Prudential plc - Interim / Quarterly Report 2017

Hong Kong Exchanges and Clearing Limited, The Stock Exchange of Hong Kong Limited and the Singapore Exchange Securities Trading Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

==> picture [189 x 138] intentionally omitted <==

(Incorporated and registered in England and Wales under the number 01397169)

(Stock code: 2378)

PRESS RELEASE AND HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2017

NEWS RELEASE

==> picture [137 x 59] intentionally omitted <==

10 August 2017

PRUDENTIAL PLC HALF YEAR 2017 RESULTS

PRUDENTIAL DELIVERS BROAD-BASED PERFORMANCE LED BY DOUBLE-DIGIT GROWTH IN ASIA

Performance highlights on a constant (and actual) exchange rate basis

Group IFRS operating profit[1] of £2,358 million, up 5 per cent[2,3] (up 15 per cent[4] )
Asia new business profit[5] of £1,092 million, up 18 per cent[2,3] (up 33 per cent[4] ), IFRS operating profit[1] of £953 million, up 16 per cent[2,3] (up 31 per cent[4] ) and free surplus generation[6] of £553 million, up 15 per cent[2,3] (up 30 per cent[4] )
US life insurance IFRS operating profit[1] of £1,079 million, up 7 per cent[3] (up 22 per cent[4] )
UK life retail APE sales of £721 million, up 22 per cent, with PruFund sales up 29 per cent to £564 million
M&G first half external asset management net inflows of £7.2 billion
M&G and Prudential UK & Europe to be combined to create a leading savings and investments provider
2017 first interim dividend of 14.50 pence per share, up 12 per cent
Group Solvency II surplus[7] estimated at £12.9 billion; equivalent to a ratio of 202 per cent[8]

Mike Wells, Group Chief Executive, said: “Our successful strategy, innovative products and strong execution have driven growth across all of our main performance measures led by double-digit growth in our Asian business. We have achieved our objective of generating over £10 billion of Group cumulative free surplus between 1 January 2014 and 31 December 2017 six months early and we remain on track to achieve the remaining Asia-focused objectives by the end of this year.

“In Asia, we continue to leverage our structural advantages, delivering a 16 per cent[2] increase in IFRS operating profit and 15 per cent[2] growth in free surplus generation. New business profit in our life business increased by 18 per cent[2] , while Eastspring, our asset management business, delivered £2.3 billion of external net inflows[9] . The scale, breadth and diversification of our businesses leave us well placed to continue to grow as we access the opportunities created by the region’s dynamic economies, fast-growing middle class and underpenetrated markets.

“Our US life business, Jackson, has delivered a 7 per cent rise in IFRS operating profit and continues to outperform the market[10] with positive net flows in variable annuities, where its product and distribution capabilities are a competitive strength. In the UK our life retail sales are up by 22 per cent due to the continued consumer appetite for PruFund-backed products, while M&G experienced record net inflows from external retail clients for the first half of the year, reflecting improved investment performance.

“Our strategy is focused on markets where the need for our products is strong and growing, and our capabilities and execution ensure that we are successfully meeting that demand across our different regions. In Asia we offer innovative products that meet the savings, health and protection needs of the fast-growing middle class, in the US our variable annuities are focused on meeting consumers’ needs as they move into retirement, and in the UK and Europe we are responding with agility to changing consumer preferences, meeting the rising demand for savings and retirement solutions.

“We are also announcing today our intention to combine M&G and Prudential UK & Europe to form M&G Prudential, 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.

“This performance demonstrates our strength in accessing the market opportunities available to us. Our proven ability to innovate in both our products and capabilities positions us well to continue generating profitable growth and cash.”

	2017	2016	Change on	Change on
Summary financials	Halfyear	Halfyear	AER basis	CER basis
IFRS operating profit based on longer term investment returns2 Underlying free surplus generated2,6 Life new business profit2,5 IFRS profit after tax11	£2,358m £1,845m £1,689m £1,505m	£2,044m £1,615m £1,257m £687m	15% 14% 34% 119%	5% 6% 20% 109%
Net cash remittances from business units	£1,230m	£1,118m	10%	-
	2017	2016	Change on
	Halfyear	Fullyear	AERbasis
IFRS shareholders’ funds	£15.4bn	£14.7bn	5%
EEV shareholders’ funds	£40.5bn	£39.0bn	4%
Group Solvency II capital surplus7,8	£12.9bn	£12.5bn	3%

Based on longer-term investment returns. 2. Following its sale in May 2017, the operating results exclude the contribution of the Korea life business. All comparative results have been similarly adjusted. 3. Period-on-period percentage increases are stated on a constant exchange rate basis unless otherwise stated. All amounts are comparable to the six months ended 30 June 2016 unless otherwise indicated.
Growth rate on an actual exchange rate basis. 5. New business profit on business sold in the period, calculated in accordance with EEV principles. 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.
1. 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 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.
1. Before allowing for first interim dividend (31 December 2016: Second interim dividend). 9.
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).
©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.
IFRS profit after tax reflects the combined effects of operating results, negative short-term fluctuations in investments variances, result attaching to the sold Korea life business and the total tax charge for the year.

Contact:

Contact:
Media					Investors/Analysts
Jonathan Oliver	+44	(0)20	7548	3537	Raghu Hariharan	+44 (0)20 7548 2871
Jonathan Miller	+44	(0)20	7548	2776	Richard Gradidge	+44 (0)20 7548 3860
					William Elderkin	+44 (0)20 3480 5590
					Chantal Waight	+44 (0)20 7548 3039

Notes to Editors:

1. The results in this announcement are prepared on two bases: International Financial Reporting Standards (IFRS) and European Embedded Value (EEV). The results prepared under IFRS form the basis of the Group's statutory financial statements. The supplementary EEV basis results have been prepared in accordance with the amended European Embedded Value Principles dated April 2016 prepared by the European Insurance CFO Forum. The Group’s EEV basis results are stated on a post-tax basis and include the post-tax IFRS basis results of the Group’s asset management and other operations. Period-on-period percentage increases are stated on a constant exchange rate basis unless otherwise stated. Constant exchange rates results are calculated by translating prior period results using the current period foreign exchange rate i.e. current period average rates for the income statement and current period closing rates for the balance sheet.

2. Annual Premium Equivalent (APE) sales comprise regular premium sales plus one-tenth of single premium insurance sales.

3. Operating profit is determined on the basis of including longer-term investment returns. EEV and IFRS operating profit is stated after excluding the effect of short-term fluctuations in investment returns against long-term assumptions. Furthermore, for EEV basis results, operating profit based on longer-term investment returns excludes the effect of changes in economic assumptions and the mark to market value movement on core borrowings. Separately on the IFRS basis, operating profit also excludes amortisation of accounting adjustments arising principally on the acquisition of REALIC completed in 2012 and the cumulative foreign exchange gain on the disposal of the Korea life business that was recycled from Other Comprehensive Income on completion of the sale process in 2017.

4. Total number of Prudential plc shares in issue as at 30 June 2017 was 2,585,853,418.

5. A presentation for analysts and investors will be held today at 11.30am (UK) / 6.30pm (Hong Kong) in the conference suite at Nomura International plc, 1 Angel Lane, London EC4R 3AB. The presentation will be webcast live and as a replay on the corporate website via the link below: http://www.prudential.co.uk/investors/results-centre

A dial-in facility will be available to listen to the presentation. Please allow time ahead of the presentation to join the call (lines open half an hour before the presentation is due to start, i.e. from 11.00am (UK) / 6.00pm (Hong Kong)). Dial-in: +44 (0) 20 3059 8125 / 0800 368 0649 (Freephone UK), Passcode: ‘Prudential’ (this must be quoted to the operator to gain access to the call). Playback: +44 (0) 121 260 4861 (UK and international excluding US) / + 1 844 2308 058 (US only) Passcode: 6695475#. This will be available from approximately 2.30pm (UK) / 9.30pm (Hong Kong) on 10 August 2017 until 11.59pm (UK) on 24 August 2017 and 6.59am (Hong Kong) on 25 August 2017.

6. 2017 First Interim Dividend

Ex-dividend date

23 August 2017 (Singapore) 24 August 2017 (UK, Ireland and Hong Kong)

Record date 25 August 2017

Payment of dividend 28 September 2017 (UK, Ireland and Hong Kong) On or about 5 October 2017 (Singapore) On or about 5 October 2017 (ADR holders)

==> picture [282 x 53] intentionally omitted <==

7. About Prudential plc

Prudential plc and its affiliated companies constitute one of the world’s leading financial services groups, serving around 24 million insurance customers, with £635 billion of assets under management (as at 30 June 2017). Prudential plc is incorporated in England and Wales and is listed on the stock exchanges in London, Hong Kong, Singapore and New York. Prudential plc is not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America.

8. 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.

Summary Half Year 2017 financial performance Financial highlights

Life APE new business sales (APE sales)[1]

*Life APE new business sales (APE sales)*1	*Life APE new business sales (APE sales)*1	*Life APE new business sales (APE sales)*1	*Life APE new business sales (APE sales)*1	*Life APE new business sales (APE sales)*1	*Life APE new business sales (APE sales)*1	*Life APE new business sales (APE sales)*1
			Actual Exchange Rate				Constant Exchange Rate
			2017£m 2016 £m			Change %	2016 £m Change %
			Halfyear Halfyear				Halfyear
Asia~~2~~					1,943 1,605	21	1,814 7
US					960 782	23	889 8
UK					721 593	22	593 22
TotalGroup~~2~~					3,624 2,980	22	3,296 10
*Life EEV new business profits and investment in new business*
		Actual Exchange Rate				Constant Exchange Rate
	2017 Halfyear £m	2016 Halfyear £m			Change %	2016 Halfyear £m			Change %
	Free surplus	Free surplus			Free surplus	Free surplus			Free surplus
	New invested in	New invested in			New investment	New investment			New investment
	Business new	Business new			Business in new	Business in new			Business in new
	Profit business	Profit business			Profit business	Profit business			Profit business
Asia~~2~~	1,092 283	821		228	33 24	928		257	18 10
US	436 246	311		209	40 18	354		238	23 3
UK	161 42	125		56	29 (25)	125		56	29 (25)
TotalGroup~~2~~	1,689 571	1,257		493	34 16	1,407		551	20 4
*IFRS Profit*
					Actual Exchange Rate			Constant Exchange Rate
					2017 £m 2016 £m Change %			2016 £m Change %
					Halfyear Halfyear			Halfyear
Operating profit before tax based on longer-term investment
returns3
Long-term business:
Asia2					870 667 30			752 16
US					1,079 888 22			1,010 7
UK					480 473 1			473 1
Long-term business operating profit before tax~~2~~					2,429 2,028 20			2,235 9
UK general insurance commission					17 19 (11)			19 (11)
Asset management business:
M&G					248 225 10			225 10
Prudential Capital					6 13 (54)			13 (54)
Eastspring Investments					83 61 36			69 20
US					(6) (12) 50			(13) 54
Other income and expenditure					(419) (333) (26)			(342) (23)
Total operating profit based on longer-term investment returns
before tax and interest received from tax settlement2					2,358 2,001 18			2,206 7
Interestreceivedfromtaxsettlement					- 43 n/a			43 n/a
Total operating profit based on longer-term
investment returns before tax2					2,358 2,044 15			2,249 5
Non-operating items:
Result attaching to the sold Korea life business					61 40 53			47 30
Other non-operatingitems					(605) (1,420) 57			(1,619) 63
Profit before tax attributable to shareholders					1,814 664 173			677 168
Tax(charge)/credit attributable to shareholders' returns					(309) 23 n/a			43 n/a
Profit for theperiod attributable to shareholders					1,505 687 119			720 109
*Post-tax profit - EEV*4
					Actual Exchange Rate			Constant Exchange Rate
					2017 £m 2016 £m Change %			2016 £m Change %
					Halfyear Halfyear			Halfyear
Post-tax operating profit based on longer-term investment
returns
Long-term business:
Asia2					1,641 1,209 36			1,361 21
US					888 694 28			789 13
UK					465 384 21			384 21
Long-term business post-tax operating profit~~2~~					2,994 2,287 31			2,534 18
UK general insurance commission					14 15 (7)			15 (7)
Asset management business:
M&G					201 181 11			181 11
Prudential Capital					5 11 (55)			11 (55)
Eastspring Investments					73 53 38			60 22
US					(4) (8) 50			(9) 56
Other income and expenditure					(413) (319) (29)			(326) (27)
Post-tax operating profit based on longer-term investment returns
before interest received from tax settlement2					2,870 2,220 29			2,466 16
Interestreceivedfromtaxsettlement					- 37 n/a			37 n/a
Post-tax operating profit based on longer-term
investment returns2					2,870 2,257 27			2,503 15
Non-operating items:
Result attaching to the sold Korea life business					- (11) 100			(12) 100
Other non-operatingitems					427 (852) n/a			(985) n/a
Post-taxprofit for theperiod attributable to shareholders					3,297 1,394 137			1,506 119

Basic earnings per share[2] - based on operating profit after tax

			Actual Exchange Rate	Actual Exchange Rate	Actual Exchange Rate	Constant Exchange Rate
			2017 pence 2016 pence Change %			2016 pence Change %
			Halfyear Halfyear			Halfyear
IFRS			70.0 61.3		14	67.6 4
EEV			111.9 88.2		27	97.8 14

*Underlying free surplus generated*4,5
	Actual Exchange Rate				Constant Exchange Rate
	2017£m	2016 £m		Change %	2016 £m Change %
	Halfyear	Halfyear			Halfyear
	Long- Long- Long-				Long- Long-
	term Total	term Total		term Total	term Total term Total

Asia2	480 553	372 425		29 30	422 482 14 15
US	555 551	492 484		13 14	559 550 (1) -
UK	521 535	499 514		4 4	499 514 4 4
M&G	- 201	- 181		- 11	- 181 - 11
PrudentialCapital	- 5	- 11		- (55)	- 11 - (55)
Total Group~~2~~	1,556 1,845	1,363 1,615		14 14	1,480 1,738 5 6

Cash remitted by the business units to the Group[6]

		2017£m 2016 £m
		Halfyear Halfyear Change %
		Total Total Total
Asia		350 258 36
US		475 339 40
UK Life		215 215 -
M&G		175 150 17
Prudential Capital		15 25 (40)
OtherUK		- 131 (100)
TotalGroup		1,230 1,118 10

*Cash and capital*
		2017 2016
		Halfyear Halfyear Change %
First interim dividend per share relating to the reporting period		14.50p 12.93p 12
Holding company cash and short-term investments		£2,657m £2,546m 4
Group Solvency II capital surplus7,8		£12.9bn £9.1bn 42
Group SolvencyIIcapital ratio7,8		202% 175% +27pp

*Group shareholders' funds (including goodwill attributable to shareholders)*

		2017 2016
		Halfyear Halfyear Change %
IFRS		£15.4bn £14.6bn 5
EEV		£40.5bn £35.0bn 16

		2017 % 2016 %
		Halfyear Halfyear
Return on IFRS shareholders' funds~~9~~		24 24
Returnonembeddedvalue9		15 14


		2017 2016
		Halfyear Halfyear Change %
EEV shareholders' funds per share (including goodwill attributable to shareholders)		1,567p 1,356p 16
EEVshareholders' funds pershare (excluding goodwillattributable to shareholders) 1,510p 1,299p 16

2017 financial objectives[2,10]

*2017 financial objectives*2,10	*2017 financial objectives*2,10
							Half	CAGR	Objectives
							year

		2012	2013	2014	2015	2016	2017	(since 2012)
									201710
Asia Objectives		£m	£m	£m	£m	£m	£m	%

Asia life and asset management IFRS operating

pr	ofit

	Full year
	Reported actuals	909	1,058	1,108	1,286	1,644			>£1,826 million
	Constant exchange rate11	884	1,058	1,228	1,430	1,641			>15% CAGR
	Constant exchange rate change % (year-on-
	year)	-	20	16	16	15		17

	Half year
	Reported actuals	427	504	508	613	728	953
	Constant exchange rate11	411	504	566	665	772	889
	Constant exchange rate change % (year-on-
	year)	-	23	12	17	16	15

A	sia UnderlyingFree Surplus Generation
	Full year
	Reported actuals	468	565	599	666	859			£0.9 - £1.1 billion
	Constant exchange rate11	454	565	669	758	872
	Constant exchange rate change % (year-on-
	year)	-	24	18	13	15

	Half year
	Reported actuals	194	290	303	344	425	553
	Constant exchange rate11	185	290	336	380	459	537
	Constant exchange rate change % (year-on-
	year)	-	57	16	13	21	17

Group Objective for cumulative period 1 January 2014			to 31 December 2017					Actual	Objective
								1 Jan 2014 to	1 Jan 2014 to
								30 June 2017	31 December 2017
								£11.1 billion	> £10 billion

		Actual		Objective
		1 Jan 2014 to		1 Jan 2014 to
		30 June 2017		31 December 2017
		£11.1 billion		> £10 billion

Cumulative Group Underlying Free Surplus Generation[5] from 2014 onwards

1 APE sales is a measure of new business activity that is calculated as the sum of annualised regular premiums from new business plus 10 per cent of single premiums on new business written during the period for all insurance products, including premiums for contracts designated as investment contracts under IFRS 4. It is not representative of premium income recorded in the IFRS financial statements. Further explanation of the differences is included in Note D of the Additional EEV financial information.
2
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.
3 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.
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 EEV basis results. A reconciliation between IFRS and the EEV shareholder funds is included in Note C of the Additional EEV 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.
6 Cash remitted to the Group form 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 IFRS 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.
7 Estimated before allowing for first interim dividend. 8 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 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.
9 Annualised operating profit after tax and non-controlling interests as a percentage of opening shareholders' funds. 10 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.
11 Constant exchange rates results translated at using exchange rates at December 2013.

Group Chief Executive’s Report

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, 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 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.

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 wellbalanced 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 $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 $16 trillion is invested in adviser-distributed retirement assets in the US[15] , while variable annuities account for just $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 the 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. 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 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 PCA. 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.

==> picture [527 x 242] intentionally omitted <==

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.
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 EEV basis results. A reconciliation between IFRS and the EEV shareholder funds is included in Note C of the Additional EEV financial information.
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.
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.
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.
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 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 (31 December 2016: Second interim dividend).
1. Comparable to 31 December 2016 on an actual exchange rate basis.
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.
OECD, Global insurance market trends, 2016.
Social Security Administration, Annual Performance Plan 2012.
Cerulli Associates – US Advisor Metrics 2016.
LIMRA/SRI U.S. Individual Annuities Executive Summary 1Q YTD 2017 17. UK Government Office for Science, Future of an ageing population, 2016.

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

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 Asiafocused 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.
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).

==> picture [527 x 46] intentionally omitted <==

IFRS Profit

IFRS Profit	IFRS Profit
	Actual Exchange Rate	Constant Exchange Rate
	2017 £m 2016 £m Change %	2016 £m Change %
	Halfyear Halfyear	Halfyear
Operating profit before tax based on longer-term investment
returns
Long-term business:
Asia1	870 667 30	752 16
US	1,079 888 22	1,010 7
UK	480 473 1	473 1
Long-term business operating profit before tax~~1~~	2,429 2,028 20	2,235 9
UK general insurance commission	17 19 (11)	19 (11)
Asset management business:
M&G	248 225 10	225 10
Prudential Capital	6 13 (54)	13 (54)
Eastspring Investments	83 61 36	69 20
US	(6) (12) 50	(13) 54
Other income and expenditure8	(419) (333) (26)	(342) (23)
Total operating profit based on longer-term investment returns
before tax and interest received from tax settlement1	2,358 2,001 18	2,206 7
Interestreceivedfromtaxsettlement	- 43 n/a	43 n/a
Total operating profit based on longer-term
investment returns before tax1	2,358 2,044 15	2,249 5
Non-operating items:
Result attaching to the sold Korea life business	61 40 53	47 30
Other non-operatingitems8	(605) (1,420) 57	(1,619) 63
Profit before tax attributable to shareholders	1,814 664 173	677 168
Tax(charge)/credit attributable to shareholders' returns	(309) 23 n/a	43 n/a
Profit for the period attributable to shareholders'	1,505 687 119	720 109

IFRS Earnings per share
	Actual Exchange Rate	Constant Exchange Rate
	2017pence 2016 pence Change %	2016 pence Change %
	Halfyear Halfyear	Halfyear
Basic earnings per share based on operating profit after tax	70.0 61.3 14	67.6 4
Basic earnings pershare based ontotalprofit aftertax	58.7 26.9 118	28.2 108

IFRS Earnings per share

	Actual Exchange Rate	Actual Exchange Rate		Constant Exchange Rate	Constant Exchange Rate
	2017pence	2016 pence	Change %	2016 pence	Change %
	Halfyear	Halfyear		Halfyear
Basic earnings per share based on operating profit after tax	70.0	61.3	14	67.6	4
Basic earnings pershare based ontotalprofit aftertax	58.7	26.9	118	28.2	108

IFRS Operating Profit based on longer-term investment returns

Total IFRS operating profit increased by 5 per 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.
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]

	2017 £m	2016 £m
	Halfyear	Halfyear
	Actual Exchange Rate	Actual Exchange Rate
	At 1 January 2017 Net liability flows11 Market and other movements At 30 June 2017	At 1 January 2016 Net liability flows11 Market and other movements At 30 June 2016

Asia~~12~~	32,851 1,016 1,173 35,040	25,032 977 4,135 30,144
US	177,626 1,958 (1,805) 177,779	138,913 2,855 17,387 159,155
UK	56,158 (1,167) 1,500 56,491	52,824 (1,699) 4,286 55,411
TotalGroup	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 Asian 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-profit funds of £1.6 billion as shown in the table below. Positive investment markets in the first half have partly been offset by currency effects as sterling strengthened over the period, increasing liabilities by £0.9 billion. In total, business flows and market movements have increased policyholder liabilities from £266.6 billion to £269.3 billion.

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

	2017 £m	2016 £m
	Halfyear	Halfyear
	Actual Exchange Rate	Actual Exchange Rate
	At 1 January 2017 Net liability flows11 Market and other movements At 30 June 2017	At 1 January 2016 Net liability flows11 Market and other movements At 30 June 2016

Asia	29,933 2,295 1,053 33,281	20,934 1,551 4,355 26,840
UK	113,146 1,574 3,729 118,449	100,069 582 6,417 107,068
TotalGroup	143,079 3,869 4,782 151,730	121,003 2,133 10,772 133,908

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

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

	siness pre-tax IFRS operating profit based on longer-term	investment returns by

	Actual Exchange Rate	Constant Exchange Rate
	2017 £m 2016 £m	2016 £m
	Halfyear Halfyear	Halfyear
	Operating Average Operating Average	Operating Average
	profit1 liability Margin profit1 liability Margin	profit1 liability Margin
	bps bps	bps
Spread income	583 89,314 131 556 80,146 139	613 85,708 143
Fee income	1,279 164,152 156 989 129,054 153	1,118 143,526 156
With-profits	172 132,701 26 162 114,109 28	165 115,945 28
Insurance margin	1,152 898	1,013
Margin on revenues	1,138 946	1,051
Expenses:
Acquisition costs*	(1,241) 3,624 (34)% (1,027) 2,980 (34)%	(1,155) 3,296 (35)%
Administration expenses	(1,131) 259,451 (87) (879) 216,075 (81)	(983) 236,974 (83)
DAC adjustments	186 132	149
Expectedreturnonshareholderassets	103 111	124
	2,241 1,888	2,095
Longevity reinsurance and other
management actions toimprove solvency	188 140	140
Operating profit 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.

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.

Asset management external funds under management[15,16]

	2017£m	2016 £m
	Halfyear	Halfyear
	Actual Exchange Rate	Actual ExchangeRate
	At 1 January Market and other At 30 June	At 1 January Market and other At 30 June
	2017 Net flows movements 2017	2016 Netflows movements 2016
M&G	136,763 7,179 5,176 149,118	126,405 (6,966) 10,217 129,656
Eastspring17	38,042 2,273 4,281 44,596	30,281 (412) 2,859 32,728
Total asset management	174,805 9,452 9,457 193,714	156,686 (7,378) 13,076 162,384

Total asset management(including MMF)	182,519 9,951 9,571 202,041	162,692 (6,722) 13,835 169,805

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 (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 percent).

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.

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)

	*mance*
	s profit and APE new business sales (APE sales)
	Actual Exchange Rate	Constant Exchange Rate
	2017 £m 2016 £m Change %	2016 £m Change %
	New New New	New New
	APE Business APE Business APE Business	APE Business APE Business
	Sales Profit Sales Profit Sales Profit	Sales Profit Sales Profit
Asia~~1~~	1,943 1,092 1,605 821 21 33	1,814 928 7 18
US	960 436 782 311 23 40	889 354 8 23
UK	721 161 593 125 22 29	593 125 22 29
Total Group~~1~~	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 longterm 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).

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 £30.0 billion at 30 June 2017 were 22 per cent higher than at the start of the year.

Free surplus generation[4]

*Free surplus generation*4	*Free surplus generation*4
	Actual Exchange Rate	Constant Exchange Rate
	2017 £m 2016 £m Change	2016 £m Change
	Halfyear Halfyear %	Halfyear %
Asia~~1~~	836 653 28	739 13
US	797 693 15	788 1
UK	577 570 1	570 1
M&G	201 181 11	181 11
PrudentialCapital	5 11 (55)	11 (55)
Underlying free surplus generated from in-force life business and asset management~~1~~ 2,416 2,108 15		2,289 6
Investmentin newbusiness1 (571) (493) (16)		(551) (4)
Underlyingfree surplus generated~~1~~ 1,845 1,615 14		1,738 6
Market related movements, timing differences and other movements (211) (38)
Net cash remitted by business units (1,230) (1,118)
Total movementin free surplus 404 459
Free surplus at 30 June 6,979 5,763

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

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

In the first half of 2017 underlying free surplus generation from our in-force life insurance and asset management business increased by 6 per 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 £7.0 billion at 30 June 2017.

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

Business unit remittance [19]

_Business unit remittance_19
	Actual Exchange Rate
	2017 £m 2016 £m
	Halfyear Halfyear
Net cash remitted by business units:
Asia	350 258
US	475 339
UK Life	215 215
M&G	175 150
Prudential Capital	15 25
OtherUK	- 131
Net cash remitted by business 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 profit - EEV	Post-tax profit - EEV
	Actual Exchange Rate	Constant Exchange Rate
	2017 £m 2016 £m Change %	2016 £m Change %
	Halfyear Halfyear	Halfyear
Post-tax operating profit based on longer-term investment
returns
Long-term business:
Asia1	1,641 1,209 36	1,361 21
US	888 694 28	789 13
UK	465 384 21	384 21
Long-term business post-tax operating profit~~1~~	2,994 2,287 31	2,534 18
UK general insurance commission	14 15 (7)	15 (7)
Asset management business:
M&G	201 181 11	181 11
Prudential Capital	5 11 (55)	11 (55)
Eastspring Investments	73 53 38	60 22
US	(4) (8) 50	(9) 56
Other income and expenditure20	(413) (319) (29)	(326) (27)
Post-tax operating profit based on longer-term investment
returns before interest received from tax settlement1	2,870 2,220 29	2,466 16
Interestreceivedfromtaxsettlement	- 37 n/a	37 n/a
Post-tax operating profit based on longer-term
investment returns1	2,870 2,257 27	2,503 15
Non-operating items:
Result attaching to the sold Korea life business	- (11) 100	(12) 100
Other non-operatingitems20	427 (852) n/a	(985) n/a
Post-taxprofit for theperiod attributable to shareholders	3,297 1,394 137	1,506 119

==> picture [527 x 34] intentionally omitted <==

EEV Earnings per share

EEV Earnings per share	EEV Earnings per share
	Actual Exchange Rate	Constant Exchange Rate
	2017pence 2016pence Change %	2016pence Change %
	Halfyear Halfyear	Halfyear
Basic earnings per share based on post-tax operating profit~~1~~	111.9 88.2 27	97.8 14
Basic earningsper share based onpost-tax totalprofit	128.5 54.5 136	58.9 118

EEV Operating Profit

On an EEV basis, Group post-tax operating profit based on longer-term investment returns was 15 per 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]


Analysis of movement in Group shareholder Solvency II surplus21
	2017 £bn	2016 £bn
	Halfyear	Halfyear Fullyear
Estimated solvency II surplus at 1 January	12.5	9.7 9.7
Operating experience	1.7	1.2 2.7
Non-operating experience (including market movements)	-	(2.4) (1.1)
Other capital movements
Subordinated debt issuance	-	0.7 1.2
Foreign currency translation impacts	(0.5)	0.9 1.6
Dividends paid	(0.8)	(0.9) (1.3)
Methodology and calibrationchanges	-	(0.1) (0.3)
Estimated Solvency II 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’s 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.

==> picture [527 x 52] intentionally omitted <==

Financing and liquidity

Shareholders’ net core structural borrowings

	orrowings

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

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

Shareholders' Funds	Shareholders' Funds
	IFRS		EEV
	2017 £m 2016 £m		2017 £m 2016 £m
	Halfyear Halfyear Fullyear		Halfyear Halfyear Fullyear
Profit after tax for the period	1,505 687	1,921	3,297 1,394	4,516
Exchange movements, net of related tax	(224) 806	1,161	(1,045) 2,663	4,211
Cumulative exchange gain of Korea life business
recycled to profit and loss account	(61) -	-	- -	-
Unrealised gains and losses on Jackson securities
classified as available for sale24	300 1,094	31	- -	-
Dividends	(786) (935)	(1,267)	(786) (935)	(1,267)
Market to market value movements on Jackson assets
backing surplus and required capital	- -	-	31 138	(11)
Other	49 (2)	(135)	55 (165)	(367)
Net increase in shareholders’ funds	783 1,650	1,711	1,552 3,095	7,082
Shareholders’ funds at beginningof theperiod	14,666 12,955	12,955	38,968 31,886	31,886
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' funds~~2~~	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.

Corporate transactions

Entrance into Nigeria

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

Disposal of Korea

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

Dividend

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

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

==> picture [527 x 281] intentionally omitted <==

Notes: 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.
1. 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.
1. Before allowing for first interim dividend. 6. 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 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.
1. Comparable to 31 December 2016 on an actual exchange rate basis. 8. Refer to note B1.1 in IFRS financial statements for the break-down of other income and expenditure and other non-operating items. 9. Operating income comprises spread income, fee income, with-profits, insurance margin and expected shareholder return. 10. Includes Group's proportionate share of the liabilities and associated flows of the insurance joint ventures and associate in Asia. 11. Defined as movements in shareholder-backed policyholder liabilities arising from premiums (net of charges), surrenders/withdrawals, maturities and deaths. 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.
1. Includes unallocated surplus of with-profits business. 14. For basis of preparation see note I (a) of Additional unaudited IFRS financial information. 15. Includes Group’s proportionate share in PPM South Africa and the Asia asset management joint ventures. 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 IFRS financial information.
1. 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).
1. ©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.
1. Net cash remitted by business units are included in the Holding Company Cashflow is disclosed in note II (a) of Additional IFRS 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 break-down of other income and expenditure and other non-operating items.
1. The methodology and assumptions used in calculating the Solvency II capital results are set out in note II (c) of Additional unaudited IFRS financial information. 22. 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 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.
The UK with-profits Solvency II surplus includes the PAC with-profits sub-fund, the Scottish Amicable Insurance Fund and the Defined Charge Participating SubFund. 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.

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

1. Introduction

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 longterm 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.

2. 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.

a. 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.

i. 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 subcommittees including security and information security where specialist skills and knowledge are required.

ii. 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.

iii. 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.

iv. Risk policies

These set out the specific requirements which cover the fundamental principles for risk management within the Group Risk 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.

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.

v. 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.

b. 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.

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

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
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.

==> picture [527 x 43] intentionally omitted <==

c. 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.

i. 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.

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 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.

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.

iii. 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 in section 4 below.

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.

==> picture [527 x 114] intentionally omitted <==

iv. Risk monitoring and reporting

3. 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 digitalisation and is closely monitoring any risks which arise.

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 withprofits fund’s future profits which is transferred to the shareholders (future

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 means 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 also is considered a key risk.

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

transfers), which is dependent on equity, property and bond values.

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.

4. 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.

4.1 Risks from our investments

a. 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 are also dependent on market interest rates and exposes us to the risk of those moving in a way that is detrimental for us.

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 fund to 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 fund’s 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 fund, 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 fund 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) – helps 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 fund.

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 withprofits 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 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.

b. 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 that 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 a 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).

c. 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.

==> picture [526 x 42] intentionally omitted <==

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;
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.

4.2 Risks from our products

a. 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;
Using longevity, morbidity and persistency assumptions that reflect recent experience and expectation of future trends, and industry data and expert judgement where appropriate;
We use reinsurance to mitigate longevity and morbidity risks;
Morbidity risk is also mitigated by appropriate underwriting when policies are issued and claims are received;
Persistency risk is mitigated through the quality of sales processes and with initiatives to increase customer retention;
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.

4.3 Risks from our business operations

a. 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.

==> picture [526 x 32] intentionally omitted <==

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 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 its 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 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 on-going 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.

b. 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 Systematically Important Insurers (G-SII) regime form 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 designation methodology 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 the 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 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, amongst 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.

c. 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 [527 x 557] intentionally omitted <==

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

Including bonds guaranteed by the federal government.

Corporate governance

The directors confirm that the Company has complied with all relevant provisions set out in the Corporate Governance Code issued by Hong Kong Stock Exchange (HK Code) throughout the accounting period. With respect to 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 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 confirms that it has adopted a code of conduct regarding securities transactions by directors on terms no less exacting than required by the Hong Kong Listing Rules and that the directors of the Company have complied with this code of conduct throughout the period.

IFRS Disclosure and Additional Financial Information Prudential plc Half Year 2017 results International Financial Reporting Standards (IFRS) basis results

		Page
	Condensed consolidated income statement	3
	Condensed consolidated statement of comprehensive income	4
	Condensed consolidated statement of changes in equity	5
	Condensed consolidated statement of financial position	8
	Condensed consolidated statement of cash flows	9

Notes

A	Background	C	Balance sheet notes (continued)	Page 43 45 46 47 48 48 51 51 52 53 55 56 56 56 56 57 58
A1 A2 B	Basis of preparation, audit status and exchange rates New accounting pronouncements in 2017 Earnings performance	C4 C5 C6 C7 C8 C9 D	Policyholder liabilities and unallocated surplus of with-profits funds C4.1 Movement of liabilities C4.1(a) Group overview C4.1(b) Asia insurance operations C4.1(c) US insurance operations C4.1(d) UK insurance operations Intangible assets C5(a) Goodwill C5(b) Deferred acquisition costs and other intangible assets Borrowings C6.1 Core structural borrowings of shareholder- financed operations C6.2 Other borrowings Deferred tax Defined benefit pension schemes Share capital, share premium and own shares Other notes
B1 B2 B3 B4 B5 B6 B7 C	Analysis of performance by segment B1.1 Segment results – profit before tax B1.2 Short-term fluctuations in investment returns on shareholder-backed business B1.3 Determining operating segments and performance measure of operating segments B1.4 Additional segmental analysis of revenue Profit before tax – asset management operations Acquisition costs and other expenditure Effect of changes and other accounting features on insurance assets and liabilities Tax charge Earnings per share Dividends Balance sheet notes
		D1 D2 D3 D4
C1 Analysis of Group statement of financial position by segment C2 Analysis of segment statement of financial position by business type C2.1 Asia insurance operations C2.2 US insurance operations C2.3 UK insurance operations C3 Assets and liabilities – classification and measurement C3.1 Group assets and liabilities – measurement C3.2 Debt securities C3.3 Loans portfolio Additional IFRS financial information*	Analysis of Group statement of financial position by segment Analysis of segment statement of financial position by business type C2.1 Asia insurance operations C2.2 US insurance operations C2.3 UK insurance operations Assets and liabilities – classification and measurement C3.1 Group assets and liabilities – measurement C3.2 Debt securities C3.3 Loans portfolio
		Statement of directors’ responsibilities Independent review report to Prudential plc



I IFRS profit and loss information (a) Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver (b) Asia operations – analysis of IFRS operating profit by business unit (c) Analysis of asset management operating profit based on longer-term investment return (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 (a) Holding company cash flow (b) Funds under management (c) Solvency II capital position at 30 June 2017				59 65 66 67 68 69 70

* The additional financial information (set out in sections I(a) to II(c)) is not covered by the KPMG independent review opinion on page 58

==> picture [514 x 323] intentionally omitted <==

[THIS PAGE INTENTIONALLY LEFT BLANK]

International Financial Reporting Standards (IFRS) Basis Results

CONDENSED CONSOLIDATED INCOME STATEMENT

CONDENSED CONSOLIDATED INCOME STATEMENT
	2017 £m	2016 £m
Note	Halfyear	Halfyear Fullyear
Earned premiums, net of reinsurance	21,158	17,394 36,961
Investment return	20,629	17,062 32,511
Other income	1,222	1,085 2,370
Total revenue,net of reinsurance B1.4	43,009	35,541 71,842
Benefits and claims and movement in unallocated surplus of with-profits funds,
net of reinsurance	(35,442)	(30,939) (59,366)
Acquisition costs and other expenditure B3	(5,330)	(3,563) (8,848)
Finance costs: interest on core structural borrowings of shareholder-financed
operations	(216)	(169) (360)
Disposal of Korea life business:
Cumulative exchange gain recycled from other comprehensive income D1	61	- -
Remeasurement adjustments D1	5	- (238)
Totalcharges,net of reinsurance	(40,922)	(34,671) (68,812)
Share ofprofitsfromjointventures and associates,net of related tax	120	86 182
Profit before tax_(being tax attributable to shareholders’ and policyholders’_
returns)*	2,207	956 3,212
Less taxcharge attributable to policyholders' returns	(393)	(292) (937)
Profit before tax attributable to shareholders B1.1	1,814	664 2,275
Total tax charge attributable to policyholders and shareholders B5	(702)	(269) (1,291)
Adjustment to remove tax charge attributable to policyholders' returns	393	292 937
Tax(charge) credit attributable to shareholders' returns B5	(309)	23 (354)
Profit for theperiod attributable to equity holders of the Company	1,505	687 1,921

	2017	2016
Earnings per share(inpence)	Halfyear	Halfyear Fullyear
Based on profit attributable to the equity holders of the Company: B6
Basic	58.7p	26.9p 75.0p
Diluted	58.6p	26.8p 75.0p


	2017	2016
Dividendsper share(inpence) Note	Halfyear	Halfyear Fullyear
Dividends relating to reporting period: B7
First interim ordinary dividend	14.50p	12.93p 12.93p
Secondinterimordinary dividend	-	- 30.57p
Total	14.50p	12.93p 43.50p
Dividends paid in reporting period: B7
Current year first interim ordinary dividend	-	- 12.93p
Second interim ordinary dividend for prior year	30.57p	26.47p 26.47p
Specialdividendforprioryear	-	10.00p 10.00p
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 withprofits fund after adjusting for taxes borne by policyholders) is not representative of pre-tax profits attributable to shareholders.

International Financial Reporting Standards (IFRS) Basis Results

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

	2017 £m	2016 £m
Note	Halfyear	Halfyear Fullyear

Profit for the period	1,505	687 1,921

Other comprehensive income (loss):
Items that may be reclassified subsequently to profit or loss
Exchange movements on foreign operations and net investment hedges:
Exchange movements arising during the period	(220)	798 1,148
Cumulative exchange gain of Korea life business recycled through profit and
loss D1	(61)	- -
Related tax	(4)	8 13
	(285)	806 1,161

Net unrealised valuation movements on securities of US insurance operations
classified as available-for-sale:
Net unrealised holding gains arising during the period	565	2,023 241
Add back net losses (deduct net gains) included in the income statement on
disposalandimpairment	(34)	95 (269)
Total C3.2(c)	531	2,118 (28)
Related change in amortisation of deferred acquisition costs C5(b)	(69)	(435) 76
Related tax	(162)	(589) (17)
	300	1,094 31

Total	15	1,900 1,192

Items that will not be reclassified to profit or loss
Shareholders' share of actuarial gains and losses on defined benefit pension
schemes:
Gross	53	11 (107)
Related tax	(7)	(2) 14
	46	9 (93)

Other comprehensive income for theperiod, net of related tax	61	1,909 1,099

Total comprehensive income for the period attributable to the equity
holders of the Company	1,566	2,596 3,020

International Financial Reporting Standards (IFRS) Basis Results

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONDENSED CONSOLIDATED	STATEMENT OF CHANGES IN EQUITY
	Period ended 30 June 2017 £m
	Available -for-sale
		Non-
	Share Share Retained Translation securities Shareholders'	controlling	Total
	capital premium earnings reserve reserves equity	interests	equity
Note	note C9 note C9
Reserves
Profit for the period	- - 1,505 - - 1,505	-	1,505
Othercomprehensiveincome (loss)	- - 46 (285) 300 61	-	61
Total comprehensive income
(loss) for the period	- - 1,551 (285) 300 1,566	-	1,566

Dividends B7	- - (786) - - (786)	-	(786)
Reserve movements in respect of
share-based payments	- - 22 - - 22	-	22

Share capital and share premium
New share capital subscribed C9	- 10 - - - 10	-	10

Treasury shares
Movement in own shares in respect
of share-based payment plans	- - (12) - - (12)	-	(12)
Movement in Prudential plc shares purchased by unit trusts
consolidated under IFRS	- - (17) - - (17)	-	(17)
Net increase (decrease) in equity	- 10 758 (285) 300 783	-	783
At beginning ofperiod	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

International Financial Reporting Standards (IFRS) Basis Results

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)

CONDENSED CONSOLIDATED	STATEMENT OF CHANGES IN EQUITY (continued)
	Period ended 30 June 2016 £m
	Available -for-sale
		Non-
	Share Share Retained Translation securities Shareholders'	controlling	Total
	capital premium earnings reserve reserves equity	interests	equity
Note	note C9 note C9
Reserves
Profit for the period	- - 687 - - 687	-	687
Othercomprehensiveincome	- - 9 806 1,094 1,909	-	1,909
Total comprehensive income for
the period	- - 696 806 1,094 2,596	-	2,596

Dividends B7	- - (935) - - (935)	-	(935)
Reserve movements in respect of
share-based payments	- - (54) - - (54)	-	(54)

Share capital and share premium
New share capital subscribed C9	- 6 - - - 6	-	6

Treasury shares
Movement in own shares in respect
of share-based payment plans	- - 22 - - 22	-	22
Movement in Prudential plc shares purchased by unit trusts
consolidated under IFRS	- - 15 - - 15	-	15
Net increase (decrease) in equity	- 6 (256) 806 1,094 1,650	-	1,650
At beginning ofperiod	128 1,915 10,436 149 327 12,955	1	12,956
At end ofperiod	128 1,921 10,180 955 1,421 14,605	1	14,606

International Financial Reporting Standards (IFRS) Basis Results

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)

CONDENSED CONSOLIDATED	STATEMENT OF CHANGES IN EQUITY (continued)
	Year ended 31 December 2016 £m
	Available -for-sale
		Non-
	Share Share Retained Translation securities Shareholders'	controlling	Total
	capital premium earnings reserve reserves equity	interests	equity
Note	note C9 note C9
Reserves
Profit for the year	- - 1,921 - - 1,921	-	1,921
Othercomprehensiveincome (loss)	- - (93) 1,161 31 1,099	-	1,099
Total comprehensive income for
the year	- - 1,828 1,161 31 3,020	-	3,020

Dividends B7	- - (1,267) - - (1,267)	-	(1,267)
Reserve movements in respect of
share-based payments	- - (51) - - (51)	-	(51)

Share capital and share premium
New share capital subscribed C9	1 12 - - - 13	-	13

Treasury shares
Movement in own shares in respect
of share-based payment plans	- - 2 - - 2	-	2
Movement in Prudential plc shares purchased by unit trusts
consolidated under IFRS	- - (6) - - (6)	-	(6)
Net increase in equity	1 12 506 1,161 31 1,711	-	1,711
At beginning ofyear	128 1,915 10,436 149 327 12,955	1	12,956
At end ofyear	129 1,927 10,942 1,310 358 14,666	1	14,667

International Financial Reporting Standards (IFRS) Basis Results

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

	2017 £m	2016 £m
Note	30 Jun	30 Jun 31 Dec
Assets
Goodwill C5(a)	1,501	1,677 1,628
Deferred acquisition costs and other intangible assets C5(b)	10,757	9,594 10,807
Property, plant and equipment	727	1,214 743
Reinsurers' share of insurance contract liabilities	9,709	9,470 10,051
Deferred tax assets C7	4,105	3,771 4,315
Current tax recoverable	700	554 440
Accrued investment income	2,887	2,764 3,153
Other debtors	3,417	3,505 3,019
Investment properties	15,218	13,940 14,646
Investment in joint ventures and associates accounted for using the equity method	1,293	1,135 1,273
Loans C3.3	16,952	14,215 15,173
Equity securities and portfolio holdings in unit trusts	210,437	176,037 198,552
Debt securities C3.2	170,793	168,367 170,458
Derivative assets	3,789	5,495 3,936
Other investments	5,566	4,845 5,465
Deposits	13,353	14,181 12,185
Assets held for sale	33	30 4,589
Cashand cashequivalents	9,893	8,530 10,065
Total assets C1	481,130	439,324 470,498

Equity
Shareholders' equity	15,449	14,605 14,666
Non-controllinginterests	1	1 1
Total equity	15,450	14,606 14,667

Liabilities
Contract liabilities (including amounts in respect of contracts classified as
investment contracts under IFRS 4)	398,980	362,510 388,996
Unallocated surplus of with-profits funds	15,090	13,597 14,317
Core structural borrowings of shareholder-financed operations C6.1	6,614	5,966 6,798
Operational borrowings attributable to shareholder-financed operations C6.2(a)	2,096	2,798 2,317
Borrowings attributable to with-profits operations C6.2(b)	3,336	1,427 1,349
Obligations under funding, securities lending and sale and repurchase agreements	6,408	4,963 5,031
Net asset value attributable to unit holders of consolidated unit trusts and similar
funds	8,577	8,770 8,687
Deferred tax liabilities C7	5,683	5,397 5,370
Current tax liabilities	743	566 649
Accruals, deferred income and other liabilities	14,524	12,915 13,825
Provisions	759	467 947
Derivative liabilities	2,870	5,342 3,252
Liabilitiesheldforsale	-	- 4,293
Total liabilities C1	465,680	424,718 455,831
Total equity and 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).

==> picture [514 x 62] intentionally omitted <==

International Financial Reporting Standards (IFRS) Basis Results

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
	2017 £m	2016 £m
Note	Halfyear	Halfyear Fullyear

Cash flows from operating activities
Profit before tax_(being tax attributable to shareholders' and policyholders' returns)_note (i)	2,207	956 3,212
Non-cash movements in operating assets and liabilities reflected in profit
before tax:
Other non-investment and non-cash assets	(550)	(2,660) (2,490)
Investments	(26,539)	(21,280) (37,824)
Policyholder liabilities (including unallocated surplus)	21,597	19,548 31,135
Other liabilities (including operational borrowings)	3,390	3,836 7,861
Other itemsnote (ii)	(15)	403 307
Net cash flowsfromoperating activities	90	803 2,201
Cash flows from investing activities
Net cash outflows from purchases and disposals of property, plant and equipment	(56)	(32) (246)
Net cash inflows (outflows)fromcorporate transactionsnote (iii)	813	(302) (303)
Net cash flowsfrom investing activities	757	(334) (549)
Cash flows from financing activities
Structural borrowings of the Group:
Shareholder-financed operations:note (iv) C6.1
Issue of subordinated debt, net of costs	-	681 1,227
Interest paid	(207)	(160) (335)
With-profits operations:note (v) C6.2
Interest paid	(4)	(4) (9)
Equity capital:
Issues of ordinary share capital	10	6 13
Dividends paid	(786)	(935) (1,267)
Net cash flowsfrom financing activities	(987)	(412) (371)
Net (decrease) / increase in cash and cash equivalents	(140)	57 1,281
Cash and cash equivalents at beginning of period	10,065	7,782 7,782
Effect ofexchangerate changes oncashand cashequivalents	(32)	691 1,002
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
		Foreign
		Balance at Amortisation of exchange Balance at

		1 Jan 2017 issue costs movement 30 Jun 2017

	Structural borrowings of shareholder-financed 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.

==> picture [514 x 60] intentionally omitted <==

International Financial Reporting Standards (IFRS) Basis Results

NOTES

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 Average for the 6 months to	Average
	Closing for the Closing Average for
	rate at 6 months to rate at 12 months to
30 Jun 2017 30 Jun 2017	30 Jun 2016 30 Jun 2016 31 Dec 2016 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.

B EARNINGS PERFORMANCE

B1 Analysis of performance by segment

B1.1 Segment results – profit before tax

B1.1 Segment results – profit before tax
	2017 £m	*2016 £m**	%	2016 £m
			Half year Half year
			2017 vs 2017 vs
			half year half year
		AER CER	2016 2016	AER
Note	Half year	Half year Half year	AER CER	Full year
		note (iv) note (iv)	note (iv) note (iv)
Asia operations
Asia insurance operations B4(a)	870	667 752	30% 16%	1,503
Eastspring Investments	83	61 69	36% 20%	141
Total Asia operations	953	728 821	31% 16%	1,644

US operations
Jackson (US insurance operations)	1,079	888 1,010	22% 7%	2,052
Broker-dealer and asset management	(6)	(12) (13)	50% 54%	(4)
TotalUS operations	1,073	876 997	22% 8%	2,048

UK operations
UK insurance operations: B4(b)
Long-term business	480	473 473	1% 1%	799
General insurance commissionnote (i)	17	19 19	(11)% (11)%	29
Total UK insurance operations	497	492 492	1% 1%	828
M&G	248	225 225	10% 10%	425
Prudential Capital	6	13 13	(54)% (54)%	27
TotalUKoperations	751	730 730	3% 3%	1,280

Total segmentprofit	2,777	2,334 2,548	19% 9%	4,972

Other income and expenditure
Investment return and other income	-	6 6	(100)% (100)%	1
Interest payable on core structural borrowings	(216)	(165) (165)	(31)% (31)%	(360)
Corporate expenditurenote (ii)	(172)	(156) (165)	(10)% (4)%	(334)
Total	(388)	(315) (324)	(23)% (20)%	(693)
Solvency II implementation costs	-	(11) (11)	n/a n/a	(28)
Restructuring costs note (iii)	(31)	(7) (7)	(343)% (343)%	(38)
Operating profit based on longer-term investment
returns before interest received from tax settlement	2,358	2,001 2,206	18% 7%	4,213
Interestreceivedfromtaxsettlement	-	43 43	n/a n/a	43
Operating profit based on longer-term
investment returns B1.3	2,358	2,044 2,249	15% 5%	4,256

Short-term fluctuations in investment returns on
shareholder-backed business B1.2	(573)	(1,385) (1,580)	59% 64%	(1,678)
Amortisation of acquisition accounting
adjustmentsnote (v)	(32)	(35) (39)	9% 18%	(76)
Cumulative exchange gain on the sold Korea life
business recycled from other comprehensive income D1	61	- -	n/a n/a	-
Profit (loss) attaching to the held for sale Korea life
business D1	-	40 47	n/a n/a	(227)
Profit before tax attributable to shareholders	1,814	664 677	173% 168%	2,275
Taxcharge attributable to shareholders' returns B5	(309)	23 43	n/a n/a	(354)
Profit for theperiod attributable to shareholders	1,505	687 720	119% 109%	1,921

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

* 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 nonoperating 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
	Halfyear	Halfyear Fullyear
Insurance operations:
Asianote (i)	41	1 (225)
USnote (ii)	(754)	(1,440) (1,455)
UKnote (iii)	9	246 198
Otheroperationsnote (iv)	131	(192) (196)
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
	Halfyear	Halfyear Fullyear
Net equity hedge result~~note (a)~~	(782)	(1,692) (1,587)
Other than equity-related derivativesnote (b)	12	335 (126)
Debt securitiesnote (c)	5	(105) 201
Equity-type investments: actual less longer-term return	1	13 35
Other items	10	9 22
Total	(754)	(1,440) (1,455)

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.
(c) Short-term fluctuations related to debt securities

(c) Short-term fluctuations related to debt securities
	2017 £m	2016 £m
	Halfyear	Halfyear Fullyear
Short-term fluctuations relating to debt securities
(Charges) credits in the period:
Losses on sales of impaired and deteriorating bonds	(2)	(87) (94)
Defaultsnote (v)	-	(6) (4)
Bond write downs	(1)	(32) (35)
Recoveries/reversals	7	4 15
Total credits (charges) in the period	4	(121) (118)
Less: Risk margin allowance deducted from operating profit based on longer-term
investmentreturns	46	42 89
	50	(79) (29)
Interest-related realised gains:
Arising in the period	23	20 376
Less: Amortisation of gains and losses arising in current and prior periods to operating
profit based on longer-term investmentreturns	(72)	(59) (135)
	(49)	(39) 241
Related amortisationofdeferred acquisitioncosts	4	13 (11)
Total short-term fluctuations 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:

		Halfyear 2017	Halfyear 2017		Halfyear 2016	Halfyear 2016		Fullyear 2016	Fullyear 2016
Moody’s rating category (or equivalent under
(or equivalent under
NAIC ratings of	Average			Average			Average
mortgage-backed	book		Annual	book		Annual	book		Annual
securities)	value	RMR	expected loss	value	RMR	expected loss	value	RMR	expected loss
	US$m	%	US$m £m	US$m	%	US$m £m	US$m	%	US$m £m

A3 or higher	27,848	0.13	(35) (28)	29,172	0.12	(36) (25)	29,051	0.12	(36) (27)
Baa1, 2 or 3	26,601	0.23	(60) (47)	25,771	0.24	(63) (44)	25,964	0.24	(62) (46)
Ba1, 2 or 3	1,052	1.03	(11) (9)	1,065	1.08	(11) (8)	1,051	1.07	(11) (8)
B1, 2 or 3	311	2.75	(9) (7)	319	3.02	(10) (7)	312	2.95	(9) (7)
Below B3	27	3.80	(1) (1)	41	3.81	(2) (1)	40	3.81	(2) (1)
Total	55,839	0.21	(116) (92)	56,368	0.21	(122) (85)	56,418	0.21	(120) (89)

Related amortisation of deferred acquisition
costs (see below)			22 17			22 15			23 17
Risk margin reserve charge to operating profit
for longer-term credit-related losses			(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 availablefor-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).

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-dealerand assetmanagement
– UK	– M&G
	– PrudentialCapital

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.
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:

and appropriate risk premiums, are as follows:
	2017	2016
	Halfyear	Halfyear	Fullyear
Equity-type securities such as common and preferred stock and
portfolio holdings in mutual funds	6.2% to 6.5%	5.5% to 5.9%	5.5% to 6.5%
Other equity-type securities such as investments in limited
partnerships andprivate equityfunds	8.2% to 8.5%	7.5% to 7.9%	7.5% to 8.5%

==> picture [514 x 38] intentionally omitted <==

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:

					Halfyear	2017	£m
	Insurance operations				Asset management
									Unallo-
									cated
									to a
									segment
				Prudential			Eastspring	Total	(central	Group
	Asia	US	UK	M&G	Capital	US	Investments	segment	operations)	total
Gross premium earned	7,697	7,997	6,411	-	-	-	-	22,105	-	22,105
Outwardreinsurance	(243)	(168)	(536)	-	-	-	-	(947)	-	(947)
Earned premiums, net of
reinsurance	7,454	7,829	5,875	-	-	-	-	21,158	-	21,158
Other income from external
customers	56	3	89	576	10	371	103	1,208	14	1,222
Total revenue from external
customers	7,510	7,832	5,964	576	10	371	103	22,366	14	22,380
Intra-group revenue	-	-	-	88	20	57	128	293	(293)	-
Interest income	485	1,082	1,754	-	30	-	1	3,352	3	3,355
Other investmentreturn	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
					Halfyear	2016	£m
	Insurance operations				Asset management

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

					Fullyear	2016	£m
	Insurance operations				Asset management
									Unallo-
									cated
									to a
									segment
				Prudential			Eastspring	Total	(central	Group
	Asia	US	UK	M&G	Capital	US	Investments	segment	operations)	total
Gross premium earned	14,006	14,685	10,290	-	-	-	-	38,981	-	38,981
Outwardreinsurance	(648)	(367)	(1,005)	-	-	-	-	(2,020)	-	(2,020)
Earned premiums, net of
reinsurance	13,358	14,318	9,285	-	-	-	-	36,961	-	36,961
Other income from external
customers	77	4	374	972	19	680	176	2,302	68	2,370
Total revenue from external
customers	13,435	14,322	9,659	972	19	680	176	39,263	68	39,331
Intra-group revenue	-	-	-	200	37	103	211	551	(551)	-
Interest income	873	2,149	4,502	15	47	2	2	7,590	57	7,647
Other investmentreturn	2,040	5,461	17,577	1	(41)	-	2	25,040	(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	2016 £m
	Prudential Eastspring Half year	Half year Full year
	M&G Capital US Investments Total	Total Total
Revenue (excluding NPH broker-dealer fees)	668 107 124 234 1,133	834 1,876
NPHbroker-dealer feesnote (i)	- - 305 - 305	259 550
Grossrevenue	668 107 429 234 1,438	1,093 2,426
Charges (excluding NPH broker-dealer fees)	(395) (50) (130) (180) (755)	(649) (1,402)
NPHbroker-dealer feesnote (i)	- - (305) - (305)	(259) (550)
Gross charges	(395) (50) (435) (180) (1,060)	(908) (1,952)
Share of profits from joint ventures and
associates,net of related tax	8 - - 29 37	26 67
Profit before tax	281 57 (6) 83 415	211 541
Comprising:
Operating profit based on longer-term
investment returnsnote (ii)	248 6 (6) 83 331	287 589
Short-term fluctuationsin investmentreturns	33 51 - - 84	(76) (48)
Profit before tax	281 57 (6) 83 415	211 541

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:

	2017 £m	2016 £m
	Halfyear	Halfyear Fullyear
Asset management fee income	491	431 900
Other income	4	9 23
Staff costs	(166)	(133) (332)
Othercosts	(95)	(96) (212)
Underlying profit before performance-related fees	234	211 379
Share of associate's results	8	5 13
Performance-relatedfees	6	9 33
M&G operating profit 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
	Halfyear	Halfyear Fullyear
Acquisition costs incurred for insurance policies	(1,920)	(1,700) (3,687)
Acquisition costs deferred less amortisation of acquisition costs	399	740 923
Administration costs and other expenditure	(3,055)	(2,451) (5,522)
Movements in amounts attributable to external unit holders
ofconsolidatedinvestmentfunds	(754)	(152) (562)
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 longterm 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).

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:

	2017 £m	2016 £m
	Current Deferred Half year	Half year Full year
Tax charge	tax tax Total	Total Total
UK tax	(240) (66) (306)	(229) (764)
Overseas tax	(187) (209) (396)	(40) (527)
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:

and shareholders as shown below:
	2017 £m	2016 £m
	Current Deferred Half year	Half year Full year
Tax charge	tax tax Total	Total Total
Tax (charge) to policyholders' returns	(247) (146) (393)	(292) (937)
Tax(charge) credit attributable to shareholders	(180) (129) (309)	23 (354)
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.

(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.

		Halfyear 2017£m
		Asia insurance US insurance UK insurance Other Attributable to Attributable to
		operations operations operations operations shareholders policyholders Total
Operating profit (loss) based on longer-
term investment returns		870 1,079 497 (88) 2,358 n/a n/a
Non-operating profit (loss)		98 (782) 9 131 (544) n/a n/a
Profit before tax		968 297 506 43 1,814 393 2,207
Expected tax rate		20% 35% 19% 19% 22% 100% 36%
Tax at the expected rate		194 104 96 8 402 393 795
	Effects of recurring tax reconciliation
	items:
	Income not taxable or taxable at
	concessionary rates	(18) (10) (3) (31) (31)
	Deductions not allowable for tax
	purposes	8 5 5 18 18
	Items related to taxation of life
	insurance businesses	(43) (85) (2) (130) (130)
	Deferred tax adjustments	4 (1) 3 3
	Effect of results of joint ventures and
	associates	(11) (9) (20) (20)
	Irrecoverable withholding taxes	29 29 29
	Other	4 2 4 10 10
	Total	(60) (91) 4 26 (121) - (121)

	Effects of non-recurring tax
	reconciliation items:
	Adjustments to tax charge in relation
	to prior years	10 (5) (1) 4 4
	Movements in provisions for open tax
	matters	7 25 32 32
	Cumulative exchange gains on the sold Korea life business recycled from
	othercomprehensiveincome (8) (8) (8)
	Total (1) 35 (5) (1) 28 - 28

Totalactualtaxcharge 133 48 95 33 309 393 702
Analysed into:
Tax on operating profit based on longer-
term investment returns 141 322 92 8 563 n/a n/a
Taxon non-operating profit (8) (274) 3 25 (254) n/a n/a
Actual tax rate:
Operating profit based on longer-term
investment returns
Including non-recurring tax reconciling
items 16% 30% 19% (9)% 24% n/a n/a
Excluding non-recurring tax
reconciling items 15% 27% 20% (10)% 22% n/a n/a
Totalprofit 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.

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.

businesses and central operations.	businesses and central operations.
		*Halfyear 2016 £m **
		Asia insurance US insurance UK insurance Other Attributable to Attributable to
		operations operations operations operations shareholders policyholders Total
Operating profit (loss) based on longer-
term investment returns*		667 888 492 (3) 2,044 n/a n/a
Non-operating profit (loss)		37 (1,471) 246 (192) (1,380) n/a n/a
Profit (loss) before tax		704 (583) 738 (195) 664 292 956
Expected tax rate		21% 35% 20% 20% 8% 100% 36%
Tax at the expected rate		148 (204) 148 (39) 53 292 345
	Effects of recurring tax reconciliation
	items:
	Income not taxable or taxable at
	concessionary rates	(14) (5) (16) (3) (38) (38)
	Deductions not allowable for tax
	purposes	8 2 6 2 18 18
	Items related to taxation of life
	insurance businesses	(10) (60) (1) - (71) (71)
	Deferred tax adjustments	(1) - 3 (3) (1) (1)
	Effect of results of joint ventures and
	associates	(10) - - (7) (17) (17)
	Irrecoverable withholding taxes	- - - 20 20 20
	Other	3 - (2) 16 17 17
	Total	(24) (63) (10) 25 (72) - (72)

	Effects of non-recurring tax
	reconciliation items:
	Adjustments to tax charge in relation
	to prioryears	1 (3) - (2) (4) (4)
	Total	1 (3) - (2) (4) - (4)

Totalactualtaxcharge (credit)		125 (270) 138 (16) (23) 292 269
Analysed into:
Tax on operating profit based on longer-
term investment returns		116 245 101 13 475 n/a n/a
Taxon non-operating profit		9 (515) 37 (29) (498) n/a n/a
Actual tax rate:
Operating profit based on longer-term
investment returns
Including non-recurring tax
reconciling items		17% 28% 21% (433)% 23% n/a n/a
Excluding non-recurring tax
reconciling items		17% 28% 21% (500)% 23% n/a n/a
Totalprofit		18% 46% 19% 8% (3)% 100% 28%

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.

==> picture [514 x 35] intentionally omitted <==

		Fullyear 2016 £m
		Asia insurance US insurance UK insurance Other Attributable to Attributable to
		operations operations operations operations shareholders policyholders Total
Operating profit (loss) based on longer-
term investment returns		1,503 2,052 828 (127) 4,256 n/a n/a
Non-operating (loss) profit		(460) (1,523) 198 (196) (1,981) n/a n/a
Profit (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	1 (81) (7) 5 (82) (82)
	Movements in provisions for open
	tax matters	20 - - 31 51 51
	Impact of changes in local statutory
	tax rates	- - (5) (1) (6) (6)
	Write downof Korealife business	58 - - - 58 58
	Total	79 (81) (12) 35 21 - 21

Totalactualtaxcharge (credit)		239 (65) 190 (10) 354 937 1,291
Analysed into:
Tax on operating profit based on longer-
term investment returns		254 468 160 12 894 n/a n/a
Taxon non-operating profit		(15) (533) 30 (22) (540) n/a n/a
Actual tax rate:
Operating profit 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
Totalprofit		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:

impact of the held for sale Korea life business, are as follows:
	Asia	Attributable to
	insurance	shareholders
Expected tax rate on total profit	22%	24%
Actual tax rate
Operating profit based on longer-term investment returns	17%	21%
Totalprofit	19%	14%

B6 Earnings per share

B6 Earnings per share
	Halfyear 2017
	Before Basic earnings Diluted earnings
	tax Tax Net of tax per share per share
	note B1.1 note B5
Note	£m £m £m pence pence
Based on operating profit based on longer-term
investment returns	2,358 (563) 1,795 70.0p 69.9p
Short-term fluctuations in investment returns on
shareholder-backed business B1.2	(573) 248 (325) (12.7)p (12.7)p
Amortisation of acquisition accounting adjustments	(32) 6 (26) (1.0)p (1.0)p
Cumulative exchange gain on the sold Korea life
businessrecycledfromothercomprehensiveincome	61 - 61 2.4p 2.4p
Based onprofit for theperiod	1,814 (309) 1,505 58.7p 58.6p

	Halfyear 2016*
	Before Basic earnings Diluted earnings
	tax Tax Net of tax per share per share
	note B1.1 note B5
Note	£m £m £m pence pence
Based on operating profit based on longer-term
investment returns	2,044 (475) 1,569 61.3p 61.2p
Short-term fluctuations in investment returns on
shareholder-backed business B1.2	(1,385) 496 (889) (34.7)p (34.7)p
Amortisation of acquisition accounting adjustments	(35) 11 (24) (0.9)p (0.9)p
Profit attaching toheldforsaleKorealife business D1	40 (9) 31 1.2p 1.2p
Based onprofit 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.

	Fullyear 2016
	Before Basic earnings Diluted earnings
	tax Tax Net of tax per share per share
	note B1.1 note B5
Note	£m £m £m pence pence
Based on operating profit based on longer-term
investment returns	4,256 (894) 3,362 131.3p 131.2p
Short-term fluctuations in investment returns on
shareholder-backed business B1.2	(1,678) 519 (1,159) (45.3)p (45.2)p
Amortisation of acquisition accounting adjustments	(76) 25 (51) (2.0)p (2.0)p
Loss attaching toheldforsaleKorealife business D1	(227) (4) (231) (9.0)p (9.0)p
Based onprofit for theyear	2,275 (354) 1,921 75.0p 75.0p

This approach is consistent with that applied at full year 2016.
			Fullyear 2016
				Basic	Diluted
	Before			earnings	earnings
	tax	Tax	Net of tax per share		per share
	note B1.1	note B5
Note	£m	£m	£m	pence	pence
Based on operating profit based on longer-term
investment returns	4,256	(894)	3,362 131.3p		131.2p
Short-term fluctuations in investment returns on
shareholder-backed business B1.2	(1,678)	519	(1,159) (45.3)p		(45.2)p
Amortisation of acquisition accounting adjustments	(76)	25	(51) (2.0)p		(2.0)p
Loss attaching toheldforsaleKorealife business D1	(227)	(4)	(231) (9.0)p		(9.0)p
Based onprofit 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	Half year Full year
	2017	2016 2016
Weighted average number of shares for calculation of:	(millions)	(millions) (millions)
Basic earnings per share	2,565	2,558 2,560
Diluted earningsper share	2,567	2,559 2,562

B7 Dividends

B7 Dividends
	Halfyear 2017	Halfyear 2016	Fullyear 2016
	Pence per Pence per Pence per
	share £m	share £m	share £m
Dividends relating to reporting period:
First interim ordinary dividend	14.50]p 375	12.93p 333	12.93p 333
Secondinterimordinary dividend	- -	- -	30.57p 789
Total	14.50p 375	12.93p 333	43.50p 1,122
Dividends paid in reporting period:
Current year first interim ordinary dividend	- -	- -	12.93p 332
Second interim ordinary dividend for prior year 30.57p 786		26.47p 679	26.47p 679
Specialdividendforprioryear - -		10.00p 256	10.00p 256
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.

C BALANCE SHEET NOTES

C1 Analysis of Group statement of financial position by segment

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

					30 Jun 31 Dec
		30 Jun 2017 £m			2016 £m 2016 £m
	Insurance operations	Asset management	Unallo- Elimin-
		Prudential Eastspring	cated ation
			to a of intra-
			segment group
			(central debtors
			opera- and	Group	Group Group
	Asia US UK	M&G Capital US Investments	tions) creditors	Total	Total Total
By operating segment	C2.1 C2.2 C2.3
Assets
GoodwillC5(a)	245 - 26	1,153 - 16 61	- -	1,501	1,677 1,628
Deferred acquisition costs and other
intangible assetsC5(b)	2,340 8,187 168	6 - 5 4	47 -	10,757	9,594 10,807
Property, plant and equipment	119 224 344	4 - 8 3	25 -	727	1,214 743
Reinsurers' share of insurance contrac	t
liabilities	1,680 6,740 2,560	- - - -	- (1,271)	9,709	9,470 10,051
Deferred tax assetsC7	85 3,678 127	20 7 130 8	50 -	4,105	3,771 4,315
Current tax recoverable	30 348 311	- 5 6 -	70 (70)	700	554 440
Accrued investment income	565 493 1,650	7 23 76 32	41 -	2,887	2,764 3,153
Other debtors	2,598 260 2,796	1,000 758 73 62	5,418 (9,548)	3,417	3,505 3,019
Investment properties	5 6 15,207	- - - -	- -	15,218	13,940 14,646
Investment in joint ventures and
associates accounted for using the
equity method	714 - 405	39 - - 135	- -	1,293	1,135 1,273
LoansC3.3	1,307 9,497 5,784	- 364 - -	- -	16,952	14,215 15,173
Equity securities and portfolio holdings
in unit trusts	26,753 125,059 58,398	111 - - 19	97 -	210,437	176,037 198,552
Debt securitiesC3.2	39,061 38,029 91,302	- 2,381 - -	20 -	170,793	168,367 170,458
Derivative assets	102 906 2,676	- 101 - -	4 -	3,789	5,495 3,936
Other investments	- 932 4,614	16 - 4 -	- -	5,566	4,845 5,465
Deposits	1,243 - 11,843	- - 18 44	205 -	13,353	14,181 12,185
Assets held for sale	- - 33	- - - -	- -	33	30 4,589
Cashand cashequivalents	1,786 1,194 4,565	350 1,451 276 156	115 -	9,893	8,530 10,065
Total assets	78,633 195,553 202,809	2,706 5,090 612 524	6,092 (10,889)	481,130	439,324 470,498

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 classified as
investment contracts under IFRS 4)C4.1	59,619 177,779 162,853	- - - -	- (1,271)	398,980	362,510 388,996
Unallocated surplus of with-profits
fundsC4.1	3,003 - 12,087	- - - -	- -	15,090	13,597 14,317
Core structural borrowings of
shareholder-financed operationsC6.1	- 192 -	- 275 - -	6,147 -	6,614	5,966 6,798
Operational borrowings attributable to
shareholder-financed operations
C6.2(a)	20 453 147	52 - - -	1,424 -	2,096	2,798 2,317
Borrowings attributable to with-profits
operationsC6.2(b)	20 - 3,316	- - - -	- -	3,336	1,427 1,349
Obligations under funding, securities
lending and sale and repurchase
agreements	- 4,518 1,890	- - - -	- -	6,408	4,963 5,031
Net asset value attributable to unit
holders of consolidated unit trusts and
similar funds	3,541 - 5,036	- - - -	- -	8,577	8,770 8,687
Deferred tax liabilitiesC7	1,021 2,981 1,646	21 - 2 1	11 -	5,683	5,397 5,370
Current tax liabilities	162 58 451	37 20 2 13	70 (70)	743	566 649
Accruals, deferred income and other
liabilities	5,804 4,517 7,035	547 4,208 406 75	1,480 (9,548)	14,524	12,915 13,825
Provisions	138 1 350	181 - - 53	36 -	759	467 947
Derivative liabilities	124 43 1,771	- 526 - -	406 -	2,870	5,342 3,252
Liabilitiesheldforsale	- - -	- - - -	- -	-	- 4,293
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.

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

C2.1 Asia insurance operations

	2017 £m	2016 £m
	Unit-linked
	With-profits assets and Other 30 Jun	30 Jun 31 Dec
	business liabilities business Total	Total Total
Note
Assets
Goodwill	- - 245 245	258 245
Deferred acquisition costs and other intangible
assets	31 - 2,309 2,340	2,356 2,316
Property, plant and equipment	82 - 37 119	88 121
Reinsurers' share of insurance contract
liabilities	50 - 1,630 1,680	1,564 1,539
Deferred tax assets	- - 85 85	92 98
Current tax recoverable	- - 30 30	38 29
Accrued investment income	253 60 252 565	570 521
Other debtors	1,847 189 562 2,598	3,229 2,633
Investment properties	- - 5 5	5 5
Investment in joint ventures and associates
accounted for using the equity method	- - 714 714	525 688
Loans C3.3	702 - 605 1,307	1,278 1,303
Equity securities and portfolio holdings in unit
trusts	12,821 12,397 1,535 26,753	22,631 23,581
Debt securities C3.2	23,398 3,442 12,221 39,061	35,519 36,546
Derivative assets	58 3 41 102	79 47
Deposits	307 393 543 1,243	912 1,379
Assets held for sale	- - - -	- 3,863
Cashand cashequivalents	733 234 819 1,786	2,010 1,995
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 classified as investment
contracts under IFRS 4) C4.1(b) 31,549 15,326 12,744 59,619		53,437 55,018
Unallocated surplus of with-profits funds C4.1(b) 3,003 - - 3,003		2,351 2,667
Operational borrowings attributable to
shareholder-financed operations - 13 7 20		11 19
Borrowings attributable to with-profits
operations 20 - - 20		6 4
Net asset value attributable to unit holders of
consolidated unit trusts and similar funds 2,114 1,201 226 3,541		3,379 3,093
Deferred tax liabilities 705 38 278 1,021		905 935
Current tax liabilities 64 - 98 162		109 113
Accruals, deferred income and other liabilities 2,667 138 2,999 5,804		5,838 5,887
Provisions 48 - 90 138		115 157
Derivative liabilities 112 2 10 124		129 265
Liabilitiesheldforsale - - - -		- 3,758
Total liabilities 40,282 16,718 16,452 73,452		66,280 71,916
Total equity and 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'.

C2.2 US insurance operations

C2.2 US insurance operations

	2017 £m	2016 £m
	Variable annuity separate account Fixed annuity, GIC and
	assets and other 30 Jun 30 Jun 31 Dec
	liabilities business Total	Total Total
Note
Assets
Deferred acquisition costs and other intangible assets	- 8,187 8,187	7,081 8,323
Property, plant and equipment	- 224 224	213 237
Reinsurers' share of insurance contract liabilities	- 6,740 6,740	6,859 7,224
Deferred tax assets	- 3,678 3,678	3,369 3,861
Current tax recoverable	- 348 348	254 95
Accrued investment income	- 493 493	520 549
Other debtors	- 260 260	18 295
Investment properties	- 6 6	5 6
Loans C3.3	- 9,497 9,497	8,504 9,735
Equity securities and portfolio holdings in unit trusts	124,735 324 125,059	104,124 120,747
Debt securities C3.2	- 38,029 38,029	41,143 40,745
Derivative assets	- 906 906	1,608 834
Other investments	- 932 932	895 987
Cashand cashequivalents	- 1,194 1,194	1,056 1,054
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 classified as investment contracts under IFRS 4) C4.1(c) 124,735 53,044 177,779		159,155 177,626
Core structural borrowings of shareholder-financed
operations - 192 192		186 202
Operational borrowings attributable to shareholder-financed
operations - 453 453		70 480
Obligations under funding, securities lending and sale and
repurchase agreements - 4,518 4,518		3,144 3,534
Net asset value attributable to unit holders of consolidated
unit trusts and similar funds - - -		23 -
Deferred tax liabilities - 2,981 2,981		3,204 2,831
Current tax liabilities - 58 58		- -
Accruals, deferred income and other liabilities - 4,517 4,517		4,385 4,749
Provisions - 1 1		5 2
Derivativeliabilities - 43 43		421 64
Total liabilities 124,735 65,807 190,542		170,593 189,488
Total equity and liabilities 124,735 70,818 195,553		175,649 194,692

C2.3 UK insurance operations

C2.3 UK insurance operations
		2017£m		2016 £m
		Other funds and subsidiaries
		Unit-linked assets and Annuity and other long-term

	With-profits		30 Jun	30 Jun 31 Dec
	sub-funds	liabilities business Total	Total	Total Total
By operating segment Note note (i)
Assets
Goodwill 26		- - -	26	189 153
Deferred acquisition costs and other
intangible assets 82		- 86 86	168	89 107
Property, plant and equipment 327		- 17 17	344	866 343
Reinsurers' share of insurance
contract liabilities 1,308		135 1,117 1,252	2,560	2,362 2,590
Deferred tax assets 73		- 54 54	127	139 146
Current tax recoverable 179		- 132 132	311	256 283
Accrued investment income 1,040		93 517 610	1,650	1,518 1,915
Other debtors 1,895		224 677 901	2,796	2,778 2,447
Investment properties 12,962		650 1,595 2,245	15,207	13,930 14,635
Investment in joint ventures and associates accounted for using the
equity method 405		- - -	405	462 409
Loans C3.3 4,036		- 1,748 1,748	5,784	3,616 3,572
Equity securities and portfolio holdings
in unit trusts 43,023		15,339 36 15,375	58,398	49,150 54,037
Debt securities C3.2 49,165		6,743 35,394 42,137	91,302	89,114 90,796
Derivative assets 2,183		3 490 493	2,676	3,563 2,927
Other investments 4,608		5 1 6	4,614	3,926 4,449
Deposits 9,542		968 1,333 2,301	11,843	13,184 10,705
Assets held for salenote (ii) 33		- - -	33	30 726
Cashand cashequivalents 3,230		762 573 1,335	4,565	3,445 4,703
Total assets 134,117		24,922 43,770 68,692	202,809	188,617 194,943
Total equity -		- 6,227 6,227	6,227	6,163 5,999
Liabilities
Contract liabilities (including amounts in respect of contracts classified as
investment contracts under IFRS 4) C4.1(d) 106,362		22,917 33,574 56,491	162,853	151,233 157,654
Unallocated surplus of with-profits
funds C4.1(d) 12,087		- - -	12,087	11,246 11,650
Operational borrowings attributable to
shareholder-financed operations -		4 143 147	147	163 167
Borrowings attributable to with-profits
operations 3,316		- - -	3,316	1,421 1,345
Obligations under funding, securities lending and sale and repurchase
agreements 1,216		- 674 674	1,890	1,619 1,497
Net asset value attributable to unit holders of consolidated unit trusts and
similar funds 3,152		1,856 28 1,884	5,036	5,368 5,594
Deferred tax liabilities 1,354		- 292 292	1,646	1,253 1,577
Current tax liabilities 246		68 137 205	451	363 447
Accruals, deferred income and other
liabilities 5,604		76 1,355 1,431	7,035	5,896 6,176
Provisions 62		- 288 288	350	156 442
Derivative liabilities 718		1 1,052 1,053	1,771	3,736 1,860
Liabilitiesheldforsalenote (ii) -		- - -	-	- 535
Total liabilities 134,117		24,922 37,543 62,465	196,582	182,454 188,944
Total equity and 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 (WPSF) mainly contains with-profits business but it also contains some non-profit business (unit-linked, term assurances and annuities). The PAC with-profits fund includes £10.9 billion (30 June 2016: £11.3 billion; 31 December 2016: £11.2 billion) of non-profits 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.

(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 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 Valuation based on significant observable Valuation based on significant unobservable
Analysis of financial investments, net of derivative liabilities by
business type	markets market inputs market inputs Total

With-profits
Loans	- - 1,906 1,906
Equity securities and portfolio holdings in unit trusts	51,136 4,282 426 55,844
Debt securities	28,122 44,145 296 72,563
Other investments (including derivative assets)	73 3,310 3,464 6,847
Derivativeliabilities	(79) (752) - (831)
Total financial investments, net of derivative liabilities	79,252 50,985 6,092 136,329
Percentage oftotal	58% 38% 4% 100%
Unit-linked and variable annuity separate account
Equity securities and portfolio holdings in unit trusts	152,050 399 23 152,472
Debt securities	5,243 4,943 - 10,186
Other investments (including derivative assets)	4 3 4 11
Derivativeliabilities	(2) - - (2)
Total financial investments, net of derivative liabilities	157,295 5,345 27 162,667
Percentage oftotal	97% 3% 0% 100%
Non-linked shareholder-backed
Loans	- 309 2,594 2,903
Equity securities and portfolio holdings in unit trusts	2,104 7 10 2,121
Debt securities	21,525 66,233 286 88,044
Other investments (including derivative assets)	(25) 1,526 996 2,497
Derivativeliabilities	(1) (1,576) (460) (2,037)
Total financial investments, net of derivative liabilities	23,603 66,499 3,426 93,528
Percentage oftotal	25% 71% 4% 100%

Group total analysis, including other financial liabilities held
at fair value
Group total
Loans	- 309 4,500 4,809
Equity securities and portfolio holdings in unit trusts	205,290 4,688 459 210,437
Debt securities	54,890 115,321 582 170,793
Other investments (including derivative assets)	52 4,839 4,464 9,355
Derivativeliabilities	(82) (2,328) (460) (2,870)
Total financial investments, net of derivative liabilities	260,150 122,829 9,545 392,524
Investment contract liabilities without discretionary participation features
held at fair value	- (17,166) - (17,166)
Borrowings attributable to with-profits operations	- - (1,816) (1,816)
Net asset value attributable to unit holders of consolidated unit trusts and
similar funds	(5,719) (2,421) (437) (8,577)
Other financial liabilitiesheld atfair value	- (394) (2,766) (3,160)
Total financial instruments at fair value	254,431 102,848 4,526 361,805
Percentage of total	70% 29% 1% 100%

	30 Jun 2016 £m
	Level 1 Level 2 Level 3
	Quoted prices (unadjusted) in active Valuation based on significant observable Valuation based on significant unobservable
Analysis of financial investments, net of derivative liabilities by
business type	markets market inputs market inputs Total

With-profits
Equity securities and portfolio holdings in unit trusts	38,596 3,969 630 43,195
Debt securities	24,430 42,741 662 67,833
Other investments (including derivative assets)	103 3,157 3,674 6,934
Derivativeliabilities	(192) (2,536) - (2,728)
Total financial investments, net of derivative liabilities	62,937 47,331 4,966 115,234
Percentage oftotal	55% 41% 4% 100%
Unit-linked and variable annuity separate account
Equity securities and portfolio holdings in unit trusts	130,977 401 27 131,405
Debt securities	4,956 5,059 - 10,015
Other investments (including derivative assets)	11 38 5 54
Derivativeliabilities	(19) (51) - (70)
Total financial investments, net of derivative liabilities	135,925 5,447 32 141,404
Percentage oftotal	96% 4% 0% 100%
Non-linked shareholder-backed
Loans	- 259 2,448 2,707
Equity securities and portfolio holdings in unit trusts	1,402 1 34 1,437
Debt securities	23,379 66,823 317 90,519
Other investments (including derivative assets)	- 2,369 983 3,352
Derivativeliabilities	- (2,064) (480) (2,544)
Total financial investments, net of derivative liabilities	24,781 67,388 3,302 95,471
Percentage oftotal	26% 71% 3% 100%

Group total analysis, including other financial liabilities held
at fair value
Group total
Loans	- 259 2,448 2,707
Equity securities and portfolio holdings in unit trusts	170,975 4,371 691 176,037
Debt securities	52,765 114,623 979 168,367
Other investments (including derivative assets)	114 5,564 4,662 10,340
Derivativeliabilities	(211) (4,651) (480) (5,342)
Total financial investments, net of derivative liabilities	223,643 120,166 8,300 352,109
Investment contract liabilities without discretionary participation features
held at fair value	- (16,178) - (16,178)
Net asset value attributable to unit holders of consolidated unit trusts and
similar funds	(5,275) (2,427) (1,068) (8,770)
Other financial liabilitiesheld atfair value	- (375) (2,616) (2,991)
Total financial instruments at fair value	218,368 101,186 4,616 324,170
Percentage of total	67% 31% 2% 100%

	31 Dec 2016 £m
	Level 1 Level 2 Level 3
	Quoted prices (unadjusted) in active Valuation based on significant observable Valuation based on significant unobservable
Analysis of financial investments, net of derivative liabilities by
business type	markets market inputs market inputs Total

With-profits
Loans	- - 27 27
Equity securities and portfolio holdings in unit trusts	45,181 3,669 690 49,540
Debt securities	26,227 43,880 690 70,797
Other investments (including derivative assets)	58 3,357 3,443 6,858
Derivativeliabilities	(51) (1,025) - (1,076)
Total financial investments, net of derivative liabilities	71,415 49,881 4,850 126,146
Percentage oftotal	56% 40% 4% 100%
Unit-linked and variable annuity separate account
Equity securities and portfolio holdings in unit trusts	146,637 374 22 147,033
Debt securities	5,136 4,462 - 9,598
Other investments (including derivative assets)	6 8 5 19
Derivativeliabilities	(4) (24) - (28)
Total financial investments, net of derivative liabilities	151,775 4,820 27 156,622
Percentage oftotal	97% 3% 0% 100%
Non-linked shareholder-backed
Loans	- 276 2,672 2,948
Equity securities and portfolio holdings in unit trusts	1,966 3 10 1,979
Debt securities	21,896 67,915 252 90,063
Other investments (including derivative assets)	- 1,492 1,032 2,524
Derivativeliabilities	(9) (1,623) (516) (2,148)
Total financial investments, net of derivative liabilities	23,853 68,063 3,450 95,366
Percentage oftotal	25% 71% 4% 100%

Group total analysis, including other financial liabilities held at fair
value
Group total
Loans	- 276 2,699 2,975
Equity securities and portfolio holdings in unit trusts	193,784 4,046 722 198,552
Debt securities	53,259 116,257 942 170,458
Other investments (including derivative assets)	64 4,857 4,480 9,401
Derivativeliabilities	(64) (2,672) (516) (3,252)
Total financial investments, net of derivative liabilities	247,043 122,764 8,327 378,134
Investment contract liabilities without discretionary participation features
held at fair value	- (16,425) - (16,425)
Net asset value attributable to unit holders of consolidated unit trusts and
similar funds	(4,217) (3,587) (883) (8,687)
Other financial liabilitiesheld atfair value	- (385) (2,851) (3,236)
Total financial instruments at fair value	242,826 102,367 4,593 349,786
Percentage of total	70% 29% 1% 100%

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.

subsidiaries and branches.
	£m
	At 1 Jan Total gains (losses) in income Total gains (losses) recorded in other compre- hensive Transfers into Transfers out of At 30 Jun
Halfyear 2017	2017 statement income Purchases Sales Settled Issued level 3 level 3 2017
Loans	2,699 96 (132) 1,879 - (70) 28 - - 4,500
Equity securities and portfolio holdings in unit
trusts	722 (17) (2) 175 (418) - - - (1) 459
Debt securities	942 2 (11) 142 (471) - - - (22) 582
Other investments (including derivative assets)	4,480 84 (64) 191 (227) - - - - 4,464
Derivativeliabilities	(516) 56 - - - - - - - (460)
Total financial investments, net of derivative
liabilities	8,327 221 (209) 2,387 (1,116) (70) 28 - (23) 9,545
Borrowings attributable to with-profits operations	- 2 - - - - (1,818) - - (1,816)
Net asset value attributable to unit holders of
consolidated unit trusts and similar funds	(883) (357) - - (167) 1,017 (47) - - (437)*
Other financial liabilities	(2,851) (96) 141 - (1) 73 (32) - - (2,766)
Total financial instruments at fair value	4,593 (230) (68) 2,387 (1,284) 1,020 (1,869) - (23) 4,526

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

			Total
			gains
			(losses)
		Total	recorded
		gains	in other
	At	(losses) in	compre-					Transfers	Transfers	At
	1 Jan	income	hensive					into	out of	31 Dec
Fullyear 2016	2016	statement	income Purchases		Sales	Settled	Issued	level 3	level 3	2016
Loans	2,183	2	427	-	-	(123)	210	-	-	2,699
Equity securities and portfolio holdings in unit
trusts	607	59	(20)	153	(133)	(9)	-	65	-	722
Debt securities	778	85	11	185	(75)	(37)	-	-	(5)	942
Other investments (including derivative assets)	4,276	359	443	720	(1,002)	-	-	73	(389)	4,480
Derivativeliabilities	(353)	(163)	-	-	-	-	-	-	-	(516)
Total financial investments, net of derivative
liabilities	7,491	342	861	1,058	(1,210)	(169)	210	138	(394)	8,327
Net asset value attributable to unit holders of
consolidated unit trusts and similar funds	(1,036)	(18)	(2)	-	24	271*	(122)	-	-	(883)
Other financial liabilities	(2,347)	(4)	(457)	-	-	259	(302)	-	-	(2,851)
Total financial 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 (losses) gains relating to financial instruments still held at the end of the period, which can be analysed as follows:

gains 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	21	(14) 8
Debt securities	2	65 71
Other investments	42	149 182
Derivative liabilities	56	(127) -
Net asset value attributable to unit holders of consolidated unit trusts and similar funds	2	23 (18)
Other financial liabilities	(357)	(4) (1)
Total	(234)	92 242

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.
(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.
(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.

(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	30 Jun 2017£m
				BBB+
	AAA	AA+ to AA-	A+ to A-	to BBB-	Below BBB-	Other	Total
Asia
With-profits	3,168	9,722	3,540	3,201	1,789	1,978	23,398
Unit-linked	501	129	526	1,502	323	461	3,442
Non-linked shareholder-backed	1,138	2,758	3,035	2,699	1,645	946	12,221
US
Non-linked shareholder-backed	455	6,739	10,318	13,526	1,046	5,945	38,029
UK
With-profits	5,965	9,872	10,827	12,577	3,481	6,443	49,165
Unit-linked	597	2,871	1,131	1,856	176	112	6,743
Non-linked shareholder-backed	4,481	10,313	10,396	4,036	388	5,780	35,394
Otheroperations	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

Total debt securities	17,124	43,679	39,965 39,492	39,965 39,492	8,862	21,671	170,793
			30 Jun 2016 £m
				BBB+
	AAA	AA+ to AA-	A+ to A-	to BBB-	Below BBB-	Other	Total
Asia
With-profits	2,894	7,756	3,132	2,982	1,925	1,889	20,578
Unit-linked	420	467	508	1,285	247	500	3,427
Non-linked shareholder-backed	1,013	3,126	2,944	1,961	1,450	1,020	11,514
US
Non-linked shareholder-backed	3,761	6,190	10,137	13,379	888	6,788	41,143
UK
With-profits	4,979	9,416	10,318	13,091	2,972	6,479	47,255
Unit-linked	404	2,488	1,218	2,042	339	97	6,588
Non-linked shareholder-backed	4,190	11,399	9,741	4,571	416	4,954	35,271
Otheroperations	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

With-profits Unit-linked Non-linked shareholder-backed Otheroperations Total debt securities	4,979 404 4,190 1,024 18,685	9,416 2,488 11,399 1,165 42,007	10,318 1,218 9,741 286 38,284	13,091 2,042 4,571 112 39,423	2,972 339 416 2 8,239	6,479 97 4,954 2 21,729	47,255 6,588 35,271 2,591 168,367
			31	Dec 2016 £m
				BBB+ to
	AAA	AA+ to AA-	A+ to A-	BBB-	Below BBB-	Other	Total
Asia
With-profits	3,183	8,522	3,560	2,996	1,887	1,713	21,861
Unit-linked	448	112	525	1,321	494	421	3,321
Non-linked shareholder-backed	1,082	2,435	2,864	2,388	1,680	915	11,364
US
Non-linked shareholder-backed	445	7,932	10,609	13,950	1,009	6,800	40,745
UK
With-profits	5,740	9,746	10,679	12,798	3,289	6,684	48,936
Unit-linked	461	2,660	1,158	1,699	212	87	6,277
Non-linked shareholder-backed	4,238	10,371	10,558	4,515	397	5,504	35,583
Otheroperations	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 an investment or security and should not be relied on as investment advice.

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

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

		2017 £m	2016 £m
	Mortgage
	-backed Other 30 Jun		30 Jun 31 Dec
US	securities securities Total		Total Total
Implicit ratings of other US debt securities based on
NAIC* valuations (see below)
NAIC 1	1,926 2,018 3,944		4,776 4,759
NAIC 2	10 1,893 1,903		1,868 1,909
NAIC 3-6	7 91 98		144 132
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
UK	30 Jun	30 Jun 31 Dec
Internal ratings or unrated
AAA to A-	7,494	6,584 6,939
BBB to B-	3,180	3,284 3,257
Below B-orunrated	1,661	1,662 2,079
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.

(b) Additional analysis of US insurance operations debt securities

	2017£m	2016 £m
	30 Jun	30 Jun 31 Dec

Corporate and government security and commercial loans:
Government	4,884	7,151 5,856
Publicly traded and SEC Rule 144A securities*	24,971	24,894 25,992
Non-SEC Rule 144A securities	4,543	4,302 4,576
Asset backed securities (seenote (e))	3,631	4,796 4,321
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:

	2017 £m	2016 £m
	30 Jun	30 Jun 31 Dec
Available-for-sale	37,936	41,045 40,645
Fair value through profit and loss:
Securitiesheld to back liabilitiesfor fundswithheld under reinsurance arrangement	93	98 100
	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.

		Foreign exchange Changes in unrealised	Foreign exchange Changes in unrealised
		30 Jun 2017 £m translation appreciation 31 Dec 2016 £m**
		Reflected as part of movement in other
		comprehensive income
Assets fair valued at below book value
Book value*		8,760 14,617
Unrealised gain(loss)		(306) 22 347 (675)
Fair value (asincludedinstatement of financialposition)		8,454	13,942
Assets fair valued at or above book value
Book value*		28,019	25,352
Unrealised gain(loss)		1,463 (72) 184 1,351
Fair value (asincludedinstatement of financialposition)		29,482	26,703
Total
Book value*		36,779	39,969
Net unrealised gain(loss)		1,157 (50) 531 676
Fair value (as included in the footnote above in the
overviewtable and the statement of financialposition)		37,936	40,645

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


US Treasuries
Book value 4,415*			5,486
	Unrealised gain(loss) (186) 13 213 (412)
	Fair value 4,229		5,074
Other debt securities
Book value 32,364*			34,483
Unrealised gain(loss) 1,343 (63) 318 1,088
Fair value 33,707			35,571
Total debt securities
Book value 36,779*			39,969
Net unrealised gain(loss) 1,157 (50) 531 676
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:

value:
	30 Jun 2017£m	30 Jun 2016 £m	31 Dec 2016 £m
	Fair Unrealised	Fair Unrealised	Fair Unrealised
	value loss	value loss	value loss
Between 90% and 100%	7,962 (236)	1,848 (51)	12,326 (405)
Between 80% and 90%	482 (64)	304 (52)	1,598 (259)
Below 80%:
Residential mortgage-backed
securities - sub-prime	- -	- -	- -
Commercial mortgage-backed
securities	- -	8 (3)	8 (3)
Other asset-backed securities	10 (6)	9 (7)	9 (8)
Government bonds	- -	- -	- -
Corporates	- -	19 (6)	1 -
	10 (6)	36 (16)	18 (11)
Total	8,454 (306)	2,188 (119)	13,942 (675)

(ii) Unrealised loss by maturity of security

(ii) Unrealised loss by maturity of security
	2017£m 2016 £m
	30 Jun 30 Jun 31 Dec
1 year to 5 years	(5) (10) (7)
5 year to 10 years	(48) (38) (118)
More than 10 years	(231) (42) (510)
Mortgage-backed and otherdebt securities	(22) (29) (40)
Total	(306) (119) (675)

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

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

	30 Jun 2017£m	30 Jun 2016 £m	31 Dec 2016 £m
	Non- investment Investment Non- investment Investment Non- investment Investment
Age analysis	grade grade Total	grade grade Total	grade grade Total
Less than 6 months (1) (15) (16)		(2) (5) (7)	(3) (599) (602)
6 months to 1 year - (251) (251)		(4) (8) (12)	- (2) (2)
1 year to 2 years (2) (1) (3)		(14) (46) (60)	(4) (27) (31)
2 year to 3 years (3) (12) (15)		- - -	(2) (1) (3)
More than3 years (1) (20) (21)		(3) (37) (40)	(2) (35) (37)
(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:

	30 Jun 2017 £m	30 Jun 2016 £m	31 Dec 2016 £m
	Fair Unrealised Fair Unrealised Fair Unrealised
Age analysis	value loss	value loss	value loss
Less than 3 months	- -	2 -	1 -
3 months to 6 months	- -	19 (6)	- -
More than6months	10 (6)	15 (10)	17 (11)
	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:

at 30 June 2017 are as follows:
	2017 £m	2016 £m
	30 Jun	30 Jun 31 Dec
Shareholder-backed operations:
Asia insurance operationsnote (i)	104	151 130
US insurance operationsnote (ii)	3,631	4,796 4,321
UK insurance operations (2017: 35% AAA, 19% AA)note (iii)	1,045	1,445 1,464
Assetmanagement operations note (iv)	665	963 771
	5,445	7,355 6,686
With-profits operations:
Asia insurance operationsnote (i)	233	310 357
UK insurance operations (2017:56%AAA,13%AA)note (iii)	5,091	4,558 5,177
	5,324	4,868 5,534
Total	10,769	12,223 12,220

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:

	2017£m	2016 £m
	30 Jun	30 Jun 31 Dec
RMBS
Sub-prime (2017: 2% AAA, 11% AA, 3% A)	150	185 180
Alt-A (2017: 3% AAA, 5% A)	151	178 177
Prime including agency (2017: 70% AA, 5% A)	515	904 675
CMBS (2017: 80% AAA, 14% AA, 1% A)	1,768	2,635 2,234
CDO funds (2017: 23% AAA, 8% AA, 43% A), including £nil exposure to sub-prime	33	55 50
Other ABS (2017: 17%AAA,17%AA, 51%A),including £108millionexposure to sub-prime 1,014		839 1,005
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:

Exposure to sovereign debts

Exposure to sovereign debts
	30 Jun 2017 £m	30 Jun 2016 £m	31 Dec 2016 £m
	Shareholder- With- Shareholder- With- Shareholder- With-
	backed profits backed profits backed profits
	business funds	business funds	business funds
Italy	57 62	58 63	56 61
Spain	33 18	35 18	33 18
France	23 23	22 -	22 -
Germany*	649 317	546 348	573 329
Other Europe (principallyBelgium)	82 32	84 32	83 33
Total Eurozone	844 452	745 461	767 441
United Kingdom	4,904 3,049	5,720 2,431	5,510 2,868
United States**	4,959 9,913	6,881 8,354	6,861 9,008
Other, predominantlyAsia	4,174 2,221	4,081 2,073	3,979 2,079
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.

Exposure to bank debt securities

		2017 £m	2016 £m

	Senior debt	Subordinated debt
	Total senior	Total subordinated 30 Jun
			30 Jun 31 Dec
Shareholder-backed business	Covered Senior debt	Tier 1 Tier 2 debt Total	Total Total
Italy	- 32 32	- - - 32	31 32
Spain	43 16 59	- - - 59	159 170
France	28 52 80	10 73 83 163	224 166
Germany	76 4 80	- 87 87 167	124 124
Netherlands	- 67 67	- 6 6 73	39 50
Other Eurozone	- 23 23	- - - 23	32 19
Total Eurozone	147 194 341	10 166 176 517	609 561
United Kingdom	698 387 1,085	6 310 316 1,401	1,118 1,174
United States	- 2,580 2,580	3 174 177 2,757	2,651 2,684
Other, predominantlyAsia	33 600 633	85 420 505 1,138	1,041 1,018
Total	878 3,761 4,639	104 1,070 1,174 5,813	5,419 5,437

With-profits funds
Italy	- 65 65	- - - 65	64 62
Spain	44 41 85	- - - 85	219 213
France	9 200 209	- 64 64 273	274 213
Germany	112 20 132	- 35 35 167	112 114
Netherlands	- 192 192	5 7 12 204	200 202
Other Eurozone	- 30 30	- - - 30	30 31
Total Eurozone	165 548 713	5 106 111 824	899 835
United Kingdom	790 515 1,305	2 485 487 1,792	1,532 1,396
United States	- 1,985 1,985	16 333 349 2,334	1,978 2,229
Other, predominantlyAsia	400 1,012 1,412	258 463 721 2,133	1,775 1,992
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.

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 Policy Other	Mortgage Policy Other	Mortgage Policy Other
	loans loans loans† Total*	loans loans loans† Total*	loans loans loans† Total*
Asia
With-profits	- 589 113 702	- 539 113 652	- 577 113 690
Non-linked
shareholder-backed	188 219 198 605	156 294 176 626	179 226 208 613
US
Non-linked
shareholder-backed	5,964 3,533 - 9,497	5,109 3,395 - 8,504	6,055 3,680 - 9,735
UK
With-profits	2,576 5 1,455 4,036	719 6 1,339 2,064	668 6 1,218 1,892
Non-linked
shareholder-backed	1,711 - 37 1,748	1,548 - 4 1,552	1,642 - 38 1,680
Asset management
operations	- - 364 364	- - 817 817	- - 563 563
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, multifamily 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:

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

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

	Insurance operations £m
	Asia US UK Total**
Halfyear 2017 movements	note C4.1(b) note C4.1(c) note C4.1(d)
At 1 January 2017	62,784 177,626 169,304 409,714
_Comprising: _
- Policyholder liabilities on the consolidated statement of financial
position‡	53,716 177,626 157,654 388,996
- Unallocated surplus of with-profits funds on the consolidated statement
of financial position	2,667 - 11,650 14,317
-Group's share of policyholder liabilities of joint ventures and associate†	6,401 - - 6,401

Net flows:
Premiums	5,699 8,148 7,756 21,603
Surrenders	(1,508) (5,071) (3,816) (10,395)
Maturities/deaths	(880) (1,119) (3,533) (5,532)
Net flows	3,311 1,958 407 5,676
Shareholders' transfers post tax	(27) - (115) (142)
Investment-related items and other movements	4,288 7,124 5,214 16,626
Foreignexchange translationdifferences	(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 financial
position‡	58,348 177,779 162,853 398,980
- Unallocated surplus of with-profits funds on the consolidated statement
of financial position	3,003 - 12,087 15,090
-Group's share of policyholder liabilities of joint ventures and associate†	6,970 - - 6,970

Halfyear 2016 movements
At1January2016	45,966 138,913 152,893 337,772
_Comprising: _
- Policyholder liabilities excluding Korea life**	38,443 138,913 142,350 319,706
- Unallocated surplus of with-profits funds on the consolidated statement
of financial position	2,553 - 10,543 13,096
-Group's share of policyholder liabilities of joint ventures and associate†	4,970 - - 4,970

Net flows:
Premiums	4,191 7,101 5,561 16,853
Surrenders	(992) (3,437) (3,208) (7,637)
Maturities/deaths	(671) (809) (3,470) (4,950)
Net flows	2,528 2,855 (1,117) 4,266
Shareholders' transfers post tax	(22) - (110) (132)
Investment-related items and other movements	2,232 2,737 10,092 15,061
Foreignexchange translationdifferences	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**	48,918 159,155 151,233 359,306
- Unallocated surplus of with-profits funds on the consolidated statement
of financial position	2,351 - 11,246 13,597
-Group's share of policyholder liabilities of joint ventures and associate†	5,715 - - 5,715
Average policyholder liability balances*
Half year 2017	62,718 177,702 160,254 400,674
Halfyear 2016**	49,023 149,034 146,792 344,849

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 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 Group’s investment 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.

‡ 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 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

	Halfyear 2017 £m
	Asia US UK Total
	note (b)
At 1 January 2017	32,851 177,626 56,158 266,635
Net flows:
Premiums	2,801 8,148 1,658 12,607
Surrenders	(1,335) (5,071) (1,500) (7,906)
Maturities/deaths	(450) (1,119) (1,325) (2,894)
Net flows~~note (a)~~	1,016 1,958 (1,167) 1,807
Investment-related items and other movements	1,912 7,124 1,500 10,536
Foreignexchange translationdifferences	(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
financial position	28,070 177,779 56,491 262,340
- Group's share of policyholder liabilities relating to joint
ventures and associate	6,970 - - 6,970

	Halfyear 2016 £m
	Asia US UK Total
	note (b)
At 1 January 2016	25,032 138,913 52,824 216,769
Net flows:
Premiums	2,090 7,101 869 10,060
Surrenders	(829) (3,437) (1,311) (5,577)
Maturities/deaths	(284) (809) (1,257) (2,350)
Net flows~~notes (a)(b)~~	977 2,855 (1,699) 2,133
Investment-related items and other movements	841 2,737 4,285 7,863
Foreignexchange translationdifferences	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)~~	24,429 159,155 55,411 238,995
- Group's share of policyholder liabilities relating to joint
ventures and associate	5,715 - - 5,715

Note

(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.

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:

the beginning of the period to 30 June is as follows:
	£m
	With-profits Unit-linked Other
Halfyear 2017 movements	business liabilities business Total*
At 1 January 2017	29,933 17,507 15,344 62,784
_Comprising: _
- Policyholder liabilities on the consolidated statement of financial position	27,266 14,289 12,161 53,716
- Unallocated surplus of with-profits funds on the consolidated statement
of financial 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
	2,898 1,332 1,469 5,699
Surrendersnote (c)	(173) (1,102) (233) (1,508)
Maturities/deaths	(430) (82) (368) (880)
Net flows~~note (b)~~	2,295 148 868 3,311
Shareholders' transfers post tax	(27) - - (27)
Investment-related items and other movementsnote (d)	2,376 1,551 361 4,288
Foreignexchange translationdifferencesnote (a)	(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 financial position* - Unallocated surplus of with-profits funds on the consolidated statement
	30,278 15,326 12,744 58,348

of financial position	3,003 - - 3,003
- Group's share of policyholder liabilities relating to joint ventures and
associate‡	- 3,507 3,463 6,970


Halfyear 2016 movements**
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-profits funds on the consolidated statement
of financial 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 (c)	(163) (679) (150) (992)
Maturities/deaths	(387) (27) (257) (671)
Net flows~~note (b)~~	1,551 346 631 2,528
Shareholders' transfers post tax	(22) - - (22)
Investment-related items and other movementsnote (d)	1,391 97 744 2,232
Foreignexchange translationdifferencesnote (a)	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**	24,489 13,224 11,205 48,918
- Unallocated surplus of with-profits funds on the consolidated statement
of financial position	2,351 - - 2,351
- Group's share of policyholder liabilities relating to joint ventures and
associate‡	- 2,900 2,815 5,715
Average policyholder liability balances~~†~~
Half year 2017	28,772 18,170 15,776 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 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.
The Group’s investment in joint ventures are accounted for on an equity method and the Group’s share of the policyholder liabilities as shown above relate to the life business in China, India and of the Takaful business in Malaysia.

Notes

(a) 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.

(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) 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).

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

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

US insurance operations
	£m
	Variable annuity separate account Fixed annuity, GIC and other
Halfyear 2017 movements	liabilities business Total
At 1 January 2017	120,411 57,215 177,626
Premiums	5,981 2,167 8,148
Surrenders	(3,409) (1,662) (5,071)
Maturities/deaths	(541) (578) (1,119)
Net flows~~note (b)~~	2,031 (73) 1,958
Transfers from general to separate account	1,240 (1,240) -
Investment-related items and other movementsnote (c)	7,236 (112) 7,124
Foreignexchange translationdifferencesnote (a)	(6,183) (2,746) (8,929)
At 30 June 2017	124,735 53,044 177,779


Halfyear 2016 movements
At 1 January 2016	91,022 47,891 138,913
Premiums	4,848 2,253 7,101
Surrenders	(2,168) (1,269) (3,437)
Maturities/deaths	(384) (425) (809)
Net flows~~note (b)~~	2,296 559 2,855
Transfers from general to separate account	169 (169) -
Investment-related items and other movements	843 1,894 2,737
Foreignexchange translationdifferences note (a)	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) 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 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.

(b) 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.

(c) 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.

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:

the beginning of the period to 30 June is as follows:
		£m
		Shareholder-backed funds and
		subsidiaries

Halfyear 2017 movements	sub-fund liabilities business Total
At 1 January 2017	113,146 22,119 34,039 169,304
_Comprising: _
- Policyholder liabilities	101,496 22,119 34,039 157,654
-Unallocated surplus of with-profits funds	11,650 - - 11,650

Premiums	6,098 1,484 174 7,756
Surrenders	(2,316) (1,472) (28) (3,816)
Maturities/deaths	(2,208) (323) (1,002) (3,533)
Net flows~~note (a)~~	1,574 (311) (856) 407
Shareholders' transfers post tax	(115) - - (115)
Switches	(91) 91 - -
Investment-related items and other movementsnote (b)	3,805 1,018 391 5,214
Foreignexchange translationdifferences	130 - - 130
At 30 June 2017	118,449 22,917 33,574 174,940
_Comprising: _
- Policyholder liabilities	106,362 22,917 33,574 162,853
-Unallocated surplus of with-profits funds	12,087 - - 12,087


Halfyear 2016 movements
At 1 January 2016	100,069 21,442 31,382 152,893
_Comprising: _
- Policyholder liabilities	89,526 21,442 31,382 142,350
-Unallocated surplus of with-profits funds	10,543 - - 10,543
Premiums	4,692 527 342 5,561
Surrenders	(1,897) (1,285) (26) (3,208)
Maturities/deaths	(2,213) (271) (986) (3,470)
Net flows~~note (a)~~	582 (1,029) (670) (1,117)
Shareholders' transfers post tax	(110) - - (110)
Switches	(84) 84 - -
Investment-related items and other movementsnote (b)	5,891 1,050 3,151 10,092
Foreignexchange translationdifferences	720 1 - 721
At 30 June 2016	107,068 21,548 33,863 162,479
_Comprising: _
- Policyholder liabilities	95,822 21,548 33,863 151,233
-Unallocated surplus of with-profits funds	11,246 - - 11,246
Average policyholder liability balances*
Half year 2017	103,929 22,518 33,807 160,254
Halfyear 2016	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 £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 withprofits 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.

C5 Intangible assets

(a) Goodwill

(a) Goodwill
	Attributable to:
	Shareholders With-profits 2017 £m			2016 £m
	30 Jun			30 Jun 31 Dec
Cost
At beginning of year	1,475 153 1,628			1,648 1,648
Disposals	- (127) (127)			- -
Charge for reclassification as held for sale	-	- -		- (56)
Additional consideration paid on previously acquired
business	-	- -		1 7
Exchange differences	-	- -		28 29
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		1,153	1,153 1,153
Other -attributable to shareholders		322	335 322
Goodwill - attributable to shareholders		1,475	1,488 1,475
Venturefundinvestments-attributable towith-profitsfunds		26	189 153
		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

(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 shareholder	10,643	9,549 10,755
Deferred acquisitioncosts and other intangible assets attributable towith-profitsfunds	114	45 52
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 classified under IFRS 4	9,022	8,010 9,114
Deferred acquisition costs related to investment management contracts, including life
assurance contracts classified as financial instruments and investment management
contracts under IFRS4	60	68 64
	9,082	8,078 9,178
Present value of acquired in-force policies for insurance contracts as classified under
IFRS 4 (PVIF)	39	48 43
Distribution rights and other intangibles	1,522	1,423 1,534
	1,561	1,471 1,577
Total of deferred acquisition costs and other intangible assets	10,643	9,549 10,755

	2017£m			2016 £m	2016 £m
	Deferred acquisition costs
	Asset	PVIF and		30 Jun 31 Dec
		other	30 Jun
	Asia US UK management	intangibles*	Total	Total Total
		note
Balance at beginning of
period:	788 8,303 79 8	1,577	10,755	8,422 8,422
Additions and acquisition of
subsidiaries	122 353 8 -	58	541	516 1,179
Amortisation to the income
statement:†
Operating profit	(66) (236) (5) (2)	(66)	(375)	(369)	(686)
Non-operating profit	- 231 - -	(4)	227	616	557
	(66) (5) (5) (2)	(70)	(148)	247 (129)
Disposals and transfersǂ	- - - -	-	-	(2) (268)
Exchange differences and other
movements	(21) (411) - -	(4)	(436)	801 1,475
Amortisation of DAC related to
net unrealised valuation
movements on Jackson's
available-for-sale securities
recognised within other
comprehensiveincome†	- (69) - -	-	(69)	(435) 76
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 gains of £2 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.
ǂ 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	2016 £m
	30 Jun	30 Jun 31 Dec
Variable annuity business	8,133	7,266 7,844
Other business	330	558 696
Cumulative shadow DAC (for unrealised gains/losses booked in Other Comprehensive
Income)*	(292)	(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).

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 shortterm 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 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)	847	823 890
Perpetual subordinated notes (Tier 2)note (i)	2,620	2,007 2,754
Subordinatednotes (Tier 2)note (i)	2,131	2,126 2,128
Subordinated debt total	5,598	4,956 5,772
Senior debt:note (ii)
£300m 6.875% Bonds 2023	300	300 300
£250m5.875%Bonds2029	249	249 249
Holding company total	6,147	5,505 6,321
Prudential Capital bank loannote (iii)	275	275 275
JacksonUS$250m8.15% SurplusNotes2027	192	186 202
Total(per condensed consolidated statement of financialposition)~~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.

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 fixed income securities programmes	1,424	2,554 1,651
Otherborrowingsnote	672	244 666
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*	3,178	1,248 1,189
£100m 8.5% undated subordinated guaranteed bonds of Scottish Amicable Finance plc**	100	100 100
Otherborrowings (predominantly obligations under financeleases)	58	79 60
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.

C7 Deferred tax

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

	Deferred tax assets	Deferred tax assets	Deferred tax liabilities	Deferred 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	21	22 23	(1,774)	(1,815) (1,534)
Balances relating to investment
and insurance contracts	-	1 1	(796)	(655) (730)
Short-term temporary
differences	4,002	3,690 4,196	(3,059)	(2,893) (3,071)
Capital allowances	16	12 16	(54)	(34) (35)
Unused tax losses	66	46 79		- -
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	2016
	30 Jun	30 Jun 31 Dec
	Tax benefit £m Losses £bn	Tax benefit £m Losses £bn Tax benefit £m Losses £bn
Capital losses	90 0.4	94 0.5 89 0.4
Tradinglosses	48 0.2	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.

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	2016 £m
	30 Jun	30 Jun	31 Dec
	Other	Other	Other
	PSPS SASPS M&GGPS schemes Total	PSPS SASPS M&GGPS schemes Total	PSPS SASPS M&GGPS schemes Total
Underlying economic
surplus (deficit)	753 (154) 85 (1) 683	1,270 (123) 115 (1) 1,261	717 (237) 84 (1) 563
Less: unrecognised
surplus	(598) - - - (598)	(1,100) - - - (1,100)	(558) - - - (558)
Economic surplus
(deficit) (including
insurance policies)	155 (154) 85 (1) 85	170 (123) 115 (1) 161	159 (237) 84 (1) 5

Attributable to:
PAC with-profits fund	109 (62) - - 47	119 (49) - - 70	111 (95) - - 16
Shareholder-backed
operations	46 (92) 85 (1) 38	51 (74) 34 (1) 10	48 (142) 84 (1) (11)

Consolidation
adjustment against
policyholder liabilities
for investment in
Prudential insurance
policies	- - (145) - (145)	- - (81) - (81)	- - (134) - (134)
IAS 19 pension asset
(liability) on the Group
statement of financial
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.

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 next triennial valuation for the PSPS and SASPS are 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:

IFRIC 14 being shown separately:
	Halfyear 2017 £m
	Surplus (deficit) in (Charge) credit to Actuarial gains and losses in other Surplus (deficit) in

	schemes at income comprehensive Contributions schemes at
	1 Jan 2017 statement income paid 30 Jun 2017
All schemes
Underlying position (without the effect of IFRIC 14)
Surplus	563 (20) 117 23 683
Less:amount attributable toPACwith-profitsfund	(425) 4 (57) (8) (486)
Shareholders' share:
Gross of tax surplus (deficit)	138 (16) 60 15 197
Related tax	(27) 3 (12) (3) (39)
Net ofshareholders'tax	111 (13) 48 12 158
Application of IFRIC 14 for the derecognition of PSPS surplus
Derecognition of surplus	(558) (7) (32) (1) (598)
Less:amount attributable toPACwith-profitsfund	409 4 26 - 439
Shareholders' share:
Gross of tax	(149) (3) (6) (1) (159)
Related tax	29 1 1 - 31
Net ofshareholders'tax	(120) (2) (5) (1) (128)
With the effect of IFRIC 14
Surplus (deficit)	5 (27) 85 22 85
Less:amount attributable toPACwith-profitsfund	(16) 8 (31) (8) (47)
Shareholders' share:
Gross of tax surplus (deficit)	(11) (19) 54 14 38
Related tax	2 4 (11) (3) (8)
Net of shareholders' tax	(9) (15) 43 11 30

C9 Share capital, share premium and own shares

	30 Jun 2017	30 Jun 2016	31 Dec 2016
	Number of	Number of	Number of
	ordinary Share Share	ordinary Share Share	ordinary Share Share
	shares capital premium	shares capital premium	shares capital premium
	£m £m	£m £m	£m £m
Issued shares of 5p each fully paid:
At 1 January	2,581,061,573 129 1,927	2,572,454,958 128 1,915	2,572,454,958 128 1,915
Shares issued under share-based
schemes	4,791,845 - 10	6,579,190 - 6	8,606,615 1 12
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		Share price	Exercisable
		to subscribe for		range	by year
			from	to
30	June 2017	6,280,110	466p	1,155p	2022
30	June 2016	7,128,449	288p	1,155p	2021
31	December 2016	7,068,884	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
Full	year 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 purchase 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 purchase of £13.8 million to book cost (30 June 2016: net disposal of £14.1 million; 31 December 2016: net purchase of £7.9 million).

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

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

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 include £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.

Statement of directors’ responsibilities

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

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

the condensed consolidated financial statements have been prepared in accordance with IAS 34, ‘Interim Financial Reporting’, as adopted by the European Union;
the Half Year Financial Report includes a fair review of information required by: (a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the six months ended 30 June 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

Chairman Independent Non-executive Directors Paul Manduca The Hon. Philip Remnant CBE FCA Sir Howard Davies Executive Directors David Law ACA Michael Wells Kaikhushru Nargolwala FCA Mark FitzPatrick CA (appointed on 17 July 2017) Anthony Nightingale CMG SBS JP Penelope James ACA Alice Schroeder John Foley Lord Turner FRS Nicolaos Nicandrou ACA Thomas Watjen (appointed on 11 July 2017) Anne Richards Barry Stowe

9 August 2017

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.

Philip Smart

For and on behalf of KPMG LLP

Chartered Accountants London 9 August 2017

Additional IFRS 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.

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

The additional financial information (set out in sections I(a) to II(c)) is not covered by the KPMG independent review opinion on page 58.

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

Longevity reinsurance and other management actions toimprove solvency Long-term business operating profit based on longer-term investment returns See notes at the end of this section.	667 - 667	888 - 888	333 140 473	1,888 140 2,028
			Half year 2016	CER
			note (iii)
					Average
	Asia	US	UK	Total	liability	Margin
	£m	£m	£m	£m	£m	bps
	note (vi)		note (v)		note (iv)	note (ii)
Spread income	91	426	96	613	85,708	143
Fee income	92	997	29	1,118	143,526	156
With-profits	27	-	138	165	115,945	28
Insurance margin	532	456	25	1,013
Margin on revenues	965	-	86	1,051
Expenses: Acquisition costsnote (i)	(644)	(469)	(42)	(1,155)	3,296	(35)%
Administration expenses DAC adjustmentsnote (v)	(412) 56	(513) 95	(58) (2)	(983) 149	236,974	(83)
Expectedreturnonshareholderassets	45	18	61	124
	752	1,010	333	2,095
Longevity reinsurance and other management
actions toimprove solvency	-	-	140	140
Long-term business operating profit
based on longer-term investment returns	752	1,010	473	2,235
See notes at the end of this section.

Margin analysis of long-term insurance business – Asia

		Asia
		note (vi)
	Half year 2017	Half year 2016 AER	Half year 2016 CER
			note (iii)
	Average	Average	Average
	Profit liability Margin	Profit liability Margin	Profit liability Margin
	£m £m bps	£m £m bps	£m £m bps
Long-termbusiness	note (iv) note (ii)	note (iv) note (ii)	note (iv) note (ii)

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

See notes at the end of this section.

Analysis of Asia operating profit drivers

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

Margin analysis of long-term insurance business – US

		US
	Half year 2017	Half year 2016 AER	Half year 2016 CER
			note (iii)
	Average	Average	Average
	Profit liability Margin	Profit liability Margin	Profit liability Margin
	£m £m bps	£m £m bps	£m £m bps
Long-termbusiness	note (iv) note (ii)	note (iv) note (ii)	note (iv) note (ii)

Spread income	401 39,731 202	379 34,886 217	426 39,199 217
Fee income	1,145 123,464 186	878 92,608 190	997 105,791 188
Insurance margin	472	401	456
Expenses:
Acquisition costsnote (i)	(463) 960 (48)%	(412) 782 (53)%	(469) 889 (53)%
Administration expenses	(593) 169,180 (70)	(452) 134,369 (67)	(513) 152,730 (67)
DAC adjustments	117	83	95
Expected return on
shareholderassets	-	11	18
Operating profit based on
longer-term investment
returns	1,079	888	1,010
See notes at the end of this	section.

Analysis of US operating profit drivers:

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

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

		Half year 2016 AER £m	Half year 2016 AER £m	Half year 2016 CER £m	Half year 2016 CER £m
					note (iii)
			Acquisition costs
		Other operating
	profits Incurred Deferred Total	profits Incurred Deferred Total		profits Incurred Deferred Total
Total operating profit
and DAC adjustments 1,425 1,425		1,217 1,217		1,384 1,384
Less new business
strain (463) 353 (110)		(412) 320 (92)		(469) 364 (105)

Other DAC adjustments - amortisation of previously deferred
acquisition costs:
Normal (272) (272)		(266) (266)		(303) (303)
Deceleration 36 36		29 29		34 34
Total 1,425 (463) 117 1,079		1,217 (412) 83 888		1,384 (469) 95 1,010

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

	2017£m	2016 £m	%
			Half year 2017 Half year 2017
			vs vs
		AER CER	half year 2016 half year 2016
	Halfyear	Halfyear Halfyear	AER CER
Spread business~~note (a)~~	176	154 175	14% 1%
Fee businessnote (b)	852	642 730	33% 17%
Life and otherbusinessnote (c)	51	92 105	(45)% (51)%
Total insurance operations	1,079	888 1,010	22% 7%

US assetmanagement 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.

Margin analysis of long-term insurance business – UK

	UK
	Halfyear 2017	Halfyear 2016
	Average	Average
	Profit liability Margin	Profit liability Margin
	£m £m bps	£m £m bps
Long-termbusiness	note (iv) note (ii)	note (iv) note (ii)

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

Analysis of UK operating profit drivers

– Spread income has decreased from £96 million in half year 2016 to £74 million in half year 2017 mainly due to lower annuity sales. Spread income has two components:

A contribution from new annuity business which was lower at £4 million in half year 2017 compared to £27 million in half year 2016, reflecting our withdrawal from this market.
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-profit 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 (AER) and Constant Exchange Rates (CER) 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 Korean life business. This approach is consistent with that applied at full year 2016.

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.

impact of exchange translation.
	2017£m	2016 £m	%	2016 £m
			Half year Half year
			2017 vs 2017 vs
			half year half year
		AER CER	2016 2016	AER
	Halfyear	Halfyear Halfyear	AER CER	Fullyear
Hong Kong	157	96 109	64% 44%	238
Indonesia	232	193 221	20% 5%	428
Malaysia	86	71 76	21% 13%	147
Philippines	21	17 18	24% 17%	38
Singapore	133	111 125	20% 6%	235
Thailand	46	39 44	18% 5%	92
Vietnam	57	44 49	30% 16%	114
South-east Asia Operations inc.
Hong Kong	732	571 642	28% 14%	1,292
China	39	20 21	95% 86%	64
Taiwan	19	13 17	46% 12%	35
Other	27	23 28	17% (4)%	49
Non-recurrentitemsnote (ii)	54	42 46	29% 17%	67
Total insurance operations~~note (i)~~	871	669 754	30% 16%	1,507
Development expenses	(1)	(2) (2)	50% 50%	(4)
Total long-term business operating
profit
	870	667 752	30% 16%	1,503
EastspringInvestments	83	61 69	36% 20%	141
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
		AER CER AER
	Halfyear	Halfyear Halfyear Fullyear
New business strain~~†~~	(40)	(17) (19) (29)
Business in force	857	644 727 1,469
Non-recurrentitemsnote (ii)	54	42 46 67
Total	871	669 754 1,507

† The IFRS new business strain corresponds to approximately (2.0) per cent of new business APE sales for half year 2017 (half year 2016: approximately (1.1) per cent; full year 2016: approximately (0.8) per cent).

The strain represents the pre-tax regulatory basis strain to net worth after IFRS adjustments; for deferral of acquisition costs and deferred income where appropriate.

(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.

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

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

Margin based on operating income Cost /incomeratio*	37bps 33bps 53% 55%	37bps 33bps 53% 55%
	Halfyear 2016 £m
	Eastspring Prudential
	M&G Investments Capital US Total
	note (ii) note (ii)
Operating income before performance-related fees	440 155 61 109 765
Performance-relatedfees	9 1 - - 10
Operating income(net of commission)~~note (i)~~	449 156 61 109 775
Operating expensenote (i)	(229) (87) (48) (121) (485)
Share of associate’s results	5 - - - 5
Group's share oftaxonjointventures'operating profit	- (8) - - (8)
Operating profit based on longer-term investmentreturns	225 61 13 (12) 287
Average funds under management	£243.2bn £102.2bn
Margin based on operating income*	36bps 30bps
Cost /incomeratio**	52% 56%

	Fullyear 2016 £m	Fullyear 2016 £m
	Eastspring Prudential
	M&G Investments Capital US Total
	note (ii) note (ii)
Operating income before performance-related fees	923 353 118 235 1,629
Performance-relatedfees	33 7 - - 40
Operating income(net of commission)~~note (i)~~	956 360 118 235 1,669
Operating expensenote (i)	(544) (198) (91) (239) (1,072)
Share of associate’s results	13 - - - 13
Group's share oftaxonjointventures'operating profit	- (21) - - (21)
Operating profit based on longer-term investmentreturns	425 141 27 (4) 589
Average funds under management	£250.4bn £109.0bn
Margin based on operating income*	37bps 32bps
Cost /incomeratio**	59% 56%

Notes

(i) Operating income and expense include the Group’s share of contribution from joint ventures (but excludes any contribution from associates). In the income statement as shown in note B2 of the IFRS financial statements, the net post-tax income of the joint ventures and associates is shown as a single item.

(ii) M&G and Eastspring Investments can be further analysed as follows:

M&G	Eastspring Investments
Operating income beforeperformance-related fees	Operating income beforeperformance-related fees
Margin Institu- Margin Margin	Margin Institu- Margin Margin
Retail of FUM tional† of FUM Total of FUM***	Retail of FUM tional† of FUM Total of FUM***
£m bps £m bps £m bps	£m bps £m bps £m bps
30 Jun 2017 285 86 210 21 495 37	30 Jun 2017 120 57 85 20 205 33
30 Jun 2016 247 87 193 21 440 36	30 Jun 2016 91 53 64 19 155 30
31 Dec 2016 504 86 419 22 923 37	31 Dec 2016 211 58 142 20 353 32

Margin represents operating income before performance related fees as a proportion of the related funds under management (FUM). Half year figures have been annualised by multiplying by two. Monthly closing internal and external funds managed by the respective entity have been used to derive the average. Any funds held by the Group's insurance operations which are managed by third parties outside of the Prudential Group are excluded from these amounts.

** Cost/income ratio represents cost as a percentage of operating income before performance related fees. † Institutional includes internal funds.

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.

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

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

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

II Other information

**II(a) Holding company cash flow[*]**

II(a) Holding company cash flow*
	2017 £m	2016 £m
	Halfyear	Halfyear Fullyear
Net cash remitted by business units:
UK life net remittances to the Group
With-profits remittance	215	215 215
Shareholder-backed businessremittance	-	- 85
	215	215 300
OtherUKpaid to Group	-	131 147
Total UK net remittances to the Group	215	346 447

US remittances to the Group	475	339 420

Total Asia net remittances to the Group	350	258 516

M&G remittances to the Group	175	150 290
Prudential Capital remittances to the Group	15	25 45
Net remittances to the Group from Business Units**	1,230	1,118 1,718
Net interest paid	(207)	(157) (333)
Tax received	84	67 132
Corporate activities	(103)	(109) (215)
Total central outflows	(226)	(199) (416)
Net operating holding company cash flow before dividend	1,004	919 1,302
Dividend paid	(786)	(935) (1,267)
Operating holding company cash flow after dividend	218	(16) 35
Non-operatingnet cash flow†	(186)	382 335
Total holding company cash flow	32	366 370
Cash and short-term investments at beginning of period	2,626	2,173 2,173
Foreignexchangemovements	(1)	7 83
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.

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

(a) Summary
	2017 £bn	2016 £bn
	30 Jun	30 Jun 31 Dec
Business area:
Asia operations	75.8	66.3 69.6
US operations	174.6	156.5 173.3
UKoperations	193.8	180.9 185.0
Prudential Group funds under management~~note (i)~~	444.2	403.7 427.9
External funds note (ii)	190.7	158.6 171.4
Total funds under management	634.9	562.3 599.3

Notes

(i) Prudential Group funds under management comprise:

Notes (i) Prudential Group funds under management comprise:
	2017 £bn	2016 £bn
	30 Jun	30 Jun 31 Dec
Total investments per the consolidated statement of financial position	437.4	398.2 421.7
Less: investments in joint ventures and associates accounted for using the equity method	(1.3)	(1.1) (1.2)
Internally managed funds held in joint ventures	7.7	6.2 7.0
Investment properties which are held for sale or occupied by the Group (included in other
IFRS captions)	0.4	0.4 0.4
Prudential Groupfunds 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.

(b) Investment products – external funds under management

	Halfyear 2017 £m	Halfyear 2016 £m	Fullyear 2016 £m
	Eastspring Group Eastspring Group Eastspring Group
	Investments M&G total	Investments M&G total	Investments M&G total
	note note	note note	note note
At beginning of period	45,756 136,763 182,519	36,287 126,405 162,692	36,287 126,405 162,692
Market gross inflows	108,240 22,677 130,917	68,465 9,731 78,196	164,004 22,841 186,845
Redemptions	(105,468) (15,498) (120,966)	(68,221) (16,697) (84,918)	(161,766) (30,931) (192,697)
Market exchange translation and
other movements	4,395 5,176 9,571	3,618 10,217 13,835	7,231 18,448 25,679
At end 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	Eastspring Investments		M&G
		note

	2017 £bn	2016 £bn 2016 £bn	2017 £bn	2016 £bn 2016 £bn

	30 Jun	30 Jun 31 Dec	30 Jun	30 Jun 31 Dec
External funds under management	52.9	40.1 45.7	149.1	129.7 136.8
Internal funds under management	77.6	64.8 72.2	132.4	125.7 128.1
Total funds under management	130.5	104.9 117.9	281.5	255.4 264.9

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).

==> picture [514 x 39] intentionally omitted <==

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.

market conditions as at 30 June 2017.
	30 Jun	30 Jun	31 Dec
Estimated Group shareholder Solvency IIcapital position*	2017£bn	2016 £bn	2016 £bn
Own funds	25.6	21.1	24.8
Solvency capital requirement	12.7	12.0	12.3
Surplus	12.9	9.1	12.5
Solvencyratio	202%	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 longstanding practice first put in place in 2009, which can be unwound at Jackson’s discretion.

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

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

Analysis of movement in Group capital position

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

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

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

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

Analysis of Group Solvency Capital Requirements

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

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

Reconciliation of IFRS equity to Group Solvency II Shareholder Own Funds

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

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

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

Sensitivity analysis

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

Impact of market sensitivities 30 Jun 2017 31 Dec 2016	Impact of market sensitivities 30 Jun 2017 31 Dec 2016
Surplus £bn Ratio	Surplus £bn Ratio
Base position 12.9 202%	12.5 201%
Impact of:
20% instantaneous fall in equity markets 0.1 4%	0.0 3%
40% fall in equity markets1 (1.2) (3)%	(1.5) (7)%
50 basis points reduction in interest rates2,3 (0.4) (9)%	(0.6) (9)%
100 basis points increase in interest rates3 0.9 18%	1.0 13%
100 basispoints increase in credit spreads4 (1.1) (3)%	(1.1) (3)%

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.

==> picture [514 x 53] intentionally omitted <==

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.

estate in line with Solvency II requirements.
Estimated UK shareholder Solvency II capitalposition*	30 Jun 2017£bn	30 Jun 2016 £bn	31 Dec 2016 £bn
Own funds	13.0	10.6	12.0
Solvency capital requirement	7.7	7.7	7.4
Surplus	5.3	2.9	4.6
Solvencyratio	168%	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.

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

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

Statement of independent review in respect of Solvency II Capital Position at 30 June 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 58.

European Embedded Value (EEV) basis results

				Page
Post-tax			operating profit based on longer-term investment returns	1
Post-tax			summarised consolidated income statement	2
Movement in shareholders’ equity				2
Summary statement of financial position				3
Notes on the EEV basis results
1	Basis of preparation			4
2	Results analysis by business area			4
3	Analysis of new business contribution			5
4	Operating profit from business in force			6
5	Short-term fluctuations in investment returns			8
6	Effect of changes in economic assumptions			9
7	Net core structural borrowings of shareholder-financed operations			10
8	Reconciliation of movement in shareholders’ equity			11
9	Analysis of movement in net worth and value of in-force for long-term business			12
10	Analysis of movement in free surplus			13
11	Sensitivity of results to alternative assumptions			16
12	Methodology and accounting presentation			17
13	Assumptions			23
14	Total insurance and investment products new business			26
15	Sale		of Korea life business	27
Additional		EEV financial information*
		A New Business		28
			A(i) New Business Insurance Operations (Actual Exchange Rates)	30
			A(ii) New Business Insurance Operations (Constant Exchange Rates)	31
			A(iii) Total Insurance New Business APE (Actual and Constant Exchange Rates)	32
			A(iv) Investment Operations (Actual Exchange Rates)	33
			A(v) Total Insurance New Business Profit (Actual and Constant Exchange Rates)	34
		B Foreign currency source of key metrics		35
		C Reconciliation between IFRS and EEV shareholders’ funds		35
		D Reconciliation of APE new business sales to earned premiums		36
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.

* The additional financial information is not covered by the KPMG LLP independent review opinion.

European Embedded Value (EEV) Basis Results

POST-TAX OPERATING PROFIT BASED ON LONGER-TERM INVESTMENT RETURNS

Results analysis by business area

	2017 £m	2016 £m
	Half year	Half year Full year
Note		notes (iii)(iv) note (iii)
Asia operations
New business 3	1,092	821 2,030
Businessin force 4	549	388 1,044
Long-term business	1,641	1,209 3,074
EastspringInvestments	73	53 125
Total	1,714	1,262 3,199
US operations
New business 3	436	311 790
Businessin force 4	452	383 1,181
Long-term business	888	694 1,971
Broker-dealerand assetmanagement	(4)	(8) (3)
Total	884	686 1,968
UK operations
New business 3	161	125 268
Businessin force 4	304	259 375
Long-term business	465	384 643
General insurance commission	14	15 23
Total UK insurance operations	479	399 666
M&G	201	181 341
PrudentialCapital	5	11 22
Total	685	591 1,029
Other income and expenditure~~note (i)~~	(386)	(302) (679)
Solvency II and restructuring costsnote (ii)	(27)	(17) (57)
Interestreceivedfromtaxsettlement	-	37 37
Operating profit based on longer-term investment returns	2,870	2,257 5,497

Analysed as profit (loss) from:
New business 3	1,689	1,257 3,088
Businessin force 4	1,305	1,030 2,600
Long-term business	2,994	2,287 5,688
Asset management and general insurance commission	289	252 508
Other results	(413)	(282) (699)
	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.

POST-TAX SUMMARISED CONSOLIDATED INCOME STATEMENT

POST-TAX SUMMARISED CONSOLIDATED INCOME STATEMENT	POST-TAX SUMMARISED CONSOLIDATED INCOME STATEMENT
	2017 £m	2016 £m
Note	Halfyear	Halfyear* Fullyear
Asia operations	1,714	1,262 3,199
US operations	884	686 1,968
UK operations	685	591 1,029
Other income and expenditure	(386)	(302) (679)
Solvency II and restructuring costs	(27)	(17) (57)
Interestreceivedfromtaxsettlement	-	37 37
Operating profit based on longer-term investment returns	2,870	2,257 5,497
Short-term fluctuations in investment returns 5	739	479 (507)
Effect of changes in economic assumptions 6	(50)	(1,318) (60)
Mark to market value movements on core borrowings	(262)	(13) (4)
Loss attaching to the sold Korea life business 15	-	(11) (410)
Total non-operating profit (loss)	427	(863) (981)
Profit for theperiod attributable to equity holders of the Company	3,297	1,394 4,516

Basic earnings per share
	2017	2016
	Halfyear	Halfyear* Fullyear
Based on post-tax operating profit including longer-term investment returns (in pence)	111.9p	88.2p 214.7p
Based on post-tax profit attributable to equity holders of the Company (in pence)	128.5p	54.5p 176.4p
Average number of shares(millions)	2,565	2,558 2,560

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

MOVEMENT IN SHAREHOLDERS' EQUITY

MOVEMENT IN SHAREHOLDERS' EQUITY
		2017 £m	2016 £m
	Note	Halfyear	Halfyear	Fullyear
Profit for the period attributable to equity shareholders		3,297	1,394	4,516
Items taken directly to equity:
Exchange movements on foreign operations and net investment hedges		(1,045)	2,663	4,211
Dividends		(786)	(935)	(1,267)
Mark to market value movements on Jackson assets backing surplus and
required capital		31	138	(11)
Other reservemovements		55	(165)	(367)
Net increase in shareholders’ equity	8	1,552	3,095	7,082
Shareholders’equity at beginning ofperiod		38,968	31,886	31,886
Shareholders’ equity at end ofperiod	8	40,520	34,981	38,968

	30 Jun 2017 £m	30 Jun 2017 £m		30 Jun 2016 £m	30 Jun 2016 £m		31 Dec2016 £m	31 Dec2016 £m
		Asset			Asset			Asset
		manage-			manage-			manage-
	Long-term	ment		Long-term	ment		Long-term	ment
	business	and other		business	and other		business	and other
Comprising:	operations	operations	Total	operations	operations	Total	operations	operations	Total
	note 8
Asia operations	19,851	382	20,233	16,578	352	16,930	18,717	383	19,100
US operations	11,370	202	11,572	10,150	201	10,351	11,805	204	12,009
UK insurance operations	10,865	14	10,879	10,075	37	10,112	10,307	25	10,332
M&G	-	1,868	1,868	-	1,838	1,838	-	1,820	1,820
Prudential Capital	-	61	61	-	31	31	-	22	22
Otheroperations	-	(4,093)	(4,093)	-	(4,281)	(4,281)	-	(4,315)	(4,315)
Shareholders’ equity at 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	41,841	1,305	43,146	36,545	270	36,815	40,584	961	41,545
Acquired goodwill	245	1,230	1,475	258	1,230	1,488	245	1,230	1,475
Holding company net borrowings atmarketvaluenote 7	-	(4,101)	(4,101)	-	(3,322)	(3,322)	-	(4,052)	(4,052)
	42,086	(1,566)	40,520	36,803	(1,822)	34,981	40,829	(1,861)	38,968

SUMMARY STATEMENT OF FINANCIAL POSITION

SUMMARY STATEMENT OF FINANCIAL POSITION
	2017 £m	2016 £m
Note	30 Jun	30 Jun 31 Dec
Total assets less liabilities, before deduction for insurance funds	419,810	381,242 407,928
Less insurance funds:*
Policyholder liabilities (net of reinsurers’ share) and unallocated surplus
of with-profits funds	(404,361)	(366,637) (393,262)
Less shareholders’ accrued interest in the long-term business 8	25,071	20,376 24,302
	(379,290)	(346,261) (368,960)
Total net assets 8	40,520	34,981 38,968

Share capital	129	128 129
Share premium	1,937	1,921 1,927
IFRS basis shareholders’ reserves	13,383	12,556 12,610
Total IFRS basis shareholders’ equity 8	15,449	14,605 14,666
Additional EEVbasisretained profit 8	25,071	20,376 24,302
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)	1,567p	1,356p 1,510p
Number of issued shares atperiod end(millions)	2,586	2,579 2,581

Annualised return on embedded value*	15%	14% 17%

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.

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
		Halfyear 2017 £m	Halfyear 2016*£m		% change
	Note		AER	CER	AER	CER
Asia operations		1,943	1,605	1,814	21%	7%
US operations		960	782	889	23%	8%
UKoperations**		721	593	593	22%	22%
Group Total	3	3,624	2,980	3,296	22%	10%
Post-tax operating profit

Annual premium equivalents (APE)note 14
	Halfyear 2017 £m	Halfyear 2016*£m	% change
Note		AER CER	AER CER
Asia operations	1,943	1,605 1,814	21% 7%
US operations	960	782 889	23% 8%
UKoperations**	721	593 593	22% 22%
Group Total 3	3,624	2,980 3,296	22% 10%

Post-tax operating profit

	Halfyear 2017 £m	Halfyear 2016*£m	% change
Note		AER CER	AER CER
Asia operations
New business 3	1,092	821 928	33% 18%
Businessin force 4	549	388 433	41% 27%
Long-term business	1,641	1,209 1,361	36% 21%
EastspringInvestments	73	53 60	38% 22%
Total	1,714	1,262 1,421	36% 21%
US operations
New business 3	436	311 354	40% 23%
Businessin force 4	452	383 435	18% 4%
Long-term business	888	694 789	28% 13%
Broker-dealerand assetmanagement	(4)	(8) (9)	50% 56%
Total	884	686 780	29% 13%
UK operations
New business 3	161	125 125	29% 29%
Businessin force 4	304	259 259	17% 17%
Long-term business	465	384 384	21% 21%
General insurance commission	14	15 15	(7)% (7)%
Total UK insurance operations	479	399 399	20% 20%
M&G	201	181 181	11% 11%
PrudentialCapital	5	11 11	(55)% (55)%
Total	685	591 591	16% 16%
Other income and expenditure	(386)	(302) (309)	(28)% (25)%
Solvency II and restructuring costs	(27)	(17) (17)	(59)% (59)%
Interestreceivedfromtaxsettlement	-	37 37	n/a n/a
Operating profit based on
longer-term investment returns	2,870	2,257 2,503	27% 15%

Analysed as profit (loss) from:
New business 3	1,689	1,257 1,407	34% 20%
Businessin force 4	1,305	1,030 1,127	27% 16%
Total long-term business	2,994	2,287 2,534	31% 18%
Asset management and general insurance
commission	289	252 258	15% 12%
Other results	(413)	(282) (289)	(46)% (43)%
Operating profit 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).

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

==> picture [527 x 79] intentionally omitted <==

Post-tax profit

Post-tax profit
	Halfyear 2017£m	Halfyear 2016*£m	% change
Note		AER CER	AER CER
Operating profit based on longer-term
investment returns	2,870	2,257 2,503	27% 15%
Short-term fluctuations in investment returns 5	739	479 504	54% 47%
Effect of changes in economic assumptions 6	(50)	(1,318) (1,475)	96% 97%
Mark to market value movements on
core borrowings	(262)	(13) (14)	(1,915)% (1,771)%
Loss attaching to the sold Korea life business 15	-	(11) (12)	n/a n/a
Total non-operating profit (loss)	427	(863) (997)	149% 143%
Profit 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)	Basic earnings per share (in pence)
	Halfyear 2017	Halfyear 2016*	% change
		AER CER	AER CER
Based on post-tax operating profit
including longer-term investment returns	111.9p	88.2p 97.8p	27% 14%
Based onpost-taxprofit	128.5p	54.5p 58.9p	136% 118%

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

3 Analysis of new business contribution

(i) Group summary

	Halfyear 2017
	Annual premium Present value	New business margin
	and contribution of new business New business
	equivalents (APE) premiums (PVNBP) contribution	APE PVNBP
	£m £m £m	% %
	note14 note14 note
Asia operations~~note (ii)~~	1,943 10,095 1,092	56 10.8
US operations	960 9,602 436	45 4.5
UKoperations	721 6,616 161	22 2.4
Total	3,624 26,313 1,689	47 6.4

	Halfyear 2016*
	Annual premium Present value	Newbusinessmargin
	and contribution of new business New business
	equivalents (APE) premiums (PVNBP) contribution	APE PVNBP
	£m £m £m	% %
	note14 note14
Asia operations~~note (ii)~~	1,605 8,679 821	51 9.5
US operations	782 7,816 311	40 4.0
UKoperations	593 5,267 125	21 2.4
Total	2,980 21,762 1,257	42 5.8

	Fullyear 2016
	Annual premium Present value	Newbusinessmargin
	and contribution of new business New business
	equivalents (APE) premiums (PVNBP) contribution	APE PVNBP
	£m £m £m	% %
	note14 note14
Asia operations~~note (ii)~~	3,599 19,271 2,030	56 10.5
US operations	1,561 15,608 790	51 5.1
UKoperations	1,160 10,513 268	23 2.5
Total	6,320 45,392 3,088	49 6.8

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

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
		AER CER	AER
	Halfyear	Halfyear Halfyear	Fullyear
China	67	22 24	63
Hong Kong	706	539 612	1,363
Indonesia	88	87 100	175
Taiwan	27	9 11	31
Other	204	164 181	398
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).

4 Operating profit from business in force

(i) Group summary

	Halfyear 2017£m
	Asia US UK
	operations operations operations Total
	note (ii) note (iii) note (iv) note
Unwind of discount and other expected returns	499 312 232 1,043
Effect of changes in operating assumptions	6 - - 6
Experiencevariances and other items	44 140 72 256
Total	549 452 304 1,305

	Halfyear 2016*£m
	Asia US UK
	operations operations operations Total
	note (ii) note (iii) note (iv)
Unwind of discount and other expected returns	373 209 205 787
Effect of changes in operating assumptions	2 - - 2
Experiencevariances and other items	13 174 54 241
Total	388 383 259 1,030

	Fullyear 2016 £m
	Asia US UK Total
	operations operations operations
	note (ii) note (iii) note (iv)
Unwind of discount and other expected returns	866 583 445 1,894
Effect of changes in operating assumptions	54 170 25 249
Experiencevariances and other items	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:

	£m
Movement in unwind of discount and other expected returns:
Effects of changes in:
Growth in opening value	105
Interest rates and other economic assumptions	76
Foreign exchange	75
	256
Movementineffect ofchangesinoperating assumptions, experiencevariances and other items (includingforeignexchange of£22 million)	19
Net movement in operating profit from business in force	275

(ii) Asia operations

(ii) Asia operations
	2017 £m	2016 £m
	Halfyear	Halfyear* Fullyear
Unwind of discount and other expected returns~~note (a)~~	499	373 866
Effect of changes in operating assumptions:
Mortality and morbidity	-	- 33
Persistency and withdrawals	3	3 (47)
Expense	3	- 15
Other	-	(1) 53
	6	2 54
Experience variances and other items:
Mortality and morbiditynote (b)	36	27 71
Persistency and withdrawalsnote (c)	11	(17) 52
Expense	(13)	(8) (23)
Other	10	11 24
	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

(iii) US operations
	2017£m	2016 £m
	Halfyear	Halfyear Fullyear
Unwind of discount and other expected returns~~note (a)~~	312	209 583
Effect of changes in operating assumptions	-	- 170

Experience variances and other items:
Spread experience variancenote (b)	42	60 119
Amortisation of interest-related realised gains and lossesnote (c)	47	39 88
Othernote (d)	51	75 221
	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.

(iv) UK insurance operations

(iv) UK insurance operations
	2017£m	2016 £m
	Halfyear	Halfyear Fullyear
Unwind of discount and other expected returns~~note (a)~~	232	205 445
Reduction in corporate tax ratenote (b)	-	- 25
Other itemsnote (c)	72	54 (95)
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:

	2017 £m	2016 £m
	Halfyear	Halfyear Fullyear
Longevity reinsurance	(6)	(10) (90)
Impact of specific management actions to improve solvency position	65	41 110
Provision for cost of undertaking past non-advised annuity sales review and potential redressnote (d)	-	- (145)
Other itemsnote (e)	13	23 30
	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

(i) Group summary
	2017 £m	2016 £m
	Halfyear	Halfyear* Fullyear
Asia operations~~note (ii)~~	544	373 (100)
US operationsnote (iii)	(126)	(237) (1,102)
UK insurance operationsnote (iv)	215	506 869
Otheroperationsnote (v)	106	(163) (174)
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:

(ii) Asia operations The short-term fluctuations in investment returns for Asia operations comprise:
	2017 £m	2016 £m
	Halfyear	Halfyear* Fullyear
Hong Kong	371	237 (105)
Singapore	85	26 52
Other	88	110 (47)
Total Asia operations~~note~~	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.

(iii) US operations

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

(iii) US operations The short-term fluctuations in investment returns for US operations comprise:
	2017 £m	2016 £m
	Halfyear	Halfyear Fullyear
Investment return related experience on fixed income securities~~note (a)~~	-	(64) (85)
Investment return related impact due to changed expectation of profits on in-force
variable annuity business in future periods based on current period separate account
return,net of relatedhedging activity and other itemsnote (b)	(126)	(173) (1,017)
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
	Halfyear	Halfyear Fullyear
Shareholder-backed annuity business~~note (a)~~	204	335 431
With-profits and othernote (b)	11	171 438
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 pretax 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.

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

(i) Group summary
	2017 £m	2016 £m
	Halfyear	Halfyear* Fullyear
Asia operations~~note (ii)~~	55	(559) 70
US operationsnote (iii)	(159)	(542) 45
UK insurance operationsnote (iv)	54	(217) (175)
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:

(ii) Asia operations The effect of changes in economic assumptions for Asia operations comprises:
	2017 £m	2016 £m
	Halfyear	Halfyear* Fullyear
Hong Kong	(72)	(483) 85
Indonesia	67	89 46
Malaysia	(20)	9 (20)
Singapore	59	(20) (60)
Taiwan	(16)	(78) 12
Other	37	(76) 7
Total Asia operations~~note~~	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
	Halfyear	Halfyear Fullyear
Variable annuity business	(194)	(709) 86
Fixed annuity and othergeneralaccount business	35	167 (41)
Total US operations~~note~~	(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.

(iv) UK insurance operations

The effect of changes in economic assumptions for UK insurance operations comprises:

	2017 £m	2016 £m
	Halfyear	Halfyear Fullyear
Shareholder-backed annuity business~~note (a)~~	-	(24) (113)
With-profits and otherbusinessnote (b)	54	(193) (62)
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	2016 £m	2016 £m
	30 Jun	30 Jun	31 Dec
	Mark to market EEV basis at	Mark to market EEV basis at	Mark to market EEV basis at
	IFRS value market	IFRS value market	IFRS value market
	basis adjustment value	basis adjustment value	basis adjustment value
Holding company (including central finance
subsidiaries) cash and short-term investments	(2,657) - (2,657)	(2,546) - (2,546)	(2,626) - (2,626)
Central funds
Subordinated debt	5,598 443 6,041	4,956 192 5,148	5,772 182 5,954
Senior debt	549 168 717	549 171 720	549 175 724
	6,147 611 6,758	5,505 363 5,868	6,321 357 6,678
Holding company net borrowings	3,490 611 4,101	2,959 363 3,322	3,695 357 4,052
Prudential Capital bank loan	275 - 275	275 - 275	275 - 275
JacksonSurplusNotes	192 62 254	186 63 249	202 65 267
Net core structural borrowings of
shareholder-financed operations	3,957 673 4,630	3,420 426 3,846	4,172 422 4,594

8 Reconciliation of movement in shareholders’ equity

	Halfyear 2017 £m	Halfyear 2017 £m	Halfyear 2017 £m	Halfyear 2017 £m	Halfyear 2017 £m	Halfyear 2017 £m	Halfyear 2017 £m
	Long-term business operations				Asset
				Total	management
			UK	long-term	and UK general
	Asia	US	insurance	business	insurance	Other	Group
	operations	operations	operations	operations	commission	operations	Total
	note (i)					note (i)
Operating profit (based on longer-term
investment returns)
Long-term business:
New businessnote 3	1,092	436	161	1,689	-	-	1,689
Businessin forcenote 4	549	452	304	1,305	-	-	1,305
	1,641	888	465	2,994	-	-	2,994
Asset management and general
insurance commission	-	-	-	-	289	-	289
Other results	-	-	(6)	(6)	-	(407)	(413)
Operating profit based on longer-term
investment returns	1,641	888	459	2,988	289	(407)	2,870
Non-operatingitems	599	(290)	269	578	68	(219)	427
Profit 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	(611)	(579)	-	(1,190)	(11)	156	(1,045)
Intra-group dividends and investment in
operationsnote (ii)	(381)	(481)	(190)	(1,052)	(272)	1,324	-
External dividends	-	-	-		-	(786)	(786)
Mark to market value movements on Jackson
assets backing surplus and required capital	-	31	-	31	-	-	31
Other movementsnote (iii)	(114)	(4)	20	(98)	(1)	154	55
Net increase in shareholders’ equity	1,134	(435)	558	1,257	73	222	1,552
Shareholders'equity at beginning ofperiod	18,472	11,805	10,307	40,584	2,454	(4,070)	38,968
Shareholders’ equity at 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)	4,935	5,011	6,213	16,159	1,297	(3,482)	13,974
Goodwill	-	-	-	-	1,230	245	1,475
Total IFRS basis shareholders’ equity	4,935	5,011	6,213	16,159	2,527	(3,237)	15,449
Additional retained profit (loss) on an
EEVbasisnote (iv)	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)	4,747	5,204	5,974	15,925	1,224	(3,958)	13,191
Goodwill	-	-	-	-	1,230	245	1,475
Total IFRS basis shareholders’ equity	4,747	5,204	5,974	15,925	2,454	(3,713)	14,666
Additional retained profit (loss) on an
EEVbasisnote (iv)	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.

9 Analysis of movement in net worth and value of in-force for long-term business

	Halfyear 2017 £m	Halfyear 2017 £m
		Total
		Value of long-term
	Free Required Total net	in-force business
	surplus capital worth	business operations
	note10	note
Group
Shareholders’ equity at beginning of period	5,351 10,296 15,647	24,937 40,584
New business contribution	(571) 354 (217)	1,906 1,689
Existing business – transfer to net worth	1,719 (363) 1,356	(1,356) -
Expected return on existing businessnote 4	66 108 174	869 1,043
Changes in operating assumptions and experience variancesnote 4	348 (145) 203	59 262
SolvencyIIandrestructuring costs	(6) - (6)	- (6)
Post-tax operating profit	1,556 (46) 1,510	1,478 2,988
Sale of Korea life businessnote 15	76 (76) -	- -
Other non-operatingitems	(38) 20 (18)	596 578
Profit after tax from long-term business	1,594 (102) 1,492	2,074 3,566
Exchange movements on foreign operations and
net investment hedges	(144) (139) (283)	(907) (1,190)
Intra-group dividends and investment in operations	(1,052) - (1,052)	- (1,052)
Other movements	(67) - (67)	- (67)
Shareholders’ equity at end ofperiod	5,682 10,055 15,737	26,104 41,841

Asia operations
New business contribution	(283) 77 (206)	1,298 1,092
Existing business – transfer to net worth	673 (58) 615	(615) -
Expected return on existing businessnote 4	19 29 48	451 499
Changesinoperating assumptions and experiencevariancesnote 4	71 (51) 20	30 50
Post-tax operating profit	480 (3) 477	1,164 1,641
Sale of Korea life businessnote 15	76 (76) -	- -
Other non-operatingitems	192 40 232	367 599
Profit after tax from long-term business	748 (39) 709	1,531 2,240

US operations
New business contribution	(246) 220 (26)	462 436
Existing business – transfer to net worth	715 (132) 583	(583) -
Expected return on existing businessnote 4	29 28 57	255 312
Changesinoperating assumptions and experiencevariancesnote 4	57 (4) 53	87 140
Post-tax operating profit	555 112 667	221 888
Non-operatingitems	(470) (109) (579)	289 (290)
Profit after tax from long-term business	85 3 88	510 598

UK insurance operations
New business contribution	(42) 57 15	146 161
Existing business – transfer to net worth	331 (173) 158	(158) -
Expected return on existing businessnote 4	18 51 69	163 232
Changes in operating assumptions and experience variancesnote 4	220 (90) 130	(58) 72
SolvencyIIandrestructuring costs	(6) - (6)	- (6)
Post-tax operating profit	521 (155) 366	93 459
Non-operatingitems	240 89 329	(60) 269
Profit 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 Dec2016 £m
	UK Total long-term	UK Total long-term
	Asia US insurance business	Asia US insurance business
	operations operations operations operations	operations operations operations operations
Value of in-force business before
deduction of cost of capital and time
value of guarantees	16,359 8,525 3,422 28,306	15,371 8,584 3,468 27,423
Cost of capital	(503) (275) (613) (1,391)	(477) (319) (692) (1,488)
Cost oftimevalue ofguarantees	(51) (760) - (811)	(87) (911) - (998)
Net value of in-force business	15,805 7,490 2,809 26,104	14,807 7,354 2,776 24,937
Total networth	3,801 3,880 8,056 15,737	3,665 4,451 7,531 15,647
Totalembeddedvalue~~note 8~~	19,606 11,370 10,865 41,841	18,472 11,805 10,307 40,584

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

	Halfyear 2017£m	Halfyear 2016*£m	% change
		AER CER	AER CER
Asia operations
Underlying free surplus generated from
in-force life business	763	600 679	27% 12%
Investmentin newbusinessnote (iii)(a)	(283)	(228) (257)	(24)% (10)%
Long-term business	480	372 422	29% 14%
EastspringInvestmentsnote (iii)(b)	73	53 60	38% 22%
Total	553	425 482	30% 15%
US operations
Underlying free surplus generated from
in-force life business	801	701 797	14% 1%
Investmentin newbusinessnote (iii)(a)	(246)	(209) (238)	(18)% (3)%
Long-term business	555	492 559	13% (1)%
Broker-dealerand assetmanagementnote (iii)(b)	(4)	(8) (9)	50% 56%
Total	551	484 550	14% 0%
UK insurance operations
Underlying free surplus generated from
in-force life business	563	555 555	1% 1%
Investmentin newbusinessnote (iii)(a)	(42)	(56) (56)	25% 25%
Long-term business	521	499 499	4% 4%
General insurance commissionnote (iii)(b)	14	15 15	(7)% (7)%
Total	535	514 514	4% 4%
M&G~~note (iii)(b)~~	201	181 181	11% 11%
Prudential Capitalnote (iii)(b)	5	11 11	(55)% (55)%
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 flows (including
expected return on net assets)	1,785	1,470 1,620	21% 10%
Effects of changes in operating assumptions,
operating experience variances and other
operatingitems	342	386 411	(11)% (17)%
Underlying free surplus generated from
in-force life business	2,127	1,856 2,031	15% 5%
Investmentin newbusinessnote (iii)(a)	(571)	(493) (551)	(16)% (4)%
Total long-term business	1,556	1,363 1,480	14% 5%
Asset management and general insurance
commissionnote (iii)(b)	289	252 258	15% 12%
	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).

(ii) Underlying free surplus generated – total Group

	Halfyear 2017£m	Halfyear 2016*£m	% change
		AER CER	AER CER
Underlying free surplus generated from
insurance and asset management operationsnote (iii)(b)	1,845	1,615 1,738	14% 6%
Other income and expenditure net of restructuring
and Solvency II costsnote (iii) (b)	(407)	(308) (315)	(32)% (29)%
Interestreceivedfromtaxsettlement	-	37 37	n/a n/a
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

(iii) Movement in free surplus
	Halfyear 2017 £m
	Asset management and UK general Total insurance and asset Central
Long-term business and asset management	Long-term insurance management and other Group
operations	business commission operations	operations total
	note 9 note (b)	note (b)
Underlying free surplus generated	1,556 289 1,845	(407) 1,438
Sale of Korea life businessnote 9	76 - 76	- 76
Other non-operatingitemsnote (c)	(38) 68 30	41 71
	1,594 357 1,951	(366) 1,585
Net cash flows to parent companynote (d)	(1,056) (174) (1,230)	1,230 -
External dividends	- - -	(786) (786)
Exchange rate movements, timing differences and
other itemsnote (e)	(207) (110) (317)	231 (86)
Net movement in free surplus	331 73 404	309 713
Balance at beginning ofperiod	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	2,347	- 2,347
US operations	1,950	- 1,950
UK operations	2,682	- 2,682
Otheroperationsnote (b)	-	1,948 1,948
	6,979	1,948 8,927

Balance at beginning of period:
Asia operations	2,142	- 2,142
US operations	2,418	- 2,418
UK operations	2,015	- 2,015
Otheroperationsnote (b)	-	1,639 1,639
	6,575	1,639 8,214

	Halfyear 2016 £m
	Asset management and UK general Total insurance and asset Central
Long-term business and asset management	Long-term insurance management and other Group
operations	business commission operations	operations total
	note (b)	note (b)
Underlying free surplus generated	1,363 252 1,615	(271) 1,344
Results of the sold Korea life business	11 - 11	- 11
Other non-operatingitemsnote (c)	(829) (61) (890)	(129) (1,019)
	545 191 736	(400) 336
Net cash flows to parent companynote (d)	(830) (288) (1,118)	1,118 -
External dividends	- - -	(935) (935)
Exchange rate movements, timing differences and
other itemsnote (e)	650 202 852	205 1,057
Net movement in free surplus	365 105 470	(12) 458
Balance at beginning ofperiod	4,169 1,124 5,293	879 6,172
Balance at end ofperiod	4,534 1,229 5,763	867 6,630

	Fullyear 2016 £m
	Asset management and UK general Total insurance and asset Central
Long-term business and asset management	Long-term insurance management and other Group
operations	business commission operations	operations total
	note (b)	note (b)
Underlying free surplus generated	3,080 508 3,588	(666) 2,922
Loss attaching to the sold Korea life business	(86) - (86)	- (86)
Other non-operatingitemsnote (c)	(932) (38) (970)	(169) (1,139)
	2,062 470 2,532	(835) 1,697
Net cash flows to parent companynote (d)	(1,236) (482) (1,718)	1,718 -
External dividends	- - -	(1,267) (1,267)
Exchange rate movements, timing differences and
other itemsnote (e)	356 112 468	1,144 1,612
Net movement in free surplus	1,182 100 1,282	760 2,042
Balance at beginning ofperiod	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 longterm 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:

		Halfyear 2017 £m
		Long-term Asset management and UK general insurance Total insurance and asset management Central and other Group
		business commission operations operations total
	Exchange rate movements	(144) (11) (155) (17) (172)
	Mark to market value movements on Jackson assets
	backing surplus and required capitalnote 8	31 - 31 - 31
	Other itemsnote (f)	(94) (99) (193) 248 55
		(207) (110) (317) 231 (86)

		Halfyear 2016 £m
		Long-term Asset management and UK general insurance Total insurance and asset management Central and other Group
		business commission operations operations total
	Exchange rate movements	329 55 384 50 434
	Mark to market value movements on Jackson assets
	backing surplus and required capital	138 - 138 - 138
	Other itemsnote (f)	183 147 330 155 485
		650 202 852 205 1,057

		Fullyear 2016 £m
		Long-term Asset management and UK general insurance Total insurance and asset management Central and other Group
		business commission operations operations total
	Exchange rate movements	633 83 716 48 764
	Mark to market value movements on Jackson assets
	backing surplus and required capital	(11) - (11) - (11)
	Other itemsnote (f)	(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.

New business contribution

New business contribution
		Halfyear	2017 £m			Fullyear	2016 £m
				Total long-				Total
			UK	term			UK	long-term
	Asia	US	insurance	business	Asia	US	insurance	business
	operations	operations	operations	operations	operations operations		operations	operations
New business contribution~~note 3~~	1,092	436	161	1,689	2,030	790	268	3,088
Discount rates – 1% increase	(208)	(21)	(18)	(247)	(375)	(43)	(32)	(450)
Interest rates – 1% increase	3	49	20	72	51	64	27	142
Interest rates – 0.5% decrease	(4)	(24)	(10)	(38)	(30)	(49)	(15)	(94)
Equity/property yields – 1% rise	61	52	20	133	129	91	28	248
Long-term expected defaults – 5 bps increase	-	-	(1)	(1)	-	-	(2)	(2)
Embedded value of long-term business operations

		30 Jun 2017 £m	30 Jun 2017 £m			31 Dec2016 £m	31 Dec2016 £m
				Total				Total
			UK	long-term			UK	long-term
	Asia	US	insurance	business	Asia	US	insurance	business
	operations	operations	operations	operations	operations	operations	operations	operations
Shareholders' equity~~note 8~~	19,606	11,370	10,865	41,841	18,472	11,805	10,307	40,584
Discount rates – 1% increase	(2,268)	(350)	(815)	(3,433)	(2,078)	(379)	(809)	(3,266)
Interest rates – 1% increase	(548)	(128)	(643)	(1,319)	(701)	(241)	(638)	(1,580)
Interest rates – 0.5% decrease	184	(54)	356	486	248	25	369	642
Equity/property yields – 1% rise	841	682	359	1,882	771	653	314	1,738
Equity/property market values – 10% fall	(416)	(127)	(447)	(990)	(361)	(11)	(399)	(771)
Statutory minimum capital	128	197	-	325	150	223	-	373
Long-term expected defaults – 5 bps increase	-	-	(136)	(136)	-	-	(138)	(138)

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.

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 subfund 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.
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.

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 inforce business instead incorporates the discounted value of future spread earnings. This value is not affected generally by shortterm 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.

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 the 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 the 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).
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.

(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:

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 nonvariable 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.

(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.

(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.

(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 discount rate %	Risk discount rate %
		New business		In-force business
	2017	2016		2017	2016
	30 Jun	30 Jun	31 Dec	30 Jun	30 Jun	31 Dec
China	9.3	9.4	9.6	9.3	9.4	9.6
Hong Kongnotes (b)(d)	3.6	3.0	3.9	3.7	2.9	3.9
Indonesia	11.2	11.5	12.0	11.2	11.5	12.0
Malaysianote (d)	6.8	6.3	6.8	6.9	6.4	6.9
Philippines Singaporenote (d)	12.2 3.8	10.5 3.6	11.6 4.2	12.2 4.7	10.5 4.5	11.6 5.0
Taiwan	3.8	3.8	4.0	4.1	3.3	4.0
Thailand	10.0	8.7	9.4	10.0	8.7	9.4
Vietnam	13.2	13.7	13.0	13.2	13.7	13.0
Total weighted risk discount ratenote (a)	5.1	4.7	5.3	5.8	5.7	6.1

	10-yeargovernment bondyield %	10-yeargovernment bondyield %		Expected long-term Inflation %	Expected long-term Inflation %
	2017	2016		2017	2016
	30 Jun	30 Jun	31 Dec	30 Jun	30 Jun	31 Dec
China	3.6	2.9	3.1	3.0	2.5	2.5
Hong Kongnotes (b)(d)	2.3	1.5	2.5	2.5	2.3	2.3
Indonesia	6.9	7.6	8.1	4.5	5.0	5.0
Malaysianote (d)	3.9	3.8	4.3	2.5	2.5	2.5
Philippines Singaporenote (d)	4.7 2.1	3.7 1.9	4.8 2.5	4.0 2.0	4.0 2.0	4.0 2.0
Taiwan	1.1	0.8	1.2	1.5	1.0	1.0
Thailand	2.5	2.0	2.7	3.0	3.0	3.0
Vietnam	5.7	6.9	6.3	5.5	5.5	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:

	2017 %	2016 %
	30 Jun	30 Jun 31 Dec
Hong Kong	6.3	5.5 6.5
Malaysia	10.4	9.8 10.2
Singapore	8.6	7.9 8.5

(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	1.50	1.25 1.25
July to December issues	n/a	n/a 1.25
Fixed index annuity business:
January to June issues	1.75	1.50 1.50
July to December issues	n/a	n/a 1.50
Institutional business	0.50	0.50 0.50
Allowance for long-term defaults included in projected spreadnote 12(a)(viii)	0.20	0.21 0.21
Risk discount rate:
Variable annuity:
Risk discount rate	6.7	6.0 6.9
Additional allowance for credit risk included in risk discount ratenote 12(a)(viii)	0.2	0.2 0.2
Non-variable annuity:
Risk discount rate	3.9	3.1 4.1
Additional allowance for credit risk included in risk discount ratenote 12(a)(viii)	1.0	1.0 1.0
Weighted average total:
New business	6.5	5.7 6.8
In-force business	6.3	5.4 6.5
US 10-year treasury bond yield	2.3	1.5 2.5
Pre-tax expected long-term nominal rate of return for US equities	6.3	5.5 6.5
Expected long-term rate of inflation	2.9	2.7 3.0
Equity risk premium	4.0	4.0 4.0
S&P equityreturn volatilitynote (v)	18.0	18.0 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.

(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	4.1	4.5 3.9
In-force business	4.3	4.2 4.5
Pre-tax expected 15-year nominal rates of investment return:notes (a)(b)
New business	2.7	3.4 3.0
In-force business	2.7	2.9 2.8
With-profits and other business:
Risk discount rate:*
New business	4.9	4.6 4.7
In-force business	4.9	4.6 4.9
Pre-tax expected 15-year nominal rates of investment return:note (b)
Overseas equities	6.1 to 9.9	5.5 to 8.8 6.2 to 9.4
Property	4.5	4.3 4.5
15-year gilt yield	1.7	1.5 1.7
Corporate bonds	3.5	3.2 3.5
Expected 15-year rate of inflation	3.5	3.1 3.6
Equityriskpremium	4.0	4.0 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:

			year	year	year	year	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.

(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

14 Total insurance and investment products new business[note (i) ]

Group insurance operations – new business premiums and contributions

					Annual premium and	Annual premium and	Present value of new	Present value of new
					contribution equivalents		business premiums
	Single premiums		Regular premiums		(APE)		(PVNBP)
					note12(a)(ii)		note12(a)(ii)
	2017£m	2016 £m	2017£m	2016 £m	2017£m	2016 £m	2017£m	2016 £m
	Half	Half Full	Half	Half Full	Half	Half Full	Half	Half Full
	year	year year	year	year year	year	year year	year	year year
Asia*	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	9,602	7,816 15,608	-	- -	960	782 1,561	9,602	7,816 15,608
UK**	6,251	4,936 9,836	96	99 177	721	593 1,160	6,616	5,267 10,513
Group Total	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	-	- -	8	6 14	8	6 14	37	30 66
Hong Kong	368	506 1,140	877	817 1,798	914	868 1,912	5,190	5,045 10,930
Indonesia	126	84 236	131	117 255	144	125 279	558	486 1,048
Malaysia	33	52 110	125	104 233	128	109 244	623	630 1,352
Philippines	28	36 91	33	26 61	36	30 70	134	118 278
Singapore	323	174 523	163	125 299	195	142 351	1,451	1,063 2,627
Thailand	53	36 80	37	39 81	42	43 89	199	197 404
Vietnam	3	3 6	62	44 115	62	44 116	298	182 519
SE Asia operations
including Hong Kong	934	891 2,186	1,436	1,278 2,856	1,529	1,367 3,075	8,490	7,751 17,224
Chinanote (ii)	141	74 124	173	102 187	187	109 199	827	452 880
Taiwan	25	14 36	102	55 146	105	56 150	314	205 499
Indianote (iii)	31	24 51	119	70 170	122	73 175	464	271 668
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	6,041	4,995 10,653	-	- -	604	500 1,065	6,041	4,995 10,653
Elite Access
(variable annuity)	1,101	990 2,056	-	- -	110	99 206	1,101	990 2,056
Fixed annuities	245	285 555	-	- -	24	28 55	245	285 555
Fixed index annuities	158	277 508	-	- -	16	28 51	158	277 508
Wholesale	2,057	1,269 1,836	-	- -	206	127 184	2,057	1,269 1,836
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	120	327 546	-	- -	12	33 55	120	327 546
Bonds	1,742	1,956 3,834	-	- -	174	196 384	1,742	1,957 3,835
Corporate pensions	77	60 110	67	68 121	75	74 132	286	258 479
Individual pensions	2,609	1,137 2,532	18	21 35	279	134 289	2,690	1,212 2,681
Income drawdown	1,061	808 1,649	-	- -	106	81 165	1,061	808 1,649
Otherproducts	642	648 1,165	11	10 21	75	75 135	717	705 1,323
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

Group Total	16,984	13,755 27,841	1,926	1,604 3,536	3,624	2,980 6,320	26,313	21,762 45,392

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.

`-` Investment products funds under management[notes (iv)(v)(vi)]

Half year 2017 £m

	Halfyear 2017 £m
	Market gross Market exchange translation and other
	1 Jan 2017 inflows Redemptions movements 30 Jun 2017
Eastspring Investments	38,042 11,536 (9,263) 4,281 44,596
M&G	136,763 22,677 (15,498) 5,176 149,118
GroupTotal	174,805 34,213 (24,761) 9,457 193,714

	Halfyear 2016 £m
	Market gross Market exchange translation and other
	1Jan 2016 inflows Redemptions movements 30 Jun 2016
Eastspring Investments	30,281 6,163 (6,575) 2,859 32,728
M&G	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 D 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 fund 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.

Additional EEV financial information*

A New Business

BASIS OF PREPARATION

The format of the schedules 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 Prudential Regulation Authority regulations.

The details shown 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.

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. New business premiums reflect those premiums attaching to covered business, including premiums for contracts designed as investment products for IFRS reporting.

Investment products referred to in the tables for funds under management are unit trusts, 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, as described in the preceding paragraph, although similar IFRS recognition and measurement principles apply to the acquisition costs and fees attaching to this type of business.

Post-tax New Business Profit has been determined using the European Embedded Value (EEV) methodology set out in our EEV basis results supplement.

In determining the EEV basis value of new business written in the period policies incept, 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.

Annual premium equivalent (APE) sales are subject to rounding.

* The additional financial information is not covered by the KPMG LLP independent review opinion .

Notes to Schedules A(i) to A(v)

(1) Prudential plc reports its results using both actual exchange rates (AER) and constant exchange rates (CER) so as to eliminate the impact of exchange translation.

	Average rate**	Closing rate
	% appreciation	% appreciation
	Half year Half year (depreciation) of local	30 Jun 30 Jun (depreciation) of local
Local currency : £	2017 2016 currency against GBP	2017 2016 currency against GBP
China	8.66 9.37 8%	8.81 8.88 1%
Hong Kong	9.80 11.13 14%	10.14 10.37 2%
Indonesia	16,793.63 19,222.95 14%	17,311.76 17,662.47 2%
Malaysia	5.53 5.87 6%	5.58 5.39 (3)%
Singapore	1.77 1.98 12%	1.79 1.80 1%
Thailand	43.72 50.81 16%	44.13 46.98 6%
US	1.26 1.43 13%	1.30 1.34 3%
Vietnam	28,612.70 31,996.45 12%	29,526.43 29,815.99 1%

Vietnam	28,612.70 31,996.45 12%	29,526.43 29,815.99 1%
	Average rate	Closing rate
	% appreciation	% appreciation
	Half year Full year (depreciation) of local**	30 Jun 31 Dec (depreciation) of local
Local currency :£	2017 2016 currency against GBP	2017 2016 currency against GBP
China	8.66 8.99 4%	8.81 8.59 (2)%
Hong Kong	9.80 10.52 7%	10.14 9.58 (6)%
Indonesia	16,793.63 18,026.11 7%	17,311.76 16,647.30 (4)%
Malaysia	5.53 5.61 1%	5.58 5.54 (1)%
Singapore	1.77 1.87 6%	1.79 1.79 0%
Thailand	43.72 47.80 9%	44.13 44.25 0%
US	1.26 1.35 7%	1.30 1.24 (5)%
Vietnam	28,612.70 30,292.79 6%	29,526.43 28,136.99 (5)%

** Average rate is for the 6 month period to 30 June.

(1a) Insurance new business for overseas operations are converted using the year-to-date average exchange rate applicable at the time (AER). The sterling results for the second half of 2016 represent the difference between the year-to-date reported sterling results at the year end and the results for the first half of 2016. The second half results therefore include the true up between the first half and full year average exchange rates applied to the first half results.
(1b) Insurance new business for overseas operations for half year 2016 has been calculated using constant exchange rates (CER).
(2) Annual Equivalents, calculated as regular new business contributions plus 10 per cent of single new business contributions, are subject to rounding. Present value of new business premiums (PVNBP) are calculated as equalling single premiums plus the present value of expected premiums of new regular premium business. In determining the present value, allowance is made for lapses and other assumptions applied in determining the EEV new business profit.
(3) Balance includes segregated and pooled pension funds, private finance assets and other institutional clients. (4) New business in India is included at Prudential's 26 per cent interest in the India life operation.
(5) Balance Sheet figures have been calculated at the closing exchange rate.
(6) New business in China is included at Prudential's 50 per cent interest in the China life operation.
(7) Mandatory Provident Fund (MPF) product sales in Hong Kong are included at Prudential's 36 per cent interest in Hong Kong MPF operation.
(8) Investment flows for the period exclude year-to-date Eastspring Money Market Funds (MMF) gross inflow of £96,704 million (half year 2016: gross inflow of £62,302 million; full year 2016: gross inflow of £146,711 million) and net inflow of £499 million (half year 2016: net inflow of £656 million; full year 2016: net inflow of £403 million).
(9) Total Group Investment Operations funds under management exclude MMF funds under management of £8,327 million at 30 June 2017 (30 June 2016: £7,421 million; 31 December 2016: £7,714 million).
(10) New business premiums and contributions exclude the results attributable to the sold Korea life business for all periods presented. Half year 2016 comparatives have been adjusted from those previously published accordingly (APE: £50 million, PVNBP: £276 million, new business contribution: £3 million on actual exchange rate).

Schedule A(i) New Business Insurance Operations (Actual Exchange Rates)


	Single premiums	Regular premiums	Annual Equivalents~~(2)~~	PVNBP~~(2)~~
	2017 2016	2017 2016	2017 2016	2017 2016
	Half Half	Half Half	Half Half	Half Half
	year year +/-	year year +/-	year year +/-	year year +/-
	£m £m %	£m £m %	£m £m %	£m £m %
Group Insurance Operations
Asia(1a)(10)	1,131 1,003 13%	1,830 1,505 22%	1,943 1,605 21%	10,095 8,679 16%
US(1a)	9,602 7,816 23%	- - -	960 782 23%	9,602 7,816 23%
UK	6,251 4,936 27%	96 99 (3)%	721 593 22%	6,616 5,267 26%
Group Total(10)	16,984 13,755 23%	1,926 1,604 20%	3,624 2,980 22%	26,313 21,762 21%

Asia Insurance
Operations(1a)
Cambodia	- - -	8 6 33%	8 6 33%	37 30 23%
Hong Kong	368 506 (27)%	877 817 7%	914 868 5%	5,190 5,045 3%
Indonesia	126 84 50%	131 117 12%	144 125 15%	558 486 15%
Malaysia	33 52 (37)%	125 104 20%	128 109 17%	623 630 (1)%
Philippines	28 36 (22)%	33 26 27%	36 30 20%	134 118 14%
Singapore	323 174 86%	163 125 30%	195 142 37%	1,451 1,063 37%
Thailand	53 36 47%	37 39 (5)%	42 43 (2)%	199 197 1%
Vietnam	3 3 -	62 44 41%	62 44 41%	298 182 64%
SE Asia Operations
inc. Hong Kong	934 891 5%	1,436 1,278 12%	1,529 1,367 12%	8,490 7,751 10%
China(6)	141 74 91%	173 102 70%	187 109 72%	827 452 83%
Taiwan	25 14 79%	102 55 85%	105 56 88%	314 205 53%
India(4)	31 24 29%	119 70 70%	122 73 67%	464 271 71%
Total Asia Insurance
Operations(10)	1,131 1,003 13%	1,830 1,505 22%	1,943 1,605 21%	10,095 8,679 16%

US Insurance
Operations(1a)
Variable annuities	6,041 4,995 21%	- - -	604 500 21%	6,041 4,995 21%
Elite Access (variable
annuity)	1,101 990 11%	- - -	110 99 11%	1,101 990 11%
Fixed annuities	245 285 (14)%	- - -	24 28 (14)%	245 285 (14)%
Fixed index annuities	158 277 (43)%	- - -	16 28 (43)%	158 277 (43)%
Wholesale	2,057 1,269 62%	- - -	206 127 62%	2,057 1,269 62%
Total US Insurance
Operations	9,602 7,816 23%	- - -	960 782 23%	9,602 7,816 23%

UK & Europe
Insurance Operations
Individual annuities	120 327 (63)%	- - -	12 33 (64)%	120 327 (63)%
Bonds	1,742 1,956 (11)%	- - -	174 196 (11)%	1,742 1,957 (11)%
Corporate pensions	77 60 28%	67 68 (1)%	75 74 1%	286 258 11%
Individual pensions	2,609 1,137 129%	18 21 (14)%	279 134 108%	2,690 1,212 122%
Income drawdown	1,061 808 31%	- - -	106 81 31%	1,061 808 31%
Other products	642 648 (1)%	11 10 10%	75 75 -	717 705 2%
Total UK & Europe Insurance
Operations	6,251 4,936 27%	96 99 (3)%	721 593 22%	6,616 5,267 26%
Group Total (10)	16,984 13,755 23%	1,926 1,604 20%	3,624 2,980 22%	26,313 21,762 21%

Schedule A(ii) New Business Insurance Operations (Constant Exchange Rates)

Note: In schedule A(ii) constant exchange rates (CER) have been used to calculate insurance new business for overseas operations for half year 2016.


	Singlepremiums	Regularpremiums	Annual Equivalents~~(2)~~	PVNBP~~(2)~~
	2017 2016	2017 2016	2017 2016	2017 2016
	Half Half	Half Half	Half Half	Half Half
	year year +/-	year year +/-	year year +/-	year year +/-
	£m £m %	£m £m %	£m £m %	£m £m %
Group Insurance
Operations
Asia(1a)(1b)(10)	1,131 1,130 0%	1,830 1,701 8%	1,943 1,814 7%	10,095 9,794 3%
US(1a)(1b)	9,602 8,890 8%	- - -	960 889 8%	9,602 8,890 8%
UK	6,251 4,936 27%	96 99 (3)%	721 593 22%	6,616 5,267 26%
Group Total(10)	16,984 14,956 14%	1,926 1,800 7%	3,624 3,296 10%	26,313 23,951 10%

Asia Insurance
Operations(1a)(1b)
Cambodia	- - -	8 6 33%	8 6 33%	37 34 9%
Hong Kong	368 576 (36)%	877 929 (6)%	914 987 (7)%	5,190 5,732 (9)%
Indonesia	126 96 31%	131 133 (2)%	144 143 1%	558 557 0%
Malaysia	33 54 (39)%	125 111 13%	128 116 10%	623 669 (7)%
Philippines	28 39 (28)%	33 28 18%	36 32 13%	134 126 6%
Singapore	323 194 66%	163 140 16%	195 159 23%	1,451 1,189 22%
Thailand	53 42 26%	37 47 (21)%	42 51 (18)%	199 229 (13)%
Vietnam	3 3 -	62 50 24%	62 50 24%	298 204 46%
SE Asia Operations
inc. Hong Kong	934 1,004 (7)%	1,436 1,444 (1)%	1,529 1,544 (1)%	8,490 8,740 (3)%
China(6)	141 81 74%	173 110 57%	187 118 58%	827 489 69%
Taiwan	25 17 47%	102 66 55%	105 68 54%	314 249 26%
India(4)	31 28 11%	119 81 47%	122 84 45%	464 316 47%
Total Asia Insurance
Operations(10)	1,131 1,130 0%	1,830 1,701 8%	1,943 1,814 7%	10,095 9,794 3%

US Insurance
Operations(1a)(1b)
Variable annuities	6,041 5,682 6%	- - -	604 568 6%	6,041 5,682 6%
Elite Access (variable
annuity)	1,101 1,125 (2)%	- - -	110 113 (3)%	1,101 1,125 (2)%
Fixed annuities	245 324 (24)%	- - -	24 32 (25)%	245 324 (24)%
Fixed index annuities	158 315 (50)%	- - -	16 32 (50)%	158 315 (50)%
Wholesale	2,057 1,444 42%	- - -	206 144 43%	2,057 1,444 42%
Total US Insurance
Operations	9,602 8,890 8%	- - -	960 889 8%	9,602 8,890 8%

UK & Europe
Insurance Operations
Individual annuities	120 327 (63)%	- - -	12 33 (64)%	120 327 (63)%
Bonds	1,742 1,956 (11)%	- - -	174 196 (11)%	1,742 1,957 (11)%
Corporate pensions	77 60 28%	67 68 (1)%	75 74 1%	286 258 11%
Individual pensions	2,609 1,137 129%	18 21 (14)%	279 134 108%	2,690 1,212 122%
Income drawdown	1,061 808 31%	- - -	106 81 31%	1,061 808 31%
Other products	642 648 (1)%	11 10 10%	75 75 -	717 705 2%
Total UK & Europe
Insurance Operations	6,251 4,936 27%	96 99 (3)%	721 593 22%	6,616 5,267 26%
Group Total(10)	16,984 14,956 14%	1,926 1,800 7%	3,624 3,296 10%	26,313 23,951 10%

Schedule A(iii) Total Insurance New Business APE (Actual and Constant Exchange Rates)

Note: In schedule A(iii) amounts for the first half (H1) and second half (H2) of 2016 are presented on both actual exchange rate (AER) and constant exchange rate (CER). The half year 2017 amounts are presented on actual exchange rate.

	2016	2016	2017
	Actual exchange rates	Constant exchange rates	Actual exchange rates
	H1 H2	H1 H2	H1
	£m £m	£m £m	£m
Group Insurance Operations
Asia(1a)(10)	1,605 1,994	1,814 2,033	1,943
US(1a)	782 779	889 789	960
UK	593 567	593 567	721
Group Total(10)	2,980 3,340	3,296 3,389	3,624

Asia Insurance Operations(1a)
Cambodia	6 8	6 8	8
Hong Kong	868 1,044	987 1,066	914
Indonesia	125 154	143 157	144
Malaysia	109 135	116 131	128
Philippines	30 40	32 39	36
Singapore	142 209	159 212	195
Thailand	43 46	51 46	42
Vietnam	44 72	50 74	62
SE Asia Operations inc. Hong Kong	1,367 1,708	1,544 1,733	1,529
China(6)	109 90	118 89	187
Taiwan	56 94	68 102	105
India(4)	73 102	84 109	122
Total Asia Insurance Operations(10)	1,605 1,994	1,814 2,033	1,943

US Insurance Operations(1a)
Variable annuities	500 565	568 576	604
Elite Access (variable annuity)	99 107	113 109	110
Fixed annuities	28 27	32 27	24
Fixed index annuities	28 23	32 23	16
Wholesale	127 57	144 54	206
Total US Insurance Operations	782 779	889 789	960

UK & Europe Insurance Operations
Individual annuities	33 22	33 22	12
Bonds	196 188	196 188	174
Corporate pensions	74 58	74 58	75
Individual pensions	134 155	134 155	279
Income drawdown	81 84	81 84	106
Other products	75 60	75 60	75
Total UK & Europe Insurance Operations	593 567	593 567	721
Group Total(10)	2,980 3,340	3,296 3,389	3,624

Schedule A(iv) Investment Operations (Actual Exchange Rates)

Schedule A(iv) Investment Operations (Actual Exchange Rates)
	2016	2017
	H1 H2	H1
	£m £m	£m
Group Investment Operations
Opening FUM	156,686 162,384	174,805
Net Flows:(8)	(7,378) 1,123	9,452
- Gross Inflows	15,894 24,239	34,213
- Redemptions	(23,272) (23,116)	(24,761)
Other Movements	13,076 11,298	9,457
Total Group Investment Operations(9)	162,384 174,805	193,714

M&G
Retail
Opening FUM	60,801 59,217	64,209
Net Flows:	(6,122) (131)	5,515
- Gross Inflows	6,160 9,625	15,871
- Redemptions	(12,282) (9,756)	(10,356)
Other Movements	4,538 5,123	2,776
Closing FUM	59,217 64,209	72,500

Comprising amounts for:
UK	34,308 35,208	35,201
Europe (excluding UK)	23,020 26,905	35,192
South Africa	1,889 2,096	2,107
	59,217 64,209	72,500

Institutional(3)
Opening FUM	65,604 70,439	72,554
Net Flows:	(844) (993)	1,664
- Gross Inflows	3,571 3,485	6,806
- Redemptions	(4,415) (4,478)	(5,142)
Other Movements	5,679 3,108	2,400
Closing FUM	70,439 72,554	76,618

Total M&G Investment Operations	129,656 136,763	149,118

PPM South Africa FUM included in Total M&G	5,354 6,047	5,427

Eastspring - excluding MMF(8)
Third Party Retail(7)
Opening FUM	25,541 27,155	30,793
Net Flows:	(787) 1,237	2,186
- Gross Inflows	5,650 9,875	10,781
- Redemptions	(6,437) (8,638)	(8,595)
Other Movements	2,401 2,401	3,114
Closing FUM(5)	27,155 30,793	36,093

Third Party Institutional Mandates
Opening FUM	4,740 5,573	7,249
Net Flows:	375 1,010	87
- Gross Inflows	513 1,254	755
- Redemptions	(138) (244)	(668)
Other Movements	458 666	1,167
Closing FUM(5)	5,573 7,249	8,503

Total Eastspring Investment Operations	32,728 38,042	44,596

Schedule A(v) Total Insurance New Business Profit (Actual and Constant Exchange Rates)

Note: In schedule A(v) amounts for half year (HY) and full year (FY) 2016 are presented on both actual exchange rate (AER) and constant exchange rate (CER) basis. The half year 2017 amounts are presented on actual exchange rates.

	2016	2016	2017
	Actual exchange rates	Constant exchange rates	Actual exchange rates
	HY FY	HY FY	HY
	£m £m	£m £m	£m
New Business Profit~~(1a)(b)~~
Total Asia Insurance Operations(10)	821 2,030	928 2,169	1,092
Total US Insurance Operations	311 790	354 850	436
Total UK Insurance Operations	125 268	125 268	161
Group Total(10)	1,257 3,088	1,407 3,287	1,689

Annual Equivalent(1a)(b)(2)
Total Asia Insurance Operations(10)	1,605 3,599	1,814 3,847	1,943
Total US Insurance Operations	782 1,561	889 1,678	960
Total UK Insurance Operations	593 1,160	593 1,160	721
Group Total(10)	2,980 6,320	3,296 6,685	3,624

New Business Margin (NBP as % of APE)
Total Asia Insurance Operations(10)	51% 56%	51% 56%	56%
Total US Insurance Operations	40% 51%	40% 51%	45%
Total UK Insurance Operations	21% 23%	21% 23%	22%
Group Total(10)	42% 49%	43% 49%	47%

PVNBP(1a)(b)(2)
Total Asia Insurance Operations(10)	8,679 19,271	9,794 20,567	10,095
Total US Insurance Operations	7,816 15,608	8,890 16,783	9,602
Total UK Insurance Operations	5,267 10,513	5,267 10,513	6,616
Group Total(10)	21,762 45,392	23,951 47,863	26,313

New Business Margin (NBP as % of PVNBP)
Total Asia Insurance Operations(10)	9.5% 10.5%	9.5% 10.5%	10.8%
Total US Insurance Operations	4.0% 5.1%	4.0% 5.1%	4.5%
Total UK Insurance Operations	2.4% 2.5%	2.4% 2.5%	2.4%
Group Total(10)	5.8% 6.8%	5.9% 6.9%	6.4%

B 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

Free surplus and IFRS half year 2017 results
	Underlying free surplus
	generated for total
	insurance and asset
	management	Pre-tax	Shareholders'
	operations	operating profit	funds
	%	%	%
		notes (2)(3)(4)	notes (2)(3)(4)
US dollar linked~~note(1)~~	11%	22%	21%
Other Asia currencies	19%	18%	15%
Total Asia	30%	40%	36%
UK sterlingnotes (3)(4) US dollarnote (4)	40% 30%	14% 46%	52% 12%
Total	100%	100%	100%
EEV half year 2017 results

EEV half year 2017 results
	Post-tax new	Post-tax	Shareholders'
	business profits	operating profit	funds
	%	%	%
		notes (2)(3)(4)	notes (2)(3)(4)
US dollar linked~~note (1)~~	52%	44%	37%
Other Asia currencies	12%	16%	13%
Total Asia	64%	60%	50%
UK sterlingnotes (3)(4) US dollarnote (4)	10% 26%	9% 31%	30% 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.

C 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	40,520	34,981 38,968
Less: Value of in-force business of long-term businessnote (a)	(26,104)	(21,785) (24,937)
Deferred acquisition costs assigned zero value for EEV purposes	9,076	8,068 9,170
Othernote (b)	(8,043)	(6,659) (8,535)
IFRS shareholders’ funds	15,449	14,605 14,666

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 a deferred acquisition costs recognised as an asset) 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.

D 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
	Halfyear	Halfyear Fullyear
Annual premium equivalents (APE) as published	3,624	2,980 6,320
Adjustment to include 100% of single premiums on new business sold in the periodnote (a)	15,286	12,379 25,057
Contribution from the sold Korea life business	-	88 192
Premiumsfrom in-force business and otheradjustmentsnote (b)	3,195	2,891 7,412
Gross premiums earned	22,105	18,338 38,981
Outwardreinsurance premiums	(947)	(944) (2,020)
Earnedpremiums, net of reinsurance as shown in the IFRS financial 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 associates. Under IFRS, joint ventures and associates are equity accounted and so no amounts are included within gross premiums earned.

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.

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.

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 the 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. 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 rulemaking 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, amongst 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). 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.

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. 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.

By order of the Board Prudential plc Alan F. Porter Group General Counsel and Company Secretary

10 August 2017, London

As at the date of this announcement, the Board of Directors of Prudential plc comprises:

Chairman

Paul Victor Falzon Sant Manduca

Executive Directors

Michael Andrew Wells (Group Chief Executive) , Mark Thomas FitzPatrick CA, Penelope Jane James ACA, John William Foley, Nicolaos Andreas Nicandrou ACA, Anne Helen Richards and Barry Lee Stowe

Independent Non-executive Directors

Sir Howard John Davies, David John Alexander Law ACA, Kaikhushru Shiavax Nargolwala FCA, Anthony John Liddell Nightingale CMG SBS JP, The Hon. Philip John Remnant CBE FCA, Alice Davey Schroeder, Jonathan Adair Lord Turner FRS and Thomas Ros Watjen

* For identification purposes

AI assistant

Prudential plc — Interim / Quarterly Report 2017

50562_rns_2017-08-10_891ce961-7a08-4c49-a207-26dca48774d8.pdf

NEWS RELEASE

10 August 2017

PRUDENTIAL PLC HALF YEAR 2017 RESULTS

PRUDENTIAL DELIVERS BROAD-BASED PERFORMANCE LED BY DOUBLE-DIGIT GROWTH IN ASIA

Performance highlights on a constant (and actual) exchange rate basis

Contact:

Notes to Editors:

7. About Prudential plc

8. Forward-Looking Statements

Summary Half Year 2017 financial performance Financial highlights

Basic earnings per share[2] - based on operating profit after tax

2017 financial objectives[2,10]

Group Chief Executive’s Report

Our first half financial performance

A clear and consistent strategy

Our customers and products

Our capabilities

Our outlook – long-term growth

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

IFRS Profit

IFRS Earnings per share

IFRS Operating Profit based on longer-term investment returns

Shareholder-backed policyholder liabilities and net liability flows[10]

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

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

Net Central Expenditure

IFRS non-operating items[8 ]

IFRS Short-term investment fluctuations

IFRS Effective tax rates

Total tax contribution

Publication of tax strategy

New business performance

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

Free surplus generation[4]

Business unit remittance [19]

Post-tax profit - EEV

EEV Operating Profit

Capital position, financing and liquidity

Capital position

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

Local statutory capital

Debt Portfolio

Financing and liquidity

Shareholders’ net core structural borrowings

Shareholders' Funds

Corporate transactions

Entrance into Nigeria

Disposal of Korea

Dividend

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

1. Introduction

2. Risk governance, culture and our risk management cycle

a. Risk governance

ii. Risk Management Framework

iii. Risk appetite, limits and triggers

Earnings volatility:

Liquidity:

Capital requirements:

iv. Risk policies

b. Our risk culture

c. The risk management cycle

i. Risk identification

Risk measurement and assessment

iii. Risk management and control

3. Summary risks

‘Macro’- risks

Risks from our investments

Credit risk

Market risk

Risks from our products

Insurance risks

Risks from our business operations

Operational risks

Regulatory risk

Liquidity risk

4. Further risk information

4.1 Risks from our investments

Prudential plc Interim / Quarterly Report 2017