(i) NPH broker-dealer fees represent commissions received that are then paid on to the writing brokers on sales of investment products.
To reflect their commercial nature, the amounts are also wholly reflected as charges within the income statement. After allowing for these charges, there is no effect on profit from this item. The presentation in the table above shows the amounts attributable to this item so that the underlying revenue and charges can be seen.
(ii) M&G operating profit based on longer-term investment returns:
 
 
 
 
2016 £m
 
2015 £m
 
 
 
Half year
 
Half year
Full year
 
Asset management fee income
431
 
489
934
 
Other income
9
 
2
5
 
Staff costs
(133)
 
(154)
(293)
 
Other costs
(96)
 
(94)
(240)
 
Underlying profit before performance-related fees
211
 
243
406
 
Share of associate's results
5
 
7
14
 
Performance-related fees
9
 
1
22
 
M&G operating profit based on longer-term investment returns
225
 
251
442
 
The revenue for M&G of £449 million (half year 2015: £492 million; full year 2015: £961 million), comprises the amounts for asset management fee income, other income and performance-related fees shown above, is different to the amount of £557 million shown in the main table of this note. This is because the £449 million (half year 2015: £492 million; full year 2015: £961 million) is after deducting commissions which would have been included as charges in the main table. The difference in the presentation of commission is aligned with how management reviews the business.
 
B3            Acquisition costs and other expenditure
 
 
2016 £m
 
2015 £m
 
Half year
 
Half year
Full year
Acquisition costs incurred for insurance policies
(1,700)
 
(1,580)
(3,275)
Acquisition costs deferred less amortisation of acquisition costs
740
 
(15)
431
Administration costs and other expenditure
(2,451)
 
(2,314)
(4,746)
Movements in amounts attributable to external unit holders
of consolidated investment funds
(152)
 
(596)
(618)
Total acquisition costs and other expenditure
(3,563)
 
(4,505)
(8,208)
 
Included in total acquisition costs and other expenditure is depreciation of property, plant and equipment of £(75) million (half year 2015: £(55) million; full year 2015 £(129) million).
 
B4            Effect of changes and other accounting features on insurance assets and liabilities
 
The following features are of relevance to the determination of the half year 2016 results:
 
(a) Asia insurance operations
In half year 2016, the IFRS operating profit based on longer-term investment returns for Asia insurance operations included a net credit of £42 million (half year 2015: £29 million; full year 2015: £62 million) representing a small number of non-recurring items, including a gain resulting from entering into a reinsurance contract in the period.
 
(b) UK insurance operations
Annuity business: allowance for credit risk
For IFRS reporting, the results for UK shareholder-backed annuity business are particularly sensitive to the allowances made for credit risk. The allowance is reflected in the deduction from the valuation rate of interest used for discounting projected future annuity payments to policyholders that would have otherwise applied. The credit risk allowance comprises an amount for long-term best estimate defaults and additional provisions for credit risk premium, the cost of downgrades and short-term defaults.
 
The IFRS credit risk allowance made for shareholder-backed fixed and linked annuity business for PRIL, the principal company which writes the UK’s shareholder-backed business, equated to 43 basis points at 30 June 2016 (30 June 2015: 46 basis points; 31 December 2015: 43 basis points). The allowance represented 23 per cent of the bond spread over swap rates (30 June 2015: 31 per cent; 31 December 2015: 25 per cent).
 
The reserves for credit risk allowance at 30 June 2016 for the UK shareholder-backed business were as follows:
 
 
 
 
 
 
 
2016 £bn
 
2015 £bn
 
30 Jun
 
30 Jun
31 Dec
PRIL
1.6
 
1.5
1.5
PAC shareholder annuity business
0.2
 
0.2
0.1
Total
1.8
 
1.7
1.6
 
Annuity business: Longevity reinsurance and other management actions
A number of management actions were taken in the first half of 2016 to improve the solvency position of the UK insurance operations and further mitigate market risk, which have generated combined profits of £140 million. Similar actions were also taken in 2015.
 
Of this amount £66 million related to profit from additional longevity reinsurance transactions covering £1.5 billion of annuity liabilities on an IFRS basis, with the balance of £74 million reflecting the effect of repositioning the fixed income portfolio and other actions.
 
The contribution to profit from similar longevity reinsurance transactions in 2015 was £61 million for half-year covering £1.6 billion of annuity liabilities (on a Pillar 1 basis) and £231 million for full year covering £6.4 billion of annuity liabilities (on a Pillar 1 basis). Other asset-related management actions generated a further £169 million at full year 2015.
 
At 30 June 2016, longevity reinsurance covered £10.7 billion of IFRS annuity liabilities equivalent to 32 per cent of total annuity liabilities.
 
B5            Tax charge
 
(a) Total tax charge by nature of expense
The total tax charge in the income statement is as follows:
 
 
2016 £m
 
2015 £m
Tax charge
Current
 tax
Deferred
 tax
Half year
Total
 
Half year
Total
Full year
Total
UK tax
(162)
(67)
(229)
 
(159)
(149)
Overseas tax
(340)
300
(40)
 
(487)
(593)
Total tax charge
(502)
233
(269)
 
(646)
(742)
 
The current tax charge of £502 million includes £27 million (half year 2015: £16 million; full year 2015: £35 million) in respect of the tax charge for the Hong Kong operation. The Hong Kong current tax charge is calculated as 16.5 per cent for all periods on either: (i) 5 per cent of the net insurance premium; or (ii) the estimated assessable profits, depending on the nature of the business written.
 
The total tax charge comprises tax attributable to policyholders and unallocated surplus of with-profits funds, unit-linked policies and shareholders as shown below:
 
 
2016 £m
 
2015 £m
Tax charge
Current
 tax
Deferred
tax
Half year
 Total
 
Half year
Total
Full year
 Total
Tax charge to policyholders' returns
(153)
(139)
(292)
 
(202)
(173)
Tax (charge) credit attributable to shareholders
(349)
372
23
 
(444)
(569)
Total tax (charge) credit
(502)
233
(269)
 
(646)
(742)
 
The principal reason for the increase in the tax charge attributable to policyholders’ returns compared to half year 2015 is an increase on investment return in the with-profits fund in the UK insurance operations. An explanation of the tax charge attributable to shareholders is shown in note (b) below.
 
(b) Reconciliation of effective tax rate
Reconciliation of tax charge on profit attributable to shareholders
 
 
 
 
Half year 2016 £m
 
 
 
Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
Other
operations
Total
Operating profit (loss) based on longer-term investment returns
682
888
492
(3)
2,059
Non-operating profit (loss)
22
(1,471)
246
(192)
(1,395)
Profit (loss) before tax attributable to shareholders
704
(583)
738
(195)
664
Expected tax rate*
21%
35%
20%
20%
8%
Tax at the expected rate
148
(204)
148
(39)
53
 
Effects of recurring tax reconciliation items:
 
 
 
 
 
 
 
Income not taxable or taxable at concessionary rates
(14)
(5)
(16)
(3)
(38)
 
 
Deductions not allowable for tax purposes
8
2
6
2
18
 
 
Items related to taxation of life insurance businesses
(10)
(60)
(1)
-
(71)
 
 
Deferred tax adjustments
(1)
-
3
(3)
(1)
 
 
Effect of results of joint ventures and associates
(10)
-
-
(7)
(17)
 
 
Irrecoverable withholding taxes
-
-
-
20
20
 
 
Other
3
-
(2)
16
17
 
Total
(24)
(63)
(10)
25
(72)
 
 
 
 
 
 
 
 
 
Effects of non-recurring tax reconciliation items:
 
 
 
 
 
 
 
Adjustments to tax charge in relation to prior years
1
(3)
-
(2)
(4)
 
Total
1
(3)
-
(2)
(4)
 
 
 
 
 
 
 
 
Total actual tax charge (credit)
125
(270)
138
(16)
(23)
Analysed into:
 
 
 
 
 
Tax on operating profit based on longer-term investment returns
120
245
101
13
479
Tax on non-operating profit
5
(515)
37
(29)
(502)
Actual tax rate:
 
 
 
 
 
Operating profit based on longer-term investment returns
 
 
 
 
 
 
 
Including non-recurring tax reconciling items
18%
28%
21%
(433)%
23%
 
 
Excluding non-recurring tax reconciling items
17%
28%
21%
(500)%
23%
Total profit
18%
46%
19%
8%
(3)%
 
 
 
 
Half year 2015 £m
 
 
 
Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
Other
operations
Total
Operating profit based on longer-term investment returns
574
834
453
20
1,881
Non-operating (loss) profit
(107)
193
(96)
11
1
Profit before tax attributable to shareholders
467
1,027
357
31
1,882
Expected tax rate*
26%
35%
20%
19%
30%
Tax at the expected rate
121
359
71
6
557
 
Effects of recurring tax reconciliation items:
 
 
 
 
 
 
 
Income not taxable or taxable at concessionary rates
(13)
(3)
(2)
(5)
(23)
 
 
Deductions not allowable for tax purposes
4
2
2
11
19
 
 
Items related to taxation of life insurance businesses
(2)
(64)
-
-
(66)
 
 
Deferred tax adjustments
1
-
(1)
(4)
(4)
 
 
Effect of results of joint ventures and associates
(16)
-
-
(6)
(22)
 
 
Irrecoverable withholding taxes
-
-
-
14
14
 
 
Other
2
-
5
(3)
4
 
Total
(24)
(65)
4
7
(78)
 
 
 
 
 
 
 
 
 
Effects of non-recurring tax reconciliation items:
 
 
 
 
 
 
 
Adjustments to tax charge in relation to prior years
5
(28)
-
4
(19)
 
 
Movements in provisions for open tax matters
(9)
-
-
(2)
(11)
 
 
Impact of changes in local statutory tax rates
(5)
-
-
-
(5)
 
Total
(9)
(28)
-
2
(35)
 
 
 
 
 
 
 
 
Total actual tax charge
88
266
75
15
444
Analysed into:
 
 
 
 
 
Tax on operating profit based on longer-term investment returns
91
222
94
19
426
Tax on non-operating profit
(3)
44
(19)
(4)
18
Actual tax rate:
 
 
 
 
 
Operating profit based on longer-term investment returns
 
 
 
 
 
 
 
Including non-recurring tax reconciling items
16%
27%
21%
95%
23%
 
 
Excluding non-recurring tax reconciling items
17%
30%
21%
85%
25%
Total profit
19%
26%
21%
48%
24%
 
 
 
 
 
Full year 2015 £m
 
 
 
Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
Other
operations
Total
Operating profit (loss) based on longer-term investment returns
1,209
1,691
1,195
(88)
4,007
Non-operating loss
(173)
(492)
(120)
(74)
(859)
Profit (loss) before tax attributable to shareholders
1,036
1,199
1,075
(162)
3,148
Expected tax rate*
24%
35%
20%
20%
27%
Tax at the expected rate
249
420
215
(32)
852
 
Effects of recurring tax reconciliation items:
 
 
 
 
 
 
 
Income not taxable or taxable at concessionary rates
(42)
(10)
(2)
(9)
(63)
 
 
Deductions not allowable for tax purposes
15
5
7
6
33
 
 
Items related to taxation of life insurance businesses
(20)
(113)
-
-
(133)
 
 
Deferred tax adjustments
10
-
-
(11)
(1)
 
 
Effect of results of joint ventures and associates
(37)
-
-
(13)
(50)
 
 
Irrecoverable withholding taxes
-
-
-
28
28
 
 
Other
(4)
(1)
6
2
3
 
Total
(78)
(119)
11
3
(183)
 
 
 
 
 
 
 
 
 
Effects of non-recurring tax reconciliation items:
 
 
 
 
 
 
 
Adjustments to tax charge in relation to prior years
5
(65)
(7)
-
(67)
 
 
Movements in provisions for open tax matters
(6)
-
-
(5)
(11)
 
 
Impact of changes in local statutory tax rates
(5)
-
(16)
(1)
(22)
 
Total
(6)
(65)
(23)
(6)
(100)
 
 
 
 
 
 
 
 
Total actual tax charge (credit)
165
236
203
(35)
569
Analysed into:
 
 
 
 
 
Tax on operating profit based on longer-term investment returns
180
408
227
(19)
796
Tax on non-operating profit
(15)
(172)
(24)
(16)
(227)
Actual tax rate:
 
 
 
 
 
Operating profit based on longer-term investment returns
 
 
 
 
 
 
 
Including non-recurring tax reconciling items
15%
24%
19%
22%
20%
 
 
Excluding non-recurring tax reconciling items
15%
28%
21%
15%
22%
Total profit
16%
20%
19%
22%
18%
 
* 
The expected tax rates (rounded to the nearest whole percentage) reflect the corporation tax rates generally applied to taxable profit of the relevant country jurisdictions. For Asia operations the expected tax rates reflect the corporation tax rates weighted by reference to the source of profit of operations contributing to the aggregate business result. The expected tax rate for other operations reflects the mix of business between UK and overseas non-insurance operations, which are taxed at a variety of rates. The rates will fluctuate from year to year dependent on the mix of profit.
 
B6            Earnings per share
 
 
 
 
Half year 2016
 
 
 
Before
 tax
Tax
 
Net of tax
Basic
earnings
 per share
Diluted
 earnings
 per share
 
 
 
note B1.1
note B5
 
 
 
 
 
 
Note
£m
£m
 
£m
pence
pence
Based on operating profit based on longer-term investment returns
 
2,059
(479)
 
1,580
61.8p
61.7p
Short-term fluctuations in investment returns on shareholder-backed business
B1.2
(1,360)
491
 
(869)
(34.0)p
(34.0)p
Amortisation of acquisition accounting adjustments
 
(35)
11
 
(24)
(0.9)p
(0.9)p
Based on profit for the period
 
664
23
 
687
26.9p
26.8p
 
 
 
 
Half year 2015
 
 
 
Before
 tax
Tax
 
Net of tax
Basic
earnings
 per share
Diluted
 earnings
 per share
 
 
 
note B1.1
note B5
 
 
 
 
 
 
Note
£m
£m
 
£m
pence
pence
Based on operating profit based on longer-term investment returns
 
1,881
(426)
 
1,455
57.0p
56.9p
Short-term fluctuations in investment returns on shareholder-backed business
B1.2
86
(31)
 
55
2.1p
2.1p
Cumulative exchange loss on the sold Japan life business recycled from other comprehensive income
 
(46)
-
 
(46)
(1.8)p
(1.8)p
Amortisation of acquisition accounting adjustments
 
(39)
13
 
(26)
(1.0)p
(1.0)p
Based on profit for the period
 
1,882
(444)
 
1,438
56.3p
56.2p
 
 
 
 
Full year 2015
 
 
 
Before
 tax
Tax
 
Net of tax
Basic
earnings
 per share 
Diluted
 earnings
 per share 
 
 
 
note B1.1
note B5
 
 
 
 
 
 
Note
£m 
£m 
 
£m 
pence
pence
Based on operating profit based on longer-term investment returns
 
4,007
(796)
 
3,211
125.8p
125.6p
Short-term fluctuations in investment returns on shareholder-backed business
B1.2
(737)
202
 
(535)
(21.0)p
(20.9)p
Cumulative exchange loss on the sold Japan life business recycled from other comprehensive income
 
(46)
-
 
(46)
(1.8)p
(1.8)p
Amortisation of acquisition accounting adjustments
 
(76)
25
 
(51)
(2.0)p
(2.0)p
Based on profit for the year
 
3,148
(569)
 
2,579
101.0p
100.9p
 
Earnings per share are calculated based on earnings attributable to ordinary shareholders, after related tax and non-controlling interests.
 
The weighted average number of shares for calculating earnings per share, which excludes those held in employee share trusts and consolidated unit trusts and OEICs, is set out as below:
 
 
 
Half year
2016
 
Half year
2015
Full year
2015
Weighted average number of shares for calculation of:
 (millions)
 
 (millions)
 (millions)
 
Basic earnings per share
2,558
 
2,552
2,553
 
Diluted earnings per share
2,559
 
2,555
2,556
 
B7            Dividends
 
 
 
 
 
 
 
 
 
 
 
 
Half year 2016
 
Half year 2015
Full year 2015
 
Pence per share
£m
 
Pence per share
£m
Pence per share
£m
Dividends relating to reporting period:
 
 
 
 
 
 
 
 
First interim dividend / Interim dividend for prior year
12.93p
333
 
12.31p
315
12.31p 
315
 
Second interim dividend
-
-
 
-
-
26.47p 
681
 
Special dividend
-
-
 
-
-
10.00p 
257
Total
12.93p
333
 
12.31p
315
48.78p 
1,253
Dividends declared and paid in reporting period:
 
 
 
 
 
 
 
 
Current year interim dividend
-
-
 
-
-
12.31p 
315
 
Second interim dividend / Final dividend for prior year
26.47p 
679
 
25.74p 
659
25.74p 
659
 
Special dividend
10.00p
256
 
-
-
-
-
Total
36.47p 
935
 
25.74p 
659
38.05p 
974
 
Dividend per share
Prudential makes twice-yearly interim dividend payments to replace interim / final dividends that were paid in 2015. The second interim dividend of 26.47 pence per ordinary share and the special dividend of 10.00 pence per ordinary share for the year ended 31 December 2015 were paid to eligible shareholders on 20 May 2016.
 
The 2016 first interim dividend of 12.93 pence per ordinary share will be paid on 29 September 2016 in sterling to shareholders on the principal register and the Irish branch register at 6.00pm BST on 26 August 2016 (Record Date), and in Hong Kong dollars to shareholders on the Hong Kong branch register at 4.30pm Hong Kong time on the Record Date (HK Shareholders). Holders of US American Depositary Receipts (US Shareholders) will be paid their dividends in US dollars on or about 6 October 2016. The first interim dividend will be paid on or about 6 October 2016 in Singapore dollars to shareholders with shares standing to the credit of their securities accounts with The Central Depository (Pte.) Limited (CDP) at 5.00pm Singapore time on the Record Date (SG Shareholders). The dividend payable to the HK Shareholders will be translated using the exchange rate quoted by the WM Company at the close of business on 9 August 2016. The exchange rate at which the dividend payable to the SG Shareholders will be translated into Singapore Dollars, will be determined by CDP.
 
Shareholders on the principal register and Irish branch register will be able to participate in a Dividend Reinvestment Plan.
 
C            BALANCE SHEET NOTES
 
C1 Analysis of Group position by segment and business type
 
To explain the assets, liabilities and capital of the Group’s businesses more comprehensively, it is appropriate to provide analyses of the Group’s statement of financial position by operating segment and type of business.
 
C1.1 
Group statement of financial position – analysis by segment
 
 
 
 
 
2016 £m
 
2015 £m
 
 
 
 
Insurance operations
Total insurance operations
 
Asset
management
operations
Unallocated
to a
segment
(central
operations)
Elimination of intra-group debtors and creditors
 
30 Jun
Group
Total
 
30 Jun
Group
Total
31 Dec
Group
Total
 
 
 
 
Asia
US 
UK
 
 
 
By operating segment
Note
C2.1
C2.2
C2.3
 
 
C2.4
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets attributable to shareholders:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
C5.1(a)
258
-
-
258
 
1,230
-
-
 
1,488
 
1,461
1,463
 
Deferred acquisition costs and other intangible assets
C5.1(b)
2,319
7,081
81
9,481
 
19
49
-
 
9,549
 
7,310
8,422
Total
 
2,577
7,081
81
9,739
 
1,249
49
-
 
11,037
 
8,771
9,885
Intangible assets attributable to with-profits funds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill in respect of acquired subsidiaries for venture fund and other investment purposes
 
-
-
189
189
 
-
-
-
 
189
 
184
185
 
Deferred acquisition costs and other intangible assets
 
37
-
8
45
 
-
-
-
 
45
 
49
50
 
Total
 
37
-
197
234
 
-
-
-
 
234
 
233
235
Total
 
2,614
7,081
278
9,973
 
1,249
49
-
 
11,271
 
9,004
10,120
Deferred tax assets
C7
92
3,369
139
3,600
 
145
26
-
 
3,771
 
2,820
2,819
Other non-investment and non-cash assets note (i)
 
5,489
7,864
7,780
21,133
 
1,635
5,603
(10,864)
 
17,507
 
14,664
14,283
Investments of long-term business and other operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment properties
 
5
5
13,930
13,940
 
-
-
-
 
13,940
 
13,259
13,422
 
Investments in joint ventures and associates accounted for using the equity method
 
525
-
462
987
 
148
-
-
 
1,135
 
962
1,034
 
Financial investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
C3.4
1,278
8,504
3,616
13,398
 
817
-
-
 
14,215
 
12,578
12,958
 
 
Equity securities and portfolio holdings in unit trusts
 
22,631
104,124
49,150
175,905
 
106
26
-
 
176,037
 
155,253
157,453
 
 
Debt securities
C3.3
35,519
41,143
89,114
165,776
 
2,587
4
-
 
168,367
 
142,307
147,671
 
 
Other investments
 
79
2,503
7,489
10,071
 
265
4
-
 
10,340
 
7,713
7,353
 
 
Deposits
 
912
-
13,184
14,096
 
85
-
-
 
14,181
 
11,043
12,088
 
Total investments
 
60,949
156,279
176,945
394,173
 
4,008
34
-
 
398,215
 
343,115
351,979
Assets held for sale
 
-
-
30
30
 
-
-
-
 
30
 
-
2
Cash and cash equivalents
 
2,010
1,056
3,445
6,511
 
1,693
326
-
 
8,530
 
8,298
7,782
Total assets
C3.1
71,154
175,649
188,617
435,420
 
8,730
6,038
(10,864)
 
439,324
 
377,901
386,985
 
 
 
 
2016 £m
 
2015 £m
 
 
 
Insurance operations
 
 
    
 
 
 
 
 
 
By operating segment 
Note
Asia
US 
UK
 Total
insurance
operations
 
Asset
management
operations
Unallocated
to a segment
(central
operations)
Elimination
 of intra-
group
debtors and
creditors
30 Jun
Group
Total
 
30 Jun
Group
Total
31 Dec
Group
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity and liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
4,873
5,056
6,163
16,092
 
2,422
(3,909)
-
14,605
 
12,104
12,955
Non-controlling interests
 
1
-
-
1
 
-
-
-
1
 
1
1
Total equity
 
4,874
5,056
6,163
16,093
 
2,422
(3,909)
-
14,606
 
12,105
12,956
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Policyholder liabilities and unallocated surplus of with-profits funds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4)
 
53,437
159,155
151,233
363,825
 
-
-
(1,315)
362,510
 
313,620
322,518
 
Unallocated surplus of with-profits funds
 
2,351
-
11,246
13,597
 
-
-
-
13,597
 
12,768
13,096
Total policyholder liabilities and unallocated surplus of with-profits funds
C4
55,788
159,155
162,479
377,422
 
-
-
(1,315)
376,107
 
326,388
335,614
Core structural borrowings of shareholder-financed operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subordinated debt
 
-
-
-
-
 
-
4,956
-
4,956
 
3,897
4,018
 
Other
 
-
186
-
186
 
275
549
-
1,010
 
983
993
Total
C6.1
-
186
-
186
 
275
5,505
-
5,966
 
4,880
5,011
Operational borrowings attributable to shareholder-financed operations
C6.2(a)
11
70
163
244
 
-
2,554
-
2,798
 
2,504
1,960
Borrowings attributable to with-profits operations
C6.2(b)
6
-
1,421
1,427
 
-
-
-
1,427
 
1,089
1,332
Deferred tax liabilities
C7
905
3,204
1,253
5,362
 
23
12
-
5,397
 
4,325
4,010
Other non-insurance
liabilitiesnote (ii)
 
9,570
7,978
17,138
34,686
 
6,010
1,876
(9,549)
33,023
 
26,610
26,102
Total liabilities
C3.1
66,280
170,593
182,454
419,327
 
6,308
9,947
(10,864)
424,718
 
365,796
374,029
Total equity and liabilities
 
71,154
175,649
188,617
435,420
 
8,730
6,038
(10,864)
439,324
 
377,901
386,985
 
Notes
(i)        The largest component of the other non-investment and non-cash assets of £17,507 million (30 June 2015: £14,664 million; 31 December 2015: £14,283 million) is the reinsurers’ share of contract liabilities of £9,470 million (30 June 2015: £7,259 million; 31 December 2015; £7,903 million). As set out in note C2.2 these amounts relate primarily to the reinsurance ceded in respect of the acquired REALIC business by the Group’s US insurance operations.
Within other non-investment and non-cash assets are premiums receivable of £467 million (30 June 2015: £884 million; 31 December 2015: £428 million) of which 73 per cent are due within one year. The remaining 27 per cent is due after one year.
Also included within other non-investment and non-cash assets are property, plant and equipment of £1,214 million (30 June 2015: £984 million; 31 December 2015: £1,197 million) of which £910 million (30 June 2015: £659 million; 31 December 2015: £833 million) was held by the Group’s with-profits operations, primarily by the consolidated subsidiaries for venture funds and other investment purposes of the PAC with-profits fund. The Group made additions to property, plant and equipment of £128 million (30 June 2015: £105 million; 31 December 2015: £256 million).
(ii)       Within other non-insurance liabilities are other creditors of £6,520 million (30 June 2015: £5,515 million; 31 December 2015: £4,876 million) of which £6,147 million (30 June 2015: £5,193 million; 31 December 2015: £4,554 million) is due within one year.
 
C1.2            Group statement of financial position – analysis by business type
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016 £m
 
 
2015 £m
 
 
 
 
Policyholder
 
Shareholder-backed business
 
 
 
 
 
 
 
 
 
Note
Participating
  funds*
 
Unit-linked
 and variable
 annuity
Non
-linked
business
Asset
management
 operations
Unallocated
 to a
 segment
 (central
  operations)
 
Elimination of intra-group debtors and creditors
 30 Jun
Group
 Total
 
 30 Jun
Group
 Total
 31 Dec
Group
 Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets attributable to shareholders:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
C5.1(a)
-
 
-
258
1,230
-
 
-
1,488
 
1,461
1,463
 
Deferred acquisition costs and other intangible assets
C5.1(b)
-
 
-
9,481
19
49
 
-
9,549
 
7,310
8,422
Total
 
-
 
-
9,739
1,249
49
 
-
11,037
 
8,771
9,885
Intangible assets attributable to with-profits funds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In respect of acquired subsidiaries for venture fund and other investment purposes
 
189
 
-
-
-
-
 
-
189
 
184
185
 
Deferred acquisition costs and other intangible assets
 
45
 
-
-
-
-
 
-
45
 
49
50
 
Total
 
234
 
-
-
-
-
 
-
234
 
233
235
Total
 
234
 
-
9,739
1,249
49
 
-
11,271
 
9,004
10,120
Deferred tax assets
C7
88
 
-
3,512
145
26
 
-
3,771
 
2,820
2,819
Other non-investment and non-cash assets
 
4,947
 
892
12,546
1,635
5,603
 
(8,116)
17,507
 
14,664
14,283
Investments of long-term business and other operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment properties
 
11,655
 
694
1,591
-
-
 
-
13,940
 
13,259
13,422
 
Investments in joint ventures and associates accounted for using the equity method
 
462
 
-
525
148
-
 
-
1,135
 
962
1,034
 
Financial investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
C3.4
2,716
 
-
10,682
817
-
 
-
14,215
 
12,578
12,958
 
 
Equity securities and portfolio holdings in unit trusts
 
43,195
 
131,405
1,305
106
26
 
-
176,037
 
155,253
157,453
 
 
Debt securities
C3.3
67,833
 
10,015
87,928
2,587
4
 
-
168,367
 
142,307
147,671
 
 
Other investments
 
6,934
 
54
3,083
265
4
 
-
10,340
 
7,713
7,353
 
 
Deposits
 
11,289
 
1,078
1,729
85
-
 
-
14,181
 
11,043
12,088
 
 
Total investments
 
144,084
 
143,246
106,843
4,008
34
 
-
398,215
 
343,115
351,979
Assets held for sale
 
30
 
-
-
-
-
 
-
30
 
-
2
Cash and cash equivalents
 
2,499
 
1,082
2,930
1,693
326
 
-
8,530
 
8,298
7,782
Total assets
C3.1
151,882
 
145,220
135,570
8,730
6,038
 
(8,116)
439,324
 
377,901
386,985
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity and liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
-
 
-
16,092
2,422
(3,909)
 
-
14,605
 
12,104
12,955
Non-controlling interests
 
-
 
-
1
-
-
 
-
1
 
1
1
Total equity
 
-
 
-
16,093
2,422
(3,909)
 
-
14,606
 
12,105
12,956
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Policyholder liabilities and unallocated surplus of with-profits funds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4)
 
120,311
 
141,157
101,042
-
-
 
-
362,510
 
313,620
322,518
 
Unallocated surplus of with-profits funds
 
13,597
 
-
-
-
-
 
-
13,597
 
12,768
13,096
Total policyholder liabilities and unallocated surplus of with-profits funds
C4
133,908
 
141,157
101,042
-
-
 
-
376,107
 
326,388
335,614
Core structural borrowings of shareholder-financed operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subordinated debt
 
-
 
-
-
-
4,956
 
-
4,956
 
3,897
4,018
 
Other
 
-
 
-
186
275
549
 
-
1,010
 
983
993
Total
C6.1
-
 
-
186
275
5,505
 
-
5,966
 
4,880
5,011
Operational borrowings attributable to shareholder-financed operations
C6.2(a)
-
 
11
233
-
2,554
 
-
2,798
 
2,504
1,960
Borrowings attributable to with-profits operations
C6.2(b)
1,427
 
-
-
-
-
 
-
1,427
 
1,089
1,332
Deferred tax liabilities
C7
1,559
 
30
3,773
23
12
 
-
5,397
 
4,325
4,010
Other non-insurance liabilities
 
14,988
 
4,022
14,243
6,010
1,876
 
(8,116)
33,023
 
26,610
26,102
Total liabilities
C3.1
151,882
 
145,220
119,477
6,308
9,947
 
(8,116)
424,718
 
365,796
374,029
Total equity and liabilities
 
151,882
 
145,220
135,570
8,730
6,038
 
(8,116)
439,324
 
377,901
386,985
* Participating funds business in the table above is presented after the elimination on consolidation of the balances relating to an intra-group reinsurance contract entered into during the period between the UK with-profits and Asia with-profits operations. In the segmental analysis presented in note C1.1, the balances are presented before elimination in the individual insurance operations segment, with the adjustment presented separately under intra-group eliminations.
 
C2            Analysis of segment position by business type
 
To show the statement of financial position by reference to the differing degrees of policyholder and shareholder economic interest of the different types of business, the analysis below is structured to show the assets and liabilities of each segment by business type.
 
C2.1 
Asia insurance operations
 
 
 
 
 
2016 £m
 
 2015 £m
 
 
 
 
With-profits 
 business 
Unit-linked 
 assets and 
 liabilities 
Other 
business
30 Jun
Total
 
30 Jun
Total
31 Dec
Total
 
 
 
Note
note
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Intangible assets attributable to shareholders:
 
 
 
 
 
 
 
 
 
Goodwill
 
-
-
258
258
 
231
233
 
Deferred acquisition costs and other intangible assets
 
-
-
2,319
2,319
 
1,918
2,103
Total
 
-
-
2,577
2,577
 
2,149
2,336
Intangible assets attributable to with-profits funds:
 
 
 
 
 
 
 
 
 
Deferred acquisition costs and other intangible assets
 
37
-
-
37
 
44
42
Deferred tax assets
 
-
-
92
92
 
95
66
Other non-investment and non-cash assets
 
2,756
325
2,408
5,489
 
3,367
3,621
Investments of long-term business and other operations:
 
 
 
 
 
 
 
 
 
Investment properties
 
-
-
5
5
 
5
5
 
Investments in joint ventures and associates accounted for using the equity method
 
-
-
525
525
 
415
475
 
Financial investments:
 
 
 
 
 
 
 
 
 
 
Loans
C3.4
652
-
626
1,278
 
1,009
1,084
 
 
Equity securities and portfolio holdings in unit trusts
 
8,898
12,698
1,035
22,631
 
20,190
18,532
 
 
Debt securities
C3.3
20,578
3,427
11,514
35,519
 
24,366
28,292
 
 
Other investments
 
41
20
18
79
 
71
57
 
 
Deposits
 
169
284
459
912
 
696
773
 
Total investments
 
30,338
16,429
14,182
60,949
 
46,752
49,218
Cash and cash equivalents
 
785
360
865
2,010
 
1,672
2,064
Total assets
 
33,916
17,114
20,124
71,154
 
54,079
57,347
Equity and liabilities
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
Shareholders’ equity
 
-
-
4,873
4,873
 
3,620
3,956
Non-controlling interests
 
-
-
1
1
 
1
1
Total equity
 
-
-
4,874
4,874
 
3,621
3,957
Liabilities
 
 
 
 
 
 
 
 
Policyholder liabilities and unallocated surplus of with-profits funds:
 
 
 
 
 
 
 
 
 
Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4)
 
25,804
15,705
11,928
53,437
 
40,832
42,516
 
Unallocated surplus of with-profits funds
 
2,351
-
-
2,351
 
2,127
2,553
 
Total
C4.1(b)
28,155
15,705
11,928
55,788
 
42,959
45,069
Operational borrowings attributable to shareholder-financed operations
 
-
7
4
11
 
-
-
Borrowings attributable to with-profits operations
 
6
-
-
6
 
-
-
Deferred tax liabilities
 
584
30
291
905
 
760
734
Other non-insurance liabilities
 
5,171
1,372
3,027
9,570
 
6,739
7,587
Total liabilities
 
33,916
17,114
15,250
66,280
 
50,458
53,390
Total equity and liabilities
 
33,916
17,114
20,124
71,154
 
54,079
57,347
 
Note
The statement of financial position for with-profits business comprises the with-profits assets and liabilities of the Hong Kong, Malaysia and Singapore operations. Assets and liabilities of other participating businesses are included in the column for 'Other business'.
 
C2.2            US insurance operations
 
 
 
 
 
2016 £m
 
 2015 £m
 
 
 
 
Variable annuity
 separate account
 assets and
 liabilities
 
Fixed annuity,
GIC and other
 business
30 Jun
 Total
 
30 Jun
 Total
31 Dec
 Total
 
 
 
Note
note (i)
 
note (i)
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Intangible assets attributable to shareholders:
 
 
 
 
 
 
 
 
 
Deferred acquisition costs and other intangibles
 
-
 
7,081
7,081
 
5,240
6,168
 
Total
 
-
 
7,081
7,081
 
5,240
6,168
Deferred tax assets
 
-
 
3,369
3,369
 
2,389
2,448
Other non-investment and non-cash assetsnote (iv)
 
-
 
7,864
7,864
 
6,562
7,205
Investments of long-term business and other operations:
 
 
 
 
 
 
 
 
 
Investment properties
 
-
 
5
5
 
19
5
 
Financial investments:
 
 
 
 
 
 
 
 
 
 
Loans
C3.4
-
 
8,504
8,504
 
6,798
7,418
 
 
Equity securities and portfolio holdings in unit trustsnote (iii)
 
103,904
 
220
104,124
 
86,283
91,216
 
 
Debt securities
C3.3
-
 
41,143
41,143
 
32,117
34,071
 
 
Other investmentsnote (ii)
 
-
 
2,503
2,503
 
1,515
1,715
 
Total investments
 
103,904
 
52,375
156,279
 
126,732
134,425
Cash and cash equivalents
 
-
 
1,056
1,056
 
713
1,405
Total assets
 
103,904
 
71,745
175,649
 
141,636
151,651
Equity and liabilities
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
Shareholders’ equitynote (v)
 
-
 
5,056
5,056
 
4,004
4,154
Total equity
 
-
 
5,056
5,056
 
4,004
4,154
Liabilities
 
 
 
 
 
 
 
 
Policyholder liabilities:
 
 
 
 
 
 
 
 
 
Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4)
 
103,904
 
55,251
159,155
 
129,667
138,913
 
Total
C4.1 (c)
103,904
 
55,251
159,155
 
129,667
138,913
Core structural borrowings of shareholder-financed operations
 
-
 
186
186
 
159
169
Operational borrowings attributable to shareholder-financed operations
 
-
 
70
70
 
221
66
Deferred tax liabilities
 
-
 
3,204
3,204
 
2,309
2,086
Other non-insurance liabilities
 
-
 
7,978
7,978
 
5,276
6,263
Total liabilities
 
103,904
 
66,689
170,593
 
137,632
147,497
Total equity and liabilities
 
103,904
 
71,745
175,649
 
141,636
151,651
 
Notes
(i) These amounts are for separate account assets and liabilities for all variable annuity products comprising those with and without guarantees. Assets and liabilities attaching to variable annuity business that are not held in the separate account, eg in respect of guarantees, are shown within other business.
(ii) Other investments comprise:
 
 
 
 
2016 £m
 
 
2015 £m
 
 
 
30 Jun
 
30 Jun
31 Dec
Derivative assets*
1,608
 
765
905
Partnerships in investment pools and other**
895
 
750
810
 
 
 
2,503
 
1,515
1,715
* After taking account of the derivative liabilities of £421 million (30 June 2015: £258 million; 31 December 2015: £249 million), which are included in other non-insurance liabilities, the derivative position for US operations is a net asset of £1,187 million (30 June 2015: net asset of £507 million; 31 December 2015: net asset of £656 million).
** Partnerships in investment pools and other comprise primarily investments in limited partnerships. These include interests in the PPM America Private Equity Fund and diversified investments in other partnerships by independent money managers that generally invest in various equities and fixed income loans and securities.
 
(iii) Equity securities and portfolio holdings in unit trusts include investments in mutual funds, the majority of which are equity-based.
(iv) Included within other non-investment and non-cash assets of £7,864 million (30 June 2015: £6,562 million; 31 December 2015: £7,205 million) were balances of £6,859 million (30 June 2015: £5,817 million; 31 December 2015: £6,211 million) for reinsurers’ share of insurance contract liabilities. Of the £6,859 million as at 30 June 2016, £5,870 million (30 June 2015: £5,057 million; 31 December 2015: £5,388 million) related to the reinsurance ceded in respect of the acquired REALIC business. Jackson holds collateral for certain of these reinsurance arrangements with a corresponding funds withheld liability. As of 30 June 2016, the funds withheld liability of £2,616 million (30 June 2015: £2,204 million; 31 December 2015: £2,347 million) was recorded within other non-insurance liabilities.
 
(v) Changes in shareholders’ equity
 
 
 
 
2016 £m
 
2015 £m
 
 
 
Half year
 
Half year
Full year
Operating profit based on longer-term investment returns B1.1
888
 
834
1,691
Short-term fluctuations in investment returns B1.2
(1,440)
 
228
(424)
Amortisation of acquisition accounting adjustments arising on the purchase of REALIC
(31)
 
(35)
(68)
Profit before shareholder tax
(583)
 
1027
1,199
Tax B5
270
 
(266)
(236)
Profit for the period
(313)
 
761
963
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Profit for the period (as above)
(313)
 
761
963
Items recognised in other comprehensive income:
 
 
 
 
 
Exchange movements
445
 
(34)
230
 
Unrealised valuation movements on securities classified as available-for-sale:
 
 
 
 
 
 
Unrealised holding gains (losses) arising during the period
2,023
 
(661)
(1,256)
 
 
Add back net losses / deduct net gains included in the income statement on disposal and impairment
95
 
(101)
(49)
 
Total unrealised valuation movements
2,118
 
(762)
(1,305)
 
 
Related amortisation of deferred acquisition costs C5.1(b)
(435)
 
165
337
 
 
Related tax
(589)
 
209
339
Total other comprehensive income (loss)
1,539
 
(422)
(399)
Total comprehensive income for the period
1,226
 
339
564
Dividends, interest payments to central companies and other movements
(324)
 
(402)
(477)
Net increase (decrease) in equity
902
 
(63)
87
Shareholders’ equity at beginning of period
4,154
 
4,067
4,067
Shareholders’ equity at end of period
5,056
 
4,004
4,154
 
C2.3 
UK insurance operations
 
Of the total investments of £177 billion in UK insurance operations, £114 billion of investments are held by Scottish Amicable Insurance Fund and the PAC with-profits sub-fund. Shareholders are exposed only indirectly to value movements on these assets.
 
 
 
 
 
 
 
 
 
2016 £m
 
 
 
 
 
 
2015 £m
 
 
 
 
 
 
 
 
Other funds and subsidiaries
 
 
 
 
 
 
 
 
 
Scottish
 Amicable
Insurance
 Fund
 
PAC
with-
profits
sub-
fund
 
Unit-linked
 assets and
 liabilities
Annuity
 and other
 long-term
 business
 
Total
 
30 Jun
 Total
 
30 Jun
 Total
31 Dec
 Total
By operating segment
Note
note (ii) 
 
note (i)
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets attributable to shareholders:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred acquisition costs and other intangible assets
 
-
 
-
 
-
81
 
81
 
81
 
85
83
 
Total
 
-
 
-
 
-
81
 
81
 
81
 
85
83
Intangible assets attributable to with-profits funds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In respect of acquired subsidiaries for venture fund and other investment purposes
 
-
 
189
 
-
-
 
-
 
189
 
184
185
 
Deferred acquisition costs
 
-
 
8
 
-
-
 
-
 
8
 
5
8
 
Total
 
-
 
197
 
-
-
 
-
 
197
 
189
193
Total
 
-
 
197
 
-
81
 
81
 
278
 
274
276
Deferred tax assets
 
-
 
88
 
-
51
 
51
 
139
 
140
132
Other non-investment and non-cash assets
 
179
 
4,760
 
567
2,274
 
2,841
 
7,780
 
8,161
7,209
Investments of long-term business and other operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment properties
 
346
 
11,309
 
694
1,581
 
2,275
 
13,930
 
13,235
13,412
 
Investments in joint ventures and associates accounted for using the equity method (principally property fund joint ventures)
 
-
 
462
 
-
-
 
-
 
462
 
433
434
 
Financial investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
C3.4
55
 
2,009
 
-
1,552
 
1,552
 
3,616
 
3,845
3,571
 
 
Equity securities and portfolio holdings in unit trusts
 
2,614
 
31,683
 
14,803
50
 
14,853
 
49,150
 
48,662
47,593
 
 
Debt securities
C3.3
2,127
 
45,128
 
6,588
35,271
 
41,859
 
89,114
 
83,876
83,101
 
 
Other investmentsnote (iii)
 
300
 
6,593
 
34
562
 
596
 
7,489
 
6,006
5,486
 
 
Deposits
 
517
 
10,603
 
794
1,270
 
2,064
 
13,184
 
10,295
11,226
 
Total investments
 
5,959
 
107,787
 
22,913
40,286
 
63,199
 
176,945
 
166,352
164,823
Properties held for sale
 
-
 
30
 
-
-
 
-
 
30
 
-
2
Cash and cash equivalents
 
144
 
1,570
 
722
1,009
 
1,731
 
3,445
 
3,673
2,880
Total assets
 
6,282
 
114,432
 
24,202
43,701
 
67,903
 
188,617
 
178,600
175,322
 
 
 
 
 
 
 
2016 £m
 
2015 £m
 
 
 
 
 
 
 
Other funds and subsidiaries
 
 
 
 
 
 
 
 
Scottish
Amicable
Insurance
 Fund
 
PAC with-profits sub-fund
 
Unit-linked 
 assets and liabilities
Annuity
and
other
long-
term
business
Total 
 
30 Jun
Total
 
30 Jun
Total
31 Dec
Total
 
 
Note
note (ii) 
 
note (i)
 
 
 
 
 
 
 
 
 
Equity and liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
-
 
-
 
-
6,163
6,163
 
6,163
 
3,972
5,140
Total equity
 
-
 
-
 
-
6,163
6,163
 
6,163
 
3,972
5,140
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Policyholder liabilities and unallocated surplus of with-profits funds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4)
 
5,906
 
89,916
 
21,548
33,863
55,411
 
151,233
 
144,431
142,350
 
Unallocated surplus of with-profits funds (reflecting application of ‘realistic’ basis provisions for UK regulated with-profits funds)
 
-
 
11,246
 
-
-
-
 
11,246
 
10,641
10,543
 
Total
C4.1(d)
5,906
 
101,162
 
21,548
33,863
55,411
 
162,479
 
155,072
152,893
Operational borrowings attributable to shareholder-financed operations
 
-
 
-
 
4
159
163
 
163
 
96
179
Borrowings attributable to with-profits funds
 
12
 
1,409
 
-
-
-
 
1,421
 
1,089
1,332
Deferred tax liabilities
 
25
 
950
 
-
278
278
 
1,253
 
1,226
1,162
Other non-insurance liabilities
 
339
 
10,911
 
2,650
3,238
5,888
 
17,138
 
17,145
14,616
Total liabilities
 
6,282
 
114,432
 
24,202
37,538
61,740
 
182,454
 
174,628
170,182
Total equity and liabilities
 
6,282
 
114,432
 
24,202
43,701
67,903
 
188,617
 
178,600
175,322
 
Notes
(i) The PAC with-profits sub-fund (WPSF) mainly contains with-profits business but it also contains some non-profit business (unit-linked, term assurances and annuities). Included in the PAC with-profits fund is £11.3 billion (30 June 2015: £11.3 billion; 31 December 2015: £10.8 billion) of non-profit annuities liabilities. The WPSF’s profits are apportioned 90 per cent to its policyholders and 10 per cent to shareholders as surplus for distribution is determined via the annual actuarial valuation. For the purposes of this table and subsequent explanation, references to the WPSF also include, for convenience, the amounts attaching to the Defined Charges Participating Sub-fund which comprises 4 per cent of the total assets of the WPSF and includes the with-profits annuity business transferred to Prudential from the Equitable Life Assurance Society on 1 December 2007 (with assets of approximately £1.7 billion). Profits to shareholders on this with-profits annuity business emerge on a ‘charges less expenses’ basis and policyholders are entitled to 100 per cent of the investment earnings.
(ii) The fund is solely for the benefit of policyholders of SAIF. Shareholders have no interest in the profits of this fund although they are entitled to asset management fees on this business. SAIF is a separate sub-fund within the PAC long-term business fund.
(iii) Other investments comprise:
 
 
2016 £m 
 
2015 £m 
 
30 Jun
 
30 Jun
31 Dec
Derivative assets*
3,563
 
2,555
1,930
Partnerships in investment pools and other**
3,926
 
3,451
3,556
 
7,489
 
6,006
5,486
* After including derivative liabilities of £3,736 million (30 June 2015: £841 million; 31 December 2015: £2,125 million), which are also included in the statement of financial position, the overall derivative position was a net liability of £173 million (30 June 2015: net asset of £1,714 million; 31 December 2015: net liability of £195 million).
** Partnerships in investment pools and other comprise mainly investments held by the PAC with-profits fund. These investments are primarily investments in limited partnerships and additionally, investments in property funds.
 
C2.4            Asset management operations
 
 
 
 
2016 £m
 
2015 £m
 
 
Note
M&G 
Prudential
Capital
US 
Eastspring
 Investments
30 Jun
Total
 
30 Jun
Total
31 Dec
Total
Assets
 
 
 
 
 
 
 
 
 
Intangible assets:
 
 
 
 
 
 
 
 
 
 
Goodwill
 
1,153
-
16
61
1,230
 
1,230
1,230
 
Deferred acquisition costs and other intangible assets
 
13
-
4
2
19
 
19
21
Total
 
1,166
-
20
63
1,249
 
1,249
1,251
Other non-investment and non-cash assets
 
905
536
263
76
1,780
 
2,292
1,644
Investments in joint ventures and associates accounted for using the equity method
 
33
-
-
115
148
 
114
125
Financial investments:
 
 
 
 
 
 
 
 
 
 
Loans
C3.4
-
817
-
-
817
 
926
885
 
Equity securities and portfolio holdings in unit trusts
 
89
-
-
17
106
 
89
85
 
Debt securities
C3.3
-
2,587
-
-
2,587
 
1,948
2,204
 
Other investments
 
19
242
4
-
265
 
118
94
 
Deposits
 
-
-
36
49
85
 
52
89
Total investments
 
141
3,646
40
181
4,008
 
3,247
3,482
Cash and cash equivalents
 
330
1,145
84
134
1,693
 
1,390
1,054
Total assets
 
2,542
5,327
407
454
8,730
 
8,178
7,431
Equity and liabilities
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
1,838
31
201
352
2,422
 
2,172
2,332
Total equity
 
1,838
31
201
352
2,422
 
2,172
2,332
Liabilities
 
 
 
 
 
 
 
 
 
Core structural borrowing of shareholder-financed operations
 
-
275
-
-
275
 
275
275
Operational borrowing attributable to shareholder-financed operations
 
-
-
-
-
-
 
11
10
Intra-group debt represented by operational borrowings at Group levelnote (i)
 
-
2,554
-
-
2,554
 
2,176
1,705
Other non-insurance liabilitiesnote (ii)
 
704
2,467
206
102
3,479
 
3,544
3,109
Total liabilities
 
704
5,296
206
102
6,308
 
6,006
5,099
Total equity and liabilities
 
2,542
5,327
407
454
8,730
 
8,178
7,431
 
Notes
(i) Intra-group debt represented by operational borrowings at Group level, which are in respect of Prudential Capital’s short-term fixed income security programme and comprise:
 
 
2016 £m 
 
2015 £m 
 
30 Jun
 
30 Jun
31 Dec
Commercial paper
1,956
 
1,577
1,107
Medium Term Notes
598
 
599
598
Total intra-group debt represented by operational borrowings at Group level
2,554
 
2,176
1,705
 
(ii) Other non-insurance liabilities consist primarily of intra-group balances, derivative liabilities and other creditors.
 
 
C3          Assets and liabilities - classification and measurement
 
C3.1 
Group assets and liabilities – classification
The classification of the Group’s assets and liabilities, and its corresponding accounting carrying values reflect the requirements of IFRS. For financial investments the basis of valuation reflects the Group's application of IAS 39 'Financial Instruments: Recognition and Measurement' as described further below. Where assets and liabilities have been valued at fair value or measured on a different basis but fair value is disclosed, the Group has followed the principles under IFRS 13 ‘Fair value measurement’. The basis applied is summarised below:
 
 
 
30 Jun 2016 £m
 
 
At fair value
Cost/
amortised
cost/ IFRS 4
basis value
Total
 carrying
 value
Fair
 value,
where
applicable
 
 
 
 
note (i)
 
 
 
 
Through
 profit
or loss
Available-
 for-sale
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets attributable to shareholders:
 
 
 
 
 
 
Goodwill
-
-
1,488
1,488
 
 
Deferred acquisition costs and other intangible assets
-
-
9,549
9,549
 
 
Total
-
-
11,037
11,037
 
Intangible assets attributable to with-profits funds:
 
 
 
 
 
 
In respect of acquired subsidiaries for venture fund and other investment purposes
-
-
189
189
 
 
Deferred acquisition costs and other intangible assets
-
-
45
45
 
 
Total
-
-
234
234
 
Total intangible assets
-
-
11,271
11,271
 
Other non-investment and non-cash assets:
 
 
 
 
 
 
Property, plant and equipment
-
-
1,214
1,214
 
 
Reinsurers’ share of insurance contract liabilities
-
-
9,470
9,470
 
 
Deferred tax assets
-
-
3,771
3,771
 
 
Current tax recoverable
-
-
554
554
 
 
Accrued investment income
-
-
2,764
2,764
2,764
 
Other debtors
-
-
3,505
3,505
3,505
 
Total
-
-
21,278
21,278
 
Investments of long-term business and other operations:note (ii)
 
 
 
 
 
 
Investment properties
13,940
-
-
13,940
13,940
 
Investments accounted for using the equity method
-
-
1,135
1,135
 
 
Loans
2,707
-
11,508
14,215
15,018
 
Equity securities and portfolio holdings in unit trusts
176,037
-
-
176,037
176,037
 
Debt securities
127,322
41,045
-
168,367
168,367
 
Other investments
10,340
-
-
10,340
10,340
 
Deposits
-
-
14,181
14,181
14,181
 
Total investments
330,346
41,045
26,824
398,215
 
Assets held for sale
30
-
-
30
30
Cash and cash equivalents
-
-
8,530
8,530
8,530
Total assets
330,376
41,045
67,903
439,324
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
Policyholder liabilities and unallocated surplus of with-profits funds:
 
 
 
 
 
 
Insurance contract liabilities
-
-
296,873
296,873
 
 
Investment contract liabilities with discretionary
participation features note (iii)
-
-
46,286
46,286
 
 
Investment contract liabilities without discretionary participation features
16,178
-
3,173
19,351
19,421
 
Unallocated surplus of with-profits funds
-
-
13,597
13,597
 
 
Total
16,178
-
359,929
376,107
 
Core structural borrowings of shareholder-financed operations
-
-
5,966
5,966
6,392
Other borrowings:
 
 
 
 
 
 
Operational borrowings attributable to shareholder-financed operations
-
-
2,798
2,798
2,798
 
Borrowings attributable to with-profits operations
-
-
1,427
1,427
1,430
Other non-insurance liabilities:
 
 
 
 
 
 
Obligations under funding, securities lending and sale and repurchase agreements
-
-
4,963
4,963
5,006
 
Net asset value attributable to unit holders of consolidated unit trusts and similar funds
8,770
-
-
8,770
8,770
 
Deferred tax liabilities
-
-
5,397
5,397
 
 
Current tax liabilities
-
-
566
566
 
 
Accruals and deferred income
-
-
912
912
 
 
Other creditors
375
-
6,145
6,520
6,520
 
Provisions
-
-
467
467
 
 
Derivative liabilities
5,342
-
-
5,342
5,342
 
Other liabilities
2,616
-
2,867
5,483
5,483
 
Total
17,103
-
21,317
38,420
 
Total liabilities
33,281
-
391,437
424,718
 
 
 
 
30 Jun 2015 £m
 
 
At fair value
Cost/
amortised
cost/ IFRS 4
basis value
Total
 carrying
 value
Fair
 value,
where
applicable
 
 
 
 
note (i)
 
 
 
 
Through
 profit
or loss
Available-
 for-sale
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets attributable to shareholders:
 
 
 
 
 
 
Goodwill
-
-
1,461
1,461
 
 
Deferred acquisition costs and other intangible assets
-
-
7,310
7,310
 
 
Total
-
-
8,771
8,771
 
Intangible assets attributable to with-profits funds:
 
 
 
 
 
 
In respect of acquired subsidiaries for venture fund and other investment purposes
-
-
184
184
 
 
Deferred acquisition costs and other intangible assets
-
-
49
49
 
 
Total
-
-
233
233
 
Total intangible assets
-
-
9,004
9,004
 
Other non-investment and non-cash assets:
 
 
 
 
 
 
Property, plant and equipment
-
-
984
984
 
 
Reinsurers’ share of insurance contract liabilities
-
-
7,259
7,259
 
 
Deferred tax assets
-
-
2,820
2,820
 
 
Current tax recoverable
-
-
220
220
 
 
Accrued investment income
-
-
2,575
2,575
2,575
 
Other debtors
-
-
3,626
3,626
3,626
 
Total
-
-
17,484
17,484
 
Investments of long-term business and other operations:note (ii)
 
 
 
 
 
 
Investment properties
13,259
-
-
13,259
13,259
 
Investments accounted for using the equity method
 
-
962
962
 
 
Loans
2,306
-
10,272
12,578
13,189
 
Equity securities and portfolio holdings in unit trusts
155,253
-
-
155,253
155,253
 
Debt securities
110,273
32,034
-
142,307
142,307
 
Other investments
7,713
-
-
7,713
7,713
 
Deposits
-
-
11,043
11,043
11,043
 
Total investments
288,804
32,034
22,277
343,115
 
Cash and cash equivalents
-
 
8,298
8,298
8,298
Total assets
288,804
32,034
57,063
377,901
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
Policyholder liabilities and unallocated surplus of with-profits funds:
 
 
 
 
 
 
Insurance contract liabilities
-
-
254,417
254,417
 
 
Investment contract liabilities with discretionary
participation features note (iii)
-
-
39,795
39,795
 
 
Investment contract liabilities without discretionary participation features
16,741
-
2,667
19,408
19,426
 
Unallocated surplus of with-profits funds
-
-
12,768
12,768
 
 
Total
16,741
-
309,647
326,388
 
Core structural borrowings of shareholder-financed operations
-
-
4,880
4,880
5,373
Other borrowings:
 
 
 
 
 
 
Operational borrowings attributable to shareholder-financed operations
-
-
2,504
2,504
2,504
 
Borrowings attributable to with-profits operations
-
-
1,089
1,089
1,102
Other non-insurance liabilities:
 
 
 
 
 
 
Obligations under funding, securities lending and sale and repurchase agreements
-
-
3,296
3,296
3,305
 
Net asset value attributable to unit holders of consolidated unit trusts and similar funds
10,007
-
-
10,007
10,007
 
Deferred tax liabilities
-
-
4,325
4,325
 
 
Current tax liabilities
-
-
393
393
 
 
Accruals and deferred income
-
-
750
750
 
 
Other creditors
322
-
5,193
5,515
5,515
 
Provisions
-
-
546
546
 
 
Derivative liabilities
1,758
-
-
1,758
1,758
 
Other liabilities
2,204
-
2,141
4,345
4,345
 
Total
14,291
-
16,644
30,935
 
Total liabilities
31,032
-
334,764
365,796
 
 
 
 
 
31 Dec 2015 £m
 
 
At fair value
Cost/
amortised
cost/ IFRS 4
basis value
Total
 carrying
 value
Fair
 value,
where
applicable
 
 
 
 
note (i)
 
 
 
 
Through
 profit
 or loss
Available-
 for-sale
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets attributable to shareholders:
 
 
 
 
 
 
Goodwill
-
-
1,463
1,463
 
 
Deferred acquisition costs and other intangible assets
-
-
8,422
8,422
 
 
Total
-
-
9,885
9,885
 
Intangible assets attributable to with-profits funds:
 
 
 
 
 
 
In respect of acquired subsidiaries for venture fund and other investment purposes
-
-
185
185
 
 
Deferred acquisition costs and other intangible assets
-
-
50
50
 
 
Total
-
-
235
235
 
Total intangible assets
-
-
10,120
10,120
 
Other non-investment and non-cash assets:
 
 
 
 
 
 
Property, plant and equipment
-
-
1,197
1,197
 
 
Reinsurers’ share of insurance contract liabilities
-
-
7,903
7,903
 
 
Deferred tax assets
-
-
2,819
2,819
 
 
Current tax recoverable
-
-
477
477
 
 
Accrued investment income
-
-
2,751
2,751
2,751
 
Other debtors
-
-
1,955
1,955
1,955
 
Total
-
-
17,102
17,102
 
Investments of long-term business and other operations:note (ii)
 
 
 
 
 
 
Investment properties
13,422
-
-
13,422
13,422
 
Investments accounted for using the equity method
-
-
1,034
1,034
 
 
Loans
2,438
-
10,520
12,958
13,482
 
Equity securities and portfolio holdings in unit trusts
157,453
-
-
157,453
157,453
 
Debt securities
113,687
33,984
-
147,671
147,671
 
Other investments
7,353
-
-
7,353
7,353
 
Deposits
-
-
12,088
12,088
12,088
 
Total investments
294,353
33,984
23,642
351,979
 
Assets held for sale
2
-
-
2
2
Cash and cash equivalents
-
-
7,782
7,782
7,782
Total assets
294,355
33,984
58,646
386,985
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
Policyholder liabilities and unallocated surplus of with-profits funds:
 
 
 
 
 
 
Insurance contract liabilities
-
-
260,622
260,622
 
 
Investment contract liabilities with discretionary
participation features note (iii)
-
-
42,959
42,959
 
 
Investment contract liabilities without discretionary participation features
16,022
-
2,784
18,806
18,842
 
Unallocated surplus of with-profits funds
-
-
13,227
13,227
 
 
Total
16,022
-
319,592
335,614
 
Core structural borrowings of shareholder-financed operations
-
-
5,011
5,011
5,419
Other borrowings:
 
 
 
 
 
 
Operational borrowings attributable to shareholder-financed operations
-
-
1,960
1,960
1,960
 
Borrowings attributable to with-profits operations
-
-
1,332
1,332
1,344
Other non-insurance liabilities:
 
 
 
 
 
 
Obligations under funding, securities lending and sale and repurchase agreements
-
-
3,765
3,765
3,775
 
Net asset value attributable to unit holders of consolidated unit trusts and similar funds
7,873
-
-
7,873
7,873
 
Deferred tax liabilities
-
-
4,010
4,010
 
 
Current tax liabilities
-
-
325
325
 
 
Accruals and deferred income
-
-
952
952
 
 
Other creditors
322
-
4,554
4,876
4,876
 
Provisions
-
-
604
604
 
 
Derivative liabilities
3,119
-
-
3,119
3,119
 
Other liabilities
2,347
-
2,241
4,588
4,588
 
Total
13,661
-
16,451
30,112
 
Total liabilities
29,683
-
344,346
374,029
 
 
Notes
(i) Assets carried at cost or amortised cost are subject to impairment testing where appropriate under IFRS requirements. This category also includes assets which are valued by reference to specific IFRS standards such as reinsurers’ share of insurance contract liabilities, deferred tax assets and investments accounted for under the equity method.
(ii) Realised gains and losses on the Group’s investments for half year 2016 recognised in the income statement amounted to a net loss of £1.2 billion (30 June 2015: net gain of £1.8 billion; 31 December 2015: net gain of £3.0 billion).
(iii) The carrying value of investment contracts with discretionary participation features is determined on an IFRS 4 basis. It is impractical to determine the fair value of these contracts due to the lack of a reliable basis on which to measure the participation features.
 
C3.2            Group assets and liabilities – measurement
 
(a) Determination of fair value
The fair values of the assets and liabilities of the Group have been determined on the following bases.
The fair values of the financial instruments for which fair valuation is required under IFRS are determined by the use of current market bid prices for exchange-quoted investments, or by using quotations from independent third parties, such as brokers and pricing services or by using appropriate valuation techniques.
The estimated fair value of derivative financial instruments reflects the estimated amount the Group would receive or pay in an arm’s length transaction. This amount is determined using quoted prices if exchange listed, quotations from independent third parties or valued internally using standard market practices.
The loans and receivables have been shown net of provisions for impairment. The fair value of loans has been estimated from discounted cash flows expected to be received. The rate of discount used was the market rate of interest where applicable.
The fair value of investment properties is based on market values as assessed by professionally qualified external valuers or by the Group’s qualified surveyors.
The fair value of the subordinated and senior debt issued by the parent company is determined using the quoted prices from independent third parties.
The fair value of financial liabilities (other than derivative financial instruments) is determined using discounted cash flows of the amounts expected to be paid.
(b) Fair value hierarchy of financial instruments measured at fair value on recurring basis
The table below shows the financial instruments carried at fair value analysed by level of the IFRS 13 ‘Fair Value Measurement’ defined fair value hierarchy. This hierarchy is based on the inputs to the fair value measurement and reflects the lowest level input that is significant to that measurement.
 
 
 
30 Jun 2016 £m
 
Level 1
Level 2
Level 3
 
Analysis of financial investments, net of derivative liabilities by business type
Quoted prices
(unadjusted)
 in active markets
Valuation based
on significant
observable
market inputs
Valuation based
on significant
unobservable
market inputs
Total
 
 
 
 
 
 
With-profits
 
 
 
 
Equity securities and portfolio holdings in unit trusts
38,596
3,969
630
43,195
Debt securities
24,430
42,741
662
67,833
Other investments (including derivative assets)
103
3,157
3,674
6,934
Derivative liabilities
(192)
(2,536)
-
(2,728)
Total financial investments, net of derivative liabilities
62,937
47,331
4,966
115,234
Percentage of total
55%
41%
4%
100%
Unit-linked and variable annuity separate account
 
 
 
 
Equity securities and portfolio holdings in unit trusts
130,977
401
27
131,405
Debt securities
4,956
5,059
-
10,015
Other investments (including derivative assets)
11
38
5
54
Derivative liabilities
(19)
(51)
-
(70)
Total financial investments, net of derivative liabilities
135,925
5,447
32
141,404
Percentage of total
96%
4%
0%
100%
Non-linked shareholder-backed
 
 
 
 
Loans
-
259
2,448
2,707
Equity securities and portfolio holdings in unit trusts
1,402
1
34
1,437
Debt securities
23,379
66,823
317
90,519
Other investments (including derivative assets)
-
2,369
983
3,352
Derivative liabilities
-
(2,064)
(480)
(2,544)
Total financial investments, net of derivative liabilities
24,781
67,388
3,302
95,471
Percentage of total
26%
71%
3%
100%
 
 
 
 
 
Group total analysis, including other financial liabilities held
at fair value
 
 
 
 
Group total
 
 
 
 
Loans*
-
259
2,448
2,707
Equity securities and portfolio holdings in unit trusts
170,975
4,371
691
176,037
Debt securities
52,765
114,623
979
168,367
Other investments (including derivative assets)
114
5,564
4,662
10,340
Derivative liabilities
(211)
(4,651)
(480)
(5,342)
Total financial investments, net of derivative liabilities
223,643
120,166
8,300
352,109
Investment contracts liabilities without discretionary participation features held at fair value
-
(16,178)
-
(16,178)
Net asset value attributable to unit holders of consolidated unit trusts and similar funds
(5,275)
(2,427)
(1,068)
(8,770)
Other financial liabilities held at fair value
-
(375)
(2,616)
(2,991)
Total financial instruments at fair value
218,368
101,186
4,616
324,170
Percentage of total
67%
31%
2%
100%
* Loans in the table above are those classified as fair value through profit and loss in note C3.1.
 
 
 
30 Jun 2015 £m
 
Level 1
Level 2
Level 3
 
Analysis of financial investments, net of derivative liabilities by business type
Quoted prices
(unadjusted)
 in active markets
Valuation based
on significant
observable
market inputs
Valuation based
on significant
unobservable
market inputs
Total
 
 
 
 
 
 
With-profits
 
 
 
 
Equity securities and portfolio holdings in unit trusts
36,488
2,650
623
39,761
Debt securities
16,988
41,635
361
58,984
Other investments (including derivative assets)
26
2,255
3,269
5,550
Derivative liabilities
(29)
(565)
-
(594)
Total financial investments, net of derivative liabilities
53,473
45,975
4,253
103,701
Percentage of total
52%
44%
4%
100%
Unit-linked and variable annuity separate account
 
 
 
 
Equity securities and portfolio holdings in unit trusts
113,797
344
9
114,150
Debt securities
4,300
5,558
-
9,858
Other investments (including derivative assets)
1
70
4
75
Derivative liabilities
-
(18)
-
(18)
Total financial investments, net of derivative liabilities
118,098
5,954
13
124,065
Percentage of total
95%
5%
0%
100%
Non-linked shareholder-backed
 
 
 
 
Loans
-
267
2,039
2,306
Equity securities and portfolio holdings in unit trusts
1,182
125
35
1,342
Debt securities
15,170
58,099
196
73,465
Other investments (including derivative assets)
-
1,310
778
2,088
Derivative liabilities
-
(810)
(336)
(1,146)
Total financial investments, net of derivative liabilities
16,352
58,991
2,712
78,055
Percentage of total
21%
76%
3%
100%
 
 
 
 
 
Group total analysis, including other financial liabilities held
at fair value
 
 
 
 
Group total
 
 
 
 
Loans*
-
267
2,039
2,306
Equity securities and portfolio holdings in unit trusts
151,467
3,119
667
155,253
Debt securities
36,458
105,292
557
142,307
Other investments (including derivative assets)
27
3,635
4,051
7,713
Derivative liabilities
(29)
(1,393)
(336)
(1,758)
Total financial investments, net of derivative liabilities
187,923
110,920
6,978
305,821
Investment contracts liabilities without discretionary participation features held at fair value
(22)
(16,719)
-
(16,741)
Net asset value attributable to unit holders of consolidated unit trusts and similar funds
(8,559)
(45)
(1,403)
(10,007)
Other financial liabilities held at fair value
-
(322)
(2,204)
(2,526)
Total financial instruments at fair value
179,342
93,834
3,371
276,547
Percentage of total
65%
34%
1%
100%
* Loans in the table above are those classified as fair value through profit and loss in note C3.1.
 
 
 
 
31 Dec 2015 £m
 
Level 1
Level 2
Level 3
 
Analysis of financial investments, net of derivative liabilities by business type
Quoted prices
(unadjusted)
 in active markets
Valuation based
on significant
observable
market inputs
Valuation based
on significant
unobservable
market inputs
Total
 
 
 
 
 
 
With-profits
 
 
 
 
Equity securities and portfolio holdings in unit trusts
35,441
3,200
554
39,195
Debt securities
20,312
40,033
525
60,870
Other investments (including derivative assets)
85
1,589
3,371
5,045
Derivative liabilities
(110)
(1,526)
-
(1,636)
Total financial investments, net of derivative liabilities
55,728
43,296
4,450
103,474
Percentage of total
54%
42%
4%
100%
Unit-linked and variable annuity separate account
 
 
 
 
Equity securities and portfolio holdings in unit trusts
116,691
354
22
117,067
Debt securities
4,350
4,940
-
9,290
Other investments (including derivative assets)
5
20
4
29
Derivative liabilities
(2)
(16)
-
(18)
Total financial investments, net of derivative liabilities
121,044
5,298
26
126,368
Percentage of total
96%
4%
0%
100%
Non-linked shareholder-backed
 
 
 
 
Loans
-
255
2,183
2,438
Equity securities and portfolio holdings in unit trusts
1,150
10
31
1,191
Debt securities
17,767
59,491
253
77,511
Other investments (including derivative assets)
-
1,378
901
2,279
Derivative liabilities
-
(1,112)
(353)
(1,465)
Total financial investments, net of derivative liabilities
18,917
60,022
3,015
81,954
Percentage of total
23%
73%
4%
100%
 
 
 
 
 
Group total analysis, including other financial liabilities held at fair value
 
 
 
 
Group total
 
 
 
 
Loans*
-
255
2,183
2,438
Equity securities and portfolio holdings in unit trusts
153,282
3,564
607
157,453
Debt securities
42,429
104,464
778
147,671
Other investments (including derivative assets)
90
2,987
4,276
7,353
Derivative liabilities
(112)
(2,654)
(353)
(3,119)
Total financial investments, net of derivative liabilities
195,689
108,616
7,491
311,796
Investment contracts liabilities without discretionary participation features held at fair value
-
(16,022)
-
(16,022)
Net asset value attributable to unit holders of consolidated unit trusts and similar funds
(5,782)
(1,055)
(1,036)
(7,873)
Other financial liabilities held at fair value
-
(322)
(2,347)
(2,669)
Total financial instruments at fair value
189,907
91,217
4,108
285,232
Percentage of total
67%
32%
1%
100%
* Loans in the table above are those classified as fair value through profit and loss in note C3.1.
 
(c) 
Valuation approach for level 2 fair valued financial instruments
A significant proportion of the Group’s level 2 assets are corporate bonds, structured securities and other non-national government debt securities. These assets, in line with market practice, are generally valued using independent pricing services or third-party broker quotes. These valuations are determined using independent external quotations from multiple sources and are subject to a number of monitoring controls, such as monthly price variances, stale price reviews and variance analysis on prices achieved on subsequent trades. For further detail on the valuation approach for level 2 fair valued financial instruments please refer to note C3.2 of the Group’s consolidated financial statements for the year ended 31 December 2015.
 
Of the total level 2 debt securities of £114,623 million at 30 June 2016 (30 June 2015: £105,292 million; 31 December 2015: £104,464 million), £11,867 million are valued internally (30 June 2015: £10,190 million; 31 December 2015: £10,331 million). The majority of such securities are valued using matrix pricing, which is based on assessing the credit quality of the underlying borrower to derive a suitable discount rate relative to government securities of a comparable duration. Under matrix pricing, the debt securities are priced taking the credit spreads on comparable quoted public debt securities and applying these to the equivalent debt instruments factoring in a specified liquidity premium. The majority of the parameters used in this valuation technique are readily observable in the market and, therefore, are not subject to interpretation.
 
(d)            Fair value measurements for level 3 fair valued financial instruments
Reconciliation of movements in level 3 financial instruments measured at fair value
The following table reconciles the value of level 3 fair valued financial instruments at 1 January 2016 to that presented at 30 June 2016.
 
Total investment return recorded in the income statement represents interest and dividend income, realised gains and losses, unrealised gains and losses on the assets classified at fair value through profit and loss and foreign exchange movements on an individual entity’s overseas investments.
 
Total gains and losses recorded in other comprehensive income includes unrealised gains and losses on debt securities held as available-for-sale within Jackson and foreign exchange movements arising from the retranslation of the Group’s overseas subsidiaries and branches.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
£m
Half year 2016
At
 1 Jan
2016
Total
gains
(losses) in
income
statement
Total
gains
(losses)
recorded
in other
compre-
hensive
income
Purchases
Sales
Settled
Issued
 
Transfers
 into
 level 3
Transfers
 out of
level 3
At
30 Jun
2016
Loans
2,183
79
227
-
-
(64)
23
-
-
2,448
Equity securities and portfolio holdings in unit trusts
607
(13)
11
81
(4)
-
-
9
-
691
Debt securities
778
66
7
120
(17)
-
-
30
(5)
979
Other investments (including derivative assets)
4,276
184
265
377
(473)
-
-
33
-
4,662
Derivative liabilities
(353)
(127)
-
-
-
-
-
-
-
(480)
Total financial investments, net of derivative liabilities
7,491
189
510
578
(494)
(64)
23
72
(5)
8,300
Net asset value attributable to unit holders of consolidated unit trusts and similar funds
(1,036)
24
(2)
-
1
62
(117)
-
-
(1,068)
Other financial liabilities
(2,347)
(84)
(243)
-
-
99
(41)
-
-
(2,616)
Total financial instruments at fair value
4,108
129
265
578
(493)
97
(135)
72
(5)
4,616
 
 
 
 
 
 
 
 
 
 
 
Half year 2015
At
 1 Jan
2015
Total
gains
(losses) in
income
statement
Total
gains
(losses)
recorded
in other
compre-
hensive
income
Purchases
Sales
Settled
Issued
 
Transfers
 into
 level 3
Transfers
 out of
level 3
At
30 Jun
2015
Loans
2,025
72
(18)
-
-
(64)
24
-
-
2,039
Equity securities and portfolio holdings in unit trusts
747
45
(1)
23
(148)
-
-
1
-
667
Debt securities
790
(66)
-
33
(245)
-
-
46
(1)
557
Other investments (including derivative assets)
4,028
114
(77)
271
(285)
-
-
-
-
4,051
Derivative liabilities
(338)
2
-
-
-
-
-
-
-
(336)
Total financial investments, net of derivative liabilities
7,252
167
(96)
327
(678)
(64)
24
47
(1)
6,978
Net asset value attributable to unit holders of consolidated unit trusts and similar funds
(1,291)
(32)
-
(4)
22
24
(122)
-
-
(1,403)
Other financial liabilities
(2,201)
(85)
19
-
-
113
(50)
-
-
(2,204)
Total financial instruments at fair value
3,760
50
(77)
323
(656)
73
(148)
47
(1)
3,371
 
 
 
 
 
 
 
 
 
 
 
 
Full year 2015
At
 1 Jan
2015
Total
gains
(losses) in
income
statement
Total
gains
(losses)
recorded
in other
compre-
hensive
income
Purchases
Sales
Settled
Issued
 
Transfers
 into
 level 3
Transfers
 out of
level 3
At
31 Dec
2015
Loans
2,025
2
119
-
-
(168)
205
-
-
2,183
Equity securities and portfolio holdings in unit trusts
747
52
3
32
(143)
-
-
4
(88)
607
Debt securities
790
(75)
1
243
(259)
-
-
82
(4)
778
Other investments (including derivative assets)
4,028
213
68
547
(700)
-
-
120
-
4,276
Derivative liabilities
(338)
(15)
-
-
-
-
-
-
-
(353)
Total financial investments, net of derivative liabilities
7,252
177
191
822
(1,102)
(168)
205
206
(92)
7,491
Net asset value attributable to unit holders of consolidated unit trusts and similar funds
(1,291)
(160)
(1)
(5)
9
412
-
-
-
(1,036)
Other financial liabilities
(2,201)
(3)
(128)
-
-
218
(233)
-
-
(2,347)
Total financial instruments at fair value
3,760
14
62
817
(1,093)
462
(28)
206
(92)
4,108
 
Of the total net gains and losses in the income statement of £129 million (30 June 2015: £50 million; 31 December 2015: £14 million), £92 million (30 June 2015: £131 million; 31 December 2015: £67 million) relates to net unrealised gains relating to financial instruments still held at the end of the period, which can be analysed as follows:
 
 
 
2016 £m
 
2015 £m
 
30 Jun
 
30 Jun
31 Dec
 
 
 
 
 
Equity securities
(14)
 
38
94
Debt securities
65
 
(2)
(12)
Other investments
149
 
125
160
Derivative liabilities
(127)
 
2
(15)
Net asset value attributable to unit holders of consolidated unit trusts and similar funds
23
 
(32)
(160)
Other financial liabilities
(4)
 
-
-
Total
92
 
131
67
 
Valuation approach for level 3 fair valued financial instruments
Investments valued using valuation techniques include financial investments which by their nature do not have an externally quoted price based on regular trades, and financial investments for which markets are no longer active as a result of market conditions eg market illiquidity. The valuation techniques used include comparison to recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option-adjusted spread models and, if applicable, enterprise valuation. For further detail on the valuation approach for level 3 fair valued financial instruments, please refer to note C3.2 of the Group’s consolidated financial statements for the year ended 31 December 2015.
 
At 30 June 2016 the Group held £4,616 million (30 June 2015: £3,371 million; 31 December 2015: £4,108 million) of net financial instruments at fair value within level 3. This represents 1 per cent (30 June 2015: 1 per cent; 31 December 2015: 1 per cent) of the total fair valued financial assets net of fair valued financial liabilities.
 
Included within these amounts were loans of £2,448 million at 30 June 2016 (30 June 2015: £2,039 million; 31 December 2015: £2,183 million), measured as the loan outstanding balance attached to REALIC and held to back the liabilities for funds withheld under reinsurance arrangements. The funds withheld liability of £2,616 million at 30 June 2016 (30 June 2015: £2,204 million; 31 December 2015: £2,347 million) was also classified within level 3, accounted for on a fair value basis being equivalent to the carrying value of the underlying assets.
 
Excluding the loans and funds withheld liability under REALIC’s reinsurance arrangements as described above, which amounted to a net liability of £(168) million (30 June 2015: £(165) million; 31 December 2015: £(164) million), the level 3 fair valued financial assets net of financial liabilities were £4,784 million (30 June 2015: £3,536 million; 31 December 2015: £4,272 million). Of this amount, a net asset of £47 million (30 June 2015: net liability of £(378) million; 31 December 2015: net liability of £(77) million) was internally valued, representing 0.0 per cent of the total fair valued financial assets net of financial liabilities (30 June 2015: 0.1 per cent; 31 December 2015: 0.1 per cent). Internal valuations are inherently more subjective than external valuations. Included within these internally valued net liabilities were:
 
(a) Debt securities of £463 million (30 June 2015: £251 million; 31 December 2015: £381 million), which were either valued on a discounted cash flow method with an internally developed discount rate or on external prices adjusted to reflect the specific known conditions relating to these securities (eg distressed securities or securities which were being restructured).
(b) Private equity and venture investments of £1,038 million (30 June 2015: £715 million; 31 December 2015: £852 million) which were valued internally based on management information available for these investments. These investments, in the form of debt and equity securities, were principally held by consolidated investment funds which are managed on behalf of third parties.
(c) Liabilities of £(1,045) million (30 June 2015: £(1,379) million; 31 December 2015: £(1,013) million) for the net asset value attributable to external unit holders in respect of the consolidated investment funds, which are non-recourse to the Group. These liabilities are valued by reference to the underlying assets.
(d) Derivative liabilities of £(480) million (30 June 2015: £(28) million; 31 December 2015: £(353) million) which are valued internally using standard market practices but are subject to independent assessment against counterparties’ valuations.
(e) Other sundry individual financial investments of £71 million (30 June 2015: £63 million; 31 December 2015: £56 million).
Of the internally valued net asset referred to above of £47 million (30 June 2015: net liability of £(378) million; 31 December 2015: net liability of £(77) million):
 
(a) A net asset of £303 million (30 June 2015: net liability of £(525) million; 31 December 2015: net asset of £29 million) was held by the Group’s participating funds and therefore shareholders’ profit and equity are not impacted by movements in the valuation of these financial instruments.
(b) A net liability of £(256) million (30 June 2015: net asset of £147 million; 31 December 2015: net liability of £(106) million) was held to support non-linked shareholder-backed business. If the value of all the level 3 instruments held to support non-linked shareholder-backed business valued internally was varied downwards by 10 per cent, the change in valuation would be £26 million (30 June 2015: £(15) million; 31 December 2015: £(11) million), which would increase / (reduce) shareholders’ equity by this amount before tax. Of this amount, an increase of £26 million (30 June 2015: a decrease of £14 million; 31 December 2015: a decrease of £10 million) would pass through the income statement substantially as part of short-term fluctuations in investment returns outside of operating profit and a £nil (30 June 2015: a decrease of £1 million; 31 December 2015: a decrease of £1 million) would be included as part of other comprehensive income, being unrealised movements on assets classified as available-for-sale.
 
(e) Transfers into and transfers out of levels
The Group’s policy is to recognise transfers into and transfers out of levels as of the end of each half year reporting period except for material transfers which are recognised as of the date of the event or change in circumstances that caused the transfer.
During half year 2016, the transfers between levels within the Group’s portfolio were primarily transfers from level 1 to 2 of £425 million and transfers from level 2 to level 1 of £155 million. These transfers, which primarily relate to debt securities, arose to reflect the change in the observability of the inputs used in valuing these securities.
 
In addition, the transfers into and out of level 3 in half year 2016 were £72 million and £5 million, respectively. These transfers were primarily between levels 3 and 2 for debt securities and other investments.
 
(f) Valuation processes applied by the Group
The Group’s valuation policies, procedures and analyses for instruments categorised as level 3 are overseen by business unit committees as part of the Group’s wider financial reporting governance processes. The procedures undertaken include approval of valuation methodologies, verification processes, and resolution of significant or complex valuation issues. In undertaking these activities the Group makes use of the extensive expertise of its asset management functions.
C3.3 
Debt securities
This note provides analysis of the Group’s debt securities, including asset-backed securities and sovereign debt securities, by segment.
 
Debt securities are carried at fair value. The amounts included in the statement of financial position are analysed as follows, with further information relating to the credit quality of the Group’s debt securities at 30 June 2016 provided in the notes below.
 
 
 
2016 £m 
 
2015 £m 
 
 
30 Jun
 
30 Jun
31 Dec
Insurance operations:
 
 
 
 
 
Asia note (a)
35,519
 
24,366
28,292
 
US note (b)
41,143
 
32,117
34,071
 
UK note (c)
89,114
 
83,876
83,101
Other operationsnote (d)
2,591
 
1,948
2,207
Total
168,367
 
142,307
147,671
 
In the tables below, with the exception of some mortgage-backed securities, Standard & Poor’s (S&P) ratings have been used where available. For securities where S&P ratings are not immediately available, those produced by Moody’s and then Fitch have been used as an alternative.
 
(a) Asia insurance operations
 
 
 
 
 
 
 
 
 
 
2016 £m
 
2015 £m
 
With-profits 
 business 
Unit-linked 
assets
Other 
business
30 Jun
Total 
 
30 Jun
Total 
31 Dec
Total 
S&P – AAA
1,472
38
307
1,817
 
1,060
1,039
S&P – AA+ to AA-
7,586
449
1,517
9,552
 
6,111
7,620
S&P – A+ to A-
2,601
418
2,731
5,750
 
4,308
3,914
S&P – BBB+ to BBB-
2,649
656
1,595
4,900
 
3,881
4,133
S&P – Other
1,848
241
1,447
3,536
 
1,926
3,183
 
16,156
1,802
7,597
25,555
 
17,286
19,889
Moody’s – Aaa
839
238
436
1,513
 
1,367
1,032
Moody’s – Aa1 to Aa3
150
18
1,483
1,651
 
1,224
1,492
Moody’s – A1 to A3
461
83
179
723
 
414
743
Moody’s – Baa1 to Baa3
295
595
330
1,220
 
560
790
Moody’s – Other
63
5
3
71
 
85
98
 
1,808
939
2,431
5,178
 
3,650
4,155
Fitch
725
186
466
1,377
 
836
1,412
Other
1,889
500
1,020
3,409
 
2,594
2,836
Total debt securities
20,578
3,427
11,514
35,519
 
24,366
28,292
 
The following table analyses other debt securities within other business which are not externally rated by S&P, Moody’s or Fitch.
 
 
2016 £m 
 
2015 £m 
 
30 Jun
 
30 Jun
31 Dec
Government bonds*
207
 
208
162
Corporate bonds*
582
 
578
481
Other
231
 
155
301
 
1,020
 
941
944
* 
Rated as investment grade by local external ratings agencies.
 
(b) US insurance operations
(i)        Overview
 
 
 
 
 
 
 
 
 
 
2016 £m 
 
2015 £m 
 
 
30 Jun
 
30 Jun
31 Dec
 
 
 
 
 
 
Corporate and government security and commercial loans:
 
 
 
 
 
Government
7,151
 
3,885
4,242
 
Publicly traded and SEC Rule 144A securities*
24,894
 
20,511
21,776
 
Non-SEC Rule 144A securities
4,302
 
3,548
3,733
 
Total
36,347
 
27,944
29,751
Residential mortgage-backed securities (RMBS)
1,267
 
1,370
1,284
Commercial mortgage-backed securities (CMBS)
2,635
 
2,212
2,403
Other debt securities
894
 
591
633
Total US debt securities**
41,143
 
32,117
34,071
* 
A 1990 SEC rule that facilitates the resale of privately placed securities under Rule 144A that are without SEC registration to qualified institutional investors. The rule was designed to develop a more liquid and efficient institutional resale market for unregistered securities.
 
** 
Debt securities for US operations included in the statement of financial position comprise:
 
 
 
2016 £m 
 
2015 £m 
 
 
30 Jun
 
30 Jun
31 Dec
Available-for-sale
41,045
 
32,034
33,984
Fair value through profit and loss:
 
 
 
 
 
Securities held to back liabilities for funds withheld under reinsurance arrangement
98
 
83
87
 
 
41,143
 
32,117
34,071
 
(ii) Valuation basis, presentation of gains and losses and securities in an unrealised loss position
Under IAS 39, unless categorised as ‘held to maturity’ or ‘loans and receivables’, debt securities are required to be fair valued. Where available, quoted market prices are used. However, where securities do not have an externally-quoted price based on regular trades or where markets for the securities are no longer active as a result of market conditions, IAS 39 requires that valuation techniques be applied. IFRS 13 requires classification of the fair values applied by the Group into a three-level hierarchy. At 30 June 2016, less than 0.1 per cent of Jackson’s debt securities were classified as level 3 (30 June 2015: 0.1 per cent; 31 December 2015: 0.1 per cent) comprising of fair values where there are significant inputs which are not based on observable market data.
 
Except for certain assets covering liabilities that are measured at fair value, the debt securities of the US insurance operations are classified as ‘available-for-sale’. Unless impaired, fair value movements are recognised in other comprehensive income. Realised gains and losses, including impairments, recorded in the income statement are as shown in note B1.2 of this report.
 
Movements in unrealised gains and losses
There was a movement in the statement of financial position value for debt securities classified as available-for-sale from a net unrealised gain of £592 million to a net unrealised gain of £2,923 million as analysed in the table below. This increase reflects the effects of lower market interest rates.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30 Jun 2016 £m
Changes in 
unrealised 
 appreciation
Foreign 
 exchange 
 translation**
31 Dec 2015 £m
 
 
 
Reflected as part of movement in other comprehensive income
 
Assets fair valued at below book value
 
 
 
 
 
Book value*
2,307
 
 
13,163
 
Unrealised (loss) gain
(119)
581
(27)
(673)
 
Fair value (as included in statement of financial position)
2,188
 
 
12,490
Assets fair valued at or above book value
 
 
 
 
 
Book value*
35,815
 
 
20,229
 
Unrealised gain
3,042
1,537
240
1,265
 
Fair value (as included in statement of financial position)
38,857
 
 
21,494
Total
 
 
 
 
 
Book value*
38,122
 
 
33,392
 
Net unrealised gain
2,923
2,118
213
592
 
Fair value (as included in statement of financial position)
41,045
 
 
33,984
 
The available-for-sale debt securities of Jackson are analysed into US Treasuries and other debt securities as follows:
 
 
 
 
 
 
 
US Treasuries
 
 
 
 
 
Book value*
5,562
 
 
3,477
 
Net unrealised gain
732
627
51
54
 
Fair value
6,294
 
 
3,531
Other debt securities
 
 
 
 
 
Book value*
32,560
 
 
29,915
 
Net unrealised gain
2,191
1,491
162
538
 
Fair value
34,751
 
 
30,453
Total debt securities
 
 
 
 
 
Book value*
38,122
 
 
33,392
 
Net unrealised gain
2,923
2,118
213
592
 
Fair value
41,045
 
 
33,984
 
* 
Book value represents cost/amortised cost of the debt securities.
** 
Translated at the average rate of US$1.4329: £1.00.
 
 
 
Debt securities classified as available-for-sale in an unrealised loss position
(a) Fair value of securities as a percentage of book value
The following table shows the fair value of the debt securities in a gross unrealised loss position for various percentages of book value:
 
 
 
30 Jun 2016 £m
 
30 Jun 2015 £m
 
31 Dec 2015 £m
 
 
Fair value
Unrealised
loss
 
Fair value
Unrealised
loss
 
Fair value
Unrealised
loss
Between 90% and 100%
1,848
(51)
 
8,998
(294)
 
11,058
(320)
Between 80% and 90%
304
(52)
 
796
(109)
 
902
(144)
Below 80%:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities (sub-prime)
-
-
 
4
(1)
 
4
(1)
 
Commercial mortgage-backed securities
8
(3)
 
10
(3)
 
-
-
 
Other asset-backed securities
9
(7)
 
9
(6)
 
9
(7)
 
Corporates
19
(6)
 
38
(11)
 
517
(201)
 
 
36
(16)
 
61
(21)
 
530
(209)
Total
2,188
(119)
 
9,855
(424)
 
12,490
(673)
 
(b) Unrealised losses by maturity of security
 
 
2016 £m
 
2015 £m
 
30 Jun
 
30 Jun
31 Dec
1 year to 5 years
(10)
 
(8)
(51)
5 years to 10 years
(38)
 
(139)
(334)
More than 10 years
(42)
 
(245)
(247)
Mortgage-backed and other debt securities
(29)
 
(32)
(41)
Total
(119)
 
(424)
(673)
 
(c) Age analysis of unrealised losses for the periods indicated
The following table shows the age analysis of all the unrealised losses in the portfolio by reference to the length of time the securities have been in an unrealised loss position:
 
 
30 Jun 2016 £m
 
30 Jun 2015 £m
 
31 Dec 2015 £m
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-
investment
 grade
Investment
 grade
Total
 
Non-
investment
 grade
Investment
 grade
Total
 
Non-
investment
 grade
Investment
 grade
Total
 
 
 
 
 
 
 
 
 
 
 
 
Less than 6 months
(2)
(5)
(7)
 
(9)
(314)
(323)
 
(13)
(148)
(161)
6 months to 1 year
(4)
(8)
(12)
 
(14)
(25)
(39)
 
(17)
(332)
(349)
1 year to 2 years
(14)
(46)
(60)
 
(2)
(1)
(3)
 
(16)
(63)
(79)
2 years to 3 years
-
-
-
 
(2)
(39)
(41)
 
(3)
(38)
(41)
More than 3 years
(3)
(37)
(40)
 
(7)
(11)
(18)
 
(3)
(40)
(43)
Total
(23)
(96)
(119)
 
(34)
(390)
(424)
 
(52)
(621)
(673)
 
The following table shows the age analysis as at 30 June 2016 of the securities whose fair values were below 80 per cent of the book value:
 
 
 
 
 
 
 
 
 
 
 
30 Jun 2016 £m
 
30 Jun 2015 £m
 
31 Dec 2015 £m
Age analysis
Fair
value
Unrealised
loss
 
Fair
value
Unrealised
loss
 
Fair
value
Unrealised
loss
Less than 3 months
2
-
 
35
(9)
 
450
(165)
3 months to 6 months
19
(6)
 
4
(2)
 
64
(34)
More than 6 months
15
(10)
 
22
(10)
 
16
(10)
 
36
(16)
 
61
(21)
 
530
(209)
 
(iii) 
Ratings
The following table summarises the ratings of securities detailed above by using S&P, Moody’s, Fitch and implicit ratings of mortgage-backed securities based on National Association of Insurance Commissioners (NAIC) valuations:
 
 
 
2016 £m 
 
2015 £m 
 
 
30 Jun
 
30 Jun
31 Dec
S&P – AAA
251
 
145
196
S&P – AA+ to AA-
6,124
 
5,216
5,512
S&P – A+ to A-
9,958
 
8,462
8,592
S&P – BBB+ to BBB-
13,067
 
10,345
11,378
S&P – Other
877
 
876
817
 
 
30,277
 
25,044
26,495
Moody’s – Aaa
3,455
 
218
963
Moody’s – Aa1 to Aa3
54
 
30
41
Moody’s – A1 to A3
51
 
35
49
Moody’s – Baa1 to Baa3
83
 
72
88
Moody’s – Other
9
 
7
13
 
 
3,652
 
362
1,154
Implicit ratings of MBS based on NAIC* valuations (see below)
 
 
 
 
 
NAIC 1
2,851
 
2,416
2,746
 
NAIC 2
39
 
57
45
 
NAIC 3-6
10
 
46
17
 
 
2,900
 
2,519
2,808
Fitch
426
 
300
345
Other **
3,888
 
3,892
3,269
Total debt securities
41,143
 
32,117
34,071
* 
The Securities Valuation Office of the NAIC classifies debt securities into six quality categories range from Class 1 (the highest) to Class 6 (the lowest). Performing securities are designated as Classes 1 to 5 and securities in or near default are designated Class 6.
**The amounts within ‘Other’ which are neither rated by S&P, Moody's nor Fitch, nor are MBS securities using the revised regulatory ratings, have the following NAIC classifications:
 
 
2016 £m 
 
2015 £m 
 
30 Jun
 
30 Jun
31 Dec
NAIC 1
1,925
 
2,177
1,588
NAIC 2
1,829
 
1,601
1,549
NAIC 3-6
134
 
114
132
 
3,888
 
3,892
3,269
 
For some mortgage-backed securities within Jackson, the table above includes these securities using the regulatory ratings detail issued by the NAIC. These regulatory ratings levels were established by external third parties (PIMCO for residential mortgage-backed securities and BlackRock Solutions for commercial mortgage-backed securities).
 
(c) UK insurance operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
£m 
 
 
 
 
 
 
 
 
 
Other funds and subsidiaries
 
UK insurance operations
 
Scottish 
 Amicable 
 Insurance 
 Fund 
PAC with-profits fund
 
Unit-linked
 assets
PRIL 
Other
 annuity and
 long-term
 business
 
30 Jun
2016
Total
30 Jun
2015
Total
31 Dec
2015
Total
S&P – AAA
141
3,343
 
308
3,160
493
 
7,445
9,302
9,577
S&P – AA+ to AA-
406
6,139
 
1,478
5,619
710
 
14,352
10,686
11,442
S&P – A+ to A-
496
8,705
 
1,117
7,003
807
 
18,128
19,428
16,439
S&P – BBB+ to BBB-
582
11,794
 
1,927
3,488
684
 
18,475
17,059
18,088
S&P – Other
137
2,615
 
324
333
60
 
3,469
2,905
2,990
 
1,762
32,596
 
5,154
19,603
2,754
 
61,869
59,380
58,536
Moody’s – Aaa
33
1,382
 
96
477
60
 
2,048
2,169
1,817
Moody’s – Aa1 to Aa3
58
2,805
 
1,008
4,070
998
 
8,939
6,589
7,727
Moody’s – A1 to A3
50
934
 
101
1,590
198
 
2,873
2,698
2,738
Moody’s – Baa1 to Baa3
28
606
 
108
329
40
 
1,111
1,356
1,031
Moody’s – Other
2
213
 
-
23
1
 
239
650
318
 
171
5,940
 
1,313
6,489
1,297
 
15,210
13,462
13,631
Fitch
13
294
 
24
160
14
 
505
744
552
Other
181
6,298
 
97
4,520
434
 
11,530
10,290
10,382
Total debt securities*
2,127
45,128
 
6,588
30,772
4,499
 
89,114
83,876
83,101
 
In the table above, Moody’s ratings have been used for the UK sovereign debt securities.
 
Where no external ratings are available, internal ratings produced by the Group’s asset management operation, which are prepared on the Company’s assessment of a comparable basis to external ratings, are used where possible. The £11,530 million total debt securities held at 30 June 2016 (30 June 2015: £10,290 million; 31 December 2015: £10,382 million) which are not externally rated are either internally rated or unrated. These are analysed as follows:
 
 
 
2016 £m 
 
2015 £m 
 
 
30 Jun
 
30 Jun
31 Dec
Internal ratings or unrated:
 
 
 
 
 
AAA to A-
6,584
 
5,306
5,570
 
BBB to B-
3,284
 
3,592
3,234
 
Below B- or unrated
1,662
 
1,392
1,578
 
Total
11,530
 
10,290
10,382
 
The majority of unrated debt security investments were held in SAIF and the PAC with-profits fund and relate to convertible debt and other investments which are not covered by ratings analysts nor have an internal rating attributed to them. Of the £4,954 million for PRIL and other annuity and long-term business investments for non-linked shareholder-backed business which are not externally rated, £1,571 million were internally rated AA+ to AA-, £2,152 million A+ to A-, £1,077 million BBB+ to BBB-, £44 million BB+ to BB- and £110 million were internally rated B+ and below or unrated.
 
(d) Other operations
The total debt securities shown in the table below are principally held by Prudential Capital.
 
 
 
 
 
2016 £m 
 
2015 £m 
 
 
 
30 Jun
 
30 Jun
31 Dec
 
 
 
 
 
 
AAA to A- by S&P or equivalent ratings
2,475
 
1,821
2,090
 
Other
116
 
127
117
Total
2,591
 
1,948
2,207
 
(e) Asset-backed securities
The Group’s holdings in asset-backed securities (ABS), which comprise residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralised debt obligations (CDO) funds and other asset-backed securities, at 30 June 2016 are as follows:
 
 
2016 £m 
 
2015 £m 
 
30 Jun
 
30 Jun
31 Dec
Shareholder-backed operations:
 
 
 
 
Asia insurance operations note (i)
151
 
115
111
US insurance operations note (ii)
4,796
 
4,173
4,320
UK insurance operations (2016: 25% AAA, 39% AA)note (iii)
1,445
 
1,938
1,531
Asset management operations note (iv)
963
 
712
911
 
7,355
 
6,938
6,873
With-profits operations:
 
 
 
 
Asia insurance operations note (i)
310
 
286
262
UK insurance operations (2016: 50% AAA, 19% AA)note (iii)
4,558
 
5,019
4,600
 
4,868
 
5,305
4,862
Total
12,223
 
12,243
11,735
 
Notes
(i) Asia insurance operations
The Asia insurance operations’ exposure to asset-backed securities is primarily held by the with-profits operations. Of the £310 million, 99 per cent (30 June 2015: 100 per cent; 31 December 2015: 84 per cent) are investment grade.
(ii) US insurance operations
US insurance operations’ exposure to asset-backed securities at 30 June 2016 comprises:
 
 
 
2016 £m 
 
2015 £m
 
 
30 Jun
 
30 Jun
31 Dec
RMBS
 
 
 
 
 
Sub-prime (2016: 3% AAA, 14% AA, 4% A)
185
 
201
191
 
Alt-A (2016: 0% AA, 3% A)
178
 
216
191
 
Prime including agency (2016: 78% AA, 2% A)
904
 
953
902
CMBS (2016: 63% AAA, 30% AA, 6% A)
2,635
 
2,212
2,403
CDO funds (2016: 44% AAA, 4% AA, 20% A), including £nil exposure to sub-prime
55
 
45
52
Other ABS (2016: 20% AAA, 16% AA, 55% A), including £116 million exposure to sub-prime
839
 
546
581
Total
4,796
 
4,173
4,320
 
(iii) UK insurance operations
The majority of holdings of the shareholder-backed business relates to the UK market and primarily relates to investments held by PRIL. Of the holdings of the with-profits operations, £1,332 million (30 June 2015: £1,358 million; 31 December 2015: £1,140 million) relates to exposure to the US markets with the remaining exposure being primarily to the UK market.
(iv) Asset management operations
Asset management operations’ exposure to asset-backed securities is held by Prudential Capital with no sub-prime exposure. Of the £963 million, 95 per cent (30 June 2015: 90 per cent; 31 December 2015: 95 per cent) are graded AAA.
 
(f) Group sovereign debt and bank debt exposure
The Group exposures held by the shareholder-backed business and with-profits funds in sovereign debts and bank debt securities at 30 June 2016:
 
Exposure to sovereign debts
 
 
 
 
 
£m
 
 
 
 
30 Jun 2016
 
30 Jun 2015
 
31 Dec 2015
 
Shareholder-backed
 business
With-
profits
funds
 
Shareholder-backed
 business
With-
profits
funds
 
Shareholder-backed
 business
With-
profits
funds
Italy
58
63
 
55
60
 
55
60
Spain
35
18
 
1
17
 
1
17
France
22
-
 
18
-
 
19
-
Germany*
546
348
 
347
330
 
409
358
Other Europe (principally Belgium)
84
32
 
5
28
 
62
44
Total Eurozone
745
461
 
426
435
 
546
479
United Kingdom
5,720
2,431
 
3,735
1,963
 
4,997
1,802
United States**
6,881
8,354
 
3,522
5,429
 
3,911
6,893
Other, predominantly Asia
4,081
2,073
 
2,890
1,682
 
3,368
1,737
Total
17,427
13,319
 
10,573
9,509
 
12,822
10,911
* Including bonds guaranteed by the federal government.
** The exposure to the United States sovereign debt comprises holdings of Jackson, the UK and Asia insurance operations. Jackson accounts for £6,294 million of this total (30 June 2015: £3,227 million, 31 December 2015: £3,531 million)
 
Exposure to bank debt securities
 
 
 
 
 
 
 
2016 £m
 
 
 
2015 £m
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior debt
 
Subordinated debt
 
 
 
 
Shareholder-backed business
Covered
Senior
Total
 senior
debt
 
Tier 1
Tier 2
Total
subordinated
 debt
30 Jun
 Total
 
30 Jun
 Total
31 Dec
Total
Italy
-
31
31
 
-
-
-
31
 
29
30
Spain
148
11
159
 
-
-
-
159
 
155
154
France
28
122
150
 
-
74
74
224
 
245
226
Germany
46
4
50
 
-
74
74
124
 
124
130
Netherlands
-
28
28
 
-
11
11
39
 
108
31
Other Eurozone
-
20
20
 
-
12
12
32
 
35
31
Total Eurozone
222
216
438
 
-
171
171
609
 
696
602
United Kingdom
518
280
798
 
9
311
320
1,118
 
1,131
957
United States
-
2,420
2,420
 
5
226
231
2,651
 
2,423
2,457
Other, predominantly Asia
17
481
498
 
78
465
543
1,041
 
712
718
Total
757
3,397
4,154
 
92
1,173
1,265
5,419
 
4,962
4,734
 
 
 
 
 
 
 
 
 
 
 
 
With-profits funds
 
 
 
 
 
 
 
 
 
 
 
Italy
-
64
64
 
-
-
-
64
 
62
57
Spain
154
65
219
 
-
-
-
219
 
203
182
France
7
161
168
 
41
65
106
274
 
242
250
Germany
96
16
112
 
-
-
-
112
 
128
111
Netherlands
-
187
187
 
6
7
13
200
 
217
205
Other Eurozone
-
30
30
 
-
-
-
30
 
35
35
Total Eurozone
257
523
780
 
47
72
119
899
 
887
840
United Kingdom
528
464
992
 
65
475
540
1,532
 
1,575
1,351
United States
-
1,582
1,582
 
124
272
396
1,978
 
1,963
1,796
Other, predominantly Asia
282
845
1,127
 
235
413
648
1,775
 
1,545
1,656
Total
1,067
3,414
4,481
 
471
1,232
1,703
6,184
 
5,970
5,643
 
The tables above exclude assets held to cover linked liabilities and those of the consolidated unit trusts and similar funds. In addition, the tables above exclude the proportionate share of sovereign debt holdings of the Group’s joint venture operations.
C3.4 
Loans portfolio
 
Loans are principally accounted for at amortised cost, net of impairment. The exceptions include:
– Certain mortgage loans which have been designated at fair value through profit or loss of the UK insurance operations as this loan portfolio is managed and evaluated on a fair value basis; and
– Certain policy loans of the US insurance operations which are held to back liabilities for funds withheld under a reinsurance arrangement and are also accounted on a fair value basis.
 
The amounts included in the statement of financial position are analysed as follows:
 
 
 
2016 £m 
 
2015 £m 
 
 
30 Jun
 
30 Jun
31 Dec
Insurance operations:
 
 
 
 
 
Asianote (a)
1,278
 
1,009
1,084
 
USnote (b)
8,504
 
6,798
7,418
 
UKnote (c)
3,616
 
3,845
3,571
Asset management operationsnote (d)
817
 
926
885
Total
14,215
 
12,578
12,958
 
(a)        Asia insurance operations
The loans of the Group’s Asia insurance operations comprise:
 
 
2016 £m 
 
2015 £m 
 
30 Jun
 
30 Jun
31 Dec
Mortgage loans
156
 
105
130
Policy loans
833
 
676
721
Other loans‡‡
289
 
228
233
Total
1,278
 
1,009
1,084
 The mortgage and policy loans are secured by properties and life insurance policies respectively.
‡‡ Other loans include commercial loans held by the Malaysia operation and which are all rated as investment grade by two local rating agencies.
 
(b) US insurance operations
The loans of the Group’s US insurance operations comprise:
 
 
30 Jun 2016 £m 
 
30 Jun 2015 £m
 
31 Dec 2015 £m
 
Loans backing liabilities for funds withheld
Other loans
Total
 
Loans backing liabilities for funds withheld
Other loans
Total
 
Loans backing liabilities for funds withheld
Other loans
Total
Mortgage loans
-
5,109
5,109
 
-
3,933
3,933
 
-
4,367
4,367
Policy loans††
2,448
947
3,395
 
2,039
826
2,865
 
2,183
868
3,051
Total
2,448
6,056
8,504
 
2,039
4,759
6,798
 
2,183
5,235
7,418
 All of the mortgage loans are commercial mortgage loans which are collateralised by properties. The property types are industrial, multi-family residential, suburban office, retail and hotel.
†† The policy loans are secured by individual life insurance policies or annuity policies. Included within the policy loans are those accounted for at fair value through profit and loss to back liabilities for funds withheld under reinsurance. All other policy loans are accounted for at amortised cost, less any impairment.
 
The US insurance operations’ commercial mortgage loan portfolio does not include any single-family residential mortgage loans and is therefore not exposed to the risk of defaults associated with residential sub-prime mortgage loans. The average loan size is £10.2 million (30 June 2015: £7.7 million; 31 December 2015: £8.6 million). The portfolio has a current estimated average loan to value of 59 per cent (30 June 2015: 57 per cent; 31 December 2015: 59 per cent).
 
At 30 June 2016, Jackson had no mortgage loans where the contractual terms of the agreements had been restructured (30 June 2015 and 31 December 2015: none).
 
(c) UK insurance operations
The loans of the Group’s UK insurance operations comprise:
 
 
 
 
2016 £m 
 
2015 £m 
 
 
30 Jun
 
30 Jun
31 Dec
SAIF and PAC WPSF
 
 
 
 
 
Mortgage loans
719
 
807
727
 
Policy loans
6
 
9
8
 
Other loans
1,339
 
1,467
1,324
 
Total SAIF and PAC WPSF loans
2,064
 
2,283
2,059
Shareholder-backed operations
 
 
 
 
 
Mortgage loans
1,548
 
1,558
1,508
 
Other loans
4
 
4
4
 
Total loans of shareholder-backed operations
1,552
 
1,562
1,512
Total
3,616
 
3,845
3,571
 The mortgage loans are collateralised by properties. By carrying value, 76 per cent of the £1,548 million (30 June 2015: 76 per cent of £1,558 million; 31 December 2015: 78 per cent of £1,508 million) held for shareholder-backed business relates to lifetime (equity release) mortgage business which has an average loan to property value of 29 per cent (30 June 2015: 30 per cent; 31 December 2015: 30 per cent).
 Other loans held by the PAC with-profits fund are all commercial loans and comprise mainly syndicated loans.
 
(d) Asset management operations
The loans of the asset management operations relate to loans and receivables managed by Prudential Capital. These assets are generally secured but most have no external credit ratings. Internal ratings prepared by the Group’s asset management operations, as part of the risk management process, are:
 
 
 
2016 £m 
 
2015 £m 
 
 
30 Jun
 
30 Jun
31 Dec
Loans and receivables internal ratings:
 
 
 
 
 
AAA
-
 
92
-
 
AA+ to AA-
31
 
32
-
 
A+ to A-
120
 
222
157
 
BBB+ to BBB-
442
 
224
607
 
BB+ to BB-
223
 
83
119
 
B and other
1
 
273
2
Total
817
 
926
885
 
C4 Policyholder liabilities and unallocated surplus of with-profits funds
 
The note provides information of policyholder liabilities and unallocated surplus of with-profits funds held on the Group’s statement of financial position:
 
 
C4.1            Movement of liabilities
C4.1(a)       Group overview
(i)              Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds
 
 
 
Insurance operations £m
 
 
Asia
US
UK
Total
Half year 2016 movements
note C4.1(b)
note C4.1(c)
note C4.1(d)
 
At 1 January 2016
48,778
138,913
152,893
340,584
Comprising:
 
 
 
 
 
- Policyholder liabilities on the consolidated statement of financial position
41,255
138,913
142,350
322,518
 
- Unallocated surplus of with-profits funds on the consolidated statement of financial position
2,553
-
10,543
13,096
 
- Group's share of policyholder liabilities of joint ventures
4,970
-
-
4,970
 
 
 
 
 
 
Net flows:
 
 
 
 
 
Premiums
4,428
7,101
5,561
17,090
 
Surrenders
(1,200)
(3,437)
(3,208)
(7,845)
 
Maturities/Deaths
(676)
(809)
(3,470)
(4,955)
Net flows
2,552
2,855
(1,117)
4,290
Shareholders' transfers post tax
(22)
-
(110)
(132)
Investment-related items and other movements
2,251
2,737
10,092
15,080
Foreign exchange translation differences
6,629
14,650
721
22,000
As at 30 June 2016
60,188
159,155
162,479
381,822
Comprising:
 
 
 
 
 
- Policyholder liabilities on the consolidated statement of financial position
52,122
159,155
151,233
362,510
 
- Unallocated surplus of with-profits funds on the consolidated statement of financial position
2,351
-
11,246
13,597
 
- Group's share of policyholder liabilities of joint ventures
5,715
-
-
5,715
 
 
 
 
 
 
Half year 2015 movements
 
 
 
 
At 1 January 2015
45,022
126,746
154,436
326,204
Comprising:
 
 
 
 
 
- Policyholder liabilities on the consolidated statement of financial position
38,705
126,746
144,088
309,539
 
- Unallocated surplus of with-profits funds on the consolidated statement of financial position
2,102
-
10,348
12,450
 
- Group's share of policyholder liabilities of joint ventures
4,215
-
-
4,215
 
 
 
 
 
Net flows:
 
 
 
 
 
Premiums
3,910
8,493
4,895
17,298
 
Surrenders
(1,437)
(3,406)
(3,012)
(7,855)
 
Maturities/Deaths
(625)
(736)
(3,248)
(4,609)
Net flows
1,848
4,351
(1,365)
4,834
Shareholders' transfers post tax
(36)
-
(106)
(142)
Investment-related items and other movements
837
(221)
2,316
2,932
Foreign exchange translation differences
(1,197)
(1,209)
(209)
(2,615)
At 30 June 2015
46,474
129,667
155,072
331,213
Comprising:
 
 
 
 
 
- Policyholder liabilities on the consolidated statement of financial position
39,522
129,667
144,431
313,620
 
- Unallocated surplus of with-profits funds on the consolidated statement of financial position
2,127
-
10,641
12,768
 
- Group's share of policyholder liabilities of joint ventures
4,825
-
-
4,825
Average policyholder liability balances*
 
 
 
 
 
Half year 2016
52,031
149,034
146,792
347,857
 
Half year 2015
43,634
128,207
144,260
316,101
* Averages have been based on opening and closing balances and adjusted for acquisitions, disposals and corporate transactions in the period and exclude unallocated surplus of with-profits funds.
 The Group’s investment in joint ventures are accounted for on the equity method in the Group’s statement of financial position. The Group’s share of the policyholder liabilities as shown above relates to the joint venture life businesses in China, India and of the Takaful business in Malaysia.
 The policyholder liabilities of the Asia insurance operations of £52,122 million as shown in the table above is after deducting the intra-group reinsurance liabilities ceded by the UK insurance operations of £1,315 million to the Hong Kong with-profits business. Including this amount total Asia policyholder liabilities are £53,437 million.
 
The items above represent the amount attributable to changes in policyholder liabilities and unallocated surplus of with-profits funds as a result of each of the components listed. The policyholder liabilities shown include investment contracts without discretionary participation features (as defined in IFRS 4) and their full movement in the period. The items above are shown gross of external reinsurance.
 
The analysis includes the impact of premiums, claims and investment movements on policyholders’ liabilities. The impact does not represent premiums, claims and investment movements as reported in the income statement. For example, the premiums shown above are after any deductions for fees/charges and claims, represent the policyholder liabilities provision released rather than the claim amount paid to the policyholder.
 
(ii) Analysis of movements in policyholder liabilities for shareholder-backed business
 
 
Half year 2016 £m
 
Asia
US
UK
Total
 
 
 
 
note (b)
At 1 January 2016
27,844
138,913
52,824
219,581
Net flows:
 
 
 
 
   Premiums
2,327
7,101
869
10,297
   Surrenders
(1,037)
(3,437)
(1,311)
(5,785)
   Maturities/Deaths
(289)
(809)
(1,257)
(2,355)
Net flowsnote
1,001
2,855
(1,699)
2,157
Investment-related items and other movements
860
2,737
4,285
7,882
Foreign exchange translation differences
3,643
14,650
1
18,294
At 30 June 2016
33,348
159,155
55,411
247,914
 
 
 
 
 
Comprising:
 
 
 
 
  - Policyholder liabilities on the consolidated statement of financial position
27,633
159,155
55,411
242,199
  - Group's share of policyholder liabilities relating to joint ventures
5,715
-
-
5,715
 
 
 
 
 
 
Half year 2015 £m
 
Asia
US
UK
Total
At 1 January 2015
26,410
126,746
55,009
208,165
Net flows:
 
 
 
 
   Premiums
2,456
8,493
2,016
12,965
   Surrenders
(1,317)
(3,406)
(1,623)
(6,346)
   Maturities/Deaths
(305)
(736)
(1,249)
(2,290)
Net flowsnote
834
4,351
(856)
4,329
Investment-related items and other movements
860
(221)
503
1,142
Foreign exchange translation differences
(803)
(1,209)
-
(2,012)
At 30 June 2015
27,301
129,667
54,656
211,624
 
 
 
 
 
Comprising:
 
 
 
 
  - Policyholder liabilities on the consolidated statement of financial position
22,476
129,667
54,656
206,799
  - Group's share of policyholder liabilities relating to joint ventures
4,825
-
-
4,825
 
Note
Including net flows of the Group’s insurance joint ventures.
C4.1(b) 
Asia insurance operations
 
(i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds
A reconciliation of the total policyholder liabilities and unallocated surplus of with-profits funds of Asia insurance operations from the beginning of the period to 30 June is as follows:
 
 
 
£m
Half year 2016 movements
With-profits 
 business 
Unit-linked 
 liabilities 
Other 
business
Total 
At 1 January 2016
20,934
15,966
11,878
48,778
Comprising:
 
 
 
 
 
- Policyholder liabilities on the consolidated statement of financial position
18,381
13,355
9,519
41,255
 
- Unallocated surplus of with-profits funds on the consolidated statement of financial position
2,553
-
-
2,553
 
- Group's share of policyholder liabilities relating to joint ventures
-
2,611
2,359
4,970
Premiums:
 
 
 
 
 
New business
706
413
337
1,456
 
In-force
1,395
851
726
2,972
 
 
2,101
1,264
1,063
4,428
Surrendersnote (c)
(163)
(870)
(167)
(1,200)
Maturities/Deaths
(387)
(28)
(261)
(676)
Net flows note (b)
1,551
366
635
2,552
Shareholders' transfers post tax
(22)
-
-
(22)
Investment-related items and other movements note (d)
1,391
101
759
2,251
Foreign exchange translation differences note (a)
2,986
2,172
1,471
6,629
At 30 June 2016
26,840
18,605
14,743
60,188
Comprising:
 
 
 
 
 
- Policyholder liabilities on the consolidated statement of financial position*
24,489
15,705
11,928
52,122
 
- Unallocated surplus of with-profits funds on the consolidated statement of financial position
2,351
-
-
2,351
 
- Group's share of policyholder liabilities relating to joint ventures
-
2,900
2,815
5,715
 
 
 
 
 
 
 
 
 
 
 
 
Half year 2015 movements
 
 
 
 
At 1 January 2015
18,612
16,209
10,201
45,022
Comprising:
 
 
 
 
 
- Policyholder liabilities on the consolidated statement of financial position
16,510
13,874
8,321
38,705
 
- Unallocated surplus of with-profits funds on the consolidated statement of financial position
2,102
-
-
2,102
 
- Group's share of policyholder liabilities relating to joint ventures
-
2,335
1,880
4,215
Premiums:
 
 
 
 
 
New business
385
692
474
1,551
 
In-force
1,069
761
529
2,359
 
 
1,454
1,453
1,003
3,910
Surrendersnote (c)
(120)
(1,158)
(159)
(1,437)
Maturities/Deaths
(320)
(44)
(261)
(625)
Net flows note (b)
1,014
251
583
1,848
Shareholders' transfers post tax
(36)
-
-
(36)
Investment-related items and other movements note (d)
(23)
637
223
837
Foreign exchange translation differencesnote (a)
(394)
(623)
(180)
(1,197)
At 30 June 2015
19,173
16,474
10,827
46,474
Comprising:
 
 
 
 
 
- Policyholder liabilities on the consolidated statement of financial position
17,046
13,845
8,631
39,522
 
- Unallocated surplus of with-profits funds on the consolidated statement of financial position
2,127
-
-
2,127
 
- Group's share of policyholder liabilities relating to joint ventures
-
2,629
2,196
4,825
Average policyholder liability balances
 
 
 
 
 
Half year 2016
21,435
17,286
13,310
52,031
 
Half year 2015
16,778
16,342
10,514
43,634
 
* The policyholder liabilities of the with-profits business of £24,489 million, shown in the table above, is after deducting the intra-group reinsurance liabilities ceded by the UK insurance operations of £1,315 million to the Hong Kong with-profits business. Including this amount the Asia with-profits policyholder liabilities are £25,804 million.
 Averages have been based on opening and closing balances and adjusted for acquisitions, disposals and corporate transactions in the period and exclude unallocated surplus of with-profits funds.
 The Group’s investment in joint ventures are accounted for on an equity method and the Group’s share of the policyholder liabilities as shown above relate to the joint venture life business in China, India and of the Takaful business in Malaysia.
 
Notes
(a) Movements in the period have been translated at the average exchange rates for the period ended 30 June 2016. The closing balance has been translated at the closing spot rates as at 30 June 2016. Differences upon retranslation are included in foreign exchange translation differences.
(b) Net flows increased by 38 per cent from £1,848 million in half year 2015 to £2,552 million in half year 2016 predominantly reflecting continued growth of the in-force book.
(c) Surrenders and maturities/deaths have decreased from £2,062 million in the first half of 2015 to £1,876 million in the first half of 2016. The rate of surrenders for shareholder-backed business (expressed as a percentage of opening liabilities) was 3.7 per cent in the first half of 2016 (half year 2015: 5.0 per cent).
(d) Investment-related items and other movements in the first half of 2016 primarily represent gains from bonds following falls in yields in the period.
 
C4.1(c) 
US insurance operations
 
(i) Analysis of movements in policyholder liabilities
A reconciliation of the total policyholder liabilities of US insurance operations from the beginning of the period to 30 June is as follows:
 
US insurance operations
 
 
£m 
Half year 2016 movements
Variable annuity
separate account
liabilities
Fixed annuity, 
 GIC and other 
 business
Total
At 1 January 2016
91,022
47,891
138,913
Premiums
4,848
2,253
7,101
Surrenders
(2,168)
(1,269)
(3,437)
Maturities/Deaths
(384)
(425)
(809)
Net flows note (b)
2,296
559
2,855
Transfers from general to separate account
169
(169)
-
Investment-related items and other movements note (c)
843
1,894
2,737
Foreign exchange translation differences note (a)
9,574
5,076
14,650
At 30 June 2016
103,904
55,251
159,155
 
 
 
 
 
 
 
 
 
 
Half year 2015 movements
 
 
 
At 1 January 2015
81,741
45,005
126,746
Premiums
6,697
1,796
8,493
Surrenders
(2,237)
(1,169)
(3,406)
Maturities/Deaths
(344)
(392)
(736)
Net flows note (b)
4,116
235
4,351
Transfers from general to separate account
560
(560)
-
Investment-related items and other movements
383
(604)
(221)
Foreign exchange translation differences note (a)
(854)
(355)
(1,209)
At 30 June 2015
85,946
43,721
129,667
Average policyholder liability balances*
 
 
 
 
Half year 2016
97,463
51,571
149,034
 
Half year 2015
83,844
44,363
128,207
* Averages have been based on opening and closing balances, and adjusted for any acquisitions, disposals and corporate transactions in the period.
 
Notes
(a) Movements in the period have been translated at an average rate of US$1.43:£1.00 (30 June 2015: US$1.52:£1.00). The closing balance has been translated at closing rate of US$1.34:£1.00 (30 June 2015: US$1.57:£1.00). Differences upon retranslation are included in foreign exchange translation differences.
(b) Net flows in the first half of 2016 were £2,855 million compared with £4,351 million in the first half of 2015.
(c) Positive investment-related items and other movements in variable annuity separate account liabilities of £843 million for the first six months in 2016 represents positive separate account return mainly following the increase in the US equity market in the period. The positive movement of £1,894 million in fixed annuity, GIC and other business primarily reflect the increase in guarantee reserves, following the fall in interest rates, and the interest credited to the policyholder accounts in the period.
 
C4.1(d) 
UK insurance operations
 
(i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds
A reconciliation of the total policyholder liabilities and unallocated surplus of with-profits funds of UK insurance operations from the beginning of the period to 30 June is as follows:
 
 
 
£m
 
 
 
Shareholder-backed funds and subsidiaries
 
Half year 2016 movements
SAIF and PAC with-profits sub-fund
Unit-linked liabilities
Annuity and
 other
 long-term
business
Total
At 1 January 2016
100,069
21,442
31,382
152,893
Comprising:
 
 
 
 
 
- Policyholder liabilities
89,526
21,442
31,382
142,350
 
- Unallocated surplus of with-profits funds
10,543
-
-
10,543
 
 
 
 
 
 
Premiums
4,692
527
342
5,561
Surrenders
(1,897)
(1,285)
(26)
(3,208)
Maturities/Deaths
(2,213)
(271)
(986)
(3,470)
Net flows note (a)
582
(1,029)
(670)
(1,117)
Shareholders' transfers post tax
(110)
-
-
(110)
Switches
(84)
84
-
-
Investment-related items and other movements note (b)
5,891
1,050
3,151
10,092
Foreign exchange translation differences
720
1
-
721
At 30 June 2016
107,068
21,548
33,863
162,479
Comprising:
 
 
 
 
 
- Policyholder liabilities
95,822
21,548
33,863
151,233
 
- Unallocated surplus of with-profits funds
11,246
-
-
11,246
 
 
 
 
 
 
 
 
 
 
 
 
Half year 2015 movements
 
 
 
 
At 1 January 2015
99,427
23,300
31,709
154,436
Comprising:
 
 
 
 
 
- Policyholder liabilities
89,079
23,300
31,709
144,088
 
- Unallocated surplus of with-profits funds
10,348
-
-
10,348
Premiums
2,879
618
1,398
4,895
Surrenders
(1,389)
(1,601)
(22)
(3,012)
Maturities/Deaths
(1,999)
(329)
(920)
(3,248)
Net flows note (a)
(509)
(1,312)
456
(1,365)
Shareholders' transfers post tax
(106)
-
-
(106)
Switches
(103)
103
-
-
Investment-related items and other movements note (b)
1,916
552
(152)
2,316
Foreign exchange translation differences
(209)
-
-
(209)
At 30 June 2015
100,416
22,643
32,013
155,072
Comprising:
 
 
 
 
 
- Policyholder liabilities
89,775
22,643
32,013
144,431
 
- Unallocated surplus of with-profits funds
10,641
-
-
10,641
Average policyholder liability balances*
 
 
 
 
 
Half year 2016
92,674
21,495
32,623
146,792
 
Half year 2015
89,427
22,972
31,861
144,260
* Averages have been based on opening and closing balances, and adjusted for any acquisitions, disposals and corporate transactions in the period, and exclude unallocated surplus of with-profits funds.
 
Notes
(a) Net outflows have decreased from £1,365 million in the first half of 2015 to £1,117 million in the same period of 2016 due primarily to higher premium flows, up by £666 million to £5,561 million, following increased sales of with-profits savings and retirement products. This has been partially offset by lower premiums into our annuity business due to our reduced appetite for annuities post-Solvency II which meant that no bulk annuities transactions were undertaken in the first half of 2016. The level of inflows/outflows for unit-linked business remains subject to annual variation as it is driven by corporate pension schemes with transfers in or out from a small number of schemes influencing the level of flows in the period.
(b) Investment-related items and other movements of £10,092 million includes investment return and realised gains attributable to policyholders in the period.
 
 
C5 Intangible assets
 
C5.1 Intangible assets attributable to shareholders
 
(a) Goodwill attributable to shareholders
 
 
2016 £m
 
2015 £m
 
30 Jun
 
30 Jun
31 Dec
Cost
 
 
 
 
At beginning of period
1,463
 
1,583
1,583
Disposal of Japan life business
-
 
(120)
(120)
Additional consideration paid on previously acquired business
-
 
2
2
Exchange differences
25
 
(4)
(2)
Cost / Net book amount at end of period
1,488
 
1,461
1,463
 
Goodwill attributable to shareholders comprises:
 
 
2016 £m 
 
2015 £m 
 
30 Jun
 
30 Jun
31 Dec
M&G
1,153
 
1,153
1,153
Other
335
 
308
310
 
1,488
 
1,461
1,463
 
Other goodwill represents amounts arising from the purchase of entities by the Asia and US operations. These goodwill amounts relating to acquired operations are not individually material.
 
(b) Deferred acquisition costs and other intangible assets attributable to shareholders
The deferred acquisition costs and other intangible assets attributable to shareholders comprise:
 
 
2016 £m
 
2015 £m
 
30 Jun
 
30 Jun
31 Dec
 
 
 
 
 
Deferred acquisition costs related to insurance contracts as classified under IFRS 4
8,010
 
5,937
6,948
Deferred acquisition costs related to investment management contracts, including life assurance contracts classified as financial instruments and investment management contracts under IFRS 4
68
 
80
74
 
8,078
 
6,017
7,022
Present value of acquired in-force policies for insurance contracts as classified under
IFRS 4 (PVIF)
48
 
51
45
Distribution rights and other intangibles
1,423
 
1,242
1,355
 
1,471
 
1,293
1,400
Total of deferred acquisition costs and other intangible assets
9,549
 
7,310
8,422
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016 £m
 
2015 £m
 
 
 
Deferred acquisition costs
 
 
 
 
 
 
 
 
 
 
Asia 
US 
UK 
Asset
management 
 
Other 
 intangibles
 
30 Jun
Total
 
30 Jun
Total 
31 Dec
Total 
 
 
 
 
 
 
 
 
note
 
 
 
 
 
 
Balance at beginning of period:
781
6,148
81
12
 
1,400
 
8,422
 
7,261
7,261
 
Additions and acquisition of subsidiaries
125
320
5
-
 
66
 
516
 
532
1,190
 
Amortisation to the income statement*:
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
(80)
(237)
(7)
(2)
 
(43)
 
(369)
 
(381)
(762)
 
 
Non-operating profit
-
616
-
-
 
-
 
616
 
(192)
93
 
 
(80)
379
(7)
(2)
 
(43)
 
247
 
(573)
(669)
 
Disposals and transfers
-
-
-
-
 
(2)
 
(2)
 
-
(8)
 
Exchange differences and other movements
102
649
-
-
 
50
 
801
 
(75)
311
 
Amortisation of DAC related to net unrealised valuation movements on Jackson's available-for-sale securities recognised within other comprehensive income*
-
(435)
-
-
 
-
 
(435)
 
165
337
 
Balance at end of period
928
7,061
79
10
 
1,471
 
9,549
 
7,310
8,422
 
* 
Under the Group’s application of IFRS 4, US GAAP is used for measuring the insurance assets and liabilities of its US and certain Asia operations. Under US GAAP, most of Jackson’s products are accounted for under Accounting Standard no. 97 of the Financial Accounting Standards Board (FAS 97) whereby deferred acquisition costs are amortised in line with the emergence of actual and expected gross profits. The amounts included in the income statements and Other Comprehensive Income affect the pattern of profit emergence and thus the DAC amortisation attaching. DAC amortisation is allocated to the operating and non-operating components of the Group’s supplementary analysis of profit and other comprehensive income by reference to the underlying items.
 Other intangibles includes amounts in relation to software rights with additions of £21 million, amortisation of £15 million, disposals of £2 million and exchange gains of £6 million and a balance at 30 June 2016 of £81 million.
 
Note
Other intangibles comprise PVIF, distribution rights and other intangibles such as software rights. Distribution rights relate to amounts that have been paid or have become unconditionally due for payment as a result of past events in respect of bancassurance partnership arrangements in Asia. These agreements allow for bank distribution of Prudential’s insurance products for a fixed period of time.
 
US insurance operations
The DAC amount in respect of US insurance operations comprises amounts in respect of:
 
 
2016 £m 
 
2015 £m 
 
30 Jun
 
30 Jun
31 Dec
Variable annuity business
7,782
 
4,931
5,713
Other business
42
 
710
703
Cumulative shadow DAC (for unrealised gains/losses booked in Other Comprehensive Income)*
(763)
 
(420)
(268)
Total DAC for US operations
7,061
 
5,221
6,148
* Consequent upon the positive unrealised valuation movement for half year 2016 of £2,118 million (30 June 2015: negative unrealised valuation movement of £762 million; 31 December 2015: negative unrealised valuation movement of £1,305 million), there is a charge of £435 million (30 June 2015: a gain of £165 million; 31 December 2015: a gain of £337 million) for altered ‘shadow’ DAC amortisation booked within other comprehensive income. These adjustments reflect the movement from period to period, in the changes to the pattern of reported gross profits that would have happened if the assets reflected in the statement of financial position had been sold, crystallising the unrealised gains and losses, and the proceeds reinvested at the yields currently available in the market.
 
For further detail on the deferral and amortisation of acquisition costs for Jackson, including the mean reversion technique, please refer to note C5.1 of the Group’s consolidated financial statements for the year ended 31 December 2015.
Sensitivity of amortisation charge
The amortisation charge to the income statement is reflected in both operating profit and short-term fluctuations in investment returns. The amortisation charge to the operating profit in a reporting period comprises:
(i)                   A core amount that reflects a relatively stable proportion of underlying premiums or profit; and
(ii)        An element of acceleration or deceleration arising from market movements differing from expectations.
In periods where the cap and floor feature of the mean reversion technique are not relevant, the technique operates to dampen the second element above. Nevertheless, extreme market movements can cause material acceleration or deceleration of amortisation in spite of this dampening effect.
Furthermore, in those periods where the cap or floor is relevant, the mean reversion technique provides no further dampening and additional volatility may result.
In the first half of 2016, the DAC amortisation charge for operating profit was determined after including a credit for decelerated amortisation of £29 million (half year 2015: credit for decelerated amortisation of £20 million; full year 2015: charge for accelerated amortisation of £2 million). The first half of 2016 amount reflects the separate account performance of 3 per cent, which is higher than the assumed level for the year (under the 8 year mean reversion technique applied).
As noted above, the application of the mean reversion formula has the effect of dampening the impact of equity market movements on DAC amortisation while the mean reversion assumption lies within the corridor. It would take a significant movement in separate account values for the mean reversion assumption to move outside the corridor. Based on a pro-forma instantaneous movement at 1 July 2016, it would need to be outside the approximate range of negative 25 per cent to positive 50 per cent for this to apply.
C6 Borrowings
 
C6.1 
Core structural borrowings of shareholder-financed operations
 
 
 
 
2016 £m
 
2015 £m
 
 
 
30 Jun
 
30 Jun
31 Dec
Holding company operations:
 
 
 
 
 
Perpetual subordinated notes (Tier 1)note (i)
823
 
698
746
 
Perpetual subordinated notes (Tier 2)notes (i),(iv)
2,007
 
1,077
1,149
 
Subordinated notes (Tier 2)note (i)
2,126
 
2,122
2,123
 
Subordinated debt total
4,956
 
3,897
4,018
 
Senior debt:note (ii)
 
 
 
 
 
 
£300m 6.875% Bonds 2023
300
 
300
300
 
 
£250m 5.875% Bonds 2029
249
 
249
249
Holding company total
5,505
 
4,446
4,567
Prudential Capital bank loannote (iii)
275
 
275
275
Jackson US$250m 8.15% Surplus Notes 2027
186
 
159
169
Total (per condensed consolidated statement of financial position)note (v)
5,966
 
4,880
5,011
 
Notes
(i) 
These debt tier classifications (including those noted for the comparative balances) are consistent with the treatment of capital for regulatory purposes under the Solvency II regime.
The perpetual subordinated capital securities are entirely US$ denominated. The Group has designated US$2.80 billion (30 Jun 2015: US$2.80 billion; 31 December 2015: US$2.80 billion) of its perpetual subordinated debt as a net investment hedge under IAS 39 to hedge the currency risks related to the investment in Jackson.
(ii) The senior debt ranks above subordinated debt in the event of liquidation.
(iii) 
The Prudential Capital bank loan of £275 million has been made in two tranches: a £160 million loan and a £115 million loan both drawn at a cost of 12 month GBP LIBOR plus 0.4 per cent and maturing on 20 December 2017.
(iv) 
In June 2016, the Company issued core structural borrowings of US$1,000 million 5.25 per cent Tier 2 perpetual subordinated notes. The proceeds net of costs, were £681 million.
(v) The maturity profile, currency and interest rates applicable to all other core structural borrowings of shareholder-financed operations of the Group are as detailed in note C6.1 of the Group’s consolidated financial statements for the year ended 31 December 2015.
 
 
C6.2 
Other borrowings
 
(a) Operational borrowings attributable to shareholder-financed operations
 
 
 
 
 
 
 
 
 
2016 £m 
 
2015 £m 
 
 
30 Jun
 
30 Jun
31 Dec
Borrowings in respect of short-term fixed income securities programmes
2,554
 
2,176
1,705
Non-recourse borrowings of US operations note (ii)
-
 
10
-
Other borrowings note (iii)
244
 
318
255
Totalnote (i)
2,798
 
2,504
1,960
 
Notes
(i) In addition to the debt listed above, £200 million Floating Rate Notes were issued by Prudential plc in October 2015 which will mature in October 2016. These Notes have been wholly subscribed by a Group subsidiary and accordingly have been eliminated on consolidation in the Group financial statements. These Notes were originally issued in October 2008 and have been reissued upon their maturity.
(ii) In all instances the holders of the debt instruments issued by these subsidiaries and funds do not have recourse beyond the assets of those subsidiaries and funds.
(iii) Other borrowings mainly include amounts whose repayment to the lender is contingent upon future surplus emerging from certain contracts specified under the arrangement. If insufficient surplus emerges on those contracts, there is no recourse to other assets of the Group and the liability is not payable to the degree of shortfall. In addition, other borrowings include senior debt issued through the Federal Home Loan Bank of Indianapolis (FHLB), secured by collateral posted with the FHLB by Jackson.
 
(b) Borrowings attributable to with-profits operations
 
 
2016 £m
 
2015 £m
 
30 Jun
 
30 Jun
31 Dec
Non-recourse borrowings of consolidated investment funds*
1,248
 
911
1,158
£100m 8.5% undated subordinated guaranteed bonds of Scottish Amicable Finance plc**
100
 
100
100
Other borrowings (predominantly obligations under finance leases)
79
 
78
74
Total
1,427
 
1,089
1,332
* In all instances the holders of the debt instruments issued by these subsidiaries and funds do not have recourse beyond the assets of those subsidiaries and funds.
** 
The interests of the holders of the bonds issued by Scottish Amicable Finance plc, a subsidiary of the Scottish Amicable Insurance Fund, are subordinated to the entitlements of the policyholders of that fund.
 
 
C7 Deferred tax
 
The statement of financial position contains the following deferred tax assets and liabilities in relation to:
 
 
Deferred tax assets
 
Deferred tax liabilities
 
2016 £m
 
2015 £m
 
2016 £m
 
2015 £m
 
30 Jun
 
30 Jun
31 Dec
 
30 Jun
 
30 Jun
31 Dec
Unrealised losses or gains on investments
22
 
331
21
 
(1,815)
 
(1,673)
(1,036)
Balances relating to investment and insurance contracts
1
 
8
1
 
(655)
 
(544)
(543)
Short-term temporary differences
3,690
 
2,407
2,752
 
(2,893)
 
(2,076)
(2,400)
Capital allowances
12
 
9
10
 
(34)
 
(32)
(31)
Unused tax losses
46
 
65
35
 
-
 
-
 
Total
3,771
 
2,820
2,819
 
(5,397)
 
(4,325)
(4,010)
 
Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying temporary differences can be deducted.
 
The taxation regimes applicable across the Group often apply separate rules to trading and capital profits and losses. The distinction between temporary differences that arise from items of either a trading or capital nature may affect the recognition of deferred tax assets. Accordingly, for the 2016 half year results and financial position at 30 June 2016, the possible tax benefit of approximately £94 million (30 June 2015: £106 million; 31 December 2015: £98 million), which may arise from capital losses valued at approximately £0.5 billion (30 June 2015: £0.5 billion; 31 December 2015: £0.5 billion), is sufficiently uncertain that it has not been recognised. In addition, a potential deferred tax asset of £60 million (30 June 2015: £42 million; 31 December 2015: £52 million), which may arise from trading tax losses and other potential temporary differences totalling £0.3 billion (30 June 2015: £0.2 billion; 31 December 2015 £0.3 billion) is sufficiently uncertain that it has not been recognised. Of the deferred tax asset recognised for unused tax losses, £39 million will expire if not utilised within the next seven years, £1 million if not utilised within 20 years and the rest has no expiry date.
 
The table that follows provides a breakdown of the recognised deferred tax assets set out in the table above for the short-term temporary differences. The table also shows the period of estimated recoverability for each respective business unit. For these and each category of deferred tax asset recognised their recoverability against forecast taxable profits is not significantly impacted by any current proposed changes to future accounting standards.
 
 
Short-term temporary differences
 
30 Jun
2016 £m
Expected period
of recoverability
Asia insurance operations
49
1 to 3 years
US insurance operations
3,353
With run-off of in-force book
UK insurance operations
136
1 to 10 years
Other operations
152
1 to 10 years
Total
3,690
 
 
Under IAS 12, ‘Income Taxes’, deferred tax is measured at the tax rates that are expected to apply to the period when the asset is realised or the liability settled, based on the tax rates (and laws) that have been enacted or are substantively enacted at the end of the reporting periods. For UK companies the UK corporation tax rate is currently 20 per cent, reducing to 19 per cent from 1 April 2017 and further to 18 per cent from 1 April 2020.
 
As part of the Finance Bill 2016, the UK government proposed a reduction in the UK corporation tax rate to 17 per cent effective 1 April 2020. As these changes have not been substantively enacted as at 30 June 2016 they have not been reflected in the balances at that date. The changes, once substantively enacted, are expected to have the effect of reducing the UK with-profits and shareholder-backed business element of the overall net deferred tax liabilities by £9 million.
C8 Defined benefit pension schemes
 
(a) IAS 19 financial positions
The Group operates a number of pension schemes. The largest defined benefit scheme is the Prudential Staff Pension Scheme (PSPS), which is the principal scheme in the UK. The Group also operates two smaller UK defined benefit schemes in respect of Scottish Amicable (SASPS) and M&G (M&GGPS). In addition, there are two small defined benefit schemes in Taiwan which have negligible deficits.
 
The Group asset/liability in respect of defined benefit pension schemes is as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016 £m
 
 
2015 £m
 
 
2015 £m
 
 
 
 
30 Jun
 
 
 
 
 
30 Jun
 
 
 
 
 
31 Dec
 
 
 
 
PSPS
SASPS
M&GGPS
Other
schemes
Total
 
PSPS
SASPS
M&GGPS
Other
schemes
Total
 
PSPS
SASPS
M&GGPS
Other
schemes
Total
Underlying economic surplus (deficit)
1,270
(123)
115
(1)
1,261
 
915
(140)
53
(1)
827
 
969
(82)
75
(1)
961
Less: unrecognised surplus
(1,100)
-
-
-
(1,100)
 
(790)
-
-
-
(790)
 
(800)
-
-
-
(800)
Economic surplus (deficit) (including investment in Prudential insurance policies)
170
(123)
115
(1)
161
 
125
(140)
53
(1)
37
 
169
(82)
75
(1)
161
Consolidation adjustment against policyholder liabilities for investment in Prudential insurance policies
-
-
(81)
-
(81)
 
-
-
(85)
-
(85)
 
-
-
(77)
-
(77)
Attributable to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PAC with-profits fund
119
(49)
-
-
70
 
88
(70)
-
-
18
 
118
(33)
-
-
85
 
Shareholder-backed operations
51
(74)
34
(1)
10
 
37
(70)
(32)
(1)
(66)
 
51
(49)
(2)
(1)
(1)
IAS 19 pension asset (liability) on the Group statement of financial position*
170
(123)
34
(1)
80
 
125
(140)
(32)
(1)
(48)
 
169
(82)
(2)
(1)
84
 
At 30 June 2016, the PSPS pension asset of £170 million (30 June 2015: £125 million; 31 December 2015: £169 million) and the other schemes’ pension liabilities of £90 million (30 June 2015: £173 million; 31 December 2015: £85 million) are included within ‘Other debtors’ and ‘Provisions’ respectively in the consolidated statement of financial position.
 
(b) Estimated pension scheme surpluses and deficits (on an economic basis)
The underlying pension position on an economic basis reflects the assets (including investments in Prudential policies that are offset against liabilities to policyholders on consolidation in the Group financial statements) and the liabilities of the schemes. The IAS 19 basis excludes the investments in Prudential policies. In principle, on consolidation the investments are eliminated against policyholder liabilities of UK insurance operations, so that the formal IAS 19 position for the scheme in isolation excludes these items. This treatment applies to the M&GGPS investments. However, as a substantial portion of the Company’s interest in the underlying surplus of PSPS is not recognised, the adjustment is not necessary for the PSPS investments.
 
Movements on the pension scheme deficit determined on the economic basis are as follows, with the effect of the application of IFRIC 14 being shown separately:
 
 
 
Half year 2016 £m
 
 
Surplus
 (deficit) in
schemes at
1 Jan 2016
(Charge) credit to income statement
Actuarial
gains
 and losses
in other
comprehensive
 income
Contributions paid
Surplus
 (deficit) in
schemes at
30 Jun 2016
All schemes
 
 
 
 
 
Underlying position (without the effect of IFRIC 14)
 
 
 
 
 
Surplus
961
-
277
23
1,261
Less: amount attributable to PAC with-profits fund
(658)
(6)
(178)
(9)
(851)
Shareholders' share:
 
 
 
 
 
 
Gross of tax surplus (deficit)
303
(6)
99
14
410
 
Related tax
(60)
1
(17)
(3)
(79)
Net of shareholders' tax
243
(5)
82
11
331
Application of IFRIC 14 for the derecognition of PSPS surplus
 
 
 
 
 
Derecognition of surplus
(800)
(18)
(282)
-
(1,100)
Less: amount attributable to PAC with-profits fund
573
12
195
1
781
Shareholders' share:  
 
 
 
 
 
 
Gross of tax
(227)
(6)
(87)
1
(319)
 
Related tax
45
1
15
-
61
Net of shareholders' tax
(182)
(5)
(72)
1
(258)
With the effect of IFRIC 14
 
 
 
 
 
Surplus (deficit)
161
(18)
(5)
23
161
Less: amount attributable to PAC with-profits fund
(85)
6
17
(8)
(70)
Shareholders' share:
 
 
 
 
 
 
Gross of tax surplus (deficit)
76
(12)
12
15
91
 
Related tax
(15)
2
(2)
(3)
(18)
Net of shareholders' tax
61
(10)
10
12
73
 
C9 Share capital, share premium and own shares
 
 
30 Jun 2016
 
30 Jun 2015
 
31 Dec 2015
 
Number of ordinary shares
Share
 capital
Share
premium
 
Number of ordinary shares
Share
 capital
Share premium
 
Number of ordinary shares
Share
 capital
Share
premium
 
 
£m
£m
 
 
£m
£m
 
 
£m
£m
Issued shares of 5p each fully paid:
 
 
 
 
 
 
 
 
 
 
 
At 1 January
2,572,454,958
128
1,915
 
2,567,779,950
128
1,908
 
2,567,779,950
128
1,908
Shares issued under share-based schemes
6,579,190
-
6
 
3,284,119
-
2
 
4,675,008
-
7
At end of period
2,579,034,148
128
1,921
 
2,571,064,069
128
1,910
 
2,572,454,958
128
1,915
 
Amounts recorded in share capital represent the nominal value of the shares issued. The difference between the proceeds received on issue of shares, net of issue costs, and the nominal value of shares issued is credited to the share premium account.
 
At 30 June 2016, there were options outstanding under Save As You Earn schemes to subscribe for shares as follows:
 
 
 
 
 
 
 
Number of shares
to subscribe for
Share price
 range
Exercisable
by year
 
 
from
to
 
30 June 2016
7,128,449
288p
1,155p
2021
30 June 2015
8,007,928
288p
1,155p
2020
31 December 2015
8,795,617
288p
1,155p
2021
 
Transactions by Prudential plc and its subsidiaries in Prudential plc shares
The Group buys and sells Prudential plc shares (‘own shares’) either in relation to its employee share schemes or via transactions undertaken by authorised investment funds that the Group is deemed to control. The cost of own shares of £185 million at 30 June 2016 (30 June 2015: £227 million; 31 December 2015: £219 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery of shares under employee incentive plans. At 30 June 2016, 11.2 million (30 June 2015: 10.8 million; 31 December 2015: 10.5 million) Prudential plc shares with a market value of £141 million (30 June 2015: £165 million; 31 December 2015: £161 million) were held in such trusts, all of which are for employee incentive plans. The maximum number of shares held during the period was 11.2 million which was in June 2016.
 
The Company purchased the following number of shares in respect of employee incentive plans:
 
 
 
 
 
Number of shares
purchased
(in millions)
Cost
£m
Half year 2016
3.8
49.5
Half year 2015
5.1
86.3
Full year 2015
5.6
92.9
 
The Group has consolidated a number of authorised investment funds where it is deemed to control these funds under IFRS. Some of these funds hold shares in Prudential plc. The total number of shares held by these funds at 30 June 2016 was 4.8 million (30 June 2015: 6.8 million; 31 December 2015: 6.1 million) and the cost of acquiring these shares of £39 million (30 June 2015: £59 million; 31 December 2015: £54 million) is included in the cost of own shares. The market value of these shares as at 30 June 2016 was £61 million (30 June 2015: £105 million; 31 December 2015: £94 million). During 2016, these funds made a net disposal of 1,280,258 Prudential shares (30 June 2015: net disposal of 724,186; 31 December 2015: net disposal of 1,402,697) for a net decrease of £14.1 million to book cost (30 June 2015: net decrease of £8.0 million; 31 December 2015: net decrease of £13 million).
 
All share transactions were made on an exchange other than the Stock Exchange of Hong Kong.
 
Other than set out above the Group did not purchase, sell or redeem any Prudential plc listed securities during half year 2016 or 2015.
 
D Other notes
 
D1 Contingencies and related obligations
The Group is involved in various litigation and regulatory issues. While the outcome of such matters cannot be predicted with certainty, Prudential believes that the ultimate outcome of such litigation and regulatory issues will not have a material adverse effect on the Group’s financial condition, results of operations or cash flows.
 
There have been no material changes to the Group’s contingencies and related obligations in the six month period ended 30 June 2016.
 
D2         Post balance sheet events
 
First interim dividend
The 2016 first interim dividend approved by the Board of Directors after 30 June 2016 is as described in note B7.
 
D3 Related party transactions
 
There were no transactions with related parties during the six months ended 30 June 2016 which have had a material effect on the results or financial position of the Group.
 
The nature of the related party transactions of the Group has not changed from those described in the Group’s consolidated financial statements for the year ended 31 December 2015.
 
 
 
Statement of directors’ responsibilities
The directors (who are listed below) are responsible for preparing the Half Year Financial Report in accordance with applicable law and regulations.
 
Accordingly, the directors confirm that to the best of their knowledge:
 
– the condensed consolidated financial statements have been prepared in accordance with IAS 34, ‘Interim Financial Reporting’, as adopted by the European Union;
 
–      the Half Year Financial Report includes a fair review of information required by:
(a) 
DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the six months ended 30 June 2016, and their impact on the condensed consolidated financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and
(b) 
DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place during the six months ended 30 June 2016 and that have materially affected the financial position or the performance of the Group during the period and changes in the related party transactions described in the Group’s consolidated financial statements for the year ended 31 December 2015.
 
Prudential plc Board of Directors:
 
Chairman
Paul Manduca
 
Executive Directors
Michael Wells
Nicolaos Nicandrou ACA
Penelope James ACA
John Foley
Anne Richards
Barry Stowe
Tony Wilkey
 
Independent Non-executive Directors
The Hon. Philip Remnant CBE FCA
Sir Howard Davies
Ann Godbehere FCPA FCGA
David Law ACA
Kaikhushru Nargolwala FCA
Anthony Nightingale CMG SBS JP
Alice Schroeder
Lord Turner
 
 
Independent review report to Prudential plc
Introduction
We have been engaged by the company to review the International Financial Reporting Standards (IFRS) basis financial information in the Half Year Financial Report for the six months ended 30 June 2016 which comprises the Condensed Consolidated Income Statement, the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Statement of Financial Position, the Condensed Consolidated Statement of Cash Flows and the related explanatory notes.
 
We have also been engaged by the company to review the European Embedded Value (EEV) basis supplementary financial information for the six months ended 30 June 2016 which comprises the Post-tax Operating Profit Based on Longer-Term Investment Returns, the Post-tax Summarised Consolidated Income Statement, the Movement in Shareholders' Equity, the Summary Statement of Financial Position and the related explanatory notes and Total Insurance and Investment Products New Business information.
 
We have read the other information contained in the Half Year Financial Report and considered whether it contains any apparent misstatements or material inconsistencies with the IFRS basis financial information or the EEV basis supplementary financial information.
 
This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the Disclosure and Transparency Rules (“the DTR”) of the UK’s Financial Conduct Authority (“the UK FCA”) and also to provide a review conclusion to the company on the EEV basis supplementary financial information. Our review of the IFRS basis financial information has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. Our review of the EEV basis supplementary financial information has been undertaken so that we might state to the company those matters we have been engaged to state in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.
 
Directors’ responsibilities
The Half Year Financial Report, including the IFRS basis financial information contained therein, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the Half Year Financial Report in accordance with the DTR of the UK FCA. The directors have accepted responsibility for preparing the EEV basis supplementary financial information in accordance with the European Embedded Value Principles dated April 2016 by the European CFO Forum ('the EEV Principles') and for determining the methodology and assumptions used in the application of those principles.
 
The annual IFRS basis financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union (‘EU’). The IFRS basis financial information included in this Half Year Financial Report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.
 
The EEV basis supplementary financial information has been prepared in accordance with the EEV Principles using the methodology and assumptions set out in the Notes to the EEV basis supplementary financial information. The EEV basis supplementary financial information should be read in conjunction with the IFRS basis financial information.
 
Our responsibility
Our responsibility is to express to the company a conclusion on the IFRS basis financial information in the Half Year Financial Report and the EEV basis supplementary financial information based on our reviews, as set out in our engagement letter with you dated 10 June 2016.
 
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information and supplementary information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
 
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the IFRS basis financial information in the Half Year Financial Report for the six months ended 30 June 2016 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FCA.
 
Based on our review, nothing has come to our attention that causes us to believe that the EEV basis supplementary financial information for the six months ended 30 June 2016 is not prepared, in all material respects, in accordance with the EEV Principles, using the methodology and assumptions set out in the Notes to the EEV basis supplementary financial information.
 
Rees Aronson
For and on behalf of KPMG LLP
Chartered Accountants
London
9 August 2016
 
Additional IFRS financial information*
 
I IFRS profit and loss information
I(a) 
Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver
This schedule classifies the Group’s pre-tax operating earnings from long-term insurance operations into the underlying drivers of those profits, using the following categories:
i Spread income represents the difference between net investment income (or premium income in the case of the UK annuities new business) and amounts credited to certain policyholder accounts. It excludes the operating investment returns on shareholder net assets, which has been separately disclosed as expected return on shareholder assets.
ii Fee income represents profits driven by net investment performance, being asset management fees that vary with the size of the underlying policyholder funds net of investment management expenses.
iii With-profits business represents the gross of tax shareholders’ transfer from the with-profits fund for the period.
iv Insurance margin primarily represents profits derived from the insurance risks of mortality and morbidity.
v Margin on revenues primarily represents amounts deducted from premiums to cover acquisition costs and administration expenses.
vi Acquisition costs and administration expenses represent expenses incurred in the period attributable to shareholders. It excludes items such as restructuring costs and Solvency II costs which are not included in the segment profit for insurance as well as items that are more appropriately included in other source of earnings lines (eg investment expenses are netted against investment income as part of spread income or fee income as appropriate).
vii DAC adjustments comprises DAC amortisation for the period, excluding amounts related to short-term fluctuations in investment returns, net of costs deferred in respect of new business.
 
Analysis of pre-tax IFRS operating profit by source and margin analysis of Group long-term insurance business
The following analysis expresses certain of the Group’s sources of operating profit as a margin of policyholder liabilities or other suitable driver. Details on the calculation of the Group’s average policyholder liability balances are given in note (iv) at the end of this section.
 
 
 
Half year 2016
 
 
Asia 
US 
UK 
Total
Average
liability
Margin
bps
 
 
£m
£m
£m
£m
£m
 
 
 
 
 
 
 
note (iv)
note(ii)
Spread income
82
379
96
557
80,819
138
Fee income
86
878
29
993
131,389
151
With-profits
24
-
138
162
114,109
28
Insurance margin
488
401
25
914
 
 
Margin on revenues
904
-
86
990
 
 
Expenses:
 
 
 
 
 
 
 
Acquisition costsnote (i)
(613)
(412)
(42)
(1,067)
3,030
(35)%
 
Administration expenses
(388)
(452)
(58)
(898)
219,083
(82)
 
DAC adjustmentsnote (v)
59
83
(2)
140
 
 
Expected return on shareholder assets
40
11
61
112
 
 
 
 
682
888
333
1,903
 
 
Longevity reinsurance and other management actions to improve solvency
-
-
140
140
 
 
Long-term business operating profit
682
888
473
2,043
 
 
See notes at the end of this section.
 
 
 
Half year 2015 AER
 
 
Asia 
US 
UK 
Total
Average
liability
Margin
bps
 
 
£m
£m
£m
£m
£m
 
 
 
 
 
 
 
note (iv)
note (ii)
Spread income
65
372
137
574
72,890
157
Fee income
86
832
33
951
125,581
151
With-profits
21
-
133
154
106,205
29
Insurance margin
387
383
26
796
 
 
Margin on revenues
832
-
88
920
 
 
Expenses:
 
 
 
 
 
 
 
Acquisition costsnote (i)
(573)
(479)
(43)
(1,095)
2,733
(40)%
 
Administration expenses
(355)
(408)
(66)
(829)
206,167
(80)
 
DAC adjustmentsnote (v)
78
114
-
192
 
 
Expected return on shareholder assets
33
20
67
120
 
 
 
 
574
834
375
1,783
 
 
Longevity reinsurance and other management actions to improve solvency
-
-
61
61
 
 
Long-term business operating profit
574
834
436
1,844
 
 
 
See notes at the end of this section.
 
The additional financial information is not covered by the KPMG independent review opinion.
 
 
 
 
 
 
 
 
 
 
Half year 2015 CER
note (iii)
 
 
Asia 
US 
UK 
Total
Average
liability
Margin
bps
 
 
£m
£m
£m
£m
£m
 
 
 
 
 
note (v)
 
note (iv)
note (ii)
Spread income
66
400
137
603
75,983
159
Fee income
87
884
33
1,004
133,147
151
With-profits
21
-
133
154
107,797
29
Insurance margin
393
408
26
827
 
 
Margin on revenues
845
-
88
933
 
 
Expenses:
 
 
 
 
 
 
 
Acquisition costsnote (i)
(582)
(509)
(43)
(1,134)
2,826
(40)%
 
Administration expenses
(359)
(434)
(66)
(859)
217,404
(79)
 
DAC adjustmentsnote (v)
79
121
-
200
 
 
Expected return on shareholder assets
34
17
67
118
 
 
 
 
584
887
375
1,846
 
 
Longevity reinsurance and other management actions to improve solvency
-
-
61
61
 
 
Long-term business operating profit
584
887
436
1,907
 
 
 
See notes at the end of this section.
 
Margin analysis of long-term insurance business – Asia
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asia
 
 
 
 
 
 
 
Half year 2016
 
Half year 2015 AER
 
Half year 2015 CER
 
 
 
 
 
 
note (iii)
 
 
 
Average 
 
 
 
Average  
 
 
 
Average 
 
 
 
Profit 
liability 
Margin 
 
Profit  
liability 
Margin 
 
Profit 
liability 
Margin 
 
 
 
note (iv)
note (ii)
 
 
note (iv)
note (ii)
 
 
note (iv)
note (ii)
Long-term business
£m 
£m 
bps 
 
£m 
£m 
bps 
 
£m 
£m 
bps 
 
 
 
 
 
 
 
 
 
 
 
 
 
Spread income
82
13,310
123
 
65
10,514
124
 
66
11,302
117
Fee income
86
17,286
100
 
86
16,342
105
 
87
17,373
100
With-profits
24
21,435
22
 
21
16,778
25
 
21
18,370
23
Insurance margin
488
 
 
 
387
 
 
 
393
 
 
Margin on revenues
904
 
 
 
832
 
 
 
845
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition costsnote (i)
(613)
1,655
(37)%
 
(573)
1,366
(42)%
 
(582)
1,404
(41)%
 
Administration expenses
(388)
30,596
(254)
 
(355)
26,856
(264)
 
(359)
28,675
(250)
 
DAC adjustmentsnote (v)
59
 
 
 
78
 
 
 
79
 
 
Expected return on shareholder assets
40
 
 
 
33
 
 
 
34
 
 
Operating profit
682
 
 
 
574
 
 
 
584
 
 
 
See notes at the end of this section.
 
Analysis of Asia operating profit drivers
– Spread income has increased on a constant exchange rate basis by 24 per cent (AER: 26 per cent) to £82 million in half year 2016, predominantly reflecting the growth of the Asia non-linked policyholder liabilities.
– The half year 2016 fee income of £86 million is in line with the prior period.
– On a constant exchange rate basis, insurance margin has increased by 24 per cent to £488 million in half year 2016 (AER: 26 per cent), primarily reflecting the continued growth of the in-force book, which contains a relatively high proportion of risk-based products. Insurance margin includes non-recurring items of £42 million (half year 2015: £29 million at AER and CER)
– Margin on revenue has increased by £59 million on a constant exchange rate basis from £845 million in half year 2015 to £904 million in half year 2016, primarily reflecting higher regular premium income recognised in the period.
– Acquisition costs have increased by 5 per cent on a constant exchange rate basis (AER: 7 per cent) in half year 2016 to £613 million, compared to the 18 per cent increase in APE sales (AER 21 per cent), resulting in a decrease in the acquisition costs ratio. The analysis above uses shareholder acquisition costs as a proportion of total APE. If with-profits sales were excluded from the denominator the acquisition cost ratio would become 73 per cent (2015: 66 per cent at CER), the increase being the result of changes in country and product mix.
– Administration expenses have increased by 8 per cent at a constant exchange rate basis (AER: 9 per cent increase) in half year 2016 as the business continues to expand. On a constant exchange rate basis, the administration expense ratio has increased from 250 basis points in half year 2015 to 254 basis points in half year 2016, the result of changes in country and product mix.
 
 
Margin analysis of long-term insurance business – US
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
US
 
 
 
 
 
 
 
Half year 2016
 
Half year 2015 AER
 
Half year 2015 CER
 
 
 
 
 
 
 
 
 
 
 
note (iii)
 
 
 
 
Average
 
 
 
Average
 
 
 
Average
 
 
 
Profit
liability
Margin
 
Profit
liability
Margin
 
Profit
liability
Margin
 
 
 
note (iv)
note (ii)
 
 
note (iv)
note (ii)
 
 
note (iv)
note (ii)
Long-term business
£m
£m
bps
 
£m
£m
bps
 
£m
£m
bps
 
 
 
 
 
 
 
 
 
 
 
 
 
Spread income
379
34,886
217
 
372
30,515
244
 
400
32,820
244
Fee income
878
92,608
190
 
832
86,267
193
 
884
92,802
191
Insurance margin
401
 
 
 
383
 
 
 
408
 
 
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition costsnote (i)
(412)
782
(53)%
 
(479)
857
(56)%
 
(509)
912
(56)%
 
Administration expenses
(452)
134,369
(67)
 
(408)
124,478
(66)
 
(434)
133,896
(65)
 
DAC adjustments
83
 
 
 
114
 
 
 
121
 
 
Expected return on shareholder assets
11
 
 
 
20
 
 
 
17
 
 
Operating profit
888
 
 
 
834
 
 
 
887
 
 
 
See notes at the end of this section.
 
Analysis of US operating profit drivers:
– Spread income has decreased by 5 per cent on a constant exchange rate basis (AER increased by 2 per cent) to £379 million in half year 2016. The reported spread margin decreased to 217 basis points from 244 basis points in half year 2015, primarily due to lower investment yields. Spread income benefited from swap transactions previously entered into to more closely match the asset and liability duration. Excluding this effect, the spread margin would have been 151 basis points (half year 2015 CER: 168 basis points and AER: 167 basis points).
– Fee income has decreased by 1 per cent on a constant exchange rate basis (AER increased by 6 per cent) to £878 million in half year 2016. Weak equity market performance in the first quarter curbed the growth of average separate account values in the first six months of 2016 and dampened overall fee income level. Fee income margin has remained broadly in line with the prior year at 190 basis points (half year 2015 CER: 191 basis points and AER: 193 basis points).
– Insurance margin represents operating profits from insurance risks, including variable annuity guarantees and other sundry items. Insurance margin of £401 million in half year 2016 was in line with last year on a constant exchange rate basis, with higher income from the variable annuity guarantees offset by a decline in the contribution from the closed books of term business acquired.
– Acquisition costs, which are commissions and expenses incurred to acquire new business, including those that are not deferrable, have decreased by 19 per cent at a constant exchange rate basis, largely due to the decline in sales in half year 2016.
– Administration expenses increased to £452 million in half year 2016, compared to £434 million for half year 2015 on a constant exchange rate basis (AER £408 million), primarily as a result of higher asset-based commissions. These are paid on policy anniversary dates and are treated as an administration expense in this analysis. Excluding these trail commissions, the resulting administration expense ratio would remain relatively flat at 36 basis points (half year 2015: 35 basis points at CER and 36 basis points at AER).
– DAC adjustments decreased to £83 million in half year 2016, compared to £121 million on a constant exchange rate basis (AER £114 million) in half year 2015, primarily due to a decline in DAC deferrals due to reduced sales in half year 2016, offset by lower amortisation.
 
 
Analysis of pre-tax operating profit before and after acquisition costs and DAC adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Half year 2016 £m
 
Half year 2015 AER £m
 
Half year 2015 CER £m
 
 
 
 
 
 
 
 
 
 
 
 
note (iii)
 
 
 
Acquisition costs
 
 
 
Acquisition costs
 
 
 
Acquisition costs
 
 
 
Other operating profits
Incurred
Deferred
Total
 
Other operating profits
Incurred
Deferred
Total
 
Other operating profits
Incurred
Deferred
Total
Total operating profit before acquisition costs and DAC adjustments
1,217
 
 
1,217
 
1,199
 
 
1,199
 
1,275
 
 
1,275
Less new business strain
 
(412)
320
(92)
 
 
(479)
369
(110)
 
 
(509)
392
(117)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other DAC adjustments - amortisation of previously deferred acquisition costs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Normal
 
 
(266)
(266)
 
 
 
(275)
(275)
 
 
 
(292)
(292)
 
Deceleration
 
 
29
29
 
 
 
20
20
 
 
 
21
21
Total
1,217
(412)
83
888
 
1,199
(479)
114
834
 
1,275
(509)
121
887
 
Analysis of operating profit based on longer-term investment returns for US operations by product
 
 
 
 
 
 
 
 
 
 
 
 
2016 £m
 
2015 £m
 
%
 
 
Half year
 
AER
Half year
CER
Half year
 
Half year 2016
vs
half year 2015
AER
Half year 2016
 vs
half year 2015
CER
Spread businessnote (a)
154
 
180
191
 
(14)%
(19)%
Fee businessnote (b)
642
 
552
587
 
16%
9%
Life and other businessnote (c)
92
 
102
109
 
(9)%
(16)%
Total insurance operations
888
 
834
887
 
6%
0%
 
 
 
 
 
 
 
 
 
US asset management and broker-dealer
(12)
 
12
12
 
n/a
n/a
Total US operations
876
 
846
899
 
4%
(2)%
 
The analysis of operating profit based on longer-term investment returns for US operations by product represents the net profit generated by each line of business after allocation of costs. Broadly:
 
a) 
Spread business is the net operating profit for fixed annuity, fixed indexed annuity and guaranteed investment contracts and largely comprises spread income less costs.
b) 
Fee business represents profits from variable annuity products. As well as fee income revenue for this product line includes spread income from investments directed to the general account and other variable annuity fees included in insurance margin.
c) 
Life and other business includes the profits from the REALIC business and other closed life books. Revenue allocated to this product line includes spread income and premiums and policy charges for life protection, which are included in insurance margin after claim costs. Insurance margin forms the vast majority of revenue.
 
Margin analysis of long-term insurance business – UK
 
 
 
UK
 
 
Half year 2016
 
 
Half year 2015
note (v)
 
 
 
Average 
 
 
 
Average  
 
 
 
Profit  
liability 
Margin 
 
Profit  
liability 
Margin 
 
 
 
note (iv)
note (ii)
 
 
note (iv)
note (ii)
Long-term business
£m 
£m 
bps 
 
£m 
£m 
bps 
 
 
 
 
 
 
 
 
 
Spread income
96
32,623
59
 
137
31,861
86
Fee income
29
21,495
27
 
33
22,972
29
With-profits
138
92,674
30
 
133
89,427
30
Insurance margin
25
 
 
 
26
 
 
Margin on revenues
86
 
 
 
88
 
 
Expenses:
 
 
 
 
 
 
 
 
Acquisition costsnote (i)
(42)
593
(7)%
 
(43)
510
(8)%
 
Administration expenses
(58)
54,118
(21)
 
(66)
54,833
(24)
 
DAC adjustments
(2)
 
 
 
-
 
 
Expected return on shareholders' assets
61
 
 
 
67
 
 
 
 
333
 
 
 
375
 
 
Longevity reinsurance and other management actions to improve solvency
140
 
 
 
61
 
 
Operating profit
473
 
 
 
436
 
 
 
Analysis of UK operating profit drivers
–     Spread income has decreased from £137 million in half year 2015 to £96 million in half year 2016 mainly due to lower annuity sales. Spread income has two components:
 
A contribution from new annuity business which was lower at £27 million in half year 2016 compared to £66 million in half year 2015, as we withdrew our participation from this business. IFRS accounting (based on grandfathered GAAP) permits upfront recognition of a considerable proportion of the spread to be earned over the entire term of the new contracts.
 
A contribution from in-force annuity and other business, which was broadly in line with last year at £69 million (2015: £71 million), equivalent to 42 basis points of average reserves (2015: 45 basis points).
–     Fee income principally represents asset management fees from unit-linked business, including direct investment only business to group pension schemes, where liability flows are driven by a small number of large single mandate transactions and fee income mostly arise within our UK asset management business. Excluding these schemes, the fee margin on the remaining balance was 40 basis points (2015: 43 basis points).
–     Margin on revenues represents premium charges for expenses of shareholder-backed business and other sundry net income. The half year 2016 margin is broadly consistent with half year 2015.
–     Acquisition costs incurred were £42 million, equivalent to 7 per cent of total APE sales in half year 2016 (2015: 8 per cent). The ratio above expresses the percentage of shareholder acquisition costs as a percentage of total APE sales. It is therefore impacted by the level of with-profit sales in the year. The ratio is also distorted by bulk annuities transactions as acquisition costs are comparatively lower. Acquisition costs as a percentage of shareholder-backed new business sales, excluding the bulk annuities transactions, were 33 per cent in half year 2016 (2015: 37 per cent).
–     Expected return on shareholders’ assets includes the longer-term return on assets held to back capital and surplus.
–     The contribution from longevity reinsurance and other management actions to improve solvency during half year 2016 was £140 million (2015: £61 million). Further explanation and analysis is provided in Additional IFRS Financial Information section I(d).
 
Notes
(i)
The ratio for acquisition costs is calculated as a percentage of APE sales including with-profits sales. Acquisition costs include only those relating to shareholder-backed business.
(ii)
Margin represents the operating return earned in the period as a proportion of the relevant class of policyholder liabilities excluding unallocated surplus. The margin is on an annualised basis in which half year profits are annualised by multiplying by two.
(iii)
The half year 2015 comparative information has been presented at Actual Exchange Rates (AER) and Constant Exchange Rates (CER) so as to eliminate the impact of exchange translation. CER results are calculated by translating prior period results using the current period foreign exchange rates. All CER profit figures have been translated at current period average rates. For Asia CER average liability calculations the policyholder liabilities have been translated using current period opening and closing exchange rates. For the US CER average liability calculations the policyholder liabilities have been translated at the current period month end closing exchange rates. See also note A1.
(iv)
For UK and Asia, opening and closing policyholder liabilities have been used to derive an average balance for the period, as a proxy for average balances throughout the period. The calculation of average liabilities for Jackson is generally derived from month end balances throughout the period as opposed to opening and closing balances only. In half year 2016, given the significant equity market fluctuations in certain months during the period, average liabilities for fee income in Jackson have been calculated using daily balances instead of month end balances in order to provide a more meaningful analysis of the fee income, which is charged on the daily account balance. The half year 2015 average liabilities for fee income in Jackson have been calculated based on average of month end balances. The alternative use of the daily balances to calculate the average would have resulted in no change to the margin on the CER basis. Average liabilities for spread income are based on the general account liabilities to which spread income attaches. Average liabilities used to calculate the administration expense margin exclude the REALIC liabilities reinsured to third parties prior to the acquisition by Jackson. Average liabilities are adjusted for business acquisitions and disposals in the period.
(v)
The DAC adjustment contains £14 million in respect of joint ventures in half year 2016 (half year 2015: £16 million).
 
I(b) Asia operations – analysis of IFRS operating profit by territory
 
Operating profit based on longer-term investment returns for Asia operations are analysed below. The table below presents the half year 2015 results on both actual exchange rates (AER) and constant exchange rates (CER) bases so as to eliminate the impact of exchange translation.
 
 
 2016 £m
 
 2015 £m
 
%
 
 2015 £m
 
 
Half year
 
AER
Half year
CER
Half year
 
Half year
2016 vs
half year
2015
AER
Half year
2016 vs
half year
2015
CER
 
AER
Full year
Hong Kong
96
 
69
73
 
39%
32%
 
150
Indonesia
193
 
167
172
 
16%
12%
 
356
Malaysia
71
 
61
58
 
16%
22%
 
120
Philippines
17
 
14
14
 
21%
21%
 
32
Singapore
111
 
105
109
 
6%
2%
 
204
Thailand
39
 
39
39
 
0%
0%
 
70
Vietnam
44
 
34
35
 
29%
26%
 
86
South-east Asia Operations inc. Hong Kong
571
 
489
500
 
17%
14%
 
1,018
China
20
 
12
12
 
67%
67%
 
32
India
22
 
22
21
 
0%
5%
 
42
Korea
15
 
19
18
 
(21)%
(17)%
 
38
Taiwan
13
 
8
8
 
63%
63%
 
25
Other
1
 
(3)
(2)
 
133%
150%
 
(4)
Non-recurrent itemsnote (ii)
42
 
29
29
 
45%
45%
 
62
Total insurance operationsnote (i)
684
 
576
586
 
19%
17%
 
1,213
Development expenses
(2)
 
(2)
(2)
 
0%
0%
 
(4)
Total long-term business operating profit
682
 
574
584
 
19%
17%
 
1,209
Eastspring Investments
61
 
58
60
 
5%
2%
 
115
Total Asia operations
743
 
632
644
 
18%
15%
 
1,324
 
Notes
(i) Analysis of operating profit between new and in-force business
The result for insurance operations comprises amounts in respect of new business and business in-force as follows:
 
 
 
 
 
 
 
 
 
 
 
 
2016 £m
 
2015 £m
 
 
 
Half year
 
AER
Half year
CER
Half year
AER
Full year
 
New business strain
(24)
 
(33)
(34)
(4)
 
Business in force
666
 
580
591
1,155
 
Non-recurrent itemsnote (ii)
42
 
29
29
62
 
Total
684
 
576
586
1,213
 The IFRS new business strain corresponds to approximately 1 per cent of new business APE sales for half year 2016 (half year 2015: approximately 2 per cent; full year 2015: approximately 0.1 per cent).
 
The strain represents the pre-tax regulatory basis strain to net worth after IFRS adjustments; for deferral of acquisition costs and deferred income where appropriate.
 
(ii) Other non-recurrent items of £42 million in 2016 (half year 2015: £29 million; full year 2015: £62 million) represent a small number of items, including a gain from entering into a reinsurance contract in the period.
 
I(c) Analysis of asset management operating profit based on longer-term investment returns
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Half year 2016 £m
 
M&G
Eastspring
 Investments
Prudential
Capital
US
Total
 
note (ii)
note (ii)
 
 
 
Operating income before performance-related fees
440
155
61
109
765
Performance-related fees
9
1
-
-
10
Operating income(net of commission)note (i)
449
156
61
109
775
Operating expensenote (i)
(229)
(87)
(48)
(121)
(485)
Share of associate’s results
5
-
-
-
5
Group's share of tax on joint ventures' operating profit
-
(8)
-
-
(8)
Operating profit/(loss) based on longer-term investment returns
225
61
13
(12)
287
Average funds under management
£243.2bn
£102.2bn
 
 
 
Margin based on operating income*
36bps
30bps
 
 
 
Cost / income ratio**
52%
56%
 
 
 
 
 
 
 
 
 
 
Half year 2015 £m
 
M&G
Eastspring
 Investments
Prudential
Capital
US
Total
 
note (ii)
note (ii)
 
 
 
Operating income before performance-related fees
491
149
47
175
862
Performance-related fees
1
2
-
-
3
Operating income(net of commission)note (i)
492
151
47
175
865
Operating expensenote (i)
(248)
(86)
(40)
(163)
(537)
Share of associate’s results
7
-
-
-
7
Group's share of tax on joint ventures' operating profit
-
(7)
-
-
(7)
Operating profit based on longer-term investment returns
251
58
7
12
328
Average funds under management
£260.1bn
£81.6bn
 
 
 
Margin based on operating income*
38bps
37bps
 
 
 
Cost / income ratio**
51%
58%
 
 
 
 
 
 
 
 
 
 
Full year 2015 £m
 
M&G
Eastspring
 Investments
Prudential
Capital
US
Total
 
note (ii)
note (ii)
 
 
 
Operating income before performance-related fees
939
304
118
321
1,682
Performance-related fees
22
3
-
-
25
Operating income(net of commission)note (i)
961
307
118
321
1,707
Operating expensenote (i)
(533)
(176)
(99)
(310)
(1,118)
Share of associate’s results
14
-
-
-
14
Group's share of tax on joint ventures' operating profit
-
(16)
-
-
(16)
Operating profit based on longer-term investment returns
442
115
19
11
587
Average funds under management
£252.5bn
£85.1bn
 
 
 
Margin based on operating income*
37bps
36bps
 
 
 
Cost / income ratio**
57%
58%
 
 
 
 
Notes
(i) Operating income and expense include the Group’s share of contribution from joint ventures (but excludes any contribution from associates). In the income statement as shown in note B2 of the IFRS financial statements, the net post-tax income of the joint ventures and associates is shown as a single item.
(ii) M&G and Eastspring Investments can be further analysed as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
M&G
 
Eastspring Investments
Operating income before performance-related fees
 
Operating income before performance-related fees
 
Retail
Margin
 of FUM*
Institu-
tional
Margin
 of FUM*
Total
Margin
 of FUM*
 
 
Retail
Margin
 of FUM*
Institu-
tional
Margin
 of FUM*
Total
Margin
 of FUM*
 
£m
bps 
£m 
bps 
£m 
bps 
 
 
£m
bps 
£m 
bps 
£m 
bps 
30 Jun 2016
247
87
193
21
440
36
 
30 Jun 2016
91
53
64
19
155
30
30 Jun 2015
309
86
182
19
491
38
 
30 Jun 2015
93
63
56
23
149
37
31 Dec 2015
582
87
357
19
939
37
 
31 Dec 2015
188
61
116
21
304
36
* Margin represents operating income before performance related fees as a proportion of the related funds under management (FUM). Half year figures have been annualised by multiplying by two. Monthly closing internal and external funds managed by the respective entity have been used to derive the average. Any funds held by the Group's insurance operations which are managed by third parties outside of the Prudential Group are excluded from these amounts.
** Cost/income ratio represents cost as a percentage of operating income before performance related fees.
 Institutional includes internal funds.
 
I(d)            Contribution to UK life financial metrics from specific management actions undertaken to position the balance sheet more efficiently under the new Solvency II regime
 
In the first half of 2016 management actions were taken to improve the solvency of UK insurance operations and to mitigate market risks. These actions included extending the reinsurance of longevity risk to cover a further £1.5 billion of IFRS annuity liabilities. As at 30 June 2016 the total IFRS annuity liabilities subject to longevity reinsurance were £10.7 billion. Management actions also repositioned the fixed income asset portfolio to improve the trade-off between yield and credit risk and to increase the proportion of the annuity business that benefits from the matching adjustment under Solvency II.
 
During 2015, the longevity risk of £6.4 billion on a Pillar 1 basis was reinsured, of which £1.6 billion was carried out in the first half. Further, a number of other management actions were also taken to reposition the fixed income portfolio and improve matching adjustment efficiency.
 
The effect of these actions on the UK’s long term IFRS operating profit, underlying free surplus generation and EEV operating profit is shown in the tables below.
 
 
 
 
 
 
 
 
 
IFRS operating profit of UK long-term business
 
 
 
Half
year
2016
Half
year
2015
Full
year
2015
 
Shareholder-backed annuity new business:
 
 
 
 
 
Retail
27
17
34
 
 
Bulks
-
49
89
 
 
 
27
66
123
 
In-force business:
 
 
 
 
 
Longevity reinsurance transactions
66
61
231
 
 
Impact of specific management actions to improve solvency
74
-
169
 
 
 
140
61
400
 
With-profits and other in-force
306
309
644
 
Total Life IFRS operating profit
473
436
1,167
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underlying free surplus generation of UK long-term business*
 
 
 
Half
year
2016
Half
year
2015
Full
year
2015
 
Expected in-force and return on net worth
334
310
620
 
Longevity reinsurance transactions
53
52
200
 
Impact of specific management actions to improve solvency
137
-
75
 
 
 
190
52
275
 
Changes in operating assumptions, experience variances and solvency II and other restructuring costs
31
(10)
(17)
 
Underlying free surplus generated from in-force business
555
352
878
 
New business strain:
 
 
 
 
Shareholder-backed annuity
(69)
(39)
(25)
 
Other products
13
(18)
(40)
 
 
 
(56)
(57)
(65)
 
Total underlying free surplus generation
499
295
813
 
 
 
 
 
 
 
 
EEV post-tax operating profit of UK long-term business*
 
 
 
Half
year
2016
Half
year
2015
Full
year
2015
 
Unwind of discount and other expected return
205
245
488
 
Longevity reinsurance transactions
(10)
(46)
(134)
 
Impact of specific management actions to improve solvency
41
-
75
 
 
 
31
(46)
(59)
 
Changes in operating assumptions and experience variances
23
57
116
 
Operating profit from in-force business
259
256
545
 
New business profit:
 
 
 
 
Shareholder-backed annuity
17
89
148
 
Other products
108
66
170
 
 
 
125
155
318
 
Total post-tax Life EEV operating profit
384
411
863
 
The half year 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016. The half year 2015 and full year 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for those periods.
 
II Other information
 
II(a) 
Holding company cash flow*
 
 
 
 
2016 £m
 
2015 £m
 
 
 
Half year
 
Half year
Full year
Net cash remitted by business units:
 
 
 
 
UK life net remittances to the Group
 
 
 
 
 
With-profits remittance
215
 
201
201
 
Shareholder-backed business remittance
-
 
-
100
 
 
 
215
 
201
301
 
Other UK paid to Group
131
 
30
30
Total UK net remittances to the Group
346
 
231
331
 
 
 
 
 
 
 
US remittances to the Group
339
 
403
470
 
 
 
 
 
 
 
Asia net remittances to the Group
 
 
 
 
 
Asia paid to the Group:
 
 
 
 
 
 
Long-term business
285
 
280
494
 
 
Other operations
36
 
40
74
 
 
 
321
 
320
568
 
Group invested in Asia:
 
 
 
 
 
 
Long-term business
(9)
 
(4)
(5)
 
 
Other operations (including funding of Regional Head Office costs)
(54)
 
(58)
(96)
 
 
 
(63)
 
(62)
(101)
Total Asia net remittances to the Group
258
 
258
467
 
 
 
 
 
 
 
M&G remittances to the Group
150
 
151
302
Prudential Capital remittances to the Group
25
 
25
55
Net remittances to the Group from Business Units**
1,118
 
1,068
1,625
Net interest paid
(157)
 
(137)
(290)
Tax received
67
 
72
145
Corporate activities
(103)
 
(93)
(193)
Solvency II costs
(6)
 
(10)
(16)
Total central outflows
(199)
 
(168)
(354)
Net operating holding company cash flow before dividend
919
 
900
1,271
Dividend paid
(935)
 
(659)
(974)
Operating holding company cash flow after dividend
(16)
 
241
297
Non-operating net cash flow
382
 
380
376
Total holding company cash flow
366
 
621
673
 
Cash and short-term investments at beginning of period
2,173
 
1,480
1,480
 
Foreign exchange movements
7
 
(7)
20
Cash and short-term investments at end of period
2,546
 
2,094
2,173
* The holding company cash flow differs from the IFRS cash flow statement, which includes all cash flows in the period including those relating to both policyholder and shareholder funds. The holding company cash flow is therefore a more meaningful indication of the Group’s central liquidity.
** 
Net cash remittances comprise dividends and other transfers from business units that are reflective of emerging earnings and capital generation.
 Non-operating net cash flow is principally for corporate transactions for distribution rights and acquired subsidiaries, and issue or repayment of subordinated debt.
 
II(b) 
Funds under management
 
For our asset management businesses the level of funds managed on behalf of third parties, which are not therefore recorded on the balance sheet, is a driver of profitability. We therefore analyse the movement in the funds under management each period, focusing on those which are external to the Group and those held by the insurance businesses and included on the Group balance sheet. This is analysed below.
 
(a)        Summary
 
 
 
2016 £bn
 
2015 £bn
 
 
30 Jun
 
30 Jun
31 Dec
Business area:
 
 
 
 
 
Asia operations
66.3
 
51.4
54.0
 
US operations
156.5
 
126.9
134.6
 
UK operations
180.9
 
169.6
168.4
Prudential Group funds under managementnote (i)
403.7
 
347.9
357.0
External funds note (ii)
158.6
 
157.0
151.6
Total funds under management
562.3
 
504.9
508.6
 
Notes
(i) Prudential Group funds under management of £403.7 billion (30 June 2015: £347.9 billion; 31 December 2015: £357.0 billion) comprise:
 
 
 
2016 £bn
 
2015 £bn
 
 
30 Jun
 
30 Jun
31 Dec
Total investments per the consolidated statement of financial position
398.2
 
343.1
352.0
Less: investments in joint ventures and associates accounted for using the equity method
(1.1)
 
(1.0)
(1.0)
Internally managed funds held in joint ventures
6.2
 
5.4
5.6
Investment properties which are held for sale or occupied by the Group (included in other IFRS captions)
0.4
 
0.4
0.4
Prudential Group funds under management
403.7
 
347.9
357.0
 
(ii) External funds shown above as at 30 June 2016 of £158.6 billion (30 June 2015: £157.0 billion; 31 December 2015: £151.6 billion) comprise £169.8 billion (30 June 2015: £168.9 billion; 31 December 2015: £162.7 billion) of funds managed by M&G and Eastspring Investments as shown in note (b) below less £11.2 billion (30 June 2015: £11.9 billion; 31 December 2015: £11.1 billion) that are classified within Prudential Group’s funds.
 
(b) Investment products – external funds under management
 
 
Half year 2016 £m
 
Half year 2015 £m
 
Full year 2015 £m
 
Eastspring
Investments
M&G
Group
total
 
Eastspring
Investments
M&G
Group
total
 
Eastspring
Investments
M&G
Group
total
 
note
 
note
 
note
 
note
 
note
 
note
At beginning of period
36,287
126,405
162,692
 
30,133
137,047
167,180
 
30,133
137,047
167,180
Market gross inflows
68,465
9,731
78,196
 
56,725
20,425
77,150
 
110,396
33,626
144,022
Redemptions
(68,221)
(16,697)
(84,918)
 
(51,555)
(22,800)
(74,355)
 
(103,360)
(40,634)
(143,994)
Market exchange translation and other movements
3,618
10,217
13,835
 
212
(1,272)
(1,060)
 
(882)
(3,634)
(4,516)
At end of period
40,149
129,656
169,805
 
35,515
133,400
168,915
 
36,287
126,405
162,692
 
Note
The £169.8 billion (30 June 2015: £168.9 billion; 31 December 2015: £162.7 billion) investment products comprise £162.4 billion (30 June 2015: £163.5 billion; 31 December 2015: £156.7 billion) plus Asia Money Market Funds of £7.4 billion (30 June 2015: £5.4 billion; 31 December 2015: £6.0 billion).
 
(c) M&G and Eastspring Investments - total funds under management
 
 
Eastspring Investments
 
M&G
 
 
note
 
 
 
 
 
 
 
2016 £bn
 
2015 £bn
2015 £bn
 
2016 £bn
 
2015 £bn
2015 £bn
 
 
30 Jun
 
30 Jun
31 Dec
 
30 Jun
 
30 Jun
31 Dec
 
External funds under management
40.1
 
35.5
36.3
 
129.7
 
133.4
126.4
 
Internal funds under management
64.8
 
49.8
52.8
 
125.7
 
123.1
119.7
 
Total funds under management
104.9
 
85.3
89.1
 
255.4
 
256.5
246.1
 
 
Note
The external funds under management for Eastspring Investments include Asia Money Market Funds at 30 June 2016 of £7.4 billion (30 June 2015: £5.4 billion; 31 December 2015: £6.0 billion).
 
II(c) 
Solvency II capital position at 30 June 2016
The estimated Group shareholder Solvency II surplus at 30 June 2016 was £9.1billion, before allowing for payment of the 2016 first interim dividend and after allowing for recalculation of transitional measures as at 30 June 2016.
 
 
 
 
 
 
30 Jun
30 Jun
31 Dec
Estimated Group shareholder Solvency II capital position1
2016 £bn
2015 £bn
2015 £bn
Own funds
21.1
19.4
20.1
Solvency capital requirement
12.0
10.2
10.4
Surplus
9.1
9.2
9.7
Solvency ratio
175%
190%
193%
1 The Group shareholder capital position excludes the contribution to Own Funds and the Solvency Capital Requirement from ring fenced With-Profit Funds and staff pension schemes in surplus
 
In accordance with Solvency II requirements, these results allow for:
 
     Capital in Jackson in excess of 250 per cent of the US local Risk Based Capital requirement. As agreed with the Prudential Regulation Authority, this is incorporated in the result above as follows:
 
 
Own funds: represents Jackson’s local US Risk Based available capital less 100 per cent of the US Risk Based Capital requirement (Company Action Level);
 
Solvency Capital Requirement: represents 150 per cent of Jackson’s local US Risk Based Capital requirement (Company Action Level); and
 
no diversification benefits are taken into account between Jackson and the rest of the Group.
 
     Matching adjustment for UK annuities, based on the calibrations published by the European Insurance and Occupational Pensions Authority; and
     UK transitional measures, which have been recalculated at the valuation date in line with our regulatory approvals.
 
The Group shareholder Solvency II capital position excludes:
 
      A portion of Solvency II surplus capital (£1.6 billion at 30 June 2016) relating to the Group’s Asian life operations, including due to “contract boundaries”;
    The contribution to Own Funds and the Solvency Capital Requirement from ring-fenced with-profits funds in surplus (representing £3.5 billion of surplus capital from UK with-profits funds at 30 June 2016) and from the shareholders’ share of the estate of with-profits funds; and
     The contribution to Own Funds and the Solvency Capital Requirement from pension funds in surplus.
 
It also excludes unrealised gains on certain derivative instruments taken out to protect Jackson against declines in long-term interest rates. At Jackson’s request, the Department of Insurance Financial Services renewed its approval to carry these instruments at book value in the local statutory returns for the period 31 December 2015 to 30 September 2016. At 30 June 2016, this approval had the effect of decreasing local statutory capital and surplus (and by extension Solvency II Own Funds and Solvency II surplus) by £0.7 billion, net of tax. This arrangement reflects an elective longstanding practice first put in place in 2009, which can be unwound at Jackson’s discretion.
 
Analysis of movement in Group capital position
A summary of the estimated movement in Group Solvency II surplus from £9.7 billion at year end 2015 to £9.1 billion at half year 2016 is set out in the table below.
 
We previously reported our economic capital results at year end 2014 before there was certainty in the final outcome of Solvency II and before we received internal model approval. The Solvency II results for 30 June 2016 and 31 December 2015 reflect the output from our approved internal model under the final Solvency II rules. The movement from the previously reported economic capital basis solvency surplus at 31 December 2014 to the Solvency II surplus at 30 June 2015 and 31 December 2015 is included for comparison.
 
 
 
 
 
 
 
Analysis of movement in Group shareholder surplus
Half year 2016 £bn
Half year 2015 £bn
Full year 2015 £bn
 
Surplus
Surplus
Surplus
Estimated Solvency II surplus at 1 January 2016 / economic capital surplus at 1 January 2015
9.7
9.7
9.7
 
 
 
 
 
 
Underlying operating experience
1.0
0.8
2.0
 
Management actions
0.2
-
0.4
Operating experience
1.2
0.8
2.4
 
 
 
 
 
Non-operating experience (including market movements)
(2.4)
0.5
(0.6)
 
 
 
 
 
Other capital movements
 
 
 
Subordinated debt issuance
0.7
0.6
0.6
Foreign currency translation impacts
0.9
(0.1)
0.2
Dividends paid
(0.9)
(0.7)
(1.0)
 
 
 
 
 
Methodology and calibration changes
 
 
 
Changes to Own Funds (net of transitionals) and SCR calibration strengthening
(0.1)
(0.2)
(0.2)
Effect of partial derecognition of Asia Solvency II surplus
-
(1.4)
(1.4)
 
 
 
 
 
Estimated Solvency II surplus at end period
9.1
9.2
9.7
 
The estimated movement in Group Solvency II surplus in the first half of 2016 is driven by:
 
 Operating experience of £1.2 billion: generated by in-force business and new business written in 2016 and also the impact of one-off management optimisations implemented in the first half of 2016;
 Non-operating experience of (£2.4) billion: mainly arising from negative market experience during the first half of 2016, after allowing for the recalculation of UK transitional measures;
 Other capital movements: comprising a gain from foreign currency translation effects and the issuance of debt in the first half of 2016 offset by a reduction in surplus from payment of dividends.
 
The methodology and calibration changes in the first half of 2016 reduce the Group surplus by £0.1 billion, which relates to finalisation of the full-year 2015 regulatory templates in May 2016. In addition, the methodology and calibration changes arising from Solvency II in 2015 relate to:
 
 A £0.2 billion reduction in surplus due to an increase in the Solvency Capital Requirement from strengthening of internal model calibrations, mainly relating to longevity risk, operational risk, credit risk and correlations, and a corresponding increase in the risk margin, which is partially offset by UK transitionals; and
 
 A £1.4 billion reduction in surplus due to the negative impact of Solvency II rules for “contract boundaries” and a reduction in the capital surplus of the Group’s Asian life operations, as agreed with the Prudential Regulation Authority.
 
Analysis of Group Solvency Capital Requirements
The split of the Group’s estimated Solvency Capital Requirement by risk type including the capital requirements in respect of Jackson’s risk exposures based on 150 per cent of US Risk Based Capital requirements (Company Action Level) but with no diversification between Jackson and the rest of the Group, is as follows:
 
 
 
 
 
 
 
 
 
30 Jun 2016
31 Dec 2015
 
 
% of undiversified
% of diversified
% of undiversified
% of diversified
Split of the Group’s estimated Solvency Capital Requirements
Solvency Capital
 Requirements
Solvency Capital
Requirements
Solvency Capital
Requirements
Solvency Capital
Requirements
Market
55%
72%
55%
72%
 
Equity
11%
16%
11%
16%
 
Credit
27%
45%
28%
47%
 
Yields (interest rates)
13%
8%
13%
6%
 
Other
4%
3%
3%
3%
Insurance
28%
20%
27%
20%
 
Mortality/morbidity
5%
2%
5%
2%
 
Lapse
15%
14%
14%
14%
 
Longevity
8%
4%
8%
4%
Operational/expense
12%
7%
11%
7%
FX translation
5%
1%
7%
1%
 
Reconciliation of IFRS equity to Group Solvency II Shareholder Own Funds
 
 
 
 
 
Reconciliation of IFRS equity to Group Solvency II Shareholder Own Funds
30 Jun 2016 £bn
30 Jun 2015 £bn
31 Dec 2015 £bn
IFRS shareholders' equity
14.6
12.1
13.0
Restate US insurance entities from IFRS onto local US statutory basis
(3.1)
(1.8)
(1.5)
Remove DAC, goodwill & intangibles
(3.9)
(3.6)
(3.7)
Add subordinated-debt
5.7
4.3
4.4
Impact of risk margin (net of transitionals)
(3.3)
(2.8)
(2.5)
Add value of shareholder-transfers
3.1
3.4
3.1
Liability valuation differences
9.7
9.0
8.6
Increase in value of net deferred tax liabilities (resulting from valuation differences above)
(1.2)
(1.1)
(0.9)
Other
(0.5)
(0.1)
(0.4)
Estimated Solvency II Shareholder Own Funds
21.1
19.4
20.1
 
The key items of the reconciliation as at 30 June 2016 are:
 
     £3.1 billion represents the adjustment required to the Group’s shareholders’ funds in order to convert Jackson’s contribution from an IFRS basis to the local statutory valuation basis. This item also reflects a derecognition of Own Funds of £0.8 billion, equivalent to the value of 100 per cent of Risk Based Capital requirements (Company Action Level), as agreed with the Prudential Regulation Authority;
     £3.9 billion due to the removal of DAC, goodwill and intangibles from the IFRS balance sheet;
     £5.7 billion due to the addition of subordinated debt which is treated as available capital under Solvency II but as a liability under IFRS;
     £3.3 billion due to the inclusion of a risk margin for UK and Asia non-hedgeable risks, net of transitionals, all of which are not applicable under IFRS;
     £3.1 billion due to the inclusion of the value of future shareholder transfers from with-profits business (excluding the shareholder’s share of the with-profits estate, for which no credit is given under Solvency II), which is excluded from the determination of the Group’s IFRS shareholders’ funds;
     £9.7 billion due to differences in insurance valuation requirements between Solvency II and IFRS, with Solvency II Own Funds partially capturing the value of in-force business which is excluded from IFRS;
     £1.2 billion due to the impact on the valuation of deferred tax assets and liabilities resulting from the other valuation differences noted above; and
     £0.5 billion due to other items, including the impact of revaluing loans, borrowings and debt from IFRS to Solvency II.
 
Sensitivity analysis
The estimated sensitivity of the Group shareholder Solvency II capital position to significant changes in market conditions is as follows:
 
 
 
 
 
 
 
Impact of market sensitivities1
30 Jun 2016
31 Dec 2015
 
Surplus £bn
Ratio
Surplus £bn
Ratio
Base position
9.1
175%
9.7
193%
Impact of:
 
 
 
 
 
20% instantaneous fall in equity markets
(0.9)
(6)%
(1.0)
(7)%
 
40% fall in equity markets(1)
(1.1)
(7)%
(1.8)
(14)%
 
50 basis points reduction in interest rates(2),(3)
(0.8)
(7)%
(1.1)
(14)%
 
100 basis points increase in interest rates(3)
2.4
27%
1.1
17%
 
100 basis points increase in credit spreads
(1.4)
(7)%
(1.2)
(6)%
(1) where hedges are dynamic, rebalancing is allowed for by assuming an instantaneous 20 per cent fall followed by a further 20 per cent fall over a four-week period
(2) subject to a floor of zero
(3) allowing for further transitional recalculation after the interest rate stress
 
The Group’s risk strategy is positioned to withstand significant deteriorations in market conditions and we continue to use market hedges to manage some of this exposure across the Group, where we believe the benefit of the protection outweighs the cost. The sensitivity analysis above allows for predetermined management actions and those taken to date, but does not reflect all possible management actions which could be taken in the future.
 
UK Solvency II capital position1, 2
On the same basis as above, the estimated UK shareholder Solvency II surplus at 30 June 2016 was £2.9 billion, after allowing for recalculation of transitional measures as at 30 June 2016. This relates to shareholder-backed business including future with-profits shareholder transfers, but excludes the shareholders’ share of the estate in line with Solvency II requirements.
 
 
 
 
 
 
Estimated UK shareholder Solvency II capital position1
30 Jun 2016 £bn
30 Jun 2015 £bn
31 Dec 2015 £bn
Own funds
10.6
10.1
10.5
Solvency capital requirement
7.7
6.7
7.2
Surplus
2.9
3.4
3.3
Solvency ratio
138%
152%
146%
1 The UK shareholder capital position excludes the contribution to Own Funds and the Solvency Capital Requirement from ring fenced With-Profit Funds and staff pension schemes in surplus
 
While the surplus position of the UK with-profits funds remains strong on a Solvency II basis, it is ring-fenced from the shareholder balance sheet and is therefore excluded from both the Group and the UK shareholder Solvency II surplus results. The estimated UK with-profits funds Solvency II surplus at 30 June 2016 was £3.5 billion, after allowing for recalculation of transitional measures as at 30 June 2016.
 
 
 
 
 
Estimated UK with-profits Solvency II capital position
30 Jun
2016 £bn
30 Jun
2015 £bn
31 Dec
2015 £bn
Own funds
8.2
7.2
7.6
Solvency capital requirement
4.7
3.5
4.4
Surplus
3.5
3.7
3.2
Solvency ratio
176%
210%
175%
 
Reconciliation of UK with-profits IFRS unallocated surplus to Solvency II Own Funds 2
 
 
 
 
 
Reconciliation of UK with-profits funds
30 Jun
2016 £bn
30 Jun
2015 £bn
31 Dec
2015 £bn
IFRS unallocated surplus of UK with-profits funds
11.2
10.6
10.5
Adjustments from IFRS basis to Solvency II :
 
 
 
 
Value of shareholder transfers
(1.9)
(2.3)
(2.1)
 
Risk margin (net of transitional)
(0.7)
(0.4)
(0.7)
 
Other valuation differences
(0.4)
(0.7)
(0.1)
Estimated Solvency II Own Funds
8.2
7.2
7.6
 
A reconciliation from IFRS to Solvency I was previously disclosed in the Group IFRS financial statements at full year 2015. At 30 June 2016 the reconciling items from IFRS to Solvency II mainly reflect valuation differences relating to non-profit annuity liabilities within the with-profits funds.
 
Statement of independent review
 
The methodology, assumptions and overall result have been subject to examination by KPMG LLP.
 
Notes:
1 The UK shareholder capital position represents the consolidated capital position of the shareholder funds of Prudential Assurance Company Ltd and all its subsidiaries.
 
2 The UK with-profits capital position includes the Prudential Assurance Company with-profits sub-fund, the Scottish Amicable Insurance Fund and the Defined Charge Participating Sub-Fund.
 
 
 
 
 
SIGNATURES
 
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
Date 10 August 2016
 
 
PRUDENTIAL PUBLIC LIMITED COMPANY
 
 
 
By: /s/ Nic Nicandrou
 
 
 
Nic Nicandrou
 
Chief Financial Officer