Prudential plc — Interim / Quarterly Report 2017

Sep 7, 2017

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Adding more to life

Prudential plc 2017 Half Year Financial Report

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By helping to take the fnancial risk out of life’s big decisions, - Prudential creates long term value for our customers, our shareholders and the communities we serve.

Adding more to life.

First interim dividend 14.5p +12% on half year 2016

Front cover: Prudential Vietnam customers Thanh Tam and Thi Tam. Back cover: Jackson customer Doris. Above: Prudential Chairman’s Challenge volunteer, Indonesia.

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Contents

• 1 Group overview 02 3 International Financial Reporting 02 Our performance Standards (IFRS) basis results 29 04 Group Chief Executive’s report 4 European Embedded Value (EEV)

• 2 Business performance 07 basis results 91 08 Chief Financial Officer’s report on the 2017 first half financial performance 5 Additional information 129

• 19 Group Chief Risk Officer’s report of the risks facing our business and how these are 130 Additional financial information managed 152 Risk factors 159 Corporate governance 160 Disclosure of interests of Directors 166 Shareholder information 167 How to contact us

Summary financials

IFRS operating proft based on longer‑term investment returns1 Underlying free surplus generated1,3 Life new business proft1,2 IFRS proft after tax6 Net cash remittances from business units	Half year 2017£m Half year 2016£m Change on actual exchange rate basis Change on constant exchange rate basis
	2,358 2,044 15% 5% 1,845 1,615 14% 6% 1,689 1,257 34% 20% 1,505 687 119% 109% 1,230 1,118 10% –
	Half year 2017£bn Full year 2016£bn Change on actual exchange rate basis 15.4 14.7 5% 40.5 39.0 4% 12.9 12.5 3%
IFRS shareholders’ funds EEV shareholders’ funds GroupSolvencyII capital surplus4,5

• 1 Following its sale in May 2017, the operating results exclude the contribution of the Korea life business. All comparative results have been similarly adjusted.

• 4 The Group shareholder capital position excludes the contribution to own funds and the solvency capital requirement from ring‑fenced with‑profits funds and staff pension schemes in surplus. The solvency positions include management’s estimate of transitional measures reflecting 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.

• 2 New business profit on business sold in the period, calculated in accordance with EEV principles.

• 3 Underlying free surplus generated based on operating movements from long‑term business (net of investment in new business) and that generated from asset management operations. Further information is set out in note 10 of the EEV basis results.

• 5 Before allowing for first interim dividend (31 December 2016: second interim dividend).

• 6 IFRS profit after tax reflects the combined effects of operating results, negative short‑term fluctuations in investment variances, results attaching to the sold Korea life business and the total tax charge for the period.

2017 Half Year Financial Report Prudential plc 1

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Our performance

Measuring our performance

To create sustainable economic value for our shareholders we focus on delivering growth and cash while maintaining appropriate capital. We aim to demonstrate how we generate profits under different accounting bases, reflecting the returns we generate on capital invested, and highlight the cash generation of our business.

What we measure and why

IFRS operating profit based on longer-term investment returns[2,3] £m

The Group’s business involves entering into long‑term contracts with customers, and hence the Group manages its associated assets and liabilities over a longer‑term time horizon. This enables the Group to manage a degree of short‑term market volatility. Therefore, IFRS operating profit based on longer‑term investment returns gives a more relevant measure of the performance of the business. Other items are excluded from IFRS operating profit to allow more relevant period on period comparisons of the trading operations of the Group, eg the effects of material corporate transactions are excluded.

Performance[1]

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CAGR
+14%
2,358
2,044
1,862
1,407 1,504
HY2013 HY2014 HY2015 HY2016 HY2017
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Group IFRS operating profit was 5 per cent higher on a constant currency basis (up 15 per cent on an actual exchange rate basis). The Group’s performance was driven by our Asia life and asset management operations which saw IFRS operating profit increase 16 per cent (up 31 per cent on an actual exchange rate basis) on growth in the in‑force portfolio. In the US, total IFRS operating profit was up 8 per cent (up 22 per cent on an actual exchange rate basis). In the UK, IFRS operating profit from our insurance and asset management operations increased by 4 per cent[11] .

EEV new business profit[3,4] £m

Life insurance products are, by their nature, long‑term and generate profit over a number of years. Embedded value reporting provides investors with a measure of the future profit streams of the Group. EEV new business profit reflects the value of future profit streams which are not fully captured in the period of sale under IFRS reporting.

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CAGR
+17%
1,689
1,186 1,257
899 1,001
HY2013 HY2014 HY2015 HY2016 HY2017
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EEV new business profit was 20 per cent higher (up 34 per cent on an actual exchange rate basis), reflecting higher sales volumes and more favourable economics.

EEV operating profit[3,4] £m

EEV operating profit is provided as an additional measure of profitability. This measure includes EEV new business profit, the change in the value of Group’s long‑term in‑force business, and profit from our asset management and other businesses. As with IFRS, EEV operating profit reflects the underlying results based on longer‑term investment returns.

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CAGR
+12%
2,870
2,257 2,257
1,815 1,933
HY2013 HY2014 HY2015 HY2016 HY2017
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Group EEV operating profit based on longer‑term investment returns was 15 per cent higher (27 per cent on an actual exchange rate basis), reflecting higher new business profits and the growth in profits from our in‑force business.

Group free surplus generation[3,5] £m

Free surplus generation is used to measure the internal cash generation of our business units. For insurance operations it represents amounts maturing from the in‑force business during the period less investment in new business and excludes other non‑operating items. For asset management it equates to post‑tax IFRS operating profit for the period.

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CAGR
+13%
1,845
1,615
1,406
1,150 1,220
HY2013 HY2014 HY2015 HY2016 HY2017
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Underlying free surplus generation increased by 6 per cent on a constant currency basis (up 14 per cent on an actual exchange rate basis), reflecting a higher contribution from our growing in‑force book of business and continued discipline of focusing on high‑return new business with fast payback periods.

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What we measure and why

Business unit remittances[6] £m

Remittances measure the cash transferred from business units to the Group. Cash flows across the Group reflect our aim of achieving a balance between ensuring sufficient net remittances from business units to cover the dividend (after corporate costs) and the use of cash for reinvestment in profitable opportunities available to the Group.

Performance[1]

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CAGR
+10%
1,230
1,068 1,118
974
844
HY2013 HY2014 HY2015 HY2016 HY2017
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Cash remittances from our business units to the Group increased by 10 per cent compared to 2016, with well‑balanced contributions across all of our geographic regions.

Group Solvency II capital surplus[7,10] £bn

Prudential is subject to the risk‑sensitive solvency framework required under European Solvency II Directives (Solvency II) as implemented by the Prudential Regulation Authority in the UK. The Solvency II surplus represents the aggregated capital (own funds) held by the Group, less solvency capital requirements.

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201% 202%
12.9
12.5
31 Dec 30 Jun
2016 2017
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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’s shareholders’ Solvency II capital surplus being estimated at £12.9 billion 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.

2017 objectives[3,8]

The Group has reported cumulative underlying free surplus generation of £11.1 billion since 2014, achieving our objective of generating over £10 billion of Group cumulative free surplus between 1 January 2014 and 31 December 2017 six months early. We remain on track to achieve the remaining Asia‑focused objectives by the end of this year.

We remain on track to achieve the remaining Asia‑focused objectives by the end of this year.	We remain on track to achieve the remaining Asia‑focused objectives by the end of this year.
Asia objectives3 2012 £m 2013 £m 2014 £m 2015 £m 2016 £m		Half year 2017 £m	CAGR (since 2012) %	Objectives 201710
Asia life and asset management IFRS operating proft
Full year Reported actuals 909 1,058 1,108 1,286 1,644 Constant exchange rate9 884 1,058 1,228 1,430 1,641 Constant exchange rate change % (year‑on‑year) – 20 16 16 15			17	>£1,826 million >15% CAGR
Half year Reported actuals 427 504 508 613 728 Constant exchange rate9 411 504 566 665 772 Constant exchange rate change % (year‑on‑year) – 23 12 17 16		953 889 15
Asia underlying free surplus generation
Full year Reported actuals 468 565 599 666 859 Constant exchange rate9 454 565 669 758 872 Constant exchange rate change % (year‑on‑year) – 24 18 13 15				£0.9 – £1.1 billion
Half year Reported actuals 194 290 303 344 425 Constant exchange rate9 185 290 336 380 459 Constant exchange rate change % (year‑on‑year) – 57 16 13 21		553 537 17
Groupobjective for cumulativeperiod 1 January2014 to 31 December 2017		Actual		Objective
	1 Jan 2014	to 30 Jun 2017	1 Jan 20	14 to 31 December 2017
Cumulative Group underlying free surplus generation5from 2014 onwards		£11.1 billion		> £10 billion

Notes

• 1 The comparative results shown above have been prepared using the actual exchange rates (AER) basis except where otherwise stated. Comparative results on a constant exchange rate (CER) basis are also shown in financial tables in the Chief Financial Officer’s report on the 2017 first half financial performance. CAGR is compound annual growth rate.

• 2 IFRS operating profit is management’s primary measure of profitability and provides an underlying operating result based on longer‑term investment returns and excludes non‑operating items. Further information on its definition and reconciliation to profit for the period is set out in note B1 of the IFRS financial statements.

• 3 Following its sale in May 2017, the operating results exclude the contribution of the Korea life business. All comparative results have been similarly adjusted. The relevant 2017 objective (Asia IFRS operating profit) has been adjusted.

4 Embedded value reporting provides investors with a measure of the future profit streams of the Group. The EEV basis results have been prepared in accordance with EEV Principles discussed in note 1 of the EEV basis results. A reconciliation between IFRS and the EEV shareholder funds is included in note II(f) of the Additional financial information.

• 5 Underlying free surplus generated comprises underlying free surplus generated from the Group’s long‑term business (net of investment in new business) and that generated from asset management operations. Further information is set out in note 10 of the EEV basis results.

Cash remitted to the Group forms part of the net cash flows of the holding company. A full holding company cash flow is set out in note II(a) of Additional financial information. This differs from the IFRS consolidated statement of cash flows which includes all cash flows relating to both policyholders and shareholders’ funds. The holding company cash flow is therefore a more meaningful indicator of the Group’s central liquidity. Estimated before allowing for first interim dividend.

6

7

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

8

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

9

• 10 The Group shareholder capital position excludes the contribution to own funds and the solvency capital requirement from ring‑fenced with‑profits funds and staff pension schemes in surplus. The solvency positions include management’s estimate of transitional measures reflecting 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.

11 Includes UK life insurance and M&G.

2017 Half Year Financial Report Prudential plc 3

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Group Chief Executive’s report – Mike Wells

Delivering value to our customers and shareholders

Our successful strategy, innovative products and strong execution have driven growth across all of our main performance measures.

Mike Wells Group Chief Executive

In the first half of 2017, the performance of the Group has been underpinned by the successful execution of our strategy, driven by the strength of our capabilities and the quality of our products.

Prudential helps to remove uncertainty from the most significant financial moments in the lives of our customers. We provide financial protection against unexpected events such as the diagnosis of critical illness or the loss of a loved one, the opportunity to turn savings into reliable retirement income and the ability to look to the future with confidence. At the same time, we put our customers’ money to work by investing in the real economy, fuelling growth and improving the quality of people’s lives in the communities in which we work.

Our strategy is focused on markets where the opportunities for us are strongest. In each of these markets, we are developing our product range and improving our distribution and technological capabilities in order to meet the needs of customers as fully as we can.

We are today also announcing an important step forward for our UK businesses. We are combining M&G and Prudential UK & Europe to create a savings and investments business focused on meeting growing customer demand for comprehensive financial solutions.

Combining these businesses will allow us to better leverage our considerable scale and capabilities. This will enable us to increase our growth prospects by providing better outcomes for our millions of customers.

Our first-half financial performance

We have continued to make progress in the first half, building on the positive business momentum seen in the second half of 2016.

Our life businesses in Asia remain the key driver of growth for the Group, with a double‑digit increase in our profitability, capital generation and cash metrics, as we continue to build out our capabilities and increase our scale across the region. We have also seen a positive performance from our asset management operations, with combined net inflows[1] from external clients at record levels for the period. In our UK life business, consumer appetite for our distinctive PruFund product proposition is supporting high levels of growth in new business sales, while in the US Jackson continues to outperform its peers in the variable annuity market[2] .

The Group remains well positioned for growth in its target markets and in the first six months of 2017 generated a 20 per cent[5] increase (34 per cent on an actual exchange rate basis) in new business profit[3] to £1,689 million. This reflects our continued prioritisation of growth in attractive product lines in each of Asia, the US and the UK.

Group IFRS operating profit based on longer‑term investment returns[4] increased by 5 per cent[5] (15 per cent on an actual exchange rate basis) to £2,358 million, reflecting growth in Asia, the US and in our UK asset management operations. IFRS operating profit continues to benefit from the recurring nature of our earnings and our focus on income from protection and fee business.

Free surplus generation[6] , our preferred measure of cash generation, increased by 6 per cent[5] (14 per cent on an actual exchange rate basis) to £1,845 million after financing investment in new business. With the first‑half contribution, we have now exceeded the financial objective we set in December 2013, to generate over £10 billion of Group cumulative free surplus between 1 January 2014 and 31 December 2017, six months early. We remain on track to achieve our Asia objectives by the end of this year.

In Asia, the addition of long‑term, high‑quality new business is building scale in our in‑force portfolio, which underpins growth and security in current and future earnings and cash generation. New business profit[3] was 18 per cent[5] higher (33 per cent on an actual exchange rate basis), with double‑digit percentage growth or higher in eight countries, driven by improvements in both agency and bancassurance channels and by our continued focus on health and protection. IFRS operating profit[4] in Asia increased by 16 per cent[5] , with free surplus generation[6] up 15 per cent[5] (up 31 per cent and 30 per cent on an actual exchange rate basis respectively). Our Asia‑based asset manager, Eastspring Investments, ended the period with total funds under management of £131 billion, 11 per cent higher on an actual exchange rate basis than at the start of the year.

In the US, Jackson’s variable annuity business continues to drive earnings, with IFRS operating profit[4] in this product line increasing by 17 per cent on higher asset balances that reflect continued positive net flows and market appreciation. Our business was well prepared for the application of the Department of Labor reforms on 9 June 2017 and has maintained relationships with its key distribution partners. Although some uncertainty remains on the direction of the regulatory process, we continue to develop products and distribution that meet the needs and preferences of the market, backed by a distinctive value proposition that differentiates Jackson from its peers.

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In the UK and Europe, M&G and our life operations are both securing significant business flows, driven by the strength of their product performance and market position. At M&G, institutional net inflows of £1.7 billion and record retail net inflows of £5.5 billion have contributed to period‑end assets under management on behalf of external clients of £149 billion. Together with internal assets, M&G’s total assets under management have increased by 6 per cent to £281 billion since the end of 2016, resulting in a 10 per cent increase in IFRS operating profit[4] . In our UK life operations, new business profit[3] increased by 29 per cent, reflecting growth in flexible personal pensions, backed by the popular PruFund investment option.

We continue to operate with strong, conservatively‑managed cash and capital positions at both the Group and local levels. Cash remittances from our business units to the Group increased by 10 per cent to £1,230 million (2016: £1,118 million), with well‑balanced contributions across all of our geographic regions. The Group’s shareholder Solvency II capital surplus[7] was £12.9 billion at 30 June 2017, equating to cover of 202 per cent[8] .

Over the period, IFRS shareholders’ funds increased by 5 per cent[9] to £15.4 billion after taking into account profit after tax of £1,505 million (2016: £687 million on an actual exchange rate basis) and other movements including negative foreign exchange movements of £224 million. EEV shareholders’ funds increased by 4 per cent[9] to £40.5 billion, equivalent to 1,567 pence per share.

A clear and consistent strategy

This performance demonstrates the success of our clear and consistent strategy, which is focused on three long‑term opportunities in Asia, the US and the UK, each driven by a structural and growing demand for our products.

In Asia, we offer products that meet the savings, health and protection needs of the region’s fast‑growing and increasingly affluent middle class. Over the next five years, nearly 700 million people in Asia are expected to enter the middle class[10] , driving sustained and material growth in consumer demand. By 2020, the spending of the middle class in the Asia‑Pacific region is expected to surpass that of the US and Europe combined[10] .

The rapidly increasing scale of the Asian middle class is creating a growing need for the financial savings and protection products we provide. Those needs are largely unmet today, with the protection gap in Asia estimated at US$45 trillion[11] and private health insurance in some areas accounting for less than a quarter of private healthcare spend[12] , while insurance

penetration remains extremely low[13] . As a result, there is a clear market opportunity for our products in Asia.

The United States is the world’s largest retirement savings market, with 10,000 Americans retiring per day[14] , which is a significant opportunity for us as a provider of retirement products and income strategies. Consumers in the US express clear demand for an investment option through which they can grow their savings while protecting income. Our variable annuity products meet this need, making them attractive for people moving into retirement. More than US$16 trillion is invested in adviser‑distributed retirement assets in the US[15] , while variable annuities account for just US$2 trillion[16] of that amount, demonstrating the scale of the opportunity for us.

There is a similar demand from under‑ saved populations in Europe. In the United Kingdom the proportion of the population aged over 60 is expected to increase by 50 per cent over the next 20 years[17] . As in the US, the demand for risk‑managed investments to fund retirement represents a significant area of growth for our business. Our new combined business, M&G Prudential, will leverage our scale, financial strength and capabilities to continue developing customer‑focused solutions and thereby more fully address these needs.

Our customers and products

We address all three of these long‑term opportunities through our close attention to the needs of our customers and by continually improving our products and capabilities to meet those needs.

In Asia, our broad‑based portfolio of businesses continues to drive our progress. We remain focused on the quality of our execution in addressing distinct consumer needs and opportunities in each of our local markets. In Hong Kong, our track record of introducing innovative features to our range of health and savings products has established us as a leader in the growing critical illness protection segment, and in June we strengthened that track record with the launch of a new lump‑sum health insurance policy providing whole‑of‑life cover against 75 early‑ to late‑stage disease conditions. In mainland China, our long‑term joint venture partnership with CITIC is reaching more customers than ever, and China is now our third‑largest contributor to new business sales in Asia. We are continuing to build the scale of our platform in China through expansion of our bancassurance and agency distribution, and by launching in new cities such as Taizhou, our 72nd city, in Zhejiang province in July.

In Singapore, we have introduced more flexibility for customers buying private healthcare insurance with market‑leading product options to encourage healthy living and help them better manage their healthcare budgets. We also introduced our first DNA‑based health and nutrition programme in Singapore, following a successful launch in Hong Kong last year. In Indonesia, we launched a new medical rider, PRUprime healthcare, in February, followed by its syariah version in April. Designed to meet the needs of customers in a higher economic segment, it includes among its features worldwide coverage with emergency hospitalisation in the US and cashless admission at a network of Prudential partner hospitals in Indonesia, Singapore and Malaysia.

Eastspring continues to attract good levels of net inflows and in May, won Asian Investor’s prestigious Asia Fund House of the Year award for the second time in three years. In June, Eastspring became the first Asian investor to sign an agreement with International Finance Corporation, a member of the World Bank Group, committing US$500 million to a programme to fund infrastructure projects in emerging markets. This is an example of our commitment to the economies and communities of developing countries.

In the United States, we are continuing to develop our business to ensure that we capture the opportunity presented by the large numbers of Americans reaching retirement age in the next decade. As regulatory developments and industry trends introduce new areas of growth potential in variable annuities, for example in the fee‑based advice market, we are adapting our product accordingly, while using our superior platform and distribution capabilities to drive speed‑to‑market. During the first half of 2017, we launched a fee‑based version of our popular Elite Access product, filed a new fee‑based version of our leading Perspective variable annuity and saw Jackson maintain relationships with its key distributors post the application of the Department of Labor’s fiduciary rule on 9 June 2017. We remain well positioned to build on our strength in the US retirement market.

Our businesses in the UK are serving customers with needs similar to those of consumers in the US. At M&G, we are developing the breadth and the depth of our offering, designing products that align to the outcomes our customers are looking to achieve. Our strong track record of translating innovative investment strategies to commercial success distinguishes M&G from its peers. Our Global Floating Rate High Yield Fund is a clear example of this, offering customers participation in a rising‑rate environment through

2017 Half Year Financial Report Prudential plc 5

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Group Chief Executive’s report – Mike Wells Continued

investment in high‑yield floating‑rate notes. Launched in September 2014, it attracted net inflows of £2,259 million in the first half of 2017 and now has assets under management of over £3.5 billion. We are also making good operational progress in our preparations for Brexit, including setting up a new legal structure and SICAV fund range in Luxembourg. These initiatives will ensure that customers retain access to our investment strategies and funds through the most appropriate structure for their needs.

Prudential UK & Europe is responding with agility to regulatory change and consumer preferences following the pensions freedoms introduced in 2015. The strength of our retail sales growth shows how the extension of our popular PruFund investment option to ISAs and retirement products, is meeting customers’ demand for proven investment capability and risk‑managed solutions as they move towards the latter stages of accumulation and into retirement income. Our Retirement Account provides a flexible personal pension which allows customers to save through single or regular payments, transfer from another pension and take income flexibly, and has proven popular with customers, accumulating funds under management of £4.1 billion since its launch at the end of 2016.

Since 2014, we have also been offering our products to a new and growing middle class in Africa, and just last month we entered our fifth African market, Nigeria, building on our success in Ghana, Kenya, Uganda and Zambia. The conditions for growth in these markets are similar to those in Asia 20 years ago, and we are excited about the long‑term outlook for our new businesses in the region.

Our capabilities

We continue to invest in our capabilities across the organisation. We are developing a range of digital innovations that will enable us to serve our customers at greater scale and speed, and we continue to invest in talent. In July, we welcomed Mark FitzPatrick to our executive team as Chief Financial Officer, succeeding Nic Nicandrou, who has taken over from Tony Wilkey as Chief Executive of Prudential Corporation Asia. Mark brings with him significant experience and knowledge of the sector, and I am confident that Nic will lead our Asian business to further success.

Our outlook – long-term growth

Our ability to serve the needs of consumers across the wide footprint of our target markets creates value for our customers and our shareholders. Our strategy is focused on markets where the need for our products is strong and growing, and we continue to develop our products and our capabilities to ensure that we access those opportunities to the fullest.

Global economic conditions remain

uncertain and markets remain volatile. However, the strength of the underlying opportunities we are accessing and our proven ability to innovate to create new products and develop our capabilities, along with our ongoing focus on risk management and the strength of our balance sheet, leave us well positioned to continue to grow profitably into the future.

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Mike Wells

Group Chief Executive

Notes

• 1 External net inflows exclude Asia Money Market Fund (MMF) net inflows of £499 million (2016: net inflows of £656 million on an actual exchange rate basis).

• 2 ©2017 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. 1Q 2017 Morningstar VA Report with Commentary.

• 3 Embedded value reporting provides investors with a measure of the future profit streams of the Group. The EEV basis results have been prepared in accordance with EEV Principles discussed in note 1 of the EEV basis results. A reconciliation between IFRS and the EEV shareholder funds is included in note II(f) of the Additional financial information.

• 4 IFRS operating profit is management’s primary measure of profitability and provides an underlying

operating result based on longer‑term investment returns and excludes non‑operating items. Further information on its definition and reconciliation to profit for the period is set out in note B1 of the IFRS financial statements. This measure is described further in the Our performance section of the Strategic report in the 2016 Annual Report.

• 5 Following its sale in May 2017, the operating results exclude the contribution of the Korea life business. The half year 2016 comparative results have been similarly adjusted.

• 6 Underlying free surplus generated based on operating movements from long‑term business (net of investment in new business) and that generated from asset management operations. Further information is set out in note 10 of the EEV basis results.

• 7 The Group shareholder capital position excludes the contribution to own funds and the solvency capital requirement from ring‑fenced with‑profits funds and staff pension schemes in surplus. The solvency positions include management’s estimate of

transitional measures reflecting 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. Before allowing for first interim dividend

• 8

• (31 December 2016: second interim dividend).

• 9 Comparable to 31 December 2016 on an actual exchange rate basis.

• 10 Brookings Institution, The unprecedented expansion of the global middle class, 2017.

• 11 Swiss Re, Mortality Protection Gap: Asia‑Pacific, 2015.

• 12 World Bank, Out‑of‑pocket health expenditure, 2014.

• 13 OECD, Global insurance market trends, 2016.

• 14 Social Security Administration, Annual Performance Plan 2012.

• 15 Cerulli Associates – US Advisor Metrics 2016.

• 16 LIMRA/SRI U.S. Individual Annuities Executive Summary 1Q YTD 2017.

• 17 UK Government Office for Science, Future of an ageing population, 2016.

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02 Business performance

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

• 19 Group Chief Risk Officer’s report of the risks facing our business and how these are managed

Doris and Doug’s story

Jackson

‘With the guarantees offered in our Jackson annuity product, we feel more secure, and ready to focus 1 on people, rather than fight for financial survival.’

• 1 Guarantees are backed by the claims‑paying ability of Jackson National Life Insurance Company.

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

Strong progress against our performance metrics

The consistency of our performance is driven by the alignment of our business to the most attractive opportunities, the quality of our franchises in those markets and our ability to adapt with speed and agility to changes in economic and regulatory conditions.

Mark FitzPatrick Chief Financial Officer

Prudential has made a good start to 2017, with increases in all of our key performance metrics, reflecting progression in the Group’s underlying earnings drivers, together with the beneficial impact of positive investment market conditions and favourable currency effects. The consistency of our performance is driven by the alignment of our business to the most attractive opportunities, the quality of our franchises in those markets and our ability to adapt with speed and agility to changes in economic and regulatory conditions, both globally and locally. At a Group level, our results benefit from diversification by geography, product and distribution channel, our focus on recurring income streams that are less exposed to market movements and the capital generative nature of our business model.

In Asia, we have achieved double‑digit growth in both IFRS operating profit and free surplus generation, reflecting the increasing scale and diversification of our long‑term recurring premium business.

We continue to take decisive actions to preserve the quality of the business that we write, building the contribution from health and protection income and improving the overall economic returns of the new business portfolio.

In the US and the UK, our financial progress is underpinned by the accumulation of assets on which we earn fees. In each of these markets, our businesses have seen strong net inflows in the first half, demonstrating their competitive positioning in product, distribution and service capabilities. Asset values were also boosted by positive investment market movements in the period.

With Group operating free surplus generation of £1.8 billion in the first half of 2017, the Group has reported cumulative underlying free surplus generation of £11.1 billion since 2014, achieving our objective of generating over £10 billion of Group cumulative free surplus between 1 January 2014 and 31 December 2017 six months early. We remain on track to achieve the remaining Asia‑focused objectives by the end of this year.

Despite the uncertainty caused by the outcome of the general election in the UK, sterling has strengthened slightly against most of the currencies in our major international markets since the beginning of the year. However, average sterling exchange rates in the first half of 2017 were significantly lower than in the same period in 2016, contributing to a positive effect on the translation of results from our non‑sterling operations. To aid comparison of underlying progress, we continue to express and comment on the performance trends of our Asia and US operations on a constant currency basis.

The key operational highlights in the first half of 2017 were as follows:

— New business profit was 20 per cent[1] higher at £1,689 million (up 34 per cent on an actual exchange rate basis), reflecting higher sales volumes and more favourable economics. Strong growth in new business profit was achieved across our life businesses in Asia, the US and the UK which were up 18 per cent[1] , 23 per cent and 29 per cent respectively.

• IFRS operating profit based on

longer-term investment returns was 5 per cent[1] higher at £2,358 million (up 15 per cent on an actual exchange rate basis), equivalent to an annualised 24 per cent[2] return on opening IFRS shareholders’ funds. The Group’s performance was driven by our Asia life and asset management operations which saw IFRS operating profit increase 16 per cent[1] to £953 million on growth in the in‑force portfolio. In the US, total IFRS operating profit was up 8 per cent, driven by increased levels of fee income on higher separate account balances. In the UK, IFRS operating profit from our insurance and asset management operations increased by 4 per cent[3] , due to stronger contributions from management actions in the life business and higher assets under management at M&G.

• Underlying free surplus

generation[4] , our preferred measure of cash generation from our life and asset management businesses, increased by 6 per cent[1] to £1,845 million after financing new business growth, reflecting a higher contribution from our growing in‑force book of business and continued discipline of focusing on high‑return new business with fast payback periods. On an actual exchange rate basis the growth in this measure was 14 per cent.

8 Prudential plc 2017 Half Year Financial Report

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• Group shareholders’ Solvency II capital surplus was estimated at £12.9 billion[5,6] at 30 June 2017, equivalent to a cover ratio of 202 per cent (31 December 2016: £12.5 billion, 201 per cent). The movement since the start of the year primarily reflects the Group’s continuing strong operating capital generation, partially offset by the payment of the 2016 second interim dividend.

Investment markets have been generally supportive through the period, with equity markets trending upwards and more stability in bond and currency markets compared with 2016. The recovery in equity markets towards the end of 2016 has continued into 2017, with the S&P 500

index up 8 per cent and the FTSE 100 index gaining 2 per cent in the first six months. Longer‑term yields at 30 June 2017 were almost unchanged from those at the start of the year in the UK, and down slightly in the US. In Asia, where yield movements have been more pronounced, our IFRS operating earnings are largely insensitive to interest rates. Overall, we continue to reduce the sensitivity of our earnings and balance sheet to investment markets, but remain significant long‑term holders of financial assets to back the commitments that we have made to our customers. Short‑term fluctuations in both these assets and related liabilities are reported outside the operating result, which is based on longer‑term investment return assumptions. In the first half of 2017, these

short‑term fluctuations were overall negative, driven by the effect of higher equity markets on our hedging programme in the US. In the first half of the year, total IFRS post‑tax profit was up at £1,505 million (2016: £720 million on a constant exchange rate basis) and total EEV after‑tax profit was also higher at £3,297 million (2016: £1,506 million on a constant exchange rate basis).

Reflecting the strong operating results, the Group’s IFRS shareholders’ equity increased by 5 per cent[7] over the six month period to £15.4 billion (31 December 2016: £14.7 billion), with the Group’s EEV basis shareholders’ equity up 4 per cent[7] to £40.5 billion (31 December 2016: £39.0 billion).

IFRS profit

	Actual exchange rate	Constant exchange rate
	Half year 2017£m Half year 2016£m Change%	Half year 2016£m Change%
Operating proft before tax based on longer-term investment returns Long‑term business: Asia1 US UK	870 667 30 1,079 888 22 480 473 1	752 16 1,010 7 473 1
Long‑term business operating proft before tax1 UK general insurance commission Asset management business: M&G Prudential Capital Eastspring Investments US Other income and expenditure8	2,429 2,028 20 17 19 (11) 248 225 10 6 13 (54) 83 61 36 (6) (12) 50 (419) (333) (26)	2,235 9 19 (11) 225 10 13 (54) 69 20 (13) 54 (342) (23)
Total operating proft based on longer‑term investment returns before tax and interest received from tax settlement1 Interest received from tax settlement	2,358 2,001 18 – 43 n/a	2,206 7 43 n/a
Total operating proft 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 Other non‑operatingitems8	61 40 53 (605) (1,420) 57	47 30 (1,619) 63
Proft before tax attributable to shareholders Tax (charge) credit attributable to shareholders’ returns	1,814 664 173 (309) 23 n/a	677 168 43 n/a
Proft for theperiod attributable to shareholders	1,505 687 119	720 109

IFRS earnings per share

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

2017 Half Year Financial Report Prudential plc 9

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Chief Financial Officer’s report on the 2017 first half financial performance – Mark FitzPatrick Continued

IFRS operating profit based on longer-term investment returns Total IFRS operating profit increased by 5 per cent[1] (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 cent[1] 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 cent[1] 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 cent[1] 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 income[9] , 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 flows[10]

	Actual exchange rate	Actual exchange rate
	Half year 2017£m	Half year 2016£m
	At 1 January 2017 Net liability fows11 Market and other movements At 30 June 2017	At 1 January 2016 Net liability fows11 Market and other movements At 30 June 2016
Asia12 US UK	32851 1016 1173 35040	25,032 977 4,135 30,144 138,913 2,855 17,387 159,155 52,824 (1,699) 4,286 55,411
	, , , , 177626 1958 (1805) 177779
	, , , , 56,158 (1,167) 1,500 56,491
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.

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

	Actual exchange rate	Actual exchange rate
	Half year 2017£m	Half year 2016£m
	At 1 January 2017 Net liability fows11 Market and other movements At 30 June 2017	At 1 January 2016 Net liability fows11 Market and other movements At 30 June 2016
Asia UK	29933 2295 1053 33281	20,934 1,551 4,355 26,840 100,069 582 6,417 107,068
	, , , , 113,146 1,574 3,729 118,449
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. customers, the emergence of shareholder During the first half of 2017, net liability profit is more gradual. The business, flows increased to £3.9 billion across our nevertheless, remains an important Asia and UK operations. As returns from source of shareholder value. these funds are smoothed and shared with

Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver[14]

	Actual exchange rate	Actual exchange rate	Constant exchange rate
	Half year 2017	Half year 2016	Half year 2016
	Operating proft1 £m Average liability £m Margin bps	Operating proft1 £m Average liability £m Margin bps	Operating proft1 £m Average liability £m Margin bps
Spread income Fee income With‑profts Insurance margin Margin on revenues Expenses: Acquisition costs* Administration expenses DAC adjustments Expected return on shareholder assets	583 89314 131	556 80,146 139 989 129,054 153 162 114,109 28 898 946 (1,027) 2,980 (34)% (879) 216,075 (81) 132 111	613 85,708 143 1,118 143,526 156 165 115,945 28 1,013 1,051 (1,155) 3,296 (35)% (983) 236,974 (83) 149 124
	, 1279 164152 156
	, , 172 132701 26
	, 1152
	, 1138
	,
	(1241) 3624 (34)%
	, , (1131) 259451 (87)
	, , 186
	103
Longevity reinsurance and other management actions to improve solvency	2241	1,888 140	2,095 140
	, 188
Operating proft based on longer‑term investment returns1	2,429	2,028	2,235

• 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.

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 cent[1] (up 28 per cent on an actual exchange rate basis) and fee income by 14 per cent[1] (up 29 per cent on an actual exchange rate basis), while spread income declined by 5 per cent[1] (up 5 per cent on an actual exchange rate basis). Administration expenses increased to £1,131 million[1] (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.

2017 Half Year Financial Report Prudential plc 11

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Chief Financial Officer’s report on the 2017 first half financial performance – Mark FitzPatrick Continued

Asset management external funds under management[15,16]

	Actual exchange rate	Actual exchange rate
	Half year 2017£m	Half year 2016£m
	At 1 January 2017 Net fows Market and other movements At 30 June 2017	At 1 January 2016 Net fows Market and other movements At 30 June 2016
M&G EastspringInvestments17	136763 7179 5176 149118	126,405 (6,966) 10,217 129,656 30,281 (412) 2,859 32,728
	, , , , 38,042 2,273 4,281 44,596
Total asset management	174,805 9,452 9,457 193,714	156,686 (7,378) 13,076 162,384
Total asset management (includingMMF)	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 inflows[17] 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 items[8]

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.

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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.

New business performance

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

		Actual exchange rate	Constant exchange rate
	Half year 2017£m	Half year 2016£m Change%	Half year 2016£m Change%
	APE sales New business proft	APE sales New business proft APE sales New business proft	APE sales New business proft APE sales New business proft
Asia1 US UK	1943 1092	1,605 821 21 33 782 311 23 40 593 125 22 29	1,814 928 7 18 889 354 8 23 593 125 22 29
	, , 960 436
	721 161
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 cent[1] (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 cent[1] (22 per cent on an actual exchange rate basis) to £3,624 million.

In Asia, new business profit was 18 per cent[1] 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 cent[1] . 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 cent[1] to £1,943 million in the first half, which is higher than in the whole of 2012[1] (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 market[18] 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).

2017 Half Year Financial Report Prudential plc 13

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Chief Financial Officer’s report on the 2017 first half financial performance – Mark FitzPatrick Continued

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.

Free surplus generation[4]

	A	ctual exchange rate	Constant exchange rate
	Half year 2017£m	Half year 2016£m Change%	Half year 2016£m Change%
Asia1 US UK M&G Prudential Capital	836	653 28 693 15 570 1 181 11 11 (55)	739 13 788 1 570 1 181 11 11 (55)
	797
	577
	201
	5
Underlying free surplus generated from in‑force life business and asset management1 Investment in new business1	2416	2,108 15 (493) (16)	2,289 6 (551) (4)
	, (571)
Underlyingfree surplusgenerated1	1,845	1,615 14	1,738 6
Market related movements, timing differences and other movements Net cash remitted bybusiness units	(211)	(38) (1,118) 459 5,763
	(1,230)
Total movement in free surplus	404
Free surplus at 30 June	6,979

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 cent[1] 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 cent[1] . 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 cent[1] , the amount of free surplus that was invested in writing new business in the period was only 4 per cent[1] 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 cent[1] 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.

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Business unit remittance[19]

Business unit remittance19
	Actual exchange rate
	Half year 2017£m	Half year 2016£m
Net cash remitted by business units: Asia US UK life M&G Prudential Capital Other UK		258 339 215 150 25 131
	350
	475
	215
	175
	15
	–
Net cash remitted bybusiness units	1,230	1,118
Holdingcompanycash 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.

Post-tax profit – EEV

Post-tax proft – EEV
	A	ctual exchange rate	Constant exchange rate
	Half year 2017£m	Half year 2016£m Change%	Half year 2016£m Change%
Post-tax operating proft based on longer-term investment returns Long‑term business: Asia1 US UK		1,209 36 694 28 384 21	1,361 21 789 13 384 21
	1641
	, 888
	465
Long‑term business post‑tax operating proft1 UK general insurance commission Asset management business: M&G Prudential Capital Eastspring Investments US Other income and expenditure20	2994	2,287 31 15 (7) 181 11 11 (55) 53 38 (8) 50 (319) (29)	2,534 18 15 (7) 181 11 11 (55) 60 22 (9) 56 (326) (27)
	, 14
	201
	5
	73
	(4)
	(413)
Post‑tax operating proft based on longer‑term investment returns before interest received from tax settlement1 Interest received from tax settlement	2870	2,220 29 37 n/a	2,466 16 37 n/a
	, –
Post-tax operating proft 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 Other non‑operatingitems20		(11) 100 (852) n/a	(12) 100 (985) n/a
	–
	427
Post-tax proft for the period attributable to shareholders	3,297	1,394 137	1,506 119

EEV earnings per share

	A	ctual exchange rate	Constant exchange rate
	Half year 2017pence	Half year 2016pence Change%	Half year 2016pence Change%
Basic earnings per share based on post‑tax operating proft1 Basic earningsper share based onpost‑tax totalproft	111.9	88.2 27 54.5 136	97.8 14 58.9 118
	128.5

2017 Half Year Financial Report Prudential plc 15

www.prudential.co.uk

Chief Financial Officer’s report on the 2017 first half financial performance – Mark FitzPatrick Continued

EEV operating profit

On an EEV basis, Group post‑tax operating profit based on longer‑term investment returns was 15 per cent[1] 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 cent[1] (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 cent[1] 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 higher[1] 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 cent[1] to £1,641 million, reflecting growth in new business profit of 18 per cent[1] at £1,092 million. In‑force profit was 27 per cent[1] 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, financing and liquidity

Capital position

Analysis of movement in Group shareholder Solvency II surplus[21]

	2017£bn	2016£bn
	Half year	Half year Full year
Estimated Solvency II surplus at 1 January Operating experience Non‑operating experience (including market movements) Other capital movements Subordinated debt issuance Foreign currency translation impacts Dividends paid Methodologyand calibration changes	12.5	9.7 9.7 1.2 2.7 (2.4) (1.1) 0.7 1.2 0.9 1.6 (0.9) (1.3) (0.1) (0.3)
	1.7
	–
	–
	(0.5)
	(0.8)
	–
Estimated SolvencyII surplus at end ofperiod	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 billion[22] (equivalent to a solvency ratio of 168 per cent) and a with‑profits surplus[23] 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.

16 Prudential plc 2017 Half Year Financial Report

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Financing and liquidity

Shareholders’ net core structural borrowings

	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
Total borrowings of shareholder‑fnanced operations Less: holding company cash and short‑term investments	6614 673 7287	5,966 426 6,392 (2,546) – (2,546)	6,798 422 7,220 (2,626) – (2,626)
	, , (2,657) – (2,657)
Net core structural borrowings of shareholder‑fnanced operations	3,957 673 4,630	3,420 426 3,846	4,172 422 4,594
Gearingratio*	20%	19%	22%

• Net core structural borrowings as a proportion of IFRS shareholders’ funds plus net debt.

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.

Shareholders’ funds

		IFRS		EEV
	2017£m	2016£m	2017£m	2016£m
	Half year	Half year Full year	Half year	Half year Full year
Proft after tax for the period Exchange movements, net of related tax Cumulative exchange gain of Korea life business recycled to proft and loss account Unrealised gains and losses on Jackson securities classifed as available‑for‑sale24 Dividends Mark to market value movements on Jackson assets backing surplus and required capital Other	1505	687 1,921 806 1,161 – – 1,094 31 (935) (1,267) – – (2) (135)	3297	1,394 4,516 2,663 4,211 – – – – (935) (1,267) 138 (11) (165) (367)
	, (224)		, (1045)
	(61)		, –
	300		–
	(786)		(786)
	–		31
	49		55
Net increase in shareholders’ funds Shareholders’ funds at beginningof theperiod	783	1,650 1,711 12,955 12,955	1552	3,095 7,082 31,886 31,886
	14,666		, 38,968
Shareholders’ funds at end of theperiod	15,449	14,605 14,666	40,520	34,981 38,968
Shareholders’ valueper 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.

2017 Half Year Financial Report Prudential plc 17

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Chief Financial Officer’s report on the 2017 first half financial performance – Mark FitzPatrick Continued

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Dividend

Corporate transactions

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.

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.

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.

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).

Mark FitzPatrick

Chief Financial Officer

Notes

• 11 Defined as movements in shareholder‑backed policyholder liabilities arising from premiums (net of charges), surrenders/withdrawals, maturities and deaths.

• 1 Following its sale in May 2017, the operating results exclude the contribution of the Korea life business. All comparative results have been similarly adjusted.

• 2 Annualised operating profit after tax and non‑ controlling interests as percentage of opening shareholders’ funds.

• 12 Following its sale in May 2017, the shareholder‑backed policyholder liabilities and related flows for Asia exclude the value for the Korea life business. The half year 2016 comparatives have been adjusted accordingly.

• 3 Includes UK life insurance and M&G.

• 4 Free surplus generation represents ‘underlying free surplus’ based on operating movements, including the general insurance commission earned during the period and excludes market movements, foreign exchange, capital movements, shareholders’ other income and expenditure and centrally arising restructuring and Solvency II implementation costs.

• 13 Includes unallocated surplus of with‑profits business. 14 For basis of preparation see note I(a) of Additional financial information.

• 15 Includes Group’s proportionate share in PPM South Africa and the Asia asset management joint ventures.

• 5 Before allowing for first interim dividend.

• 16 For our asset management business the level of funds managed on behalf of third parties, which are not therefore recorded on the balance sheet, is a driver of profitability. We therefore analyse the movement in the funds under management each period, focusing between those which are external to the Group and those held by the insurance business and included on the Group balance sheet. This is analysed in note II(b) of the Additional financial information.

• 6 The Group shareholder capital position excludes the contribution to own funds and the solvency capital requirement from ring‑fenced with‑profits funds and staff pension schemes in surplus. The solvency positions include management’s estimate of transitional measures reflecting 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.

• 17 Net inflows exclude Asia Money Market Fund (MMF) inflows of £499 million (2016: net inflows £656 million on an actual exchange rate basis). External funds under management exclude Asia MMF balances of £8,327 million (2016: £7,421 million on an actual exchange rate basis).

• 7 Comparable to 31 December 2016 on an actual exchange rate basis.

• 8 Refer to note B1.1 in IFRS financial statements for the breakdown of other income and expenditure and other non‑operating items.

• other non‑operating items. 18 ©2017 Morningstar, Inc. All Rights Reserved. The

• 9 Operating income comprises spread income, fee information contained herein: (1) is proprietary to income, with‑profits, insurance margin and expected Morningstar and/or its content providers; (2) may not shareholder return. be copied or distributed; and (3) is not warranted to be

• 10 Includes Group’s proportionate share of the liabilities accurate, complete or timely. Neither Morningstar nor and associated flows of the insurance joint ventures and associate in Asia.

• 9 Operating income comprises spread income, fee income, with‑profits, insurance margin and expected shareholder return.

• its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. 1Q 2017 Morningstar VA Report with Commentary.

• 19 Net cash remitted by business units included in the Holding company cash flow is disclosed in note II (a) of Additional financial information.

• 20 Refer to the EEV basis supplementary information – Post‑tax operating profit based on longer‑term investment returns and Post‑tax summarised consolidated income statement for the breakdown of other income and expenditure and other non‑operating items.

• 21 The methodology and assumptions used in calculating the Solvency II capital results are set out in note II(c) of Additional financial information.

• 22 The UK shareholder capital position excludes the contribution to own funds and the solvency capital requirement from ring‑fenced with‑profits funds and staff pension schemes in surplus. The solvency positions include management’s estimate of transitional measures reflecting operating and market conditions at the 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.

• 23 The UK with‑profits Solvency II surplus includes the PAC with‑profits sub‑fund, the Scottish Amicable Insurance Fund and the Defined Charge Participating Sub‑Fund. The estimated solvency position allows for management’s estimate of transitional measures reflecting operating and market conditions at the valuation date.

• 24 Net of related changes to deferred acquisition costs and tax.

18 Prudential plc 2017 Half Year Financial Report

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Group Chief Risk Officer’s report of the risks facing our business and how these are managed – Penny James

Generating value while managing risk

Our Risk Management Framework is designed to ensure the business remains strong through stress events so we can continue to deliver - on our long term commitments to our customers and shareholders.

Penny James Group Chief Risk Officer

We continue to operate in a global environment of political uncertainty, although financial markets have remained resilient through the first half of the year. As we position ourselves, we remain mindful of the uncertain environment from a political, economic and social perspective.

As in previous years, we continue to maintain a strong and sustained focus on planning for the possibility of, and ultimately managing, the market volatility and macroeconomic uncertainty arising from the global environment. Our Risk Management Framework and risk appetite have allowed us to successfully control our risk exposure throughout the year. Our governance, processes and controls enable us to deal with the uncertainty ahead in order to continue helping our customers achieve their long‑term financial goals.

Our results show that, even in times of such unpredictability, we can generate value for our shareholders by selectively taking exposure to risks that are adequately rewarded and that can be appropriately quantified and managed. We retain risks within a clearly defined risk appetite, where we believe doing so contributes to value creation and the Group is able to

withstand the impact of an adverse outcome. For our retained risks, we ensure that we have the necessary capabilities, expertise, processes and controls to appropriately manage the exposure.

In my report, I seek to explain the main risks inherent in our business and how we manage those risks, with the aim of ensuring we maintain an appropriate risk profile.

Risk governance, culture and our risk management cycle

Prudential defines ‘risk’ as the uncertainty that we face in successfully implementing our strategies and objectives. This includes all internal or external events, acts or omissions that have the potential to threaten the success and survival of the Group. Accordingly, material risks will be retained selectively where we think there is value to do so, and where it is consistent with the Group’s risk appetite and philosophy towards risk‑taking.

The following section provides more detail on our risk governance, culture and risk management process.

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2017 Half Year Financial Report Prudential plc 19

www.prudential.co.uk

Group Chief Risk Officer’s report of the risks facing our business and how these are managed – Penny James Continued

Risk governance

Our risk governance comprises the organisational structures, reporting relationships, delegation of authority, roles and responsibilities, and risk policies that the Group Head Office and our business units establish to make decisions and control their activities on risk‑related matters. This encompasses individuals, Group‑wide functions and committees involved in managing risk.

Risk committees and governance structure

Our risk governance structure is led by the Group’s Risk Committee, supported by independent non‑executives on risk committees of major subsidiaries. These committees monitor the development of the Risk Management Framework, the Group’s risk appetites, limits and policies, as well as its risk culture. We have a comprehensive risk management cycle in place to identify, measure, manage and monitor our risk exposures.

In addition to our risk committees, there are various executive risk forums to ensure risk issues are shared and considered across the Group. These are led by the Group Executive Risk Committee which is supported by a number of specific sub‑committees including security and information security where specialist skills and knowledge are required.

Risk Management Framework

The Group’s Risk Management Framework has been developed to monitor and manage the risk of the business at all levels and is owned by the Board. The aggregate Group exposure to the key risk drivers is monitored and managed by the Group Risk function which is responsible for reviewing, assessing and reporting on the Group’s risk exposure and solvency position from the Group economic, regulatory and ratings perspectives.

The Framework requires all our businesses and functions to establish processes for identifying, evaluating and managing the key risks faced by the Group – the ‘risk management cycle’ (see below) is based on the concept of the ‘three lines of defence’, comprising risk taking and management, risk control and oversight, and independent assurance.

A major part of the risk management cycle is the annual assessment of the Group’s risks which are considered key. These key risks range from risks associated with the economic, market, political and regulatory environment; those that we assume when writing our insurance products and by virtue of the investments we hold; and those that are inherent in our business model and its operation. This is used to inform risk reporting to the risk committees and the Board for the year.

Risk appetite, limits and triggers

The extent to which we are willing to take risk in the pursuit of our objective to create shareholder value is defined by a number of risk appetite statements, operationalised through measures such as limits, triggers and indicators. The Group risk appetite is approved by the Board and is set with reference to economic and regulatory capital, liquidity and earnings volatility. The Group risk appetite is aimed at ensuring that we take an appropriate level of aggregate risk and covers all risks to shareholders, including those from participating and third‑party business.

We have no appetite for material losses (direct or indirect) suffered as a result of failing to develop, implement and monitor appropriate controls to manage operational risks. Group limits operate within the risk appetite to constrain the material risks, while triggers and indicators provide further constraint and ensure escalation. The Group Chief Risk Officer determines the action to be taken upon all breaches of Group limits.

The Group Risk function is responsible for reviewing the scope and operation of these measures at least annually to determine that they remain relevant. The Board approves all changes made to the Group’s Risk Appetite Framework. We define and monitor aggregate risk limits based on financial and non‑financial stresses for our earnings volatility, liquidity and capital requirements.

Earnings volatility

The objectives of the aggregate risk limits seek to ensure that:

• The volatility of earnings is consistent with the expectations of stakeholders;

• The Group has adequate earnings (and cash flows) to service debt, expected dividends and to withstand unexpected shocks; and

• Earnings (and cash flows) are managed properly across geographies and are consistent with funding strategies.

The two measures used to monitor the volatility of earnings are IFRS operating profit and EEV operating profit, although IFRS and EEV total profits are also considered.

Liquidity

The objective is to ensure that the Group is able to generate sufficient cash resources to meet financial obligations as they fall due in business as usual and stressed scenarios. Risk appetite with respect to liquidity risk is measured using a Liquidity Coverage Ratio which considers the sources of liquidity versus liquidity requirements under stress scenarios.

Capital requirements

The limits aim to ensure that:

• The Group meets its internal economic capital requirements;

• The Group achieves its desired target rating to meet its business objectives; and

• Supervisory intervention is avoided.

The two measures used at the Group level are Solvency II capital requirements and internal economic capital requirements. In addition, capital requirements are monitored on local statutory bases.

The Group Risk Committee is responsible for reviewing the risks inherent in the Group’s business plan and for providing the Board with input on the risk/reward trade‑offs implicit therein. This review is supported by the Group Risk function, which uses submissions from our local business units to calculate the Group’s aggregated position (allowing for diversification effects between local business units) relative to the aggregate risk limits.

20 Prudential plc 2017 Half Year Financial Report

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An evaluation of risk culture is part of the Risk Management Framework and in particular seeks to identify evidence that:

Risk policies

These set out the specific requirements which cover the fundamental principles for risk management within the Risk Management Framework. Policies are designed to give some flexibility so that business users can determine how best to comply with policies based on their local expertise.

• Senior management in business units articulate the need for good risk management as a way to realise long‑term value and continuously support this through their actions;

• Employees understand and care about their role in managing risk – they are aware of and openly discuss risk as part of the way they perform their role; and

There are core risk policies for credit, market, insurance, liquidity and operational risks and a number of internal control policies covering internal model risk, underwriting, dealing controls and tax risk management. They form part of the Group Governance Manual, which was developed to make a key contribution to the sound system of internal control that we maintain in line with the UK Corporate Governance Code and the Hong Kong Code on Corporate Governance Practices. Group Head Office and business units must confirm that they have implemented the necessary controls to evidence compliance with the Group Governance Manual on an annual basis.

• Employees invite open discussion on the approach to the management of risk.

Key aspects of risk culture are also communicated through the Code of Conduct and the policies in the Group Governance Manual, including the commitments to the fair treatment of our customers and staff. The approach to the management of risk also is a key part of the evaluation of the remuneration of executives. Risk culture is an evolving topic across the financial services industry and we are working to evaluate and embed a strong risk culture.

Risk standards

The Group‑wide Operating Standards provide supporting detail to the higher level risk policies. In many cases they define the minimum requirements for compliance with Solvency II regulations which in some areas are highly prescriptive. The standards are more detailed than policies.

The risk management cycle

The risk management cycle comprises processes to identify, measure and assess, manage and control, and monitor and report on our risks.

Risk identification

Group‑wide risk identification takes place throughout the year and includes processes such as our Own Risk and Solvency Assessment (ORSA) and the horizon‑scanning performed as part of our emerging risk management process.

Our risk culture

Culture is a strategic priority of the Board who recognise the importance of good culture in the way that we do business. Risk culture is a subset of broader organisational culture, which shapes the organisation‑ wide values that we use to prioritise risk management behaviours and practices.

• Risk identification covers Group‑wide: — Top‑down risk identification

• — Bottom‑up risk identification

• — Emerging risk identification

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On an annual basis, a top‑down identification of the Group’s key risks is performed which considers those risks that have the greatest potential to impact on the Group’s operating results and financial condition. A bottom‑up process of risk identification is performed by the business units who identify, assess and document risks, with appropriate coordination and challenge from the risk functions.

The Group ORSA report pulls together the analysis performed by a number of risk and capital management processes, which are embedded across the Group, and provides quantitative and qualitative assessments of the Group’s risk profile, risk management and solvency needs on a forward‑looking basis. The scope of the report covers the full known risk universe of the Group.

The Directors perform a robust assessment of the principal risks facing the Company, through the Group ORSA report and the risk assessments done as part of the business planning review, including how they are managed and mitigated.

Reverse stress testing, which requires us to ascertain the point of business model failure, is another tool that helps us to identify the key risks and scenarios that may materially impact the Group.

Our emerging risk management process identifies potentially material risks which have a high degree of uncertainty around timing, magnitude and propensity to evolve. The Group holds emerging risk sessions over the year to identify emerging risks which includes input from local subject matter and industry experts. We maintain contacts with thought leaders and peers to benchmark and refine our process.

Risks are assessed in terms of materiality.

Material risks which are modelled are included in capital models, including E‑Cap.

Risks which cannot be quantified are assessed qualitatively.

Risk processes that support the management and controlling of risk exposures include:

• Risk appetite and limits

• Financial incidents procedures

• Large risk approval process

• Global counterparty limit framework

• Own risk and solvency assessment

• Reverse stress testing

2017 Half Year Financial Report Prudential plc 21

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Group Chief Risk Officer’s report of the risks facing our business and how these are managed – Penny James Continued

The risk profile is a key output from the risk identification and risk measurement processes, and is used as a basis for setting Group‑wide limits, management information, assessment of solvency needs, and determining appropriate stress and scenario testing. The risk identification processes support the creation of our annual set of key risks, which are then given enhanced management and reporting focus.

Risk measurement and assessment

All identified risks are assessed based on an appropriate methodology for that risk. All quantifiable risks which are material and mitigated by holding capital are modelled in the Group’s internal model, which is used to determine capital requirements under Solvency II and our own economic capital basis. Governance arrangements are in place to support the internal model, including independent validation and process and controls around model changes and limitations.

Risk management and control

The control procedures and systems established within the Group are designed to reasonably manage the risk of failing to meet business objectives and are detailed in the Group risk policies. This can only provide reasonable and not absolute assurance against material misstatement or loss. They focus on aligning the levels of risk‑taking with the achievement of business objectives.

The management and control of risks are set out in the Group risk policies, and form part of the holistic risk management approach under the Group’s ORSA. These risk policies define:

• The Group’s risk appetite in respect of material risks, and the framework under which the Group’s exposure to those risks is limited;

• The processes to enable Group senior management to effect the measurement and management of the Group material risk profile in a consistent and coherent way; and

• The flows of management information required to support the measurement and management of the Group material risk profile and to meet the needs of external stakeholders.

The methods and risk management tools we employ to mitigate each of our major categories of risks are detailed below.

Risk monitoring and reporting

The identification of the Group’s key risks informs the management information received by the Group risk committees and the Board. Risk reporting of key exposures against appetite is also included, as well as ongoing developments in other key and emerging risks.

Summary risks

The table below is a summary of the key risks facing the Group, which can be grouped into those which apply to us because of the global environment in which we operate, and those which arise as a result of the business that we operate – including risks arising from our investments, the nature of our products and from our business operations.

‘Macro’ risks

Some of the risks that we are exposed to are necessarily broad given the external influences which may impact on the Group. These risks include:

Global economic conditions

Changes in global economic conditions can impact us directly; for example, by leading to poor returns on our investments and increasing the cost of promises we have made to our customers. They can also have an indirect impact; for example, economic pressures could lead to decreased savings, reducing the propensity for people to buy our products. Global economic conditions may also impact on regulatory risk for the Group by changing prevailing political attitudes towards regulation.

Geopolitical risk

The geopolitical environment is increasingly uncertain with political upheaval in the UK, the US and the Eurozone. Uncertainty in these regions, combined with conflict in the Middle East and increasing tensions in east Asia underline that geopolitical risks are truly global and their potential impacts are wide‑ranging; for example, through increased regulatory risk. The geopolitical and economic environments are increasingly closely linked, and changes in the political arena may have direct or indirect impacts on our Group.

Digital disruption

The emergence of advanced technologies such as artificial intelligence and blockchain is providing an impetus for companies to rethink their existing operating models and how they interact with their customers. Prudential is embracing the opportunities presented by digitisation and is closely monitoring any risks which arise.

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Risks from our investments

Global economic conditions – see above – have a large impact on those risks from our investments.

Our fund investment performance is a fundamental part of our business in providing appropriate returns for our customers and shareholders, and so is an important area of focus.

Credit risk

Is the potential for reduced value of our investments due to the uncertainty around investment returns arising from the potential for defaults of our investment counterparties.

Invested credit risk arises from our asset portfolio. We increase sector focus where necessary.

The assets backing the UK and Jackson’s annuity business mean credit risk is a significant focus for the Group.

Market risk

Is the potential for reduced value of our investments resulting from the volatility of asset prices as driven by fluctuations in equity prices, interest rates, foreign exchange rates and property prices.

In our Asia business, our main market risks arise from the value of fees from our fee‑earning products.

In the US, Jackson’s fixed and variable annuity books are exposed to a variety of market risks due to the assets backing these policies.

In the UK, exposure relates to the valuation of the proportion of the with‑profits funds’ future profits that is transferred to the shareholders (future transfers), which is dependent on equity, property and bond values.

Risks from our products

Insurance risks

The nature of the products offered by the Group exposes it to insurance risks, which are a significant part of our overall risk profile.

The insurance risks that we are exposed to by virtue of our products include longevity risk (policyholders living longer than expected); mortality risk (policyholders with life protection dying); morbidity risk (policyholders with health protection becoming ill) and persistency risk (customers lapsing their policies).

From our health protection products, increases in the costs of claims (including the level of medical expenses) increasing over and above price inflation (claim inflation) is another risk.

The processes that determine the price of our products and reporting the results of our long‑term business operations require us to make a number of assumptions. Where experience deviates from these assumptions our profitability may be impacted.

Across our business units, persistency and morbidity risks are among the largest insurance risks for our Asia business given our strong focus on health protection products in the region.

For the UK and Jackson, the most significant insurance risk is longevity risk driven by their annuity businesses.

Risks from our business operations

Operational risks

As a Group, we are dependent on the appropriate and secure processing of a large number of transactions by our people, IT infrastructure and outsourcing partners, which exposes us to operational risks and reputational risks.

Information security risk is a significant consideration within operational risk, including both the risk of malicious attack on our systems as well as risks relating to data security and integrity and network disruption. The size of Prudential’s IT infrastructure and network, our move toward digitisation and the increasing number of high profile cyber security incidents across industries mean that this will continue to be an area of high focus.

Regulatory risk

We also operate under the ever‑evolving requirements set out by diverse regulatory and legal regimes (including tax), as well as utilising a significant number of third parties to distribute products and to support business operations; all of which add to the complexity of the operating model if not properly managed.

The number of regulatory changes under way across Asia, in particular those focusing on consumer protection means that regulatory change in the region is also considered a key risk.

Both Jackson and the UK operate in highly regulated markets. Regulatory reforms could materially impact on our businesses, and regulatory focus continues to be high.

M&G invests in a broad range of asset classes and its income is subject to the price volatility of global financial and currency markets.

Liquidity risk

Is the risk of not having sufficient liquid assets to meet our obligations as they fall due, and incorporates the risk arising from funds composed of illiquid assets. It results from a mismatch between the liquidity profile of assets and liabilities.

Further risk information

In reading the sections below, it is useful to understand that there are some risks that our policyholders assume by virtue of the nature of their products, and some risks that the Company and its shareholders assume. Examples of the latter include those risks arising from assets held directly by and for the Company or the risk that policyholder funds are exhausted. This report is focused mainly on risks to the shareholder, but will include those which arise indirectly through our policyholder exposures.

Risks from our investments

Market risk

The main drivers of market risk in the Group are:

• Investment risk (including equity and property risk);

• Interest rate risk; and

• Given the geographical diversity of our business, foreign exchange risk.

With respect to investment risk, equity and property risk arises from our holdings of equity and property investments, the prices of which can change depending on market conditions.

The valuation of our assets (particularly the bonds that we invest in) and liabilities is also dependent on market interest rates and exposes us to the risk of those moving in a way that is detrimental for us.

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Given our global business, we earn our profits and hold assets in various currencies. The translation of those into our reporting currency exposes us to movements in foreign exchange rates.

Our main investment risk exposure arises from the portion of the profits from the UK with‑profits funds which we are entitled to receive; the value of the future fees from our fee‑earning products in our Asia business; and from the asset returns backing Jackson’s variable annuities business.

Our interest rate risk is driven in the UK by our need to match our assets and liabilities; from the guarantees of some non unit‑ linked investment products in Asia; and the cost of guarantees in Jackson’s fixed, fixed index and variable annuity business. The methods that we use to manage and mitigate our market risks include the following:

• Our market risk policy;

• Risk appetite statements, limits and triggers that we have in place;

• The monitoring and oversight of market risks through the regular reporting of management information;

• Our asset and liability management programmes;

• Use of derivative programmes, including, for example, interest rate swaps, options and hybrid options for interest rate risk;

• Regular deep dive assessments; and

• Use of currency hedging.

Investment risk

In the UK business, our main investment risk arises from the assets held in the with‑ profits funds. Although this is mainly held by our policyholders, a proportion of the funds’ profit (one tenth) is transferred to us and so our investment exposure relates to the future valuation of that proportion (future transfers). This investment risk is driven mainly by equities in the funds, although there is some risk associated with other investments such as property and bonds. Some hedging to protect from a reduction in the value of these future transfers against falls in equity prices is performed outside the funds using derivatives. The with‑profits funds’ large Solvency II own funds – estimated at £8.6 billion as at 30 June 2017 (31 December 2016: £8.4 billion) – help to protect against market fluctuations and helps the fund to maintain appropriate solvency levels. The with‑profits funds’ Solvency II own funds are partially protected against falls in equity markets through an active hedging programme within the funds.

In Asia, our shareholder exposure to equity price movements results from unit‑linked products, where our fee income is linked to the market value of the funds under management. Further exposure arises from with‑profits businesses where bonuses declared are broadly based on historical and current rates of return on equity.

In Jackson, investment risk arises from the assets backing customer policies. In the case of spread‑based business, including fixed annuities, these assets are generally bonds, and shareholder exposure comes from the minimum returns needed to meet the guaranteed rates that we offer to policyholders. For our variable annuity business, these assets include both equities and bonds. In this case, the main risk to the shareholder comes from the guaranteed benefits that can be included as part of these products. Our exposure to this kind of situation is reduced by using a derivative hedging programme, as well as through the use of reinsurance to pass on the risk to third‑party reinsurers.

Interest rate risk

While long‑term interest rates in advanced economies have broadly increased since mid‑2016 and indications are for further gradual tightening of monetary policy, they remain close to historical lows. Some products that we offer are sensitive to movements in interest rates. We have already taken a number of actions to reduce the risk to the in‑force business, as well as re‑pricing and restructuring new business offerings in response to these historically low interest rates. Nevertheless, we still retain some sensitivity to interest rate movements.

Interest rate risk arises in our UK business from the need to match cash payments to meet annuity obligations with the cash we receive from our investments. To minimise the impact on our profit, we aim to match the duration (a measure of interest rate sensitivity) of assets and liabilities as closely as possible and the position is monitored regularly. Under the Solvency II regulatory regime, additional interest rate risk results from the way the balance sheet is constructed, such as the requirement for us to include a risk margin. The UK business continually assesses the need for any derivatives in managing its interest rate sensitivity. The with‑profits business is exposed to interest rate risk because of underlying guarantees in some of its products. Such risk is largely borne by the with‑profits fund itself but shareholder support may be required in extreme circumstances where the fund has insufficient resources to support the risk.

In Asia, our exposure to interest rate risk arises from the guarantees of some non unit‑linked investment products. This exposure exists because it may not be possible to hold assets which will provide cash payments to us which match exactly those payments we in turn need to make to policyholders – this is known as an asset and liability mismatch and although it is small and appropriately managed, it cannot be eliminated.

Jackson is exposed to interest rate risk in its fixed, fixed index and variable annuity books. Movements in interest rates can impact on the cost of guarantees in these products, in particular the cost of guarantees may increase when interest rates fall. We actively monitor the level of sales of variable annuity products with guaranteed living benefits, and together with the risk limits we have in place this helps us to ensure that we are comfortable with the interest rate and market risks we incur as a result. The Jackson hedging programme includes hybrid derivatives to protect us from a combined fall in interest rates and equity markets since Jackson is exposed to the combination of these market movements.

Foreign exchange risk

The geographical diversity of our businesses means that we have some exposure to the risk of exchange rate fluctuations. Our operations in the US and Asia, which represent a large proportion of our operating profit and shareholders’ funds, generally write policies and invest in assets in local currencies. Although this limits the effect of exchange rate movements on local operating results, it can lead to fluctuations in our Group financial statements when results are reported in UK sterling.

We retain revenues locally to support the growth of our business and capital is held in the local currency of the business to meet local regulatory and market requirements. We accept the foreign exchange risk this can produce when reporting our Group balance sheet and income statement. In cases where a surplus arises in an overseas operation which is to be used to support Group capital, or where a significant cash payment is due from an overseas subsidiary to the Group, this foreign exchange exposure is hedged where we believe it is economically favourable to do so. Generally, we do not have appetite for significant direct shareholder exposure to foreign exchange risks in currencies outside of the countries in which we operate, but we do have some controlled appetite for this on fee income

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and on non‑sterling investments within the with‑profits fund. Where foreign exchange risk arises outside our appetite, currency borrowings, swaps and other derivatives are used to manage our exposure.

Credit risk

We invest in bonds that provide a regular, fixed amount of interest income (fixed income assets) in order to match the payments we need to make to policyholders. We also enter into reinsurance and derivative contracts with third parties to mitigate various types of risk, as well as holding cash deposits at certain banks. As a result, we are exposed to credit risk and counterparty risk across our business.

Credit risk is the potential for reduction in the value of our investments which results from the perceived level of risk of an investment issuer being unable to meet its obligations (defaulting). Counterparty risk is a type of credit risk and relates to the risk of the counterparty to any contract we enter into being unable to meet their obligations, causing us to suffer loss.

We use a number of risk management tools to manage and mitigate this credit risk, including the following:

• Our credit risk policy;

• Risk appetite statements and limits that we have defined on issuers and counterparties;

• Collateral arrangements we have in place for derivative, reverse repo and reinsurance transactions;

• The Group Credit Risk Committee’s oversight of credit and counterparty credit risk and sector and/or name‑ specific reviews. In the first half of 2017 it has conducted sector reviews in the Asia sovereign sector and continues to review the developments around central clearing;

• Regular deep dive assessments; and

• Close monitoring or restrictions on investments that may be of concern.

Debt and loan portfolio

Our UK business is mainly exposed to credit risk on fixed income assets in the shareholder‑backed portfolio. At 30 June 2017, this portfolio contained fixed income assets worth £35.4 billion. Credit risk arising from a further £55.9 billion of fixed income assets is largely borne by the with‑profits fund, to which the shareholder is not directly exposed although under extreme circumstances shareholder support may be required if the fund is unable to meet payments as they fall due.

The value of our debt portfolio in our Asia business was £39.1 billion at 30 June 2017. The majority (69 per cent) of the portfolio is in unit‑linked and with‑profits funds and so exposure of the shareholder to this component is minimal. The remaining

31 per cent of the debt portfolio is held to back the shareholder business.

Credit risk also arises in the general account of the Jackson business, where £38.0 billion of fixed income assets are held to support shareholder liabilities including those from our fixed annuities, fixed index annuities and life insurance products.

The shareholder‑owned debt and loan portfolio of the Group’s asset management business of £2.4 billion as at 30 June 2017 mostly belongs to our Prudential Capital (PruCap) operations.

Further details of the composition and quality of our debt portfolio, and exposure to loans, can be found in the IFRS financial statements.

Group sovereign debt

We also invest in bonds issued by national governments. This sovereign debt represented 17 per cent or £14.9 billion of the shareholder debt portfolio as at 30 June 2017 (31 December 2016: 19 per cent or £17.1 billion). 5 per cent of this was rated AAA and 90 per cent was considered investment grade (31 December 2016: 92 per cent investment grade). At 30 June 2017, the Group’s shareholder holding in Eurozone sovereign debt[1] was £844 million. 77 per cent of this relates to German government debt[2] (31 December 2016: 75 per cent).

The particular risks associated with holding sovereign debt are detailed further in our disclosures on risk factors.

The exposures held by the shareholder‑ backed business and with‑profits funds in sovereign debt securities at 30 June 2017 are given in Note C3.2(f) of the Group’s IFRS financial statements.

Bank debt exposure and counterparty credit risk

Our exposure to banks is a key part of our core investment business, as well as being important for the hedging and other activities we undertake to manage our various financial risks. Given the importance of our relationship with our banks, exposure to the sector is considered a key risk for the Group with an appropriate level of management information provided to the Group’s risk committees and the Board.

The exposures held by the shareholder‑ backed business and with‑profits funds in bank debt securities at 30 June 2017 are given in Note C3.2(f) of the Group’s IFRS financial statements.

Our exposure to derivative counterparty and reinsurance counterparty credit risk is managed using an array of risk management tools, including a comprehensive system of limits.

Where appropriate, we reduce our exposure, buy credit protection or use additional collateral arrangements to manage our levels of counterparty credit risk.

At 30 June 2017, shareholder exposures by rating and sector are shown below:

• 96 per cent of the shareholder portfolio is investment grade rated. In particular, 69 per cent of the portfolio is rated A and above; and

• The Group’s shareholder portfolio is well diversified: no individual sector makes up more than 10 per cent of the total portfolio (excluding the financial and sovereign sectors).

Liquidity risk

Our liquidity risk arises from the need to have sufficient liquid assets to meet policyholder and third‑party payments as they fall due. This incorporates the risk arising from funds composed of illiquid assets and results from a mismatch between the liquidity profile of assets and liabilities. Liquidity risk may arise, for example, where external capital is unavailable at sustainable cost, increased liquid assets are required to be held as collateral under derivative transactions or redemption requests are made against Prudential issued illiquid funds.

We have significant internal sources of liquidity, which are sufficient to meet all of our expected cash requirements for at least 12 months from the date the financial statements are approved, without having to resort to external sources of funding. In total, the Group has £2.6 billion of undrawn committed facilities that we can make use of, £2.4 billion of which expire in 2022 and £0.2 billion in 2021. We have access to further liquidity by way of the debt capital markets, and also have in place an extensive commercial paper programme and have maintained a consistent presence as an issuer in this market for the last decade.

Liquidity uses and sources are assessed at a Group and business unit level under both base case and stressed assumptions. We calculate a Liquidity Coverage Ratio (LCR) under stress scenarios as one measure of our liquidity risk, and this ratio and the liquidity resources available to us are regularly monitored and are assessed to be sufficient.

Our risk management and mitigation of liquidity risk include:

• Our liquidity risk policy;

• The risk appetite statements, limits and triggers that we have in place;

• The monitoring of liquidity risk we perform through regular management information to committees and the Board;

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• Our Liquidity Risk Management Plan, which includes details of the Group Liquidity Risk Framework as well as gap analysis of our liquidity risks and the adequacy of our available liquidity resources under normal and stressed conditions;

• Regular stress testing;

• Our established contingency plans and identified sources of liquidity;

• Our ability to access the money and debt capital markets;

• Regular deep dive assessments; and

• The access we enjoy to external sources of finance through committed credit facilities.

Risks from our products

Insurance risk

Insurance risk makes up a significant proportion of our overall risk exposure. The profitability of our businesses depends on a mix of factors including levels of, and trends in, mortality (policyholders dying), morbidity (policyholders becoming ill) and persistency (customers lapsing their policies), and increases in the costs of claims, including the level of medical expenses increases over and above price inflation (claim inflation).

The key drivers of the Group’s insurance risks are persistency and morbidity risk in the Asia business; and longevity risk in the Jackson and Prudential UK & Europe businesses.

We manage and mitigate our insurance risk using the following:

• Our insurance and underwriting risk policies;

• The risk appetite statements, limits and triggers we have in place;

• Longevity, morbidity and persistency assumptions that reflect recent experience and expectation of future trends, and industry data and expert judgement where appropriate;

• Reinsurance to mitigate longevity and morbidity risks;

• Appropriate underwriting when policies are issued and claims are received to mitigate morbidity risk;

• The quality of sales processes and initiatives to increase customer retention to mitigate persistency risk;

• Medical expense inflation risk mitigated through product re‑pricing; and

• Regular deep dive assessments.

Longevity risk is an important element of our insurance risks for which we need to hold a large amount of capital under Solvency II regulations. Longevity reinsurance is a key tool for us in managing our risk. The enhanced pensions freedoms introduced in the UK during 2015 greatly reduced the demand for retail annuities and further liberalisation is anticipated. Although we have scaled down our participation in the annuity market by reducing new business acquisition, given our significant annuity portfolio the assumptions we make about future rates of improvement in mortality rates remain key to the measurement of our insurance liabilities and to our assessment of any reinsurance transactions.

We continue to conduct research into longevity risk using both experience from our annuity portfolio and industry data. Although the general consensus in recent years is that people are living longer, there is considerable volatility in year‑on‑year longevity experience, which is why we need expert judgement in setting our longevity basis.

Our morbidity risk is mitigated by appropriate underwriting when policies are issued and claims are received. Our morbidity assumptions reflect our recent experience and expectation of future trends for each relevant line of business.

In Asia, we write significant volumes of health protection business, and so a key assumption for us is the rate of medical inflation, which is often in excess of general price inflation. There is a risk that the expenses of medical treatment increase more than we expect, so the medical claim cost passed on to us is higher than anticipated. Medical expense inflation risk is best mitigated by retaining the right to re‑price our products each year and by having suitable overall claim limits within our policies, either limits per type of claim or in total across a policy.

Our persistency assumptions similarly reflect a combination of recent past experience for each relevant line of business and expert judgement, especially where a lack of relevant and credible experience data exists. Any expected change in future persistency is also reflected in the assumption. Persistency risk is mitigated by appropriate training and sales processes and managed locally post‑sale through regular experience monitoring and the identification of

common characteristics of business with high lapse rates. Where appropriate, we make allowance for the relationship (either assumed or historically observed) between persistency and investment returns and account for the resulting additional risk. Modelling this dynamic policyholder behaviour is particularly important when assessing the likely take‑up rate of options embedded within certain products. The effect of persistency on our financial results can vary but mostly depends on the value of the product features and market conditions.

Risks from our business operations

Operational risk

Operational risk is the risk of loss (or unintended gain or profit) arising from inadequate or failed internal processes, personnel and systems, or from external events. This includes employee error, model error, system failures, fraud or some other event which disrupts business processes.

We manage and mitigate our operational risk using the following:

• Operational risk and outsourcing and third‑party supply policies;

• Corporate insurance programmes to limit the impact of operational risks;

• Scenario analysis for operational risk capital requirements, which focus on extreme, yet plausible, events;

• Internal and external review of cyber security capability;

• Regular testing of elements of the disaster recovery plan;

• Group and business unit level compliance oversight and testing in respect of adherence with in‑force regulations; and

• Regulatory change teams in place assist the business in proactively adapting and complying with regulatory developments.

An important element of operational risk relates to compliance with changing regulatory requirements. The high rate of global regulatory change, in an already complex regulatory landscape, increases the risk of non‑compliance due to a failure to identify, correctly interpret, implement and/or monitor regulations. Legislative developments over recent years, together with enhanced regulatory oversight and increased capability to issue sanctions, have resulted in a complex regulatory environment that may lead to breaches of varying magnitude if the Group’s business‑ as‑usual operations are not compliant. As

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well as prudential regulation, we focus on conduct regulation, including regulations related to anti‑money laundering, bribery and corruption, and sales practices. We have a particular focus on these regulations in newer/emerging markets.

The performance of core activities places reliance on the IT infrastructure that supports day‑to‑day transaction processing. Our IT environment must also be secure and we must address an increasing cyber risk threat as our digital footprint increases – see separate Cyber risk section below. The risk that our IT infrastructure does not meet these requirements is a key area of focus, particularly the risk that legacy IT infrastructure supporting core activities/ processes affects business continuity or impacts on business growth.

Addressing these key risks requires change and transformation activities in order for Prudential to meet the expectations of its stakeholders, regulators, customers and shareholders, as well as to maintain market competitiveness in an industry where innovation is steadily accelerating. There are financial and reputational implications if such activities fail (either wholly or in part) to meet their objectives, and even if successful there is a potential to alter Prudential’s operational risk profile. Owing to these factors, the execution and implications of internal change activities is an important area of focus.

As well as the above, other key areas of focus within operational risk include:

• The risk of a significant failure of a third‑party outsourcing partner impacting critical services;

• The risk of trading or transaction errors having a material cost across the Group;

• The risk that errors within models and user‑developed applications used by the Group result in incorrect or inappropriate transactions being instructed;

• Departure of key persons or teams resulting in disruption to current and planned business activities;

• The risk that key people, processes and systems are unable to operate (thus impacting on the ongoing operation of the business) due to a significant unexpected external event; for example, pandemic, terrorist attack, natural disaster or political unrest; and

• The risk of inadequate or inappropriate controls, governance structures or communication channels in place to support the desired culture and ensure that the business is managed in line with the core business values, within the established risk appetite and in alignment with external stakeholder expectations.

Global regulatory and political risk Our risk management and mitigation of regulatory and political risk includes the following:

• Risk assessment of the Business Plan which includes consideration of current strategies;

• Close monitoring and assessment of our business environment and strategic risks;

• Board strategy sessions that consider risk themes;

• A Systemic Risk Management Plan that details the Group’s strategy and Risk Management Framework; and

• A Recovery Plan covering corporate and risk governance for managing risks in a distressed environment, a range of recovery options, and scenarios to assess the effectiveness of these recovery options.

On 29 March 2017 the UK submitted formal notification of its intention to withdraw from the EU. The potential outcome of the negotiations on UK withdrawal and any subsequent negotiations on trade and access to major trading markets, including the single EU market, is currently highly uncertain. Following submission of this notification, the UK has a period of two years to negotiate the terms of its withdrawal from the EU. If no formal withdrawal agreement is reached then it is expected the UK’s membership of the EU will automatically terminate two years after the submission of the notification.

The ongoing uncertainty and likelihood of a lengthy negotiation period may increase volatility in the markets where we operate, creating the potential for a general downturn in economic activity and for further or prolonged falls in interest rates in some jurisdictions due to easing of monetary policy and investor sentiment. We have several UK‑domiciled operations, including Prudential UK and M&G, and these may be impacted by a UK withdrawal from the EU. However, our diversification by geography, currency, product and distribution should reduce some of the potential impact. Contingency plans were developed ahead of the referendum by business units and operations that may be immediately impacted by a vote to withdraw the UK from the EU, and these plans have been enacted since the referendum result.

The UK’s decision to leave the EU has the potential to result in changes to future applicability of the Solvency II regime in the UK. The European Commission has commenced a review of some elements of the application of the Solvency II legislation with a particular focus on the Solvency Capital Requirement calculated using the standard formula.

National and regional efforts to curb systemic risk and promote financial stability are also underway in certain jurisdictions in which Prudential operates, including the Dodd‑Frank Wall Street Reform and Consumer Protection Act in the US, and other European Union legislation related to the financial services industry, such as MiFID2.

There are a number of ongoing policy initiatives and regulatory developments that are having, and will continue to have, an impact on the way Prudential is supervised. These include addressing Financial Conduct Authority (FCA) reviews, ongoing engagement with the Prudential Regulation Authority (PRA), and the work of the Financial Stability Board (FSB) and standard‑setting institutions such as the International Association of Insurance Supervisors (IAIS). Decisions taken by regulators, including those related to solvency requirements, corporate or governance structures, capital allocation and risk management may have an impact on our business.

The IAIS’s Global Systemically Important Insurer (G‑SII) regime forms additional compliance considerations for us. Groups designated as G‑SIIs are subject to additional regulatory requirements, including enhanced group‑wide supervision, effective resolution planning, development of a Systemic Risk Management Plan, a Recovery Plan and a Liquidity Risk Management Plan. Prudential’s designation as a 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. The IAIS is intending to review the G‑SII designation methodology, including considering the activity based approach to systemic risk assessment in 2019.

We continue to engage with the IAIS on developments in capital requirements for groups with G‑SII designation. The regime introduces capital requirements in the form of a Higher Loss Absorption (HLA) requirement. While this requirement was initially intended to come into force in 2019, this has now been postponed to 2022. The HLA is also now intended to be based on the Insurance Capital Standard (ICS), which is being developed by the IAIS as the capital requirements under its Common Framework (ComFrame). This framework is focused on the supervision of Internationally Active Insurance Groups and will establish a set of common principles and standards designed to assist regulators in addressing risks that arise from insurance groups with operations in

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multiple jurisdictions. As part of this, work is underway to develop a global Insurance Capital Standard that is intended to apply to Internationally Active Insurance Groups.

A consultation on the ICS was concluded in 2016 and the IAIS intends to publish an interim version of ICS in 2017. Further field testing, consultations and private reporting to group‑wide supervisors on the interim version of the ICS are expected over the coming years. It is currently planned to be adopted as part of ComFrame by the IAIS in late 2019.

The IAIS’s Insurance Core Principles, which provide a globally‑accepted framework for the supervision of the insurance sector and ComFrame evolution, are expected to create continued development in both prudential and conduct regulations over the next two to three years.

In the US, the Department of Labor rule became effective on 9 June 2017 (although some provisions do not come into effect until January 2018), and introduces new fiduciary obligations for distributors of investment products to holders of regulated accounts, which may dramatically reshape the distribution of retirement products. Jackson’s strong relationships with distributors, history of product innovation and efficient operations should help mitigate any impacts.

The US National Association of Insurance Commissioners (NAIC) is currently conducting an industry consultation with the aim of reducing the non‑economic volatility in the variable annuity statutory balance sheet and risk management. Following an industry quantitative impact study, changes have been proposed to the current framework; however, these are considered to be at an early stage of development. Jackson continues to be engaged in the consultation and testing process. The proposal is expected to be effective from 2019 at the earliest.

With the new US administration having taken office in January 2017, the potential uncertainty as to the timetable and status of these key US reforms has increased given preliminary indications from Washington. Our preparations to manage the impact of these reforms will continue until further clarification is provided.

In May 2017, the International Accounting Standards Board (IASB) published IFRS 17 which will introduce fundamental changes to the statutory reporting of insurance entities that prepare accounts according to IFRS from 2021. We are currently considering the potential impact of the complex requirements of this standard

on the Group which can be expected to, among other things, alter the timing of IFRS profit recognition.

In Asia, regulatory regimes are developing at different speeds, driven by a combination of global factors and local considerations. New requirements could be introduced in these and other regulatory regimes that challenge legal or ownership structures, current sales practices, or could retrospectively be applied to sales made prior to their introduction, which could have a negative impact on Prudential’s business or reported results.

Cyber risk

Cyber risk is an area of increased scrutiny for global regulators after a number of recent high profile attacks and data losses. The growing maturity and industrialisation of cyber‑criminal capability, together with an increasing level of understanding of complex financial transactions by criminal groups, are two reasons why risks to the financial services industry are increasing. Developments in data protection worldwide (such as the EU General Data Protection Regulation that is expected to come into force in 2018) may increase the financial and reputational implications for Prudential on a breach of its IT systems.

Given this, cyber security is seen as a key risk for the Group. Our current threat assessment is that, while we are not individually viewed as a compelling target for a direct cyber attack, there have been recent changes to the threat landscape and the risk from untargeted but sophisticated and automated attacks has increased, as has the risk stemming from geopolitical tensions. These have the potential to significantly impact on business continuity, our customer relationship and our brand reputation.

The Board receives periodic updates on cyber risk management throughout the year. The current Group‑wide Cyber Risk Management Strategy and the associated Group‑wide Coordinated Cyber Defence Plan were approved by the Board in 2016.

The Cyber Risk Management Strategy includes three core objectives: to develop a comprehensive situational awareness of our business in cyberspace; to pro‑actively engage cyber attackers to minimise harm to our business; and to enable the business to grow confidently and safely in cyberspace.

The Cyber Defence Plan consists of a number of work‑streams, including developing our ability to deal with incidents; alignment with our digital transformation strategy; and increasing cyber oversight and assurance to the Board.

Protecting our customers remains core to our business, and the successful delivery of the Cyber Defence Plan will reinforce our capabilities to continue doing so in cyberspace as we transition to a digital business.

Group functions work with each of the business units to address cyber risks locally within the national and regional context of each business, following the strategic direction laid out in the Cyber Risk Management Strategy and managed through the execution of the Cyber Defence Plan.

The Group Information Security Committee, which consists of senior executives from each of the businesses and meets on a regular basis, governs the execution of the Cyber Defence Plan and reports on delivery and cyber risks to the Group Executive Risk Committee. Both committees also receive regular operational management information on the performance of controls.

==> picture [212 x 181] intentionally omitted <==

Penny James Group Chief Risk Officer

Notes

1 Excludes Group’s proportionate share in joint ventures and associates and unit‑linked assets and holdings of consolidated unit trust and similar funds.

2 Including bonds guaranteed by the federal government.

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03 International Financial Reporting Standards (IFRS) basis results

30 0 0 XxxIndex to Group IFRS financial results 00089 XxxStatement of Directors’ responsibilities 90 Independent review report to Prudential plc

Patrick’s story M&G

‘Saving for the future is part of my DNA, which is why investing with a company like M&G is important to me. I know that looking after customers’ money is part of their DNA too.’

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Index to Group IFRS financial results

International Financial Reporting Standards

(IFRS) basis results

• 31 Condensed consolidated income statement

• 32 Condensed consolidated statement of comprehensive income

• 33 Condensed consolidated statement of changes in equity 35 Condensed consolidated statement of financial position 36 Condensed consolidated statement of cash flows

Notes

A	Background	Background		C	Balance sheet notes	Balance sheet notes
37	A1	Basis of	preparation, audit status	52	C1	Analysis of Group statement of fnancial
		and exchange rates				position by segment
37	A2	New accounting pronouncements			C2	Analysis of segment statement of fnancial
		in 2017				position by business type
				54		C2.1 Asia insurance operations
B	Earnings performance			55		C2.2 US insurance operations
	B1	Analysis of performance by segment		56		C2.3 UK insurance operations
38		B1.1	Segment results – proft before tax		C3	Assets and liabilities – classifcation
39		B1.2	Short‑term fuctuations in investment			and measurement
			returns on shareholder‑backed business	57		C3.1 Group assets and liabilities – measurement
42		B1.3	Determining operating segments	65		C3.2 Debt securities
			and performance measure of	72		C3.3 Loans portfolio
			operating segments		C4	Policyholder liabilities and unallocated surplus
43		B1.4	Additional segmental analysis of revenue			of with‑profts funds
44	B2	Proft before tax – asset management operations				C4.1 Movement of liabilities
45	B3	Acquisition costs and other expenditure		74		C4.1(a) Group overview
45	B4	Effect of changes and other accounting		76		C4.1(b) Asia insurance operations
		features on insurance assets and liabilities		78		C4.1(c) US insurance operations
46	B5	Tax charge		79		C4.1(d) UK insurance operations
50	B6	Earnings per share			C5	Intangible assets
51	B7	Dividends		80		C5(a) Goodwill
				80		C5(b) Deferred acquisition costs and
						other intangible assets
					C6	Borrowings
				82		C6.1 Core structural borrowings of shareholder‑
						fnanced operations
				83		C6.2 Other borrowings
				84	C7	Deferred tax
				85	C8	Defned beneft pension schemes
				87	C9	Share capital, share premium and own shares
				D	Other	notes
				88	D1	Sale of Korea life business
				88	D2	Contingencies and related obligations
				88	D3	Post balance sheet events
				88	D4	Related party transactions

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Condensed consolidated income statement

Note	2017£m	2016£m
	Half year	Half year Full year
Earned premiums, net of reinsurance Investment return Other income	21158	17,394 36,961 17,062 32,511 1,085 2,370
	, 20629
	, 1,222
Total revenue, net of reinsurance B1.4	43,009	35,541 71,842
Benefts and claims and movement in unallocated surplus of with‑profts funds, net of reinsurance Acquisition costs and other expenditure B3 Finance costs: interest on core structural borrowings of shareholder‑ fnanced operations Disposal of Korea life business: Cumulative exchange gain recycled from other comprehensive income D1 Remeasurement adjustments D1	(35442)	(30,939) (59,366) (3,563) (8,848) (169) (360) – – – (238)
	, (5330)
	, (216)
	61
	5
Total charges, net of reinsurance	(40,922)	(34,671) (68,812)
Share ofprofts fromjoint ventures and associates, net of related tax	120	86 182
Proft before tax (being tax attributable to shareholders’ and policyholders’ returns)* Less tax charge attributable topolicyholders’ returns	2207	956 3,212 (292) (937)
	, (393)
Proft before tax attributable to shareholders B1.1 Total tax charge attributable to policyholders and shareholders B5 Adjustment to remove tax charge attributable to policyholders’ returns Tax (charge) credit attributable to shareholders’ returns B5	1,814	664 2,275
	(702)	(269) (1,291) 292 937
	393
	(309)	23 (354)
Proft for theperiod attributable to equityholders of the Company	1,505	687 1,921
Earningsper share (inpence) Note	2017	2016
	Half year	Half year Full year
Based on proft attributable to the equity holders of the Company: B6 Basic Diluted		26.9p 75.0p 26.8p 75.0p
	58.7p
	58.6p
Dividendsper share (inpence) Note	2017	2016
	Half year	Half year Full year
Dividends relating to reporting period: B7 First interim ordinary dividend Second interim ordinarydividend		12.93p 12.93p – 30.57p
	14.50p
	–
Total	14.50p	12.93p 43.50p
Dividends paid in reporting period: B7 Current year frst interim ordinary dividend Second interim ordinary dividend for prior year Special dividend forprioryear		– 12.93p 26.47p 26.47p 10.00p 10.00p
	–
	30.57p
	–
Total	30.57p	36.47p 49.40p

• This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders. This is because the corporate taxes of the Group include those on the income of consolidated with‑profits and unit‑linked funds that, through adjustments to benefits, are borne by policyholders. These amounts are required to be included in the tax charge of the Company under IAS 12. Consequently, the profit before all taxes measure (which is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of the PAC with‑profits fund after adjusting for taxes borne by policyholders) is not representative of pre‑tax profits attributable to shareholders.

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Condensed consolidated statement of comprehensive income

Note	2017£m	2016£m
	Half year	Half year Full year
Proft for the period Other comprehensive income: Items that may be reclassifed subsequently to proft or loss Exchange movements on foreign operations and net investment hedges: Exchange movements arising during the period Cumulative exchange gain of Korea life business recycled through proft and loss D1 Related tax	1505	687 1,921 798 1,148 – – 8 13
	,
	(220)
	(61)
	(4)
	(285)	806 1,161
Net unrealised valuation movements on securities of US insurance operations classifed as available‑for‑sale: Net unrealised holding gains arising during the period Add back net losses (deduct net gains) included in the income statement on disposal and impairment		2,023 241 95 (269)
	565
	(34)
Total C3.2(c)	531	2,118 (28)
Related change in amortisation of deferred acquisition costs C5(b) Related tax	(69)	(435) 76 (589) (17)
	(162)
	300	1,094 31
Total	15	1,900 1,192
Items that will not be reclassifed to proft or loss Shareholders’ share of actuarial gains and losses on defned beneft pension schemes: Gross Related tax		11 (107) (2) 14
	53
	(7)
	46	9 (93)
Other comprehensive income for theperiod, net of related tax		1,909 1,099
	61
Total comprehensive income for the period attributable to the equityholders of the Company	1,566	2,596 3,020

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Condensed consolidated statement of changes in equity

Note	Period ended 30 June 2017£m
	Share capital note C9 Share premium note C9 Retained earnings Translation reserve Available- for-sale securities reserves Share- holders’ equity	Non- controlling interests	Total equity
Reserves Proft for the period Other comprehensive income (loss)
	– – 1505 – – 1505	–	1505
	, , – – 46 (285) 300 61	–	, 61
Total comprehensive income (loss) for the period Dividends B7 Reserve movements in respect of share‑based payments Share capital and share premium New share capital subscribed C9 Treasury shares Movement in own shares in respect of share‑based payment plans Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS	– – 1551 (285) 300 1566	–	1566
	, ,		,
	– – (786) – – (786)	–	(786)
	– – 22 – – 22	–	22
	– 10 – – – 10	–	10
	– – (12) – – (12)	–	(12)
	– – (17) – – (17)	–	(17)
Net increase (decrease) in equity At beginningofperiod	– 10 758 (285) 300 783	–	783
	129 1,927 10,942 1,310 358 14,666	1	14,667
At end ofperiod	129 1,937 11,700 1,025 658 15,449	1	15,450
Note	Period ended 30 June 2016£m
	Share capital note C9 Share premium note C9 Retained earnings Translation reserve Available- for-sale securities reserves Share- holders’ equity	Non- controlling interests	Total equity
Reserves Proft for the period Other comprehensive income	– – 687 – – 687 – – 9 806 1,094 1,909	– –	687 1,909
Total comprehensive income for the period Dividends B7 Reserve movements in respect of share‑based payments Share capital and share premium New share capital subscribed C9 Treasury shares Movement in own shares in respect of share‑based payment plans Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS	– – 696 806 1,094 2,596 – – (935) – – (935) – – (54) – – (54) – 6 – – – 6 – – 22 – – 22 – – 15 – – 15	– – – – – –	2,596 (935) (54) 6 22 15
Net increase (decrease) in equity At beginningofperiod	– 6 (256) 806 1,094 1,650 128 1,915 10,436 149 327 12,955	– 1	1,650 12,956
At end ofperiod	128 1,921 10,180 955 1,421 14,605	1	14,606

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Condensed consolidated statement of changes in equity Continued

Note	Year ended 31 December 2016£m
	Share capital note C9 Share premium note C9 Retained earnings Translation reserve Available- for-sale securities reserves Share- holders’ equity	Non- controlling interests	Total equity
Reserves Proft for the year Other comprehensive income (loss)	– – 1,921 – – 1,921 – – (93) 1,161 31 1,099	– –	1,921 1,099
Total comprehensive income for the year Dividends B7 Reserve movements in respect of share‑based payments Share capital and share premium New share capital subscribed C9 Treasury shares Movement in own shares in respect of share‑based payment plans Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS	– – 1,828 1,161 31 3,020 – – (1,267) – – (1,267) – – (51) – – (51) 1 12 – – – 13 – – 2 – – 2 – – (6) – – (6)	– – – – – –	3,020 (1,267) (51) 13 2 (6)
Net increase in equity At beginningofyear	1 12 506 1,161 31 1,711 128 1,915 10,436 149 327 12,955	– 1	1,711 12,956
At end ofyear	129 1,927 10,942 1,310 358 14,666	1	14,667

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Condensed consolidated statement of financial position

Note	2017£m	2016£m
	30 Jun	30 Jun 31 Dec
Assets Goodwill C5(a) Deferred acquisition costs and other intangible assets C5(b) Property, plant and equipment Reinsurers’ share of insurance contract liabilities Deferred tax assets C7 Current tax recoverable Accrued investment income Other debtors Investment properties Investment in joint ventures and associates accounted for using the equity method Loans C3.3 Equity securities and portfolio holdings in unit trusts Debt securities C3.2 Derivative assets Other investments Deposits Assets held for sale Cash and cash equivalents		1,677 1,628 9,594 10,807 1,214 743 9,470 10,051 3,771 4,315 554 440 2,764 3,153 3,505 3,019 13,940 14,646 1,135 1,273 14,215 15,173 176,037 198,552 168,367 170,458 5,495 3,936 4,845 5,465 14,181 12,185 30 4,589 8,530 10,065
	1501
	, 10757
	, 727
	9709
	, 4105
	, 700
	2887
	, 3417
	, 15218
	, 1293
	, 16952
	, 210437
	, 170793
	, 3789
	, 5566
	, 13353
	, 33
	9,893
Total assets C1	481,130	439,324 470,498
Equity Shareholders’ equity Non‑controllinginterests		14,605 14,666 1 1
	15449
	, 1
Total equity	15,450	14,606 14,667
Liabilities Contract liabilities (including amounts in respect of contracts classifed as investment contracts under IFRS 4) C4.1(a) Unallocated surplus of with‑profts funds C4.1(a) Core structural borrowings of shareholder‑fnanced operations C6.1 Operational borrowings attributable to shareholder‑fnanced operations C6.2(a) Borrowings attributable to with‑profts operations C6.2(b) Obligations under funding, securities lending and sale and repurchase agreements Net asset value attributable to unit holders of consolidated unit trusts and similar funds Deferred tax liabilities C7 Current tax liabilities Accruals, deferred income and other liabilities Provisions Derivative liabilities Liabilities held for sale		362,510 388,996 13,597 14,317 5,966 6,798 2,798 2,317 1,427 1,349 4,963 5,031 8,770 8,687 5,397 5,370 566 649 12,915 13,825 467 947 5,342 3,252 – 4,293
	398980
	, 15090
	, 6614
	, 2096
	, 3336
	, 6408
	, 8577
	, 5683
	, 743
	14524
	, 759
	2870
	, –
Total liabilities C1	465,680	424,718 455,831
Total equityand liabilities	481,130	439,324 470,498

Included within equity securities and portfolio holdings in unit trusts, debt securities and other investments are £9,182 million of lent securities as at 30 June 2017 (30 June 2016: £8,162 million; 31 December 2016: £8,545 million).

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Condensed consolidated statement of cash flows

Note	2017£m	2016£m
	Half year	Half year Full year
Cash fows from operating activities Proft before tax (being tax attributable to shareholders’ and policyholders’ returns)note (i) Non‑cash movements in operating assets and liabilities refected in proft before tax: Other non‑investment and non‑cash assets Investments Policyholder liabilities (including unallocated surplus) Other liabilities (including operational borrowings) Other itemsnote (ii)		956 3,212 (2,660) (2,490) (21,280) (37,824) 19,548 31,135 3,836 7,861 403 307
	2207
	,
	(550)
	(26539)
	, 21597
	, 3390
	, (15)
Net cash fows from operatingactivities	90	803 2,201
Cash fows from investing activities Net cash outfows from purchases and disposals of property, plant and equipment Net cash infows (outfows) from corporate transactionsnote (iii)		(32) (246) (302) (303)
	(56)
	813
Net cash fows from investingactivities	757	(334) (549)
Cash fows from fnancing activities Structural borrowings of the Group: Shareholder‑fnanced operations:note (iv) C6.1 Issue of subordinated debt, net of costs Interest paid With‑profts operations:note (v) C6.2 Interest paid Equity capital: Issues of ordinary share capital Dividendspaid		681 1,227 (160) (335) (4) (9) 6 13 (935) (1,267)
	–
	(207)
	(4)
	10
	(786)
Net cash fows from fnancingactivities	(987)	(412) (371)
Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of period Effect of exchange rate changes on cash and cash equivalents	(140)	57 1,281 7,782 7,782 691 1,002
	10065
	, (32)
Cash and cash equivalents at end ofperiod	9,893	8,530 10,065

Notes

(i) This measure as explained in the footnote to the income statement is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders.

(ii) The adjusting items to profit before tax included within other items are adjustments in respect of non‑cash items together with operational interest receipts and payments, dividend receipts and tax paid.

(iii) Net cash flows for corporate transactions are for distribution rights and the acquisition and disposal of businesses (including private equity and other subsidiaries acquired by with‑profits funds for investment purposes).

(iv) Structural borrowings of shareholder‑financed operations exclude borrowings to support short‑term fixed income securities programmes, non‑recourse borrowings of investment subsidiaries of shareholder‑financed operations and other borrowings of shareholder‑financed operations. Cash flows in respect of these borrowings are included within cash flows from operating activities.

The changes in the carrying value of the structural borrowings of shareholder‑financed operations during half year 2017 are analysed as follows:

	Non-cash movements£m
	Balance at 1 Jan 2017 Amortisation of issue costs Foreign exchange movement Balance at 30 Jun 2017
Structural borrowings of shareholder‑fnanced operations	6,798 7 (191) 6,614

(v) Interest paid on structural borrowings of with‑profits operations relate solely to the £100 million 8.5 per cent undated subordinated guaranteed bonds, which contribute to the solvency base of the Scottish Amicable Insurance Fund (SAIF), a ring‑fenced sub‑fund of the PAC with‑profits fund. There is no change in respect of the carrying value of the £100 million structural borrowings of the with‑profits operations during half year 2017. Cash flows in respect of other borrowings of with‑profits funds, which principally relate to consolidated investment funds, are included within cash flows from operating activities.

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A Background

A1 Basis of preparation, audit status and exchange rates

These condensed consolidated interim financial statements for the six months ended 30 June 2017 have been prepared in accordance with IAS 34, ‘Interim Financial Reporting’ as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU). The Group’s policy for preparing this interim financial information is to use the accounting policies adopted by the Group in its last consolidated financial statements, as updated by any changes in accounting policies it intends to make in its next consolidated financial statements as a result of new or amended IFRS that are applicable or available for early adoption for the next annual financial statements and other policy improvements. EU‑endorsed IFRS may differ from IFRSs issued by the IASB if, at any point in time, new or amended IFRS have not been endorsed by the EU. At 30 June 2017, there were no unendorsed standards effective for the period ended 30 June 2017 which impact the condensed consolidated financial statements of the Group, and there were no differences between IFRS endorsed by the EU and IFRS issued by the IASB in terms of their application to the Group.

The IFRS basis results for the 2017 and 2016 half years are unaudited. The 2016 full year IFRS basis results have been derived from the 2016 statutory accounts. The auditors have reported on the 2016 statutory accounts which have been delivered to the Registrar of Companies. The auditors’ report was: (i) unqualified; (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report; and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The exchange rates applied for balances and transactions in currencies other than the presentational currency of the Group, pounds sterling (GBP), were:

Closing rate at 30 Jun 2017 Average for the 6 months to 30 Jun 2017	Closing rate at 30 Jun 2016 Average for the 6 months to 30 Jun 2016 Closing rate at 31 Dec 2016 Average for 12 months to 31 Dec 2016
Local currency: £ Hong Kong 10.14 9.80 Indonesia 17,311.76 16,793.63 Malaysia 5.58 5.53 Singapore 1.79 1.77 China 8.81 8.66 India 83.96 82.77 Vietnam 29,526.43 28,612.70 Thailand 44.13 43.72 US 1.30 1.26	10.37 11.13 9.58 10.52 17,662.47 19,222.95 16,647.30 18,026.11 5.39 5.87 5.54 5.61 1.80 1.98 1.79 1.87 8.88 9.37 8.59 8.99 90.23 96.30 83.86 91.02 29,815.99 31,996.45 28,136.99 30,292.79 46.98 50.81 44.25 47.80 1.34 1.43 1.24 1.35

Certain notes to the financial statements present half year 2016 comparative information at constant exchange rates (CER), in addition to the reporting at actual exchange rates (AER) used throughout the condensed consolidated financial statements. AER are actual historical exchange rates for the specific accounting period, being the average rates over the period for the income statement and the closing rates at the balance sheet date for the balance sheet. CER results are calculated by translating prior period results using the current period foreign exchange rate ie current period average rates for the income statement and current period closing rates for the balance sheet.

The accounting policies applied by the Group in determining the IFRS basis results in this report are the same as those previously applied in the Group’s consolidated financial statements for the year ended 31 December 2016, as disclosed in the 2016 statutory accounts.

A2 New accounting pronouncements in 2017

The IASB has issued the following new accounting pronouncements to be effective for 1 January 2017:

• Disclosure Initiative (Amendments to IAS 7, ‘Statement of Cash Flows’);

• Recognition of deferred tax assets for unrealised losses (Amendments to IAS 12, ‘Income Taxes’); and

• Annual Improvements to IFRSs 2014‑2016 Cycle.

The pronouncements have yet to be endorsed by the EU and will have no effect on the Group financial statements other than minor changes to disclosures.

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B Earnings performance

B1 Analysis of performance by segment

B1.1 Segment results – profit before tax

Note	2017£m	2016*£m	%	2016£m
	Half year	AER Half year note (iv) CER Half year note (iv)	Half year 2017 vs half year 2016 AER note (iv) Half year 2017 vs half year 2016 CER note (iv)	AER Full year
Asia operations Asia insurance operations B4(a) EastspringInvestments		667 752 61 69	30% 16% 36% 20%	1,503 141
	870
	83
Total Asia operations	953	728 821	31% 16%	1,644
US operations Jackson (US insurance operations) Broker-dealer and asset management		888 1,010 (12) (13)	22% 7% 50% 54%	2,052 (4)
	1079
	, (6)
Total US operations	1,073	876 997	22% 8%	2,048
UK operations UK insurance operations: B4(b) Long‑term business General insurance commissionnote (i)		473 473 19 19	1% 1% (11)% (11)%	799 29
	480
	17
Total UK insurance operations M&G Prudential Capital	497	492 492 225 225 13 13	1% 1% 10% 10% (54)% (54)%	828 425 27
	248
	6
Total UK operations	751	730 730	3% 3%	1,280
Total segmentproft	2,777	2,334 2,548	19% 9%	4,972
Other income and expenditure Investment return and other income Interest payable on core structural borrowings Corporate expenditurenote (ii)		6 6 (165) (165) (156) (165)	(100)% (100)% (31)% (31)% (10)% (4)%	1 (360) (334)
	–
	(216)
	(172)
Total	(388)	(315) (324)	(23)% (20)%	(693)
Solvency II implementation costs Restructuringcostsnote (iii)	–	(11) (11) (7) (7)	n/a n/a (343)% (343)%	(28) (38)
	(31)
Operating proft based on longer‑term investment returns before interest received from tax settlement Interest received from tax settlement	2358	2,001 2,206 43 43	18% 7% n/a n/a	4,213 43
	, –
Operating proft based on longer-term investment returns B1.3 Short‑term fuctuations in investment returns on shareholder‑ backed business B1.2 Amortisation of acquisition accounting adjustmentsnote (v) Cumulative exchange gain on the sold Korea life business recycled from other comprehensive income D1 Proft (loss) attachingto the held for sale Korea life business D1	2358	2,044 2,249 (1,385) (1,580) (35) (39) – – 40 47	15% 5% 59% 64% 9% 18% n/a n/a n/a n/a	4,256 (1,678) (76) – (227)
	, (573)
	(32)
	61
	–
Proft before tax attributable to shareholders	1,814	664 677	173% 168%	2,275
Tax (charge) credit attributable to shareholders’ returns B5	(309)	23 43	n/a n/a	(354)
Proft for theperiod attributable to shareholders	1,505	687 720	119% 109%	1,921

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Basic earningsper share (inpence) B6	2017	2016*	%	2016
	Half year	AER Half year note (iv) CER Half year note (iv)	Half year 2017 vs half year 2016 AER note (iv) Half year 2017 vs half year 2016 CER note (iv)	AER Full year
Based on operating proft based on longer‑term investment returns Based onproft for theperiod	70.0p	61.3p 67.6p 26.9p 28.2p	14% 4% 118% 108%	131.3p 75.0p
	58.7p

• The Group completed the sale of its life business in Korea in May 2017. Operating profit based on longer‑term investment returns for half year 2017 excludes the results attributable to the sold Korea life business, as described in note D1. This approach is consistent with the presentation of operating profit for full year 2016 reported in the Group 2016 Annual Report. Comparative operating profit for half year 2016 has been represented in order to show the results of the retained operations on a comparable basis, resulting in a reclassification in half year 2016 of £15 million of operating profit attributable to the Korea life business to non‑operating profit.

Notes

(i) General insurance commission represents the commission receivable net of expenses for Prudential‑branded general insurance products in connection with the arrangement to transfer the UK general insurance business to Churchill in 2002.

(ii) Corporate expenditure as shown above is for Group Head Office and Asia Regional Head Office.

(iii) Restructuring costs are incurred in the UK and Asia and represent one‑off business development expenses. (iv) For definitions of AER and CER refer to note A1.

(v) Amortisation of acquisition accounting adjustments principally relate to the REALIC business of Jackson.

B1.2 Short-term fluctuations in investment returns on shareholder-backed business

	2017£m	2016£m
	Half year	Half year Full year*
Insurance operations: Asianote (i) USnote (ii) UKnote (iii) Other operationsnote (iv)		1 (225) (1,440) (1,455) 246 198 (192) (196)
	41
	(754)
	9
	131
Total	(573)	(1,385) (1,678)

• Following its sale in May 2017, the half year 2016 comparative short‑term fluctuations in investment returns 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

(i) Asia insurance operations

In Asia, the positive short‑term fluctuations of £41 million principally reflect net value movements on shareholders’ assets and related liabilities following falls in bond yields across the region during the period (half year 2016: positive £1 million; full year 2016: negative £(225) million).

(ii) US insurance operations

The short‑term fluctuations in investment returns for US insurance operations are reported net of related credit for amortisation of deferred acquisition costs, of £231 million as shown in note C5 (half year 2016: credit of £616 million; full year 2016: credit of £565 million) and comprise amounts in respect of the following items:

	2017£m	2016£m
	Half year	Half year Full year
Net equity hedge resultnote (a) Other than equity‑related derivativesnote (b) Debt securitiesnote (c) Equity‑type investments: actual less longer‑term return Other items	(782)	(1,692) (1,587) 335 (126) (105) 201 13 35 9 22
	12
	5
	1
	10
Total	(754)	(1,440) (1,455)

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B Earnings performance Continued

B1 Analysis of performance by segment continued

B1.2 Short-term fluctuations in investment returns on shareholder-backed business continued

• Notes (a) Net equity hedge result The purpose of the inclusion of this item in short‑term fluctuations in investment returns is to segregate the amount included in pre‑tax profit that relates to the accounting effect of market movements on both the measured value of guarantees in Jackson’s variable annuity and fixed index annuity products and on the related derivatives used to manage the exposures inherent in these guarantees. As the Group applies US GAAP for the measured value of the product guarantees this item also includes asymmetric impacts where the measurement bases of the liabilities and associated derivatives used to manage the Jackson annuity business differ as described below. The result comprises the net effect of: 1 The accounting value movements on the variable and fixed index annuity guarantee liabilities. This includes: – The Guaranteed Minimum Death Benefit (GMDB), and the ‘for life’ portion of Guaranteed Minimum Withdrawal Benefit (GMWB) guarantees which are measured under the US GAAP basis applied for IFRS in a way that is substantially insensitive to the effect of current period equity market and interest rate changes; and

• – The ‘not for life’ portion of GMWB embedded derivative liabilities which are required to be measured under IAS 39 using a basis under which the projected future growth rate of the account balance is based on current swap rates (rather than expected rates of return) with only a portion of the expected future guarantee fees included. Reserve value movements on these liabilities are sensitive to changes to levels of equity markets, implied volatility and interest rates.

• 2 Adjustments in respect of fee assessments and claim payments; 3 Fair value movements on free‑standing equity derivatives held to manage equity exposures of the variable annuity guarantees and fixed index annuity embedded options; and

• 4 Related changes to DAC amortisation in accordance with the policy that DAC is amortised in line with emergence of margins. The net equity hedge result therefore includes significant accounting mismatches and other factors that detract from the presentation of an economic result. These other factors include: – The variable annuity guarantees and fixed index annuity embedded options being only partially fair valued under ‘grandfathered’ US GAAP; – The interest rate exposure being managed through the other than equity‑related derivative programme explained in note (b) below; and – Jackson’s management of its economic exposures for a number of other factors that are treated differently in the accounting frameworks such as future fees and assumed volatility levels.

• (b) Other than equity‑related derivatives The fluctuations for this item comprise the net effect of:

• Fair value movements on free‑standing, other than equity‑related derivatives;

• Accounting effects of the Guaranteed Minimum Income Benefit (GMIB) reinsurance; and

• Related amortisation of DAC.

• The free‑standing, other than equity‑related derivatives, are held to manage interest rate exposures and durations within the general account and the variable annuity guarantees and fixed index annuity embedded options described in note (a) above.

• The direct GMIB liability is valued using the US GAAP measurement basis applied for IFRS reporting in a way that substantially does not recognise the effects of market movements. Reinsurance arrangements are in place so as to essentially fully insulate Jackson from the GMIB exposure. Notwithstanding that the liability is essentially fully reinsured, as the reinsurance asset is net settled, it is deemed a derivative under IAS 39 which requires fair valuation.

• The fluctuations for this item therefore include significant accounting mismatches caused by:

• The fair value movements booked in the income statement on the derivative programme being in respect of the management of interest rate exposures of the variable and fixed index annuity business, as well as the fixed annuity business guarantees and durations within the general account;

• Fair value movements on Jackson’s debt securities of the general account which are recorded in other comprehensive income rather than the income statement; and

• The mixed measurement model that applies for the GMIB and its reinsurance.

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(c)	Short‑term fuctuations related to debt securities	2017£m	2016£m
		Half year	Half year Full year
	Short‑term fuctuations relating to debt securities (Charges) credits in the period: Losses on sales of impaired and deteriorating bonds Defaultsnote (v) Bond write downs Recoveries/reversals		(87) (94) (6) (4) (32) (35) 4 15
		(2)
		–
		(1)
		7
	Total credits (charges) in the period Less: Risk margin allowance deducted from operating proft based on longer‑term investment returns	4	(121) (118) 42 89
		46
		50	(79) (29)
	Interest‑related realised gains: Arising in the period Less: Amortisation of gains and losses arising in current and prior periods to operating proft based on longer‑term investment returns		20 376 (59) (135)
		23
		(72)
		(49)	(39) 241
	Related amortisation of deferred acquisition costs	4	13 (11)
	Total short‑term fuctuations related to debt securities	5	(105) 201

The debt securities of Jackson are held in the general account of the business. Realised gains and losses are recorded in the income statement with normalised returns included in operating profit and variations from year to year are included in the short‑term fluctuations category. The risk margin reserve charge for longer‑term credit‑related losses included in operating profit based on longer‑term investment returns of Jackson for half year 2017 is based on an average annual risk margin reserve of 21 basis points (half year 2016: 21 basis points; full year 2016: 21 basis points) on average book values of US$55.8 billion (half year 2016: US$56.4 billion; full year 2016: US$56.4 billion) as shown below:

Moody’s rating category (or equivalent under NAIC ratings of mortgage- backed securities)		Half year	2017		Half ye	ar 2016		Full yea	r 2016
	Average book value	RMR	Annual expected loss	Average book value	RMR	Annual expected loss	Average book value	RMR	Annual expected loss
	US$m	%	US$m £m	US$m	%	US$m £m	US$m	%	US$m £m
A3 or higher Baa1, 2 or 3 Ba1, 2 or 3 B1, 2 or 3 Below B3	27848	0.13	(35) (28)	29,172 25,771 1,065 319 41	0.12 0.24 1.08 3.02 3.81	(36) (25) (63) (44) (11) (8) (10) (7) (2) (1)	29,051 25,964 1,051 312 40	0.12 0.24 1.07 2.95 3.81	(36) (27) (62) (46) (11) (8) (9) (7) (2) (1)
	, 26601	0.23	(60) (47)
	, 1052	1.03	(11) (9)
	, 311	2.75	(9) (7)
	27	3.80	(1) (1)
Total	55,839	0.21	(116) (92)	56,368	0.21	(122) (85) 22 15	56,418	0.21	(120) (89) 23 17
Related amortisation of deferred acquisition costs (see below) Risk margin reserve charge to operating proft for longer‑term credit‑related losses
			22 17
			(94) (75)			(100) (70)			(97) (72)

Consistent with the basis of measurement of insurance assets and liabilities for Jackson’s IFRS results, the charges and credits to operating profits based on longer‑term investment returns are partially offset by related amortisation of deferred acquisition costs. In addition to the accounting for realised gains and losses described above for Jackson general account debt securities, included within the statement of other comprehensive income is a pre‑tax credit of £462 million for net unrealised gains on debt securities classified as available‑for‑sale net of related amortisation of deferred acquisition costs (half year 2016: credit of £1,683 million for net unrealised gains; full year 2016: credit of £48 million for net unrealised losses). Temporary market value movements do not reflect defaults or impairments. Additional details of the movement in the value of the Jackson portfolio are included in note C3.2(b).

(iii) UK insurance operations

The positive short‑term fluctuations in investment returns for UK insurance operations of £9 million (half year 2016: £246 million; full year 2016: £198 million) include net unrealised movements on fixed income assets supporting the capital of the shareholder‑backed annuity business.

(iv) Other

The positive short‑term fluctuations in investment returns for other operations of £131 million (half year 2016: negative £(192) million; full year 2016: negative £(196) million) include unrealised value movements on financial instruments and foreign exchange items.

(v) Default losses

The Group incurred no default losses on its shareholder‑backed debt securities portfolio for half year 2017 (half year 2016: £(6) million; full year 2016: £(4) million).

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B Earnings performance Continued

B1 Analysis of performance by segment continued

B1.3 Determining operating segments and performance measure of operating segments Operating segments

The Group’s operating segments, determined in accordance with IFRS 8 ‘Operating Segments’, are as follows:

Insurance operations:	Asset management operations:
—Asia	—EastspringInvestments
—US (Jackson)	—US broker‑dealer and asset management
—UK	—M&G
	—Prudential Capital

The Group’s operating segments are also its reportable segments for the purposes of internal management reporting.

Performance measure

The performance measure of operating segments utilised by the Company is IFRS operating profit attributable to shareholders based on longer‑term investment returns. This measurement basis distinguishes operating profit based on longer‑term investment returns from other constituents of the total profit as follows:

• Short‑term fluctuations in investment returns on shareholder‑backed business;

• Amortisation of acquisition accounting adjustments arising on the purchase of business. This comprises principally the charge for the adjustments arising on the purchase of REALIC in 2012; and

• Profit (loss) attaching to the sold Korea life business including the recycling of the cumulative exchange translation gain on the sold Korea life business from other comprehensive income to the income statement in 2017.

Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items are mainly in relation to the Group Head Office and the Asia Regional Head Office.

The determination of operating profit based on longer‑term investment returns for investment and liability movements is as described in note B1.3 of the Group’s consolidated financial statements for the year ended 31 December 2016.

For Group debt securities at 30 June 2017, the level of unamortised interest‑related realised gains and losses related to previously sold bonds and have yet to be amortised to operating profit was a net gain of £876 million (30 June 2016: net gain of £605 million; 31 December 2016: net gain of £969 million).

For equity‑type securities, the longer‑term rates of return applied by the non‑linked shareholder‑financed insurance operations of Asia and the US to determine the amount of investment return included in operating profit are as follows:

• For Asia insurance operations, investments in equity securities held for non‑linked shareholder‑financed operations amounted to £1,535 million as at 30 June 2017 (30 June 2016: £1,035 million; 31 December 2016: £1,405 million). The rates of return applied for 2017 ranged from 4.7 per cent to 17.2 per cent (30 June 2016: 3.2 per cent to 13.0 per cent; 31 December 2016: 3.2 per cent to 13.9 per cent) with the rates applied varying by business unit; and

— For US insurance operations, at 30 June 2017, the equity‑type securities for non‑separate account operations amounted to £1,256 million (30 June 2016: £1,115 million; 31 December 2016: £1,323 million). The longer‑term rates of return for income and capital applied in 2017 and 2016, which reflect the combination of the average risk‑free rates over the period and appropriate risk premiums, are as follows:

	2017	2016
	Half year	Half year Full year
Equity‑type securities such as common and preferred stock and portfolio holdings in mutual funds Other equity‑type securities such as investments in limited partnerships andprivate equityfunds	6.2% to 6.5%	5.5% to 5.9% 5.5% to 6.5% 7.5% to 7.9% 7.5% to 8.5%
	8.2% to 8.5%

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B1.4 Additional segmental analysis of revenue The additional segmental analysis of revenue including those from external customers excluding investment return and net of outward reinsurance premiums are as follows:

		Half year 2017£m
	Insurance operations	Asset management Total segment M&G Prudential Capital US Eastspring Investments	Unallo- cated to a segment (central operations) Group total
	Asia US UK
Gross premium earned Outward reinsurance	7697 7997 6411	– – – – 22105	– 22105
	, , , (243) (168) (536)	, – – – – (947)	, – (947)
Earned premiums, net of reinsurance Other income from external customers	7454 7829 5875	– – – – 21158	– 21158
	, , , 56 3 89	, 576 10 371 103 1,208	, 14 1,222
Total revenue from external customers Intra‑group revenue Interest income Other investment return	7510 7832 5964	576 10 371 103 22366	14 22380
	, , , – – –	, 88 20 57 128 293	, (293) –
	485 1082 1754	– 30 – 1 3352	3 3355
	, , 4,315 7,253 5,605	, 4 47 1 2 17,227	, 47 17,274
Total revenue, net of reinsurance	12,310 16,167 13,323	668 107 429 234 43,238	(229) 43,009

		Half year 2016£m
	Insurance operations	Asset management Total segment M&G Prudential Capital US Eastspring Investments	Unallo- cated to a segment (central operations) Group total
	Asia US UK
Gross premium earned Outward reinsurance	6,116 6,980 5,242 (401) (162) (381)	– – – – 18,338 – – – – (944)	– 18,338 – (944)
Earned premiums, net of reinsurance Other income from external customers	5,715 6,818 4,861 32 1 124	– – – – 17,394 463 2 322 85 1,029	– 17,394 56 1,085
Total revenue from external customers Intra‑group revenue Interest income Other investment return	5,747 6,819 4,985 – – – 441 992 2,186 2,241 1,537 9,789	463 2 322 85 18,423 88 16 47 95 246 2 36 – 1 3,658 4 (67) (1) – 13,503	56 18,479 (246) – – 3,658 (99) 13,404
Total revenue, net of reinsurance	8,429 9,348 16,960	557 (13) 368 181 35,830	(289) 35,541

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B Earnings performance Continued

B1 Analysis of performance by segment continued

B1.4 Additional segmental analysis of revenue continued

		Full year 2016£m
	Insurance operations	Asset management Total segment M&G Prudential Capital US Eastspring Investments	Unallo- cated to a segment (central operations) Group total
	Asia US UK
Gross premium earned Outward reinsurance	14,006 14,685 10,290 (648) (367) (1,005)	– – – – 38,981 – – – – (2,020)	– 38,981 – (2,020)
Earned premiums, net of reinsurance Other income from external customers	13,358 14,318 9,285 77 4 374	– – – – 36,961 972 19 680 176 2,302	– 36,961 68 2,370
Total revenue from external customers Intra‑group revenue Interest income Other investment return	13,435 14,322 9,659 – – – 873 2,149 4,502 2,040 5,461 17,577	972 19 680 176 39,263 200 37 103 211 551 15 47 2 2 7,590 1 (41) – 2 25,040	68 39,331 (551) – 57 7,647 (176) 24,864
Total revenue, net of reinsurance	16,348 21,932 31,738	1,188 62 785 391 72,444	(602) 71,842

B2 Profit before tax – asset management operations

The profit included in the income statement in respect of asset management operations for the year is as follows:

	2017£m M&G Prudential Capital US Eastspring Investments Half year Total	2016£m
		Half year Total Full year Total
Revenue (excluding NPH broker‑dealer fees) NPH broker‑dealer feesnote (i)	668 107 124 234 1,133 – – 305 – 305	834 1,876 259 550
Gross revenue	668 107 429 234 1,438	1,093 2,426
Charges (excluding NPH broker‑dealer fees) NPH broker‑dealer feesnote (i)	(395) (50) (130) (180) (755) – – (305) – (305)	(649) (1,402) (259) (550)
Gross charges	(395) (50) (435) (180) (1,060)	(908) (1,952)
Share of profts from joint ventures and associate, net of related tax	8 – – 29 37	26 67
Proft before tax	281 57 (6) 83 415	211 541
Comprising: Operating proft based on longer‑term investment returnsnote (ii) Short‑term fuctuations in investment returns	248 6 (6) 83 331 33 51 – – 84	287 589 (76) (48)
Proft before tax	281 57 (6) 83 415	211 541

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Notes

(i) NPH broker‑dealer fees represent commissions received that are then paid on to the writing brokers on sales of investment products.

To reflect their commercial nature, the amounts are also wholly reflected as charges within the income statement. After allowing for these charges, there is no effect on profit from this item. The presentation in the table above shows the amounts attributable to this item so that the underlying revenue and charges can be seen. (ii) M&G operating profit based on longer‑term investment returns:

M&G operating proft based on longer‑term investment returns:
	2017£m	2016£m
	Half year	Half year Full year
Asset management fee income Other income Staff costs Other costs	491	431 900 9 23 (133) (332) (96) (212)
	4
	(166)
	(95)
Underlying proft before performance‑related fees Share of associate’s results Performance‑related fees	234	211 379 5 13 9 33
	8
	6
M&G operating proft based on longer‑term investment returns	248	225 425

The revenue for M&G of £501 million (half year 2016: £449 million; full year 2016: £956 million), comprising the amounts for asset management fee income, other income and performance‑related fees shown above, is different to the amount of £668 million shown in the main table of this note. This is because the £501 million (half year 2016: £449 million; full year 2016: £956 million) is after deducting commissions which would have been included as charges in the main table. The difference in the presentation of commission is aligned with how management reviews the business.

B3 Acquisition costs and other expenditure

	2017£m	2016£m
	Half year	Half year Full year
Acquisition costs incurred for insurance policies Acquisition costs deferred less amortisation of acquisition costs Administration costs and other expenditure Movements in amounts attributable to external unit holders of consolidated investment funds	(1920)	(1,700) (3,687) 740 923 (2,451) (5,522) (152) (562)
	, 399
	(3055)
	, (754)
Total acquisition costs and other expenditure	(5,330)	(3,563) (8,848)

Included in total acquisition costs and other expenditure is depreciation of property, plant and equipment of £(60) million (half year 2016: £(75) million; full year 2016: £(158) million).

B4 Effect of changes and other accounting features on insurance assets and liabilities

The following features are of relevance to the determination of the half year 2017 results:

(a) Asia insurance operations

In half year 2017, the IFRS operating profit based on longer‑term investment returns for Asia insurance operations included a net credit of £54 million (half year 2016: £42 million; full year 2016: £67 million) representing a small number of non‑recurring items.

(b) UK insurance operations

Annuity business

Allowance for credit risk

For IFRS reporting, the results for UK shareholder‑backed annuity business are particularly sensitive to the allowances made for credit risk. The allowance is reflected in the deduction from the valuation rate of interest used for discounting projected future annuity payments to policyholders that would have otherwise applied. The credit risk allowance comprises an amount for long‑term best estimate defaults and additional provisions for credit risk premium, the cost of downgrades and short‑term defaults.

Prudential Retirement Income Limited (PRIL) was the principal company writing the UK’s shareholder‑backed annuity business. In the second half of 2016, the business of PRIL was transferred into PAC following a Part VII transfer under the Financial Services and Markets Act 2000.

The IFRS credit risk allowance made for the ex‑PRIL UK shareholder‑backed fixed and linked annuity business equated to 43 basis points at 30 June 2017 (30 June 2016 and 31 December 2016: 43 basis points). The allowance represented 28 per cent of the bond spread over swap rates (30 June 2016: 23 per cent; 31 December 2016: 26 per cent).

The reserves for credit risk allowance at 30 June 2017 for the UK shareholder‑backed business (both for ex‑PRIL and the legacy PAC shareholder annuity business) were £1.7 billion (30 June 2016: £ 1.8 billion; 31 December 2016: £1.7 billion).

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B Earnings performance Continued

B4 Effect of changes and other accounting features on insurance assets and liabilities continued

Longevity reinsurance and other management actions

A number of management actions were taken in the first half of 2017 to improve the solvency position of the UK insurance operations and further mitigate market risk, which have generated combined profits of £188 million. Similar actions were also taken in 2016. Of this amount £31 million related to profit from additional longevity reinsurance transactions covering £0.6 billion of annuity liabilities on an IFRS basis, with the balance of £157 million reflecting the effect of repositioning the fixed income portfolio and other actions. The contribution to profit from similar longevity reinsurance and other management actions in 2016 was £140 million for the first half of the year (of which £66 million related to longevity reinsurance transactions covering £1.5 billion of IFRS annuity liabilities) and £332 million for the full year (of which £197 million related to longevity reinsurance transactions covering £5.4 billion of IFRS annuity liabilities).

At 30 June 2017, longevity reinsurance covered £14.8 billion of IFRS annuity liabilities equivalent to 44 per cent of total annuity liabilities (30 June 2016: £10.7 billion, 32 per cent; 31 December 2016: £14.4 billion, 42 per cent).

Review of past annuity sales

Prudential has agreed with the Financial Conduct Authority (FCA) to review annuities sold without advice after 1 July 2008 to its contract‑based defined contribution pension customers. The review will examine whether customers were given sufficient information about their potential eligibility to purchase an enhanced annuity, either from Prudential or another pension provider. The review commenced in 2017 and is expected to last a period of three years. A provision of £175 million was established at 31 December 2016 to cover the costs of undertaking the review and any potential redress. Other than to cover the small amount of costs incurred in the period, no change has been made to this provision as at 30 June 2017. The ultimate amount that will be expended by the Group on the review remains uncertain. Although the Group’s professional indemnity insurance may mitigate the overall financial impact of this review, with potential insurance recoveries of up to £175 million, no such recovery has been factored in the provision, in accordance with the requirements of IAS 37, ‘Provisions, Contingent Liabilities and Contingent Assets’.

B5 Tax charge

(a) Total tax charge by nature of expense

The total tax charge in the income statement is as follows:

Tax charge	2017£m	2016£m
	Current tax Deferred tax Half year Total	Half year Total Full year Total
UK tax Overseas tax	(240) (66) (306)	(229) (764) (40) (527)
	(187) (209) (396)
Total tax charge	(427) (275) (702)	(269) (1,291)

The current tax charge of £427 million includes £37 million (half year 2016: £27 million; full year 2016: £53 million) in respect of the tax charge for the Hong Kong operation. The Hong Kong current tax charge is calculated as 16.5 per cent for all periods on either: (i) 5 per cent of the net insurance premium; or (ii) the estimated assessable profits, depending on the nature of the business written. The total tax charge comprises tax attributable to policyholders and unallocated surplus of with‑profits funds, unit‑linked policies and shareholders as shown below:

Tax charge	2017£m	2016£m
	Current tax Deferred tax Half year Total	Half year Total Full year Total
Tax (charge) to policyholders’ returns Tax (charge) credit attributable to shareholders	(247) (146) (393)	(292) (937) 23 (354)
	(180) (129) (309)
Total tax (charge)	(427) (275) (702)	(269) (1,291)

The principal reason for the increase in the tax charge attributable to policyholders’ returns compared to half year 2016 is an increase on investment return in the with‑profits fund in the UK insurance operations. The principal reason for the increase in the tax charge attributable to shareholders’ returns compared to half year 2016 is a reduction in the deferred tax credit on derivative fair value movements in the US insurance operations.

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(b) Reconciliation of effective tax rate

In the reconciliation below, the expected tax rates reflect the corporate income tax rates that are expected to apply to the taxable profit of the relevant business. Where there are profits of more than one jurisdiction the expected tax rates reflect the corporation tax rates weighted by reference to the amount of profit contributing to the aggregate business result. In the column ‘Attributable to policyholders’, the 100 per cent expected tax rate is the result of accounting for policyholder income after the deduction of expenses and movement on unallocated surpluses and on an after tax basis, the effect of which leaves the profit equal to the tax charge.

	Half year 2017£m
	Asia insurance operations US insurance operations UK insurance operations Other operations Attributable to shareholders Attributable to policyholders Total
Operating proft (loss) based on longer‑term investment returns Non‑operating proft (loss)	870 1079 497 (88) 2358 n/a n/a
	, , 98 (782) 9 131 (544) n/a n/a
Proft before tax	968 297 506 43 1,814 393 2,207
Expected tax rate Tax at the expected rate Effects of recurring tax reconciliation items: Income not taxable or taxable at concessionary rates Deductions not allowable for tax purposes Items related to taxation of life insurance businesses Deferred tax adjustments Effect of results of joint ventures and associates Irrecoverable withholding taxes Other	20% 35% 19% 19% 22% 100% 36%
	194 104 96 8 402 393 795
	(18) (10) – (3) (31) (31)
	8 – 5 5 18 18
	(43) (85) (2) – (130) (130)
	4 – (1) – 3 3
	(11) – – (9) (20) (20)
	– – – 29 29 29
	– 4 2 4 10 10
Total Effects of non‑recurring tax reconciliation items: Adjustments to tax charge in relation to prior years Movements in provisions for open tax matters Cumulative exchange gains on the sold Korea life business recycled from other comprehensive income	(60) (91) 4 26 (121) – (121)
	– 10 (5) (1) 4 4
	7 25 – – 32 32
	(8) – – – (8) (8)
Total	(1) 35 (5) (1) 28 – 28
Total actual tax charge	133 48 95 33 309 393 702
Analysed into: Tax on operating proft based on longer‑term investment returns Tax on non‑operating proft Actual tax rate: Operating proft based on longer‑term investment returns Including non‑recurring tax reconciling items Excluding non‑recurring tax reconciling items Totalproft
	141 322 92 8 563 n/a n/a
	(8) (274) 3 25 (254) n/a n/a
	16% 30% 19% (9)% 24% n/a n/a
	15% 27% 20% (10)% 22% n/a n/a
	14% 16% 19% 77% 17% 100% 32%

The more significant reconciling items are explained below:

Asia insurance operations

The £18 million reconciling item ‘income not taxable or taxable at concessionary rates’ primarily reflects income not subject to the full rate of corporate tax in Malaysia, Singapore and Taiwan.

The £43 million reconciling item ‘items related to taxation of life insurance businesses’ reflects where the basis of tax is not the accounting profits, primarily in:

• Hong Kong where the taxable profit is based on the net insurance premiums; and

• Indonesia and Philippines where investment income is subject to withholding tax at source and no further corporation tax.

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B Earnings performance Continued

B5 Tax charge continued

(b) Reconciliation of effective tax rate continued

The £11 million reconciling item ‘effect of results of the joint ventures and associates’ arises from the accounting requirement for inclusion in the profit before tax of Prudential’s share of the profits after tax from the joint ventures and associates, with no equivalent item included in Prudential’s tax charge.

The £8 million reconciling item ‘cumulative exchange gain on the sold Korea life business recycled from other comprehensive income’ reflects the non‑taxable exchange gain arising on the Korea life business previously taken through other comprehensive income on a period‑by‑period basis recycled through the income statement following the sale of the business.

US insurance operations

The £85 million reconciling item ‘items related to taxation of life insurance businesses’ reflects the impact of the dividend received deduction on the taxation of profits from the variable annuity business.

UK insurance operations

There are no significant reconciling items or significant movements from half year 2016.

Other operations

The £29 million reconciling item ‘irrecoverable withholding taxes’ relates to withholding tax suffered on distributions from Group companies which cannot be recovered against other taxes paid. Other operations comprise the Group’s asset management businesses and central operations.

	Half year 2016*£m
	Asia insurance operations US insurance operations UK insurance operations Other operations Attributable to shareholders Attributable to policyholders Total
Operating proft (loss) based on longer‑term investment returns Non‑operating proft (loss)	667 888 492 (3) 2,044 n/a n/a 37 (1,471) 246 (192) (1,380) n/a n/a
Proft (loss) before tax	704 (583) 738 (195) 664 292 956
Expected tax rate Tax at the expected rate Effects of recurring tax reconciliation items: Income not taxable or taxable at concessionary rates Deductions not allowable for tax purposes Items related to taxation of life insurance businesses Deferred tax adjustments Effect of results of joint ventures and associates Irrecoverable withholding taxes Other	21% 35% 20% 20% 8% 100% 36% 148 (204) 148 (39) 53 292 345 (14) (5) (16) (3) (38) (38) 8 2 6 2 18 18 (10) (60) (1) – (71) (71) (1) – 3 (3) (1) (1) (10) – – (7) (17) (17) – – – 20 20 20 3 – (2) 16 17 17
Total Effects of non‑recurring tax reconciliation items: Adjustments to tax charge in relation to prioryears	(24) (63) (10) 25 (72) – (72) 1 (3) – (2) (4) (4)
Total	1 (3) – (2) (4) – (4)
Total actual tax charge (credit)	125 (270) 138 (16) (23) 292 269
Analysed into: Tax on operating proft based on longer‑term investment returns Tax on non‑operating proft Actual tax rate: Operating proft based on longer‑term investment returns Including non‑recurring tax reconciling items Excluding non‑recurring tax reconciling items Totalproft
	116 245 101 13 475 n/a n/a 9 (515) 37 (29) (498) n/a n/a
	17% 28% 21% (433)% 23% n/a n/a 17% 28% 21% (500)% 23% n/a n/a 18% 46% 19% 8% (3)% 100% 28%

• Following its sale in May 2017, the half year 2016 comparative 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.

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					Full year 2016£m	Full year 2016£m
		Asia	US	UK		Attributable	Attributable
		insurance	insurance	insurance	Other	to	to
	operations		operations	operations	operations	shareholders	policyholders	Total
Operating proft (loss) based on longer‑term
investment returns		1,503	2,052	828	(127)	4,256	n/a	n/a
Non‑operating(loss)proft		(460)	(1,523)	198	(196)	(1,981)	n/a	n/a
Proft (loss) before tax		1,043	529	1,026	(323)	2,275	937	3,212
Expected tax rate		22%	35%	20%	19%	25%	100%	47%
Tax at the expected rate		229	185	205	(61)	558	937	1,495
Effects of recurring tax reconciliation items:
Income not taxable or taxable at
concessionary rates		(28)	(18)	(12)	(9)	(67)		(67)
Deductions not allowable for tax purposes		19	8	7	26	60		60
Items related to taxation of life insurance
businesses		(20)	(159)	(1)	–	(180)		(180)
Deferred tax adjustments		(11)	–	2	(14)	(23)		(23)
Effect of results of joint ventures and associates		(29)	–	–	(17)	(46)		(46)
Irrecoverable withholding taxes		–	–	–	36	36		36
Other		–	–	1	(6)	(5)		(5)
Total		(69)	(169)	(3)	16	(225)	–	(225)
Effects of non‑recurring tax reconciliation items: Adjustments to tax charge in relation to prior years Movements in provisions for open tax matters Impact of changes in local statutory tax rates Write down of Korea life business Total		1 20 – 58 79	(81) – – – (81)	(7) – (5) – (12)	5 31 (1) – 35	(82) 51 (6) 58 21	–	(82) 51 (6) 58 21
Total actual tax charge (credit)		239	(65)	190	(10)	354	937	1,291
Analysed into:
Tax on operating proft based on longer‑term
investment returns		254	468	160	12	894	n/a	n/a
Tax on non‑operating proft		(15)	(533)	30	(22)	(540)	n/a	n/a
Actual tax rate:
Operating proft based on longer‑term
investment returns
Including non‑recurring tax reconciling items		17%	23%	19%	(9)%	21%	n/a	n/a
Excluding non‑recurring tax reconciling items		16%	27%	21%	18%	22%	n/a	n/a
Totalproft		23%	(12)%	19%	3%	16%	100%	40%

The full year 2016 expected and actual tax rates as shown includes the impact of the re‑measurement loss on the held for sale Korea life business. The full year 2016 tax rates for Asia insurance operations and attributable to shareholders, excluding the impact of the held for sale Korea life business, are as follows:

	Asia	Attributable to
	insurance	shareholders
Expected tax rate on total proft	22%	24%
Actual tax rate
Operating proft based on longer‑term investment returns	17%	21%
Totalproft	19%	14%

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B Earnings performance Continued

B6 Earnings per share

Note	Half year 2017
	Before tax note B1.1 £m Tax note B5 £m Net of tax £m Basic earnings per share pence Diluted earnings per share pence
Based on operating proft based on longer‑term investment returns Short‑term fuctuations in investment returns on shareholder‑backed business B1.2 Amortisation of acquisition accounting adjustments Cumulative exchange gain on the sold Korea life business recycled from other comprehensive income	2358 (563) 1795 70.0p 69.9p
	, , (573) 248 (325) (12.7)p (12.7)p
	(32) 6 (26) (1.0)p (1.0)p
	61 – 61 2.4p 2.4p
Based onproft for theperiod	1,814 (309) 1,505 58.7p 58.6p

Note	Half year 2016*
	Before tax note B1.1 £m Tax note B5 £m Net of tax £m Basic earnings per share pence Diluted earnings per share pence
Based on operating proft based on longer‑term investment returns Short‑term fuctuations in investment returns on shareholder‑backed business B1.2 Amortisation of acquisition accounting adjustments Proft attachingto held for sale Korea life business D1	2,044 (475) 1,569 61.3p 61.2p (1,385) 496 (889) (34.7)p (34.7)p (35) 11 (24) (0.9)p (0.9)p 40 (9) 31 1.2p 1.2p
Based onproft for theperiod	664 23 687 26.9p 26.8p

• 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.

Note	Full year 2016
	Before tax note B1.1 £m Tax note B5 £m Net of tax £m Basic earnings per share pence Diluted earnings per share pence
Based on operating proft based on longer‑term investment returns Short‑term fuctuations in investment returns on shareholder‑backed business B1.2 Amortisation of acquisition accounting adjustments Loss attachingto held for sale Korea life business D1	4,256 (894) 3,362 131.3p 131.2p (1,678) 519 (1,159) (45.3)p (45.2)p (76) 25 (51) (2.0)p (2.0)p (227) (4) (231) (9.0)p (9.0)p
Based onproft for theyear	2,275 (354) 1,921 75.0p 75.0p

Earnings per share are calculated based on earnings attributable to ordinary shareholders, after related tax and non‑controlling interests. The weighted average number of shares for calculating earnings per share, which excludes those held in employee share trusts and consolidated unit trusts and OEICs, is set out as below:

Half year 2017 (millions)	Half year 2016 (millions) Full year 2016 (millions)
Weighted average number of shares for calculation of: Basic earnings per share 2,565 Diluted earningsper share 2,567	2,558 2,560 2,559 2,562

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B7 Dividends

	Half year 2017	Half year 2016	Full year 2016
	Pence per share £m	Pence per share £m	Pence per share £m
Dividends relating to reporting period: First interim ordinary dividend Second interim ordinarydividend		12.93p 333 – –	12.93p 333 30.57p 789
	14.50p 375
	– –
Total	14.50p 375	12.93p 333	43.50p 1,122
Dividends paid in reporting period: Current year frst interim ordinary dividend Second interim ordinary dividend for prior year Special dividend forprioryear		– – 26.47p 679 10.00p 256	12.93p 332 26.47p 679 10.00p 256
	– –
	30.57p 786
	– –
Total	30.57p 786	36.47p 935	49.40p 1,267

Dividend per share

The second interim dividend of 30.57 pence per ordinary share for the year ended 31 December 2016 was paid to eligible shareholders on 19 May 2017.

The 2017 first interim dividend of 14.50 pence per ordinary share will be paid on 28 September 2017 in sterling to shareholders on the principal (UK) register and the Irish branch register at 6.00pm BST on 25 August 2017 (Record Date), and in Hong Kong dollars to shareholders on the Hong Kong branch register at 4.30pm Hong Kong time on the Record Date (HK Shareholders). The dividend payable to the HK Shareholders will be translated using the exchange rate quoted by the WM Company at the close of business on 9 August 2017. Holders of US American Depositary Receipts (US Shareholders) will be paid their dividends in US dollars on or about 5 October 2017. The exchange rate at which the dividend payable to the US Shareholders will be translated into US dollars will be determined by the depositary agent. The first interim dividend will be paid on or about 5 October 2017 in Singapore dollars to shareholders with shares standing to the credit of their securities accounts with The Central Depository (Pte.) Limited (CDP) at 5.00pm Singapore time on the Record Date (SG Shareholders). The exchange rate at which the dividend payable to the SG Shareholders will be translated from Hong Kong dollars into Singapore dollars, will be determined by CDP.

Shareholders on the principal (UK) register and Irish branch register will be able to participate in a Dividend Reinvestment Plan.

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C Balance sheet notes

C1 Analysis of Group statement of financial position by segment

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

By operating segment		30 Jun 2017£m			30 Jun 2016£m 31 Dec 2016£m
	Insurance operations	Asset management	Unallo- cated to a segment (central opera- tions) Elimin- ation of intra- group debtors and creditors	Group total	Group total Group total
	Asia C2.1 US C2.2 UK C2.3	M&G Prudential Capital US Eastspring Invest- ments
Assets GoodwillC5(a) Deferred acquisition costs and other intangible assetsC5(b) Property, plant and equipmentnote (i) Reinsurers’ share of insurance contract liabilities Deferred tax assetsC7 Current tax recoverable Accrued investment income Other debtors Investment properties Investment in joint ventures and associates accounted for using the equity method LoansC3.3 Equity securities and portfolio holdings in unit trusts Debt securitiesC3.2 Derivative assets Other investments Deposits Assets held for sale Cash and cash equivalents					1,677 1,628 9,594 10,807 1,214 743 9,470 10,051 3,771 4,315 554 440 2,764 3,153 3,505 3,019 13,940 14,646 1,135 1,273 14,215 15,173 176,037 198,552 168,367 170,458 5,495 3,936 4,845 5,465 14,181 12,185 30 4,589 8,530 10,065
	245 – 26	1153 – 16 61	– –	1501
	2340 8187 168	, 6 – 5 4	47 –	, 10757
	, , 119 224 344	4 – 8 3	25 –	, 727
	1680 6740 2560	– – – –	– (1271)	9709
	, , , 85 3678 127	20 7 130 8	, 50 –	, 4105
	, 30 348 311	– 5 6 –	70 (70)	, 700
	565 493 1650	7 23 76 32	41 –	2887
	, 2598 260 2796	1000 758 73 62	5418 (9548)	, 3417
	, , 5 6 15207	, – – – –	, , – –	, 15218
	, 714 – 405	39 – – 135	– –	, 1293
	1307 9497 5784	– 364 – –	– –	, 16952
	, , , 26753125059 58398	111 – – 19	97 –	, 210437
	, , , 39061 38029 91302	– 2381 – –	20 –	, 170793
	, , , 102 906 2676	, – 101 – –	4 –	, 3789
	, – 932 4614	16 – 4 –	– –	, 5566
	, 1243 – 11843	– – 18 44	205 –	, 13353
	, , – – 33	– – – –	– –	, 33
	1,786 1,194 4,565	350 1,451 276 156	115 –	9,893
Total assets	78,633 195,553 202,809	2,706 5,090 612 524	6,092 (10,889)	481,130	439,324 470,498

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By operating segment		30 Jun 2017£m			30 Jun 2016£m 31 Dec 2016£m
	Insurance operations	Asset management	Unallo- cated to a segment (central opera- tions) Elimin- ation of intra- group debtors and creditors	Group total	Group total Group total
	Asia C2.1 US C2.2 UK C2.3	M&G Prudential Capital US Eastspring Invest- ments
Total equity	5,181 5,011 6,227	1,868 61 202 382	(3,482) –	15,450	14,606 14,667
Liabilities Contract liabilities (including amounts in respect of contracts classifed as investment contracts under IFRS 4)C4.1(a) 59,619 177,779 162,853 Unallocated surplus of with‑profts fundsC4.1(a) 3,003 – 12,087 Core structural borrowings of shareholder‑fnanced operationsC6.1 – 192 – Operational borrowings attributable to shareholder‑fnanced operationsC6.2(a) 20 453 147 Borrowings attributable to with‑profts operationsC6.2(b) 20 – 3,316 Obligations under funding, securities lending and sale and repurchase agreements – 4,518 1,890 Net asset value attributable to unit holders of consolidated unit trusts and similar funds 3,541 – 5,036 Deferred tax liabilitiesC7 1,021 2,981 1,646 Current tax liabilities 162 58 451 Accruals, deferred income and other liabilitiesnote (iv) 5,804 4,517 7,035 Provisions 138 1 350 Derivative liabilities 124 43 1,771 Liabilities held for sale – – –					362,510 388,996 13,597 14,317 5,966 6,798 2,798 2,317 1,427 1,349 4,963 5,031 8,770 8,687 5,397 5,370 566 649 12,915 13,825 467 947 5,342 3,252 – 4,293
	59619177779 162853	– – – –	– (1271)	398980
	, , , 3003 – 12087	– – – –	, – –	, 15090
	, , – 192 –	– 275 – –	6147 –	, 6614
	20 453 147	52 – – –	, 1424 –	, 2096
	20 – 3316	– – – –	, – –	, 3336
	, – 4518 1890	– – – –	– –	, 6408
		– – – –	– –	, 8577
		21 – 2 1	11 –	, 5683
		37 20 2 13	70 (70)	, 743
		547 4208 406 75	1480 (9548)	14524
		, 181 – – 53	, , 36 –	, 759
		– 526 – –	406 –	2870
		– – – –	– –	, –
Total liabilities 73,452 190,542 196,582		838 5,029 410 142	9,574 (10,889)	465,680	424,718 455,831
Total equity and liabilities 78,633 195,553 202,809		2,706 5,090 612 524	6,092 (10,889) 481,130		439,324 470,498

Notes

(i) £409 million (30 June 2016: £910 million; 31 December 2016: £413 million) of the property, plant and equipment of £727 million (30 June 2016: £1,214 million; 31 December 2016: £743 million) was held by the Group’s with‑profits operations, primarily by the consolidated subsidiaries for venture funds and other investment purposes of the PAC with‑profits fund. The Group made additions to property, plant and equipment of £120 million during the period (30 June 2016: £128 million; 31 December 2016: £348 million).

(ii) Reinsurers’ share of contract liabilities relate primarily to the reinsurance ceded in respect of the acquired REALIC business by the Group’s US insurance operations. (iii) Within other debtors are premiums receivable of £432 million (30 June 2016: £467 million; 31 December 2016: £498 million) of which 77 per cent are due within one year. The remaining 23 per cent is due after one year.

(iv) Within ‘Accruals, deferred income and other liabilities’ of £14,524 million (30 June 2016: £12,915 million; 31 December 2016: £13,825 million) is an amount of £8,575 million (30 June 2016: £7,506 million; 31 December 2016: £9,873 million) that is due within one year.

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C Balance sheet notes Continued

C2 Analysis of segment statement of financial position by business type

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

C2.1 Asia insurance operations

Note	2017£m	2016£m
	With-profts business Unit-linked assets and liabilities Other business 30 Jun Total	30 Jun Total 31 Dec Total
Assets Goodwill Deferred acquisition costs and other intangible assets Property, plant and equipment Reinsurers’ share of insurance contract liabilities Deferred tax assets Current tax recoverable Accrued investment income Other debtors Investment properties Investment in joint ventures and associates accounted for using the equity method Loans C3.3 Equity securities and portfolio holdings in unit trusts Debt securities C3.2 Derivative assets Deposits Assets held for sale Cash and cash equivalents		258 245 2,356 2,316 88 121 1,564 1,539 92 98 38 29 570 521 3,229 2,633 5 5 525 688 1,278 1,303 22,631 23,581 35,519 36,546 79 47 912 1,379 – 3,863 2,010 1,995
	– – 245 245
	31 – 2309 2340
	, , 82 – 37 119
	50 – 1630 1680
	, , – – 85 85
	– – 30 30
	253 60 252 565
	1847 189 562 2598
	, , – – 5 5
	– – 714 714
	702 – 605 1307
	, 12821 12397 1535 26753
	, , , , 23398 3442 12221 39061
	, , , , 58 3 41 102
	307 393 543 1243
	, – – – –
	733 234 819 1,786
Total assets	40,282 16,718 21,633 78,633	71,154 76,909
Total equity	– – 5,181 5,181	4,874 4,993
Liabilities Contract liabilities (including amounts in respect of contracts classifed as investment contracts under IFRS 4) C4.1(b) Unallocated surplus of with‑profts funds C4.1(b) Operational borrowings attributable to shareholder‑fnanced operations Borrowings attributable to with‑profts operations Net asset value attributable to unit holders of consolidated unit trusts and similar funds Deferred tax liabilities Current tax liabilities Accruals, deferred income and other liabilities Provisions Derivative liabilities Liabilities held for sale		53,437 55,018 2,351 2,667 11 19 6 4 3,379 3,093 905 935 109 113 5,838 5,887 115 157 129 265 – 3,758
	31549 15326 12744 59619
	, , , , 3003 – – 3003
	, , – 13 7 20
	20 – – 20
	2114 1201 226 3541
	, , , 705 38 278 1021
	, 64 – 98 162
	2667 138 2999 5804
	, , , 48 – 90 138
	112 2 10 124
	– – – –
Total liabilities	40,282 16,718 16,452 73,452	66,280 71,916
Total equityand liabilities	40,282 16,718 21,633 78,633	71,154 76,909

Note

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

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C2.2 US insurance operations

C2.2 US insurance operations
Note	2017£m	2016£m
	Variable annuity separate account assets and liabilities Fixed annuity, GIC and other business 30 Jun Total	30 Jun Total 31 Dec Total
Assets Deferred acquisition costs and other intangible assets Property, plant and equipment Reinsurers’ share of insurance contract liabilities Deferred tax assets Current tax recoverable Accrued investment income Other debtors Investment properties Loans C3.3 Equity securities and portfolio holdings in unit trusts Debt securities C3.2 Derivative assets Other investments Cash and cash equivalents		7,081 8,323 213 237 6,859 7,224 3,369 3,861 254 95 520 549 18 295 5 6 8,504 9,735 104,124 120,747 41,143 40,745 1,608 834 895 987 1,056 1,054
	– 8187 8187
	, , – 224 224
	– 6740 6740
	, , – 3678 3678
	, , – 348 348
	– 493 493
	– 260 260
	– 6 6
	– 9497 9497
	, , 124735 324 125059
	, , – 38029 38029
	, , – 906 906
	– 932 932
	– 1,194 1,194
Total assets	124,735 70,818 195,553	175,649 194,692
Total equity	– 5,011 5,011	5,056 5,204
Liabilities Contract liabilities (including amounts in respect of contracts classifed as investment contracts under IFRS 4) C4.1(c) Core structural borrowings of shareholder‑ fnanced operations Operational borrowings attributable to shareholder‑fnanced operations Obligations under funding, securities lending and sale and repurchase agreements Net asset value attributable to unit holders of consolidated unit trusts and similar funds Deferred tax liabilities Current tax liabilities Accruals, deferred income and other liabilities Provisions Derivative liabilities		159,155 177,626 186 202 70 480 3,144 3,534 23 – 3,204 2,831 – – 4,385 4,749 5 2 421 64
	124735 53044 177779
	, , , – 192 192
	– 453 453
	– 4518 4518
	, , – – –
	– 2981 2981
	, , – 58 58
	– 4517 4517
	, , – 1 1
	– 43 43
Total liabilities	124,735 65,807 190,542	170,593 189,488
Total equityand liabilities	124,735 70,818 195,553	175,649 194,692

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C Balance sheet notes Continued

C2 Analysis of segment statement of financial position by business type continued

C2.3 UK insurance operations

By operating segment Note		2017£m		2016£m
	With-profts sub-funds note (i)	Other funds and subsidiaries	30 Jun Total	30 Jun Total 31 Dec Total
		Unit-linked assets and liabilities Annuity and other long-term business Total
Assets Goodwill Deferred acquisition costs and other intangible assets Property, plant and equipment Reinsurers’ share of insurance contract liabilities Deferred tax assets Current tax recoverable Accrued investment income Other debtors Investment properties Investment in joint ventures and associates accounted for using the equity method Loans C3.3 Equity securities and portfolio holdings in unit trusts Debt securities C3.2 Derivative assets Other investments Deposits Assets held for salenote (ii) Cash and cash equivalents				189 153 89 107 866 343 2,362 2,590 139 146 256 283 1,518 1,915 2,778 2,447 13,930 14,635 462 409 3,616 3,572 49,150 54,037 89,114 90,796 3,563 2,927 3,926 4,449 13,184 10,705 30 726 3,445 4,703
	26	– – –	26
	82	– 86 86	168
	327	– 17 17	344
	1308	135 1117 1252	2560
	, 73	, , – 54 54	, 127
	179	– 132 132	311
	1040	93 517 610	1650
	, 1895	224 677 901	, 2796
	, 12962	650 1595 2245	, 15207
	, 405	, , – – –	, 405
	4036	– 1748 1748	5784
	, 43023	, , 15339 36 15375	, 58398
	, 49165	, , 6743 35394 42137	, 91302
	, 2183	, , , 3 490 493	, 2676
	, 4608	5 1 6	, 4614
	, 9542	968 1333 2301	, 11843
	, 33	, , – – –	, 33
	3,230	762 573 1,335	4,565
Total assets	134,117	24,922 43,770 68,692	202,809	188,617 194,943

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By operating segment Note		2017£m		2016£m
	With-profts sub-funds note (i)	Other funds and subsidiaries	30 Jun Total	30 Jun Total 31 Dec Total
		Unit-linked assets and liabilities Annuity and other long-term business Total
Total equity	–	– 6,227 6,227	6,227	6,163 5,999
Liabilities Contract liabilities (including amounts in respect of contracts classifed as investment contracts under IFRS 4) C4.1(d) Unallocated surplus of with‑profts funds C4.1(d) Operational borrowings attributable to shareholder‑fnanced operations Borrowings attributable to with‑ profts operations Obligations under funding, securities lending and sale and repurchase agreements Net asset value attributable to unit holders of consolidated unit trusts and similar funds Deferred tax liabilities Current tax liabilities Accruals, deferred income and other liabilities Provisions Derivative liabilities Liabilities held for salenote (ii)				151,233 157,654 11,246 11,650 163 167 1,421 1,345 1,619 1,497 5,368 5,594 1,253 1,577 363 447 5,896 6,176 156 442 3,736 1,860 – 535
	106362	22917 33574 56491	162853
	, 12087	, , , – – –	, 12087
	, –	4 143 147	, 147
	3316	– – –	3316
	, 1216	– 674 674	, 1890
	, 3152	1856 28 1884	, 5036
	, 1354	, , – 292 292	, 1646
	, 246	68 137 205	, 451
	5604	76 1355 1431	7035
	, 62	, , – 288 288	, 350
	718	1 1052 1053	1771
	–	, , – – –	, –
Total liabilities	134,117	24,922 37,543 62,465	196,582	182,454 188,944
Total equityand liabilities	134,117	24,922 43,770 68,692	202,809	188,617 194,943

Notes

• (i) Includes the Scottish Amicable Insurance Fund which, at 30 June 2017, has total assets and liabilities of £5,943 million (30 June 2016: £6,282 million; 31 December 2016:

• £6,101 million). The PAC with‑profits sub‑fund mainly contains with‑profits business but it also contains some non‑profit business (unit‑linked, term assurances and annuities). The PAC with‑profits fund includes £10.9 billion (30 June 2016: £11.3 billion; 31 December 2016: £11.2 billion) of non‑profit annuities liabilities.

(ii) The assets and liabilities held for sale for the UK insurance operations comprise the investment properties and consolidated private equity investments of the PAC with‑profits fund, for which the sales had been agreed but not yet completed at the period end.

C3 Assets and liabilities – classification and measurement

C3.1 Group assets and liabilities – measurement (a) Determination of fair value

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

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

Other than the loans which have been designated at fair value through profit or loss, the loans and receivables have been shown net of provisions for impairment. The fair value of loans has been estimated from discounted cash flows expected to be received. The discount rate used is updated for the market rate of interest where applicable.

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

The fair value of financial liabilities (other than derivative financial instruments) and borrowings that are carried at fair value through profit or loss is determined using discounted cash flows of the amounts expected to be paid.

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C Balance sheet notes Continued

C3 Assets and liabilities – classification and measurement continued

C3.1 Group assets and liabilities – measurement continued

(b) Fair value hierarchy of financial instruments measured at fair value on recurring basis Assets and liabilities carried at fair value on the statement of financial position

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

Financial instruments at fair value

Financial instruments at fair value
	30 Jun 2017£m Level 1 Level 2 Level 3 Quoted prices (unadjusted) in active markets Valuation based on signifcant observable market inputs Valuation based on signifcant unobservable market inputs Total
Analysis of fnancial investments, net of derivative liabilities by business type With-profts Loans Equity securities and portfolio holdings in unit trusts Debt securities Other investments (including derivative assets) Derivative liabilities
	– – 1906 1906
	, , 51136 4282 426 55844
	, , , 28122 44145 296 72563
	, , , 73 3310 3464 6847
	, , , (79) (752) – (831)
Total fnancial investments, net of derivative liabilities Percentage of total	79252 50985 6092 136329
	, , , , 58% 38% 4% 100%
Unit-linked and variable annuity separate account Equity securities and portfolio holdings in unit trusts Debt securities Other investments (including derivative assets) Derivative liabilities
	152050 399 23 152472
	, , 5243 4943 – 10186
	, , , 4 3 4 11
	(2) – – (2)
Total fnancial investments, net of derivative liabilities Percentage of total	157295 5345 27 162667
	, , , 97% 3% 0% 100%
Non-linked shareholder-backed Loans Equity securities and portfolio holdings in unit trusts Debt securities Other investments (including derivative assets) Derivative liabilities
	– 309 2594 2903
	, , 2104 7 10 2121
	, , 21525 66233 286 88044
	, , , – 1501 996 2497
	, , (26) (1,551) (460) (2,037)
Total fnancial investments, net of derivative liabilities Percentage of total	23603 66499 3426 93528
	, , , , 25% 71% 4% 100%
Group total analysis, including other fnancial liabilities held at fair value
Group total Loans Equity securities and portfolio holdings in unit trusts Debt securities Other investments (including derivative assets) Derivative liabilities
	– 309 4500 4809
	, , 205290 4688 459 210437
	, , , 54890 115321 582 170793
	, , , 77 4814 4464 9355
	, , , (107) (2,303) (460) (2,870)
Total fnancial investments, net of derivative liabilities Investment contract liabilities without discretionary participation features held at fair value Borrowings attributable to with‑profts operations Net asset value attributable to unit holders of consolidated unit trusts and similar funds Other fnancial liabilities held at fair value	260150 122829 9545 392524
	, , , , – (17166) – (17166)
	, , – – (1816) (1816)
	, , (5719) (2421) (437) (8577)
	, , , – (394) (2,766) (3,160)
Total fnancial instruments at fair value Percentage of total	254431 102848 4526 361805
	, , , , 70% 29% 1% 100%

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	30 Jun 2016£m Level 1 Level 2 Level 3 Quoted prices (unadjusted) in active markets Valuation based on signifcant observable market inputs Valuation based on signifcant unobservable market inputs Total
Analysis of fnancial investments, net of derivative liabilities by business type With-profts Equity securities and portfolio holdings in unit trusts Debt securities Other investments (including derivative assets) Derivative liabilities	38,596 3,969 630 43,195 24,430 42,741 662 67,833 103 3,157 3,674 6,934 (192) (2,536) – (2,728)
Total fnancial investments, net of derivative liabilities Percentage of total	62,937 47,331 4,966 115,234 55% 41% 4% 100%
Unit-linked and variable annuity separate account Equity securities and portfolio holdings in unit trusts Debt securities Other investments (including derivative assets) Derivative liabilities	130,977 401 27 131,405 4,956 5,059 – 10,015 11 38 5 54 (19) (51) – (70)
Total fnancial investments, net of derivative liabilities Percentage of total	135,925 5,447 32 141,404 96% 4% 0% 100%
Non-linked shareholder-backed Loans Equity securities and portfolio holdings in unit trusts Debt securities Other investments (including derivative assets) Derivative liabilities	– 259 2,448 2,707 1,402 1 34 1,437 23,379 66,823 317 90,519 – 2,369 983 3,352 – (2,064) (480) (2,544)
Total fnancial investments, net of derivative liabilities Percentage of total	24,781 67,388 3,302 95,471 26% 71% 3% 100%
Group total analysis, including other fnancial liabilities held at fair value
Group total Loans Equity securities and portfolio holdings in unit trusts Debt securities Other investments (including derivative assets) Derivative liabilities	– 259 2,448 2,707 170,975 4,371 691 176,037 52,765 114,623 979 168,367 114 5,564 4,662 10,340 (211) (4,651) (480) (5,342)
Total fnancial investments, net of derivative liabilities Investment contract liabilities without discretionary participation features held at fair value Net asset value attributable to unit holders of consolidated unit trusts and similar funds Other fnancial liabilities held at fair value	223,643 120,166 8,300 352,109 – (16,178) – (16,178) (5,275) (2,427) (1,068) (8,770) – (375) (2,616) (2,991)
Total fnancial instruments at fair value Percentage of total	218,368 101,186 4,616 324,170 67% 31% 2% 100%

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C Balance sheet notes Continued

C3 Assets and liabilities – classification and measurement continued

C3.1 Group assets and liabilities – measurement continued

	31 Dec 2016£m Level 1 Level 2 Level 3 Quoted prices (unadjusted) in active markets Valuation based on signifcant observable market inputs Valuation based on signifcant unobservable market inputs Total
Analysis of fnancial investments, net of derivative liabilities by business type With-profts Loans Equity securities and portfolio holdings in unit trusts Debt securities Other investments (including derivative assets) Derivative liabilities	– – 27 27 45,181 3,669 690 49,540 26,227 43,880 690 70,797 58 3,357 3,443 6,858 (51) (1,025) – (1,076)
Total fnancial investments, net of derivative liabilities Percentage of total	71,415 49,881 4,850 126,146 56% 40% 4% 100%
Unit-linked and variable annuity separate account Equity securities and portfolio holdings in unit trusts Debt securities Other investments (including derivative assets) Derivative liabilities	146,637 374 22 147,033 5,136 4,462 – 9,598 6 8 5 19 (4) (24) – (28)
Total fnancial investments, net of derivative liabilities Percentage of total	151,775 4,820 27 156,622 97% 3% 0% 100%
Non-linked shareholder-backed Loans Equity securities and portfolio holdings in unit trusts Debt securities Other investments (including derivative assets) Derivative liabilities	– 276 2,672 2,948 1,966 3 10 1,979 21,896 67,915 252 90,063 – 1,492 1,032 2,524 (9) (1,623) (516) (2,148)
Total fnancial investments, net of derivative liabilities Percentage of total	23,853 68,063 3,450 95,366 25% 71% 4% 100%
Group total analysis, including other fnancial liabilities held at fair value
Group total Loans Equity securities and portfolio holdings in unit trusts Debt securities Other investments (including derivative assets) Derivative liabilities	– 276 2,699 2,975 193,784 4,046 722 198,552 53,259 116,257 942 170,458 64 4,857 4,480 9,401 (64) (2,672) (516) (3,252)
Total fnancial investments, net of derivative liabilities Investment contract liabilities without discretionary participation features held at fair value Net asset value attributable to unit holders of consolidated unit trusts and similar funds Other fnancial liabilities held at fair value	247,043 122,764 8,327 378,134 – (16,425) – (16,425) (4,217) (3,587) (883) (8,687) – (385) (2,851) (3,236)
Total fnancial instruments at fair value Percentage of total	242,826 102,367 4,593 349,786 70% 29% 1% 100%

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All assets and liabilities held at fair value are classified as fair value through profit or loss, except for £37,936 million (30 June 2016: £41,045 million; 31 December 2016: £40,645 million) of debt securities classified as available‑for‑sale.

The Korea life business was classified as held for sale in the second half of 2016, with the sale completed in May 2017. Accordingly, the financial instruments shown above only included the assets and liabilities of Korea life business as at 30 June 2016 (prior to its classification as held for sale). The assets and liabilities held for sale on the consolidated statement of financial position at 31 December 2016 in respect of Korea life business included a net financial instruments balance of £3,200 million, primarily for equity securities and debt securities. Of this amount, £2,763 million was classified as level 1 and £437 million as level 2.

(c) Valuation approach for level 2 fair valued financial instruments

A significant proportion of the Group’s level 2 assets are corporate bonds, structured securities and other non‑national government debt securities. These assets, in line with market practice, are generally valued using independent pricing services or third‑party broker quotes. These valuations are determined using independent external quotations from multiple sources and are subject to a number of monitoring controls, such as monthly price variances, stale price reviews and variance analysis on prices achieved on subsequent trades. For further detail on the valuation approach for level 2 fair valued financial instruments please refer to note C3.1 of the Group’s consolidated financial statements for the year ended 31 December 2016.

Of the total level 2 debt securities of £115,321 million at 30 June 2017 (30 June 2016: £114,623 million; 31 December 2016: £116,257 million), £13,596 million are valued internally (30 June 2016: £11,867 million; 31 December 2016: £12,708 million). The majority of such securities are valued using matrix pricing, which is based on assessing the credit quality of the underlying borrower to derive a suitable discount rate relative to government securities of a comparable duration. Under matrix pricing, the debt securities are priced taking the credit spreads on comparable quoted public debt securities and applying these to the equivalent debt instruments factoring in a specified liquidity premium. The majority of the parameters used in this valuation technique are readily observable in the market and, therefore, are not subject to interpretation.

(d) Fair value measurements for level 3 fair valued financial instruments

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

The following table reconciles the value of level 3 fair valued financial instruments at 1 January 2017 to that presented at 30 June 2017. Total investment return recorded in the income statement represents interest and dividend income, realised gains and losses, unrealised gains and losses on the assets classified at fair value through profit and loss and foreign exchange movements on an individual entity’s overseas investments.

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

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C Balance sheet notes Continued

C3 Assets and liabilities – classification and measurement continued

C3.1 Group assets and liabilities – measurement continued

C3.1 Group assets and li	abilities – measurementcontinued
	Half year 2017£m
	At 1 Jan 2017 Total gains (losses) in income statement Total gains (losses) recorded in other compre- hensive income Purchases Sales Settled Issued Transfers into level 3 Transfers out of level 3 At 30 Jun 2017
Loans Equity securities and portfolio holdings in unit trusts Debt securities Other investments (including derivative assets) Derivative liabilities	2699 96 (132) 1879 – (70) 28 – – 4500
	, , , 722 (17) (2) 175 (418) – – – (1) 459
	942 2 (11) 142 (471) – – – (22) 582
	4480 84 (64) 191 (227) – – – – 4464
	, , (516) 56 – – – – – – – (460)
Total fnancial investments, net of derivative liabilities Borrowings attributable to with‑profts operations Net asset value attributable to unit holders of consolidated unit trusts and similar funds Other fnancial liabilities	8327 221 (209) 2387 (1116) (70) 28 – (23) 9545
	, , , , – 2 – – – – (1818) – – (1816)
	, , (883) (357) – – (167) 1017* (47) – – (437)
	, (2,851) (96) 141 – (1) 73 (32) – – (2,766)
Total fnancial instruments at fair value	4,593 (230) (68) 2,387 (1,284) 1,020 (1,869) – (23) 4,526
	Half year 2016£m
	At 1 Jan 2016 Total gains (losses) in income statement Total gains (losses) recorded in other compre- hensive income Purchases Sales Settled Issued Transfers into level 3 Transfers out of level 3 At 30 Jun 2016
Loans Equity securities and portfolio holdings in unit trusts Debt securities Other investments (including derivative assets) Derivative liabilities	2,183 79 227 – – (64) 23 – – 2,448 607 (13) 11 81 (4) – – 9 – 691 778 66 7 120 (17) – – 30 (5) 979 4,276 184 265 377 (473) – – 33 – 4,662 (353) (127) – – – – – – – (480)
Total fnancial investments, net of derivative liabilities Net asset value attributable to unit holders of consolidated unit trusts and similar funds Other fnancial liabilities	7,491 189 510 578 (494) (64) 23 72 (5) 8,300 (1,036) 24 (2) – 1 62* (117) – – (1,068) (2,347) (84) (243) – – 99 (41) – – (2,616)
Total fnancial instruments at fair value	4,108 129 265 578 (493) 97 (135) 72 (5) 4,616

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	Full year 2016£m
	At 1 Jan 2016 Total gains (losses) in income statement Total gains (losses) recorded in other compre- hensive income Purchases Sales Settled Issued Transfers into level 3 Transfers out of level 3 At 31 Dec 2016
Loans Equity securities and portfolio holdings in unit trusts Debt securities Other investments (including derivative assets) Derivative liabilities	2,183 2 427 – – (123) 210 – – 2,699 607 59 (20) 153 (133) (9) – 65 – 722 778 85 11 185 (75) (37) – – (5) 942 4,276 359 443 720 (1,002) – – 73 (389) 4,480 (353) (163) – – – – – – – (516)
Total fnancial investments, net of derivative liabilities Net asset value attributable to unit holders of consolidated unit trusts and similar funds Other fnancial liabilities	7,491 342 861 1,058 (1,210) (169) 210 138 (394) 8,327 (1,036) (18) (2) – 24 271* (122) – – (883) (2,347) (4) (457) – – 259 (302) – – (2,851)
Total fnancial instruments at fair value	4,108 320 402 1,058 (1,186) 361 (214) 138 (394) 4,593

• Includes distributions to third‑party investors by subsidiaries held by the UK with‑profits funds for investment purposes. These distributions vary period to period depending on the maturity of the subsidiaries and the gains realised by those entities in the period.

Of the total net gains and losses in the income statement of £(230) million (30 June 2016: £129 million; 31 December 2016: £320 million), £(234) million (30 June 2016: £92 million; 31 December 2016: £242 million) relates to net unrealised gains (losses) relating to financial instruments still held at the end of the period, which can be analysed as follows:

	2017£m	2016£m
	30 Jun	30 Jun 31 Dec
Equity securities Debt securities Other investments Derivative liabilities Net asset value attributable to unit holders of consolidated unit trusts and similar funds Other fnancial liabilities	21	(14) 8 65 71 149 182 (127) – 23 (18) (4) (1)
	2
	42
	56
	2
	(357)
Total	(234)	92 242

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C Balance sheet notes Continued

C3 Assets and liabilities – classification and measurement continued

C3.1 Group assets and liabilities – measurement continued

Valuation approach for level 3 fair valued financial instruments

Investments valued using valuation techniques include financial investments which by their nature do not have an externally quoted price based on regular trades, and financial investments for which markets are no longer active as a result of market conditions, eg market illiquidity. The valuation techniques used include comparison to recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option‑adjusted spread models and, if applicable, enterprise valuation. For further detail on the valuation approach for level 3 fair valued financial instruments, please refer to note C3.1 of the Group’s consolidated financial statements for the year ended 31 December 2016.

At 30 June 2017, the Group held £4,526 million (30 June 2016: £4,616 million; 31 December 2016: £4,593 million) of net financial instruments at fair value within level 3. This represents 1 per cent (30 June 2016: 2 per cent; 31 December 2016: 1 per cent) of the total fair valued financial assets net of fair valued financial liabilities.

The net financial instruments at fair value within level 3 at 30 June 2017 include £1,906 million of loans and a corresponding £1,816 million of borrowings held by a subsidiary of the Group’s UK with‑profits fund, attaching to the acquisition of a portfolio of buy‑to‑let mortgage loans in half year 2017 financed largely by external third‑party (non‑recourse) borrowings (see note C3.3(c) for further details). The fair value of these loans and the related borrowings is determined by an external valuer using the income approach, with the most significant inputs into the valuation being non‑observable assumptions on the future level of defaults and prepayments and their effect on cash flows. The discount rate applied is updated to reflect changes in the LIBOR swap rate. The Group’s exposure is limited to the investment held by the UK with‑profits fund, rather than to the individual loans and borrowings themselves. The fair value movements of these loans and borrowings have no effect on shareholders’ profit and equity.

Included within these amounts were loans of £2,594 million at 30 June 2017 (30 June 2016: £2,448 million; 31 December 2016: £2,672 million), measured as the loan outstanding balance attached to REALIC and held to back the liabilities for funds withheld under reinsurance arrangements. The funds withheld liability of £2,766 million at 30 June 2017 (30 June 2016: £2,616 million; 31 December 2016: £2,851 million) was also classified within level 3, accounted for on a fair value basis being equivalent to the carrying value of the underlying assets.

Excluding the loans and funds withheld liability under REALIC’s reinsurance arrangements as described above, which amounted to a net liability of £(172) million (30 June 2016: £(168) million; 31 December 2016: £(179) million), the level 3 fair valued financial assets net of financial liabilities were £4,698 million (30 June 2016: £4,784 million; 31 December 2016: £4,772 million). Of this amount, a net liability of £(218) million (30 June 2016: net asset of £47 million; 31 December 2016: net asset of £72 million) was internally valued, representing 0.1 per cent of the total fair valued financial assets net of financial liabilities (30 June 2016: 0.0 per cent; 31 December 2016: 0.1 per cent). Internal valuations are inherently more subjective than external valuations. Included within these internally valued net liabilities were:

• (a) Debt securities of £446 million (30 June 2016: £463 million; 31 December 2016: £422 million), which were either valued on a discounted cash flow method with an internally developed discount rate or on external prices adjusted to reflect the specific known conditions relating to these securities (eg distressed securities or securities which were being restructured);

• (b) Private equity and venture investments of £176 million (30 June 2016: £1,038 million; 31 December 2016: £956 million) which were valued internally based on management information available for these investments. These investments, in the form of debt and equity securities, were principally held by consolidated investment funds which are managed on behalf of third parties;

• (c) Liabilities of £(437) million (30 June 2016: £(1,045) million; 31 December 2016: £(883) million) for the net asset value attributable to external unit holders in respect of the consolidated investment funds, which are non‑recourse to the Group. These liabilities are valued by reference to the underlying assets;

• (d) Derivative liabilities of £(460) million (30 June 2016: £(480) million; 31 December 2016: £(516) million) which are valued internally using standard market practices but are subject to independent assessment against counterparties’ valuations; and

• (e) Other sundry individual financial investments of £57 million (30 June 2016: £71 million; 31 December 2016: £93 million).

Of the internally valued net liability referred to above of £(218) million (30 June 2016: net asset of £47 million; 31 December 2016: net asset of £72 million):

• (a) A net liability of £(97) million (30 June 2016: net asset of £303 million; 31 December 2016: net asset of £315 million) was held by the Group’s participating funds and therefore shareholders’ profit and equity are not impacted by movements in the valuation of these financial instruments; and

• (b) A net liability of £(121) million (30 June 2016: net liability of £(256) million; 31 December 2016: net liability of £(243) million) was held to support non‑linked shareholder‑backed business. If the value of all the level 3 instruments held to support non‑linked shareholder‑ backed business valued internally was varied downwards by 10 per cent, the change in valuation would be £12 million (30 June 2016: £26 million; 31 December 2016: £24 million), which would increase (reduce) shareholders’ equity by this amount before tax. All this amount passes through the income statement substantially as part of short‑term fluctuations in investment returns outside of operating profit.

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(e) Transfers into and transfers out of levels

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

During half year 2017, the transfers between levels within the Group’s portfolio were primarily transfers from level 1 to 2 of £119 million and transfers from level 2 to level 1 of £400 million. These transfers, which primarily relate to debt securities, arose to reflect the change in the observability of the inputs used in valuing these securities.

In addition, the transfers out of level 3 in half year 2017 were £23 million. These transfers were primarily between levels 3 and 2 for debt securities and other investments. There were no transfers into level 3 in the period.

(f) Valuation processes applied by the Group

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

C3.2 Debt securities

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

(a) Credit rating

Debt securities are analysed below according to external credit ratings issued, with equivalent ratings issued by different ratings agencies grouped together. Standard and Poor’s ratings have been used where available, if this isn’t the case Moody’s and then Fitch have been used as alternatives. In the table below, AAA is the highest possible rating. Investment grade financial assets are classified within the range of AAA to BBB‑ ratings. Financial assets which fall outside this range are classified as below BBB‑. Debt securities with no external credit rating are classified as ‘Other’.

	30 Jun 2017£m
	AAA AA+ to AA- A+ to A- BBB+ to BBB- Below BBB- Other Total
Asia With‑profts Unit‑linked Non‑linked shareholder‑ backed US Non‑linked shareholder‑ backed UK With‑profts Unit‑linked Non‑linked shareholder‑ backed Other operations
	3168 9722 3540 3201 1789 1978 23398
	, , , , , , , 501 129 526 1502 323 461 3442
	, , 1138 2758 3035 2699 1645 946 12221
	, , , , , ,
	455 6739 10318 13526 1046 5945 38029
	, , , , , ,
	5965 9872 10827 12577 3481 6443 49165
	, , , , , , , 597 2871 1131 1856 176 112 6743
	, , , , 4481 10313 10396 4036 388 5780 35394
	, , , , , , 819 1,275 192 95 14 6 2,401
Total debt securities	17,124 43,679 39,965 39,492 8,862 21,671 170,793

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C Balance sheet notes Continued

C3 Assets and liabilities – classification and measurement continued

C3.2 Debt securities continued

	30 Jun 2016£m
	AAA AA+ to AA- A+ to A- BBB+ to BBB- Below BBB- Other Total
Asia With‑profts Unit‑linked Non‑linked shareholder‑ backed US Non‑linked shareholder‑ backed UK With‑profts Unit‑linked Non‑linked shareholder‑ backed Other operations	2,894 7,756 3,132 2,982 1,925 1,889 20,578 420 467 508 1,285 247 500 3,427 1,013 3,126 2,944 1,961 1,450 1,020 11,514 3,761 6,190 10,137 13,379 888 6,788 41,143 4,979 9,416 10,318 13,091 2,972 6,479 47,255 404 2,488 1,218 2,042 339 97 6,588 4,190 11,399 9,741 4,571 416 4,954 35,271 1,024 1,165 286 112 2 2 2,591
Total debt securities	18,685 42,007 38,284 39,423 8,239 21,729 168,367
	31 Dec 2016£m
	AAA AA+ to AA- A+ to A- BBB+ to BBB- Below BBB- Other Total
Asia With‑profts Unit‑linked Non‑linked shareholder‑ backed US Non‑linked shareholder‑ backed UK With‑profts Unit‑linked Non‑linked shareholder‑ backed Other operations	3,183 8,522 3,560 2,996 1,887 1,713 21,861 448 112 525 1,321 494 421 3,321 1,082 2,435 2,864 2,388 1,680 915 11,364 445 7,932 10,609 13,950 1,009 6,800 40,745 5,740 9,746 10,679 12,798 3,289 6,684 48,936 461 2,660 1,158 1,699 212 87 6,277 4,238 10,371 10,558 4,515 397 5,504 35,583 830 1,190 242 97 10 2 2,371
Total debt securities	16,427 42,968 40,195 39,764 8,978 22,126 170,458

The credit ratings, information or data contained in this report which are attributed and specifically provided by S&P, Moody’s and Fitch Solutions and their respective affiliates and suppliers (Content Providers) is referred to here as the ‘Content’. Reproduction of any Content in any form is prohibited except with the prior written permission of the relevant party. The Content Providers do not guarantee the accuracy, adequacy, completeness, timeliness or availability of any Content and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such Content. The Content Providers expressly disclaim liability for any damages, costs, expenses, legal fees, or losses (including lost income or lost profit and opportunity costs) in connection with any use of the Content. A reference to a particular investment or security, a rating or any observation concerning an investment that is part of the Content is not a recommendation to buy, sell or hold any such investment or security, nor does it address the suitability of an investment or security and should not be relied on as investment advice.

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Securities with credit ratings classified as ‘Other’ can be further analysed as follows:

	2017£m	2016£m
	30 Jun	30 Jun 31 Dec
Asia Non-linked shareholder-backed Internally rated Government bonds Corporate bonds – rated as investment grade by local external ratings agencies Other		207 63 582 757 231 95
	40
	821
	85
Total Asia non‑linked shareholder‑backed	946	1,020 915

	2017£m	2016£m
	Mortgage -backed securities Other securities 30 Jun Total	30 Jun Total 31 Dec Total
US Implicit ratings of other US debt securities based on NAIC* valuations (see below) NAIC 1 NAIC 2 NAIC 3‑6		4,776 4,759 1,868 1,909 144 132
	1926 2018 3944
	, , , 10 1893 1903
	, , 7 91 98
Total US	1,943 4,002 5,945	6,788 6,800

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

	2017£m	2016£m
	30 Jun	30 Jun 31 Dec
UK Internal ratings or unrated AAA to A‑ BBB to B‑ Below B‑ or unrated		6,584 6,939 3,284 3,257 1,662 2,079
	7494
	, 3180
	, 1,661
Total UK	12,335	11,530 12,275

In addition to the debt securities shown above, the assets held for sale on the consolidated statement of financial position at 31 December 2016 in respect of Korea life business included a debt securities balance of £652 million.

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C Balance sheet notes Continued

C3 Assets and liabilities – classification and measurement continued

C3.2 Debt securities continued

(b) Additional analysis of US insurance operations debt securities

	2017£m	2016£m
	30 Jun	30 Jun 31 Dec
Corporate and government securities and commercial loans: Government Publicly traded and SEC Rule 144A securities* Non‑SEC Rule 144A securities Asset‑backed securities(see note (e))		7,151 5,856 24,894 25,992 4,302 4,576 4,796 4,321
	4884
	, 24971
	, 4543
	, 3,631
Total US debt securities†	38,029	41,143 40,745

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

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

develop a more liquid and effcient institutional resale market for unregistered securities. Debt securities for US operations included in the statement of fnancial position comprise:
	2017£m	2016£m
	30 Jun	30 Jun 31 Dec
Available‑for‑sale Fair value through proft and loss: Securities held to back liabilities for funds withheld under reinsurance arrangement	37936	41,045 40,645 98 100
	,
	93
	38,029	41,143 40,745

Realised gains and losses, including impairments, recorded in the income statement are as shown in note B1.2 of this report.

(c) Movements in unrealised gains and losses on Jackson available-for-sale securities

There was a movement in the statement of financial position value for debt securities classified as available‑for‑sale from a net unrealised gain of £676 million to a net unrealised gain of £1,157 million as analysed in the table below:

	30 Jun 2017£m Foreign exchange translation† Changes in unrealised appreciation	31 Dec 2016£m
	Refected as part of movement in other comprehensive income
Assets fair valued at below book value Book value* Unrealised (loss)gain		14,617 (675)
	8760
	, (306) 22 347
Fair value (as included in statement of fnancialposition)	8,454	13,942
Assets fair valued at or above book value Book value* Unrealisedgain (loss)		25,352 1,351
	28019
	, 1,463 (72) 184
Fair value (as included in statement of fnancialposition)	29,482	26,703
Total Book value* Net unrealisedgain (loss)		39,969 676
	36779
	, 1,157 (50) 531
Fair value (as included in the footnote above in the overview table and the statement of fnancialposition)	37,936	40,645

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The available‑for‑sale debt securities of Jackson are analysed into US Treasuries and other debt securities as follows:

	30 Jun 2017£m Foreign exchange translation† Changes in unrealised appreciation	31 Dec 2016£m
	Refected as part of movement in other comprehensive income
US Treasuries Book value* Unrealised (loss)gain		5,486 (412)
	4415
	, (186) 13 213
Fair value	4,229	5,074
Other debt securities Book value* Unrealisedgain (loss)		34,483 1,088
	32364
	, 1,343 (63) 318
Fair value	33,707	35,571
Total debt securities Book value* Net unrealisedgain (loss)		39,969 676
	36779
	, 1,157 (50) 531
Fair value	37,936	40,645

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

† Translated at the average rate of US$1.2599: £1.00.

(d) US debt securities classified as available-for-sale in an unrealised loss position (i) Fair value of securities as a percentage of book value

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

	30 Jun 2017£m	30 Jun 2016£m	31 Dec 2016£m
	Fair value Unrealised loss	Fair value Unrealised loss	Fair value Unrealised loss
Between 90% and 100% Between 80% and 90% Below 80%: Residential mortgage‑backed securities – sub‑prime Commercial mortgage‑backed securities Other asset‑backed securities Government bonds Corporates	7962 (236)	1,848 (51) 304 (52)	12,326 (405) 1,598 (259)
	, 482 (64)
	– –	– – 8 (3) 9 (7) – – 19 (6)	– – 8 (3) 9 (8) – – 1 –
	– –
	10 (6)
	– –
	– –
	10 (6)	36 (16)	18 (11)
Total	8,454 (306)	2,188 (119)	13,942 (675)

(ii) Unrealised loss by maturity of security

	2017£m	2016£m
	30 Jun	30 Jun 31 Dec
1 year to 5 years 5 years to 10 years More than 10 years Mortgage‑backed and other debt securities	(5)	(10) (7) (38) (118) (42) (510) (29) (40)
	(48)
	(231)
	(22)
Total	(306)	(119) (675)

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C Balance sheet notes Continued

C3 Assets and liabilities – classification and measurement continued

C3.2 Debt securities continued

(iii) Age analysis of unrealised losses for the periods indicated

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

Age analysis	30 Jun 2017£m	30 Jun 2016£m	31 Dec 2016£m
	Non- investment grade Investment grade Total	Non- investment grade Investment grade Total	Non- investment grade Investment grade Total
Less than 6 months 6 months to 1 year 1 year to 2 years 2 years to 3 years More than 3years	(1) (15) (16)	(2) (5) (7) (4) (8) (12) (14) (46) (60) – – – (3) (37) (40)	(3) (599) (602) – (2) (2) (4) (27) (31) (2) (1) (3) (2) (35) (37)
	– (251) (251)
	(2) (1) (3)
	(3) (12) (15)
	(1) (20) (21)
	(7) (299) (306)	(23) (96) (119)	(11) (664) (675)

Further, the following table shows the age analysis as at 30 June 2017 of the securities whose fair values were below 80 per cent of the book value:

Age analysis	30 Jun 2017£m	30 Jun 2016£m	31 Dec 2016£m
	Fair value Unrealised loss	Fair value Unrealised loss	Fair value Unrealised loss
Less than 3 months 3 months to 6 months More than 6 months	– –	2 – 19 (6) 15 (10)	1 – – – 17 (11)
	– –
	10 (6)
	10 (6)	36 (16)	18 (11)

(e) Asset-backed securities

The Group’s holdings in asset‑backed securities (ABS), which comprise residential mortgage‑backed securities (RMBS), commercial mortgage‑backed securities (CMBS), collateralised debt obligations (CDO) funds and other asset‑backed securities, at 30 June 2017 are as follows:

	2017£m	2016£m
	30 Jun	30 Jun 31 Dec
Shareholder-backed operations: Asia insurance operationsnote (i) US insurance operationsnote (ii) UK insurance operations (2017: 35% AAA, 19% AA)note (iii) Asset management operationsnote (iv)		151 130 4,796 4,321 1,445 1,464 963 771
	104
	3631
	, 1045
	, 665
	5,445	7,355 6,686
With-profts operations: Asia insurance operationsnote (i) UK insurance operations (2017: 56% AAA, 13% AA)note (iii)		310 357 4,558 5,177
	233
	5,091
	5,324	4,868 5,534
Total	10,769	12,223 12,220

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Notes

(i) Asia insurance operations The Asia insurance operations’ exposure to asset‑backed securities is primarily held by the with‑profits operations. Of the £233 million, 99 per cent (30 June 2016: 99 per cent; 31 December 2016: 99 per cent) are investment grade.

(ii) US insurance operations

US insurance operations’ exposure to asset‑backed securities at 30 June 2017 comprises:

31 December 2016: 99 per cent) are investment grade. US insurance operations US insurance operations’ exposure to asset‑backed securities at 30 June 2017 comprises:
	2017£m	2016£m
	30 Jun	30 Jun 31 Dec
RMBS Sub‑prime (2017: 2% AAA, 11% AA, 3% A) Alt‑A (2017: 3% AAA, 5% A) Prime including agency (2017: 70% AA, 5% A) CMBS (2017: 80% AAA, 14% AA, 1% A) CDO funds (2017: 23% AAA, 8% AA, 43% A), including £nil exposure to sub‑prime Other ABS (2017: 17% AAA, 17% AA, 51% A), including £108 million exposure to sub‑prime		185 180 178 177 904 675 2,635 2,234 55 50 839 1,005
	150
	151
	515
	1768
	, 33
	1,014
Total	3,631	4,796 4,321

(iii) UK insurance operations

The majority of holdings of the shareholder‑backed business are UK securities and relate to PAC’s annuity business. Of the holdings of the with‑profits operations, £1,473 million (30 June 2016: £1,332 million; 31 December 2016: £1,623 million) relates to exposure to the US markets with the remaining exposure being primarily to the UK market.

(iv) Asset management operations

Asset management operations’ exposure to asset‑backed securities is held by Prudential Capital with no sub‑prime exposure. Of the £665 million, 96 per cent (30 June 2016: 95 per cent; 31 December 2016: 95 per cent) are graded AAA.

(f) Group sovereign debt and bank debt exposure

The Group exposures held by the shareholder‑backed business and with‑profits funds in sovereign debts and bank debt securities at 30 June 2017 are analysed as follows:

Exposure to sovereign debts

	30 Jun 2017£m	30 Jun 2016£m	31 Dec 2016£m
	Shareholder- backed business With- profts funds	Shareholder- backed business With- profts funds	Shareholder- backed business With- profts funds
Italy Spain France Germany* Other Europe (principallyBelgium)	57 62	58 63 35 18 22 – 546 348 84 32	56 61 33 18 22 – 573 329 83 33
	33 18
	23 23
	649 317
	82 32
Total Eurozone United Kingdom United States† Other,predominantlyAsia	844 452	745 461 5,720 2,431 6,881 8,354 4,081 2,073	767 441 5,510 2,868 6,861 9,008 3,979 2,079
	4904 3049
	, , 4959 9913
	, , 4,174 2,221
Total	14,881 15,635	17,427 13,319	17,117 14,396

• Including bonds guaranteed by the federal government.

† The exposure to the United States sovereign debt comprises holdings of Jackson, the UK and Asia insurance operations.

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C Balance sheet notes Continued

C3 Assets and liabilities – classification and measurement continued

C3.2 Debt securities continued Exposure to bank debt securities

		2017£m	2016£m
	Senior debt	Subordinated debt Tier 1 Tier 2 Total subordinated debt 30 Jun Total	30 Jun Total 31 Dec Total
	Covered Senior Total senior debt
Shareholder-backed business Italy Spain France Germany Netherlands Other Eurozone			31 32 159 170 224 166 124 124 39 50 32 19
	– 32 32	– – – 32
	43 16 59	– – – 59
	28 52 80	10 73 83 163
	76 4 80	– 87 87 167
	– 67 67	– 6 6 73
	– 23 23	– – – 23
Total Eurozone United Kingdom United States Other, predominantly Asia	147 194 341	10 166 176 517	609 561 1,118 1,174 2,651 2,684 1,041 1,018
	698 387 1085	6 310 316 1401
	, – 2,580 2,580	, 3 174 177 2,757
	33 600 633	85 420 505 1,138
Total	878 3,761 4,639	104 1,070 1,174 5,813	5,419 5,437
With-profts funds Italy Spain France Germany Netherlands Other Eurozone			64 62 219 213 274 213 112 114 200 202 30 31
	– 65 65	– – – 65
	44 41 85	– – – 85
	9 200 209	– 64 64 273
	112 20 132	– 35 35 167
	– 192 192	5 7 12 204
	– 30 30	– – – 30
Total Eurozone United Kingdom United States Other, predominantly Asia	165 548 713	5 106 111 824	899 835 1,532 1,396 1,978 2,229 1,775 1,992
	790 515 1,305	2 485 487 1,792
	– 1,985 1,985	16 333 349 2,334
	400 1,012 1,412	258 463 721 2,133
Total	1,355 4,060 5,415	281 1,387 1,668 7,083	6,184 6,452

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

C3.3 Loans portfolio

(a) Overview of loans portfolio

Loans are principally accounted for at amortised cost, net of impairment except for:

• Certain mortgage loans which have been designated at fair value through profit or loss of the UK insurance operations as this loan portfolio is managed and evaluated on a fair value basis; and

• Certain policy loans of the US insurance operations which are held to back liabilities for funds withheld under a reinsurance arrangement and are also accounted for on a fair value basis.

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

	30 Jun 2017£m	30 Jun 2016£m	31 Dec 2016£m
	Mortgage loans Policy loans† Other loans‡ Total*	Mortgage loans Policy loans† Other loans‡ Total*	Mortgage loans Policy loans† Other loans‡ Total*
Asia With‑profts – 589 113 702 Non‑linked shareholder‑ backed 188 219 198 605 US Non‑linked shareholder‑ backed 5,964 3,533 – 9,497 UK With‑profts 2,576 5 1,455 4,036 Non‑linked shareholder‑ backed 1,711 – 37 1,748 Asset management operations – – 364 364		– 539 113 652 156 294 176 626 5,109 3,395 – 8,504 719 6 1,339 2,064 1,548 – 4 1,552 – – 817 817	– 577 113 690 179 226 208 613 6,055 3,680 – 9,735 668 6 1,218 1,892 1,642 – 38 1,680 – – 563 563
	– 589 113 702
Total loans securities 10,439 4,346 2,167 16,952		7,532 4,234 2,449 14,215	8,544 4,489 2,140 15,173

• All mortgage loans are secured by properties.

† In the US £2,594 million (30 June 2016: £2,448 million; 31 December 2016: £2,672 million) policy loans are backing liabilities for funds withheld under reinsurance arrangements and are accounted for at fair value through profit or loss. All other policy loans are accounted for at amortised cost, less any impairment.

‡ Other loans held in UK with‑profits funds are commercial loans and comprise mainly syndicated loans. The majority of other loans in shareholder‑backed business in Asia are commercial loans held by the Malaysia operation and which are all investment graded by two local rating agencies.

(b) Additional information on US mortgage loans

In the US, mortgage loans are all commercial mortgage loans that are secured on the following property types: industrial, multi‑family residential, suburban office, retail or hotel. The US insurance operations’ commercial mortgage loan portfolio does not include any single‑family residential mortgage loans and is therefore not exposed to the risk of defaults associated with residential sub‑prime mortgage loans. The average loan size is £12.5 million (30 June 2016: £10.2 million; 31 December 2016: £12.4 million). The portfolio has a current estimated average loan to value of 59 per cent (30 June 2016 and 31 December 2016: 59 per cent). At 30 June 2017, Jackson had no mortgage loans where the contractual terms of the agreements had been restructured (30 June 2016 and 31 December 2016: none).

(c) Additional information on UK mortgage loans

During the first half of 2017, the UK with‑profits fund invested in an entity established to acquire a portfolio of buy‑to‑let mortgage loans. The vehicle financed the acquisition through the issue of debt instruments, largely to external parties, securitised upon the mortgages acquired. These third‑party borrowings have no recourse to any other assets of the Group and the Group’s exposure is limited to the amount invested by the UK with‑profits fund. The securitisation entity is consolidated under IFRS with the mortgage loans and the related third‑party non‑recourse borrowings (see note C6.2 (b)) carried at fair value through profit or loss as they are managed and evaluated by the Group on a fair value basis. By carrying value, 100 per cent of the £1,711 million (30 June 2016: 76 per cent of £1,548 million; 31 December 2016: 96 per cent of £1,642 million) mortgage loans held by the UK shareholder‑backed business relates to lifetime (equity release) mortgage business which has an average loan to property value of 30 per cent (30 June 2016: 29 per cent; 2016: 30 per cent).

(d) Loans held by asset management operations

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

	2017£m	2016£m
	30 Jun	30 Jun 31 Dec
Loans and receivables internal ratings: AA+ to AA‑ A+ to A‑ BBB+ to BBB‑ BB+ to BB‑ B and other		31 29 120 100 442 248 223 185 1 1
	21
	97
	146
	100
	–
Total	364	817 563

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C Balance sheet notes Continued

C4 Policyholder liabilities and unallocated surplus of with-profits funds

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

C4.1 Movement of liabilities

C4.1(a) Group overview

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

Halfyear 2017 movements	Insurance operations£m
	Asia note C4.1(b) US note C4.1(c) UK note C4.1(d) Total*
At 1 January2017	62,784 177,626 169,304 409,714
Comprising:
– Policyholder liabilities on the consolidated statement of fnancial position† – Unallocated surplus of with-profts funds on the consolidated statement of fnancial position – Group’s share of policyholder liabilities of joint ventures and associate‡	53716 177626 157654 388996
	, , , , 2667 – 11650 14317
	, , , 6,401 – – 6,401
Net fows: Premiums Surrenders Maturities/deaths
	5699 8148 7756 21603
	, , , , (1508) (5071) (3816) (10395)
	, , , , (880) (1,119) (3,533) (5,532)
Net fows Shareholders’ transfers post tax Investment‑related items and other movements Foreign exchange translation differences	3311 1958 407 5676
	, , , (27) – (115) (142)
	4288 7124 5214 16626
	, , , , (2,035) (8,929) 130 (10,834)
As at 30 June 2017	68,321 177,779 174,940 421,040
Comprising:
– Policyholder liabilities on the consolidated statement of fnancial position† – Unallocated surplus of with-profts funds on the consolidated statement of fnancial position – Group’s share ofpolicyholder liabilities ofjoint ventures and associate‡	58348 177779 162853 398980
	, , , , 3003 – 12087 15090
	, , , 6,970 – – 6,970
Halfyear 2016 movements
At 1 January2016	45,966 138,913 152,893 337,772
Comprising:
– Policyholder liabilities excluding Korea life* – Unallocated surplus of with-profts funds on the consolidated statement of fnancial position – Group’s share of policyholder liabilities of joint ventures and associate‡	38,443 138,913 142,350 319,706 2,553 – 10,543 13,096 4,970 – – 4,970
Net fows: Premiums Surrenders Maturities/deaths	4,191 7,101 5,561 16,853 (992) (3,437) (3,208) (7,637) (671) (809) (3,470) (4,950)
Net fows Shareholders’ transfers post tax Investment‑related items and other movements Foreign exchange translation differences	2,528 2,855 (1,117) 4,266 (22) – (110) (132) 2,232 2,737 10,092 15,061 6,280 14,650 721 21,651
At 30 June 2016	56,984 159,155 162,479 378,618
Comprising:
– Policyholder liabilities excluding Korea life* – Unallocated surplus of with-profts funds on the consolidated statement of fnancial position – Group’s share of policyholder liabilities of joint ventures and associate‡	48,918 159,155 151,233 359,306 2,351 – 11,246 13,597 5,715 – – 5,715
Average policyholder liability balances_§ Half year 2017 Halfyear 2016*_
	62,718 177,702 160,254 400,674
	49,023 149,034 146,792 344,849

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• The sale of the Group’s Korea life business was completed in May 2017. Accordingly, no amounts are shown in the half year 2017 analysis above for Korea. The half year 2016 comparatives have been correspondingly adjusted. The amounts excluded from policyholder liabilities as presented in the balance sheet are £2,812 million at 1 January 2016 and £3,204 million at 30 June 2016.

† The policyholder liabilities of the Asia insurance operations of £58,348 million as shown in the table above, is after deducting the intra‑group reinsurance liabilities ceded by the UK insurance operations of £1,271 million to the Hong Kong with‑profits business.

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

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

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

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

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

	Half year 2017£m
	Asia US UK Total note (b)
At 1 January 2017 Net fows: Premiums Surrenders Maturities/deaths	32851 177626 56158 266635
	, , , ,
	2801 8148 1658 12607
	, , , , (1335) (5071) (1500) (7906)
	, , , , (450) (1,119) (1,325) (2,894)
Net fowsnote (a) Investment‑related items and other movements Foreign exchange translation differences	1016 1958 (1167) 1807
	, , , , 1912 7124 1500 10536
	, , , , (739) (8,929) – (9,668)
At 30 June 2017	35,040 177,779 56,491 269,310
Comprising:
– Policyholder liabilities on the consolidated statement of fnancial position – Group’s share of policyholder liabilities relating to joint ventures and associate	28070 177779 56491 262340
	, , , , 6,970 – – 6,970
	Half year 2016£m
	Asia note (b) US UK Total
At 1 January 2016 Net fows: Premiums Surrenders Maturities/deaths	25,032 138,913 52,824 216,769 2,090 7,101 869 10,060 (829) (3,437) (1,311) (5,577) (284) (809) (1,257) (2,350)
Net fowsnotes (a)(b) Investment‑related items and other movements Foreign exchange translation differences	977 2,855 (1,699) 2,133 841 2,737 4,285 7,863 3,294 14,650 1 17,945
At 30 June 2016	30,144 159,155 55,411 244,710
Comprising:
– Policyholder liabilities excluding Korea life_note (b) – Group’s share of policyholder liabilities relating to joint ventures_ and associate	24,429 159,155 55,411 238,995 5,715 – – 5,715

Notes

(a) Including net flows of the Group’s insurance joint ventures and associate.

(b) The sale of the Group’s Korea life business was completed in May 2017. Accordingly, no amounts are shown in the half year 2017 analysis above for Korea. The half year 2016 comparatives have been correspondingly adjusted. The amounts excluded from policyholder liabilities as presented in the balance sheet are £2,812 million at 1 January 2016 and £3,204 million at 30 June 2016.

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C Balance sheet notes Continued

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

C4.1 Movement of liabilities continued

C4.1(b) Asia insurance operations

(i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds A reconciliation of the total policyholder liabilities and unallocated surplus of with‑profits funds of Asia insurance operations from the beginning of the period to 30 June is as follows:

		With-profts	Unit-linked	Other
		business*	liabilities	business	Total
Halfyear 2017 movements		£m	£m	£m	£m
At 1 January 2017		29,933	17,507	15,344	62,784
Comprising: – Policyholder liabilities on the consolidated statement of fnancial position		27,266	14,289	12,161	53,716
	– Unallocated surplus of with-profts funds on the consolidated statement
	of fnancial position	2,667	–	–	2,667
	– Group’s share of policyholder liabilities relating to joint ventures
	and associate†	–	3,218	3,183	6,401
Premiums: New business		676	527	528	1,731
	In‑force	2,222	805	941	3,968
Surrendersnote (a)		2,898 (173)	1,332 (1,102)	1,469 (233)	5,699 (1,508)
Maturities/deaths		(430)	(82)	(368)	(880)
	Net fowsnote (b)	2,295	148	868	3,311
Shareholders’ transfers post tax		(27)	–	–	(27)
Investment‑related items and other movementsnote (c)		2,376	1,551	361	4,288
Foreign exchange translation differencesnote (d)		(1,296)	(373)	(366)	(2,035)
At 30 June 2017		33,281	18,833	16,207	68,321
Comprising: – Policyholder liabilities on the consolidated statement of fnancial position*		30,278	15,326	12,744	58,348
	– Unallocated surplus of with-profts funds on the consolidated statement
	of fnancial position	3,003	–	–	3,003
	– Group’s share of policyholder liabilities relating to joint ventures
	and associate†	–	3,507	3,463	6,970

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		With-profts	Unit-linked	Other
		business*	liabilities	business	Total
	Halfyear 2016 movements‡	£m	£m	£m	£m
	At 1 January 2016	20,934	13,779	11,253	45,966
Comprising:
	– Policyholder liabilities excluding Korea life‡	18,381	11,168	8,894	38,443
	– Unallocated surplus of with-profts funds on the consolidated statement
	of fnancial position	2,553	–	–	2,553
	– Group’s share of policyholder liabilities relating to joint ventures
	and associate†	–	2,611	2,359	4,970
Premiums:
	New business	706	366	335	1,407
	In‑force	1,395	686	703	2,784
		2,101	1,052	1,038	4,191
Surrendersnote (a)		(163)	(679)	(150)	(992)
Maturities/deaths		(387)	(27)	(257)	(671)
Net fowsnote (b)		1,551	346	631	2,528
Shareholders’ transfers post tax		(22)	–	–	(22)
Investment‑related items and other movementsnote (c)		1,391	97	744	2,232
Foreign exchange translation differencesnote (d)		2,986	1,902	1,392	6,280
At 30 June 2016		26,840	16,124	14,020	56,984
Comprising:
– Policyholder liabilities excluding Korea life‡ – Unallocated surplus of with-profts funds on the consolidated statement of fnancial position – Group’s share of policyholder liabilities relating to joint ventures and associate† Average policyholder liability balances§ Half year 2017		24,489 2,351 – 28,772	13,224 – 2,900 18,170	11,205 – 2,815 15,776	48,918 2,351 5,715 62,718
	Halfyear 2016‡	21,435	14,951	12,637	49,023

• The policyholder liabilities of the with‑profits business of £30,278 million, shown in the table above, is after deducting the intra‑group reinsurance liabilities ceded by the UK insurance operations of £1,271 million to the Hong Kong with‑profits business.

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

‡ The sale of the Group’s Korea life business was completed in May 2017. Accordingly, no amounts are shown in the half year 2017 analysis above for Korea. The half year 2016 comparatives have been correspondingly adjusted. The amounts excluded from policyholder liabilities as presented in the balance sheet are £2,812 million at 1 January 2016 and £3,204 million at 30 June 2016.

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

Notes

(a) The rate of surrenders for shareholder‑backed business (expressed as a percentage of opening liabilities) was 4.1 per cent in the first half of 2017 (half year 2016: 3.3 per cent).

(b) Net flows increased by 31 per cent from £2,528 million in half year 2016 to £3,311 million in half year 2017 predominantly reflecting continued growth of the in‑force book and increased flows from new business.

(c) Investment‑related items and other movements in the first half of 2017 primarily represent gains on equities and bonds during the period.

(d) Movements in the period have been translated at the average exchange rates for the period ended 30 June 2017. The closing balance has been translated at the closing spot rates as at 30 June 2017. Differences upon retranslation are included in foreign exchange translation differences.

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C Balance sheet notes Continued

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

C4.1 Movement of liabilities continued

C4.1(c) US insurance operations

(i) Analysis of movements in policyholder liabilities

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

US insurance operations

	Variable
	annuity
	separate	Fixed annuity,
	account	GIC and other
	liabilities	business	Total
Halfyear 2017 movements	£m	£m	£m
At 1 January2017	120,411	57,215	177,626
Premiums Surrenders	5,981 (3,409)	2,167 (1,662)	8,148 (5,071)
Maturities/deaths	(541)	(578)	(1,119)
Net fowsnote (a) Transfers from general to separate account Investment‑related items and other movementsnote (b)	2,031 1,240 7,236	(73) (1,240) (112)	1,958 – 7,124
Foreign exchange translation differencesnote (c)	(6,183)	(2,746)	(8,929)
At 30 June 2017	124,735	53,044	177,779
Halfyear 2016 movements
At 1 January2016	91,022	47,891	138,913
Premiums	4,848	2,253	7,101
Surrenders	(2,168)	(1,269)	(3,437)
Maturities/deaths	(384)	(425)	(809)
Net fowsnote (a)	2,296	559	2,855
Transfers from general to separate account	169	(169)	–
Investment‑related items and other movements	843	1,894	2,737
Foreign exchange translation differencesnote (c)	9,574	5,076	14,650
At 30 June 2016	103,904	55,251	159,155
Average policyholder liability balances*
Half year 2017	122,573	55,129	177,702
Halfyear 2016	97,463	51,571	149,034

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

Notes

(a) Net flows in the first half of 2017 were £1,958 million (2016: £2,855 million) as we continue to grow the business with gross inflows of £8,148 million, principally into variable annuities, more than exceeding surrenders and maturities in the period.

(b) Positive investment‑related items and other movements in variable annuity separate account liabilities of £7,236 million for the first six months in 2017 represents positive separate account return mainly following the increase in the US equity market in the period.

(c) Movements in the period have been translated at an average rate of US$1.26:£1.00 (30 June 2016: US$1.43:£1.00). The closing balance has been translated at a closing rate of US$1.30:£1.00 (30 June 2016: US$1.34:£1.00). Differences upon retranslation are included in foreign exchange translation differences.

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C4.1(d) UK insurance operations

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

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

Halfyear 2017 movements	Shareholder-backed funds and subsidiaries
	SAIF and PAC with-profts sub-fund £m Unit-linked liabilities £m Annuity and other long-term business £m Total £m
At 1 January 2017 Comprising:	113146 22119 34039 169304
	, , , ,
– Policyholder liabilities – Unallocated surplus of with-profts funds	101496 22119 34039 157654
	, , , , 11,650 – – 11,650
Premiums Surrenders Maturities/deaths	6098 1484 174 7756
	, , , (2316) (1472) (28) (3816)
	, , , (2,208) (323) (1,002) (3,533)
Net fowsnote (a) Shareholders’ transfers post tax Switches Investment‑related items and other movementsnote (b) Foreign exchange translation differences	1574 (311) (856) 407
	, (115) – – (115)
	(91) 91 – –
	3805 1018 391 5214
	, , , 130 – – 130
At 30 June 2017	118,449 22,917 33,574 174,940
Comprising:
– Policyholder liabilities – Unallocated surplus of with-profts funds	106362 22917 33574 162853
	, , , , 12,087 – – 12,087
Halfyear 2016 movements
At 1 January 2016 Comprising:	100,069 21,442 31,382 152,893
– Policyholder liabilities – Unallocated surplus of with-profts funds	89,526 21,442 31,382 142,350 10,543 – – 10,543
Premiums Surrenders Maturities/deaths	4,692 527 342 5,561 (1,897) (1,285) (26) (3,208) (2,213) (271) (986) (3,470)
Net fowsnote (a) Shareholders’ transfers post tax Switches Investment‑related items and other movementsnote (b) Foreign exchange translation differences	582 (1,029) (670) (1,117) (110) – – (110) (84) 84 – – 5,891 1,050 3,151 10,092 720 1 – 721
At 30 June 2016	107,068 21,548 33,863 162,479
Comprising:
– Policyholder liabilities – Unallocated surplus of with-profts funds	95,822 21,548 33,863 151,233 11,246 – – 11,246
Average policyholder liability balances* Half year 2017 Halfyear 2016
	103,929 22,518 33,807 160,254
	92,674 21,495 32,623 146,792

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

Notes

(a) Net flows have improved from a net outflow of £1,117 million in the first half of 2016 to net inflows of £407 million in the same period of 2017 due primarily to higher premium flows, up by £2,195 million to £7,756 million, following increased sales of with‑profits savings and retirement products. This has been partially offset by lower premiums into our annuity business due to our withdrawal from selling new annuity business. The level of inflows/outflows for unit‑linked business remains subject to annual variation as it is driven by corporate pension schemes with transfers in or out from a small number of schemes influencing the level of flows in the period.

(b) Investment‑related items and other movements of £5,214 million principally comprise investment return attributable to policyholders earned in the period reflecting favourable equity market movements.

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C Balance sheet notes Continued

C5 Intangible assets

(a) Goodwill

	Attributable to: Shareholders With-profts 2017£m	2016£m
	30 Jun	30 Jun 31 Dec
Cost At beginning of year Disposals Charge for reclassifcation as held for sale Additional consideration paid on previously acquired business Exchange differences		1,648 1,648 – – – (56) 1 7 28 29
	1475 153 1628
	, , – (127) (127)
	– – –
	– – –
	– – –
Net book amount at end ofyear	1,475 26 1,501	1,677 1,628
Goodwill comprises:

	2017£m	2016£m
	30 Jun	30 Jun 31 Dec
M&G – attributable to shareholders Other – attributable to shareholders	1153	1,153 1,153 335 322
	, 322
Goodwill – attributable to shareholders Venture fund investments – attributable to with‑profts funds	1475	1,488 1,475 189 153
	, 26
	1,501	1,677 1,628

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

(b) Deferred acquisition costs and other intangible assets

	2017£m	2016£m
	30 Jun	30 Jun 31 Dec
Deferred acquisition costs and other intangible assets attributable to shareholders Deferred acquisition costs and other intangible assets attributable to with‑profts funds	10643	9,549 10,755 45 52
	, 114
Total of deferred acquisition costs and other intangible assets	10,757	9,594 10,807

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

	2017£m	2016£m
	30 Jun	30 Jun 31 Dec
Deferred acquisition costs related to insurance contracts as classifed under IFRS 4 Deferred acquisition costs related to investment management contracts, including life assurance contracts classifed as fnancial instruments and investment management contracts under IFRS 4	9022	8,010 9,114 68 64
	, 60
	9,082	8,078 9,178
Present value of acquired in‑force policies for insurance contracts as classifed under IFRS 4 (PVIF) Distribution rights and other intangibles	39	48 43 1,423 1,534
	1,522
	1,561	1,471 1,577
Total of deferred acquisition costs and other intangible assets	10,643	9,549 10,755

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	2017£m			2016£m
	Deferred acquisition costs	PVIF and other intangibles* note	30 Jun Total	30 Jun Total 31 Dec Total
	Asia US UK Asset management
Balance at beginning of period: Additions and acquisition of subsidiaries Amortisation to the income statement:† Operating proft Non‑operating proft Disposals and transfers‡ Exchange differences and other movements Amortisation of DAC related to net unrealised valuation movements on Jackson’s available‑for‑sale securities recognised within other comprehensive income†	788 8303 79 8	1577	10755	8,422 8,422 516 1,179
	, 122 353 8 –	, 58	, 541
	(66) (236) (5) (2)	(66)	(375)	(369) (686) 616 557
	– 231 – –	(4)	227
	(66) (5) (5) (2)	(70)	(148)	247 (129) (2) (268) 801 1,475 (435) 76
	– – – –	–	–
	(21) (411) – –	(4)	(436)
	– (69) – –	–	(69)
Balance at end ofperiod	823 8,171 82 6	1,561	10,643	9,549 10,755

• PVIF and other intangibles includes amounts in relation to software rights with additions of £17 million, amortisation of £16 million, foreign exchange losses of £1 million and a balance at 30 June 2017 of £66 million.

• Under the Group’s application of IFRS 4, US GAAP is used for measuring the insurance assets and liabilities of its US and certain Asia operations. Under US GAAP, most of the US insurance operation’s products are accounted for under Accounting Standard no. 97 of the Financial Accounting Standards Board (FAS 97) whereby deferred acquisition costs are amortised in line with the emergence of actual and expected gross profits, which are determined using an assumption for long‑term investment returns for the separate account of 7.4 per cent (half year 2016: 7.4 per cent) (gross of asset management fees and other charges to policyholders, but net of external fund management fees). The amounts included in the income statement and other comprehensive income affect the pattern of profit emergence and thus the DAC amortisation attaching. DAC amortisation is allocated to the operating and non‑operating components of the Group’s supplementary analysis of profit and other comprehensive income by reference to the underlying items.

• Of the £268 million of disposals and transfers at 31 December 2016, £265 million related to the reclassification of the Korea life business as held for sale.

Note

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

US insurance operations

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

	2017£m 30 Jun	2016£m
		30 Jun 31 Dec
Variable annuity business Other business Cumulative shadow DAC (for unrealised gains/losses booked in other comprehensive income)*	8,133 330 (292)	7,266 7,844 558 696 (763) (237)
Total DAC for US operations	8,171	7,061 8,303

• Consequent upon the positive unrealised valuation movement for half year 2017 of £531 million (30 June 2016: positive unrealised valuation movement of £2,118 million; 31 December 2016: negative unrealised valuation movement of £28 million), there is a charge of £69 million (30 June 2016: a charge of £435 million; 31 December 2016: a gain of £76 million) for altered ‘shadow’ DAC amortisation booked within other comprehensive income. These adjustments reflect the movement from period to period, in the changes to the pattern of reported gross profits that would have happened if the assets reflected in the statement of financial position had been sold, crystallising the unrealised gains and losses, and the proceeds reinvested at the yields currently available in the market. At 30 June 2017, the cumulative shadow DAC balance as shown in the table above was negative £292 million (30 June 2016: negative £763 million; 31 December 2016: negative £237 million).

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C Balance sheet notes Continued

C5 Intangible assets continued

Sensitivity of amortisation charge

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

(i) A core amount that reflects a relatively stable proportion of underlying premiums or profit; and

(ii) An element of acceleration or deceleration arising from market movements differing from expectations.

In periods where the cap and floor feature of the mean reversion technique (which is used for moderating the effect of short‑term volatility in investment returns) are not relevant, the technique operates to dampen the second element above. Nevertheless, extreme market movements can cause material acceleration or deceleration of amortisation in spite of this dampening effect. Furthermore, in those periods where the cap or floor is relevant, the mean reversion technique provides no further dampening and additional volatility may result.

In the first half of 2017, the DAC amortisation charge for operating profit was determined after including a credit for decelerated amortisation of £36 million (half year 2016: £29 million; full year 2016: £93 million). The first half of 2017 amount reflects the impact of the positive separate account performance, which is higher than the assumed level for the period.

The application of the mean reversion formula has the effect of dampening the impact of equity market movements on DAC amortisation, while the mean reversion assumption lies within the corridor. At 1 July 2017, it would take an instantaneous movement in separate account values of approximately more than either negative 25 per cent or positive 41 per cent for the mean reversion assumption to move outside the corridor.

C6 Borrowings

C6.1 Core structural borrowings of shareholder-financed operations

	2017£m	2016£m
	30 Jun	30 Jun 31 Dec
Holding company operations: Perpetual subordinated notes (Tier 1)note (i) Perpetual subordinated notes (Tier 2)note (i) Subordinated notes (Tier 2)note (i)		823 890 2,007 2,754 2,126 2,128
	847
	2620
	, 2,131
Subordinated debt total Senior debt:note (ii) £300m 6.875% Bonds 2023 £250m 5.875% Bonds 2029	5598	4,956 5,772 300 300 249 249
	,
	300
	249
Holding company total Prudential Capital bank loannote (iii) Jackson US$250m 8.15% Surplus Notes 2027	6147	5,505 6,321 275 275 186 202
	, 275
	192
Total (per condensed consolidated statement of fnancialposition)note (iv)	6,614	5,966 6,798

Notes

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

The Group has designated US$4.5 billion (30 June 2016: US$2.80 billion; 31 December 2016: US$4.5 billion) of its perpetual subordinated debt as a net investment hedge under IAS 39 to hedge the currency risks related to the investment in Jackson.

(ii) The senior debt ranks above subordinated debt in the event of liquidation.

(iii) The Prudential Capital bank loan of £275 million is drawn at a cost of 12 month GBP LIBOR plus 0.4 per cent and matures on 20 December 2017. (iv) The maturity profile, currency and interest rates applicable to all other core structural borrowings of shareholder‑financed operations of the Group are as detailed in note C6.1 of the Group’s consolidated financial statements for the year ended 31 December 2016.

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

The financial strength of The Prudential Assurance Company Limited is rated AA by Standard & Poor’s, Aa3 by Moody’s and AA by Fitch.

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

The financial strength of Prudential Assurance Co. Singapore (Pte) Ltd. (Prudential Singapore) is rated AA by Standard & Poor’s. All ratings on Prudential and its subsidiaries have been reaffirmed on stable outlook.

C6.2 Other borrowings

(a) Operational borrowings attributable to shareholder-financed operations

	2017£m	2016£m
	30 Jun	30 Jun 31 Dec
Borrowings in respect of short‑term fxed income securities programmes Other borrowingsnote	1424	2,554 1,651 244 666
	, 672
Total	2,096	2,798 2,317

Note

Other borrowings mainly include senior debt issued through the Federal Home Loan Bank of Indianapolis (FHLB), secured by collateral posted with the FHLB by Jackson. In addition, other borrowings include amounts whose repayment to the lender is contingent upon future surplus emerging from certain contracts specified under the arrangement. If insufficient surplus emerges on those contracts, there is no recourse to other assets of the Group and the liability is not payable to the degree of shortfall.

(b) Borrowings attributable to with-profits operations

	2017£m	2016£m
	30 Jun	30 Jun 31 Dec
Non‑recourse borrowings of consolidated investment funds* £100m 8.5% undated subordinated guaranteed bonds of Scottish Amicable Finance plc† Other borrowings (predominantlyobligations under fnance leases)	3178	1,248 1,189 100 100 79 60
	, 100
	58
Total	3,336	1,427 1,349

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

31 December 2016 primarily relates to the debt instruments issued by a new consolidated securitisation entity backed by a portfolio of mortgage loans (see note C3.3(c) for further details). † The interests of the holders of the bonds issued by Scottish Amicable Finance plc, a subsidiary of the Scottish Amicable Insurance Fund, are subordinated to the entitlements of the policyholders of that fund.

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C Balance sheet notes Continued

C7 Deferred tax

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

	D	eferred tax assets	De	ferred tax liabilities
	2017£m	2016£m	2017£m	2016£m
	30 Jun	30 Jun 31 Dec	30 Jun	30 Jun 31 Dec
Unrealised losses or gains on investments Balances relating to investment and insurance contracts Short‑term temporary differences Capital allowances Unused tax losses	21	22 23 1 1 3,690 4,196 12 16 46 79	(1774)	(1,815) (1,534) (655) (730) (2,893) (3,071) (34) (35) – –
	–		, (796)
	4002		(3059)
	, 16		, (54)
	66		–
Total	4,105	3,771 4,315	(5,683)	(5,397) (5,370)

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

The taxation regimes applicable across the Group often apply separate rules to trading and capital profits and losses. The distinction between temporary differences that arise from items of either a trading or capital nature may affect the recognition of deferred tax assets. For the 2017 half year results and financial position at 30 June 2017 the tax benefits on the following losses have not been recognised:

	2017 30 Jun Tax beneft£m Losses£bn	2016
		30 Jun 31 Dec
		Tax beneft£m Losses£bn Tax beneft£m Losses£bn
Capital losses Tradinglosses	90 0.4 48 0.2	94 0.5 89 0.4 60 0.3 41 0.2

Of the unrecognised trading losses, £33 million will expire within the next seven years, the rest have no expiry date. Under IAS 12, ‘Income Taxes’, deferred tax is measured at the tax rates that are expected to apply to the period when the asset is realised or the liability settled, based on the tax rates (and laws) that have been enacted or are substantively enacted at the end of the reporting period.

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C8 Defined benefit pension schemes

(a) IAS 19 financial positions

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

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

	2017£m	2016	£m
	30 Jun	30 Jun	31 Dec
	PSPS SASPS M&GGPS Other schemes Total	PSPS SASPS M&GGPS Other schemes Total	PSPS SASPS M&GGPS Other schemes Total
Underlying economic surplus (defcit) Less: unrecognised surplus	753 (154) 85 (1) 683	1,270 (123) 115 (1) 1,261 (1,100) – – – (1,100)	717 (237) 84 (1) 563 (558) – – – (558)
	(598) – – – (598)
Economic surplus (defcit) (including investment in Prudential insurance policies) Attributable to: PAC with‑ profts fund Shareholder‑ backed operations Consolidation adjustment against policyholder liabilities for investment in Prudential insurance policies	155 (154) 85 (1) 85	170 (123) 115 (1) 161	159 (237) 84 (1) 5
	109 (62) – – 47	119 (49) – – 70 51 (74) 115 (1) 91	111 (95) – – 16 48 (142) 84 (1) (11)
	46 (92) 85 (1) 38
		– – (81) – (81)	– – (134) – (134)
	– – (145) – (145)
IAS 19 pension asset (liability) on the Group statement of fnancial position*	155 (154) (60) (1) (60)	170 (123) 34 (1) 80	159 (237) (50) (1) (129)

• At 30 June 2017, the PSPS pension asset of £155 million (30 June 2016: £170 million; 31 December 2016: £159 million) and the other schemes’ pension liabilities of £215 million (30 June 2016: £90 million; 31 December 2016: £288 million) are included within ‘Other debtors’ and ‘Provisions’ respectively in the consolidated statement of financial position.

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C Balance sheet notes Continued

C8 Defined benefit pension schemes continued

(a) IAS 19 financial positions continued

Triennial actuarial valuations

Defined benefit schemes in the UK are generally required to be subject to full actuarial valuations every three years in order to assess the appropriate level of funding for schemes in relation to their commitments. These valuations include assessments of the likely rate of return on the assets held within the separate trustee administered funds.

The triennial valuations for the PSPS and SASPS as at 5 April 2017 and 31 March 2017 respectively are currently in progress. The next triennial valuation for the M&GGPS is at 31 December 2017.

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

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

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

	Half year 2017£m
	Surplus (defcit) in schemes at 1 Jan 2017 (Charge) credit to income statement Actuarial gains and losses in other comprehensive income Contributions paid Surplus (defcit) in schemes at 30 Jun 2017
All schemes Underlying position (without the effect of IFRIC 14) Surplus Less: amount attributable to PAC with‑profts fund
	563 (20) 117 23 683
	(425) 4 (57) (8) (486)
Shareholders’ share: Gross of tax surplus (defcit) Related tax
	138 (16) 60 15 197
	(27) 3 (12) (3) (39)
Net of shareholders’ tax	111 (13) 48 12 158
Application of IFRIC 14 for the derecognition of PSPS surplus Derecognition of surplus Less: amount attributable to PAC with‑profts fund
	(558) (7) (32) (1) (598)
	409 4 26 – 439
Shareholders’ share: Gross of tax Related tax
	(149) (3) (6) (1) (159)
	29 1 1 – 31
Net of shareholders’ tax	(120) (2) (5) (1) (128)
With the effect of IFRIC 14 Surplus (defcit) Less: amount attributable to PAC with‑profts fund
	5 (27) 85 22 85
	(16) 8 (31) (8) (47)
Shareholders’ share: Gross of tax (defcit) surplus Related tax
	(11) (19) 54 14 38
	2 4 (11) (3) (8)
Net of shareholders’ tax	(9) (15) 43 11 30

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C9 Share capital, share premium and own shares

Issued shares of 5p each fully paid	30 Jun 2017	30 Jun 2016	31 Dec 2016
	Number of ordinary shares Share capital £m Share premium £m	Number of ordinary shares Share capital £m Share premium £m	Number of ordinary shares Share capital £m Share premium £m
At 1 January Shares issued under share‑based schemes	2581061573 129 1927	2,572,454,958 128 1,915 6,579,190 – 6	2,572,454,958 128 1,915 8,606,615 1 12
	,,, , 4,791,845 – 10
At end ofperiod	2,585,853,418 129 1,937	2,579,034,148 128 1,921	2,581,061,573 129 1,927

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

At 30 June 2017, there were options outstanding under Save As You Earn schemes to subscribe for shares as follows:

Number of shares to subscribe for	Share price range Exercisable by year from to
30 June 2017 6,280,110 30 June 2016 7,128,449 31 December 2016 7,068,884	466p 1,155p 2022
	288p 1,155p 2021 466p 1,155p 2022

Transactions by Prudential plc and its subsidiaries in Prudential plc shares

The Group buys and sells Prudential plc shares (own shares) either in relation to its employee share schemes or via transactions undertaken by authorised investment funds that the Group is deemed to control. The cost of own shares of £257 million at 30 June 2017 (30 June 2016: £185 million; 31 December 2016: £226 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery of shares under employee incentive plans. At 30 June 2017, 11.5 million (30 June 2016: 11.2 million; 31 December 2016: 10.7 million) Prudential plc shares with a market value of £204 million (30 June 2016: £141 million; 31 December 2016: £175 million)

were held in such trusts, all of which are for employee incentive plans. The maximum number of shares held during the period was 15.1 million which was in March 2017.

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

	Number of
	shares
	purchased	Cost
	(in millions)	£m
Half year 2017	3.3	56.0
Half year 2016	3.8	49.5
Fullyear 2016	4.4	57.2

The Group has consolidated a number of authorised investment funds where it is deemed to control these funds under IFRS. Some of these funds hold shares in Prudential plc. The total number of shares held by these funds at 30 June 2017 was 6.7 million (30 June 2016: 4.8 million; 31 December 2016: 6.0 million) and the cost of acquiring these shares of £75 million (30 June 2016: £39 million; 31 December 2016: £61 million) is included in the cost of own shares. The market value of these shares as at 30 June 2017 was £120 million (30 June 2016: £61 million; 31 December 2016: £97 million). During 2017, these funds made a net addition of 678,131 Prudential shares (30 June 2016: net disposal of 1,280,258; 31 December 2016: net disposal of 77,423) for a net increase of £13.8 million to book cost (30 June 2016: net decrease of £14.1 million; 31 December 2016: net increase of £7.9 million).

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

Other than those set out above, the Group did not purchase, sell or redeem any Prudential plc listed securities during half year 2017 or 2016.

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D Other notes

D1 Sale of Korea life business

On 18 May 2017, the Group announced that it had completed the sale of its life insurance subsidiary in Korea, PCA Life Insurance Co. Ltd. to Mirae Asset Life Insurance Co. Ltd., following regulatory approvals. The transaction, announced on 10 November 2016, was for a consideration of KRW170 billion (equivalent to £117 million at 17 May 2017 closing rate). The proceeds, net of £9 million of related expenses, were £108 million. This has changed by £3 million from the £105 million carrying value recorded at 31 December 2016 due to exchange rate movement.

On completion of the sale, the cumulative foreign exchange translation gain of the Korea life business of £61 million, that had arisen from 2004 (the year of the Group’s conversion to IFRS) to disposal, was recycled from other comprehensive income through the profit and loss account in 2017, as required by IAS 21. This amount is included within ‘Cumulative exchange gain on the sold Korea life business recycled from other comprehensive income’ in the supplementary analysis of profit of the Group as shown in note B1.1. The adjustment has no net effect on shareholders’ equity. The net contribution for Korea life business to the half year 2017 profit after tax, is the £61 million gain for foreign exchange translation recycling with other elements in the various line items, including a £5 million remeasurement adjustment, netting to nil.

The full year 2016 income statement recorded a charge for remeasurement of Korea Life business classified as held for sale of £(238) million. To facilitate comparisons of businesses retained by the Group, the supplementary analysis of profit shown in note B1.1 shows separately the results of the Korea life business. For full year 2016, the result for the year, including short‑term fluctuations in investment returns, together with the adjustment to the carrying value, gave rise to an aggregate loss of £(227) million (half year 2016: profit of £40 million).

D2 Contingencies and related obligations

In addition to the matters set out in note B4(b) in relation to the Financial Conduct Authority review of past annuity sales, the Group is involved in various litigation and regulatory issues. These may from time to time include class actions involving Jackson. While the outcome of such matters cannot be predicted with certainty, Prudential believes that the ultimate outcome of such litigation and regulatory issues will not have a material adverse effect on the Group’s financial condition, results of operations or cash flows. There have been no material changes to the Group’s contingencies and related obligations in the six month period ended 30 June 2017.

D3 Post balance sheet events

First interim ordinary dividend

The 2017 first interim ordinary dividend approved by the Board of Directors after 30 June 2017 is as described in note B7.

D4 Related party transactions

There were no transactions with related parties during the six months ended 30 June 2017 which have had a material effect on the results or financial position of the Group.

The nature of the related party transactions of the Group has not changed from those described in the Group’s consolidated financial statements for the year ended 31 December 2016.

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Statement of Directors’ responsibilities

The Directors (who are listed below) are responsible for preparing the Half Year Financial Report in accordance with applicable law and regulations.

Accordingly, the Directors confirm that, to the best of their knowledge:

• The condensed consolidated financial statements have been prepared in accordance with IAS 34, ‘Interim Financial Reporting’, as adopted by the European Union; and

• The Half Year Financial Report includes a fair review of information required by:

• (a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the six months ended 30 June 2017, and their impact on the condensed consolidated financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place during the six months ended 30 June 2017 and that have materially affected the financial position or the performance of the Group during the period and changes in the related party transactions described in the Group’s consolidated financial statements for the year ended 31 December 2016.

Prudential plc Board of Directors

Chairman

Paul Manduca

Executive Directors

Michael Wells Mark FitzPatrick CA (appointed on 17 July 2017) Penelope James ACA John Foley Nicolaos Nicandrou ACA Anne Richards Barry Stowe

Independent Non-executive Directors

The Hon. Philip Remnant CBE FCA Sir Howard Davies David Law ACA Kaikhushru Nargolwala FCA Anthony Nightingale CMG SBS JP Alice Schroeder Lord Turner FRS Thomas Watjen (appointed on 11 July 2017)

9 August 2017

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Independent review report to Prudential plc

Conclusion

We have been engaged by the Company to review the International Financial Reporting Standards (IFRS) basis financial information in the Half Year Financial Report for the six months ended 30 June 2017 which comprises the Condensed Consolidated Income Statement, the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Statement of Financial Position, the Condensed Consolidated Statement of Cash Flows and the related explanatory notes.

Based on our review, nothing has come to our attention that causes us to believe that the IFRS basis financial information in the Half Year Financial Report for the six months ended 30 June 2017 is not prepared, in all material respects, in accordance with IAS 34, ‘ Interim Financial Reporting’ as adopted by the European Union (EU) and the Disclosure Guidance and Transparency Rules (the DTR) of the UK’s Financial Conduct Authority (the UK FCA).

We have also been engaged by the Company to review the European Embedded Value (EEV) basis supplementary financial information for the six months ended 30 June 2017 which comprises the Post‑tax Operating Profit Based on Longer‑Term Investment Returns, the Post‑tax Summarised Consolidated Income Statement, the Movement in Shareholders’ Equity, the Summary Statement of Financial Position and the related explanatory notes and Total Insurance and Investment Products New Business information.

Based on our review, nothing has come to our attention that causes us to believe that the EEV basis supplementary financial information for the six months ended 30 June 2017 is not prepared, in all material respects, in accordance with the European Embedded Value Principles dated April 2016 by the European Insurance CFO Forum (the EEV Principles), using the methodology and assumptions set out in the Notes to the EEV basis supplementary financial information.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information and supplementary information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We have read the other information contained in the Half Year Financial Report and considered whether it contains any apparent misstatements or material inconsistencies with the IFRS basis financial information or the EEV basis supplementary financial information.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Directors’ responsibilities

The Half Year Financial Report, including the IFRS basis financial information contained therein, is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Half Year Financial Report in accordance with the DTR of the UK FCA. The Directors have accepted responsibility for preparing the EEV basis supplementary financial information in accordance with the EEV Principles and for determining the methodology and assumptions used in the application of those principles.

The annual IFRS basis financial statements of the Group are prepared in accordance with IFRSs as adopted by the EU. The Directors are responsible for preparing the IFRS basis financial information included in the Half Year Financial Report in accordance with IAS 34 as adopted by the EU.

The EEV basis supplementary financial information has been prepared in accordance with the EEV Principles using the methodology and assumptions set out in the Notes to the EEV basis supplementary financial information. The EEV basis supplementary financial information should be read in conjunction with the IFRS basis financial information.

Our responsibility

Our responsibility is to express to the Company a conclusion on the IFRS basis financial information in the Half Year Financial Report and the EEV basis supplementary financial information based on our reviews.

The purpose of our review work and to whom we owe our responsibilities

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the DTR of the UK FCA and also to provide a review conclusion to the Company on the EEV basis supplementary financial information. Our review of the IFRS basis financial information has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. Our review of the EEV basis supplementary financial information has been undertaken so that we might state to the Company those matters we have been engaged to state in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.

==> picture [100 x 39] intentionally omitted <==

Philip Smart

For and on behalf of KPMG LLP Chartered Accountants London 9 August 2017

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04

European Embedded Value (EEV) basis results

92 Index to EEV basis results

‘Because of my PRUlink exact 10 policy, I finally mustered the courage and took the big leap of following my dreams.’ Paul’s story PruLife UK, the Philippines

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Index to European Embedded Value (EEV) basis results

• 93 Post‑tax operating profit based on longer‑term investment returns

• 94 Post‑tax summarised consolidated income statement

• 95 Movement in shareholders’ equity 96 Summary statement of financial position

Notes on the EEV basis results

• 97 1 Basis of preparation

• 97 2 Results analysis by business area 100 3 Analysis of new business contribution 101 4 Operating profit from business in force 103 5 Short‑term fluctuations in investment returns 105 6 Effect of changes in economic assumptions 106 7 Net core structural borrowings of shareholder‑ financed operations

• 107 8 Reconciliation of movement in shareholders’ equity

• 108 9 Analysis of movement in net worth and value of in‑force for long‑term business

• 110 10 Analysis of movement in free surplus

• 113 11 Sensitivity of results to alternative assumptions 115 12 Methodology and accounting presentation 121 13 Assumptions 126 14 Total insurance and investment products new business 127 15 Sale of Korea life business

Description of EEV basis reporting

In broad terms, IFRS profit for long‑term business reflects the aggregate of results on a traditional accounting basis. By contrast, EEV is a way of reporting the value of the life insurance business.

The EEV basis results have been prepared in accordance with the EEV Principles dated April 2016, issued by the European Insurance CFO Forum. The EEV Principles provide consistent definitions, a framework for setting actuarial assumptions, and an approach to the underlying methodology and disclosures.

Results prepared under the EEV Principles capture the discounted value of future profits expected to arise from the current book of long‑term business. The results are prepared by projecting cash flows, by product, using best estimate assumptions for all relevant factors. Furthermore, in determining these expected profits, full allowance is made for the risks attached to their emergence and the associated cost of capital, taking into account recent experience in assessing likely future persistency, mortality, morbidity and expenses. Further details are explained in notes 12 and 13.

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European Embedded Value (EEV) basis results

Post-tax operating profit based on longer-term investment returns

Post-tax operating proft based on longer-term investment returns
Results analysis by business area
Note	2017£m	2016£m
	Half year	Half year notes (iii)(iv) Full year note (iii)
Asia operations New business 3 Business in force 4		821 2,030 388 1,044
	1092
	, 549
Long‑term business EastspringInvestments	1641	1,209 3,074 53 125
	, 73
Total	1,714	1,262 3,199
US operations New business 3 Business in force 4		311 790 383 1,181
	436
	452
Long‑term business Broker‑dealer and asset management	888	694 1,971 (8) (3)
	(4)
Total	884	686 1,968
UK operations New business 3 Business in force 4		125 268 259 375
	161
	304
Long‑term business General insurance commission	465	384 643 15 23
	14
Total UK insurance operations M&G Prudential Capital	479	399 666 181 341 11 22
	201
	5
Total	685	591 1,029
Other income and expenditurenote (i) Solvency II and restructuring costsnote (ii) Interest received from tax settlement	(386)	(302) (679) (17) (57) 37 37
	(27)
	–
Operating proft based on longer-term investment returns	2,870	2,257 5,497
Analysed as proft (loss) from: New business 3 Business in force 4		1,257 3,088 1,030 2,600
	1689
	, 1,305
Long‑term business Asset management and general insurance commission Other results	2994	2,287 5,688 252 508 (282) (699)
	, 289
	(413)
	2,870	2,257 5,497

Notes

(i) EEV basis other income and expenditure represents the post‑tax IFRS basis result less the unwind of expected margins on the internal management of the assets of the covered business (as explained in note 12(a)(vii)).

(ii) Solvency II and restructuring costs comprise the net‑of‑tax charge recognised on an IFRS basis and the additional amount recognised on an EEV basis for the shareholders’ share incurred by the PAC with‑profits fund.

(iii) The comparative results have been prepared using previously reported average exchange rates for the period.

(iv) The Group completed the sale of its life business in Korea in May 2017. In order to show the results of the retained operations on a comparable basis, operating profit based on longer‑term investment returns excludes the results attributable to the sold Korea life business for all periods shown, as described in note 15. For half year 2016 this has resulted in a reclassification of £6 million of operating profit attributable to the Korea life business to non‑operating profit. This approach has been adopted consistently throughout this supplementary information.

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European Embedded Value (EEV) basis results Continued

Post-tax summarised consolidated income statement

Note	2017£m	2016£m
	Half year	Half year Full year*
Asia operations US operations UK operations Other income and expenditure Solvency II and restructuring costs Interest received from tax settlement	1714	1,262 3,199 686 1,968 591 1,029 (302) (679) (17) (57) 37 37
	, 884
	685
	(386)
	(27)
	–
Operating proft based on longer-term investment returns Short‑term fuctuations in investment returns 5 Effect of changes in economic assumptions 6 Mark to market value movements on core borrowings Loss attaching to the sold Korea life business 15 Total non‑operating proft (loss)	2,870	2,257 5,497
	739	479 (507) (1,318) (60) (13) (4) (11) (410)
	(50)
	(262)
	–
	427	(863) (981)
Proft for theperiod attributable to equityholders of the Company	3,297	1,394 4,516

Basic earnings per share

	2017	2016
	Half year	Half year Full year*
Based on post‑tax operating proft including longer‑term investment returns (in pence) Based on post‑tax proft attributable to equity holders of the Company (in pence) Average number of shares (millions)	111.9p	88.2p 214.7p 54.5p 176.4p 2,558 2,560
	128.5p
	2,565

• The half year 2016 comparative operating result has been adjusted to exclude the result attributable to the sold Korea life business (see note 15).

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Movement in shareholders’ equity

Note	2017£m	2016£m
	Half year	Half year Full year
Proft for the period attributable to equity shareholders Items taken directly to equity: Exchange movements on foreign operations and net investment hedges Dividends Mark to market value movements on Jackson assets backing surplus and required capital Other reserve movements	3297	1,394 4,516 2,663 4,211 (935) (1,267) 138 (11) (165) (367)
	,
	(1045)
	, (786)
	31
	55
Net increase in shareholders’ equity 8 Shareholders’ equityat beginningofperiod	1552	3,095 7,082 31,886 31,886
	, 38,968
Shareholders’ equityat end ofperiod 8	40,520	34,981 38,968

Comprising:	30 Jun 2017£m	30 Jun 2016£m	31 Dec 2016£m
	Long-term business operations note 8 Asset manage- ment and other operations Total	Long-term business operations Asset manage- ment and other operations Total	Long-term business operations Asset manage- ment and other operations Total
Asia operations US operations UK insurance operations M&G Prudential Capital Other operations	19851 382 20233	16,578 352 16,930 10,150 201 10,351 10,075 37 10,112 – 1,838 1,838 – 31 31 – (4,281) (4,281)	18,717 383 19,100 11,805 204 12,009 10,307 25 10,332 – 1,820 1,820 – 22 22 – (4,315) (4,315)
	, , 11370 202 11572
	, , 10865 14 10879
	, , – 1868 1868
	, , – 61 61
	– (4,093) (4,093)
Shareholders’ equityat end ofperiod	42,086 (1,566) 40,520	36,803 (1,822) 34,981	40,829 (1,861) 38,968
Representing: Net assets excluding acquired goodwill and holding company net borrowings Acquired goodwill Holding company net borrowings at market valuenote 7		36,545 270 36,815 258 1,230 1,488 – (3,322) (3,322)	40,584 961 41,545 245 1,230 1,475 – (4,052) (4,052)
	41841 1305 43146
	, , , 245 1230 1475
	, , – (4,101) (4,101)
	42,086 (1,566) 40,520	36,803 (1,822) 34,981	40,829 (1,861) 38,968

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European Embedded Value (EEV) basis results Continued

Summary statement of financial position

Note	2017£m	2016£m
	30 Jun	30 Jun 31 Dec
Total assets less liabilities, before deduction for insurance funds Less insurance funds:* Policyholder liabilities (net of reinsurers’ share) and unallocated surplus of with‑profts funds Less shareholders’ accrued interest in the long‑term business 8	419810	381,242 407,928
	,
	(404361)	(366,637) (393,262) 20,376 24,302
	, 25,071
	(379,290)	(346,261) (368,960)
Total net assets 8	40,520	34,981 38,968
Share capital Share premium IFRS basis shareholders’ reserves		128 129 1,921 1,927 12,556 12,610
	129
	1937
	, 13,383
Total IFRS basis shareholders’ equity 8 Additional EEV basis retainedproft 8	15449	14,605 14,666 20,376 24,302
	, 25,071
Total EEV basis shareholders’ equity (excluding non-controlling interests) 8	40,520	34,981 38,968

• Including liabilities in respect of insurance products classified as investment contracts under IFRS 4.

Net asset value per share

	2017	2016
	30 Jun	30 Jun 31 Dec
Based on EEV basis shareholders’ equity of £40,520 million (half year 2016: £34,981 million, full year 2016: £38,968 million) (in pence) Number of issued shares atperiod end (millions)	1567p	1,356p 1,510p 2,579 2,581
	, 2,586
Annualised return on embedded value*		14% 17%
	15%

• Annualised return on embedded value is based on EEV post‑tax operating profit, as a percentage of opening EEV basis shareholders’ equity. Half year profits are annualised by multiplying by two.

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Notes on the EEV basis results

1 Basis of preparation

The EEV basis results have been prepared in accordance with the EEV Principles dated April 2016, issued by the European Insurance CFO Forum. Where appropriate, the EEV basis results include the effects of adoption of EU‑endorsed IFRS.

The Directors are responsible for the preparation of the supplementary information in accordance with the EEV Principles. The EEV basis results of half year 2017 and half year 2016 are unaudited. The full year 2016 results have been derived from the EEV basis results supplement to the Company’s statutory accounts for 2016. The supplement included an unqualified audit report from the auditors. A detailed description of the EEV methodology and accounting presentation is provided in note 12.

2 Results analysis by business area

The half year 2016 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases. The half year 2016 CER comparative results are translated at half year 2017 average exchange rates.

Annual premium equivalents (APE)[note 14]

Annual premium equivalents (APE)note 14
Note	Half year 2017 £m	Half year 2016* £m	% change
		AER CER	AER CER
Asia operations US operations UK operations†	1943	1,605 1,814 782 889 593 593	21% 7% 23% 8% 22% 22%
	, 960
	721
Grouptotal 3	3,624	2,980 3,296	22% 10%

• The half year 2016 comparative operating result has been adjusted to exclude the result attributable to the sold Korea life business (see note 15).

† No UK bulk annuity transactions were recorded in half year 2017 or half year 2016.

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Notes on the EEV basis results Continued

2 Results analysis by business area continued

Post-tax operating proft
Note	Half year 2017 £m	Half year 2016* £m	% change
		AER CER	AER CER
Asia operations New business 3 Business in force 4		821 928 388 433	33% 18% 41% 27%
	1092
	, 549
Long‑term business EastspringInvestments	1641	1,209 1,361 53 60	36% 21% 38% 22%
	, 73
Total	1,714	1,262 1,421	36% 21%
US operations New business 3 Business in force 4		311 354 383 435	40% 23% 18% 4%
	436
	452
Long‑term business Broker‑dealer and asset management	888	694 789 (8) (9)	28% 13% 50% 56%
	(4)
Total	884	686 780	29% 13%
UK operations New business 3 Business in force 4		125 125 259 259	29% 29% 17% 17%
	161
	304
Long‑term business General insurance commission	465	384 384 15 15	21% 21% (7)% (7)%
	14
Total UK insurance operations M&G Prudential Capital	479	399 399 181 181 11 11	20% 20% 11% 11% (55)% (55)%
	201
	5
Total	685	591 591	16% 16%
Other income and expenditure Solvency II and restructuring costs Interest received from tax settlement	(386)	(302) (309) (17) (17) 37 37	(28)% (25)% (59)% (59)% n/a n/a
	(27)
	–
Operating proft based on longer-term investment returns	2,870	2,257 2,503	27% 15%
Analysed as proft (loss) from: New business 3 Business in force 4		1,257 1,407 1,030 1,127	34% 20% 27% 16%
	1689
	, 1,305
Total long‑term business Asset management and general insurance commission Other results	2994	2,287 2,534 252 258 (282) (289)	31% 18% 15% 12% (46)% (43)%
	, 289
	(413)
Operating proft based on longer-term investment returns	2,870	2,257 2,503	27% 15%

• The half year 2016 comparative operating result has been adjusted to exclude the result attributable to the sold Korea life business (see note 15).

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Post-tax profit

Post-tax proft
Note	Half year 2017 £m	Half year 2016* £m	% change
		AER CER	AER CER
Operating proft based on longer‑term investment returns Short‑term fuctuations in investment returns 5 Effect of changes in economic assumptions 6 Mark to market value movements on core borrowings Loss attaching to the sold Korea life business 15 Total non‑operating proft (loss)	2,870	2,257 2,503	27% 15% 54% 47% 96% 97% (1,915)% (1,771)% n/a n/a 149% 143%
	739	479 504 (1,318) (1,475) (13) (14) (11) (12)
	(50)
	(262)
	–
	427	(863) (997)
Proft for the period attributable to shareholders	3,297	1,394 1,506	137% 119%

• The half year 2016 comparative operating result has been adjusted to exclude the result attributable to the sold Korea life business (see note 15).

Basic earnings per share (in pence)

Basic earnings per share (in pence)
	Half year 2017	Half year 2016*	% change
		AER CER	AER CER
Based on post‑tax operating proft including longer‑term investment returns Based onpost‑taxproft	111.9p	88.2p 97.8p 54.5p 58.9p	27% 14% 136% 118%
	128.5p

• The half year 2016 comparative operating result has been adjusted to exclude the result attributable to the sold Korea life business (see note 15).

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Notes on the EEV basis results Continued

3 Analysis of new business contribution

(i) Group summary

(i) Group summary
	Half year 2017
	Annual premium and contribution equivalents (APE) £m note 14 Present value of new business premiums (PVNBP) £m note 14 New business contribution £m note	New business margin
		APE % PVNBP %
Asia operationsnote (ii) US operations UK operations	1943 10095 1092	56 10.8
	, , , 960 9602 436	45 4.5
	, 721 6,616 161	22 2.4
Total	3,624 26,313 1,689	47 6.4
	Half year 2016*
	Annual premium and contribution equivalents (APE) £m note 14 Present value of new business premiums (PVNBP) £m note 14 New business contribution £m	New business margin
		APE % PVNBP %
Asia operationsnote (ii) US operations UK operations	1,605 8,679 821 782 7,816 311 593 5,267 125	51 9.5 40 4.0 21 2.4 42 5.8
Total	2,980 21,762 1,257
	Full year 2016
	Annual premium and contribution equivalents (APE) £m note 14 Present value of new business premiums (PVNBP) £m note 14 New business contribution £m	New business margin
		APE % PVNBP %
Asia operationsnote (ii) US operations UK operations	3,599 19,271 2,030 1,561 15,608 790 1,160 10,513 268	56 10.5 51 5.1 23 2.5 49 6.8
Total	6,320 45,392 3,088

• The half year 2016 comparative result has been adjusted to exclude the result attributable to the sold Korea life business (see note 15).

Note

The increase in new business contribution of £432 million from £1,257 million for half year 2016 to £1,689 million for half year 2017 comprises an increase on a CER basis of £282 million and an increase of £150 million for foreign exchange effects. The increase of £282 million on a CER basis comprises a contribution of £140 million for higher sales volumes in half year 2017 and a £142 million benefit from movements in long‑term interest rates, generated by the active basis of setting economic assumptions (analysed as Asia £74 million, US £62 million and UK £6 million).

(ii) Asia operations – new business contribution by business unit

	2017£m	2016£m
	Half year	AER Half year CER Half year**	AER Full year
China Hong Kong Indonesia Taiwan Other	67	22 24 539 612 87 100 9 11 164 181	63 1,363 175 31 398
	706
	88
	27
	204
Total Asia operations	1,092	821 928	2,030

• The half year 2016 comparative result has been adjusted to exclude the result attributable to the sold Korea life business (see note 15).

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4 Operating profit from business in force

(i) Group summary

(i) Group summary
	Half year 2017£m
	Asia operations note (ii) US operations note (iii) UK operations note (iv) Total note
Unwind of discount and other expected returns Effect of changes in operating assumptions Experience variances and other items	499 312 232 1043
	, 6 – – 6
	44 140 72 256
Total	549 452 304 1,305
	Half year 2016*£m
	Asia operations note (ii) US operations note (iii) UK operations note (iv) Total
Unwind of discount and other expected returns Effect of changes in operating assumptions Experience variances and other items	373 209 205 787 2 – – 2 13 174 54 241
Total	388 383 259 1,030
	Full year 2016£m
	Asia operations note (ii) US operations note (iii) UK operations note (iv) Total
Unwind of discount and other expected returns Effect of changes in operating assumptions Experience variances and other items	866 583 445 1,894 54 170 25 249 124 428 (95) 457
Total	1,044 1,181 375 2,600

• The half year 2016 comparative result has been adjusted to exclude the result attributable to the sold Korea life business (see note 15).

Note

The movement in operating profit from business in force of £275 million from £1,030 million for half year 2016 to £1,305 million for half year 2017 comprises:

pg p , y , y p	£m
Movement in unwind of discount and other expected returns: Effects of changes in: Growth in opening value Interest rates and other economic assumptions Foreign exchange Movement in effect of changes in operating assumptions, experience variances and other items (including foreign exchange of £22 million) Net movement in operating proft from business in force	105 76 75 256 19 275

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Notes on the EEV basis results Continued

4 Operating profit from business in force continued

(ii) Asia operations

	2017£m	2016£m
	Half year	Half year Full year*
Unwind of discount and other expected returnsnote (a) Effect of changes in operating assumptions: Mortality and morbidity Persistency and withdrawals Expense Other Experience variances and other items: Mortality and morbiditynote (b) Persistency and withdrawalsnote (c) Expense Other	499	373 866
	–	– 33 3 (47) – 15 (1) 53
	3
	3
	–
	6	2 54
	36	27 71 (17) 52 (8) (23) 11 24
	11
	(13)
	10
	44	13 124
Total Asia operations	549	388 1,044

• The half year 2016 comparative result has been adjusted to exclude the result attributable to the sold Korea life business (see note 15).

Notes

(a) The increase in unwind of discount and other expected returns of £126 million from £373 million for half year 2016 to £499 million for half year 2017 comprises a positive £45 million effect for the growth in the opening in‑force value and a positive £46 million foreign exchange effect, together with a £35 million benefit from the increase in long‑term interest rates across most business units since 30 June 2016 and the effect of changes in other economic assumptions (see note 13(i)).

(b) The positive mortality and morbidity experience variance in half year 2017 of £36 million (half year 2016: £27 million; full year 2016: £71 million) reflects better than expected experience in a number of business units.

(c) The positive £11 million for persistency and withdrawals experience in half year 2017 comprises positive and negative contributions from various operations, with positive persistency experience on participating and health and protection products more than offsetting negative experience on unit‑linked products.

(iii) US operations

	2017£m	2016£m
	Half year	Half year Full year
Unwind of discount and other expected returnsnote (a) Effect of changes in operating assumptions Experience variances and other items: Spread experience variancenote (b) Amortisation of interest‑related realised gains and lossesnote (c) Othernote (d)	312	209 583 – 170
	–
	42	60 119 39 88 75 221
	47
	51
	140	174 428
Total US operations	452	383 1,181

Notes

(a) The increase in unwind of discount and other expected returns of £103 million from £209 million for half year 2016 to £312 million for half year 2017 comprises a positive £43 million effect for the underlying growth in the in‑force book and a positive £29 million foreign exchange effect, together with a £31 million benefit from the 80 basis points increase in the US 10‑year treasury yield since 30 June 2016.

(b) The spread assumption for Jackson is determined on a longer‑term basis, net of provision for defaults (see note 13(ii)). The spread experience variance in half year 2017 of £42 million (half year 2016: £60 million; full year 2016: £119 million) includes the positive effect of transactions previously undertaken to more closely match the overall asset and liability duration. The reduction compared to the prior period reflects the effects of declining yields in the portfolio caused by the prolonged low interest rate environment.

(c) The amortisation of interest‑related gains and losses reflects the fact that when bonds that are neither impaired nor deteriorating are sold and reinvested there will be a consequent change in the investment yield. The realised gain or loss is amortised into the result over the period when the bonds would have otherwise matured to better reflect the long‑term returns included in operating profits.

(d) Other experience variances of £51 million in half year 2017 (half year 2016: £75 million; full year 2016: £221 million) include the effects of positive persistency experience and other variances.

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(iv) UK insurance operations

(iv) UK insurance operations
	2017£m	2016£m
	Half year	Half year Full year
Unwind of discount and other expected returnsnote (a) Reduction in corporate tax ratenote (b) Other itemsnote (c)	232	205 445 – 25 54 (95)
	–
	72
Total UK insurance operations	304	259 375

Notes

(a) The increase in unwind of discount and expected returns of £27 million from £205 million for half year 2016 to £232 million for half year 2017 comprises a positive £17 million effect for the underlying growth in the in‑force book and a £10 million effect driven by the 20 basis points increase in the UK 15‑year gilt yield since 30 June 2016.

(b) The full year 2016 credit of £25 million for the reduction in UK corporate tax rate reflected the beneficial effect of applying lower corporation tax rates (see note 13) to future life profits from in‑force business in the UK.

(c) Other items comprise the following:

profts from in‑force business in the UK. Other items comprise the following:
	2017£m	2016£m
	Half year	Half year Full year
Longevity reinsurance Impact of specifc management actions to improve solvency position Provision for cost of undertaking past non‑advised annuity sales review and potential redressnote (d) Other itemsnote (e)	(6)	(10) (90) 41 110 – (145) 23 30
	65
	–
	13
	72	54 (95)

(d) In response to the findings of the FCA’s Thematic Review of Annuities Sales Practices, the UK business will review all internally vesting annuities sold without advice after 1 July 2008. Reflecting this, the UK full year 2016 result included a provision of £145 million (post‑tax) for the estimated cost of the review and any appropriate customer redress, but excluded any potential for insurance recoveries. Other than to cover the small amount of costs incurred in the period, no change has been made to this provision as at 30 June 2017.

(e) The half year 2017 credit of £13 million (half year 2016: £23 million; full year 2016: £30 million) comprises experience variances for mortality, expense and other items.

5 Short-term fluctuations in investment returns

Short‑term fluctuations in investment returns included in profit for the period arise as follows:

(i) Group summary

	2017£m	2016£m
	Half year	Half year Full year*
Asia operationsnote (ii) US operationsnote (iii) UK insurance operationsnote (iv) Other operationsnote (v)	544	373 (100) (237) (1,102) 506 869 (163) (174)
	(126)
	215
	106
Total	739	479 (507)

• The half year 2016 comparative result has been adjusted to exclude the result attributable to the sold Korea life business (see note 15).

(ii) Asia operations

The short‑term fluctuations in investment returns for Asia operations comprise:

	2017£m	2016£m
	Half year	Half year Full year*
Hong Kong Singapore Other	371	237 (105) 26 52 110 (47)
	85
	88
Total Asia operationsnote	544	373 (100)

• The half year 2016 comparative result has been adjusted to exclude the result attributable to the sold Korea life business (see note 15).

Note

For half year 2017, the credit of £544 million principally arises from unrealised gains on bonds driven by decreases in long‑term interest rates across the business units (as shown in note 13(i)) and higher than assumed returns on equities backing with‑profits business in Hong Kong.

2017 Half Year Financial Report Prudential plc 103

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Notes on the EEV basis results Continued

5 Short-term fluctuations in investment returns continued

(iii) US operations

The short‑term fluctuations in investment returns for US operations comprise:

	2017£m	2016£m
	Half year	Half year Full year
Investment return related experience on fxed income securitiesnote (a) Investment return related impact due to changed expectation of profts on in‑force variable annuity business in future periods based on current period separate account return, net of related hedgingactivityand other itemsnote (b)	–	(64) (85) (173) (1,017)
	(126)
Total US operations	(126)	(237) (1,102)

Notes

• (a) The net result relating to fixed income securities reflects a number of offsetting items as follows:

• the impact on portfolio yields of changes in the asset portfolio in the period;

• the excess of actual realised gains and losses over the amortisation of interest‑related realised gains and losses recorded in the profit and loss account; and

• credit experience (versus the longer‑term assumption).

• (b) This item reflects the net impact of:

• changes in projected future fees and future benefit costs arising from the difference between the actual growth in separate account asset values of 7.9 per cent and that assumed of 2.9 per cent for the period ended 30 June 2017; and

• related hedging activity arising from realised and unrealised gains and losses on equity‑related hedges and interest rate options, and other items.

(iv) UK insurance operations

The short‑term fluctuations in investment returns for UK insurance operations comprise:

	2017£m	2016£m
	Half year	Half year Full year
Shareholder‑backed annuity businessnote (a) With‑profts and othernote (b)	204	335 431 171 438
	11
Total UK operations	215	506 869

Notes

• (a) Short‑term fluctuations in investment returns for shareholder‑backed annuity business includes:

• gains on surplus assets compared to the expected long‑term rate of return reflecting reductions in corporate bond and gilt yields; and

• the difference between actual and expected default experience.

• (b) The positive £11 million fluctuation in half year 2017 for with‑profits and other business represents the impact of achieving a 4.3 per cent pre‑tax return on the with‑profits fund (including unallocated surplus) compared to the assumed rate of return of 2.6 per cent for the period ended 30 June 2017 (half year 2016: achieved return of 5.3 per cent compared to assumed rate of 2.3 per cent; full year 2016: achieved return of 13.6 per cent compared to assumed rate of 5.0 per cent), partially offset by the effect of a partial hedge of future shareholder transfers expected to emerge from the UK’s with‑profits sub‑fund entered into to protect future shareholder with‑profit transfers from movements in the UK equity market.

(v) Other operations

Short‑term fluctuations in investment returns for other operations of positive £106 million (half year 2016: negative £(163) million; full year 2016: negative £(174) million) include unrealised value movements on financial instruments held outside of the main life operations.

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6 Effect of changes in economic assumptions

The effects of changes in economic assumptions for in‑force business included in the profit for the period arise as follows:

(i) Group summary

	2017£m	2016£m
	Half year	Half year Full year*
Asia operationsnote (ii) US operationsnote (iii) UK insurance operationsnote (iv)	55	(559) 70 (542) 45 (217) (175)
	(159)
	54
Total	(50)	(1,318) (60)

• The half year 2016 comparative result has been adjusted to exclude the result attributable to the sold Korea life business (see note 15).

(ii) Asia operations

The effect of changes in economic assumptions for Asia operations comprises:

	2017£m	2016£m
	Half year	Half year Full year*
Hong Kong Indonesia Malaysia Singapore Taiwan Other	(72)	(483) 85 89 46 9 (20) (20) (60) (78) 12 (76) 7
	67
	(20)
	59
	(16)
	37
Total Asia operationsnote	55	(559) 70

• The half year 2016 comparative result has been adjusted to exclude the result attributable to the sold Korea life business (see note 15).

Note

The positive effect for half year 2017 of £55 million largely arises from the movements in long‑term interest rates (see note 13(i)), with losses arising from lower interest rates and hence lower fund earned rates in Hong Kong, Malaysia and Taiwan, more than offset by profits arising from the beneficial impact of valuing future profits at lower discount rates in Indonesia and Singapore, together with £117 million for the net effect of various changes to the basis of setting economic assumptions (see note 12(a)(viii) and note 13(i)).

(iii) US operations

The effect of changes in economic assumptions for US operations comprises:

	2017£m	2016£m
	Half year	Half year Full year
Variable annuity business Fixed annuityand othergeneral account business	(194)	(709) 86 167 (41)
	35
Total US operationsnote	(159)	(542) 45

Note

For half year 2017, the charge of £(159) million mainly reflects the decrease in the assumed separate account return and reinvestment rates for variable annuity business, following the 20 basis points decrease in the US 10‑year treasury yield in the period, resulting in lower projected fee income and an increase in projected benefit costs. For fixed annuity and other general account business, the impact reflects the effect on the present value of future projected spread income of applying a lower discount rate on the opening value of the in‑force book.

2017 Half Year Financial Report Prudential plc 105

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Notes on the EEV basis results Continued

6 Effect of changes in economic assumptions continued

(iv) UK insurance operations

The effect of changes in economic assumptions for UK insurance operations comprises:

	2017£m	2016£m
	Half year	Half year Full year
Shareholder‑backed annuity businessnote (a) With‑profts and other businessnote (b)	–	(24) (113) (193) (62)
	54
Total UK insurance operations	54	(217) (175)

Notes

(a) For shareholder‑backed annuity business, the overall net nil result for half year 2017 reflects the increase in the risk‑free yield curve (as shown in note 13(iii)) being offset by a decrease in spreads.

(b) The credit of £54 million for half year 2017 mainly results from higher expected future fund earned rates following the increases in the risk‑free yield curve and expected investment return on overseas equities (as shown in note 13(iii)).

7 Net core structural borrowings of shareholder-financed operations

	2017£m	201	6£m
	30 Jun	30 Jun	31 Dec
	IFRS basis Mark to market value adjustment EEV basis at market value	IFRS basis Mark to market value adjustment EEV basis at market value	IFRS basis Mark to market value adjustment EEV basis at market value
Holding company (including central fnance subsidiaries) cash and short‑term investments Central funds Subordinated debt Senior debt	(2657) – (2657)	(2,546) – (2,546)	(2,626) – (2,626)
	, ,
	5598 443 6041	4,956 192 5,148 549 171 720	5,772 182 5,954 549 175 724
	, , 549 168 717
	6,147 611 6,758	5,505 363 5,868	6,321 357 6,678
Holding company net borrowings Prudential Capital bank loan Jackson Surplus Notes	3490 611 4101	2,959 363 3,322 275 – 275 186 63 249	3,695 357 4,052 275 – 275 202 65 267
	, , 275 – 275
	192 62 254
Net core structural borrowings of shareholder‑fnanced operations	3,957 673 4,630	3,420 426 3,846	4,172 422 4,594

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8 Reconciliation of movement in shareholders’ equity

	Half year 2017£m
	Long-term business operations Asset management and UK general insurance commission Other operations note (i) Group total Asia operations note (i) US operations UK insurance operations Total long-term business operations
Operating proft (based on longer-term investment returns) Long‑term business: New businessnote 3 Business in forcenote 4
	1092 436 161 1689 – – 1689
	, , , 549 452 304 1,305 – – 1,305
Asset management and general insurance commission Other results	1641 888 465 2994 – – 2994
	, , , – – – – 289 – 289
	– – (6) (6) – (407) (413)
Operating proft based on longer-term investment returns Non‑operatingitems	1641 888 459 2988 289 (407) 2870
	, , , 599 (290) 269 578 68 (219) 427
Proft for theperiod	2,240 598 728 3,566 357 (626) 3,297
Other items taken directly to equity Exchange movements on foreign operations and net investment hedges Intra‑group dividends and investment in operationsnote (ii) External dividends Mark to market value movements on Jackson assets backing surplus and required capital Other movementsnote (iii)
	(611) (579) – (1190) (11) 156 (1045)
	, , (381) (481) (190) (1052) (272) 1324 –
	, , – – – – – (786) (786)
	– 31 – 31 – – 31
	(114) (4) 20 (98) (1) 154 55
Net increase in shareholders’ equity Shareholders’ equityat beginningofperiod	1134 (435) 558 1257 73 222 1552
	, , , 18,472 11,805 10,307 40,584 2,454 (4,070) 38,968
Shareholders’ equityat end ofperiod	19,606 11,370 10,865 41,841 2,527 (3,848) 40,520
Representing: Statutory IFRS basis shareholders’ equity: Net assets (liabilities) Goodwill
	4935 5011 6213 16159 1297 (3482) 13974
	, , , , , , , – – – – 1,230 245 1,475
Total IFRS basis shareholders’ equity Additional retainedproft (loss) on an EEV basisnote (iv)	4935 5011 6213 16159 2527 (3237) 15449
	, , , , , , , 14,671 6,359 4,652 25,682 – (611) 25,071
EEV basis shareholders’ equity	19,606 11,370 10,865 41,841 2,527 (3,848) 40,520
Balance at beginning of period: Statutory IFRS basis shareholders’ equity: Net assets (liabilities) Goodwill	4,747 5,204 5,974 15,925 1,224 (3,958) 13,191 – – – – 1,230 245 1,475
Total IFRS basis shareholders’ equity Additional retainedproft (loss) on an EEV basisnote (iv)	4,747 5,204 5,974 15,925 2,454 (3,713) 14,666 13,725 6,601 4,333 24,659 – (357) 24,302
EEV basis shareholders’ equity	18,472 11,805 10,307 40,584 2,454 (4,070) 38,968

Notes

(i) Other operations of £(3,848) million represents the shareholders’ equity of £(4,093) million for other operations as shown in the movement in shareholders’ equity and includes goodwill of £245 million (half year 2016: £258 million; full year 2016: £245 million) related to Asia long‑term operations.

(ii) Intra‑group dividends represent dividends that have been declared in the period and investment in operations reflect increases in share capital. The amounts included in note

10 for these items are as per the holding company cash flow at transaction rates. The difference primarily relates to intra‑group loans, foreign exchange and other non‑cash items. (iii) Other movements include reserve movements in respect of the shareholders’ share of actuarial gains and losses on defined benefit pension schemes, share capital subscribed, share‑based payments and treasury shares and intra‑group transfers between operations which have no overall effect on the Group’s embedded value.

(iv) The additional retained loss on an EEV basis for Other operations primarily represents the mark to market value adjustment for holding company net borrowings of a charge of £(611) million (half year 2016: £(363) million; full year 2016: £(357) million), as shown in note 7.

2017 Half Year Financial Report Prudential plc 107

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Notes on the EEV basis results Continued

9 Analysis of movement in net worth and value of in-force for long-term business

	Half year 2017£m
	Free surplus note 10 Required capital Total net worth Value of in-force business note Total long-term business operations
Group Shareholders’ equity at beginning of period New business contribution Existing business – transfer to net worth Expected return on existing businessnote 4 Changes in operating assumptions and experience variancesnote 4 SolvencyII and restructuringcosts
	5351 10296 15647 24937 40584
	, , , , , (571) 354 (217) 1906 1689
	, , 1719 (363) 1356 (1356) –
	, , , 66 108 174 869 1043
	, 348 (145) 203 59 262
	(6) – (6) – (6)
Post-tax operating proft Sale of Korea life businessnote 15 Other non‑operatingitems	1556 (46) 1510 1478 2988
	, , , , 76 (76) – – –
	(38) 20 (18) 596 578
Proft after tax from long-term business Exchange movements on foreign operations and net investment hedges Intra‑group dividends and investment in operations Other movements	1594 (102) 1492 2074 3566
	, , , , (144) (139) (283) (907) (1190)
	, (1052) – (1052) – (1052)
	, , , (67) – (67) – (67)
Shareholders’ equityat end ofperiod	5,682 10,055 15,737 26,104 41,841
Asia operations New business contribution Existing business – transfer to net worth Expected return on existing businessnote 4 Changes in operating assumptions and experience variancesnote 4
	(283) 77 (206) 1298 1092
	, , 673 (58) 615 (615) –
	19 29 48 451 499
	71 (51) 20 30 50
Post-tax operating proft Sale of Korea life businessnote 15 Other non‑operatingitems	480 (3) 477 1164 1641
	, , 76 (76) – – –
	192 40 232 367 599
Proft after tax from long-term business	748 (39) 709 1,531 2,240
US operations New business contribution Existing business – transfer to net worth Expected return on existing businessnote 4 Changes in operating assumptions and experience variancesnote 4
	(246) 220 (26) 462 436
	715 (132) 583 (583) –
	29 28 57 255 312
	57 (4) 53 87 140
Post-tax operating proft Non‑operatingitems	555 112 667 221 888
	(470) (109) (579) 289 (290)
Proft after tax from long-term business	85 3 88 510 598

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	Half year 2017£m
	Free surplus note 10 Required capital Total net worth Value of in-force business note Total long-term business operations
UK insurance operations New business contribution Existing business – transfer to net worth Expected return on existing businessnote 4 Changes in operating assumptions and experience variancesnote 4 SolvencyII and restructuringcosts
	(42) 57 15 146 161
	331 (173) 158 (158) –
	18 51 69 163 232
	220 (90) 130 (58) 72
	(6) – (6) – (6)
Post-tax operating proft Non‑operatingitems	521 (155) 366 93 459
	240 89 329 (60) 269
Proft after tax from long-term business	761 (66) 695 33 728

Note

The net value of in‑force business comprises the value of future margins from current in‑force business less the cost of holding required capital as shown below:

	30 Jun 2017£m	31 Dec 2016£m
	Asia operations US operations UK insurance operations Total long-term business operations	Asia operations US operations UK insurance operations Total long-term business operations
Value of in‑force business before deduction of cost of capital and time value of guarantees Cost of capital Cost of time value of guarantees	16359 8525 3422 28306	15,371 8,584 3,468 27,423 (477) (319) (692) (1,488) (87) (911) – (998)
	, , , , (503) (275) (613) (1391)
	, (51) (760) – (811)
Net value of in‑force business Total net worth	15805 7490 2809 26104	14,807 7,354 2,776 24,937 3,665 4,451 7,531 15,647
	, , , , 3,801 3,880 8,056 15,737
Total embedded valuenote 8	19,606 11,370 10,865 41,841	18,472 11,805 10,307 40,584

2017 Half Year Financial Report Prudential plc 109

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Notes on the EEV basis results Continued

10 Analysis of movement in free surplus

For EEV covered business, free surplus is the excess of the regulatory basis net assets for EEV reporting purposes (net worth) over the capital required to support the covered business. Where appropriate, adjustments are made to the net worth so that backing assets are included at fair value rather than cost so as to comply with the EEV Principles. Free surplus for asset management operations and the UK general insurance commission is taken to be IFRS basis post‑tax earnings and shareholders’ equity, net of goodwill. Free surplus for other operations is taken to be EEV basis post‑tax earnings and shareholders’ equity for central operations net of goodwill, with subordinated debt recorded as free surplus to the extent that it is classified as available capital under Solvency II.

Free surplus for insurance and asset management operations and Group total free surplus, including other operations, are shown in the tables below.

(i) Underlying free surplus generated – insurance and asset management operations

The half year 2016 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases. The half year 2016 CER comparative results are translated at half year 2017 average exchange rates.

	Half year 2017 £m	Half year 2016* £m	% change
		AER CER	AER CER
Asia operations Underlying free surplus generated from in‑force life business Investment in new businessnote (iii)(a)		600 679 (228) (257)	27% 12% (24)% (10)%
	763
	(283)
Long‑term business EastspringInvestmentsnote (iii)(b)	480	372 422 53 60	29% 14% 38% 22%
	73
Total	553	425 482	30% 15%
US operations Underlying free surplus generated from in‑force life business Investment in new businessnote (iii)(a)		701 797 (209) (238)	14% 1% (18)% (3)%
	801
	(246)
Long‑term business Broker‑dealer and asset managementnote (iii)(b)	555	492 559 (8) (9)	13% (1)% 50% 56%
	(4)
Total	551	484 550	14% 0%
UK insurance operations Underlying free surplus generated from in‑force life business Investment in new businessnote (iii)(a)		555 555 (56) (56)	1% 1% 25% 25%
	563
	(42)
Long‑term business General insurance commissionnote (iii)(b)	521	499 499 15 15	4% 4% (7)% (7)%
	14
Total	535	514 514	4% 4%
M&Gnote (iii)(b) Prudential Capitalnote (iii)(b)	201	181 181 11 11	11% 11% (55)% (55)%
	5
Underlying free surplus generated from insurance and asset management operations	1,845	1,615 1,738	14% 6%
Representing: Long‑term business: Expected in‑force cash fows (including expected return on net assets) Effects of changes in operating assumptions, operating experience variances and other operatingitems		1,470 1,620 386 411	21% 10% (11)% (17)%
	1785
	, 342
Underlying free surplus generated from in‑force life business Investment in new businessnote (iii)(a)	2127	1,856 2,031 (493) (551)	15% 5% (16)% (4)%
	, (571)
Total long‑term business Asset management andgeneral insurance commissionnote (iii)(b)	1556	1,363 1,480 252 258	14% 5% 15% 12%
	, 289
	1,845	1,615 1,738	14% 6%

• The half year 2016 comparative operating result has been adjusted to exclude the result attributable to the sold Korea life business (see note 15).

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(ii) Underlying free surplus generated – total Group

	Half year 2017 £m	Half year 2016* £m	% change
		AER CER	AER CER
Underlying free surplus generated from insurance and asset management operationsnote (iii)(b) Other income and expenditure net of restructuring and Solvency II costsnote (iii) (b) Interest received from tax settlement	1845	1,615 1,738 (308) (315) 37 37	14% 6% (32)% (29)% n/a n/a
	, (407)
	–
Group underlying free surplus generated, includingother operations	1,438	1,344 1,460	7% (2)%

• The half year 2016 comparative operating result has been adjusted to exclude the result attributable to the sold Korea life business (see note 15).

(iii) Movement in free surplus

Long-term business and asset management operations	Half year 2017£m
	Long-term business note 9 Asset management and UK general insurance commission note (b) Total insurance and asset management operations Central and other operations note (b) Group total
Underlying free surplus generated Sale of Korea life businessnote 9 Other non‑operatingitemsnote (c)	1556 289 1845 (407) 1438
	, , , 76 – 76 – 76
	(38) 68 30 41 71
Net cash fows to parent companynote (d) External dividends Exchange rate movements, timing differences and other itemsnote (e)	1594 357 1951 (366) 1585
	, , , (1056) (174) (1230) 1230 –
	, , , – – – (786) (786)
	(207) (110) (317) 231 (86)
Net movement in free surplus Balance at beginningofperiod	331 73 404 309 713
	5,351 1,224 6,575 1,639 8,214
Balance at end ofperiod	5,682 1,297 6,979 1,948 8,927
Representing: Asia operations US operations UK operations Other operationsnote (b)	2,347 – 2,347 1,950 – 1,950 2,682 – 2,682 – 1,948 1,948
	6,979 1,948 8,927
Balance at beginning of period: Asia operations US operations UK operations Other operationsnote (b)	2,142 – 2,142 2,418 – 2,418 2,015 – 2,015 – 1,639 1,639
	6,575 1,639 8,214

2017 Half Year Financial Report Prudential plc 111

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Notes on the EEV basis results Continued

10 Analysis of movement in free surplus continued

Long-term business and asset management operations	Half year 2016£m
	Long-term business Asset management and UK general insurance commission note (b) Total insurance and asset management operations Central and other operations note (b) Group total
Underlying free surplus generated Results of the sold Korea life business Other non‑operatingitemsnote (c)	1,363 252 1,615 (271) 1,344 11 – 11 – 11 (829) (61) (890) (129) (1,019)
Net cash fows to parent companynote (d) External dividends Exchange rate movements, timing differences and other itemsnote (e)	545 191 736 (400) 336 (830) (288) (1,118) 1,118 – – – – (935) (935) 650 202 852 205 1,057
Net movement in free surplus Balance at beginningofperiod	365 105 470 (12) 458 4,169 1,124 5,293 879 6,172
Balance at end ofperiod	4,534 1,229 5,763 867 6,630

Long-term business and asset management operations	Full year 2016£m
	Long-term business Asset management and UK general insurance commission note (b) Total insurance and asset management operations Central and other operations note (b) Group total
Underlying free surplus generated Loss attaching to the sold Korea life business Other non‑operatingitemsnote (c)	3,080 508 3,588 (666) 2,922 (86) – (86) – (86) (932) (38) (970) (169) (1,139)
Net cash fows to parent companynote (d) External dividends Exchange rate movements, timingdifferences and other itemsnote (e)	2,062 470 2,532 (835) 1,697 (1,236) (482) (1,718) 1,718 – – – – (1,267) (1,267) 356 112 468 1,144 1,612
Net movement in free surplus Balance at beginningofperiod	1,182 100 1,282 760 2,042 4,169 1,124 5,293 879 6,172
Balance at end ofperiod	5,351 1,224 6,575 1,639 8,214

Notes

(a) Free surplus invested in new business represents amounts set aside for required capital and acquisition costs.

(b) Free surplus for asset management operations and the UK general insurance commission is taken to be IFRS basis post‑tax earnings and shareholders’ equity, net of goodwill. Free surplus for other operations is taken to be EEV basis post‑tax earnings and shareholders’ equity net of goodwill, with subordinated debt recorded as free surplus to the extent that it is classified as available capital under Solvency II.

(c) Non‑operating items are principally short‑term fluctuations in investment returns and the effect of changes in economic assumptions for long‑term business operations.

(d) Net cash flows to parent company for long‑term business operations reflect the flows as included in the holding company cash flow at transaction rates. (e) Exchange rate movements, timing differences and other items represent:

	Half year 2017£m
	Long-term business Asset management and UK general insurance commission Total insurance and asset management operations Central and other operations Group total
Exchange rate movements Mark to market value movements on Jackson assets backing surplus and required capitalnote 8 Other itemsnote (f)	(144) (11) (155) (17) (172)
	31 – 31 – 31
	(94) (99) (193) 248 55
	(207) (110) (317) 231 (86)

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	Half year 2016£m
	Long-term business Asset management and UK general insurance commission Total insurance and asset management operations Central and other operations Group total
Exchange rate movements Mark to market value movements on Jackson assets backing surplus and required capital Other itemsnote (f)	329 55 384 50 434 138 – 138 – 138 183 147 330 155 485
	650 202 852 205 1,057

	Full year 2016£m
	Long-term business Asset management and UK general insurance commission Total insurance and asset management operations Central and other operations Group total
Exchange rate movements Mark to market value movements on Jackson assets backing surplus and required capital Other itemsnote (f)	633 83 716 48 764 (11) – (11) – (11) (266) 29 (237) 1,096 859
	356 112 468 1,144 1,612

(f) Other items include the effect of intra‑group loans and other intra‑group transfers between operations, non‑cash items, together with movements in subordinated debt for Other operations.

11 Sensitivity of results to alternative assumptions

Sensitivity analysis – economic assumptions

The tables below show the sensitivity of the embedded value as at 30 June 2017 and 31 December 2016 and the new business contribution after the effect of required capital for half year 2017 and full year 2016 to:

• 1 per cent increase in the discount rates;

• 1 per cent increase in interest rates, including all consequential changes (assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates);

• 0.5 per cent decrease in interest rates, including all consequential changes (assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates);

• 1 per cent rise in equity and property yields;

• 10 per cent fall in market value of equity and property assets (embedded value only);

• The statutory minimum capital level by contrast to EEV basis required capital (for embedded value only); and

• 5 basis points increase in UK long‑term expected defaults.

In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised economic conditions.

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Notes on the EEV basis results Continued

11 Sensitivity of results to alternative assumptions continued

New business contribution

New business contribution
	Half year 2017£m	Full year 2016£m
	Asia operations US operations UK insurance operations Total long-term business operations	Asia operations US operations UK insurance operations Total long-term business operations
New business contributionnote 3	1,092 436 161 1,689	2,030 790 268 3,088
Discount rates – 1% increase Interest rates – 1% increase Interest rates – 0.5% decrease Equity/property yields – 1% rise Long‑term expected defaults – 5 bps increase	(208) (21) (18) (247)	(375) (43) (32) (450) 51 64 27 142 (30) (49) (15) (94) 129 91 28 248 – – (2) (2)
	3 49 20 72
	(4) (24) (10) (38)
	61 52 20 133
	– – (1) (1)

Embedded value of long-term business operations

	30 Jun 2017£m	31 Dec 2016£m
	Asia operations US operations UK insurance operations Total long-term business operations	Asia operations US operations UK insurance operations Total long-term business operations
Shareholders’ equitynote 8	19,606 11,370 10,865 41,841	18,472 11,805 10,307 40,584
Discount rates – 1% increase Interest rates – 1% increase Interest rates – 0.5% decrease Equity/property yields – 1% rise Equity/property market values – 10% fall Statutory minimum capital Long‑term expected defaults – 5 bps increase	(2268) (350) (815) (3433)	(2,078) (379) (809) (3,266) (701) (241) (638) (1,580) 248 25 369 642 771 653 314 1,738 (361) (11) (399) (771) 150 223 – 373 – – (138) (138)
	, , (548) (128) (643) (1319)
	, 184 (54) 356 486
	841 682 359 1882
	, (416) (127) (447) (990)
	128 197 – 325
	– – (136) (136)

The sensitivities shown above are for the impact of instantaneous changes on the embedded value of long‑term business operations and include the combined effect on the value of in‑force business and net assets at the balance sheet dates indicated. If the change in assumptions shown in the sensitivities were to occur, then the effect shown above would be recorded within two components of the profit analysis for the following year. These are for the effect of economic assumption changes and short‑term fluctuations in investment returns. In addition to the sensitivity effects shown above, the other components of the profit for the following year would be calculated by reference to the altered assumptions, for example new business contribution and unwind of discount, together with the effect of other changes such as altered corporate bond spreads. In addition for changes in interest rates, the effect shown above for Jackson would also be recorded within the fair value movements on assets backing surplus and required capital, which are taken directly to shareholders’ equity.

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12 Methodology and accounting presentation

(a) Methodology Overview

The embedded value is the present value of the shareholders’ interest in the earnings distributable from assets allocated to covered business after sufficient allowance has been made for the aggregate risks in that business. The shareholders’ interest in the Group’s long‑term business comprises:

• the present value of future shareholder cash flows from in‑force covered business (value of in‑force business), less deductions for: – the cost of locked‑in required capital; and

• the time value of cost of options and guarantees;

• locked‑in required capital; and

• the shareholders’ net worth in excess of required capital (free surplus).

The value of future new business is excluded from the embedded value.

Notwithstanding the basis of presentation of results as explained in note 12(b)(iii), no smoothing of market or account balance values, unrealised gains or investment return is applied in determining the embedded value or profit. Separately, the analysis of profit is delineated between operating profit based on longer‑term investment returns and other constituent items, as explained in note 12(b)(i).

(i) Covered business

The EEV results for the Group are prepared for ‘covered business’, as defined by the EEV Principles. Covered business represents the Group’s long‑term insurance business, including the Group’s investments in joint venture and associate insurance operations, for which the value of new and in‑force contracts is attributable to shareholders. The post‑tax EEV basis results for the Group’s covered business are then combined with the post‑tax IFRS basis results of the Group’s asset management and other operations. Under the EEV Principles, the results for covered business incorporate the projected margins of attaching internal asset management, as described in note 12(a)(vii).

The definition of long‑term business operations comprises those contracts falling under the definition for regulatory purposes together with, for US operations, contracts that are in substance the same as guaranteed investment contracts (GICs) but do not fall within the technical definition.

Covered business comprises the Group’s long‑term business operations, with two exceptions:

• the closed Scottish Amicable Insurance Fund (SAIF) which is excluded from covered business. SAIF is a ring‑fenced sub‑fund of the Prudential Assurance Company (PAC) long‑term fund, established by a Court Approved Scheme of Arrangement in October 1997. SAIF is closed to new business and the assets and liabilities of the fund are wholly attributable to the policyholders of the fund; and

• the presentational treatment of the Group’s principal defined benefit pension scheme, the Prudential Staff Pension Scheme (PSPS). The partial recognition of the surplus for PSPS is recognised in ‘Other’ operations.

A small amount of UK group pensions business is also not modelled for EEV reporting purposes.

(ii) Valuation of in-force and new business

The embedded value results are prepared incorporating best estimate assumptions about all relevant factors including levels of future investment returns, expenses, persistency, mortality and morbidity, as described in note 13. These assumptions are used to project future cash flows. The present value of the future cash flows is then calculated using a discount rate which reflects both the time value of money and the non‑diversifiable risks associated with the cash flows that are not otherwise allowed for.

New business

In determining the EEV basis value of new business, premiums are included in projected cash flows on the same basis of distinguishing annual and single premium business as set out for statutory basis reporting.

New business premiums reflect those premiums attaching to covered business, including premiums for contracts classified as investment products for IFRS basis reporting. New business premiums for regular premium products are shown on an annualised basis. Internal vesting business is classified as new business where the contracts include an open market option.

The post‑tax contribution from new business represents profits determined by applying operating assumptions as at the end of the period.

For UK immediate annuity business, the new business contribution is determined by applying economic assumptions reflecting point‑of‑sale market conditions. This is consistent with how the business is priced as crediting rates are linked to yields on specific assets and the yield is locked in when the assets are purchased at the point of sale of the policy. For other business within the Group, end‑of‑ period economic assumptions are used.

New business profitability is a key metric for the Group’s management of the development of the business. In addition, post‑tax new business margins are shown by reference to annual premium equivalents (APE) and the present value of new business premiums (PVNBP). These margins are calculated as the percentage of the value of new business profit to APE and PVNBP. APE is calculated as the aggregate of regular premiums and one‑tenth of single premiums. PVNBP is calculated as equalling single premiums plus the present value of expected premiums of regular premium new business, allowing for lapses and other assumptions made in determining the EEV new business contribution.

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Notes on the EEV basis results Continued

12 Methodology and accounting presentation continued

Valuation movements on investments

With the exception of debt securities held by Jackson, investment gains and losses during the period (to the extent that changes in capital values do not directly match changes in liabilities) are included directly in the profit for the period and shareholders’ equity as they arise.

The results for any covered business conceptually reflect the aggregate of the IFRS results and the movements on the additional shareholders’ interest recognised on the EEV basis. Thus the start point for the calculation of the EEV results for Jackson, as for other businesses, reflects the market value movements recognised on an IFRS basis.

However, in determining the movements on the additional shareholders’ interest, the basis for calculating the EEV result for Jackson acknowledges that, for debt securities backing liabilities, the aggregate EEV results reflect the fact that the value of in‑force business instead incorporates the discounted value of future spread earnings. This value is not affected generally by short‑term market movements on securities that, broadly speaking, are held for the longer term.

Fixed income securities backing the free surplus and required capital for Jackson are accounted for at fair value. However, consistent with the treatment applied under IFRS for Jackson securities classified as available‑for‑sale, movements in unrealised appreciation (depreciation) on these securities are accounted for in equity rather than in the income statement, as shown in the movement in shareholders’ equity.

(iii) Cost of capital

A charge is deducted from the embedded value for the cost of locked‑in required capital supporting the Group’s long‑term business. The cost is the difference between the nominal value of the capital and the discounted value of the projected releases of this capital, allowing for post‑tax investment earnings on the capital.

The annual result is affected by the movement in this cost from year to year which comprises a charge against new business profit and generally a release in respect of the reduction in capital requirements for business in force as this runs off.

Where required capital is held within a with‑profits long‑term fund, the value placed on surplus assets in the fund is already discounted to reflect its release over time and no further adjustment is necessary in respect of required capital.

(iv) Financial options and guarantees

Nature of financial options and guarantees in Prudential’s long-term business

Asia operations

Subject to local market circumstances and regulatory requirements, the guarantee features described below in respect of UK business broadly apply to similar types of participating contracts principally written in Hong Kong, Singapore and Malaysia. Participating products have both guaranteed and non‑guaranteed elements.

There are also various non‑participating long‑term products with guarantees. The principal guarantees are those for whole‑of‑life contracts with floor levels of policyholder benefits that accrue at rates set at inception and do not vary subsequently with market conditions.

US operations (Jackson)

The principal financial options and guarantees in Jackson are associated with the fixed annuity (FA) and variable annuity (VA) lines of business.

Fixed annuities provide that, at Jackson’s discretion, it may reset the interest rate credited to policyholders’ accounts, subject to a guaranteed minimum. The guaranteed minimum return varies from 1.0 per cent to 5.5 per cent for all periods, depending on the particular product, jurisdiction where issued, and date of issue. For all periods shown, 87 per cent of the account values on fixed annuities are for policies with guarantees of 3 per cent or less, and the average guarantee rate is 2.6 per cent.

Fixed annuities also present a risk that policyholders will exercise their option to surrender their contracts in periods of rapidly rising interest rates, possibly requiring Jackson to liquidate assets at an inopportune time.

Jackson issues VA contracts for which it contractually guarantees to the contract holder either: a) return of no less than total deposits made to the contract adjusted for any partial withdrawals; b) total deposits made to the contract adjusted for any partial withdrawals plus a minimum return; or c) the highest contract value on a specified anniversary date adjusted for any withdrawals following the specified contract anniversary. These guarantees include benefits that are payable upon depletion of funds (Guaranteed Minimum Withdrawal Benefit (GMWB)), as death benefits (Guaranteed Minimum Death Benefits (GMDB)) or as income benefits (Guaranteed Minimum Income Benefits (GMIB)). These guarantees generally protect the policyholders’ value in the event of poor equity market performance. Jackson hedges the GMWB and GMDB guarantees through the use of equity options and futures contracts, and fully reinsures the GMIB guarantees.

Jackson also issues fixed index annuities (FIA) that enable policyholders to obtain a portion of an equity‑linked return while providing a guaranteed minimum return. The guaranteed minimum returns are of a similar nature to those described above for fixed annuities.

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UK insurance operations

For covered business the only significant financial options and guarantees in the UK insurance operations arise in the with‑profits fund. With‑profits products provide returns to policyholders through bonuses that are smoothed. There are two types of bonuses – annual and final. Annual bonuses are declared once a year and, once credited, are guaranteed in accordance with the terms of the particular product. Unlike annual bonuses, final bonuses are guaranteed only until the next bonus declaration. The PAC with‑profits fund also held a provision on a Solvency II basis of £62 million at 30 June 2017 (30 June 2016: £54 million; 31 December 2016: £62 million) to honour guarantees on a small number of guaranteed annuity option products.

The Group’s main exposure to guaranteed annuity options in the UK is through the non‑covered business of SAIF. A provision on a Solvency II basis of £572 million was held in SAIF at 30 June 2017 (30 June 2016: £575 million; 31 December 2016: £571 million) to honour the guarantees. As described in note 12(a)(i), the assets and liabilities are wholly attributable to the policyholders of the fund. Therefore the movement in the provision has no direct impact on shareholders’ funds.

Time value

The value of financial options and guarantees comprises two parts:

• the first part arises from a deterministic valuation on best estimate assumptions (the intrinsic value); and

• the second part arises from the variability of economic outcomes in the future (the time value).

Where appropriate, a full stochastic valuation has been undertaken to determine the time value of the financial options and guarantees. The economic assumptions used for the stochastic calculations are consistent with those used for the deterministic calculations. Assumptions specific to the stochastic calculations reflect local market conditions and are based on a combination of actual market data, historic market data and an assessment of long‑term economic conditions. Common principles have been adopted across the Group for the stochastic asset models, for example, separate modelling of individual asset classes but with an allowance for correlation between the various asset classes. Details of the key characteristics of each model are given in notes 13(iv), (v) and (vi).

In deriving the time value of financial options and guarantees, management actions in response to emerging investment and fund solvency conditions have been modelled. Management actions encompass, but are not confined to, investment allocation decisions, levels of reversionary and terminal bonuses and credited rates. Bonus rates are projected from current levels and varied in accordance with assumed management actions applying in the emerging investment and fund solvency conditions.

In all instances, the modelled actions are in accordance with approved local practice and therefore reflect the options actually available to management. For the PAC with‑profits fund, the actions assumed are consistent with those set out in the Principles and Practices of Financial Management which explains how regular and final bonus rates within the discretionary framework are determined, subject to the general legislative requirements applicable.

(v) Level of required capital

In adopting the EEV Principles, Prudential has based required capital on its internal targets, subject to it being at least the local statutory minimum requirements.

For with‑profits business written in a segregated life fund, as is the case in Asia and the UK, the capital available in the fund is sufficient to meet the required capital requirements. Following the implementation of Solvency II, which became effective on 1 January 2016, a portion of future shareholder transfers expected from the with‑profits fund is recognised within net worth, together with the associated capital requirements.

For shareholder‑backed business, the following capital requirements apply:

• Asia operations: the level of required capital has been set to an amount at least equal to the higher of local statutory requirements and the internal target;

• US operations: the level of required capital has been set at 250 per cent of the risk‑based capital (RBC) required by the National Association of Insurance Commissioners (NAIC) at the Company Action Level (CAL); and

• UK insurance operations: the capital requirements are set at the Solvency II Solvency Capital Requirement (SCR) for shareholder‑ backed business as a whole.

(vi) With-profits business and the treatment of the estate

The proportion of surplus allocated to shareholders from the PAC with‑profits fund has been based on the present level of 10 per cent. The value attributed to the shareholders’ interest in the estate is derived by increasing final bonus rates (and related shareholder transfers) so as to exhaust the estate over the lifetime of the in‑force with‑profits business. In any scenarios where the total assets of the life fund are insufficient to meet policyholder claims in full, the excess cost is fully attributed to shareholders. Similar principles apply, where appropriate, for other with‑profits funds of the Group’s Asia operations.

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Notes on the EEV basis results Continued

12 Methodology and accounting presentation continued

(vii) Internal asset management

The in‑force and new business results from long‑term business include the projected value of profits or losses from asset management and service companies that support the Group’s covered insurance businesses. The results of the Group’s asset management operations include the current period profits from the management of both internal and external funds. EEV basis shareholders’ other income and expenditure is adjusted to deduct the unwind of the expected internal asset management profit margin for the period. The deduction is on a basis consistent with that used for projecting the results for covered insurance business. Group operating profit accordingly includes the variance between actual and expected profit in respect of management of the assets for covered business.

(viii) Allowance for risk and risk discount rates

Overview

Under the EEV Principles, discount rates used to determine the present value of future cash flows are set by reference to risk‑free rates plus a risk margin.

For Asia and US operations, the risk‑free rates are based on 10‑year local government bond yields.

For UK insurance operations, following the implementation of Solvency II on 1 January 2016, the EEV risk‑free rate is based on the full term structure of interest rates; ie a yield curve, rather than a flat 15‑year gilt yield, is used to determine the embedded value at the end of the reporting period.

The risk margin should reflect any non‑diversifiable risk associated with the emergence of distributable earnings that is not allowed for elsewhere in the valuation. Prudential has selected a granular approach to better reflect differences in market risk inherent in each product group. The risk discount rate so derived does not reflect an overall Group market beta but instead reflects the expected volatility associated with the cash flows for each product category in the embedded value model.

Since financial options and guarantees are explicitly valued under the EEV methodology, discount rates under EEV are set excluding the effect of these product features.

The risk margin represents the aggregate of the allowance for market risk, additional allowance for credit risk where appropriate, and allowance for non‑diversifiable non‑market risk. No allowance is required for non‑market risks where these are assumed to be fully diversifiable.

Market risk allowance

The allowance for market risk represents the beta multiplied by an equity risk premium. Except for UK shareholder‑backed annuity business (as explained below), such an approach has been used for the Group’s businesses.

The beta of a portfolio or product measures its relative market risk. The risk discount rates reflect the market risk inherent in each product group and hence the volatility of product cash flows. These are determined by considering how the profits from each product are affected by changes in expected returns on various asset classes. By converting this into a relative rate of return, it is possible to derive a product‑specific beta.

Product level betas reflect the most recent product mix to produce appropriate betas and risk discount rates for each major product grouping.

Additional credit risk allowance

The Group’s methodology is to allow appropriately for credit risk. The allowance for total credit risk is to cover:

• expected long‑term defaults;

• credit risk premium (to reflect the volatility in downgrade and default levels); and

• short‑term downgrades and defaults.

These allowances are initially reflected in determining best estimate returns and through the market risk allowance described above. However, for those businesses largely backed by holdings of debt securities these allowances in the projected returns and market risk allowances may not be sufficient and an additional allowance may be appropriate.

The practical application of the allowance for credit risk varies depending upon the type of business as described below:

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Asia operations

For Asia operations, the allowance for credit risk incorporated in the projected rates of return and the market risk allowance are sufficient. Accordingly, no additional allowance for credit risk is required.

The projected rates of return for holdings of corporate bonds comprise the risk‑free rate plus an assessment of long‑term spread over the risk‑free rate.

US operations (Jackson)

For Jackson business, the allowance for long‑term defaults is reflected in the risk margin reserve (RMR) charge which is deducted in determining the projected spread margin between the earned rate on the investments and the policyholder crediting rate.

The risk discount rate incorporates an additional allowance for credit risk premium and short‑term downgrades and defaults as shown in note 13(ii). In determining this allowance a number of factors have been considered. These factors, in particular, include:

• How much of the credit spread on debt securities represents an increased credit risk not reflected in the RMR long‑term default assumptions, and how much is liquidity premium (which is the premium required by investors to compensate for the risk of longer‑ term investments which cannot be easily converted into cash, and converted at the fair market value). In assessing this effect, consideration has been given to a number of approaches to estimating the liquidity premium by considering recent statistical data; and

• Policyholder benefits for Jackson fixed annuity business are not fixed. It is possible in adverse economic scenarios to pass on a component of credit losses to policyholders (subject to guarantee features) through lower investment return rates credited to policyholders. Consequently, it is only necessary to allow for the balance of the credit risk in the risk discount rate.

The level of the additional allowance is assessed at each reporting period to take account of prevailing credit conditions and as the business in force alters over time. The additional allowance for variable annuity business has been set at one‑fifth of the non‑variable annuity business to reflect the proportion of the allocated holdings of general account debt securities.

The level of allowance differs from that for UK annuity business for investment portfolio differences and to take account of the management actions available in adverse economic scenarios to reduce crediting rates to policyholders, subject to guarantee features of the products.

UK operations

(1) Shareholder-backed annuity business

For Prudential’s UK shareholder‑backed annuity business, Prudential has used a market consistent embedded value (MCEV) approach to derive an implied risk discount rate which is then applied to the projected best estimate cash flows.

In the annuity MCEV calculations, as the assets are generally held to maturity to match liabilities, the future cash flows are discounted using the swap yield curve plus an allowance for liquidity premium based on the Solvency II allowance for credit risk. The Solvency II allowance is set by European Insurance and Occupational Pensions Authority (EIOPA) using a prudent assumption that all future downgrades will be replaced annually, and allowing for the credit spread floor.

For the purposes of presentation in the EEV results, the results on this basis are reconfigured. Under this approach the projected earned rate of return on the debt securities held is determined after allowing for a best estimate credit risk allowance. The remaining elements of prudence within the Solvency II allowance are incorporated into the risk margin included in the discount rate, shown in note 13(iii).

(2) With-profits fund non-profit annuity business

For UK non‑profit annuity business attributable to the PAC with‑profits fund, the basis for determining the aggregate allowance for credit risk is consistent with that applied for UK shareholder‑backed annuity business (as described above). The allowance for credit risk for this business is taken into account in determining the projected cash flows to the with‑profits fund, which are in turn discounted at the risk discount rate applicable to all of the projected cash flows of the fund.

(3) With-profits fund holdings of debt securities

The UK with‑profits fund holds debt securities as part of its investment portfolio backing policyholder liabilities and unallocated surplus. The assumed earned rate for with‑profit holdings of corporate bonds is defined as the risk‑free rate plus an assessment of the long‑term spread over risk free, net of expected long‑term defaults. This approach is similar to that applied for equities and properties for which the projected earned rate is defined as the risk‑free rate plus a long‑term risk premium.

Allowance for non-diversifiable non-market risks

The majority of non‑market and non‑credit risks are considered to be diversifiable. Finance theory cannot be used to determine the appropriate component of beta for non‑diversifiable non‑market risks since there is no observable risk premium associated with it that is akin to the equity risk premium. Recognising this, a pragmatic approach has been applied.

A base level allowance of 50 basis points is applied to cover the non‑diversifiable non‑market risks associated with the Group’s businesses. For the Group’s Asia operations in China, Indonesia, the Philippines, Taiwan, Thailand and Vietnam, additional allowances are applied for emerging market risk ranging from 100 to 250 basis points. The level of these allowances are reviewed and updated based on an assessment of a range of pre‑defined emerging market risk indicators, as well as the Group’s exposure and experience in the business units. At half year 2017, the China allowance for non‑market risk was reduced reflecting the growth in the size of the business, increasing management exposure and experience in the country and an improvement in our risk assessment of the market. For the Group’s US business and UK business, no additional allowance is necessary.

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Notes on the EEV basis results Continued

12 Methodology and accounting presentation continued

(ix) Foreign currency translation

Foreign currency profits and losses have been translated at average exchange rates for the period. Foreign currency assets and liabilities have been translated at period‑end exchange rates. The principal exchange rates are shown in note A1 of the IFRS financial statements.

(x) Taxation

In determining the post‑tax profit for the period for covered business, the overall tax rate includes the impact of tax effects determined on a local regulatory basis. Tax payments and receipts included in the projected cash flows to determine the value of in‑force business are calculated using rates that have been announced and substantively enacted by the end of the reporting period.

(xi) Inter-company arrangements

The EEV results for covered business incorporate annuities established in the PAC non‑profit sub‑fund from vesting pension policies in SAIF (which is not covered business). The EEV results also incorporate the effect of the reinsurance arrangement of non‑profit immediate pension annuity liabilities of SAIF to the PAC non‑profit sub‑fund.

(b) Accounting presentation

(i) Analysis of post-tax profit

To the extent applicable, the presentation of the EEV post‑tax profit for the period is consistent in the classification between operating and non‑operating results with the basis that the Group applies for the analysis of IFRS basis results. Operating results reflect underlying results including longer‑term investment returns (which are determined as described in note 12(b)(ii) below) and incorporate the following:

• new business contribution, as defined in note 12(a)(ii);

• unwind of discount on the value of in‑force business and other expected returns, as described in note 12(b)(iii) below;

• the impact of routine changes of estimates relating to operating assumptions, as described in note 12(b)(iv) below; and

• operating experience variances, as described in note 12(b)(v) below.

Non‑operating results comprise the recurrent items of:

• short‑term fluctuations in investment returns;

• the mark to market value movements on core borrowings; and

• the effect of changes in economic assumptions.

In addition, for half year 2017, non‑operating free surplus generated includes the effect of the disposal of the Korea life business. For all periods, non‑operating profit includes a reclassification from operating profit of the results attributable to the sold Korea life business. For full year 2016, non‑operating result also includes the effect of adjustment to the carrying value of the Korea life business following its reclassification as held for sale (see note 15 for details).

Total profit attributable to shareholders and basic earnings per share include these items, together with actual investment returns. The Group believes that operating profit, as adjusted for these items, better reflects underlying performance.

(ii) Investment returns included in operating profit

For the investment element of the assets covering the net worth of long‑term insurance business, investment returns are recognised in operating results at the expected long‑term rate of return. These expected returns are calculated by reference to the asset mix of the portfolio. For the purpose of calculating the longer‑term investment return to be included in the operating result of the PAC with‑profits fund of UK operations, where assets backing the liabilities and unallocated surplus are subject to market volatility, asset values at the beginning of the reporting period are adjusted to remove the effects of short‑term market movements as explained in note 12(b)(iii) below.

For the purpose of determining the long‑term returns for debt securities of US operations for fixed annuity and other general account business, a risk margin charge is included which reflects the expected long‑term rate of default based on the credit quality of the portfolio. For Jackson, interest‑related realised gains and losses are amortised to the operating results over the maturity period of the sold bonds and for equity‑related investments, a long‑term rate of return is assumed, which reflects the aggregation of end‑of‑period risk‑free rates and equity risk premium. For US variable annuity separate account business, operating profit includes the unwind of discount on the opening value of in‑force business adjusted to reflect end‑of‑period projected rates of return with the excess or deficit of the actual return recognised within non‑operating profit, together with the related hedging activity.

For UK annuity business, rebalancing of the asset portfolio backing the liabilities to policyholders may, from time to time, take place to align it more closely with the internal benchmark of credit quality that management applies. Such rebalancing will result in a change in the projected yield on the asset portfolio and the allowance for default risk. The net effect of these changes is included in the operating result for the period.

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(iii) Unwind of discount and other expected returns

The Group’s methodology in determining the unwind of discount and other expected returns is by reference to:

• the value of in‑force business at the beginning of the period (adjusted for the effect of current period economic and operating assumption changes); and

• required capital and surplus assets.

In applying this general approach, the unwind of discount included in operating profit for UK insurance operations is described below.

UK operations

The unwind is determined by reference to an implied single risk discount rate. Following the implementation of Solvency II, the EEV risk‑free rate is based on a yield curve (as set out in note 12a(viii) above), which is used to derive a single implied discount rate which, if this rate had been used, would reproduce the same embedded value as that calculated by reference to the yield curve. The difference between the operating profit determined using the single implied discount rate and that derived using the yield curve is included within non‑operating profit.

For with‑profits business, the opening value of in‑force is adjusted for the effect of short‑term investment volatility due to market movements (ie smoothed). In the summary statement of financial position and for total profit reporting, asset values and investment returns are not smoothed. At 30 June 2017 the shareholders’ interest in the smoothed surplus assets used for this purpose only were £31 million lower (30 June 2016: £21 million lower; 31 December 2016: £77 million lower) than the surplus assets carried in the statement of financial position.

(iv) Effect of changes in operating assumptions

Operating profit includes the effect of changes to non‑economic assumptions on the value of in‑force at the end of the period. For presentational purposes the effect of changes is delineated to show the effect on the opening value of in‑force as operating assumption changes, with the experience variances subsequently being determined by reference to the end‑of‑period assumptions (see note 12(b) (v) below).

(v) Operating experience variances

Operating profit includes the effect of experience variances on non‑economic assumptions, such as persistency, mortality and morbidity, expenses and other factors, which are calculated with reference to the end‑of‑period assumptions.

(vi) Effect of changes in economic assumptions

Movements in the value of in‑force business at the beginning of the period caused by changes in economic assumptions, net of the related change in the time value of cost of options and guarantees, are recorded in non‑operating results. For UK insurance operations, the embedded value incorporates Solvency II transitional measures, which are recalculated using management’s estimate of the impact of operating and market conditions at the valuation date. The effect of changes in economic assumptions is after allowing for this recalculation.

13 Assumptions

Principal economic assumptions

The EEV basis results for the Group’s operations have been determined using economic assumptions where the long‑term expected rates of return on investments and risk discount rates are set by reference to period‑end risk‑free rates of return (defined below for each of the Group’s insurance operations). Expected returns on equity and property asset classes and corporate bonds are derived by adding a risk premium, based on the Group’s long‑term view, to the risk‑free rate. In order to reflect Prudential’s most recent assessment of the growth prospects of the region compared to other developed markets and the historically strong relationship between long‑term economic growth and long‑term equity returns, in a number of Asia business units, equity risk premiums have been increased at half year 2017 by between 25 basis points and 75 basis points from those applied at half year and full year 2016. The related risk discount rates have also been increased by equivalent amounts. In addition, for a few Asia business units, expected long‑term inflation assumptions at half year 2017 have been revised to better reflect central bank inflation targets and to align with the currency of the underlying exposures.

The total profit that emerges over the lifetime of an individual contract as calculated using the embedded value basis is the same as that calculated under the IFRS basis. Since the embedded value basis reflects discounted future cash flows, under this methodology the profit emergence is advanced, thus more closely aligning the timing of the recognition of profit with the efforts and risks of current management actions, particularly with regard to business sold during the period.

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Notes on the EEV basis results Continued

13 Assumptions continued

(i) Asia operations[ notes (b)(c)]

The risk‑free rates of return for Asia operations are defined as 10‑year government bond yields at the end of the period.

		Risk disco	unt rate%
		New business	In-	force business
	2017	2016	2017	2016
	30 Jun	30 Jun 31 Dec	30 Jun	30 Jun 31 Dec
China Hong Kongnotes (b)(d) Indonesia Malaysianote (d) Philippines Singaporenote (d) Taiwan Thailand Vietnam Total weighted risk discount ratenote (a)	9.3	9.4 9.6 3.0 3.9 11.5 12.0 6.3 6.8 10.5 11.6 3.6 4.2 3.8 4.0 8.7 9.4 13.7 13.0 4.7 5.3	9.3	9.4 9.6 2.9 3.9 11.5 12.0 6.4 6.9 10.5 11.6 4.5 5.0 3.3 4.0 8.7 9.4 13.7 13.0 5.7 6.1
	3.6		3.7
	11.2		11.2
	6.8		6.9
	12.2		12.2
	3.8		4.7
	3.8		4.1
	10.0		10.0
	13.2		13.2
	5.1		5.8

	10-year government bond yield%	10-year government bond yield%	Expected long-term Infation%	Expected long-term Infation%
	2017	2016	2017	2016
	30 Jun	30 Jun 31 Dec	30 Jun	30 Jun 31 Dec
China Hong Kongnotes (b)(d) Indonesia Malaysianote (d) Philippines Singaporenote (d) Taiwan Thailand Vietnam	3.6	2.9 3.1 1.5 2.5 7.6 8.1 3.8 4.3 3.7 4.8 1.9 2.5 0.8 1.2 2.0 2.7 6.9 6.3	3.0	2.5 2.5 2.3 2.3 5.0 5.0 2.5 2.5 4.0 4.0 2.0 2.0 1.0 1.0 3.0 3.0 5.5 5.5
	2.3		2.5
	6.9		4.5
	3.9		2.5
	4.7		4.0
	2.1		2.0
	1.1		1.5
	2.5		3.0
	5.7		5.5

Notes

(a) The weighted risk discount rates for Asia operations shown above have been determined by weighting each country’s risk discount rates by reference to the post‑tax EEV basis new business contribution and the closing value of in‑force business. The changes in the risk discount rates for individual Asia business units reflect:

– the movements in 10‑year government bond yields;

– changes in product mix; and

– the effect of changes in the economic basis (see note 6(ii)).

(b) For Hong Kong the assumptions shown are for US dollar denominated business. For other business units, the assumptions are for local currency denominated business.

(c) Equity risk premiums in Asia range from 4.0 per cent to 9.4 per cent (half year 2016: from 3.5 per cent to 8.7 per cent; full year 2016: from 3.5 per cent to 8.7 per cent).

(d) The mean equity return assumptions for the most significant equity holdings of the Asia operations are:

The mean equity return assumptions for the most signifcant equity holdings of the Asia operations are:
	2017%	2016%
	30 Jun	30 Jun 31 Dec
Hong Kong Malaysia Singapore	6.3	5.5 6.5 9.8 10.2 7.9 8.5
	10.4
	8.6

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(ii) US operations

The risk‑free rates of return for US operations are defined as 10‑year treasury bond yield at the end of the period.

	2017%	2016%
	30 Jun	30 Jun 31 Dec
Assumed new business spread margins:* Fixed annuity business:† January to June issues July to December issues Fixed index annuity business: January to June issues July to December issues Institutional business Allowance for long‑term defaults included in projected spreadnote 12(a)(viii) Risk discount rate: Variable annuity: Risk discount rate Additional allowance for credit risk included in risk discount ratenote 12(a)(viii) Non‑variable annuity: Risk discount rate Additional allowance for credit risk included in risk discount ratenote 12(a)(viii) Weighted average total: New business In‑force business US 10‑year treasury bond yield Pre‑tax expected long‑term nominal rate of return for US equities Expected long‑term rate of infation Equity risk premium S&P equityreturn volatilitynote (v)		1.25 1.25 n/a 1.25 1.50 1.50 n/a 1.50 0.50 0.50 0.21 0.21 6.0 6.9 0.2 0.2 3.1 4.1 1.0 1.0 5.7 6.8 5.4 6.5 1.5 2.5 5.5 6.5 2.7 3.0 4.0 4.0 18.0 18.0
	1.50
	n/a
	1.75
	n/a
	0.50
	0.20
	6.7
	0.2
	3.9
	1.0
	6.5
	6.3
	2.3
	6.3
	2.9
	4.0
	18.0

• Including the proportion of variable annuity business invested in the general account and fixed index annuity business, the assumed spread margin grades up linearly by 25 basis points to a long‑term assumption over five years.

† Including the proportion of variable annuity business invested in the general account.

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Notes on the EEV basis results Continued

13 Assumptions continued

(iii) UK insurance operations

Following the implementation of Solvency II on 1 January 2016, the risk‑free rate is based on the full term structure of interest rates, ie a yield curve, which is used to determine the embedded value at the end of the reporting period. These yield curves are used to derive pre‑tax expected long‑term nominal rates of investment return and risk discount rates. For the purpose of determining the unwind of discount in the analysis of operating profit, these yield curves are used to derive a single implied risk discount rate, as explained in note 12(a)(viii).

This single implied risk discount rate is shown, along with the 15‑year nominal rate of return based on the yield curve.

	2017%	2016%
	30 Jun	30 Jun 31 Dec
Shareholder-backed annuity business: Risk discount rate:note (a) New business In‑force business Pre‑tax expected 15‑year nominal rates of investment return:notes (a)(b) New business In‑force business With-profts and other business: Risk discount rate:* New business In‑force business Pre‑tax expected 15‑year nominal rates of investment return:note (b) Overseas equities Property 15‑year gilt yield Corporate bonds Expected 15‑year rate of infation Equityriskpremium		4.5 3.9 4.2 4.5 3.4 3.0 2.9 2.8 4.6 4.7 4.6 4.9 5.5 to 8.8 6.2 to 9.4 4.3 4.5 1.5 1.7 3.2 3.5 3.1 3.6 4.0 4.0
	4.1
	4.3
	2.7
	2.7
	4.9
	4.9
	6.1 to 9.9
	4.5
	1.7
	3.5
	3.5
	4.0

• The risk discount rates for with‑profits and other business shown above represents a weighted average total of the rates applied to determine the present value of future cash flows, including a portion of future with‑profits business shareholders’ transfers recognised in net worth.

Notes

(a) For shareholder‑backed annuity business, the movements in the pre‑tax long‑term nominal rates of return and risk discount rates for new and in‑force businesses reflect the effect of changes in asset yields (based on average yields for new business).

(b) The table below shows the pattern of the UK risk‑free Solvency II spot yield curve at the end of all periods shown:

		1 year	5 year	10 year	15 year	20 year
30	Jun 2017	0.4%	0.8%	1.2%	1.4%	1.5%
31	Dec 2016	0.4%	0.7%	1.1%	1.3%	1.3%
30	Jun 2016	0.4%	0.5%	0.9%	1.1%	1.1%

Stochastic assumptions

Details are given below of the key characteristics of the models used to determine the time value of the financial options and guarantees as referred to in note 12(a)(iv).

(iv) Asia operations

• The stochastic cost of guarantees is primarily of significance for the Hong Kong, Malaysia, Singapore and Taiwan operations.

• The principal asset classes are government and corporate bonds.

• The asset return models are similar to the models as described for UK insurance operations below.

• The volatility of equity returns ranges from 18 per cent to 35 per cent, and the volatility of government bond yields ranges from 0.9 per cent to 2.3 per cent for all periods shown.

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(v) US operations (Jackson)

• Interest rates and equity returns are projected using a log‑normal generator reflecting historical market data.

• Corporate bond returns are based on treasury yields plus a spread that reflects current market conditions.

• The volatility of equity returns ranges from 18 per cent to 27 per cent for all periods shown, and the standard deviation of interest rates ranges from 2.4 per cent to 2.7 per cent (half year and full year 2016: from 2.3 per cent to 2.6 per cent).

(vi) UK insurance operations

• Interest rates are projected using a stochastic interest rate model calibrated to the current market yields.

• Equity returns are assumed to follow a log‑normal distribution.

• The corporate bond return is calculated based on a risk‑free return plus a mean‑reverting spread.

• Property returns are also modelled on a risk‑free return plus a risk premium with a stochastic process reflecting total property returns.

• The standard deviation of equities and property ranges from 15 per cent to 20 per cent for all periods shown.

Operating assumptions

Best estimate assumptions

Best estimate assumptions are used for the cash flow projections, where best estimate is defined as the mean of the distribution of future possible outcomes. The assumptions are reviewed actively and changes are made when evidence exists that material changes in future experience are reasonably certain.

Assumptions required in the calculation of the value of options and guarantees, for example relating to volatilities and correlations, or dynamic algorithms linking liabilities to assets, have been set equal to the best estimates and, wherever material and practical, reflect any dynamic relationships between the assumptions and the stochastic variables.

Demographic assumptions

Persistency, mortality and morbidity assumptions are based on an analysis of recent experience, but also reflect expected future experience. Where relevant, when calculating the time value of financial options and guarantees, policyholder withdrawal rates vary in line with the emerging investment conditions according to management’s expectations.

Expense assumptions

Expense levels, including those of service companies that support the Group’s long‑term business operations, are based on internal expense analysis investigations and are appropriately allocated to acquisition of new business and renewal of in‑force business. Exceptional expenses are identified and reported separately. For mature business, it is Prudential’s policy not to take credit for future cost reduction programmes until the savings have been delivered. For businesses which are currently sub‑scale (China, Malaysia Takaful and Taiwan), expense overruns are reported where these are expected to be short‑lived.

For Asia operations, the expenses comprise costs borne directly and recharged costs from the Asia regional head office, that are attributable to covered business. The assumed future expenses for these operations also include projections of these future recharges. Development expenses are charged as incurred.

Corporate expenditure, which is included in other income and expenditure, comprises:

• expenditure for Group head office, to the extent not allocated to the PAC with‑profits funds, together with Solvency II implementation and restructuring costs, which are charged to the EEV basis results as incurred; and

• expenditure of the Asia regional head office that is not allocated to the covered business or asset management operations which is charged as incurred. These costs are primarily for corporate related activities and are included within corporate expenditure.

Tax rates

The assumed long‑term effective tax rates for operations reflect the incidence of taxable profits and losses in the projected cash flows as explained in note 12(a)(x).

The local standard corporate tax rates applicable for the most significant operations for 2016 and half year 2017 are as follows:

Standard corporate tax rates		%
Asia operations:
Hong Kong		16.5 per cent on 5 per cent of premium income
Indonesia		25.0
Malaysia		24.0
Singapore		17.0
US operations		35.0
UK operations	2016:	20.0; from 1 April 2017: 19.0; from 1 April 2020: 17.0

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Notes on the EEV basis results Continued

14 Total insurance and investment products new business[note (i)]

Group insurance operations – new business premiums and contributions

	Single premiums	Single premiums	Regular premiums	Regular premiums	Annual premium and contribution equivalents (APE) note 12(a)(ii)	Annual premium and contribution equivalents (APE) note 12(a)(ii)	Pres busi	ent value of new ness premiums (PVNBP) note 12(a)(ii)
	2017£m	2016£m	2017£m	2016£m	2017£m	2016£m	2017£m	2016£m
	Half year	Half year Full year	Half year	Half year Full year	Half year	Half year Full year	Half year	Half year Full year
Asia* US UK†	1131	1,003 2,397 7,816 15,608 4,936 9,836	1830	1,505 3,359 – – 99 177	1943	1,605 3,599 782 1,561 593 1,160	10095	8,679 19,271 7,816 15,608 5,267 10,513
	, 9602		, –		, 960		, 9602
	, 6,251		96		721		, 6,616
Grouptotal	16,984	13,755 27,841	1,926	1,604 3,536	3,624	2,980 6,320	26,313	21,762 45,392
Asia insurance operations Cambodia Hong Kong Indonesia Malaysia Philippines Singapore Thailand Vietnam		– – 506 1,140 84 236 52 110 36 91 174 523 36 80 3 6		6 14 817 1,798 117 255 104 233 26 61 125 299 39 81 44 115		6 14 868 1,912 125 279 109 244 30 70 142 351 43 89 44 116		30 66 5,045 10,930 486 1,048 630 1,352 118 278 1,063 2,627 197 404 182 519
	–		8		8		37
	368		877		914		5190
	126		131		144		, 558
	33		125		128		623
	28		33		36		134
	323		163		195		1451
	53		37		42		, 199
	3		62		62		298
SE Asia operations including Hong Kong Chinanote (ii) Taiwan Indianote (iii)	934	891 2,186 74 124 14 36 24 51	1436	1,278 2,856 102 187 55 146 70 170	1529	1,367 3,075 109 199 56 150 73 175	8490	7,751 17,224 452 880 205 499 271 668
	141		, 173		, 187		, 827
	25		102		105		314
	31		119		122		464
Total Asia insurance operations	1,131	1,003 2,397	1,830	1,505 3,359	1,943	1,605 3,599	10,095	8,679 19,271
US insurance operations Variable annuities Elite Access (variable annuity) Fixed annuities Fixed index annuities Wholesale		4,995 10,653 990 2,056 285 555 277 508 1,269 1,836		– – – – – – – – – –		500 1,065 99 206 28 55 28 51 127 184		4,995 10,653 990 2,056 285 555 277 508 1,269 1,836
	6041		–		604		6041
	, 1101		–		110		, 1101
	, 245		–		24		, 245
	158		–		16		158
	2,057		–		206		2,057
Total US insurance operations	9,602	7,816 15,608	–	– –	960	782 1,561	9,602	7,816 15,608
UK and Europe insurance operations Individual annuities Bonds Corporate pensions Individual pensions Income drawdown Otherproducts		327 546 1,956 3,834 60 110 1,137 2,532 808 1,649 648 1,165		– – – – 68 121 21 35 – – 10 21		33 55 196 384 74 132 134 289 81 165 75 135		327 546 1,957 3,835 258 479 1,212 2,681 808 1,649 705 1,323
	120		–		12		120
	1742		–		174		1742
	, 77		67		75		, 286
	2609		18		279		2690
	, 1061		–		106		, 1061
	, 642		11		75		, 717
Total UK and Europe insurance operations	6,251	4,936 9,836	96	99 177	721	593 1,160	6,616	5,267 10,513
Grouptotal		13,755 27,841		1,604 3,536		2,980 6,320		21,762 45,392
	16,984		1,926		3,624		26,313

• New business premiums and contributions exclude the results attributable to the sold Korea life business for all periods presented. The half year 2016 comparatives have been adjusted from those previously published accordingly.

† No UK bulk annuity transactions were recorded in half year 2017 or half year 2016.

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Investment products – funds under management[notes (iv)(v)(vi)]

	Half year 2017£m
	1 Jan 2017 Market gross infows Redemptions Market exchange translation and other movements 30 Jun 2017
Eastspring Investments M&G	38042 11536 (9263) 4281 44596
	, , , , , 136,763 22,677 (15,498) 5,176 149,118
Grouptotal	174,805 34,213 (24,761) 9,457 193,714
	Half year 2016£m
	1 Jan 2016 Market gross infows Redemptions Market exchange translation and other movements 30 Jun 2016
Eastspring Investments M&G	30,281 6,163 (6,575) 2,859 32,728 126,405 9,731 (16,697) 10,217 129,656
Grouptotal	156,686 15,894 (23,272) 13,076 162,384

Notes

(i) The tables shown above are provided as an indicative volume measure of transactions undertaken in the reporting period that have the potential to generate profits for shareholders. The amounts shown are not, and not intended to be, reflective of premium income recorded in the IFRS income statement. A reconciliation of APE and gross earned premiums on an IFRS basis is provided in note II(g) within the EEV unaudited financial information.

The format of the tables shown above is consistent with the distinction between insurance and investment products as applied for previous financial reporting periods. With the exception of some US institutional business, products categorised as ‘insurance’ refer to those classified as contracts of long‑term insurance business for regulatory reporting purposes, ie falling within one of the classes of insurance specified in Part II of schedule 1 to the Regulated Activities Order under PRA regulations.

The details shown above for insurance products include contributions for contracts that are classified under IFRS 4 ‘Insurance Contracts’ as not containing significant insurance risk. These products are described as investment contracts or other financial instruments under IFRS. Contracts included in this category are primarily certain unit‑linked and similar contracts written in UK insurance operations and Guaranteed Investment Contracts and similar funding agreements written in US operations.

(ii) New business in China is included at Prudential’s 50 per cent interest in the China life operation.

(iii) New business in India is included at Prudential’s 26 per cent interest in the India life operation.

(iv) Investment products referred to in the tables for funds under management above are unit trust, mutual funds and similar types of retail fund management arrangements. These are unrelated to insurance products that are classified as ‘investment contracts’ under IFRS 4, although similar IFRS recognition and measurement principles apply to the acquisition costs and fees attaching to this type of business.

(v) Investment flows for half year 2017 exclude Eastspring Money Market Funds gross inflows of £96,704 million (half year 2016: gross inflows of £62,302 million) and net inflows of £499 million (half year 2016: net inflows of £656 million).

(vi) New business and market gross inflows and redemptions have been translated at an average exchange rate for the period applicable. Funds under management at points in time are translated at the exchange rate applicable to those dates.

15 Sale of Korea life business

On 18 May 2017, the Group announced it had completed the sale of its life insurance subsidiary in Korea, PCA Life Insurance, to Mirae Asset Life Insurance for KRW 170 billion (£117 million at 17 May 2017 closing exchange rate) following regulatory approval. The proceeds, net of £9 million of related expenses, were £108 million. Upon disposal, £76 million of required capital was released and a corresponding increase in free surplus was recognised. There were no other impacts on the half year 2017 results.

In order to facilitate comparisons of the Group’s retained businesses, the EEV basis operating profit excludes the contribution from the Korea life business, and reclassifies it separately within non‑operating results. This approach is consistent with the presentation of operating profit for full year 2016 reported in the Group 2016 Annual Report. The half year 2016 comparative results have been similarly adjusted. For full year 2016, the non‑operating loss attributable to the Korea life business also includes the adjustment to the carrying value of the business following its reclassification as held for sale.

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05 Additional information

130 Additional financial information 152 Risk factors

159 Corporate governance

160 Disclosure of interests of Directors 166 Shareholder information 167 How to contact us

‘Thanks to my adviser, I can sleep easy at night knowing that I should be able to achieve my future plans because of the financial security my investments with Prudential should provide.’ Helen’s story Prudential UK & Europe

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Index to the additional financial information*

I. IFRS profit and loss information

• 131 a Analysis of long‑term insurance business pre‑tax IFRS operating profit based on longer‑term investment returns by driver

• 137 b Asia operations – analysis of IFRS operating profit by business unit

• 138 c Analysis of asset management operating profit based on longer‑term investment returns

• 140 d Contribution to UK life financial metrics from specific management actions undertaken to position the balance sheet more efficiently under the Solvency II regime

II. Other information

• 141 a Holding company cash flow 142 b Funds under management 144 c Solvency II capital position at 30 June 2017 148 d Option schemes 150 e Foreign currency source of key metrics 151 f Reconciliation between IFRS and EEV shareholders’ funds 151 g Reconciliation of APE new business sales to earned premiums

• The additional financial information (set out in sections I(a) to II(g)) is not covered by the KPMG independent review opinion on page 90.

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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:

• i 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.

• ii 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.

• iii With-profits business represents the gross of tax shareholders’ transfer from the with‑profits fund for the period.

• iv Insurance margin primarily represents profits derived from the insurance risks of mortality and morbidity.

• v Margin on revenues primarily represents amounts deducted from premiums to cover acquisition costs and administration expenses. vi 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).

• vii 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.

	Half year 2017
	Asia £m US £m UK £m Total £m Average liability note (iv) £m Margin note(ii) bps
Spread income Fee income With‑profts Insurance margin Margin on revenues Expenses: Acquisition costsnote (i) Administration expenses DAC adjustmentsnote (v) Expected return on shareholder assets	108 401 74 583 89314 131
	, 103 1145 31 1279 164152 156
	, , , 30 – 142 172 132701 26
	, 658 472 22 1152
	, 1056 – 82 1138
	, ,
	(736) (463) (42) (1241) 3624 (34)%
	, , (471) (593) (67) (1131) 259451 (87)
	, , 66 117 3 186
	56 – 47 103
Longevity reinsurance and other management actions to improve solvency	870 1079 292 2241
	, , – – 188 188
Long‑term business operating proft based on longer‑term investment returns	870 1,079 480 2,429

See notes at the end of this section.

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Additional financial information Continued

I IFRS profit and loss information continued

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

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

See notes at the end of this section.

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

See notes at the end of this section.

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Margin analysis of long-term insurance business – Asia

Long-term business		Asia note (vi)
	Half year 2017	Half year 2016 AER	Half year 2016 CER note (iii)
	Proft £m Average liability note (iv) £m Margin note (ii) bps	Proft £m Average liability note (iv) £m Margin note (ii) bps	Proft £m Average liability note (iv) £m Margin note (ii) bps
Spread income Fee income With‑profts Insurance margin Margin on revenues Expenses: Acquisition costsnote (i) Administration expenses DAC adjustmentsnote (v) Expected return on shareholder assets	108 15776 137	81 12,637 128 82 14,951 110 24 21,435 22 472 860 (573) 1,605 (36)% (369) 27,588 (268) 51 39	91 13,886 131 92 16,240 113 27 23,271 23 532 965 (644) 1,814 (36)% (412) 30,126 (274) 56 45
	, 103 18170 113
	, 30 28772 21
	, 658
	1056
	,
	(736) 1943 (38)%
	, (471) 33946 (278)
	, 66
	56
Operating proft 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.

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Additional financial information Continued

I IFRS profit and loss information continued

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

Long-term business		US
	Half year 2017	Half year 2016 AER	Half year 2016 CER note (iii)
	Proft £m Average liability note (iv) £m Margin note (ii) bps	Proft £m Average liability note (iv) £m Margin note (ii) bps	Proft £m Average liability note (iv) £m Margin note (ii) bps
Spread income Fee income Insurance margin Expenses: Acquisition costsnote (i) Administration expenses DAC adjustments Expected return on shareholder assets	401 39731 202	379 34,886 217 878 92,608 190 401 (412) 782 (53)% (452) 134,369 (67) 83 11	426 39,199 217 997 105,791 188 456 (469) 889 (53)% (513) 152,730 (67) 95 18
	, 1145 123464 186
	,, 472
	(463) 960 (48)%
	(593) 169180 (70)
	, 117
	–
Operating proft 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.

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

		Half year 2017£m	H	alf year 2016 AER£m	H	alf year 2016 CER£m note (iii)
	Other operating profts	Acquisition costs Total Incurred Deferred	Other operating profts	Acquisition costs Total Incurred Deferred	Other operating profts	Acquisition costs Total Incurred Deferred
Total operating proft before acquisition costs and DAC adjustments Less new business strain Other DAC adjustments – amortisation of previously deferred acquisition costs: Normal Deceleration	1425	1425	1,217	1,217 (412) 320 (92) (266) (266) 29 29	1,384	1,384 (469) 364 (105) (303) (303) 34 34
	,	, (463) 353 (110)
		(272) (272)
		36 36
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

	2017£m Half year	2016£m	%
		AER Half year CER Half year	Half year 2017 vs half year 2016 AER Half year 2017 vs half year 2016 CER
Spread businessnote (a) Fee businessnote (b) Life and other businessnote (c)	176 852 51	154 175 642 730 92 105	14% 1% 33% 17% (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:

• a) Spread business is the net operating profit for fixed annuity, fixed indexed annuity and guaranteed investment contracts and largely comprises spread income less costs.

• b) 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.

• c) 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.

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Additional financial information Continued

I IFRS profit and loss information continued

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

Long-term business	U	K
	Half year 2017	Half year 2016
	Proft £m Average liability note (iv) £m Margin note (ii) bps	Proft £m Average liability note (iv) £m Margin note (ii) bps
Spread income Fee income With‑profts Insurance margin Margin on revenues Expenses: Acquisition costsnote (i) Administration expenses DAC adjustments Expected return on shareholders’ assets	74 33807 44	96 32,623 59 29 21,495 27 138 92,674 30 25 86 (42) 593 (7)% (58) 54,118 (21) (2) 61
	, 31 22518 27
	, 142 103929 27
	, 22
	82
	(42) 721 (6)%
	(67) 56325 (24)
	, 3
	47
Longevity reinsurance and other management actions to improve solvency	292	333 140
	188
Operating proft 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).

Notes

• (i) The ratio for acquisition costs is calculated as a percentage of APE sales including with‑profits sales. Acquisition costs include only those relating to shareholder‑backed business. (ii) Margin represents the operating return earned in the period as a proportion of the relevant class of policyholder liabilities excluding unallocated surplus. The margin is on an annualised basis in which half year profits are annualised by multiplying by two.

• (iii) The half year 2016 comparative information has been presented at actual exchange rates and constant exchange rates so as to eliminate the impact of exchange translation. CER results are calculated by translating prior period results using the current period foreign exchange rates. All CER profit figures have been translated at current period average rates. For Asia CER average liability calculations the policyholder liabilities have been translated using current period opening and closing exchange rates. For the US CER average liability calculations the policyholder liabilities have been translated at the current period month end closing exchange rates. See also note A1.

• (iv) For UK and Asia, opening and closing policyholder liabilities have been used to derive an average balance for the period, as a proxy for average balances throughout the period. The calculation of average liabilities for Jackson is generally derived from month end balances throughout the period as opposed to opening and closing balances only. The average liabilities for fee income in Jackson have been calculated using daily balances instead of month end balances in order to provide a more meaningful analysis of the fee income, which is charged on the daily account balance. Average liabilities for spread income are based on the general account liabilities to which spread income attaches. Average liabilities used to calculate the administration expense margin exclude the REALIC liabilities reinsured to third parties prior to the acquisition by Jackson. Average liabilities are adjusted for business acquisitions and disposals in the period.

• (v) The DAC adjustment contains £10 million in respect of joint ventures and associate in half year 2017 (half year 2016: £14 million).

• (vi) 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.

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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.

	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
Hong Kong Indonesia Malaysia Philippines Singapore Thailand Vietnam	157	96 109 193 221 71 76 17 18 111 125 39 44 44 49	64% 44% 20% 5% 21% 13% 24% 17% 20% 6% 18% 5% 30% 16%	238 428 147 38 235 92 114
	232
	86
	21
	133
	46
	57
South-east Asia operations including Hong Kong China Taiwan Other Non‑recurrent itemsnote (ii)	732	571 642 20 21 13 17 23 28 42 46	28% 14% 95% 86% 46% 12% 17% (4)% 29% 17%	1,292 64 35 49 67
	39
	19
	27
	54
Total insurance operationsnote (i) Development expenses	871	669 754 (2) (2)	30% 16% 50% 50%	1,507 (4)
	(1)
Total long-term business operating proft EastspringInvestments	870	667 752 61 69	30% 16% 36% 20%	1,503 141
	83
Total Asia operations	953	728 821	31% 16%	1,644

• 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

(i) 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:

	2017£m	2016£m
	Half year	AER Half year CER Half year AER Full year
New business strain† Business in force Non‑recurrent itemsnote (ii)	(40)	(17) (19) (29) 644 727 1,469 42 46 67
	857
	54
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.

(ii) 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.

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Additional financial information Continued

I IFRS profit and loss information continued

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

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

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

	Full year 2016£m	Full year 2016£m
	M&G note (ii) Eastspring Investments note (ii) Prudential Capital US Total
Operating income before performance‑related fees Performance‑related fees	923 353 118 235 1,629 33 7 – – 40
Operating income (net of commission)note (i) Operating expensenote (i) Share of associate’s results Group’s share of tax onjoint ventures’ operating proft	956 360 118 235 1,669 (544) (198) (91) (239) (1,072) 13 – – – 13 – (21) – – (21)
Operating proft based on longer‑term investment returns	425 141 27 (4) 589
Average funds under management Margin based on operating income* Cost/income ratio†	£250.4bn £109.0bn 37bps 32bps 59% 56%

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Notes

(i) Operating income and expense include the Group’s share of contributions from joint ventures (but excludes any contribution from the associate). In the income statement as shown in note B2 of the IFRS financial statements, the net post‑tax income of the joint ventures and associate is shown as a single item. (ii) M&G and Eastspring Investments can be further analysed as follows:

M&G and Eastspring Investments can be further analysed as follows:
	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 30 Jun 2016 31 Dec 2016	285 86 210 21 495 37
	247 87 193 21 440 36 504 86 419 22 923 37

	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 30 Jun 2016 31 Dec 2016	120 57 85 20 205 33
	91 53 64 19 155 30 211 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.

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Additional financial information Continued

I IFRS profit and loss information continued

I(d) Contribution to UK life financial metrics from specific management actions undertaken to position

the balance sheet more efficiently under the 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

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

Underlying free surplus generation of UK long-term business

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

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

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

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II Other information

II(a) Holding company cash flow*

	2017£m	2016£m
	Half year	Half year Full year
Net cash remitted by business units: UK life net remittances to the Group With‑profts remittance Shareholder‑backed business remittance		215 215 – 85
	215
	–
Other UKpaid to Group	215	215 300 131 147
	–
Total UK net remittances to the Group US remittances to the Group Total Asia net remittances to the Group M&G remittances to the Group Prudential Capital remittances to the Group	215	346 447 339 420 258 516 150 290 25 45
	475
	350
	175
	15
Net remittances to the Group from business units† Net interest paid Tax received Corporate activities	1230	1,118 1,718 (157) (333) 67 132 (109) (215)
	, (207)
	84
	(103)
Total central outfows	(226)	(199) (416)
Net operating holding company cash fow before dividend Dividendpaid	1004	919 1,302 (935) (1,267)
	, (786)
Operating holding company cash fow after dividend Non‑operatingnet cash fow‡	218	(16) 35 382 335
	(186)
Total holding company cash fow Cash and short‑term investments at beginning of period Foreign exchange movements	32	366 370 2,173 2,173 7 83
	2626
	, (1)
Cash and short-term investments at end ofperiod	2,657	2,546 2,626

• 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.

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Additional financial information Continued

II Other information continued

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

	2017£bn	2016£bn
	30 Jun	30 Jun 31 Dec
Business area: Asia operations US operations UK operations		66.3 69.6 156.5 173.3 180.9 185.0
	75.8
	174.6
	193.8
Prudential Group funds under managementnote (i) External fundsnote (ii)	444.2	403.7 427.9 158.6 171.4
	190.7
Total funds under management	634.9	562.3 599.3

Note (i)	s Prudential Group funds under management comprise:	2017£bn	2016£bn
		30 Jun	30 Jun 31 Dec
	Total investments per the consolidated statement of fnancial position Less: investments in joint ventures and associates accounted for using the equity method Internally managed funds held in joint ventures Investment properties which are held for sale or occupied by the Group (included in other IFRS captions)	437.4	398.2 421.7 (1.1) (1.2) 6.2 7.0 0.4 0.4
		(1.3)
		7.7
		0.4
	Prudential Group funds under management	444.2	403.7 427.9

(ii) 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.

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(b) Investment products – external funds under management

	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
At beginning of period Market gross infows Redemptions Market exchange translation and other movements	45756 136763 182519	36,287 126,405 162,692 68,465 9,731 78,196 (68,221) (16,697) (84,918) 3,618 10,217 13,835	36,287 126,405 162,692 164,004 22,841 186,845 (161,766) (30,931) (192,697) 7,231 18,448 25,679
	,, , 108240 22677 130917
	, , , (105468) (15498) (120966)
	,,, 4,395 5,176 9,571
At end ofperiod	52,923 149,118 202,041	40,149 129,656 169,805	45,756 136,763 182,519

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).

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

	Eastspring Investments note	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
External funds under management Internal funds under management	52.9	40.1 45.7 64.8 72.2	149.1	129.7 136.8 125.7 128.1
	77.6		132.4
Total funds under management	130.5	104.9 117.9	281.5	255.4 264.9

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).

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Additional financial information Continued

II Other information continued

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.

Estimated Groupshareholder SolvencyII capitalposition 30 Jun 2017*£bn	30 Jun 2016£bn 31 Dec 2016£bn
Own funds 25.6 Solvency capital requirement 12.7 Surplus 12.9 Solvencyratio 202%	21.1 24.8 12.0 12.3 9.1 12.5 175% 201%

• 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.

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.

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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.

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

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:

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

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Additional financial information Continued

II Other information continued

II(c) Solvency II capital position at 30 June 2017 continued Reconciliation of IFRS equity to Group Solvency II Shareholder Own Funds

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

Impact of market sensitivities	30 Jun 2017	31 Dec 2016
	Surplus£bn Ratio	Surplus£bn Ratio
Base position Impact of: 20% instantaneous fall in equity markets 40% fall in equity markets1 50 basis points reduction in interest rates2,3 100 basis points increase in interest rates3 100 basispoints increase in credit spreads4	12.9 202%	12.5 201% 0.0 3% (1.5) (7)% (0.6) (9)% 1.0 13% (1.1) (3)%
	0.1 4%
	(1.2) (3)%
	(0.4) (9)%
	0.9 18%
	(1.1) (3)%

Notes

1 Where hedges are dynamic, rebalancing is allowed for by assuming an instantaneous 20 per cent fall followed by a further 20 per cent fall over a four‑week period. 2 Subject to a floor of zero.

3 Allowing for further transitional recalculation after the interest rate stress.

4 US Risk Based Capital solvency position included using a stress of 10 times expected credit defaults.

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.

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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.

Estimated UK shareholder SolvencyII capitalposition 30 Jun 2017*£bn	30 Jun 2016£bn 31 Dec 2016£bn
Own funds 13.0 Solvency capital requirement 7.7 Surplus 5.3 Solvencyratio 168%	10.6 12.0 7.7 7.4 2.9 4.6 138% 163%

• 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.

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.

Estimated UK with-profts SolvencyII capitalposition 30 Jun 2017£bn	30 Jun 2016£bn 31 Dec 2016£bn
Own funds 8.6 Solvency capital requirement 4.5 Surplus 4.1 Solvencyratio 192%	8.2 8.4 4.7 4.7 3.5 3.7 176% 179%

Reconciliation of UK with-profits IFRS unallocated surplus to Solvency II Own Funds[2]

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

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

Statement of independent review in respect of Solvency II Capital Position at 30 June 2017[3]

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 on page 90.

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Additional financial information Continued

II Other information continued

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

Date of grant Exercise price £	Exercise period	Number of shares under options
	Beginning End	Beginning of period Granted Exercised Cancelled Forfeited Lapsed End of period
16 Sep 11 4.66 21 Sep 12 6.29 20 Sep 13 9.01 20 Sep 13 9.01 23 Sep 14 11.55 23 Sep 14 11.55 22 Sep 15 11.11 22 Sep 15 11.11 21 Sep 16 11.04 21 Sep16 11.04	01 Dec 16 31 May 17 01 Dec 17 31 May 18 01 Dec 16 31 May 17 01 Dec 18 31 May 19 01 Dec 17 31 May 18 01 Dec 19 31 May 20 01 Dec 18 31 May 19 01 Dec 20 31 May 21 01 Dec 19 31 May 20 01 Dec 21 31 May22	36006 – (36006) – – – –
		, , 119886 – – – (477) (1431) 117978
		, , , 73812 – (69644) – (998) (1795) 1375
		, , , , 70258 – (1698) – (332) (963) 67265
		, , , 759088 – (14350) (10013) (9828) (5613) 719284
		, , , , , , 390761 – (5098) (786) (524) (5966) 378387
		, , , , 933241 – (10100) (16976) (7046) (15022) 884097
		, , , , , , 223807 – (486) (810) (3240) (1134) 218137
		, , , , 719,147 – (710) (11,311) (8,948) (6,171) 692,007
		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.

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International savings-related share option scheme

Date of grant Exercise price £	Exercise period	Number of shares under options
	Beginning End	Beginning of period Granted Exercised Cancelled Forfeited Lapsed End of period
16 Sep 11 4.66 21 Sep 12 6.29 21 Sep 12 6.29 20 Sep 13 9.01 20 Sep 13 9.01 23 Sep 14 11.55 23 Sep 14 11.55 22 Sep 15 11.11 22 Sep 15 11.11 21 Sep16 11.04	01 Dec 16 31 May 17 01 Dec 15 31 May 16 01 Dec 17 31 May 18 01 Dec 16 31 May 17 01 Dec 18 31 May 19 01 Dec 17 31 May 18 01 Dec 19 31 May 20 01 Dec 18 31 May 19 01 Dec 20 31 May 21 01 Dec 19 31 May20	722 – (722) – – – –
		2725 – (2725) – – – –
		, , 14501 – (154) (225) – – 14122
		, , 131680 – (126373) (149) (7) (5151) –
		, , , 43676 – (1396) – (600) – 41680
		, , , 7709 – – – – – 7709
		, , 4464 – – – – – 4464
		, , 23556 – – – – – 23556
		, , 3,240 – – – – – 3,240
		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

Date of grant Exercise price £	Exercise period	Number of shares under options
	Beginning End	Beginning of period Granted Exercised Cancelled Forfeited Lapsed End of period
16 Sep 11 4.66 21 Sep 12 6.29 20 Sep 13 9.01 20 Sep 13 9.01 23 Sep 14 11.55 23 Sep 14 11.55 22 Sep 15 11.11 22 Sep 15 11.11 21 Sep 16 11.04 21 Sep16 11.04	01 Dec 16 31 May 17 01 Dec 17 31 May 18 01 Dec 16 31 May 17 01 Dec 18 31 May 19 01 Dec 17 31 May 18 01 Dec 19 31 May 20 01 Dec 18 31 May 19 01 Dec 20 31 May 21 01 Dec 19 31 May 20 01 Dec 21 31 May22	29936 – (29936) – – – –
		, , 28001 – – – – – 28001
		, , 346321 – (337618) (300) – – 8403
		, , , 406850 – – (405) – – 406445
		, , 596435 – – (10530) – – 585905
		, , , 502793 – – (4932) (1298) – 496563
		, , , , 480825 – – (8199) – – 472626
		, , , 405994 – – (2700) – – 403294
		, , , 334,276 – – – – – 334,276
		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.

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Additional financial information Continued

II Other information continued

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

	Underlying
	free surplus
	generated for
	total insurance
	and asset	Pre-tax
	management operations	operating proft	Shareholders’ funds
	%	%	%
		notes 2,3,4	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

	Post-tax
	new	Post-tax
	business profts	operating proft	Shareholders’ funds
	%	%	%
		notes 2,3,4	notes 2,3,4
US dollar linked1	52	44	37
Other Asia currencies	12	16	13
Total Asia UK sterling3,4	64 10	60 9	50 30
US dollar4	26	31	20
Total	100	100	100

Notes

1 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.

2 Includes long‑term, asset management business and other businesses.

3 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.

4 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.

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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:

	2017£m	2016£m
	30 Jun	30 Jun 31 Dec
EEV shareholders’ funds Less: Value of in‑force business of long‑term businessnote (a) Deferred acquisition costs assigned zero value for EEV purposes Othernote (b)	40520	34,981 38,968 (21,785) (24,937) 8,068 9,170 (6,659) (8,535)
	, (26104)
	, 9076
	, (8,043)
IFRS shareholders’ funds	15,449	14,605 14,666

Notes

• (a) 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.

(b) 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.

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:

	2017£m	2016£m
	Half year	Half year Full year
Annual premium equivalents (APE) as published Adjustment to include 100% of single premiums on new business sold in the periodnote (a) Contribution from the sold Korea life business Premiums from in‑force business and other adjustmentsnote (b)	3624	2,980 6,320 12,379 25,057 88 192 2,891 7,412
	, 15286
	, –
	3,195
Grosspremiums earned	22,105	18,338 38,981
Outward reinsurancepremiums	(947)	(944) (2,020)
Earnedpremiums, net of reinsurance as shown in the IFRS fnancial statements	21,158	17,394 36,961

Notes

(a) APE new business sales only include one‑tenth of single premiums, recorded on policies sold in the period. Gross premiums earned include 100 per cent of such premiums.

(b) Other adjustments principally include amounts in respect of the following:

• Gross premiums earned include premiums from existing in‑force business as well as new business. The most significant amount is recorded in Asia, where a significant portion of regular premium business is written. Asia in‑force premiums form the vast majority of the other adjustment amount;

• 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.

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Risk factors

A number of risk factors affect Prudential’s operating results and financial condition and, accordingly, the trading price of its shares. The risk factors mentioned below should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties. The information given is as of the date of this document, and any forward‑looking statements are made subject to the reservations specified below under ‘Forward‑looking statements’.

Prudential’s approaches to managing risks are explained in the ‘Group Chief Risk Officer’s report on the risks facing our business and how these are managed’ section of this document.

Risks relating to Prudential’s business

Prudential’s businesses are inherently subject to market fluctuations and general economic conditions

Uncertainty or negative trends in international economic and investment climates could adversely affect Prudential’s business and profitability. Prudential operates against a challenging background of periods of significant uncertainty and volatility in global capital and equity markets and interest rates (which in some jurisdictions are negative), together with widespread economic uncertainty. For example, government interest rates remain at or near historic lows in the US, the UK and some Asian countries in which Prudential operates. These factors could have a material adverse effect on Prudential’s business and profitability.

In the future, the adverse effects of such factors would be felt principally through the following items:

• Investment impairments and/or reduced investment returns, which could reduce Prudential’s capital and impair its ability to write significant volumes of new business, increase the potential adverse impact of product guarantees, or have a negative impact on its assets under management and profit;

• Higher credit defaults and wider credit and liquidity spreads resulting in realised and unrealised credit losses;

— Failure of counterparties who have transactions with Prudential (eg banks and reinsurers) to meet commitments that could give rise to a negative impact on Prudential’s financial position and on the accessibility or recoverability of amounts due or, for derivative transactions, adequate collateral not being in place;

• Estimates of the value of financial instruments being difficult because in certain illiquid or closed markets, determining the value at which financial instruments can be realised is highly subjective. Processes to ascertain such values require substantial elements of judgement, assumptions and estimates (which may change over time); and

— Increased illiquidity also adds to uncertainty over the accessibility of financial resources and may reduce capital resources as valuations decline. For example, this could occur where external capital is unavailable at sustainable cost, increased liquid assets are required to be held as collateral under derivative transactions or redemption restrictions are placed on Prudential’s investments in illiquid funds. In addition, significant redemption requests could also be made on Prudential’s issued funds and while this may not have a direct impact on the Group’s liquidity, it could result in reputational damage to Prudential.

Global financial markets are subject to uncertainty and volatility created by a variety of factors, including concerns over: the expected change in accommodative monetary policies in the US, the UK and other jurisdictions with the risk of a disorderly repricing of inflation expectations and global bond yields, sovereign debt, a general slowing in world growth, the increased level of geopolitical risk and policy‑related uncertainty and potentially negative socio‑political events.

On 29 March 2017 the UK submitted the formal notification of its intention to withdraw from the EU pursuant to Article 50 of the Treaty on the European Union, as amended. Following submission of this notification, the UK has a maximum period of two years to negotiate the terms of its withdrawal from the EU. If no formal withdrawal agreement is reached between the UK and the EU, then it is expected the UK’s membership of the EU will automatically terminate two years after the submission of the notification of the UK’s intention to withdraw from the EU. The UK’s decision to leave the EU will have political, legal and economic ramifications for both the UK and the EU, although these are expected to be more pronounced for the UK. The Group has several UK domiciled operations, including Prudential UK and M&G, and these may be impacted by a UK withdrawal from the EU. The potential outcome of the negotiations on UK withdrawal and any subsequent negotiations on trade and access to the country’s major trading markets, including the single EU market, is currently unknown. The ongoing uncertainty of when the UK will leave the EU, whether any form of transitional arrangements will be agreed between the UK and the EU, and the possibility of a lengthy period before negotiations are concluded may increase volatility in the markets where the Group operates and create the potential for a general downturn in economic activity and for further or prolonged interest rate reductions in some jurisdictions due to monetary easing and investor sentiment.

More generally, upheavals in the financial markets may affect general levels of economic activity, employment and customer behaviour. As a result, insurers may experience an elevated incidence of claims, lapses, or surrenders of policies, and some policyholders may choose to defer or stop paying insurance premiums. The demand for insurance products may also be adversely affected. In addition, there may be a higher incidence of counterparty failures. If sustained, this environment is likely to have a negative impact on the insurance sector over time and may consequently have a negative impact on Prudential’s business and its balance sheet and profitability. For example, this could occur if the recoverable value of intangible assets for bancassurance agreements and deferred acquisition costs are reduced. New challenges related to market fluctuations and general economic conditions may continue to emerge.

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For some non‑unit‑linked investment products, in particular those written in some of the Group’s Asian operations, it may not be possible to hold assets which will provide cash flows to match those relating to policyholder liabilities. This is particularly true in those countries where bond markets are not developed and in certain markets where regulated premium and claim values are set with reference to the interest rate environment prevailing at the time of policy issue. This results in a mismatch due to the duration and uncertainty of the liability cash flows and the lack of sufficient assets of a suitable duration. While this residual asset/liability mismatch risk can be managed, it cannot be eliminated. Where interest rates in these markets remain lower than those used to calculate premium and claim values over a sustained period, this could have a material adverse effect on Prudential’s reported profit.

In the US, fluctuations in prevailing interest rates can affect results from Jackson which has a significant spread‑based business, with the significant proportion of its assets invested in fixed income securities. In particular, fixed annuities and stable value products written by Jackson expose Prudential to the risk that changes in interest rates, which are not fully reflected in the interest rates credited to customers, will reduce spread. The spread is the difference between the rate of return Jackson is able to earn on the assets backing the policyholders’ liabilities and the amounts that are credited to policyholders in the form of benefit increases, subject to minimum crediting rates. Declines in spread from these products or other spread businesses that Jackson conducts, and increases in surrender levels arising from interest rate rises, could have a material impact on its businesses or results of operations.

Jackson also writes a significant amount of variable annuities that offer capital or income protection guarantees. The value of these guarantees is affected by market factors (such as interest rates, equity values, bond spreads and realised volatility) and policyholder behaviour. Jackson manages its exposure to market risks arising on these guarantees by using a derivative hedging programme. However, there could be market circumstances where the derivatives that Jackson enters into to hedge its market risks may not fully cover its exposures under the guarantees. The cost of the guarantees that remain unhedged will also affect Prudential’s results.

In addition, Jackson hedges the guarantees on its variable annuity book on an economic basis (with consideration of the local regulatory position) and, thus, accepts variability in its accounting results in the short term in order to achieve the appropriate result on these bases. In particular, for Prudential’s Group IFRS reporting, the measurement of the Jackson variable annuity guarantees is typically less sensitive to market movements than for the corresponding hedging derivatives, which are held at market value. However, depending on the level of hedging conducted regarding a particular risk type, certain market movements can drive volatility in the economic or local regulatory results that may be less significant under IFRS reporting.

A significant part of the profit from Prudential’s UK insurance operations is related to bonuses for policyholders declared on with‑profits products, which are broadly based on historical and current rates of return on equity, real estate and fixed income securities, as well as Prudential’s expectations of future investment returns. This profit could be lower in a sustained low interest rate environment.

Prudential is subject to the risk of potential sovereign debt credit deterioration owing to the amounts of sovereign debt obligations held in its investment portfolio

Investing in sovereign debt creates exposure to the direct or indirect consequences of political, social or economic changes (including changes in governments, heads of state or monarchs) in the countries in which the issuers are located and the creditworthiness of the sovereign. Investment in sovereign debt obligations involves risks not present in debt obligations of corporate issuers. In addition, the issuer of the debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or pay interest when due in accordance with the terms of such debt, and Prudential may have limited recourse to compel payment in the event of a default. A sovereign debtor’s willingness or ability to repay principal and to pay interest in a timely manner may be affected by, among other factors, its cash flow situation, its relations with its central bank, the extent of its foreign currency reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor’s policy toward local and international lenders, and the political constraints to which the sovereign debtor may be subject.

Moreover, governments may use a variety of techniques, such as intervention by their central banks or imposition of regulatory controls or taxes, to devalue their currencies’ exchange rates, or may adopt monetary and other policies (including to manage their debt burdens) that have a similar effect, all of which could adversely impact the value of an investment in sovereign debt even in the absence of a technical default. Periods of economic uncertainty may affect the volatility of market prices of sovereign debt to a greater extent than the volatility inherent in debt obligations of other types of issuers.

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Risk factors Continued

In addition, if a sovereign default or other such events described above were to occur, other financial institutions may also suffer losses or experience solvency or other concerns, and Prudential might face additional risks relating to any debt of such financial institutions held in its investment portfolio. There is also risk that public perceptions about the stability and creditworthiness of financial institutions and the financial sector generally might be affected, as might counterparty relationships between financial institutions. If a sovereign were to default on its obligations, or adopted policies that devalued or otherwise altered the currencies in which its obligations were denominated this could have a material adverse effect on Prudential’s financial condition and results of operations.

Prudential is subject to the risk of exchange rate fluctuations owing to the geographical diversity of its businesses

Due to the geographical diversity of Prudential’s businesses, Prudential is subject to the risk of exchange rate fluctuations. Prudential’s operations in the US and Asia, which represent a significant proportion of operating profit based on longer‑term investment returns and shareholders’ funds, generally write policies and invest in assets denominated in local currencies. Although this practice limits the effect of exchange rate fluctuations on local operating results, it can lead to significant fluctuations in Prudential’s consolidated financial statements upon the translation of results into pounds sterling. This exposure is not currently separately managed. The currency exposure relating to the translation of reported earnings could impact on financial reporting ratios such as dividend cover, which is calculated as operating profit after tax on an IFRS basis, divided by the dividends relating to the reporting year. The impact of gains or losses on currency translations is recorded as a component of shareholders’ funds within other comprehensive income. Consequently, this could impact on Prudential’s gearing ratios (defined as debt over debt plus shareholders’ funds). The Group’s surplus capital position for regulatory reporting purposes may also be affected by fluctuations in exchange rates with possible consequences for the degree of flexibility that Prudential has in managing its business.

Prudential conducts its businesses subject to regulation and associated regulatory risks, including the effects of changes in the laws, regulations, policies and interpretations and any accounting standards in the markets in which it operates

Changes in government policy and legislation (including in relation to tax and capital controls), regulation or regulatory interpretation applying to companies in the financial services and insurance industries in any of the markets in which Prudential operates, and decisions taken by regulators in connection with their supervision of members of the Group, which in some circumstances may be applied retrospectively, may adversely affect Prudential’s product range, distribution channels, competitiveness, profitability, capital requirements, risk management approaches, corporate or governance structure and, consequently, reported results and financing requirements. Also, regulators in jurisdictions in which Prudential operates may impose requirements affecting the allocation of capital and liquidity between different business units in the Group, whether on a geographic, legal entity, product line or other basis. Regulators may change the level of capital required to be held by individual businesses or could introduce possible changes in the regulatory framework for pension arrangements and policies, the regulation of selling practices and solvency requirements. In addition, there could be changes to the maximum level of non‑domestic ownership by foreign companies in certain jurisdictions. Furthermore, as a result of interventions by governments in response to recent financial and global economic conditions, it is widely expected that there will continue to be a substantial increase in government regulation and supervision of the financial services industry, including the possibility of higher capital requirements, restrictions on certain types of transactions and enhanced supervisory powers.

The European Union’s Solvency II Directive came into effect on 1 January 2016. This measure of regulatory capital is more volatile than under the previous Solvency I regime and regulatory policy may evolve under the new regime. The European Commission has in late 2016 begun a review of some aspects of the Solvency II legislation, which is expected to continue until 2021 and covers, among other things, a review of the Long Term Guarantee measures. Prudential applied for, and has been granted approval by the UK Prudential Regulation Authority to use the following measures when calculating its Solvency II capital requirements: the use of an internal model, the ‘matching adjustment’ for UK annuities, the ‘volatility adjustment’ for selected US dollar‑ denominated business, and UK transitional measures. Prudential also has permission to use ‘deduction and aggregation’ as the method by which the contribution of the Group’s US insurance entities to the Group’s solvency is calculated, which in effect recognises surplus in US insurance entities in excess of 250 per cent of local US Risk Based Capital requirements. There is a risk that in the future changes are required to be made to the approved internal model and these related applications which could have a material impact on the Group Solvency II capital position. Where internal model changes are subject to regulatory approval, there is a risk that the approval is delayed or not given. In such circumstances, changes in our risk profile would not be able to be appropriately reflected in our internal model, which could have a material impact on the Group’s Solvency II capital position. The UK’s decision to leave the EU could result in significant changes to the regulatory regime under which the Group operates.

Currently there are also a number of other global regulatory developments which could impact the way in which Prudential is supervised in its many jurisdictions. These include the Dodd‑Frank Wall Street Reform and Consumer Protection Act (Dodd‑Frank Act) in the US, the work of the Financial Stability Board (FSB) on Global Systemically Important Insurers (G‑SIIs) and the proposed amendments to Markets in Financial Instruments Directive (the ‘MiFID2 Directive’) in the EU.

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In addition, regulators in a number of jurisdictions in which the Group operates are further developing local capital regimes; this includes potential future developments in Solvency II in the UK (as referred to above), National Association of Insurance Commissioners’ reforms in the US, and amendments to certain local statutory regimes in some territories in Asia. These changes and their potential impact on the Group remain uncertain.

The Dodd‑Frank Act represents a comprehensive overhaul of the financial services industry within the US including reforms to financial services entities, products and markets. The full impact of the Dodd‑Frank Act on Prudential’s businesses remains unclear, as many of its provisions are primarily focused on the banking industry, have a delayed effectiveness and/or require rule making or other actions by various US regulators over the coming years. There is also uncertainty surrounding future changes to the Dodd‑Frank Act.

Prudential’s designation as a G‑SII was reaffirmed on 21 November 2016. As a result of this designation, Prudential is subject to additional regulatory requirements, including a requirement to submit enhanced risk management plans (such as a Group‑wide Recovery Plan, a Systemic Risk Management Plan and a Liquidity Risk Management Plan) to a Crisis Management Group (CMG) comprised of an international panel of regulators.

The G‑SII regime also introduces capital requirements in the form of a Higher Loss Absorption (HLA) requirement. While this requirement was initially intended to come into force in 2019, this has now been postponed to 2022. The HLA is also now intended to be based on the Insurance Capital Standard (ICS). This is being developed by the IAIS as the Pillar 1 capital requirement under ComFrame to be applied for Internationally Active Insurance Groups (IAIGs), with a target to finalise a version for implementation in 2019. (ComFrame will more generally establish a set of common principles and standards designed to assist regulators in addressing risks that arise from insurance groups with operations in multiple jurisdictions.)

Various jurisdictions in which Prudential operates have created investor compensation schemes that require mandatory contributions from market participants in some instances in the event of a failure of a market participant. As a major participant in the majority of its chosen markets, circumstances could arise where Prudential, along with other companies, may be required to make such contributions.

The Group’s accounts are prepared in accordance with current International Financial Reporting Standards (IFRS) applicable to the insurance industry. The International Accounting Standards Board (IASB) introduced a framework that it described as Phase I which, under its standard IFRS 4 permitted insurers to continue to use the statutory basis of accounting for insurance assets and liabilities that existed in their jurisdictions prior to January 2005. In May 2017, the IASB published its replacement standard on insurance accounting (IFRS 17, ‘Insurance Contracts’), which will have the effect of introducing fundamental changes to the statutory reporting of insurance entities that prepare accounts according to IFRS from 2021. The European Union will apply its usual process for assessing whether the standard meets the necessary criteria for endorsement. With the publication of IFRS 17, the Group is familiarising itself with the complex requirements of this standard and considering its potential impact. The effect of changes required to the Group’s accounting policies as a result of implementing the new standard is currently uncertain, but these changes can be expected to, among other things, alter the timing of IFRS profit recognition.

Any changes or modification of IFRS accounting policies may require a change in the way in which future results will be determined and/or a retrospective adjustment of reported results to ensure consistency.

The resolution of several issues affecting the financial services industry could have a negative impact on Prudential’s reported results or on its relations with current and potential customers Prudential is, and in the future may be, subject to legal and regulatory actions in the ordinary course of its business, both in the UK and internationally. This risk could arise from the application of current regulations or the failure to implement new regulations. These actions could involve a review of types of business sold in the past under acceptable market practices at the time, such as the requirement in the UK to provide redress to certain past purchasers of pensions and mortgage endowment policies, changes to the tax regime affecting products, and regulatory reviews on products sold and industry practices, including, in the latter case, lines of business it has closed. Current regulatory actions include the UK business’s undertaking to the Financial Conduct Authority to review annuities sold without advice after 1 July 2008 to its contract‑ based defined contribution pension customers and potentially provide redress to certain such customers.

Regulators’ interest may also include the approach that product providers use to select third‑party distributors and to monitor the appropriateness of sales made by them. In some cases, product providers can be held responsible for the deficiencies of third‑party distributors.

In the US, there has been significant attention on the different regulatory standards applied to investment advice delivered to retail customers by different sectors of the industry. As a result of reports relating to perceptions of industry abuses, there have been numerous regulatory inquiries and proposals for legislative and regulatory reforms. This includes focus on the suitability of sales of certain products, alternative investments and the widening of the circumstances under which a person or entity providing investment advice with respect to certain employee benefit and pension plans would be considered a fiduciary (subjecting the person or entity to certain regulatory requirements, such as those adopted by the US Department of Labor issued in April 2016 which is likely to cause market disruption in the shorter term).

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Risk factors Continued

There is a risk that new regulations introduced may have a material adverse effect on the sales of the products by Prudential and increase Prudential’s exposure to legal risks.

In Asia, regulatory regimes are developing at different speeds, driven by a combination of global factors and local considerations. New requirements could be introduced in these and other regulatory regimes that challenge legal structures, current sales practices, or could retrospectively be applied to sales made prior to their introduction, which could have a negative impact on Prudential’s business or reported results.

Litigation, disputes and regulatory investigations may adversely affect Prudential’s profitability and financial condition

Prudential is, and may be in the future, subject to legal actions, disputes and regulatory investigations in various contexts, including in the ordinary course of its insurance, investment management and other business operations. These legal actions, disputes and investigations may relate to aspects of Prudential’s businesses and operations that are specific to Prudential, or that are common to companies that operate in Prudential’s markets. Legal actions and disputes may arise under contracts, regulations (including tax) or from a course of conduct taken by Prudential, and may be class actions. Although Prudential believes that it has adequately provided in all material aspects for the costs of litigation and regulatory matters, no assurance can be provided that such provisions are sufficient. Given the large or indeterminate amounts of damages sometimes sought, other sanctions that might be applicable and the inherent unpredictability of litigation and disputes, it is possible that an adverse outcome could, from time to time, have an adverse effect on Prudential’s reputation, results of operations or cash flows.

Prudential’s businesses are conducted in highly competitive environments with developing demographic trends and continued profitability depends upon management’s ability to respond to these pressures and trends

The markets for financial services in the UK, US and Asia are highly competitive, with several factors affecting Prudential’s ability to sell its products and continued profitability, including price and yields offered, financial strength and ratings, range of product lines and product quality, brand strength and name recognition, investment management performance, historical bonus levels, the ability to respond to developing demographic trends and customer appetite for certain savings products. In some of its markets, Prudential faces competitors that are larger, have greater financial resources or a greater market share, offer a broader range of products or have higher bonus rates. Further, heightened competition for talented and skilled employees and agents with local experience, particularly in Asia, may limit Prudential’s potential to grow its business as quickly as planned.

In Asia, the Group’s principal competitors in the region are international financial companies, including global life insurers such as Allianz, AXA, AIA and Manulife, and multinational asset managers such as J.P. Morgan Asset Management, Schroders, HSBC Global Asset Management and Franklin Templeton. In a number of markets, local companies have a very significant market presence.

Within the UK, Prudential’s principal competitors include many of the major retail financial services companies and fund management companies including, in particular, Aviva, Legal & General, Standard Life, Schroders, Invesco Perpetual and Fidelity.

Jackson’s competitors in the US include major stock and mutual insurance companies, mutual fund organisations, banks and other financial services companies such as AIG, AXA Financial Inc., Allianz, Prudential Financial, MetLife and Aegon.

Prudential believes competition will intensify across all regions in response to consumer demand, technological advances, the impact of consolidation, regulatory actions and other factors. Prudential’s ability to generate an appropriate return depends significantly upon its capacity to anticipate and respond appropriately to these competitive pressures.

Downgrades in Prudential’s financial strength and credit ratings could significantly impact its competitive position and damage its relationships with creditors or trading counterparties

Prudential’s financial strength and credit ratings, which are used by the market to measure its ability to meet policyholder obligations, are an important factor affecting public confidence in Prudential’s products, and as a result its competitiveness. Downgrades in Prudential’s ratings, as a result of, for example, decreased profitability, increased costs, increased indebtedness or other concerns, could have an adverse effect on its ability to market products; retain current policyholders; and on the Group’s financial flexibility. In addition, the interest rates Prudential pays on its borrowings are affected by its credit ratings, which are in place to measure the Group’s ability to meet its contractual obligations.

Prudential plc’s long‑term senior debt is rated as A2 by Moody’s, A+ by Standard & Poor’s and A by Fitch. These ratings are all on a stable outlook.

Prudential plc’s short‑term debt is rated as P‑1 by Moody’s, A‑1 by Standard & Poor’s and F1 by Fitch.

The Prudential Assurance Company Limited’s financial strength is rated Aa3 by Moody’s, AA by Standard & Poor’s and AA by Fitch. These ratings are all on a stable outlook.

Jackson’s financial strength is rated AA by Standard & Poor’s and Fitch, A1 by Moody’s and A+ by AM Best. These ratings have a stable outlook.

Prudential Assurance Co. Singapore (Pte) Ltd’s financial strength is rated AA by Standard & Poor’s. This rating is on a stable outlook.

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In addition, changes in methodologies and criteria used by rating agencies could result in downgrades that do not reflect changes in the general economic conditions or Prudential’s financial condition.

Adverse experience in the operational risks inherent in Prudential’s business could disrupt its business functions and have a negative impact on its results of operations

Operational risks are present in all of Prudential’s businesses, including the risk (from both Prudential and its outsourcing partners) of direct or indirect loss resulting from inadequate or failed internal and external processes, systems and human error or from external events. Prudential’s business is dependent on processing a large number of transactions across numerous and diverse products, and is subject to a range of evolving legal and regulatory regimes. In addition, Prudential also employs a large number of models and user‑developed applications in its processes. Further, because of the long‑term nature of much of the Group’s business, accurate records have to be maintained for significant periods.

These factors, among others, result in significant reliance on and require significant investment in information technology (IT), compliance and other operational systems, personnel and processes, requiring a number of change initiatives to be established across Prudential that may have material financial and reputational implications if such initiatives fail (either wholly or in part) to meet their objectives. In addition, Prudential outsources several operations, including a significant part of its UK back office and customer‑facing functions as well as a number of IT functions, resulting in reliance upon the operational processing performance of its outsourcing partners.

Although Prudential’s IT, compliance and other operational systems, models and processes incorporate controls designed to manage and mitigate the operational and model risks associated with its activities, there can be no assurance that such controls will always be effective.

Due to human error among other reasons, operational and model risk incidents do happen periodically and no system or process can entirely prevent them although there have not been any material events to date. Prudential’s legacy and other IT systems and processes, as with operational systems and processes generally, may be susceptible to failure or security breaches.

Such events could, among other things, harm Prudential’s ability to perform necessary business functions, result in the loss of confidential or proprietary data (exposing it to potential legal claims and regulatory sanctions) and damage its reputation and relationships with its customers and business partners. Similarly, any weakness in administration systems (such as those relating to policyholder records or meeting regulatory requirements) or actuarial reserving processes could have a material adverse effect on its results of operations during the effective period.

Attempts by third parties to disrupt Prudential’s IT systems could result in loss of trust from Prudential’s customers, reputational damage and financial loss

Prudential and its business partners are increasingly exposed to the risk that third parties may attempt to disrupt the availability, confidentiality and integrity of its IT systems, which could result in disruption to the key operations, make it difficult to recover critical services, damage assets and compromise the integrity and security of data (both corporate and customer). This could result in loss of trust from Prudential’s customers, reputational damage and direct or indirect financial loss. The cyber‑security threat continues to evolve globally in sophistication and potential significance. Prudential’s increasing market profile, growing customer interest in interacting with their insurance providers and asset managers through the internet and social media, improved brand awareness and the classification of Prudential as a G‑SII could also increase the likelihood of Prudential being considered a target by cyber criminals. Further, there have been recent changes to the threat landscape and the risk from untargeted but sophisticated and automated attacks has increased.

Developments in data protection worldwide (such as the EU General Data Protection Regulation that is expected to come into force in 2018) may also increase the financial and reputational implications for Prudential following a significant breach of its IT systems. To date, Prudential has not identified a failure or breach which has had a material impact in relation to its legacy and other IT systems and processes. However, it has been, and likely will continue to be, subject to potential damage from computer viruses, attempts at unauthorised access and cyber‑security attacks such as ‘denial of service’ attacks (which, for example, can cause temporary disruption to websites and IT networks), phishing and disruptive software campaigns.

Prudential is continually enhancing its IT environment to remain secure against emerging threats, together with increasing its ability to detect system compromise and recover should such an incident occur. However, there can be no assurance that such events will not take place which may have material adverse consequential effects on Prudential’s business and financial position.

Adverse experience relative to the assumptions used in pricing products and reporting business results could significantly affect Prudential’s results of operations In common with other life insurers, the profitability of the Group’s businesses depends on a mix of factors including mortality and morbidity levels and trends, policy surrenders and take‑up rates on guarantee features of products, investment performance and impairments, unit cost of administration and new business acquisition expenses.

Prudential needs to make assumptions about a number of factors in determining the pricing of its products, for setting reserves, and for reporting its capital levels and the results of its long‑term business operations. For example, the assumption that Prudential makes about future expected levels of mortality is particularly relevant for its UK annuity business, where payments are guaranteed for at least as long as the policyholder is alive.

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Risk factors Continued

Prudential conducts rigorous research into longevity risk, using industry data as well as its own substantial annuitant experience. As part of its pension annuity pricing and reserving policy, Prudential’s UK business assumes that current rates of mortality continuously improve over time at levels based on adjusted data and informed by models from the Continuous Mortality Investigation (CMI) as published by the Institute and Faculty of Actuaries. Assumptions about future expected levels of mortality are also of relevance to the Guaranteed Minimum Withdrawal Benefit (GMWB) of Jackson’s variable annuity business. If mortality improvement rates significantly exceed the improvement assumed, Prudential’s results of operations could be adversely affected.

A further factor is the assumption that Prudential makes about future expected levels of the rates of early termination of products by its customers (known as persistency). This is relevant to a number of lines of business in the Group, especially for Jackson’s portfolio of variable annuities. Prudential’s persistency assumptions reflect a combination of recent past experience for each relevant line of business and expert judgement, especially where a lack of relevant and credible experience data exists. Any expected change in future persistency is also reflected in the assumption. If actual levels of future persistency are significantly different than assumed, the Group’s results of operations could be adversely affected. Furthermore, Jackson’s variable annuity products are sensitive to other types of policyholder behaviour, such as the take‑up of its GMWB product features.

Another example is the impact of epidemics and other effects that give rise to a large number of deaths or additional sickness claims. Significant influenza epidemics have occurred a number of times over the past century but the likelihood, timing, or the severity of future epidemics cannot be predicted. The effectiveness of external parties, including governmental and non‑governmental organisations, in combating the spread and severity of any epidemics could have a material impact on the Group’s loss experience.

As a holding company, Prudential is dependent upon its subsidiaries to cover operating expenses and dividend payments

The Group’s insurance and investment management operations are generally conducted through direct and indirect subsidiaries, which are subject to the risks discussed elsewhere in this Risk factors section.

As a holding company, Prudential’s principal sources of funds are remittances from subsidiaries, shareholder‑backed funds, the shareholder transfer from long‑term funds and any amounts that may be raised through the issuance of equity, debt and commercial paper.

Certain of Prudential’s subsidiaries are restricted by applicable insurance, foreign exchange and tax laws, rules and regulations that can limit remittances. In some circumstances, this could limit Prudential’s ability to pay dividends to shareholders or to make available funds held in certain subsidiaries to cover operating expenses of other members of the Group.

Prudential operates in a number of markets through joint ventures and other arrangements with third parties, involving certain risks that Prudential does not face with respect to its consolidated subsidiaries

Prudential operates, and in certain markets is required by local regulation to operate, through joint ventures and other similar arrangements. For such Group operations, management control is exercised in conjunction with other participants. The level of control exercisable by the Group depends on the terms of the contractual agreements, in particular, the allocation of control among, and continued cooperation between, the participants. Prudential may face financial, reputational and other exposure (including regulatory censure) in the event that any of its partners fails to meet its obligations under the arrangements, encounters financial difficulty, or fails to comply with local or

international regulation and standards such as those pertaining to the prevention of financial crime. In addition, a significant proportion of the Group’s product distribution is carried out through arrangements with third parties not controlled by Prudential and is therefore dependent upon continuation of these relationships. A temporary or permanent disruption to these distribution arrangements, such as through significant deterioration in the reputation, financial position or other circumstances of the third party or material failure in controls (such as those pertaining to the prevention of financial crime) could adversely affect the results of operations of Prudential.

Prudential’s Articles of Association contain an exclusive jurisdiction provision

Under Prudential’s Articles of Association, certain legal proceedings may only be brought in the courts of England and Wales. This applies to legal proceedings by a shareholder (in its capacity as such) against Prudential and/or its Directors and/or its professional service providers. It also applies to legal proceedings between Prudential and its Directors and/or Prudential and Prudential’s professional service providers that arise in connection with legal proceedings between the shareholder and such professional service provider. This provision could make it difficult for US and other non‑UK shareholders to enforce their shareholder rights.

Changes in tax legislation may result in adverse tax consequences

Tax rules, including those relating to the insurance industry, and their interpretation may change, possibly with retrospective effect, in any of the jurisdictions in which Prudential operates. Significant tax disputes with tax authorities, and any change in the tax status of any member of the Group or in taxation legislation or its scope or interpretation could affect Prudential’s financial condition and results of operations.

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Corporate governance

Hong Kong listing obligations

The Directors confirm that the Company has complied with all relevant provisions set out in the Corporate Governance Code issued by The Stock Exchange of Hong Kong Limited (‘HK Code’) throughout the accounting period. With respect to the Code Provision B.1.2(d) of the HK Code, the responsibilities of the Remuneration Committee do not include making recommendations to the Board on the remuneration of Non‑executive Directors. In line with the principles of the UK Corporate Governance Code, fees for the Non‑executive Directors are determined by the Board.

The Directors also confirm that the financial results contained in this document have been reviewed by the Group Audit Committee.

The Company has adopted securities dealing rules relating to transactions in Prudential securities by Directors on terms no less exacting than those required by Appendix 10 to the Hong Kong Listing Rules. The Directors of the Company have complied with this code of conduct throughout the accounting period.

Going concern

In accordance with the requirements of the guidance issued by the Financial Reporting Council in September 2014 ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting’, after making sufficient enquiries the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue their operations for a period of at least 12 months from the date that the financial statements are approved.

In support of this expectation, an update of the Company’s business activities, together with the factors likely to affect its future development, successful performance and position in the current economic climate are set out in the business performance section. The risks facing the Group’s liquidity and capital positions and their sensitivities are referred to in the ‘Chief Financial Officer’s report on the 2017 first half financial performance’, the ‘Group Chief Risk Officer’s report of the risks facing our business and how these are managed’ and note II (c) ‘Solvency II capital at 30 June 2017’ within Additional Financial Information. The Group’s IFRS financial statements include cash flow details in the ‘Condensed consolidated statement of cash flows’ and borrowings information in note C6.

The Directors therefore consider it appropriate to continue to adopt the going concern basis of accounting in preparing the financial statements for the period ended 30 June 2017.

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Disclosure of interests of Directors

Outstanding share options

The following table sets out the share options held by the Directors in the UK Savings‑Related Share Option Scheme (SAYE) as at the end of the period.

Market price at 30 June 2017 (pence) Date of grant Exercise price (pence)	Exercise period	Number of options
	Beginning End	Beginning of period Granted Exercised Cancelled Forfeited Lapsed End of period
John Foley 23 Sep 14 1,155 1,761 John Foley 21 Sep 16 1,104 1,761 Penny James 22 Sep 15 1,111 1,761 Nic Nicandrou 23 Sep 14 1,155 1,761 Nic Nicandrou 21 Sep 16 1,104 1,761 Anne Richards 21 Sep 16 1,104 1,761 Mike Wells 22 Sep15 1,111 1,761	01 Dec 17 31 May 18 01 Dec 19 31 May 20 01 Dec 18 31 May 19 01 Dec 19 31 May 20 01 Dec 21 31 May 22 01 Dec 19 31 May 20 01 Dec 18 31 May19	779 – – – – – 779
		815 – – – – – 815
		1620 – – – – – 1620
		, , 1311 – – – – – 1311
		, , 1358 – – – – – 1358
		, , 1630 – – – – – 1630
		, , 1,620 – – – – – 1,620

Buy-out award

Details of the outstanding buy‑out award made to Anne Richards in order to facilitate her appointment as Chief Executive, M&G, in 2016 and pursuant to rule 9.4.2 of the UK LA Listing Rules are set out below. This award, which could not be granted under any of the Company’s existing incentive plans, entitles Anne Richards to receive a cash amount equal to the market value of the specified notional number of Prudential plc shares on the date of exercise, less an award price of 5 pence per share. The award will vest on the dates detailed below. During the reporting period no award was exercised by Anne Richards. The market value of Prudential plc shares on the date of the award (23 June 2016) was £13.22. Anne Richards is the sole participant in this arrangement and no further awards will be made to Anne Richards under the arrangement.

	Number of
Exercise period	notional shares
1 December 2017 to 1 January 2018	39,810
1 December 2018 to 1 January 2019	25,078
1 December 2019 to 1 January 2020	25,078
1 December 2020 to 1 January2021	13,426

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Directors’ shareholdings and substantial shareholdings

The Company and its Directors, Chief Executives and shareholders have been granted a partial exemption from the disclosure requirements under Part XV of the Securities and Futures Ordinance (SFO). As a result of this exemption, Directors, Chief Executives and shareholders do not have an obligation under the SFO to notify the Company of shareholding interests, and the Company is not required to maintain a register of Directors’ and Chief Executives’ interests under section 352 of the SFO, nor a register of interests of substantial shareholders under section 336 of the SFO. The Company is, however, required to file with the Stock Exchange of Hong Kong Limited any disclosure of interests notified to it in the United Kingdom.

The following table sets out the interests of Directors, including the interests of persons connected with Directors as at the end of the period. This includes shares acquired under the Share Incentive Plan and deferred annual bonus awards as detailed in the table on ‘Other share awards’ on page 163.

	01 Jan 2017	30 Jun 2017
	Total benefcial interest (number of shares)	Total benefcial interest (number of shares) Number of shares subject to performance conditions Total interest in shares
Chairman Paul Manduca Executive Directors John Foley Penny James Nic Nicandrou Anne Richards Barry Stowe1 Mike Wells2 Tony Wilkey Non-executive Directors Howard Davies Ann Godbehere3 David Law Kaikhushru Nargolwala Anthony Nightingale Philip Remnant Alice Schroeder4 Lord Turner
	42500	42500 – 42500
	,	, ,
	249965	248865 381325 630190
	, 41572	, , , 75561 236049 311610
	, 304138	, , , 291450 349310 640760
	, 31439	, , , 64677 153367 218044
	, 265878	, , , 280030 686398 966428
	, 544534	, , , 660199 835625 1495824
	, 120528	, , ,, 74419 454170 528589
	,	, , ,
	9049	9204 – 9204
	, 15914	, , n/a n/a n/a
	, 6904	6904 – 6904
	, 70000	, , 70000 – 70000
	, 30000	, , 30000 – 30000
	, 6916	, , 6916 – 6916
	, 8500	, , 8500 – 8500
	, 5,500	, , 6,500 – 6,500

Notes

1 For the 1 January 2017 figure Barry Stowe’s beneficial interest in shares is made up of 132,939 ADRs (representing 265,878 ordinary shares), (8,513.73 of these ADRs are held within an investment account which secures premium financing for a life assurance policy). For the 30 June 2017 figure the beneficial interest in shares is made up of 140,015 ADRs (representing 280,030 ordinary shares).

2 For the 1 January 2017 figure Mike Wells’ beneficial interest in shares is made up of 218,576 ADRs (representing 437,152 ordinary shares) and 107,382 ordinary shares. For the 30 June 2017 figure his beneficial interest in shares is made up of 248,291 ADRs (representing 496,582 ordinary shares) and 163,617 ordinary shares.

3 Ann Godbehere stepped down from the Board on 18 May 2017.

4 Alice Schroeder’s beneficial interest in shares is made up of 4,250 ADRs (representing 8,500 ordinary shares).

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Disclosure of interests of Directors Continued

Directors’ outstanding long-term incentive awards Share-based long-term incentive awards

									Conditional
			Conditional						share
			share		Market	Dividend			awards	Date of
			awards	Conditional	price at	equivalents	Rights	Rights	outstanding	end of
	Plan	Year	outstanding	awards	date of	on vested	exercised	lapsed	at 30 Jun	performance
	name	of award	at 1 Jan 2017	in 2017	award	shares	in 2017	in 2017	2017	period
						(note 3)
						(number of
			(number of	(number of		shares			(number of
			shares)	shares)	(pence)	released)			shares)
John Foley	PLTIP	2014	125,776		1,317	7,972	89,093	36,683	–	31 Dec 16
	PLTIP	2014	29,556		1,342	1,872	20,935	8,621	–	31 Dec 16
	PLTIP	2015	122,808		1,672				122,808	31 Dec 17
	PLTIP	2016	144,340		1,279				144,340	31 Dec 18
	PLTIP	2017		114,177	1,672				114,177	31 Dec 19
			422,480	114,177		9,844	110,028	45,304	381,325
Penny James	PLTIP	2014	30,279		1,317	1,918	21,446	8,833	–	31 Dec 16
	PLTIP	2015	24,348		1,672				24,348	31 Dec 17
	PLTIP	2016	116,628		1,279				116,628	31 Dec 18
	PLTIP	2017		95,073	1,672				95,073	31 Dec 19
			171,255	95,073		1,918	21,446	8,833	236,049
Nic Nicandrou	PLTIP	2014	132,375		1,317	8,390	93,768	38,607	–	31 Dec 16
	PLTIP	2015	104,117		1,672				104,117	31 Dec 17
	PLTIP	2016	136,836		1,279				136,836	31 Dec 18
	PLTIP	2017		108,357	1,672				108,357	31 Dec 19
			373,328	108,357		8,390	93,768	38,607	349,310
Anne Richards	PLTIP	2016	45,906		1,358.5				45,906	31 Dec 18
	PLTIP	2017		107,461	1,672				107,461	31 Dec 19
			45,906	107,461		–	–	–	153,367
Barry Stowe1	PLTIP	2014	114,824		1,317	7,034	78,462	36,362	–	31 Dec 16
	PLTIP	2015	113,940		1,672				113,940	31 Dec 17
	PLTIP	2015	50,668		1,611.5				50,668	31 Dec 17
	PLTIP	2016	274,100		1,279				274,100	31 Dec 18
	PLTIP	2017		247,690	1,672				247,690	31 Dec 19
			553,532	247,690		7,034	78,462	36,362	686,398
Mike Wells2	PLTIP	2014	238,954		1,317	15,178	169,262	69,692	–	31 Dec 16
	PLTIP	2015	209,222		1,672				209,222	31 Dec 17
	PLTIP	2015	30,132		1,611.5				30,132	31 Dec 17
	PLTIP	2016	332,870		1,279				332,870	31 Dec 18
	PLTIP	2017		263,401	1,672				263,401	31 Dec 19
			811,178	263,401		15,178	169,262	69,692	835,625
Tony Wilkey4	PLTIP	2014	22,935		1,317	1,401	15,671	7,264	–	31 Dec 16
	PCA LTIP	2014	45,870		1,317		45,870		–	31 Dec 16
	PCA LTIP	2014	68,806		1,317				68,806	31 Dec 17
	PLTIP	2015	21,091		1,672				21,091	31 Dec 17
	PCA LTIP	2015	42,183		1,672				42,183	31 Dec 17
	PLTIP	2015	29,008		1,611.5				29,008	31 Dec 17
	PLTIP	2016	153,742		1,279				153,742	31 Dec 18
	PLTIP	2017		139,340	1,672				139,340	31 Dec 19
			383,635	139,340		1,401	61,541	7,264	454,170

Notes

• 1 The awards for Barry Stowe were made in ADRs (1 ADR = 2 ordinary shares). The figures in the table are represented in terms of ordinary shares.

2 The awards in 2014 and 2015 for Mike Wells were made in ADRs (1 ADR = 2 ordinary shares). The awards in 2016 and 2017 were made in ordinary shares. The figures in the table are represented in terms of ordinary shares.

• 3 A dividend equivalent was accumulated on these awards.

4 The PCA LTIP is an arrangement for executives and senior management of PCA. Tony Wilkey was a participant of this plan until his appointment to the Board on 1 June 2015 and has not been eligible to new awards since this date. The column above marked ‘Date of end of performance period’ for the PCA LTIP reflects the end of the vesting period as there are no performance conditions on these awards.

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Other share awards

The table below sets out Executive Directors’ deferred bonus share awards.

						Conditional
		Conditional				share				Market
		share				awards	Date of		Market	price at
		awards	Conditionally	Dividends	Shares	outstanding	end of		price at	date of
	Year of	outstanding	awarded	accumulated	released	at 30 Jun	restricted	Date of	date of	vesting or
	grant	at 1 Jan 2017	in 2017	in 2017	in 2017	2017	period	release	award	release
				(note 5)
		(number of	(number of	(number of	(number of	(number of
		shares)	shares)	shares)	shares)	shares)			(pence)	(pence)
John Foley
Deferred 2013 annual
incentive award	2014	33,968			33,968	–	31 Dec 16	03 Apr 17	1,317	1,653
Deferred 2014 annual
incentive award	2015	43,651		762		44,413	31 Dec 17		1,672
Deferred 2015 annual
incentive award	2016	65,713		1,148		66,861	31 Dec 18		1,279
Deferred 2016 annual
incentive award	2017		30,352	530		30,882	31 Dec 19		1,672
		143,332	30,352	2,440	33,968	142,156
Penny James1
Deferred 2013 Group
deferred bonus
plan award	2014	5,064			5,064	–	31 Dec 16	03 Apr 17	1,317	1,653
Deferred 2014 Group
deferred bonus
plan award	2015	4,091		71		4,162	31 Dec 17		1,672
Deferred 2015 annual
incentive award	2016	13,791		240		14,031	31 Dec 18		1,279
Deferred 2016 annual
incentive award	2017		22,966	401		23,367	31 Dec 19		1,672
		22,946	22,966	712	5,064	41,560
Nic Nicandrou
Deferred 2013 annual
incentive award	2014	38,024			38,024	–	31 Dec 16	03 Apr 17	1,317	1,653
Deferred 2014 annual
incentive award	2015	29,887		522		30,409	31 Dec 17		1,672
Deferred 2015 annual
incentive award	2016	39,107		683		39,790	31 Dec 18		1,279
Deferred 2016 annual
incentive award	2017		29,504	515		30,019	31 Dec 19		1,672
		107,018	29,504	1,720	38,024	100,218
Anne Richards
Deferred 2016 annual
incentive award	2017		32,668	570		33,238	31 Dec 19		1,672
			32,668	570		33,238
Barry Stowe2
Deferred 2013 annual
incentive award	2014	32,950			32,950	–	31 Dec 16	03 Apr 17	1,317	1,653
Deferred 2014 annual
incentive award	2015	29,046		510		29,556	31 Dec 17		1,672
Deferred 2015 annual
incentive award Deferred 2016 annual incentive award	2016 2017	111,618 173,614	134,534 134,534	1,960 2,362 4,832	32,950	113,578 136,896 280,030	31 Dec 18 31 Dec 19		1,279 1,672

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Disclosure of interests of Directors Continued

						Conditional
		Conditional				share				Market
		share				awards	Date of		Market	price at
		awards	Conditionally	Dividends	Shares	outstanding	end of		price at	date of
	Year of	outstanding	awarded	accumulated	released	at 30 Jun	restricted	Date of	date of	vesting or
	grant	at 1 Jan 2017	in 2017	in 2017	in 2017	2017	period	release	award	release
				(note 5)
		(number of	(number of	(number of	(number of	(number of
		shares)	shares)	shares)	shares)	shares)			(pence)	(pence)
Mike Wells3
Deferred 2013 annual
incentive award	2014	108,578			108,578	–	31 Dec 16	03 Apr 17	1,317	1,653
Deferred 2014 annual
incentive award	2015	120,686		2,120		122,806	31 Dec 17		1,672
Deferred 2015 annual
incentive award	2016	107,112		1,871		108,983	31 Dec 18		1,279
Deferred 2016 annual
incentive award	2017		51,371	897		52,268	31 Dec 19		1,672
		336,376	51,371	4,888	108,578	284,057
Tony Wilkey4
Deferred 2014 PCA
deferred bonus
plan award	2015	84,595			84,595	–	31 Dec 16	03 Apr 17	1,672	1,653
Deferred 2015 annual
incentive award	2016	35,933		627		36,560	31 Dec 18		1,279
Deferred 2016 annual
incentive award	2017		37,209	650		37,859	31 Dec 19		1,672
		120,528	37,209	1,277	84,595	74,419

Notes

1 The Group deferred bonus plan is an arrangement for executives and senior management. Penny James was granted awards under this plan in 2014 and 2015 prior to her appointment to the Board on 1 September 2015 and has not been eligible for new awards under the Group deferred bonus plan from this date.

2 The awards for Barry Stowe were made in ADRs (1 ADR = 2 ordinary shares). The figures in the table are represented in terms of ordinary shares. 3 The awards for Mike Wells in 2014 and 2015 were made in ADRs (1 ADR = 2 ordinary shares). The awards made in 2016 and 2017 were made in ordinary shares. The figures in the table are represented in terms of ordinary shares.

4 The PCA deferred bonus plan is an arrangement for executives and senior management of PCA. Tony Wilkey was granted awards under this plan in 2015 prior to his appointment to the Board on 1 June 2015 and has not been eligible for new awards under the PCA deferred bonus plan from this date.

5 A dividend equivalent was accumulated on these awards.

All-employee share plans

It is important that all employees are offered the opportunity to own shares in Prudential, connecting them both to the success of the Company and to the interests of other shareholders. Executive Directors are invited to participate in these plans on the same basis as other staff in their location.

Save As You Earn (SAYE) schemes

UK‑based Executive Directors are eligible to participate in the HM Revenue and Customs (HMRC) approved Prudential Savings‑ Related Share Option Scheme. This scheme allows all eligible employees to save towards the exercise of options over Prudential plc shares with the option price set at the beginning of the savings period at a discount of up to 20 per cent of the market price. Since 2014 participants have been able to elect to enter into savings contracts of up to £500 per month for a period of three or five years. At the end of this term, participants may exercise their options within six months and purchase shares. If an option is not exercised within six months, participants are entitled to a refund of their cash savings plus interest if applicable under the rules. Shares are issued to satisfy those options which are exercised. No options may be granted under the schemes if the grant would cause the number of shares which have been issued, or which remain issuable pursuant to options granted in the preceding 10 years under the scheme and any other option schemes operated by the Company, or which have been issued under any other share incentive scheme of the Company, to exceed 10 per cent of the Company’s ordinary share capital at the proposed date of grant.

Details of Executive Directors’ rights under the SAYE scheme are set out in the ‘Outstanding share options’ table.

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Share Incentive Plan (SIP)

UK‑based Executive Directors are also eligible to participate in the Company’s Share Incentive Plan (SIP). From April 2014, all UK‑based employees were able to purchase Prudential plc shares up to a value of £150 per month from their gross salary (partnership shares) through the SIP. For every four partnership shares bought, an additional matching share is awarded which is purchased by Prudential on the open market. Dividend shares accumulate while the employee participates in the plan. If the employee withdraws from the plan, or leaves the Group, matching shares may be forfeited.

The table below provides information about shares purchased under the SIP together with matching shares (awarded on a 1:4 basis) and dividend shares.

		Share Incentive	Partnership	Matching	Dividend	Share Incentive
		Plan awards	shares	shares	shares	Plan awards
	Year of initial	held in Trust	accumulated	accumulated	accumulated	held in Trust
	grant	at 1 Jan 2017	in 2017	in 2017	in 2017	at 30 Jun 2017
		(number of	(number of	(number of	(number of	(number of
		shares)	shares)	shares)	shares)	shares)
John Foley	2014	433	54	14	8	509
Nic Nicandrou	2010	1,644	54	14	29	1,741
Mike Wells	2015	270	54	13	5	342

Cash-settled long-term incentive awards

This information has been prepared in line with the reporting requirements of the Hong Kong Stock Exchange and sets out Executive Directors' outstanding share awards and share options. For details of the cash‑settled long‑term incentive awards held by some Executive Directors, please see our Annual Report.

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Shareholder information

Dividends

Dividends
				Shareholders with
				ordinary shares
	Shareholders	Shareholders	Holders of	standing to the
	registered on the	registered on the	US American	credit of their
2017 frst interim dividend	UK register and Irish branch register	Hong Kong branch register	Depositary Receipts	Singapore CDP securities accounts
Ex‑dividend date Record date	24 August 2017 25 August 2017	24 August 2017 25 August 2017	24 August 2017 25 August 2017	23 August 2017 25 August 2017
Payment of 2017 frst interim dividend	28 September 2017	28 September 2017	On or about 5 October 2017	On or about 5 October 2017

Shareholder enquiries

For enquiries about shareholdings, including dividends and lost share certificates, please contact the Company’s registrars:

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By post By telephone
Equiniti Limited Tel 0371 384 2035
Aspect House Textel 0371 384 2255 (for hard of hearing)
Spencer Road Lines are open from 8.30am to 5.30pm, Monday to Friday.
Lancing International shareholders tel +44 (0)121 415 7026
West Sussex BN99 6DA
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Dividend mandates

Shareholders may have their dividends paid directly to their bank or building society account. If you wish to take advantage of this facility, please call Equiniti Limited (Equiniti) and request a Cash Dividend Mandate form. Alternatively, shareholders may download a form from www.prudential.co.uk/ investors/shareholder‑centre/forms

Cash dividend alternative

The Company has a Dividend Re‑investment Plan (DRIP).

Shareholders who have elected for the DRIP will automatically receive shares for all future dividends in respect of which a DRIP alternative is offered. The election may be cancelled at any time by the shareholder. Further details of the DRIP and the timetable are available on the Company’s website at www.prudential. co.uk/investors/shareholder‑centre/ dividend‑information/cash‑dividend

Electronic communications

Shareholders are encouraged to elect to receive shareholder documents electronically by registering with Shareview at www.shareview.co.uk. This will save on printing and distribution costs, and create environmental benefits. Shareholders who have registered will be sent an email notification whenever shareholder documents are available on the Company’s website and a link will be provided to that information. When registering, you will need your shareholder reference number which can be found on your share certificate or proxy form. The option to receive shareholder documents electronically is not available to shareholders holding shares through The Central Depository (Pte) Limited (CDP) in Singapore. Please contact Equiniti if you require any assistance or further information.

Equiniti Shareview service

Information on how to manage shareholdings can be found at https://help.shareview.co.uk

The pages at this web address provide the following:

• Answers to commonly asked questions regarding shareholder registration;

Share dealing services

The Company's registrars, Equiniti, offer a postal dealing facility for buying and selling Prudential plc ordinary shares; please see the Equiniti address above or telephone 0371 384 2248. They also offer a telephone and internet dealing service, Shareview, which provides a simple and convenient way of selling Prudential plc shares. For telephone sales call 0371 384 2780 between 8.30am and 4.30pm, Monday to Friday excluding UK bank holidays, and for internet sales log on to www.shareview.co.uk/dealing

ShareGift

Shareholders who have only a small number of shares, the value of which makes them uneconomic to sell, may wish to consider donating them to ShareGift (Registered Charity 1052686). The relevant share transfer form may be obtained from our website www.prudential.co.uk/investors/ shareholder‑centre/forms or from Equiniti. Further information about ShareGift may be obtained on +44 (0)20 7930 3737 or from www.ShareGift.org

There are no implications for capital gains tax purposes (no gain or loss) on gifts of shares to charity and it is also possible to obtain income tax relief.

• Links to downloadable forms, guidance notes and Company history factsheets; and

• A choice of contact methods – via email, telephone or post.

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How to contact us

Irish branch register

The Company operates a branch register for shareholders in Ireland. All enquiries regarding Irish branch register accounts should be directed to Capita Asset Services, Shareholder solutions (Ireland), PO Box 7117, Dublin 2, Ireland Tel + 353 1 553 0050

Hong Kong branch register

The Company operates a branch register for shareholders in Hong Kong. All enquiries regarding Hong Kong branch register accounts should be directed to Computershare Hong Kong Investor Services Limited, 17M Floor, Hopewell Centre, 183 Queen's Road East, Wan Chai, Hong Kong. Tel +852 2862 8555

Singapore branch register

Shareholders who have shares standing to the credit of their securities accounts with The Central Depository (Pte) Limited (CDP) in Singapore may refer queries to the CDP at 9 North Buona Vista Drive, #01‑19/20, The Metropolis, Singapore 138588. Tel +65 6535 7511

Enquiries regarding shares held in Depository Agent Sub‑accounts should be directed to your Depository Agent or broker.

American Depositary Receipts (ADRs)

The Company's ordinary shares are listed on the New York Stock Exchange in the form of American Depositary Shares, evidenced by ADRs and traded under the symbol PUK. Each American Depositary Share represents two ordinary shares. All enquiries regarding ADR holder accounts should be directed to JP Morgan, the authorised depositary bank, at JP Morgan Chase Bank, N.A., PO Box 64504, St Paul, MN 55164‑0854, USA.

Tel general +1 800 990 1135 or from outside the US +1 651 453 2128 or log on to www.adr.com

Board

Paul Manduca Chairman

Mike Wells Group Chief Executive

Mark FitzPatrick Chief Financial Officer

Penny James Group Chief Risk Officer

John Foley Chief Executive, M&G Prudential

Anne Richards

Deputy Chief Executive, M&G Prudential and Chief Executive, M&G

Nic Nicandrou

Chief Executive, Prudential Corporation Asia

Barry Stowe

Chairman and Chief Executive Officer of North America Business Unit

Group Executive Committee

Julian Adams

Group Regulatory and Government Relations Director

Raghu Hariharan

Director of Strategy and Capital Market Relations

Jonathan Oliver Group Communications Director

Alan Porter

Group General Counsel and Company Secretary

Al-Noor Ramji Group Chief Digital Officer

Our businesses

Prudential plc

Tel +44 (0)20 7220 7588 www.prudential.co.uk

Prudential UK & Europe

Tel +44 (0)800 000 000 www.pru.co.uk

M&G

Tel +44 (0)20 7626 4588 www.mandg.co.uk

Prudential Corporation Asia Tel +852 2918 6300 www.prudentialcorporation‑asia.com

Jackson National Life Insurance Company Tel +1 517 381 5500 www.jackson.com

Media enquiries

Tel +44 (0)20 7548 2776 Email media.relations@prudential.co.uk

Shareholder contacts

Institutional Analyst and Investor Enquiries Tel +44 (0)20 7548 3300 Email investor.relations@prudential.co.uk

UK Register Private Shareholder Enquiries Tel 0371 384 2035 International shareholders Tel +44 (0)121 415 7026

Irish Branch Register Private Shareholder Enquiries Tel +353 1 553 0050

Hong Kong Branch Register Private Shareholder Enquiries Tel +852 2862 8555

US American Depositary Receipts Holder Enquiries Tel +1 651 453 2128

Tim Rolfe

Group Human Resources Director

The Central Depository (Pte) Limited Shareholder Enquiries Tel +65 6535 7511

2017 Half Year Financial Report Prudential plc 167

www.prudential.co.uk

Prudential public limited company

Incorporated and registered in England and Wales

Registered office

Laurence Pountney Hill London EC4R 0HH Registered number 1397169

www.prudential.co.uk

Principal place of business in Hong Kong

13th Floor One International Finance Centre 1 Harbour View Street Central Hong Kong

Prudential plc is a holding company, subsidiaries of which are authorised and regulated, as applicable, by the Prudential Regulation Authority and the Financial Conduct Authority.

Forward-looking statements

This document may contain ‘forward‑ looking statements’ with respect to certain of Prudential's plans and its goals and expectations relating to its future financial condition, performance, results, strategy and objectives. Statements that are not historical facts, including statements about Prudential’s beliefs and expectations and including, without limitation, statements containing the words ‘may’, ‘will’, ‘should’, ‘continue’, ‘aims’, ‘estimates’, ‘projects’, ‘believes’, ‘intends’, ‘expects’, ‘plans’, ‘seeks’ and ‘anticipates’, and words of similar meaning, are forward‑looking statements. These statements are based on plans, estimates and projections as at the time they are made, and therefore undue reliance should not be placed on them. By their nature, all forward‑looking statements involve risk and uncertainty. A number of important factors could cause Prudential's actual future financial condition or performance or other indicated results to differ materially from those indicated in any forward‑looking statement. Such factors include, but are not limited to, future market conditions, including fluctuations in interest rates and exchange rates, the potential for a sustained low‑interest rate environment, and the performance of financial markets generally; the policies and actions of regulatory authorities, including, for example, new government initiatives; the political, legal and economic effects of the UK’s decision to leave the European Union; the impact of continuing designation as a Global Systemically Important Insurer or ‘G‑SII’; the impact of competition, economic uncertainty, inflation and deflation; the effect on Prudential’s business and results from, in particular, mortality and morbidity trends, lapse rates and policy renewal

rates; the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; the impact of internal projects and other strategic actions failing to meet their objectives; the impact of changes in capital, solvency standards, accounting standards or relevant regulatory frameworks, and tax and other legislation and regulations in the jurisdictions in which Prudential and its affiliates operate; and the impact of legal and regulatory actions, investigations and disputes. These and other important factors may, for example, result in changes to assumptions used for determining results of operations or re‑estimations of reserves for future policy benefits. Further discussion of these and other important factors that could cause Prudential's actual future financial condition or performance or other indicated results to differ, possibly materially, from those anticipated in Prudential's forward‑looking statements can be found under the ‘Risk Factors’ heading in this document.

Any forward‑looking statements contained in this document speak only as of the date on which they are made. Prudential expressly disclaims any obligation to update any of the forward‑looking statements contained in this document or any other forward‑looking statements it may make, whether as a result of future events, new information or otherwise except as required pursuant to the UK Prospectus Rules, the UK Listing Rules, the UK Disclosure and Transparency Rules, the Hong Kong Listing Rules, the SGX‑ST listing rules or other applicable laws and regulations.

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History

Providing financial security since 1848

Successive generations have looked to Prudential to safeguard their financial security – from industrial workers and their families in Victorian Britain, to around 24 million insurance customers worldwide today. Our financial strength, heritage, prudence and focus on our customers’ long‑term needs ensure that people continue to turn to our trusted brands to help them plan for today and tomorrow.

1848

Prudential is established as Prudential Mutual Assurance Investment and Loan Association in Hatton Garden, London, offering loans and life assurance to professional people.

1854

Prudential opens the Industrial Department to sell a new type of insurance, Industrial Insurance, to the working classes, for premiums of a penny and upwards.

1923

Prudential’s first overseas life branch is established in India, with the first policy being sold to a tea planter in Assam.

1949

The ‘Man from the Pru’ advertising campaign is launched.

1986

Prudential acquires Jackson in the United States.

1994

Prudential Corporation Asia is formed in Hong Kong as a regional head office to expand operations beyond an existing presence in Malaysia, Singapore and Hong Kong.

1999

Prudential acquires M&G, pioneer of unit trusts in the UK and a leading provider of investment products.

2000

2014

Prudential acquires businesses in Ghana and Kenya, marking its entry into the fast‑growing African life insurance industry.

2017

M&G and Prudential UK & Europe combine to form M&G Prudential, a leading savings and investments business ideally positioned to target growing customer demand for comprehensive financial solutions.

Prudential and CITIC launch the first Sino‑British life insurance joint venture in China.

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www.prudentialhistory.co.uk

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Prudential public limited company Incorporated and registered in England and Wales

Registered office Laurence Pountney Hill London EC4R 0HH Registered number 1397169

www.prudential.co.uk

Prudential plc is a holding company, subsidiaries of which are authorised and regulated, as applicable, by the Prudential Regulation Authority and the Financial Conduct Authority.

Printed on Amadeus 75 Matt, a paper made from

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75 per cent recycled post‑consumer waste and 25 per cent fibre sourced from fully sustainable forests; and Amadeus 100 White Offset which is made from 100 per cent recycled post‑consumer waste.

All material used in this report has been independently certified according to the rules of the Forest Stewardship Council (FSC). All pulps used are elemental chlorine free, and the inks used are vegetable oil based. The manufacturing mills and the printer are registered to the Environmental Management System ISO 14001 and are FSC chain‑of‑custody certified.

Designed by FleishmanHillard Fishburn Printed in the UK by CPI Colour

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