Prudential plc - HY16 Results - IFRS

RNS Number : 7326G
Prudential PLC
10 August 2016
 

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: 

 

-    The fair value movements booked in the income statement on the derivative programme being in respect of the management of  interest rate exposures of the variable and fixed index annuity business, as well as the fixed annuity business guarantees and durations within the general account; 

-    Fair value movements on Jackson's debt securities of the general account which are recorded in other comprehensive income rather than the income statement; and

-    The mixed measurement model that applies for the GMIB and its reinsurance.

 

(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

(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

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.

 


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