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C: Balance sheet notes

C1: Analysis of Group position by segment and business type

To explain the assets, liabilities and capital of the Group’s businesses more comprehensively, it is appropriate to provide analyses of the Group’s statement of financial position by operating segment and type of business.

C1.1 Group statement of financial position – analysis by segment

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    2016 £m   2015 £m
    Insurance operations Total insurance operations   Asset manage- ment operations C2.4 Unallo- cated to a segment (central opera- tions) Elimina- tion of intra- group debtors and creditors 30 Jun Group Total   30 Jun Group Total 31 Dec Group Total
By operating segment Note Asia C2.1 US C2.2 UK C2.3
Assets                          
Intangible assets attributable to shareholders:                          
Goodwill C5.1(a) 258 258   1,230 1,488   1,461 1,463
Deferred acquisition costs and other intangible assets C5.1(b) 2,319 7,081 81 9,481   19 49 9,549   7,310 8,422
Total   2,577 7,081 81 9,739   1,249 49 11,037   8,771 9,885
Intangible assets attributable to with-profits funds:                          
Goodwill in respect of acquired subsidiaries for venture fund and other investment purposes   189 189   189   184 185
Deferred acquisition costs and other intangible assets   37 8 45   45   49 50
Total   37 197 234   234   233 235
Total   2,614 7,081 278 9,973   1,249 49 11,271   9,004 10,120
Deferred tax assets C7 92 3,369 139 3,600   145 26 3,771   2,820 2,819
Other non-investment and non-cash assets note (i)   5,489 7,864 7,780 21,133   1,635 5,603 (10,864) 17,507   14,664 14,283
Investments of long-term business and other operations:                          
Investment properties   5 5 13,930 13,940   13,940   13,259 13,422
Investments in joint ventures and associates accounted for using the equity method   525 462 987   148 1,135   962 1,034
Financial investments:                          
Loans C3.4 1,278 8,504 3,616 13,398   817 14,215   12,578 12,958
Equity securities and portfolio holdings in unit trusts   22,631 104,124 49,150 175,905   106 26 176,037   155,253 157,453
Debt securities C3.3 35,519 41,143 89,114 165,776   2,587 4 168,367   142,307 147,671
Other investments   79 2,503 7,489 10,071   265 4 10,340   7,713 7,353
Deposits   912 13,184 14,096   85 14,181   11,043 12,088
Total investments   60,949 156,279 176,945 394,173   4,008 34 398,215   343,115 351,979
Assets held for sale   30 30   30   2
Cash and cash equivalents   2,010 1,056 3,445 6,511   1,693 326 8,530   8,298 7,782
Total assets C3.1 71,154 175,649 188,617 435,420   8,730 6,038 (10,864) 439,324   377,901 386,985

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    2016 £m   2015 £m
    Insurance operations Total insurance operations   Asset manage- ment operations Unallo- cated to a segment (central opera- tions) Elimina- tion of intra- group debtors and creditors 30 Jun Group Total   30 Jun Group Total 31 Dec Group Total
By operating segment Note Asia US UK

Notes

  1. The largest component of the other non-investment and non-cash assets of £17,507 million (30 June 2015: £14,664 million; 31 December 2015: £14,283 million) is the reinsurers’ share of contract liabilities of £9,470 million (30 June 2015: £7,259 million; 31 December 2015: £7,903 million). As set out in note C2.2 these amounts relate primarily to the reinsurance ceded in respect of the acquired REALIC business by the Group’s US insurance operations.
    Within other non-investment and non-cash assets are premiums receivable of £467 million (30 June 2015: £884 million; 31 December 2015: £428 million) of which 73 per cent are due within one year. The remaining 27 per cent is due after one year.
    Also included within other non-investment and non-cash assets are property, plant and equipment of £1,214 million (30 June 2015: £984 million; 31 December 2015: £1,197 million) of which £910 million (30 June 2015: £659 million; 31 December 2015: £833 million) was held by the Group’s with-profits operations, primarily by the consolidated subsidiaries for venture funds and other investment purposes of the PAC with-profits fund. The Group made additions to property, plant and equipment of £128 million (30 June 2015: £105 million; 31 December 2015: £256 million).
  2. Within other non-insurance liabilities are other creditors of £6,520 million (30 June 2015: £5,515 million; 31 December 2015: £4,876 million) of which £6,147 million (30 June 2015: £5,193 million; 31 December 2015: £4,554 million) is due within one year.
Equity and liabilities                          
Equity                          
Shareholders’ equity   4,873 5,056 6,163 16,092   2,422 (3,909) 14,605   12,104 12,955
Non-controlling interests   1 1   1   1 1
Total equity   4,874 5,056 6,163 16,093   2,422 (3,909) 14,606   12,105 12,956
Liabilities                          
Policyholder liabilities and unallocated surplus of with-profits funds:                          
Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4)   53,437 159,155 151,233 363,825   (1,315) 362,510   313,620 322,518
Unallocated surplus of with-profits funds   2,351 11,246 13,597   13,597   12,768 13,096
Total policyholder liabilities and unallocated surplus of with-profits funds C4 55,788 159,155 162,479 377,422   (1,315) 376,107   326,388 335,614
Core structural borrowings of shareholder-financed operations:                          
Subordinated debt     4,956 4,956   3,897 4,018
Other   186 186   275 549 1,010   983 993
Total C6.1 186 186   275 5,505 5,966   4,880 5,011
Operational borrowings attributable to shareholder-financed operations C6.2(a) 11 70 163 244   2,554 2,798   2,504 1,960
Borrowings attributable to with-profits operations C6.2(b) 6 1,421 1,427   1,427   1,089 1,332
Deferred tax liabilities C7 905 3,204 1,253 5,362   23 12 5,397   4,325 4,010
Other non-insurance liabilitiesnote (ii)   9,570 7,978 17,138 34,686   6,010 1,876 (9,549) 33,023   26,610 26,102
Total liabilities C3.1 66,280 170,593 182,454 419,327   6,308 9,947 (10,864) 424,718   365,796 374,029
Total equity and liabilities   71,154 175,649 188,617 435,420   8,730 6,038 (10,864) 439,324   377,901 386,985

C1.2 Group statement of financial position – analysis by business type

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    2016 £m   2015 £m
    Policyholder   Shareholder-backed business          
Note Participating funds*   Unit-linked and variable annuity Non-linked business Asset manage- ment operations Unallo- cated to a segment (central opera- tions)   Elimination of intra- group debtors and creditors 30 Jun Group Total   30 Jun Group Total 31 Dec Group Total
Assets                          
Intangible assets attributable to shareholders:                          
Goodwill C5.1(a)   258 1,230   1,488   1,461 1,463
Deferred acquisition costs and other intangible assets C5.1(b)   9,481 19 49   9,549   7,310 8,422
Total     9,739 1,249 49   11,037   8,771 9,885
Intangible assets attributable to with-profits funds:                          
In respect of acquired subsidiaries for venture fund and other investment purposes   189     189   184 185
Deferred acquisition costs and other intangible assets   45     45   49 50
Total   234     234   233 235
Total   234   9,739 1,249 49   11,271   9,004 10,120
Deferred tax assets C7 88   3,512 145 26   3,771   2,820 2,819
Other non-investment and non-cash assets   4,947   892 12,546 1,635 5,603   (8,116) 17,507   14,664 14,283
Investments of long-term business and other operations:                          
Investment properties   11,655   694 1,591   13,940   13,259 13,422
Investments in joint ventures and associates accounted for using the equity method   462   525 148   1,135   962 1,034
Financial investments:                          
Loans C3.4 2,716   10,682 817   14,215   12,578 12,958
Equity securities and portfolio holdings in unit trusts   43,195   131,405 1,305 106 26   176,037   155,253 157,453
Debt securities C3.3 67,833   10,015 87,928 2,587 4   168,367   142,307 147,671
Other investments   6,934   54 3,083 265 4   10,340   7,713 7,353
Deposits   11,289   1,078 1,729 85   14,181   11,043 12,088
Total investments   144,084   143,246 106,843 4,008 34   398,215   343,115 351,979
Assets held for sale   30     30   2
Cash and cash equivalents   2,499   1,082 2,930 1,693 326   8,530   8,298 7,782
Total assets C3.1 151,882   145,220 135,570 8,730 6,038   (8,116) 439,324   377,901 386,985

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    2016 £m   2015 £m
    Policyholder   Shareholder-backed business          
Note Participating funds*   Unit-linked and variable annuity Non-linked business Asset manage- ment operations Unallo- cated to a segment (central opera- tions)   Elimination of intra- group debtors and creditors 30 Jun Group Total   30 Jun Group Total 31 Dec Group Total

* Participating funds business in the table above is presented after the elimination on consolidation of the balances relating to an intra-group reinsurance contract entered into during the period between the UK with-profits and Asia with-profits operations. In the segmental analysis presented in note C1.1, the balances are presented before elimination in the individual insurance operations segment, with the adjustment presented separately under intra-group eliminations.

Equity and liabilities                          
Equity                          
Shareholders’ equity     16,092 2,422 (3,909)   14,605   12,104 12,955
Non-controlling interests     1   1   1 1
Total equity     16,093 2,422 (3,909)   14,606   12,105 12,956
Liabilities                          
Policyholder liabilities and unallocated surplus of with-profits funds:                          
Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4)   120,311   141,157 101,042   362,510   313,620 322,518
Unallocated surplus of with-profits funds   13,597     13,597   12,768 13,096
Total policyholder liabilities and unallocated surplus of with-profits funds C4 133,908   141,157 101,042   376,107   326,388 335,614
Core structural borrowings of shareholder-financed operations:                          
Subordinated debt     4,956   4,956   3,897 4,018
Other     186 275 549   1,010   983 993
Total C6.1   186 275 5,505   5,966   4,880 5,011
Operational borrowings attributable to shareholder-financed operations C6.2(a)   11 233 2,554   2,798   2,504 1,960
Borrowings attributable to with-profits operations C6.2(b) 1,427     1,427   1,089 1,332
Deferred tax liabilities C7 1,559   30 3,773 23 12   5,397   4,325 4,010
Other non-insurance liabilities   14,988   4,022 14,243 6,010 1,876   (8,116) 33,023   26,610 26,102
Total liabilities C3.1 151,882   145,220 119,477 6,308 9,947   (8,116) 424,718   365,796 374,029
Total equity and liabilities   151,882   145,220 135,570 8,730 6,038   (8,116) 439,324   377,901 386,985

C2: Analysis of segment position by business type

To show the statement of financial position by reference to the differing degrees of policyholder and shareholder economic interest of the different types of business, the analysis below is structured to show the assets and liabilities of each segment by business type.

C2.1 Asia insurance operations

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    2016 £m   2015 £m
  Note With-profits business
note
Unit-linked assets and liabilities Other business 30 Jun Total   30 Jun Total 31 Dec Total

Note

The statement of financial position for with-profits business comprises the with-profits assets and liabilities of the Hong Kong, Malaysia and Singapore operations. Assets and liabilities of other participating businesses are included in the column for ‘Other business’.

Assets                
Intangible assets attributable to shareholders:                
Goodwill   258 258   231 233
Deferred acquisition costs and other intangible assets   2,319 2,319   1,918 2,103
Total   2,577 2,577   2,149 2,336
Intangible assets attributable to with-profits funds:                
Deferred acquisition costs and other intangible assets   37 37   44 42
Deferred tax assets   92 92   95 66
Other non-investment and non-cash assets   2,756 325 2,408 5,489   3,367 3,621
Investments of long-term business and other operations:                
Investment properties   5 5   5 5
Investments in joint ventures and associates accounted for using the equity method   525 525   415 475
Financial investments:                
Loans C3.4 652 626 1,278   1,009 1,084
Equity securities and portfolio holdings in unit trusts   8,898 12,698 1,035 22,631   20,190 18,532
Debt securities C3.3 20,578 3,427 11,514 35,519   24,366 28,292
Other investments   41 20 18 79   71 57
Deposits   169 284 459 912   696 773
Total investments   30,338 16,429 14,182 60,949   46,752 49,218
Cash and cash equivalents 785 360 865 2,010   1,672 2,064
Total assets 33,916 17,114 20,124 71,154   54,079 57,347
Equity and liabilities                
Equity                
Shareholders’ equity   4,873 4,873   3,620 3,956
Non-controlling interests   1 1   1 1
Total equity   4,874 4,874   3,621 3,957
Liabilities                
Policyholder liabilities and unallocated surplus of with-profits funds:                
Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4)   25,804 15,705 11,928 53,437   40,832 42,516
Unallocated surplus of with-profits funds   2,351 2,351   2,127 2,553
Total C4.1(b) 28,155 15,705 11,928 55,788   42,959 45,069
Operational borrowings attributable to shareholder-financed operations   7 4 11  
Borrowings attributable to with-profits operations   6 6  
Deferred tax liabilities   584 30 291 905   760 734
Other non-insurance liabilities   5,171 1,372 3,027 9,570   6,739 7,587
Total liabilities   33,916 17,114 15,250 66,280   50,458 53,390
Total equity and liabilities   33,916 17,114 20,124 71,154   54,079 57,347

C2.2 US insurance operations

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    2016 £m   2015 £m
Note Variable annuity separate account assets and liabilities
note (i)
Fixed annuity, GIC and other business
note (i)
30 Jun
Total
  30 Jun
Total
31 Dec
Total

Notes

  1. These amounts are for separate account assets and liabilities for all variable annuity products comprising those with and without guarantees. Assets and liabilities attaching to variable annuity business that are not held in the separate account, eg in respect of guarantees, are shown within other business.
  2. Other investments comprise:

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

    * After taking account of the derivative liabilities of £421 million (30 June 2015: £258 million; 31 December 2015: £249 million), which are included in other non-insurance liabilities, the derivative position for US operations is a net asset of £1,187 million (30 June 2015: net asset of £507 million; 31 December 2015: net asset of £656 million).

    † Partnerships in investment pools and other comprise primarily investments in limited partnerships. These include interests in the PPM America Private Equity Fund and diversified investments in other partnerships by independent money managers that generally invest in various equities and fixed income loans and securities.

    Derivative assets* 1,608   765 905
    Partnerships in investment pools and other 895   750 810
      2,503   1,515 1,715
  3. Equity securities and portfolio holdings in unit trusts include investments in mutual funds, the majority of which are equity-based.
  4. Included within other non-investment and non-cash assets of £7,864 million (30 June 2015: £6,562 million; 31 December 2015: £7,205 million) were balances of £6,859 million (30 June 2015: £5,817 million; 31 December 2015: £6,211 million) for reinsurers’ share of insurance contract liabilities. Of the £6,859 million as at 30 June 2016, £5,870 million (30 June 2015: £5,057 million; 31 December 2015: £5,388 million) related to the reinsurance ceded in respect of the acquired REALIC business. Jackson holds collateral for certain of these reinsurance arrangements with a corresponding funds withheld liability. As of 30 June 2016, the funds withheld liability of £2,616 million (30 June 2015: £2,204 million; 31 December 2015: £2,347 million) was recorded within other non-insurance liabilities.
  5. Changes in shareholders’ equity

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      2016 £m   2015 £m
    Half year   Half year Full year
    Operating profit based on longer-term investment returns B1.1 888   834 1,691
    Short-term fluctuations in investment returns B1.2 (1,440)   228 (424)
    Amortisation of acquisition accounting adjustments arising on the purchase of REALIC (31)   (35) (68)
    Profit before shareholder tax (583)   1,027 1,199
    Tax B5 270   (266) (236)
    Profit for the period (313)   761 963

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      2016 £m   2015 £m
      Half year   Half year Full year
    Profit for the period (as above) (313)   761 963
    Items recognised in other comprehensive income:        
    Exchange movements 445   (34) 230
    Unrealised valuation movements on securities classified as available-for-sale:        
    Unrealised holding gains (losses) arising during the period 2,023   (661) (1,256)
    Add back net losses (deduct net gains) included in the income statement on disposal and impairment 95   (101) (49)
    Total unrealised valuation movements 2,118   (762) (1,305)
    Related amortisation of deferred acquisition costs C5.1(b) (435)   165 337
    Related tax (589)   209 339
    Total other comprehensive income (loss) 1,539   (422) (399)
    Total comprehensive income for the period 1,226   339 564
    Dividends, interest payments to central companies and other movements (324)   (402) (477)
    Net increase (decrease) in equity 902   (63) 87
    Shareholders’ equity at beginning of period 4,154   4,067 4,067
    Shareholders’ equity at end of period 5,056   4,004 4,154
Assets              
Intangible assets attributable to shareholders:              
Deferred acquisition costs and other intangibles   7,081 7,081   5,240 6,168
Total   7,081 7,081   5,240 6,168
Deferred tax assets   3,369 3,369   2,389 2,448
Other non-investment and non-cash assetsnote (iv)   7,864 7,864   6,562 7,205
Investments of long-term business and other operations:              
Investment properties   5 5   19 5
Financial investments:              
Loans C3.4 8,504 8,504   6,798 7,418
Equity securities and portfolio holdings in unit trustsnote (iii)   103,904 220 104,124   86,283 91,216
Debt securities C3.3 41,143 41,143   32,117 34,071
Other investmentsnote (ii)   2,503 2,503   1,515 1,715
Total investments   103,904 52,375 156,279   126,732 134,425
Cash and cash equivalents   1,056 1,056   713 1,405
Total assets   103,904 71,745 175,649   141,636 151,651
Equity and liabilities              
Equity              
Shareholders’ equitynote (v)   5,056 5,056   4,004 4,154
Total equity   5,056 5,056   4,004 4,154
Liabilities              
Policyholder liabilities:              
Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4)   103,904 55,251 159,155   129,667 138,913
Total C4.1 (c) 103,904 55,251 159,155   129,667 138,913
Core structural borrowings of shareholder-financed operations   186 186   159 169
Operational borrowings attributable to shareholder-financed operations   70 70   221 66
Deferred tax liabilities   3,204 3,204   2,309 2,086
Other non-insurance liabilities   7,978 7,978   5,276 6,263
Total liabilities   103,904 66,689 170,593   137,632 147,497
Total equity and liabilities   103,904 71,745 175,649   141,636 151,651

C2.3 UK insurance operations

Of the total investments of £177 billion in UK insurance operations, £114 billion of investments are held by Scottish Amicable Insurance Fund and the PAC with-profits sub-fund. Shareholders are exposed only indirectly to value movements on these assets.

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    2016 £m   2015 £m
            Other funds and subsidiaries        
By operating segment Note Scottish Amicable Insurance Fund
note (ii)
  PAC with-profits sub-fund
note (i)
  Unit-linked assets and liabilities Annuity and other long-term business Total   30 Jun Total   30 Jun Total 31 Dec Total
Assets                          
Intangible assets attributable to shareholders:                          
Deferred acquisition costs and other intangible assets       81 81   81   85 83
Total       81 81   81   85 83
Intangible assets attributable to with-profits funds:                          
In respect of acquired subsidiaries for venture fund and other investment purposes     189     189   184 185
Deferred acquisition costs     8     8   5 8
Total     197     197   189 193
Total     197   81 81   278   274 276
Deferred tax assets     88   51 51   139   140 132
Other non-investment and non-cash assets   179   4,760   567 2,274 2,841   7,780   8,161 7,209
Investments of long-term business and other operations:                          
Investment properties   346   11,309   694 1,581 2,275   13,930   13,235 13,412
Investments in joint ventures and associates accounted for using the equity method (principally property fund joint ventures)     462     462   433 434
Financial investments:                          
Loans C3.4 55   2,009   1,552 1,552   3,616   3,845 3,571
Equity securities and portfolio holdings in unit trusts   2,614   31,683   14,803 50 14,853   49,150   48,662 47,593
Debt securities C3.3 2,127   45,128   6,588 35,271 41,859   89,114   83,876 83,101
Other investmentsnote (iii)   300   6,593   34 562 596   7,489   6,006 5,486
Deposits   517   10,603   794 1,270 2,064   13,184   10,295 11,226
Total investments   5,959   107,787   22,913 40,286 63,199   176,945   166,352 164,823
Properties held for sale     30     30   2
Cash and cash equivalents   144   1,570   722 1,009 1,731   3,445   3,673 2,880
Total assets   6,282   114,432   24,202 43,701 67,903   188,617   178,600 175,322

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    2016 £m   2015 £m
            Other funds and subsidiaries        
By operating segment Note Scottish Amicable Insurance Fund
note (ii)
  PAC with-profits sub-fund
note (i)
  Unit-linked assets and liabilities Annuity and other long-term business Total   30 Jun Total   30 Jun Total 31 Dec Total

Notes

  1. The PAC with-profits sub-fund (WPSF) mainly contains with-profits business but it also contains some non-profit business (unit-linked, term assurances and annuities). Included in the PAC with-profits fund is £11.3 billion (30 June 2015: £11.3 billion; 31 December 2015: £10.8 billion) of non-profit annuities liabilities. The WPSF’s profits are apportioned 90 per cent to its policyholders and 10 per cent to shareholders as surplus for distribution is determined via the annual actuarial valuation. For the purposes of this table and subsequent explanation, references to the WPSF also include, for convenience, the amounts attaching to the Defined Charges Participating Sub-fund which comprises 4 per cent of the total assets of the WPSF and includes the with-profits annuity business transferred to Prudential from the Equitable Life Assurance Society on 1 December 2007 (with assets of approximately £1.7 billion). Profits to shareholders on this with-profits annuity business emerge on a ‘charges less expenses’ basis and policyholders are entitled to 100 per cent of the investment earnings.
  2. The fund is solely for the benefit of policyholders of SAIF. Shareholders have no interest in the profits of this fund although they are entitled to asset management fees on this business. SAIF is a separate sub-fund within the PAC long-term business fund.
  3. Other investments comprise:

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

    * After including derivative liabilities of £3,736 million (30 June 2015: £841 million; 31 December 2015: £2,125 million), which are also included in the statement of financial position, the overall derivative position was a net liability of £173 million (30 June 2015: net asset of £1,714 million; 31 December 2015: net liability of £195 million).

    † Partnerships in investment pools and other comprise mainly investments held by the PAC with-profits fund. These investments are primarily investments in limited partnerships and additionally, investments in property funds.

    Derivative assets* 3,563   2,555 1,930
    Partnerships in investment pools and other 3,926   3,451 3,556
      7,489   6,006 5,486
Equity and liabilities                          
Equity                          
Shareholders’ equity       6,163 6,163   6,163   3,972 5,140
Total equity       6,163 6,163   6,163   3,972 5,140
Liabilities                          
Policyholder liabilities and unallocated surplus of with-profits funds:                          
Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4)   5,906   89,916   21,548 33,863 55,411   151,233   144,431 142,350
Unallocated surplus of with-profits funds (reflecting application of ‘realistic’ basis provisions for UK regulated with-profits funds)     11,246     11,246   10,641 10,543
Total C4.1(d) 5,906   101,162   21,548 33,863 55,411   162,479   155,072 152,893
Operational borrowings attributable to shareholder-financed operations       4 159 163   163   96 179
Borrowings attributable to with-profits funds   12   1,409     1,421   1,089 1,332
Deferred tax liabilities   25   950   278 278   1,253   1,226 1,162
Other non-insurance liabilities   339   10,911   2,650 3,238 5,888   17,138   17,145 14,616
Total liabilities   6,282   114,432   24,202 37,538 61,740   182,454   174,628 170,182
Total equity and liabilities   6,282   114,432   24,202 43,701 67,903   188,617   178,600 175,322

C2.4 Asset management operations

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    2016 £m   2015 £m
  Note M&G Prudential Capital US Eastspring Investments 30 Jun Total   30 Jun Total 31 Dec Total

Notes

  1. Intra-group debt represented by operational borrowings at Group level, which are in respect of Prudential Capital’s short-term fixed income security programme and comprise:

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      2016 £m   2015 £m
    30 Jun   30 Jun 31 Dec
    Commercial paper 1,956   1,577 1,107
    Medium Term Notes 598   599 598
    Total intra-group debt represented by operational borrowings at Group level 2,554   2,176 1,705
  2. Other non-insurance liabilities consist primarily of intra-group balances, derivative liabilities and other creditors.
Assets                  
Intangible assets:                  
Goodwill   1,153 16 61 1,230   1,230 1,230
Deferred acquisition costs and other intangible assets   13 4 2 19   19 21
Total   1,166 20 63 1,249   1,249 1,251
Other non-investment and non-cash assets   905 536 263 76 1,780   2,292 1,644
Investments in joint ventures and associates accounted for using the equity method   33 115 148   114 125
Financial investments:                  
Loans C3.4 817 817   926 885
Equity securities and portfolio holdings in unit trusts   89 17 106   89 85
Debt securities C3.3 2,587 2,587   1,948 2,204
Other investments   19 242 4 265   118 94
Deposits   36 49 85   52 89
Total investments   141 3,646 40 181 4,008   3,247 3,482
Cash and cash equivalents   330 1,145 84 134 1,693   1,390 1,054
Total assets   2,542 5,327 407 454 8,730   8,178 7,431
Equity and liabilities                  
Equity                  
Shareholders’ equity   1,838 31 201 352 2,422   2,172 2,332
Total equity   1,838 31 201 352 2,422   2,172 2,332
Liabilities                  
Core structural borrowing of shareholder-financed operations   275 275   275 275
Operational borrowing attributable to shareholder-financed operations     11 10
Intra-group debt represented by operational borrowings at Group levelnote (i)   2,554 2,554   2,176 1,705
Other non-insurance liabilitiesnote (ii)   704 2,467 206 102 3,479   3,544 3,109
Total liabilities   704 5,296 206 102 6,308   6,006 5,099
Total equity and liabilities   2,542 5,327 407 454 8,730   8,178 7,431

C3: Assets and liabilities – classification and measurement

C3.1 Group assets and liabilities – classification

The classification of the Group’s assets and liabilities, and its corresponding accounting carrying values reflect the requirements of IFRS. For financial investments the basis of valuation reflects the Group’s application of IAS 39 ‘Financial Instruments: Recognition and Measurement’ as described further below. Where assets and liabilities have been valued at fair value or measured on a different basis but fair value is disclosed, the Group has followed the principles under IFRS 13 ‘Fair value measurement’. The basis applied is summarised below:

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  30 Jun 2016 £m
  At fair value
 
Cost/ amortised cost/IFRS 4 basis value
note (i)
Total carrying value Fair value, where applicable
  Through profit or loss Available-
for-sale
     
Assets          
Intangible assets attributable to shareholders:          
Goodwill 1,488 1,488  
Deferred acquisition costs and other intangible assets 9,549 9,549  
Total 11,037 11,037  
Intangible assets attributable to with-profits funds:          
In respect of acquired subsidiaries for venture fund and other investment purposes 189 189  
Deferred acquisition costs and other intangible assets 45 45  
Total 234 234  
Total intangible assets 11,271 11,271  
Other non-investment and non-cash assets:          
Property, plant and equipment 1,214 1,214  
Reinsurers’ share of insurance contract liabilities 9,470 9,470  
Deferred tax assets 3,771 3,771  
Current tax recoverable 554 554  
Accrued investment income 2,764 2,764 2,764
Other debtors 3,505 3,505 3,505
Total 21,278 21,278  
Investments of long-term business and other operations:note (ii)          
Investment properties 13,940 13,940 13,940
Investments accounted for using the equity method 1,135 1,135  
Loans 2,707 11,508 14,215 15,018
Equity securities and portfolio holdings in unit trusts 176,037 176,037 176,037
Debt securities 127,322 41,045 168,367 168,367
Other investments 10,340 10,340 10,340
Deposits 14,181 14,181 14,181
Total investments 330,346 41,045 26,824 398,215  
Assets held for sale 30 30 30
Cash and cash equivalents 8,530 8,530 8,530
Total assets 330,376 41,045 67,903 439,324  

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  30 Jun 2016 £m
  At fair value
 
Cost/ amortised cost/IFRS 4 basis value
note (i)
Total carrying value Fair value, where applicable
  Through profit or loss Available-
for-sale
     
Liabilities          
Policyholder liabilities and unallocated surplus of with-profits funds:          
Insurance contract liabilities 296,873 296,873  
Investment contract liabilities with discretionary participation featuresnote (iii) 46,286 46,286  
Investment contract liabilities without discretionary participation features 16,178 3,173 19,351 19,421
Unallocated surplus of with-profits funds 13,597 13,597  
Total 16,178 359,929 376,107  
Core structural borrowings of shareholder-financed operations 5,966 5,966 6,392
Other borrowings:          
Operational borrowings attributable to shareholder-financed operations 2,798 2,798 2,798
Borrowings attributable to with-profits operations 1,427 1,427 1,430
Other non-insurance liabilities:          
Obligations under funding, securities lending and sale and repurchase agreements 4,963 4,963 5,006
Net asset value attributable to unit holders of consolidated unit trusts and similar funds 8,770 8,770 8,770
Deferred tax liabilities 5,397 5,397  
Current tax liabilities 566 566  
Accruals and deferred income 912 912  
Other creditors 375 6,145 6,520 6,520
Provisions 467 467  
Derivative liabilities 5,342 5,342 5,342
Other liabilities 2,616 2,867 5,483 5,483
Total 17,103 21,317 38,420  
Total liabilities 33,281 391,437 424,718  

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  30 Jun 2015 £m
  At fair value
 
Cost/ amortised cost/IFRS 4 basis value
note (i)
Total carrying value Fair value, where applicable
  Through profit or loss Available-
for-sale
     
Assets          
Intangible assets attributable to shareholders:          
Goodwill 1,461 1,461  
Deferred acquisition costs and other intangible assets 7,310 7,310  
Total 8,771 8,771  
Intangible assets attributable to with-profits funds:          
In respect of acquired subsidiaries for venture fund and other investment purposes 184 184  
Deferred acquisition costs and other intangible assets 49 49  
Total 233 233  
Total intangible assets 9,004 9,004  
Other non-investment and non-cash assets:          
Property, plant and equipment 984 984  
Reinsurers’ share of insurance contract liabilities 7,259 7,259  
Deferred tax assets 2,820 2,820  
Current tax recoverable 220 220  
Accrued investment income 2,575 2,575 2,575
Other debtors 3,626 3,626 3,626
Total 17,484 17,484  
Investments of long-term business and other operations:note (ii)          
Investment properties 13,259 13,259 13,259
Investments accounted for using the equity method 962 962  
Loans 2,306 10,272 12,578 13,189
Equity securities and portfolio holdings in unit trusts 155,253 155,253 155,253
Debt securities 110,273 32,034 142,307 142,307
Other investments 7,713 7,713 7,713
Deposits 11,043 11,043 11,043
Total investments 288,804 32,034 22,277 343,115  
Cash and cash equivalents 8,298 8,298 8,298
Total assets 288,804 32,034 57,063 377,901  

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  30 Jun 2015 £m
  At fair value
 
Cost/ amortised cost/IFRS 4 basis value
note (i)
Total carrying value Fair value, where applicable
  Through profit or loss Available-
for-sale
     
Liabilities          
Policyholder liabilities and unallocated surplus of with-profits funds:          
Insurance contract liabilities 254,417 254,417  
Investment contract liabilities with discretionary participation featuresnote (iii) 39,795 39,795  
Investment contract liabilities without discretionary participation features 16,741 2,667 19,408 19,426
Unallocated surplus of with-profits funds 12,768 12,768  
Total 16,741 309,647 326,388  
Core structural borrowings of shareholder-financed operations 4,880 4,880 5,373
Other borrowings:          
Operational borrowings attributable to shareholder-financed operations 2,504 2,504 2,504
Borrowings attributable to with-profits operations 1,089 1,089 1,102
Other non-insurance liabilities:          
Obligations under funding, securities lending and sale and repurchase agreements 3,296 3,296 3,305
Net asset value attributable to unit holders of consolidated unit trusts and similar funds 10,007 10,007 10,007
Deferred tax liabilities 4,325 4,325  
Current tax liabilities 393 393  
Accruals and deferred income 750 750  
Other creditors 322 5,193 5,515 5,515
Provisions 546 546  
Derivative liabilities 1,758 1,758 1,758
Other liabilities 2,204 2,141 4,345 4,345
Total 14,291 16,644 30,935  
Total liabilities 31,032 334,764 365,796  

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  31 Dec 2015 £m
  At fair value
 
Cost/ amortised cost/IFRS 4 basis value
note (i)
Total carrying value Fair value, where applicable
  Through profit or loss Available-
for-sale
     
Assets          
Intangible assets attributable to shareholders:          
Goodwill 1,463 1,463  
Deferred acquisition costs and other intangible assets 8,422 8,422  
Total 9,885 9,885  
Intangible assets attributable to with-profits funds:          
In respect of acquired subsidiaries for venture fund and other investment purposes 185 185  
Deferred acquisition costs and other intangible assets 50 50  
Total 235 235  
Total intangible assets 10,120 10,120  
Other non-investment and non-cash assets:          
Property, plant and equipment 1,197 1,197  
Reinsurers’ share of insurance contract liabilities 7,903 7,903  
Deferred tax assets 2,819 2,819  
Current tax recoverable 477 477  
Accrued investment income 2,751 2,751 2,751
Other debtors 1,955 1,955 1,955
Total 17,102 17,102  
Investments of long-term business and other operations:note (ii)          
Investment properties 13,422 13,422 13,422
Investments accounted for using the equity method 1,034 1,034  
Loans 2,438 10,520 12,958 13,482
Equity securities and portfolio holdings in unit trusts 157,453 157,453 157,453
Debt securities 113,687 33,984 147,671 147,671
Other investments 7,353 7,353 7,353
Deposits 12,088 12,088 12,088
Total investments 294,353 33,984 23,642 351,979  
Assets held for sale 2 2 2
Cash and cash equivalents 7,782 7,782 7,782
Total assets 294,355 33,984 58,646 386,985  

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  31 Dec 2015 £m
  At fair value
 
Cost/ amortised cost/IFRS 4 basis value
note (i)
Total carrying value Fair value, where applicable
  Through profit or loss Available-
for-sale
     

Notes

  1. Assets carried at cost or amortised cost are subject to impairment testing where appropriate under IFRS requirements. This category also includes assets which are valued by reference to specific IFRS standards such as reinsurers’ share of insurance contract liabilities, deferred tax assets and investments accounted for under the equity method.
  2. Realised gains and losses on the Group’s investments for half year 2016 recognised in the income statement amounted to a net loss of £1.2 billion (30 June 2015: net gain of £1.8 billion; 31 December 2015: net gain of £3.0 billion).
  3. The carrying value of investment contracts with discretionary participation features is determined on an IFRS 4 basis. It is impractical to determine the fair value of these contracts due to the lack of a reliable basis on which to measure the participation features.
Liabilities          
Policyholder liabilities and unallocated surplus of with-profits funds:          
Insurance contract liabilities 260,622 260,622  
Investment contract liabilities with discretionary participation featuresnote (iii) 42,959 42,959  
Investment contract liabilities without discretionary participation features 16,022 2,784 18,806 18,842
Unallocated surplus of with-profits funds 13,227 13,227  
Total 16,022 319,592 335,614  
Core structural borrowings of shareholder-financed operations 5,011 5,011 5,419
Other borrowings:          
Operational borrowings attributable to shareholder-financed operations 1,960 1,960 1,960
Borrowings attributable to with-profits operations 1,332 1,332 1,344
Other non-insurance liabilities:          
Obligations under funding, securities lending and sale and repurchase agreements 3,765 3,765 3,775
Net asset value attributable to unit holders of consolidated unit trusts and similar funds 7,873 7,873 7,873
Deferred tax liabilities 4,010 4,010  
Current tax liabilities 325 325  
Accruals and deferred income 952 952  
Other creditors 322 4,554 4,876 4,876
Provisions 604 604  
Derivative liabilities 3,119 3,119 3,119
Other liabilities 2,347 2,241 4,588 4,588
Total 13,661 16,451 30,112  
Total liabilities 29,683 344,346 374,029  

C3.2 Group assets and liabilities – measurement

a Determination of fair value

The fair values of the assets and liabilities of the Group have been determined on the following bases.

The fair values of the financial instruments for which fair valuation is required under IFRS are determined by the use of current market bid prices for exchange-quoted investments, or by using quotations from independent third parties, such as brokers and pricing services or by using appropriate valuation techniques.

The estimated fair value of derivative financial instruments reflects the estimated amount the Group would receive or pay in an arm’s length transaction. This amount is determined using quoted prices if exchange listed, quotations from independent third parties or valued internally using standard market practices.

The loans and receivables have been shown net of provisions for impairment. The fair value of loans has been estimated from discounted cash flows expected to be received. The rate of discount used is the market rate of interest where applicable.

The fair value of investment properties is based on market values as assessed by professionally qualified external valuers or by the Group’s qualified surveyors.

The fair value of the subordinated and senior debt issued by the parent company is determined using the quoted prices from independent third parties.

The fair value of financial liabilities (other than derivative financial instruments) is determined using discounted cash flows of the amounts expected to be paid.

b Fair value hierarchy of financial instruments measured at fair value on recurring basis

The table below shows the financial instruments carried at fair value analysed by level of the IFRS 13 ‘Fair Value Measurement’ defined fair value hierarchy. This hierarchy is based on the inputs to the fair value measurement and reflects the lowest level input that is significant to that measurement.

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  30 Jun 2016 £m
  Level 1 Level 2 Level 3  
  Quoted prices (unadjusted) in active markets Valuation based on significant observable market inputs Valuation based on significant unobservable market inputs Total

* Loans in the table above are those classified as fair value through profit and loss in note C3.1.

Analysis of financial investments, net of derivative liabilities by business type        
With-profits        
Equity securities and portfolio holdings in unit trusts 38,596 3,969 630 43,195
Debt securities 24,430 42,741 662 67,833
Other investments (including derivative assets) 103 3,157 3,674 6,934
Derivative liabilities (192) (2,536) (2,728)
Total financial investments, net of derivative liabilities 62,937 47,331 4,966 115,234
Percentage of total 55% 41% 4% 100%
Unit-linked and variable annuity separate account        
Equity securities and portfolio holdings in unit trusts 130,977 401 27 131,405
Debt securities 4,956 5,059 10,015
Other investments (including derivative assets) 11 38 5 54
Derivative liabilities (19) (51) (70)
Total financial investments, net of derivative liabilities 135,925 5,447 32 141,404
Percentage of total 96% 4% 0% 100%
Non-linked shareholder-backed        
Loans 259 2,448 2,707
Equity securities and portfolio holdings in unit trusts 1,402 1 34 1,437
Debt securities 23,379 66,823 317 90,519
Other investments (including derivative assets) 2,369 983 3,352
Derivative liabilities (2,064) (480) (2,544)
Total financial investments, net of derivative liabilities 24,781 67,388 3,302 95,471
Percentage of total 26% 71% 3% 100%
Group total analysis, including other financial liabilities held at fair value        
Group total        
Loans* 259 2,448 2,707
Equity securities and portfolio holdings in unit trusts 170,975 4,371 691 176,037
Debt securities 52,765 114,623 979 168,367
Other investments (including derivative assets) 114 5,564 4,662 10,340
Derivative liabilities (211) (4,651) (480) (5,342)
Total financial investments, net of derivative liabilities 223,643 120,166 8,300 352,109
Investment contracts liabilities without discretionary participation features held at fair value (16,178) (16,178)
Net asset value attributable to unit holders of consolidated unit trusts and similar funds (5,275) (2,427) (1,068) (8,770)
Other financial liabilities held at fair value (375) (2,616) (2,991)
Total financial instruments at fair value 218,368 101,186 4,616 324,170
Percentage of total 67% 31% 2% 100%

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  30 Jun 2015 £m
  Level 1 Level 2 Level 3  
  Quoted prices (unadjusted) in active markets Valuation based on significant observable market inputs Valuation based on significant unobservable market inputs Total

* Loans in the table above are those classified as fair value through profit and loss in note C3.1.

Analysis of financial investments, net of derivative liabilities by business type        
With-profits        
Equity securities and portfolio holdings in unit trusts 36,488 2,650 623 39,761
Debt securities 16,988 41,635 361 58,984
Other investments (including derivative assets) 26 2,255 3,269 5,550
Derivative liabilities (29) (565) (594)
Total financial investments, net of derivative liabilities 53,473 45,975 4,253 103,701
Percentage of total 52% 44% 4% 100%
Unit-linked and variable annuity separate account        
Equity securities and portfolio holdings in unit trusts 113,797 344 9 114,150
Debt securities 4,300 5,558 9,858
Other investments (including derivative assets) 1 70 4 75
Derivative liabilities (18) (18)
Total financial investments, net of derivative liabilities 118,098 5,954 13 124,065
Percentage of total 95% 5% 0% 100%
Non-linked shareholder-backed        
Loans 267 2,039 2,306
Equity securities and portfolio holdings in unit trusts 1,182 125 35 1,342
Debt securities 15,170 58,099 196 73,465
Other investments (including derivative assets) 1,310 778 2,088
Derivative liabilities (810) (336) (1,146)
Total financial investments, net of derivative liabilities 16,352 58,991 2,712 78,055
Percentage of total 21% 76% 3% 100%
Group total analysis, including other financial liabilities held at fair value        
Group total        
Loans* 267 2,039 2,306
Equity securities and portfolio holdings in unit trusts 151,467 3,119 667 155,253
Debt securities 36,458 105,292 557 142,307
Other investments (including derivative assets) 27 3,635 4,051 7,713
Derivative liabilities (29) (1,393) (336) (1,758)
Total financial investments, net of derivative liabilities 187,923 110,920 6,978 305,821
Investment contracts liabilities without discretionary participation features held at fair value (22) (16,719) (16,741)
Net asset value attributable to unit holders of consolidated unit trusts and similar funds (8,559) (45) (1,403) (10,007)
Other financial liabilities held at fair value (322) (2,204) (2,526)
Total financial instruments at fair value 179,342 93,834 3,371 276,547
Percentage of total 65% 34% 1% 100%

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  31 Dec 2015 £m
  Level 1 Level 2 Level 3  
  Quoted prices (unadjusted) in active markets Valuation based on significant observable market inputs Valuation based on significant unobservable market inputs Total

* Loans in the table above are those classified as fair value through profit and loss in note C3.1.

Analysis of financial investments, net of derivative liabilities by business type        
With-profits        
Equity securities and portfolio holdings in unit trusts 35,441 3,200 554 39,195
Debt securities 20,312 40,033 525 60,870
Other investments (including derivative assets) 85 1,589 3,371 5,045
Derivative liabilities (110) (1,526) (1,636)
Total financial investments, net of derivative liabilities 55,728 43,296 4,450 103,474
Percentage of total 54% 42% 4% 100%
Unit-linked and variable annuity separate account        
Equity securities and portfolio holdings in unit trusts 116,691 354 22 117,067
Debt securities 4,350 4,940 9,290
Other investments (including derivative assets) 5 20 4 29
Derivative liabilities (2) (16) (18)
Total financial investments, net of derivative liabilities 121,044 5,298 26 126,368
Percentage of total 96% 4% 0% 100%
Non-linked shareholder-backed        
Loans 255 2,183 2,438
Equity securities and portfolio holdings in unit trusts 1,150 10 31 1,191
Debt securities 17,767 59,491 253 77,511
Other investments (including derivative assets) 1,378 901 2,279
Derivative liabilities (1,112) (353) (1,465)
Total financial investments, net of derivative liabilities 18,917 60,022 3,015 81,954
Percentage of total 23% 73% 4% 100%
Group total analysis, including other financial liabilities held at fair value        
Group total        
Loans* 255 2,183 2,438
Equity securities and portfolio holdings in unit trusts 153,282 3,564 607 157,453
Debt securities 42,429 104,464 778 147,671
Other investments (including derivative assets) 90 2,987 4,276 7,353
Derivative liabilities (112) (2,654) (353) (3,119)
Total financial investments, net of derivative liabilities 195,689 108,616 7,491 311,796
Investment contracts liabilities without discretionary participation features held at fair value (16,022) (16,022)
Net asset value attributable to unit holders of consolidated unit trusts and similar funds (5,782) (1,055) (1,036) (7,873)
Other financial liabilities held at fair value (322) (2,347) (2,669)
Total financial instruments at fair value 189,907 91,217 4,108 285,232
Percentage of total 67% 32% 1% 100%

c Valuation approach for level 2 fair valued financial instruments

A significant proportion of the Group’s level 2 assets are corporate bonds, structured securities and other non-national government debt securities. These assets, in line with market practice, are generally valued using independent pricing services or third-party broker quotes. These valuations are determined using independent external quotations from multiple sources and are subject to a number of monitoring controls, such as monthly price variances, stale price reviews and variance analysis on prices achieved on subsequent trades. For further detail on the valuation approach for level 2 fair valued financial instruments please refer to note C3.2 of the Group’s consolidated financial statements for the year ended 31 December 2015.

Of the total level 2 debt securities of £114,623 million at 30 June 2016 (30 June 2015: £105,292 million; 31 December 2015: £104,464 million), £11,867 million are valued internally (30 June 2015: £10,190 million; 31 December 2015: £10,331 million). The majority of such securities are valued using matrix pricing, which is based on assessing the credit quality of the underlying borrower to derive a suitable discount rate relative to government securities of a comparable duration. Under matrix pricing, the debt securities are priced taking the credit spreads on comparable quoted public debt securities and applying these to the equivalent debt instruments factoring in a specified liquidity premium. The majority of the parameters used in this valuation technique are readily observable in the market and, therefore, are not subject to interpretation.

d Fair value measurements for level 3 fair valued financial instruments

Reconciliation of movements in level 3 financial instruments measured at fair value

The following table reconciles the value of level 3 fair valued financial instruments at 1 January 2016 to that presented at 30 June 2016.

Total investment return recorded in the income statement represents interest and dividend income, realised gains and losses, unrealised gains and losses on the assets classified at fair value through profit and loss and foreign exchange movements on an individual entity’s overseas investments.

Total gains and losses recorded in other comprehensive income includes unrealised gains and losses on debt securities held as available-for-sale within Jackson and foreign exchange movements arising from the retranslation of the Group’s overseas subsidiaries and branches.

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  Half year 2016 £m
  At 1 Jan 2016 Total gains (losses) in income statement Total gains (losses) recorded in other compre- hensive income Purchases Sales Settled Issued Transfers into
level 3
Transfers out of
level 3
At 30 Jun 2016
Loans 2,183 79 227 (64) 23 2,448
Equity securities and portfolio holdings in unit trusts 607 (13) 11 81 (4) 9 691
Debt securities 778 66 7 120 (17) 30 (5) 979
Other investments (including derivative assets) 4,276 184 265 377 (473) 33 4,662
Derivative liabilities (353) (127) (480)
Total financial investments, net of derivative liabilities 7,491 189 510 578 (494) (64) 23 72 (5) 8,300
Net asset value attributable to unit holders of consolidated unit trusts and similar funds (1,036) 24 (2) 1 62 (117) (1,068)
Other financial liabilities (2,347) (84) (243) 99 (41) (2,616)
Total financial instruments at fair value 4,108 129 265 578 (493) 97 (135) 72 (5) 4,616

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  Half year 2015 £m
  At 1 Jan 2015 Total gains (losses) in income statement Total gains (losses) recorded in other compre- hensive income Purchases Sales Settled Issued Transfers into
level 3
Transfers out of
level 3
At 30 Jun 2015
Loans 2,025 72 (18) (64) 24 2,039
Equity securities and portfolio holdings in unit trusts 747 45 (1) 23 (148) 1 667
Debt securities 790 (66) 33 (245) 46 (1) 557
Other investments (including derivative assets) 4,028 114 (77) 271 (285) 4,051
Derivative liabilities (338) 2 (336)
Total financial investments, net of derivative liabilities 7,252 167 (96) 327 (678) (64) 24 47 (1) 6,978
Net asset value attributable to unit holders of consolidated unit trusts and similar funds (1,291) (32) (4) 22 24 (122) (1,403)
Other financial liabilities (2,201) (85) 19 113 (50) (2,204)
Total financial instruments at fair value 3,760 50 (77) 323 (656) 73 (148) 47 (1) 3,371

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  Full year 2015 £m
  At 1 Jan 2015 Total gains (losses) in income statement Total gains (losses) recorded in other compre- hensive income Purchases Sales Settled Issued Transfers into
level 3
Transfers out of
level 3
At 31 Dec 2015
Loans 2,025 2 119 (168) 205 2,183
Equity securities and portfolio holdings in unit trusts 747 52 3 32 (143) 4 (88) 607
Debt securities 790 (75) 1 243 (259) 82 (4) 778
Other investments (including derivative assets) 4,028 213 68 547 (700) 120 4,276
Derivative liabilities (338) (15) (353)
Total financial investments, net of derivative liabilities 7,252 177 191 822 (1,102) (168) 205 206 (92) 7,491
Net asset value attributable to unit holders of consolidated unit trusts and similar funds (1,291) (160) (1) (5) 9 412 (1,036)
Other financial liabilities (2,201) (3) (128) 218 (233) (2,347)
Total financial instruments at fair value 3,760 14 62 817 (1,093) 462 (28) 206 (92) 4,108

Of the total net gains and losses in the income statement of £129 million (30 June 2015: £50 million; 31 December 2015: £14 million), £92 million (30 June 2015: £131 million; 31 December 2015: £67 million) relates to net unrealised gains relating to financial instruments still held at the end of the period, which can be analysed as follows:

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  2016 £m   2015 £m
  30 Jun   30 Jun 31 Dec
Equity securities (14)   38 94
Debt securities 65   (2) (12)
Other investments 149   125 160
Derivative liabilities (127)   2 (15)
Net asset value attributable to unit holders of consolidated unit trusts and similar funds 23   (32) (160)
Other financial liabilities (4)  
Total 92   131 67
Valuation approach for level 3 fair valued financial instruments

Investments valued using valuation techniques include financial investments which by their nature do not have an externally quoted price based on regular trades, and financial investments for which markets are no longer active as a result of market conditions, eg market illiquidity. The valuation techniques used include comparison to recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option-adjusted spread models and, if applicable, enterprise valuation. For further detail on the valuation approach for level 3 fair valued financial instruments, please refer to note C3.2 of the Group’s consolidated financial statements for the year ended 31 December 2015.

At 30 June 2016 the Group held £4,616 million (30 June 2015: £3,371 million; 31 December 2015: £4,108 million) of net financial instruments at fair value within level 3. This represents 1 per cent (30 June 2015: 1 per cent; 31 December 2015: 1 per cent) of the total fair valued financial assets net of fair valued financial liabilities.

Included within these amounts were loans of £2,448 million at 30 June 2016 (30 June 2015: £2,039 million; 31 December 2015: £2,183 million), measured as the loan outstanding balance attached to REALIC and held to back the liabilities for funds withheld under reinsurance arrangements. The funds withheld liability of £2,616 million at 30 June 2016 (30 June 2015: £2,204 million; 31 December 2015: £2,347 million) was also classified within level 3, accounted for on a fair value basis being equivalent to the carrying value of the underlying assets.

Excluding the loans and funds withheld liability under REALIC’s reinsurance arrangements as described above, which amounted to a net liability of £(168) million (30 June 2015: £(165) million; 31 December 2015: £(164) million), the level 3 fair valued financial assets net of financial liabilities were £4,784 million (30 June 2015: £3,536 million; 31 December 2015: £4,272 million). Of this amount, a net asset of £47 million (30 June 2015: net liability of £(378) million; 31 December 2015: net liability of £(77) million) was internally valued, representing 0.0 per cent of the total fair valued financial assets net of financial liabilities (30 June 2015: 0.1 per cent; 31 December 2015: 0.1 per cent). Internal valuations are inherently more subjective than external valuations. Included within these internally valued net liabilities were:

  1. Debt securities of £463 million (30 June 2015: £251 million; 31 December 2015: £381 million), which were either valued on a discounted cash flow method with an internally developed discount rate or on external prices adjusted to reflect the specific known conditions relating to these securities (eg distressed securities or securities which were being restructured).
  2. Private equity and venture investments of £1,038 million (30 June 2015: £715 million; 31 December 2015: £852 million) which were valued internally based on management information available for these investments. These investments, in the form of debt and equity securities, were principally held by consolidated investment funds which are managed on behalf of third parties.
  3. Liabilities of £(1,045) million (30 June 2015: £(1,379) million; 31 December 2015: £(1,013) million) for the net asset value attributable to external unit holders in respect of the consolidated investment funds, which are non-recourse to the Group. These liabilities are valued by reference to the underlying assets.
  4. Derivative liabilities of £(480) million (30 June 2015: £(28) million; 31 December 2015: £(353) million) which are valued internally using standard market practices but are subject to independent assessment against counterparties’ valuations.
  5. Other sundry individual financial investments of £71 million (30 June 2015: £63 million; 31 December 2015: £56 million).

Of the internally valued net asset referred to above of £47 million (30 June 2015: net liability of £(378) million; 31 December 2015: net liability of £(77) million):

  1. A net asset of £303 million (30 June 2015: net liability of £(525) million; 31 December 2015: net asset of £29 million) was held by the Group’s participating funds and therefore shareholders’ profit and equity are not impacted by movements in the valuation of these financial instruments.
  2. A net liability of £(256) million (30 June 2015: net asset of £147 million; 31 December 2015: net liability of £(106) million) was held to support non-linked shareholder-backed business. If the value of all the level 3 instruments held to support non-linked shareholder-backed business valued internally was varied downwards by 10 per cent, the change in valuation would be £26 million (30 June 2015: £(15) million; 31 December 2015: £(11) million), which would increase/(reduce) shareholders’ equity by this amount before tax. Of this amount, an increase of £26 million (30 June 2015: a decrease of £14 million; 31 December 2015: a decrease of £10 million) would pass through the income statement substantially as part of short-term fluctuations in investment returns outside of operating profit and a £nil (30 June 2015: a decrease of £1 million; 31 December 2015: a decrease of £1 million) would be included as part of other comprehensive income, being unrealised movements on assets classified as available-for-sale.

e Transfers into and transfers out of levels

The Group’s policy is to recognise transfers into and transfers out of levels as of the end of each half year reporting period except for material transfers which are recognised as of the date of the event or change in circumstances that caused the transfer.

During half year 2016, the transfers between levels within the Group’s portfolio were primarily transfers from level 1 to 2 of £425 million and transfers from level 2 to level 1 of £155 million. These transfers, which primarily relate to debt securities, arose to reflect the change in the observability of the inputs used in valuing these securities.

In addition, the transfers into and out of level 3 in half year 2016 were £72 million and £5 million, respectively. These transfers were primarily between levels 3 and 2 for debt securities and other investments.

f Valuation processes applied by the Group

The Group’s valuation policies, procedures and analyses for instruments categorised as level 3 are overseen by business unit committees as part of the Group’s wider financial reporting governance processes. The procedures undertaken include approval of valuation methodologies, verification processes, and resolution of significant or complex valuation issues. In undertaking these activities the Group makes use of the extensive expertise of its asset management functions.

C3.3 Debt securities

This note provides analysis of the Group’s debt securities, including asset-backed securities and sovereign debt securities, by segment.

Debt securities are carried at fair value. The amounts included in the statement of financial position are analysed as follows, with further information relating to the credit quality of the Group’s debt securities at 30 June 2016 provided in the notes below.

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2016 £m   2015 £m
  30 Jun   30 Jun 31 Dec
Insurance operations:        
Asianote (a) 35,519   24,366 28,292
USnote (b) 41,143   32,117 34,071
UKnote (c) 89,114   83,876 83,101
Other operationsnote (d) 2,591   1,948 2,207
Total 168,367   142,307 147,671

In the tables below, with the exception of some mortgage-backed securities, Standard & Poor’s (S&P) ratings have been used where available. For securities where S&P ratings are not immediately available, those produced by Moody’s and then Fitch have been used as an alternative.

a Asia insurance operations

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  2016 £m   2015 £m
  With-profits business Unit-linked assets Other business 30 Jun
Total
  30 Jun
Total
31 Dec
Total
S&P – AAA 1,472 38 307 1,817   1,060 1,039
S&P – AA+ to AA- 7,586 449 1,517 9,552   6,111 7,620
S&P – A+ to A- 2,601 418 2,731 5,750   4,308 3,914
S&P – BBB+ to BBB- 2,649 656 1,595 4,900   3,881 4,133
S&P – Other 1,848 241 1,447 3,536   1,926 3,183
  16,156 1,802 7,597 25,555   17,286 19,889
Moody’s – Aaa 839 238 436 1,513   1,367 1,032
Moody’s – Aa1 to Aa3 150 18 1,483 1,651   1,224 1,492
Moody’s – A1 to A3 461 83 179 723   414 743
Moody’s – Baa1 to Baa3 295 595 330 1,220   560 790
Moody’s – Other 63 5 3 71   85 98
  1,808 939 2,431 5,178   3,650 4,155
Fitch 725 186 466 1,377   836 1,412
Other 1,889 500 1,020 3,409   2,594 2,836
Total debt securities 20,578 3,427 11,514 35,519   24,366 28,292

The following table analyses other debt securities within other business which are not externally rated by S&P, Moody’s or Fitch.

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

* Rated as investment grade by local external ratings agencies.

Government bonds* 207   208 162
Corporate bonds* 582   578 481
Other 231   155 301
  1,020   941 944

b US insurance operations

i Overview

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

* A 1990 SEC rule that facilitates the resale of privately placed securities under Rule 144A that are without SEC registration to qualified institutional investors. The rule was designed to develop a more liquid and efficient institutional resale market for unregistered securities.

† Debt securities for US operations included in the statement of financial position comprise:

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  2016 £m   2015 £m
  30 Jun   30 Jun 31 Dec
Available-for-sale 41,045   32,034 33,984
Fair value through profit and loss:        
Securities held to back liabilities for funds withheld under reinsurance arrangement 98   83 87
  41,143   32,117 34,071
Corporate and government security and commercial loans:        
Government 7,151   3,885 4,242
Publicly traded and SEC Rule 144A securities* 24,894   20,511 21,776
Non-SEC Rule 144A securities 4,302   3,548 3,733
Total 36,347   27,944 29,751
Residential mortgage-backed securities (RMBS) 1,267   1,370 1,284
Commercial mortgage-backed securities (CMBS) 2,635   2,212 2,403
Other debt securities 894   591 633
Total US debt securities 41,143   32,117 34,071
ii Valuation basis, presentation of gains and losses and securities in an unrealised loss position

Under IAS 39, unless categorised as ‘held to maturity’ or ‘loans and receivables’, debt securities are required to be fair valued. Where available, quoted market prices are used. However, where securities do not have an externally-quoted price based on regular trades or where markets for the securities are no longer active as a result of market conditions, IAS 39 requires that valuation techniques be applied. IFRS 13 requires classification of the fair values applied by the Group into a three-level hierarchy. At 30 June 2016, less than 0.1 per cent of Jackson’s debt securities were classified as level 3 (30 June 2015: 0.1 per cent; 31 December 2015: 0.1 per cent) comprising fair values where there are significant inputs which are not based on observable market data.

Except for certain assets covering liabilities that are measured at fair value, the debt securities of the US insurance operations are classified as ‘available-for-sale’. Unless impaired, fair value movements are recognised in other comprehensive income. Realised gains and losses, including impairments, recorded in the income statement are as shown in note B1.2 of this report.

Movements in unrealised gains and losses

There was a movement in the statement of financial position value for debt securities classified as available-for-sale from a net unrealised gain of £592 million to a net unrealised gain of £2,923 million as analysed in the table below. This increase reflects the effects of lower market interest rates.

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    Changes in unrealised appreciation Foreign exchange translation  
  30 Jun 2016
£m
Reflected as part of movement in other comprehensive income 31 Dec 2015
£m

* Book value represents cost/amortised cost of the debt securities.

† Translated at the average rate of US$1.4329: £1.00.

Assets fair valued at below book value        
Book value* 2,307     13,163
Unrealised (loss) gain (119) 581 (27) (673)
Fair value (as included in statement of financial position) 2,188     12,490
Assets fair valued at or above book value        
Book value* 35,815     20,229
Unrealised gain 3,042 1,537 240 1,265
Fair value (as included in statement of financial position) 38,857     21,494
Total        
Book value* 38,122     33,392
Net unrealised gain 2,923 2,118 213 592
Fair value (as included in statement of financial position) 41,045     33,984
         
The available-for-sale debt securities of Jackson are analysed into US Treasuries and other debt securities as follows:
US Treasuries        
Book value* 5,562     3,477
Net unrealised gain 732 627 51 54
Fair value 6,294     3,531
Other debt securities        
Book value* 32,560     29,915
Net unrealised gain 2,191 1,491 162 538
Fair value 34,751     30,453
Total debt securities        
Book value* 38,122     33,392
Net unrealised gain 2,923 2,118 213 592
Fair value 41,045     33,984
Debt securities classified as available-for-sale in an unrealised loss position
a Fair value of securities as a percentage of book value

The following table shows the fair value of the debt securities in a gross unrealised loss position for various percentages of book value:

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  30 Jun 2016 £m   30 Jun 2015 £m   31 Dec 2015 £m
  Fair value Unrealised loss   Fair value Unrealised loss   Fair value Unrealised loss
Between 90% and 100% 1,848 (51)   8,998 (294)   11,058 (320)
Between 80% and 90% 304 (52)   796 (109)   902 (144)
Below 80%:                
Residential mortgage-backed securities (sub-prime)   4 (1)   4 (1)
Commercial mortgage-backed securities 8 (3)   10 (3)  
Other asset-backed securities 9 (7)   9 (6)   9 (7)
Corporates 19 (6)   38 (11)   517 (201)
  36 (16)   61 (21)   530 (209)
Total 2,188 (119)   9,855 (424)   12,490 (673)
b Unrealised losses by maturity of security

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  2016 £m   2015 £m
  30 Jun   30 Jun 31 Dec
1 year to 5 years (10)   (8) (51)
5 years to 10 years (38)   (139) (334)
More than 10 years (42)   (245) (247)
Mortgage-backed and other debt securities (29)   (32) (41)
Total (119)   (424) (673)
c Age analysis of unrealised losses for the periods indicated

The following table shows the age analysis of all the unrealised losses in the portfolio by reference to the length of time the securities have been in an unrealised loss position:

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  30 Jun 2016 £m   30 Jun 2015 £m   31 Dec 2015 £m
  Non- investment grade Investment grade Total   Non- investment grade Investment grade Total   Non- investment grade Investment grade Total
Less than 6 months (2) (5) (7)   (9) (314) (323)   (13) (148) (161)
6 months to 1 year (4) (8) (12)   (14) (25) (39)   (17) (332) (349)
1 year to 2 years (14) (46) (60)   (2) (1) (3)   (16) (63) (79)
2 years to 3 years   (2) (39) (41)   (3) (38) (41)
More than 3 years (3) (37) (40)   (7) (11) (18)   (3) (40) (43)
Total (23) (96) (119)   (34) (390) (424)   (52) (621) (673)

The following table shows the age analysis as at 30 June 2016 of the securities whose fair values were below 80 per cent of the book value:

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  30 Jun 2016 £m   30 Jun 2015 £m   31 Dec 2015 £m
Age analysis Fair value Unrealised loss   Fair value Unrealised loss   Fair value Unrealised loss
Less than 3 months 2   35 (9)   450 (165)
3 months to 6 months 19 (6)   4 (2)   64 (34)
More than 6 months 15 (10)   22 (10)   16 (10)
  36 (16)   61 (21)   530 (209)
iii Ratings

The following table summarises the ratings of securities detailed above by using S&P, Moody’s, Fitch and implicit ratings of mortgage-backed securities based on National Association of Insurance Commissioners (NAIC) valuations:

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

* The Securities Valuation Office of the NAIC classifies debt securities into six quality categories range from Class 1 (the highest) to Class 6 (the lowest). Performing securities are designated as Classes 1 to 5 and securities in or near default are designated Class 6.

† The amounts within ‘Other’ which are neither rated by S&P, Moody’s nor Fitch, nor are MBS securities using the revised regulatory ratings, have the following NAIC classifications:

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  2016 £m   2015 £m
  30 Jun   30 Jun 31 Dec
NAIC 1 1,925   2,177 1,588
NAIC 2 1,829   1,601 1,549
NAIC 3-6 134   114 132
  3,888   3,892 3,269
S&P – AAA 251   145 196
S&P – AA+ to AA- 6,124   5,216 5,512
S&P – A+ to A- 9,958   8,462 8,592
S&P – BBB+ to BBB- 13,067   10,345 11,378
S&P – Other 877   876 817
  30,277   25,044 26,495
Moody’s – Aaa 3,455   218 963
Moody’s – Aa1 to Aa3 54   30 41
Moody’s – A1 to A3 51   35 49
Moody’s – Baa1 to Baa3 83   72 88
Moody’s – Other 9   7 13
  3,652   362 1,154
Implicit ratings of MBS based on NAIC* valuations (see below)        
NAIC 1 2,851   2,416 2,746
NAIC 2 39   57 45
NAIC 3-6 10   46 17
  2,900   2,519 2,808
Fitch 426   300 345
Other 3,888   3,892 3,269
Total debt securities 41,143   32,117 34,071

For some mortgage-backed securities within Jackson, the table above includes these securities using the regulatory ratings detail issued by the NAIC. These regulatory ratings levels were established by external third parties (PIMCO for residential mortgage-backed securities and BlackRock Solutions for commercial mortgage-backed securities).

c UK insurance operations

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  2016 £m          
      Other funds and subsidiaries   UK insurance operations
  Scottish Amicable Insurance Fund PAC with-profits fund Unit-linked assets PRIL Other annuity and long-term business   30 Jun 2016
Total
£m
  30 Jun 2015
Total
£m
31 Dec 2015
Total
£m

* In the table above, Moody’s ratings have been used for the UK sovereign debt securities.

S&P – AAA 141 3,343 308 3,160 493   7,445   9,302 9,577
S&P – AA+ to AA- 406 6,139 1,478 5,619 710   14,352   10,686 11,442
S&P – A+ to A- 496 8,705 1,117 7,003 807   18,128   19,428 16,439
S&P – BBB+ to BBB- 582 11,794 1,927 3,488 684   18,475   17,059 18,088
S&P – Other 137 2,615 324 333 60   3,469   2,905 2,990
  1,762 32,596 5,154 19,603 2,754   61,869   59,380 58,536
Moody’s – Aaa 33 1,382 96 477 60   2,048   2,169 1,817
Moody’s – Aa1 to Aa3 58 2,805 1,008 4,070 998   8,939   6,589 7,727
Moody’s – A1 to A3 50 934 101 1,590 198   2,873   2,698 2,738
Moody’s – Baa1 to Baa3 28 606 108 329 40   1,111   1,356 1,031
Moody’s – Other 2 213 23 1   239   650 318
  171 5,940 1,313 6,489 1,297   15,210   13,462 13,631
Fitch 13 294 24 160 14   505   744 552
Other 181 6,298 97 4,520 434   11,530   10,290 10,382
Total debt securities* 2,127 45,128 6,588 30,772 4,499   89,114   83,876 83,101

Where no external ratings are available, internal ratings produced by the Group’s asset management operation, which are prepared on the Company’s assessment of a comparable basis to external ratings, are used where possible. The £11,530 million total debt securities held at 30 June 2016 (30 June 2015: £10,290 million; 31 December 2015: £10,382 million) which are not externally rated are either internally rated or unrated. These are analysed as follows:

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  2016 £m   2015 £m
  30 Jun   30 Jun 31 Dec
Internal ratings or unrated:        
AAA to A- 6,584   5,306 5,570
BBB to B- 3,284   3,592 3,234
Below B- or unrated 1,662   1,392 1,578
Total 11,530   10,290 10,382

The majority of unrated debt security investments were held in SAIF and the PAC with-profits fund and relate to convertible debt and other investments which are not covered by ratings analysts nor have an internal rating attributed to them. Of the £4,954 million for PRIL and other annuity and long-term business investments for non-linked shareholder-backed business which are not externally rated, £1,571 million were internally rated AA+ to AA-, £2,152 million A+ to A-, £1,077 million BBB+ to BBB-, £44 million BB+ to BB and £110 million were internally rated B+ and below or unrated.

d Other operations

The total debt securities shown in the table below are principally held by Prudential Capital.

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  2016 £m   2015 £m
  30 Jun   30 Jun 31 Dec
AAA to A- by S&P or equivalent ratings 2,475   1,821 2,090
Other 116   127 117
Total 2,591   1,948 2,207

e Asset-backed securities

The Group’s holdings in asset-backed securities (ABS), which comprise residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralised debt obligations (CDO) funds and other asset-backed securities, at 30 June 2016, are as follows:

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

Notes

  1. Asia insurance operations
    The Asia insurance operations’ exposure to asset-backed securities is primarily held by the with-profits operations. Of the £310 million, 99 per cent (30 June 2015: 100 per cent; 31 December 2015: 84 per cent) are investment grade.

  2. US insurance operations
    US insurance operations’ exposure to asset-backed securities comprises:

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      2016 £m   2015 £m
      30 Jun   30 Jun 31 Dec
    RMBS        
    Sub-prime (2016: 3% AAA, 14% AA, 4% A) 185   201 191
    Alt-A (2016: 0% AA, 3% A) 178   216 191
    Prime including agency (2016: 78% AA, 2% A) 904   953 902
    CMBS (2016: 63% AAA, 30% AA, 6% A) 2,635   2,212 2,403
    CDO funds (2016: 44% AAA, 4% AA, 20% A), including £nil exposure to sub-prime 55   45 52
    Other ABS (2016: 20% AAA, 16% AA, 55% A), including £116 million exposure to sub-prime 839   546 581
    Total 4,796   4,173 4,320
  3. UK insurance operations
    The majority of holdings of the shareholder-backed business relates to the UK market and primarily relates to investments held by PRIL. Of the holdings of the with-profits operations, £1,332 million (30 June 2015: £1,358 million; 31 December 2015: £1,140 million) relates to exposure to the US markets with the remaining exposure being primarily to the UK market.

  4. Asset management operations
    Asset management operations’ exposure to asset-backed securities is held by Prudential Capital with no sub-prime exposure. Of the £963 million, 95 per cent (30 June 2015: 90 per cent; 31 December 2015: 95 per cent) are graded AAA.

Shareholder-backed operations:        
Asia insurance operationsnote (i) 151   115 111
US insurance operationsnote (ii) 4,796   4,173 4,320
UK insurance operations (2016: 25% AAA, 39% AA)note (iii) 1,445   1,938 1,531
Asset management operationsnote (iv) 963   712 911
  7,355   6,938 6,873
With-profits operations:        
Asia insurance operationsnote (i) 310   286 262
UK insurance operations (2016: 50% AAA, 19% AA)note (iii) 4,558   5,019 4,600
  4,868   5,305 4,862
Total 12,223   12,243 11,735

f Group sovereign debt and bank debt exposure

The Group exposures held by the shareholder-backed business and with-profits funds in sovereign debts and bank debt securities at 30 June 2016:

Exposure to sovereign debts

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  30 Jun 2016 £m   30 Jun 2015 £m   31 Dec 2015 £m
  Shareholder- backed business With-profits funds   Shareholder- backed business With-profits funds   Shareholder- backed business With-profits funds

* Including bonds guaranteed by the federal government.

† The exposure to the United States sovereign debt comprises holdings of Jackson, the UK and Asia insurance operations. Jackson accounts for £6,294 million of this total (30 June 2015: £3,227 million, 31 December 2015: £3,531 million).

Italy 58 63   55 60   55 60
Spain 35 18   1 17   1 17
France 22   18   19
Germany* 546 348   347 330   409 358
Other Europe (principally Belgium) 84 32   5 28   62 44
Total Eurozone 745 461   426 435   546 479
United Kingdom 5,720 2,431   3,735 1,963   4,997 1,802
United States 6,881 8,354   3,522 5,429   3,911 6,893
Other, predominantly Asia 4,081 2,073   2,890 1,682   3,368 1,737
Total 17,427 13,319   10,573 9,509   12,822 10,911
Exposure to bank debt securities

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  2016 £m   2015 £m
  Senior debt   Subordinated debt          
Shareholder-backed business Covered Senior Total senior debt   Tier 1 Tier 2 Total sub- ordinated debt    30 Jun Total    30 Jun Total  31 Dec Total
Italy 31 31     31   29 30
Spain 148 11 159     159   155 154
France 28 122 150   74 74   224   245 226
Germany 46 4 50   74 74   124   124 130
Netherlands 28 28   11 11   39   108 31
Other Eurozone 20 20   12 12   32   35 31
Total Eurozone 222 216 438   171 171   609   696 602
United Kingdom 518 280 798   9 311 320   1,118   1,131 957
United States 2,420 2,420   5 226 231   2,651   2,423 2,457
Other, predominantly Asia 17 481 498   78 465 543   1,041   712 718
Total 757 3,397 4,154   92 1,173 1,265   5,419   4,962 4,734
                         
With-profits funds                        
Italy 64 64     64   62 57
Spain 154 65 219     219   203 182
France 7 161 168   41 65 106   274   242 250
Germany 96 16 112     112   128 111
Netherlands 187 187   6 7 13   200   217 205
Other Eurozone 30 30     30   35 35
Total Eurozone 257 523 780   47 72 119   899   887 840
United Kingdom 528 464 992   65 475 540   1,532   1,575 1,351
United States 1,582 1,582   124 272 396   1,978   1,963 1,796
Other, predominantly Asia 282 845 1,127   235 413 648   1,775   1,545 1,656
Total 1,067 3,414 4,481   471 1,232 1,703   6,184   5,970 5,643

The tables above exclude assets held to cover linked liabilities and those of the consolidated unit trusts and similar funds. In addition, the tables above exclude the proportionate share of sovereign debt holdings of the Group’s joint venture operations.

C3.4 Loans portfolio

Loans are principally accounted for at amortised cost, net of impairment. The exceptions include:

  • Certain mortgage loans which have been designated at fair value through profit or loss of the UK insurance operations as this loan portfolio is managed and evaluated on a fair value basis; and
  • Certain policy loans of the US insurance operations which are held to back liabilities for funds withheld under a reinsurance arrangement and are also accounted on a fair value basis.

The amounts included in the statement of financial position are analysed as follows:

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  2016 £m   2015 £m
  30 Jun   30 Jun 31 Dec
Insurance operations:        
Asianote (a) 1,278   1,009 1,084
USnote (b) 8,504   6,798 7,418
UKnote (c) 3,616   3,845 3,571
Asset management operationsnote (d) 817   926 885
Total 14,215   12,578 12,958

a Asia insurance operations

The loans of the Group’s Asia insurance operations comprise:

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

* The mortgage and policy loans are secured by properties and life insurance policies respectively.

† Other loans include commercial loans held by the Malaysia operation and which are all rated as investment grade by two local rating agencies.

Mortgage loans* 156   105 130
Policy loans* 833   676 721
Other loans 289   228 233
Total 1,278   1,009 1,084

b US insurance operations

The loans of the Group’s US insurance operations comprise:

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  30 Jun 2016 £m   30 Jun 2015 £m   31 Dec 2015 £m
  Loans backing liabilities for funds withheld Other loans Total   Loans backing liabilities for funds withheld Other loans Total   Loans backing liabilities for funds withheld Other loans Total

* All of the mortgage loans are commercial mortgage loans which are collateralised by properties. The property types are industrial, multi-family residential, suburban office, retail and hotel.

† The policy loans are secured by individual life insurance policies or annuity policies. Included within the policy loans are those accounted for at fair value through profit and loss to back liabilities for funds withheld under reinsurance. All other policy loans are accounted for at amortised cost, less any impairment.

Mortgage loans* 5,109 5,109   3,933 3,933   4,367 4,367
Policy loans 2,448 947 3,395   2,039 826 2,865   2,183 868 3,051
Total 2,448 6,056 8,504   2,039 4,759 6,798   2,183 5,235 7,418

The US insurance operations’ commercial mortgage loan portfolio does not include any single-family residential mortgage loans and is therefore not exposed to the risk of defaults associated with residential sub-prime mortgage loans. The average loan size is £10.2 million (30 June 2015: £7.7 million; 31 December 2015: £8.6 million). The portfolio has a current estimated average loan to value of 59 per cent (30 June 2015: 57 per cent; 31 December 2015: 59 per cent).

At 30 June 2016, Jackson had no mortgage loans where the contractual terms of the agreements had been restructured (30 June 2015 and 31 December 2015: none).

c UK insurance operations

The loans of the Group’s UK insurance operations comprise:

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

* The mortgage loans are collateralised by properties. By carrying value, 76 per cent of the £1,548 million (30 June 2015: 76 per cent of £1,558 million; 31 December 2015: 78 per cent of £1,508 million) held for shareholder-backed business relates to lifetime (equity release) mortgage business which has an average loan to property value of 29 per cent (30 June 2015: 30 per cent; 31 December 2015: 30 per cent).

† Other loans held by the PAC with-profits fund are all commercial loans and comprise mainly syndicated loans.

SAIF and PAC WPSF        
Mortgage loans* 719   807 727
Policy loans 6   9 8
Other loans 1,339   1,467 1,324
Total SAIF and PAC WPSF loans 2,064   2,283 2,059
Shareholder-backed operations        
Mortgage loans* 1,548   1,558 1,508
Other loans 4   4 4
Total loans of shareholder-backed operations 1,552   1,562 1,512
Total 3,616   3,845 3,571

d Asset management operations

The loans of the asset management operations relate to loans and receivables managed by Prudential Capital. These assets are generally secured but most have no external credit ratings. Internal ratings prepared by the Group’s asset management operations, as part of the risk management process, are:

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  2016 £m   2015 £m
  30 Jun   30 Jun 31 Dec
Loans and receivables internal ratings:        
AAA   92
AA+ to AA- 31   32
A+ to A- 120   222 157
BBB+ to BBB- 442   224 607
BB+ to BB- 223   83 119
B and other 1   273 2
Total 817   926 885

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

The note provides information of policyholder liabilities and unallocated surplus of with-profits funds held on the Group’s statement of financial position:

C4.1 Movement of liabilities

C4.1(a) Group overview

(i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds

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  Insurance operations £m
Half year 2016 movements Asia
note C4.1(b)
US
note C4.1(c)
UK
note C4.1(d)
Total

* Averages have been based on opening and closing balances and adjusted for acquisitions, disposals and corporate transactions in the period and exclude unallocated surplus of with-profits funds.

† The Group’s investment in joint ventures are accounted for on the equity method in the Group’s statement of financial position. The Group’s share of the policyholder liabilities as shown above relates to the joint venture life businesses in China, India and of the Takaful business in Malaysia.

‡ The policyholder liabilities of the Asia insurance operations of £52,122 million as shown in the table above is after deducting the intra-group reinsurance liabilities ceded by the UK insurance operations of £1,315 million to the Hong Kong with-profits business. Including this amount total Asia policyholder liabilities are £53,437 million.

At 1 January 2016 48,778 138,913 152,893 340,584
Comprising:        
Policyholder liabilities on the consolidated statement of financial position 41,255 138,913 142,350 322,518
Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,553 10,543 13,096
Group’s share of policyholder liabilities of joint ventures 4,970 4,970
Net flows:        
Premiums 4,428 7,101 5,561 17,090
Surrenders (1,200) (3,437) (3,208) (7,845)
Maturities/Deaths (676) (809) (3,470) (4,955)
Net flows 2,552 2,855 (1,117) 4,290
Shareholders’ transfers post tax (22) (110) (132)
Investment-related items and other movements 2,251 2,737 10,092 15,080
Foreign exchange translation differences 6,629 14,650 721 22,000
As at 30 June 2016 60,188 159,155 162,479 381,822
Comprising:        
Policyholder liabilities on the consolidated statement of financial position 52,122 159,155 151,233 362,510
Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,351 11,246 13,597
Group’s share of policyholder liabilities of joint ventures 5,715 5,715
Half year 2015 movements        
At 1 January 2015 45,022 126,746 154,436 326,204
Comprising:        
Policyholder liabilities on the consolidated statement of financial position 38,705 126,746 144,088 309,539
Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,102 10,348 12,450
Group’s share of policyholder liabilities of joint ventures 4,215 4,215
Net flows:        
Premiums 3,910 8,493 4,895 17,298
Surrenders (1,437) (3,406) (3,012) (7,855)
Maturities/Deaths (625) (736) (3,248) (4,609)
Net flows 1,848 4,351 (1,365) 4,834
Shareholders’ transfers post tax (36) (106) (142)
Investment-related items and other movements 837 (221) 2,316 2,932
Foreign exchange translation differences (1,197) (1,209) (209) (2,615)
At 30 June 2015 46,474 129,667 155,072 331,213
Comprising:        
Policyholder liabilities on the consolidated statement of financial position 39,522 129,667 144,431 313,620
Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,127 10,641 12,768
Group’s share of policyholder liabilities of joint ventures 4,825 4,825
Average policyholder liability balances*        
Half year 2016 52,031 149,034 146,792 347,857
Half year 2015 43,634 128,207 144,260 316,101

The items above represent the amount attributable to changes in policyholder liabilities and unallocated surplus of with-profits funds as a result of each of the components listed. The policyholder liabilities shown include investment contracts without discretionary participation features (as defined in IFRS 4) and their full movement in the period. The items above are shown gross of external reinsurance.

The analysis includes the impact of premiums, claims and investment movements on policyholders’ liabilities. The impact does not represent premiums, claims and investment movements as reported in the income statement. For example, the premiums shown above are after any deductions for fees/charges and claims, represent the policyholder liabilities provision released rather than the claim amount paid to the policyholder.

ii Analysis of movements in policyholder liabilities for shareholder-backed business

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  Half year 2016 £m
  Asia US UK Total
note (b)
At 1 January 2016 27,844 138,913 52,824 219,581
Net flows:        
Premiums 2,327 7,101 869 10,297
Surrenders (1,037) (3,437) (1,311) (5,785)
Maturities/Deaths (289) (809) (1,257) (2,355)
Net flowsnote 1,001 2,855 (1,699) 2,157
Investment-related items and other movements 860 2,737 4,285 7,882
Foreign exchange translation differences 3,643 14,650 1 18,294
At 30 June 2016 33,348 159,155 55,411 247,914
Comprising:        
Policyholder liabilities on the consolidated statement of financial position 27,633 159,155 55,411 242,199
Group's share of policyholder liabilities relating to joint ventures 5,715 5,715

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Half year 2015 £m
  Asia US UK Total

Note

Including net flows of the Group’s insurance joint ventures.

At 1 January 2015 26,410 126,746 55,009 208,165
Net flows:        
Premiums 2,456 8,493 2,016 12,965
Surrenders (1,317) (3,406) (1,623) (6,346)
Maturities/Deaths (305) (736) (1,249) (2,290)
Net flowsnote 834 4,351 (856) 4,329
Investment-related items and other movements 860 (221) 503 1,142
Foreign exchange translation differences (803) (1,209) (2,012)
At 30 June 2015 27,301 129,667 54,656 211,624
Comprising:        
Policyholder liabilities on the consolidated statement of financial position 22,476 129,667 54,656 206,799
Group’s share of policyholder liabilities relating to joint ventures 4,825 4,825

C4.1(b) Asia insurance operations

i Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds

A reconciliation of the total policyholder liabilities and unallocated surplus of with-profits funds of Asia insurance operations from the beginning of the period to 30 June is as follows:

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Half year 2016 movements With-profits business
£m
Unit-linked liabilities
£m
Other business
£m
Total
£m
At 1 January 2016 20,934 15,966 11,878 48,778

* The policyholder liabilities of the with-profits business of £24,489 million, shown in the table above, is after deducting the intra-group reinsurance liabilities ceded by the UK insurance operations of £1,315 million to the Hong Kong with-profits business. Including this amount the Asia with-profits policyholder liabilities are £25,804 million.

† Averages have been based on opening and closing balances and adjusted for acquisitions, disposals and corporate transactions in the period and exclude unallocated surplus of with-profits funds.

‡ The Group’s investments in joint ventures are accounted for on an equity method and the Group’s share of the policyholder liabilities as shown above relate to the joint venture life business in China, India and of the Takaful business in Malaysia.

Notes

  1. Movements in the period have been translated at the average exchange rates for the period ended 30 June 2016. The closing balance has been translated at the closing spot rates as at 30 June 2016. Differences upon retranslation are included in foreign exchange translation differences.
  2. Net flows increased by 38 per cent from £1,848 million in half year 2015 to £2,552 million in half year 2016 predominantly reflecting continued growth of the in-force book.
  3. Surrenders and maturities/deaths have decreased from £2,062 million in the first half of 2015 to £1,876 million in the first half of 2016. The rate of surrenders for shareholder-backed business (expressed as a percentage of opening liabilities) was 3.7 per cent in the first half of 2016 (half year 2015: 5.0 per cent).
  4. Investment-related items and other movements in the first half of 2016 primarily represent gains from bonds following falls in yields in the period.
Comprising:        
Policyholder liabilities on the consolidated statement of financial position 18,381 13,355 9,519 41,255
Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,553 2,553
Group’s share of policyholder liabilities relating to joint ventures 2,611 2,359 4,970
Premiums:        
New business 706 413 337 1,456
In-force 1,395 851 726 2,972
  2,101 1,264 1,063 4,428
Surrendersnote (c) (163) (870) (167) (1,200)
Maturities/Deaths (387) (28) (261) (676)
Net flowsnote (b) 1,551 366 635 2,552
Shareholders’ transfers post tax (22) (22)
Investment-related items and other movementsnote (d) 1,391 101 759 2,251
Foreign exchange translation differencesnote (a) 2,986 2,172 1,471 6,629
At 30 June 2016 26,840 18,605 14,743 60,188
Comprising:        
Policyholder liabilities on the consolidated statement of financial position* 24,489 15,705 11,928 52,122
Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,351 2,351
Group’s share of policyholder liabilities relating to joint ventures 2,900 2,815 5,715
Half year 2015 movements        
At 1 January 2015 18,612 16,209 10,201 45,022
Comprising:        
Policyholder liabilities on the consolidated statement of financial position 16,510 13,874 8,321 38,705
Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,102 2,102
Group’s share of policyholder liabilities relating to joint ventures 2,335 1,880 4,215
Premiums:        
New business 385 692 474 1,551
In-force 1,069 761 529 2,359
  1,454 1,453 1,003 3,910
Surrendersnote (c) (120) (1,158) (159) (1,437)
Maturities/Deaths (320) (44) (261) (625)
Net flowsnote (b) 1,014 251 583 1,848
Shareholders’ transfers post tax (36) (36)
Investment-related items and other movements (23) 637 223 837
Foreign exchange translation differences (394) (623) (180) (1,197)
At 30 June 2015 19,173 16,474 10,827 46,474
Comprising:        
Policyholder liabilities on the consolidated statement of financial position 17,046 13,845 8,631 39,522
Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,127 2,127
Group’s share of policyholder liabilities relating to joint ventures 2,629 2,196 4,825
Average policyholder liability balances        
Half year 2016 21,435 17,286 13,310 52,031
Half year 2015 16,778 16,342 10,514 43,634

C4.1(c) US insurance operations

i Analysis of movements in policyholder liabilities

A reconciliation of the total policyholder liabilities of US insurance operations from the beginning of the period to 30 June is as follows:

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US insurance operations Variable annuity separate account liabilities
£m
Fixed annuity, GIC and other business
£m
Total
£m

* Averages have been based on opening and closing balances, and adjusted for any acquisitions, disposals and corporate transactions in the period.

Notes

  1. Movements in the period have been translated at an average rate of US$1.43:£1.00 (30 June 2015: US$1.52:£1.00). The closing balance has been translated at closing rate of US$1.34:£1.00 (30 June 2015: US$1.57:£1.00). Differences upon retranslation are included in foreign exchange translation differences.
  2. Net flows in the first half of 2016 were £2,855 million compared with £4,351 million in the first half of 2015.
  3. Positive investment-related items and other movements in variable annuity separate account liabilities of £843 million for the first six months in 2016 represents positive separate account return mainly following the increase in the US equity market in the period. The positive movement of £1,894 million in fixed annuity, GIC and other business primarily reflect the increase in guarantee reserves, following the fall in interest rates, and the interest credited to the policyholder accounts in the period.
Half year 2016 movements      
At 1 January 2016 91,022 47,891 138,913
Premiums 4,848 2,253 7,101
Surrenders (2,168) (1,269) (3,437)
Maturities/Deaths (384) (425) (809)
Net flowsnote (b) 2,296 559 2,855
Transfers from general to separate account 169 (169)
Investment-related items and other movementsnote (c) 843 1,894 2,737
Foreign exchange translation differencesnote (a) 9,574 5,076 14,650
At 30 June 2016 103,904 55,251 159,155
Half year 2015 movements      
At 1 January 2015 81,741 45,005 126,746
Premiums 6,697 1,796 8,493
Surrenders (2,237) (1,169) (3,406)
Maturities/Deaths (344) (392) (736)
Net flowsnote (b) 4,116 235 4,351
Transfers from general to separate account 560 (560)
Investment-related items and other movements 383 (604) (221)
Foreign exchange translation differencesnote (a) (854) (355) (1,209)
At 30 June 2015 85,946 43,721 129,667
Average policyholder liability balances*      
Half year 2016 97,463 51,571 149,034
Half year 2015 83,844 44,363 128,207

C4.1(d) UK insurance operations

i Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds

A reconciliation of the total policyholder liabilities and unallocated surplus of with-profits funds of UK insurance operations from the beginning of the period to 30 June is as follows:

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  Shareholder-backed funds and subsidiaries
Half year 2016 movements SAIF and PAC with-profits sub-fund
£m
Unit-linked liabilities
£m
Annuity and other long-term business
£m
Total
£m

* Averages have been based on opening and closing balances, and adjusted for any acquisitions, disposals and corporate transactions in the period, and exclude unallocated surplus of with-profits funds.

Notes

  1. Net outflows have decreased from £1,365 million in the first half of 2015 to £1,117 million in the same period of 2016 due primarily to higher premium flows, up by £666 million to £5,561 million, following increased sales of with-profits savings and retirement products. This has been partially offset by lower premiums into our annuity business due to our reduced appetite for annuities post-Solvency II which meant that no bulk annuities transactions were undertaken in the first half of 2016. The level of inflows/outflows for unit-linked business remains subject to annual variation as it is driven by corporate pension schemes with transfers in or out from a small number of schemes influencing the level of flows in the period.
  2. Investment-related items and other movements of £10,092 million includes investment return and realised gains attributable to policyholders in the period.
At 1 January 2016 100,069 21,442 31,382 152,893
Comprising:        
Policyholder liabilities 89,526 21,442 31,382 142,350
Unallocated surplus of with-profits funds 10,543 10,543
         
Premiums 4,692 527 342 5,561
Surrenders (1,897) (1,285) (26) (3,208)
Maturities/Deaths (2,213) (271) (986) (3,470)
Net flowsnote (a) 582 (1,029) (670) (1,117)
Shareholders’ transfers post tax (110) (110)
Switches (84) 84
Investment-related items and other movementsnote (b) 5,891 1,050 3,151 10,092
Foreign exchange translation differences 720 1 721
At 30 June 2016 107,068 21,548 33,863 162,479
Comprising:        
Policyholder liabilities 95,822 21,548 33,863 151,233
Unallocated surplus of with-profits funds 11,246 11,246
         
Half year 2015 movements        
At 1 January 2015 99,427 23,300 31,709 154,436
Comprising:        
Policyholder liabilities 89,079 23,300 31,709 144,088
Unallocated surplus of with-profits funds 10,348 10,348
         
Premiums 2,879 618 1,398 4,895
Surrenders (1,389) (1,601) (22) (3,012)
Maturities/Deaths (1,999) (329) (920) (3,248)
Net flowsnote (a) (509) (1,312) 456 (1,365)
Shareholders’ transfers post tax (106) (106)
Switches (103) 103
Investment-related items and other movements 1,916 552 (152) 2,316
Foreign exchange translation differences (209) (209)
At 30 June 2015 100,416 22,643 32,013 155,072
Comprising:        
Policyholder liabilities 89,775 22,643 32,013 144,431
Unallocated surplus of with-profits funds 10,641 10,641
Average policyholder liability balances*        
Half year 2016 92,674 21,495 32,623 146,792
Half year 2015 89,427 22,972 31,861 144,260

C5: Intangible assets

C5.1 Intangible assets attributable to shareholders

C5.1(a) Goodwill attributable to shareholders

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  2016 £m   2015 £m
  30 Jun   30 Jun 31 Dec
Cost  
At beginning of period 1,463   1,583 1,583
Disposal of Japan life business   (120) (120)
Additional consideration paid on previously acquired business   2 2
Exchange differences 25   (4) (2)
Cost/Net book amount at end of period 1,488   1,461 1,463

Goodwill attributable to shareholders comprises:

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  2016 £m   2015 £m
  30 Jun   30 Jun 31 Dec
M&G 1,153   1,153 1,153
Other 335   308 310
  1,488   1,461 1,463

Other goodwill represents amounts arising from the purchase of entities by the Asia and US operations. These goodwill amounts relating to acquired operations are not individually material.

C5.1(b) Deferred acquisition costs and other intangible assets attributable to shareholders

The deferred acquisition costs and other intangible assets attributable to shareholders comprise:

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2016 £m   2015 £m
  30 Jun   30 Jun 31 Dec
Deferred acquisition costs related to insurance contracts as classified under IFRS 4 8,010   5,937 6,948
Deferred acquisition costs related to investment management contracts, including life assurance contracts classified as financial instruments and investment management contracts under IFRS 4 68   80 74
8,078   6,017 7,022
Present value of acquired in-force policies for insurance contracts as classified under IFRS 4 (PVIF) 48   51 45
Distribution rights and other intangibles 1,423   1,242 1,355
1,471   1,293 1,400
Total of deferred acquisition costs and other intangible assets 9,549   7,310 8,422

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  2016 £m   2015 £m
  Deferred acquisition costs        
  Asia US UK Asset
manage-
ment
  Other
intangibles note
  30 Jun
Total
  30 Jun
Total
31 Dec
Total

* Under the Group’s application of IFRS 4, US GAAP is used for measuring the insurance assets and liabilities of its US and certain Asia operations. Under US GAAP, most of Jackson’s products are accounted for under Accounting Standard no. 97 of the Financial Accounting Standards Board (FAS 97) whereby deferred acquisition costs are amortised in line with the emergence of actual and expected gross profits. The amounts included in the income statements and Other Comprehensive Income affect the pattern of profit emergence and thus the DAC amortisation attaching. DAC amortisation is allocated to the operating and non-operating components of the Group’s supplementary analysis of profit and other comprehensive income by reference to the underlying items.

† Other intangibles includes amounts in relation to software rights with additions of £21 million, amortisation of £15 million, disposals of £2 million and exchange gains of £6 million and a balance at 30 June 2016 of £81 million.

Note

Other intangibles comprise PVIF, distribution rights and other intangibles such as software rights. Distribution rights relate to amounts that have been paid or have become unconditionally due for payment as a result of past events in respect of bancassurance partnership arrangements in Asia. These agreements allow for bank distribution of Prudential’s insurance products for a fixed period of time.

US insurance operations

The DAC amount in respect of US insurance operations comprises amounts in respect of:

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

* Consequent upon the positive unrealised valuation movement for half year 2016 of £2,118 million (30 June 2015: negative unrealised valuation movement of £762 million; 31 December 2015: negative unrealised valuation movement of £1,305 million), there is a charge of £435 million (30 June 2015: a gain of £165 million; 31 December 2015: a gain of £337 million) for altered ‘shadow’ DAC amortisation booked within other comprehensive income. These adjustments reflect the movement from period to period, in the changes to the pattern of reported gross profits that would have happened if the assets reflected in the statement of financial position had been sold, crystallising the unrealised gains and losses, and the proceeds reinvested at the yields currently available in the market.

Variable annuity business 7,782   4,931 5,713
Other business 42   710 703
Cumulative shadow DAC (for unrealised gains/losses booked in other comprehensive income)* (763)   (420) (268)
Total DAC for US operations 7,061   5,221 6,148
Balance at beginning of period: 781 6,148 81 12   1,400   8,422   7,261 7,261
Additions and acquisition of subsidiaries 125 320 5   66   516   532 1,190
Amortisation to the income statement*:                      
Operating profit (80) (237) (7) (2)   (43)   (369)   (381) (762)
Non-operating profit 616     616   (192) 93
(80) 379 (7) (2)   (43)   247   (573) (669)
Disposals and transfers   (2)   (2)   (8)
Exchange differences and other movements 102 649   50   801   (75) 311
Amortisation of DAC related to net unrealised valuation movements on Jackson’s available-for-sale securities recognised within other comprehensive income* (435)     (435)   165 337
Balance at end of period 928 7,061 79 10   1,471   9,549   7,310 8,422

For further detail on the deferral and amortisation of acquisition costs for Jackson, including the mean reversion technique, please refer to note C5.1 of the Group’s consolidated financial statements for the year ended 31 December 2015.

Sensitivity of amortisation charge

The amortisation charge to the income statement is reflected in both operating profit and short-term fluctuations in investment returns. The amortisation charge to the operating profit in a reporting period comprises:

  1. A core amount that reflects a relatively stable proportion of underlying premiums or profit; and
  2. An element of acceleration or deceleration arising from market movements differing from expectations.

In periods where the cap and floor feature of the mean reversion technique are not relevant, the technique operates to dampen the second element above. Nevertheless, extreme market movements can cause material acceleration or deceleration of amortisation in spite of this dampening effect.

Furthermore, in those periods where the cap or floor is relevant, the mean reversion technique provides no further dampening and additional volatility may result.

In the first half of 2016, the DAC amortisation charge for operating profit was determined after including a credit for decelerated amortisation of £29 million (half year 2015: credit for decelerated amortisation of £20 million; full year 2015: charge for accelerated amortisation of £2 million). The first half of 2016 amount reflects the separate account performance of 3 per cent, which is higher than the assumed level for the year (under the 8 year mean reversion technique applied).

As noted above, the application of the mean reversion formula has the effect of dampening the impact of equity market movements on DAC amortisation while the mean reversion assumption lies within the corridor. It would take a significant movement in separate account values for the mean reversion assumption to move outside the corridor. Based on a pro forma instantaneous movement at 1 July 2016, it would need to be outside the approximate range of negative 25 per cent to positive 50 per cent for this to apply.

C6: Borrowings

C6.1 Core structural borrowings of shareholder-financed operations

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

Notes

  1. These debt tier classifications (including those noted for the comparative balances) are consistent with the treatment of capital for regulatory purposes under the Solvency II regime.

    The perpetual subordinated capital securities are entirely US$ denominated. The Group has designated US$2.80 billion (30 June 2015: US$2.80 billion; 31 December 2015: US$2.80 billion) of its perpetual subordinated debt as a net investment hedge under IAS 39 to hedge the currency risks related to the investment in Jackson.

  2. The senior debt ranks above subordinated debt in the event of liquidation.
  3. The Prudential Capital bank loan of £275 million has been made in two tranches: a £160 million loan and a £115 million loan both drawn at a cost of 12 month GBP LIBOR plus 0.4 per cent and maturing on 20 December 2017.
  4. In June 2016, the Company issued core structural borrowings of US$1,000 million 5.25 per cent Tier 2 perpetual subordinated notes. The proceeds net of costs, were £681 million.
  5. The maturity profile, currency and interest rates applicable to all other core structural borrowings of shareholder-financed operations of the Group are as detailed in note C6.1 of the Group’s consolidated financial statements for the year ended 31 December 2015.
Holding company operations:      
Perpetual subordinated notes (Tier 1)note (i) 823   698 746
Perpetual subordinated notes (Tier 2)notes (i), (iv) 2,007   1,077 1,149
Subordinated notes (Tier 2)note (i) 2,126   2,122 2,123
Subordinated debt total 4,956   3,897 4,018
Senior debt:note (ii)      
£300m 6.875% Bonds 2023 300   300 300
£250m 5.875% Bonds 2029 249   249 249
Holding company total 5,505   4,446 4,567
Prudential Capital bank loannote (iii) 275   275 275
Jackson US$250m 8.15% Surplus Notes 2027 186   159 169
Total (per condensed consolidated statement of financial position)note (v) 5,966   4,880 5,011

C6.2 Other borrowings

a Operational borrowings attributable to shareholder-financed operations

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

Notes

  1. In addition to the debt listed above, £200 million Floating Rate Notes were issued by Prudential plc in October 2015 which will mature in October 2016. These Notes have been wholly subscribed by a Group subsidiary and accordingly have been eliminated on consolidation in the Group financial statements. These Notes were originally issued in October 2008 and have been reissued upon their maturity.
  2. In all instances the holders of the debt instruments issued by these subsidiaries and funds do not have recourse beyond the assets of those subsidiaries and funds.
  3. Other borrowings mainly include amounts whose repayment to the lender is contingent upon future surplus emerging from certain contracts specified under the arrangement. If insufficient surplus emerges on those contracts, there is no recourse to other assets of the Group and the liability is not payable to the degree of shortfall. In addition, other borrowings include senior debt issued through the Federal Home Loan Bank of Indianapolis (FHLB), secured by collateral posted with the FHLB by Jackson.
Borrowings in respect of short-term fixed income securities programmes 2,554   2,176 1,705
Non-recourse borrowings of US operationsnote (ii)   10
Other borrowingsnote (iii) 244   318 255
Totalnote (i) 2,798   2,504 1,960

b Borrowings attributable to with-profits operations

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

* In all instances the holders of the debt instruments issued by these subsidiaries and funds do not have recourse beyond the assets of those subsidiaries and funds.

† The interests of the holders of the bonds issued by Scottish Amicable Finance plc, a subsidiary of the Scottish Amicable Insurance Fund, are subordinated to the entitlements of the policyholders of that fund.

Non-recourse borrowings of consolidated investment funds* 1,248   911 1,158
£100m 8.5% undated subordinated guaranteed bonds of Scottish Amicable Finance plc 100   100 100
Other borrowings (predominantly obligations under finance leases) 79   78 74
Total 1,427   1,089 1,332

C7: Deferred tax

The statement of financial position contains the following deferred tax assets and liabilities in relation to:

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  Deferred tax assets   Deferred tax liabilities
  2016 £m   2015 £m   2016 £m   2015 £m
  30 Jun   30 Jun 31 Dec   30 Jun   30 Jun 31 Dec
Unrealised losses or gains on investments 22   331 21   (1,815)   (1,673) (1,036)
Balances relating to investment and insurance contracts 1   8 1   (655)   (544) (543)
Short-term temporary differences 3,690   2,407 2,752   (2,893)   (2,076) (2,400)
Capital allowances 12   9 10   (34)   (32) (31)
Unused tax losses 46   65 35    
Total 3,771   2,820 2,819   (5,397)   (4,325) (4,010)

Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying temporary differences can be deducted.

The taxation regimes applicable across the Group often apply separate rules to trading and capital profits and losses. The distinction between temporary differences that arise from items of either a trading or capital nature may affect the recognition of deferred tax assets. Accordingly, for the 2016 half year results and financial position at 30 June 2016, the possible tax benefit of approximately £94 million (30 June 2015: £106 million; 31 December 2015: £98 million), which may arise from capital losses valued at approximately £0.5 billion (30 June 2015: £0.5 billion; 31 December 2015: £0.5 billion), is sufficiently uncertain that it has not been recognised. In addition, a potential deferred tax asset of £60 million (30 June 2015: £42 million; 31 December 2015: £52 million), which may arise from trading tax losses and other potential temporary differences totalling £0.3 billion (30 June 2015: £0.2 billion; 31 December 2015: £0.3 billion) is sufficiently uncertain that it has not been recognised. Of the deferred tax asset recognised for unused tax losses, £39 million will expire if not utilised within the next seven years, £1 million if not utilised within 20 years and the rest has no expiry date.

The table that follows provides a breakdown of the recognised deferred tax assets set out in the table above for the short-term temporary differences. The table also shows the period of estimated recoverability for each respective business unit. For these and each category of deferred tax asset recognised their recoverability against forecast taxable profits is not significantly impacted by any current proposed changes to future accounting standards.

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  Short-term temporary differences
  30 Jun 2016
£m
Expected period of recoverability
Asia insurance operations 49 1 to 3 years
US insurance operations 3,353 With run-off of in-force book
UK insurance operations 136 1 to 10 years
Other operations 152 1 to 10 years
Total 3,690

Under IAS 12, ‘Income Taxes’, deferred tax is measured at the tax rates that are expected to apply to the period when the asset is realised or the liability settled, based on the tax rates (and laws) that have been enacted or are substantively enacted at the end of the reporting periods. For UK companies the UK corporation tax rate is currently 20 per cent, reducing to 19 per cent from 1 April 2017 and further to 18 per cent from 1 April 2020.

As part of the Finance Bill 2016, the UK government proposed a reduction in the UK corporation tax rate to 17 per cent effective 1 April 2020. As these changes have not been substantively enacted as at 30 June 2016 they have not been reflected in the balances at that date. The changes, once substantively enacted, are expected to have the effect of reducing the UK with-profits and shareholder-backed business element of the overall net deferred tax liabilities by £9 million.

C8: Defined benefit pension schemes

a IAS 19 financial positions

The Group operates a number of pension schemes. The largest defined benefit scheme is the Prudential Staff Pension Scheme (PSPS), which is the principal scheme in the UK. The Group also operates two smaller UK defined benefit schemes in respect of Scottish Amicable (SASPS) and M&G (M&GGPS). In addition, there are two small defined benefit schemes in Taiwan which have negligible deficits.

The Group asset/liability in respect of defined benefit pension schemes is as follows:

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  30 Jun 2016 £m
  PSPS SASPS M&GGPS Other schemes Total
Underlying economic surplus (deficit) 1,270 (123) 115 (1) 1,261
Less: unrecognised surplus (1,100) (1,100)
Economic surplus (deficit) (including investment in Prudential insurance policies) 170 (123) 115 (1) 161
Consolidation adjustment against policyholder liabilities for investment in Prudential insurance policies (81) (81)
Attributable to:
PAC with-profits fund 119 (49) 70
Shareholder-backed operations 51 (74) 34 (1) 10
IAS 19 pension asset (liability) on the Group statement of financial position* 170 (123) 34 (1) 80

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  2015 £m
  30 Jun   31 Dec
  PSPS SASPS M&GGPS Other schemes Total   PSPS SASPS M&GGPS Other schemes Total
Underlying economic surplus (deficit) 915 (140) 53 (1) 827   969 (82) 75 (1) 961
Less: unrecognised surplus (790) (790)   (800) (800)
Economic surplus (deficit) (including investment in Prudential insurance policies) 125 (140) 53 (1) 37   169 (82) 75 (1) 161
Consolidation adjustment against policyholder liabilities for investment in Prudential insurance policies (85) (85)   (77) (77)
Attributable to:  
PAC with-profits fund 88 (70) 18   118 (33) 85
Shareholder-backed operations 37 (70) (32) (1) (66)   51 (49) (2) (1) (1)
IAS 19 pension asset (liability) on the Group statement of financial position* 125 (140) (32) (1) (48)   169 (82) (2) (1) 84

* At 30 June 2016, the PSPS pension asset of £170 million (30 June 2015: £125 million; 31 December 2015: £169 million) and the other schemes’ pension liabilities of £90 million (30 June 2015: £173 million; 31 December 2015: £85 million) are included within ‘Other debtors’ and ‘Provisions’ respectively in the consolidated statement of financial position.

b Estimated pension scheme surpluses and deficits (on an economic basis)

The underlying pension position on an economic basis reflects the assets (including investments in Prudential policies that are offset against liabilities to policyholders on consolidation in the Group financial statements) and the liabilities of the schemes. The IAS 19 basis excludes the investments in Prudential policies. In principle, on consolidation the investments are eliminated against policyholder liabilities of UK insurance operations, so that the formal IAS 19 position for the scheme in isolation excludes these items. This treatment applies to the M&GGPS investments. However, as a substantial portion of the Company’s interest in the underlying surplus of PSPS is not recognised, the adjustment is not necessary for the PSPS investments.

Movements on the pension scheme deficit determined on the economic basis are as follows, with the effect of the application of IFRIC 14 being shown separately:

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Half year 2016 £m
  Surplus
(deficit) in
schemes at
1 Jan 2016
(Charge)
credit
to income
statement
Actuarial
gains
and losses
in other
comprehensive
income
Contributions
paid
Surplus
(deficit) in
schemes at
30 Jun 2016
All schemes          
Underlying position (without the effect of IFRIC 14)          
Surplus 961 277 23 1,261
Less: amount attributable to PAC with-profits fund (658) (6) (178) (9) (851)
Shareholders’ share:          
Gross of tax surplus (deficit) 303 (6) 99 14 410
Related tax (60) 1 (17) (3) (79)
Net of shareholders’ tax 243 (5) 82 11 331
Application of IFRIC 14 for the derecognition of PSPS surplus          
Derecognition of surplus (800) (18) (282) (1,100)
Less: amount attributable to PAC with-profits fund 573 12 195 1 781
Shareholders’ share:          
Gross of tax (227) (6) (87) 1 (319)
Related tax 45 1 15 61
Net of shareholders’ tax (182) (5) (72) 1 (258)
With the effect of IFRIC 14          
Surplus (deficit) 161 (18) (5) 23 161
Less: amount attributable to PAC with-profits fund (85) 6 17 (8) (70)
Shareholders’ share:          
Gross of tax surplus (deficit) 76 (12) 12 15 91
Related tax (15) 2 (2) (3) (18)
Net of shareholders’ tax 61 (10) 10 12 73

C9: Share capital, share premium and own shares

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  30 Jun 2016   30 Jun 2015   31 Dec 2015
Issued shares of 5p each fully paid Number of ordinary shares
 
Share capital
£m
Share premium
£m
  Number of ordinary shares
 
Share capital
£m
Share premium
£m
  Number of ordinary shares
 
Share capital
£m
Share premium
£m
At 1 January 2,572,454,958 128 1,915   2,567,779,950 128 1,908   2,567,779,950 128 1,908
Shares issued under share-based schemes 6,579,190 6   3,284,119 2   4,675,008 7
At end of period 2,579,034,148 128 1,921   2,571,064,069 128 1,910   2,572,454,958 128 1,915

Amounts recorded in share capital represent the nominal value of the shares issued. The difference between the proceeds received on issue of shares, net of issue costs, and the nominal value of shares issued is credited to the share premium account.

At 30 June 2016, there were options outstanding under Save As You Earn schemes to subscribe for shares as follows:

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  Number of shares to subscribe for Share price range Exercisable
by year
from to
30 June 2016 7,128,449 288p 1,155p 2021
30 June 2015 8,007,928 288p 1,155p 2020
31 December 2015 8,795,617 288p 1,155p 2021

Transactions by Prudential plc and its subsidiaries in Prudential plc shares

The Group buys and sells Prudential plc shares (‘own shares’) either in relation to its employee share schemes or via transactions undertaken by authorised investment funds that the Group is deemed to control. The cost of own shares of £185 million at 30 June 2016 (30 June 2015: £227 million; 31 December 2015: £219 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery of shares under employee incentive plans. At 30 June 2016, 11.2 million (30 June 2015: 10.8 million; 31 December 2015: 10.5 million) Prudential plc shares with a market value of £141 million (30 June 2015: £165 million; 31 December 2015: £161 million) were held in such trusts, all of which are for employee incentive plans. The maximum number of shares held during the period was 11.2 million which was in June 2016.

The Company purchased the following number of shares in respect of employee incentive plans:

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  Number of shares purchased
(in millions)
Cost
£m
Half year 2016 3.8 49.5
Half year 2015 5.1 86.3
Full year 2015 5.6 92.9

The Group has consolidated a number of authorised investment funds where it is deemed to control these funds under IFRS. Some of these funds hold shares in Prudential plc. The total number of shares held by these funds at 30 June 2016 was 4.8 million (30 June 2015: 6.8 million; 31 December 2015: 6.1 million) and the cost of acquiring these shares of £39 million (30 June 2015: £59 million; 31 December 2015: £54 million) is included in the cost of own shares. The market value of these shares as at 30 June 2016 was £61 million (30 June 2015: £105 million; 31 December 2015: £94 million). During 2016, these funds made a net disposal of 1,280,258 Prudential shares (30 June 2015: net disposal of 724,186; 31 December 2015: net disposal of 1,402,697) for a net decrease of £14.1 million to book cost (30 June 2015: net decrease of £8.0 million; 31 December 2015: net decrease of £13 million).

All share transactions were made on an exchange other than the Stock Exchange of Hong Kong.

Other than set out above the Group did not purchase, sell or redeem any Prudential plc listed securities during half year 2016 or 2015.

Section 3

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D: Other notes

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