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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Prudential Plc | LSE:PRU | London | Ordinary Share | GB0007099541 | ORD 5P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| -13.60 | -2.01% | 663.80 | 664.20 | 664.60 | 681.40 | 663.40 | 673.40 | 16,912,299 | 16:35:23 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Life Insurance | 12.19B | 1.7B | 0.6401 | 10.38 | 18B |
From Feb 2020 to Feb 2025
TIDMPRU
RNS Number : 9461I
Prudential PLC
14 August 2019
IFRS disclosure and additional financial information
Prudential plc Half Year 2019 results
International Financial Reporting Standards (IFRS) basis results
CONDENSED CONSOLIDATED INCOME STATEMENT
Hot Features
Premium
2019 GBPm 2018* GBPm
--------- --------------------
Note Half year Half year Full year
---------------------------------------------------------------------- ----- --------- --------- ---------
Profit from continuing operations:
Gross premiums earned 16,293 14,786 34,163
Outward reinsurance premiums (520) (363) (886)
------------------------------------------------------------------------ ----- --------- --------- ---------
Earned premiums, net of reinsurance 15,773 14,423 33,277
Investment return 24,633 1,381 (6,829)
Other income 199 215 398
------------------------------------------------------------------------ ----- --------- --------- ---------
Total revenue, net of reinsurance B1.4 40,605 16,019 26,846
------------------------------------------------------------------------ ----- --------- --------- ---------
Benefits and claims and movement in unallocated surplus of with-profits
funds, net of reinsurance (36,671) (10,928) (17,545)
Acquisition costs and other expenditure B2 (2,711) (3,285) (6,386)
Finance costs: interest on core structural borrowings of
shareholder-financed businesses (226) (189) (410)
Gain (loss) on disposal of businesses and corporate transactions D1 13 (57) (80)
------------------------------------------------------------------------ ----- --------- --------- ---------
Total charges, net of reinsurance and gain (loss) on disposal of
businesses (39,595) (14,459) (24,421)
------------------------------------------------------------------------ ----- --------- --------- ---------
Share of profits from joint ventures and associates, net of related tax 106 82 239
------------------------------------------------------------------------ ----- --------- --------- ---------
Profit before tax (being tax attributable to shareholders' and
policyholders' returns)note
(i) 1,116 1,642 2,664
Less tax charge attributable to policyholders' returns (220) (43) (80)
------------------------------------------------------------------------ ----- --------- --------- ---------
Profit before tax attributable to shareholders B1.1 896 1,599 2,584
--------- --------- ---------
Total tax charge attributable to policyholders and shareholders B4 (221) (369) (506)
Adjustment to remove tax charge attributable to policyholders' returns 220 43 80
--------- --------- ---------
Tax charge attributable to shareholders' returns B4 (1) (326) (426)
------------------------------------------------------------------------ ----- --------- --------- ---------
Profit from continuing operations for the period 895 1,273 2,158
Profit from discontinued operations for the period, net of related
taxnote (ii) D2.1 645 83 855
------------------------------------------------------------------------ ----- --------- --------- ---------
Profit for the period 1,540 1,356 3,013
------------------------------------------------------------------------ ----- --------- --------- ---------
Attributable to:
Equity holders of the Company:
From continuing operations 890 1,272 2,155
From discontinued operations 645 83 855
Non-controlling interests from continuing operations 5 1 3
----------------------------------------------------------------------- ----- --------- --------- ---------
Profit for the period 1,540 1,356 3,013
------------------------------------------------------------------------ ----- --------- --------- ---------
Earnings per share (in pence) 2019 2018*
--------- --------------------
Note Half year Half year Full year
------------------------------------------------------------------- ----- --------- --------- ---------
Based on profit attributable to the equity holders of the Company:
Basic B5
Based on profit from continuing operations 34.4p 49.5p 83.7p
Based on profit from discontinued operationsnote (ii) 25.0p 3.2p 33.2p
-------------------------------------------------------------------------- --------- --------- ---------
59.4p 52.7p 116.9p
Diluted B5
Based on profit from continuing operations 34.4p 49.4p 83.6p
Based on profit from discontinued operationsnote (ii) 25.0p 3.2p 33.2p
-------------------------------------------------------------------------- --------- --------- ---------
59.4p 52.6p 116.8p
------------------------------------------------------------------------- --------- --------- ---------
* The 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).
Dividends per share (in pence) 2019 2018
--------- --------------------
Note Half year Half year Full year
------------------------------------------------ ----- --------- --------- ---------
Dividends relating to reporting period: B6
First interim ordinary dividend 16.45p 15.67p 15.67p
Second interim ordinary dividend - - 33.68p
------------------------------------------------------- --------- --------- ---------
Total 16.45p 15.67p 49.35p
------------------------------------------------- ----- --------- --------- ---------
Dividends paid in reporting period: B6
Current year first interim ordinary dividend - - 15.67p
Second interim ordinary dividend for prior year 33.68p 32.50p 32.50p
------------------------------------------------------- --------- --------- ---------
Total 33.68p 32.50p 48.17p
------------------------------------------------- ----- --------- --------- ---------
Notes
(i) This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders. This is principally because the corporate taxes of the Group include those on the income of consolidated with-profits and unit-linked funds that, through adjustments to benefits, are borne by policyholders. These amounts are required to be included in the tax charge of the Company under IAS 12. Consequently, the profit before all taxes measure is not representative of pre-tax profits attributable to shareholders. Profit before all taxes is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of with-profits funds after adjusting for taxes borne by policyholders.
(ii) Profit from discontinued operations represents the post-tax profit contributed by the UK and Europe operations which are classified as held for distribution at 30 June 2019 (a line-by-line analysis of profit for the period for the discontinued UK and Europe operations is included in note D2.1).The 2018 comparative results have been re-presented from those previously published accordingly (as described in note A2).
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
2019 GBPm 2018* GBPm
--------- --------------------
Note Half year Half year Full year
---------------------------------------------------------------------- ----- --------- --------- ---------
Profit for the period from continuing operations 895 1,273 2,158
Other comprehensive income (loss) from continuing operations:
Items that may be reclassified subsequently to profit or loss
Exchange movements on foreign operations and net investment hedges:
Exchange movements arising during the period 95 70 344
Related tax 1 2 5
----------------------------------------------------------------------- ----- --------- --------- ---------
96 72 349
---------------------------------------------------------------------------- --------- --------- ---------
Net unrealised valuation movements on securities of US insurance
operations classified as
available-for-sale:
Net unrealised holding gains (losses) arising in the period 2,636 (1,392) (1,606)
Deduct net gains included in the income statement on disposal and
impairment (19) (29) (11)
----------------------------------------------------------------------- ----- --------- --------- ---------
2,617 (1,421) (1,617)
---------------------------------------------------------------------------- --------- --------- ---------
Related change in amortisation of deferred acquisition costs C5.2 (432) 272 246
Related tax (459) 241 288
----------------------------------------------------------------------- ----- --------- --------- ---------
1,726 (908) (1,083)
---------------------------------------------------------------------------- --------- --------- ---------
Total items that may be reclassified subsequently to profit or loss 1,822 (836) (734)
------------------------------------------------------------------------ ----- --------- --------- ---------
Items that will not be reclassified to profit or loss
Shareholders' share of actuarial gains and losses on defined benefit
pension schemes:
Net actuarial (losses) / gains on defined benefit pension schemes (86) 3 20
Related tax 14 (1) (4)
----------------------------------------------------------------------- ----- --------- --------- ---------
Total items that will not be reclassified to profit or loss (72) 2 16
------------------------------------------------------------------------ ----- --------- --------- ---------
Other comprehensive income (loss) from continuing operations for the
period, net of related
tax 1,750 (834) (718)
------------------------------------------------------------------------ ----- --------- --------- ---------
Total comprehensive income for the period from continuing operations 2,645 439 1,440
------------------------------------------------------------------------ ----- --------- --------- ---------
Profit for the period from discontinued operations D2.1 645 83 855
Other comprehensive income from discontinued operations D2.1 4 62 57
------------------------------------------------------------------------ ----- --------- --------- ---------
Total comprehensive income for the period from discontinued operations 649 145 912
------------------------------------------------------------------------ ----- --------- --------- ---------
Total comprehensive income for the period 3,294 584 2,352
------------------------------------------------------------------------ ----- --------- --------- ---------
Attributable to:
Equity holders of the Company
From continuing operations 2,640 438 1,436
From discontinued operations 649 145 912
Non-controlling interests from continuing operations 5 1 4
----------------------------------------------------------------------- ----- --------- --------- ---------
Total comprehensive income for the period 3,294 584 2,352
------------------------------------------------------------------------ ----- --------- --------- ---------
* The 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Period ended 30 June 2019 GBPm
----------------------------------------------------------------------------------------
Available
-for-sale Non-
Share Share Retained Translation securities Shareholders' controlling Total
capital premium earnings reserve reserves equity interests equity
Note note C9 note C9
-------------- ----- ------- ------- -------- ----------- ---------- ------------- ----------- -------
Reserves
Profit from
continuing
operations for
the period - - 890 - - 890 5 895
Other
comprehensive
income (loss)
from
continuing
operations - - (72) 96 1,726 1,750 - 1,750
--------------- ----- ------- ------- -------- ----------- ---------- ------------- ----------- -------
Total
comprehensive
income from
continuing
operations for
the period - - 818 96 1,726 2,640 5 2,645
Total
comprehensive
income from
discontinued
operations for
the period - - 647 2 - 649 - 649
--------------- ----- ------- ------- -------- ----------- ---------- ------------- ----------- -------
Total
comprehensive
income (loss)
for the period - - 1,465 98 1,726 3,289 5 3,294
Dividends B6 - - (870) - - (870) - (870)
Reserve
movements in
respect of
share-based
payments - - 2 - - 2 - 2
Share capital
and share
premium
New share
capital
subscribed C9 - 10 - - - 10 - 10
Treasury shares
Movement in own
shares in
respect of
share-based
payment plans - - (9) - - (9) - (9)
Movement in
Prudential plc
shares
purchased by
unit trusts
consolidated
under IFRS - - 1 - - 1 - 1
--------------- ----- ------- ------- -------- ----------- ---------- ------------- ----------- -------
Net increase
(decrease) in
equity - 10 589 98 1,726 2,423 5 2,428
At beginning of
period 130 1,964 14,206 1,188 (239) 17,249 18 17,267
--------------- ----- ------- ------- -------- ----------- ---------- ------------- ----------- -------
At end of
period 130 1,974 14,795 1,286 1,487 19,672 23 19,695
--------------- ----- ------- ------- -------- ----------- ---------- ------------- ----------- -------
Period ended 30 June 2018* GBPm
----------------------------------------------------------------------------------------
Available
-for-sale Non-
Share Share Retained Translation securities Shareholders' controlling Total
capital premium earnings reserve reserves equity interests equity
Note note C9 note C9
-------------- ----- ------- ------- -------- ----------- ---------- ------------- ----------- ------- Reserves Profit from continuing operations for the period - - 1,272 - - 1,272 1 1,273 Other comprehensive income (loss) from continuing operations - - 2 72 (908) (834) - (834) --------------- ----- ------- ------- -------- ----------- ---------- ------------- ----------- ------- Total comprehensive income (loss) from continuing operations for the period - - 1,274 72 (908) 438 1 439 Total comprehensive income (loss) from discontinued operations for the period - - 148 (3) - 145 - 145 --------------- ----- ------- ------- -------- ----------- ---------- ------------- ----------- ------- Total comprehensive income (loss) for the period - - 1,422 69 (908) 583 1 584 Dividends B6 - - (840) - - (840) - (840) Reserve movements in respect of share-based payments - - (9) - - (9) - (9) Share capital and share premium New share capital subscribed C9 - 6 - - - 6 - 6 Treasury shares Movement in own shares in respect of share-based payment plans - - 28 - - 28 - 28 Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS - - 27 - - 27 - 27 --------------- ----- ------- ------- -------- ----------- ---------- ------------- ----------- ------- Net increase (decrease) in equity - 6 628 69 (908) (205) 1 (204) At beginning of period 129 1,948 12,326 840 844 16,087 7 16,094 --------------- ----- ------- ------- -------- ----------- ---------- ------------- ----------- ------- At end of period 129 1,954 12,954 909 (64) 15,882 8 15,890 --------------- ----- ------- ------- -------- ----------- ---------- ------------- ----------- -------
* The half year 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
Year ended 31 December 2018* GBPm
---------------- ----- ------- -------------------------------------------------------------------------------
Available
-for-sale Non-
Share Share Retained Translation securities Shareholders' controlling Total
capital premium earnings reserve reserves equity interests equity
Note note C9 note C9
---------------- ----- ------- ------- -------- ----------- ---------- ------------- ----------- -------
Reserves
Profit from
continuing
operations for
the year - - 2,155 - - 2,155 3 2,158
Other
comprehensive
income (loss)
from continuing
operations - - 16 348 (1,083) (719) 1 (718)
----------------- ----- ------- ------- -------- ----------- ---------- ------------- ----------- -------
Total
comprehensive
income (loss)
from continuing
operations for
the year - - 2,171 348 (1,083) 1,436 4 1,440
Total
comprehensive
income from
discontinued
operations for
the year - - 912 - - 912 - 912
----------------- ----- ------- ------- -------- ----------- ---------- ------------- ----------- -------
Total
comprehensive
income (loss)
for the year - - 3,083 348 (1,083) 2,348 4 2,352
Dividends B6 - - (1,244) - - (1,244) - (1,244)
Reserve movements
in respect of
share-based
payments - - 69 - - 69 - 69
Change in
non-controlling
interests - - - - - - 7 7
Movements in
respect of
option to
acquire
non-controlling
interests - - (109) - - (109) - (109)
Share capital and
share premium
New share capital
subscribed C9 1 16 - - - 17 - 17
Treasury shares
Movement in own
shares in
respect of
share-based
payment plans - - 29 - - 29 - 29
Movement in
Prudential plc
shares purchased
by unit trusts
consolidated
under IFRS - - 52 - - 52 - 52
----------------- ----- ------- ------- -------- ----------- ---------- ------------- ----------- -------
Net increase
(decrease) in
equity 1 16 1,880 348 (1,083) 1,162 11 1,173
At beginning of
year 129 1,948 12,326 840 844 16,087 7 16,094
----------------- ----- ------- ------- -------- ----------- ---------- ------------- ----------- -------
At end of year 130 1,964 14,206 1,188 (239) 17,249 18 17,267
----------------- ----- ------- ------- -------- ----------- ---------- ------------- ----------- -------
* The full year 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
2019 GBPm 2018 GBPm
--------- ----------------
Note 30 Jun 30 Jun 31 Dec
-------------------------------------------------------------------------- ----- --------- ------- -------
Assets
Goodwill C5.1 510 1,620 1,857
Deferred acquisition costs and other intangible assets C5.2 12,659 11,359 11,923
Property, plant and equipmentnote (i) 785 951 1,409
Reinsurers' share of insurance contract liabilities 10,151 9,620 11,144
Deferred tax assets C7 2,762 2,435 2,595
Current tax recoverable 371 626 618
Accrued investment income 1,332 2,574 2,749
Other debtors 2,011 3,519 4,088
Investment properties 11 17,605 17,925
Investment in joint ventures and associates accounted for using the equity
method 1,030 1,554 1,733
Loans C3.3 12,513 16,922 18,010
Equity securities and portfolio holdings in unit trustsnote (ii) 183,670 229,707 214,733
Debt securitiesnote (ii) C3.2 99,675 160,305 175,356
Derivative assets 1,222 3,428 3,494
Other investmentsnote (ii) 958 6,059 6,512
Deposits 1,491 12,412 11,796
Assets held for distributionnote (iii) C1 218,324 - -
Assets held for sale - 12,024 10,578
Cash and cash equivalents 5,208 8,450 12,125
---------------------------------------------------------------------------- ----- --------- ------- -------
Total assets C1 554,683 501,170 508,645
---------------------------------------------------------------------------- ----- --------- ------- ------- Equity Shareholders' equity 19,672 15,882 17,249 Non-controlling interests 23 8 18 ---------------------------------------------------------------------------- ----- --------- ------- ------- Total equity 19,695 15,890 17,267 ---------------------------------------------------------------------------- ----- --------- ------- ------- Liabilities Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4) C4.1 285,168 405,482 409,301 Unallocated surplus of with-profits funds C4.1 2,944 17,283 15,845 Core structural borrowings of shareholder-financed businesses C6.1 7,441 6,367 7,664 Operational borrowings attributable to shareholder-financed businessesnote (i) C6.2 1,664 1,618 998 Borrowings attributable to with-profits businessesnote (i) C6.2 238 3,589 3,940 Obligations under funding, securities lending and sale and repurchase agreements 6,756 7,128 6,989 Net asset value attributable to unit holders of consolidated unit trusts and similar funds 3,482 9,358 11,651 Deferred tax liabilities C7 3,701 4,443 4,022 Current tax liabilities 319 415 568 Accruals, deferred income and other liabilities 10,597 13,551 15,248 Provisions 254 920 1,078 Derivative liabilities 1,037 3,149 3,506 Liabilities held for distributionnote (iii) C1 211,387 - - Liabilities held for sale - 11,977 10,568 ---------------------------------------------------------------------------- ----- --------- ------- ------- Total liabilities C1 534,988 485,280 491,378 ---------------------------------------------------------------------------- ----- --------- ------- ------- Total equity and liabilities 554,683 501,170 508,645 ---------------------------------------------------------------------------- ----- --------- ------- -------
Notes
(i) As at 1 January 2019, the Group applied IFRS 16, 'Leases', using the modified retrospective approach. Under this approach, comparative information is not restated. The application of the standard has resulted in the recognition of an additional lease liability and a corresponding 'right-of-use' asset of a similar amount as at 1 January 2019. See note A3 for further details. As at 30 June 2019, right-of-use assets recognised in property, plant and equipment for continuing operations amounted to GBP425 million.
(ii) Included within equity securities and portfolio holdings in unit trusts, debt securities and other investments are GBP8 million of lent securities as at 30 June 2019 (30 June 2018: GBP8,993 million; 31 December 2018: GBP8,278 million).
(iii) Assets and liabilities held for distribution relate to the Group's UK and Europe operations, which have been classified as discontinued operations at 30 June 2019 and are presented above after the elimination of intra-Group balances with the continuing operations (see note C1). A line-by-line analysis of assets and liabilities for the discontinued UK and Europe operations before elimination of such intra-Group balances, is included in note D2.2. The 2018 comparative results for the assets and liabilities at 30 June 2018 and 31 December 2018 are as published and not re-presented on a basis consistent with half year 2019 (as described in note A2).
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
2019 GBPm 2018* GBPm
--------- --------------------
Note Half year Half year Full year
---------------------------------------------------------------------- ----- --------- --------- ---------
Cash flows from continuing operations:
Cash flows from operating activities
Profit before tax (being tax attributable to shareholders' and
policyholders' returns)note
(i) 1,116 1,642 2,664
Adjustments to profit before tax for non-cash movements in
operating assets and liabilities:
Investments (29,889) (3,439) 1,675
Other non-investment and non-cash assets (2,075) (58) (1,495)
Policyholder liabilities (including unallocated surplus) 26,820 2,186 (1,229)
Other liabilities (including operational borrowings) 3,147 292 644
Other itemsnote (ii) 97 357 201
------------------------------------------------------------------------ ----- --------- --------- ---------
Net cash flows from operating activities (784) 980 2,460
------------------------------------------------------------------------ ----- --------- --------- ---------
Cash flows from investing activities
Net cash flows from purchases and disposals of property, plant and
equipment (16) (59) (100)
Net cash flows from corporate transactionsnote (iii) (72) (132) (331)
------------------------------------------------------------------------ ----- --------- --------- ---------
Net cash flows from investing activities (88) (191) (431)
------------------------------------------------------------------------ ----- --------- --------- ---------
Cash flows from financing activities
Structural borrowings of the Group:
Shareholder-financed operations:note (iv) C6.1
Issue of subordinated debt, net of costs - - 1,630
Redemption of subordinated debt (400) - (434)
Fees paid to modify terms and conditions of debt issued by the Groupnote (v) (141) - (33)
Interest paid (229) (187) (376)
Equity capital:
Issues of ordinary share capital 10 6 17
Dividends paid B6 (870) (840) (1,244)
Net remittances from discontinued operations D2.3 356 341 654
------------------------------------------------------------------------ ----- --------- --------- ---------
Net cash flows from financing activities (1,274) (680) 214
------------------------------------------------------------------------ ----- --------- --------- ---------
Net increase in cash and cash equivalents from continuing operations (2,146) 109 2,243
Net cash flows from discontinued operationsnote (vi) D2.3 (124) (2,380) (1,112)
Cash and cash equivalents at beginning of period 12,125 10,690 10,690
Effect of exchange rate changes on cash and cash equivalents (23) 31 304
------------------------------------------------------------------------ ----- --------- --------- ---------
Cash and cash equivalents at end of period 9,832 8,450 12,125
------------------------------------------------------------------------ ----- --------- --------- ---------
Comprising:
Cash and cash equivalents from continuing operations 5,208 5,030 7,376
Cash and cash equivalents from discontinued operations 4,624 3,420 4,749
----------------------------------------------------------------------- ----- --------- --------- ---------
* The 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).
Notes
(i) This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders, as explained in footnote (i) of the 'Condensed Consolidated Income Statement'.
(ii) The adjusting items to profit before tax included within other items are adjustments in respect of non-cash items together with operational interest receipts and payments, dividend receipts and tax paid.
(iii) Net cash flows from corporate transactions include amounts paid for distribution rights and cash flows arising from the acquisitions and disposals of businesses.
(iv) Structural borrowings of shareholder-financed businesses exclude borrowings to support short-term fixed income securities programmes, non-recourse borrowings of investment subsidiaries of shareholder-financed businesses and other borrowings of shareholder-financed businesses. Cash flows in respect of these borrowings are included within cash flows from operating activities. The changes in the carrying value of the structural borrowings of shareholder-financed businesses are analysed as follows:
Cash movements GBPm Non-cash movements GBPm
---------------------------------- -----------------------------------
Balance at Change to Foreign Change to
beginning Issue Redemption terms of exchange terms of Other Balance at
of period of debt of debt debt movement debt movements end of period
note (v)
------------- ---------- -------- ---------- ------------ --------- ------------ ---------- -------------
Half year
2019 7,664 - (400) - 8 169 - 7,441
Half year
2018 6,280 - - - 83 - 4 6,367
Full year
2018 6,280 1,630 (434) (33) 210 - 11 7,664
------------- ---------- -------- ---------- ------------ --------- ------------ ---------- -------------
(v) In the first half of 2019, the Group agreed with the holders of two subordinated debt instruments to alter the terms and conditions of these instruments in exchange for an upfront fee and an increase in the coupon of the instruments. The upfront fee and increase in coupon rates represent a significant change in the cash flows of each instrument and therefore, in accordance with IAS 39, has resulted in an extinguishment of the old debt and recognition of a new debt at fair value, the net effect of which is a non-cash movement in debt of GBP169 million. The upfront fee paid of GBP141 million has been expensed and is shown in the cash flow statement above (see note C6.1 for further details).
(vi) Net cash flows from discontinued operations represents the movement in cash and cash equivalents from the UK and Europe operations, which are classified as held for distribution at 30 June 2019. A detailed analysis of cash flows for the period for the discontinued UK and Europe operations is included in note D2.3. The 2018 comparative results have been re-presented from those previously published accordingly (as described in note A2).
NOTES TO PRIMARY STATEMENTS
A BACKGROUND
A1 Basis of preparation, audit status and exchange rates
These condensed consolidated interim financial statements for the six months ended 30 June 2019 have been prepared in accordance with IAS 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU). The Group's policy for preparing this interim financial information is to use the accounting policies adopted by the Group in its last consolidated financial statements, as updated by any changes in accounting policies it intends to make in its next consolidated financial statements as a result of new or amended IFRS and other policy improvements. EU-endorsed IFRS may differ from IFRSs issued by the IASB if, at any point in time, new or amended IFRS have not been endorsed by the EU. At 30 June 2019, there were no unendorsed standards effective for the period ended 30 June 2019 which impacted the condensed consolidated financial statements of the Group, and there were no differences between IFRS endorsed by the EU and IFRS issued by the IASB in terms of their application to the Group.
The IFRS basis results for half year 2019 and half year 2018 are unaudited. Except for re-presenting the results for UK and Europe operations as discontinued operations, the 2018 full year IFRS basis results have been derived from the 2018 statutory accounts. The auditors have reported on the 2018 statutory accounts which have been delivered to the Registrar of Companies. The auditors' report was: (i) unqualified; (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report; and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.
The exchange rates applied for balances and transactions in currencies other than the presentational currency of the Group, pounds sterling (GBP), were:
Average Average Average
Closing for the Closing for the Closing for the
rate at 6 months to rate at 6 months to rate at 12 months to
30 Jun 2019 30 Jun 2019 30 Jun 2018 30 Jun 2018 31 Dec 2018 31 Dec 2018
-------------------- ------------ ------------ ------------ ------------ ------------ -------------
Local currency: GBP
Hong Kong 9.94 10.15 10.36 10.78 9.97 10.46
Indonesia 17,980.07 18,364.05 18,919.18 18,938.64 18,314.37 18,987.65
Malaysia 5.26 5.33 5.33 5.42 5.26 5.38
Singapore 1.72 1.76 1.80 1.83 1.74 1.80
China 8.74 8.78 8.75 8.76 8.74 8.82
India 87.85 90.62 90.46 90.37 88.92 91.25
Vietnam 29,660.27 30,087.11 30,310.96 31,329.01 29,541.15 30,732.53
Thailand 39.06 40.91 43.74 43.66 41.47 43.13
US 1.27 1.29 1.32 1.38 1.27 1.34
-------------------- ------------ ------------ ------------ ------------ ------------ -------------
Certain notes to the financial statements present half year 2018 comparative information at constant exchange rates (CER), in addition to the reporting at actual exchange rates (AER) used throughout the condensed consolidated financial statements. AER are actual historical exchange rates for the specific accounting period, being the average rates over the period for the income statement and the closing rates at the balance sheet date for the statement of financial position. CER results are calculated by translating prior period results using the current period foreign exchange rate, ie current period average rates for the income statement and current period closing rates for the statement of financial position.
The accounting policies applied by the Group in determining the IFRS basis results in this report are the same as those previously applied in the Group's consolidated financial statements for the year ended 31 December 2018, as disclosed in the 2018 statutory accounts, aside from those discussed in note A3 below.
A2 Discontinued operations
The Group is planning to demerge its UK and Europe operations, M&GPrudential, from the Prudential plc group in the fourth quarter of 2019. Following an assessment at 30 June 2019, in accordance with IFRS 5, 'Non-current assets held for sale and discontinued operations', the results of M&GPrudential have been classified as held for distribution and as discontinued operations at 30 June 2019 in these condensed consolidated financial statements.
In order to present the results of the continuing operations on a comparable basis and consistent with IFRS 5 requirements, results attributable to the discontinued UK and Europe operations in half year 2019 have been shown in a single line in the income statement with 2018 comparatives being restated accordingly. Notes B1 to B5 have been prepared on a consistent basis.
IFRS 5 requires the assets and liabilities of the UK and Europe operations at 30 June 2019 to be presented as single line 'assets held for distribution' and 'liabilities held for distribution' on the statement of financial position but does not permit the comparative 30 June 2018 and 31 December 2018 assets and liabilities to be re-presented as the UK and Europe operations were not classified as held for distribution at these dates. In the related balance sheet notes, prior period balances have been presented to show the amounts from discontinued operations separately from continuing operations. Additionally, in the analysis of movements in Group assets and liabilities between the beginning and end of periods, the balances of the discontinued UK and Europe operations are removed from the opening balances to show the underlying movements from continuing operations.
The profit from the discontinued UK and Europe operations is presented in the condensed consolidated income statement before the elimination of intragroup transactions with continuing operations in order to provide a more meaningful presentation of the position of the Group immediately after the proposed demerger.
The condensed consolidated statement of financial position has been presented after the elimination of all intragroup balances.
A detailed analysis of the earnings performance, financial position and cash flows in the periods from the discontinued UK and Europe operations is provided in note D2, with supplementary analysis on adjusted IFRS operating profit based on longer-term investment returns by driver provided in note I(vi) within the additional financial information.
A3 New accounting pronouncements in 2019
IFRS 16, 'Leases'
The Group has adopted IFRS 16, 'Leases' from 1 January 2019. The new standard brings most leases on-balance-sheet for lessees under a single model, eliminating the distinction between operating and finance leases.
IFRS 16 applies primarily to operating leases of major properties occupied by the Group's businesses where Prudential is a lessee. Under IFRS 16, these leases are brought onto the Group's statement of financial position with a 'right-of-use' asset being established and a corresponding liability representing the obligation to make lease payments. The rental accrual charge in the income statement under IAS 17 is replaced with a depreciation charge for the 'right-of-use' asset and an interest expense on the lease liability leading to a more front-loaded operating lease cost profile compared to IAS 17.
As permitted by IFRS 16, the Group has chosen to adopt the modified retrospective approach upon transition to the new standard. Under the approach adopted, there is no adjustment to the Group's retained earnings at 1 January 2019 and the Group's 2018 comparative information is not restated. The right-of-use asset and lease liability at 1 January 2019 is set at an amount equal to the discounted remaining lease payments adjusted by any prepaid or accrued lease payment balance immediately before the date of initial application of the standard.
When measuring lease liabilities on adoption, the Group discounted lease payments using its incremental borrowing rate at 1 January 2019. The weighted-average rate applied is 3.4 per cent. The aggregate effect of the adoption of the standard on the statement of financial position at 1 January 2019 is shown in the tables below:
Consolidated statement of financial position
Effect of adoption of IFRS 16 at 1 January 2019 GBPm Continuing operations Discontinued operations* Total Group -------------------------------------------------------- --------------------- ------------------------ ----------- Assets Property, plant and equipment (Right-of-use assets) 414 289 703 -------------------------------------------------------- --------------------- ------------------------ ----------- Total assets 414 289 703 -------------------------------------------------------- --------------------- ------------------------ ----------- Liabilities Operational borrowings attributable to shareholder-financed businesses (Lease liability) 206 304 510 Borrowings attributable to with-profits businesses (Lease liability) 219 21 240 Accruals, deferred income and other liabilities (Accrued lease payment balance under IAS 17) (11) (36) (47) -------------------------------------------------------- --------------------- ------------------------ ----------- Total liabilities 414 289 703 -------------------------------------------------------- --------------------- ------------------------ -----------
* Presented within assets and liabilities held for distribution at 30 June 2019.
The Group has applied the practical expedient to grandfather the definition of a lease on transition. This means that IFRS 16 has been applied to all contracts, which were identified as leases in accordance with IAS 17 and IFRIC 4, 'Determining whether an Arrangement contains a Lease', entered into before 1 January 2019. Therefore, the definition of a lease under IFRS 16 was applied only to contracts entered into or changed on or after 1 January 2019.
The Group has used the following practical expedients, in addition to the aforementioned when applying IFRS 16 to leases previously classified as operating leases under IAS 17:
- Applied a single discount rate to a portfolio of leases with similar characteristics. Accordingly, for such portfolios, the incremental borrowing rates used to discount the future lease payments will be determined based on market specific risk-free rates adjusted with a margin/spread to reflect the Group's credit standing, lease term and the outstanding lease payments.
- Used hindsight when determining the lease term if the contract contains options to extend or terminate the lease.
Other new accounting pronouncements
In addition to the above, the IASB has also issued the following new accounting pronouncements to be effective from 1 January 2019:
- IFRIC Interpretation 23, 'Uncertainty over income tax treatments'; - Amendments to IAS 28, 'Long-term Interests in Associates and Joint Ventures'; - Amendments to IFRS 9, 'Prepayment features with negative compensation'; - Annual Improvements to IFRSs 2015-2017 cycle; and - Amendments to IAS 19, 'Plan Amendment, Curtailment or Settlement'.
The Group has applied the principles within the Amendments to IAS 19, 'Plan Amendment, Curtailment or Settlement', when accounting for the changes to the pension benefits of its UK defined benefit schemes during the period. The other pronouncements have had no significant impact on the Group financial statements.
B EARNINGS PERFORMANCE
B1 Analysis of performance by segment
B1.1 Segment results
Half year 2019 vs
2019 GBPm 2018* GBPm half year 2018* % 2018* GBPm
--------- ------------------------- -------------------- ----------
AER CER AER
Note Half year Half year Half year AER CER Full year
notes (i),(v) note (i) note (i) note (i) note (i)
--------------------------- ----- --------- ------------- ---------- --------- --------- ----------
Asia:
Insurance operations 1,095 927 963 18% 14% 1,982
Asset management 103 89 92 16% 12% 182
----------------------------- ----- --------- ------------- ---------- --------- --------- ----------
Total Asia 1,198 1,016 1,055 18% 14% 2,164
----------------------------- ----- --------- ------------- ---------- --------- --------- ----------
US:
Jackson (US insurance
operations) 1,203 1,001 1,064 20% 13% 1,911
Asset management 12 1 1 n/a n/a 8
----------------------------- ----- --------- ------------- ---------- --------- --------- ----------
Total US 1,215 1,002 1,065 21% 14% 1,919
----------------------------- ----- --------- ------------- ---------- --------- --------- ----------
Total segment profit from
continuing operations 2,413 2,018 2,120 20% 14% 4,083
----------------------------- ----- --------- ------------- ---------- --------- --------- ----------
Other income and expenditure:
Investment return and other
income 24 33 33 (27)% (27)% 52
Interest payable on core
structural borrowings(note)
(ii) (226) (189) (189) (20)% (20)% (410)
Corporate expenditurenote
(iii) (164) (173) (175) 5% 6% (367)
---------------------------- ----- --------- ------------- ---------- --------- --------- ----------
Total other income and
expenditure (366) (329) (331) (11)% (11)% (725)
----------------------------- ----- --------- ------------- ---------- --------- --------- ----------
Restructuring costs (23) (20) (20) (15)% (15)% (56)
----------------------------- ----- --------- ------------- ---------- --------- --------- ----------
Adjusted IFRS operating
profit based on longer-term
investment returns from
continuing operations B1.3 2,024 1,669 1,769 21% 14% 3,302
Short-term fluctuations in
investment returns on
shareholder-backed business B1.2 (1,124) 9 8 n/a n/a (592)
Amortisation of acquisition
accounting
adjustmentsnote (iv) (17) (22) (23) 23% 26% (46)
Gain (loss) on disposal of
businesses and corporate
transactions D1 13 (57) (60) n/a n/a (80)
----------------------------- ----- --------- ------------- ---------- --------- --------- ----------
Profit from continuing
operations before tax
attributable to shareholders 896 1,599 1,694 (44)% (47)% 2,584
Tax charge attributable to
shareholders' returns B4 (1) (326) (343) 100% 100% (426)
----------------------------- ----- --------- ------------- ---------- --------- --------- ----------
Profit from continuing
operations for the period 895 1,273 1,351 (30)% (34)% 2,158
Profit from discontinued
operations for the period,
net of related taxnote (v) D2.1 645 83 83 n/a n/a 855
----------------------------- ----- --------- ------------- ---------- --------- --------- ----------
Profit for the period 1,540 1,356 1,434 14% 7% 3,013
----------------------------- ----- --------- ------------- ---------- --------- --------- ----------
Attributable to:
Equity holders of the
Company
From continuing operations 890 1,272 1,350 (30)% (34)% 2,155
From discontinued operations 645 83 83 n/a n/a 855
Non-controlling interests
from continuing operations 5 1 1 400% 400% 3
---------------------------- ----- --------- ------------- ---------- --------- --------- ----------
1,540 1,356 1,434 14% 7% 3,013
--------------------------------- --------- ------------- ---------- --------- --------- ----------
Half year 2019 vs
2019 2018* half year 2018* % 2018*
--------- ------------------------- -------------------- ----------
AER CER AER
Note Half year Half year Half year AER CER Full year
Basic earnings per share (in
pence) B5 notes (i),(v) note (i) note (i) note (i) note (i)
----------------------------- ----- --------- ------------- ---------- --------- --------- ----------
Based on adjusted IFRS
operating profit based on
longer-term investment
returns, net of tax,
from continuing
operationsnote (vi) 65.3p 53.7p 57.0p 22% 15% 108.7p
Based on profit for the
period from continuing
operations 34.4p 49.5p 52.6p (31)% (35)% 83.7p
Based on profit for the
period from discontinued
operations 25.0p 3.2p 3.2p 681% 681% 33.2p
----------------------------- ----- --------- ------------- ---------- --------- --------- ----------
* The 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).
Notes
(i) For definitions of AER and CER refer to note A1. The difference between 'Profit for the period attributable to shareholders' in the prior half year 2018 on an AER basis and a CER basis is GBP78 million, arising from the retranslation of the prior period results of the Group's foreign subsidiaries into GBP using the exchange rates applied to the equivalent current period results.
(ii) Interest charged to the income statement on debt that is capable of being substituted to M&GPrudential for the six months ended 30 June 2019 was GBP(85) million (see note C6.1 for further details).
(iii) Corporate expenditure as shown above is primarily for Group Head Office and Asia Regional Head Office.
(iv) Amortisation of acquisition accounting adjustments principally relate to the REALIC business of Jackson which was acquired in 2012.
(v) Profit from discontinued operations represents the post-tax profit contributed by the UK and Europe operations which are classified as held for distribution at 30 June 2019 (a line-by-line analysis of profit for the period for the discontinued UK and Europe operations is included in note D2.1, with supplementary analysis on adjusted IFRS operating profit based on longer-term investment returns by driver provided in note I(vi) within the additional financial information). The 2018 comparative results have been re-presented from those previously published accordingly (as described in note A2).
(vi) Tax charges have been reflected as operating and non-operating in the same way as for the pre-tax items. Further details on tax charges are provided in note B4.
B1.2 Short-term fluctuations in investment returns on shareholder-backed business
2019 GBPm 2018* GBPm
--------- --------------------
Half year Half year Full year
Asia operationsnote (i) 420 (326) (512)
US operationsnote (ii) (1,521) 244 (100)
Other operationsnote (iii) (23) 91 20
---------------------------- --------- --------- ---------
Total (1,124) 9 (592)
---------------------------- --------- --------- ---------
* The 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).
(i) Asia operations
In Asia, the positive short-term fluctuations of GBP420 million (half year 2018: negative GBP(326) million; full year 2018: negative GBP(512) million) principally reflect net value movements on shareholders' assets and related liabilities following decrease in bond yields during the period.
(ii) US operations
The short-term fluctuations in investment returns for US insurance operations are reported net of the related credit for amortisation of deferred acquisition costs of GBP476 million as shown in note C5.2 (half year 2018: charge of GBP(199) million; full year 2018: charge of GBP(114) million) and comprise amounts in respect of the following items:
2019 GBPm 2018 GBPm
--------- --------------------
Half year Half year Full year
-------------------------------------------------------- --------- --------- ---------
Net equity hedge resultnote (a) (1,955) 383 (58)
Other than equity-related derivativesnote (b) 433 (183) (64)
Debt securitiesnote (c) 11 6 (31)
Equity-type investments: actual less longer-term return (7) 31 38
Other items (3) 7 15
--------------------------------------------------------- --------- --------- ---------
Total (1,521) 244 (100)
--------------------------------------------------------- --------- --------- ---------
Notes
(a) Net equity hedge result
The purpose of the inclusion of this item in short-term fluctuations in investment returns is to segregate the amount included in pre-tax profit that relates to the accounting effect of market movements on both the value of guarantees in Jackson's variable annuity and fixed index annuity products and on the related derivatives used to manage the exposures inherent in these guarantees. The level of fees recognised in non-operating profit is determined by reference to that allowed for within the reserving basis. The variable annuity guarantees are valued in accordance with either Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures (formerly FAS 157) or ASC Topic 944, Financial Services - Insurance (formerly SOP 03-01) depending on the type of guarantee. Both approaches require an entity to determine the total fee ('the fee assessment') that is expected to fund future projected benefit payments arising using the assumptions applicable for that method. The method under FAS 157 requires this fee assessment to be fixed at the time of issue. As the fees included within the initial fee assessment are earned, they are included in non-operating profit to match the corresponding movement in the guarantee liability. As the Group applies US GAAP for the measured value of the product guarantees this item also includes asymmetric impacts where the measurement bases of the liabilities and associated derivatives used to manage the Jackson annuity business differ.
The net equity hedge result therefore includes significant accounting mismatches and other factors that do not represent the economic result. These other factors include:
- The variable annuity guarantees and fixed index annuity embedded options being only partially fair valued under 'grandfathered' US GAAP;
- The interest rate exposure being managed through the other than equity-related derivative programme explained in note (b) below; and
- Jackson's management of its economic exposures for a number of other factors that are treated differently in the accounting frameworks such as future fees and assumed volatility levels.
The net equity hedge result can be summarised as follows:
2019 GBPm 2018 GBPm
--------- --------------------
Half year Half year Full year
----------------------------------------------------------------------------------- --------- --------- ---------
Fair value movements on equity hedge instruments* (2,466) (375) 299
Accounting value movements on the variable and fixed index annuity guarantee
liabilities 227 505 (894)
Fee assessments net of claim payments 284 253 537
----------------------------------------------------------------------------------- --------- --------- ---------
Total (1,955) 383 (58)
----------------------------------------------------------------------------------- --------- --------- ---------
* Held to manage equity exposures of the variable annuity guarantees and fixed index annuity options.
(b) Other than equity-related derivatives
The fluctuations for this item comprise the net effect of:
- Fair value movements on free-standing, other than equity-related derivatives;
- Fair value movements on the Guaranteed Minimum Income Benefit (GMIB) reinsurance asset that are not matched by movements in the underlying GMIB liability, which is not fair valued; and
- Related amortisation of DAC.
The free-standing, other than equity-related derivatives, are held to manage interest rate exposures and durations within the general account and the variable annuity guarantees and fixed index annuity embedded options described in note (a) above. Accounting mismatches arise because of differences between the measurement basis and presentation of the derivatives, which are fair valued with movements recorded in the income statement, and the exposures they are intended to manage.
(c) Short-term fluctuations related to debt securities
2019 GBPm 2018 GBPm
--------- --------------------
Half year Half year Full year
-------------------------------------------------------------------------------- --------- --------- ---------
(Charges) credits in the period:
Losses on sales of impaired and deteriorating bonds (19) (1) (4)
Bond write-downs (1) (2) (4)
Recoveries/reversals 1 18 19
-------------------------------------------------------------------------------- --------- --------- ---------
Total (charges) credits in the period (19) 15 11
Risk margin allowance deducted from adjusted IFRS operating profit based on
longer-term investment
returns* 42 38 77
--------------------------------------------------------------------------------- --------- --------- ---------
23 53 88
-------------------------------------------------------------------------------- --------- --------- ---------
Interest-related realised (losses) gains:
Gains (losses) arising in the period 33 8 (8)
Amortisation of gains and losses arising in current and prior periods to
adjusted IFRS operating
profit based on longer-term investment returns (46) (57) (116)
-------------------------------------------------------------------------------- --------- --------- ---------
(13) (49) (124)
-------------------------------------------------------------------------------- --------- --------- ---------
Related amortisation of deferred acquisition costs 1 2 5
--------------------------------------------------------------------------------- --------- --------- ---------
Total short-term fluctuations related to debt securities 11 6 (31)
--------------------------------------------------------------------------------- --------- --------- ---------
* The debt securities of Jackson are held in the general account of the business. Realised gains and losses are recorded in the income statement with normalised returns included in adjusted IFRS operating profit based on longer-term investment returns with variations from period to period included in the short-term fluctuations category. The risk margin reserve charge for longer-term credit-related losses included in adjusted IFRS operating profit based on longer-term investment returns of Jackson for half year 2019 is based on an average annual risk margin reserve of 18 basis points (half year 2018: 19 basis points; full year 2018: 18 basis points) on average book values of US$60.0 billion (half year 2018: US$54.9 billion; full year 2018: US$57.1 billion) as shown below:
Moody's rating
category Half year 2019 Half year 2018 Full year 2018
--------------------------- -------------------------- ---------------------------
(or equivalent
under Average Annual Average Annual Average Annual
NAIC ratings of book expected book expected book expected
mortgage-backed value RMR loss value RMR loss value RMR loss
-------- ---- ----------- ------- ---- ----------- ------- ---- ------------
securities) US$m % US$m GBPm US$m % US$m GBPm US$m % US$m GBPm
---------------- -------- ---- ----- ---- ------- ---- ----- ---- ------- ---- ----- -----
A3 or higher 34,318 0.10 (36) (28) 26,260 0.11 (29) (21) 29,982 0.10 (31) (23)
Baa1, 2 or 3 24,385 0.23 (55) (42) 27,337 0.20 (57) (41) 25,814 0.21 (55) (40)
Ba1, 2 or 3 1,008 0.93 (10) (7) 978 1.01 (10) (7) 1,042 0.98 (10) (8)
B1, 2 or 3 246 2.62 (6) (5) 309 2.61 (8) (6) 289 2.64 (8) (6)
Below B3 37 3.42 (1) (1) 11 3.71 - - 11 3.69 - -
---------------- -------- ---- ----- ---- ------- ---- ----- ---- ------- ---- ----- -----
Total 59,994 0.18 (108) (83) 54,895 0.19 (104) (75) 57,138 0.18 (104) (77)
---------------- -------- ---- ------- ---- ------- ----
Related amortisation of deferred
acquisition costs 18 14 22 15 22 15
----- ---- ----- ---- ----- -----
Risk margin reserve charge to
adjusted IFRS operating profit
for longer-term credit-related
losses (90) (69) (82) (60) (82) (62)
-------------------------------- ----- ---- ----- ---- ----- -----
Consistent with the basis of measurement of insurance assets and liabilities for Jackson's IFRS results, the charges and credits to adjusted IFRS operating profit based on longer-term investment returns are partially offset by related amortisation of deferred acquisition costs.
In addition to the accounting for realised gains and losses described above for Jackson general account debt securities, included within the statement of other comprehensive income is a pre-tax credit of GBP2,185 million for net unrealised gains on debt securities classified as available-for-sale net of related amortisation of deferred acquisition costs (half year 2018: charge of GBP(1,149) million for net unrealised losses; full year 2018: charge of GBP(1,371) million for net unrealised losses). Temporary market value movements do not reflect defaults or impairments. Additional details of the movement in the value of the Jackson portfolio are included in note C3.2(c).
(iii) Other operations
Short-term fluctuations in investment returns for other operations of negative GBP(23) million (half year 2018: positive GBP91 million; full year 2018: positive GBP20 million) include unrealised value movements on financial instruments held outside of the main life operations.
B1.3 Determining operating segments and performance measure of operating segments
Operating segments
The Group's operating segments for financial reporting purposes are defined and presented in accordance with IFRS 8, 'Operating Segments' on the basis of the management reporting structure and its financial management information.
Under the Group's management and reporting structure its chief operating decision maker is the Group Executive Committee (GEC). In the management structure, responsibility is delegated to the Chief Executive Officers of Prudential Corporation Asia, the North American Business Unit and M&GPrudential for the day-to-day management of their business units (within the framework set out in the Group Governance Manual). Financial management information used by the GEC aligns with these three business segments. These operating segments derive revenue from both long-term insurance and asset management activities. In light of the proposed demerger, the segment analysis for the discontinued UK and Europe operations is provided in note D2, separate from those for the continuing operations.
Operations which do not form part of any business unit are reported as 'Unallocated to a segment'. These include Group Head Office and Asia Regional Head Office costs. The Group's existing treasury company, Prudential Capital, and the Africa operations do not form part of any operating segment under the structure, and their assets and liabilities and profit or loss before tax are not material to the overall financial position of the Group. Prudential Capital and Africa operations are therefore also reported as 'Unallocated to a segment'.
Performance measure
The performance measure of operating segments utilised by the Company is adjusted IFRS operating profit based on longer-term investment returns attributable to shareholders. This measurement basis distinguishes adjusted IFRS operating profit based on longer-term investment returns from other constituents of the total profit as follows:
- Short-term fluctuations in investment returns on shareholder-backed business;
- Amortisation of acquisition accounting adjustments arising on the purchase of business. This comprises principally the charge for the adjustments arising on the purchase of REALIC in 2012; and
- Gain or loss on corporate transactions, such as disposals undertaken in the period and the costs related to the preparation for the proposed demerger of M&GPrudential from Prudential plc.
The determination of adjusted IFRS operating profit based on longer-term investment returns for investment and liability movements is as described in note B1.3 of the Group's consolidated financial statements for the year ended 31 December 2018.
For Group debt securities at 30 June 2019 held by the continuing insurance operations in Asia and US, the level of unamortised interest-related realised gains and losses related to previously sold bonds and which have yet to be amortised to adjusted IFRS operating profit based on longer-term investment returns for continuing operations was a net gain of GBP580 million (30 June 2018: net gain of GBP800 million; 31 December 2018: net gain of GBP609 million).
For equity-type securities, the longer-term rates of return applied by the non-linked shareholder-financed insurance operations of Asia and the US to determine the amount of investment return included in adjusted IFRS operating profit based on longer-term investment returns are as follows:
- For Asia insurance operations, investments in equity securities held for non-linked shareholder-financed operations amounted to GBP2,282 million as at 30 June 2019 (30 June 2018: GBP1,622 million; 31 December 2018: GBP2,146 million). The rates of return applied for 2019 ranged from 5.2 per cent to 17.6 per cent (30 June 2018: 5.1 per cent to 17.2 per cent; 31 December 2018: 5.3 per cent to 17.6 per cent) with the rates applied varying by business unit.
- For US insurance operations, at 30 June 2019, the equity-type securities for non-separate account operations amounted to GBP1,178 million (30 June 2018: GBP1,187 million; 31 December 2018: GBP1,359 million). The longer-term rates of return for income and capital applied in 2019 and 2018, which reflect the combination of the average risk-free rates over the period and appropriate risk premiums, are as follows:
2019 2018
------------------------------------------------ ---------------------------------------------------------
Full
Half year Half year year
------------ ------------------------------------------------ ------------------------------------------------ -------
Equity-type
securities
such as
common and
preferred
stock and
portfolio
holdings in
mutual 6.7% to
funds 6.0% to 6.7% 6.7% to 7.0% 7.2%
Other
equity-type
securities
such as
investments
in limited
partnerships
and private
equity 8.0% to 8.7% to 8.7% to
funds 8.7% 9.0% 9.2%
------------ ------------------------------------------------ ------------------------------------------------ -------
B1.4 Additional segmental analysis of revenue from continuing operations
Half year 2019 GBPm - continuing operations
---------------------------------------------------
Unallocated
to a
segment
Total (central Group
Asia US segment operations) total
------------------------------------------- ------- ------- ---------- ------------- ------
Gross premiums earned 8,856 7,410 16,266 27 16,293
Outward reinsurance premiums (386) (131) (517) (3) (520)
-------------------------------------------- ------- ------- ---------- ------------- ------
Earned premiums, net of reinsurance 8,470 7,279 15,749 24 15,773
Other incomenote (i) 176 11 187 12 199
-------------------------------------------- ------- ------- ---------- ------------- ------
Total external revenue 8,646 7,290 15,936 36 15,972
Intra-group revenue 16 24 40 (40) -
Interest income 622 1,128 1,750 21 1,771
Other investment return 6,821 16,023 22,844 18 22,862
-------------------------------------------- ------- ------- ---------- ------------- ------
Total revenue, net of reinsurancenote (ii) 16,105 24,465 40,570 35 40,605
-------------------------------------------- ------- ------- ---------- ------------- ------
Half year 2018* GBPm - continuing operations
----------------------------------------------------
Unallocated
to a
segment
Total (central Group
Asia US segment operations) total
------------------------------------------- --------- ------ ---------- ------------- ------
Gross premiums earned 7,736 7,036 14,772 14 14,786
Outward reinsurance premiums (222) (141) (363) - (363)
-------------------------------------------- --------- ------ ---------- ------------- ------
Earned premiums, net of reinsurance 7,514 6,895 14,409 14 14,423
Other incomenote (i) 157 44 201 14 215
-------------------------------------------- --------- ------ ---------- ------------- ------
Total external revenue 7,671 6,939 14,610 28 14,638
Intra-group revenue 20 32 52 (52) -
Interest income 513 940 1,453 26 1,479
Other investment return (1,703) 1,486 (217) 119 (98)
-------------------------------------------- --------- ------ ---------- ------------- ------
Total revenue, net of reinsurancenote (ii) 6,501 9,397 15,898 121 16,019
-------------------------------------------- --------- ------ ---------- ------------- ------
Full year 2018* GBPm - continuing operations
----------------------------------------------------
Unallocated
to a
segment
Total (central Group
Asia US segment operations) total
------------------------------------------- -------- -------- --------- ------------ -------
Gross premiums earned 16,469 17,656 34,125 38 34,163
Outward reinsurance premiums (575) (309) (884) (2) (886)
-------------------------------------------- -------- -------- --------- ------------ -------
Earned premiums, net of reinsurance 15,894 17,347 33,241 36 33,277
Other incomenote (i) 309 50 359 39 398
-------------------------------------------- -------- -------- --------- ------------ -------
Total external revenue 16,203 17,397 33,600 75 33,675
Intra-group revenue 42 50 92 (92) -
Interest income 1,086 2,016 3,102 51 3,153
Other investment return (3,240) (6,804) (10,044) 62 (9,982)
-------------------------------------------- -------- -------- --------- ------------ -------
Total revenue, net of reinsurancenote (ii) 14,091 12,659 26,750 96 26,846
-------------------------------------------- -------- -------- --------- ------------ -------
* The 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).
Notes
(i) Other income comprises income from external customers and consists primarily of revenue from the Group's continuing asset management business of GBP153 million (half year 2018: GBP108 million; full year 2018: GBP216 million). The remaining other income consists primarily of policy fee revenue from external customers.
(ii) Total revenue from continuing operations excludes the contribution from the discontinued UK and Europe operations which are classified as held for distribution at 30 June 2019 (a line-by-line analysis of revenue for the period for the discontinued UK and Europe operations is included in note D2.1). The 2018 comparative results have been re-presented from those previously published accordingly (as described in note A2).
B2 Acquisition costs and other expenditure from continuing operations
2019 GBPm 2018* GBPm
--------- --------------------
Half year Half year Full year
-------------------------------------------------------------------------- --------- --------- ---------
Acquisition costs incurred for insurance policies (1,630) (1,538) (3,230)
Acquisition costs deferred less amortisation of acquisition costsnote (i) 774 (61) 44
Administration costs and other expenditurenote (ii) (1,771) (1,625) (2,903)
Movements in amounts attributable to external unit holders
of consolidated investment funds (84) (61) (297)
-------------------------------------------------------------------------- --------- --------- ---------
Total acquisition costs and other expenditure from continuing operations (2,711) (3,285) (6,386)
-------------------------------------------------------------------------- --------- --------- ---------
* The 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).
Notes
(i) The components of 'acquisition costs deferred less amortisation of acquisition costs' of GBP774 million in half year 2019 are set out in note C5.2.
(ii) Included in total administration costs and other expenditure for half year 2019 is depreciation of property, plant and equipment of GBP(83) million (half year 2018: GBP(34) million; full year 2018: GBP(69) million). Out of the GBP(83) million of depreciation of property, plant and equipment for half year 2019, GBP(51) million relates to the right-of-use assets recognised under IFRS 16 adopted in 2019 (as described in note A3).
B3 Effect of changes and other accounting matters on insurance assets and liabilities
The following matters are relevant to the determination of the half year 2019 results:
(a) Asia insurance operations
In half year 2019, the adjusted IFRS operating profit based on longer-term investment returns for Asia insurance operations included a net credit of GBP76 million (half year 2018: GBP69 million; full year 2018: GBP94 million) representing a small number of items that are not expected to reoccur, including the impact of a refinement to the run-off of the allowance for prudence within technical provisions.
(b) US insurance operations
There has been no material change in assumptions underpinning insurance assets and liabilities since full year 2018.
(c) UK and Europe insurance operations
Changes in the allowance for credit risk for annuity business, mortality and other assumptions are discussed in note D2.2 following the classification of the Group's UK and Europe operations as discontinued at 30 June 2019.
B4 Tax charge from continuing operations
B4.1 Total tax charge by nature of expense from continuing operations
The total tax charge for continuing operations in the income statement is as follows:
2019 GBPm 2018* GBPm
---------------------------- --------------------
Current Deferred Half year Half year Full year
Tax charge tax tax Total Total Total
----------------------------------------------------------- ------- -------- --------- --------- ---------
Attributable to shareholders:
Asia operations (139) (49) (188) (139) (277)
US operations (130) 241 111 (216) (255)
Other operations 84 (8) 76 29 106
---------------------------------------------------------- ------- -------- --------- --------- ---------
Tax (charge) credit attributable to shareholders' returns (185) 184 (1) (326) (426)
----------------------------------------------------------- ------- -------- --------- --------- ---------
Attributable to policyholders:
Asia operations (54) (166) (220) (43) (80)
---------------------------------------------------------- ------- -------- --------- --------- ---------
Total tax (charge) credit (239) 18 (221) (369) (506)
----------------------------------------------------------- ------- -------- --------- --------- ---------
* The 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).
The principal reason for the decrease in the tax charge attributable to shareholders' returns from continuing operations is the result of the tax credit on US derivative losses largely eliminating the tax charge on Asia profits.
B4.2 Shareholder profit and tax charge from continuing operations
The shareholder profit, tax charge (credit) and effective tax rate for continuing operations are as follows:
Half year 2019 GBPm
-------------------------------------------------------
Total
Asia US Other attributable to
operations operations operations shareholders
---------------------------------------------------------- ----------- ----------- ----------- ----------------
Adjusted IFRS operating profit (loss) based on longer-term
investment returns 1,198 1,215 (389) 2,024
Non-operating profit (loss) 627 (1,536) (219) (1,128)
----------------------------------------------------------- ----------- ----------- ----------- ----------------
Profit (loss) before tax 1,825 (321) (608) 896
----------------------------------------------------------- ----------- ----------- ----------- ----------------
Tax charge (credit) on:
Adjusted IFRS operating profit (loss) based on longer-term
investment returns 168 203 (39) 332
Non-operating profit (loss) 20 (314) (37) (331)
---------------------------------------------------------- ----------- ----------- ----------- ----------------
Total actual tax charge (credit) 188 (111) (76) 1
----------------------------------------------------------- ----------- ----------- ----------- ----------------
Actual tax rate on:
Adjusted IFRS operating profit based on longer-term
investment returns 14% 17% 10% 16%
Profit before tax 10% 35% 13% 0%
---------------------------------------------------------- ----------- ----------- ----------- ----------------
Half year 2018* GBPm
------------------------------------------------------------
Total
Asia US attributable to
operations operations Other operations shareholders
----------------------------------------------------- ----------- ----------- ---------------- ----------------
Adjusted IFRS operating profit (loss) based on
longer-term investment returns 1,016 1,002 (349) 1,669
Non-operating (loss) profit (338) 184 84 (70)
------------------------------------------------------ ----------- ----------- ---------------- ----------------
Profit (loss) before tax 678 1,186 (265) 1,599
------------------------------------------------------ ----------- ----------- ---------------- ----------------
Tax charge (credit) on:
Adjusted IFRS operating profit (loss) based on
longer-term investment returns 151 177 (41) 287
Non-operating (loss) profit (12) 39 12 39
----------------------------------------------------- ----------- ----------- ---------------- ----------------
Total actual tax charge (credit) 139 216 (29) 326
------------------------------------------------------ ----------- ----------- ---------------- ----------------
Actual tax rate on:
Adjusted IFRS operating profit based on longer-term
investment returns 15% 18% 12% 17%
Profit before tax 21% 18% 11% 20%
----------------------------------------------------- ----------- ----------- ---------------- ----------------
* The half year 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations (as described in note A2).
Full year 2018* GBPm
-------------------------------------------------------
Total
Asia US Other attributable to
operations operations operations shareholders
---------------------------------------------------------- ----------- ----------- ----------- ----------------
Adjusted IFRS operating profit (loss) based on longer-term
investment returns 2,164 1,919 (781) 3,302
Non-operating (loss) profit (527) (180) (11) (718)
----------------------------------------------------------- ----------- ----------- ----------- ----------------
Profit (loss) before tax 1,637 1,739 (792) 2,584
----------------------------------------------------------- ----------- ----------- ----------- ----------------
Tax charge (credit) on:
Adjusted IFRS operating profit (loss) based on longer-term
investment returns 308 301 (110) 499
Non-operating (loss) profit (31) (46) 4 (73)
---------------------------------------------------------- ----------- ----------- ----------- ----------------
Total actual tax charge (credit) 277 255 (106) 426
----------------------------------------------------------- ----------- ----------- ----------- ----------------
Actual tax rate on:
Adjusted IFRS operating profit based on longer-term
investment returns 14% 16% 14% 15%
Profit before tax 17% 15% 13% 16%
---------------------------------------------------------- ----------- ----------- ----------- ----------------
* The full year 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations (as described in note A2).
B4.3 Reconciliation of shareholder effective tax rate from continuing operations
In the reconciliation below, the expected tax rates reflect the corporation tax rates that are expected to apply to the taxable profit of the relevant business. Where there are profits of more than one jurisdiction, the expected tax rates reflect the corporation tax rates weighted by reference to the amount of profit contributing to the aggregate business result.
2019 2018
--------------- --------- -------------------- ---------
Half year Half year Full year
--------------- -------------------- --------------------
GBPm % GBPm % GBPm %
note (i) note (iv) note (iv) note (iv) note (iv)
----------------------------------------------- ----- -------- --------- --------- --------- ---------
Profit before tax 896 1,599 2,584
Expected tax rate (ETR) 20% 22% 22%
Tax at the expected rate 179 20.0% 352 22.0% 568 22.0%
Effects of recurring tax reconciliation items
and percentage impact on ETR:
Income not taxable or taxable at concessionary
rates (54) (6.0)% (19) (1.2)% (53) (2.1)%
Deductions not allowable for tax purposes 23 2.6% 25 1.6% 52 2.0%
Items related to taxation of life insurance
businessesnote (ii) (138) (15.4)% (36) (2.3)% (96) (3.7)%
Deferred tax adjustments (9) (1.0)% (17) (1.1)% (41) (1.6)%
Effect of results of joint ventures and
associates (27) (3.0)% (20) (1.3)% (61) (2.4)%
Irrecoverable withholding taxes 21 2.3% 26 1.8% 47 1.8%
Other 4 0.4% - - 6 0.3%
----------------------------------------------- ----- -------- --------- --------- --------- ---------
Total (180) (20.1)% (41) (2.5)% (146) (5.7)%
Effects of non-recurring tax reconciliation
items and percentage impact on ETR:
Adjustments to tax charge in relation to prior
years 15 1.7% 7 0.4% (3) (0.1)%
Movements in provisions for open tax
mattersnote (iii) 6 0.7% 8 0.5% 7 0.3%
Adjustments in relation to business disposals (19) (2.2)% - - - -
----------------------------------------------- ----- -------- --------- --------- --------- ---------
Total 2 0.2% 15 0.9% 4 0.2%
Total actual tax charge 1 0.1% 326 20.4% 426 16.5%
------------------------------------------------- ----- -------- --------- --------- --------- ---------
Notes
(i) The main driver of the Group's effective tax rate is the relative mix of the profits between jurisdictions with higher tax rates (such as Indonesia and Malaysia), jurisdictions with lower tax rates (such as Hong Kong and Singapore) and jurisdictions with rates in between (such as the UK and the US). At half year 2019, the reduction in the effective tax rate is a result of the loss before tax in US operations.
(ii) The GBP138 million reconciling item related to taxation of life insurance businesses for half year 2019 (half year 2018: GBP36 million; full year 2018: GBP96 million) mainly reflects GBP82 million in the Hong Kong business in relation to investment gains which are not subject to tax due to the taxable profit being computed as 5 per cent of net insurance premiums.
(iii) The statement of financial position contains the following provisions in relation to open tax matters:
GBPm
------------------------------------------------------------------------------------ -----
At 31 December 2018 (149)
Movements in the current period included in tax charge attributable to shareholders (6)
Other movements* (1)
------------------------------------------------------------------------------------ -----
At 30 June 2019 (156)
------------------------------------------------------------------------------------- -----
* Other movements include interest arising on open tax matters and amounts included in the Group's share of profits from joint ventures and associates, net of related tax.
(iv) The Group's UK and Europe operations are classified as held for distribution at 30 June 2019. The 2018 comparative results have been re-presented from those previously published accordingly (as described in note A2).
B5 Earnings per share
Half year 2019
------------------------------------------------------------------------------------
Net of tax Basic Diluted
Before Non-controlling and non- earnings earnings
tax Tax interests controlling interests per share per share
GBPm GBPm GBPm GBPm pence pence
Note B1.1 B4
---------------------- ----- ------- ----- --------------------- --------------------- ---------- ----------
Based on adjusted IFRS
operating profit based
on longer-term
investment returns 2,024 (332) (5) 1,687 65.3p 65.3p
Short-term fluctuations
in investment returns
on shareholder-backed
business B1.2 (1,124) 314 - (810) (31.4)p (31.4)p
Amortisation of
acquisition accounting
adjustments (17) 3 - (14) (0.5)p (0.5)p
Gain (loss) on disposal
of businesses and
corporate transactions 13 14 - 27 1.0p 1.0p
----------------------- ----- ------- ----- --------------------- --------------------- ---------- ----------
Based on profit for the
period from continuing
operations 896 (1) (5) 890 34.4p 34.4p
Based on profit for the
period from
discontinued
operations D2.1 817 (172) - 645 25.0p 25.0p
----------------------- ----- ------- ----- --------------------- --------------------- ---------- ----------
Based on profit for the
period 1,713 (173) (5) 1,535 59.4p 59.4p
----------------------- ----- ------- ----- --------------------- --------------------- ---------- ----------
Half year 2018*
------------------------------------------------------------------------------------
Net of tax Basic Diluted
Before Non-controlling and non- earnings earnings
tax Tax interests controlling interests per share per share
GBPm GBPm GBPm GBPm pence pence
Note B1.1 B4
---------------------- ----- ------ ----- --------------------- ---------------------- ---------- ----------
Based on adjusted IFRS
operating profit based
on longer-term
investment returns 1,669 (287) (1) 1,381 53.7p 53.6p
Short-term fluctuations
in investment returns
on shareholder-backed
business B1.2 9 (51) - (42) (1.6)p (1.6)p
Amortisation of
acquisition accounting
adjustments (22) 4 - (18) (0.7)p (0.7)p
Gain (loss) on disposal
of businesses and
corporate transactions (57) 8 - (49) (1.9)p (1.9)p
----------------------- ----- ------ ----- --------------------- ---------------------- ---------- ----------
Based on profit for the
period from continuing
operations 1,599 (326) (1) 1,272 49.5p 49.4p
Based on profit for the
period from
discontinued
operations D2.1 101 (18) - 83 3.2p 3.2p
----------------------- ----- ------ ----- --------------------- ---------------------- ---------- ----------
Based on profit for the
period 1,700 (344) (1) 1,355 52.7p 52.6p
----------------------- ----- ------ ----- --------------------- ---------------------- ---------- ----------
Full year 2018*
------------------------------------------------------------------------------------
Net of tax Basic Diluted
Before Non-controlling and non- earnings earnings
tax Tax interests controlling interests per share per share
GBPm GBPm GBPm GBPm pence pence
Note B1.1 B4
---------------------- ----- ------ ----- --------------------- ---------------------- ---------- ----------
Based on adjusted IFRS
operating profit based
on longer-term
investment returns 3,302 (499) (3) 2,800 108.7p 108.6p
Short-term fluctuations
in investment returns
on shareholder-backed
business B1.2 (592) 52 - (540) (21.0)p (21.0)p
Amortisation of
acquisition accounting
adjustments (46) 9 - (37) (1.4)p (1.4)p
Gain (loss) on disposal
of businesses and
corporate transactions (80) 12 - (68) (2.6)p (2.6)p
----------------------- ----- ------ ----- --------------------- ---------------------- ---------- ----------
Based on profit for the
year from continuing
operations 2,584 (426) (3) 2,155 83.7p 83.6p
Based on profit for the
year from discontinued
operations D2.1 1,051 (196) - 855 33.2p 33.2p
----------------------- ----- ------ ----- --------------------- ---------------------- ---------- ----------
Based on profit for the
year 3,635 (622) (3) 3,010 116.9p 116.8p
----------------------- ----- ------ ----- --------------------- ---------------------- ---------- ----------
* The 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).
Earnings per share are calculated based on earnings attributable to ordinary shareholders, after related tax and non-controlling interests.
The weighted average number of shares for calculating earnings per share, which excludes those held in employee share trusts and consolidated unit trusts and OEICs, is set out as below:
Weighted average number (in millions) of shares 2019 2018
--------- --------------------
for calculation of: Half year Half year Full year
------------------------------------------------- --------- --------- ---------
Basic earnings per share 2,583 2,573 2,575
Diluted earnings per share 2,584 2,574 2,576
------------------------------------------------ --------- --------- ---------
B6 Dividends
Half year 2019 Half year 2018 Full year 2018
--------------------- --------------------- ----------------------
Pence per share GBPm Pence per share GBPm Pence per share GBPm
------------------------------------------ --------------- ---- --------------- ---- --------------- -----
Dividends relating to reporting period:
First interim ordinary dividend 16.45p 428 15.67p 406 15.67p 406
Second interim ordinary dividend - - - - 33.68p 873
----------------------------------------- --------------- ---- --------------- ---- --------------- -----
Total 16.45p 428 15.67p 406 49.35p 1,279
------------------------------------------ --------------- ---- --------------- ---- --------------- -----
Dividends paid in reporting period:
Current year first interim ordinary
dividend - - - - 15.67p 404
Second interim ordinary dividend for
prior year 33.68p 870 32.50p 840 32.50p 840
----------------------------------------- --------------- ---- --------------- ---- --------------- -----
Total 33.68p 870 32.50p 840 48.17p 1,244
------------------------------------------ --------------- ---- --------------- ---- --------------- -----
Dividend per share
The 2019 first interim dividend of 16.45 pence per ordinary share will be paid on 26 September 2019 in sterling to shareholders in the UK, and in Hong Kong dollars to shareholders on the Hong Kong branch register at 4.30pm Hong Kong time on 26 September 2019. The dividend payable to the HK Shareholders will be translated using the exchange rate quoted by the WM Company at the close of business on 13 August 2019. Holders of US American Depositary Receipts (US Shareholders) will be paid their dividends in US dollars on or about 3 October 2019. The exchange rate at which the dividend payable to the US Shareholders will be translated into US dollars will be determined by the depositary agent. The second interim dividend will be paid on or about 3 October 2019 in Singapore dollars to shareholders with shares standing to the credit of their securities accounts with The Central Depository (Pte) Limited (CDP) at 5.00pm Singapore time on the Record Date (SG Shareholders). The exchange rate at which the dividend payable to the SG Shareholders will be translated from Hong Kong dollars into Singapore dollars, will be determined by CDP.
Shareholders on the UK register are eligible to participate in a Dividend Reinvestment Plan.
C BALANCE SHEET NOTES
C1 Analysis of Group statement of financial position by segment
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.
30 Jun 2019 GBPm 2018 GBPm
----------------------------------------------------------------------------- ----------------
Before elimination of
intra-group debtors
and creditors Elimination
------------------------
Unallocated of intra-
to a Discontinued group
segment Total UK and debtors 30 Jun 31 Dec
(central continuing Europe and Group Group Group
Asia US operations) operations operations creditors Total Total Total
note note
By operating segment Note C2.1 C2.2 note (i) note (v) (v) (v)
----------------------- --------- ------- ------- ----------- ---------- ------------ ----------- ------- ------- -------
Assets
Goodwill C5.1 510 - - 510 - - 510 1,620 1,857
Deferred acquisition
costs and other
intangible assets C5.2 3,624 8,990 45 12,659 - - 12,659 11,359 11,923
Reinsurers' share of
insurance contract
liabilitiesnote (ii) 3,621 6,527 3 10,151 - - 10,151 9,620 11,144
Other assetsnote (iii) 4,319 3,908 2,525 10,752 - (3,491) 7,261 10,105 11,459
Investment properties 5 6 - 11 - - 11 17,605 17,925
Investment in joint
ventures and
associates accounted
for using the equity
method 1,030 - - 1,030 - - 1,030 1,554 1,733
Financial investments 93,476 203,898 2,155 299,529 - - 299,529 428,833 429,901
Assets held for
distribution D2.2 - - - - 221,126 (2,802) 218,324 - -
Assets held for sale - - - - - - - 12,024 10,578
Cash and cash
equivalents 2,222 1,184 1,802 5,208 - - 5,208 8,450 12,125
----------------------- --------- ------- ------- ----------- ---------- ------------ ----------- ------- ------- -------
Total assets 108,807 224,513 6,530 339,850 221,126 (6,293) 554,683 501,170 508,645
----------------------- --------- ------- ------- ----------- ---------- ------------ ----------- ------- ------- -------
Total equity 7,656 6,752 (2,993) 11,415 8,280 - 19,695 15,890 17,267
----------------------- --------- ------- ------- ----------- ---------- ------------ ----------- ------- ------- -------
Liabilities
Contract liabilities
(including amounts in
respect of contracts
classified as
investment contracts
under IFRS 4) C4.1(i) 84,077 202,152 47 286,276 - (1,108) 285,168 405,482 409,301
Unallocated surplus of
with-profits funds C4.1(i) 3,034 - - 3,034 - (90) 2,944 17,283 15,845
Core structural
borrowings of
shareholder-financed
businesses C6.1 - 196 7,245 7,441 - - 7,441 6,367 7,664
Operational borrowings
attributable to
shareholder-financed
businesses C6.2(i) 137 800 727 1,664 - - 1,664 1,618 998
Borrowings attributable
to with-profits
businesses C6.2(ii) 238 - - 238 - - 238 3,589 3,940
Other liabilitiesnote
(iv) 13,665 14,613 1,504 29,782 - (3,636) 26,146 38,964 43,062
Liabilities held for
distribution D2.2 - - - - 212,846 (1,459) 211,387 - -
Liabilities held for
sale - - - - - - - 11,977 10,568
----------------------- --------- ------- ------- ----------- ---------- ------------ ----------- ------- ------- -------
Total liabilities 101,151 217,761 9,523 328,435 212,846 (6,293) 534,988 485,280 491,378
----------------------- --------- ------- ------- ----------- ---------- ------------ ----------- ------- ------- -------
Total equity and
liabilities 108,807 224,513 6,530 339,850 221,126 (6,293) 554,683 501,170 508,645
----------------------- --------- ------- ------- ----------- ---------- ------------ ----------- ------- ------- -------
Notes
(i) Unallocated to a segment includes central operations, the Group's existing treasury company, Prudential Capital, and Africa operations as per note B1.3.
(ii) Reinsurers' share of contract liabilities of GBP10,151 million at 30 June 2019 includes the reinsurance ceded in respect of the acquired REALIC business by the Group's US insurance operations. In addition to this REALIC reinsurance, the balances in 2018 also included the reinsurance of part of the UK shareholder-backed annuity portfolio.
(iii) 'Other assets' at 30 June 2019 included property, plant and equipment of GBP785 million relating to continuing operations (30 June 2018: GBP951 million, of which GBP363 million related to continuing operations; 31 December 2018: GBP1,409 million, of which GBP378 million related to continuing operations). On 1 January 2019, GBP414 million of right-of-use assets was recognised for continuing operations upon adoption of IFRS 16 (see note A3). During the period, the Group made additions of GBP82 million for continuing operations of which GBP66 million relates to right-of-use assets.
Contained within 'Other assets' is premiums receivable of GBP564 million, of which 91 per cent are due within one year (30 June 2018: premiums receivable for total continuing and discontinued operations of GBP595 million, of which 89 per cent are due within one year; 31 December 2018: premiums receivable for total continuing and discontinued operations of GBP672 million, of which 73 per cent are due within one year.
(iv) Within 'Other liabilities' at 30 June 2019 is accruals, deferred income and other liabilities of GBP10,597 million for continuing operations (30 June 2018: GBP13,551 million for continuing and discontinued operations; 31 December 2018: GBP15,248 million for continuing and discontinued operations), of which GBP6,722 million (30 June 2018: GBP8,435 million; 31 December 2018: GBP9,968 million) are due within one year.
(v) Assets and liabilities held for distribution relate to the Group's UK and Europe operations classified as discontinued operations at 30 June 2019. A line-by-line analysis of assets and liabilities for the discontinued UK and Europe operations (before elimination of intra-group balances with continuing operations) is included in note D2.2). The 2018 comparative results for the assets and liabilities at 30 June 2018 and 31 December 2018 are as published and not restated (as described in note A2).
C2 Analysis of segment statement of financial 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
30 Jun 2019 GBPm 2018 GBPm
------------------------------------------------------------------------ --------------
Total insurance
---------- ----------------------- -------
Unit
-linked
With assets Asset-
-profits and Other manage Elimina- 30 Jun 31 Dec
Note business* liabilities business Total ment tions Total Total Total
--------------------- ----- ---------- ------------ --------- ------- ------- -------- ------- ------ ------
Assets
Goodwill - - 252 252 258 - 510 306 498
Deferred acquisition
costs and other
intangible assets 58 - 3,554 3,612 12 - 3,624 2,614 2,937
Reinsurers' share of
insurance contract
liabilities 83 - 3,538 3,621 - - 3,621 2,258 2,777
Other assets 2,526 315 1,357 4,198 156 (35) 4,319 3,298 3,916
Investment properties - - 5 5 - - 5 5 5
Investment in joint
ventures and
associates accounted
for using the equity
method - - 859 859 171 - 1,030 867 991
Financial investments 54,687 18,492 20,134 93,313 163 - 93,476 75,913 80,886
Cash and cash
equivalents 534 400 1,179 2,113 109 - 2,222 2,177 2,189
----------------------- ----- ---------- ------------ --------- ------- ------- -------- ------- ------ ------
Total assets 57,888 19,207 30,878 107,973 869 (35) 108,807 87,438 94,199
----------------------- ----- ---------- ------------ --------- ------- ------- -------- ------- ------ ------
Total equity - - 7,077 7,077 579 - 7,656 5,741 6,428
----------------------- ----- ---------- ------------ --------- ------- ------- -------- ------- ------ ------
Liabilities
Contract liabilities
(including amounts in
respect of contracts
classified as
investment contracts
under IFRS 4) C4.2 48,041 17,594 18,442 84,077 - - 84,077 66,821 73,216
Unallocated surplus of
with-profits funds C4.2 3,034 - - 3,034 - - 3,034 3,766 2,511
Operational borrowings
attributable to
shareholder-financed
businesses - 36 88 124 13 - 137 17 61
Borrowings attributable
to with-profits
businesses 238 - - 238 - - 238 32 19
Other liabilities 6,575 1,577 5,271 13,423 277 (35) 13,665 11,061 11,964
----------------------- ----- ---------- ------------ --------- ------- ------- -------- ------- ------ ------
Total liabilities 57,888 19,207 23,801 100,896 290 (35) 101,151 81,697 87,771
----------------------- ----- ---------- ------------ --------- ------- ------- -------- ------- ------ ------
Total equity and
liabilities 57,888 19,207 30,878 107,973 869 (35) 108,807 87,438 94,199
----------------------- ----- ---------- ------------ --------- ------- ------- -------- ------- ------ ------
* The statement of financial position for with-profits business comprises the with-profits assets and liabilities of the Hong Kong, Malaysia and Singapore operations. 'Other business' includes assets and liabilities of other participating businesses and other non-linked shareholder-backed business.
30 Jun 2019 GBPm 2018 GBPm
------------------------------------------------------------- ----------------
Total insurance
------------ ------------------
Variable
annuity
separate Fixed
account annuity,
assets GICs and Asset
and other manage- Elimina- 30 Jun 31 Dec
Note liabilities business Total ment tions Total Total Total
------------------------- ----- ------------ --------- ------- -------- -------- ------- ------- -------
Assets
Goodwill - - - - - - - -
Deferred acquisition costs
and other intangible
assets - 8,990 8,990 - - 8,990 8,503 8,747
Reinsurers' share of
insurance contract
liabilities - 6,527 6,527 - - 6,527 6,436 6,662
Other assets - 3,834 3,834 143 (69) 3,908 3,381 3,588
Investment properties - 6 6 - - 6 5 6
Financial investments 145,295 58,585 203,880 18 - 203,898 183,501 182,910
Cash and cash equivalents - 1,130 1,130 54 - 1,184 1,174 3,005
-------------------------- ----- ------------ --------- ------- -------- -------- ------- ------- -------
Total assets 145,295 79,072 224,367 215 (69) 224,513 203,000 204,918
-------------------------- ----- ------------ --------- ------- -------- -------- ------- ------- -------
Total equity - 6,702 6,702 50 - 6,752 5,100 5,624
-------------------------- ----- ------------ --------- ------- -------- -------- ------- ------- -------
Liabilities
Contract liabilities
(including amounts in
respect of contracts
classified as investment
contracts
under IFRS 4) C4.3 145,295 56,857 202,152 - - 202,152 185,150 185,600
Core structural borrowings
of shareholder-financed
businesses - 196 196 - - 196 189 196
Operational borrowings
attributable to
shareholder-financed
businesses - 767 767 33 - 800 262 328
Other liabilities - 14,550 14,550 132 (69) 14,613 12,299 13,170
-------------------------- ----- ------------ --------- ------- -------- -------- ------- ------- -------
Total liabilities 145,295 72,370 217,665 165 (69) 217,761 197,900 199,294 -------------------------- ----- ------------ --------- ------- -------- -------- ------- ------- ------- Total equity and liabilities 145,295 79,072 224,367 215 (69) 224,513 203,000 204,918 -------------------------- ----- ------------ --------- ------- -------- -------- ------- ------- -------
C3 Assets and liabilities
C3.1 Group assets and liabilities - measurement
(a) Determination of fair value
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.
Other than the loans which have been designated at fair value through profit or loss, 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 discount rate used is updated for 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 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 measurement hierarchy of Group assets and liabilities
Assets and liabilities carried at fair value on the statement of financial position
The table below shows the assets and liabilities 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.
The analysis of the fair value measurement hierarchy of the Group's assets and liabilities at 30 June 2019 below excludes the analysis for the Group's UK and Europe operations which are classified as held for distribution. A separate fair value measurement hierarchy analysis at 30 June 2019 for the UK and Europe is presented in note D2.2. In line with the IFRS requirements, the comparatives have not been re-presented for the assets and liabilities classified for held for distribution in the current period.
All assets and liabilities held at fair value are classified as fair value through profit or loss, except for GBP44,178 million (30 June 2018: GBP35,860 million; 31 December 2018: GBP40,849 million) of debt securities in the US operations classified as available-for-sale. All assets and liabilities held at fair value are measured on a recurring basis. As of 30 June 2019, the Group does not have any financial instruments that are measured on a non-recurring basis.
Financial instruments at fair value
30 Jun 2019 GBPm
-----------------------------------------------------------
Level 1 Level 2 Level 3
------------------ -------------- --------------
Valuation Valuation
based on based on
Analysis of financial investments, net of derivative Quoted prices significant significant
liabilities by business type from continuing (unadjusted) observable unobservable
operations in active markets market inputs market inputs Total
------------------------------------------------------- ------------------ -------------- -------------- -------
With-profits
Loans - - - -
Equity securities and portfolio holdings in unit trusts 19,318 1,906 153 21,377
Debt securities 28,964 3,093 6 32,063
Other investments (including derivative assets) 107 81 - 188
Derivative liabilities (34) (11) - (45)
------------------------------------------------------- ------------------ -------------- -------------- -------
Total financial investments, net of derivative
liabilities 48,355 5,069 159 53,583
Percentage of total (%) 90% 10% 0% 100%
------------------------------------------------------- ------------------ -------------- -------------- -------
Unit-linked and variable annuity separate account
Equity securities and portfolio holdings in unit trusts 159,462 230 - 159,692
Debt securities 2,840 763 - 3,603
Other investments (including derivative assets) - - - -
Derivative liabilities (11) (6) - (17)
------------------------------------------------------- ------------------ -------------- -------------- -------
Total financial investments, net of derivative
liabilities 162,291 987 - 163,278
Percentage of total (%) 99% 1% 0% 100%
------------------------------------------------------- ------------------ -------------- -------------- -------
Non-linked shareholder-backed
Loans - - 2,799 2,799
Equity securities and portfolio holdings in unit trusts 2,580 4 17 2,601
Debt securities 16,726 47,283 - 64,009
Other investments (including derivative assets) 42 988 962 1,992
Derivative liabilities (7) (513) (455) (975)
------------------------------------------------------- ------------------ -------------- -------------- -------
Total financial investments, net of derivative
liabilities 19,341 47,762 3,323 70,426
Percentage of total (%) 27% 68% 5% 100%
------------------------------------------------------- ------------------ -------------- -------------- -------
Group total analysis, including other financial
liabilities held
at fair value from continuing operations
------------------------------------------------------- ------------------ -------------- -------------- -------
Loans - - 2,799 2,799
Equity securities and portfolio holdings in unit trusts 181,360 2,140 170 183,670
Debt securities 48,530 51,139 6 99,675
Other investments (including derivative assets) 149 1,069 962 2,180
Derivative liabilities (52) (530) (455) (1,037)
------------------------------------------------------- ------------------ -------------- -------------- -------
Total financial investments, net of derivative
liabilities 229,987 53,818 3,482 287,287
Investment contract liabilities without discretionary
participation features held at fair
value - (666) - (666)
Net asset value attributable to unit holders of
consolidated unit trusts and similar funds (3,482) - - (3,482)
Other financial liabilities held at fair value - (5) (3,081) (3,086)
------------------------------------------------------- ------------------ -------------- -------------- -------
Total financial instruments at fair value 226,505 53,147 401 280,053
Percentage of total (%) 81% 19% 0% 100%
------------------------------------------------------- ------------------ -------------- -------------- -------
30 Jun 2018 GBPm
------------------------------------------------------------
Level 1 Level 2 Level 3
------------------ -------------- --------------
Valuation Valuation
based on based on
Quoted prices significant significant
Analysis of financial investments, net of derivative (unadjusted) observable unobservable
liabilities by business type in active markets market inputs market inputs Total
------------------------------------------------------ ------------------ -------------- -------------- --------
With-profits
Loans - - 1,848 1,848
Equity securities and portfolio holdings in unit
trusts 59,025 4,748 490 64,263
Debt securities 29,680 45,952 355 75,987
Other investments (including derivative assets) 76 3,185 3,866 7,127
Derivative liabilities (40) (1,003) - (1,043)
------------------------------------------------------ ------------------ -------------- -------------- --------
Total financial investments, net of derivative
liabilities 88,741 52,882 6,559 148,182
Percentage of total (%) 60% 36% 4% 100%
------------------------------------------------------ ------------------ -------------- -------------- --------
Unit-linked and variable annuity separate account
Equity securities and portfolio holdings in unit
trusts 162,698 494 18 163,210
Debt securities 5,162 5,145 - 10,307
Other investments (including derivative assets) 3 4 7 14
Derivative liabilities (9) (4) - (13)
------------------------------------------------------ ------------------ -------------- -------------- --------
Total financial investments, net of derivative
liabilities 167,854 5,639 25 173,518
Percentage of total (%) 97% 3% 0% 100%
------------------------------------------------------ ------------------ -------------- -------------- --------
Non-linked shareholder-backed
Loans - - 2,935 2,935
Equity securities and portfolio holdings in unit
trusts 2,215 9 10 2,234
Debt securities 17,918 55,795 298 74,011
Other investments (including derivative assets) 34 1,403 909 2,346
Derivative liabilities (1) (1,692) (400) (2,093)
------------------------------------------------------ ------------------ -------------- -------------- --------
Total financial investments, net of derivative
liabilities 20,166 55,515 3,752 79,433
Percentage of total (%) 25% 70% 5% 100%
------------------------------------------------------ ------------------ -------------- -------------- --------
Group total analysis, including other financial
liabilities held
at fair value
------------------------------------------------------ ------------------ -------------- -------------- --------
Loans - - 4,783 4,783
Equity securities and portfolio holdings in unit
trusts 223,938 5,251 518 229,707
Debt securities 52,760 106,892 653 160,305
Other investments (including derivative assets) 113 4,592 4,782 9,487
Derivative liabilities (50) (2,699) (400) (3,149)
------------------------------------------------------ ------------------ -------------- -------------- --------
Total financial investments, net of derivative
liabilities 276,761 114,036 10,336 401,133
Investment contract liabilities without discretionary
participation features held at fair
value - (16,713) - (16,713)
Borrowings attributable to with-profits businesses - - (1,746) (1,746)
Net asset value attributable to unit holders of
consolidated unit trusts and similar funds (5,184) (3,407) (767) (9,358)
Other financial liabilities held at fair value - - (3,159) (3,159)
------------------------------------------------------ ------------------ -------------- -------------- --------
Total financial instruments at fair value 271,577 93,916 4,664 370,157
Percentage of total (%) 74% 25% 1% 100%
------------------------------------------------------ ------------------ -------------- -------------- --------
Analysed as:
Total from continuing operations
With-profits 37,521 1,960 160 39,641
Unit-linked and variable annuity separate account 150,528 (253) - 150,275
Non-linked shareholder-backed 15,956 38,070 403 54,429
----------------------------------------------------- ------------------ -------------- -------------- --------
204,005 39,777 563 244,345
Percentage of total continuing operations (%) 84% 16% 0% 100%
Total from discontinued UK and Europe operations* 67,572 54,139 4,101 125,812
Percentage of total discontinued operations (%) 54% 43% 3% 100%
------------------------------------------------------ ------------------ -------------- -------------- --------
* Classified as discontinued operations at 30 June 2019 (as described in note A2).
31 Dec 2018 GBPm
------------------------------------------------------------
Level 1 Level 2 Level 3
------------------ -------------- --------------
Valuation Valuation
based on based on
Quoted prices significant significant
Analysis of financial investments, net of derivative (unadjusted) observable unobservable
liabilities by business type in active markets market inputs market inputs Total
------------------------------------------------------ ------------------ -------------- -------------- --------
With-profits
Loans - - 1,703 1,703
Equity securities and portfolio holdings in unit
trusts 52,320 5,447 488 58,255
Debt securities 31,210 48,981 811 81,002
Other investments (including derivative assets) 143 3,263 4,325 7,731
Derivative liabilities (85) (1,231) - (1,316)
------------------------------------------------------ ------------------ -------------- -------------- --------
Total financial investments, net of derivative
liabilities 83,588 56,460 7,327 147,375
Percentage of total (%) 57% 38% 5% 100%
------------------------------------------------------ ------------------ -------------- -------------- --------
Unit-linked and variable annuity separate account
Equity securities and portfolio holdings in unit
trusts 152,987 505 9 153,501
Debt securities 4,766 9,727 - 14,493
Other investments (including derivative assets) 6 3 6 15
Derivative liabilities (2) (3) - (5)
------------------------------------------------------ ------------------ -------------- -------------- --------
Total financial investments, net of derivative
liabilities 157,757 10,232 15 168,004
Percentage of total (%) 94% 6% 0% 100%
------------------------------------------------------ ------------------ -------------- -------------- --------
Non-linked shareholder-backed
Loans - - 3,050 3,050
Equity securities and portfolio holdings in unit
trusts 2,957 2 18 2,977
Debt securities 17,687 61,803 371 79,861
Other investments (including derivative assets) 61 1,258 941 2,260
Derivative liabilities (2) (1,760) (423) (2,185)
------------------------------------------------------ ------------------ -------------- -------------- --------
Total financial investments, net of derivative
liabilities 20,703 61,303 3,957 85,963
Percentage of total (%) 24% 71% 5% 100%
------------------------------------------------------ ------------------ -------------- -------------- --------
Group total analysis, including other financial
liabilities held
at fair value
------------------------------------------------------ ------------------ -------------- -------------- --------
Loans - - 4,753 4,753
Equity securities and portfolio holdings in unit
trusts 208,264 5,954 515 214,733
Debt securities 53,663 120,511 1,182 175,356
Other investments (including derivative assets) 210 4,524 5,272 10,006
Derivative liabilities (89) (2,994) (423) (3,506)
------------------------------------------------------ ------------------ -------------- -------------- --------
Total financial investments, net of derivative
liabilities 262,048 127,995 11,299 401,342
Investment contract liabilities without discretionary
participation features held at fair
value - (16,054) - (16,054)
Borrowings attributable to with-profits businesses - - (1,606) (1,606)
Net asset value attributable to unit holders of
consolidated unit trusts and similar funds (6,852) (3,811) (988) (11,651)
Other financial liabilities held at fair value - (2) (3,404) (3,406)
------------------------------------------------------ ------------------ -------------- -------------- --------
Total financial instruments at fair value 255,196 108,128 5,301 368,625
Percentage of total (%) 70% 29% 1% 100%
------------------------------------------------------ ------------------ -------------- -------------- --------
Analysed as:
Total from continuing operations
With-profits 39,191 3,928 159 43,278
Unit-linked and variable annuity separate account 143,556 (64) - 143,492
Non-linked shareholder-backed 16,549 43,948 266 60,763
----------------------------------------------------- ------------------ -------------- -------------- --------
199,296 47,812 425 247,533
Percentage of total continuing operations (%) 81% 19% 0% 100%
Total from discontinued UK and Europe operations* 55,900 60,316 4,876 121,092
Percentage of total discontinued operations (%) 46% 50% 4% 100%
------------------------------------------------------ ------------------ -------------- -------------- --------
* Classified as discontinued operations at 30 June 2019 (as described in note A2).
Assets and liabilities at amortised cost and their fair value
The table below shows the financial assets and liabilities carried at amortised cost on the statement of financial position and their fair value, excluding those held for distribution. Cash deposits, accrued income, other debtors, accruals, deferred income and other liabilities are excluded from the analysis below, as these are carried at amortised cost, which approximates fair value.
2019 GBPm 2018 GBPm
----------------- -------- ----------------- -------
30 Jun 30 Jun 31 Dec
----------------- ----------------- -----------------
Carrying Fair Carrying Fair Carrying Fair
value value value value value value
--------------------------------------------------------- -------- ------- -------- ------- -------- -------
Assets
Loans 9,714 10,010 12,139 12,710 13,257 13,666
Liabilities
Investment contract liabilities without discretionary
participation features (3,132) (3,140) (3,001) (3,003) (3,168) (3,157)
Core structural borrowings of shareholder-financed
businesses (7,441) (8,052) (6,367) (6,518) (7,664) (7,847)
Operational borrowings (excluding lease liabilities)
attributable to shareholder-financed
businesses (1,435) (1,435) (1,618) (1,618) (998) (998)
Borrowings (excluding lease liabilities) attributable to
the with-profits funds (25) (24) (1,843) (1,768) (2,334) (2,103)
Obligations under funding, securities lending and sale
and repurchase agreements (6,756) (6,890) (7,128) (7,126) (6,989) (7,008)
--------------------------------------------------------- -------- ------- -------- ------- -------- -------
Total financial instruments carried at amortised cost (9,075) (9,531) (7,818) (7,323) (7,896) (7,447)
--------------------------------------------------------- -------- ------- -------- ------- -------- -------
Analysed as:
Total from continuing operations (7,921) (7,989) (7,848) (8,040)
Total from discontinued UK and Europe operations* 103 666 (48) 593
-------- ------- -------- -------
(7,818) (7,323) (7,896) (7,447)
-------- ------- -------- -------
* Classified as discontinued operations at 30 June 2019 (as described in note A2).
(c) Valuation approach for level 2 fair valued assets and liabilities
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 a designated independent pricing service or quote from third-party brokers. These valuations are subject to a number of monitoring controls, such as comparison to multiple pricing sources where available, 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 assets and liabilities please refer to note C3.1 of the Group IFRS financial statements for the year ended 31 December 2018.
(d) Fair value measurements for level 3 fair valued assets and liabilities
Reconciliation of movements in level 3 assets and liabilities measured at fair value
The following table reconciles the value of level 3 fair valued assets and liabilities at 1 January 2019 to that presented at 30 June 2019.
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.
Half year 2019 GBPm
-----------------------------------------------------------------------------------------------------------
Net asset
value
Equity attributable
securities to unit
Reconciliation of and holders of
movements in level portfolio Other Borrowings consolidated
3 assets and holdings investments attributable unit trusts
liabilities in (including to with and Other
measured at fair unit Debt derivative Derivative -profits similar financial
value Loans trusts securities assets) liabilities businesses funds liabilities Total
------------------ ------- ---------- ---------- ----------- ----------- ------------ ------------ ----------- -------
At 1 January 2019 4,753 515 1,182 5,272 (423) (1,606) (988) (3,404) 5,301
Reclassification
to held for
distribution (1,970) (345) (1,177) (4,333) - 1,606 988 355 (4,876)
Total gains
(losses) in income
statement:
Net realised
gains (losses) 91 - 5 (25) - - - (94) (23)
Net unrealised
gains (losses)
on financial
instruments held
at the end of
period - (2) - 40 (15) - - (14) 9
Total gains
(losses) recorded
in other
comprehensive
income 4 - 1 (5) (17) - - (11) (28)
Purchases - 2 - 127 - - - - 129
Sales - - (5) (114) - - - - (119)
Issues 26 - - - - - - (35) (9)
Settlements (105) - - - - - - 122 17
------------------ ------- ---------- ---------- ----------- ----------- ------------ ------------ ----------- -------
At 30 June 2019 2,799 170 6 962 (455) - - (3,081) 401
------------------ ------- ---------- ---------- ----------- ----------- ------------ ------------ ----------- -------
Half year 2018 GBPm
-------------------------------------------------------------------------------------------------------
Net asset
value
Equity attributable
securities to unit
Reconciliation and holders of
of movements in portfolio Other Borrowings consolidated
level 3 assets holdings investments attributable unit trusts
and liabilities in (including to with- and Other
measured at fair unit Debt derivative Derivative profits similar financial
value Loans trusts securities assets) liabilities businesses funds liabilities Total
---------------- ----- ---------- ---------- ----------- ----------- ------------ ------------ ----------- -----
At 1 January
2018 4,837 371 654 4,424 (512) (1,887) (413) (3,031) 4,443
Total gains
(losses) in
income
statement:
Net realised
gains (losses) 82 - - 79 - - - (82) 79
Net unrealised
gains (losses)
on financial
instruments
held at the
end of period (23) 43 (10) 109 57 (2) 38 (2) 210
Total gains
(losses)
recorded in
other
comprehensive
income 65 (7) - 46 - - - (68) 36
Purchases 2 112 55 550 - - - - 719
Sales - (1) (46) (426) - - - - (473)
Issues 43 - - - - - (414) (79) (450)
Settlements (223) - - - - 143 22* 103 45
Transfers out of
level 3 - - - - 55 - - - 55
---------------- ----- ---------- ---------- ----------- ----------- ------------ ------------ ----------- -----
At 30 June 2018 4,783 518 653 4,782 (400) (1,746) (767) (3,159) 4,664
---------------- ----- ---------- ---------- ----------- ----------- ------------ ------------ ----------- -----
Full year 2018 GBPm
----- ---------- ---------- -------------------------------------- ------------ ----------- -------
Net asset
value
Equity attributable
securities to unit
Reconciliation and holders of
of movements in portfolio Other Borrowings consolidated
level 3 assets holdings investments attributable unit trusts
and liabilities in (including to with- and Other
measured at fair unit Debt derivative Derivative profits similar financial
value Loans trusts securities assets) liabilities businesses funds liabilities Total
---------------- ----- ---------- ---------- ----------- ----------- ------------ ------------ ----------- -------
At 1 January
2018 4,837 371 654 4,424 (512) (1,887) (413) (3,031) 4,443
Total gains
(losses) in
income
statement:
Net realised
gains (losses) (7) - 9 35 - - - (1) 36
Net unrealised
gains (losses)
on financial
instruments
held at the
end of the
year (71) 38 (16) 370 27 (23) 67 6 398
Total gains
(losses)
recorded in
other
comprehensive
income 162 8 - 54 (1) - 31 (170) 84
Purchases 62 125 666 1,202 - - - - 2,055
Sales (178) (35) (131) (813) - - - - (1,157)
Issues 279 - - - - - (697) (481) (899)
Settlements (331) - - - - 304 57 273 303
Transfers into
level 3 - 8 - - - - - - 8
Transfers out of
level 3 - - - - 63 - (33) - 30
---------------- ----- ---------- ---------- ----------- ----------- ------------ ------------ ----------- -------
At 31 December
2018 4,753 515 1,182 5,272 (423) (1,606) (988) (3,404) 5,301
---------------- ----- ---------- ---------- ----------- ----------- ------------ ------------ ----------- -------
* Includes distributions to third-party investors by subsidiaries held by the UK with-profits funds for investment purposes. These distributions vary period to period depending on the maturity of the subsidiaries and the gains realised by those entities in the period.
Valuation approach for level 3 fair valued assets and liabilities
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 assets and liabilities, please refer to note C3.1 of the Group's consolidated financial statements for the year ended 31 December 2018.
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. In addition, the Group has minimum standards for independent price verification to ensure valuation accuracy is regularly independently verified. Adherence to this policy is monitored across the business units.
At 30 June 2019, the Group held GBP401 million of net financial instruments at fair value within level 3. This represents less than 0.5 per cent of the total fair valued financial assets net of financial liabilities of the continuing operations.
Included within these net assets and liabilities are policy loans of GBP2,799 million at 30 June 2019 measured as the loan outstanding balance, plus accrued investment income, attached to acquired REALIC business and held to back the liabilities for funds withheld under reinsurance arrangements. The funds withheld liability of GBP2,953 million at 30 June 2019 is also classified within level 3. The fair value of the liabilities is equal to the fair value of the underlying assets held as collateral, which primarily consist of policy loans and debt securities. The assets and liabilities broadly offset and therefore their movements have minimal impact on shareholders' profit and equity.
Excluding the loans and funds withheld liability under REALIC's reinsurance arrangements as described above, which amounted to a net liability of GBP154 million, the level 3 fair valued financial assets net of financial liabilities were a net asset of GBP555 million, which are all externally valued and comprise the following:
- Other financial investments of GBP1,006 million consisting primarily of private equity limited partnerships held by Jackson, which are externally valued in accordance with International Private Equity and Venture Capital Association guidelines using management information available for these investments; and
- Offset by net derivative liabilities of GBP451 million, which are valued externally using the discounted cash flow method in line with standard market practices but are subject to a further independent assessment against external counterparties' valuations.
Of the net asset of GBP555 million referred to above:
- A net asset of GBP159 million is held by the Group's Asia participating funds and therefore shareholders' profit and equity are not impacted by movements in the valuation of these financial instruments; and
- A net asset of GBP396 million is held to support non-linked shareholder-backed business. All of these instruments are externally valued and are therefore inherently less subjective than internal valuations. If the value of all these Level 3 financial instruments decreased by 10 per cent, the change in valuation would be GBP40 million, which would reduce shareholders' equity by this amount before tax. All of this amount would pass through the income statement substantially as part of short-term fluctuations in investment returns outside of adjusted IFRS operating profit based on longer-term investment returns.
(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. Transfers are deemed to have occurred when there is a material change in the observed valuation inputs or a change in the level of trading activities of the securities.
During half year 2019, the transfers between levels within the Group's portfolio, excluding those held by the Group's discontinued UK and Europe operations, were primarily transfers from level 1 to level 2 of GBP131 million and transfers from level 2 to level 1 of GBP618 million. These transfers which relate to equity securities and debt securities arose to reflect the change in the observed valuation inputs and in certain cases, the change in the level of trading activities of the securities. There were no transfers into and out of level 3 in the period.
C3.2 Debt securities
This note provides analysis of the Group's debt securities, including asset-backed securities and sovereign debt securities.
With the exception of certain debt securities for US insurance operations classified as 'available-for-sale' under IAS 39 as disclosed in notes C3.2 (b) to (d) below, the Group's debt securities are carried at fair value through profit or loss.
The analysis of the Group's debt securities at 30 June 2019 below excludes those of the Group's UK and Europe operations which are classified as held for distribution. In line with IFRS requirements, the comparatives have not been re-presented for the assets and liabilities classified for held for distribution in the current period. An analysis of the credit ratings of the debt securities held by the UK and Europe operations at 30 June 2019 is provided in note D2.2.
(a) Credit rating
Debt securities are analysed below according to external credit ratings issued, with equivalent ratings issued by different ratings agencies grouped together. Standard & Poor's ratings have been used where available, if this isn't the case Moody's and then Fitch have been used as alternatives. For the US, NAIC ratings have also been used where relevant (as shown in 'Other' in the tables below). In the table below, AAA is the highest possible rating. Investment grade financial assets are classified within the range of AAA to BBB- ratings. Financial assets which fall outside this range are classified as below BBB-.
30 Jun 2019 GBPm
-----------------------------------------------------------------------
Other
BBB+ (including
AAA AA+ to AA- A+ to A- to BBB- Below BBB- NAIC rated) Total
------------------------------ ----- ---------- -------- -------- ---------- ------------ ------
Asia
With-profits 3,131 14,977 4,688 4,621 2,016 2,630 32,063
Unit-linked 405 196 458 1,502 378 664 3,603
Non-linked shareholder-backed 1,072 4,155 4,458 3,287 2,493 1,371 16,836
Asset management 12 - 37 - - - 49
US
Non-linked shareholder-backed 1,189 7,984 11,527 15,068 1,579 7,917 45,264
Other operations 510 1,144 129 20 50 7 1,860
------------------------------- ----- ---------- -------- -------- ---------- ------------ ------
Total debt securities 6,319 28,456 21,297 24,498 6,516 12,589 99,675
------------------------------- ----- ---------- -------- -------- ---------- ------------ ------
30 Jun 2018 GBPm
-------------------------------------------------------------------------
Other
BBB+ (including
AAA AA+ to AA- A+ to A- to BBB- Below BBB- NAIC rated) Total
---------------------------------------- ------ ---------- -------- -------- ---------- ------------ -------
Asia
With-profits 2,496 11,425 3,983 3,351 1,768 1,900 24,923
Unit-linked 726 147 489 1,326 441 642 3,771
Non-linked shareholder-backed 948 3,138 3,234 3,063 2,040 1,099 13,522
Asset management 12 - 28 - - - 40
US
Non-linked shareholder-backed 442 6,338 9,439 13,148 1,035 5,713 36,115
Other operations 673 1,237 177 39 45 19 2,190
----------------------------------------- ------ ---------- -------- -------- ---------- ------------ -------
Total continuing operations 5,297 22,285 17,350 20,927 5,329 9,373 80,561
----------------------------------------- ------ ---------- -------- -------- ---------- ------------ -------
Total discontinued UK and Europe
operations* 10,722 17,118 18,438 16,488 3,788 13,190 79,744
----------------------------------------- ------ ---------- -------- -------- ---------- ------------ -------
Total debt securities 16,019 39,403 35,788 37,415 9,117 22,563 160,305
----------------------------------------- ------ ---------- -------- -------- ---------- ------------ -------
31 Dec 2018 GBPm
-------------------------------------------------------------------------
Other
BBB+ (including
AAA AA+ to AA- A+ to A- to BBB- Below BBB- NAIC rated) Total
---------------------------------------- ------ ---------- -------- -------- ---------- ------------ -------
Asia
With-profits 2,873 12,379 4,142 3,760 1,747 2,303 27,204
Unit-linked 817 100 492 1,431 426 715 3,981
Non-linked shareholder-backed 1,034 3,552 3,717 2,934 2,202 1,144 14,583
Asset management 11 - 60 - - - 71
US
Non-linked shareholder-backed 678 7,383 10,286 14,657 1,429 7,161 41,594
Other operations 619 1,089 151 41 49 18 1,967
----------------------------------------- ------ ---------- -------- -------- ---------- ------------ -------
Total continuing operations 6,032 24,503 18,848 22,823 5,853 11,341 89,400
----------------------------------------- ------ ---------- -------- -------- ---------- ------------ -------
Total discontinued UK and Europe
operations* 10,938 18,204 18,645 19,728 3,444 14,997 85,956
----------------------------------------- ------ ---------- -------- -------- ---------- ------------ -------
Total debt securities 16,970 42,707 37,493 42,551 9,297 26,338 175,356
----------------------------------------- ------ ---------- -------- -------- ---------- ------------ -------
* Classified as discontinued operations at 30 June 2019 (as described in note A2).
Securities for continuing operations with credit ratings classified as 'Other' can be further analysed as follows. Refer to note D2.2 for details on securities with ratings classified as 'Other' for discontinued operations.
2019 GBPm 2018 GBPm
--------- --------------
Asia 30 Jun 30 Jun 31 Dec
------------------------------------------------------------- ----------- ----------- --------- ------ ------
Government bonds 37 23 36
Corporate bonds - rated as investment grade by local external ratings agencies 1,215 1,006 978
Other 119 70 130
------------------------------------------------------------- ----------- ----------- --------- ------ ------
Total Asia non-linked shareholder-backed other debt
securities 1,371 1,099 1,144
------------------------------------------------------------- ----------- ----------- --------- ------ ------
2019 GBPm 2018 GBPm
----------------------------------- --------------
Mortgage
-backed Other
US securities securities 30 Jun 30 Jun 31 Dec
------------------------------------------------------------- ----------- ----------- --------- ------ ------
Implicit ratings of other US debt securities based on NAIC*
valuations (see below)
NAIC 1 2,184 3,337 5,521 3,903 5,006
NAIC 2 - 2,357 2,357 1,781 2,118
NAIC 3-6 3 36 39 29 37
------------------------------------------------------------ ----------- ----------- --------- ------ ------
Total US other debt securities 2,187 5,730 7,917 5,713 7,161
------------------------------------------------------------- ----------- ----------- --------- ------ ------
* The Securities Valuation Office of the NAIC classifies debt securities into six quality categories ranging 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.
Mortgage-backed securities totalling GBP2,003 million at 30 June 2019 have credit ratings issued by Standard & Poor's of BBB- or above and hence are designated as investment grade. Other securities totalling GBP5,694 million at 30 June 2019 with NAIC ratings 1 or 2 are also designated as investment grade.
The credit ratings, information or data contained in this report which are attributed and specifically provided by S&P, Moody's and Fitch Solutions and their respective affiliates and suppliers ('Content Providers') is referred to here as the 'Content'. Reproduction of any Content in any form is prohibited except with the prior written permission of the relevant party. The Content Providers do not guarantee the accuracy, adequacy, completeness, timeliness or availability of any Content and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such Content. The Content Providers expressly disclaim liability for any damages, costs, expenses, legal fees, or losses (including lost income or lost profit and opportunity costs) in connection with any use of the Content. A reference to a particular investment or security, a rating or any observation concerning an investment that is part of the Content is not a recommendation to buy, sell or hold any such investment or security, nor does it address the suitability an investment or security and should not be relied on as investment advice.
(b) Additional analysis of US insurance operations debt securities
2019 GBPm 2018 GBPm
--------- --------------
30 Jun 30 Jun 31 Dec
-------------------------------------------------------- --------- ------ ------
Corporate and government security and commercial loans:
Government 6,094 4,737 5,465
Publicly traded and SEC Rule 144A securities* 27,419 23,346 26,196
Non-SEC Rule 144A securities 7,293 4,659 6,329
Asset backed securities (see note (e)) 4,458 3,373 3,604
--------------------------------------------------------- --------- ------ ------
Total US debt securities 45,264 36,115 41,594
--------------------------------------------------------- --------- ------ ------
* 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:
2019 GBPm 2018 GBPm
--------- --------------
30 Jun 30 Jun 31 Dec
----------------------------------- --------- ------ ------
Available-for-sale 44,178 35,860 40,849
Fair value through profit and loss 1,086 255 745
------------------------------------ --------- ------ ------
45,264 36,115 41,594
----------------------------------- --------- ------ ------
Realised gains and losses, including impairments, recorded in the income statement are as shown in note B1.2 of this report.
(c) Movements in unrealised gains and losses on Jackson available-for-sale securities
The movement in the statement of financial position value for debt securities classified as available-for-sale from a net unrealised loss of GBP414 million to a net unrealised gain of GBP2,247 million as analysed in the table below.
Foreign Changes in
exchange unrealised
30 Jun 2019 GBPm translation appreciation 31 Dec 2018 GBPm
---------------- ------------------------- ------------------------- ----------------
Reflected as part of movement in other comprehensive
income
------------------------- ---------------- ---------------------------------------------------- ----------------
Assets fair valued at
below book value
Book value* 2,339 25,330
Unrealised gain (loss) (49) 14 862 (925)
------------------------- ---------------- ----------------
Fair value (as included
in statement of
financial position) 2,290 24,405
------------------------- ---------------- ----------------
Assets fair valued at or
above book value
Book value* 39,592 15,933
Unrealised gain (loss) 2,296 30 1,755 511
------------------------- ---------------- ----------------
Fair value (as included
in statement of
financial position) 41,888 16,444
------------------------- ---------------- ----------------
Total
Book value* 41,931 41,263
Net unrealised gain
(loss) 2,247 44 2,617 (414)
------------------------- ---------------- ----------------
Fair value (as included
in the footnote above in
the overview table and
the statement of
financial
position) 44,178 40,849
------------------------- ---------------- ----------------
* Book value represents cost/amortised cost of the debt securities.
Translated at the average rate of US$1.2939: GBP1.00.
(d) US debt securities classified as available-for-sale in an unrealised loss position (i) Fair value of securities as a percentage of book value
The following table shows the fair value of the debt securities in a gross unrealised loss position for various percentages of book value:
30 Jun 2019 GBPm 30 Jun 2018 GBPm 31 Dec 2018 GBPm
------------------ ------------------ ------------------
Fair Unrealised Fair Unrealised Fair Unrealised
value loss value loss value loss
--------------------- ------ ---------- ------ ---------- ------ ----------
Between 90% and 100% 2,221 (32) 22,187 (729) 23,662 (809)
Between 80% and 90% 38 (5) 195 (29) 707 (104)
Below 80% 31 (12) 15 (4) 36 (12)
---------------------- ------ ---------- ------ ---------- ------ ----------
Total 2,290 (49) 22,397 (762) 24,405 (925)
---------------------- ------ ---------- ------ ---------- ------ ----------
(ii) Unrealised losses by maturity of security
2019 GBPm 2018 GBPm
--------- --------------
30 Jun 30 Jun 31 Dec
------------------------------------------ --------- ------ ------
1 year to 5 years (2) (65) (72)
5 years to 10 years (10) (348) (436)
More than 10 years (19) (297) (372)
Mortgage-backed and other debt securities (18) (52) (45)
------------------------------------------- --------- ------ ------
Total (49) (762) (925)
------------------------------------------- --------- ------ ------
(iii) Age analysis of unrealised losses for the periods indicated
The following table shows the age analysis of all the unrealised losses in the portfolio by reference to the length of time the securities have been in an unrealised loss position:
30 Jun 2019 GBPm 30 Jun 2018 GBPm 31 Dec 2018 GBPm
----------------------- ----- ------------------------------ ------------------------------
Non- Non- Non-
investment Investment investment Investment investment Investment
Age analysis grade grade* Total grade grade* Total grade grade* Total
------------------ ----------- ---------- ----- ----------- ---------- ----- ----------- ---------- -----
Less than 6 months (1) (4) (5) (14) (418) (432) (20) (141) (161)
6 months to 1 year (1) (13) (14) (7) (148) (155) (22) (440) (462)
1 year to 2 years (1) (9) (10) (1) (148) (149) (10) (142) (152)
2 years to 3 years - (10) (10) - (1) (1) - (123) (123)
More than 3 years - (10) (10) (1) (24) (25) (2) (25) (27)
------------------ ----------- ---------- ----- ----------- ---------- ----- ----------- ---------- -----
(3) (46) (49) (23) (739) (762) (54) (871) (925)
------------------ ----------- ---------- ----- ----------- ---------- ----- ----------- ---------- -----
* For Standard and Poor, Moody's and Fitch rated debt securities, those with ratings range from AAA to BBB- are designated as investment grade. For NAIC rated debt securities, those with ratings 1 or 2 are designated as investment grade.
Further, the following table shows the age analysis of the securities whose fair values were below 80 per cent of the book value:
30 Jun 2019 GBPm 30 Jun 2018 GBPm 31 Dec 2018 GBPm
------------------ ------------------ ------------------
Fair Unrealised Fair Unrealised Fair Unrealised
Age analysis value loss value loss value loss
--------------------- ------ ---------- ------ ---------- ------ ----------
Less than 3 months 26 (10) 13 (3) 32 (10)
3 months to 6 months 5 (2) - - 2 (1)
More than 6 months - - 2 (1) 2 (1)
--------------------- ------ ---------- ------ ---------- ------ ----------
31 (12) 15 (4) 36 (12)
--------------------- ------ ---------- ------ ---------- ------ ----------
(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 2019 are as follows:
2019 GBPm 2018 GBPm
--------- --------------
30 Jun 30 Jun 31 Dec
------------------------------------------------- --------- ------ ------
Asia operations:note (i)
Shareholder-backed business 126 97 121
With-profits business 256 192 235
US operationsnote (ii) 4,458 3,373 3,604
Other operationsnote (iii) 315 507 445
-------------------------------------------------- --------- ------ ------
Total for continuing operations 5,155 4,169 4,405
Total for discontinued UK and Europe operations* 6,374 6,676
------ ------
Group total 10,543 11,081
------ ------
* Classified as discontinued operations at 30 June 2019 (as described in note A2).
Notes
(i) The Asia operations' exposure to asset-backed securities for the shareholder-backed business and with-profits business at 30 June 2019, is 100 per cent (30 June 2018: 100 per cent; 31 December 2018: 99.8 per cent) investment grade.
(ii) US operations' exposure to asset-backed securities comprises:
2019 GBPm 2018 GBPm
--------- --------------
30 Jun 30 Jun 31 Dec
-------------------------------------------------------------------------------------- --------- ------ ------
RMBS
Sub-prime (30 Jun 2019: 2% AAA, 5% AA, 2% A) 88 105 96
Alt-A (30 Jun 2019: 17% AAA, 34% A) 101 117 105
Prime including agency (2019: 39% AAA, 45% AA, 7% A) 579 425 441
CMBS (30 Jun 2019: 78% AAA, 16% AA, 3% A) 2,266 1,638 1,945
CDO funds (30 Jun 2019: 37% AAA, 33% AA, 30% A), including GBPnil exposure to sub-prime 353 11 13
Other ABS (30 Jun 2019: 15% AAA, 16% AA, 52% A), including GBP59 million exposure to
sub-prime 1,071 1,077 1,004
--------------------------------------------------------------------------------------- --------- ------ ------
Total (30 Jun 2019: 52% AAA, 21% AA, 18% A) 4,458 3,373 3,604
--------------------------------------------------------------------------------------- --------- ------ ------
(iii) Other operations' exposure to asset-backed securities is held by Prudential Capital with no sub-prime exposure. Of the GBP315 million held at 30 June 2019, 100 per cent (30 June 2018: 99 per cent; 31 December 2018: 99 per cent) are graded AAA.
(f) Group sovereign debt and bank debt exposure
The Group exposures held by the shareholder-backed business and with-profits funds in sovereign debts and bank debt securities at 30 June 2019 are analysed as follows:
Exposure to sovereign debts
30 Jun 2019 GBPm 30 Jun 2018 GBPm 31 Dec 2018 GBPm
---------------------------- ---------------------------- ----------------------------
With- With- With-
Shareholder-backed profits Shareholder-backed profits Shareholder-backed profits
business funds business funds business funds
------------------------ ------------------ -------- ------------------ -------- ------------------ --------
Total Eurozone - - 799 429 378 440
United Kingdom 988 - 3,482 3,130 3,226 3,013
United States* 6,410 12,925 5,243 10,519 5,647 11,858
Indonesia 295 - 262 - 282 -
Singapore 132 1,719 128 1,278 164 1,658
Thailand 1,106 - 965 - 921 -
Vietnam 1,186 - 1,794 - 1,871 -
Other Asia 1,925 944 1,651 730 1,779 866
Other 98 25 123 306 125 221
------------------------ ------------------ -------- ------------------ -------- ------------------ --------
Total 12,140 15,613 14,447 16,392 14,393 18,056
------------------------ ------------------ -------- ------------------ -------- ------------------ --------
Analysed as:
Total from continuing
operations 11,180 11,824 11,658 13,144
Total from discontinued
UK and Europe
operations 3,267 4,568 2,735 4,912
------------------ -------- ------------------ --------
14,447 16,392 14,393 18,056
------------------ -------- ------------------ --------
* The exposure to the United States sovereign debt comprises holdings of the US and Asia insurance operations.
Classified as discontinued operations at 30 June 2019 (as described in note A2).
Exposure to bank debt securities
30 Jun 2019 GBPm 2018 GBPm
------------------------------------------ ------------------------
Senior debt Subordinated debt 30 Jun 31 Dec
----------- --------------------- ----------- -----------
Group
Shareholder-backed business Total Tier 1 Tier 2 Total total Group total Group total
------------------------------------ ----------- ------ ------ ----- ------ ----------- -----------
Italy - - - - - - -
Spain 70 - - - 70 78 106
France 142 - 9 9 151 81 156
Germany 30 - 12 12 42 119 125
Netherlands 56 - 3 3 59 51 73
Other Eurozone - - - - - 15 17
-------------------------------------- ----------- ------ ------ ----- ------ ----------- -----------
Total Eurozone 298 - 24 24 322 344 477
United Kingdom 598 8 95 103 701 1,289 1,346
United States 2,354 1 31 32 2,386 2,495 2,667
Asia 248 114 312 426 674 572 592
Other 470 - 75 75 545 639 645
-------------------------------------- ----------- ------ ------ ----- ------ ----------- -----------
Total 3,968 123 537 660 4,628 5,339 5,727
-------------------------------------- ----------- ------ ------ ----- ------ ----------- -----------
Analysed as:
Total from continuing operations 4,172 4,640
Total from discontinued UK and Europe
operations* 1,167 1,087
----------- -----------
5,339 5,727
----------- -----------
With-profits funds
------------------------------------ ----------- ------ ------ ----- ------ ----------- -----------
Italy - - - - - 38 38
Spain 2 - - - 2 21 17
France 7 - 27 27 34 318 352
Germany - - 47 47 47 207 229
Netherlands 8 - 10 10 18 227 266
Other Eurozone - - - - - 27 74
-------------------------------------- ----------- ------ ------ ----- ------ ----------- -----------
Total Eurozone 17 - 84 84 101 838 976
United Kingdom 31 2 82 84 115 2,032 2,194
United States 16 1 3 4 20 2,533 2,730
Asia 279 363 299 662 941 906 1,015
Other 59 - 142 142 201 1,882 1,810
-------------------------------------- ----------- ------ ------ ----- ------ ----------- -----------
Total 402 366 610 976 1,378 8,191 8,725
-------------------------------------- ----------- ------ ------ ----- ------ ----------- -----------
Analysed as:
Total from continuing operations 1,264 1,287
Total from discontinued UK and Europe
operations* 6,927 7,438
----------- -----------
8,191 8,725
----------- -----------
* Classified as discontinued operations at 30 June 2019 (as described in note A2).
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.
C3.3 Loans portfolio
(a) Overview of loans portfolio
Loans are principally accounted for at amortised cost, net of impairment except for certain policy loans of the US insurance operations that are held to back liabilities for funds withheld under reinsurance arrangements and are also accounted on a fair value basis.
The analysis of the Group's loan portfolio at 30 June 2019 below excludes those of the Group's UK and Europe operations which are classified as held for distribution. An analysis of the loan portfolio held by the UK and Europe operations at 30 June 2019 is provided in note D2.2. In line with IFRS requirements, the comparatives have not been re-presented for the assets and liabilities classified for held for distribution in the current period.
The amounts included in the statement of financial position are analysed as follows:
30 Jun 2018
30 Jun 2019 GBPm GBPm 31 Dec 2018 GBPm
------------------------------- -------- ------------- ------ -------------------------------
Mortgage Policy Other Mortgage Policy Other Mortgage Policy Other
loans loans loans Total loans loans loans Total loans loans loans Total
note note note
note (i) (ii) note (i) (ii) note (i) (ii)
-------- ------ ----- ------ -------- ------ ----- ------ -------- ------ ----- ------
Asia
With-profits - 783 63 846 - 652 105 757 - 727 65 792
Non-linked
shareholder-backed 140 233 15 388 170 217 193 580 156 226 203 585
US
Non-linked
shareholder-backed 7,587 3,686 - 11,273 6,292 3,523 - 9,815 7,385 3,681 - 11,066
Other operations - - 6 6 - - 106 106 - - - -
-------------------- -------- ------ ----- ------ -------- ------ ----- ------ -------- ------ ----- ------
Total continuing
operations 7,727 4,702 84 12,513 6,462 4,392 404 11,258 7,541 4,634 268 12,443
-------- ------ ----- ------
Total discontinued
UK and Europe
operationsnote
(iii) 3,953 4 1,707 5,664 4,116 3 1,448 5,567
-------- ------ ----- ------ -------- ------ ----- ------
Total loans
securities 10,415 4,396 2,111 16,922 11,657 4,637 1,716 18,010
-------- ------ ----- ------ -------- ------ ----- ------
Notes
(i) All mortgage loans are secured by properties.
(ii) In the US, GBP2,799 million of policy loans held at 30 June 2019 (30 June 2018: GBP2,638 million; 31 December 2018: GBP2,783 million) are backing liabilities for funds withheld under reinsurance arrangements and are accounted for at fair value through profit or loss. All other policy loans are accounted for at amortised cost, less any impairment.
(iii) The amounts held by the UK and Europe operations were transferred to assets held for distribution at 30 June 2019 (see note D2.2).
(b) Additional information on US mortgage loans
In the US, mortgage loans are all commercial mortgage loans that are secured by the following property types: industrial, multi-family residential, suburban office, retail or hotel. The average loan size is GBP14.7 million (30 June 2018: GBP13.3 million; 31 December 2018: GBP14.0 million). The portfolio has a current estimated average loan to value of 53 per cent (30 June 2018: 55 per cent; 31 December 2018: 53 per cent).
Jackson had no mortgage loans where the contractual terms of the agreements had been restructured for all periods shown.
C4 Policyholder liabilities and unallocated surplus
The note provides information of policyholder liabilities and unallocated surplus of with-profits funds held on the Group's statement of financial position.
The analysis below excludes the movement for UK and Europe operations which are classified as held for distribution as at 30 June 2019. The balances of the discontinued UK and Europe operations are removed from the opening balance. An analysis of the movement in policyholder liabilities and unallocated surplus of with-profits funds held by the UK and Europe operations at 30 June 2019 is provided in note D2.2.
C4.1 Group overview
(i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds
Half year 2019 GBPm
------------------------------------------
UK and
Asia US Europe Total
note C4.2 note C4.3 note D2.2
------------------------------------------------------------------------ --------- --------- --------- ---------
At 1 January 2019 82,763 185,600 164,889 433,252
------------------------------------------------------------------------ --------- --------- --------- ---------
Comprising:
------------------------------------------------------------------------ --------- --------- --------- ---------
- Policyholder liabilities on the consolidated statement of financial
position
(excludes GBP39 million classified as unallocated to a segment)note (a) 72,107 185,600 151,555 409,262
- Unallocated surplus of with-profits funds on the consolidated
statement of financial position 2,511 - 13,334 15,845
- Group's share of policyholder liabilities of joint ventures and
associatenote(b) 8,145 - - 8,145
----------------------------------------------------------------------- --------- --------- --------- ---------
Reclassification of UK and Europe liabilities as held for distribution - - (164,889) (164,889)
Net flows:
Premiums 7,574 7,060 - 14,634
Surrenders (1,531) (6,398) - (7,929)
Maturities/deaths (989) (1,348) - (2,337)
----------------------------------------------------------------------- --------- --------- --------- ---------
Net flows 5,054 (686) - 4,368
Shareholders' transfers post tax (38) - - (38)
Investment-related items and other movements 6,142 16,838 - 22,980
Foreign exchange translation differences 676 400 - 1,076
------------------------------------------------------------------------ --------- --------- --------- ---------
At 30 June 2019 94,597 202,152 - 296,749
------------------------------------------------------------------------ --------- --------- --------- ---------
Comprising:
------------------------------------------------------------------------ --------- --------- --------- ---------
- Policyholder liabilities on the consolidated statement of financial
position 82,969 202,152 - 285,121
(excludes GBP47 million classified as unallocated to a segment)note (a)
- Unallocated surplus of with-profits funds on the consolidated
statement of financial position 2,944 - - 2,944
- Group's share of policyholder liabilities of joint ventures and
associatenote (b) 8,684 - - 8,684
----------------------------------------------------------------------- --------- --------- --------- ---------
Half year 2018 GBPm
------------------------------------------
UK and
Asia US Europe Total
note C4.2 note C4.3 note D2.2
------------------------------------------------------------------------ --------- --------- --------- ---------
At 1 January 2018 73,839 180,724 181,066 435,629
------------------------------------------------------------------------ --------- --------- --------- ---------
Comprising:
------------------------------------------------------------------------ --------- --------- --------- ---------
- Policyholder liabilities on the consolidated statement of financial
position
(excludes GBP32 million classified as unallocated to a segment) 62,898 180,724 167,589 411,211
- Unallocated surplus of with-profits funds on the consolidated
statement of financial position 3,474 - 13,477 16,951
- Group's share of policyholder liabilities of joint ventures and
associatenote (b) 7,467 - - 7,467
----------------------------------------------------------------------- --------- --------- --------- ---------
Reclassification of reinsured UK annuity contracts as held for sale - - (12,002) (12,002)
Net flows:
Premiums 6,247 7,111 6,964 20,322
Surrenders (1,547) (5,953) (3,446) (10,946)
Maturities/deaths (838) (1,076) (3,499) (5,413)
----------------------------------------------------------------------- --------- --------- --------- ---------
Net flows 3,862 82 19 3,963
Shareholders' transfers post tax (27) - (127) (154)
Investment-related items and other movements (1,349) (103) (801) (2,253)
Foreign exchange translation differences 690 4,447 17 5,154
------------------------------------------------------------------------ --------- --------- --------- ---------
At 30 June 2018 77,015 185,150 168,172 430,337
------------------------------------------------------------------------ --------- --------- --------- ---------
Comprising:
------------------------------------------------------------------------ --------- --------- --------- ---------
- Policyholder liabilities on the consolidated statement of financial
position 65,640 185,150 154,655 405,445
(excludes GBP37 million classified as unallocated to a segment)note (a)
- Unallocated surplus of with-profits funds on the consolidated
statement of financial position 3,766 - 13,517 17,283
- Group's share of policyholder liabilities of joint ventures and
associatenote (b) 7,609 - - 7,609
----------------------------------------------------------------------- --------- --------- --------- ---------
Average policyholder liability balancesnote (c)
Half year 2019 85,953 193,876 - 279,829
Half year 2018 71,807 182,937 161,122 415,866
----------------------------------------------------------------------- --------- --------- --------- ---------
Notes
(a) The policyholder liabilities of the Asia insurance operations at 30 June 2019 of GBP82,969 million (30 June 2018: GBP65,640 million; 31 December 2018: GBP72,107 million) are after deducting the intra-group reinsurance liabilities ceded by the UK and Europe insurance operations of GBP1,108 million (30 June 2018: GBP1,181 million; 31 December 2018: GBP1,109 million) to the Hong Kong with-profits business. Including this amount, total Asia policyholder liabilities are GBP84,077 million (30 June 2018: GBP66,821 million; 31 December 2018: GBP73,216 million).
(b) The Group's investment in joint ventures and associate are accounted for on an equity method basis in the Group's statement of financial position. The Group's share of the policyholder liabilities as shown above relates to life businesses in China, India and of the Takaful business in Malaysia.
(c) Averages have been based on opening and closing balances, adjusted for acquisitions, disposals and corporate transactions arising in the period, and exclude unallocated surplus of with-profits funds.
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 but exclude liabilities that have not been allocated to a reporting segment. 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 will exclude any deductions for fees/charges. Claims (surrenders, maturities and deaths) represent the policyholder liabilities provision released rather than the claim amount paid to the policyholder.
(ii) Analysis of movements in policyholder liabilities for shareholder-backed business
Half year 2019 GBPm
------------------------------------
UK and
Asia US Europe Total
-------------------------------------------------------------------------------- ------- ------- -------- --------
At 1 January 2019 40,597 185,600 40,760 266,957
Reclassification of UK and Europe liabilities as held for distribution - - (40,760) (40,760)
Net flows:
Premiums 3,923 7,060 - 10,983
Surrenders (1,324) (6,398) - (7,722)
Maturities/deaths (439) (1,348) - (1,787)
-------------------------------------------------------------------------------- ------- ------- -------- --------
Net flows(note) 2,160 (686) - 1,474
Investment-related items and other movements 1,623 16,838 - 18,461
Foreign exchange translation differences 340 400 - 740
-------------------------------------------------------------------------------- ------- ------- -------- --------
At 30 June 2019 44,720 202,152 - 246,872
-------------------------------------------------------------------------------- ------- ------- -------- --------
Comprising:
-------------------------------------------------------------------------------- ------- ------- -------- --------
- Policyholder liabilities on the consolidated statement of financial position 36,036 202,152 - 238,188
(excludes GBP47 million classified as unallocated to a segment)
- Group's share of policyholder liabilities relating to joint ventures and
associate 8,684 - - 8,684
-------------------------------------------------------------------------------- ------- ------- -------- --------
Half year 2018 GBPm
------------------------------------
UK and
Asia US Europe Total
-------------------------------------------------------------------------------- ------- ------- -------- --------
At 1 January 2018 37,402 180,724 56,367 274,493
Reclassification of reinsured UK annuity contracts as held for sale - - (12,002) (12,002)
Net flows:
Premiums 3,266 7,111 681 11,058
Surrenders (1,383) (5,953) (1,200) (8,536) Maturities/deaths (420) (1,076) (1,294) (2,790) -------------------------------------------------------------------------------- ------- ------- -------- -------- Net flows(note) 1,463 82 (1,813) (268) Investment-related items and other movements (718) (103) (236) (1,057) Foreign exchange translation differences 1 4,447 - 4,448 -------------------------------------------------------------------------------- ------- ------- -------- -------- At 30 June 2018 38,148 185,150 42,316 265,614 -------------------------------------------------------------------------------- ------- ------- -------- -------- Comprising: -------------------------------------------------------------------------------- ------- ------- -------- -------- - Policyholder liabilities on the consolidated statement of financial position 30,539 185,150 42,316 258,005 (excludes GBP37 million classified as unallocated to a segment) - Group's share of policyholder liabilities relating to joint ventures and associate 7,609 - - 7,609 -------------------------------------------------------------------------------- ------- ------- -------- --------
Note
Including net flows of the Group's insurance joint ventures and associate.
(iii) Movement in insurance contract liabilities and unallocated surplus of with-profits funds
Further analysis of the movement in the period of the Group's gross contract liabilities, reinsurer's share of insurance contract liabilities and unallocated surplus of with-profits funds (excluding those held by joint ventures and associate) is provided below:
Unallocated
Reinsurer's share of insurance surplus of
Contract liabilities contract liabilities with-profits funds
GBPm GBPm GBPm
------------------------------------- -------------------- ------------------------------------ -------------------
At 1 January 2019 409,301 (11,144) 15,845
Removal of opening balances relating
to the discontinued UK and Europe
insurance operationsnote
(a) (151,555) 1,703 (13,334)
Income and expense included in the
income statement 26,274 (680) 506
Other movementsnote (b) 41 - (90)
Foreign exchange translation
differences 1,107 (30) 17
------------------------------------- -------------------- ------------------------------------ -------------------
At 30 June 2019 285,168 (10,151) 2,944
------------------------------------- -------------------- ------------------------------------ -------------------
Notes
(a) The balances of the discontinued UK and Europe operations are removed from the opening balances to show the underlying movement from continuing operations (as described in note A2). The GBP1,703 million of reinsurer's share of insurance contract liabilities in the table above excluded the intra-group reinsurance assets of GBP1,109 million for the with-profits business ceded to the Asia insurance operations, which were eliminated on consolidation at 1 January 2019. An analysis of the movement in policyholder liabilities and unallocated surplus of with-profits funds held by the UK and Europe operations at 30 June 2019 is provided in note D2.2.
(b) Other movements include premiums received and claims paid on investment contracts without discretionary participating features, which are taken directly to the statement of financial position in accordance with IAS 39.
The total charge for benefit and claims shown in the income statement from continuing operations comprises the amounts shown as 'income and expense included in the income statement' in the table above together with claims paid of GBP11,037 million in the period net of amounts attributable to reinsurers of GBP(466) million.
C4.2 Asia insurance operations
Half year 2019 GBPm
----------------------------------------------
With-profits Unit-linked Other
business liabilities business Total
------------------------------------------------------------------- ------------ ------------ --------- -------
At 1 January 2019 42,166 20,182 20,415 82,763
Comprising:
-------------------------------------------------------------------- ------------ ------------ --------- -------
- Policyholder liabilities on the consolidated statement of
financial positionnote (v) 39,655 16,368 16,084 72,107
- Unallocated surplus of with-profits funds on the consolidated
statement of financial position 2,511 - - 2,511
- Group's share of policyholder liabilities relating to joint
ventures and associatenote (i) - 3,814 4,331 8,145
------------------------------------------------------------------- ------------ ------------ --------- -------
Premiums:
New business 594 775 912 2,281
In-force 3,057 932 1,304 5,293
------------------------------------------------------------------- ------------ ------------ --------- -------
3,651 1,707 2,216 7,574
Surrendersnote (ii) (207) (1,070) (254) (1,531)
Maturities/deaths (550) (69) (370) (989)
-------------------------------------------------------------------- ------------ ------------ --------- -------
Net flows 2,894 568 1,592 5,054
Shareholders' transfers post tax (38) - - (38)
Investment-related items and other movements note (iii) 4,519 582 1,041 6,142
Foreign exchange translation differencesnote (iv) 336 172 168 676
-------------------------------------------------------------------- ------------ ------------ --------- -------
At 30 June 2019 49,877 21,504 23,216 94,597
-------------------------------------------------------------------- ------------ ------------ --------- -------
Comprising:
-------------------------------------------------------------------- ------------ ------------ --------- -------
- Policyholder liabilities on the consolidated statement of
financial positionnote (v) 46,933 17,594 18,442 82,969
- Unallocated surplus of with-profits funds on the consolidated
statement of financial position 2,944 - - 2,944
- Group's share of policyholder liabilities relating to joint
ventures and associatenote (i) - 3,910 4,774 8,684
------------------------------------------------------------------- ------------ ------------ --------- -------
Half year 2018 GBPm
----------------------------------------------
With-profits Unit-linked Other
business liabilities business Total
------------------------------------------------------------------- ------------ ------------ --------- -------
At 1 January 2018 36,437 20,027 17,375 73,839
Comprising:
-------------------------------------------------------------------- ------------ ------------ --------- -------
- Policyholder liabilities on the consolidated statement of
financial position 32,963 16,263 13,672 62,898
- Unallocated surplus of with-profits funds on the consolidated
statement of financial position 3,474 - - 3,474
- Group's share of policyholder liabilities relating to joint
ventures and associatenote (i) - 3,764 3,703 7,467
------------------------------------------------------------------- ------------ ------------ --------- -------
Premiums:
New business 432 870 435 1,737
In-force 2,549 841 1,120 4,510
------------------------------------------------------------------- ------------ ------------ --------- -------
2,981 1,711 1,555 6,247
Surrendersnote (ii) (164) (1,071) (312) (1,547)
Maturities/deaths (418) (93) (327) (838)
-------------------------------------------------------------------- ------------ ------------ --------- -------
Net flows 2,399 547 916 3,862
Shareholders' transfers post tax (27) - - (27)
Investment-related items and other movementsnote (iii) (631) (652) (66) (1,349)
Foreign exchange translation differencesnote (iv) 689 (142) 143 690
-------------------------------------------------------------------- ------------ ------------ --------- -------
At 30 June 2018 38,867 19,780 18,368 77,015
-------------------------------------------------------------------- ------------ ------------ --------- -------
Comprising:
-------------------------------------------------------------------- ------------ ------------ --------- -------
- Policyholder liabilities on the consolidated statement of
financial positionnote (v) 35,101 16,094 14,445 65,640
- Unallocated surplus of with-profits funds on the consolidated
statement of financial position 3,766 - - 3,766
- Group's share of policyholder liabilities relating to joint
ventures and associatenote (i) - 3,686 3,923 7,609
------------------------------------------------------------------- ------------ ------------ --------- -------
Average policyholder liability balancesnote (vi)
Half year 2019 43,294 20,843 21,816 85,953
Half year 2018 34,032 19,903 17,872 71,807
------------------------------------------------------------------- ------------ ------------ --------- -------
Notes
(i) The Group's investment in joint ventures and associate are accounted for on an equity method and the Group's share of the policyholder liabilities as shown above relate to the life business in China, India and of the Takaful business in Malaysia.
(ii) The rate of surrenders for shareholder-backed business (expressed as a percentage of opening liabilities) was 3.3 per cent in the first half of 2019 (half year 2018: 3.7 per cent).
(iii) Investment-related items and other movements in the first half of 2019 primarily represent equity market gains from the with-profits business and falls in bond yields during the period in a number of business units.
(iv) Movements in the period have been translated at the average exchange rates for the period ended 30 June 2019. The closing balance has been translated at the closing spot rates as at 30 June 2019. Differences upon retranslation are included in foreign exchange translation differences.
(v) The policyholder liabilities at 30 June 2019 is after deducting the intra-group reinsurance liabilities ceded by the UK and Europe insurance operations of GBP1,108 million (30 June 2018: GBP1,181 million; 31 December 2018: GBP1,109 million) for the with-profits business. Including this amount the Asia total policyholder liabilities are GBP84,077 million (30 June 2018: GBP66,821 million; 31 December 2018: GBP73,216 million).
(vi) Averages have been based on opening and closing balances, adjusted for any acquisitions, disposals and corporate transactions arising in the period, and exclude unallocated surplus of with-profits funds.
C4.3 US insurance operations
Half year 2019 GBPm
-------------------------------------------
Variable annuity Fixed annuity,
separate account GICs and other
liabilities business Total
------------------------------------------------------- ----------------- --------------- -------
At 1 January 2019 128,220 57,380 185,600
Premiums 4,661 2,399 7,060
Surrenders (4,643) (1,755) (6,398)
Maturities/deaths (604) (744) (1,348)
-------------------------------------------------------- ----------------- --------------- -------
Net flowsnote (ii) (586) (100) (686)
Transfers from general to separate account 492 (492) -
Investment-related items and other movementsnote (iii) 16,800 38 16,838
Foreign exchange translation differencesnote (i) 369 31 400
-------------------------------------------------------- ----------------- --------------- -------
At 30 June 2019 145,295 56,857 202,152
-------------------------------------------------------- ----------------- --------------- -------
Half year 2018 GBPm
-------------------------------------------
Variable annuity Fixed annuity,
separate account GICs and other
liabilities business Total
-------------------------------------------------------- ----------------- --------------- -------
At 1 January 2018 130,528 50,196 180,724
Premiums 5,528 1,583 7,111
Surrenders (4,225) (1,728) (5,953)
Maturities/deaths (540) (536) (1,076)
-------------------------------------------------------- ----------------- --------------- -------
Net flowsnote (ii) 763 (681) 82
Transfers from general to separate account 387 (387) -
Investment-related items and other movements 582 (685) (103)
Foreign exchange translation differencesnote (i) 3,286 1,161 4,447
-------------------------------------------------------- ----------------- --------------- -------
At 30 June 2018 135,546 49,604 185,150
-------------------------------------------------------- ----------------- --------------- -------
Average policyholder liability balancesnote (iv)
Half year 2019 136,757 57,119 193,876
Half year 2018 133,037 49,900 182,937
------------------------------------------------------- ----------------- --------------- -------
Notes
(i) Movements in the period have been translated at an average rate of US$1.29: GBP1.00 (30 June 2018: US$1.38: GBP1.00; 31 December 2018: US$1.34: GBP1.00). The closing balances have been translated at closing rate of US$1.27: GBP1.00 (30 June 2018: US$1.32: GBP1.00; 31 December 2018: US$1.27: GBP1.00). Differences upon retranslation are included in foreign exchange translation differences.
(ii) Net outflows in the first half of 2019 were GBP686 million (first half of 2018 inflows: GBP82 million) with net outflows from the variable annuity business following lower sales in the period offset by higher sales of other business in line with the intention to diversify the US product mix. The net outflow for other business in half year 2019 included annuity payments relating to the John Hancock business which was acquired in the fourth quarter of 2018.
(iii) Positive investment-related items and other movements in variable annuity separate account liabilities of GBP16,800 million for the first half of 2019 represent positive separate account return mainly following the increase in the US equity market in the period.
(iv) Averages have been based on opening and closing balances.
C5 Intangible assets
The analysis of intangible assets below excludes the UK and Europe operations which are classified as held for distribution as at 30 June 2019. In line with IFRS requirements, the comparatives have not been re-presented. For the analysis of movements during the period, the balances of the discontinued UK and Europe operations are removed from the opening balance.
C5.1 Goodwill
Goodwill shown on the statement of financial position at 30 June 2019 is wholly attributable to shareholders and represents amounts allocated to entities in Asia in respect of both acquired asset management and life businesses.
2019 GBPm 2018 GBPm
--------- --------------
30 Jun 30 Jun 31 Dec
----------------------------------------------------- --------- ------ ------
Carrying value at beginning of period 1,857 1,482 1,482
Reclassification to held for distribution(note D2.2) (1,359) - -
Additions in the period - 149 376
Disposals/reclassifications to held for sale - (10) (10)
Exchange differences 12 (1) 9
----------------------------------------------------- --------- ------ ------
Carrying value at end of period 510 1,620 1,857
----------------------------------------------------- --------- ------ ------
C5.2 Deferred acquisition costs and other intangible assets
2019 GBPm 2018 GBPm
--------- --------------
30 Jun 30 Jun 31 Dec
-------------------------------------------------------------------------------------- --------- ------ ------
Deferred acquisition costs and other intangible assets attributable to shareholders:
From continuing operations 12,601 11,112 11,672
From discontinued operations* - 98 112
-------------------------------------------------------------------------------------- --------- ------ ------
Total 12,601 11,210 11,784
Other intangible assets, including computer software, attributable to with-profits
funds:
From continuing operations 58 48 56
From discontinued operations* - 101 83
-------------------------------------------------------------------------------------- --------- ------ ------
Total 58 149 139
-------------------------------------------------------------------------------------- --------- ------ ------
Total of deferred acquisition costs and other intangible assets 12,659 11,359 11,923
--------------------------------------------------------------------------------------- --------- ------ ------
* Classified as discontinued operations at 30 June 2019 (as described in note A2).
The deferred acquisition costs and other intangible assets attributable to shareholders comprise:
2019 GBPm 2018 GBPm
--------- --------------
30 Jun 30 Jun 31 Dec
----------------------------------------------------------------------------------------- --------- ------ ------
Deferred acquisition costs related to insurance contracts as classified under IFRS 4 10,326 9,596 10,017
Deferred acquisition costs related to investment management contracts, including life
assurance
contracts classified as financial instruments and investment management contracts under
IFRS
4 27 61 78
----------------------------------------------------------------------------------------- --------- ------ ------
Deferred acquisition costs related to insurance and investment contracts 10,353 9,657 10,095
----------------------------------------------------------------------------------------- --------- ------ ------
Present value of acquired in-force policies for insurance contracts as classified under
IFRS 4 (PVIF) 31 35 34
Distribution rights and other intangibles 2,217 1,518 1,655
----------------------------------------------------------------------------------------- --------- ------ ------
Present value of acquired in-force (PVIF) and other intangibles attributable to
shareholders 2,248 1,553 1,689
----------------------------------------------------------------------------------------- --------- ------ ------
Total of deferred acquisition costs and other intangible assetsnote (a) 12,601 11,210 11,784
----------------------------------------------------------------------------------------- --------- ------ ------
Notes
(a) Total deferred acquisition costs and other intangible assets can be further analysed by business operations as follows:
2018
2019 GBPm GBPm
------------------------------------------------------------------ ------ --------
Deferred acquisition costs
---------------------------------------------
UK and PVIF and
Asia US Europe All asset other 30 Jun 30 Jun 31 Dec
insurance insurance* insurance management intangibles Total Total Total
------------------- --------- ---------- --------- ----------- ----------- ------ ------ --------
Balance at 1
January: 1,264 8,727 86 18 1,689 11,784 10,866 10,866
Reclassification to
held for
distribution - - (86) (18) (8) (112) - -
Additions(++) 198 285 - - 652 1,135 511 1,248
Amortisation to the
income
statement:note (c)
--------- ---------- --------- ----------- ----------- ------ ------ --------
Adjusted IFRS
operating profit
based on
longer-term
investment returns (91) (94) - - (102) (287) (447) (1,024)
Non-operating
profit - 476 - - - 476 (199) (118)
--------- ---------- --------- ----------- ----------- ------ ------ --------
(91) 382 - - (102) 189 (646) (1,142)
Disposals and
transfers - - - - (5) (5) (11) (14)
Exchange differences
and other movements 12 8 - - 22 42 218 580
Amortisation of DAC
related to net
unrealised
valuation movements
on the US insurance
operation's
available-for-sale
securities
recognised within
other comprehensive
income - (432) - - - (432) 272 246
-------------------- --------- ---------- --------- ----------- ----------- ------ ------ --------
Balance at 30 June 1,383 8,970 - - 2,248 12,601 11,210 11,784
-------------------- --------- ---------- --------- ----------- ----------- ------ ------ --------
* 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 the US insurance operation'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 which are determined using an assumption for long-term investment returns for the separate account of 7.4 per cent (half year and full year 2018: 7.4 per cent) (gross of asset management fees and other charges to policyholders, but net of external fund management fees). The amounts included in the income statement 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.
PVIF and 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. Software rights include amounts reclassified as held for distribution of negative GBP6 million, additions of GBP16 million, amortisation of GBP15 million, disposals of GBP2 million and a balance at 30 June 2019 of GBP55 million.
(++) In January 2019, the Group renewed its regional strategic bancassurance alliance with United Overseas Bank Limited (UOB). The new agreement extends the original alliance, which commenced in 2010, to 2034 and increases the geographical scope to include a fifth market, Vietnam, alongside the existing markets of Singapore, Malaysia, Thailand and Indonesia. As part of this transaction, Prudential has agreed to pay UOB an initial fee of GBP662 million (translated using a Singapore dollar: GBP foreign exchange rate of 1.7360) for distribution rights which are not dependent on future sales volumes. This amount is paid in three instalments of GBP230 million in February 2019, GBP331 million in January 2020 and GBP101 million in January 2021. After allowing for discounting, the amount included in additions in the table above is GBP630 million.
(b) The DAC amount in respect of US insurance operations comprises amounts in respect of:
2019 GBPm 2018 GBPm
--------- --------------
30 Jun 30 Jun 31 Dec
----------------------------------------------------------------------------------------- --------- ------ ------
Variable annuity business 9,118 8,258 8,477
Other business 341 241 299
Cumulative shadow DAC (for unrealised gains/losses booked in other comprehensive income)* (489) (13) (49)
----------------------------------------------------------------------------------------- --------- ------ ------
Total DAC for US operations 8,970 8,486 8,727
----------------------------------------------------------------------------------------- --------- ------ ------
* A loss of GBP(432) million (30 June 2018: a gain of GBP272 million; 31 December 2018: a gain of GBP246 million) for shadow DAC amortisation is booked within other comprehensive income to reflect the impact from the positive unrealised valuation movement for half year 2019 of GBP2,617 million (30 June 2018: negative unrealised valuation movement of GBP(1,421) million; 31 December 2018: negative unrealised valuation movement of GBP(1,617) million). 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. At 30 June 2019, the cumulative shadow DAC balance as shown in the table above was negative GBP(489) million (30 June 2018: negative GBP(13) million; 31 December 2018: negative GBP(49) million).
(c) Sensitivity of amortisation charge
The amortisation charge to the income statement is reflected in both adjusted IFRS operating profit based on longer-term investment returns and short-term fluctuations in investment returns. The amortisation charge to adjusted IFRS operating profit based on longer-term investment returns in a reporting period comprises:
- A core amount that reflects a relatively stable proportion of underlying premiums or profit; and
- 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 (which is used for moderating the effect of short-term volatility in investment returns) 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 2019, the DAC amortisation charge for adjusted IFRS operating profit based on longer-term investment returns was determined after including a credit for decelerated amortisation of GBP148 million (half year 2018 charge for accelerated: GBP(42) million; full year 2018 charge for accelerated: GBP194 million). The deceleration arising in the first half of 2019 reflects a mechanical decrease in the projected separate account return for the next five years under the mean-reversion technique. Under this technique the projected level of return for each of the next five years is adjusted so that in combination with the actual rates of return for the preceding three years (including the current period) the assumed long-term annual separate account return of 7.4 per cent is realised on average over the entire eight-year period. The deceleration in DAC amortisation in the first half of 2019 is driven both by the actual separate account return in the period being higher than that assumed and by the higher than expected return in 2016 falling out of the eight-year period.
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. At 30 June 2019, it would take approximate movements in separate account values of more than either negative 35 per cent or positive 30 per cent for mean reversion assumption to move outside the corridor.
C6 Borrowings
C6.1 Core structural borrowings of shareholder-financed businesses
2019 GBPm 2018 GBPm
--------- --------------
30 Jun 30 Jun 31 Dec
----------------------------------------------------------------------------------- --------- ------ ------
Holding company operations:note (i)
Subordinated debt with no option to substitute to M&GPrudential:
US$250m 6.75% Notes (Tier 1)note (ii) 196 189 196
US$300m 6.5% Notes (Tier 1)note (ii) 236 227 235
US$550m 7.75% Notes (Tier 1) - 417 -
------------------------------------------------------------------------------------ --------- ------ ------
Perpetual Subordinated Capital Securities (Tier 1) 432 833 431
------------------------------------------------------------------------------------ --------- ------ ------
US$700m 5.25% Notes (Tier 2) 550 530 550
US$1,000m 5.25% Notes (Tier 2) 781 751 780
US$725m 4.375% Notes (Tier 2) 566 544 565
US$750m 4.875% Notes (Tier 2) 584 563 583
------------------------------------------------------------------------------------ --------- ------ ------
Perpetual Subordinated Capital Securities (Tier 2) 2,481 2,388 2,478
------------------------------------------------------------------------------------ --------- ------ ------
EUR20m Medium Term Notes 2023 (Tier 2) 18 18 18
GBP435m 6.125% Notes 2031 (Tier 2) 431 430 431
GBP400m 11.375% Notes 2039 (Tier 2)note (iii) - 398 399
------------------------------------------------------------------------------------ --------- ------ ------
Subordinated notes (Tier 2) 449 846 848
------------------------------------------------------------------------------------ --------- ------ ------
Subordinated debt total 3,362 4,067 3,757
Senior debt:note (iv)
GBP300m 6.875% Bonds 2023 295 300 294
GBP250m 5.875% Bonds 2029 224 249 223
Bank loannote (v) 275 - 275
------------------------------------------------------------------------------------ --------- ------ ------
Total debt before amounts capable of being substituted to M&GPrudentialnote (vii) 4,156 4,616 4,549
------------------------------------------------------------------------------------- --------- ------ ------
Subordinated debt capable of being substituted to M&GPrudential as at 30 Jun 2019:
GBP600m 5.56% (30 Jun and 31 Dec 2018: 5.0%) Notes 2055 (Tier 2)note (vi) 642 591 591 GBP700m 6.34% (30 Jun and 31 Dec 2018: 5.7%) Notes 2063 (Tier 2)note (vi) 814 696 696 GBP750m 5.625% Notes 2051 (Tier 2) 744 - 743 GBP500m 6.25% Notes 2068 (Tier 2) 498 - 498 US$500m 6.5% Notes 2048 (Tier 2) 391 - 391 ------------------------------------------------------------------------------------ --------- ------ ------ Total subordinated debt capable of being substituted to M&GPrudential as at 30 Jun 2019note (vii) 3,089 1,287 2,919 ------------------------------------------------------------------------------------- --------- ------ ------ Holding company total 7,245 5,903 7,468 Prudential Capital bank loannote (v) - 275 - Jackson US$250m 8.15% Surplus Notes 2027note (viii) 196 189 196 ------------------------------------------------------------------------------------- --------- ------ ------ Total (per condensed consolidated statement of financial position) 7,441 6,367 7,664 ------------------------------------------------------------------------------------- --------- ------ ------
Notes
(i) The debt tier classifications used are consistent with the treatment of capital for regulatory purposes under the Solvency II regime.
The Group has designated US$3,725 million (30 June 2018: US$4,275 million; 31 December 2018: US$3,725 million) of its US dollar denominated subordinated debt as a net investment hedge under IAS 39 to hedge the currency risks related to the net investment in Jackson.
(ii) These borrowings can be converted, in whole or in part, at the Company's option and subject to certain conditions, on any interest payment date, into one or more series of Prudential preference shares.
(iii) In May 2019, the Company redeemed its GBP400 million 11.375 per cent Tier 2 subordinated notes.
(iv) The senior debt ranks above subordinated debt in the event of liquidation. In 2018, as part of its preparation to demerge M&GPrudential, the Group made certain modifications to the terms and conditions of the senior bonds with bondholders' consent. The amendment to the terms and conditions will avoid an event of a technical default on the bonds, should the proposed demerger proceed. The fees paid to bondholders have been adjusted to the carrying value of the bonds and will be amortised in subsequent periods. No other adjustments were made to the carrying value of the debt as a result of the modification.
(v) The bank loan of GBP275 million is drawn at a cost of 12-month GBP LIBOR plus 0.33 per cent. The loan, held by Prudential Capital at 30 June 2018, was renewed in December 2018 with Prudential plc being the new holder. The loan matures on 20 December 2022 with an option to repay annually.
(vi) In the first half of 2019, the Group agreed with the holders of these two subordinated debt instruments that, in return for an increase in the coupon of the two instruments and upfront fees totalling GBP141 million for both instruments, they would permit the substitution of M&GPrudential as the issuer of the instruments, together with other modifications of terms to ensure the debt meet the requirements of Solvency II. In accordance with IAS 39, this has been accounted for as an extinguishment of the old debt and the issuance of new debt, recognised at fair value. The loss arising from this revaluation has been treated as an expense attributable to the M&GPrudential segment (see note D2.1). The GBP141 million of upfront fees have been paid by Prudential plc and have been treated as a non-operating expense.
(vii) The annualised interest of debt that is not capable of being substituted to M&GPrudential, using coupon rates and exchange rates at 30 June 2019, is GBP(234) million. The interest charge to the income statement for the six months ended 30 June 2019 for debt that is capable of being substituted to M&GPrudential was GBP(85) million (half year 2018: GBP(35) million; full year 2018: GBP(95) million).
(viii) Jackson's borrowings are unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims of Jackson.
Prior to the proposed demerger, the Group expects to rebalance its debt capital across Prudential plc and M&GPrudential. This will include the ultimate holding company of M&GPrudential becoming an issuer of debt following substitution from Prudential plc. Based on the operating environment and economic conditions as at 30 June 2019, the total debt expected to be transferred valued at original proceeds less unamortised transaction costs is GBP3.2 billion, of which GBP2.9 billion was held by Prudential plc at 30 June 2019 (IFRS value of GBP3.1 billion), with a further GBP0.3 billion (coupon of 3.875 per cent) raised in July 2019.
Ratings
Prudential plc has debt ratings from Standard & Poor's, Moody's and Fitch. Prudential plc's long-term senior debt is rated A2 by Moody's, A by Standard & Poor's and A- by Fitch.
Prudential plc's short-term debt is rated as P-1 by Moody's, A-1 by Standard & Poor's and F1 by Fitch.
The financial strength of The Prudential Assurance Company Limited is rated A+ by Standard & Poor's, Aa3 by Moody's and AA- by Fitch.
Jackson National Life Insurance Company's financial strength is rated AA- by Standard & Poor's and Fitch, A1 by Moody's and A+ by A.M. Best.
Prudential Assurance Co. Singapore (Pte) Ltd.'s (Prudential Singapore) financial strength is rated AA- by Standard & Poor's.
All the Group's ratings are on a stable outlook.
C6.2 Other borrowings
(i) Operational borrowings attributable to shareholder-financed businesses
2019 GBPm 2018 GBPm
--------- --------------
30 Jun 30 Jun 31 Dec
----------------------------------------------------------------------- --------- ------ ------
Borrowings in respect of short-term fixed income securities programmes 661 1,209 472
Lease liability for operating leasesnote (a) 229 - -
Non-recourse borrowings of consolidated investment fundsnote (b) 545 - 263
Other borrowingsnote (c) 229 409 263
------------------------------------------------------------------------ --------- ------ ------
Total 1,664 1,618 998
------------------------------------------------------------------------ --------- ------ ------
Analysed as:
Total from continuing operations 1,488 892
Total from discontinued UK and Europe operations* 130 106
------ ------
1,618 998
------ ------
* Classified as discontinued operations at 30 June 2019 (as described in note A2).
Notes
(a) The Group adopted IFRS 16 as at 1 January 2019, using the modified retrospective approach. Under this approach, comparative information is not restated (as described in note A3).
(b) 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.
(c) Other borrowings mainly include senior debt issued through the Federal Home Loan Bank of Indianapolis (FHLB), secured by collateral posted with the FHLB by Jackson.
(ii) Borrowings attributable to with-profits businesses
2019 GBPm 2018 GBPm
--------- --------------
30 Jun 30 Jun 31 Dec
------------------------------------------------------------------ --------- ------ ------
Non-recourse borrowings of consolidated investment fundsnote (a) - 3,521 3,845
Other borrowings (predominantly obligations under leases)note (b) 238 68 95
------------------------------------------------------------------ --------- ------ ------
Total 238 3,589 3,940
------------------------------------------------------------------ --------- ------ ------
Analysed as:
Total from continuing operations 32 19
Total from discontinued UK and Europe operations* 3,557 3,921
------ ------
3,589 3,940
------ ------
* Classified as discontinued operations at 30 June 2019 (as described in note A2).
Notes
(a) 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.
(b) The Group adopted IFRS 16 as at 1 January 2019, using the modified retrospective approach. Under this approach, comparative information is not restated. Other borrowings at 30 June 2019 included GBP213 million relating to lease liabilities (as described in note A3).
C7 Deferred tax
The analysis below excludes the UK and Europe operations which are classified as held for distribution as at 30 June 2019. The balances of the discontinued UK and Europe operations are removed from the opening balance.
The statement of financial position contains the following deferred tax assets and liabilities in relation to:
Half year 2019 GBPm
--------------------------------------------------------------------------------------------------
Movement
through Other movements
Reclassification other including foreign
as held for Movement in income comprehensive currency
At 1 Jan distribution* statement income and equity movements At 30 Jun
------------------ -------- ------------------ ------------------ ------------------ ----------------- ---------
Deferred tax
assets
Unrealised losses
or gains on
investments 113 - (13) - (97) 3
Balances relating
to investment and
insurance
contracts 1 - - - - 1
Short-term
temporary
differences 2,339 (115) 392 (1) 5 2,620
Capital allowances 15 (11) (1) - - 3
Unused tax losses 127 - 8 - - 135
------------------ -------- ------------------ ------------------ ------------------ ----------------- ---------
Total 2,595 (126) 386 (1) (92) 2,762
------------------ -------- ------------------ ------------------ ------------------ ----------------- ---------
Deferred tax
liabilities
Unrealised losses
or gains on
investments (867) 827 (40) (459) 74 (465)
Balances relating
to investment and
insurance
contracts (1,002) - (189) - 2 (1,189)
Short-term
temporary
differences (2,097) 183 (139) 16 (5) (2,042)
Capital allowances (56) 51 - - - (5)
------------------ -------- ------------------ ------------------ ------------------ ----------------- ---------
Total (4,022) 1,061 (368) (443) 71 (3,701)
------------------ -------- ------------------ ------------------ ------------------ ----------------- ---------
* The Group's UK and Europe operations are classified as discontinued operations at 30 June 2019 (as described in note A2).
The principal reason for the increase in deferred tax assets in continuing operations is an increase in the deferred tax asset for losses on derivatives in the US insurance business, which for US tax purposes are spread across three years, reflecting a higher level of losses in the first half of 2019 (and therefore a higher amount deferred to subsequent periods) compared to prior periods.
C8 Defined benefit pension schemes
The Group's businesses operate a number of pension schemes. The largest defined benefit scheme is the principal UK scheme, namely the Prudential Staff Pension Scheme (PSPS). The Group also operates two smaller UK defined benefit schemes in respect of Scottish Amicable (SASPS) and M&G (M&GGPS). Historically, all pension surplus and deficits were attributable to subsidiaries of M&GPrudential in line with the Group's allocation policy, with the exception of 30 per cent of the surplus attaching to PSPS, which was allocated to Prudential plc. In preparation for the proposed demerger of M&GPrudential, at 30 June 2019, the 30 per cent of surplus attaching to PSPS was formally reallocated to M&GPrudential Services Limited. Accordingly, at 30 June 2019, the IAS 19 pension assets/liabilities of all the UK schemes of a net deficit of GBP69 million was included within the held for distribution assets/liabilities of the discontinued UK and Europe operations. In addition to the UK schemes, there are two small defined benefit schemes in Taiwan which have negligible deficits. These other schemes remain with the continuing operations.
C9 Share capital, share premium and own shares
30 Jun 2019 30 Jun 2018 31 Dec 2018
------------------------------- -------------------------------- ---------------------------------
Issued Number of Number of Number of
shares of 5p ordinary Share Share ordinary Share Share ordinary Share Share
each shares capital premium shares capital premium shares capital premium
fully paid: GBPm GBPm GBPm GBPm GBPm GBPm
------------ ------------- ------- ------- ------------- -------- ------- ------------- -------- --------
At 1 January 2,593,044,409 130 1,964 2,587,175,445 129 1,948 2,587,175,445 129 1,948
Shares
issued
under
share-based
schemes 6,751,790 - 10 4,697,422 - 6 5,868,964 1 16
------------ ------------- ------- ------- ------------- -------- ------- ------------- -------- --------
At end of
period 2,599,796,199 130 1,974 2,591,872,867 129 1,954 2,593,044,409 130 1,964
------------ ------------- ------- ------- ------------- -------- ------- ------------- -------- --------
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 each period end shown below, there were options outstanding under Save As You Earn schemes to subscribe for shares as follows:
Number of shares Share price range Exercisable
-------------------
to subscribe for from to by year
------------ ---------------- ------- ---------- -----------
30 Jun 2019 3,808,687 901p 1,455p 2024
30 Jun 2018 5,851,810 629p 1,455p 2023
31 Dec 2018 4,885,804 901p 1,455p 2024
------------ ---------------- ------- -----------
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 GBP179 million at 30 June 2019 (30 June 2018: GBP197 million; 31 December 2018: GBP170 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery of shares under employee incentive plans. At 30 June 2019, 9.5 million (30 June 2018: 9.7 million; 31 December 2018: 9.6 million) Prudential plc shares with a market value of GBP163 million (30 June 2018: GBP168 million; 31 December 2018: GBP135 million) were held in such trusts, all of which are for employee incentive plans. The maximum number of shares held during the period was 14.1 million which was in March 2019.
Within the trust, shares are notionally allocated by business unit reflecting the employees to which the awards were made. On demerger, it is intended that shares allocated to M&GPrudential will be transferred to a separate trust, established by M&GPrudential.
The Company purchased the following number of shares in respect of employee incentive plans:
Number of shares
purchased Cost
(in millions) GBPm
---------------- -----
Half year 2019 3.1 49.4
Half year 2018 1.8 32.2
Full year 2018 2.6 44.8
---------------- -----
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 2019 was 3.0 million (30 June 2018: 4.8 million; 31 December 2018: 3.0 million) and the cost of acquiring these shares of GBP21 million (30 June 2018: GBP46 million; 31 December 2018: GBP20 million) is included in the cost of own shares. The market value of these shares as at 30 June 2019 was GBP52 million (30 June 2018: GBP84 million; 31 December 2018: GBP42 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 2019 or 2018.
D OTHER NOTES
D1 Gain (loss) on disposal of business and corporate transactions undertaken by continuing operations
2019 GBPm 2018 GBPm
--------- --------------------
Half year Half year Full year
---------------------------- --------- --------- ---------
Gain on disposalsnote (i) 209 - -
Other transactionsnote (ii) (196) (57) (80)
---------------------------- --------- --------- ---------
13 (57) (80)
---------------------------- --------- --------- ---------
Notes
(i) In half year 2019, the GBP209 million gain on disposals principally relates to profits arising from a reduction in the Group's stake (from 26 per cent to 22 per cent) in its associate in India, ICICI Prudential Life Insurance Company, and the disposal of Prudential Vietnam Finance Company Limited, a wholly owned subsidiary that provides consumer finance.
(ii) Other transaction costs of GBP(196) million incurred by the continuing operations of the Group in half year 2019 reflect costs related to the preparation for the proposed demerger of M&GPrudential from Prudential plc. These include the following amounts:
- GBP(18) million transaction related costs, principally fees to advisors;
- GBP(141) million being the fee paid to the holders of two subordinated debt instruments as discussed in note C6.1(vi); and
- GBP(37) million for one-off costs arising from the separation of the M&GPrudential business from Prudential plc.
In 2018, other transaction costs additionally included amounts from exiting the NPH broker-dealer business in the US.
D2 Discontinued UK and Europe operations held for distribution
In March 2018, the Group announced its intention to demerge its UK and Europe operations (M&GPrudential) from the Group, resulting in two separately listed companies by issuing shares in a newly listed company to existing shareholders. As discussed in note A2, the Group's UK and Europe operations have been classified as discontinued operations and held for distribution in these condensed consolidated financial statements in accordance with IFRS 5, 'Non-current assets held for sale and discontinued operations'.
The results for the discontinued operations presented in the consolidated financial statements are analysed below:
D2.1 Profit and loss for the period
2019 GBPm 2018 GBPm
--------- --------------------
Half year Half year Full year
Gross premiums earned 5,907 6,555 13,061
Outward reinsurance premiums (487) (12,598) (13,137)
--------------------------------------------------------------------------------- --------- --------- ---------
Earned premiums, net of reinsurance 5,420 (6,043) (76)
Investment return 13,072 53 (3,434)
Other income 643 890 1,595
--------------------------------------------------------------------------------- --------- --------- ---------
Total revenue, net of reinsurance 19,135 (5,100) (1,915)
--------------------------------------------------------------------------------- --------- --------- ---------
Benefits and claims and movement in unallocated surplus of with-profits funds,
net of reinsurance (16,361) 6,421 4,977
Fair value loss on debt extinguishmentnote (a) (169) - -
Acquisition costs and other expenditure (1,391) (1,250) (2,469)
--------------------------------------------------------------------------------- --------- --------- ---------
Total charges, net of reinsurance (17,921) 5,171 2,508
--------------------------------------------------------------------------------- --------- --------- ---------
Share of profits from joint ventures and associates, net of related tax 33 20 52
--------------------------------------------------------------------------------- --------- --------- ---------
Profit before tax (being tax attributable to shareholders' and policyholders'
returns)note
(b) 1,247 91 645
Less tax charge attributable to policyholders' returns (430) 10 406
--------------------------------------------------------------------------------- --------- --------- ---------
Profit before tax attributable to shareholders 817 101 1,051
--------- --------- ---------
Total tax charge attributable to policyholders and shareholders (602) (8) 210
Adjustment to remove tax charge attributable to policyholders' returns 430 (10) (406)
--------- ---------
Tax charge attributable to shareholders' returns (172) (18) (196)
--------------------------------------------------------------------------------- --------- --------- ---------
Profit for the period 645 83 855
--------------------------------------------------------------------------------- --------- --------- ---------
Notes
(a) As described in note C6.1(vi), during the first half of 2019, the Group agreed to change the terms of certain debt holdings to enable M&GPrudential to be substituted as the issuer of the instruments (in the place of Prudential plc). In return, the Group agreed to pay an initial fee of GBP141 million and increase the coupon on the debt. In accordance with IAS 39, this transaction has been accounted for as an extinguishment of old debt and issuance of new debt. The change in fair value of debt, driven by the higher coupon, will be borne by M&GPrudential post the proposed demerger and hence it has been included in discontinued profit or loss. The consent cost has been borne by Prudential plc and has been included in continuing operations.
(b) This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders. This is principally because the corporate taxes of the Group include those on the income of consolidated with-profits and unit-linked funds that, through adjustments to benefits, are borne by policyholders. These amounts are required to be included in the tax charge of the Company under IAS 12. Consequently, the profit before all taxes measure is not representative of pre-tax profits attributable to shareholders. Profit before all taxes is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of with-profits funds after adjusting for taxes borne by policyholders.
Other comprehensive income
The other comprehensive income included in the consolidated statement of comprehensive income in respect of the discontinued UK and Europe operations is as follows:
2019 GBPm 2018 GBPm
--------------------
Half year Half year Full year
-------------------------------------------------------------------------------- --------- --------- ---------
Other comprehensive income (loss) from continuing operations:
Exchange movements arising during the period 2 (3) -
-------------------------------------------------------------------------------- --------- --------- ---------
Items that will not be reclassified to profit or loss
Shareholders' share of actuarial gains and (losses) on defined benefit pension
schemes:
Net actuarial (losses) gains on defined benefit pension schemes (177) 104 114
Related tax 30 (18) (19)
-------------------------------------------------------------------------------- --------- --------- ---------
(147) 86 95
Deduct amount attributable to UK with-profit funds transferred to unallocated
surplus of with-profit
funds, net of related tax 149 (21) (38)
-------------------------------------------------------------------------------- --------- --------- ---------
2 65 57
-------------------------------------------------------------------------------- --------- --------- --------- Other comprehensive income for the period, net of related tax 4 62 57 --------------------------------------------------------------------------------- --------- --------- ---------
The profit and other comprehensive income for the period from the discontinued UK and Europe operations were wholly attributable to the equity holders of the Company.
Assumption changes
For the shareholder-backed business, the adjusted IFRS operating profit based on longer-term investment returns of the discontinued UK and Europe operations includes a benefit of GBP127 million (half year 2018: nil; full year 2018: GBP441 million) relating to changes to annuitant mortality assumptions, including the adoption of the Continuous Mortality Investigation (CMI) 2017 model with an uplift to the calibration such that additional liabilities are held to cover potential differences in experience between the PAC policyholder portfolio and the England and Wales population, in addition to the usual provisions for adverse deviation included when determining policyholder liabilities (half year 2018: no changes; full year 2018: changes to reflect current mortality experience and the adoption of the CMI 2016 model).
D2.2 Financial position*
2019 GBPm 2018(++) GBPm
Other funds and
subsidiaries
Annuity Asset
With- and Total manage- Elimina- 30 Jun 30 Jun 31 Dec
By operating segment profits Unit-linked other insurance ment tions Total Total Total
------------ ---------- ------- -------
Assets
Goodwillnote (a) 202 - - 202 1,153 - 1,355 1,314 1,359
Deferred acquisition
costs and other
intangible assets 47 - 110 157 17 - 174 199 195
Property, plant and
equipmentnote (b) 997 - 66 1,063 370 - 1,433 588 1,031
Reinsurers' share of
insurance contract
liabilities 1,136 119 1,435 2,690 - - 2,690 2,104 2,812
Deferred tax assets 58 - 43 101 17 - 118 130 126
Current tax
recoverable 215 - 57 272 7 - 279 255 244
Accrued investment
income 1,056 89 290 1,435 10 - 1,445 1,471 1,511
Other debtors 2,105 773 226 3,104 476 (151) 3,429 3,580 4,189
Investment properties 16,406 580 1,648 18,634 - - 18,634 17,595 17,914
Investment in joint
ventures and
associates accounted
for using the equity
method 566 - - 566 39 - 605 687 742
Loansnote (e) 3,756 - 1,779 5,535 - - 5,535 5,664 5,567
Equity securities and
portfolio holdings in
unit trusts 45,743 13,678 16 59,437 216 - 59,653 62,832 53,810
Debt securitiesnote
(d) 54,796 8,727 21,614 85,137 37 - 85,174 79,744 85,956
Derivative assets 2,354 2 527 2,883 - - 2,883 2,305 2,513
Other investments 6,105 9 1 6,115 18 - 6,133 5,158 5,585
Deposits 13,422 1,235 2,135 16,792 - - 16,792 11,020 10,320
Assets held for sale 6 - 10,164 10,170 - - 10,170 12,024 10,578
Cash and cash
equivalents 3,311 169 792 4,272 352 - 4,624 3,420 4,749
------------ ---------- ------- -------
Total assets 152,281 25,381 40,903 218,565 2,712 (151) 221,126 210,090 209,201
------------ ---------- ------- -------
Total equity - - 6,287 6,287 1,993 - 8,280 8,046 8,700
------------ ---------- ------- -------
Liabilities
Contract liabilities
(including amounts in
respect of contracts
classified as
investment contracts
under IFRS 4)note (f) 118,148 21,172 20,284 159,604 - - 159,604 154,655 151,555
Unallocated surplus of
with-profits
fundsnote (f) 15,116 - - 15,116 - - 15,116 13,517 13,334
Operational borrowings
attributable to
shareholder-financed
operationsnote (b) - 4 156 160 296 - 456 130 106
Borrowings
attributable to
with-profits
businesses 3,580 - - 3,580 - - 3,580 3,557 3,921
Obligations under
funding, securities
lending and sale and
repurchase agreements 846 - 208 1,054 - - 1,054 1,516 1,224
Net asset value
attributable to unit
holders of
consolidated unit
trusts
and similar funds 4,827 3,659 7 8,493 19 - 8,512 5,781 9,013
Deferred tax
liabilities 995 - 163 1,158 29 - 1,187 1,602 1,061
Current tax
liabilities 293 36 32 361 34 - 395 194 326
Accruals, deferred
income and other
liabilities 6,988 498 2,031 9,517 151 (151) 9,517 6,349 6,442
Provisionsnote (h) 21 - 373 394 190 - 584 684 743
Derivative liabilities 1,467 12 1,198 2,677 - - 2,677 2,082 2,208
Liabilities held for
sale - - 10,164 10,164 - - 10,164 11,977 10,568
------------ ---------- ------- -------
Total liabilities 152,281 25,381 34,616 212,278 719 (151) 212,846 202,044 200,501
------------ ---------- ------- -------
Total equity and
liabilities 152,281 25,381 40,903 218,565 2,712 (151) 221,126 210,090 209,201
------------ ---------- ------- -------
* The statement of financial position as shown above reflects the segmental position of the discontinued UK and Europe operations and is therefore presented before the elimination of intragroup balances with continuing operations.
Includes the Scottish Amicable Insurance Fund which, at 30 June 2019, has total assets and liabilities of GBP4,887 million (30 June 2018: GBP5,310 million; 31 December 2018: GBP4,844 million). 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). The PAC with-profits fund includes GBP9.6 billion (30 June 2018: GBP10.2 billion; 31 December 2018: GBP9.5 billion) of non-profits annuities liabilities.
(++) The 2018 comparatives assets and liabilities have not been re-presented to be classified as held for distribution on the Group's statement of financial position (as described in note A2).
Notes
(a) Goodwill
At 30 June 2019, GBP1,153 million goodwill in M&G Investments is attributable to shareholders (30 June 2018: GBP1,153 million; 31 December 2018: GBP1,153 million) and GBP202 million goodwill in venture fund investments is attributable to with-profits funds (30 June 2018: GBP161 million; 31 December 2018: GBP206 million).
(b) Property, plant and equipment
As at 1 January 2019, the Group applied IFRS 16, 'Leases', using the modified retrospective approach. Under this approach, comparative information is not restated. The application of the standard has resulted in the recognition of an additional lease liability and a corresponding 'right-of-use' asset of a similar amount as at 1 January 2019. See note A3 for further details. As at 30 June 2019, right-of-use assets recognised in property, plant and equipment amounted to GBP278 million.
(c) Fair value measurement of financial assets and liabilities
Assets and liabilities carried at fair value on the statement of financial position
The table below shows the assets and liabilities carried at fair value as at each period end indicated, analysed by level of the IFRS 13, 'Fair Value Measurement', defined fair value hierarchy. This hierarchy is based on the inputs to the fair value measurement and reflects the lowest level input that is significant to that measurement.
30 Jun 2019 GBPm
------------------ ------------------------------ --------
Level 1 Level 2 Level 3
------------------ -------------- --------------
Valuation Valuation
based on based on
Quoted prices significant significant
Analysis of financial investments, net of derivative (unadjusted) observable unobservable
liabilities by business type in active markets market inputs market inputs Total
------------------ -------------- -------------- --------
With-profits
Loans - - 1,637 1,637
Equity securities and portfolio holdings in unit trusts 41,593 3,758 392 45,743
Debt securities 7,534 46,410 852 54,796
Other investments (including derivative assets) 66 3,282 5,111 8,459
Derivative liabilities (60) (1,400) (7) (1,467)
Total financial investments, net of derivative
liabilities 49,133 52,050 7,985 109,168
Percentage of total (%) 45% 48% 7% 100%
Unit-linked
Equity securities and portfolio holdings in unit trusts 12,728 939 11 13,678
Debt securities 1,818 6,909 - 8,727
Other investments (including derivative assets) 4 - 7 11
Derivative liabilities (4) (8) - (12)
Total financial investments, net of derivative
liabilities 14,546 7,840 18 22,404
Percentage of total (%) 65% 35% 0% 100%
Shareholder-backed annuities and other
Loans - - 303 303
Equity securities and portfolio holdings in unit trusts 232 - - 232
Debt securities 3,560 17,754 337 21,651
Other investments (including derivative assets) - 527 19 546
Derivative liabilities (1) (1,197) - (1,198)
Total financial investments, net of derivative
liabilities 3,791 17,084 659 21,534
Percentage of total (%) 18% 79% 3% 100%
UK and Europe total analysis, including other financial
liabilities held at fair value
Loans - - 1,940 1,940
Equity securities and portfolio holdings in unit trusts 54,553 4,697 403 59,653
Debt securities 12,912 71,073 1,189 85,174
Other investments (including derivative assets) 70 3,809 5,137 9,016
Derivative liabilities (65) (2,605) (7) (2,677)
Total financial investments, net of derivative
liabilities 67,470 76,974 8,662 153,106
Investment contract liabilities without discretionary
participation features held at fair
value - (15,695) - (15,695)
Borrowings attributable to with-profits businesses - - (1,504) (1,504)
Net asset value attributable to unit holders of
consolidated unit trusts and similar funds (6,784) (744) (984) (8,512)
Other financial liabilities held at fair value - - (379) (379)
------------------ -------------- -------------- --------
Total financial instruments at fair value 60,686 60,535 5,795 127,016
Percentage of total (%) 47% 48% 5% 100%
------------------ -------------- -------------- --------
30 Jun 2018 GBPm
------------------ ------------------------------ --------
Level 1 Level 2 Level 3
------------------ -------------- --------------
Valuation Valuation
based on based on
Quoted prices significant significant
Analysis of financial investments, net of derivative (unadjusted) observable unobservable
liabilities by business type in active markets market inputs market inputs Total
------------------ -------------- -------------- --------
With-profits
Loans - - 1,808 1,808
Equity securities and portfolio holdings in unit trusts 43,931 3,322 337 47,590
Debt securities 7,341 43,374 349 51,064
Other investments (including derivative assets) 25 3,099 3,866 6,990
Derivative liabilities (32) (961) - (993)
Total financial investments, net of derivative
liabilities 51,265 48,834 6,360 106,459
Percentage of total (%) 48% 46% 6% 100%
Unit-linked
Equity securities and portfolio holdings in unit trusts 14,746 309 17 15,072
Debt securities 2,097 4,439 - 6,536
Other investments (including derivative assets) 4 - 7 11
Derivative liabilities (3) (2) - (5)
Total financial investments, net of derivative
liabilities 16,844 4,746 24 21,614
Percentage of total (%) 78% 22% 0% 100%
Shareholder-backed annuities and other
Loans - - 296 296
Equity securities and portfolio holdings in unit trusts 170 - - 170
Debt securities 3,978 17,868 298 22,144
Other investments (including derivative assets) - 460 2 462
Derivative liabilities - (1,084) - (1,084)
Total financial investments, net of derivative
liabilities 4,148 17,244 596 21,988
Percentage of total (%) 19% 78% 3% 100%
UK and Europe total analysis, including other financial
liabilities held at fair value
Loans - - 2,104 2,104
Equity securities and portfolio holdings in unit trusts 58,847 3,631 354 62,832
Debt securities 13,416 65,681 647 79,744
Other investments (including derivative assets) 29 3,559 3,875 7,463
Derivative liabilities (35) (2,047) - (2,082)
Total financial investments, net of derivative
liabilities 72,257 70,824 6,980 150,061
Investment contract liabilities without discretionary
participation features held at fair
value - (16,355) - (16,355)
Borrowings attributable to with-profits businesses - - (1,746) (1,746)
Net asset value attributable to unit holders of
consolidated unit trusts and similar funds (4,685) (330) (767) (5,782)
Other financial liabilities held at fair value - - (366) (366)
------------------ -------------- -------------- --------
Total financial instruments at fair value 67,572 54,139 4,101 125,812
Percentage of total (%) 54% 43% 3% 100%
------------------ -------------- -------------- --------
31 Dec 2018 GBPm
------------------------------ --------
Level 1 Level 2 Level 3
------------------ -------------- --------------
Valuation Valuation
based on based on
Quoted prices significant significant
Analysis of financial investments, net of derivative (unadjusted) observable unobservable
liabilities by business type in active markets market inputs market inputs Total
------------------ -------------- -------------- --------
With-profits
Loans - - 1,703 1,703
Equity securities and portfolio holdings in unit trusts 37,027 3,728 335 41,090
Debt securities 8,374 44,619 805 53,798
Other investments (including derivative assets) 56 3,149 4,325 7,530
Derivative liabilities (64) (1,201) - (1,265)
Total financial investments, net of derivative
liabilities 45,393 50,295 7,168 102,856
Percentage of total (%) 44% 49% 7% 100%
Unit-linked
Equity securities and portfolio holdings in unit trusts 12,150 318 9 12,477
Debt securities 1,750 8,762 - 10,512
Other investments (including derivative assets) 4 1 6 11
Derivative liabilities (1) (2) - (3)
Total financial investments, net of derivative
liabilities 13,903 9,079 15 22,997
Percentage of total (%) 60% 40% 0% 100%
Shareholder-backed annuities and other
Loans - - 267 267
Equity securities and portfolio holdings in unit trusts 242 - 1 243
Debt securities 3,804 17,470 372 21,646
Other investments (including derivative assets) 1 554 2 557
Derivative liabilities - (940) - (940)
Total financial investments, net of derivative
liabilities 4,047 17,084 642 21,773
Percentage of total (%) 19% 78% 3% 100%
UK and Europe total analysis, including other financial
liabilities held at fair value
Loans - - 1,970 1,970
Equity securities and portfolio holdings in unit trusts 49,419 4,046 345 53,810
Debt securities 13,928 70,851 1,177 85,956
Other investments (including derivative assets) 61 3,704 4,333 8,098
Derivative liabilities (65) (2,143) - (2,208)
Total financial investments, net of derivative
liabilities 63,343 76,458 7,825 147,626
Investment contract liabilities without discretionary
participation features held at fair
value - (15,560) - (15,560)
Borrowings attributable to with-profits businesses - - (1,606) (1,606)
Net asset value attributable to unit holders of
consolidated unit trusts and similar funds (7,443) (582) (988) (9,013)
Other financial liabilities held at fair value - - (355) (355)
------------------ -------------- -------------- --------
Total financial instruments at fair value 55,900 60,316 4,876 121,092
Percentage of total (%) 46% 50% 4% 100%
------------------ -------------- -------------- --------
Level 3 fair value assets and liabilities
At 30 June 2019, the discontinued UK and Europe operations held GBP5,795 million of net financial instruments at fair value within level 3, which comprises externally valued net assets of GBP5,632 million, primarily in private equity funds and investments in property funds which are exposed to bespoke properties or risks, and net assets of GBP163 million relating to investments which are internally valued or subject to a number of unobservable assumptions. The internally valued net assets include investments in debt securities, private equity and venture investment in both debt and equity securities and equity release mortgage loans, which are valued using a discounted cash flow method.
Transfers into and transfers out of levels
During half year 2019, the transfers between levels within the UK and Europe operations portfolio, were primarily transfers from level 1 to level 2 of GBP104 million and from level 1 to level 3 of GBP19 million. These transfers which relate mainly to debt securities and other financial investments arose to reflect the change in the observed valuation inputs and in certain cases, the change in the level of trading activities of the securities. In addition, there were transfers from level 2 to level 3 of GBP58 million and transfers from level 3 to level 2 of GBP118 million for equity securities and debt securities.
Assets and liabilities at amortised cost and their fair value
The table below shows the financial assets and liabilities carried at amortised cost on the statement of financial position and their fair value. Cash deposits, accrued income, other debtors, accruals, deferred income and other liabilities are excluded from the analysis below, as these are carried at amortised cost, which approximates fair value.
2019 GBPm 2018 GBPm
--------
30 Jun 30 Jun 31 Dec
Carrying Fair Carrying Fair Carrying Fair
value value value value value value
-------- ------- -------- -------- -------
Assets
Loans 3,595 4,149 3,560 4,078 3,597 4,008
Liabilities
Operational borrowings (excluding lease liabilities)
attributable to shareholder-financed
businesses (114) (114) (130) (130) (106) (106)
Borrowings (excluding lease liabilities) attributable to
the with-profits funds (2,038) (2,038) (1,811) (1,766) (2,315) (2,085)
Obligations under funding, securities lending and sale
and repurchase agreements (1,054) (1,054) (1,516) (1,516) (1,224) (1,224)
-------- ------- -------- --------
Total financial instruments carried at amortised cost 389 943 103 666 (48) 593
-------- ------- -------- --------
(d) Debt securities
Debt securities are carried at fair value through profit or loss and are analysed below according to external credit ratings issued, with equivalent ratings issued by different rating agencies grouped together.
30 Jun 2019 GBPm
------ ---------- ------ ------
BBB+
AAA AA+ to AA- A+ to A- to BBB- Below BBB- Other* Total
------ ---------- -------- -------- ---------- ------ ------
With-profits 5,401 8,488 13,446 15,641 2,824 8,996 54,796
Unit-linked 578 2,025 1,959 2,450 934 781 8,727
Non-linked shareholder-backed 2,791 6,115 4,615 1,655 211 6,264 21,651
------ ---------- -------- -------- ---------- ------ ------
Total debt securities 8,770 16,628 20,020 19,746 3,969 16,041 85,174
------ ---------- -------- -------- ---------- ------ ------
30 Jun 2018 GBPm
BBB+
AAA AA+ to AA- A+ to A- to BBB- Below BBB- Other* Total
------ ---------- -------- -------- ---------- ------ ------
With-profits 7,091 8,723 11,606 13,544 2,847 7,253 51,064
Unit-linked 358 2,099 1,694 1,448 718 219 6,536
Non-linked shareholder-backed 3,273 6,296 5,138 1,496 223 5,718 22,144
------ ---------- -------- -------- ---------- ------ ------
Total debt securities 10,722 17,118 18,438 16,488 3,788 13,190 79,744
------ ---------- -------- -------- ---------- ------ ------
31 Dec 2018 GBPm
BBB+
AAA AA+ to AA- A+ to A- to BBB- Below BBB- Other* Total
------ ---------- -------- -------- ---------- ------ ------
With-profits 6,890 9,332 11,779 14,712 2,891 8,194 53,798
Unit-linked 1,041 2,459 2,215 3,501 395 901 10,512
Non-linked shareholder-backed 3,007 6,413 4,651 1,515 158 5,902 21,646
------ ---------- -------- -------- ---------- ------ ------
Total debt securities 10,938 18,204 18,645 19,728 3,444 14,997 85,956
------ ---------- -------- -------- ---------- ------ ------
* Securities with credit ratings classified as 'Other' which are internally rated and are analysed as follows:
2019 GBPm 2018 GBPm
---------
30 Jun 30 Jun 31 Dec
---------
AAA to A- 8,630 7,828 8,150
BBB to B- 2,947 2,866 3,034
Below B- or unrated 4,464 2,496 3,813
---------
Total UK and Europe 16,041 13,190 14,997
---------
The Group exposures held by the shareholder-backed business and with-profits funds in sovereign debts and bank debt securities at 30 June 2019 are analysed as follows:
Exposure to sovereign debts
30 Jun 2019 GBPm 30 Jun 2018 GBPm 31 Dec 2018 GBPm
---------------------------- ---------------------------- ----------------------------
With- With- With-
Shareholder-backed profits Shareholder-backed profits Shareholder-backed profits
business funds business funds business funds
--------------- ------------------ -------- ------------------ -------- ------------------ --------
Italy - 59 - 60 - 57
Spain 49 19 36 18 36 18
France 23 - 23 6 - 50
Germany* 240 324 663 315 239 281
Other Eurozone 100 33 77 30 103 34
--------------- ------------------ -------- ------------------ -------- ------------------ --------
Total Eurozone 412 435 799 429 378 440
United Kingdom 2,235 2,636 2,410 3,130 2,300 3,013
United States - 632 1 724 - 1,261
Other 60 208 57 285 57 198
--------------- ------------------ -------- ------------------ -------- ------------------ --------
Total 2,707 3,911 3,267 4,568 2,735 4,912
--------------- ------------------ -------- ------------------ -------- ------------------ --------
* Including bonds guaranteed by the federal government.
Exposure to bank debt securities
30 Jun 2019 GBPm 2018 GBPm
Senior debt Subordinated debt 30 Jun 31 Dec
-----------
Group
Shareholder-backed business Covered Senior Total Tier 1 Tier 2 Total total Group total Group total
Italy - - - - - - - - -
Spain - - - - - - - - -
France 21 36 57 - - - 57 27 20
Germany - - - - 90 90 90 82 83
Netherlands - 37 37 - - - 37 17 17
Other Eurozone - - - - - - - - -
Total Eurozone 21 73 94 - 90 90 184 126 120
United Kingdom 450 243 693 - 67 67 760 726 674
United States - 252 252 - 29 29 281 260 253
Asia - - - - - - - - -
Other - - - - 36 36 36 55 40
---------------------------- ------- ------ ------ ------ -----------
Total 471 568 1,039 - 222 222 1,261 1,167 1,087
---------------------------- ------- ------ ------ ------ -----------
With-profits funds
---------------------------- ------- ------ ------ ------ -----------
Italy - 39 39 - - - 39 38 38
Spain - 26 26 - - - 26 21 17
France 6 363 369 - 74 74 443 312 348
Germany 116 63 179 - 8 8 187 171 185
Netherlands - 288 288 - - - 288 214 249
Other Eurozone - 86 86 - - - 86 27 74
---------------------------- ------- ------ ------ ------ -----------
Total Eurozone 122 865 987 - 82 82 1,069 783 911
United Kingdom 877 873 1,750 52 322 374 2,124 1,937 2,096
United States - 2,771 2,771 16 335 351 3,122 2,519 2,709
Asia - 127 127 - - - 127 38 106
Other 506 998 1,504 15 35 50 1,554 1,650 1,616 ---------------------------- ------- ------ ------ ------ ----------- Total 1,505 5,634 7,139 83 774 857 7,996 6,927 7,438 ---------------------------- ------- ------ ------ ------ -----------
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 UK and Europe's joint venture operations.
(e) Loans portfolio
The amounts included in the statement of financial position are analysed as follows:
30 Jun 2019 30 Jun 2018 31 Dec 2018
GBPm GBPm GBPm
--------
Mortgage Policy Other Mortgage Policy Other Mortgage Policy Other
loans* loans loans Total loans* loans loans Total loans* loans loans Total
-------- ------ ----- -----
With-profits 2,260 3 1,493 3,756 2,267 4 1,672 3,943 2,461 3 1,389 3,853
Non-linked
shareholder-backed 1,711 - 68 1,779 1,686 - 35 1,721 1,655 - 59 1,714
-------- ------ ----- -----
Total loans
securities 3,971 3 1,561 5,535 3,953 4 1,707 5,664 4,116 3 1,448 5,567
-------- ------ ----- -----
* All mortgage loans are secured by properties.
Other loans held in the UK with-profits funds are commercial loans and comprise mainly syndicated loans.
(f) Policyholder liabilities and unallocated surplus of with-profits funds
Shareholder-backed funds and subsidiaries
Annuity Total
and other discontinued
With-profits long-term UK and Europe
Half year 2019 movements GBPm sub-fund(++) Unit-linked liabilities business operations
------------- ----------------------------- ------------ --------------
At 1 January 2019 124,129 20,717 20,043 164,889
Comprising:
------------- ----------------------------- ------------ --------------
- Policyholder liabilities 110,795 20,717 20,043 151,555
- Unallocated surplus of with-profits
funds 13,334 - - 13,334
------------- ----------------------------- ------------
Premiums 5,668 447 151 6,266
Surrenders (2,462) (1,548) (25) (4,035)
Maturities/deaths (2,309) (224) (617) (3,150)
------------- ----------------------------- ------------ --------------
Net flows 897 (1,325) (491) (919)
Shareholders' transfers post tax (130) - - (130)
Switches (57) 57 - -
Investment-related items and other
movements 8,431 1,669 732 10,832
Foreign exchange translation differences (6) 54 - 48
------------- ----------------------------- ------------ --------------
At 30 June 2019 133,264 21,172 20,284 174,720
------------- ----------------------------- ------------ --------------
Comprising:
------------- ----------------------------- ------------ --------------
- Policyholder liabilities 118,148 21,172 20,284 159,604
- Unallocated surplus of with-profits
funds 15,116 - - 15,116
------------- ----------------------------- ------------
Half year 2018 movements GBPm
--------------
At 1 January 2018 124,699 23,145 33,222 181,066
Comprising:
- Policyholder liabilities 111,222 23,145 33,222 167,589
- Unallocated surplus of with-profits
funds 13,477 - - 13,477
Reclassification of reinsured UK annuity
contracts - - (12,002) (12,002)
as held for sale*
-
Premiums 6,283 516 165 6,964
Surrenders (2,246) (1,163) (37) (3,446)
Maturities/deaths (2,205) (313) (981) (3,499)
Net flows 1,832 (960) (853) 19
Shareholders' transfers post tax (127) - - (127)
Switches (89) 89 - -
Investment-related items and other
movements (476) (76) (249) (801)
Foreign exchange translation differences 17 - - 17
At 30 June 2018 125,856 22,198 20,118 168,172
Comprising:
- Policyholder liabilities 112,339 22,198 20,118 154,655
- Unallocated surplus of with-profits
funds 13,517 - - 13,517
Average policyholder liability balances
Half year 2019 114,472 20,945 20,163 155,580
Half year 2018 111,781 22,671 26,670 161,122
* The reclassification of the reinsured UK annuity business as held for sale reflects the value of policyholder liabilities held at 1 January 2018. Movements in items covered by the reinsurance contract prior to the 14 March inception date are included within net flows.
Averages have been based on opening and closing balances and adjusted for any acquisitions, disposals and corporate transactions arising in the period and exclude unallocated surplus of with-profits funds.
(++) Includes the Scottish Amicable Insurance Fund.
(g) Allowance for credit risk
For IFRS reporting, the results for UK shareholder-backed annuity business are particularly sensitive to the allowances made for credit risk. The allowance is reflected in the deduction from the valuation rate of interest used for discounting projected future annuity payments to policyholders that would have otherwise applied. The credit risk allowance comprises an amount for long-term best estimate defaults and additional provisions for credit risk premium, the cost of downgrades and short-term defaults.
The IFRS credit risk allowance made for the UK shareholder-backed fixed and linked annuity business equated to 40 basis points at 30 June 2019 (30 June 2018: 44 basis points; 31 December 2018: 40 basis points). The allowance represented 21 per cent of the bond spread over swap rates (30 June 2018: 26 per cent; 31 December 2018: 22 per cent).
The reserves for credit risk allowance at 30 June 2019 for the UK shareholder-backed business were GBP0.9 billion (30 June 2018: GBP1.1 billion; 31 December 2018: GBP0.9 billion). The 30 June 2019 credit risk allowance information is after reflecting the impact of the reinsurance of GBP12.0 billion of the UK shareholder-backed annuity portfolio to Rothesay Life entered into in March 2018.
(h) Review of past annuity sales
Prudential has agreed with the Financial Conduct Authority (FCA) to review annuities sold without advice after 1 July 2008 to its contract-based defined contribution pension customers. The review is examining whether customers were given sufficient information about their potential eligibility to purchase an enhanced annuity, either from Prudential or another pension provider. A gross provision of GBP400 million, before allowing for costs incurred to date, had been established at 31 December 2017 to cover the costs of undertaking the review and any related redress. In the first half of 2018, the Group agreed with its professional indemnity insurers that they would meet GBP166 million of the Group's claims costs, which would be paid as the Group incurred costs/redress with amounts remaining to be paid classed as 'other debtors' in the statement of financial position. Following a reassessment of the provision held, no further amount has been provided in the first half of 2019. The ultimate amount that will be expended by the Group on the review, which is currently expected to be completed in 2019, remains uncertain.
D2.3 Cash flows
2019 GBPm 2018 GBPm
--------------------
Half year Half year Full year
-------------------------------------------------------------
Cash flows from operating activities 404 (1,711) 4
Cash flows from investing activities (172) (224) (358)
Cash flows from financing activities* (356) (445) (758)
-------------------------------------------------------------
Total cash flows in the period (124) (2,380) (1,112)
Cash and cash equivalents at beginning of period 4,749 5,808 5,808
Effect of exchange rate changes on cash and cash equivalents (1) (8) 53
-------------------------------------------------------------
Cash and cash equivalents at end of period 4,624 3,420 4,749
-------------------------------------------------------------
* The cash flows from financing activities comprise net cash remittances to Group of GBP356 million at half year 2019 (30 June 2018: GBP341 million; 31 December 2018: GBP654 million) and in 2018 GBP104 million relating to the redemption of the subordinated guaranteed bond which was held within the with-profits business of the discontinued operations.
D3 Contingencies and related obligations
In addition to the matters set out in note D2.2(h) in relation to the Financial Conduct Authority review of past annuity sales, the Group is involved in various litigation and regulatory issues. These may from time to time include class actions involving Jackson. While the outcome of such litigation and regulatory issues cannot be predicted with certainty, the Company believes that their ultimate outcome will not have a material adverse effect on the Group's financial condition, results of operations, or cash flows.
There have been no material changes to the Group's contingencies and related obligations in the six month period ended 30 June 2019.
D4 Post balance sheet events
First interim ordinary dividend
The 2019 first interim ordinary dividend approved by the Board of Directors after 30 June 2019 is as described in note B6.
D5 Related party transactions
There were no transactions with related parties during the six months ended 30 June 2019 which have had a material effect on the results or financial position of the Group.
The nature of the related party transactions of the Group has not changed from those described in the Group's consolidated financial statements for the year ended 31 December 2018.
Statement of Directors' responsibilities
The Directors (who are listed below) are responsible for preparing the Half Year Financial Report in accordance with applicable law and regulations.
Accordingly, the Directors confirm that to the best of their knowledge:
- the condensed consolidated financial statements have been prepared in accordance with IAS 34, 'Interim Financial Reporting', as adopted by the European Union;
- the Half Year Financial Report includes a fair review of information required by:
(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the six months ended 30 June 2019, and their impact on the condensed consolidated financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place during the six months ended 30 June 2019 and that have materially affected the financial position or performance of the Group during that period; and any changes in the related party transactions described in the Group's consolidated financial statements for the year ended 31 December 2018 that could do so.
Prudential plc Board of Directors:
Chairman Independent Non-executive Directors
Paul Manduca The Hon. Philip Remnant CBE FCA
Sir Howard Davies
Executive Directors David Law ACA
Michael Wells Kaikhushru Nargolwala FCA
Mark FitzPatrick CA Anthony Nightingale CMG SBS JP
James Turner FCA FCSI FRM Alice Schroeder
Thomas Watjen
Fields Wicker-Miurin OBE
13 August 2019
Independent review report to Prudential plc
Conclusion
We have been engaged by the Company to review the International Financial Reporting Standards (IFRS) condensed set of financial statements in the Half Year Financial Report for the six months ended 30 June 2019 which comprises the Condensed Consolidated Income Statement, the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Statement of Financial Position, the Condensed Consolidated Statement of Cash Flows and the related explanatory notes.
Based on our review, nothing has come to our attention that causes us to believe that the IFRS condensed set of financial statements in the Half Year Financial Report for the six months ended 30 June 2019 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union ('EU') and the Disclosure Guidance and Transparency Rules ('the DTR') of the UK's Financial Conduct Authority ('the UK FCA').
We have also been engaged by the Company to review the European Embedded Value (EEV) basis supplementary financial information for the six months ended 30 June 2019 which comprises the Summarised Consolidated Income Statement, the Movement in Shareholders' Equity, the Summary Statement of Financial Position and the related explanatory notes.
Based on our review, nothing has come to our attention that causes us to believe that the EEV basis supplementary financial information for the six months ended 30 June 2019 is not prepared, in all material respects, in accordance with the European Embedded Value Principles issued by the European Insurance CFO Forum in 2016 ('the EEV Principles'), using the methodology and assumptions set out in the Notes to the EEV basis supplementary financial information.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the Half Year Financial Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the IFRS condensed set of financial statements or the EEV basis supplementary financial information.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
The impact of uncertainties due to the UK exiting the European Union on our review
Uncertainties related to the effects of Brexit are relevant to understanding our review of the IFRS condensed financial statements and the EEV basis supplementary financial information. Brexit is one of the most significant economic events for the UK, and at the date of this report its effects are subject to unprecedented levels of uncertainty of outcomes, with the full range of possible effects unknown. An interim review cannot be expected to predict the unknowable factors or all possible future implications for a company and this is particularly the case in relation to Brexit.
Directors' responsibilities
The Half Year Financial Report, including the IFRS condensed set of financial statements contained therein, is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Half Year Financial Report in accordance with the DTR of the UK FCA. The Directors have accepted responsibility for preparing the EEV basis supplementary financial information in accordance with the EEV Principles and for determining the methodology and assumptions used in the application of those principles.
The annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the EU. The Directors are responsible for preparing the IFRS condensed set of financial statements included in the Half Year Financial Report in accordance with IAS 34 as adopted by the EU.
The EEV basis supplementary financial information has been prepared in accordance with the EEV Principles using the methodology and assumptions set out in the Notes to the EEV basis supplementary financial information. The EEV basis supplementary financial information should be read in conjunction with the IFRS condensed set of financial statements.
Our responsibility
Our responsibility is to express to the Company a conclusion on the IFRS condensed set of financial statements in the Half Year Financial Report and the EEV basis supplementary financial information based on our reviews.
The purpose of our review work and to whom we owe our responsibilities
This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the DTR of the UK FCA and also to provide a review conclusion to the Company on the EEV basis supplementary financial information. Our review of the IFRS condensed set of financial statements has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. Our review of the EEV basis supplementary financial information has been undertaken so that we might state to the Company those matters we have been engaged to state in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.
Philip Smart
For and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
13 August 2019
I Additional financial information
I(i) Group capital position
(a) Solvency II capital position
The estimated Group shareholder Solvency II surplus (including M&GPrudential) at 30 June 2019 was GBP16.7 billion, before allowing for payment of the 2019 first interim ordinary dividend and after allowing for management's calculation of transitional measures reflecting operating and market conditions as at 30 June 2019.
2019 2018
Estimated Group shareholder Solvency II capital position* 30 Jun 30 Jun 31 Dec
---------------------------------------------------------- ------ ------ ------
Own funds (GBPbn) 30.4 27.5 30.2
Solvency Capital Requirement (GBPbn) 13.7 13.1 13.0
Surplus (GBPbn) 16.7 14.4 17.2
Solvency ratio (%) 222% 209% 232%
* The Group shareholder Solvency II capital position excludes the contribution to own funds and the SCR from ring-fenced with-profits funds and staff pension schemes in surplus. The estimated solvency positions include management's calculation of UK transitional measures reflecting operating and market conditions at each valuation date, which at 31 December 2018 reflected the approved regulatory position.
In accordance with Solvency II requirements, these results allow for:
- Capital in Jackson in excess of 250 per cent of the US local Risk Based Capital (RBC) requirement. As agreed with the Prudential Regulation Authority (PRA), this is incorporated in the result above as follows:
- Own funds: represents Jackson's local US risk based available capital less 100 per cent of the US RBC requirement (Company Action Level);
- Solvency Capital Requirement (SCR): represents 150 per cent of Jackson's local US RBC requirement (Company Action Level); and
- No diversification benefits are taken into account between Jackson and the rest of the Group.
- Matching adjustment for UK annuities and volatility adjustment for US dollar denominated Hong Kong with-profits business, based on approvals from the PRA and calibrations published by the European Insurance and Occupational Pensions Authority (EIOPA); and
- UK transitional measures, which have been recalculated using management's calculation of the impact of operating and market conditions at the valuation date. Transitional measures were last approved by the PRA as at 31 December 2018. Applying this approved regulatory transitional amount would result in the estimated Group shareholder Solvency II surplus reducing from GBP16.7 billion to GBP16.6 billion as at 30 June 2019.
The Group shareholder Solvency II capital position excludes:
- A portion of Solvency II surplus capital (GBP2.0 billion at 30 June 2019) relating to the Group's Asia life operations, primarily due to the Solvency II definition of 'contract boundaries', which prevents some expected future cash flows from being recognised;
- The contribution to own funds and the SCR from ring-fenced with-profits funds in surplus (representing GBP6.6 billion of surplus capital from UK with-profits funds at 30 June 2019) and from the shareholders' share of the estate of with-profits funds; and
- The contribution to own funds and the SCR from staff pension schemes in surplus.
It also excludes unrealised gains on certain derivative instruments taken out to protect Jackson against declines in long-term interest rates. At Jackson's request, the Department of Insurance Financial Services renewed its approval to carry these instruments at book value in the local statutory returns for the period 31 December 2018 to 1 October 2019. At 30 June 2019, applying this approval had the effect of decreasing local available statutory capital and surplus (and by extension Solvency II own funds and Solvency II surplus) by GBP0.4 billion net of tax. This arrangement reflects an elective long-standing practice first put in place in 2009, which can be unwound at Jackson's discretion.
Further information on the consolidated Solvency II capital position for the Group and The Prudential Assurance Company Limited (PAC) is published annually in the Solvency and Financial Condition Reports which are available on the Group's website.
Analysis of movement in Group capital position
A summary of the estimated movement in Group Solvency II surplus from GBP17.2 billion at 31 December 2018 to GBP16.7 billion at 30 June 2019 is set out in the table below. The movement from the Group Solvency II surplus at 31 December 2017 to the Group Solvency II surplus at 30 June 2018 and 31 December 2018 is included for comparison.
2019 GBPbn 2018 GBPbn
-----------
Analysis of movement in Group shareholder Solvency II surplus Half year Half year Full year
----------- --------- ---------
Estimated Solvency II surplus at beginning of period 17.2 13.3 13.3
Underlying operating experience 2.1 1.7 4.1
Management actions 0.0 0.1 0.1
----------- --------- ---------
Operating experience 2.1 1.8 4.2
Non-operating experience (including market movements) (1.5) 0.0 (1.2)
M&GPrudential transactions - 0.1 0.4
Other capital movements:
Net subordinated debt issuance/redemption (0.4) - 1.2
Foreign currency translation impacts 0.0 0.1 0.5
Dividends paid (0.9) (0.8) (1.2)
Model changes 0.2 (0.1) 0.0
--------------------------------------------------------------- ----------- --------- ---------
Estimated Solvency II surplus at end of period 16.7 14.4 17.2
The estimated movement in Group Solvency II surplus over the first half of 2019 is driven by:
- Operating experience of GBP2.1 billion: generated by in-force business and new business written in 2019, after allowing for amortisation of the UK transitional measures;
- Non-operating experience of GBP(1.5) billion: mainly as a result of the negative impact of market movements during the first half of the year, after allowing for the recalculation of the UK transitional measures at the valuation date. This includes Jackson hedging losses net of reserve movements, together with the effect of corporate transactions in the period including a GBP(0.6) billion Solvency II impact from the extension of the UOB bancassurance distribution deal and GBP(0.2) billion of costs associated with the demerger, offset by GBP0.2 billion of gains on disposals in the period;
- Other capital movements of GBP(1.3) billion: comprise a decrease in surplus from the impact of debt redeemed during 2019 and from the payment of the 2018 second interim dividend; and
- Model changes of GBP0.2 billion: reflecting internal model changes approved by the PRA and other minor internal model calibration changes made in the period.
Analysis of Group SCR
The split of the Group's estimated SCR by risk type, including the capital requirements in respect of Jackson's risk exposures based on 150 per cent of US RBC requirements (Company Action Level) but with no diversification between Jackson and the rest of the Group, is as follows:
30 Jun 2019 30 Jun 2018 31 Dec 2018
---------------------------- ---------------------------- ----------------------------
% of % of % of % of % of % of
Split of the Group's undiversified diversified undiversified diversified undiversified diversified
estimated SCR SCR SCR SCR SCR SCR SCR
---------------------- -------------- ------------ -------------- ------------ -------------- ------------
Market 59% 76% 56% 70% 57% 70%
Equity 14% 25% 15% 25% 13% 23%
Credit 23% 41% 21% 36% 23% 38%
Yields (interest
rates) 17% 9% 14% 7% 16% 6%
Other 5% 1% 6% 2% 5% 3%
Insurance 23% 16% 25% 20% 24% 20%
Mortality/morbidity 5% 2% 5% 2% 5% 2%
Lapse 14% 13% 15% 16% 15% 17%
Longevity 4% 1% 5% 2% 4% 1%
Operational/expense 11% 7% 12% 7% 12% 8%
Foreign exchange
translation 7% 1% 7% 3% 7% 2%
Reconciliation of IFRS shareholders' equity to Group shareholder Solvency II own funds
2019 GBPbn 2018 GBPbn
30 Jun 30 Jun 31 Dec
IFRS shareholders' equity 19.7 15.9 17.2
Restate US insurance entities from IFRS basis to local US statutory basis (4.2) (2.6) (2.5)
Remove DAC, goodwill and other intangibles (5.4) (4.1) (4.6)
Add subordinated debt 7.0 5.8 7.2
Impact of risk margin (net of transitional measures) (3.8) (3.8) (3.8)
Add value of shareholder transfers 5.5 5.5 5.3
Liability valuation differences 13.1 12.2 13.3
Increase in net deferred tax liabilities resulting from liability valuation differences
above (1.6) (1.4) (1.5)
Other 0.1 0.0 (0.4)
Estimated shareholder Solvency II own funds 30.4 27.5 30.2
The key items of the reconciliation as at 30 June 2019 are:
- GBP(4.2) billion representing the adjustment required to the Group's IFRS shareholders' equity in order to convert Jackson's contribution from an IFRS basis to the local statutory valuation basis. This item also reflects a de-recognition of own funds of GBP1.0 billion, equivalent to the value of 100 per cent of US RBC requirements (Company Action Level), as agreed with the PRA;
- GBP(5.4) billion due to the removal of DAC, goodwill and other intangibles from the IFRS statement of financial position;
- GBP7.0 billion due to the addition of subordinated debt, which is treated as available capital under Solvency II but as a liability under IFRS;
- GBP(3.8) billion due to the inclusion of a risk margin for the UK and Asia non-hedgeable risks, net of GBP1.7 billion from transitional measures (after allowing for the recalculation of transitional measures as at 30 June 2019), which are not applicable under IFRS;
- GBP5.5 billion due to the inclusion of the value of future shareholder transfers from with-profits business (excluding the shareholders' share of the with-profits estate, for which no credit is given under Solvency II), which is excluded from the determination of the Group's IFRS shareholders' equity;
- GBP13.1 billion mainly due to differences in insurance valuation requirements between Solvency II and IFRS, with Solvency II own funds partially capturing the value of in-force business, which is excluded from IFRS;
- GBP(1.6) billion due to the impact on the valuation of net deferred tax liabilities resulting from the liability valuation differences noted above; and
- GBP0.1 billion due to other items, including the impact of revaluing loans, borrowings and debt from IFRS to Solvency II.
Sensitivity analysis
The estimated sensitivity of the Group Solvency II capital position to significant changes in market conditions is as follows:
30 Jun 2019 31 Dec 2018
------------------------ ------------------------
Solvency II Solvency Solvency II Solvency
Impact of market sensitivities surplus GBPbn ratio % surplus GBPbn ratio %
-------------- -------- -------------- --------
Base position 16.7 222% 17.2 232%
Impact of:
20% instantaneous fall in equity markets (0.5) 1% (1.6) (10)%
40% fall in equity marketsnote (1) (2.7) (12)% (4.0) (28)%
50 basis points reduction in interest ratesnotes (2),(3) (2.5) (26)% (1.8) (21)%
100 basis points increase in interest ratesnote (3) 0.8 18% 1.2 20%
100 basis points increase in credit spreadsnote (4) (1.9) (11)% (1.7) (9)%
Notes
(1) Where hedges are dynamic, rebalancing is allowed for by assuming an instantaneous 20 per cent fall followed by a further 20 per cent fall over a four-week period.
(2) Subject to a floor of zero for Asia and US interest rates.
(3) Allowing for further transitional measures recalculation after the interest rate stress.
(4) US RBC solvency position included using a stress of 10 times expected credit defaults.
The Group believes it is positioned to withstand significant deteriorations in market conditions and it continues to use market hedges to manage some of this exposure across the Group, where it believes the benefit of the protection outweighs the cost. The sensitivity analysis above allows for predetermined management actions and those taken to date, but does not reflect all possible management actions which could be taken in the future.
UK PAC Solvency II capital position(notes 1,2)
On the same basis as above, the estimated shareholder Solvency II surplus for PAC and its subsidiaries(note 2) at 30 June 2019 was GBP3.7 billion, after allowing for the recalculation of transitional measures as at 30 June 2019. This relates to shareholder-backed business including future shareholder transfers from the with-profits funds, but excludes the shareholders' share of the estate, in line with Solvency II requirements.
2019 2018
Estimated UK PAC shareholder Solvency II capital position* 30 Jun 30 Jun 31 Dec
Own funds(GBPbn) 8.9 14.7 8.8
Solvency Capital Requirement (GBPbn) 5.2 7.2 5.1
Surplus (GBPbn) 3.7 7.5 3.7
Solvency ratio (%) 171% 203% 172%
* The UK PAC shareholder Solvency II capital position excludes the contribution to own funds and the SCR from ring-fenced with-profits funds and staff pension schemes in surplus. The estimated solvency positions include management's calculation of UK transitional measures reflecting both operating and market conditions at each valuation date, which at 31 December 2018 reflected the approved regulatory position.
The 30 June 2018 UK PAC shareholder Solvency II capital position included the contribution to own funds and the SCR from the Hong Kong business, which was subsequently transferred to Prudential Corporation Asia Limited (PCA) in December 2018.
The UK PAC Solvency II surplus at 30 June 2019 is unchanged since 31 December 2018:
- Operating experience of GBP0.4 billion: generated by in-force business and new business written in 2019, after allowing for amortisation of the UK transitional measures. This includes a GBP0.1 billion benefit from the impact of updates to UK longevity best estimate assumptions;
- Capital movements of GBP(0.3) billion: reflecting cash remittances made to the Group over the period; and
- Other movements of GBP(0.1) billion.
Whilst there is a large surplus in the UK with-profits funds, this is ring-fenced from the shareholder balance sheet and is therefore excluded from both the Group and the UK PAC shareholder Solvency II surplus results. The estimated UK with-profits funds Solvency II surplus at 30 June 2019 was GBP6.6 billion, after allowing for recalculation of transitional measures as at 30 June 2019.
2019 2018
------
Estimated UK with-profits Solvency II capital position* 30 Jun 30 Jun 31 Dec
-------------------------------------------------------- ------ ------ ------
Own funds (GBPbn) 11.1 9.4 9.7
Solvency Capital Requirement (GBPbn) 4.5 3.9 4.2
Surplus (GBPbn) 6.6 5.5 5.5
Solvency ratio (%) 249% 244% 231%
* The estimated solvency positions include management's calculation of UK transitional measures reflecting operating and market conditions at each valuation date, which as at 31 December 2018 reflected the approved regulatory position.
Reconciliation of UK with-profits IFRS unallocated surplus to Solvency II own funds(note 1)
A reconciliation between the IFRS unallocated surplus and Solvency II own funds for UK with-profits business is as follows:
2019 GBPbn 2018 GBPbn
----------
30 Jun 30 Jun 31 Dec
---------- ------ ------
IFRS unallocated surplus of UK with-profits funds 15.1 13.5 13.3
Value of shareholder transfers (2.7) (2.7) (2.4)
Risk margin (net of transitional measures) (1.1) (1.0) (1.0)
Other valuation differences (0.2) (0.4) (0.2)
---------- ------ ------
Estimated with-profits Solvency II own funds 11.1 9.4 9.7
Notes
1 The UK with-profits capital position includes the PAC with-profits sub-fund, the Scottish Amicable Insurance Fund (SAIF) and the Defined Charge Participating Sub-Fund.
2 The results include the insurance subsidiaries of PAC being Prudential International Assurance plc and Prudential Pensions Limited and exclude the contribution from Prudential Holborn Life Limited in order to align the segmental definitions applied within IFRS and EEV reporting. Prudential Holborn Life Limited is expected to be liquidated prior to the demerger.
Statement of independent review in respect of Solvency II Capital Position at 30 June 2019
The methodology, assumptions and overall result have been subject to examination by KPMG LLP.
M&GPrudential shareholder Solvency II capital position
Following the proposed demerger of M&GPrudential from Prudential plc, the PRA will assume the role of the group-wide supervisor for the M&GPrudential Group with the Solvency II framework continuing to apply.
The M&GPrudential Group has requested approval from the Prudential Regulatory Authority (PRA) to amend the group internal model to apply at the level of the M&GPrudential Group, rather than at the level of the existing Prudential Group. The decision is pending and is expected to be provided shortly before the planned demerger, such that the Prudential Group internal model remains in place until the demerger with M&GPrudential's model commencing from this point. The results set out below should not be interpreted as representing the Pillar I output from an approved Solvency II internal model for M&GPrudential and are subject to change.
Based on the assumptions that underpin the current approved Group internal model the estimated shareholder Solvency II surplus for the M&GPrudential Group at 30 June 2019 was GBP3.9 billion. The estimated pro forma position, assuming that the proposed demerger of M&GPrudential from Prudential plc had been completed as at 30 June 2019 based on the operating environment and economic conditions as at that date, was GBP3.9 billion (equivalent to a cover ratio of 169 per cent).
Estimated M&GPrudential Group Solvency II capital position* As reported(note) Adjustments Pro Forma(++)
----------------- ----------- -------------
Own funds (GBPbn) 9.5 0.0 9.5
Solvency Capital Requirement (GBPbn) 5.6 0.0 5.6
Surplus (GBPbn) 3.9 0.0 3.9
Solvency ratio (%) 169% 0% 169%
----------------- ----------- -------------
* Based on outputs from the M&GPrudential Group internal model which has not yet been approved by the PRA.
The adjustments as shown in the table above, which result in an increase in surplus of GBPnil billion, represent the estimated impact on the M&GPrudential Group shareholder Solvency II capital position of the proposed demerger. The adjustments, which are based on current indicative estimates and are subject to change, include:
- The expected impact of the transfer of GBP3.2 billion of subordinated debt to M&GPrudential by substituting M&GPrudential in the place of Prudential plc as issuer of such debt;
- The expected proceeds of GBP3.0 billion from a pre-demerger dividend to be paid by M&GPrudential to Prudential plc shortly before demerger, together with planned dividends of GBP0.3 billion expected to be paid earlier. All dividends are subject to the customary legal and governance considerations required before approval by the M&GPrudential Board; and
- GBP0.1 billion of other associated effects.
(++) No account has been taken of any trading and other changes in the financial position of the M&GPrudential Group after 30 June 2019, thus the pro forma shareholder Solvency II capital position does not reflect the actual shareholder Solvency II capital position of the M&GPrudential Group following the completion of the proposed demerger.
Note
The M&GPrudential Group Solvency II capital position at 30 June 2019 has been subject to examination by KPMG LLP.
(b) Local Capital Summation Method (LCSM)
Following the proposed demerger of M&GPrudential from Prudential plc, the Hong Kong Insurance Authority (IA) will assume the role of the group-wide supervisor for the retained Group (excluding M&GPrudential). The retained Group will no longer be subject to Solvency II capital requirements. Ultimately, Prudential plc will become subject to the Group Wide Supervision (GWS) framework which is currently under development by the Hong Kong IA for the industry and is not expected to come into force until the second half of 2020 (subject to the legislative process) at the earliest.
Until Hong Kong's GWS framework comes into force, Prudential will apply the local capital summation method (LCSM) that has been agreed with the Hong Kong IA to determine group regulatory capital requirements (both minimum and prescribed levels). The summation of local statutory capital requirements across the group will be used to determine group regulatory capital requirements, with no allowance for diversification between business operations. The group available capital will be determined by the summation of available capital across local solvency regimes for regulated entities and IFRS net assets (with adjustments described below) for non-regulated entities. The Hong Kong IA has yet to make any final decisions regarding the GWS framework for the industry and it continues to consider and consult on the proposed legislation and related guidelines. The amounts below should not therefore be interpreted as representing the results or requirements under the industry-wide GWS framework and are not intended to provide a forecast of the eventual position.
In determining the LCSM available capital and minimum required capital the following principles have been applied:
- For regulated insurance entities, available and required capital is based on the local solvency regime applicable in each jurisdiction, with required capital set at the solo legal entity statutory minimum capital requirements. The treatment of participating funds is consistent with the local basis. For the US insurance entities, available and required capital is based on the local US RBC framework set by the NAIC with required capital set at 100 per cent of the Company Action Level;
- For asset management operations and other regulated entities, the shareholder capital position is derived based on the sectoral basis applicable in each jurisdiction, with required capital based on the solo legal entity statutory minimum capital requirement;
- For non-regulated entities, the available capital is based on IFRS net assets after deducting intangible assets. No required capital is held in respect of unregulated entities;
- Investments in subsidiaries, joint ventures and associates (including, if any, loans that are recognised as capital on the receiving entity's balance sheet) are eliminated from the relevant holding company to prevent the double counting of available capital; and
- The Hong Kong IA has agreed that certain specific bonds (being those subordinated debt instruments expected to be held by Prudential plc at the date of demerger) can be included as part of the group's capital resources for the purposes of satisfying group minimum and prescribed capital requirements from the date of demerger as part of the LCSM. Grandfathering provisions under the GWS framework remain subject to further consultation and the Hong Kong legislative process in due course.
At 30 June 2019 the Prudential Group's aggregated (ie policyholder and shareholder) surplus of available capital over the Group minimum capital requirement calculated using the LCSM outlined above, and excluding M&GPrudential, was GBP16.0 billion before allowing for the payment of the 2019 first interim ordinary dividend.
The Group holds material participating business in Hong Kong, Singapore and Malaysia. If the available capital and minimum capital requirement attributed to this business is excluded, then the Prudential Group shareholder surplus of available capital over the Group minimum capital requirement at 30 June 2019, using the LCSM outlined above, and excluding M&GPrudential, was GBP7.4 billion before allowing for the payment of the 2019 first interim ordinary dividend. This is analysed as follows:
Estimated Group shareholder LCSM capital position at 30 June 2019
Unallocated to
Asia GBPbn US GBPbn a segment GBPbn Total GBPbn
----------------------------------------------- ------------------- -------- ---------------- -----------
Available Capital 5.8 3.9 0.9 10.6
Minimum Required Capital 2.2 1.0 - 3.2
LCSM surplus 3.6 2.9 0.9 7.4
----------------------------------------------- ------------------- -------- ---------------- -----------
The estimated pro forma shareholder position presented below assumes the proposed demerger of M&GPrudential from Prudential plc had completed as at 30 June 2019.
Estimated Group shareholder LCSM pro-forma capital position as at 30 June 2019
As reported
Less
Consolidated Policyholder Shareholder Adjustments Pro Forma(++)
-------------- --------------- ------------ ----------- -------------
Available Capital* (GBPbn) 22.8 (12.2) 10.6 +0.3 10.9
Minimum Required Capital (GBPbn) 6.8 (3.6) 3.2 - 3.2
LCSM surplus (GBPbn) 16.0 (8.6) 7.4 +0.3 7.7
LCSM ratio (%) 337% (5)% 332% +8% 340%
-------------- --------------- ------------ ----------- -------------
* Excludes M&GPrudential and includes GBP2.9 billion of subordinated debt issued by Prudential plc that is expected to be transferred to M&GPrudential pre-demerger and hence has not been grandfathered with Hong Kong IA.
The adjustments as shown in the table above, which result in an increase in surplus of GBP0.3 billion, represent the estimated impact on the retained Prudential Group shareholder LCSM capital position of the proposed demerger. The adjustments, which are based on current indicative estimates and are subject to change, include:
- A reduction of GBP2.9 billion for the expected impact of the transfer of subordinated debt to M&GPrudential by substituting M&GPrudential in the place of Prudential as issuer of such debt. The GBP2.9 billion represents debt capable of being substituted that was held at 30 June 2019. A further GBP0.3 billion was raised in July bringing the total of subordinated debt expected to be transferred to GBP3.2 billion;
- An increase for the expected proceeds of GBP3.0 billion from a pre-demerger dividend to be paid by M&GPrudential to Prudential plc shortly before demerger, together with planned dividends of GBP0.3 billion expected to be paid earlier. All dividends are subject to the customary legal and governance considerations required before approval by the M&GPrudential Board; and
- A reduction of GBP0.1 billion for expected directly attributable transaction costs associated with the proposed demerger that have yet to be incurred at 30 June 2019.
(++) No account has been taken of any trading and other changes in financial position of the Prudential Group after 30 June 2019, thus the pro forma shareholder LCSM capital position does not reflect the actual shareholder LCSM capital position of the retained Prudential Group following the completion of the proposed demerger.
Reconciliation of Group shareholder Solvency II capital position to shareholder LCSM capital position at 30 June 2019
Surplus
Available capital GBPbn Capital requirements GBPbn GBPbn
Estimated Group shareholder Solvency II capital position 30.4 13.7 16.7
Remove M&GPrudential (9.5) (5.6) (3.9)
Reduction in capital requirements from Solvency II SCR
to Solvency II MCR - (5.1) 5.1
Adjust insurance entities' Solvency II available capital
to local basis (10.3) - (10.3)
Other - 0.2 (0.2)
Estimated Group shareholder LCSM capital position
(excluding M&GPrudential) 10.6 3.2 7.4
The key items of the reconciliation as at 30 June 2019 are:
- Removal of the M&GPrudential Solvency II own funds (GBP9.5 billion) and SCR (GBP5.6 billion) at 30 June 2019;
- GBP(5.1) billion representing the adjustment required to restate Solvency II SCR to Solvency II MCR, including the reduction in US entities' required capital from the 150 per cent of the US Risk Based Capital requirement (Company Action Level) allowed for within the Solvency II SCR to the 100 per cent relevant to the MCR reducing required capital by GBP0.5 billion;
- GBP(10.3) billion due to valuation differences between Solvency II and the local solvency regime in each jurisdiction. This mainly relates to the removal of the value of in-force business (restricted by the Solvency II definition of 'contract boundaries') captured in the Solvency II own funds for the Asian business but excluded from the local basis. For Jackson it includes the reversal of the reduction made to Solvency II available capital equal to 100 per cent of the US Risk Based Capital requirement (Company Action Level) increasing available capital by GBP1.0 billion; and
- GBP0.2 billion due to other items.
Reconciliation of Group IFRS shareholders' equity to shareholder LCSM available capital position at 30 June 2019
Available capital GBPbn
Group IFRS shareholders' equity 19.7
Remove M&GPrudential (8.3)
Add subordinated debt at IFRS book value 6.5
Valuation differences 6.1
Remove DAC, goodwill and intangibles (13.1)
Other (0.3)
Estimated Group shareholder LCSM available capital (excluding M&GPrudential) 10.6
Valuation differences of GBP6.1 billion primarily relate to differences on the basis of valuing assets and liabilities between IFRS and local statutory valuation rules, including reductions for inadmissible assets. The most significant difference arises in Jackson where local statutory reserves are reduced by an allowance for future surrender charges. IFRS makes no such allowance but instead defers acquisition costs on the balance sheet as a separate asset (which is not recognised on the statutory balance sheet).
I(ii) Funds under management (a) Summary
For Prudential's asset management businesses, funds managed on behalf of third parties are not recorded on the statement of financial position. They are, however, a driver of profitability. Prudential therefore analyses the movement in the funds under management each period, focusing on those which are external to the Group and those primarily held by the Group's insurance businesses. The table below analyses, by segment, the funds of the Group held in the statement of financial position and the external funds that are managed by Prudential's asset management businesses.
2019 GBPbn 2018 GBPbn
---------- --------------
30 Jun 30 Jun 31 Dec
---------- ------ ------
Asia operations:
Internal funds 102.8 83.7 89.5
Eastspring Investments external funds 67.0 52.4 61.1
------------------------------------------------------------------------ ---------- ------ ------
169.8 136.1 150.6
US operations - internal funds 204.1 183.7 183.1
Other operations 2.2 2.7 2.4
------------------------------------------------------------------------- ---------- ------ ------
Total funds under management from continuing operations 376.1 322.5 336.1
------------------------------------------------------------------------- ---------- ------ ------
M&GPrudential:
Internal funds, including PruFund-backed products 188.1 176.4 174.3
External funds 153.0 165.5 146.9
------------------------------------------------------------------------ ---------- ------ ------
Total funds under management from discontinued UK and Europe operations 341.1 341.9 321.2
------------------------------------------------------------------------- ---------- ------ ------
Total Group funds under management(note) 717.2 664.4 657.3
------------------------------------------------------------------------- ---------- ------ ------
Note
Total Group funds under management comprise:
2019 GBPbn 2018 GBPbn
---------- --------------
30 Jun 30 Jun 31 Dec
---------- ------ ------
Total investments per the consolidated statement of financial position 496.0 448.0 449.6
External funds of M&GPrudential and Eastspring Investments (as analysed in note (b)
below) 219.9 217.9 208.0
Internally managed funds held in joint ventures and other adjustments 1.3 (1.5) (0.3)
---------- ------ ------
Prudential Group funds under management 717.2 664.4 657.3
---------- ------ ------
(b) Investment products - external funds under management
Half year 2019 GBPm
------------- ------------------------------------------------------------ --------------
Market and other
At 1 Jan 2019 Market gross inflows Redemptions movements At 30 Jun 2019
------------- -------------------- ----------- ------------------------- --------------
Eastspring Investments 61,057 119,791 (117,711) 3,827 66,964
M&G Investments:
Wholesale/Direct 69,465 11,867 (16,118) 4,267 69,481
Institutional 77,481 5,926 (6,261) 6,334 83,480
------------- -------------------- ----------- ------------------------- --------------
Total M&G Investmentsnote
(1) 146,946 17,793 (22,379) 10,601 152,961
------------- -------------------- ----------- ------------------------- --------------
Group totalnote (2) 208,003 137,584 (140,090) 14,428 219,925
------------- -------------------- ----------- ------------------------- --------------
Half year 2018 GBPm
------------- ------------------------------------------------------------ --------------
Market and other
At 1 Jan 2018 Market gross inflows Redemptions movements At 30 Jun 2018
------------- -------------------- ----------- ------------------------- --------------
Eastspring Investments 55,885 105,792 (105,990) (3,250) 52,437
M&G Investments:
Wholesale/Direct 79,697 16,471 (14,317) (2,030) 79,821
Institutional 84,158 4,930 (3,536) 117 85,669
------------- -------------------- ----------- ------------------------- --------------
Total M&G Investmentsnote
(1) 163,855 21,401 (17,853) (1,913) 165,490
------------- -------------------- ----------- ------------------------- --------------
Group totalnote (2) 219,740 127,193 (123,843) (5,163) 217,927
------------- -------------------- ----------- ------------------------- --------------
Full year 2018 GBPm
------------- ------------------------------------------------------------ --------------
Market and other
At 1 Jan 2018 Market gross inflows Redemptions movements At 31 Dec 2018
------------- -------------------- ----------- ------------------------- --------------
Eastspring Investments 55,885 212,070 (212,156) 5,258 61,057
M&G Investments:
Wholesale/Direct 79,697 24,584 (29,452) (5,364) 69,465
Institutional 84,158 12,954 (18,001) (1,630) 77,481
------------- -------------------- ----------- ------------------------- --------------
Total M&G Investmentsnote
(1) 163,855 37,538 (47,453) (6,994) 146,946
------------- -------------------- ----------- ------------------------- --------------
Group totalnote (2) 219,740 249,608 (259,609) (1,736) 208,003
------------- -------------------- ----------- ------------------------- --------------
Notes
(1) The results exclude the contribution from PruFund products net inflows of GBP3.5 billion in half year 2019 (half year 2018: GBP4.4 billion; full year 2018: GBP8.5 billion) and funds under management of GBP49.6 billion as at 30 June 2019 (30 June 2018: GBP40.3 billion; 31 December 2018: GBP43.0 billion).
(2) The GBP219.9 billion (30 June 2018: GBP217.9 billion; 31 December 2018: GBP208 billion) investment products comprise of GBP209.4 billion (30 June 2018: GBP207.9 billion; 31 December 2018: GBP196.4 billion) plus Asia Money Market Funds of GBP10.5 billion (30 June 2018: GBP10.0 billion; 31 December 2018: GBP11.6 billion).
I(iii) Holding company cash flow(*)
2019 GBPm 2018 GBPm
--------- --------------------
Half year Half year Full year
--------- --------- ---------
Net cash remitted by business units:
From continuing operations
Asia net remittances to the Group 451 391 699
US remittances to the Group 400 342 342
Other UK (including Prudential Capital) paid to the Group 5 37 37
Total continuing operations 856 770 1,078
From discontinued UK and Europe operations 356 341 654
------------------------------------------------------------
Net remittances to the Group from business unitsnote (a) 1,212 1,111 1,732
Net interest paid (218) (187) (366)
Tax received 93 81 142
Corporate activities (97) (113) (206)
------------------------------------------------------------
Total central outflows (222) (219) (430)
------------------------------------------------------------
Operating holding company cash flow before dividend 990 892 1,302
Dividend paid (870) (840) (1,244)
------------------------------------------------------------
Operating holding company cash flow after dividend 120 52 58
Non-operating net cash flowsnote (b) (999) (106) 913
------------------------------------------------------------
Total holding company cash flow (879) (54) 971
Cash and short-term investments at beginning of period 3,236 2,264 2,264
Foreign exchange movements 8 - 1
-----------------------------------------------------------
Cash and short-term investments at end of periodnote (c) 2,365 2,210 3,236
------------------------------------------------------------
* The holding company cash flow differs from the IFRS cash flow statement, which includes all cash flows in the period including those relating to both policyholder and shareholder funds. The holding company cash flow is therefore a more meaningful indication of the Group's central liquidity.
Notes
(a) Net cash remittances comprise dividends and other transfers from business units that are reflective of emerging earnings and capital generation. In half year 2019 it includes GBP191 million of proceeds from the reduction in the Group's shareholding in ICICI Prudential.
(b) Non-operating net cash flows principally relate to the repayment of debt, demerger costs and associated transactions and payments for distribution rights. In full year 2018, the amounts include the receipts from issuance of debt.
(c) Including central finance subsidiaries.
I(iv) Analysis of adjusted IFRS operating profit based on longer-term investment returns by driver from continuing long-term insurance businesses
This schedule classifies the Group's adjusted IFRS operating profit based on longer-term investment returns (operating profit) from continuing long-term insurance businesses into the underlying drivers using the following categories:
- Spread income represents the difference between net investment income and amounts credited to certain policyholder accounts. It excludes the operating investment return on shareholder net assets, which has been separately disclosed as expected return on shareholder assets.
- Fee income represents profit driven by net investment performance, being asset management fees that vary with the size of the underlying policyholder funds, net of investment management expenses.
- With-profits represents the pre-tax shareholders' transfer from the with-profits business for the period.
- Insurance margin primarily represents profit derived from the insurance risks of mortality and morbidity.
- Margin on revenues primarily represents amounts deducted from premiums to cover acquisition costs and administration expenses (see below).
- Acquisition costs and administration expenses represent expenses incurred in the period attributable to shareholders. These exclude items such as restructuring costs, which are not included in the segment profit, as well as items that are more appropriately included in other categories (eg investment expenses are netted against investment income as part of spread income or fee income as appropriate).
- DAC adjustments comprise DAC amortisation for the period, excluding amounts related to short-term fluctuations in investment returns, net of costs deferred in respect of new business written in the period.
(a) Margin analysis of long-term insurance business - continuing operations
The following analysis expresses certain of the Group's sources of adjusted IFRS operating profit based on longer-term investment returns as a margin of policyholder liabilities or other relevant drivers. Details on the calculation of the Group's average policyholder liability balances are given in note (1).
Half year 2019
------------------------------------------------
Group Average
Asia US total liability Margin
GBPm GBPm GBPm GBPm bps
note (b) note (c) note (1) note(2)
-------- -------- ------- ---------- -------
Spread income 119 230 349 65,174 107
Fee income 111 1,238 1,349 157,676 171
With-profits 41 - 41 43,294 19
Insurance margin 852 549 1,401
Margin on revenues 1,124 - 1,124
Expenses:
Acquisition costsnote (3) (802) (382) (1,184) 2,809 (42)%
Administration expenses (547) (637) (1,184) 225,483 (105)
DAC adjustmentsnote (4) 132 191 323
Expected return on shareholder assets 69 14 83
------------------------------------------------------------------ -------- -------- ------- ---------- -------
1,099 1,203 2,302
Share of related tax charges from joint ventures and associatenote
(5) (4) - (4)
------------------------------------------------------------------ -------- -------- ------- ---------- -------
Adjusted IFRS operating profit based on longer-term investment
returns from continuing long-term
business 1,095 1,203 2,298
------------------------------------------------------------------ -------- -------- ------- ---------- -------
Half year 2018 AERnote (7)
--------------------------------------------------
Group Average
Asia US total liability Margin
GBPm GBPm GBPm GBPm bps
note (b) note (c) note (1) note (2)
---- -------- -------- ---------
Spread income 112 295 407 54,268 150
Fee income 108 1,185 1,293 149,991 172
With-profits 30 - 30 34,032 18
Insurance margin 723 463 1,186
Margin on revenues 1,004 - 1,004
Expenses:
Acquisition costsnote (3) (721) (384) (1,105) 2,552 (43)%
Administration expenses (512) (580) (1,092) 208,441 (105)
DAC adjustmentsnote (4) 143 10 153
Expected return on shareholder assets 58 12 70
-------------------------------------------------------- -------- -------- ------- ---------- ---------
945 1,001 1,946
Share of related tax charges from joint ventures and
associatenote (5) (18) - (18)
-------------------------------------------------------- -------- -------- ------- ---------- ---------
Adjusted IFRS operating profit based on longer-term
investment returns from continuing long-term
business 927 1,001 1,928
Half year 2018 CERnotes (6)(7)
Average
Asia US Total liability Margin
GBPm GBPm GBPm GBPm bps
note (b) note (c) note (1) note (2)
-------- --------
Spread income 115 314 429 57,280 150
Fee income 110 1,260 1,370 158,567 173
With-profits 31 - 31 35,700 17
Insurance margin 750 491 1,241
Margin on revenues 1,042 - 1,042
Expenses:
Acquisition costsnote (3) (749) (408) (1,157) 2,674 (43)%
Administration expenses (526) (617) (1,143) 219,632 (104)
DAC adjustmentsnote (4) 148 11 159
Expected return on shareholder assets 60 13 73
-------- -------- ------- ----------
981 1,064 2,045
Share of related tax charges from joint ventures and
associatenote (5) (18) - (18)
-------- -------- ------- ----------
Adjusted IFRS operating profit based on longer-term
investment returns from continuing long-term
business 963 1,064 2,027
-------- -------- ------- ----------
Notes to the tables throughout I(iv)
(1) For Asia, opening and closing policyholder liabilities have been used to derive an average balance for the period, as a proxy for average balances throughout the period. The calculation of average liabilities for the US is generally derived from month-end balances throughout the period as opposed to opening and closing balances only. The average liabilities for fee income in the US have been calculated using daily balances instead of month-end balances in order to provide a more meaningful analysis of the fee income, which is charged on the daily account balance. Average liabilities for spread income are based on the general account liabilities to which spread income is attached. Average liabilities used to calculate the administration expenses margin exclude the REALIC liabilities reinsured to third parties prior to the acquisition by Jackson.
(2) Margin represents the operating return earned in the period as a proportion of the relevant class of policyholder liabilities excluding unallocated surplus. The margin is on an annualised basis in which half year profits are annualised by multiplying by two.
(3) The ratio of acquisition costs is calculated as a percentage of APE sales including with-profits sales. Acquisition costs include only those relating to shareholder-backed business.
(4) The DAC adjustments contain a credit of GBP25 million in respect of joint ventures and associate in half year 2019 (half year 2018: GBP14 million).
(5) Under IFRS, the Group's share of results from its investments in joint ventures and associate accounted for using the equity method is included in the Group's profit before tax on a net of related tax basis. These tax charges are shown separately in the analysis of Asia operating profit drivers in order for the contribution from the joint ventures and associate to be included in the margin analysis on a consistent basis as the rest of the Asia's operations.
(6) The half year 2018 comparative information has been presented at both AER and CER to eliminate the impact of exchange translation. CER results are calculated by translating prior period results using the current period foreign exchange rates. All CER profit figures have been translated at current period average rates. For Asia, CER average liabilities have been translated using current period opening and closing exchange rates. For US, CER average liabilities have been translated at the current period month-end closing exchange rates.
(7) The half year 2018 comparative results exclude the contribution from the UK and Europe operations, which have been classified as discontinued at 30 June 2019.
(b) Margin analysis of long-term insurance business - Asia
Half year 2019 Half year 2018 AER Half year 2018 CERnote (6)
Average Average Average
Profit liability Margin Profit liability Margin Profit liability Margin
GBPm GBPm bps GBPm GBPm bps GBPm GBPm bps
Long-term business note (1) note (2) note (1) note (2) note (1) note (2)
-------- --------
Spread income 119 21,816 109 112 17,872 125 115 18,515 124
Fee income 111 20,843 107 108 19,903 109 110 20,513 107
With-profits 41 43,294 19 30 34,032 18 31 35,700 17
Insurance margin 852 723 750
Margin on revenues 1,124 1,004 1,042
Expenses:
Acquisition costsnote
(3) (802) 1,978 (41)% (721) 1,736 (42)% (749) 1,806 (41)%
Administration
expenses (547) 42,659 (256) (512) 37,775 (271) (526) 39,028 (270)
DAC adjustmentsnote
(4) 132 143 148
Expected return on
shareholder assets 69 58 60
-------- --------
1,099 945 981
Share of related tax
charges from joint
ventures and
associatenote (5) (4) (18) (18)
-------- --------
Adjusted IFRS
operating profit
based on
longer-term
investment returns 1,095 927 963
-------- --------
Analysis of Asia operating profit drivers
- Spread income has increased on a CER basis by 3 per cent (AER: 6 per cent) to GBP119 million in half year 2019, with a decrease in the margin on a CER basis from 124 basis points (AER: 125 basis points) in half year 2018 to 109 basis points in half year 2019 predominantly reflecting the changes in investment mix, product and geographical mix as well as lower interest rates in the period.
- Fee income has increased by 1 per cent on a CER basis (AER: 3 per cent) to GBP111 million in half year 2019, broadly in line with the increase in movement in average unit-linked liabilities.
- Insurance margin has increased by 14 per cent on a CER basis (AER: 18 per cent), primarily reflecting the continued growth of the in-force book, which contains a relatively high proportion of protection products.
- Margin on revenues has increased by 8 per cent on a CER basis (AER: 12 per cent) to GBP1,124 million in half year 2019, primarily reflecting higher premiums together with the effect of changes in product mix.
- Acquisition costs have increased by 7 per cent on a CER basis (AER: 11 per cent) to GBP(802) million in half year 2019, compared to a 10 per cent increase in APE sales on a CER basis (AER : 14 per cent). The analysis above uses shareholder acquisition costs as a proportion of total APE. If with-profits sales were excluded from the denominator, the acquisition cost ratio would become 66 per cent (half year 2018: 69 per cent on a CER basis), the decrease being the result of product and geographical mix.
- Administration expenses including renewal commissions have increased by 4 per cent on a CER basis (AER: 7 per cent) to GBP(547) million in half year 2019 as the business continues to expand. On a CER basis, the administration expense ratio has decreased from 270 basis points in half year 2018 to 256 basis points in half year 2019 as a result of changes in geographical and product mix.
(c) Margin analysis of long-term insurance business - US
Half year 2019 Half year 2018 AER Half year 2018 CERnote (6)
Average Average Average
Profit liability Margin Profit liability Margin Profit liability Margin
GBPm GBPm bps GBPm GBPm bps GBPm GBPm bps
Long-term business note (1) note (2) note (1) note (2) note (1) note (2)
--------- -------- --------- -------- ---------- ---------
Spread income 230 43,358 106 295 36,396 162 314 38,765 162
Fee income 1,238 136,833 181 1,185 130,088 182 1,260 138,054 183
Insurance margin 549 463 491
Expenses:
Acquisition costsnote
(3) (382) 831 (46)% (384) 816 (47)% (408) 868 (47)%
Administration
expenses (637) 182,824 (70) (580) 170,666 (68) (617) 180,604 (68)
DAC adjustments 191 10 11
Expected return on
shareholder assets 14 12 13
--------- -------- --------- -------- ---------- ---------
Adjusted IFRS
operating profit
based on
longer-term
investment returns 1,203 1,001 1,064
--------- -------- --------- -------- ---------- ---------
Analysis of US operating profit drivers
- Spread income has decreased by 27 per cent on a CER basis (AER: 22 per cent) to GBP230 million in half year 2019, reflecting the combination of lower spread income and lower swap income. The reduction in spread income reflects the effect of lower invested asset yields. The decline in swap income is a result of the unfavourable impact of higher short-term interest rates over much of the period. The decline in spread margin to 106 basis points from 162 basis points at half year 2018 (on and AER and CER basis) in relation to average spread-related general account assets also reflects the full consolidation in the current period of the assets acquired with the John Hancock transaction in November 2018. Excluding the effect of the swaps transactions, the spread margin would have been 95 basis points (half year 2018: 133 basis points).
- Fee income has decreased on a CER basis by 2 per cent (AER: increased by 4 per cent) to GBP1,238 million in half year 2019, primarily due to lower average separate account balances as a result of market depreciation during the second half of 2018. Fee income margin has decreased to 181 basis points from 183 basis points on a CER basis (AER: 182 basis points) primarily reflecting a change in product mix.
- Insurance margin represents profits from insurance risks, including variable annuity guarantees and other sundry items. Insurance margin increased on a CER basis from GBP491 million (AER: GBP463 million) in half year 2018 to GBP549 million in half year 2019. The increase is due to higher income from variable annuity guarantees and a contribution from the John Hancock business acquired in the fourth quarter of 2018.
- Acquisition costs, which are commissions and expenses incurred to acquire new business, including those that are not deferrable, have decreased on a CER basis by 6 per cent (AER: 1 per cent). This primarily reflects a 4 per cent decrease in APE sales.
- Administration expenses increased on a CER basis from GBP(617) million (AER GBP(580) million) in half year 2018 to GBP(637) million in half year 2019, primarily as a result of higher asset-based commissions. Excluding these asset-based commissions, the resulting administration expense ratio would be 34 basis points (half year 2018: 34 basis points on a CER basis; 33 basis points on AER basis).
- DAC adjustments in half year 2019 was a positive GBP191 million (half year 2018: positive GBP11 million on a CER basis) due to a decrease in the DAC amortisation charge. The lower DAC amortisation charge in half year 2019 arises largely from a deceleration of amortisation of GBP148 million (half year 2018: acceleration of GBP(45) million on a CER basis) driven primarily by higher equity market returns in the first half of 2019.
Analysis of adjusted IFRS operating profit based on longer-term investment returns for US insurance operations before and after acquisition costs and DAC adjustments
Half year 2019 GBPm Half year 2018 AER GBPm Half year 2018 CERnote (6) GBPm
Acquisition costs Acquisition costs Acquisition costs
------------------ ------------------ ------------------
Before After Before After Before After
acquisition acquisition acquisition acquisition acquisition acquisition
costs and costs and costs and costs and costs and costs and
DAC DAC DAC DAC DAC DAC
adjustments Incurred Deferred adjustments adjustments Incurred Deferred adjustments adjustments Incurred Deferred adjustments
-------------- ----------- -------- ----------- ----------- -------- ----------- ----------- -------- -----------
Total adjusted
IFRS operating
profit based
on longer-term
investment
returns before
acquisition
costs and DAC
adjustments 1,394 - - 1,394 1,375 - - 1,375 1,462 - - 1,462
Less new
business
strain - (382) 285 (97) - (384) 290 (94) - (408) 308 (100)
Other DAC
adjustments -
amortisation of
previously
deferred
acquisition
costs: -
Normal - - (242) (242) - - (238) (238) - - (253) (253)
(Accelerated)
decelerated - - 148 148 (42) (42) - - (45) (45)
-------------- ----------- -------- -------- ----------- ----------- -------- -------- ----------- -------- -------- -----------
Total adjusted
IFRS operating
profit based
on longer-term
investment
returns 1,394 (382) 191 1,203 1,375 (384) 10 1,001 1,462 (408) 10 1,064
----------- -------- -------- ----------- ----------- -------- -------- -----------
Analysis of adjusted IFRS operating profit based on longer-term investment returns for US by product
Half year 2019 vs half year 2018
Half year 2019 GBPm Half year 2018 GBPm %
AER CERnote (6) AER CERnote (6)
--------------- ------
Spread business 123 153 163 (20)% (25)%
Fee business 1,048 791 841 32% 25%
Life and other business 32 57 60 (44)% (47)%
--------------------
Total insurance business 1,203 1,001 1,064 20% 13%
Asset management and
broker-dealer 12 1 1 1,100% 1,100%
--------------------
Total US 1,215 1,002 1,065 21% 14%
--------------------
The analysis of adjusted IFRS operating profit based on longer-term investment returns for US by product represents the net profit generated by each line of business after allocation of costs. Broadly:
- Spread business is the net adjusted operating profit for fixed annuity, fixed indexed annuity and guaranteed investment contracts and largely comprises spread income less costs.
- Fee business represents profit from variable annuity products. As well as fee income, revenue for this product line includes spread income from investments directed to the general account and other variable annuity fees included in insurance margin.
- Life and other business include profit from the REALIC business and other closed life books. Revenue allocated to this product line includes spread income and premiums and policy charges for life protection, which are included in insurance margin after claim costs.
I(v) Asia operations - analysis of adjusted IFRS operating profit based on longer-term investment returns by business unit
(a) Analysis of adjusted IFRS operating profit based on longer-term investment returns by business unit
Adjusted operating profit based on longer-term investment returns for Asia operations are analysed below. The table below presents the half year 2018 results on both AER and CER bases to eliminate the impact of exchange translation.
2019 GBPm 2018 GBPm Half year 2019 vs half year 2018 % 2018 GBPm
----------- -------------------- ------------------------------------ ----------
Half year Half year Full year
Half year AER CER AER CER AER
----------- --------- ----------------- ----------
Hong Kong 260 190 202 37% 29% 443
Indonesia 200 205 212 (2)% (6)% 416
Malaysia 109 97 99 12% 10% 194
Philippines 26 20 21 30% 24% 43
Singapore 176 143 149 23% 18% 329
Thailand 48 46 48 4% 0% 113
Vietnam 83 63 67 32% 24% 149
----------- --------- --------- ----------------- ----------------- ----------
South-east Asia including
Hong Kong 902 764 798 18% 13% 1,687
China JV 69 62 61 11% 13% 143
Taiwan 24 19 20 26% 20% 51
Other 30 33 32 (9)% (6)% 51
Non-recurrent items* 76 69 72 10% 6% 94
----------- --------- --------- ----------------- ----------------- ----------
Total insurance operations 1,101 947 983 16% 12% 2,026
Share of related tax
charges from joint
ventures and associate (4) (18) (18) 78% 78% (40)
Development expenses (2) (2) (2) - - (4)
----------- --------- --------- ----------------- ----------------- ----------
Total long-term business 1,095 927 963 18% 14% 1,982
Asset management
(Eastspring Investments) 103 89 92 16% 12% 182
----------- --------- --------- ----------------- ----------------- ----------
Total Asia 1,198 1,016 1,055 18% 14% 2,164
----------- --------- --------- ----------------- ----------------- ----------
* In half year 2019, the adjusted IFRS operating profit based on longer-term investment returns for Asia insurance operations included a net credit of GBP76 million (half year 2018: GBP69 million; full year 2018: GBP94 million) representing a small number of items that are not expected to reoccur, including the impact of a refinement to the run-off of the allowance for prudence within technical provisions.
(b) Analysis of Eastspring Investments operating profit for the period
2019 GBPm 2018 GBPm
Half year Half year Full year
Operating income before performance-related feesnote (1) 239 216 424
Performance-related fees 1 2 17
Operating income (net of commission)note (2) 240 218 441
Operating expensenote (2) (121) (116) (232)
Group's share of tax on joint ventures' operating profit (16) (13) (27)
Operating profit for the period 103 89 182
Average funds under management GBP162.4bn GBP139.5bn GBP146.3bn
Margin based on operating income* 29bps 31bps 29bps
Cost/income ratio 51% 54% 55%
Notes
(1) Operating income before performance-related fees for Eastspring Investments can be further analysed as follows:
Retail Margin of FUM* Institutional(++) Margin of FUM* Total Margin of FUM*
GBPm bps GBPm bps GBPm bps
------------ ------ ----------------- -----
30 Jun 2019 148 51 91 18 239 29
30 Jun 2018 128 54 88 19 216 31
31 Dec 2018 252 50 172 18 424 29
------------ ------ ----------------- -----
* Margin represents operating income before performance-related fees as a proportion of the related funds under management (FUM). Half year figures have been annualised by multiplying by two. Monthly closing internal and external funds managed by Eastspring have been used to derive the average. Any funds held by the Group's insurance operations that are managed by third parties outside the Prudential Group are excluded from these amounts.
Cost/income ratio represents cost as a percentage of operating income before performance-related fees.
(++) Institutional includes internal funds.
(2) Operating income and expense include the Group's share of contribution from joint ventures (but excludes any contribution from associates). In the condensed consolidated income statement of the Group IFRS basis results, the net post-tax income of the joint ventures and associates is shown as a single line item.
(c) Eastspring Investments total funds under management
Eastspring Investments, the Group's asset management business in Asia, manages funds from external parties and also funds for the Group's insurance operations. The table below analyses the total funds under management managed by Eastspring Investments.
2019 GBPbn 2018 GBPbn
30 Jun 30 Jun 31 Dec
External funds under management* 67.0 52.4 61.1
Internal funds under management 102.5 85.8 90.2
Total funds under management 169.5 138.2 151.3
* The external funds under management for Eastspring Investments include Asia Money Market Funds at 30 June 2019 of GBP10.5 billion (30 June 2018: GBP10.0 billion; 31 December 2018: GBP11.6 billion).
I(vi) Additional financial information on the discontinued UK and Europe operations
(a) Analysis of profit for the period by driver
2019 GBPm 2018 GBPm
Half year Half year Full year
Core profit from long-term business 345 255 519
Shareholder-backed annuity new business 8 3 9
Changes in longevity assumption basis 127 - 441
Other management actions to improve solvency 16 63 58
Provision for guaranteed minimum pension equalisation - - (55)
Insurance recoveries in respect of the review of past annuity sales - 166 166
Operating profit from long-term business 496 487 1,138
General insurance commissions 2 19 19
Asset management operations 239 272 477
Head office costs (21) - -
Restructuring costs (29) (42) (109)
Adjusted IFRS operating profit based on longer-term investment returns 687 736 1,525
Fair value loss on debt extinguishment(note) (169) - -
Other non-operating profit (loss) 299 (635) (474) Profit before tax 817 101 1,051 Tax charge attributable to shareholders' returns (172) (18) (196) Profit for period, net of related tax 645 83 855
Note
As described in note C6.1(vi) of the Group IFRS basis results, during the first half of 2019, the Group agreed to change the terms of certain debt holdings to enable M&GPrudential to be substituted as the issuer of the instruments (in the place of Prudential plc). The change in fair value of debt, driven by the higher coupon, will be borne by M&GPrudential post the proposed demerger and hence it has been included in the results from discontinued operations in the table above. The 2018 comparative results include a GBP(513) million loss arising on the reinsurance of part of the UK annuity portfolio to Rothesay Life.
(b) Analysis of M&G Investments operating profit for the period
2019 GBPm 2018 GBPm
----------------------
Half year Half year Full year
Asset management fee income 511 552 1,098
Other income 12 1 2
Operating income before performance-related fees(note) 523 553 1,100
Staff costs (176) (190) (384)
Other costs (122) (107) (270)
Operating expense (298) (297) (654)
Underlying profit before performance-related fees 225 256 446
Performance-related fees 7 8 15
Share of associate's results 7 8 16
Operating profit based on longer-term investment returns 239 272 477
Average funds under management GBP263.8bn GBP285.3bn GBP276.6bn
Margin based on operating income* 40bps 39bps 40bps
Cost/income ratio 57% 54% 59%
Note
Operating income before performance-related fees can be further analysed as follows:
Retail Margin of FUM* Institutional(++) Margin of FUM* Total Margin of FUM*
GBPm bps GBPm bps GBPm bps
------ -----
30 Jun 2019 280 83 243 25 523 40
30 Jun 2018 331 84 222 21 553 39
31 Dec 2018 662 85 438 22 1,100 40
------------ ------ -----
* Margin represents operating income before performance related fees as a proportion of the related funds under management (FUM). Half year figures have been annualised by multiplying by two. Monthly closing internal and external funds managed by the respective entity have been used to derive the average. Any funds held by the Group's insurance operations that are managed by third parties outside the Prudential Group are excluded from these amounts.
Cost/income ratio represents operating expense as a percentage of operating income before performance-related fees.
(++) Institutional includes internal funds.
(c) M&G Investments total funds under management
M&G Investments, the asset management business of M&GPrudential, manages funds from external parties and also funds for the Group's insurance operations. The table below analyses the total funds under management managed by M&G Investments.
2019 GBPbn 2018 GBPbn
30 Jun 30 Jun 31 Dec
External funds under management 153.0 165.5 146.9
Internal funds under management 123.7 120.3 118.2
Total funds under management 276.7 285.8 265.1
I(vii) Pro forma Prudential Group IFRS shareholders' equity, excluding M&GPrudential, as at 30 June 2019
The pro forma impact on the Prudential Group IFRS shareholders' equity below illustrates the estimated effect of the proposed demerger of M&GPrudential from Prudential plc as if it had completed as at 30 June 2019, is provided in the table below.
30 Jun
2019 GBPbn
-----------
IFRS shareholders' equity as reported in the statement of financial position 19.7
Adjustments:note (1)
-----------
Remove IFRS shareholders' equity of the discontinued M&GPrudential operations (8.3)
Dividends to be remitted by M&GPrudential to Prudential plc prior to demerger 3.3
Directly attributable transaction costs to be borne by Prudential plc (0.1)
(5.1)
-----------
Pro forma IFRS shareholders' equitynote (2) 14.6
-----------
Notes
(1) The adjustments as shown in the table above, which result in a decrease in IFRS shareholders' equity of GBP5.1 billion, represent the estimated impact on the retained Prudential Group's IFRS shareholders' equity of the proposed demerger. The adjustments, which are calculated based on the information and assumptions at 30 June 2019 and therefore, do not necessarily represent the actual financial position following the proposed demerger, include:
- The removal of the IFRS shareholders' equity of M&GPrudential as at 30 June 2019 of GBP8.3 billion, as shown in note D2.2;
- The expected proceeds of GBP3.0 billion from a pre-demerger dividend to be paid by M&GPrudential to Prudential plc, shortly before demerger, together with planned dividends of GBP0.3 billion expected to be paid earlier. All dividends are subject to the customary legal and governance considerations required before approval by the M&GPrudential Board; and
- GBP0.1 billion of expected transaction related costs associated with the proposed demerger that have yet to be incurred at 30 June 2019, principally relating to fees to advisors. Further information on the total costs associated with the demerger are set out in the CFO Report.
The expected transfer of GBP3.2 billion of debt to M&GPrudential prior to the proposed demerger by substituting M&GPrudential in the place of Prudential plc as issuer of such debt, as discussed in note C6.1, does not result in a separate pro forma adjustment to IFRS shareholders equity.
(2) No account has been taken of any trading and other changes in financial position of the Prudential Group after 30 June 2019, thus the pro forma IFRS shareholders' equity does not reflect the actual IFRS shareholders' equity of the retained Prudential Group following the completion of the demerger.
I(viii) Return on IFRS shareholders' funds
Operating return on IFRS shareholders' funds is calculated as operating profit net of tax and non-controlling interests divided by opening shareholders' equity. Total comprehensive return on shareholders' funds is calculated as IFRS total comprehensive income for the period net of tax and non-controlling interests divided by opening shareholders' equity. Detailed reconciliation of operating profit based on longer-term investment returns to IFRS profit before tax for continuing operations is shown in note B1.1 to the Group IFRS basis results. The reconciliation for discontinued operations is shown in note I(vi).
Half year 2019 GBPm
Discontinued UK and Europe Total
Asia US Other Total continuing operations operations Group
Operating profit based on
longer-term investment
returns 1,198 1,215 (389) 2,024 687 2,711
Tax on operating profit (168) (203) 39 (332) (146) (478)
Profit attributable to
non-controlling interests (4) - (1) (5) - (5)
Operating profit based on
longer-term investment
returns, net of tax and
non-controlling interests 1,026 1,012 (351) 1,687 541 2,228
Non-operating profit
(loss), net of tax 607 (1,222) (182) (797) 104 (693)
IFRS profit for the period,
net of tax and
non-controlling interests 1,633 (210) (533) 890 645 1,535
Other comprehensive income,
net of tax and
non-controlling interests 84 1,748 (82) 1,750 4 1,754
IFRS total comprehensive
income 1,717 1,538 (615) 2,640 649 3,289 Opening shareholders' funds 6,419 5,624 (3,494) 8,549 8,700 17,249 Annualised operating return on shareholders' funds (%)* 32% 36% (20)% 39% 12% 26% Annualised total comprehensive return on shareholders' funds (%)* 53% 55% (35)% 62% 15% 38%
* Half year profits are annualised by multiplying by two.
Half year 2018* GBPm
Discontinued UK and Europe Total
Asia US Other Total continuing operations operations Group
Operating profit based on
longer-term investment
returns 1,016 1,002 (349) 1,669 736 2,405
Tax on operating profit (151) (177) 41 (287) (142) (429)
Profit attributable to
non-controlling interests - - (1) (1) - (1)
Operating profit based on
longer-term investment
returns, net of tax and
non-controlling interests 865 825 (309) 1,381 594 1,975
Non-operating profit (loss),
net of tax (326) 145 72 (109) (511) (620)
IFRS profit for the period,
net of tax and
non-controlling interests 539 970 (237) 1,272 83 1,355
Other comprehensive income,
net of tax and
non-controlling interests 22 (790) (66) (834) 62 (772)
IFRS total comprehensive
income 561 180 (303) 438 145 583
Opening shareholders' funds 5,925 5,248 (3,331) 7,842 8,245 16,087
Annualised operating return
on shareholders' funds (%) 29% 31% (19)% 35% 14% 25%
Annualised total
comprehensive return on
shareholders' funds (%) 19% 7% (18)% 11% 4% 7%
* The half year 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations as at 30 June 2019.
Half year profits are annualised by multiplying by two.
Full year 2018* GBPm
Discontinued UK and Europe Total
Asia US Other Total continuing operations operations Group
Operating profit based on
longer-term investment
returns 2,164 1,919 (781) 3,302 1,525 4,827
Tax on operating profit (308) (301) 110 (499) (293) (792)
Profit attributable to
non-controlling interests (1) - (2) (3) - (3)
Operating profit based on
longer-term investment
returns, net of tax and
non-controlling interests 1,855 1,618 (673) 2,800 1,232 4,032
Non-operating profit (loss),
net of tax (496) (134) (15) (645) (377) (1,022)
IFRS profit for the period,
net of tax and
non-controlling interests 1,359 1,484 (688) 2,155 855 3,010
Other comprehensive income,
net of tax and
non-controlling interests 221 (754) (185) (718) 57 (661)
IFRS total comprehensive
income 1,580 730 (873) 1,437 912 2,349
Opening shareholders' funds 5,925 5,248 (3,331) 7,842 8,245 16,087
Operating return on
shareholders' funds (%) 31% 31% (20)% 36% 15% 25%
Total comprehensive return
on shareholders' funds (%) 27% 14% (26)% 18% 11% 15%
* The full year 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations as at 30 June 2019.
Return on shareholders' funds based on total profit for the period
Total return on shareholders' funds is calculated as IFRS profit for the period net of tax and non-controlling interests divided by opening shareholders' equity.
2019 GBPm 2018 GBPm
Half year* Half year* Full year
Total profit for the period, net of tax and minority interest 1,535 1,355 3,010
Opening Shareholders' funds 17,249 16,087 16,087
Return on shareholders' funds 18% 17% 19%
* Half year profits are annualised by multiplying by two.
II Calculation of alternative performance measures
The half year 2019 report uses alternative performance measures (APMs) to provide more relevant explanations of the Group's financial position and performance. This section sets out explanations for each APM and reconciliations to relevant IFRS balances.
II(i) Reconciliation of adjusted IFRS operating profit based on longer-term investment returns from continuing operations to profit before tax
Adjusted IFRS operating profit attributable to shareholders based on longer-term investment returns from continuing operations (operating profit) presents the operating performance of the business. This measurement basis adjusts for the following items within total IFRS profit before tax:
- Short-term fluctuations in investment returns on shareholder-backed business; - Amortisation of acquisition accounting adjustments arising on the purchase of business; - Gain or loss on corporate transactions, such as disposals undertaken in the period; and - Profit for the period from discontinued operations.
More details on how adjusted IFRS operating profit based on longer-term investment returns is determined are included in note B1.3 of the Group IFRS basis results.
II(ii) Calculation of IFRS gearing ratio
IFRS gearing ratio is calculated as net core structural borrowings of shareholder-financed businesses divided by closing IFRS shareholders' equity plus net core structural borrowings.
2019 GBPm 2018 GBPm
--------- ----------------
30 Jun 30 Jun 31 Dec
------------------------------------------------------------------ --------- ------- -------
Core structural borrowings of shareholder-financed businesses 7,441 6,367 7,664
Less holding company cash and short-term investments (2,365) (2,210) (3,236)
------------------------------------------------------------------ --------- ------- -------
Net core structural borrowings of shareholder-financed businesses 5,076 4,157 4,428
Closing shareholders' equity 19,672 15,882 17,249
------------------------------------------------------------------ --------- ------- -------
Closing shareholders' equity plus net core structural borrowings 24,748 20,039 21,677
------------------------------------------------------------------ --------- ------- -------
IFRS gearing ratio 21% 21% 20%
------------------------------------------------------------------ --------- ------- -------
II(iii) Calculation of IFRS shareholders' funds per share
IFRS shareholders' funds per share is calculated as closing IFRS shareholders' equity divided by the number of issued shares at the end of the period (30 June 2019: 2,600 million shares; 30 June 2018: 2,592 million shares; 31 December 2018: 2,593 million shares).
30 Jun 2019
----- ----- -----------
Discontinued
Total UK and
continuing Europe
Asia US Other operations operations Total Group
----- ----- ----------- ------------ -----------
Closing IFRS shareholders' equity (GBP million) 7,643 6,752 (3,003) 11,392 8,280 19,672
Shareholders' funds per share (pence) 294p 260p (116)p 438p 319p 757p
----- ----------- ------------ -----------
30 Jun 2018
----- ----- -----------
Discontinued
Total UK and
continuing Europe
Asia US Other operations operations Total Group
----- ----- ----------- ------------ -----------
Closing IFRS shareholders' equity (GBP million) 5,740 5,100 (3,004) 7,836 8,046 15,882
Shareholders' funds per share (pence) 221p 197p (116)p 302p 311p 613p
----- ----------- ------------ -----------
31 Dec 2018
----- ----- -----------
Discontinued
Total UK and
continuing Europe
Asia US Other operations operations Total Group
----- ----- ----------- ------------ -----------
Closing IFRS shareholders' equity (GBP million) 6,419 5,624 (3,494) 8,549 8,700 17,249
Shareholders' funds per share (pence) 248p 217p (135)p 330p 335p 665p
----- ----------- ------------ -----------
II(iv) Calculation of asset management cost/income ratio
The asset management cost/income ratio is calculated as asset management operating expenses, adjusted for commission and joint venture contribution, divided by asset management total IFRS revenue, adjusted for commission, joint venture contribution, performance-related fees and non-operating items.
Eastspring Investments - continuing
2019 GBPm 2018 GBPm
Half year Half year Full year
Operating income before performance-related fees 239 216 424
Share of joint venture revenue (93) (99) (188)
Commission 68 59 118
Performance-related fees 1 2 17
IFRS revenue 215 178 371
Operating expense 121 116 232
Share of joint venture expense (40) (58) (100)
Commission 68 59 118
IFRS charges 149 117 250
Cost/income ratio: operating expense/operating income before
performance-related fees 51% 54% 55%
M&GPrudential asset management - discontinued
2019 GBPm 2018 GBPm
Half year Half year Full year
Operating income before performance-related fees 523 553 1,100
Commission 132 155 313
Performance-related fees 7 8 15
Investment return - - (14)
Short-term fluctuations in investment returns on
shareholder-backed business 7 (6) (15)
IFRS revenue 669 710 1,399
Operating expense used in cost/income ratio 298 297 654
Investment return - - (14)
Commission 132 155 313
IFRS charges 430 452 953
Cost/income ratio: operating expense/operating income before
performance-related fees 57% 54% 59%
II(v) Reconciliation of Asia renewal insurance premium to gross premiums earned
Asia renewal insurance premium is calculated as IFRS gross earned premiums less new business premiums and adjusted for the contribution from joint ventures.
2019 GBPm 2018 GBPm
--------- --------------------
Half year Half year Full year
---------------------------------------------------------------------------- --------- --------- ---------
Asia renewal insurance premium 7,093 6,076 12,856
Add: General insurance premium 50 42 90
Add: IFRS gross earned premium from new regular and single premium business 2,406 2,237 4,809
Less: Renewal premiums from joint ventures (693) (619) (1,286)
---------------------------------------------------------------------------- --------- --------- ---------
Asia segment IFRS gross premiums earned 8,856 7,736 16,469
---------------------------------------------------------------------------- --------- --------- ---------
II(vi) Reconciliation of APE new business sales to gross premiums earned
The Group reports APE new business sales as a measure of the new policies sold in the period. This differs from the IFRS measure of gross premiums earned as shown below:
2019 GBPm 2018* GBPm
Half year Half year Full year
Annual premium equivalents (APE) from continuing operations 2,809 2,552 5,286
Adjustment to include 100% of single premiums on new business sold in the
periodnote (a) 8,762 8,356 15,966
Premiums from in-force business and other adjustmentsnote (b) 4,722 3,878 12,911
Gross premiums earned from continuing operations 16,293 14,786 34,163
Annual premiums equivalents (APE) from discontinued UK and Europe operations 705 770 1,516
Adjustment to include 100% of single premiums on new business sold in the
periodnote (a) 5,503 6,021 12,043
Premiums from in-force business and other adjustmentsnote (b) (301) (236) (498)
Gross premiums earned from discontinued operations 5,907 6,555 13,061
* The 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations as at 30 June 2019.
Notes
(a) APE new business sales only include one tenth of single premiums, recorded on policies sold in the period. Gross premiums earned include 100 per cent of such premiums.
(b) Other adjustments principally include amounts in respect of the following:
- Gross premiums earned include premiums from existing in-force business as well as new business. The most significant amount is recorded in Asia, where a significant portion of regular premium business is written. Asia in-force premiums form the vast majority of the other adjustment amount;
- In October 2018, Jackson entered into a 100 per cent reinsurance agreement with John Hancock Life Insurance Company to acquire a closed block of group pay-out annuity business. The transaction resulted in an addition to gross premiums earned of GBP3.7 billion. No amounts were included in APE new business sales;
- APE includes new policies written in the period which are classified as investment contracts without discretionary participation features under IFRS 4, arising mainly in Jackson for guaranteed investment contracts and in M&GPrudential for certain unit-linked savings and similar contracts. These are excluded from gross premiums earned and recorded as deposits;
- APE new business sales are annualised while gross premiums earned are recorded only when revenues are due; and
- For the purpose of reporting APE new business sales, the Group's share of amounts sold by the Group's insurance joint ventures and associates are included. Under IFRS, joint ventures and associates are equity accounted and so no amounts are included within gross premiums earned.
II(vii) Reconciliation between IFRS and EEV shareholders' equity
The table below shows the reconciliation of EEV shareholders' equity and IFRS shareholders' equity at the end of the period:
2019 GBPm 2018 GBPm
30 Jun 30 Jun 31 Dec
EEV shareholders' equity 53,416 47,443 49,782
Less: Value of in-force business of long-term businessnote (a) (35,567) (31,555) (33,013)
Deferred acquisition costs assigned zero value for EEV purposes 10,443 9,652 10,077
Othernote (b) (8,620) (9,658) (9,597)
IFRS shareholders' equity 19,672 15,882 17,249
Notes
(a) The EEV shareholders' equity comprises the present value of the shareholders' interest in the value of in-force business, total net worth of long-term business operations and IFRS shareholders' equity of asset management and other operations. The value of in-force business reflects the present value of expected future shareholder cash flows from long-term in-force business which are not captured as shareholders' interest on an IFRS basis. Total net worth represents the net assets for EEV reporting that reflect the regulatory basis position, with adjustments to achieve consistency with the IFRS treatment of certain items as appropriate.
(b) Other adjustments represent asset and liability valuation differences between IFRS and the local regulatory reporting basis used to value total net worth for long-term insurance operations. These also include the mark-to-market value movements of the Group's core structural borrowings which are fair valued under EEV but are held at amortised cost under IFRS. The most significant valuation differences relate to changes in the valuation of insurance liabilities. For example, in Jackson, IFRS liabilities are higher than the local regulatory basis as they are principally based on policyholder account balances (with a deferred acquisition costs recognised as an asset), whereas the local regulatory basis used for EEV reporting is based on expected future cash flows due to the policyholder on a prudent basis, with the consideration of an expense allowance, as applicable, but with no separate deferred acquisition cost asset.
II(viii) Reconciliation of EEV operating profit based on longer-term investment returns to profit for the period
To the extent applicable, the presentation of the EEV profit for the period is consistent in the classification between operating and non-operating results with the basis that the Group applies for the analysis of IFRS basis results. Operating results based on longer-term investment returns are determined following the EEV Principles issued by the European Insurance CFO Forum in 2016.
Non-operating results comprise:
- Short-term fluctuations in investment returns; - Mark-to-market value movements on core structural borrowings; - Effect of changes in economic assumptions; and - The impact of corporate transactions undertaken in the period.
More details on how EEV profit for the period is determined and the components of EEV operating profit are included in note 11 of the supplementary EEV basis of results.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
IR PJMLTMBJBBIL
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August 14, 2019 04:30 ET (08:30 GMT)
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