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Additional financial information

I: IFRS profit and loss information

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:

  1. 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.
  2. 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.
  3. With-profits business represents the gross of tax shareholders’ transfer from the with-profits fund for the period.
  4. Insurance margin primarily represents profits derived from the insurance risks of mortality and morbidity.
  5. Margin on revenues primarily represents amounts deducted from premiums to cover acquisition costs and administration expenses.
  6. 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).
  7. 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.

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  Half year 2016
  Asia

£m
US

£m
UK

£m
Total

£m
Average
liability
note (iv)
£m
Margin
note (ii)
bps
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.

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  Half year 2015 AER
Asia

£m
US

£m
UK

£m
Total

£m
Average liability
note (iv)
£m
Margin
note (ii)
bps
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 61 61    
Long-term business operating profit 574 834 436 1,844    

See notes at the end of this section.

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  Half year 2015 CER note (iii)
Asia

£m
US

£m
UK

£m
Total

£m
Average liability
note (iv)
£m
Margin
note (ii)
bps
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 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

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  Asia
  Half year 2016   Half year 2015 AER   Half year 2015 CER note (iii)  
Long-term business Profit

£m
Average liability
note (iv)
£m
Margin
note (ii)
bps
  Profit

£m
Average liability
note (iv)
£m
Margin
note (ii)
bps
  Profit

£m
Average liability
note (iv)
£m
Margin
note (ii)
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

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  US
  Half year 2016   Half year 2015 AER   Half year 2015 CER note (iii)
Long-term business Profit

£m
Average liability
note (iv)
£m
Margin
note (ii)
bps
  Profit

£m
Average liability
note (iv)
£m
Margin
note (ii)
bps
  Profit

£m
Average liability
note (iv)
£m
Margin
note (ii)
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

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  Half year 2016 £m   Half year 2015 AER £m   Half year 2015 CER £m note (iii)
  Other operating profits Acquisition costs Total   Other operating profits Acquisition costs Total   Other operating profits Acquisition costs Total
  Incurred Deferred   Incurred Deferred   Incurred Deferred
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

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  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 business note (a) 154   180 191   (14)% (19)%
Fee business note (b) 642   552 587   16% 9%
Life and other business note (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:

  1. Spread business is the net operating profit for fixed annuity, fixed indexed annuity and guaranteed investment contracts and largely comprises spread income less costs.
  2. 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.
  3. 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

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  UK
  Half year 2016   Half year 2015
Long-term business Profit

£m
Average liability
note (iv)
£m
Margin
note (ii)
bps
  Profit

£m
Average liability
note (iv)
£m
Margin
note (ii)
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 financial information section I(d).

Notes

  1. 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.
  2. 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.
  3. The half year 2015 comparative information has been presented at AER and 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.
  4. 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.
  5. The DAC adjustment contains £14 million in respect of joint ventures in half year 2016 (half year 2015: £16 million).

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 AER and CER bases to eliminate the impact of exchange translation.

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  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

Notes

  1. 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:

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      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.

  2. 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.
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

c Analysis of asset management operating profit based on longer-term investment returns

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  Half year 2016 £m
  M&G
note (ii)
Eastspring
Investments
note (ii)
Prudential
Capital

US

Total

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%      

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  Half year 2015 £m
  M&G
note (ii)
Eastspring
Investments
note (ii)
Prudential
Capital

US

Total

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%      

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  Full year 2015 £m
  M&G
note (ii)
Eastspring
Investments
note (ii)
Prudential
Capital

US

Total

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

  1. 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.
  2. M&G and Eastspring Investments can be further analysed as follows:

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      M&G
      Operating income before performance-related fees
      Retail
    £m
    Margin
    of FUM*
    bps
    Institu-
    tional
    £m
    Margin
    of FUM*
    bps
    Total
    £m
    Margin
    of FUM*
    bps
    30 Jun 2016 247 87 193 21 440 36
    30 Jun 2015 309 86 182 19 491 38
    31 Dec 2015 582 87 357 19 939 37

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      Eastspring Investments
      Operating income before performance-related fees
      Retail
    £m
    Margin
    of FUM*
    bps
    Institu-
    tional
    £m
    Margin
    of FUM*
    bps
    Total
    £m
    Margin
    of FUM*
    bps
    30 Jun 2016 91 53 64 19 155 30
    30 Jun 2015 93 63 56 23 149 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.

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

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  2016 £m   2015 £m
  Half year   Half year Full year
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*

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  2016 £m   2015 £m
  Half year   Half year Full year
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*

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  2016 £m   2015 £m
  Half year   Half year Full year
* 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.
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

II: Other information

a Holding company cash flow*

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  2016 £m   2015 £m
  Half year   Half year Full year
  • * 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.
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

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

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  2016 £bn   2015 £bn
  30 Jun   30 Jun 31 Dec

Notes

  1. Prudential Group funds under management of £403.7 billion (30 June 2015: £347.9 billion; 31 December 2015: £357.0 billion) comprise:

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      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
  2. 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.
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 fundsnote (ii) 158.6   157.0 151.6
Total funds under management 562.3   504.9 508.6

(b) Investment products – external funds under management

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  Half year 2016 £m   Half year 2015 £m   Full year 2015 £m
  Eastspring Investments note M&G
 
Group total note   Eastspring Investments note M&G
 
Group total note   Eastspring Investments note M&G
 
Group total note

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).

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

(c) M&G and Eastspring Investments – total funds under management

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  Eastspring Investments   M&G
  2016 £bn   2015 £bn 2015 £bn   2016 £bn   2015 £bn 2015 £bn
  30 Jun
note
  30 Jun
note
31 Dec
note
  30 Jun
 
  30 Jun
 
31 Dec
 

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).

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

c Solvency II capital position at 30 June 2016

The estimated Group shareholder Solvency II surplus at 30 June 2016 was £9.1 billion, before allowing for payment of the 2016 first interim dividend and after allowing for recalculation of transitional measures as at 30 June 2016.

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Estimated Group shareholder Solvency II capital position1 30 Jun 2016 £bn   30 Jun 2015 £bn 31 Dec 2015 £bn

Note

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.

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%

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 long-standing 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.

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Analysis of movement in Group shareholder surplus Half year 2016 £bn   Half year 2015 £bn Full year 2015 £bn
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; and
  • 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:

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  30 Jun 2016   31 Dec 2015
Split of the Group’s estimated Solvency Capital Requirements % of undiversified Solvency Capital Requirements % of diversified Solvency Capital Requirements   % of undiversified Solvency Capital Requirements % of diversified 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

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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 and 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 shareholders’ 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:

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  30 Jun 2016   31 Dec 2015
Impact of market sensitivities1 Surplus
£bn
Ratio   Surplus
£bn
Ratio

Notes

  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.
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 markets1 (1.1) (7)%   (1.8) (14)%
50 basis points reduction in interest rates2,3 (0.8) (7)%   (1.1) (14)%
100 basis points increase in interest rates3 2.4 27%   1.1 17%
100 basis points increase in credit spreads (1.4) (7)%   (1.2) (6)%

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.

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Estimated UK shareholder Solvency II capital position* 30 Jun 2016
£bn
  30 Jun 2015
£bn
31 Dec 2015
£bn
* 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.
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%

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.

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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 Funds2

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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.

d Option schemes

The Group presently grants share options through four schemes, and exercises of the options are satisfied by the issue of new shares. Executive Directors and eligible employees based in the UK may participate in the UK savings-related share option scheme. Executives and eligible employees based in Asia as well as eligible employees based in Europe can participate in the international savings-related share option scheme while agents based in certain regions of Asia can participate in the international savings-related share option scheme for non-employees. Employees based in Dublin are eligible to participate in the Prudential International Assurance sharesave plan, which currently has no outstanding options in issue. Further details of the schemes and accounting policies are detailed in note B3.2 of the IFRS basis consolidated financial statements in the 2015 annual report.

All options were granted at £nil consideration. No options have been granted to substantial shareholders, suppliers of goods or services (excluding options granted to agents under the non-employee savings-related share option scheme) or in excess of the individual limit for the relevant scheme.

The options schemes will terminate as follows, unless the directors resolve to terminate the plans at an earlier date:

  • UK savings-related share option scheme: 16 May 2023;
  • International savings-related share option scheme: 31 May 2021;
  • Prudential International Assurance sharesave plan: 3 August 2019; and
  • International savings-related share option scheme for non-employees 2012: 17 May 2022.

The weighted average share price of Prudential plc for the period ended 30 June 2016 was £12.85 (30 June 2015: £16.22).

The following analyses show the movements in options for each of the option schemes for the period ended 30 June 2016.

UK savings-related share option scheme

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    Exercise period   Number of shares under options
Date of grant Exercise
price £
Beginning End   Beginning
of period
Granted Exercised Cancelled Forfeited Lapsed End of period
25 Sep 08 4.38 01 Dec 15 31 May 16   3,071 (3,071)
27 Apr 09 2.88 01 Jun 16 30 Nov 16   154,981 (140,201) (33) 14,747
28 Sep 10 4.61 01 Dec 15 31 May 16   45,959 (45,290) (669)
16 Sep 11 4.66 01 Dec 16 31 May 17   160,392 (5,944) (1,245) 153,203
21 Sep 12 6.29 01 Dec 15 31 May 16   215,520 (207,882) (1,431) (1,343) 4,864
21 Sep 12 6.29 01 Dec 17 31 May 18   127,520 (318) (159) 127,043
20 Sep 13 9.01 01 Dec 16 31 May 17   324,479 (2,013) (5,924) (5,787) (559) 310,196
20 Sep 13 9.01 01 Dec 18 31 May 19   70,590 (749) (332) (915) 68,594
23 Sep 14 11.55 01 Dec 17 31 May 18   870,308 (4,278) (25,774) (14,608) (9,662) 815,986
23 Sep 14 11.55 01 Dec 19 31 May 20   440,551 (2,084) (6,712) (2,622) (9,715) 419,418
22 Sep 15 11.11 01 Dec 18 31 May 19   1,039,759 (212) (35,305) (9,039) (1,796) 993,407
22 Sep 15 11.11 01 Dec 20 31 May 21   234,607 (270) (4,590) 229,747
  3,687,737 (412,042) (73,985) (38,409) (26,096) 3,137,205

The total number of securities available for issue under the scheme is 3,137,205 which represents 0.122 per cent of the issued share capital at 30 June 2016.

The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £13.47.

International savings-related share option scheme

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    Exercise period   Number of shares under options
Date of grant Exercise price £ Beginning End   Beginning of period Granted Exercised Cancelled Forfeited Lapsed End of period
16 Sep 11 4.66 01 Dec 16 31 May 17   17,617 17,617
21 Sep 12 6.29 01 Dec 15 31 May 16   249,429 (224,996) (11,910) 12,523
21 Sep 12 6.29 01 Dec 17 31 May 18   14,501 14,501
20 Sep 13 9.01 01 Dec 16 31 May 17   571,967 (17,275) 554,692
20 Sep 13 9.01 01 Dec 18 31 May 19   47,004 (1,664) 45,340
23 Sep 14 11.55 01 Dec 17 31 May 18   8,643 8,643
23 Sep 14 11.55 01 Dec 19 31 May 20   4,464 4,464
22 Sep 15 11.11 01 Dec 18 31 May 19   24,284 24,284
22 Sep 15 11.11 01 Dec 20 31 May 21   3,240 3,240
  941,149 (224,996) (18,939) (11,910) 685,304

The total number of securities available for issue under the scheme is 685,304 which represents 0.027 per cent of the issued share capital at 30 June 2016.

The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £13.51.

Prudential International Assurance sharesave plan

There are no securities available for issue under the scheme at 30 June 2016.

Non-employee savings-related share option scheme

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    Exercise period   Number of shares under options
Date of grant Exercise price £ Beginning End   Beginning of period Granted Exercised Cancelled Forfeited Lapsed End of period
28 Sep 10 4.61 01 Dec 15 31 May 16   341,948 (25,357) (316,591)
16 Sep 11 4.66 01 Dec 16 31 May 17   243,641 (183,641) 60,000
21 Sep 12 6.29 01 Dec 15 31 May 16   273,565 (148,635) (124,930)
21 Sep 12 6.29 01 Dec 17 31 May 18   82,872 (54,871) 28,001
20 Sep 13 9.01 01 Dec 16 31 May 17   755,540 (599) 754,941
20 Sep 13 9.01 01 Dec 18 31 May 19   419,452 419,452
23 Sep 14 11.55 01 Dec 17 31 May 18   615,326 (2,310) 613,016
23 Sep 14 11.55 01 Dec 19 31 May 20   512,917 512,917
22 Sep 15 11.11 01 Dec 18 31 May 19   499,276 (3,078) 496,198
22 Sep 15 11.11 01 Dec 20 31 May 21   422,194 (779) 421,415
  4,166,731 (173,992) (6,766) (680,033) 3,305,940

The total number of securities available for issue under the scheme is 3,305,940 which represents 0.128 per cent of the issued share capital at 30 June 2016.

The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £13.51.

e Foreign currency source of key metrics

The tables below show the Group’s key free surplus, IFRS and EEV metrics analysis by contribution by currency group:

Free surplus and IFRS half year 2016 results

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  Underlying free
surplus
generated for
total insurance
and asset
management
operations
%
note 2
Pre-tax operating profit
%

notes 2,3,4
Shareholders’ funds
%
notes 2,3,4
US$ linkednote 1 15 19 18
Other Asia currencies 11 17 18
Total Asia 26 36 36
UK sterlingnotes 3,4 44 21 42
US$note 4 30 43 22
Total 100 100 100

EEV half year 2016 results

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  Post-tax new
business profits
%
 
Post-tax
operating profit
%

notes 2,3,4
Shareholders’ funds
%
notes 2,3,4

Notes

  1. US$ linked comprises the Hong Kong and Vietnam operations where the currencies are pegged to the US dollar and the Malaysia and Singapore operations where the currencies are managed against a basket of currencies including the US dollar.
  2. Includes long-term, asset management business and other businesses.
  3. For operating profit and shareholders’ funds, UK sterling includes amounts in respect of central operations as well as UK insurance operations and M&G.
  4. For shareholders’ funds, the US$ grouping includes US$ denominated core structural borrowings. Sterling operating profits include all interest payable as sterling denominated, reflecting interest rate currency swaps in place.
US$ linkednote 1 54 42 34
Other Asia currencies 11 14 14
Total Asia 65 56 48
UK sterlingnotes 3,4 10 14 22
US$note 4 25 30 30
Total 100 100 100

f Reconciliation between IFRS and EEV shareholders’ funds

The table below shows the reconciliation of EEV shareholders’ funds and IFRS shareholders’ funds at the end of the period:

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  2016 £m   2015 £m
  30 Jun   30 Jun 31 Dec

Notes

  1. The EEV shareholders’ funds comprises the present value of the shareholders’ interest in the value of in-force business, net worth of long-term business operations and IFRS shareholders’ funds of asset management and other operations. The value of in-force business reflects the present value of future shareholder cash flows from long-term in-force business which are not captured as shareholders’ interest on an IFRS basis. Net worth represents the net assets for EEV reporting purposes that reflect the regulatory basis position, sometimes with adjustments to achieve consistency with the IFRS treatment of certain items.
  2. Other adjustments represent asset and liability valuation differences between IFRS and the local regulatory reporting basis used to value net worth for long-term insurance operations. It also includes the mark to market of the Group’s core borrowings which are fair valued under EEV but not IFRS. The most significant valuation differences relate to changes in the valuation of insurance liabilities. For example, in Jackson where IFRS liabilities are higher than the local regulatory basis as they are principally based on policyholder account balances (with a deferred acquisition costs recognised as an asset) whereas the local regulatory basis used for EEV is based on future cash flows due to the policyholder on a prudent basis with consideration of an expense allowance as applicable, but with no separate deferred acquisition cost asset.
  3. The half year 2016 EEV 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 EEV results for UK insurance operations were prepared on a basis reflecting the Solvency I regime. As stated in note b above, ‘other adjustments’ represent asset and liability valuation differences between IFRS and the local regulatory basis used to value net worth for long-term insurance operations. At 30 June 2016 for the UK this would be the difference between IFRS and Solvency II, and at 30 June 2015 and 31 December 2015 the difference between IFRS and Solvency I.
EEV shareholders’ funds 34,981   30,074 32,359
Less: Value of in-force business of long-term businessnote a (21,785)   (21,003) (22,431)
Deferred acquisition costs assigned zero value for EEV purposes 8,068   6,003 7,010
Othernotes b,c (6,659)   (2,970) (3,983)
IFRS shareholders’ funds 14,605   12,104 12,955

g Reconciliation of APE new business sales to earned premiums

The Group reports annual premium equivalent (APE) new business sales as a measure of the new policies sold in the period. This differs to the IFRS measure of premiums earned as shown below:

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  2016 £m   2015 £m
  Half year   Half year Full year

Notes

  1. APE new business sales only include one tenth of single premiums, recorded on policies sold in the period. Gross premiums earned include 100 per cent of such premiums.
  2. Other adjustments principally include amounts in respect of the following:
    • Gross premiums earned includes premiums from existing in-force business as well as new business. The most significant amount is recorded in Asia, where a significant portion of regular premium business is written. Asia in-force premiums form the vast majority of the other adjustment amount;
    • APE includes new policies written in the period which are classified as investment contracts without discretionary participation features under IFRS 4, arising mainly in Jackson for guaranteed investment contracts and in the UK for certain unit-linked savings and similar contracts. These are excluded from gross premiums earned and recorded as deposits;
    • APE new business sales are annualised while gross premiums earned are recorded only when revenues are due; and
    • For the purpose of reporting APE new business sales, we include the Group’s share of amounts sold by the Group’s insurance joint ventures. Under IFRS, joint ventures are equity accounted and so no amounts are included within gross premiums earned.
Annual premium equivalents (APE) as published 3,030   2,733 5,607
Adjustment to include 100% of single premiums on new business sold in the periodnote a 12,417   12,606 25,082
Premiums from in-force business and other adjustmentsnote b 2,891   3,067 5,974
Gross premiums earned 18,338   18,406 36,663
Outward reinsurance premiums (944)   (522) (1,157)
Earned premiums, net of reinsurance as shown in the IFRS financial statements 17,394   17,884 35,506

Section 5

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