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Chief Financial Officer’s report on the
2016 first half financial performance

Delivering increases across
our key metrics


“The high quality and recurring nature of
our operating income offers meaningful
protection in times of macro-economic
and market uncertainty. ”

Nic Nicandrou
Chief Financial Officer

Nic Nicandrou, Chief Financial Officer

Prudential has made a good start to 2016. Although financial markets have been volatile in this period and the downward path of global long-term interest rates has accelerated following the UK referendum on EU membership, our operational delivery has remained intact. We have delivered increases across our key metrics of new business profit, IFRS operating profit and free surplus generation, while maintaining a strong capital position.

The high quality and recurring nature of our operating income offers meaningful protection in times of macro-economic and market uncertainty. We have used this to good effect in the first half of the year, to both offset the impact of the anticipated decline in contributions from M&G, UK bulk annuities and spread profits in the US and to protect our robust capital position. We have also proactively managed costs across the Group, taken further specific actions to improve our UK solvency position and continued to prioritise actions which sustain long-term value creation over tactical volume growth.

Compared to the same period in 2015, sterling has declined against most global currencies, which is positive for the translation of results from our sizeable non-sterling operations. To aid comparison of underlying progress, we continue to express and comment on the performance trends of our Asia and US operations on a constant currency basis.

The key operational highlights in the first half of 2016 were as follows:

  • IFRS operating profit based on longer-term investment returns was 6 per cent higher at £2,059 million (up 9 per cent on an actual exchange rate basis), equivalent to an annualised 24 per cent return on opening IFRS equity. This result was driven by continued double-digit growth in our Asia life operations, with life IFRS operating profit up 17 per cent to £682 million. In Jackson, the expected reduction in spread earnings reflecting lower rates was mitigated by a robust performance from fee business. IFRS operating profit from our UK life business also increased by 8 per cent, despite the loss of earnings from new bulk annuity sales, in part due to a contribution from actions taken to improve solvency. As anticipated, M&G’s earnings were lower by 10 per cent following a decline over the last year in retail assets managed, driven by net outflows.
  • Underlying free surplus generation1,2, our preferred measure of cash generation from our life and asset management businesses, increased by 10 per cent to £1,609 million, after financing new business growth. On an actual exchange rate basis the growth in this measure was 13 per cent, with the increase reflecting a higher contribution from our growing in-force book of business and continued discipline of focusing on high-return new business with fast payback periods.
  • New business profit2 was 8 per cent3 higher at £1,260 million, with Asia up 20 per cent as a result of both volume growth and improvements in country and channel mix. The contribution from Jackson declined by 21 per cent due to lower volumes and the adverse effect of lower interest rates. UK life retail new business profit grew by 56 per cent, driven by strong consumer demand for our PruFund product range.

During the first half of 2016, investment markets have remained volatile, reflecting growing concerns on the outlook for global growth, the consequences of monetary policy actions and unease caused by steep declines in commodity prices. The first quarter of the year was characterised by sizeable equity market falls, wider credit spreads and lower rates, while in the second quarter equity and credit markets normalised but long-term interest rates fell further following the UK referendum on EU membership. Although we have taken steps to reduce the investment market sensitivity of our earnings and balance sheet, we remain significant long-term holders of financial assets to back the commitments that we have made to our customers. Short-term fluctuations in both these assets and related liabilities are reported outside the operating result, which is based on long-term assumptions. In the first half of the year, these short-term fluctuations were overall negative, driven by the net effect that the sharp decline in interest rates had on our overall balance sheet. This contrasts with the equivalent period of 2015, where a more benign market environment and rising interest rates produced comparatively modest short-term investment variances. As a result, in the first half of the year total IFRS post-tax profit was 54 per cent lower at £687 million and total EEV after-tax profit was 36 per cent lower at £1,394 million.

Further, over the course of the first six months of 2016 sterling weakened significantly relative to major global currencies. As the majority of the Group’s business is conducted in US dollars and in various Asian currencies, our earnings, shareholders’ equity and solvency have benefited strongly from this movement. In addition, the significant fall in US long-term rates between the start and the end of the reporting period produced substantial unrealised gains on the fixed income securities held by Jackson accounted for through Other Comprehensive Income. The improved operating results, negative short-term investment variances, unrealised gains on Jackson’s fixed income securities and positive currency effects combined to drive the Group’s IFRS shareholders’ equity 21 per cent4 higher at £14.6 billion. Similarly, the Group’s EEV basis shareholders’ equity was also higher at £35.0 billion, up 16 per cent2,4.

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IFRS profits

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  Actual exchange rate   Constant exchange rate
  Half year 2016 £m   Half year 2015 £m Change %   Half year 2015 £m Change %
Operating profit before tax              
Long-term business:              
Asia 682   574 19   584 17
US 888   834 6   887
UK 473   436 8   436 8
Long-term business operating profit before tax 2,043   1,844 11   1,907 7
UK general insurance commission 19   17 12   17 12
Asset management business:              
M&G 225   251 (10)   251 (10)
Prudential Capital 13   7 86   7 86
Eastspring Investments 61   58 5   60 2
US (12)   12 n/a   12 n/a
Other income and expenditure5 (290)   (308) 6   (308) 6
Total operating profit based on longer-term investment returns before tax 2,059   1,881 9   1,946 6
Short-term fluctuations in investment returns:              
Insurance operations (1,168)   75 n/a   86 n/a
Other operations (192)   11 n/a   11 n/a
  (1,360)   86 n/a   97 n/a
Other non-operating items5 (35)   (85) 59   (96) 64
Profit before tax attributable to shareholders 664   1,882 (65)   1,947 (66)
Tax credit (charge) attributable to shareholders’ returns 23   (444) 105   (461) 105
Profit for the year attributable to shareholders 687   1,438 (52)   1,486 (54)

IFRS earnings per share

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  Actual exchange rate   Constant exchange rate
  Half year 2016 pence   Half year 2015 pence Change %   Half year 2015 pence Change %
Basic earnings per share based on operating profit after tax 61.8   57.0 8   59.0 5
Basic earnings per share based on total profit after tax 26.9   56.3 (52)   58.2 (54)

Note B1: Analysis of performance by segment
Note B6: Earnings per share

IFRS operating profit

Total IFRS operating profit increased by 6 per cent (9 per cent on an actual exchange rate basis) in the first half of 2016 to £2,059 million.

  • Asia total operating profit of £743 million was 15 per cent higher than the previous period (18 per cent on an actual exchange rate basis), with continued strong growth in life insurance.
  • US total operating profit at £876 million decreased by 3 per cent (4 per cent increase on an actual exchange rate basis), reflecting stable life profits and the impact of Curian closure costs.
  • UK total operating profit of £492 million was 9 per cent higher, with core in-force life earnings consistent with prior year and management actions to support solvency contributing £140 million (2015: £61 million). 2015 included profits of £49 million from bulk annuity transactions that were not repeated in the first half of 2016.
  • M&G operating profit (excluding Prudential Capital) was 10 per cent lower at £225 million, reflecting the impact of recent asset outflows from retail funds on overall funds under management, the effect of which has been mitigated by action on costs.

At the beginning of the year, we expected earnings would contract in a few discrete areas of the business: at M&G, due to the impact of outflows on funds under management on the corresponding fee income; in Jackson’s spread business portfolio as a result of the persistence of interest rates at historically low levels; and in our UK life business given our reduced appetite for writing new bulk annuity business. These identified effects have emerged largely as expected and we currently expect they will continue into the rest of the year. However, during the first half of 2016, we have maintained our focus on cost control across all parts of the Group, which has mitigated the overall impact of these adverse effects. Earnings have also benefited from continued growth in the premium base in Asia and the level of aggregate assets managed by our life operations across the Group, together with the additional earnings of £140 million from management actions taken in the UK to support solvency during the period.

Life insurance operations: Taken together, IFRS operating profit from our life insurance operations in Asia, the US and the UK increased 7 per cent to £2,043 million (11 per cent on an actual exchange rate basis).

IFRS operating profit in our life insurance operations in Asia was 17 per cent higher at £682 million (up 19 per cent on an actual exchange rate basis), reflecting our ability to translate top-line growth into shareholder value. The performance is underpinned by the recurring premium income nature of our in-force book and the highly diverse nature of our earnings by geography and by source. Income from insurance margin is the largest contributor to the growth in Asia’s earnings, up 24 per cent, reflecting our continued focus on health and protection business. At a country level, we have seen double-digit growth in seven markets, led by Hong Kong, Indonesia and Malaysia, which has more than compensated for the impact of our decision to discontinue sales of universal life products across the region.

In the US, life IFRS operating profit at £888 million was in line with the first half of 2015 (up 6 per cent on an actual exchange rate basis), reflecting the resilient performance of our franchise in an environment of market volatility and industry disruption caused by Department of Labor reforms. Despite the equity market falls sustained in the early part of the year, we have broadly maintained the level of fee income earned on separate account values, which continue to benefit from positive net flows in spite of the reduced level of new business sales in the period. As expected, lower yields in the period have impacted spread income, which decreased by 5 per cent.

UK life IFRS operating profit increased by 8 per cent to £473 million. Within this total, the contribution from new annuity business reduced from £66 million to £27 million, as we scale down our participation in the annuity market. We have taken a number of asset and liability actions in the first half of 2016 to improve the solvency position of our UK life operations and further mitigate market risk, which have generated combined profits of £140 million. Of this amount, £66 million related to profit from new longevity reinsurance transactions (2015: £61 million), with the balance of £74 million reflecting the effect of repositioning the fixed income asset portfolio and other actions. The contribution to the IFRS operating profit from ongoing with-profits and annuity in-force business was broadly consistent with the prior year at £306 million (2015: £309 million).

The increase in our IFRS operating earning levels continues to reflect the growth in the scale of our operations, driven primarily by positive business flows. We track the progress that we make in growing our life insurance business by reference to the scale of our obligations to our customers, which are referred to in the financial statements as policyholder liabilities. Each period these increase as we write new business and collect regular premiums from existing customers and decrease as we pay claims and policies mature. The overall scale of these policyholder liabilities is relevant in evaluation of our profit potential in that it reflects, for example, our ability to earn fees on the unit-linked element and sizes the risk that we carry on the insurance element, for which Prudential needs to be compensated.

Shareholder-backed policyholder liabilities and net liability flows 6

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  Actual exchange rate   Actual exchange rate
  Half year 2016 £m   Half year 2015 £m
  At 1
January 2016
Net liability flows7 Market
and other movements
At 30
June 2016
  At 1
January 2015
Net liability flows7 Market
and other movements
At 30
June 2015
Asia 27,844 1,001 4,503 33,348   26,410 834 57 27,301
US 138,913 2,855 17,387 159,155   126,746 4,351 (1,430) 129,667
UK 52,824 (1,699) 4,286 55,411   55,009 (856) 503 54,656
Total Group 219,581 2,157 26,176 247,914   208,165 4,329 (870) 211,624

Note C4: Policyholder liabilities and unallocated surplus of with-profits funds

Focusing on the business supported by shareholder capital, which generates the majority of the life profit, in the first half of 2016 net flows into our businesses were overall positive at £2.2 billion. This was driven by our US and Asian operations, as we continue to focus on both retaining our existing customers and attracting new business to drive long-term value creation. Net outflows in the UK are partly due to the impact of large investment-only corporate pension schemes transfers combined with annuity payments that are no longer offset by new business inflows following the reduction in annuity sales.

The weakening of sterling in late June contributed a total £18.3 billion positive foreign exchange movement which, together with favourable investment and other movements, led to an additional £26.2 billion increase in policyholder liabilities, with much of this increase arising at the end of the reporting period. The average total policyholder liabilities8 were 11 per cent higher, having increased from £209.9 billion in the first half of 2015 to £233.7 billion in the equivalent period this year. The 11 per cent increase in the Group’s aggregate life IFRS operating profit on an actual exchange rate basis is in line with the growth in average policyholder liabilities.

Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver 9

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  Actual exchange rate   Constant exchange rate
  Half year 2016   Half year 2015   Half year 2015
  Operating
profit
£m
Average
liability
£m
Margin
bps
  Operating
profit 
£m
Average
liability
£m
Margin
bps
  Operating
profit 
£m
Average
liability
£m
Margin
bps

* The ratio of acquisition costs is calculated as a percentage of APE sales including with-profits sales. Acquisition costs include only those relating to shareholder-backed business.

Spread income 557 80,819 138   574 72,890 157   603 75,983 159
Fee income 993 131,389 151   951 125,581 151   1,004 133,147 151
With-profits 162 114,109 28   154 106,205 29   154 107,797 29
Insurance margin 914   796       827    
Margin on revenues 990   920       933    
Expenses:                
Acquisition costs* (1,067) 3,030 (35)%   (1,095) 2,733 (40)%   (1,134) 2,826 (40)%
Administration expenses (898) 219,083 (82)   (829) 206,167 (80)   (859) 217,404 (79)
DAC adjustments 140   192       200    
Expected return on shareholder assets 112   120       118    
Longevity reinsurance and other management actions to improve solvency 140   61   61
Operating profit based on longer-term investment returns 2,043       1,844       1,907    

Note Ia: Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver

Alongside growing our overall level of life operating profit, we continue to maintain our preference for higher-quality sources of income such as insurance margin and fee income. We favour insurance margin because it is relatively insensitive to the equity and interest rate cycle, and prefer fee income to spread income because it is more capital-efficient. In line with this approach, on an actual exchange rate basis, in the first half of 2016, insurance margin has increased by 15 per cent and fee income by 4 per cent, while spread income declined by 3 per cent.

Asset management: Movements in asset management operating profit are also primarily influenced by changes in the scale of these businesses, as measured by funds managed on behalf of external institutional and retail customers and our internal life insurance operations. In the first half of 2016, the lower overall contribution to IFRS operating profit from our asset management businesses in the UK and Asia reflects the decrease in average assets under management.

Asset management external funds under management 10, 11

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  Actual exchange rate   Actual exchange rate
  Half year 2016 £m   Half year 2015 £m
  At
1 January 2016
Net flows Market
and other movements
At
30 June 2016
  At
1 January 2015
Net flows Market
and other movements
At
30 June 2015
M&G 126,405 (6,966) 10,217 129,656   137,047 (2,375) (1,272) 133,400
Eastspring Investments12 30,281 (412) 2,859 32,728   25,333 4,561 194 30,088
Total asset management 156,686 (7,378) 13,076 162,384   162,380 2,186 (1,078) 163,488
Total asset management (including MMF) 162,692 (6,722) 13,835 169,805   167,180 2,795 (1,060) 168,915

Note Ic: Analysis of asset management operating profit based on longer-term investment returns

M&G’s IFRS operating profit declined by 10 per cent to £225 million (2015: £251 million), reflecting the impact on revenues of lower assets under management as a result of the net retail business outflows experienced since the second quarter of 2015. Careful management of costs has contributed to an 8 per cent fall in expenses, which has cushioned the full impact of the decline in revenues in the first half of the year. The same dynamics have seen the cost-income ratio move up 1 percentage point to 52 per cent.

Given the continued outflows in 2016, retail assets under management at 30 June 2016 were 14 per cent lower than a year ago at £59.2 billion, which will continue to put downward pressure on revenue prospects for the remainder of 2016. In addition, as M&G’s cost base is typically higher in the second half of the year, we expect the cost-income ratio to move up towards 60 per cent for the full year.

Our Asia-based asset manager, Eastspring Investments, has also been impacted by net outflows in the first half of the year, although these have been modest considering the market volatility across the region during this period. However, taken together with positive net flows in the second half of 2015 and market movements, average external funds under management8 (excluding MMF) increased by 14 per cent, from £27.7 billion in the first half of 2015 to £31.5 billion in the equivalent period this year. A shift in the overall mix of assets away from higher-margin equity funds towards lower-margin bonds has muted the benefit of the higher asset base on overall fee revenues, which was up 1 per cent at £155 million. Control on costs has resulted in an improvement in the cost-income ratio to 56 per cent (2015: 58 per cent), driving Eastspring Investments’ operating profit 2 per cent higher to £61 million (up 5 per cent on an actual exchange rate basis).

In the US, our non-life insurance businesses collectively generated an IFRS operating loss of £12 million (2015: profit of £12 million), mainly reflecting costs relating to the closure of Curian, which is now complete.

Prudential Capital produced IFRS operating profit of £13 million in the first half of 2016. During 2015 we started to refocus activity away from revenue generation towards internal treasury services and this reprioritisation continued into 2016. As this reprioritisation is executed through this year, Prudential Capital’s contribution to operating profit will decline.

IFRS short-term fluctuations

IFRS operating profit is based on longer-term investment return assumptions. The difference between actual investment returns recorded in the income statement and the assumed longer-term returns is reported within short-term fluctuations in investment returns. In the first half of 2016 the total short-term fluctuations in investment returns relating to the life operations were negative £1,168 million, comprising positive £26 million for Asia, negative £1,440 million in the US and positive £246 million in the UK.

The Asia positive £26 million short-term fluctuations principally reflect the net value movements on shareholders’ assets and related liabilities following the fall in bond yields across the region.

In the US, Jackson provides certain guarantees on its annuity products, the value of which would typically rise when equity markets fall and long-term interest rates decline. Jackson charges annual fees for these guarantees which are in turn used to purchase downside protection in the form of options and futures to mitigate the effect of equity market falls, and swaps and swaptions to cushion the impact of drops in long-term interest rates. Under IFRS, accounting for the movement in the valuation of these derivatives, which are all fair valued, is asymmetrical to the movement in guarantee liabilities, which are not fair valued in all cases. Jackson designs its hedge programme to protect the economics of the business from large movements in investment markets and accepts the variability in accounting results. The negative short-term fluctuations of £1,440 million in the first half mainly reflect the net value movements on the guarantees and the associated derivatives of the 78 basis points fall in the 10-year US government bond yields during the period.

Jackson hedges on a macro-economic basis and an extension of its approach of seeking economic protection against declining rates has provided a further source of accounting asymmetry in the first half of 2016. Given poor value offered by traditional derivative instruments, at the start of 2016 Jackson opted to manage interest rate risk by further increasing its holding of long-dated US Treasuries, achieving an economically similar result when rates fall in a more efficient manner. At 30 June 2016 Jackson’s holding of US Treasuries totalled £6.3 billion in value (31 December 2015: £3.5 billion). The decline in interest rates observed during the first half of 2016 gave rise to unrealised gains on these US Treasuries of £627 million over the period, which provided an additional economic offset against the higher guaranteed reserves booked. Under the Group’s accounting policies, these unrealised gains were recorded within Other Comprehensive Income, rather than in the profit and loss account, giving rise to a further accounting asymmetry in Jackson’s reported profit for the period.

The UK non-operating profit of positive £246 million mainly reflects gains on bonds backing annuity capital and shareholders’ funds following the 89 basis points fall in 15-year UK gilt yields in the first half of 2016.

The negative short-term fluctuations in investment returns for other operations of £192 million (2015: positive £11 million) principally reflect unrealised value movements on financial instruments.

IFRS effective tax rates

In the first half of 2016, the effective tax rate on IFRS operating profit based on longer-term investment returns was in line with the equivalent period last year at 23 per cent. A lower benefit from non-recurring tax credits was offset by a larger overall contribution to the operating profit from Asia which attracts a lower rate of tax.

The effective tax rate on the total IFRS profit was negative 3 per cent in the first half of 2016 (2015: 24 per cent), driven by the larger negative short-term investment fluctuations in the US insurance operations, which attract tax relief at a higher rate than the rates at which profits are taxed elsewhere in the Group.

Total tax contribution

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  Half year 2016 £m   Half year 2015 £m   Full year 2015 £m
Corporation taxes Other taxes Taxes collected Total   Total   Total
Taxes paid in:                
Asia 138 50 60 248   164   446
US 53 34 254 341   461   1,040
UK 93 99 484 676   941   1,491
Other 3 23 2 28   8   27
Total tax paid 287 206 800 1,293   1,574   3,004

The Group continues to make significant tax contributions in the countries in which it operates, with £1,293 million remitted to tax authorities in the first half of 2016. This was lower than the equivalent amount of £1,574 million in the first half of 2015. This is principally due to lower corporation tax payments driven by the absence of two exceptional factors arising in 2015. In the US, a change in basis for taxing derivatives which affects the timing, but not the quantum, of tax payable accelerated tax payments into 2015 and decreased payments in 2016. In the UK, payments in 2015 reflected positive investment returns in 2014, while the adverse market conditions in late 2015 are reflected in the 2016 payments.

Corporation taxes include amounts paid, by both Group companies and the Group’s share of joint ventures, on taxable profits. In certain countries this includes policyholder investment returns on certain life insurance products, such as in the UK, and withholding tax where this is a form of corporation tax, such as in Indonesia and the Philippines. Other taxes include property taxes, withholding taxes (allocated to the jurisdiction in which the withholding tax is paid), employer payroll taxes and irrecoverable indirect taxes. Taxes collected are other taxes that Prudential remits to tax authorities that it is obliged to collect from employees, customers and third parties which include taxes on sales, and those associated with employee and annuitant payrolls.

New business performance

Life EEV new business profit2 and APE new business sales (APE sales)

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  Actual exchange rate   Constant exchange rate
  Half year 2016 £m   Half year 2015 £m Change
%
  Half year 2015 £m Change
%
  APE Sales New Business Profit   APE Sales New Business Profit APE Sales New Business Profit   APE Sales New Business Profit APE Sales New Business Profit
Asia 1,655 824   1,366 664 21 24   1,404 688 18 20
US 782 311   857 371 (9) (16)   912 394 (14) (21)
UK retail 3 593 125   393 80 51 56   393 80 51 56
Total Group excluding bulk annuities 3 3,030 1,260   2,616 1,115 16 13   2,709 1,162 12 8
UK bulk annuities   117 75 (100) (100)   117 75 (100) (100)
Total Group 3,030 1,260   2,733 1,190 11 6   2,826 1,237 7 2

Note 4: Analysis of new business contribution

Life insurance new business profit2 was up 8 per cent3 (13 per cent on an actual exchange rate basis) to £1,260 million, reflecting a strong underlying increase in contributions from Asia and the UK retail business, which has outweighed the adverse impact of lower interest rates across the Group and reduced volumes in the US. Life insurance new business APE sales increased by 12 per cent3 (16 per cent on an actual exchange rate basis) to £3,030 million led by Asia and the UK.

In Asia new business profit was 20 per cent higher at £824 million, outpacing new business APE sales in the region which increased by 18 per cent to £1,655 million (up 24 and 21 per cent respectively on an actual exchange rate basis). Our product solutions vary by market, but typically start with tailored morbidity or mortality riders and a long-term savings component, with premium payments stretching over multiple years. This strategic preference underpins the quality of our new business production, which has a high proportion of regular premiums (94 per cent of APE sales) and a significant proportion directed towards health and protection coverage (24 per cent of APE sales), which makes our business less correlated to investment markets.

APE sales in Hong Kong were up 58 per cent in the first half of 2016, with regular premiums driving growth and accounting for 94 per cent of the total. We continue to generate business from both Mainland China residents and local customers. In Indonesia, trading conditions remain challenging, and in such an environment we have retained our more cautious approach to new business sales, resulting in a decline of 33 per cent in APE sales. In Malaysia, APE sales increased by 10 per cent, with good progress in developing the Bumi sector of the market, where Takaful now accounts for 25 per cent of our overall new business sales. In Singapore, we remain focused on growing regular premium agency sales of protection products, which is driving improvements in the economics of new business written. Our decision to discontinue sales of universal life during 2015 means headline APE sales were 11 per cent lower overall. In our other Asian markets we continue to focus on positioning our businesses for long-term growth, with pleasing improvements in China in particular, where regular premium APE sales were up 59 per cent.

The 20 per cent increase in new business profit reflects the increase in APE sales volumes (up 18 per cent) and positive effects from changes in country mix and channel mix (contributing 9 percentage points to the increase), which have more than offset the overall negative impact of the downward movements in interest rates (generating a drag of 7 percentage points).

In the US, retirement markets were disrupted by the Department of Labor reforms, resulting in lower industry sales of variable annuities. Although Jackson retained market share13, total variable annuity sales including Elite Access were down 27 per cent, contributing to an overall decline in APE sales of 14 per cent. The lower variable annuity sales were partially offset by higher opportunistic institutional APE sales. Traditional variable annuities excluding Elite Access were down 22 per cent. Elite Access continues to be the undisputed leader14 in the investment-only variable annuity market. APE sales of this product were lower at £99 million (2015: £176 million), due in part to the wider disruption in the variable annuity market, as well as a demand shift from qualified to non-qualified accounts, which in the first half accounted for 69 per cent of sales. Notwithstanding this reduction, the proportion of variable annuity sales without living benefits remains significant at 28 per cent (2015: 34 per cent).

The 21 per cent decrease in Jackson’s new business profit reflected a lower level of sales (down 14 per cent), the negative impact of downward movements in interest rates (generating a drag of 10 percentage points) and improved business mix (contributing 3 percentage points to the increase). The economics on Jackson’s new business remain extremely attractive, with high internal rates of return and short payback periods.

In the UK, at a time when asset yields are declining and consumers are becoming more self-reliant, our strong customer propositions in retail risk-managed products are proving ever more popular. The smoothed balanced-fund returns and volatility control offered by our sizeable and well capitalised UK with-profits funds continue to attract record levels of new business flows. Our strategy of extending the PruFund range of investments to new product wrappers such as income drawdown, individual pensions and most recently to ISAs, has delivered a 51 per cent increase in retail APE sales to £593 million. Within this, PruFund APE sales grew by 80 per cent to £438 million, driving the total PruFund assets under management 22 per cent higher than at the end of 2015, to £20.1 billion. Despite the continued volatility in financial markets, the with-profit fund performed strongly, achieving a 5.3 per cent pre-tax investment return15 during the first half of 2016, outperforming the FTSE All-Share index total return of 2.1 per cent over the same period.

This excellent performance demonstrates our success in diversifying our product portfolio in response to regulatory change and the expanding market for flexible retirement income and pensions products. As previously signalled, our appetite for annuities has diminished following the significant increase in capital requirements under Solvency II, which has made annuities economically unattractive for Prudential. Consequently, we transacted no bulk deals in the period (2015: APE sales of £117 million and new business profit of £75 million).

Free surplus generation

Free surplus generation is the financial metric we use to measure the internal cash generation of our business operations. For life insurance operations it represents amounts maturing from the in-force business during the year, net of amounts reinvested in writing new business. For asset management it equates to post-tax IFRS profit for the period.

This metric is based on the capital regimes which apply locally in the various jurisdictions in which our life businesses operate. The introduction of Solvency II with effect from 1 January this year has altered the regime locally applied to our UK life business, so the 2016 UK life half year free surplus figures reflect this change. The 2015 UK life comparatives are unchanged as they reflect the regime that applied at that time. Solvency II does not directly impact the way capital is generated locally in the US and in our Asian life operations, so there is no change in the way free surplus is calculated for these businesses.

In the first half of 2016 underlying free surplus generation, after investment in new business, increased by 10 per cent2 to £1,609 million, even though the considerably lower interest rate environment depressed this measure by an estimated £128 million (Asia £41 million, US £70 million and UK £17 million).

Free surplus generation

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  Actual exchange rate   Constant exchange rate
  Half year 2016 £m   Half year 2015 £m Change %   Half year 2015 £m Change %
Free surplus generation 1,2              
Asia 656   569 15   581 13
US 693   708 (2)   754 (8)
UK 570   366 56   366 56
M&G 181   203 (11)   203 (11)
Prudential Capital 11   6 83   6 83
Underlying free surplus generated from in-force life business and asset management 2,111   1,852 14   1,910 11
Investment in new business (502)   (434) (16)   (449) (12)
Underlying free surplus generated 1,609   1,418 13   1,461 10
Free surplus at 30 June 2 5,763   5,304  

Note 11: Analysis of movement in free surplus

The 10 per cent2 increase in free surplus generated by our life insurance and asset management businesses to £1,609 million (up 13 per cent2 on an actual exchange rate basis) reflects our growing scale and the highly capital-generative nature of our business model. We drive this metric by targeting markets and products that have low-strain, high-return and fast payback profiles and by delivering both good service and value to improve customer retention. Our ability to generate both growth and cash is a distinctive feature of Prudential. The closing value of free surplus in our life and asset management operations was £5.8 billion2 at 30 June 2016, after financing reinvestment in new business, covering negative non-operating free surplus movements following the large falls in long-term interest rates and funding cash remittances from the business units to Group.

In Asia, growth in the in-force life portfolio, combined with post-tax asset management profits from Eastspring Investments, contributed to free surplus generation of £656 million, up 13 per cent. In the US, free surplus generation decreased by 8 per cent, mainly reflecting the negative impact of lower long-term interest rates on expected returns and lower positive experience. In the UK2, the 56 per cent increase to £570 million included a contribution of £190 million (2015: £52 million from longevity reinsurance) from the specific asset and liability management actions taken in the first half of 2016 to improve the solvency position of our UK life business and further mitigate market risk.

We invested £502 million of the free surplus generated2 during the period in writing new business (2015: £449 million, including bulk annuities) equivalent to an increase of 12 per cent.

Asia remained the primary destination of our new business investment, 9 per cent higher at £237 million, given the superior profitable growth opportunities available in that region. We continue to generate internal rates of return in the region in excess of 20 per cent, with an average payback period of four years.

In the US, new business investment increased by 19 per cent to £209 million, as a result of change in the mix of business sold, including higher institutional volumes. At just 3 per cent of new business single premium sales, Jackson’s overall strain remains low, supporting the generation of significant returns on capital. New business economics on Jackson’s new business remain extremely attractive, with business written at an overall internal rate of return in excess of 20 per cent and short payback periods averaging three years.

The new business investment in the UK2 was £56 million (2015: £57 million), albeit comparisons are distorted by the application of different capital regimes in the two periods. Investment in the first half of 2016 included a significantly higher strain for new non-profit annuities which totalled £69 million in the period (on APE sales of £29 million), compared to a £39 million strain in the same period last year (on APE sales of £139 million, including £117 million for bulks). The much increased capital intensity of new annuity business in the current interest rate environment has lowered returns significantly. Consequently, our appetite for annuity business has diminished further and we are taking steps in the second half of this year which will see us curtail retail sales.

We continue to manage cash flows across the Group with a view to achieving a balance between ensuring sufficient remittances are made to service central requirements (including paying the external dividend) and maximising value to shareholders through retention and reinvestment of capital in business opportunities.

Holding company cash16

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  Actual exchange rate
  Half year
2016 £m
  Half year
2015 £m
Net cash remitted by business units:
Asia 258   258
US 339   403
UK Life 215   201
M&G 150   151
Prudential Capital 25   25
Other UK 131   30
Net cash remitted by business units 1,118   1,068
Holding company cash at 30 June 2,546   2,094

Note IIa: Holding company cash flow

Cash remitted to the corporate centre in the first half of 2016 amounted to £1,118 million. Asia’s net remittances of £258 million were consistent with those in the first half of 2015, which included £42 million of one-off proceeds from the sale of the Japan life business. Excluding these, underlying remittances from Asia were up 19 per cent. Our disciplined approach to balancing trade-offs between growth, value and risk, enabled Jackson to make a sizeable remittance of £339 million in the first half, albeit lower than last year when investment market conditions were more benign. The remittances from UK life and M&G were broadly in line with the first half of 2015. Actions completed in the period including internal restructuring that has enabled us to centrally access resources previously held at intermediary holding and other companies contributed £131 million to the remittances total. As the restructuring is now complete, these are not expected to recur.

Cash remitted to the Group in the first half of 2016 was used to meet central costs of £199 million (2015: £168 million), pay the 2015 second interim ordinary and special dividend and finance the final up-front payment for the renewal of the distribution agreement with Standard Chartered Bank. We took advantage of the low interest rate environment to issue US$1 billion of perpetual subordinated debt at attractive rates in early June. The proceeds will be used for general business purposes and to support the withdrawal of Solvency II ‘grandfathered’ debt in due course. Reflecting these movements in the period, total holding company cash at 30 June 2016 was £2,546 million compared to £2,094 million at the end of 2015.

EEV profits

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  Actual exchange rate   Constant exchange rate
  Half year 2016 £m   Half year 2015 £m Change %   Half year 2015 £m Change %
Post-tax operating profit2              
Long-term business:              
Asia 1,215   1,072 13   1,106 10
US 694   812 (15)   863 (20)
UK 384   411 (7)   411 (7)
Long-term business post-tax operating profit 2,293   2,295   2,380 (4)
UK general insurance commission 15   14 7   14 7
Asset management business:            
M&G 181   2031 (11)   203 (11)
Prudential Capital 11   6 83   6 83
Eastspring Investments 53   50 6   52 2
US (8)   8 n/a   8 n/a
Other income and expenditure17 (282)   (298) 5   (298) 5
Post-tax operating profit based on longer-term investment returns 2,263   2,278 (1)   2,365 (4)
Short-term fluctuations in investment returns:              
Insurance operations 652   (382) n/a   (403) n/a
Other operations (163)   15 n/a   14 n/a
  489   (367) n/a   (389) n/a
Effect of changes in economic assumptions (1,345)   80 n/a   88 n/a
Other non-operating items17 (13)   124 110   124 (110)
Profit for the period attributable to shareholders 1,394   2,115 (34)   2,188 (36)

EEV earnings per share2

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  Actual exchange rate   Constant exchange rate
  Half year 2016 pence   Half year 2015 pence Change %   Half year 2015 pence Change %
Basic earnings per share based on post-tax operating profit 88.5   89.3 (1)   92.7 (5)
Basic earnings per share based on post-tax total profit 54.5   82.9 (34)   85.7 (36)

Note 3: Results analysis by business area

EEV operating profit

On an EEV basis, Group post-tax operating profit based on longer-term investment returns was 4 per cent2 lower (1 per cent on an actual exchange rate basis) at £2,263 million in the first half of 2016. Prudential adopts an active basis for setting the future return assumptions used to calculate both the Group’s EEV basis operating profit and the Group’s overall embedded value. These assumptions are, therefore, based on 30 June 2016 long-term interest rates, which for our main life operations in the US, the UK, Hong Kong, Singapore and Indonesia were between 80 and 100 basis points lower than those used at 30 June 2015. The adoption of these lower long-term rates reduced the half year 2016 EEV operating profit by an estimated £249 million. EEV operating profit would have increased by 6 per cent2, if the adverse interest rate effect is removed (up 10 per cent2 on an actual exchange rate basis). The EEV results of all three life operations have, therefore, been adversely impacted by lower interest rates, the effect of which has masked the underlying business growth and a higher contribution from experience profits and assumption changes. Despite this, the Group’s operations delivered an overall annualised return on opening embedded value of 14 per cent.

EEV operating profit includes new business profit from the Group’s life businesses, which increased by 8 per cent2,3 (13 per cent on an actual exchange rate basis) to £1,260 million, despite the adverse interest rate effect estimated at £88 million. It also includes life in-force profit of £1,033 million, which was 10 per cent2 lower, in part due to the estimated £161 million adverse interest rate effect. This is most evident in the profit from the unwind of the in-force business, which was lower at £798 million2 (2015: £915 million). Experience and assumptions changes were positive at £235 million2 (2015: £228 million), reflecting our ongoing focus on managing the in-force book for value.

In Asia, EEV life operating profit was up 10 per cent to £1,215 million, reflecting growth in new business profit of 20 per cent at £824 million. Overall in-force profit was 6 per cent lower at £391 million, after a £75 million adverse interest rate effect. In-force profit continues to benefit from favourable experience profits.

Jackson’s EEV life operating profit was down 20 per cent to £694 million, reflecting a 21 per cent decline in new business profit to £311 million and a reduction in the contribution from in-force profit of 18 per cent to £383 million. The decline in our US EEV operating profit reflected lower sales volumes, an adverse interest rate effect estimated at £91 million and a reduction in experience profits to £174 million (2015: £218 million), driven by lower spreads.

In the UK, EEV life operating profit decreased by 7 per cent2 to £384 million (2015: £411 million). The decline is due to the absence of new bulk annuities, which contributed £75 million in the comparative period, a £37 million adverse interest rate effect, offset by higher profits from retail sales and a positive contribution from actions taken to improve the solvency of the UK business.

EEV non-operating result

EEV operating profit is based on longer-term investment returns and excludes the effect of short-term volatility arising from market movements and the effect of changes from economic assumptions. These items are included in non-operating profit and were negative £869 million2 in the first half of 2016 (2015: negative £163 million on an actual exchange rate basis).

EEV short-term fluctuations

Short-term fluctuations in investment returns reflect the element of non-operating profit which relates to the difference between the actual investment returns achieved and those assumed in arriving at the reported operating profit.

Short-term fluctuations in investment returns for life operations of positive £652 million include positive £383 million for Asia, negative £237 million for our US operations and positive £506 million2 in the UK.

In Asia and the UK, positive short-term fluctuations principally reflect unrealised movements on bond holdings in the period. In the US, the short-term fluctuations of negative £237 million mainly represent the effect of lower than anticipated equity returns compared to those assumed.

Effect of changes in economic assumptions

The fall in interest rates also had a net negative impact on the overall level of future earnings that we expect to generate from our existing book of business. Once this and other changes in investment market conditions are factored into the EEV calculations they gave rise to a negative movement of £1,345 million2 in the first half of 2016 (2015: positive £80 million on an actual exchange rate basis) more than offsetting the overall positive short-term fluctuations reported in the period.

Taken together, the two non-operating result components totalling negative £869 million2 are equivalent to just over 2 per cent of the Group’s 30 June 2016 embedded value, a modest impact considering the significant falls in long-term rates in the first half of 2016 to all-time lows. This demonstrates the resilience of our life operations, which benefit from the natural offsets that exist across our large and well diversified books of life businesses globally.

2017 financial objectives

We are continuing to make good progress towards our 2017 objectives announced in December 2013.

Asia objectives

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  2012
£m18
2013
£m
2014
£m
2015
£m
Half year 2016
£m
CAGR (since 2012)
%
Objectives* 2017
Asia life and asset management IFRS operating profit              
Full year              
Reported actuals 924 1,075 1,140 1,324     >£1,858 million
Constant exchange rate 901 1,075 1,260 1,468     >15% CAGR
Constant exchange rate change % (year-on-year)   19 17 17   18
               
Half year              
Reported actuals 435 512 525 632 743    
Constant exchange rate 420 512 583 683 787    
Constant exchange rate change % (year-on-year)   22 14 17 15  
               
Asia Underlying Free Surplus Generation19              
Full year              
Reported actuals 484 573 592 673     £0.9 – £1.1 billion
Constant exchange rate 471 573 662 765      
Constant exchange rate change % (year-on-year)   22 16 16    
               
Half year              
Reported actuals 201 292 302 356 419    
Constant exchange rate 192 292 335 392 453    
Constant exchange rate change % (year-on-year)   52 15 17 16  

Group objective for cumulative period 1 January 2014 to 31 December 2017

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  Actual Objective
  1 Jan 2014 to
30 June 2016
1 Jan 2014 to
31 December 2017

* The objectives assume exchange rate at December 2013 and economic assumptions made by Prudential in calculating the EEV basis supplementary information for the half year ended 30 June 2013, and are based on regulatory and solvency regimes applicable across the Group at the time the objectives were set. The objectives assume the existing EEV, IFRS and free surplus methodology at December 2013 will be applicable over the period.

† Asia life and asset management pre-tax operating profit to grow at a compound annual rate of at least 15 per cent over the period 2012-2017.

‡ Constant exchange rates results translated using exchange rates at December 2013.

§ 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 cumulative results for UK insurance prior to 31 December 2015 reflect the Solvency I basis.

Cumulative Group underlying free surplus generation from 2014 onwards§ £7.2 billion > £10 billion

Capital position, financing and liquidity

Capital position

With effect from 1 January 2016, the Group is required to adopt Solvency II as its consolidated capital regime. This was developed by the EU in order to harmonise the various regimes previously applied across EU member states. As the regime was primarily designed with European life products in mind, it is a poor fit with Prudential’s business given the predominantly non-EU footprint of the Group. The one year value at risk nature of the Solvency II test, which has its roots in banking regulation where risk positions can be priced and readily traded, runs counter to the multi-year nature of life insurance business, where the illiquid nature of liabilities renders such potential market solutions theoretical and not grounded in established sector practices. It also means that solvency capital will be highly volatile.

While Solvency II does not fully recognise the economic capital strength of the Group, we have implemented it after receiving internal model approval from the Prudential Regulation Authority in December 2015.

The high quality and recurring nature of our operating capital generation and our disciplined approach to managing balance sheet risk have enabled us to enter the new Solvency II regime with a strong Group shareholders’ capital surplus of £9.7 billion. These factors have also provided meaningful protection against the significant adverse market-driven effects on this metric in the first half of the year. As a result the overall net reduction in the Group shareholders’ Solvency II capital was contained, with surplus estimated at £9.1 billion20,21 at 30 June 2016 (equivalent to a solvency ratio of 175 per cent).

In July 2013, Prudential plc was listed by the Financial Stability Board as one of nine companies to be designated as a Global Systemically Important Insurer, a classification that was reaffirmed in November 2015. Prudential is monitoring the development and potential impact of the related framework of policy measures and is engaging closely with the Prudential Regulation Authority on the implications of this designation.

Local statutory capital

All of our subsidiaries continue to hold appropriate capital positions on a local regulatory basis. In the UK, at 30 June 2016 the Prudential Assurance Company Limited and its subsidiaries had an estimated Solvency II shareholder surplus of £2.9 billion (equivalent to a solvency ratio of 138 per cent) and a with-profits surplus of £3.5 billion (equivalent to a solvency ratio of 176 per cent). In the US, a high start of year capital level coupled with strong operational capital formation in the first half has allowed Jackson to withstand the adverse market-driven effects and remit £339 million to Group.

Debt portfolio

The Group continues to maintain a high-quality defensively positioned debt portfolio. Shareholders’ exposure to credit is concentrated in the UK annuity portfolio and the US general account, mainly attributable to Jackson’s fixed annuity portfolio. The credit exposure is well diversified and 98 per cent of our UK portfolio and 98 per cent of our US portfolio are investment grade. During the first half of 2016 default losses were minimal and reported impairments were £32 million (2015: £3 million) across these two fixed income securities portfolios.

Financing and liquidity

Shareholders’ net core structural borrowings and ratings

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  30 June 2016 £m   30 June 2015 £m   31 December 2015 £m
  IFRS
basis
Mark to
market
value
EEV
basis
  IFRS
basis
Mark to
market
value
EEV
basis
  IFRS
basis
Mark to
market
value
EEV
basis
Shareholders’ borrowings in holding company 5,505 363 5,868   4,446 442 4,888   4,567 353 4,920
Prudential Capital 275 275   275 275   275 275
Jackson surplus notes 186 63 249   159 51 210   169 55 224
Total 5,966 426 6,392   4,880 493 5,373   5,011 408 5,419
Less: Holding company cash and short-term investments (2,546) (2,546)   (2,094) (2,094)   (2,173) (2,173)
Net core structural borrowings of shareholder-financed operations 3,420 426 3,846   2,786 493 3,279   2,838 408 3,246

Note C6.1: Core structural borrowings of shareholder-financed operations

Our financing and central liquidity position remained strong throughout the period. Our central cash resources amounted to £2.5 billion at 30 June 2016 (31 December 2015: £2.2 billion). Total core borrowings increased by £1.0 billion to £6.0 billion following the issue of US$1 billion (£738 million at 30 June 2016) 5.25 per cent tier 2 perpetual subordinated debt in June 2016 and the impact of currency movements.

In addition to its net core structural borrowings of shareholder-financed operations set out above, the Group also has access to funding via the money markets and has in place an unlimited global commercial paper programme. As at 30 June 2016, we had issued commercial paper under this programme totalling £182 million and US$2,370 million.

Prudential’s holding company currently has access to £2.6 billion of syndicated and bilateral committed revolving credit facilities, provided by 19 major international banks, expiring between 2020 and 2021. Apart from small drawdowns to test the process, these facilities have never been drawn, and there were no amounts outstanding at 30 June 2016.

Prudential manages the Group’s core debt within a target level consistent with its current debt ratings. At 30 June 2016, the gearing ratio (core debt, net of cash and short-term investments, expressed as a proportion of IFRS shareholders’ funds plus net core debt) was 19 per cent (31 December 2015: 18 per cent).

Prudential plc has debt ratings from Standard & Poor’s, Moody’s and Fitch. Prudential plc’s long-term senior debt is rated A+, A2 and A from Standard & Poor’s, Moody’s and Fitch, while short-term ratings are A-1, P-1 and F1 respectively.

The financial strength of PAC is rated AA by Standard & Poor’s, Aa3 by Moody’s and AA by Fitch.

Jackson National Life Insurance Company’s financial strength is rated AA by Standard & Poor’s, A1 by Moody’s and AA by Fitch.

Prudential Assurance Co. Singapore (Pte) Ltd.’s (Prudential Singapore) financial strength is rated AA by Standard & Poor’s.

All ratings on Prudential and its subsidiaries have been reaffirmed on stable outlook except for PAC, which was placed on negative outlook by Moody’s in June 2016 following the UK referendum on EU membership.


£14.6bn IFRS shareholders' funds

24% return on shareholders' funds


Shareholders’ funds

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  IFRS   EEV2
  2016 £m   2015 £m   2016 £m   2015 £m
  Half year   Half year Full year   Half year   Half year Full year
Profit after tax for the period 687   1,438 2,579   1,394   2,115 3,951
Exchange movements, net of related tax 806   (120) 118   2,663   (554) 244
Unrealised gains and losses on Jackson securities classified as available for sale22 1,094   (388) (629)    
Dividends (935)   (659) (974)   (935)   (659) (974)
Mark to market value movements on Jackson assets backing surplus and required capital     138   (8) (76)
Other (2)   22 50   (165)   19 53
Net increase in shareholders’ funds 1,650   293 1,144   3,095   913 3,198
Shareholders’ funds at beginning of the period 12,955   11,811 11,811   32,359   29,161 29,161
Effect of implementation of Solvency II     (473)  
Shareholders’ funds at end of the period 14,605   12,104 12,955   34,981   30,074 32,359
Shareholders’ value per share 566p   471p 504p   1,356p   1,170p 1,258p
Return on shareholders’ funds23 24%   25% 27%   14%   16% 17%

Condensed consolidated statement of changes in equity
Note 9: Reconciliation of movements in shareholders’ equity

In the first half of 2016, UK sterling weakened relative to the US dollar and various Asian currencies. With approximately 58 per cent of the Group’s IFRS net assets (78 per cent of the Group’s EEV net assets) denominated in non-sterling currencies this generated a positive foreign exchange movement on net assets in the period. In addition, the significant fall in US long-term rates between the start and the end of the reporting period produced substantial unrealised gains on the fixed income securities held by Jackson accounted through other comprehensive income.

After taking these movements together with the profit for the period and dividends paid, the Group’s IFRS shareholders’ funds at 30 June 2016 increased by 21 per cent to £14.6 billion (30 June 2015: £12.1 billion on an actual exchange rate basis).

The introduction of Solvency II at the start of 2016 changed the capital dynamics of our UK life operations which are directly impacted by this change. In overview, it permitted the inclusion of future profits in the available capital of the business but increased the statutory capital requirements. Factoring these and other consequential methodology changes in the EEV calculations of the UK life business produced a net charge of £473 million, equivalent to 5 per cent of the UK’s embedded value (just over 1 per cent of the Group’s embedded value). For our operations in Asia and the US, there is no impact on the EEV results since Solvency II does not act as the local constraint on the ability to distribute profits to the Group.

The Group’s EEV basis shareholders’ funds also increased by 16 per cent2 to £35.0 billion (30 June 2015: £30.1 billion on an actual exchange rate basis). On a per share basis the Group’s embedded value at 30 June 2016 stood at 1,356 pence, up from 1,170 pence at 30 June 2015.

Corporate transactions

Entrance into Zambia

In June 2016 we completed the acquisition of Professional Life Assurance of Zambia, increasing Prudential’s insurance business footprint in Africa to four markets. Across Ghana, Kenya, Uganda and now Zambia we are gradually laying the foundations for what we hope will become a meaningful component of the Group in the years to come. Our current focus in these businesses is on growing our distribution; at 30 June we had nearly 1,500 agents and five local bank partnerships (four exclusive) in place across these businesses.

Dividend

As in previous years, the first interim dividend for 2016 has been calculated formulaically as one-third of the prior year’s full year ordinary dividend, excluding special dividends. The Board has approved a first interim dividend for 2016 of 12.93 pence per share, which equates to an increase of 5 per cent over the 2015 first interim dividend.

The Group’s dividend policy remains unchanged. The Board will maintain focus on delivering a growing ordinary dividend, which will continue to be determined after taking into account the Group’s financial flexibility and our assessment of opportunities to generate attractive returns by investing in specific areas of business. The Board believes that in the medium term a dividend cover of around two times is appropriate.


12.93p first interim dividend

5% increase on half year 2015


Notes

  1. Free surplus generation represents ‘underlying free surplus’ based on operating movements, including the general insurance commission earned during the period and excludes market movements, foreign exchange, capital movements, shareholders’ other income and expenditure and centrally arising restructuring and Solvency II implementation costs.
  2. The half year 2016 EEV basis 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 comparative results for UK insurance reflects the Solvency I basis.
  3. Excluding UK bulk annuities as Prudential has withdrawn from this market.
  4. Comparable to 30 June 2015 on an actual exchange rate basis.
  5. Refer to note B1.1 in IFRS financial statements for the breakdown of other income and expenditure, and other non-operating items.
  6. Includes Group’s proportionate share of the liabilities and associated flows of the insurance joint ventures in Asia.
  7. Defined as movements in shareholder-backed policyholder liabilities arising from premiums (net of charges), surrenders/withdrawals, maturities and deaths.
  8. Average is calculated as opening plus closing balances for the period divided by two.
  9. For basis of preparation see note I (a) of additional financial information.
  10. Includes Group’s proportionate share in PPM South Africa and the Asia asset management joint ventures.
  11. For our asset management business 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 between those which are external to the Group and those held by the insurance business and included on the Group balance sheet. This is analysed in note II (c) of the additional financial information.
  12. Net inflows exclude Asia Money Market Fund (MMF) inflows of £656 million (2015: net inflows £609 million). External funds under management exclude Asia MMF balances of £7,421 million (2015: £5,428 million).
  13. Source: Morningstar, incl. Variable Annuity new sales data as at Q1 2016.
  14. Based on investment-only variable annuity sales since the Elite Access launch March 2012 through Q1 2016. Top competitors include Lincoln, MetLife, Prudential, AXA, Nationwide, American General (SunAmerica).
  15. Based on total return including unallocated surplus.
  16. The full holding company cash flow is disclosed in note II (a) of additional financial information.
  17. Refer to the EEV basis supplementary information – post-tax operating profit based on longer-term investment returns and post-tax summarised consolidated income statement, for the breakdown of other income and expenditure, and other non-operating items.
  18. Asia 2012 IFRS operating profit of £924 million is based on the retrospective application of new and amended accounting standards as at 31 December 2013, and excludes the 2012 one-off gain of £51 million from the sale of the Group’s holding in China Life Insurance Company of Taiwan.
  19. Underlying free surplus generation comprises underlying free surplus released from long-term business (net of investment in new business) and that generated from asset management operations. The 2012 comparative is based on the retrospective application of new and amended accounting standards and excludes the 2012 one-off gain of £51 million from the sales of the Group’s holding in China Life Insurance Company of Taiwan.
  20. Before allowing for first interim dividend.
  21. The methodology and assumptions used in calculating the Solvency II capital results are set out in note II (c) of additional financial information.
  22. Net of related changes to deferred acquisition costs and tax.
  23. Annualised operating profit after tax and non-controlling interests as percentage of opening shareholders’ funds.

Section 2

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