Chief Financial Officer’s report on the
2017 first half financial performance

Download IFRS profits for 2017 compared to 2016, with % change, in Actual Exchange Rate and Constant Exchange Rate as Excel file

	Actual exchange rate				Constant exchange rate
	Half year 2017 £m	Half year 2016 £m	Change %		Half year 2016 £m	Change %
Operating profit before tax based on longer-term investment returns
Long-term business:
Asia1	870	667	30		752	16
US	1,079	888	22		1,010	7
UK	480	473	1		473	1
Long-term business operating profit before tax1	2,429	2,028	20		2,235	9
UK general insurance commission	17	19	(11)		19	(11)
Asset management business:
M&G	248	225	10		225	10
Prudential Capital	6	13	(54)		13	(54)
Eastspring Investments	83	61	36		69	20
US	(6)	(12)	50		(13)	54
Other income and expenditure8	(419)	(333)	(26)		(342)	(23)
Total operating profit based on longer-term investment returns before tax and interest received from tax settlement1	2,358	2,001	18		2,206	7
Interest received from tax settlement	–	43	n/a		43	n/a
Total operating profit based on longer-term investment returns before tax1	2,358	2,044	15		2,249	5
Non-operating items:
Result attaching to the sold Korea life business	61	40	53		47	30
Other non-operating items8	(605)	(1,420)	57		(1,619)	63
Profit before tax attributable to shareholders	1,814	664	173		677	168
Tax (charge) credit attributable to shareholders’ returns	(309)	23	n/a		43	n/a
Profit for the period attributable to shareholders	1,505	687	119		720	109

IFRS earnings per share

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	Actual exchange rate				Constant exchange rate
	Half year 2017 pence	Half year 2016 pence	Change %		Half year 2016 pence	Change %
Basic earnings per share based on operating profit after tax	70.0	61.3	14		67.6	4
Basic earnings per share based on total profit after tax	58.7	26.9	118		28.2	108

IFRS operating profit based on longer-term investment returns

Total IFRS operating profit increased by 5 per cent¹ (15 per cent on an actual exchange rate basis) in the first half of 2017 to £2,358 million.

• Asia total operating profit of £953 million was 16 per cent¹ higher (31 per cent on an actual exchange rate basis), with continued strong growth in both life insurance and asset management through Eastspring Investments.
• US total operating profit at £1,073 million increased by 8 per cent (22 per cent increase on an actual exchange rate basis), reflecting increased levels of fee income on higher variable annuity account balances.
• UK total operating profit of £497 million was in line with the first half of 2016, with lower shareholder annuity profits offset by larger contributions from management actions.
• M&G operating profit was 10 per cent higher at £248 million, driven by increased funds under management as a result of asset inflows and positive markets.

Life insurance operations: Taken together, IFRS operating profit from our life insurance operations in Asia, the US and the UK increased 9 per cent¹ to £2,429 million (20 per cent on an actual exchange rate basis).

IFRS operating profit in our life insurance operations in Asia was 16 per cent¹ higher at £870 million (up 30 per cent on an actual exchange rate basis), as a result of the continued growth of our in-force book of recurring premium business. Insurance margin was 24 per cent higher and accounted for 69 per cent of operating income⁹, reflecting our ongoing preference for health and protection. Following strong recent growth in sales volumes, particularly in health and protection through our agency channel, the contribution to IFRS operating profit from China and Hong Kong combined has become more significant to the overall total, accounting for 23 per cent compared with 17 per cent one year ago. IFRS operating profit from Indonesia was 5 per cent higher (up 20 per cent on an actual exchange rate basis) and on the same basis Singapore was 6 per cent higher (up 20 per cent on an actual exchange rate basis).

In the US, life IFRS operating profit was up 7 per cent at £1,079 million (up 22 per cent on an actual exchange rate basis), reflecting increased profits from our variable annuity business. US equity markets rallied towards the end of 2016 and have risen further during the first half of 2017, which together with continued positive net asset flows of £2.0 billion, has led to separate account balances that were on average 16 per cent higher than in the prior year period. As a result, fee income was up 15 per cent at £1,145 million driven by fees earned on separate account assets. Spread-based income decreased by 6 per cent, as anticipated, reflecting the impact of lower yields on our fixed annuity portfolio.

UK life IFRS operating profit increased by 1 per cent to £480 million. Within this total, the contribution from our core in-force book has remained relatively stable at £288 million (2016: £306 million). Profits from new annuity business reduced to £4 million from £27 million in the prior period, reflecting our withdrawal from this market. We have taken a number of asset and liability actions (including longevity reinsurance) in the first half of 2017 to improve portfolio efficiency, which have generated combined profits of £188 million (2016: £140 million).

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

Shareholder-backed policyholder liabilities and net liability flows¹⁰

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	Actual exchange rate					Actual exchange rate
	Half year 2017 £m					Half year 2016 £m
	At 1 January 2017	Net liability flows11	Market and other movements	At 30 June 2017		At 1 January 2016	Net liability flows11	Market and other movements	At 30 June 2016
Asia12	32,851	1,016	1,173	35,040		25,032	977	4,135	30,144
US	177,626	1,958	(1,805)	177,779		138,913	2,855	17,387	159,155
UK	56,158	(1,167)	1,500	56,491		52,824	(1,699)	4,286	55,411
Total Group	266,635	1,807	868	269,310		216,769	2,133	25,808	244,710

Focusing on the business supported by shareholder capital, which generates the majority of the life profit, in the first half of 2017 net flows into our businesses were overall positive at £1.8 billion. This was driven by our US and Asia operations, as we continue to focus on both retaining our existing customers and attracting new business to drive long-term value creation. The outflow from our UK operations primarily reflects the run-off of the in-force annuity portfolio following our withdrawal from selling new annuity business. This decrease in shareholder liabilities has been more than offset by the flows into the with-profits funds of £1.6 billion, as shown in the table below. Positive investment markets in the first half have partly been offset by currency effects as sterling strengthened over the period, increasing liabilities by £0.9 billion. In total, business flows and market movements have increased policyholder liabilities from £266.6 billion to £269.3 billion.

Policyholder liabilities and net liability flows in with-profits business^10,13

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	Actual exchange rate					Actual exchange rate
	Half year 2017 £m					Half year 2016 £m
	At 1 January 2017	Net liability flows11	Market and other movements	At 30 June 2017		At 1 January 2016	Net liability flows11	Market and other movements	At 30 June 2016
Asia	29,933	2,295	1,053	33,281		20,934	1,551	4,355	26,840
UK	113,146	1,574	3,729	118,449		100,069	582	6,417	107,068
Total Group	143,079	3,869	4,782	151,730		121,003	2,133	10,772	133,908

Policyholder liabilities in our with-profits business have increased by 6 per cent to £151.7 billion in the first half of 2017. This reflects the growing popularity of PruFund with consumers seeking protection from the impact of volatile market conditions. During the first half of 2017, net liability flows increased to £3.9 billion across our Asia and UK operations. As returns from these funds are smoothed and shared with customers, the emergence of shareholder profit is more gradual. The business, nevertheless, remains an important source of shareholder value.

Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver¹⁴

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	Actual exchange rate								Constant exchange rate
	Half year 2017				Half year 2016				Half year 2016
	Operating profit1 £m	Average liability £m	Margin bps		Operating profit1 £m	Average liability £m	Margin bps		Operating profit1 £m	Average liability £m	Margin bps
* The ratio of acquisition costs is calculated as a percentage of APE sales including with-profits sales. Acquisition costs include only those relating to shareholder-backed business.
Spread income	583	89,314	131		556	80,146	139		613	85,708	143
Fee income	1,279	164,152	156		989	129,054	153		1,118	143,526	156
With-profits	172	132,701	26		162	114,109	28		165	115,945	28
Insurance margin	1,152				898				1,013
Margin on revenues	1,138				946				1,051
Expenses:
Acquisition costs*	(1,241)	3,624	(34)%		(1,027)	2,980	(34)%		(1,155)	3,296	(35)%
Administration expenses	(1,131)	259,451	(87)		(879)	216,075	(81)		(983)	236,974	(83)
DAC adjustments	186				132				149
Expected return on shareholder assets	103				111				124
	2,241				1,888				2,095
Longevity reinsurance and other management actions to improve solvency	188				140				140
Operating profit based on longer-term investment returns1	2,429				2,028				2,235

We continue to maintain our preference for higher-quality sources of income such as insurance margin and fee income. We favour insurance margin because it is relatively insensitive to the equity and interest rate cycle, and prefer fee income to spread income because it is more capital-efficient. In line with this approach, on a constant exchange rate basis, in the first half of 2017, insurance margin has increased by 14 per cent¹ (up 28 per cent on an actual exchange rate basis) and fee income by 14 per cent¹ (up 29 per cent on an actual exchange rate basis), while spread income declined by 5 per cent¹ (up 5 per cent on an actual exchange rate basis). Administration expenses increased to £1,131 million¹ (2016: £983 million) as the business continues to expand. The expense ratio has grown from 83 basis points to 87 basis points, reflecting country mix and the continued increase in US producers selecting asset-based commissions, which are treated as an administrative expense in this analysis.

Asset management external funds under management^15,16

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	Actual exchange rate					Actual exchange rate
	Half year 2017 £m					Half year 2016 £m
	At 1 January 2017	Net flows	Market and other movements	At 30 June 2017		At 1 January 2016	Net flows	Market and other movements	At 30 June 2016
M&G	136,763	7,179	5,176	149,118		126,405	(6,966)	10,217	129,656
Eastspring Investments17	38,042	2,273	4,281	44,596		30,281	(412)	2,859	32,728
Total asset management	174,805	9,452	9,457	193,714		156,686	(7,378)	13,076	162,384
Total asset management (including MMF)	182,519	9,951	9,571	202,041		162,692	(6,722)	13,835	169,805

Asset management: Movements in asset management operating profit are also primarily influenced by changes in the scale of these businesses, as measured by funds managed on behalf of external institutional and retail customers and our internal life insurance operations.

In the first half of 2017, average assets under management in our asset management businesses in the UK and Asia benefited from net inflows of assets and favourable markets, driving higher fee revenues. Reflecting this, IFRS operating profit from M&G increased by 10 per cent to £248 million and by 20 per cent at Eastspring Investments (up 36 per cent on an actual exchange rate basis) to £83 million.

M&G’s external assets under management have benefited from a strong recovery in net flows, reflecting improvements in investment performance and supportive markets. External net inflows totalled £7.2 billion (2016: net outflows of £7.0 billion), with strong contributions from European investors in the Optimal Income Fund, Global Floating High Yield Fund and multi-asset fund range, and from institutional clients investing in illiquid credit strategies. External assets under management at 30 June 2017 were £149.1 billion, up 9 per cent since the start of the year. Internal assets managed on behalf of Prudential’s life operations also benefited from strong markets, rising 3 per cent and taking total assets under management to £281.5 billion (31 December 2016: £264.9 billion). IFRS operating profit increased 10 per cent to £248 million, consistent with the year-on-year increase in average assets under management and reflecting a cost-income ratio of 53 per cent. M&G’s full-year cost-income ratio is typically higher than for the first half, as its cost base is weighted towards the second half of the year (half year 2016: 52 per cent, full year 2016: 59 per cent).

Eastspring also attracted good levels of net inflows¹⁷ in the first half across its equity, fixed income and balanced fund range, totalling £2.3 billion. Including money market funds and the assets managed for internal life operations, Eastspring’s total assets under management increased to £130.5 billion (31 December 2016: £117.9 billion), while the cost-income ratio improved to 55 per cent (2016: 56 per cent), driving a 20 per cent increase in IFRS operating profits to £83 million (2016: £69 million).

Net central expenditure

Higher interest costs related to the debt issued in 2016 contributed to an increase in net central expenditure of £77 million to £419 million (2016: £342 million).

IFRS non-operating items⁸

IFRS non-operating items consist of short-term fluctuations of negative £(573) million (2016: £1,580 million), the results attaching to the sold life business in Korea of £61 million (2016: £47 million), and the amortisation of acquisition accounting adjustments of £32 million (2016: £39 million) arising principally from the REALIC business in 2012. Following its disposal in the first half of 2017 the ‘Result attaching to the sold Korea life business’ represents the recognition upon disposal in the income statement of cumulative foreign exchange gains previously recognised in other comprehensive income, which has no overall impact on shareholders’ equity. The 2016 comparative figure represents the profit before tax of the Korea life business in the first half of 2016.

Short-term investment fluctuations represent the most significant component of non-operating items and are discussed further below.

IFRS short-term investment fluctuations

IFRS operating profit is based on longer-term investment return assumptions. The difference between actual investment returns recorded in the income statement and the assumed longer-term returns is reported within short-term fluctuations in investment returns. In the first half of 2017, the total short-term fluctuations in investment returns relating to the life operations were negative £(704) million, comprising positive £41 million for Asia, negative £(754) million in the US and positive £9 million in the UK.

In the US, Jackson provides certain guarantees on its annuity products, the value of which would typically rise when equity markets fall and long-term interest rates decline. Jackson includes the expected cost of hedging when pricing its products and charges fees for these guarantees which are used, as necessary, to purchase downside protection in the form of options and futures to mitigate the effect of equity market falls, and swaps and swaptions to cushion the impact of drops in long-term interest rates. Under IFRS, accounting for the movement in the valuation of these derivatives, which are all fair-valued, is asymmetrical to the movement in guarantee liabilities, which are not fair-valued in all cases. Jackson designs its hedge programme to protect the economics of the business from large movements in investment markets and accepts the variability in accounting results. The negative short-term fluctuations of £(754) million in the first half are mainly attributable to the net value movement in the period of the hedge instruments held to manage market exposures primarily and reflect the positive equity market performance in the US during the period.

The positive short-term fluctuations in investment returns for other operations of £131 million (2016: negative £(192) million) principally reflect unrealised value movements on financial instruments.

IFRS effective tax rates

In the first half of 2017, the effective tax rate on IFRS operating profit based on longer-term investment returns was broadly in line with the equivalent rate last year at 24 per cent (2016: 23 per cent), with the difference being mainly due to the effect of prior year adjustments in the first half of 2017.

The effective tax rate on the total IFRS profit was 17 per cent in the first half of 2017 (2016: negative (3) per cent), driven by the smaller negative short-term investment fluctuations in the US insurance operations, which attract tax relief at a higher rate than the rates at which profits are taxed elsewhere in the Group.

The main driver of the Group’s effective tax rate is the mix of the profits between countries with higher tax rates (such as US, Indonesia and Malaysia), and countries with lower tax rates (such as Hong Kong, Singapore and the UK).

The proposed changes to the UK tax rules for utilisation of brought forward tax losses and the deductibility of interest are not expected to impact the Group’s effective tax rate. No substantive US tax reform proposals which require material consideration have been issued as yet.

Total tax contribution

The Group continues to make significant tax contributions in the countries in which it operates, with £1,595 million remitted to tax authorities in the first half of 2017. This was higher than the equivalent amount of £1,293 million in the first half of 2016 due to an increase in corporation tax payments (up from £287 million to £535 million). This was principally because of increases in the US and UK, of which a significant proportion is an increase in the amount paid on profits taxable at policyholder rather than shareholder rate.

Publication of tax strategy

In the first half of 2017, the new UK requirement for large UK businesses to publish their tax strategy came into effect. Prudential’s tax strategy, together with further details on tax payments made in 2016, have been made available on the Group’s website.

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

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	Actual exchange rate								Constant exchange rate
	Half year 2017 £m			Half year 2016 £m		Change %			Half year 2016 £m		Change %
	APE sales	New business profit		APE sales	New business profit	APE sales	New business profit		APE sales	New business profit	APE sales	New business profit
Asia1	1,943	1,092		1,605	821	21	33		1,814	928	7	18
US	960	436		782	311	23	40		889	354	8	23
UK	721	161		593	125	22	29		593	125	22	29
Total Group1	3,624	1,689		2,980	1,257	22	34		3,296	1,407	10	20

Life insurance new business profit was up 20 per cent¹ (34 per cent on an actual exchange rate basis) at £1,689 million, reflecting a strong underlying increase in Asia, Jackson and the UK driven by higher volumes and better new business economics. Life insurance new business APE sales increased by 10 per cent¹ (22 per cent on an actual exchange rate basis) to £3,624 million.

In Asia, new business profit was 18 per cent¹ higher at £1,092 million, driven by a combination of growth in sales volumes, improvements in the mix of sales and favourable economic effects. We continue to favour new business premiums that are long-term and recurring in nature and with a high proportion of health and protection, as these are characteristics that mean our income is less sensitive to market cyclicality and variability in economic conditions. Reflecting this and confirming the quality of our new business, regular premiums accounted for 94 per cent of APE sales while sales of health and protection increased by 17 per cent¹. New business profit from agency-driven health and protection was up 23 per cent and has resulted in a significant improvement in the overall new business economics across the region compared with the prior year.

Headline APE sales increased by 7 per cent¹ to £1,943 million in the first half, which is higher than in the whole of 2012¹ (on both constant and actual exchange rate basis), highlighting the consistency in performance from our broad and diversified new business franchise. As reported previously, the business took the decision in the first half of 2016 to pull back from the third-party broker channel in Hong Kong, which is reflected in a 7 per cent decline in APE sales in this market. Excluding the broker channel in Hong Kong, APE sales in Asia increased by 18 per cent, reflecting the improved performance in our agency and bancassurance channels.

We have continued to see strong demand for our products in China, where APE sales increased by 58 per cent and new business profit rose by 179 per cent, reflecting our efforts to grow health and protection sales through the agency channel. In Hong Kong, we are also increasing our focus on health and protection, with new business profit in this segment 20 per cent higher overall. As expected, we are starting to see some moderation in the level of sales from Mainland China into Hong Kong, which is expected to continue in the second half of the year. In Indonesia, sales have stabilised as we continue to take steps to broaden our product offering, improve our productivity and accelerate the pace of business automation.

In Singapore and Malaysia, APE sales increased by 23 per cent and 10 per cent respectively, as we broaden our product offering and increase the productivity of our distribution channels. Including strong contributions from Vietnam, India and Taiwan, a total of eight countries delivered at least double-digit growth in APE sales and new business profit.

In the US, new business profit increased by 23 per cent to £436 million, reflecting volume growth and the positive economic effect of the 82 basis point rise in 10-year Treasury yields since 30 June 2016. Total APE sales were up 8 per cent to £960 million, including wholesale business of £206 million (2016: £144 million).

Although industry volumes in the variable annuity market remain subdued following the declines in 2016, Jackson has continued to outperform the market¹⁸ with an increase in variable annuity sales of 5 per cent in the first half of 2017, reflecting the competitive strengths of Jackson’s product offering and distribution capability. Total net inflows into Jackson’s separate account asset balances, which drive fee-based earnings on variable annuity business, remain positive at £2.0 billion (2016: £2.3 billion).

Our UK life business has emerged successfully from the regulatory change in the retail savings and retirement market, driven by the strength of investment performance of its with-profits fund and the transparent structure of PruFund, with its distinctive smoothing process. By extending access to the PruFund investment option to a wider range of product wrappers, we have been able to achieve rapid growth in market segments such as flexible personal pensions and ISAs. Reflecting this continuing success, new business profit increased by 29 per cent to £161 million on APE sales growth of 22 per cent.

APE sales of products that offer access to PruFund’s smoothed multi-asset fund returns were up 29 per cent, within which flexible personal pensions grew by 76 per cent. As a result, PruFund assets under management of £30 billion at 30 June 2017 were 22 per cent higher than at the start of the year.

Download Free surplus generation as Excel file

	Actual exchange rate					Constant exchange rate
	Half year 2017 £m		Half year 2016 £m	Change %		Half year 2016 £m	Change %
Asia1	836		653	28		739	13
US	797		693	15		788	1
UK	577		570	1		570	1
M&G	201		181	11		181	11
Prudential Capital	5		11	(55)		11	(55)
Underlying free surplus generated from in-force life business and asset management1	2,416		2,108	15		2,289	6
Investment in new business1	(571)		(493)	(16)		(551)	(4)
Underlying free surplus generated1	1,845		1,615	14		1,738	6
Market related movements, timing differences and other movements	(211)		(38)
Net cash remitted by business units	(1,230)		(1,118)
Total movement in free surplus	404		459
Free surplus at 30 June	6,979		5,763

Free surplus generation is the financial metric we use to measure the internal cash generation of our business operations and is based on the capital regimes which apply locally in the various jurisdictions in which our life businesses operate. For life insurance operations it represents amounts maturing from the in-force business during the year, net of amounts reinvested in writing new business. For asset management it equates to post-tax IFRS profit for the period.

We drive free surplus generation by targeting markets and products that have low-strain, high-return and fast payback profiles and by delivering both good service and value to improve customer retention. Our ability to generate both growth and cash is a distinctive feature of Prudential.

In the first half of 2017, underlying free surplus generation from our in-force life insurance and asset management business increased by 6 per cent¹ to £2,416 million (15 per cent on an actual exchange rate basis). This reflects our growing scale and the highly capital-generative nature of our business model. In Asia, growth in the in-force life portfolio, combined with post-tax asset management profits from Eastspring, contributed to free surplus generation of £836 million, up 13 per cent¹. In the US, free surplus generation increased by 1 per cent with growth in the in-force portfolio being offset by lower spread earnings as investment yields fell. In the UK, free surplus generation increased by 1 per cent to £577 million, including management actions to improve the solvency position of our UK life business of £193 million (2016: £190 million).

Although new business profit increased by 20 per cent¹, the amount of free surplus that was invested in writing new business in the period was only 4 per cent¹ higher at £571 million (2016: £551 million).

Asia remains the primary destination for reinvestment of capital given its higher margin organic growth opportunities. Investment in new business was 10 per cent¹ higher at £283 million, mainly reflecting volume growth and mix effects. We continue to generate internal rates of return in the region in excess of 20 per cent, with an average payback period of three years.

In the US, new business investment increased by 3 per cent to £246 million, compared with a 23 per cent increase in new business profit, and Jackson’s overall strain remains low. Jackson’s new business continues to be written at an overall internal rate of return in excess of 20 per cent and short payback periods averaging three years.

The new business investment in the UK was £42 million in the first half of 2017. This was £14 million lower than the £56 million invested in 2016 following our withdrawal from selling non-profit retail annuities which have higher capital requirements than other lines of business.

After financing reinvestment in new business and funding cash remittances from the business units to Group, the closing value of free surplus in our life and asset management operations was £7 billion at 30 June 2017.

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

Business unit remittance¹⁹

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	Actual exchange rate
	Half year 2017 £m		Half year 2016 £m
Net cash remitted by business units:
Asia	350		258
US	475		339
UK life	215		215
M&G	175		150
Prudential Capital	15		25
Other UK	–		131
Net cash remitted by business units	1,230		1,118
Holding company cash at 30 June	2,657		2,546

Cash remitted to the corporate centre in the first half of 2017 totalled £1,230 million, 10 per cent higher than in 2016. Asia’s net remittance was £350 million in the first half of 2017 (2016: £258 million), reflecting both business growth and the effect of weaker sterling. For similar reasons, Jackson’s remittance also increased to £475 million in the first half of 2017, up from £339 million paid in the first half of 2016. The remittances from UK life and M&G were broadly in line with the first half of 2016.

Cash remitted to the corporate centre in the first half of 2017 was used to meet central costs of £226 million (2016: £199 million) and pay the 2016 second interim ordinary dividend. Reflecting these and other movements in the period, total holding company cash at 30 June 2017 was £2,657 million compared with £2,626 million at the end of 2016.

Download EEV profits for 2017 compared to 2016, with % change, in Actual Exchange Rate and Constant Exchange Rate as Excel file

	Actual exchange rate					Constant exchange rate
	Half year 2017 £m		Half year 2016 £m	Change %		Half year 2016 £m	Change %
Post-tax operating profit based on longer-term investment returns
Long-term business:
Asia1	1,641		1,209	36		1,361	21
US	888		694	28		789	13
UK	465		384	21		384	21
Long-term business post-tax operating profit1	2,994		2,287	31		2,534	18
UK general insurance commission	14		15	(7)		15	(7)
Asset management business:
M&G	201		181	11		181	11
Prudential Capital	5		11	(55)		11	(55)
Eastspring Investments	73		53	38		60	22
US	(4)		(8)	50		(9)	56
Other income and expenditure20	(413)		(319)	(29)		(326)	(27)
Post-tax operating profit based on longer-term investment returns before interest received from tax settlement1	2,870		2,220	29		2,466	16
Interest received from tax settlement	–		37	n/a		37	n/a
Post-tax operating profit based on longer-term investment returns1	2,870		2,257	27		2,503	15
Non-operating items:
Result attaching to the sold Korea life business	–		(11)	100		(12)	100
Other non-operating items20	427		(852)	n/a		(985)	n/a
Post-tax profit for the period attributable to shareholders	3,297		1,394	137		1,506	119

EEV earnings per share

Download EEV earnings per share for 2017 compared to 2016, with % change, in Actual Exchange Rate and Constant Exchange Rate as Excel file

	Actual exchange rate					Constant exchange rate
	Half year 2017 pence		Half year 2016 pence	Change %		Half year 2016 pence	Change %
Basic earnings per share based on post-tax operating profit1	111.9		88.2	27		97.8	14
Basic earnings per share based on post-tax total profit	128.5		54.5	136		58.9	118

EEV operating profit

On an EEV basis, Group post-tax operating profit based on longer-term investment returns was 15 per cent¹ higher (27 per cent on an actual exchange rate basis) at £2,870 million in the first half of 2017, equating to an overall annualised return on opening embedded value of 15 per cent.

EEV operating profit includes new business profit from the Group’s life businesses, which increased by 20 per cent¹ (34 per cent on an actual exchange rate basis) to £1,689 million. It also includes life in-force profit of £1,305 million, which was 16 per cent¹ higher reflecting the growth in our in-force business as well as the beneficial impact of higher long-term interest rates compared with 30 June 2016. This is most evident in the profit from the unwind of the in-force business, which was 21 per cent higher¹ at £1,043 million (2016: £862 million). Experience and assumption changes were overall positive at £262 million (2016: £265 million), reflecting our ongoing focus on managing the in-force book for value.

In Asia, EEV life operating profit was up 21 per cent¹ to £1,641 million, reflecting growth in new business profit of 18 per cent¹ at £1,092 million. In-force profit was 27 per cent¹ higher at £549 million as the business continues to grow with discipline.

Jackson’s EEV life operating profit was up 13 per cent to £888 million, reflecting a 23 per cent increase in new business profit to £436 million and an increase in the contribution from in-force profit of 4 per cent to £452 million. The increase in our US EEV operating profit reflects positive interest rate effects and an increase in sales volume, partially offset by profits from favourable experience that were at a lower level than 2016.

In the UK, EEV life operating profit increased by 21 per cent to £465 million (2016: £384 million). The increase reflects higher sales volumes and the positive contribution from actions taken to improve the solvency of the UK business.

Capital position

Analysis of movement in Group shareholder Solvency II surplus²¹

Download Capital position for 2017 compared to 2016 as Excel file

	2017 £bn		2016 £bn
	Half year		Half year	Full year
Estimated Solvency II surplus at 1 January	12.5		9.7	9.7
Operating experience	1.7		1.2	2.7
Non-operating experience (including market movements)	–		(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)
Methodology and calibration changes	–		(0.1)	(0.3)
Estimated Solvency II surplus at end of period	12.9		9.1	12.5

The high quality and recurring nature of our operating capital generation and our disciplined approach to managing balance sheet risk has resulted in the Group shareholders’ Solvency II capital surplus being estimated at £12.9 billion^5,6 at 30 June 2017 (equivalent to a solvency ratio of 202 per cent) compared with £12.5 billion (201 per cent) at 31 December 2016.

Prudential’s designation as a Global Systemically Important Insurer (G-SII) was reaffirmed by the IAIS in November 2016, based on the updated methodology published in June 2016. Prudential is monitoring the development and potential impact of the policy measures and is continuing to engage with the PRA on the implications of the policy measures and Prudential’s designation as a G-SII.

Local statutory capital

All of our subsidiaries continue to hold appropriate capital positions on a local regulatory basis. In the UK, at 30 June 2017, The Prudential Assurance Company Limited and its subsidiaries had an estimated Solvency II shareholder surplus of £5.3 billion²² (equivalent to a solvency ratio of 168 per cent) and a with-profits surplus²³ of £4.1 billion (equivalent to a solvency ratio of 192 per cent).

Debt portfolio

The Group continues to maintain a high-quality defensively positioned debt portfolio. Shareholders’ exposure to credit is concentrated in the UK annuity portfolio and the US general account, mainly attributable to Jackson’s fixed annuity portfolio. The credit exposure is well diversified and 98 per cent of our UK portfolio and 97 per cent of our US portfolio are investment grade. During the first half of 2017 there were no default losses in the US or the UK portfolio and reported impairments were minimal (2016: £32 million) in the US portfolio.

Financing and liquidity

Shareholders’ net core structural borrowings

Download Shareholders’ net core structural borrowings as Excel file

	30 June 2017 £m				30 June 2016 £m				31 December 2016 £m
	IFRS basis	Mark to market value	EEV basis		IFRS basis	Mark to market value	EEV basis		IFRS basis	Mark to market value	EEV basis
* Net core structural borrowings as a proportion of IFRS shareholders’ funds plus net debt.
Total borrowings of shareholder-financed operations	6,614	673	7,287		5,966	426	6,392		6,798	422	7,220
Less: holding company cash and short-term investments	(2,657)	–	(2,657)		(2,546)	–	(2,546)		(2,626)	–	(2,626)
Net core structural borrowings of shareholder-financed operations	3,957	673	4,630		3,420	426	3,846		4,172	422	4,594
Gearing ratio*	20%				19%				22%

Our financing and central liquidity position remained strong throughout the period. Our central cash resources amounted to £2.7 billion at 30 June 2017 (31 December 2016: £2.6 billion).

In addition to its net core structural borrowings of shareholder-financed operations set out above, the Group also has access to funding via the money markets and has in place a global commercial paper programme. As at 30 June 2017, we had issued commercial paper under this programme totalling £10 million and US$1,058 million.

Prudential’s holding company currently has access to £2.6 billion of syndicated and bilateral committed revolving credit facilities, provided by 19 major international banks, expiring between 2021 and 2022. Apart from small drawdowns to test the process, these facilities have never been drawn, and there were no amounts outstanding at 30 June 2017. The medium-term note programme, the US shelf programme (platform for issuance of SEC registered public bonds in the US market), the commercial paper programme and the committed revolving credit facilities are all available for general corporate purposes and to support the liquidity needs of Prudential’s holding company and are intended to maintain a strong and flexible funding capacity.

Download Shareholders funds for 2017 compared with 2016 for IFRS and EEV as Excel file

	IFRS					EEV
	2017 £m		2016 £m			2017 £m		2016 £m
	Half year		Half year	Full year		Half year		Half year	Full year
Profit after tax for the period	1,505		687	1,921		3,297		1,394	4,516
Exchange movements, net of related tax	(224)		806	1,161		(1,045)		2,663	4,211
Cumulative exchange gain of Korea life business recycled to profit and loss account	(61)		–	–		–		–	–
Unrealised gains and losses on Jackson securities classified as available-for-sale24	300		1,094	31		–		–	–
Dividends	(786)		(935)	(1,267)		(786)		(935)	(1,267)
Mark to market value movements on Jackson assets backing surplus and required capital	–		–	–		31		138	(11)
Other	49		(2)	(135)		55		(165)	(367)
Net increase in shareholders’ funds	783		1,650	1,711		1,552		3,095	7,082
Shareholders’ funds at beginning of the period	14,666		12,955	12,955		38,968		31,886	31,886
Shareholders’ funds at end of the period	15,449		14,605	14,666		40,520		34,981	38,968
Shareholders’ value per share	597p		566p	568p		1,567p		1,356p	1,510p
Return on shareholders’ funds2	24%		24%	26%		15%		14%	17%

Group IFRS shareholders’ funds at 30 June 2017 increased by 5 per cent to £15.4 billion (31 December 2016: £14.7 billion on an actual exchange rate basis), driven by the strength of the operating result, offset by dividend payments of £786 million representing the second interim dividend for 2016. In the first half of the period, UK sterling strengthened relative to the US dollar and various Asian currencies. With approximately 48 per cent of the Group IFRS net assets (70 per cent of the Group’s EEV net assets) denominated in non-sterling currencies, this generated a negative exchange rate movement on net assets in the period. In addition, the fall in US long-term interest rates between the start and the end of the reporting period produced unrealised gains on fixed income securities held by Jackson accounted through other comprehensive income.

The Group’s EEV basis shareholders’ funds also increased by 4 per cent to £40.5 billion (31 December 2016: £39.0 billion on an actual exchange rate basis). On a per share basis the Group’s embedded value at 30 June 2017 equated to 1,567 pence, up from 1,510 pence at 31 December 2016.

Entrance into Nigeria

In July 2017 the Group acquired a majority stake in Zenith Life of Nigeria and formed exclusive bancassurance partnerships with Zenith Bank in Nigeria and Ghana. The acquisition and bancassurance partnerships will see Prudential enter the market in Nigeria, Africa’s largest economy, with a population of over 180 million. This demonstrates Prudential’s commitment to Africa following the launch of businesses in Ghana and Kenya in 2014, in Uganda in 2015 and Zambia in 2016.

Disposal of Korea

In May 2017, the Group completed the sale of the Group’s life insurance subsidiary in Korea, PCA Life Insurance Co., Ltd to Mirae Asset Life Insurance Co., Ltd. for KRW170 billion (equivalent to £117 million at 17 May 2017 closing rate).

As in previous years, the first interim dividend for 2017 has been calculated formulaically as one third of the prior year’s full-year ordinary dividend. The Board has approved a first interim dividend for 2017 of 14.50 pence per share, which equates to an increase of 12 per cent over the 2016 first interim dividend.

The Group’s dividend policy remains unchanged. The Board will maintain focus on delivering a growing ordinary dividend. In line with this policy, Prudential aims to grow the ordinary dividend by 5 per cent per annum. The potential for additional distributions will continue to be determined after taking into account the Group’s financial flexibility across a broad range of financial metrics and an assessment of opportunities to generate attractive returns by investing in specific areas of the business.