Additional financial information

I: IFRS profit and loss information

I(a) Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver

This schedule classifies the Group’s pre-tax operating earnings from long-term insurance operations into the underlying drivers of those profits, using the following categories:

1. Spread income represents the difference between net investment income (or premium income in the case of the UK annuities new business) and amounts credited to certain policyholder accounts. It excludes the operating investment returns on shareholder net assets, which has been separately disclosed as expected return on shareholder assets.
2. Fee income represents profits driven by net investment performance, being asset management fees that vary with the size of the underlying policyholder funds net of investment management expenses.
3. With-profits business represents the gross of tax shareholders’ transfer from the with-profits fund for the period.
4. Insurance margin primarily represents profits derived from the insurance risks of mortality and morbidity.
5. Margin on revenues primarily represents amounts deducted from premiums to cover acquisition costs and administration expenses.
6. Acquisition costs and administration expenses represent expenses incurred in the period attributable to shareholders. It excludes items such as restructuring costs and Solvency II costs which are not included in the segment profit for insurance as well as items that are more appropriately included in other source of earnings lines (eg investment expenses are netted against investment income as part of spread income or fee income as appropriate).
7. DAC adjustments comprises DAC amortisation for the period, excluding amounts related to short-term fluctuations in investment returns, net of costs deferred in respect of new business.

Analysis of pre-tax IFRS operating profit by source and margin analysis of Group long-term insurance business

The following analysis expresses certain of the Group’s sources of operating profit as a margin of policyholder liabilities or other suitable driver. Details on the calculation of the Group’s average policyholder liability balances are given in note (iv) at the end of this section.

Download Analysis of pre-tax IFRS operating profit by source and margin analysis of Group long-term insurance business as Excel file

	Half year 2017
	Asia £m	US £m	UK £m	Total £m	Average liability note (iv) £m	Margin note (ii) bps
Spread income	108	401	74	583	89,314	131
Fee income	103	1,145	31	1,279	164,152	156
With-profits	30	–	142	172	132,701	26
Insurance margin	658	472	22	1,152
Margin on revenues	1,056	–	82	1,138
Expenses:
Acquisition costsnote (i)	(736)	(463)	(42)	(1,241)	3,624	(34)%
Administration expenses	(471)	(593)	(67)	(1,131)	259,451	(87)
DAC adjustmentsnote (v)	66	117	3	186
Expected return on shareholder assets	56	–	47	103
	870	1,079	292	2,241
Longevity reinsurance and other management actions to improve solvency	–	–	188	188
Long-term business operating profit based on longer-term investment returns	870	1,079	480	2,429

See notes at the end of this section.

Download Analysis of pre-tax IFRS operating profit by source and margin analysis of Group long-term insurance business continued as Excel file

	Half year 2016 AER
	Asia note (vi) £m	US £m	UK £m	Total £m	Average liability note (iv) £m	Margin note (ii) bps
Spread income	81	379	96	556	80,146	139
Fee income	82	878	29	989	129,054	153
With-profits	24	–	138	162	114,109	28
Insurance margin	472	401	25	898
Margin on revenues	860	–	86	946
Expenses:
Acquisition costsnote (i)	(573)	(412)	(42)	(1,027)	2,980	(34)%
Administration expenses	(369)	(452)	(58)	(879)	216,075	(81)
DAC adjustmentsnote (v)	51	83	(2)	132
Expected return on shareholder assets	39	11	61	111
	667	888	333	1,888
Longevity reinsurance and other management actions to improve solvency	–	–	140	140
Long-term business operating profit based on longer-term investment returns	667	888	473	2,028

See notes at the end of this section.

Download Analysis of pre-tax IFRS operating profit by source and margin analysis of Group long-term insurance business continued as Excel file

	Half year 2016 CER note (iii)
	Asia note (vi) £m	US £m	UK note (v) £m	Total £m	Average liability note (iv) £m	Margin note (ii) bps
Spread income	91	426	96	613	85,708	143
Fee income	92	997	29	1,118	143,526	156
With-profits	27	–	138	165	115,945	28
Insurance margin	532	456	25	1,013
Margin on revenues	965	–	86	1,051
Expenses:
Acquisition costsnote (i)	(644)	(469)	(42)	(1,155)	3,296	(35)%
Administration expenses	(412)	(513)	(58)	(983)	236,974	(83)
DAC adjustmentsnote (v)	56	95	(2)	149
Expected return on shareholder assets	45	18	61	124
	752	1,010	333	2,095
Longevity reinsurance and other management actions to improve solvency	–	–	140	140
Long-term business operating profit based on longer-term investment returns	752	1,010	473	2,235

See notes at the end of this section.

Margin analysis of long-term insurance business – Asia

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	Asia note (vi)
	Half year 2017				Half year 2016 AER				Half year 2016 CER note (iii)
Long-term business	Profit £m	Average liability note (iv) £m	Margin note (ii) bps		Profit £m	Average liability note (iv) £m	Margin note (ii) bps		Profit £m	Average liability note (iv) £m	Margin note (ii) bps
Spread income	108	15,776	137		81	12,637	128		91	13,886	131
Fee income	103	18,170	113		82	14,951	110		92	16,240	113
With-profits	30	28,772	21		24	21,435	22		27	23,271	23
Insurance margin	658				472				532
Margin on revenues	1,056				860				965
Expenses:
Acquisition costsnote (i)	(736)	1,943	(38)%		(573)	1,605	(36)%		(644)	1,814	(36)%
Administration expenses	(471)	33,946	(278)		(369)	27,588	(268)		(412)	30,126	(274)
DAC adjustmentsnote (v)	66				51				56
Expected return on shareholder assets	56				39				45
Operating profit based on longer-term investment returns	870				667				752

See notes at the end of this section.

Analysis of Asia operating profit drivers

• Spread income has increased on a constant exchange rate basis by 19 per cent (AER: 33 per cent) to £108 million in half year 2017, predominantly reflecting the growth of the Asia non-linked policyholder liabilities.
• Fee income has increased by 12 per cent at constant exchange rates (AER: 26 per cent) to £103 million in half year 2017, broadly in line with the increase in movement in average unit-linked liabilities.
• On a constant exchange rate basis, insurance margin has increased by 24 per cent to £658 million in half year 2017 (AER: 39 per cent), primarily reflecting the continued growth of the in-force book, which contains a relatively high proportion of risk-based products. Insurance margin includes non-recurring items of £66 million (half year 2016: £42 million at AER and £46 million at CER).
• Margin on revenue has increased by £91 million on a constant exchange rate basis from £965 million in half year 2016 to £1,056 million in half year 2017, primarily reflecting growth of the in-force book and higher regular premium income recognised in the period.
• Acquisition costs have increased by 14 per cent at constant exchange rates (AER: 28 per cent) to £736 million, compared to the 7 per cent increase in APE sales, resulting in an increase in the acquisition costs ratio. The analysis above uses shareholder acquisition costs as a proportion of total APE. If with-profits sales were excluded from the denominator the acquisition cost ratio would become 65 per cent (half year 2016: 72 per cent at CER), the decrease being the result of product and country mix.
• Administration expenses have increased by 14 per cent at a constant exchange rate basis (AER: 28 per cent increase) in half year 2017 as the business continues to expand. On a constant exchange rate basis, the administration expense ratio has increased from 274 basis points in half year 2016 to 278 basis points in half year 2017, the result of changes in country and product mix.

Margin analysis of long-term insurance business – US

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	US
	Half year 2017				Half year 2016 AER				Half year 2016 CER note (iii)
Long-term business	Profit £m	Average liability note (iv) £m	Margin note (ii) bps		Profit £m	Average liability note (iv) £m	Margin note (ii) bps		Profit £m	Average liability note (iv) £m	Margin note (ii) bps
Spread income	401	39,731	202		379	34,886	217		426	39,199	217
Fee income	1,145	123,464	186		878	92,608	190		997	105,791	188
Insurance margin	472				401				456
Expenses:
Acquisition costsnote (i)	(463)	960	(48)%		(412)	782	(53)%		(469)	889	(53)%
Administration expenses	(593)	169,180	(70)		(452)	134,369	(67)		(513)	152,730	(67)
DAC adjustments	117				83				95
Expected return on shareholder assets	–				11				18
Operating profit based on longer-term investment returns	1,079				888				1,010

See notes at the end of this section.

Analysis of US operating profit drivers

• Spread income has decreased by 6 per cent at constant exchange rates (AER: increased by 6 per cent) to £401 million in the first half of 2017. The reported spread margin decreased to 202 basis points from 217 basis points in the first half of 2016, due to lower investment yields. Spread income benefited from swap transactions previously entered into to more closely match the asset and liability duration. Excluding this effect, the spread margin would have been 147 basis points (half year 2016 CER: 150 basis points and AER: 151 basis points).
• Fee income has increased by 15 per cent at constant exchange rates (AER: increased by 30 per cent) to £1,145 million during the first half of 2017, primarily due to higher average separate account balances resulting from positive net cash flows from variable annuity business and market appreciation.
• Insurance margin represents operating profits from insurance risks, including variable annuity guarantees and other sundry items. Insurance margin increased to £472 million in the first half of 2017 compared to £456 million at constant exchange rates at half year 2016. The increase was primarily due to higher income from variable annuity guarantees partially offset by a decline in the contribution from the closed books of business.
• Acquisition costs, which are commissions and expenses incurred to acquire new business, including those that are not deferrable, have decreased in absolute terms and as a percentage of APE compared to the first half of 2016 at constant exchange rates. This is due to the continued increase in producers selecting asset-based commissions which are paid upon policy anniversary dates and are treated as an administrative expense in this analysis, rather than front-end commissions and the result of change in product mix.
• Administration expenses increased to £593 million during the first half of 2017, compared to £513 million for the first half of 2016 at a constant exchange rate (AER: £452 million), primarily as a result of higher asset-based commissions. Excluding these trail commissions, the resulting administration expense ratio would remain flat at 36 basis points (half year 2016: 36 basis points at CER and AER).
• DAC adjustments increased to £117 million during the first half of 2017, compared to £95 million at a constant exchange rate (AER: £83 million) during the first half of 2016, primarily due to lower DAC amortisation due to higher fund returns.

Analysis of pre-tax operating profit before and after acquisition costs and DAC adjustments

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	Half year 2017 £m					Half year 2016 AER £m					Half year 2016 CER £m note (iii)
	Other operating profits	Acquisition costs		Total		Other operating profits	Acquisition costs		Total		Other operating profits	Acquisition costs		Total
		Incurred	Deferred				Incurred	Deferred				Incurred	Deferred
Total operating profit before acquisition costs and DAC adjustments	1,425			1,425		1,217			1,217		1,384			1,384
Less new business strain		(463)	353	(110)			(412)	320	(92)			(469)	364	(105)
Other DAC adjustments – amortisation of previously deferred acquisition costs:
Normal			(272)	(272)				(266)	(266)				(303)	(303)
Deceleration			36	36				29	29				34	34
Total	1,425	(463)	117	1,079		1,217	(412)	83	888		1,384	(469)	95	1,010

Analysis of operating profit based on longer-term investment returns for US operations by product

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	2017 £m		2016 £m			%
	Half year		AER Half year	CER Half year		Half year 2017 vs half year 2016 AER	Half year 2017 vs half year 2016 CER
Spread business note (a)	176		154	175		14%	1%
Fee business note (b)	852		642	730		33%	17%
Life and other business note (c)	51		92	105		(45)%	(51)%
Total insurance operations	1,079		888	1,010		22%	7%
US asset management and broker-dealer	(6)		(12)	(13)		50%	54%
Total US operations	1,073		876	997		22%	8%

The analysis of operating profit based on longer-term investment returns for US operations by product represents the net profit generated by each line of business after allocation of costs. Broadly:

1. Spread business is the net operating profit for fixed annuity, fixed indexed annuity and guaranteed investment contracts and largely comprises spread income less costs.
2. Fee business represents profits from variable annuity products. As well as fee income revenue for this product line includes spread income from investments directed to the general account and other variable annuity fees included in insurance margin.
3. Life and other business includes the profits from the REALIC business and other closed life books. Revenue allocated to this product line includes spread income and premiums and policy charges for life protection, which are included in insurance margin after claim costs. Insurance margin forms the vast majority of revenue.

Margin analysis of long-term insurance business – UK

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	UK
	Half year 2017				Half year 2016
Long-term business	Profit £m	Average liability note (iv) £m	Margin note (ii) bps		Profit £m	Average liability note (iv) £m	Margin note (ii) bps
Spread income	74	33,807	44		96	32,623	59
Fee income	31	22,518	27		29	21,495	27
With-profits	142	103,929	27		138	92,674	30
Insurance margin	22				25
Margin on revenues	82				86
Expenses:
Acquisition costsnote (i)	(42)	721	(6)%		(42)	593	(7)%
Administration expenses	(67)	56,325	(24)		(58)	54,118	(21)
DAC adjustments	3				(2)
Expected return on shareholders’ assets	47				61
	292				333
Longevity reinsurance and other management actions to improve solvency	188				140
Operating profit based on longer-term investment returns	480				473

Analysis of UK operating profit drivers

• Spread income has decreased from £96 million in half year 2016 to £74 million in half year 2017 mainly due to lower annuity sales. Spread income has two components:
  • A contribution from new annuity business which was lower at £4 million in half year 2017 compared to £27 million in half year 2016, reflecting our withdrawal from this market; and
  • A contribution from in-force annuity and other business, which was broadly in line with last year at £70 million (half year 2016: £69 million), equivalent to 41 basis points of average reserves (half year 2016: 42 basis points).
• Fee income principally represents asset management fees from unit-linked business, including direct investment only business to group pension schemes, where liability flows are driven by a small number of large single mandate transactions and fee income mostly arise within our UK asset management business. Excluding these schemes, the fee margin on the remaining balance was 40 basis points (half year 2016: 40 basis points).
• Margin on revenues represents premium charges for expenses of shareholder-backed business and other sundry net income.
• Acquisition costs incurred were £42 million, equivalent to 6 per cent of total APE sales in half year 2017 (half year 2016: 7 per cent). The ratio above expresses the percentage of shareholder acquisition costs as a percentage of total APE sales. It is therefore impacted by the level of with-profits sales in the year. Acquisition costs as a percentage of shareholder-backed new business sales were 32 per cent in half year 2017 (half year 2016: 33 per cent).
• The contribution from longevity reinsurance and other management actions to improve solvency during half year 2017 was £188 million (half year 2016: £140 million). Further explanation and analysis is provided in Additional financial information section I(d).

I(b) Asia operations – analysis of IFRS operating profit by business unit

Operating profit based on longer-term investment returns for Asia operations are analysed below. The table below presents the half year 2016 results on both actual exchange rates (AER) and constant exchange rates (CER) bases so as to eliminate the impact of exchange translation.

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	2017 £m		2016* £m			%			2016 £m
	Half year		AER Half year	CER Half year		Half year 2017 vs half year 2016 AER	Half year 2017 vs half year 2016 CER		AER Full year
* Following its sale in May 2017, the half year 2016 comparative operating result has been adjusted to exclude the result attributable to the sold Korea life business. This approach is consistent with that applied at full year 2016.
Notes Analysis of operating profit between new and in-force business The result for insurance operations comprises amounts in respect of new business and business in force as follows: Download Analysis of operating profit between new and in-force business as Excel file   2017 £m   2016 £m   Half year   AER Half year CER Half year AER Full year New business strain† (40)   (17) (19) (29) Business in force 857   644 727 1,469 Non-recurrent itemsnote (ii) 54   42 46 67 Total 871   669 754 1,507 † The IFRS new business strain corresponds to approximately (2.0) per cent of new business APE sales for half year 2017 (half year 2016: approximately (1.1) per cent; full year 2016: approximately (0.8) per cent). The strain represents the pre-tax regulatory basis strain to net worth after IFRS adjustments; for deferral of acquisition costs and deferred income where appropriate. Other non-recurrent items of £54 million in 2017 (half year 2016: £42 million; full year 2016: £67 million) represent a small number of items.
Hong Kong	157		96	109		64%	44%		238
Indonesia	232		193	221		20%	5%		428
Malaysia	86		71	76		21%	13%		147
Philippines	21		17	18		24%	17%		38
Singapore	133		111	125		20%	6%		235
Thailand	46		39	44		18%	5%		92
Vietnam	57		44	49		30%	16%		114
South-east Asia operations including Hong Kong	732		571	642		28%	14%		1,292
China	39		20	21		95%	86%		64
Taiwan	19		13	17		46%	12%		35
Other	27		23	28		17%	(4)%		49
Non-recurrent itemsnote (ii)	54		42	46		29%	17%		67
Total insurance operationsnote (i)	871		669	754		30%	16%		1,507
Development expenses	(1)		(2)	(2)		50%	50%		(4)
Total long-term business operating profit	870		667	752		30%	16%		1,503
Eastspring Investments	83		61	69		36%	20%		141
Total Asia operations	953		728	821		31%	16%		1,644

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

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	Half year 2017 £m
	M&G note (ii)	Eastspring Investments note (ii)	Prudential Capital	US	Total
Operating income before performance-related fees	495	205	56	124	880
Performance-related fees	6	3	–	–	9
Operating income (net of commission)note (i)	501	208	56	124	889
Operating expensenote (i)	(261)	(113)	(50)	(130)	(554)
Share of associate’s results	8	–	–	–	8
Group’s share of tax on joint ventures’ operating profit	–	(12)	–	–	(12)
Operating profit (loss) based on longer-term investment returns	248	83	6	(6)	331
Average funds under management	£267.2bn	£124.9bn
Margin based on operating income*	37bps	33bps
Cost/income ratio†	53%	55%

Download I(c) Analysis of asset management operating profit based on longer-term investment returns 2016 as Excel file

	Half year 2016 £m
	M&G note (ii)	Eastspring Investments note (ii)	Prudential Capital	US	Total
Operating income before performance-related fees	440	155	61	109	765
Performance-related fees	9	1	–	–	10
Operating income (net of commission)note (i)	449	156	61	109	775
Operating expensenote (i)	(229)	(87)	(48)	(121)	(485)
Share of associate’s results	5	–	–	–	5
Group’s share of tax on joint ventures’ operating profit	–	(8)	–	–	(8)
Operating profit based on longer-term investment returns	225	61	13	(12)	287
Average funds under management	£243.2bn	£102.2bn
Margin based on operating income*	36bps	30bps
Cost/income ratio†	52%	56%

Download Analysis of asset management operating profit based on longer-term investment returns for 2016 as Excel file

	Full year 2016 £m
	M&G note (ii)	Eastspring Investments note (ii)	Prudential Capital	US	Total
Notes Operating income and expense include the Group’s share of contribution from joint ventures (but excludes any contribution from associates). In the income statement as shown in note B2 of the IFRS financial statements, the net post-tax income of the joint ventures and associates is shown as a single item. M&G and Eastspring Investments can be further analysed as follows: Download Operating income before performance-related fees as Excel file   M&G   Operating income before performance-related fees   Retail £m Margin of FUM* bps Institu- tional‡ £m Margin of FUM* bps Total £m Margin of FUM* bps 30 Jun 2017 285 86 210 21 495 37 30 Jun 2016 247 87 193 21 440 36 31 Dec 2016 504 86 419 22 923 37 Download Operating income before performance-related fees - Eastspring Investments as Excel file   Eastspring Investments   Operating income before performance-related fees   Retail £m Margin of FUM* bps Institu- tional‡ £m Margin of FUM* bps Total £m Margin of FUM* bps 30 Jun 2017 120 57 85 20 205 33 30 Jun 2016 91 53 64 19 155 30 31 Dec 2016 211 58 142 20 353 32 * Margin represents operating income before performance related fees as a proportion of the related funds under management (FUM). Half year figures have been annualised by multiplying by two. Monthly closing internal and external funds managed by the respective entity have been used to derive the average. Any funds held by the Group’s insurance operations which are managed by third parties outside of the Prudential Group are excluded from these amounts. † Cost/income ratio represents cost as a percentage of operating income before performance-related fees. ‡ Institutional includes internal funds.
Operating income before performance-related fees	923	353	118	235	1,629
Performance-related fees	33	7	–	–	40
Operating income (net of commission)note (i)	956	360	118	235	1,669
Operating expensenote (i)	(544)	(198)	(91)	(239)	(1,072)
Share of associate’s results	13	–	–	–	13
Group’s share of tax on joint ventures’ operating profit	–	(21)	–	–	(21)
Operating profit based on longer-term investment returns	425	141	27	(4)	589
Average funds under management	£250.4bn	£109.0bn
Margin based on operating income*	37bps	32bps
Cost/income ratio†	59%	56%

I(d) Contribution to UK life financial metrics from specific management actions undertaken to position the balance sheet more efficiently under the new Solvency II regime

In the first half of 2017, further management actions were taken to improve the solvency of UK insurance operations and to mitigate market risks. These actions included extending the reinsurance of longevity risk to cover a further £0.6 billion of IFRS annuity liabilities.

As at 30 June 2017, the total IFRS annuity liabilities subject to longevity reinsurance were £14.8 billion. Management actions also repositioned the fixed income asset portfolio to improve the trade-off between yield and credit risk.

The effect of these actions on the UK’s long-term IFRS operating profit, underlying free surplus generation and EEV operating profit is shown in the tables below.

IFRS operating profit of UK long-term business

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	2017 £m		2016 £m
	Half year		Half year	Full year
Shareholder-backed annuity new business:
Retail	4		27	41
Bulks	–		–	–
	4		27	41
In-force business:
Longevity reinsurance transactions	31		66	197
Other management actions to improve solvency	157		74	135
Provision for the review of past annuity sales	–		–	(175)
	188		140	157
With-profits and other in-force	288		306	601
Total Life IFRS operating profit	480		473	799

Underlying free surplus generation of UK long-term business

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	2017 £m		2016 £m
	Half year		Half year	Full year
Expected in-force and return on net worth	349		334	693
Longevity reinsurance transactions	15		53	126
Other management actions to improve solvency	178		137	225
Provision for the review of past annuity sales	–		–	(145)
	193		190	206
Changes in operating assumptions, experience variances and Solvency II and other restructuring costs	21		31	8
Underlying free surplus generated from in-force business	563		555	907
New business strain:	(42)		(56)	(129)
Total underlying free surplus generation	521		499	778

EEV post-tax operating profit of UK long-term business

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	2017 £m		2016 £m
	Half year		Half year	Full year
Unwind of discount and other expected return	232		205	445
Longevity reinsurance transactions	(6)		(10)	(90)
Other management actions to improve solvency	65		41	110
Provision for the review of past annuity sales	–		–	(145)
	59		31	(125)
Changes in operating assumptions and experience variances	13		23	55
Operating profit from in-force business	304		259	375
New business profit:
Shareholder-backed annuity	4		17	32
Other products	157		108	236
	161		125	268
Total post-tax life EEV operating profit	465		384	643

II(a) Holding company cash flow*

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	2017 £m		2016 £m
	Half year		Half year	Full year
* The holding company cash flow differs from the IFRS cash flow statement, which includes all cash flows in the period including those relating to both policyholder and shareholder funds. The holding company cash flow is therefore a more meaningful indication of the Group’s central liquidity. † Net cash remittances comprise dividends and other transfers from business units that are reflective of emerging earnings and capital generation. ‡ Non-operating net cash flow is principally for corporate transactions for distribution rights and acquired businesses, and issue or repayment of subordinated debt.
Net cash remitted by business units:
UK life net remittances to the Group
With-profits remittance	215		215	215
Shareholder-backed business remittance	–		–	85
	215		215	300
Other UK paid to Group	–		131	147
Total UK net remittances to the Group	215		346	447
US remittances to the Group	475		339	420
Total Asia net remittances to the Group	350		258	516
M&G remittances to the Group	175		150	290
Prudential Capital remittances to the Group	15		25	45
Net remittances to the Group from business units†	1,230		1,118	1,718
Net interest paid	(207)		(157)	(333)
Tax received	84		67	132
Corporate activities	(103)		(109)	(215)
Total central outflows	(226)		(199)	(416)
Net operating holding company cash flow before dividend	1,004		919	1,302
Dividend paid	(786)		(935)	(1,267)
Operating holding company cash flow after dividend	218		(16)	35
Non-operating net cash flow‡	(186)		382	335
Total holding company cash flow	32		366	370
Cash and short-term investments at beginning of period	2,626		2,173	2,173
Foreign exchange movements	(1)		7	83
Cash and short-term investments at end of period	2,657		2,546	2,626

II(b) Funds under management

For our asset management businesses, funds managed on behalf of third parties are not recorded on the balance sheet. They are however a driver of profitability. We therefore analyse the movement in the funds under management each period, focusing on those which are external to the Group and those held by the insurance businesses and included on the Group balance sheet. This is analysed below.

(a) Summary

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	2017 £bn		2016 £bn
	30 Jun		30 Jun	31 Dec
Notes Prudential Group funds under management comprise: Download Prudential Group funds under management as Excel file   2017 £bn   2016 £bn   30 Jun   30 Jun 31 Dec Total investments per the consolidated statement of financial position 437.4   398.2 421.7 Less: investments in joint ventures and associates accounted for using the equity method (1.3)   (1.1) (1.2) Internally managed funds held in joint ventures 7.7   6.2 7.0 Investment properties which are held for sale or occupied by the Group (included in other IFRS captions) 0.4   0.4 0.4 Prudential Group funds under management 444.2   403.7 427.9 External funds shown above as at 30 June 2017 of £190.7 billion (30 June 2016: £158.6 billion; 31 December 2016: £171.4 billion) comprise £202.0 billion (30 June 2016: £169.8 billion; 31 December 2016: £182.5 billion) of funds managed by M&G and Eastspring Investments as shown in note (b) below less £11.3 billion (30 June 2016: £11.2 billion; 31 December 2016: £11.1 billion) that are classified within Prudential Group’s funds.
Business area:
Asia operations	75.8		66.3	69.6
US operations	174.6		156.5	173.3
UK operations	193.8		180.9	185.0
Prudential Group funds under managementnote (i)	444.2		403.7	427.9
External fundsnote (ii)	190.7		158.6	171.4
Total funds under management	634.9		562.3	599.3

(b) Investment products – external funds under management

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	Half year 2017 £m				Half year 2016 £m				Full year 2016 £m
	Eastspring Investments note	M&G	Group total note		Eastspring Investments note	M&G	Group total note		Eastspring Investments note	M&G	Group total note
Note The £202.0 billion (30 June 2016: £169.8 billion; 31 December 2016: £182.5 billion) investment products comprise £193.7 billion (30 June 2016: £162.4 billion; 31 December 2016: £174.8 billion) plus Asia Money Market Funds of £8.3 billion (30 June 2016: £7.4 billion; 31 December 2016: £7.7 billion).
At beginning of period	45,756	136,763	182,519		36,287	126,405	162,692		36,287	126,405	162,692
Market gross inflows	108,240	22,677	130,917		68,465	9,731	78,196		164,004	22,841	186,845
Redemptions	(105,468)	(15,498)	(120,966)		(68,221)	(16,697)	(84,918)		(161,766)	(30,931)	(192,697)
Market exchange translation and other movements	4,395	5,176	9,571		3,618	10,217	13,835		7,231	18,448	25,679
At end of period	52,923	149,118	202,041		40,149	129,656	169,805		45,756	136,763	182,519

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

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	Eastspring Investments note					M&G
	30 Jun 2017 £bn		30 Jun 2016 £bn	31 Dec 2016 £bn		30 Jun 2017 £bn		30 Jun 2016 £bn	31 Dec 2016 £bn
Note The external funds under management for Eastspring Investments include Asia Money Market Funds at 30 June 2017 of £8.3 billion (30 June 2016: £7.4 billion; 31 December 2016: £7.7 billion).
External funds under management	52.9		40.1	45.7		149.1		129.7	136.8
Internal funds under management	77.6		64.8	72.2		132.4		125.7	128.1
Total funds under management	130.5		104.9	117.9		281.5		255.4	264.9

II(c) Solvency II capital position at 30 June 2017

The estimated Group shareholder Solvency II surplus at 30 June 2017 was £12.9 billion, before allowing for payment of the 2017 first interim dividend and after allowing for management’s estimate of transitional measures reflecting operating and market conditions as at 30 June 2017.

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Estimated Group shareholder Solvency II capital position*	30 Jun 2017 £bn		30 Jun 2016 £bn	31 Dec 2016 £bn
* The Group shareholder capital position excludes the contribution to Own Funds and the Solvency Capital Requirement from ring-fenced with-profit funds and staff pension schemes in surplus. The solvency positions include management’s estimates of UK transitional measures reflecting operating and market conditions at each valuation date.
Own funds	25.6		21.1	24.8
Solvency capital requirement	12.7		12.0	12.3
Surplus	12.9		9.1	12.5
Solvency ratio	202%		175%	201%

In accordance with Solvency II requirements, these results allow for:

• Capital in Jackson in excess of 250 per cent of the US local Risk Based Capital requirement. As agreed with the Prudential Regulation Authority, this is incorporated in the result above as follows:
  • Own funds: represents Jackson’s local US Risk Based available capital less 100 per cent of the US Risk Based Capital requirement (Company Action Level);
  • Solvency Capital Requirement: represents 150 per cent of Jackson’s local US Risk Based Capital requirement (Company Action Level); and
  • No diversification benefits are taken into account between Jackson and the rest of the Group.
• Matching adjustment for UK annuities and volatility adjustment for US dollar denominated Hong Kong with-profits business, based on approvals from the Prudential Regulation Authority and calibrations published by the European Insurance and Occupational Pensions Authority; and
• UK transitional measures, which have been recalculated using management’s estimate of the impact of operating and market conditions at the valuation date. The estimated Group shareholder surplus would increase from £12.9 billion to £13.6 billion at 30 June 2017 if the approved regulatory transitional amount was applied instead.

The Group shareholder Solvency II capital position excludes:

• A portion of Solvency II surplus capital (£1.6 billion at 30 June 2017) relating to the Group’s Asian life operations, including due to ‘contract boundaries’;
• The contribution to Own Funds and the Solvency Capital Requirement from ring-fenced with-profits funds in surplus (representing £4.1 billion of surplus capital from UK with-profits funds at 30 June 2017) and from the shareholders’ share of the estate of with-profits funds; and
• The contribution to Own Funds and the Solvency Capital Requirement from pension funds in surplus.

It also excludes unrealised gains on certain derivative instruments taken out to protect Jackson against declines in long-term interest rates. At Jackson’s request, the Department of Insurance Financial Services renewed its approval to carry these instruments at book value in the local statutory returns for the period 31 December 2016 to 1 October 2017. At 30 June 2017, this approval had the effect of decreasing local statutory capital and surplus (and by extension Solvency II Own Funds and Solvency II surplus) by £0.4 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.

The 30 June 2017 Solvency II results above allow for the completion of the sale of the Korea life business in the first half of 2017.

Further information on the Solvency II capital position for the Group and The Prudential Assurance Company Limited is published annually in the Solvency and Financial Condition Reports. These were last published on the Group’s website on 18 May 2017.

Analysis of movement in Group capital position

A summary of the estimated movement in Group Solvency II surplus from £12.5 billion at year end 2016 to £12.9 billion at half year 2017 is set out in the table below. The movement from the Group Solvency II surplus at 31 December 2015 to the Solvency II surplus at 30 June 2016 and 31 December 2016 is included for comparison.

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	Half year 2017 £bn		Half year 2016 £bn	Full year 2016 £bn
Analysis of movement in Group shareholder surplus	Surplus		Surplus	Surplus
Estimated Solvency II surplus at 1 January 2017/1 January 2016	12.5		9.7	9.7
Underlying operating experience	1.5		1.0	2.3
Management actions	0.2		0.2	0.4
Operating experience	1.7		1.2	2.7
Non-operating experience (including market movements)	0.0		(2.4)	(1.1)
Other capital movements
Subordinated debt issuance	–		0.7	1.2
Foreign currency translation impacts	(0.5)		0.9	1.6
Dividends paid	(0.8)		(0.9)	(1.3)
Model changes	0.0		(0.1)	(0.3)
Estimated Solvency II surplus at end period	12.9		9.1	12.5

The estimated movement in Group Solvency II surplus in the first half of 2017 is driven by:

• Operating experience of £1.7 billion: generated by in-force business and new business written in 2017, after allowing for amortisation of the UK transitional and the impact of one-off management optimisations implemented over the period;
• Non-operating experience: has been neutral overall during the first half of 2017, after allowing for the recalculation of the UK transitional at the valuation date; and
• Other capital movements: comprising a loss from foreign currency translation in the first half of 2017 and a reduction in surplus from payment of dividends.

Analysis of Group Solvency Capital Requirements

The split of the Group’s estimated Solvency Capital Requirement by risk type including the capital requirements in respect of Jackson’s risk exposures based on 150 per cent of US Risk Based Capital requirements (Company Action Level) but with no diversification between Jackson and the rest of the Group, is as follows:

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	30 Jun 2017			31 Dec 2016
Split of the Group’s estimated Solvency Capital Requirements	% of undiversified Solvency Capital Requirements	% of diversified Solvency Capital Requirements		% of undiversified Solvency Capital Requirements	% of diversified Solvency Capital Requirements
Market	56%	71%		55%	68%
Equity	13%	21%		12%	19%
Credit	25%	40%		25%	41%
Yields (interest rates)	14%	8%		13%	7%
Other	4%	2%		5%	1%
Insurance	27%	21%		28%	23%
Mortality/morbidity	5%	2%		5%	2%
Lapse	16%	17%		16%	19%
Longevity	6%	2%		7%	2%
Operational/expense	10%	6%		11%	7%
FX translation	7%	2%		6%	2%

Reconciliation of IFRS equity to Group Solvency II Shareholder Own Funds

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Reconciliation of IFRS equity to Group Solvency II Shareholder Own Funds	30 Jun 2017 £bn		30 Jun 2016 £bn	31 Dec 2016 £bn
IFRS shareholders’ equity	15.4		14.6	14.7
Restate US insurance entities from IFRS onto local US statutory basis	(2.6)		(3.1)	(2.2)
Remove DAC, goodwill and intangibles	(3.9)		(3.9)	(3.8)
Add subordinated debt	6.1		5.7	6.3
Impact of risk margin (net of transitionals)	(3.6)		(3.3)	(3.4)
Add value of shareholder transfers	4.6		3.1	4.0
Liability valuation differences	10.7		9.7	10.5
Increase in value of net deferred tax liabilities (resulting from valuation differences above)	(1.4)		(1.2)	(1.3)
Other	0.3		(0.5)	0.0
Estimated Solvency II Shareholder Own Funds	25.6		21.1	24.8

The key items of the reconciliation as at 30 June 2017 are:

• £(2.6) billion represents the adjustment required to the Group’s shareholders’ funds in order to convert Jackson’s contribution from an IFRS basis to the local statutory valuation basis. This item also reflects a derecognition of Own Funds of £0.8 billion, equivalent to the value of 100 per cent of Risk Based Capital requirements (Company Action Level), as agreed with the Prudential Regulation Authority;
• £(3.9) billion due to the removal of DAC, goodwill and intangibles from the IFRS balance sheet;
• £6.1 billion due to the addition of subordinated debt which is treated as available capital under Solvency II but as a liability under IFRS;
• £(3.6) billion due to the inclusion of a risk margin for UK and Asia non-hedgeable risks, net of £2.1 billion from transitional measures (after recalculation for management’s estimate of the impact of operating and market conditions on the UK transitional as at 30 June 2017), all of which are not applicable under IFRS;
• £4.6 billion due to the inclusion of the value of future shareholder transfers from with-profits business (excluding the shareholders’ share of the with-profits estate, for which no credit is given under Solvency II), which is excluded from the determination of the Group’s IFRS shareholders’ funds;
• £10.7 billion due to differences in insurance valuation requirements between Solvency II and IFRS, with Solvency II Own Funds partially capturing the value of in-force business which is excluded from IFRS;
• £(1.4) billion due to the impact on the valuation of deferred tax assets and liabilities resulting from the other valuation differences noted above; and
• £0.3 billion due to other items, including the impact of revaluing loans, borrowings and debt from IFRS to Solvency II.

Sensitivity analysis

The estimated sensitivity of the Group shareholder Solvency II capital position to significant changes in market conditions is as follows:

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	30 Jun 2017			31 Dec 2016
Impact of market sensitivities	Surplus £bn	Ratio		Surplus £bn	Ratio
Notes 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. Subject to a floor of zero. Allowing for further transitional recalculation after the interest rate stress. US Risk Based Capital solvency position included using a stress of 10 times expected credit defaults.
Base position	12.9	202%		12.5	201%
Impact of:
20% instantaneous fall in equity markets	0.1	4%		0.0	3%
40% fall in equity markets1	(1.2)	(3)%		(1.5)	(7)%
50 basis points reduction in interest rates2,3	(0.4)	(9)%		(0.6)	(9)%
100 basis points increase in interest rates3	0.9	18%		1.0	13%
100 basis points increase in credit spreads4	(1.1)	(3)%		(1.1)	(3)%

The Group is positioned to withstand significant deteriorations in market conditions and we continue to use market hedges to manage some of this exposure across the Group, where we believe the benefit of the protection outweighs the cost. The sensitivity analysis above allows for predetermined management actions and those taken to date, but does not reflect all possible management actions which could be taken in the future.

UK Solvency II capital position^1,2

On the same basis as above, the estimated UK shareholder Solvency II surplus at 30 June 2017 was £5.3 billion, after allowing for management’s estimate of transitional measures reflecting operating and market conditions as at 30 June 2017. This relates to shareholder-backed business including future with-profits shareholder transfers, but excludes the shareholders’ share of the estate in line with Solvency II requirements.

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Estimated UK shareholder Solvency II capital position*	30 Jun 2017 £bn		30 Jun 2016 £bn	31 Dec 2016 £bn
* The UK shareholder capital position excludes the contribution to Own Funds and the Solvency Capital Requirement from ring-fenced with-profit funds and staff pension schemes in surplus. The solvency positions include management’s estimate of UK transitional measures reflecting operating and market conditions at each valuation date. The estimated UK shareholder surplus would increase from £5.3 billion to £6.0 billion at 30 June 2017 if the approved regulatory transitional amount was applied instead.
Own funds	13.0		10.6	12.0
Solvency capital requirement	7.7		7.7	7.4
Surplus	5.3		2.9	4.6
Solvency ratio	168%		138%	163%

While the surplus position of the UK with-profits funds remains strong on a Solvency II basis, it is ring-fenced from the shareholder balance sheet and is therefore excluded from both the Group and the UK shareholder Solvency II surplus results. The estimated UK with-profits funds Solvency II surplus at 30 June 2017 was £4.1 billion, after allowing for management’s estimate of transitional measures reflecting operating and market conditions as at 30 June 2017.

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Estimated UK with-profits Solvency II capital position	30 Jun 2017 £bn		30 Jun 2016 £bn	31 Dec 2016 £bn
Own funds	8.6		8.2	8.4
Solvency capital requirement	4.5		4.7	4.7
Surplus	4.1		3.5	3.7
Solvency ratio	192%		176%	179%

Reconciliation of UK with-profits IFRS unallocated surplus to Solvency II Own Funds²

A reconciliation between the IFRS unallocated surplus and Solvency II Own Funds for UK with-profits business is as follows:

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Reconciliation of UK with-profits funds	30 Jun 2017 £bn		30 Jun 2016 £bn	31 Dec 2016 £bn
IFRS unallocated surplus of UK with-profits funds	12.1		11.2	11.7
Adjustments from IFRS basis to Solvency II:
Value of shareholder transfers	(2.5)		(1.9)	(2.3)
Risk margin (net of transitional)	(0.6)		(0.7)	(0.7)
Other valuation differences	(0.4)		(0.4)	(0.3)
Estimated Solvency II Own Funds	8.6		8.2	8.4

Statement of independent review in respect of Solvency II Capital Position at 30 June 2017³

The methodology, assumptions and overall result have been subject to examination by KPMG LLP.

Notes

1. The UK shareholder capital position represents the consolidated capital position of the shareholder funds of The Prudential Assurance Company Ltd (PAC) and all its subsidiaries.
2. The UK with-profits capital position includes the PAC with-profits sub-fund, the Scottish Amicable Insurance Fund and the Defined Charge Participating Sub-Fund.
3. This review is separate from that set out in the Independent review report to Prudential plc.

II(d) Option schemes

The Group presently grants share options through four schemes, and exercises of the options are satisfied by the issue of new shares. Executive Directors and eligible employees based in the UK may participate in the UK savings-related share option scheme. Executives and eligible employees based in Asia as well as eligible employees based in Europe can participate in the international savings-related share option scheme while agents based in certain regions of Asia can participate in the international savings-related share option scheme for non-employees. Employees based in Dublin are eligible to participate in the Prudential International Assurance sharesave plan, which currently has no outstanding options in issue. Further details of the schemes and accounting policies are detailed in note B3.2 of the IFRS basis consolidated financial statements in the 2016 annual report.

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

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

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

The weighted average share price of Prudential plc for the period ended 30 June 2017 was £16.77 (30 June 2016: £12.85).

The following analyses show the movements in options for each of the option schemes for the period ended 30 June 2017.

UK savings-related share option scheme

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		Exercise period			Number of shares under options
Date of grant	Exercise price £	Beginning	End		Beginning of period	Granted	Exercised	Cancelled	Forfeited	Lapsed	End of period
16 Sep 11	4.66	01 Dec 16	31 May 17		36,006	–	(36,006)	–	–	–	–
21 Sep 12	6.29	01 Dec 17	31 May 18		119,886	–	–	–	(477)	(1,431)	117,978
20 Sep 13	9.01	01 Dec 16	31 May 17		73,812	–	(69,644)	–	(998)	(1,795)	1,375
20 Sep 13	9.01	01 Dec 18	31 May 19		70,258	–	(1,698)	–	(332)	(963)	67,265
23 Sep 14	11.55	01 Dec 17	31 May 18		759,088	–	(14,350)	(10,013)	(9,828)	(5,613)	719,284
23 Sep 14	11.55	01 Dec 19	31 May 20		390,761	–	(5,098)	(786)	(524)	(5,966)	378,387
22 Sep 15	11.11	01 Dec 18	31 May 19		933,241	–	(10,100)	(16,976)	(7,046)	(15,022)	884,097
22 Sep 15	11.11	01 Dec 20	31 May 21		223,807	–	(486)	(810)	(3,240)	(1,134)	218,137
21 Sep 16	11.04	01 Dec 19	31 May 20		719,147	–	(710)	(11,311)	(8,948)	(6,171)	692,007
21 Sep 16	11.04	01 Dec 21	31 May 22		164,428	–	–	(6,520)	(1,358)	–	156,550
					3,490,434	–	(138,092)	(46,416)	(32,751)	(38,095)	3,235,080

The total number of securities available for issue under the scheme is 3,235,080 which represents 0.125 per cent of the issued share capital at 30 June 2017.

The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £16.56.

International savings-related share option scheme

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		Exercise period			Number of shares under options
Date of grant	Exercise price £	Beginning	End		Beginning of period	Granted	Exercised	Cancelled	Forfeited	Lapsed	End of period
16 Sep 11	4.66	01 Dec 16	31 May 17		722	–	(722)	–	–	–	–
21 Sep 12	6.29	01 Dec 15	31 May 16		2,725	–	(2,725)	–	–	–	–
21 Sep 12	6.29	01 Dec 17	31 May 18		14,501	–	(154)	(225)	–	–	14,122
20 Sep 13	9.01	01 Dec 16	31 May 17		131,680	–	(126,373)	(149)	(7)	(5,151)	–
20 Sep 13	9.01	01 Dec 18	31 May 19		43,676	–	(1,396)	–	(600)	–	41,680
23 Sep 14	11.55	01 Dec 17	31 May 18		7,709	–	–	–	–	–	7,709
23 Sep 14	11.55	01 Dec 19	31 May 20		4,464	–	–	–	–	–	4,464
22 Sep 15	11.11	01 Dec 18	31 May 19		23,556	–	–	–	–	–	23,556
22 Sep 15	11.11	01 Dec 20	31 May 21		3,240	–	–	–	–	–	3,240
21 Sep 16	11.04	01 Dec 19	31 May 20		15,516	–	–	–	–	–	15,516
					247,789	–	(131,370)	(374)	(607)	(5,151)	110,287

The total number of securities available for issue under the scheme is 110,287 which represents 0.004 per cent of the issued share capital at 30 June 2017.

The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £16.76.

Prudential International Assurance sharesave plan

There are no securities available for issue under the scheme at 30 June 2017.

Non-employee savings-related share option scheme

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		Exercise period			Number of shares under options
Date of grant	Exercise price £	Beginning	End		Beginning of period	Granted	Exercised	Cancelled	Forfeited	Lapsed	End of period
16 Sep 11	4.66	01 Dec 16	31 May 17		29,936	–	(29,936)	–	–	–	–
21 Sep 12	6.29	01 Dec 17	31 May 18		28,001	–	–	–	–	–	28,001
20 Sep 13	9.01	01 Dec 16	31 May 17		346,321	–	(337,618)	(300)	–	–	8,403
20 Sep 13	9.01	01 Dec 18	31 May 19		406,850	–	–	(405)	–	–	406,445
23 Sep 14	11.55	01 Dec 17	31 May 18		596,435	–	–	(10,530)	–	–	585,905
23 Sep 14	11.55	01 Dec 19	31 May 20		502,793	–	–	(4,932)	(1,298)	–	496,563
22 Sep 15	11.11	01 Dec 18	31 May 19		480,825	–	–	(8,199)	–	–	472,626
22 Sep 15	11.11	01 Dec 20	31 May 21		405,994	–	–	(2,700)	–	–	403,294
21 Sep 16	11.04	01 Dec 19	31 May 20		334,276	–	–	–	–	–	334,276
21 Sep 16	11.04	01 Dec 21	31 May 22		199,230	–	–	–	–	–	199,230
					3,330,661	–	(367,554)	(27,066)	(1,298)	–	2,934,743

The total number of securities available for issue under the scheme is 2,934,743 which represents 0.113 per cent of the issued share capital at 30 June 2017.

The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £16.86.

II(e) Foreign currency source of key metrics

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

Free surplus and IFRS half year 2017 results

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	Underlying free surplus generated for total insurance and asset management operations %	Pre-tax operating profit % notes 2,3,4	Shareholders’ funds % notes 2,3,4
US dollar linked1	11	22	21
Other Asia currencies	19	18	15
Total Asia	30	40	36
UK sterling3,4	40	14	52
US dollar4	30	46	12
Total	100	100	100

EEV half year 2017 results

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	Post-tax new business profits %	Post-tax operating profit % notes 2,3,4	Shareholders’ funds % notes 2,3,4
Notes US dollar linked comprise the Hong Kong and Vietnam operations where the currencies are pegged to the US dollar and the Malaysia and Singapore operations where the currencies are managed against a basket of currencies including the US dollar. Includes long-term, asset management business and other businesses. For operating profit and shareholders’ funds, UK sterling includes amounts in respect of UK insurance operations, M&G and central operations. Operating profit for central operations includes amounts for corporate expenditure for Group Head Office as well as Asia Regional Head Office which is incurred in HK dollars. For shareholders’ funds, the US dollar grouping includes US dollar denominated core structural borrowings. Sterling operating profits include all interest payable as sterling denominated, reflecting interest rate currency swaps in place.
US dollar linked1	52	44	37
Other Asia currencies	12	16	13
Total Asia	64	60	50
UK sterling3,4	10	9	30
US dollar4	26	31	20
Total	100	100	100

II(f) Reconciliation between IFRS and EEV shareholders’ funds

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

Download II(f) Reconciliation between IFRS and EEV shareholders' funds as Excel file

	2017 £m		2016 £m
	30 Jun		30 Jun	31 Dec
Notes The EEV shareholders’ funds comprises the present value of the shareholders’ interest in the value of in-force business, net worth of long-term business operations and IFRS shareholders’ funds of asset management and other operations. The value of in-force business reflects the present value of future shareholder cash flows from long-term in-force business which are not captured as shareholders’ interest on an IFRS basis. Net worth represents the net assets for EEV reporting purposes that reflect the regulatory basis position, sometimes with adjustments to achieve consistency with the IFRS treatment of certain items. Other adjustments represent asset and liability valuation differences between IFRS and the local regulatory reporting basis used to value net worth for long-term insurance operations. For the UK, this would be the difference between IFRS and Solvency II. It also includes the mark to market of the Group’s core borrowings which are fair valued under EEV but not IFRS. The most significant valuation differences relate to changes in the valuation of insurance liabilities. For example, in Jackson where IFRS liabilities are higher than the local regulatory basis as they are principally based on policyholder account balances (with deferred acquisition costs recognised as assets) whereas the local regulatory basis used for EEV is based on future cash flows due to the policyholder on a prudent basis with consideration of an expense allowance as applicable, but with no separate deferred acquisition cost asset.
EEV shareholders’ funds	40,520		34,981	38,968
Less: Value of in-force business of long-term business note (a)	(26,104)		(21,785)	(24,937)
Deferred acquisition costs assigned zero value for EEV purposes	9,076		8,068	9,170
Othernote (b)	(8,043)		(6,659)	(8,535)
IFRS shareholders’ funds	15,449		14,605	14,666

II(g) Reconciliation of APE new business sales to earned premiums

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

Download II(g) Reconciliation of APE new business sales to earned premiums as Excel file

	2017 £m		2016 £m
	Half year		Half year	Full year
Notes 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. 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; APE includes new policies written in the period which are classified as investment contracts without discretionary participation features under IFRS 4, arising mainly in Jackson for guaranteed investment contracts and in the UK for certain unit-linked savings and similar contracts. These are excluded from gross premiums earned and recorded as deposits; APE new business sales are annualised while gross premiums earned are recorded only when revenues are due; and For the purpose of reporting APE new business sales, we include the Group’s share of amounts sold by the Group’s insurance joint ventures and associate. Under IFRS, joint ventures and associates are equity accounted and so no amounts are included within gross premiums earned.
Annual premium equivalents (APE) as published	3,624		2,980	6,320
Adjustment to include 100% of single premiums on new business sold in the periodnote (a)	15,286		12,379	25,057
Contribution from the sold Korea life business	–		88	192
Premiums from in-force business and other adjustmentsnote (b)	3,195		2,891	7,412
Gross premiums earned	22,105		18,338	38,981
Outward reinsurance premiums	(947)		(944)	(2,020)
Earned premiums, net of reinsurance as shown in the IFRS financial statements	21,158		17,394	36,961